[Title 17 CFR 1]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[Title 17 - COMMODITY AND SECURITIES EXCHANGES]
[Chapter I - COMMODITY FUTURES TRADING COMMISSION]
[Part 1 - GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT]
[From the U.S. Government Printing Office]
17COMMODITY AND SECURITIES EXCHANGES12003-04-012003-04-01falseGENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT1PART 1COMMODITY AND SECURITIES EXCHANGESCOMMODITY FUTURES TRADING COMMISSION
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents
Definitions
Sec.
1.1 Fraud in or in connection with transactions in foreign currency
subject to the Commodity Exchange Act.
1.2 Liability of principal for act of agent.
1.3 Definitions.
1.4 Use of electronic signatures.
Minimum Financial and Related Reporting Requirements
1.10 Financial reports of futures commission merchants and introducing
brokers.
1.11 [Reserved]
1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
1.13 [Reserved]
1.14 Risk assessment recordkeeping requirements for futures commission
merchants.
1.15 Risk assessment reporting requirements for futures commission
merchants.
1.16 Qualifications and reports of accountants.
1.17 Minimum financial requirements for futures commission merchants
and introducing brokers.
1.18 Records for and relating to financial reporting and monthly
computation by futures commission merchants and introducing
brokers.
Prohibited Trading in Commodity Options
1.19 Prohibited trading in certain ``puts'' and ``calls''.
Customers' Money, Securities, and Property
1.20 Customer funds to be segregated and separately accounted for.
1.21 Care of money and equities accruing to customers.
1.22 Use of customer funds restricted.
1.23 Interest of futures commission merchant in segregated funds;
additions and withdrawals.
1.24 Segregated funds; exclusions therefrom.
1.25 Investment of customer funds.
1.26 Deposit of instruments purchased with customer funds.
1.27 Record of investments.
1.28 Appraisal of instruments purchased with customer funds.
1.29 Increment or interest resulting from investment of customer funds.
1.30 Loans by futures commission merchants; treatment of proceeds.
Recordkeeping
1.31 Books and records; keeping and inspection.
1.32 Segregated account; daily computation and record.
1.33 Monthly and confirmation statements.
1.34 Monthly record, ``point balance''.
1.35 Records of cash commodity, futures, and option transactions.
1.36 Record of securities and property received from customers and
option customers.
1.37 Customer's or option customer's name, address, and occupation
recorded; record of guarantor or controller of account.
1.38 Execution of transactions.
1.39 Simultaneous buying and selling orders of different principals;
execution of, for and between principals.
Miscellaneous
1.40 Crop, market information letters, reports; copies required.
1.41 [Reserved]
1.41a-1.41c [Reserved]
1.42-1.43 [Reserved]
1.44 Records and reports of warehouses, depositories, and other similar
entities; visitation of premises.
1.45 [Reserved]
1.46 Application and closing out of offsetting long and short
positions.
1.47 Requirements for classification of purchases or sales of contracts
for future delivery as bona fide hedging under Sec. 1.3(z)(3)
of the regulations.
1.48 Requirements for classification of sales or purchases for future
delivery as bona fide hedging of unsold anticipated production
or unfilled anticipated requirements under Sec. 1.3(z)(2)
(i)(B) or (ii)(C) of the regulations.
1.49 Denomination of customer funds and location of depositories.
1.50-1.51 [Reserved]
1.52 Self-regulatory organization adoption and surveillance of minimum
financial requirements.
1.53 Enforcement of contract market bylaws, rules, regulations, and
resolutions.
1.54 Contract market rules submitted to and approved or not disapproved
by the Secretary of Agriculture.
1.55 Distribution of ``Risk Disclosure Statement'' by futures
commission merchants and introducing brokers.
1.56 Prohibition of guarantees against loss.
1.57 Operations and activities of introducing brokers.
1.58 Gross collection of exchange-set margins.
1.59 Activities of self-regulatory organization employees, governing
board members, committee members, and consultants.
1.60 Pending legal proceedings.
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1.61 [Reserved]
1.62 Contract market requirement for floor broker and floor trader
registration.
1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
1.64 Composition of various self-regulatory organization governing
boards and major disciplinary committees.
1.65 Notice of bulk transfers and disclosure obligations to customers.
1.66 No-action positions with respect to floor traders.
1.67 Notification of final disciplinary action involving financial harm
to a customer.
1.68 Customer election not to have funds, carried by a futures
commission merchant for trading on a registered derivatives
transaction execution facility, separately accounted for and
segregated.
1.69 Voting by interested members of self-regulatory organization
governing boards and various committees.
1.70 Notification of State enforcement actions brought under the
Commodity Exchange Act.
Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews
and Financial Reviews
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. 106-554, 114 Stat. 2763
(2000).
Source: 41 FR 3194, Jan. 21, 1976, unless otherwise noted.
Definitions
Sec. 1.1 Fraud in or in connection with transactions in foreign currency subject to the Commodity Exchange Act.
(a) Scope. The provisions of this section shall be applicable to
accounts, agreements, contracts, or transactions described in section
2(c)(1) of the Act, to the extent that the Commission exercises
jurisdiction over such accounts, agreements, contracts and transactions
as provided in section 2(c)(2)(B) of the Act (except that this section
shall not be applicable to persons described in section
2(c)(2)(B)(ii)(II) or 2(c)(2)(B)(ii)(III) of the Act).
(b) Fraudulent conduct prohibited. It shall be unlawful for any
person, directly or indirectly, in or in connection with any account,
agreement, contract or transaction that is subject to paragraph (a) of
this section:
(1) To cheat or defraud or attempt to cheat or defraud any person;
(2) Willfully to make or cause to be made to any person any false
report or statement or cause to be entered for any person any false
record; or
(3) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
[66 FR 42269, Aug. 10, 2001]
Sec. 1.2 Liability of principal for act of agent.
The act, omission, or failure of any official, agent, or other
person acting for any individual, association, partnership, corporation,
or trust, within the scope of his employment or office, shall be deemed
the act, omission, or failure of such individual, association,
partnership, corporation, or trust as well as of such official, agent,
or other person.
Sec. 1.3 Definitions.
Words used in the singular form in the rules and regulations in this
chapter shall be deemed to import the plural and vice versa, as the
context may require. The following terms, as used in the Commodity
Exchange Act, or in the rules and regulations in this chapter, shall
have the meanings hereby assigned to them, unless the context otherwise
requires:
(a) Board of Trade. This term means any exchange or association,
whether incorporated or unincorporated, of persons who shall be engaged
in the business of buying or selling any commodity or receiving the same
for sale on consignment.
(b) Business day. This term means any day other than a Sunday or
holiday. In all notices required by the act or by the rules and
regulations in this chapter to be given in terms of business days the
rule for computing time shall be to exclude the day on which notice is
given and include the day on which shall take place the act of which
notice is given.
(c) Clearing member. This term means any person who is a member of,
or enjoys the privilege of clearing trades in his own name through, the
clearing organization of a contract market.
(d) Clearing organization. This term means the person or
organization
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which acts as a medium for clearing transactions in commodities for
future delivery or commodity option transactions, or for effecting
settlements of contracts for future delivery or commodity option
transactions, for and between members of any contract market.
(e) Commodity. This term means and includes wheat, cotton, rice,
corn, oats, barley, rye, flaxseed, grain sorghums, millfeeds, butter,
eggs, Irish potatoes, wool, wool tops, fats and oils (including lard,
tallow, cottonseed oil, peanut oil, soybean oil, and all other fats and
oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean meal,
livestock, livestock products, and frozen concentrated orange juice, and
all other goods and articles, except onions as provided in Pub. L. 85-
839, and all services, rights and interests in which contracts for
future delivery are presently or in the future dealt in.
(Sec. 2(a)(1), 88 Stat. 1395; 7 U.S.C. 2(1))
(f) Commodity Exchange Act; the Act. These terms mean the Commodity
Exchange Act, as amended, 7 U.S.C. 1 et seq.
(g) Institutional customer. This term has the same meaning as
``eligible contract participant'' as defined in section 1a(12) of the
Act.
(h) Contract market. This term means a board of trade designated by
the Commission as a contract market under the Commodity Exchange Act or
in accordance with the provisions of part 33 of this chapter.
(i) Contract of sale. This term includes sales, purchases,
agreements of sale or purchase and agreements to sell or purchase.
(j) Controlled account. An account shall be deemed to be controlled
by a person if such person by power of attorney or otherwise actually
directs trading for such account.
(k) Customer; commodity customer. These terms have the same meaning
and refer to a customer trading in any commodity named in the definition
of commodity herein: Provided, however, An owner or holder of a
proprietary account as defined in paragraph (y) of this section shall
not be deemed to be a customer within the meaning of section 4d of the
Act, the regulations that implement sections 4d and 4f of the Act and
Sec. 1.35, and such an owner or holder of such a proprietary account
shall otherwise be deemed to be a customer within the meaning of the Act
and Secs. 1.37 and 1.46 and all other sections of these rules,
regulations and orders which do not implement sections 4d and 4f.
(l) Delivery month. This term means the month of delivery specified
in a contract of sale of any commodity for future delivery.
(m) [Reserved]
(n) Floor broker. This term means any person who, in or surrounding
any pit, ring, post or other place provided by a contract market for the
meeting of persons similarly engaged, shall purchase or sell for any
other person any commodity for future delivery on or subject to the
rules of any contract market and shall include any person required to
register as a floor broker under the Act by virtue of part 33 of this
chapter.
(o) Future delivery. This term does not include any sale of a cash
commodity for deferred shipment or delivery.
(p) Futures commission merchant. This term means:
(1) Individuals, associations, partnerships, corporations, and
trusts engaged in soliciting or in accepting orders for the purchase or
sale of any commodity for future delivery on or subject to the rules of
any contract market and that, in or in connection with such solicitation
or acceptance of orders, accepts any money, securities, or property (or
extends credit in lieu thereof) to margin, guarantee or secure any
trades or contracts that result or may result therefrom; and
(2) Shall include any person required to register as a futures
commission merchant under the Act by virtue of part 32 or part 33 of
this chapter.
(q) Member of a contract market. This term means and includes
individuals, associations, partnerships, corporations, and trusts owning
or holding membership in, or admitted to membership representation on, a
contract market or given members' trading privileges thereon.
(r) Net equity. This term means the credit balance which would be
obtained
[[Page 8]]
by combining the commodity margin balance of any person with the net
profit or loss, if any, accruing on the open trades or contracts or
commodity option transactions of such person.
(s) Net deficit. This term means the debit balance which would be
obtained by combining the commodity margin balance of any person with
the net profit or loss, if any, accruing on the open trades or contracts
or commodity option transactions of such person.
(t) Open contracts. This term means contracts of purchase or sale of
any commodity made by or for any person on or subject to the rules of a
board of trade for future delivery during a specified month or delivery
period which have not been fulfilled by delivery nor offset by other
contracts of sale or purchase in the same commodity and delivery month.
(u) Person. This term includes individuals, associations,
partnerships, corporations, and trusts.
(v) [Reserved]
(w) Secretary of Agriculture. This term means the Secretary of
Agriculture or any person to whom authority has heretofore lawfully been
delegated or to whom authority may hereafter lawfully be delegated to
act in his stead.
(x) Floor trader. This term means any person who, in our surrounding
any pit, ring, post, or other place provided by a contract market for
the meeting of persons similarly engaged, purchases or sells solely for
such person's own account, or has been authorized by a contract market
to purchase or sell for such person's own account, any commodity for
future delivery on or subject to the rules of any contract market and
shall include any person required to register as a floor trader under
the Act by virtue of part 33 of this chapter or by rule or regulation of
the Commission pertaining to the operation of an electronic trading
system.
(y) Proprietary account. This term means a commodity futures or
commodity option trading account carried on the books and records of an
individual, a partnership, corporation or other type association (1) for
one of the following persons, or (2) of which ten percent or more is
owned by one of the following persons, or an aggregate of ten percent or
more of which is owned by more than one of the following persons:
(i) Such individual himself, or such partnership, corporation or
association itself;
(ii) In the case of a partnership, a general partner in such
partnership;
(iii) In the case of a limited partnership, a limited or special
partner in such partnership whose duties include:
(A) The management of the partnership business or any part thereof,
(B) The handling of the trades or customer funds of customers or
option customers of such partnership,
(C) The keeping of records pertaining to the trades or customer
funds of customers or option customers of such partnership, or
(D) The signing or co-signing of checks or drafts on behalf of such
partnership;
(iv) In the case of a corporation or association, an officer,
director or owner of ten percent or more of the capital stock, of such
organization;
(v) An employee of such individual, partnership, corporation or
association whose duties include:
(A) The management of the business of such individual, partnership,
corporation or association or any part thereof,
(B) The handling of the trades or customer funds of customers or
option customers of such individual, partnership, corporation or
association,
(C) The keeping of records pertaining to the trades or customer
funds of customers or option customers of such individual, partnership,
corporation or association, or
(D) The signing or co-signing of checks or drafts on behalf of such
individual, partnership, corporation or association;
(vi) A spouse or minor dependent living in the same household of any
of the foregoing persons;
(vii) A business affiliate that directly or indirectly controls such
individual, partnership, corporation or association.
(viii) A business affiliate that, directly or indirectly is
controlled by or is under common control with, such individual,
partnership, corporation or association. Provided, however, That an
account owned by any shareholder or
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member of a cooperative association of producers, within the meaning of
sections 5(5) and 6a of the Act, which association is registered as a
futures commission merchant and carries such account on its records,
shall be deemed to be an account of a customer or option customer and
not a proprietary account of such association, unless the shareholder or
member is an officer, director or manager of the association.
(z) Bona fide hedging transactions and positions--(1) General
definition. Bona fide hedging transactions and positions shall mean
transactions or positions in a contract for future delivery on any
contract market, or in a commodity option, where such transactions or
positions normally represent a substitute for transactions to be made or
positions to be taken at a later time in a physical marketing channel,
and where they are economically appropriate to the reduction of risks in
the conduct and management of a commercial enterprise, and where they
arise from:
(i) The potential change in the value of assets which a person owns,
produces, manufactures, processes, or merchandises or anticipates
owning, producing, manufacturing, processing, or merchandising,
(ii) The potential change in the value of liabilities which a person
owns or anticipates incurring, or
(iii) The potential change in the value of services which a person
provides, purchases, or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions shall be
classified as bona fide hedging unless their purpose is to offset price
risks incidental to commercial cash or spot operations and such
positions are established and liquidated in an orderly manner in
accordance with sound commercial practices and, for transactions or
positions on contract markets subject to trading and position limits in
effect pursuant to section 4a of the Act, unless the provisions of
paragraphs (z) (2) and (3) of this section and Secs. 1.47 and 1.48 of
the regulations have been satisfied.
(2) Enumerated hedging transactions. The definitions of bona fide
hedging transactions and positions in paragraph (z)(1) of this section
includes, but is not limited to, the following specific transactions and
positions:
(i) Sales of any commodity for future delivery on a contract market
which do not exceed in quantity:
(A) Ownership or fixed-price purchase of the same cash commodity by
the same person; and
(B) Twelve months' unsold anticipated production of the same
commodity by the same person provided that no such position is
maintained in any future during the five last trading days of that
future.
(ii) Purchases of any commodity for future delivery on a contract
market which do not exceed in quantity.
(A) The fixed-price sale of the same cash commodity by the same
person.
(B) The quantity equivalent of fixed-price sales of the cash
products and by-products of such commodity by the same person; and
(C) Twelve months' unfilled anticipated requirements of the same
cash commodity for processing, manufacturing, or feeding by the same
person, provided that such transactions and positions in the five last
trading days of any one future do not exceed the person's unfilled
anticipated requirements of the same cash commodity for that month and
for the next succeeding month.
(iii) Offsetting sales and purchases for future delivery on a
contract market which do not exceed in quantity that amount of the same
cash commodity which has been bought and sold by the same person at
unfixed prices basis different delivery months of the contract market,
provided that no such position is maintained in any future during the
five last trading days of that future.
(iv) Sales and purchases for future delivery described in paragraphs
(z)(2) (i), (ii), and (iii) of this section may also be offset other
than by the same quantity of the same cash commodity, provided that the
fluctuations in value of the position for future delivery are
substantially related to the fluctuations in value of the actual or
anticipated cash position, and provided that the positions in any one
future shall not be maintained during the five last trading days of that
future.
[[Page 10]]
(3) Non-enumerated cases. Upon specific request made in accordance
with Sec. 1.47 of the regulations, the Commission may recognize
transactions and positions other than those enumerated in paragraph
(z)(2) of this section as bona fide hedging in such amount and under
such terms and conditions as it may specify in accordance with the
provisions of Sec. 1.47. Such transactions and positions may include,
but are not limited to, purchases or sales for future delivery on any
contract market by an agent who does not own or who has not contracted
to sell or purchase the offsetting cash commodity at a fixed price,
provided That the person is responsible for the merchandising of the
cash position which is being offset.
(aa) Associated person. This term means any natural person who is
associated in any of the following capacities with:
(1) A futures commission merchant as a partner, officer, or employee
(or any natural person occupying a similar status or performing similar
functions), in any capacity which involves (i) the solicitation or
acceptance of customers' or option customers' orders (other than in a
clerical capacity) or (ii) the supervision of any person or persons so
engaged;
(2) An introducing broker as a partner, officer, employee, or agent
(or any natural person occupying a similar status or performing similar
functions), in any capacity which involves (i) the solicitation or
acceptance of customers' or option customers' orders (other than in a
clerical capacity) or (ii) the supervision of any person or persons so
engaged;
(3) A commodity pool operator as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves (i) the
solicitation of funds, securities, or property for a participation in a
commodity pool or (ii) the supervision of any person or persons so
engaged; or
(4) A commodity trading advisor as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves: (i)
The solicitation of a client's or prospective client's discretionary
account, or (ii) the supervision of any person or persons so engaged;
and
(5) A leverage transaction merchant as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves: (i)
The solicitation or acceptance of leverage customers' orders (other than
in a clerical capacity) for leverage transactions as defined in
Sec. 31.4(x) of this chapter, or (ii) the supervision of any person or
persons so engaged.
(bb)(1) Commodity trading advisor. This term means any person who,
for compensation or profit, engages in the business of advising others,
either directly or through publications, writings or electronic media,
as to the value of or the advisability of trading in any contract of
sale of a commodity for future delivery made or to be made on or subject
to the rules of a contract market, any commodity option authorized under
section 4c of the Act, or any leverage transaction authorized under
section 19 of the Act, or who, for compensation or profit, and as part
of a regular business, issues or promulgates analyses or reports
concerning any of the foregoing; but such term does not include (i) any
bank or trust company or any person acting as an employee thereof, (ii)
any news reporter, news columnist, or news editor of the print or
electronic media, or any lawyer, accountant, or teacher, (iii) any floor
broker or futures commission merchant, (iv) the publisher or producer of
any print or electronic data of general and regular dissemination,
including its employees, (v) the named fiduciary, or trustee, of any
defined benefit plan which is subject to the provisions of the Employee
Retirement Income Security Act of 1974, or any fiduciary whose sole
business is to advise that plan, (vi) any contract market, and (vii)
such other persons not within the intent of this definition as the
Commission may specify by rule, regulation or order: Provided, That the
furnishing of such services by the foregoing persons is solely
incidental to the conduct of their business or profession: Provided
further, That the Commission, by rule
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or regulation, may include within this definition, any person advising
as to the value of commodities or issuing reports or analyses concerning
commodities, if the Commission determines that such rule or regulation
will effectuate the purposes of this provision.
(cc) Commodity pool operator. This term means any person engaged in
a business which is of the nature of an investment trust, syndicate, or
similar form of enterprise, and who, in connection therewith, solicits,
accepts, or receives from others, funds, securities, or property, either
directly or through capital contributions, the sale of stock or other
forms of securities, or otherwise, for the purpose of trading in any
commodity for future delivery or commodity option on or subject to the
rules of any contract market, but does not include such persons not
within the intent of this definition as the Commission may specify by
rule or regulation or by order.
(dd) Commission. This term means the Commodity Futures Trading
Commission.
(ee) Self-regulatory organization. This term means a contract market
(as defined in Sec. 1.3(h)), or a registered futures association under
section 17 of the Act.
(ff) Designated self-regulatory organization. This term means:
(1) Self-regulatory organization of which a futures commission
merchant, an introducing broker or a leverage transaction merchant is a
member; or
(2) If a futures commission merchant or an introducing broker is a
member of more than one self-regulatory organization and such futures
commission merchant or introducing broker is the subject of an approved
plan under Sec. 1.52 of this part, then a self-regulatory organization
delegated the responsibility by such a plan for monitoring and auditing
such futures commission merchant or introducing broker for compliance
with the minimum financial and related reporting requirements of the
self-regulatory organizations of which the futures commission merchant
or introducing broker is a member, and for receiving the financial
reports necessitated by such minimum financial and related reporting
requirements from such futures commission merchant or introducing
broker; or
(3) If a leverage transaction merchant is a member of more than one
self-regulatory organization and such leverage transaction merchant is
the subject of an approved plan under Sec. 31.28 of this chapter, then a
self-regulatory organization delegated the responsibility by such a plan
for monitoring and auditing such leverage transaction merchant for
compliance with the minimum financial, cover, segregation and sales
practice, and related reporting requirements of the self-regulatory
organizations of which the leverage transaction merchant is a member,
and for receiving the reports necessitated by such minimum financial,
cover, segregation and sales practice, and related reporting
requirements from such leverage transaction merchant.
(gg) Customer funds. This term means all money, securities, and
property received by a futures commission merchant or by a clearing
organization from, for, or on behalf of, customers or option customers:
(1) In the case of commodity customers, to margin, guarantee, or
secure contracts for future delivery on or subject to the rules of a
contract market and all money accruing to such customers as the result
of such contracts; and
(2) In the case of option customers, in connection with a commodity
option transaction on or subject to the rules of a contract market:
(i) To be used as a premium for the purchase of a commodity option
for an option customer;
(ii) As a premium payable to an option customer;
(iii) To guarantee or secure performance of a commodity option by an
option customer; or
(iv) Representing accruals (including, for purchasers of a commodity
option for which the full premium has been paid, the market value of
such commodity option) to an option customer.
(3) Notwithstanding paragraphs (gg)(1) and (2) of this section, the
term customer funds shall exclude money, securities or property received
to margin, guarantee or secure the trades or contracts of opt-out
customers, and all money accruing to opt-out customers
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as the result of such trades or contracts, to the extent that such
trades or contracts are made on or subject to the rules of any
registered derivatives transaction execution facility that has
authorized opting out in accordance with Sec. 37.7 of this chapter.
(4) Notwithstanding paragraphs (gg)(1), (2) and (3) of this section,
the term customer funds shall exclude money, securities or property held
to margin, guarantee or secure security futures products held in a
securities account, and all money accruing as the result of such
security futures products.
(hh) Commodity option transaction; commodity option. These terms
each mean any transaction or agreement in interstate commerce which is
or is held out to be of the character of, or is commonly known to the
trade as, an ``option,'' ``privilege,'' ``indemnity,'' ``bid,''
``offer,'' ``call,'' ``put.'' ``advance guaranty,'' or ``decline
guaranty,'' and which is subject to regulation under the Act and these
regulations.
(ii) Premium. This term means the amount agreed upon between the
purchaser and seller, or their agents, for the purchase or sale of a
commodity option on or subject to the rules of a contract market.
(jj) Option customer. This term means any person who directly or
indirectly, purchases or grants (sells), or otherwise acquires or
disposes of any interest in a commodity option for value, but does not
include: (1) For purposes of Secs. 1.16, 1.17, 1.20-1.30, 1.32, 1.36,
33.3 and 33.7 of this chapter, the owner or holder of a proprietary
account; and (2) option customers whose option transactions are
conducted in accordance with the requirements of part 32 of this
chapter.
(kk) Strike price. This term means the price, per unit, at which a
person may purchase or sell the contract of sale of a commodity for
future delivery or the physical which is the subject of a commodity
option: Provided, That for purposes of Sec. 1.17, the term ``strike
price'' means the total price at which a person may purchase or sell the
contract of sale of a commodity for future delivery or the physical
which is the subject of a commodity option (i.e., price per unit times
the number of units).
(ll) Physical. This term means any good, article, service, right or
interest upon which a commodity option may be traded in accordance with
the Act and these regulations.
(mm) Introducing broker. This term means:
(1) Any person who, for compensation or profit, whether direct or
indirect, is engaged in soliciting or in accepting orders (other than in
a clerical capacity) for the purchase or sale of any commodity for
future delivery on or subject to the rules of any contract market who
does not accept any money, securities, or property (or extend credit in
lieu thereof) to margin, guarantee, or secure any trades or contracts
that result or may result therefrom; and
(2) Includes any person required to register as an introducing
broker by virtue of part 33 of this chapter: Provided, That the term
``introducing broker'' shall not include:
(i) Any futures commission merchant, floor broker, or associated
person, acting in its capacity as such, regardless of whether that
futures commission merchant, floor broker, or associated person is
registered or exempt from registration in such capacity;
(ii) Any commodity trading advisor, which, acting in its capacity as
a commodity trading advisor, is not compensated on a per-trade basis or
which solely manages discretionary accounts pursuant to a power of
attorney, regardless of whether that commodity trading advisor is
registered or exempt from registration in such capacity; and
(iii) Any commodity pool operator which, acting in its capacity as a
commodity pool operator, solely operates commodity pools, regardless of
whether that commodity pool operator is registered or exempt from
registration in such capacity.
(nn) Guarantee agreement. This term means an agreement of guaranty
in the form set forth in part B of Form 1-FR, executed by a registered
futures commission merchant and by an introducing broker or applicant
for registration as an introducing broker on behalf of an introducing
broker or applicant for registration as an introducing
[[Page 13]]
broker in satisfaction of the alternative adjusted net capital
requirement set forth in Sec. 1.17(a)(2)(ii).
(oo) Leverage transaction merchant. Means and includes any
individual, association, partnership, corporation, trust or other person
that is engaged in the business of offering to enter into, entering into
or confirming the execution of leverage contracts, or soliciting or
accepting orders for leverage contracts, and who accepts leverage
customer funds (or extends credit in lieu thereof) in connection
therewith.
(pp) Leverage customer funds. Means all money, securities and
property received, directly or indirectly by a leverage transaction
merchant from, for, or on behalf of leverage customers to margin,
guarantee or secure leverage contracts and all money, securities and
property accruing to such customers as the result of such contracts, or
the customers' leverage equity. In the case of a long leverage
transaction, profit or loss accruing to a leverage customer is the
difference between the leverage transaction merchant's current bid price
for the leverage contract and the ask price of the leverage contract
when entered into. In the case of a short leverage transaction, profit
or loss accruing to a leverage customer is the difference between the
bid price of the leverage contract when entered into and the leverage
transaction merchant's current ask price for the leverage contract.
(qq) Leverage contract. Shall have the same meaning as that set
forth in Sec. 31.4(w) of this chapter.
(rr) Foreign futures or foreign options secured amount. This term
means all money, securities and property held by or held for or on
behalf of a futures commission merchant from, for, or on behalf of
foreign futures or foreign options customers as defined in Sec. 30.1 of
this chapter:
(1) In the case of foreign futures customers, money, securities and
property required by a futures commission merchant to margin, guarantee,
or secure open foreign futures contracts plus or minus any unrealized
gain or loss on such contracts; and
(2) In the case of foreign options customers in connection with open
foreign options transactions money, securities and property representing
premiums paid or received, plus any other funds required to guarantee or
secure open transactions plus or minus any unrealized gain or loss on
such transactions.
(ss) Foreign board of trade. This term means any board of trade,
exchange or market located outside the United States, its territories or
possessions, whether incorporated or unincorporated, where foreign
futures or foreign options transactions are entered into.
(tt) Electronic signature means an electronic sound, symbol, or
process attached to or logically associated with a record and executed
or adopted by a person with the intent to sign the record.
(uu) Opt-out customer. This term means a customer that is an
eligible contract participant, as defined in section 1a(12) of the Act,
and that, in accordance with Sec. 1.68, has elected not to have funds
that are being carried for purposes of trading on or through the
facilities of a registered derivatives transaction execution facility,
separately accounted for and segregated by the futures commission
merchant pursuant to section 4d of the Act and Secs. 1.20-1.30, 1.32 and
1.36. A customer is an opt-out customer solely with respect to
agreements, contracts or transactions, and the money, securities or
property received by a futures commission merchant to margin, guarantee
or secure such agreements, contracts or transactions, made on or subject
to the rules of any derivatives transaction execution facility that has
adopted rules permitting a customer to elect to be an opt-out customer
and with respect to which the customer has made such an election. For
all other purposes under the Act and the rules thereunder, except where
otherwise provided, an opt-out customer shall be a customer as defined
in Sec. 1.3(k).
(vv) Futures account. This term means an account that is maintained
in accordance with the segregation requirements of section 4d of the
Commodity Exchange Act and the rules thereunder.
(ww) Securities account. This term means an account that is
maintained in accordance with the requirements of
[[Page 14]]
section 15(c)(3) of the Securities Exchange Act of 1934 and Rule 15c3-3
thereunder.
[41 FR 3194, Jan. 21, 1976]
Editorial Note: For Federal Register citations affecting Sec. 1.3,
see the List of CFR Sections Affected, which appears in the Finding Aids
sections of the printed volume and on GPO Access.
Sec. 1.4 Use of electronic signatures.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that requires
a document to be signed by a customer of a futures commission merchant
or introducing broker, a pool participant or a client of a commodity
trading advisor, an electronic signature executed by the customer,
participant or client will be sufficient, if the futures commission
merchant, introducing broker, commodity pool operator or commodity
trading advisor elects generally to accept electronic signatures;
Provided, however, That the electronic signature must comply with
applicable Federal laws and other Commission rules; And, Provided
further, That the futures commission merchant, introducing broker,
commodity pool operator or commodity trading advisor must adopt and
utilize reasonable safeguards regarding the use of electronic
signatures, including at a minimum safeguards employed to prevent
alteration of the electronic record with which the electronic signature
is associated, after such record has been electronically signed.
[65 FR 12469, Mar. 9, 2000]
Minimum Financial and Related Reporting Requirements
Sec. 1.10 Financial reports of futures commission merchants and introducing brokers.
(a) Application for registration. (1) Except as otherwise provided,
a futures commission merchant or an applicant for registration as a
futures commission merchant, in order to satisfy any requirement in this
part that it file a Form 1-FR, must file a Form 1-FR-FCM, and any
reference in this part to Form 1-FR with respect to a futures commission
merchant or applicant therefor shall be deemed to be a reference to Form
1-FR-FCM. Except as otherwise provided, an introducing broker or an
applicant for registration as an introducing broker, in order to satisfy
any requirement in this part that it file a Form 1-FR, must file a Form
1-FR-IB, and any reference in this part to Form 1-FR with respect to an
introducing broker or applicant therefor shall be deemed to be a
reference to Form 1-FR-IB.
(2) (i) (A) Except as provided in paragraphs (a)(3) and (h) of this
section, each person who files an application for registration as a
futures commission merchant and who is not so registered at the time of
such filing, must, concurrently with the filing of such application,
file either:
(1) A Form 1-FR-FCM certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which such report is filed; or
(2) A Form 1-FR-FCM as of a date not more than 17 business days
prior to the date on which such report is filed and a Form 1-FR-FCM
certified by an independent public accountant in accordance with
Sec. 1.16 as of a date not more than one year prior to the date on which
such report is filed.
(B) Each such person must include with such financial report a
statement describing the source of his current assets and representing
that his capital has been contributed for the purpose of operating his
business and will continue to be used for such purpose.
(ii) (A) Except as provided in paragraphs (a)(3) and (h) of this
section, each person who files an application for registration as an
introducing broker and who is not so registered at the time of such
filing, must, concurrently with the filing of such application, file
either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which such report is filed;
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which such report is filed and a Form 1-FR-IB certified
by an independent public accountant in accordance with Sec. 1.16 as of a
date not more
[[Page 15]]
than one year prior to the date on which such report is filed;
(3) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which such report is filed, Provided, however, that such
applicant shall be subject to a review by the applicant's designated
self-regulatory organization within six months of registration; or
(4) A guarantee agreement.
(B) Each person filing in accordance with paragraphs (a)(2)(ii)(A)
(1), (2) or (3) of this section must include with such financial report
a statement describing the source of his current assets and representing
that his capital has been contributed for the purpose of operating his
business and will continue to be used for such purpose.
(3)(i) The provisions of paragraph (a)(2) of this section do not
apply to any person succeeding to and continuing the business of another
futures commission merchant. Each such person who files an application
for registration as a futures commission merchant and who is not so
registered in that capacity at the time of such filing must file a Form
1-FR-FCM as of the first month end following the date on which his
registration is approved. Such report must be filed with the National
Futures Association, the Commission and the designated self-regulatory
organization, if any, not more than 17 business days after the date for
which the report is made.
(ii) The provisions of paragraph (a)(2) of this section do not apply
to any person succeeding to and continuing the business of another
introducing broker.
(A) Each such person who succeeds to and continues the business of
an introducing broker which was not operating pursuant to a guarantee
agreement, or which was operating pursuant to a guarantee agreement and
was also a securities broker or dealer at the time of succession, who
files an application for registration as an introducing broker, and who
is not so registered in that capacity at the time of such filing, must
file with the National Futures Association either a guarantee agreement
with his application for registration or a Form 1-FR-IB as of the first
month end following the date on which his registration is approved. Such
Form 1-FR-IB must be filed not more than 17 business days after the date
for which the report is made.
(B) Each such person who succeeds to and continues the business of
an introducing broker which was operating pursuant to a guarantee
agreement and which was not also a securities broker or dealer at the
time of succession, who files an application for registration as an
introducing broker, and who is not so registered in that capacity at the
time of such filing, must file with the National Futures Association
either a guarantee agreement or a Form 1-FR-IB with his application for
registration. If such person files a Form 1-FR-IB with his application
for registration, such person must also file a Form 1-FR-IB, certified
by an independent public accountant, as of a date no later than the end
of the month registration is granted. The Form 1-FR-IB certified by an
independent public accountant must be filed with the National Futures
Association not more than 45 days after the date for which the report is
made.
(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 for each fiscal
quarter of each fiscal year, including the final fiscal quarter of each
fiscal year, unless the futures commission merchant elects, pursuant to
paragraph (e)(2) of this section, to file a Form 1-FR-FCM for each
calendar quarter of each calendar year, including the final calendar
quarter of each calendar year. Each Form 1-FR-FCM must be filed no later
than 17 business days after the date for which the report is made:
Provided, however, That for each fiscal or calendar quarter ending
between June 30, 1997 and December 31, 1997, inclusive, each Form 1-FR-
FCM must be filed no later than 30 calendar days after the date for
which the report is made.
(ii) In addition to the financial reports required by paragraph
(b)(1)(i) of this section, each person registered as a futures
commission merchant must file a Form 1-FR-FCM as of the close
[[Page 16]]
of its fiscal year (even if it files quarterly reports as of each
calendar quarter) which must be certified by an independent public
accountant in accordance with Sec. 1.16 no later than 90 days after the
close of each futures commission merchant's fiscal year: Provided,
however, that a registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer must file this
report not later than the time permitted for filing an annual audit
report under Sec. 240.17a-5(d)(5) of this title.
(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)(2) 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:
Provided, however, That for each reporting period ending between June
30, 1997 and December 31, 1997, inclusive, each Form 1-FR-IB must be
filed no later than 30 calendar days after the date for which the report
is made.
(ii) (A) In addition to the financial reports required by paragraph
(b)(2)(i) of this section, each person registered as an introducing
broker must file a Form 1-FR-IB as of the close of its fiscal year (even
if it files semiannual reports on a calendar year basis) which must be
certified by an independent public accountant in accordance with
Sec. 1.16 no later than 90 days after the close of each introducing
broker's fiscal year: Provided, however, that a registrant which is
registered with the Securities and Exchange Commission as a securities
broker or dealer must file this report not later than the time permitted
for filing an annual audit report under Sec. 240.17a-5(d)(5) of this
title.
(B) If an introducing broker has filed previously a Form 1-FR-IB,
certified by an independent public accountant in accordance with the
provisions of paragraphs (a)(2)(ii) or (j)(8) of this section and
Sec. 1.16 of this part, as of a date not more than one year prior to the
close of such introducing broker's fiscal year, it need not have
certified by an independent public accountant the Form 1-FR-IB filed as
of the introducing broker's first fiscal year-end following the as of
date of its initial certified Form 1-FR-IB. In such a case, the
introducing broker's Form 1-FR-IB filed as of the close of the second
fiscal year-end following the as of date of its initial certified Form
1-FR-IB must cover the period of time between those two dates and must
be certified by an independent public accountant in accordance with
Sec. 1.16 of this part.
(iii) A Form 1-FR required to be certified by an independent public
accountant in accordance with Sec. 1.16 which is filed by a futures
commission merchant, an introducing broker or an applicant for
registration in either category, must be filed in paper form and may not
be filed electronically.
(3) The provisions of paragraphs (b)(1) and (b)(2) of this section
may be met by any person registered as a futures commission merchant or
as an introducing broker who is a member of a designated self-regulatory
organization and conforms to minimum financial standards and related
reporting requirements set by such designated self-regulatory
organization in its bylaws, rules, regulations, or resolutions and
approved after the effective date of these regulations by the Commission
pursuant to section 4f(b) of the Act and Sec. 1.52: Provided, however,
That each such registrant shall promptly file with the Commission a true
and exact copy of each financial report which it files with such
designated self-regulatory organization.
(4) Upon receiving written notice from any representative of the
National Futures Association, the Commission or any self-regulatory
organization of which it is a member, an applicant or registrant, except
an applicant for registration as an introducing broker which has filed
concurrently with its application for registration a guarantee agreement
and which is not also a securities broker or dealer, must, monthly or at
such times as specified, furnish the National Futures
[[Page 17]]
Association, the Commission or the self-regulatory organization
requesting such information a Form 1-FR or such other financial
information as requested by the National Futures Association, the
Commission or the self-regulatory organization. Each such Form 1-FR or
such other information must be furnished within the time period
specified in the written notice, and in accordance with the provisions
of paragraph (c) of this section.
(c) Where to file reports. The reports provided for in this section
will be considered filed when received by the regional office of the
Commission nearest the principal place of business of the registrant
(except that a registrant under the jurisdiction of the Commission's
Western Regional Office must file such reports with the South-western
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 nearest
the principal place of business of the applicant (except that an
applicant under the jurisdiction of the Commission's Western Regional
Office must file such reports with the South western Regional Office):
Provided, however, That any report filed pursuant to paragraphs (b)(1),
(b)(2), or (b)(4) of this section or Sec. 1.12 (a) or (b) 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 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: And, provided further, That
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) Contents of financial reports. (1) Each Form 1-FR filed pursuant
to this Sec. 1.10 which is not required to be certified by an
independent public accountant must be completed in accordance with the
instructions to the form and contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) A statement of changes in ownership equity for the period
between the date of the most recent statement of financial condition
filed with the Commission and the date for which the report is made;
(iii) A statement of changes in liabilities subordinated to claims
of general creditors for the period between the date of the most recent
statement of financial condition filed with the Commission and the date
for which the report is made;
(iv) A statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17 as of the date for which the report
is made;
(v) For a futures commission merchant only, the statements of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the statement of secured amounts and funds held in separate accounts
for foreign futures and foreign options customers in accordance with
Sec. 30.7 of this chapter as of the date for which the report is made;
and
(vi) In addition to the information expressly required, such futher
material information as may be necessary to make the required statements
and schedules not misleading.
(2) Each Form 1-FR filed pursuant to this Sec. 1.10 which is
required to be certified by an independent public accountant must be
completed in accordance with the instructions to the form and contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) Statements of income (loss), cash flows, changes in ownership
equity, and changes in liabilities subordinated to claims of general
creditors, for the period between the date of the most recent certified
statement of financial
[[Page 18]]
condition filed with the Commission and the date for which the report is
made: Provided, That for an applicant filing pursuant to paragraph
(a)(2) of this section the period must be the year ending as of the date
of the statement of financial condition;
(iii) A statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17 as of the date for which the report
is made;
(iv) For a futures commission merchant only, the statements of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the statement of secured amounts and funds held in separate accounts
for foreign futures and foreign options customers in accordance with
Sec. 30.7 of this chapter as of the date for which the report is made;
(v) Appropriate footnote disclosures;
(vi) A reconciliation, including appropriate explanations, of the
statement of the computation of the minimum capital requirements
pursuant to Sec. 1.17 and, for a futures commission merchant only, the
statements of segregation requirements and funds in segregation for
customers trading on U.S. commodity exchanges and for customers' dealer
option accounts, and the statement of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter, in the certified Form 1-FR
with the applicant's or registrant's corresponding uncertified most
recent Form 1-FR filing when material differences exist or, if no
material differences exist, a statement so indicating; and
(vii) In addition to the information expressly required, such
further material information as may be necessary to make the required
statements not misleading.
(3) The statements required by paragraphs (d)(2)(i) and (d)(2)(ii)
of this section may be presented in accordance with generally accepted
accounting principles in the certified reports filed as of the close of
the registrant's fiscal year pursuant to paragraphs (b)(1)(ii) or
(b)(2)(ii) of this section or accompanying the application for
registration pursuant to paragraph (a)(2) of this section, rather than
in the format specifically prescribed by these regulations: Provided,
the statement of financial condition is presented in a format as
consistent as possible with the Form 1-FR and a reconciliation is
provided reconciling such statement of financial condition to the
statement of the computation of the minimum capital requirements
pursuant to Sec. 1.17. Such reconciliation must be certified by an
independent public accountant in accordance with Sec. 1.16.
(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. If the applicant or registrant is a
sole proprietorship, then the oath or affirmation must be made by the
proprietor; if a partnership, by a general partner; or if a corporation,
by the chief executive officer or chief financial officer. 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) Election of fiscal year. (1) An applicant wishing to establish a
fiscal year other than the calendar year may do so by notifying the
National Futures Association of its election of such fiscal year, in
writing, concurrently with the filing of the Form 1-FR pursuant to
paragraph (a)(2) of this section, but in no event may such fiscal year
end more than one year from the date of the Form 1-FR filed pursuant to
paragraph (a)(2) of this section. A copy of such written notice must
also be filed with the regional office of the Commission nearest the
principal place of business of the applicant (except that an applicant
under the jurisdiction of the Commission's Western Regional Office
[[Page 19]]
must file such a notice with the Commission's Southwestern Regional
Office). An applicant which does not so notify the National Futures
Association and the Commission will be deemed to have elected the
calendar year as its fiscal year. A registrant must continue to use its
elected fiscal year, calendar or otherwise, unless a change in such
fiscal year is approved upon written application to the principal office
of the Commission in Washington, DC, and written notice of such change
is given to the designated self-regulatory organization, if any.
(2) An applicant may elect to file its Form 1-FR for each calendar
quarter in lieu of each fiscal quarter by notifying the National Futures
Association of its election, in writing, concurrently with the filing of
the Form 1-FR pursuant to paragraph (a)(2) of this section. A copy of
such written notice must also be filed with the regional office of the
Commission nearest the principal place of business of the applicant
(except that an applicant under the jurisdiction of the Commission's
Western Regional Office must file such a notice with the Commission's
Southwestern Regional Office). A registrant wishing to change such
election or to make such election other than concurrently with the
filing of the Form 1-FR pursuant to paragraph (a)(2) of this section may
do so only if such change or election is approved by the Commission upon
written application to the principal office of the Commission in
Washington, DC, and written notice of such change is given to the
designated self-regulatory organization, if any.
(f) Extension of time for filing uncertified reports. (1) In the
event a registrant finds that it cannot file its report for any period
within the time specified in paragraphs (b)(1)(i), (b)(2)(i) or (b)(4)
of this section or Sec. 1.12(b) without substantial undue hardship, it
may file with the principal office of the Commission in Washington,
D.C., an application for an extension of time to a specified date which
may not be more than 90 days after the date as of which the financial
statements were to have been filed. The application must state the
reasons for the requested extension and must contain an agreement to
file the report on or before the specified date. The application must be
received by the Commission before the time specified in paragraphs
(b)(1)(i), (b)(2)(i) or (b)(4) of this section or Sec. 1.12(b) for
filing the report. Notice of such application must be given to the
designated self-regulatory organization, if any, concurrently with the
filing of such application with the Commission. Within ten calendar days
after receipt of the application for an extension of time, the
Commission shall: (i) Notify the registrant of the grant or denial of
the requested extension; or (ii) indicate to the registrant that
additional time is required to analyze the request, in which case the
amount of time needed will be specified. (See Sec. 1.16(f) for extension
of the time for filing certified financial statements.)
(2) In the event an applicant finds that it cannot file its report
for any period within the time specified in paragraph (b)(4) of this
section or Sec. 1.12(b) without substantial undue hardship, it may file
with the National Futures Association an application for an extension of
time to a specified date which may not be more than 90 days after the
date as of which the financial statements were to have been filed. The
application must state the reasons for the requested extension and must
contain an agreement to file the report on or before the specified date.
The application must be received by the National Futures Association
before the time specified in paragraph (b)(4) of this section or
Sec. 1.12(b) for filing the report. Notice of such application must be
filed with the regional office of the Commission nearest the principal
place of business of the applicant (except that an applicant under the
jurisdiction of the Commission's Western Regional Office must file such
a notice with the Commission's Southwestern Regional Office)
concurrently with the filing of such application with the National
Futures Association. Within ten calendar days after receipt of the
application for an extension of time, the National Futures Association
shall:
(i) Notify the applicant of the grant or denial of the requested
extension; or
(ii) Indicate to the applicant that additional time is required to
analyze the request, in which case the amount of time needed will be
specified.
[[Page 20]]
(g) Nonpublic treatment of reports. (1) The following portions of
Forms 1-FR filed pursuant to this section will be public: the statement
of financial condition, the statement of the computation of the minimum
capital requirements, the statements (to be filed by a futures
commission merchant only) of segregation requirements and funds in
segregation for customers trading on U.S. commodity exchanges and for
customers' dealer options accounts, and the statement (to be filed by a
futures commission merchant only) of secured amounts and funds held in
separate accounts for foreign futures and foreign options customers in
accordance with Sec. 30.7 of this chapter. The other financial
statements (including the statement of income (loss)), footnote
disclosures and schedules of Form 1-FR, trade secrets and certain other
commercial or financial information on such other statements and
schedules will be treated as nonpublic for purposes of the Freedom of
Information Act and the Government in the Sunshine Act and parts 145 and
147 of this chapter.
(2) The following portions of copies of the Financial and
Operational Combined Uniform Single Report under the Securities Exchange
Act of 1934, Part II or Part IIA filed pursuant to paragraph (h) of this
section, will be public: The statement of financial condition, the
computations of net capital and the minimum capital requirements, the
statements (to be filed by a futures commission merchant only) of
segregation requirements and funds in segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the statement (to be filed by a futures commission merchant only) of
secured amounts and funds held in separate accounts for foreign futures
and foreign options customers in accordance with Sec. 30.7 of this
chapter. The other financial statements (including the statement of
income (loss)), footnote disclosures and schedules of the Financial and
Operational Combined Uniform Single Report under the Securities and
Exchange Act of 1934, Part II or Part IIA, trade secrets and certain
other commercial or financial information on such other statements and
schedules will be treated as nonpublic for purposes of the Freedom of
Information Act and the Government in the Sunshine Act and parts 145 and
147 of this chapter.
(3) [Reserved]
(4) All information on such other statements, footnote disclosures
and schedules will, however, be available for official use by any
official or employee of the United States or any State, by any self-
regulatory organization of which the person filing such report is a
member, by the National Futures Association in the case of an applicant,
and by any other person to whom the Commission believes disclosure of
such information is in the public interest. Nothing in this paragraph
(g) will limit the authority of any self-regulatory organization to
request or receive any information relative to its members' financial
condition.
(5) The independent accountant's opinion and a guarantee agreement
filed pursuant to this section will be deemed public information.
(h) Filing option available to a futures commission merchant or an
introducing broker which is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with the
requirements of this section by filing (in accordance with paragraphs
(a), (b), (c), and (j) of this section) a copy of its Financial and
Operational Combined Uniform Single Report under the Securities Exchange
Act of 1934, part II or part IIA, in lieu of Form 1-FR: Provided,
however, That all information which is required to be furnished on and
submitted with Form 1-FR is provided with such Report.
(i) Filing option available to an introducing broker or applicant
for registration as an introducing broker which is also a country
elevator. Any introducing broker or applicant for registration as an
introducing broker which is also a country elevator but which is not
also a securities broker or dealer may comply with the requirements of
this section by filing (in accordance with paragraphs (a), (b) and (c)
of this section) a copy of a financial report prepared by a grain
commission firm which has been
[[Page 21]]
authorized by the Deputy Vice President of the Commodity Credit
Corporation of the United States Department of Agriculture to provide a
compilation report of financial statements of warehousemen for purposes
of Uniform Grain Storage Agreements, and which complies with the
standards for independence set forth in Sec. 1.16(b)(2) with respect to
the registrant or applicant: Provided, however, That all information
which is required to be furnished on and submitted with Form 1-FR is
provided with such financial report, including a statement of the
computation of the minimum capital requirements pursuant to Sec. 1.17:
And, provided further, That the balance sheet is presented in a format
as consistent as possible with the Form 1-FR and a reconciliation is
provided reconciling such balance sheet to the statement of the
computation of the minimum capital requirements pursuant to Sec. 1.17.
Attached to each financial report filed pursuant to this paragraph (i)
must be an oath or affirmation that to the best knowledge and belief of
the individual making such oath or affirmation the information contained
therein is true and correct. If the applicant or registrant is a sole
proprietorship, then the oath or affirmation must be made by the
proprietor; if a partnership, by a general partner; or if a corporation,
by the chief executive officer or chief financial officer.
(j) Requirements for guarantee agreement. (1) A guarantee agreement
filed pursuant to this section must be signed in a manner sufficient to
be a binding guarantee under local law by an appropriate person on
behalf of the futures commission merchant and the introducing broker,
and each signature must be accompanied by evidence that the signatory is
authorized to enter the agreement on behalf of the futures commission
merchant or introducing broker and is such an appropriate person. For
purposes of this paragraph (j), an appropriate person shall be the
proprietor, if the firm is a sole proprietorship; a general partner, if
the firm is a partnership; and either the chief executive officer or the
chief financial officer, if the firm is a corporation.
(2) No futures commission merchant may enter into a guarantee
agreement if:
(i) It knows or should have known that its adjusted net capital is
less than the amount set forth in Sec. 1.12(b); or
(ii) There is filed against the futures commission merchant an
adjudicatory proceeding brought by or before the Commission pursuant to
the provisions of sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or
Secs. 3.55, 3.56 or 3.60 of this chapter.
(3) A guarantee agreement filed in connection with an application
for initial registration as an introducing broker in accordance with the
provisions of Sec. 3.10(a) of this chapter shall become effective upon
the granting of registration or, if appropriate, a temporary license, to
the introducing broker. A guarantee agreement filed other than in
connection with an application for initial registration as an
introducing broker shall become effective as of the date agreed to by
the parties.
(4)(i) If the registration of the introducing broker is suspended,
revoked, or withdrawn in accordance with the provisions of this chapter,
the guarantee agreement shall expire as of the date of such suspension,
revocation or withdrawal.
(ii) If the registration of the futures commission merchant is
suspended or revoked, the guarantee agreement shall expire 30 days after
such suspension or revocation, or at such earlier time as may be
approved by the Commission, the introducing broker, and the introducing
broker's designated self-regulatory organization.
(5) A guarantee agreement may be terminated at any time during the
term thereof:
(i) By mutual written consent of the parties, signed by an
appropriate person on behalf of each party, with prompt written notice
thereof, signed by an appropriate person on behalf of each party, to the
Commission and to the designated self-regulatory organizations of the
futures commission merchant and the introducing broker;
(ii) For good cause shown, by either party giving written notice of
its intention to terminate the agreement,
[[Page 22]]
signed by an appropriate person, to the other party to the agreement, to
the Commission, and to the designated self-regulatory organizations of
the futures commission merchant and the introducing broker; or
(iii) By either party giving written notice of its intention to
terminate the agreement, signed by an appropriate person, at least 30
days prior to the proposed termination date, to the other party to the
agreement, to the Commission, and to the designated self-regulatory
organizations of the futures commission merchant and the introducing
broker.
(6) The termination of a guarantee agreement by a futures commission
merchant or an introducing broker, or the expiration of such an
agreement, shall not relieve either party from any liability or
obligation arising from acts or omissions which occurred during the term
of the agreement.
(7) An introducing broker may not simultaneously be a party to more
than one guarantee agreement: Provided, however, That the provisions of
this paragraph (j)(7) shall not be deemed to preclude an introducing
broker from entering into a guarantee agreement with another futures
commission merchant if the introducing broker or the futures commission
merchant which is a party to the existing agreement has provided notice
of termination of the existing agreement in accordance with the
provisions of paragraph (j)(5) of this section, and the new guarantee
agreement does not become effective until the day following the date of
termination of the existing agreement: And, provided further, That the
provisions of this paragraph (j)(7) shall not be deemed to preclude an
introducing broker from entering into a guarantee agreement with another
futures commission merchant if the futures commission merchant which is
a party to the existing agreement ceases to remain registered and the
existing agreement would therefore expire in accordance with the
provisions of paragraph (j)(4)(ii) of this section.
(8)(i)(A) An introducing broker that is a party to a guarantee
agreement that has been terminated in accordance with the provisions of
paragraph (j)(5) of this section, or that is due to expire in accordance
with the provisions of paragraph (j)(4)(ii) of this section, must cease
doing business as an introducing broker on or before the effective date
of such termination or expiration unless, on or before 10 days prior to
the effective date of such termination or expiration or such other
period of time as the Commission or the designated self-regulatory
organization may allow for good cause shown, the introducing broker
files with its designated self-regulatory organization either a new
guarantee agreement effective as of the day following the date of
termination of the existing agreement, or, in the case of a guarantee
agreement that is due to expire in accordance with the provisions of
paragraph (j)(4)(ii) of this section, a new guarantee agreement
effective on or before such expiration, or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which the report is filed and a Form 1-FR-IB certified by
an independent public accountant in accordance with Sec. 1.16 as of a
date not more than one year prior to the date on which the report is
filed.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
(ii) (A) Notwithstanding the provisions of paragraph (j)(8)(i) of
this section or of Sec. 1.17(a), an introducing broker that is a party
to a guarantee agreement that has been terminated in accordance with the
provisions of paragraph (j)(5)(ii) of this section shall not be deemed
to be in violation of the minimum adjusted net capital requirement of
Sec. 1.17(a)(1)(ii) or (a)(2) for 30 days following such termination.
Such an introducing broker must cease doing business as an introducing
broker on or after the effective date of such termination, and may not
resume
[[Page 23]]
doing business as an introducing broker unless and until it files a new
agreement or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days prior
to the date on which the report is filed and a Form 1-FR-IB certified by
an independent public accountant in accordance with Sec. 1.16 as of a
date not more than one year prior to the date on which the report is
filed.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
(k) Filing option available to an introducing broker. (1) Any
introducing broker or applicant for registration as an introducing
broker which is not operating or intending to operate pursuant to a
guarantee agreement may comply with the requirements of this section by
filing (in accordance with paragraphs (a), (b) and (c) of this section)
a Form 1-FR-IB in lieu of a Form 1-FR-FCM.
(2) If an introducing broker or applicant therefor avails itself of
the filing option available under paragraph (k)(1) of this section, the
report required to be filed in accordance with Sec. 1.16(c)(5) of this
part must be filed as of the date of the Form 1-FR-IB being filed, and
such an introducing broker or applicant therefor must maintain its
financial records and make its monthly formal computation of its
adjusted net capital, as required by Sec. 1.18 of this part, in a manner
consistent with Form 1-FR-IB.
(The information collection requirements contained in Sec. 1.10 were
approved by the Office of Management and Budget under control number
3038-0024; in paragraphs (a) and (b) under control number 3038-0023; and
in paragraph (f) under control number 3038-0003.)
[43 FR 39967, Sept. 8, 1978, as amended at 45 FR 80491, Dec. 5, 1980; 46
FR 63035, Dec. 30, 1981; 48 FR 35280, Aug. 3, 1983; 49 FR 39524, Oct. 9,
1984; 53 FR 4611, Feb. 17, 1988; 53 FR 7179, Mar. 7, 1988; 57 FR 23143,
June 2, 1992; 58 FR 10953, Feb. 23, 1993; 58 FR 12988, Mar. 8, 1993; 58
FR 19589, Apr. 15, 1993; 59 FR 5525, Feb. 7, 1994; 62 FR 4639, Jan. 31,
1997; 62 FR 10444, Mar. 7, 1997; 62 FR 33007, June 18, 1997; 66 FR
53516, Oct. 23, 2001]
Sec. 1.11 [Reserved]
Sec. 1.12 Maintenance of minimum financial requirements by futures commission merchants and introducing brokers.
(a) Each person registered as a futures commission merchant or who
files an application for registration as a futures commission merchant,
and each person registered as an introducing broker or who files an
application for registration as an introducing broker (except for an
introducing broker or applicant for registration as an introducing
broker operating pursuant to, or who has filed concurrently with its
application for registration, a guarantee agreement and who is not also
a securities broker or dealer), who knows or should have known that its
adjusted net capital at any time is less than the minimum required by
Sec. 1.17 or by the capital rule of any self-regulatory organization to
which such person is subject, if any, must:
(1) Give telephonic notice, to be confirmed in writing by
telegraphic or facsimile notice, as set forth in paragraph (i) of this
section that the applicant's or registrant's adjusted net capital is
less than required by Sec. 1.17 or by other capital rule, identifying
the applicable capital rule. The notice must be given
[[Page 24]]
immediately after the applicant or registrant knows or should know that
its adjusted net capital is less than required by any of the aforesaid
rules to which the applicant or registrant is subject; and
(2) If the person is a futures commission merchant or applicant
therefor, within 24 hours after giving such notice file a statement of
financial condition, a statement of the computation of the minimum
capital requirements pursuant to Sec. 1.17 (computed in accordance with
the applicable capital rule), the statements of segregation requirements
and funds in segregation for customers trading on U.S. commodity
exchanges and for customers' dealer options accounts, and the statement
of secured amounts and funds held in separate accounts for foreign
futures and foreign options customers in accordance with Sec. 30.7 of
this chapter, all as of the date such applicant's or registrant's
adjusted net capital is less than the minimum required; or
(3) If the person is an introducing broker or applicant therefor,
within 24 hours after giving such notice file a statement of financial
condition and a statement of the computation of the minimum capital
requirements pursuant to Sec. 1.17 (computed in accordance with the
applicable capital rule) all as of the date such applicant's or
registrant's adjusted net capital is less than the minimum required.
(b) Each person registered as a futures commission merchant, or who
files an application for registration as a futures commission merchant,
who knows or should have known that its adjusted net capital at any time
is less than the greatest of:
(1) 150 percent of the appropriate minimum dollar amount required by
Sec. 1.17(a)(1)(i);
(2) Six percent of the following amount: The customer funds required
to be segregated pursuant to the Act and the regulations in this part,
plus the funds of opt-out customers that, but for the election to opt
out pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by such customers on or subject to the
rules of a contract market or a foreign board of trade for which the
full premiums have been paid: Provided, however, that the deduction for
each such customer shall be limited to the amount of customer funds in
such customer's account(s) and foreign futures and foreign options
secured amounts;
(3) 150 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For securities brokers or dealers, the amount of net capital
specified in Rule 17a-11(b) of the Securities and Exchange Commission
(17 CFR 240.17a-11(b)), must file written notice to that effect as set
forth in paragraph (i) of this section within five (5) business days of
such event. Such applicant or registrant must also file a Form 1-FR-FCM
(or, if such applicant or registrant is registered with the Securities
and Exchange Commission as a securities broker or dealer, it may file,
in accordance with Sec. 1.10(h), a copy of its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, Part II, in lieu of Form 1-FR-FCM) or such other financial
statement designated by the National Futures Association, in the case of
an applicant, or by the Commission or the designated self-regulatory
organization, if any, in the case of a registrant, as of the close of
business for the month during which such event takes place and as of the
close of business for each month thereafter until three (3) successive
months have elapsed during which the applicant's or registrant's
adjusted net capital is at all times equal to or in excess of the
minimums set forth in this paragraph (b) which are applicable to such
applicant or registrant. Each financial statement required by this
paragraph (b) must be filed within 17 business days after the end of the
month for which such report is being made: Provided, however, That for
each month ending between June 30, 1997 and December 31, 1997,
inclusive, for which a financial statement is required by this paragraph
(b), such financial statement must be filed within 30 calendar days
after the end of the month for which such report is being made.
[[Page 25]]
(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, give
telegraphic or facsimile notice of such fact, specifying the books and
records which have not been made or which are not current, and within 5
business days 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 these
regulations, of the existence of any material inadequacy, as specified
in Sec. 1.16(d)(2) of these regulations, such applicant or registrant
must give telegraphic or facsimile notice of such material inadequacy
within 3 business days, and within 5 business days after giving such
notice file a written report stating what steps have been and are being
taken to correct the material inadequacy.
(e) Whenever any self-regulatory organization learns that a member
registrant has failed to file a notice or written report as required by
Sec. 1.12, that self-regulatory organization must immediately report
this failure by telephone, confirmed in writing immediately by
telegraphic or facsimile notice, as provided in paragraph (i) of this
section.
(f)(1) Whenever a clearing organization determines that any position
it carries for one of its clearing members which is registered as a
futures commission merchant or as a leverage transaction merchant must
be liquidated immediately, transferred immediately or that the trading
of any account of such futures commission merchant or such leverage
transaction merchant shall be only for the purposes of liquidation,
because that clearing member has failed to meet a call for margin or to
make other required deposits, the clearing organization must give
telephonic, confirmed in writing by telegraphic or facsimile notice of
such a determination to the principal office of the Commission at
Washington, DC immediately.
(2) Whenever a registered futures commission merchant determines
that any position it carries for another registered futures commission
merchant or for a registered leverage transaction merchant must be
liquidated immediately, transferred immediately or that the trading of
any account of such futures commission merchant or leverage transaction
merchant shall be only for purposes of liquidation, because the other
futures commission merchant or the leverage transaction merchant has
failed to meet a call for margin or to make other required deposits, the
carrying futures commission merchant must give telephonic, confirmed in
writing by telegraphic or facsimile notice of such a determination to
the principal office of the Commission at Washington, DC, immediately.
(3) Whenever a registered futures commission merchant determines
that an account which it is carrying is undermargined by an amount which
exceeds the futures commission merchant's adjusted net capital
determined in accordance with Sec. 1.17, the futures commission merchant
must give immediate telephonic, confirmed in writing by telegraphic or
facsimile notice of such a determination to the designated self-
regulatory organization and the principal office of the Commission at
Washington, DC. This paragraph (f)(3) shall apply to any account carried
by the futures commission merchant, whether a customer, noncustomer,
omnibus or proprietary account. For purposes of this paragraph (f)(3),
if any person has an interest of 10 percent or more in ownership or
equity in, or guarantees, more than one account, or has guaranteed an
account in addition to his own account, all such accounts shall be
combined. A designated self-regulatory organization may grant an
exemption from the provisions of this paragraph to a futures commission
merchant with respect to any particular account on a continuous basis
provided the designated self-regulatory organization documents the
reasons for granting such an exemption and continues to monitor any such
account.
(4) A futures commission merchant shall report immediately by
telephone, confirmed in writing immediately by
[[Page 26]]
telegraphic or facsimile notice, whenever any commodity interest account
it carries is subject to a margin call, or call for other deposits
required by the futures commission merchant, that exceeds the futures
commission merchant's excess adjusted net capital, determined in
accordance with Sec. 1.17, and such call has not been answered by the
close of business on the day following the issuance of the call. This
applies to all accounts carried by the futures commission merchant,
whether customer, noncustomer, or omnibus, that are subject to
margining, including commodity futures and options. In addition to
actual margin deposits by an account owner, a futures commission
merchant may also take account of favorable market moves in determining
whether the margin call is required to be reported under this paragraph.
(5)(i) A futures commission merchant shall report immediately by
telephone, confirmed in writing immediately by telegraphic or facsimile
notice, whenever its excess adjusted net capital is less than six
percent of the maintenance margin required by the futures commission
merchant on all positions held in accounts of a noncustomer other than a
noncustomer who is subject to the minimum financial requirements of:
(A) A futures commission merchant, or
(B) The Securities and Exchange Commission for a securities broker
and dealer.
(ii) For purposes of paragraph (f)(5)(i), maintenance margin shall
include all deposits which the futures commission merchant requires the
noncustomer to maintain in order to carry its positions at the futures
commission merchant.
(g) A futures commission merchant shall provide written notice of a
substantial reduction in capital as compared to that last reported in a
financial report filed with the Commission pursuant to Sec. 1.10. This
notice shall be provided as follows:
(1) If any event or series of events, including any withdrawal,
advance, loan or loss cause, on a net basis, a reduction in net capital
(or, if the futures commission merchant is qualified to use the filing
option available under Sec. 1.10(h), tentative net capital as defined in
the rules of the Securities and Exchange Commission) of 20 percent or
more, notice must be provided within two business days of the event or
series of events causing the reduction; and
(2) If equity capital of the futures commission merchant or a
subsidiary or affiliate of the futures commission merchant consolidated
pursuant to Sec. 1.17(f) (or 17 CFR 240.15c3-1e) would be withdrawn by
action of a stockholder or a partner or by redemption or repurchase of
shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, or an unsecured
advance or loan would be made to a stockholder, partner, sole
proprietor, employee or affiliate, such that the withdrawal, advance or
loan would cause, on a net basis, a reduction in excess adjusted net
capital (or, if the futures commission merchant is qualified to use the
filing option available under Sec. 1.10(h), excess net capital as
defined in the rules of the Securities and Exchange Commission) of 30
percent or more, notice must be provided at least two business days
prior to the withdrawal, advance or loan that would cause the reduction:
Provided, however, That the provisions of paragraphs (g)(1) and (g)(2)
of this section do not apply to any futures or securities transaction in
the ordinary course of business between a futures commission merchant
and any affiliate where the futures commission merchant makes payment to
or on behalf of such affiliate for such transaction and then receives
payment from such affiliate for such transaction within two business
days from the date of the transaction.
(3) Upon receipt of such notice from a futures commission merchant,
the Director of the Division of Clearing and Intermediary Oversight or
the Director's designee may require that the futures commission merchant
provide or cause a Material Affiliated Person (as that term is defined
in Sec. 1.14(a)(2)) to provide, within three business days from the date
of request or such shorter period as the Division Director or designee
may specify, such other information as the Division Director or designee
determines to be necessary based
[[Page 27]]
upon market conditions, reports provided by the futures commission
merchant, or other available information.
(h) Whenever a person registered as a futures commission merchant
knows or should know that the total amount of its funds on deposit in
segregated accounts on behalf of customers, or that the total amount set
aside on behalf of customers trading on non-United States markets, is
less than the total amount of such funds required by the Act and the
Commission's rules to be on deposit in segregated or secured amount
accounts on behalf of such customers, the registrant must report
immediately by telephone, confirmed in writing immediately by
telegraphic or facsimile notice, such deficiency to the registrant's
designated self-regulatory organization and the principal office of the
Commission in Washington, D.C., to the attention of the Director and the
Chief Accountant of the Division of Clearing and Intermediary Oversight.
(i)(1) Every notice and written report required to be given or filed
by this section (except for notices required by paragraph (f) of this
section) by a futures commission merchant, an applicant for registration
as a futures commission merchant or a self-regulatory organization must
be filed with the regional office of the Commission nearest the
principal place of business of the applicant or registrant (except that
an applicant, registrant or self-regulatory organization under the
jurisdiction of the Commission's Western Regional Office must file such
notices and reports with the Southwestern Regional Office), with the
designated self-regulatory organization, if any, with the Securities and
Exchange Commission, if such applicant or registrant is a securities
broker or dealer, and with the National Futures Association, if the firm
is an applicant. In addition, every notice required to be given by this
section must also be filed with the principal office of the Commission
in Washington, DC. Each statement of financial condition, each statement
of the computation of the minimum capital requirements pursuant to
Sec. 1.17 of this part, and each schedule of segregation requirements
and funds on deposit in segregation required by this section must be
filed in accordance with the provisions of Sec. 1.10(d) of this part
unless otherwise indicated.
(2) Every notice and written report which an introducing broker or
applicant for registration as an introducing broker is required to give
or file by paragraphs (a), (c) and (d) of this section must be filed
with the National Futures Association (on behalf of the Commission),
with the designated self-regulatory organization, if any, and with every
futures commission merchant carrying or intending to carry customer
accounts for the introducing broker or applicant for registration as an
introducing broker. Any notice or report filed with the National Futures
Association pursuant to this paragraph shall be deemed for all purposes
to be filed with, and to be the official record of, the Commission.
(Approved by the Office of Management and Budget under control number
3038-0024)
[43 FR 39969, Sept. 8, 1978, as amended at 45 FR 6539, Jan. 29, 1980; 46
FR 63035, Dec. 30, 1981; 47 FR 41516, Sept. 21, 1982; 48 FR 35283, Aug.
3, 1983; 49 FR 5521, Feb. 13, 1984; 49 FR 39525, Oct. 9, 1984; 52 FR
28248, July 29, 1987; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17,
1988; 58 FR 10953, Feb. 23, 1993; 59 FR 66688, Dec. 28, 1994; 61 FR
19185, May 1, 1996; 62 FR 4640, Jan. 31, 1997; 63 FR 32731, June 16,
1998; 63 FR 45715, Aug. 27, 1998; 66 FR 20744, Apr. 25, 2001; 67 FR
62351, Oct. 7, 2002]
Sec. 1.13 [Reserved]
Sec. 1.14 Risk assessment recordkeeping requirements for futures commission merchants.
(a) Requirement to maintain and preserve information. (1) Each
futures commission merchant registered with the Commission pursuant to
Section 4d of the Act, unless exempt pursuant to paragraph (d) of this
section, shall prepare, maintain and preserve the following information:
(i) An organizational chart which includes the futures commission
merchant and each of its affiliated persons. Included in the
organizational chart shall be a designation of which affiliated persons
are ``Material Affiliated Persons'' as that term is used in paragraph
(a)(2) of this section, which Material Affiliated Persons file routine
financial or risk exposure reports with
[[Page 28]]
the Securities and Exchange Commission, a federal banking agency, an
insurance commissioner or other similar official or agency of a state,
or a foreign regulatory authority, and which Material Affiliated Persons
are dealers in financial instruments with off-balance sheet risk and, if
a Material Affiliated Person is such a dealer, whether it is also an
end-user of such instruments;
(ii) Written policies, procedures, or systems concerning the futures
commission merchant's:
(A) Method(s) for monitoring and controlling financial and
operational risks to it resulting from the activities of any of its
affiliated persons;
(B) Financing and capital adequacy, including information regarding
sources of funding, together with a narrative discussion by management
of the liquidity of the material assets of the futures commission
merchant, the structure of debt capital, and sources of alternative
funding;
(C) Establishing and maintaining internal controls with respect to
market risk, credit risk, and other risks created by the futures
commission merchant's proprietary and noncustomer clearing activities,
including systems and policies for supervising, monitoring, reporting
and reviewing trading activities in securities, futures contracts,
commodity options, forward contracts and financial instruments; policies
for hedging or managing risks created by trading activities or
supervising accounts carried for noncustomer affiliates, including a
description of the types of reviews conducted to monitor positions; and
policies relating to restrictions or limitations on trading activities:
Provided, however, that if the futures commission merchant has no such
written policies, procedures or systems, it must so state in writing;
(iii) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the futures
commission merchant's organizational structure, which shall include the
futures commission merchant and its other Material Affiliated Persons,
prepared in accordance with generally accepted accounting principles,
which consolidated balance sheets shall be audited by an independent
certified public accountant if an annual audit is performed in the
ordinary course of business, but which otherwise may be unaudited, and
which shall include appropriate explanatory notes. The consolidating
balance sheets may be those prepared by the futures commission
merchant's highest level Material Affiliated Person as part of its
internal financial reporting process. Any additional information
required to be filed under Sec. 1.15(a)(2)(iii) shall also be maintained
and preserved; and
(iv) Fiscal year-end consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary course
of business, but which otherwise may be unaudited, and which shall
include appropriate explanatory notes. The consolidating statements may
be those prepared by the futures commission merchant's highest level
Material Affiliated Person as part of its internal financial reporting
process. Any additional information required to be filed under
Sec. 1.15(a)(2)(iii) shall also be maintained and preserved.
(2) The determination of whether an affiliated person of a futures
commission merchant is a Material Affiliated Person shall involve
consideration of all aspects of the activities of, and the relationship
between, both entities, including without limitation, the following
factors:
(i) The legal relationship between the futures commission merchant
and the affiliated person;
(ii) The overall financing requirements of the futures commission
merchant and the affiliated person, and the degree, if any, to which the
futures commission merchant and the affiliated person are financially
dependent on each other;
[[Page 29]]
(iii) The degree, if any, to which the futures commission merchant
or its customers rely on the affiliated person for operational support
or services in connection with the futures commission merchant's
business;
(iv) The level of market, credit or other risk present in the
activities of the affiliated person; and
(v) The extent to which the affiliated person has the authority or
the ability to cause a withdrawal of capital from the futures commission
merchant.
(3) For purposes of this section and Sec. 1.15, the term Material
Affiliated Person does not include a natural person.
(4) The information, reports and records required by this section
shall be maintained and preserved, and made readily available for
inspection, in accordance with the provisions of Sec. 1.31.
(b) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(i), (a)(1)(iii) and
(a)(1)(iv) of this section with respect to a Material Affiliated Person
if:
(1) The futures commission merchant is required, or that Material
Affiliated Person is required, to maintain and preserve information, or
such information is maintained and preserved by the futures commission
merchant on behalf of the Material Affiliated Person, pursuant to
Sec. 240.17h-1T of this title, or such other risk assessment regulations
as the Securities and Exchange Commission may adopt, and maintains and
makes available for inspection by the Commission in accordance with the
provisions of this section copies of the records and reports maintained
and filed on Form 17-H (or such other forms or reports as may be
required) by such futures commission merchant or its Material Affiliated
Person with the Securities and Exchange Commission pursuant to
Secs. 240.17h-1T and 240.17h-2T of this title, or such other risk
assessment regulations as the Securities and Exchange Commission may
adopt;
(2) In the case of a Material Affiliated Person (including a foreign
banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant or such Material Affiliated Person maintains and
makes available for inspection by the Commission in accordance with the
provisions of this section copies of all reports submitted by such
Material Associated Person to the Federal banking agency pursuant to
section 5211 of the Revised Statutes, section 9 of the Federal Reserve
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b) of
the Home Owners' Loan Act, or section 5 of the Bank Holding Company Act
of 1956; or
(3) In the case of a Material Affiliated Person that is subject to
the supervision of an insurance commissioner or other similar official
or agency of a state, the futures commission merchant or such Material
Affiliated Person maintains and makes available for inspection by the
Commission in accordance with the provisions of this section copies of
the annual statements with schedules and exhibits prepared by the
Material Affiliated Person on forms prescribed by the National
Association of Insurance Commissioners or by a state insurance
commissioner.
(c) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(iii) and (a)(1)(iv) of
this section with respect to a Material Affiliated Person if such
futures commission merchant maintains and makes available, or causes
such Material Affiliated Person to make available, for inspection by the
Commission in accordance with the provisions of this section copies of
any financial or risk exposure reports filed by such Material Affiliated
Person with a foreign futures authority or other foreign regulatory
authority, provided that: (1) the futures commission merchant agrees to
use its best efforts to obtain from the Material Affiliated Person and
to cause the Material Affiliated Person to provide, directly or through
its foreign futures authority or other foreign regulatory authority, any
supplemental information the Commission may request and there is no
statute or other bar in the
[[Page 30]]
foreign jurisdiction that would preclude the futures commission
merchant, the Material Affiliated Person, the foreign futures authority
or other foreign regulatory authority from providing such information to
the Commission; or (2) the foreign futures authority or other foreign
regulatory authority with whom the Material Affiliated Person files such
reports has entered into an information-sharing agreement with the
Commission which is in effect as of the futures commission merchant's
fiscal year-end and which will allow the Commission to obtain the type
of information required herein. The futures commission merchant shall
maintain a copy of the original report and a copy translated into the
English language. For the purposes of this section, the term ``Foreign
Futures Authority'' shall have the meaning set forth in section 1a(10)
of the Act.
(d) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted net capital as of the futures commission
merchant's current fiscal year-end; provided, however, that such futures
commission merchant is not a clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this section,
other than paragraph (a)(1)(ii) of this section, either unconditionally
or on specified terms and conditions, any futures commission merchant
affiliated with such Reporting Futures Commission Merchant. The term
``Reporting Futures Commission Merchant'' shall mean, in the case of a
futures commission merchant that is affiliated with another registered
futures commission merchant, the futures commission merchant which
maintains the greater amount of adjusted net capital as last reported on
financial reports filed with the Commission pursuant to Sec. 1.10 unless
another futures commission merchant is acting as the Reporting Broker or
Dealer under Sec. 240.17h-2T of this title, or the Commission permits
another futures commission merchant to act as the Reporting Futures
Commission Merchant. In granting exemptions under this section, the
Commission shall consider, among other factors, whether the records
required by this section concerning the Material Affiliated Persons of
the futures commission merchant affiliated with the Reporting Futures
Commission Merchant will be available to the Commission pursuant to this
section or Sec. 1.15. A request for exemption filed under this paragraph
(d)(2) shall explain the basis for the designation of a particular
futures commission merchant as the Reporting Futures Commission Merchant
and will become effective on the thirtieth day after receipt of such
request by the Commission unless the Commission objects to the request
by that date.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(e) Location of records. A futures commission merchant required to
maintain records concerning Material Affiliated Persons pursuant to this
section may maintain those records either at the principal office of the
Material Affiliated Person or at a records storage facility, provided
that, except as set forth in paragraph (c) of this section, the records
are located within the boundaries of the United States and the records
are kept and available for inspection in accordance with Sec. 1.31. If
such records are maintained at a place other than the futures commission
merchant's principal place of business, the Material Affiliated Person
or other entity maintaining the records shall file with the Commission a
written undertaking, in a form acceptable to the Commission, signed by a
duly authorized person, to the effect that the records will be treated
as if the futures commission merchant were maintaining the records
pursuant to this section and that the entity maintaining the records
will permit examination of such records at any time, or from time
[[Page 31]]
to time during business hours, by representatives or designees of the
Commission and promptly furnish the Commission representative or its
designee true, correct, complete and current hard copy of all or any
part of such records. The election to maintain records at the principal
place of business of the Material Affiliated Person or at a records
storage facility pursuant to the provisions of this paragraph shall not
relieve the futures commission merchant required to maintain and
preserve such records from any of its responsibilities under this
section or Sec. 1.15.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Affiliated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. (1) Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing April 30,
1995 and the information required by paragraphs (a)(1)(iii) and
(a)(1)(iv) of this section commencing May 15, 1995 or, if December 31,
1994 is not the futures commission merchant's fiscal year-end, 135
calendar days following the first fiscal year-end occurring after
December 31, 1994.
(2) Each futures commission merchant whose registration becomes
effective after December 31, 1994 and is subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing 60
calendar days after registration become effective and the information
required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this section
commencing 105 calendar days following the first fiscal year-end
occurring after registration becomes effective.
[59 FR 66688, Dec. 28, 1994]
Sec. 1.15 Risk assessment reporting requirements for futures commission merchants.
(a) Reporting requirements with respect to information required to
be maintained by Sec. 1.14. (1) Each futures commission merchant
registered with the Commission pursuant to Section 4d of the Act, unless
exempt pursuant to paragraph (c) of this section, shall file the
following with the regional office with which it files periodic
financial reports by no later than April 30, 1995, provided that in the
case of a futures commission merchant whose registration becomes
effective after December 31, 1994, such futures commission merchant
shall file the following within 60 calendar days after the effective
date of such registration, or by April 30, 1995, whichever comes later:
(i) A copy of the organizational chart maintained by the futures
commission merchant pursuant to paragraph (a)(l)(i) of Sec. 1.14. Where
there is a material change in information provided, an updated
organizational chart shall be filed within sixty calendar days after the
end of the fiscal quarter in which the change has occurred; and
(ii) Copies of the financial, operational, and risk management
policies, procedures and systems maintained by the futures commission
merchant pursuant to paragraph (a)(l)(ii) of Sec. 1.14. If the futures
commission merchant has no such written policies, procedures or systems,
it must file a statement so indicating. Where there is a material change
in information provided, such change shall be reported within sixty
calendar days after the end of the fiscal quarter in which the change
has occurred.
(2) Each futures commission merchant registered with the Commission
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph
(c) of this section, shall file the following with the regional office
with which it files periodic financial reports within 105 calendar days
after the end of each fiscal year or, if a filing is made pursuant to a
written notice issued under paragraph (a)(2)(iii) of this section,
within the time period specified in the written notice:
(i) Fiscal year-end consolidated and consolidating balance sheets
for the
[[Page 32]]
highest level Material Affiliated Person within the futures commission
merchant's organizational structure, which shall include the futures
commission merchant and its other Material Affiliated Persons, prepared
in accordance with generally accepted accounting principles, which
consolidated balance sheets shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary course
of business, but which otherwise may be unaudited, and which
consolidated balance sheets shall include appropriate explanatory notes.
The consolidating balance sheets may be those prepared by the futures
commission merchant's highest level Material Affiliated Person as part
of its internal financial reporting process;
(ii) Fiscal year-end annual consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary course
of business, but which otherwise may be unaudited, and which
consolidated statements shall include appropriate explanatory notes. The
consolidating statements may be those prepared by the futures commission
merchant's highest level Material Affiliated Person as part of its
internal financial reporting process; and
(iii) Upon receiving written notice from any representative of the
Commission and within the time period specified in the written notice,
such additional information which the Commission determines is necessary
for a complete understanding of a particular affiliate's financial
impact on the futures commission merchant's organizational structure.
(3) For the purposes of this section, the term Material Affiliated
Person shall have the meaning used in Sec. 1.14.
(4) The reports required to be filed pursuant to paragraphs (a)(1)
and (a)(2) of this section shall be considered filed when received by
the regional office of the Commission with whom the futures commission
files financial reports pursuant to Sec. 1.10.
(b) [Reserved]
(c) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted net capital as of the futures commission
merchant's fiscal year-end; provided, however, that such futures
commission merchant is not a clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this section,
other than paragraph (a)(1)(ii) of this section, either unconditionally
or on specified terms and conditions, any futures commission merchant
affiliated with such Reporting Futures Commission Merchant. The term
``Reporting Futures Commission Merchant'' shall mean, in the case of a
futures commission merchant that is affiliated with another registered
futures commission merchant, the futures commission merchant which
maintains the greater amount of net capital as last reported on its
financial reports filed with the Commission pursuant to Sec. 1.10 unless
another futures commission merchant is acting as the Reporting Broker or
Dealer under Sec. 240.17h-2T of this title or the Commission permits
another futures commission merchant to act as the Reporting Futures
Commission Merchant. In granting exemptions under this section, the
Commission shall consider, among other factors, whether the records and
other information required to be maintained pursuant to Sec. 1.14
concerning the Material Affiliated Persons of the futures commission
merchant affiliated with the Reporting Futures Commission Merchant will
be available to the Commission pursuant to the provisions of this
section. A request for exemption filed under this paragraph (c)(2) shall
explain the basis for the designation of a
[[Page 33]]
particular futures commission merchant as the Reporting Futures
Commission Merchant and will become effective on the thirtieth day after
receipt of such request by the Commission unless the Commission objects
to the request by that date. The Reporting Futures Commission Merchant
must submit the information required by paragraph (a)(1)(ii) of this
section on behalf of its affiliated futures commission merchants.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(d) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. (1) In the
case of a futures commission merchant which is required to file, or has
a Material Affiliated Person which is required to file, Form 17-H (or
such other forms or reports as may be required) with the Securities and
Exchange Commission pursuant to Sec. 240.17h-2T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission may adopt, such futures commission merchant shall be deemed
to be in compliance with the reporting requirements of paragraphs
(a)(1)(i) and (a)(2) of this section if the futures commission merchant
furnishes, in accordance with paragraph (a)(2) of this section, a copy
of the most recent Form 17-H filed by the futures commission merchant or
its Material Affiliated Person with the Securities and Exchange
Commission, provided however, that if the futures commission merchant
has designated any of its affiliated persons as Material Affiliated
Persons for purposes of this section and Sec. 1.14 which are not
designated as Material Associated Persons for purposes of the Form 17-H
filed pursuant to Secs. 240.17h-1T and 240.17h-2T of this title, the
futures commission must also designate any such affiliated person as a
Material Affiliated Person on the organizational chart required as Item
1 of Part I of Form 17-H. To comply with paragraphs (a)(1)(i) and (a)(2)
of this section, such futures commission merchant may, at its option,
file Form 17-H in its entirety or file such form without the information
required under Part II of Form 17-H.
(2) In the case of a Material Affiliated Person (including a foreign
banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to such Material Affiliated Person if the futures commission merchant or
such Material Affiliated Person maintains in accordance with Sec. 1.14
copies of all reports filed by the Material Affiliated Person with the
Federal banking agency pursuant to section 5211 of the Revised Statutes,
section 9 of the Federal Reserve Act, section 7(a) of the Federal
Deposit Insurance Act, section 10(b) of the Home Owners' Loan Act, or
section 5 of the Bank Holding Company Act of 1956.
(3) In the case of a futures commission merchant that has a Material
Affiliated Person that is subject to the supervision of an insurance
commissioner or other similar official or agency of a state, such
futures commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to the Material Affiliated Person if:
(i) With respect to a Material Affiliated Person organized as a
mutual insurance company or a non-public stock company, the futures
commission merchant or such Material Affiliated Person maintains in
accordance with Sec. 1.14 copies of the annual statements with schedules
and exhibits prepared by the Material Affiliated Person on forms
prescribed by the National Association of Insurance Commissioners or by
a state insurance commissioner; and
(ii) With respect to a Material Affiliated Person organized as a
public stock company, the futures commission merchant or such Material
Affiliated Person maintains, in addition to the annual statements with
schedules and exhibits required to be maintained pursuant to Sec. 1.14,
copies of the filings made
[[Page 34]]
by the Material Affiliated Person pursuant to sections 13 or 15 of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
(4) No futures commission merchant shall be required to furnish to
the Commission any examination report of any Federal banking agency or
any supervisory recommendations or analyses contained therein with
respect to a Material Affiliated Person that is subject to the
regulation of a Federal banking agency. All information received by the
Commission pursuant to this section concerning a Material Affiliated
Person that is subject to examination by or the reporting requirements
of a Federal banking agency shall be deemed confidential for the
purposes of section 8 of the Act.
(5) The furnishing of any information or documents by a futures
commission merchant pursuant to this section shall not constitute an
admission for any purpose that a Material Affiliated Person is otherwise
subject to the Act.
(e) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to a Material Affiliated Person if such futures commission merchant
furnishes, or causes such Material Affiliated Person to make available,
in accordance with the provisions of this section, copies of any
financial or risk exposure reports filed by such Material Affiliated
Person with a foreign futures authority or other foreign regulatory
authority, provided that:
(1) The futures commission merchant agrees to use its best efforts
to obtain from the Material Affiliated Person and to cause the Material
Affiliated Person to provide, directly or through its foreign futures
authority or other foreign regulatory authority, any supplemental
information the Commission may request and there is no statute or other
bar in the foreign jurisdiction that would preclude the futures
commission merchant, the Material Affiliated Person, the foreign futures
authority or other foreign regulatory authority from providing such
information to the Commission; or
(2) The foreign futures authority or other foreign regulatory
authority with whom the Material Affiliated Person files such reports
has entered into an information sharing agreement with the Commission
which is in effect as of the futures commission merchant's fiscal year-
end and which will allow the Commission to obtain the type of
information required herein. The futures commission merchant shall file
a copy of the original report and a copy translated into the English
language. For the purposes of this section, the term ``Foreign Futures
Authority'' shall have the meaning set forth in section 1a(10) of the
Act.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Associated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall file the information required by paragraph (a)(1) of
this section no later than April 30, 1995 and the information required
by paragraph (a)(2) of this section no later than May 15, 1995. Each
futures commission merchant whose registration becomes effective after
December 31, 1994 and is subject to the requirements of this section
shall file the information required by paragraph (a)(1) of this section
within 60 calendar days after registration is granted, or by April 30,
1995, whichever comes later and the information required by paragraph
(a)(2) of this section within 105 calendar days after registration is
granted or by May 15, 1995, whichever comes later.
[59 FR 66690, Dec. 28, 1994; 60 FR 13901, Mar. 15, 1995]
Sec. 1.16 Qualifications and reports of accountants.
(a) Definitions--(1) Accountant's report. The term ``accountant's
report,'' when used in regard to financial statements and schedules,
means a document in which an independent licensed or certified public
accountant indicates the scope of the audit (or examination) which he
has made and sets forth his
[[Page 35]]
opinion regarding the financial statements and schedules taken as a
whole or an assertion to the fact that an overall opinion cannot be
expressed. When an overall opinion cannot be expressed, the reasons
therefore must be stated.
(2) Audit or examination. The terms ``audit'' and ``examination,''
when used in regard to financial statements and schedules, mean an
examination of the statements and schedules by an accountant in
accordance with generally accepted auditing standards for the purposes
of expressing an opinion thereon.
(3) Certified. The term ``certified,'' when used in regard to
financial statements and schedules, means audited and reported upon with
an opinion expressed by an independent certified public accountant or
independent licensed public accountant.
(4) Customer. The term ``customer'' means customer (as defined in
Sec. 1.3(k)) and option customer (as defined in Sec. 1.3(jj) of this
part and in Sec. 32.1(c) of this chapter) and includes a foreign futures
and foreign options customer (as defined in Sec. 30.1(c) of this
chapter).
(b) Qualifications of accountants. (1) The Commission will recognize
any person as a certified public accountant who is duly registered and
in good standing as such under the laws of the place of his residence or
principal office. The Commission will recognize any person as a licensed
public accountant who was duly licensed on or before December 31, 1970,
and is in good standing as such under the laws of the place of his
residence or principal office.
(2) The Commission will not recognize any certified public
accountant or licensed public accountant as independent who is not in
fact independent. For example, an accountant will not be considered
independent with respect to any applicant or registrant or any parent,
subsidiary, or other affiliate of such applicant or registrant (i) in
which, during the period of his professional engagement to examine the
financial statements and schedules being reported on or at the date of
his report, he or his firm or a member thereof had, or was committed to
acquire, any direct financial interest or any material indirect
financial interest, or (ii) with which, during the period of his
professional engagement to examine the financial statements and
schedules being reported on, at the date of his report or during the
period covered by the financial statements, he or his firm or a member
thereof was connected as a promoter, underwriter, voting trustee,
director, officer, or employee, except that a firm will be deemed
independent with respect to an applicant or registrant and its
affiliates if a former employee or officer of such applicant or
registrant or any such affiliate is employed by the firm and such
individual has completely disassociated himself from the applicant or
registrant and its affiliates and does not participate in auditing
financial statements and schedules of the applicant or registrant or its
affiliates covering any period of his employment by the applicant or
registrant or its affiliates. An accountant will not be considered
independent if he or his firm or a member thereof performs manual or
automated bookkeeping services or assumes responsibility for maintenance
of the accounting records, including accounting classification
decisions, of such applicant or registrant or any of its affiliates. For
the purposes of this Sec. 1.16(b), the term ``member'' means all
partners in the firm and all professional employees participating in the
audit or located in the office of the firm participating in a
significant portion of the audit.
(3) In determining whether an accountant may in fact not be
independent with respect to a particular applicant or registrant, the
Commission will give appropriate consideration to all relevant
circumstances, including evidence bearing on all relationships between
the accountant and that applicant or registrant or any affiliate
thereof, and will not confine itself to the relationship existing in
connection with the filing of reports with the Commission.
(c) Accountant's reports--(1) Technical requirements. The
accountant's report (i) must be dated, (ii) must be signed manually,
(iii) must indicate the city and State where issued and (iv) must
identify without detailed enumeration
[[Page 36]]
the financial statements covered by the report.
(2) Representations as to the audit. The accountant's report (i)
must state whether the audit was made in accordance with generally
accepted auditing standards, and (ii) must designate any auditing
procedures deemed necessary by the accountant under the circumstances of
the particular case which have been omitted and the reasons for their
omission. However, nothing in this paragraph (c)(2) shall be construed
to imply authority for the omission of any procedure which independent
accountants would ordinarily employ in the course of an audit made for
the purposes of expressing the opinion required by paragraph (c)(3) of
this section.
(3) Opinion to be expressed. The accountant's report must state
clearly: (i) The opinion of the accountant with respect to the financial
statements and schedules covered by the report and the accounting
principles and practices reflected therein and (ii) the opinion of the
accountant as to the consistency of the application of the accounting
principles, or as to any changes in such principles which have material
effect on the financial statements and schedules.
(4) Exceptions. Any matters to which the accountant takes exception
must be clearly identified, such exceptions specifically and clearly
stated, and to the extent practicable, the effect of each exception on
related financial statements and schedules given.
(5) Accountant's report on material inadequacies. A registrant must
file concurrently with the annual audit report a supplemental report by
the accountant describing any material inadequacies found to exist or
found to have existed since the date of the previous audit. An applicant
must file concurrently with the audit report a supplemental report by
the accountant describing any material inadequacies found to exist as of
the date of the Form 1-FR being filed: Provided, however, That if such
applicant is registered with the Securities and Exchange Commission as a
securities broker or dealer, and it files (in accordance with
Sec. 1.10(h)) a copy of its Financial and Operational Combined Uniform
Single Report under the Securities Exchange Act of 1934, part II or part
IIA, in lieu of Form 1-FR, the accountant's supplemental report must be
made as of the date of such report. The supplemental report must
indicate any corrective action taken or proposed by the applicant or
registrant in regard thereto. If the audit did not disclose any material
inadequacies, the supplemental report must so state.
(d) Audit objectives. (1) The audit must be made in accordance with
generally accepted auditing standards and must include a review and
appropriate tests of the accounting system, the internal accounting
control, and the procedures for safeguarding customer and firm assets in
accordance with the provisions of the Act and the regulations
thereunder, since the prior examination date. The audit must include all
procedures necessary under the circumstances to enable the independent
licensed or certified public accountant to express an opinion on the
financial statements and schedules. The scope of the audit and review of
the accounting system, the internal controls, and procedures for
safeguarding customer and firm assets must be sufficient to provide
reasonable assurance that any material inadequacies existing at the date
of the examination in (i) the accounting system, (ii) the internal
accounting controls, and (iii) the procedures for safeguarding customer
and firm assets (including, in the case of a futures commission
merchant, the segregation requirements of section 4d(2) of the Act and
these regulations and the secured amount requirements of the Act and
these regulations) will be discovered. Additionally, as specified
objectives the audit must include reviews of the practices and
procedures followed by the registrant in making (A) periodic
computations of the minimum financial requirements pursuant to Sec. 1.17
and (B) in the case of a futures commission merchant, daily computations
of the segregation requirements of section 4d(2) of the Act and these
regulations and the secured amount requirements of the Act and these
regulations.
(2) A material inadequacy in the accounting system, the internal
accounting controls, the procedures for safeguarding customer and firm
assets, and
[[Page 37]]
the practices and procedures referred to in paragraph (d)(1) of this
section which is to be reported in accordance with paragraph (e)(2) of
this section includes any conditions which contributed substantially to
or, if appropriate corrective action is not taken, could reasonably be
expected to:
(i) Inhibit an applicant or registrant from promptly completing
transactions or promptly discharging his responsibilities to customers
or other creditors;
(ii) Result in material financial loss;
(iii) Result in material misstatement of the applicant's or
registrant's financial statements and schedules; or
(iv) Result in violations of the Commission's segregation or secured
amount (in the case of a futures commission merchant), recordkeeping or
financial reporting requirements to the extent that could reasonably be
expected to result in the conditions described in paragraph (d)(2) (i),
(ii), or (iii) of this section.
(e) Extent and timing of audit procedures. (1) The extent and timing
of audit procedures are matters for the independent public accountant to
determine on the basis of his review and evaluation of existing internal
controls and other audit procedures performed in accordance with
generally accepted auditing standards and the audit objectives set forth
in paragraph (d) of this section. In determining the extent of testing,
consideration must be given to the materiality of an area and to the
possible effect on the financial statements and schedules of a material
misstatement in a related account.
(2) If during the course of an audit or interim work, the
independent public accountant determines that any material inadequacies
exist in the accounting system, in the internal accounting control, in
the procedures for safeguarding customer or firm assets, or as otherwise
defined in paragraph (d) of this section, he must call such inadequacies
to the attention of the applicant or registrant, which has the
responsibility to give notice to the National Futures Association and,
if an applicant, or the Commission and the designated self-regulatory
organization, if any, if a registrant, in accordance with paragraphs (d)
and (g) of Sec. 1.12: Provided, however, That if the applicant or
registrant is an introducing broker or applicant for registration as an
introducing broker, it also has the responsibility to give notice to the
National Futures Association, the designated self-regulatory
organization, if any, and every futures commission merchant carrying or
intending to carry customer accounts for the introducing broker or
applicant for registration as an introducing broker. The applicant or
registrant must also furnish the accountant with a copy of said notice
within three (3) business days. If the accountant fails to receive such
notice from the applicant or registrant within three (3) business days,
or if he disagrees with the statements contained in the notice of the
applicant or registrant, the accountant must inform the National Futures
Association, in the case of an applicant, or the Commission and the
designated self-regulatory organization, if any, in the case of a
registrant, by reporting the material inadequacy and, in the case of an
applicant or registrant which is an introducing broker or applicant for
registration as in introducing broker, the accountant must also inform
the National Futures Association, the designated self-regulatory
organization, if any, and every futures commission merchant carrying or
intending to carry customer accounts for the introducing an introducing
broker, within three (3) business days thereafter. Such report from the
accountant must, if the applicant or registrant failed to file a notice,
describe the material inadequacies found to exist. If the applicant or
registrant filed a notice, the accountant must file a report detailing
the aspects, if any, of the applicant's or registrant's notice with
which the accountant does not agree.
(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 file with the principal
office of the Commission in Washington, DC, an application for extension
of time to a specified date not more than 90 days after the date as of
which the certified financial statements and
[[Page 38]]
schedules were to have been filed. Notice of such application must be
sent to the designated self-regulatory organization, if any. The
application must be made by the registrant and must:
(i) State the reasons for the requested extension;
(ii) Indicate that the inability to make a timely filing is due to
circumstances beyond the control of the registrant, if such is the case,
and describe briefly the nature of such circumstances;
(iii) Be accompanied by the latest available formal computation of
the registrant's adjusted net capital and minimum financial requirements
computed in accordance with Sec. 1.17;
(iv) In the case of a futures commission merchant, be accompanied by
the latest available computation of required segregation and by a
computation of the amount of money, securities, and property segregated
on behalf of customers, and by a computation of secured amounts and
funds held in separate accounts for foreign futures and foreign options
customers in accordance with Sec. 30.7 of this chapter, as of the date
of the latest available computation;
(v) Contain an agreement to file the report on or before the date
specified by the registrant in the application;
(vi) Be received by the principal office of the Commission in
Washington, DC and by the designated self-regulatory organization, if
any, prior to the date on which the report is due; and
(vii) Be accompanied by a letter from the independent public
accountant answering the following questions:
(A) What specifically are the reasons for the extension request?
(B) On the basis of that part of your audit to date, do you have any
indication that may cause you to consider commenting on any material
inadequacies in the accounting system, internal accounting controls or
procedures for safeguarding customer or firm assets?
(C) Do you have any indication from the part of your audit completed
to date that would lead you to believe that the firm was or is not
meeting the minimum capital requirements specified in Sec. 1.17 or (in
the case of a futures commission merchant) either the segregation
requirements of section 4d(2) of the Act and these regulations or the
secured amount requirements of the Act and these regulations, or has any
significant financial or recordkeeping problems?
(2) Within ten calendar days after receipt of an application for
extension of time, the Commission shall: (i) Notify the registrant of
the grant or denial of the requested extension; or (ii) indicate to the
registrant that additional time is required to analyze the request, in
which case the amount of time needed will be specified.
(3) On the written request of any designated self-regulatory
organization or registrant, or on its own motion, the Commission may
grant an extension of time or an exemption from any of the certified
financial reporting requirements of this chapter either unconditionally
or on specified terms and conditions.
(g) Replacement of accountant. (1) In the event (i) the independent
public accountant who was previously engaged as the principal accountant
to audit an applicant's or registrant's financial statements resigns (or
indicates he declines to stand for re-election after the completion of
the current audit) or is dismissed as the applicant's or registrant's
principal accountant, (ii) another independent accountant is engaged as
principal accountant, or (iii) an independent accountant on whom the
principal accountant expresses reliance in his report regarding a
subsidiary resigns (or formally indicates he declines to stand for re-
election after completion of the current audit) or is dismissed or
another independent public accountant is engaged to audit that
subsidiary, an applicant shall file written notice of such occurrence
with the National Futures Association, and a registrant shall file
written notice of such occurrence with the Commission at its principal
office in Washington, DC, and with the designated self-regulatory
organization, if any, not more than 15 business days after such
occurrence.
(2) Such notice must state (i) the date of such resignation (or
declination to stand for re-election, dismissal or engagement) and (ii)
whether, in connection with the audit of the two most recent fiscal
years and any subsequent
[[Page 39]]
interim period preceding such resignation, dismissal or engagement,
there were any disagreements with the former accountant on any matter of
accounting principles or practices, financial statements disclosure,
auditing scope or procedures, or compliance with the applicable rules of
the Commission, which, if not resolved to the satisfaction of the former
accountant, would have caused him to make reference in connection with
his report to the subject matter of the disagreements (if so, describe
such disagreements). The disagreements required to be reported in this
paragraph (g)(2) include both those resolved to the former accountant's
satisfaction and those not resolved to the former accountant's
satisfaction. Disagreements contemplated by this paragraph (g)(2) are
those which occur at the decision-making level, i.e., between personnel
of the applicant or registrant responsible for presentation of its
financial statements and schedules and personnel of the accounting firm
responsible for rendering its report. The notice must also state whether
the accountant's report on the financial statements and schedules for
any of the past two years contained an adverse opinion or a disclaimer
of opinion or was qualified as to uncertainties, audit scope, or
accounting principles (if so, describe the nature of each such adverse
opinion, disclaimer of opinion, or qualification). An applicant must
also request the former accountant to furnish the applicant with a
letter addressed to the National Futures Association, and a registrant
must also request the former accountant to furnish the registrant with a
letter addressed to the Commission, stating whether he agrees with the
statements contained in the notice of the applicant or registrant and,
if not, stating the respects in which he does not agree. Each copy of
the notice and accountant's letter must be manually signed by the sole
proprietor or a general partner or a duly authorized corporate officer
of the applicant or registrant, as appropriate, and by the accountant.
(3) If (i) within the 24 months prior to the date of the most recent
audited financial statement, a notice has been filed pursuant to
paragraph (g)(1) of this section reporting a change of accountants, (ii)
included in such filing there is a reported disagreement on any matters
of accounting principles or practices, financial statements disclosure,
auditing scope, or noncompliance with the applicable rules of the
Commission, (iii) during the fiscal year in which the change in
accountants took place or during the subsequent fiscal year, there have
been any transactions or events similar to those which involved a
reported disagreement, and (iv) such transactions or events are material
and were accounted for or disclosed in a manner different from that
which the former accountant apparently would have concluded was
required, the existence and nature of the disagreements and also the
effect on the financial statements must be stated in a written notice to
the National Futures Association, in the case of an applicant, or to the
Commission at its principal office in Washington, DC, and the designated
self-regulatory organization, if any, in the case of a registrant, if
the method which the former accountant apparently would have concluded
was required had been followed. These disclosures need not be made if
the method asserted by the former accountant ceases to be generally
accepted because of authoritative standards or interpretations
subsequently issued. The notice required by this paragraph (g)(3) must
be filed by the applicant or registrant concurrently with the financial
statements and schedules to which it pertains.
(h) Exemption for introducing broker or applicant therefor. The
provisions of this section do not apply to an introducing broker which
is operating pursuant to a guarantee agreement, nor do such provisions
apply to an applicant for registration as an introducing broker who
files concurrently with such application a guarantee agreement, provided
such introducing
[[Page 40]]
broker or applicant therefor is not also a securities broker or dealer.
(Approved by the Office of Management and Budget under control numbers
3038-0007, 3038-0024)
[43 FR 39970, Sept. 8, 1978, as amended at 46 FR 54516, Nov. 3, 1981; 46
FR 63035, Dec. 30, 1981; 48 FR 35284, Aug. 3, 1983; 49 FR 39526, Oct. 9,
1984; 52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17, 1988]
Sec. 1.17 Minimum financial requirements for futures commission merchants and introducing brokers.
(a)(1)(i) Except as provided in paragraph (a)(2)(i) of this section,
each person registered as a futures commission merchant must maintain
adjusted net capital equal to or in excess of the greatest of:
(A) $250,000;
(B) Four percent of the following amount: The customer funds
required to be segregated pursuant to the Act and the regulations in
this part, plus the funds of opt-out customers that, but for the
election to opt out pursuant to Sec. 1.68, would be required to be
segregated, plus the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by customers on or
subject to the rules of a contract market or a foreign board of trade
for which the full premiums have been paid: Provided, however, that the
deduction for each customer shall be limited to the amount of segregated
customer funds in such customer's account(s) and foreign futures and
foreign options secured accounts;
(C) The amount of adjusted net capital required by a registered
futures association of which it is a member; or
(D) For securities brokers and dealers, the amount of net capital
required by Rule 15c3-1(a) of the Securities and Exchange Commission (17
CFR 240.15c3-1(a)).
(ii) Each person registered as a futures commission merchant engaged
in soliciting or accepting orders and customer funds related thereto for
the purchase or sale of any commodity for future delivery or any
commodity option on or subject to the rules of a registered derivatives
transaction execution facility from any customer who does not qualify as
an ``institutional customer'' as defined in Sec. 1.3(g) must:
(A) Be a clearing member of a derivatives clearing organization and
maintain net capital in the amount of the greater of $20,000,000 or the
amounts otherwise specified in paragraph (a)(1)(i) of this section; or
(B) Receive orders on behalf of the customer from a commodity
trading advisor acting in accordance with Sec. 4.32 of this chapter.
(iii) Except as provided in paragraph (a)(2) of this section, each
person registered as an introducing broker must maintain adjusted net
capital equal to or in excess of the greatest of:
(A) $30,000;
(B) The amount of adjusted net capital required by a registered
futures association of which it is a member; or
(C) For securities brokers and dealers, the amount of net capital
required by Rule 15c3-1(a) of the Securities and Exchange Commission (17
CFR 240.15c3-1(a)).
(2)(i) The requirements of paragraph (a)(1) of this section shall
not be applicable if the registrant is a member of a designated self-
regulatory organization and conforms to minimum financial standards and
related reporting requirements set by such designated self-regulatory
organization in its bylaws, rules, regulations or resolutions approved
by the Commission pursuant to section 4f(b) of the Act and Sec. 1.52.
(ii) The minimum requirements of paragraph (a)(1)(ii) of this
section shall not be applicable to an introducing broker which elects to
meet the alternative adjusted net capital requirement for introducing
brokers by operating pursuant to a guarantee agreement which meets the
requirements set forth in Sec. 1.10(j). Such an introducing broker shall
be deemed to meet the adjusted net capital requirement under this
section so long as such agreement is binding and in full force and
effect, and, if the introducing broker is also a securities broker or
dealer, it maintains the amount of net capital required by Rule 15c3-
1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).
(3) No person applying for registration as a futures commission
merchant or as an introducing broker shall be so
[[Page 41]]
registered unless such person affirmatively demonstrates to the
satisfaction of the National Futures Association that it complies with
the financial requirements of this section. Each registrant must be in
compliance with this section at all times and must be able to
demonstrate such compliance to the satisfaction of the Commission or the
designated self-regulatory organization.
(4) A futures commission merchant who is not in compliance with this
section, or is unable to demonstrate such compliance as required by
paragraph (a)(3) of this section, must transfer all customer accounts
and immediately cease doing business as a futures commission merchant
until such time as the firm is able to demonstrate such compliance:
Provided, however, The registrant may trade for liquidation purposes
only unless otherwise directed by the Commission and/or the designated
self-regulatory organization: And, Provided further, That if such
registrant immediately demonstrates to the satisfaction of the
Commission or the designated self-regulatory organization the ability to
achieve compliance, the Commission or the designated self-regulatory
organization may in its discretion allow such registrant up to a maximum
of 10 business days in which to achieve compliance without having to
transfer accounts and cease doing business as required above. Nothing in
this paragraph (a)(4) shall be construed as preventing the Commission or
the designated self-regulatory organization from taking action against a
registrant for non-compliance with any of the provisions of this
section.
(5) An introducing broker who is not in compliance with this
section, or is unable to demonstrate such compliance as required by
paragraph (a)(3) of this section, must immediately cease doing business
as an introducing broker until such time as the registrant is able to
demonstrate such compliance: Provided, however, That if such registrant
immediately demonstrates to the satisfaction of the Commission or the
designated self-regulatory organization the ability to achieve
compliance, the Commission or the designated self-regulatory
organization may in its discretion allow such registrant up to a maximum
of 10 business days in which to achieve compliance without having to
cease doing business as required above. If the introducing broker is
required to cease doing business in accordance with this paragraph
(a)(5), the introducing broker must immediately notify each of its
customers and the futures commission merchants carrying the account of
each customer that it has ceased doing business. Nothing in this
paragraph (a)(5) shall be construed as preventing the Commission or the
designated self-regulatory organization from taking action against a
registrant for non-compliance with any of the provisions of this
section.
(b) For the purposes of this section:
(1) Where the applicant or registrant has an asset or liability
which is defined in Securities Exchange Act Rule 15c3-1 (Sec. 240.15c3-1
of this title) the inclusion or exclusion of all or part of such asset
or liability for the computation of adjusted net capital shall be in
accordance with Sec. 240.15c3-1 of this title, unless specifically
stated otherwise in this section.
(2) Customer means customer (as defined in Sec. 1.3(k)), option
customer (as defined in Sec. 1.3(jj) of this part and in Sec. 32.1(c) of
this chapter) and includes a foreign futures and foreign options
customer (as defined in Sec. 30.1(c) of this chapter).
(3) Proprietary account means a commodity futures or options account
carried on the books of the applicant or registrant for the applicant or
registrant itself, or for general partners in the applicant or
registrant.
(4) Noncustomer account means a commodity futures or option account
carried on the books of the applicant or registrant which is not
included in the definition of customer (as defined in paragraph (b)(2))
or proprietary account (as defined in paragraph (b)(3) of this section).
(5) Clearing organization means clearing organization (as defined in
Sec. 1.3(d)) and includes a clearing organization of any board of trade.
(6) Business day means any day other than a Sunday, Saturday, or
holiday.
(c) Definitions: For the purposes of this section:
[[Page 42]]
(1) Net capital means the amount by which current assets exceed
liabilities. In determining ``net capital'':
(i) Unrealized profits shall be added and unrealized losses shall be
deducted in the accounts of the applicant or registrant, including
unrealized profits and losses on fixed price commitments and forward
contracts;
(ii) All long and all short positions in commodity options which are
traded on a contract market and listed security options shall be marked
to their market value and all long and all short securities and
commodities positions shall be marked to their market value;
(iii) The value attributed to any commodity option which is not
traded on a contract market shall be the difference between the option's
strike price and the market value for the physical or futures contract
which is the subject of the option. In the case of a call commodity
option which is not traded on a contract market, if the market value for
the physical or futures contract which is the subject of the option is
less than the strike price of the option, it shall be given no value. In
the case of a put commodity option which is not traded on a contract
market, if the market value for the physical or futures contract which
is the subject of the option is more than the strike price of the
option, it shall be given no value; and
(iv) The value attributed to any unlisted security option shall be
the difference between the option's exercise value or striking value and
the market value of the underlying security. In the case of an unlisted
call, if the market value of the underlying security is less than the
exercise value or striking value of such call, it shall be given no
value; and, in the case of an unlisted put, if the market value of the
underlying security is more than the exercise value or striking value of
the unlisted put, it shall be given no value.
(2) The term current assets means cash and other assets or resources
commonly identified as those which are reasonably expected to be
realized in cash or sold during the next 12 months. ``Current assets''
shall:
(i) Exclude any unsecured commodity futures or option account
containing a ledger balance and open trades, the combination of which
liquidates to a deficit or containing a debit ledger balance only:
Provided, however, Deficits or debit ledger balances in unsecured
customers', non-customers', and proprietary accounts, which are the
subject of calls for margin or other required deposits may be included
in current assets until the close of business on the business day
following the date on which such deficit or debit ledger balance
originated providing that the account had timely satisfied, through the
deposit of new funds, the previous day's debit or deficits, if any, in
its entirety.
(ii) Exclude all unsecured receivables, advances and loans except
for:
(A) Receivables resulting from the marketing of inventories commonly
associated with the business activities of the applicant or registrant
and advances on fixed price purchases commitments: Provided, Such
receivables or advances are outstanding no longer than 3 calendar months
from the date that they are accrued;
(B) Interest receivable, floor brokerage receivable, commissions
receivable from other brokers or dealers (other than syndicate profits),
mutual fund concessions receivable and management fees receivable from
registered investment companies and commodity pools: Provided, Such
receivables are outstanding no longer than thirty (30) days from the
date they are due; and dividends receivable outstanding no longer than
thirty (30) days from the payable date;
(C) Receivables from clearing organizations and securities clearing
organizations;
(D) Receivables from registered futures commission merchants or
brokers, resulting from commodity futures or option transactions, except
those specifically excluded under paragraph (c)(2)(i) of this section;
(E) Insurance claims which arise from a reportable segment of the
applicant's or registrant's overall business activities, as defined in
generally accepted accounting principles, other than in the commodity
futures, commodity option, security and security option segments of the
applicant's or registrant's business activities which
[[Page 43]]
are not outstanding more than 3 calendar months after the date they are
recorded as a receivable;
(F) All other insurance claims not subject to paragraph
(c)(2)(ii)(E) of this section, which are not older than seven (7)
business days from the date the loss giving rise to the claim is
discovered; insurance claims which are not older than twenty (20)
business days from the date the loss giving rise to the claim is
discovered and which are covered by an option of outside counsel that
the claim is valid and is covered by insurance policies presently in
effect; insurance claims which are older than twenty (20) business days
from the date the loss giving rise to the claim is discovered and which
are covered by an opinion of outside counsel that the claim is valid and
is covered by insurance policies presently in effect and which have been
acknowledged in writing by the insurance carrier as due and payable:
Provided, Such claims are not outstanding longer than twenty (20)
business days from the date they are so acknowledged by the carrier;
(iii) Exclude all prepaid expenses and deferred charges;
(iv) Exclude all inventories except for:
(A) Readily marketable spot commodities; or spot commodities which
``adequately collateralize'' indebtedness under paragraph (c)(7) of this
section;
(B) Securities which are considered ``readily marketable'' (as
defined in Sec. 240.15c3-1(c)(11) of this title) or which ``adequately
collateralize'' indebtedness under paragraph (c)(7) of this section;
(C) Work in process and finished goods which result from the
processing of commodities at market value;
(D) Raw materials at market value which will be combined with spot
commodities to produce a finished proc- essed commodity; and
(E) Inventories held for resale commonly associated with the
business activities of the applicant or registrant;
(v) Include fixed assets and assets which otherwise would be
considered noncurrent to the extent of any long-term debt adequately
collateralized by assets acquired for use in the ordinary course of the
trade or business of an applicant or registrant and any other long-term
debt adequately collateralized by assets of the applicant or registrant
if the sole recourse of the creditor for nonpayment of such liability is
to such asset: Provided, Such liabilities are not excluded from
liabilities in the computation of net capital under paragraph (c)(4)(vi)
of this section;
(vi) Exclude all assets doubtful of collection or realization less
any reserves established therefor;
(vii) Include, in the case of future income tax benefits arising as
a result of unrealized losses, the amount of such benefits not exceeding
the amount of income tax liabilities accrued on the books and records of
the applicant or registrant, but only to the extent such benefits could
have been applied to reduce accrued tax liabilities on the date of the
capital computation, had the related unrealized losses been realized on
that date;
(viii) Include guaranteee deposits with clearing organizations and
stock in clearing organizations to the extent of its margin value;
(ix) In the case of an introducing broker or an applicant for
registration as an introducing broker, include 50 percent of the value
of a guarantee or security deposit with a futures commission merchant
which carries or intends to carry accounts for the customers of the
introducing broker; and
(x) Exclude exchange memberships.
(3) A loan or advance or any other form of receivable shall not be
considered ``secured'' for the purposes of paragraph (c)(2) of this
section unless the following conditions exist:
(i) The receivable is secured by readily marketable collateral which
is otherwise unencumbered and which can be readily converted into cash:
Provided, however, That the receivable will be considered secured only
to the extent of the market value of such collateral after application
of the percentage deductions specified in paragraph (c)(5) of this
section; and
(ii)(A) The readily marketable collateral is in the possession or
control of the applicant or registrant; or
(B) The applicant or registrant has a legally enforceable, written
security agreement, signed by the debtor, and
[[Page 44]]
has a perfected security interest in the readily marketable collateral
within the meaning of the laws of the State in which the readily
marketable collateral is located.
(4) The term liabilities means the total money liabilities of an
applicant or registrant arising in connection with any transaction
whatsoever, including economic obligations of an applicant or registrant
that are recognized and measured in conformity with generally accepted
accounting principles. ``Liabilities'' also include certain deferred
credits that are not obligations but that are recognized and measured in
conformity with generally accepted accounting principles. For the
purposes of computing ``net capital'', the term ``liabilities'':
(i) Excludes liabilities of an applicant or registrant which are
subordi- nated to the claims of all general creditors of the applicant
or registrant pursuant to a satisfactory subordination agreement, as
defined in paragraph (h) of this section;
(ii) Excludes, in the case of a futures commission merchant, the
amount of money, securities and property due to commodity futures or
option customers which is held in segregated accounts in compliance with
the requirements of the Act and these regulations: Provided, however,
That such exclusion may be taken only if such money, securities and
property held in segregated accounts have been excluded from current
assets in computing net capital;
(iii) Includes, in the case of an applicant or registrant who is a
sole proprietor, the excess of liabilities which have not been incurred
in the course of business as a futures commission merchant or as an
introducing broker over assets not used in the business;
(iv) Excludes the lesser of any deferred income tax liability
related to the items in paragraphs (c)(4)(i) (A), (B), and (C) below, or
the sum of paragraphs (c)(4)(i) (A), (B), and (C) below:
(A) The aggregate amount resulting from applying to the amount of
the deductions computed in accordance with paragraph (c)(5) of this
section the appropriate Federal and State tax rate(s) applicable to any
unrealized gain on the asset on which the deduction was computed;
(B) Any deferred tax liability related to income accrued which is
directly related to an asset otherwise deducted pursuant to this
section;
(C) Any deferred tax liability related to unrealized appreciation in
value of any asset(s) which has been otherwise excluded from current
assets in accordance with the provisions of this section;
(v) Excludes any current tax liability related to income accrued
which is directly related to an asset otherwise deducted pursuant to
this section; and
(vi) Excludes liabilities which would be classified as long term in
accordance with generally accepted accounting principles to the extent
of the net book value of plant, property and equipment which is used in
the ordinary course of any trade or business of the applicant or
registrant which is a reportable segment of the applicant's or
registrant's overall business activities, as defined in generally
accepted accounting principles, other than in the commodity futures,
commodity option, security and security option segments of the
applicant's or registrant's business activities: Provided, That such
plant, property and equipment is not included in current assets pursuant
to paragraph (c)(2)(v) of this section.
(5) The term adjusted net capital means net capital less:
(i) The amount by which any advances paid by the applicant or
registrant on cash commodity contracts and used in computing net capital
exceeds 95 percent of the market value of the commodities covered by
such contracts;
(ii) In the case of all inventory, fixed price commitments and
forward contracts, except for inventory and forward contracts in those
foreign currencies which are purchased or sold for future delivery on or
subject to the rules of a contract market and covered by an open futures
contract for which there will be no charge, the applicable percentage of
the net position specified below:
(A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical.--No charge.
[[Page 45]]
(B) Inventory which is covered by an open futures contract or
commodity option.--5 percent of the market value.
(C) Inventory which is not covered.--20 percent of the market value.
(D) Fixed price commitments (open purchases and sales) and forward
contracts which are covered by an open futures contract or commodity
option.--10 percent of the market value.
(E) Fixed price commitments (open purchases and sales) and forward
contracts which are not covered by an open futures contract or commodity
option.--20 percent of the market value.
(iii)-(iv) [Reserved]
(v) In the case of securities and obligations used by the applicant
or registrant in computing net capital, and in the case of a futures
commission merchant with securities in segregation pursuant to section
4d(2) of the Act and the regulations in this chapter which were not
deposited by customers, the percentages specified in Rule 240.15c3-
1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi)) (``securities haircuts'') and 100 percent of the value of
``nonmarketable securities'' as specified in Rule 240.15c3-1(c)(2)(vii)
of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vii));
(vi) In the case of securities options and/or other options for
which a haircut has been specified for the option or for the underlying
instrument in Sec. 240.15c3-1 appendix A of this title, the treatment
specified in, or under, Sec. 240.15c3-1 appendix A, after effecting
certain adjustments to net capital for listed and unlisted options as
set forth in such appendix;
(vii) In the case of an applicant or registrant who has open
contractual commitments, as hereinafter defined, the deductions
specified in Sec. 240.15c3-1(c)(2)(viii) of this title;
(viii) In the case of a futures commission merchant, for
undermargined customer commodity futures accounts and commodity option
customer accounts the amount of funds required in each such account to
meet maintenance margin requirements of the applicable board of trade or
if there are no such maintenance margin requirements, clearing
organization margin requirements applicable to such positions, after
application of calls for margin or other required deposits which are
outstanding three business days or less. If there are no such
maintenance margin requirements or clearing organization margin
requirements, then the amount of funds required to provide margin equal
to the amount necessary after application of calls for margin or other
required deposits outstanding three business days or less to restore
original margin when the original margin has been depleted by 50 percent
or more: Provided, To the extent a deficit is excluded from current
assets in accordance with paragraph (c)(2)(i) of this section such
amount shall not also be deducted under this paragraph (c)(5)(viii). In
the event that an owner of a customer account has deposited an asset
other than cash to margin, guarantee or secure his account, the value
attributable to such asset for purposes of this subparagraph shall be
the lesser of (A) the value attributable to the asset pursuant to the
margin rules of the applicable board of trade, or (B) the market value
of the asset after application of the percentage deductions specified in
this paragraph (c)(5);
(ix) In the case of a futures commission merchant, for undermargined
commodity futures and commodity option noncustomer and omnibus accounts
the amount of funds required in each such account to meet maintenance
margin requirements of the applicable board of trade or if there are no
such maintenance margin requirements, clearing organization margin
requirements applicable to such positions, after application of calls
for margin or other required deposits which are outstanding two business
days or less. If there are no such maintenance margin requirements or
clearing organization margin requirements, then the amount of funds
required to provide margin equal to the amount necessary after
application of calls for margin or other required deposits outstanding
two business days or less to restore original margin when the original
margin has been depleted by 50 percent or more: Provided, To the extent
a deficit is excluded from current assets in accordance with paragraph
(c)(2)(i) of this section such amount shall not also be
[[Page 46]]
deducted under this paragraph (c)(5)(ix). In the event that an owner of
a noncustomer or omnibus account has deposited an asset other than cash
to margin, guarantee or secure his account the value attributable to
such asset for purposes of this subparagraph shall be the lesser of (A)
the value attributable to such asset pursuant to the margin rules of the
applicable board of trade, or (B) the market value of such asset after
application of the percentage deductions specified in this paragraph
(c)(5);
(x) In the case of open futures contracts and granted (sold)
commodity options held in proprietary accounts carried by the applicant
or registrant which are not covered by a position held by the applicant
or registrant or which are not the result of a ``changer trade'' made in
accordance with the rules of a contract market:
(A) For an applicant or registrant which is a clearing member of a
clearing organization for the positions cleared by such member, the
applicable margin requirement of the applicable clearing organization;
(B) For an applicant or registrant which is a member of a self-
regulatory organization 150 percent of the applicable maintenance margin
requirement of the applicable board of trade, or clearing organization,
whichever is greater;
(C) For all other applicants or registrants, 200 percent of the
applicable maintenance margin requirements of the applicable board of
trade or clearing organization, whichever is greater; or
(D) For open contracts or granted (sold) commodity options for which
there are no applicable maintenance margin requirements, 200 percent of
the applicable initial margin requirement: Provided, The equity in any
such proprietary account shall reduce the deduction required by this
paragraph (c)(5)(x) if such equity is not otherwise includable in
adjusted net capital;
(xi) In the case of an applicant or registrant which is a purchaser
of a commodity option not traded on a contract market which has value
and such value is used to increase adjusted net capital, ten percent of
the market value of the physical or futures contract which is the
subject of such option but in no event more than the value attributed to
such option;
(xii) In the case of an applicant or registrant which is a purchaser
of a commodity option which is traded on a contract market the same
safety factor as if the applicant or registrant were the grantor of such
option in accordance with paragraph (c)(5)(x) of this section, but in no
event shall the safety factor be greater than the market value
attributed to such option;
(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.
(xiv) For securities brokers and dealers, all other deductions
specified in Sec. 240.15c3-1 of this title.
(6) [Reserved]
(7) Liabilities are ``adequately collateralized'' when, pursuant to
a legally enforceable written instrument, such liabilities are secured
by identified assets that are otherwise unencumbered and the market
value of which exceeds the amount of such liabilities.
(8) The term contractual commitments shall include underwriting,
when issued, when distributed, and delayed delivery contracts; and the
writing or
[[Page 47]]
endorsement of security puts and calls and combinations thereof; but
shall not include uncleared regular way purchases and sales of
securities. A series of contracts of purchase or sale of the same
security, conditioned, if at all, only upon issuance, may be treated as
an individual commitment.
(d) Each applicant or registrant shall have equity capital
(inclusive of satisfactory subordination agreements which qualify under
this paragraph (d) as equity capital) of not less than 30 percent of the
debt-equity total, provided, an applicant or registrant may be exempted
from the provisions of this paragraph (d) for a period not to exceed 90
days or for such longer period which the Commission may, upon
application of the applicant or registrant, grant in the public interest
or for the protection of investors. For the purposes of this paragraph
(d):
(1) Equity capital means a satisfactory subordination agreement
entered into by a partner or stockholder which has an initial term of at
least 3 years and has a remaining term of not less than 12 months if:
(i) It does not have any of the provisions for accelerated maturity
provided for by paragraphs (h)(2) (ix)(A), (x)(A), or (x)(B) of this
section, or the provisions allowing for special prepayment provided for
by paragraph (h)(2)(vii)(B) of this section, and is maintained as
capital subject to the provisions restricting the withdrawal thereof
required by paragraph (e) of this section; or
(ii) The partnership agreement provides that capital contributed
pursuant to a satisfactory subordination agreement as defined in
paragraph (h) of this section shall in all respects be partnership
capital subject to the provisions restricting the withdrawal thereof
required by paragraph (e) of this section, and
(A) In the case of a corporation, the sum of its par or stated value
of capital stock, paid in capital in excess of par, retained earnings,
unrealized profit and loss, and other capital accounts.
(B) In the case of a partnership, the sum of its capital accounts of
partners (inclusive of such partners' commodities, options and
securities accounts subject to the provisions of paragraph (e) of this
section), and unrealized profit and loss.
(C) In the case of a sole proprietorship, the sum of its capital
accounts of the sole proprietorship and unrealized profit and loss.
(2) Debt-equity total means equity capital as defined in paragraph
(d)(1) of this section plus the outstanding principal amount of
satisfactory subordination agreements.
(e) No equity capital of the applicant or registrant or a
subsidiary's or affiliate's equity capital consolidated pursuant to
paragraph (f) of this section, whether in the form of capital
contributions by partners (including amounts in the commodities, options
and securities trading accounts of partners which are treated as equity
capital but excluding amounts in such trading accounts which are not
equity capital and excluding balances in limited partners' capital
accounts in excess of their stated capital contributions), par or stated
value of capital stock, paid-in capital in excess of par or stated
value, retained earnings or other capital accounts, may be withdrawn by
action of a stockholder or partner or by redemption or repurchase of
shares of stock by any of the consolidated entities or through the
payment of dividends or any similar distribution, nor may any unsecured
advance or loan be made to a stockholder, partner, sole proprietor, or
employee if, after giving effect thereto and to any other such
withdrawals, advances, or loans and any payments of payment obligations
(as defined in paragraph (h) of this section) under satisfactory
subordination agreements and any payments of liabilities excluded
pursuant to paragraph (c)(4)(vi) of this section which are scheduled to
occur within six months following such withdrawal, advance or loan:
(1) Either adjusted net capital of any of the consolidated entities
would be less than the greatest of:
(i) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(ii) For a futures commission merchant or applicant therefor, 6
percent of the following amount: The customer
[[Page 48]]
funds required to be segregated pursuant to the Act and the regulations
in this part, plus the funds of opt-out customers that, but for the
election to opt out pursuant to Sec. 1.68, would be required to be
segregated, plus the foreign futures or foreign options secured amount,
less the market value of commodity options purchased by customers on or
subject to the rules of a contract market or a foreign board of trade
for which the full premiums have been paid: Provided, however, That the
deduction for each customer shall be limited to the amount of customer
funds in such customer's account(s) and foreign futures and foreign
options secured amounts;
(iii) 120 percent of the amount of adjusted net capital required by
a registered futures association of which it is a member; or
(iv) For an applicant or registrant which is also a securities
broker or dealer, the amount of net capital specified in Rule 15c3-1(e)
of the Securities and Exchange Commission (17 CFR 240.15c3-1(e)); or
(2) In the case of any applicant or registrant included within such
consolidation, if equity capital of the applicant or registrant
(inclusive of satisfactory subordination agreements which qualify as
equity under paragraph (d) of this section) would be less than 30
percent of the required debt-equity total as defined in paragraph (d) of
this section.
Provided, That this paragraph (e) shall not preclude an applicant or
registrant from making required tax payments or preclude the payment to
partners of reasonable compensation. The Commission may, upon
application of the applicant or registrant, grant relief from this
paragraph (e) if the Commission deems it to be in the public interest or
for the protection of nonproprietary accounts.
(f)(1) Every applicant or registrant, in computing its net capital
pursuant to this section must, subject to the provisions of paragraphs
(f)(2) and (f)(4) of this section, consolidate in a single computation,
assets and liabilities of any subsidiary or affiliate for which it
guarantees, endorses, or assumes directly or indirectly the obligations
or liabilities. The assets and liabilities of a subsidiary or affiliate
whose liabilities and obligations have not been guaranteed, endorsed, or
assumed directly or indirectly by the applicant or registrant may also
be so consolidated if an opinion of counsel is obtained as provided for
in paragraph (f)(2) of this section.
(2)(i) If the consolidation, provided for in paragraph (f)(1) of
this section, of any such subsidiary or affiliate results in the
increase of the applicant's or registrant's adjusted net capital or
decreases the minimum adjusted net capital requirement, and an opinion
of counsel called for in paragraph (f)(2)(ii) of this section has not
been obtained, such benefits shall not be recognized in the applicant's
or registrant's computation required by this section.
(ii) Except as provided for in paragraph (f)(2)(i) of this section,
consolidation shall be permitted with respect to any subsidiaries or
affiliates which are majority owned and controlled by the applicant or
registrant, and for which the applicant can demonstrate to the
satisfaction of the National Futures Association, or for which the
registrant can demonstrate to the satisfaction of the Commission and the
designated self-regulatory organization, if any, by an opinion of
counsel, that the net asset values or the portion thereof related to the
parent's ownership interest in the subsidiary or affiliate, may be
caused by the applicant or registrant or an appointed trustee to be
distributed to the applicant or registrant within 30 calendar days. Such
opinion must also set forth the actions necessary to cause such a
distribution to be made, identify the parties having the authority to
take such actions, identify and describe the rights of other parties or
classes of parties, including but not limited to customers, general
creditors, subordinated lenders, minority shareholders, employees,
litigants, and governmental or regulatory authorities, who may delay or
prevent such a distribution and such other assurances as the National
Futures Association, the Commission or the designated self-regulatory
organization by rule or interpretation may require. Such opinion must be
current and periodically renewed in connection with the applicant's or
registrant's annual
[[Page 49]]
audit pursuant to Sec. 1.10 or upon any material change in
circumstances.
(3) In preparing a consolidated computation of adjusted net capital
pursuant to this section, the following minimum and non-exclusive
requirements shall be observed;
(i) Consolidated adjusted net capital shall be reduced by the
estimated amount of any tax reasonably anticipated to be incurred upon
distribution of the assets of the subsidiary or affiliate.
(ii) Liabilities of a consolidated subsidiary or affiliate which are
subordinated to the claims of present and future creditors pursuant to a
satisfactory subordination agreement shall be deducted from consolidated
adjusted net capital unless such subordination extends also to the
claims of present or future creditors of the parent applicant or
registrant and all consolidated subsidiaries.
(iii) Subordinated liabilities of a consolidated subsidiary or
affiliate which are consolidated in accordance with paragraph (f)(3)(ii)
of this section may not be prepaid, repaid, or accelerated if any of the
entities included in such consolidation would otherwise be unable to
comply with the provisions of paragraph (h) of this section.
(iv) Each applicant or registrant included within the consolidation
shall at all times be in compliance with the adjusted net capital
requirement to which it is subject.
(4) No applicant or registrant shall guarantee, endorse, or assume
directly or indirectly any obligation or liability of a subsidiary or
affiliate unless the obligation or liability is reflected in the
computation of adjusted net capital pursuant to this section except as
provided in paragraph (f)(2)(i) of this section.
(g) [Reserved]
(h) The term satisfactory subordination agreement (``subordination
agreement'') means an agreement which contains the minimum and
nonexclusive requirements set forth below.
(1) Certain definitions for purposes of this section:
(i) A subordination agreement may be either a subordinated loan
agreement or a secured demand note agreement.
(ii) The term subordinated loan agreement means the agreement or
agreements evidencing or governing a subordinated borrowing of cash.
(iii) The term ``collateral value'' of any securities pledged to
secure a secured demand note means the market value of such securities
after giving effect to the percentage deductions specified in Rule
240.15c3-1d(a)(2)(iii) of the Securities and Exchange Commission (17 CFR
240.15c3-1d(a)(2)(iii)).
(iv) The term payment obligation means the obligation of an
applicant or registrant in respect to any subordination agreement:
(A) To repay cash loaned to the applicant or registrant pursuant to
a subordinated loan agreement; or
(B) To return a secured demand note contributed to the applicant or
registrant or to reduce the unpaid principal amount thereof and to
return cash or securities pledged as collateral to secure the secured
demand note; and (C) ``payment'' shall mean the performance by an
applicant or registrant of a payment obligation.
(v)(A) The term secured demand note agreement means an agreement
(including the related secured demand note) evidencing or governing the
contribution of a secured demand note to an applicant or registrant and
the pledge of securities and/or cash with the applicant or registrant as
collateral to secure payment of such secured demand note. The secured
demand note agreement may provide that neither the lender, his heirs,
executors, administrators, or assigns shall be personally liable on such
note and that in the event of default the applicant or registrant shall
look for payment of such note solely to the collateral then pledged to
secure the same.
(B) The secured demand note shall be a promissory note executed by
the lender and shall be payable on the demand of the applicant or
registrant to which it is contributed: Provided, however, That the
making of such demand may be conditioned upon the occurrence of any of
certain events which are acceptable to the designated self-regultory
organization and the Commission.
(C) If such note is not paid upon presentment and demand as provided
for
[[Page 50]]
therein, the applicant or registrant shall have the right to liquidate
all or any part of the securities then pledged as collateral to secure
payment of the same and to apply the net proceeds of such liquidation,
together with any cash then included in the collateral, in payment of
such note. Subject to the prior rights of the applicant or registrant as
pledgee, the lender, as defined in paragraph (h)(i)(v)(F) of this
section may retain ownership of the collateral and have the benefit of
any increases and bear the risks fo any decreases in the value of the
collateral and may retain the right to vote securities contained within
the collateral and any right to income therefrom or distributions
thereon, except the applicant or registrant shall have the right to
receive and hold as pledgee all dividends payable in securities and all
partial and complete liquidating dividends.
(D) Subject to the prior rights of the applicant or registrant as
pledgee, the lender may have the right to direct the sale of any
securities included in the collateral, to direct the purchase of
securities with any cash included therein, to withdraw excess collateral
or to substitute cash or other securities as collateral: Provided, That
the net proceeds of any such sale and the cash so substituted and the
securities so purchased or substituted are held by the applicant or
registrant as pledgee, and are included within the collateral to secure
payment of the secured demand note: And provided further, That no such
transaction shall be permitted, if, after giving effect therto, the sum
of the amount of any cash, plus the collateral value of the securities,
then pledged as collateral to secure the secured demand note would be
less than the unpaid principal amount of the secured demand note.
(E) Upon payment by the lender, as distinguished from a reduction by
the lender which is provided for in paragraph (h)(2)(vi)(C) of this
section or reduction by the applicant or registrant as provided for in
paragraph (h)(2)(vii) of this section, of all or any part of the unpaid
principal amount of the secured demand note, the applicant or registrant
shall issue to the lender a subordinated loan agreement in the amout of
such payment (or in the case of an pplicant or registrant that is a
partnership, credit a capital account of the lender), or issue preferred
or common stock of the applicant or registrant in the amount of such
payment, or any combination of the foregoing, as provided for in the
secured demand note agreement.
(F) The term lender means the person who lends cash to an applicant
or registrant pursuant to a subordinated loan agreement and the person
who contributes a secured demand note to an applicant or registrant
pursuant to a secured demand note agreement.
(2) Minimum requirements for subordination agreements:
(i) Subject to paragraph (h)(1) of this section, a subordination
agreement shall mean a written agreement between the applicant or
registrant and the lender, which:
(A) Has a minimum term of 1 year, except for temporary subordination
agreements provided for in paragraph (h)(3)(v) of this section, and
(B) Is a valid and binding obligation enforceable in accordance with
its terms (subject as to enforcement to applicable bankruptcy,
insolvency, reorganization, moratorium, and other similar laws) against
the applicant or registrant and the lender and their respective heirs,
executors, administrators, successors, and assigns.
(ii) Specific amount. All subordination agreements shall be for a
specific dollar amount which shall not be reduced for the duration of
the agreement except by installments as specifically provided for
therein and except as otherwise provided in this paragraph (h)(2) of
this section.
(iii) Effective subordination. The subordination agreement shall
effectively subordinate any right of the lender to receive any payment
with respect thereto, together with accrued interest or compensation, to
the prior payment or provision for payment in full of all claims of all
present and future creditors of the applicant or registrant arising out
of any matter occurring prior to the date on which the related payment
obligation matures, except for claims which are the subject of
subordination agreements which rank on the same priority as or junior to
the claim
[[Page 51]]
of the lender under such subordination agreements.
(iv) Proceeds of subordinated loan agreements. The subordinated loan
agreement shall provide that the cash proceeds thereof shall be used and
dealt with by the applicant or registrant as part of its capital and
shall be subject to the risks of the business.
(v) Certain rights of the borrower. The subordination agreement
shall provide that the applicant or registrant shall have the right to:
(A) Deposit any cash proceeds of a subordinated loan agreement and
any cash pledged as collateral to secure a secured demand note in an
account or accounts in its own name in any bank or trust company;
(B) Pledge, repledge, hypothecate and rehypothecate, any or all of
the securities pledged as collateral to secure a secured demand note,
without notice, separately or in common with other securities or
property for the purpose of securing any indebtedness of the applicant
or registrant; and
(C) Lend to itself or others any or all of the securities and cash
pledged as collateral to secure a secured demand note.
(vi) Collateral for secured demand notes. Only cash and securities
which are fully paid for and which may be publicly offered or sold
without registration under the Securities Act of 1933, and the offer,
sale, and transfer of which are not otherwise restricted, may be pledged
as collateral to secure a secured demand note. The secured demand note
agreement shall provide that if at any time the sum of the amount of any
cash, plus the collateral value of any securities, then pledged as
collateral to secure the secured demand note is less than the unpaid
principal amount of the secured demand note, the applicant or registrant
must immediately transmit written notice to that effect to the lender.
The secured demand note agreement shall also provide that if the
borrower is an applicant, such notice must also be transmitted
immediately to the National Futures Association, and if the borrower is
a registrant, such notice must also be transmitted immediately to the
designated self-regulatory organization, if any, and the Commission. The
secured demand note agreement shall also require that following such
transmittal:
(A) The lender, prior to noon of the business day next succeeding
the transmittal of such notice, may pledge as collateral additional cash
or securities sufficient, after giving effect to such pledge, to bring
the sum of the amount of any cash plus the collateral value of any
securities, then pledged as collateral to secure the secured demand
note, up to an amount not less than the unpaid principal amount of the
secured demand note; and
(B) Unless additional cash or securities are pledged by the lender
as provided in paragraph (h)(2)(vi)(A) above, the applicant or
registrant at noon on the business day next succeeding the transmittal
of notice to the lender must commence sale, for the account of the
lender, of such of the securities then pledged as collateral to secure
the secured demand note and apply so much of the net proceeds thereof,
together with such of the cash then pledged as collateral to secure the
secured demand note as may be necessary to eliminate the unpaid
principal amount of the secured demand note: Provided, however, That the
unpaid principal amount of the secured demand note need not be reduced
below the sum of the amount of any remaining cash, plus the collateral
value of the remaining securities, then pledged as collateral to secure
the secured demand note. The applicant or registrant may not purchase
for its own account any securities subject to such a sale; and
(C) The secured demand note agreement may also provide that, in lieu
of the procedures specified in the provisions required by paragraph
(h)(2)(vi)(B) of this section, the lender, with the prior written
consent of the applicant and the National Futures Association, or with
the prior written consent of the registrant and the designated self-
regulatory organization or, if the registrant is not a member of a
designated self-regulatory organization, the Commission, may reduce the
unpaid principal amount of the secured demand note: Provided, That after
giving effect to such reduction the adjusted net capital of the
applicant or
[[Page 52]]
registrant would not be less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 7
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of trade for which the full
premiums have been paid: Provided, however, That the deduction for each
customer shall be limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign options secured
amounts;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-
1d(b)(6)(iii) of the Securities and Exchange Commission (17 CFR
240.15c3-1d(b)(6)(iii)): Provided, further, That no single secured
demand note shall be permitted to be reduced by more than 15 percent of
its original principal amount and after such reduction no excess
collateral may be withdrawn.
(vii) Permissive prepayments and special prepayments. (A) An
applicant or registrant at its option, but not at the option of the
lender, may, if the subordination agreement so provides, make a payment
of all or any portion of the payment obligation thereunder prior to the
scheduled maturity date of such payment obligation (hereinafter referred
to as a ``prepayment''), but in no event may any prepayment be made
before the expiration of one year from the date such subordination
agreement became effective: Provided, however, That the foregoing
restriction shall not apply to temporary subordination agreements which
comply with the provisions of paragraph (h)(3)(v) of this section nor
shall it apply to ``special prepayments'' made in accordance with the
provisions of paragraph (h)(2)(vii)(B) of this section. No prepayment
shall be made if, after giving effect thereto (and to all payments of
payment obligations under any other subordination agreements then
outstanding, the maturity or accelerated maturities of which are
scheduled to fall due within six months after the date such prepayment
is to occur pursuant to this provision, or on or prior to the date on
which the payment obligation in respect to such prepayment is scheduled
to mature disregarding this provision, whichever date is earlier)
without reference to any projected profit or loss of the applicant or
registrant, the adjusted net capital of the applicant or registrant is
less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 7
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of trade for which the full
premiums have been paid: Provided, however, That the deduction for each
customer shall be limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign options secured
amounts;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(7) of
the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(7)).
[[Page 53]]
(B) An applicant or registrant at its option, but not at the option
of the lender, may, if the subordination agreement so provides, make a
payment at any time of all or any portion of the payment obligation
thereunder prior to the scheduled maturity date of such payment
obligation (hereinafter referred to as a ``special prepayment''). No
special prepayment shall be made if, after giving effect thereto (and to
all payments of payment obligations under any other subordination
agreements then outstanding, the maturity or accelerated maturities of
which are scheduled to fall due within six months after the date such
special prepayment is to occur pursuant to this provision, or on or
prior to the date on which the payment obligation in respect to such
special prepayment is scheduled to mature disregarding this provision,
whichever date is earlier) without reference to any projected profit or
loss of the applicant or registrant, the adjusted net capital of the
applicant or registrant is less than the greatest of:
(1) 200 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 10
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of trade for which the full
premiums have been paid: Provided, however, That the deduction for each
customer shall be limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign options secured
amounts;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(ii)
of the Securities and Exchange Commission (17 CFR 240.15c3-
1d(c)(5)(ii)): Provided, however, That no special prepayment shall be
made if pre-tax losses during the latest three-month period were greater
than 15 percent of current excess adjusted net capital.
(C)(1) Notwithstanding the provisions of paragraphs (h)(2)(vii)(A)
and (h)(2)(vii)(B) of this section, in the case of an applicant, no
prepayment or special prepayment shall occur without the prior written
approval of the National Futures Association; in the case of a
registrant, no prepayment or special prepayment shall occur without the
prior written approval of the designated self-regulatory organization,
if any, or of the Commission if the registrant is not a member of a
self-regulatory organization.
(2) A registrant may make a prepayment or special prepayment without
the prior written approval of the designated self-regulatory
organization: Provided, That the registrant: Is a securities broker or
dealer registered with the Securities and Exchange Commission; files a
request to make a prepayment or special prepayment with its applicable
securities designated examining authority, as defined in Rule 15c3-
1(c)(12) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(12)), in the form and manner prescribed by the designated examining
authority; files a copy of the prepayment request or special prepayment
request with the designated self-regulatory organization at the time it
files such request with the designated examining authority in the form
and manner prescribed by the designated self-regulatory organization;
and files a copy of the designated examining authority's approval of the
prepayment or special prepayment with the designated self-regulatory
organization immediately upon receipt of such approval. The approval of
the prepayment or special prepayment by the designated examining
authority will be deemed approval by the designated self-regulatory
organization, unless the designated self-regulatory organization
[[Page 54]]
notifies the registrant that the designated examining authority's
approval shall not constitute designated self-regulatory organization
approval.
(3) The designated self-regulatory organization shall immediately
provide the Commission with a copy of any notice of approval issued
where the requested prepayment or special prepayment will result in the
reduction of the registrant's net capital by 20 percent or more or the
registrant's excess adjusted net capital by 30 percent or more.
(viii) Suspended repayment. (A) The payment obligation of the
applicant or registrant in respect of any subordination agreement shall
be suspended and shall not mature if, after giving effect to payment of
such payment obligation (and to all payments of payment obligations of
the applicant or registrant under any other subordination agreement(s)
then outstanding which are scheduled to mature on or before such payment
obligation), the adjusted net capital of the applicant or registrant
would be less than the greatest of:
(1) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(2) For a futures commission merchant or applicant therefor, 6
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of trade for which the full
premiums have been paid: Provided, however, That the deduction for each
customer shall be limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign options secured
amounts;
(3) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(4) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(b)(8)(i)
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(8)(i)):
Provided, That the subordination agreement may provide that if the
payment obligation of the applicant or registrant thereunder does not
mature and is suspended as a result of the requirement of this paragraph
(h)(2)(viii) for a period of not less than six months, the applicant or
registrant shall then commence the rapid and orderly liquidation of its
business, but the right of the lender to receive payment, together with
accrued interest or compensation, shall remain subordinate as required
by the provisions of this section.
(B) [Reserved]
(ix) Accelerated maturity. Obligation to repay to remain
subordinate:
(A) Subject to the provisions of paragraph (h)(2)(viii) of this
section, a subordination agreement may provide that the lender may, upon
prior written notice to the applicant and the National Futures
Association, or upon prior written notice to the registrant and the
designated self-regulatory organization or, if the registrant is not a
member of a designated self-regulatory organization, the Commission,
given not earlier than six months after the effective date of such
subordination agreement, accelerate the date on which the payment
obligation of the borrower, together with accrued interest or
compensation, is scheduled to mature to a date not earlier than six
months after giving of such notice, but the right of the lender to
receive payment, together with accrued interest or compensation, shall
remain subordinate as required by the provisions of this paragraph
(h)(2) of this section.
(B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this
section, the payment obligation of the applicant or registrant with
respect to a subordination agreement, together with accrued interest and
compensation, shall mature in the event of any receivership, insolvency,
liquidation pursuant to the Securities Investor Protection Act of 1970
or otherwise, bankruptcy, assignment for the benefit of creditors,
reorganization whether or not pursuant to the bankruptcy laws, or any
other marshalling of the assets
[[Page 55]]
and liabilities of the applicant or registrant, but the right of the
lender to receive payment, together with accrued interest or
compensation, shall remain subordinate as required by the provisions of
paragraph (h)(2) of this section.
(x) Accelerated maturity of subordination agreements on event of
default and event of acceleration. Obligation to repay to remain
subordinate:
(A) A subordination agreement may provide that the lender may, upon
prior written notice to the applicant and the National Futures
Association, or upon prior written notice to the registrant and the
designated self-regulatory organization or, if the registrant is not a
member of a designated self-regulatory organization, the Commission, of
the occurrence of any event of acceleration (as hereinafter defined)
given no sooner than six months after the effective date of such
subordination agreement, accelerate the date on which the payment
obligation of the applicant or registrant, together with accrued
interest or compensation, is scheduled to mature, to the last business
day of a calendar month which is not less than six months after notice
of acceleration is received by the applicant and by the National Futures
Association, or by the registrant and the designated self-regulatory
organization or, if the registrant is not a member of a designated self-
regulatory organization, the Commission. Any subordination agreement
containing such events of acceleration may also provide that, if upon
such accelerated maturity date the payment obligation of the applicant
or registrant is suspended as required by paragraph (h)(2)(viii) of this
section and liquidation of the applicant or registrant has not commenced
on or prior to such accelerated maturity date, notwithstanding paragraph
(h)(2)(viii) of this section, the payment obligation of the applicant or
registrant with respect to such subordination agreement shall mature on
the day immediately following such accelerated maturity date and in any
such event the payment obligations of the applicant or registrant with
respect to all other subordination agreements then outstanding shall
also mature at the same time but the rights of the respective lenders to
receive payment, together with accrued interest or compensation, shall
remain subordinate as required by the provisions of paragraph (h)(2) of
this section. Events of acceleration which may be included in a
subordination agreement complying with this paragraph (h)(2)(x) of this
section shall be limited to:
(1) Failure to pay interest or any installment of principal on a
subordination agreement as scheduled;
(2) Failure to pay when due other money obligations of a specified
material amount;
(3) Discovery that any material, specified representation or
warranty of the applicant or registrant which is included in the
subordination agreement and on which the subordination agreement was
based or continued was inaccurate in a material respect at the time
made;
(4) Any specified and clearly measurable event which is included in
the subordination agreement and which the lender and the applicant or
registrant agree, (a) is a significant indication that the financial
position of the applicant or registrant has changed materially and
adversely from agreed upon specified norms; or (b) could materially and
adversely affect the ability of the applicant or registrant to conduct
its business as conducted on the date the subordination agreement was
made; or (c) is a significant change in the senior management of the
applicant or registrant or in the general business conducted by the
applicant or registrant from that which obtained on the date the
subordination agreement became effective;
(5) Any continued failure to perform agreed covenants included in
the subordination agreement relating to the conduct of the business of
the applicant or registrant or relating to the maintenance and reporting
of its financial position; and
(B) Notwithstanding the provisions of paragraph (h)(2)(viii) of this
section, a subordination agreement may provide that, if liquidation of
the business of the applicant or registrant has not already commenced,
the payment obligation of the applicant or registrant shall mature,
together with accrued interest or compensation, upon the occurrence
[[Page 56]]
of an event of default (as hereinafter defined). Such agreement may also
provide that, if liquidation of the business of the applicant or
registrant has not already commenced, the rapid and orderly liquidation
of the business of the applicant or registrant shall then commence upon
the happening of an event of default. Any subordination agreement which
so provides for maturity of the payment obligation upon the occurrence
of an event of default shall also provide that the date on which such
event of default occurs shall, if liquidation of the applicant or
registrant has not already commenced, be the date on which the payment
obligation of the applicant or registrant with respect to all other
subordination agreements then outstanding shall mature but the rights of
the respective lenders to receive payment, together with accrued
interest or compensation, shall remain subordinate as required by the
provisions of paragraph (h)(2) of this section. Events of default which
may be included in a subordination agreement shall be limited to:
(1) The making of an application by the Securities Investor
Protection Corporation for a decree adjudicating that customers of the
applicant or registrant are in need of protection under the Securities
Investor Protection Act of 1970 and the failure of the applicant or
registrant to obtain the dismissal of such application within 30 days;
(2) Failure to meet the minimum capital requirements of the
designated self-regulatory organization, or of the Commission,
throughout a period of 15 consecutive business days, commencing on the
day the borrower first determines and notifies the designated self-
regulatory organization, if any, of which he is a member and the
Commission, in the case of a registrant, or the National Futures
Association, in the case of an applicant, or commencing on the day any
self-regulatory organization, the Commission or the National Futures
Association first determines and notifies the applicant or registrant of
such fact;
(3) The Commission shall revoke the registration of the applicant or
registrant;
(4) The self-regulatory organization shall suspend (and not
reinstate within 10 days) or revoke the applicant or registrant's status
as a member thereof;
(5) Any receivership, insolvency, liquidation pursuant to the
Securities Investor Protection Act of 1970 or otherwise, bankruptcy,
assignment for the benefit of creditors, reorganization whether or not
pursuant to bankruptcy laws, or any other marshalling of the assets and
liabilities of the applicant or registrant. A subordination agreement
which contains any of the provisions permitted by this subparagraph
(2)(x) shall not contain the provision otherwise permitted by paragraph
(h)(2)(ix)(A) of this section.
(3) Miscellaneous provisions--(i) Prohibited cancellation. The
subordination agreement shall not be subject to cancellation by either
party; no payment shall be made with respect thereto and the agreement
shall not be terminated, rescinded or modified by mutual consent or
otherwise if the effect thereof would be inconsistent with the
requirements of paragraph (h) of this section.
(ii) Notice of maturity or accelerated maturity. Every applicant or
registrant shall immediately notify the National Futures Association,
and the registrant shall immediately notify the designated self-
regulatory organization, if any, and the Commission if, after giving
effect to all payments of payment obligations under subordination
agreements then outstanding which are then due or mature within the
following six months without reference to any projected profit or loss
of the applicant or registrant, its adjusted net capital would be less
than:
(A) 120 percent of the minimum dollar amount required by paragraphs
(a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 6
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of
[[Page 57]]
trade for which the full premiums have been paid: Provided, however,
That the deduction for each customer shall be limited to the amount of
customer funds in such customer's account(s) and foreign futures and
foreign options secured amounts;
(C) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member; or
(D) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(2) of
the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(2)).
(iii) Certain legends. If all the provisions of a satisfactory
subordination agreement do not appear in a single instrument, then the
debenture or other evidence of indebtedness shall bear on its face an
appropriate legend stating that it is issued subject to the provisions
of a satisfactory subordination agreement which shall be adequately
referred to and incorporated by reference.
(iv) Legal title to securities. All securities pledged as collateral
to secure a secured demand note must be in bearer form, or registered in
the name of the applicant or registrant or the name of its nominee or
custodian.
(v) Temporary subordinations. To enable an applicant or registrant
to participate as an underwriter of securities or undertake other
extraordinary activities and remain in compliance with the adjusted net
capital requirements of this section, an applicant or registrant shall
be permitted, on no more than three occasions in any 12-month period, to
enter into a subordination agreement on a temporary basis which has a
stated term of no more than 45 days from the date the subordination
agreement became effective: Provided, That this temporary relief shall
not apply to any applicant or registrant if the adjusted net capital of
the applicant or registrant is less than the greatest of:
(A) 120 percent of the appropriate minimum dollar amount required by
paragraphs (a)(1)(i)(A) or (a)(1)(ii)(A) of this section;
(B) For a futures commission merchant or applicant therefor, 7
percent of the following amount: The customer funds required to be
segregated pursuant to the Act and the regulations in this part, plus
the funds of opt-out customers that, but for the election to opt out
pursuant to Sec. 1.68, would be required to be segregated, plus the
foreign futures or foreign options secured amount, less the market value
of commodity options purchased by customers on or subject to the rules
of a contract market or a foreign board of trade for which the full
premiums have been paid: Provided, however, That the deduction for each
customer shall be limited to the amount of customer funds in such
customer's account(s) and foreign futures and foreign options secured
amounts;
(C) 120 percent of the amount of adjusted net capital required by a
registered futures association of which it is a member;
(D) For an applicant or registrant which is also a securities broker
or dealer, the amount of net capital specified in Rule 15c3-1d(c)(5)(i)
of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(i));
or
(E) The amount of equity capital as defined in paragraph (d) of this
section is less than the limits specified in paragraph (d) of this
section. Such temporary subordination agreement shall be subject to all
the other provisions of this section.
(vi) Filing. An applicant shall file a signed copy of any proposed
subordination agreement (including nonconforming subordination
agreements) with the National Futures Association at least ten days
prior to the proposed effective date of the agreement or at such other
time as the National Futures Association for good cause shall accept
such filing. A registrant that is not a member of any designated self-
regulatory organization shall file two signed copies of any proposed
subordination agreement (including nonconforming subordination
agreements) with the regional office of the Commission nearest the
principal place of business of the registrant (except that a registrant
under the jurisdiction of the Commission's Western Regional Office shall
file such copies with the Commission's Southwestern Regional Office) at
[[Page 58]]
least ten days prior to the proposed effective date of the agreement or
at such other time as the Commission for good cause shall accept such
filing. A registrant that is a member of a designated self-regulatory
organization shall file signed copies of any proposed subordination
agreement (including nonconforming subordination agreements) with the
designated self-regulatory organization in such quantities and at such
time as the designated self-regulatory organization may require prior to
the effective date. The applicant or registrant shall also file with
said parties a statement setting forth the name and address of the
lender, the business relationship of the lender to the applicant or
registrant and whether the applicant or registrant carried funds or
securities for the lender at or about the time the proposed agreement
was so filed. A proposed agreement filed by an applicant with the
National Futures Association shall be reviewed by the National Futures
Association, and no such agreement shall be a satisfactory subordination
agreement for the purposes of this section unless and until the National
Futures Association has found the agreement acceptable and such
agreement has become effective in the form found acceptable. A proposed
agreement filed by a registrant shall be reviewed by the designated
self-regulatory organization with whom such an agreement is required to
be filed prior to its becoming effective or, if the registrant is not a
member of any designated self-regulatory organization, by the regional
office of the Commission where the agreement is required to be filed
prior to its becoming effective. No proposed agreement shall be a
satisfactory subordination agreement for the purposes of this section
unless and until the designated self-regulatory organization or, if a
registrant is not a member of any designated self-regulatory
organization, the Commission, has found the agreement acceptable and
such agreement has become effective in the form found acceptable:
Provided, however, That a proposed agreement shall be a satisfactory
subordination agreement for purpose of this section if the registrant:
is a securities broker or dealer registered with the Securities and
Exchange Commission; files signed copies of the proposed subordination
agreement with the applicable securities designated examining authority,
as defined in Rule 15c3-1(c)(12) of the Securities and Exchange
Commission (17 CFR 240.15c3-1(c)(12)), in the form and manner prescribed
by the designated examining authority; files signed copies of the
proposed subordination agreement with the designated self-regulatory
organization at the time it files such copies with the designated
examining authority in the form and manner prescribed by the designated
self-regulatory organization; and files a copy of the designated
examining authority's approval of the proposed subordination agreement
with the designated self-regulatory organization immediately upon
receipt of such approval. The designated examining authority's
determination that the proposed subordination agreement satisfies the
requirements for a satisfactory subordination agreement will be deemed a
like finding by the designated self-regulatory organization, unless the
designated self-regulatory organization notifies the registrant that the
designated examining authority's determination shall not constitute a
like finding by the designated self-regulatory organization.
(vii) Subordination agreements in effect prior to adoption. Any
subordination agreement which has been entered into prior to the
effective date of this section and which has been deemed to be
satisfactorily subordinated pursuant to this section previously in
effect or the adjusted net capital rules of a self-regulatory
organization shall continue to be deemed a satisfactory subordination
agreement until the maturity of such agreement. Provided, That no
renewal of an agreement which provides for automatic or optional renewal
by the applicant or registrant or lender shall be deemed to be a
satisfactory subordination agreement unless such renewal agreement meets
the requirements of this section, within 6 months of the effective date
of this section. Provided further, That all subordination agreements
must meet the requirements of this rule within 5 years of the effective
date of this section.
[[Page 59]]
(4) A designated self-regulatory organization and the Commission may
allow debt with a maturity date of 1 year or more to be treated as
meeting the provisions of this paragraph (h): Provided, (i) Such
exemption shall only be given when the registrant's adjusted net capital
is less than the minimum required by this section or by the capital rule
of the designated self-regulatory organization to which such registrant
is subject;
(ii) That such debt did not exist prior to its use under this
paragraph (h)(4);
(iii) Such exemption shall be for a period of 30 days or such lesser
period as the designated self-regulatory organization and the Commission
may determine;
(iv) Such exemption shall not be allowed more than once in any 12
month period; and
(v) At all times during such exemption the registrant shall make a
good faith effort to comply with the provisions of this section or the
capital rule of the designated self-regulatory organization to which
such registrant is subject exclusive of any benefits derived from this
paragraph (h)(4).
(i) [Reserved]
(j) For the purposes of this section cover is defined as follows:
(1) General definition. Cover shall mean transactions or positions
in a contract for future delivery on a board of trade or a commodity
option where such transactions or positions normally represent a
substitute for transactions to be made or positions to be taken at a
later time in a physical marketing channel, and where they are
economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise, and where they arise from:
(i) The potential change in the value of assets which a person owns,
produces, manufactures, processes, or merchandises or anticipates
owning, producing, manufacturing, processing, or merchandising.
(ii) The potential change in the value of liabilities which a person
owes or anticipates incurring, or
(iii) The potential change in the value of services which a person
provides, purchases or anticipates providing or purchasing.
Notwithstanding the foregoing, no transactions or positions shall be
classified as cover for the purposes of this section unless their
purpose is to offset price risks incidental to commercial cash or spot
operations and such positions are established and liquidated in
accordance with sound commercial practices and unless the provisions of
paragraphs (j) (2) and (3) of this section have been satisfied.
(2) Enumerated cover transactions. The definition of covered
transactions and positions in paragraph (j)(1) of this section includes,
but is not limited to, the following specific transactions and
positions:
(i) Ownership or fixed-price purchase of any commodity which does
not exceed in quantity (A) the sales of the same commodity for future
delivery on a board of trade or (B) the purchase of a put commodity
option of the same commodity for which the market value for the actual
commodity or futures contract which is the subject of the option is less
than the strike price of the option or (C) the ownership of a commodity
option position established by the sale (grant) of a call commodity
option of the same commodity for which the market value for the actual
commodity or futures contract which is the subject of the option is more
than the strike price of the option: Provided, That for purposes of
paragraph (c)(5)(x) of this section the market value for the actual
commodity or futures contract which is the subject of such option need
not be more than the strike price of that option;
(ii) Fixed-price sale of any commodity which does not exceed in
quantity (A) the purchase of the same commodity for future delivery on a
board of trade or (B) the purchase of a call commodity option of the
same commodity for which the market value for the actual commodity or
futures contract which is the subject of such option is more than the
strike price of the option or (C) ownership of a commodity option
position established by the sale (grant) of a put commodity option of
the same commodity for which the market value for the actual commodity
or futures comtract which is the subject of the option is less than the
strike price of the option: Provided,
[[Page 60]]
That for purposes of paragraph (c)(5)(x) of this section the market
value for the actual commodity or futures contract which is the subject
of such option need not be less than the strike price of that option;
and
(iii) Ownership or fixed-price contracts of a commodity described in
paragraphs (j)(2)(i) and (j)(2)(ii) of this section may also be covered
other than by the same quantity of the same cash commodity, provided
that the fluctuations in value of the position for future delivery or
commodity option are substantially related to the fluctuations in value
of the actual cash position.
(3) Nonenumerated cases. Upon specific request, the Commission may
recognize transactions and positions other than those enumerated in
paragraph (j)(2) of this section as cover in amounts and under the terms
and conditions as it may specify. Any applicant or registrant who wishes
to avail itself of the provisions of this paragraph (j)(3) must apply to
the Commission in writing at its principal office in Washington, DC
giving full details of the transaction including detailed information
which will demonstrate that the transaction is economically appropriate
to the reduction of risk exposure attendant to the conduct and
management of a commercial enterprise.
(Approved by the Office of Management and Budget under control number
3038-0024)
[43 FR 39972, Sept. 8, 1978]
Editorial Note: For Federal Register citations affecting Sec. 1.17,
see the List of Sections Affected, which appears in the Finding Aids
section of the printed volume and on GPO Access.
Sec. 1.18 Records for and relating to financial reporting and monthly computation by futures commission merchants and introducing brokers.
(a) No person shall be registered as a futures commission merchant
or as an introducing broker under the Act unless, commencing on the date
his application for such registration is filed, he prepares and keeps
current ledgers or other similar records which show or summarize, with
appropriate references to supporting documents, each transaction
affecting his asset, liability, income, expense and capital accounts,
and in which (except as otherwise permitted in writing by the
Commission) all his asset, liability and capital accounts are classified
into either the account classification subdivisions specified on Form 1-
FR-FCM or Form 1-FR-IB, respectively, or, if such person is registered
with the Securities and Exchange Commission as a securities broker or
dealer and he files (in accordance with Sec. 1.10(h)) a copy of his
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II or Part IIA, in lieu of Form 1-
FR-FCM or Form 1-FR-IB, the account classification subdivisions
specified on such Report, or categories that are in accord with
generally accepted accounting principles. Each person so registered
shall prepare and keep current such records.
(b) 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. An applicant
or registrant which is also registered as a securities broker or dealer
with the Securities and Exchange Commission may meet the computation
requirements of this paragraph (b) by completing the Statement of
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II or Part IIA. 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: Provided, however, That for each month ending between June 30,
1997 and December 31, 1997, inclusive, such computations must be
completed and made available for inspection within 30 calendar days
after the date for which the computations are made.
(c) The provisions of this section do not apply to an introducing
broker
[[Page 61]]
which is operating pursuant to a guarantee agreement, nor do such
provisions apply to an applicant for registration as an introducing
broker who files concurrently with such application a guarantee
agreement, provided such introducing broker or applicant therefor is not
also a securities broker or dealer.
[48 FR 35288, Aug. 3, 1983, as amended at 49 FR 39530, Oct. 9, 1984; 62
FR 4641, Jan. 31, 1997]
Prohibited Trading in Commodity Options
Sec. 1.19 Prohibited trading in certain ``puts'' and ``calls''.
No futures commission merchant or introducing broker may make,
underwrite, issue, or otherwise assume any financial responsibility for
the fulfillment of, any commodity option except:
(a) Commodity options traded on or subject to the rules of a
contract market in accordance with the requirements of part 33 of this
chapter;
(b) Commodity options traded on or subject to the rules of a foreign
board of trade in accordance with the requirements of part 30 of this
chapter; or
(c) For futures commission merchants, any option permitted under
Sec. 32.4 of this chapter, provided however, that a capital treatment
for such options is referenced in Sec. 1.17(c)(5)(vi).
[52 FR 28997, Aug. 5, 1987, as amended at 58 FR 68520, Dec. 28, 1993]
Customers' Money, Securities, and Property
Sec. 1.20 Customer funds to be segregated and separately accounted for.
(a) All customer funds shall be separately accounted for and
segregated as belonging to commodity or option customers. Such customer
funds when deposited with any bank, trust company, clearing organization
or another futures commission merchant shall be deposited under an
account name which clearly identifies them as such and shows that they
are segregated as required by the Act and this part. Each registrant
shall obtain and retain in its files for the period provided in
Sec. 1.31 a written acknowledgment from such bank, trust company,
clearing organization, or futures commission merchant, that it was
informed that the customer funds deposited therein are those of
commodity or option customers and are being held in accordance with the
provisions of the Act and this part: Provided, however, that an
acknowledgment need not be obtained from a clearing organization that
has adopted and submitted to the Commission rules that provide for the
segregation as customer funds, in accordance with all relevant
provisions of the Act and the rules and orders promulgated thereunder,
of all funds held on behalf of customers. Under no circumstances shall
any portion of customer funds be obligated to a clearing organization,
any member of a contract market, a futures commission merchant, or any
depository except to purchase, margin, guarantee, secure, transfer,
adjust or settle trades, contracts or commodity option transactions of
commodity or option customers. No person, including any clearing
organization or any depository, that has received customer funds for
deposit in a segregated account, as provided in this section, may hold,
dispose of, or use any such funds as belonging to any person other than
the option or commodity customers of the futures commission merchant
which deposited such funds.
(b) All customer funds received by a clearing organization from a
member of the clearing organization to purchase, margin, guarantee,
secure or settle the trades, contracts or commodity options of the
clearing member's commodity or option customers and all money accruing
to such commodity or option customers as the result of trades, contracts
or commodity options so carried shall be separately accounted for and
segregated as belonging to such commodity or option customers, and a
clearing organization shall not hold, use or dispose of such customer
funds except as belonging to such commodity or option customers. Such
customer funds when deposited in a bank or trust company shall be
deposited under an account name which clearly shows that they are the
customer funds of the commodity or option customers of clearing members,
segregated as required by the Act and
[[Page 62]]
these regulations. The clearing organization shall obtain and retain in
its files for the period provided by Sec. 1.31 an acknowledgment from
such bank or trust company that it was informed that the customer funds
deposited therein are those of commodity or option customers of its
clearing members and are being held in accordance with the provisions of
the Act and these regulations.
(c) Each futures commission merchant shall treat and deal with the
customer funds of a commodity customer or of an option customer as
belonging to such commodity or option customer. All customer funds shall
be separately accounted for, and shall not be commingled with the money,
securities or property of a futures commission merchant or of any other
person, or be used to secure or guarantee the trades, contracts or
commodity options, or to secure or extend the credit, of any person
other than the one for whom the same are held: Provided, however, That
customer funds treated as belonging to the commodity or option customers
of a futures commission merchant may for convenience be commingled and
deposited in the same account or accounts with any bank or trust
company, with another person registered as a futures commission
merchant, or with a clearing organization, and that such share thereof
as in the normal course of business is necessary to purchase, margin,
guarantee, secure, transfer, adjust, or settle the trades, contracts or
commodity options of such commodity or option customers or resulting
market positions, with the clearing organization or with any other
person registered as a futures commission merchant, may be withdrawn and
applied to such purposes, including the payment of premiums to option
grantors, commissions, brokerage, interest, taxes, storage and other
fees and charges, lawfully accruing in connection with such trades,
contracts or commodity options: Provided, further, That customer funds
may be invested in instruments described in Sec. 1.25.
(Approved by the Office of Management and Budget under control numbers
3038-0007, and 3038-0024)
[46 FR 54518, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 50
FR 36051, Sept. 5, 1985; 65 FR 78009, Dec. 13, 2000]
Sec. 1.21 Care of money and equities accruing to customers.
All money received directly or indirectly by, and all money and
equities accruing to, a futures commission merchant from any clearing
organization or from any clearing member or from any member of a
contract market incident to or resulting from any trade, contract or
commodity option made by or through such futures commission merchant on
behalf of any commodity or option customer shall be considered as
accruing to such commodity or option customer within the meaning of the
Act and these regulations. Such money and equities shall be treated and
dealt with as belonging to such commodity or option customer in
accordance with the provisions of the Act and these regulations. Money
and equities accruing in connection with commodity or option customers'
open trades, contracts, or commodity options need not be separately
credited to individual accounts but may be treated and dealt with as
belonging undivided to all commodity or option customers having open
trades, contracts, or commodity option positions which if closed would
result in a credit to such commodity or option customers.
[46 FR 54519, Nov. 3, 1981]
Sec. 1.22 Use of customer funds restricted.
No futures commission merchant shall use, or permit the use of, the
customer funds of one commodity and/or option customer to purchase,
margin, or settle the trades, contracts, or commodity options of, or to
secure or extend the credit of, any person other than such customer or
option customer. Customer funds shall not be
[[Page 63]]
used to carry trades or positions of the same commodity and/or option
customer other than in commodities or commodity options traded throught
the facilities of a contract market.
[47 FR 57007, Dec. 22, 1982]
Sec. 1.23 Interest of futures commission merchant in segregated funds; additions and withdrawals.
The provision in section 4d(2) of the Act and the provision in
Sec. 1.20(c), which prohibit the commingling of customer funds with the
funds of a futures commission merchant, shall not be construed to
prevent a futures commission merchant from having a residual financial
interest in the customer funds, segregated as required by the Act and
the rules in this part and set apart for the benefit of commodity or
option customers; nor shall such provisions be construed to prevent a
futures commission merchant from adding to such segregated customer
funds such amount or amounts of money, from its own funds or
unencumbered securities from its own inventory, of the type set forth in
Sec. 1.25, as it may deem necessary to ensure any and all commodity or
option customers' accounts from becoming undersegregated at any time.
The books and records of a futures commission merchant shall at all
times accurately reflect its interest in the segregated funds. A futures
commission merchant may draw upon such segregated funds to its own
order, to the extent of its actual interest therein, including the
withdrawal of securities held in segregated safekeeping accounts held by
a bank, trust company, contract market clearing organization or other
futures commission merchant. Such withdrawal shall not result in the
funds of one commodity and/or option customer being used to purchase,
margin or carry the trades, contracts or commodity options, or extend
the credit of any other commodity customer, option customer or other
person.
[62 FR 42400, Aug. 7, 1997]
Sec. 1.24 Segregated funds; exclusions therefrom.
Money held in a segregated account by a futures commission merchant
shall not include: (a) Money invested in obligations or stocks of any
clearing organization or in memberships in or obligations of any
contract market; or (b) money held by any clearing organization which it
may use for any purpose other than to purchase, margin, guarantee,
secure, transfer, adjust, or settle the contracts, trades, or commodity
options of the commodity or option customers of such futures commission
merchant.
[46 FR 54519, Nov. 3, 1981]
Sec. 1.25 Investment of customer funds.
(a) Permitted investments. (1) Subject to the terms and conditions
set forth in this section, a futures commission merchant or a clearing
organization may invest customer funds in the following instruments
(permitted investments):
(i) Obligations of the United States and obligations fully
guaranteed as to principal and interest by the United States (U.S.
government securities);
(ii) General obligations of any State or of any political
subdivision thereof (municipal securities);
(iii) General obligations issued by any agency sponsored by the
United States (government sponsored agency securities);
(iv) Certificates of deposit issued by a bank (certificates of
deposit) as defined in section 3(a)(6) of the Securities Exchange Act of
1934, or a domestic branch of a foreign bank that carries deposits
insured by the Federal Deposit Insurance Corporation;
(v) Commercial paper;
(vi) Corporate notes;
(vii) General obligations of a sovereign nation; and
(viii) Interests in money market mutual funds.
(2) In addition, a futures commission merchant or a clearing
organization may buy and sell the permitted investments listed in
paragraphs (a)(1)(i) through (viii) of this section pursuant to
agreements for resale or repurchase of the instruments, in accordance
with the provisions of paragraph (d) of this section.
(b) General terms and conditions. A futures commission merchant or a
clearing organization is required to manage the permitted investments
consistent
[[Page 64]]
with the objectives of preserving principal and maintaining liquidity
and according to the following specific requirements.
(1) Marketability. Except for interests in money market mutual
funds, investments must be ``readily marketable'' as defined in
Sec. 240.15c3-1 of this title.
(2) Ratings. (i) Initial requirement. Instruments that are required
to be rated by this section must be rated by an NRSRO. For an investment
to qualify as a permitted investment, ratings are required as follows:
(A) U.S. government securities need not be rated;
(B) Municipal securities, government sponsored agency securities,
certificates of deposit, commercial paper, and corporate notes, except
notes that are asset-backed, must have the highest short-term rating of
an NRSRO or one of the two highest long-term ratings of an NRSRO;
(C) Corporate notes that are asset-backed must have the highest
ratings of an NRSRO;
(D) Sovereign debt must be rated in the highest category by at least
one NRSRO; and
(E) Money market mutual funds that are rated by an NRSRO must be
rated at the highest rating of the NRSRO.
(ii) Effect of downgrade. If an NRSRO lowers the rating of an
instrument that was previously a permitted investment on the basis of
that rating to below the minimum rating required under this section, the
value of the instrument recognized for segregation purposes will be the
lesser of:
(A) The current market value of the instrument; or
(B) The market value of the instrument on the business day preceding
the downgrade, reduced by 20 percent of that value for each business day
that has elapsed since the downgrade.
(3) Restrictions on instrument features. (i) With the exception of
money market mutual funds, no permitted investment may contain an
embedded derivative of any kind, including but not limited to a call
option, put option, or collar, cap, or floor on interest paid.
(ii) No instrument may contain interest-only payment features.
(iii) No instrument may provide payments linked to a commodity,
currency, reference instrument, index, or benchmark except as provided
in paragraph (b)(3)(iv) of this section.
(iv) Variable-rate securities are permitted, provided the interest
rates paid correlate closely and on an unleveraged basis to a benchmark
of either the Federal Funds target or effective rate, the prime rate,
the three-month Treasury Bill rate, or the one-month or three-month
LIBOR rate.
(v) Certificates of deposit, if negotiable, must be able to be
liquidated within one business day or, if not negotiable, must be
redeemable at the issuing bank within one business day, with any penalty
for early withdrawal limited to any accrued interest earned according to
its written terms.
(4) Concentration. (i) Direct investments. (A) U.S. government
securities and money market mutual funds shall not be subject to a
concentration limit or other limitation.
(B) Securities of any single issuer of government sponsored agency
securities held by a futures commission merchant or clearing
organization may not exceed 25 percent of total assets held in
segregation by the futures commission merchant or clearing organization.
(C) Securities of any single issuer of municipal securities,
certificates of deposit, commercial paper, or corporate notes held by a
futures commission merchant or clearing organization may not exceed 5
percent of total assets held in segregation by the futures commission
merchant or clearing organization.
(D) Sovereign debt is subject to the following limits: a futures
commission merchant may invest in the sovereign debt of a country to the
extent it has balances in segregated accounts owed to its customers
denominated in that country's currency; a clearing organization may
invest in the sovereign debt of a country to the extent it has balances
in segregated accounts owed to its clearing member futures commission
merchants denominated in that country's currency.
(ii) Repurchase agreements. For purposes of determining compliance
with the concentration limits set forth in this section, securities sold
by a futures commission merchant or clearing organization subject to
agreements to
[[Page 65]]
repurchase shall be combined with securities held by the futures
commission merchant or clearing organization as direct investments.
(iii) Reverse repurchase agreements. The concentration limit
applicable to securities of each issuer that are held by a futures
commission merchant or clearing organization subject to agreements to
resell to a particular counterparty shall be as follows:
(A) For a portfolio of securities held that are subject to resale to
a counterparty that has been rated single A or higher by two or more
NRSROs, or whose obligation under an agreement is guaranteed by a parent
or affiliate company that has been rated single A or higher by two or
more NRSROs:
(1) Government sponsored agency debt, issued by the same issuer and
supplied by the counterparty, may not exceed 50 percent of the total
amount of securities supplied by such counterparty; and
(2) Municipal securities, certificates of deposit, commercial paper,
and corporate notes, issued by the same issuer and supplied by the
counterparty, may not exceed 10 percent of the total amount of
securities supplied by such counterparty; and
(B) For a portfolio of securities held that are subject to resale to
a counterparty that does not have a rating or guarantee as specified in
paragraph (b)(4)(iii)(A) of this section:
(1) Government sponsored agency debt, issued by the same issuer and
supplied by the counterparty, may not exceed 25 percent of the total
amount of securities supplied by such counterparty; and
(2) Municipal securities, certificates of deposit, commercial paper,
and corporate notes, issued by the same issuer and supplied by the
counterparty, may not exceed 5 percent of the total amount of securities
supplied by such counterparty.
(iv) Treatment of securities issued by affiliates. For purposes of
determining compliance with the concentration limits set forth in this
section, securities issued by entities that are affiliated, as defined
in paragraph (b)(6) of this section, shall be aggregated and deemed the
securities of a single issuer. An interest in a permitted money market
mutual fund is not deemed to be a security issued by its sponsoring
entity.
(v) Treatment of customer-owned securities. For purposes of
determining compliance with the concentration limits set forth in this
section, securities owned by the customers of a futures commission
merchant and posted as margin collateral are not included in total
assets held in segregation by the futures commission merchant, and
securities posted by a futures commission merchant with a clearing
organization are not included in total assets held in segregation by the
clearing organization.
(5) Time-to-maturity. Except for investments in money market mutual
funds, the dollar-weighted average of the time-to-maturity of the
portfolio, as that average is computed pursuant to Sec. 270.2a-7 of this
title, may not exceed 24 months.
(6) Investments in instruments issued by affiliates. (i) A futures
commission merchant shall not invest customer funds in obligations of an
entity affiliated with the futures commission merchant, and a clearing
organization shall not invest customer funds in obligations of an entity
affiliated with the clearing organization. An affiliate includes parent
companies, including all entities through the ultimate holding company,
subsidiaries to the lowest level, and companies under common ownership
of such parent company or affiliates.
(ii) A futures commission merchant or clearing organization may
invest customer funds in a fund affiliated with that futures commission
merchant or clearing organization.
(7) Recordkeeping. A futures commission merchant and a clearing
organization shall prepare and maintain a record that will show for each
business day with respect to each type of investment made pursuant to
this section, the following information:
(i) The type of instruments in which customer funds have been
invested;
(ii) The original cost of the instruments; and
(iii) The current market value of the instruments.
(c) Money market mutual funds. The following provisions will apply
to the
[[Page 66]]
investment of customer funds in money market mutual funds (the fund).
(1) Generally, the fund must be an investment company that is
registered under the Investment Company Act of 1940 with the Securities
and Exchange Commission and that holds itself out to investors as a
money market fund, in accordance with Sec. 270.2a-7 of this title. A
fund sponsor, however, may petition the Commission for an exemption from
this requirement. The Commission may grant such an exemption provided
that the fund can demonstrate that it will operate in a manner designed
to preserve principal and to maintain liquidity. The application for
exemption must describe how the fund's structure, operations and
financial reporting are expected to differ from the requirements
contained in Sec. 270.2a-7 of this title and the risk-limiting
provisions for direct investments contained in this section. The fund
must also specify the information that the fund would make available to
the Commission on an ongoing basis.
(2) The fund must be sponsored by a federally-regulated financial
institution, a bank as defined in section 3(a)(6) of the Securities
Exchange Act of 1934, an investment adviser registered under the
Investment Advisers Act of 1940, or a domestic branch of a foreign bank
insured by the Federal Deposit Insurance Corporation, except for a fund
exempted in accordance with paragraph (c)(1) of this section.
(3) A futures commission merchant or clearing organization shall
maintain the confirmation relating to the purchase in its records in
accordance with Sec. 1.31 and note the ownership of fund shares (by
book-entry or otherwise) in a custody account of the FCM or clearing
organization in accordance with Sec. 1.26(a). If the futures commission
merchant or the clearing organization holds its shares of the fund with
the fund's shareholder servicing agent, the sponsor of the fund and the
fund itself are required to provide the acknowledgment letter required
by Sec. 1.26.
(4) The net asset value of the fund must be computed by 9 a.m. of
the business day following each business day and made available to the
futures commission merchant or clearing organization by that time.
(5) A fund must be able to redeem an interest by the business day
following a redemption request by the futures commission merchant or
clearing organization. Demonstration that this requirement has been met
may include either an appropriate provision in the offering memorandum
of the fund or a separate side agreement between the fund and a futures
commission merchant or clearing organization.
(6) The agreement pursuant to which the futures commission merchant
or clearing organization has acquired and is holding its interest in a
fund must contain no provision that would prevent the pledging or
transferring of shares.
(d) Repurchase and reverse repurchase agreements. A futures
commission merchant or clearing organization may buy and sell the
permitted investments listed in paragraphs (a)(1)(i) through (viii) of
this section pursuant to agreements for resale or repurchase of the
securities (agreements to repurchase or resell), provided the agreements
to repurchase or resell conform to the following requirements:
(1) The securities are specifically identified by coupon rate, par
amount, market value, maturity date, and CUSIP or ISIN number.
(2) Counterparties are limited to a bank as defined in section
3(a)(6) of the Securities Exchange Act of 1934, a domestic branch of a
foreign bank insured by the Federal Deposit Insurance Corporation, a
securities broker or dealer, or a government securities broker or
government securities dealer registered with the Securities and Exchange
Commission or which has filed notice pursuant to section 15C(a) of the
Government Securities Act of 1986.
(3) The transaction is executed in compliance with the concentration
limit requirements applicable to the securities held in connection with
the agreements to repurchase referred to in paragraphs (b)(4)(ii) and
(iii) of this section.
(4) The transaction is made pursuant to a written agreement signed
by the parties to the agreement, which is consistent with the conditions
set forth in paragraphs (d)(1) through (d)(12) of this section and which
states that the parties thereto intend the transaction to
[[Page 67]]
be treated as a purchase and sale of securities.
(5) The term of the agreement is no more than one business day, or
reversal of the transaction is possible on demand.
(6) The securities transferred under the agreement are held in a
safekeeping account with a bank as referred to in paragraph (d)(2) of
this section, a clearing organization, or the Depository Trust Company
in an account that complies with the requirements of Sec. 1.26.
(7) The futures commission merchant or the clearing organization may
not use securities received under the agreement in another similar
transaction and may not otherwise hypothecate or pledge such securities,
except securities may be pledged on behalf of customers at another
futures commission merchant or clearing organization. Substitution of
securities is allowed, provided, however, that:
(i) The qualifying securities being substituted and original
securities are specifically identified by date of substitution, market
values substituted, coupon rates, par amounts, maturity dates and CUSIP
or ISIN numbers;
(ii) Substitution is made on a ``delivery versus delivery'' basis;
and
(iii) The market value of the substituted securities is at least
equal to that of the original securities.
(8) The transfer of securities is made on a delivery versus payment
basis in immediately available funds. The transfer is not recognized as
accomplished until the funds and/or securities are actually received by
the custodian of the futures commission merchant's or clearing
organization's customer funds or securities purchased on behalf of
customers. The transfer or credit of securities covered by the agreement
to the futures commission merchant's or clearing organization's customer
segregated custodial account is made simultaneously with the
disbursement of funds from the futures commission merchant's or clearing
organization's customer segregated cash account at the custodian bank.
On the sale or resale of securities, the futures commission merchant's
or clearing organization's customer segregated cash account at the
custodian bank must receive same-day funds credited to such segregated
account simultaneously with the delivery or transfer of securities from
the customer segregated custodial account.
(9) A written confirmation to the futures commission merchant or
clearing organization specifying the terms of the agreement and a
safekeeping receipt are issued immediately upon entering into the
transaction and a confirmation to the futures commission merchant or
clearing organization is issued once the transaction is reversed.
(10) The transactions effecting the agreement are recorded in the
record required to be maintained under Sec. 1.27 of investments of
customer funds, and the securities subject to such transactions are
specifically identified in such record as described in paragraph (d)(1)
of this section and further identified in such record as being subject
to repurchase and reverse repurchase agreements.
(11) An actual transfer of securities by book entry is made
consistent with Federal or State commercial law, as applicable. At all
times, securities received subject to an agreement are reflected as
``customer property.''
(12) The agreement makes clear that, in the event of the bankruptcy
of the futures commission merchant or clearing organization, any
securities purchased with customer funds that are subject to an
agreement may be immediately transferred. The agreement also makes clear
that, in the event of a futures commission merchant or clearing
organization bankruptcy, the counterparty has no right to compel
liquidation of securities subject to an agreement or to make a priority
claim for the difference between current market value of the securities
and the price agreed upon for resale of the securities to the
counterparty, if the former exceeds the latter.
(e) Deposit of firm-owned securities into segregation. A futures
commission merchant shall not be prohibited from directly depositing
unencumbered securities of the type specified in this section, which it
owns for its own account, into a segregated safekeeping account or from
transferring any such securities from a segregated account to its
[[Page 68]]
own account, up to the extent of its residual financial interest in
customers' segregated funds; provided, however, that such investments,
transfers of securities, and disposition of proceeds from the sale or
maturity of such securities are recorded in the record of investments
required to be maintained by Sec. 1.27. All such securities may be
segregated in safekeeping only with a bank, trust company, clearing
organization, or other registered futures commission merchant.
Furthermore, for purposes of Secs. 1.25, 1.26, 1.27, 1.28 and 1.29,
investments permitted by Sec. 1.25 that are owned by the futures
commission merchant and deposited into such a segregated account shall
be considered customer funds until such investments are withdrawn from
segregation.
[65 FR 78010, Dec. 13, 2000, as amended at 65 FR 82271, Dec. 28, 2000]
Sec. 1.26 Deposit of instruments purchased with customer funds.
(a) Each futures commission merchant who invests customer funds in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such
commodity or option customers. Such instruments, when deposited with a
bank, trust company, clearing organization or another futures commission
merchant, shall be deposited under an account name which clearly shows
that they belong to commodity or option customers and are segregated as
required by the Act and this part. Each futures commission merchant upon
opening such an account shall obtain and retain in its files an
acknowledgment from such bank, trust company, clearing organization or
other futures commission merchant that it was informed that the
instruments belong to commodity or option customers and are being held
in accordance with the provisions of the Act and this part. Provided,
however, that an acknowledgment need not be obtained from a clearing
organization that has adopted and submitted to the Commission rules that
provide for the segregation as customer funds, in accordance with all
relevant provisions of the Act and the rules and orders promulgated
thereunder, of all funds held on behalf of customers and all instruments
purchased with customer funds. Such acknowledgment shall be retained in
accordance with Sec. 1.31. Such bank, trust company, clearing
organization or other futures commission merchant shall allow inspection
of such obligations at any reasonable time by representatives of the
Commission.
(b) Each clearing organization which invests money belonging or
accruing to commodity or option customers of its clearing members in
instruments described in Sec. 1.25 shall separately account for such
instruments and segregate such instruments as belonging to such
commodity or option customers. Such instruments, when deposited with a
bank or trust company, shall be deposited under an account name which
will clearly show that they belong to commodity or option customers and
are segregated as required by the Act and this part. Each clearing
organization upon opening such an account shall obtain and retain in its
files a written acknowledgment from such bank or trust company that it
was informed that the instruments belong to commodity or option
customers of clearing members and are being held in accordance with the
provisions of the Act and this part. Such acknowledgment shall be
retained in accordance with Sec. 1.31. Such bank or trust company shall
allow inspection of such instruments at any reasonable time by
representatives of the Commission.
[65 FR 78012, Dec. 13, 2000]
Sec. 1.27 Record of investments.
(a) Each futures commission merchant which invests customer funds,
and each clearing organization which invests customer funds of its
clearing members' customers or option customers, shall keep a record
showing the following:
(1) The date on which such investments were made;
(2) The name of the person through whom such investments were made;
(3) The amount of money so invested;
(4) A description of the instruments in which such investments were
made, including the CUSIP or ISIN numbers;
(5) The identity of the depositories or other places where such
instruments are segregated;
[[Page 69]]
(6) The date on which such investments were liquidated or otherwise
disposed of and the amount of money received of such disposition, if
any; and
(7) The name of the person to or through whom such investments were
disposed of.
(b) Each clearing organization which receives documents from its
clearing members representing investment of customer funds shall keep a
record showing separately for each clearing member the following:
(1) The date on which such documents were received from the clearing
member;
(2) A description of such documents, including the CUSIP or ISIN
numbers; and
(3) The date on which such documents were returned to the clearing
member or the details of disposition by other means.
(c) Such records shall be retained in accordance with Sec. 1.31. No
such investments shall be made except in instruments described in
Sec. 1.25.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62
FR 42401, Aug. 7, 1997; 65 FR 78013, Dec. 13, 2000]
Sec. 1.28 Appraisal of instruments purchased with customer funds.
Futures commission merchants who invest customer funds in
instruments described in Sec. 1.25 of this part shall include such
instruments in segregated account records and reports at values which at
no time exceed current market value, determined as of the close of the
market on the date for which such computation is made.
[58 FR 10953, Feb. 23, 1993, as amended at 65 FR 78013, Dec. 13, 2000]
Sec. 1.29 Increment or interest resulting from investment of customer funds.
The investment of customer funds in instruments described in
Sec. 1.25 shall not prevent the futures commission merchant or clearing
organization so investing such funds from receiving and retaining as its
own any increment or interest resulting therefrom.
[46 FR 54520, Nov. 3, 1981, as amended at 65 FR 78013, Dec. 13, 2000]
Sec. 1.30 Loans by futures commission merchants; treatment of proceeds.
Nothing in these regulations shall prevent a futures commission
merchant from lending its own funds to commodity or option customers on
securities and property pledged by such commodity or option customers,
or from repledging or selling such securities and property pursuant to
specific written agreement with such commodity or option customers. The
proceeds of such loans used to purchase, margin, guarantee, or secure
the trades, contracts, or commodity options of commodity or option
customers shall be treated and dealt with by a futures commission
merchant as belonging to such commodity or option customers, in
accordance with and subject to the provisions of section 4d(2) of the
Act and these regulations.
[46 FR 54520, Nov. 3, 1981]
Recordkeeping
Sec. 1.31 Books and records; keeping and inspection.
(a)(1) All books and records required to be kept by the Act or by
these regulations shall be kept for a period of five years from the date
thereof and shall be readily accessible during the first 2 years of the
5-year period. All such books and records shall be open to inspection by
any representative of the Commission or the United States Department of
Justice.
(2) A copy of any book or record required to be kept by the Act or
by these regulations shall be provided, at the expense of the person
required to keep the book or record, to a Commission representative upon
the representative's request. Instead of furnishing a copy, such person
may provide the original book or record for reproduction, which the
representative may temporarily remove from such person's premises for
this purpose. All copies or originals shall be provided promptly. Upon
request, the Commission representative shall issue a receipt provided by
such person for any copy or
[[Page 70]]
original book or record received. At the request of the Commission
representative, such person shall, upon the return thereof, issue a
receipt for any copy or original book or record returned by the
representative.
(b) Except as provided in paragraph (d) of this section, immediate
reproductions on either ``micrographic media'' (as defined in paragraph
(b)(1)(i) of this section) or ``electronic storage media'' (as defined
in paragraph (b)(1)(ii) this section) may be kept in that form for the
required time period under the conditions set forth in this paragraph
(b).
(1) For purposes of this section:
(i) The term ``micrographic media'' means microfilm or microfiche or
any similar medium.
(ii) The term ``electronic storage media'' means any digital storage
medium or system that:
(A) Preserves the records exclusively in a non-rewritable, non-
erasable format;
(B) Verifies automatically the quality and accuracy of the storage
media recording process;
(C) Serializes the original and, if applicable, duplicate units of
storage media and creates a time-date record for the required period of
retention for the information placed on such electronic storage media;
and
(D) Permits the immediate downloading of indexes and records
preserved on the electronic storage media onto paper, microfilm,
microfiche or other medium acceptable under this paragraph upon the
request of representatives of the Commission or the Department of
Justice.
(2) Persons who use either micrographic media or electronic storage
media to maintain records in accordance with this section must:
(i) Have available at all times, for examination by representatives
of the Commission or the Department of Justice, facilities for
immediate, easily readable projection or production of micrographic
media or electronic storage media images;
(ii) Be ready at all times to provide, and immediately provide at
the expense of the person required to keep such records, any easily
readable hard-copy image that representatives of the Commission or
Department of Justice may request;
(iii) Keep only Commission-require records on the individual medium
employed (e.g., a disk or sheets of microfiche);
(iv) Store a duplicate of the record, in any medium acceptable under
this regulation, at a location separate from the original for the period
of time required for maintenance of the original; and
(v) Organize and maintain an accurate index of all information
maintained on both the original and duplicate storage media such that:
(A) The location of any particular record stored on the media may be
immediately ascertained;
(B) The index is available at all times for immediate examination by
representatives of the Commission or the Department of Justice;
(C) A duplicate of the index is stored at a location separate from
the original index; and
(D) Both the original index and the duplicate index are preserved
for the time period required for the records included in the index.
(3) In addition to the foregoing conditions, persons using
electronic storage media must:
(i) Be ready at all times to provide, and immediately provide at the
expense of the person required to keep such records, copies of such
records on such approved machine-readable media as defined in
Sec. 15.00(1) of this chapter which any representative of the Commission
or the Department of Justice may request. Records must use a format and
coding structure specified in the request.
(ii) Develop and maintain written operational procedures and
controls (an ``audit system'') designed to provide accountability over
both the initial entry of required records to the electronic storage
media and the entry of each change made to any original or duplicate
record maintained on the electronic storage media such that:
(A) The results of such audit system are available at all times for
immediate examination by representatives of the Commission or the
Department of Justice;
[[Page 71]]
(B) The results of such audit system are preserved for the time
period required for the records maintained on the electronic storage
media; and
(C) The written operational procedures and controls are available at
all times for immediate examination by representatives of the Commission
or the Department of Justice.
(iii) Either
(A) Maintain, keep current, and make available at all times for
immediate examination by representatives of the Commission or Department
of Justice all information necessary to access records and indexes
maintained on the electronic storage media; or
(B) Place in escrow and keep current a copy of the physical and
logical format of the electronic storage media, the file format of all
different information types maintained on the electronic storage media
and the source code, documentation, and information necessary to access
the records and indexes maintained on the electronic storage media.
(4) In addition to the foregoing conditions, any person who uses
only electronic storage media to preserve some or all of its required
records (``Electronic Recordkeeper'') shall, prior to the media's use,
enter into an arrangement with at least one third party technical
consultant (``Technical Consultant'') who has the technical and
financial capability to perform the undertakings described in this
paragraph (b)(4). The arrangement shall provide that the Technical
Consultant will have access to, and the ability to download, information
from the Electronic Recordkeeper's electronic storage media to any
medium acceptable under this regulation.
(i) The Technical Consultant must file with the Commission an
undertaking in a form acceptable to the Commission, signed by the
Technical Consultant or a person duly authorized by the Technical
Consultant. An acceptable undertaking must include the following
provision with respect to the Electronic Recordkeeper:
With respect to any books and records maintained or preserved on
behalf of the Electronic Recordkeeper, the undersigned hereby undertakes
to furnish promptly to any representative of the United States Commodity
Futures Trading Commission or the United States Department of Justice
(the ``Representative''), upon reasonable request, such information as
is deemed necessary by the Representative to download information kept
on the Electronic Recordkeeper's electronic storage media to any medium
acceptable under 17 CFR 1.31. The undersigned also undertakes to take
reasonable steps to provide access to information contained on the
Electronic Recordkeeper's electronic storage media, including, as
appropriate, arrangements for the downloading of any record required to
be maintained under the Commodity Exchange Act or the rules,
regulations, or orders of the United States Commodity Futures Trading
Commission, in a format acceptable to the Representative. In the event
the Electronic Recordkeeper fails to download a record into a readable
format and after reasonable notice to the Electronic Recordkeeper, upon
being provided with the appropriate electronic storage medium, the
undersigned will undertake to do so, at no charge to the United States,
as the Representative may request.
(ii) [Reserved]
(c) Persons employing an electronic storage system shall provide a
representation to the Commission prior to the initial use of the system.
The representation shall be made by the person required to maintain the
records, the storage system vendor, or another third party with
appropriate expertise and shall state that the selected electronic
storage system meets the requirements set forth in paragraph (b)(1)(ii)
of this section. Persons employing an electronic storage system using
media other than optical disk or CD-ROM technology shall so state. The
representation shall be accompanied by the type of oath or affirmation
described in Sec. 1.10(d)(4).
(d) Trading cards, documents on which trade information is
originally recorded in writing, and written orders required to be kept
pursuant to Sec. 1.35(a), (a-1)(1), (a-1)(2) and (d) must be retained in
hard-copy for the required time period.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 22, Jan. 2, 1981; 46 FR
63035, Dec. 30, 1981; 58 FR 27464, 27467, May 10, 1993; 62 FR 24031, May
2, 1997; 64 FR 28742, May 27, 1999]
[[Page 72]]
Sec. 1.32 Segregated account; daily computation and record.
(a) Each futures commission merchant must compute as of the close of
each business day, on a currency-by-currency basis:
(1) The total amount of customer funds on deposit in segregated
accounts on behalf of commodity and option customers;
(2) the amount of such customer funds required by the Act and these
regulations to be on deposit in segregated accounts on behalf of such
commodity and option customers; and
(3) the amount of the futures commission merchant's residual
interest in such customer funds.
(b) In computing the amount of funds required to be in segregated
accounts, a futures commission merchant may offset any net deficit in a
particular customer's account against the current market value of
readily marketable securities, less applicable percentage deductions
(i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi) of
the Securities and Exchange Commission (17 CFR 241.15c3-1(c)(2)(vi)),
held for the same customer's account. The futures commission merchant
must maintain a security interest in the securities, including a written
authorization to liquidate the securities at the futures commission
merchant's discretion, and must segregate the securities in a
safekeeping account with a bank, trust company, clearing organization of
a contract market, or another futures commission merchant. For purposes
of this section, a security will be considered readily marketable if it
is traded on a ``ready market'' as defined in Rule 15c3-1(c)(11)(i) of
the Securities and Exchange Commission (17 CFR 240.15c3-1(c)(11)(i)).
(c) The daily computations required by this section must be
completed by the futures commission merchant prior to noon on the next
business day and must be kept, together with all supporting data, in
accordance with the requirements of Sec. 1.31.
[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003]
Sec. 1.33 Monthly and confirmation statements.
(a) Monthly statements. Each futures commission merchant must
promptly furnish in writing to each commodity customer and to each
option customer and to each foreign futures and foreign options
customer, as of the close of the last business day of each month or as
of any regular monthly date selected, except for accounts in which there
are neither open positions at the end of the statement period nor any
changes to the account balance since the prior statement period, but in
any event not less frequently than once every three months, a statement
which clearly shows:
(1) For each commodity customer and foreign futures customer--
(i) The open contracts with prices at which acquired;
(ii) The net unrealized profits or losses in all open contracts
marked to the market; and
(iii) Any customer funds carried with the futures commission
merchant; and
(iv) A detailed accounting of all financial charges and credits to
such customer accounts during the monthly reporting period, including
all customer funds and funds on deposit with respect to foreign futures
transactions in accordance with Sec. 30.7 of this chapter received from
or disbursed to such customer and realized profits and losses; and
(2) For each option customer and foreign options customer--
(i) All commodity options and foreign options purchased, sold,
exercised, or expired during the monthly reporting period, identified by
underlying futures contract or underlying physical, strike price,
transaction date, and expiration date;
(ii) The open commodity option and foreign option positions carried
for such customer as of the end of the monthly reporting period,
identified by underlying futures contract or underlying physical, strike
price, transaction date, and expiration date;
(iii) All open commodity option and foreign option positions marked
to the market and the amount each position is in the money, if any;
(iv) Any customer funds carried in such customer's account(s); and
[[Page 73]]
(v) A detailed accounting of all financial charges and credits to
such customer's account(s) during the monthly reporting period,
including all customer funds and funds on deposit with respect to
foreign options transactions received from or disbursed to such
customer, premiums charged and received, and realized profits and
losses.
(b) Confirmation statement. Each futures commission merchant must,
not later than the next business day after any commodity futures or
commodity option transaction, including any foreign futures or foreign
options transactions, furnish:
(1) To each commodity customer, a written confirmation of each
commodity futures transaction caused to be executed by it for the
customer.
(2) To each option customer, a written confirmation of each
commodity option transaction, containing at least the following
information:
(i) The option customer's account identification number;
(ii) A separate listing of the actual amount of the premium, as well
as each mark-up thereon, if applicable, and all other commissions,
costs, fees and other charges incurred in connection with the commodity
option transaction;
(iii) The strike price;
(iv) The underlying futures contract or underlying physical;
(v) The final exercise date of the commodity option purchased or
sold; and
(vi) The date the commodity option transaction was executed.
(3) To each option customer, upon the expiration or exercise of any
commodity option, a written confirmation statement thereof, which
statement shall include the date of such occurrence, a description of
the option involved, and, in the case of exercise, the details of the
futures or physical position which resulted therefrom including, if
applicable, the final trading date of the contract for future delivery
underlying the option.
(4) Notwithstanding the provisions of paragraphs (b)(1) through
(b)(3) of this section, a commodity futures or commodity option
transaction that is caused to be executed for a commodity pool need be
confirmed only to the operator of the commodity pool.
(c) Exemptions. The requirements of paragraphs (a)(1)(i),
(a)(1)(ii), and (b)(1) of this section shall not apply to the following:
(1) Any account carried for a person who is a member of any contract
market;
(2) Any omnibus account carried for another futures commission
merchant; and
(3) Any account containing only bona fide hedge positions, except
that confirmations must be furnished to accounts containing only bona
fide hedge positions.
(d) Controlled accounts. With respect to any account controlled by
any person other than the commodity customer or option customer for whom
such account is carried, each futures commission merchant shall:
(1) Promptly furnish in writing to such other person the information
required by paragraphs (a) and (b) of this section;
(2) [Reserved]
(3) Promptly furnish in writing to such other person a copy of the
statement required by Sec. 1.46: Provided, however, That the provisions
of this paragraph (d) shall not apply to an account controlled by the
spouse, parent or child of the customer for whom such account is
carried.
(e) Recordkeeping. Each futures commission merchant shall retain, in
accordance with Sec. 1.31, a copy of each monthly statement and
confirmation required by this section.
(f) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the futures commission merchant is providing the statement was
introduced by an introducing broker and the names of the futures
commission merchant and introducing broker.
(g) Electronic transmission of statements. (1) The statements
required by this section, and by Sec. 1.46, may be furnished to any
customer by means of electronic media if the customer so consents,
Provided, however, that a futures commission merchant must, prior to the
transmission of any statement by means of electronic media,
[[Page 74]]
disclose the electronic medium or source through which statements will
be delivered, the duration, whether indefinite or not, of the period
during which consent will be effective, any charges for such service,
the information that will be delivered by such means, and that consent
to electronic delivery may be revoked at any time.
(2) In the case of a customer who does not qualify as an
``institutional customer'' as defined in Sec. 1.3(g), a futures
commission merchant must obtain the customer's signed consent
acknowledging disclosure of the information set forth in paragraph
(g)(1) of this section prior to the transmission of any statement by
means of electronic media.
(3) Any statement required to be furnished to a person other than a
customer in accordance with paragraph (d) of this section may be
furnished by electronic media.
(4) A futures commission merchant who furnishes statements to any
customer by means of electronic media must retain a daily confirmation
statement for such customer as of the end of the trading session,
reflecting all transactions made during that session for the customer,
in accordance with Sec. 1.31.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024; the information collection requirements in
paragraph (c) were approved under control number 3038-0005)
[46 FR 54520, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982; 48 FR 1185, Jan. 11, 1983; 48 FR 35289, Aug. 3,
1983; 52 FR 28997, Aug. 5, 1987; 66 FR 53517, Oct. 23, 2001]
Sec. 1.34 Monthly record, ``point balance''.
(a) Each futures commission merchant shall prepare, and retain in
accordance with the requirements of Sec. 1.31, a statement commonly
known as a ``point balance,'' which accrues or brings to the official
closing price, or settlement price fixed by the clearing organization,
all open contracts of customers as of the last business day of each
month or of any regular monthly date selected: Provided, however, That a
futures commission merchant who carries part or all of customers' open
contracts with other futures commission merchants on an ``instruct
basis'' will be deemed to have met the requirements of this section as
to open contracts so carried if a monthly statement is prepared which
shows that the prices and amounts of such contracts long and short in
the customers' accounts are in balance with those in the carrying
futures commission merchants' accounts, and such statements are retained
in accordance with the requirements of Sec. 1.31.
(b) Each futures commission merchant shall prepare, and retain in
accordance with the requirements of Sec. 1.31, a listing in which all
open commodity option positions carried for option customers are marked
to the market. Such listing shall be prepared as of the last business
day of each month, or as of any regular monthly date selected, and shall
be by put or by call, by underlying contract for future delivery (by
delivery month) or underlying physical (by option expiration date), and
by strike price.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54521, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982]
Sec. 1.35 Records of cash commodity, futures, and option transactions.
(a) Futures commission merchants, introducing brokers, and members
of contract markets. Each futures commission merchant, introducing
broker, and member of a contract market shall keep full, complete, and
systematic records, together with all pertinent data and memoranda, of
all transactions relating to its business of dealing in commodity
futures, commodity options, and cash commodities. Each futures
commission merchant, introducing broker, and member of a contract market
shall retain the required records, data, and memoranda in accordance
with the requirements of Sec. 1.31, and produce them for inspection and
furnish true and correct information and reports as to the contents or
the meaning thereof, when and as requested by an authorized
representative of the Commission or the United States Department of
Justice. Included among such records shall be all orders
[[Page 75]]
(filled, unfilled, or canceled), trading cards, signature cards, street
books, journals, ledgers, canceled checks, copies of confirmations,
copies of statements of purchase and sale, and all other records, data
and memoranda, which have been prepared in the course of its business of
dealing in commodity futures, commodity options, and cash commodities.
Among such records each member of a contract market must retain and
produce for inspection are all documents on which trade information is
originally recorded, whether or not such documents must be prepared
pursuant to the rules or regulations of either the Commission or the
contract market. For purposes of this section, such documents are
referred to as ``original source documents.''
(a-1) Futures commission merchants, introducing brokers, and members
of contract markets: Recording of customers' and option customers'
orders. (1) Each futures commission merchant and each introducing broker
receiving a customer's or option customer's order shall immediately upon
receipt thereof prepare a written record of the order including the
account identification, except as provided in paragraph (a-1)(5) of this
section, and order number, and shall record thereon, by timestamp or
other timing device, the date and time, to the nearest minute, the order
is received, and in addition, for option customers' orders, the time, to
the nearest minute, the order is transmitted for execution.
(2)(i) Each member of a contract market who on the floor of such
contract market receives a customer's or option customer's order which
is not in the form of a written record including the account
identification, order number, and the date and time, to the nearest
minute, the order was transmitted or received on the floor of such
contract market, shall immediately upon receipt thereof prepare a
written record of the order in nonerasable ink, including the account
identification, except as provided in paragraph (a-1)(5) of this section
or appendix C to this part, and order number and shall record thereon,
by timestamp or other timing device, the date and time, to the nearest
minute, the order is received.
(ii) Except as provided in paragraph (a-1)(3) of this section:
(A) Each contract market member who on the floor of such contract
market receives an order from another member present on the floor which
is not in the form of a written record shall, immediately upon receipt
of such order, prepare a written record of the order or obtain from the
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and
shall record thereon, by time-stamp or other timing device, the date and
time, to the nearest minute, the order is received; or
(B) When a contract market member present on the floor places an
order, which is not in the form of a written record, for his own account
or an account over which he has control, with another member of such
contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of placement to the nearest minute
on a sequentially-numbered trading card maintained in accordance with
the requirements of paragraph (d) of this section;
(2) The member receiving and executing such order immediately upon
execution of the order shall record the time of execution to the nearest
minute on a trading card or other record maintained pursuant to the
requirements of paragraph (d) of this section; and
(3) The member receiving and executing the order shall return such
trading card or other record to the member placing the order. The member
placing the order then must submit together both of the trading cards or
other records documenting such trade to contract market personnel or the
clearing member, in accordance with contract market rules adopted
pursuant to paragraph (j)(1) of this section.
(iii) Each contract market may adopt rules, which must be submitted
to the Commission pursuant to section 5a(a)(12)(A) of the Act and
Commission Regulation 1.41, that provide alternative requirements to
those contained in paragraph (a-1)(2)(ii) of this section.
[[Page 76]]
Such rules shall, at a minimum, require that the contemporaneous written
records:
(A) Contain the terms of the order;
(B) Include reliable timing data for the initiation and execution of
the order which would permit complete and effective reconstruction of
the order placement and execution; and
(C) Be submitted to contract market personnel or clearing members in
accordance with contract market rules adopted pursuant to paragraph
(j)(1) of this section.
(3)(i) The requirements of paragraph (a-1)(2)(ii) of this section
will not apply if a contract market maintains in effect rules which have
been submitted to the Commission pursuant to section 5a(a)(12)(A) of the
Act and Commission Regulation 1.41, which provide for an exemption
where:
(A) A contract market member places with another member of such
contract market an order that is part of a spread transaction;
(B) The member placing the order personally executes one or more
legs of the spread; and
(C) The member receiving and executing such order immediately upon
execution of the order records the time of execution to the nearest
minute on his trading card or other record maintained in accordance with
the requirements of paragraph (d) of this section.
(ii) Each contract market shall, as part of its trade practice
surveillance program, conduct surveillance for compliance with the
recordkeeping and other requirements under paragraphs (a-1) (2) and (3)
of this section, and for trading abuses related to the execution of
orders for members present on the floor of the contract market.
(4) Each member of a contract market reporting the execution from
the floor of the contract market of a customer's or option customer's
order or the order of another member of the contract market received in
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this
section, shall record on a written record of the order, including the
account identification, except as provided in paragraph (a-1)(5) of this
section, and order number, by timestamp or other timing device, the date
and time to the nearest minute such report of execution is made. Each
member of a contract market shall submit the written records of customer
orders or orders from other contract market members to contract market
personnel or to the clearing member responsible for the collection of
orders prepared pursuant to this paragraph as required by contract
market rules adopted in accordance with paragraph (j)(1) of this
section. The execution price and other information reported on the order
tickets must be written in nonerasable ink.
(5) Orders eligible for post-execution allocation. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution if the
requirements of this paragraph are met. The bunched order must be placed
by an eligible account manager on behalf of eligible customer accounts
and must be handled in accordance with contract market rules that have
been submitted to the Commission pursuant to Section 5a(a)(12)(A) of the
Act and Sec. 1.41.
(i) Eligible account managers. The person placing and directing the
allocation of an order eligible for post-execution allocation must be
one of the following who has been granted investment discretion with
regard to eligible customer accounts:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act;
(B) An investment adviser registered with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940;
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation; or
(D) A foreign adviser who provides advice solely to foreign persons
and who is subject to regulation by a foreign regulator or self-
regulatory organization that has been granted an exemption pursuant to
Sec. 30.10 of this chapter or has entered into a Memorandum of
Understanding or other arrangement for cooperative enforcement
[[Page 77]]
and information sharing with the Commission (for the purposes of this
section, referred to as a ``foreign authority''), provided that the
certification required by paragraph (a-1)(5)(iv)(C) of this section is
made.
(ii) Eligible customers. The accounts for which orders eligible for
post-execution allocation may be placed and to which fills may be
allocated must be owned by the following entities:
(A) A bank or trust company;
(B) A savings and loan association or credit union;
(C) An insurance company;
(D) An investment company subject to regulation under the Investment
Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or a foreign investment
company performing a similar role or function subject to foreign
regulation, provided that the investment company has total assets
exceeding $5,000,000;
(E) A commodity pool formed and operated by a person subject to
regulation under the Act or a foreign entity performing a similar role
or function subject to foreign regulation, provided that the commodity
pool or foreign entity has total assets exceeding $5,000,000;
(F) A corporation, partnership, proprietorship, organization, trust,
or other entity, provided that the entity has either a net worth
exceeding $1,000,000 or total assets exceeding $10,000,000;
(G) An employee benefit plan subject to the Employee Retirement
Income Security Act of 1974 or a foreign entity performing a similar
role or function subject to foreign regulation, with total assets
exceeding $5,000,000 or whose investment decisions are made by a bank,
trust company, insurance company, investment adviser subject to
regulation under the Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et
seq.) or a commodity trading advisor subject to regulation under the
Act;
(H) Any governmental entity (including the United States, any State,
or any foreign government) or political subdivision thereof, or any
multinational or supranational entity or any instrumentality, agency, or
department of any of the foregoing;
(I) A broker-dealer subject to regulation under the Securities
Exchange Act of 1934 (15 U.S.C. 78a et seq.) or a foreign person
performing a similar role or function subject to foreign regulation,
acting on its own behalf;
(J) A futures commission merchant, floor broker, or floor trader
subject to regulation under the Act or a foreign person performing a
similar role or function subject to foreign regulation, acting on its
own behalf;
(K) An eligible account manager, as defined in paragraph (a-1)(5)(i)
of this section; or
(L) Any natural person with total assets exceeding $10,000,000.
(iii) Disclosure. Before placing the initial order eligible for
post-execution allocation, the account manager must disclose the
following to each of its customers to be subject to post-execution
allocation:
(A) The general nature of the allocation methodology the account
manager will use;
(B) The standard by which the account manager will judge the
fairness of allocations;
(C) The ability of the customer to review summary or composite data
sufficient for that customer to compare its results with those of other
relevant customers; and
(D) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation.
(iv) Account certification. Before placing an order eligible for
post-execution allocation, the account manager must provide the
following to each futures commission merchant clearing any part of the
order:
(A) If not previously provided, certification, in writing, that the
account manager is aware of, and will remain in compliance with, the
requirements of this paragraph. This certification shall remain in
effect until revoked by the account manager; and
(B) If not previously identified, the identity of each eligible
customer account to which fills will be allocated.
(C) Foreign advisers must also provide a written certification from
a foreign authority stating that the foreign adviser's activities are
subject to regulation by that foreign authority and the foreign
authority will provide,
[[Page 78]]
upon request of the Commission or Department of Justice, information
that relates to the foreign adviser's compliance with the requirements
of this paragraph.
(v) Allocation. Orders eligible for post-execution allocation must
be allocated in accordance with the following:
(A) Allocations must be made only to the accounts of eligible
customers.
(B) Allocations must be made as soon as practicable after the entire
transaction is executed, but no later than the end of the day the order
is executed.
(C) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(D) The allocation methodology must be sufficiently objective and
specific so that the appropriate allocation for a given trade can be
verified in an independent audit.
(E) The allocation methodology must be consistently applied.
(vi) Recordkeeping. The following recordkeeping requirements apply
to orders eligible for post-execution allocation:
(A) Prior to order placement, each account manager must create and
timestamp an order origination document reflecting the terms of the
order and expected allocation thereof. Any subsequent determination to
alter any terms or allocation of the order should likewise be
documented.
(B) Each order must be identified by group identifier or other code
on the office and/or floor order tickets at the time of placement. The
group identifier or other code on each order ticket must relate back to
the specific order origination document required by paragraph (a-
1)(5)(vi)(A) of this section.
(C) Each transaction must be identified as part of an order eligible
for post-execution allocation on contract market trade registers and
other computerized trade practice surveillance records.
(D) Each account manager must make available, upon request of any
representative of the Commission or the United States Department of
Justice, the following records:
(1) The disclosure documents required pursuant to paragraph (a-
1)(5)(iii) of this section; and
(2) Records reflecting futures and option transactions and other
transactions and any other records, including the order origination
document, that would identify the management strategy or the allocation
methodology or would relate to, or reflect upon, the fairness of the
allocations.
(E) Each account manager must make available for review, upon
request of an eligible customer, summary or composite data sufficient
for that customer to compare its results with those of other relevant
customers. These summary data may be prepared so as not to disclose the
identity of individual account holders.
(vii) Self regulatory organization rule enforcement and audit
procedures. As part of its rule enforcement program, each contract
market that adopts rules that allow the placement of orders eligible for
post-execution allocation must adopt audit procedures to determine
compliance with the recordkeeping requirements identified in paragraph
(a-1)(5)(vi) (B) and (C) of this section. Each contract market, or the
designated self-regulatory organization of a member firm, must adopt
audit procedures to determine compliance with the certification and
allocation requirements identified in paragraphs (a-1)(5)(iv) and (a-
1)(5)(v) (A) and (B) of this section.
(a-2)(1) Futures commission merchants, introducing brokers, and
members of contract markets. Upon request of the contract market, the
Commission, or the United States Department of Justice, each futures
commission merchant, introducing broker, and member of a contract market
shall request from its customers and, upon receipt thereof, provide to
the requesting body documentation of cash transactions underlying
exchanges of futures for cash commodities or exchanges of futures in
connection with cash commodity transactions.
(2) Customers. Each customer of a futures commission merchant,
introducing broker, or member of a contract market shall create, retain,
and produce upon request of the contract market, the Commission, or the
United
[[Page 79]]
States Department of Justice documentation of cash transactions
underlying exchanges of futures for cash commodities or exchanges of
futures in connection with cash commodity transactions.
(3) Contract markets. Every contract market shall adopt rules which
require its members to provide documentation of cash transactions
underlying exchanges of futures for cash commodities or exchanges of
futures in connection with cash commodity transactions upon request of
the contract market.
(4) Documentation. For the purposes of this paragraph, documentation
means those documents customarily generated in accordance with cash
market practices which demonstrate the existence and nature of the
underlying cash transactions, including, but not limited to, contracts,
confirmation statements, telex printouts, invoices, and warehouse
receipts or other documents of title.
(b) Futures commission merchants, introducing brokers, and clearing
members of contract markets. Each futures commission merchant and each
clearing member of a contract market and, for purposes of paragraph
(b)(3) of this section, each introducing broker, shall, as a minimum
requirement, prepare regularly and promptly, and keep systematically and
in permanent form, the following:
(1) A financial ledger record which will show separately for each
customer or option customer all charges against and credits to such
customer's or option customer's account, including but not limited to
customer funds deposited, withdrawn, or transferred, and charges or
credits resulting from losses or gains on closed transactions;
(2) A record of transactions which will show separately for each
account (including proprietary accounts):
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future; and
(ii) All commodity option transactions executed for such account,
including the date, whether the transaction involved a put or call,
expiration date, quantity, underlying contract for future delivery or
underlying physical, strike price, and details of the purchase price of
the option, including premium, mark-up, commission and fees; and
(3) A record or journal which will separately show for each business
day complete details of:
(i) All commodity futures transactions executed on that day,
including the date, price, quantity, market, commodity, future and the
person for whom such transaction was made;
(ii) All commodity option transactions executed on that day,
including the date, whether the transaction involved a put or call, the
expiration date, quantity, underlying contract for future delivery, or
underlying physical, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees and the person
for whom the transaction was made; and
(iii) In the case of an introducing broker, the record or journal
required by this paragraph (b)(3) shall also include the futures
commission merchant carrying the account for which each commodity
futures and commodity option transaction was executed on that day.
Provided, however, that where reproductions on microfilm, microfiche or
optical disk are substituted for hard copy in accordance with the
provisions of Sec. 1.31(b) of this part, the requirements of paragraphs
(b)(1) and (b)(2) of this section will be considered met if the person
required to keep such records is ready at all times to provide, and
immediately provides in the same city as that in which such person's
commodity or commodity option books and records are maintained, at the
expense of such person, reproduced copies which show the records as
specified in paragraphs (b)(1) and (b)(2) of this section, on request of
any representatives of the Commission or the U.S. Department of Justice.
(c) Clearing members of contract markets. In the daily record or
journal required to be kept under paragraph (b)(3) of this section, each
clearing member of a contract market shall also show the floor broker or
floor trader executing each transaction, the opposite floor broker or
floor trader, and the opposite clearing member with whom it was made.
[[Page 80]]
(d) Members of contract markets. (1) Each member of a contract
market who, in the place provided by the contract market for the meeting
of persons similarly engaged, executes purchases or sales of any
commodity for future delivery or commodity option on or subject to the
rules of such contract market, shall prepare regularly and promptly a
trading card or other record showing such purchases and sales. Such
trading card or record shall show the member's name, the name of the
clearing member, transaction date, time (as specified in rules of the
contract market which comply with the requirements of this section),
quantity, and, as applicable, underlying commodity, contract for future
delivery or physical, price or premium, delivery month or expiration
date, whether the transaction involved a put or a call and strike price.
Such trading card or other record shall also clearly identify the
opposite floor broker or floor trader with whom the transaction was
executed, and the opposite clearing member (if, in accordance with the
rules or practice of the contract market, such opposite clearing member
is made known to the member).
(2) Each member of a contract market recording purchases and sales
on trading cards must record such purchases and sales in exact
chronological order of execution on sequential lines of the trading card
without skipping lines between trades; Provided, however; That if lines
remain after the last execution recorded on a trading card, the
remaining lines must be marked through.
(3) Each member of a contract market must identify on his trading
cards in the manner prescribed by the rules of the contract market the
purchases and sales executed during the opening and closing periods
designated by the contract market pursuant to paragraph (j)(7) of this
section.
(4) Trading cards prepared by a member of a contract market pursuant
to contract market rules must contain:
(i) Pre-printed member identification or other unique identifying
information which would permit the trading cards of one member to be
distinguished from those of all other members;
(ii) Pre-printed sequence numbers to permit the intra-day sequencing
of the cards; and
(iii) Unique and pre-printed identifying information which would
distinguish each of the trading cards prepared by the member from other
such trading cards for no less than a one-week period.
(5) Trading cards prepared by a member of a contract market and
collected pursuant to paragraph (j)(1) of this section must be
timestamped promptly to the nearest minute upon collection by either the
contract market or the relevant clearing member.
(6) Each member of a contract market shall be accountable for all
trading cards prepared pursuant to contract market rules in exact
numerical sequence, whether or not such trading cards are relied on as
original source documents.
(7) Trading records prepared by a member of a contract market
pursuant to contract market rules must:
(i) Be submitted in accordance with contract market rules adopted
pursuant to paragraph (j)(1) of this section; and
(ii) Be completed in non-erasable ink. A member may correct any
errors by crossing out erroneous information without obliterating or
otherwise making illegible any of the originally recorded information.
With regard to trading cards only, a member may correct erroneous
information by rewriting the trading card; provided, however, that the
member must submit a ply of the trading card, or in the absence of plies
the original trading card, that is subsequently rewritten in accordance
with contract market rules which set forth the required collection
schedule for trading cards and provided further that the member is
accountable for any trading card that subsequently is rewritten pursuant
to paragraph (d)(6) of this section.
(8) Each member of a contract market must use a new trading card at
the beginning of each designated 30-minute interval required by
paragraph (j)(1) of this section (or such lesser interval as may be
determined appropriate by the applicable contract market) or as may be
required pursuant hereto.
[[Page 81]]
(e) Contract markets. Each contract market shall maintain or cause
to be maintained by its clearing organization a single record which
shall show for each futures or option trade: the transaction date, time
(as described in paragraph (g) of this section), quantity, and, as
applicable, underlying commodity, contract for future delivery or
physical, price or premium, delivery month or expiration date, whether
the transaction involved a put or a call, strike price, floor broker or
floor trader buying, clearing member buying, floor broker or floor
trader selling, clearing member selling, and symbols indicating the
buying and selling customer or option customer types. The customer and
option customer type indicators shall show, with respect to each person
executing the trade, whether such person:
(1) Was trading for his own account, or an account for which he has
discretion;
(2) Was trading for his clearing member's house account;
(3) Was trading for another member present on the exchange floor, or
an account controlled by such other member; or
(4) Was trading for any other type of customer or option customer.
The record required by this paragraph (e) shall also show, by
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with written rules of the contract market
which have been submitted to and approved by the Commission in
accordance with the provisions of Sec. 1.38, and trades cleared on dates
other than the date of execution. Except as otherwise approved by the
Commission for good cause shown, the record required by this paragraph
(e) shall be maintained in a format and coding structure approved by the
Commission (i) in hard copy or on microfilm as specified in Sec. 1.31
and (ii) for 60 days in computer-readable form on compatible magnetic
tapes or discs.
(f) Each contract market shall provide for the identification of
floor brokers, floor traders, and clearing members, in the records
required to be kept under paragraphs (c), (d), and (e) of this section,
by the use of a distinctive, nonvariable designation for each such floor
broker, floor trader, and clearing member.
(g) Time of trade execution. For purposes of paragraph (e) of this
section: (1) The actual time of the execution of each side of a
transaction must be obtained, or (2) if a contract market identifies and
records the time of a transaction, a single actual time of execution for
both sides of the transaction may be obtained. Actual times of execution
shall be stated in increments of no more than one minute in length. If a
contract market submits rules to the Commission, in accordance with the
provisions of section 5a(a)(12)(A) of the Act and Sec. 1.41, defining
and separately identifying opening and closing time periods, the
contract market may, for purposes of paragraph (e) of this section, use
those time periods for trades occurring during the opening and closing
periods. Contract market rules in effect prior to the effective date of
this paragraph (g) upon which a contract market intends to rely in
complying herewith must be submitted for this purpose to the Commission
in accordance with the provisions of section 5a(a)(12)(A) of the Act and
Sec. 1.41.
(h) Contract market price change register. Each contract market
shall establish and maintain a record of all changes in the price of
futures or option transactions executed on the floor of the contract
market. This record shall include the time of all changes in price to
the nearest ten seconds.
(i) Contract markets. A contract market, in order to demonstrate
that it is exercising due diligence in maintaining the continuing
affirmative action program required by the Act and Sec. 1.51, shall, at
a minimum:
(1) Demonstrate effective use in its continuing affirmative action
program of the information required to be obtained by paragraph (e) of
this section to reconstruct rapidly and accurately transactions executed
on or subject to the rules of such contract market; and
(2) Submit to the Commission such reports as the Commission or the
Director of the Division of Trading and Markets, or such persons under
the supervision of the Director as may be specified from time to time,
may require concerning the accuracy of all information recorded under
paragraph (e)
[[Page 82]]
of this section and the use of such information in the contract market's
affirmative action program.
(j) Contract markets. Each contract market must maintain in effect
rules which require that:
(1) Trading records prepared by a member of the contract market
pursuant to paragraphs (a-1) and (d) of this section be submitted to
contract market personnel or the clearing member within 15 minutes of
designated intervals not to exceed 30 minutes, commencing with the
beginning of each trading session. The time period permitted for the
submission of trading records after the close of trading in each market
shall not exceed 15 minutes from the close. Such documents should
nevertheless be collected as often as is practicable by the contract
market or relevant clearing member. Such contract market rules need not,
however, require that those original source documents which cannot be
relied upon by the contract market or clearing member for clearing
purposes be submitted pursuant to this paragraph. Each contract market
shall submit a written report to the Commission no later than nine
months after the effective date of this paragraph describing with
particularity the contract market's system(s) in place to comply with
this paragraph and the level of compliance achieved to date.
(2) Trading cards collected pursuant to this paragraph must be
timestamped promptly to the nearest minute upon collection by either the
contract market or relevant clearing member.
(3) A member of the contract market must use a new trading card at
the beginning of each designated 30-minute interval required by
paragraph (j)(1) of this section.
(4) A member of the contract market must record trades in the manner
prescribed by paragraph (d)(2) of this section.
(5) Trading cards prepared by a member of the contract market must
contain the identifying information prescribed by paragraph (d)(4) of
this section.
(6) A member of the contract market must be accountable for all
trading cards prepared pursuant to contract market rules in exact
numerical sequence, whether or not such trading cards are relied on as
original source documents.
(7) A member of the contract market must identify on his trading
cards trades executed during opening and closing periods either by
drawing a line on the trading card to separate those trades from others
recorded thereon or by some other method. Each contract market must
designate as opening and closing periods for this purpose those periods
upon which the opening and closing trading ranges are based for each of
its markets.
(8) A member of the contract market must complete trades in non-
erasable ink in the manner prescribed by paragraph (d)(7)(ii) of this
section.
(k) Collection of trading cards in intervals not to exceed 15
minutes. The Commission, in its discretion, may publish a schedule in
the Federal Register no earlier than 11 months after paragraph (j)(1) of
this section becomes effective, indicating when the records required to
be submitted pursuant to that paragraph must be submitted to contract
market personnel or the clearing member within 15 minutes of designated
intervals not to exceed 15 minutes, commencing with the beginning of
each trading session.
(l) A contract market which can demonstrate that it currently has
available hand-held terminals or such other automated means for the
recordation of trades which can eliminate the opportunity for improper
alteration or fabrication of trading records, may petition the
Commission for an exemption from Regulations 1.35(a-1) (2) and (4), (d),
(j) or (k), as appropriate.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976, as amended by 46 FR 54521, Nov. 3, 1981; 46
FR 55925, Nov. 13, 1981; 46 FR 63035, Dec. 30, 1981; 47 FR 57008, Dec.
22, 1982; 48 FR 35389, Aug. 3, 1983; 51 FR 2691, Jan. 21, 1986; 54 FR
33881, Aug. 17, 1989; 55 FR 8137, Mar. 7, 1990; 58 FR 27465, May 10,
1993; 58 FR 31166, June 1, 1993; 58 FR 40348, July 28, 1993; 59 FR 5525,
Feb. 7, 1994; 61 FR 43001, Aug. 20, 1996; 63 FR 45709, Aug. 27, 1998; 63
FR 49955, Sept. 18, 1998]
[[Page 83]]
Sec. 1.36 Record of securities and property received from customers and option customers.
(a) Each futures commission merchant shall maintain, as provided in
Sec. 1.31, a record of all securities and property received from
customers or option customers in lieu of money to margin, purchase,
guarantee, or secure the commodity or commodity option transactions of
such customers or option customers. Such record shall show separately
for each customer or option customer: a description of the securities or
property received; the name and address of such customer or option
customer; the dates when the securities or property were received; the
identity of the depositories or other places where such securities or
property are segregated; the dates of deposits and withdrawals from such
depositories; and the dates of return of such securities or property to
such customer or option customer, or other disposition thereof, together
with the facts and circumstances of such other disposition. In the event
any futures commission merchant deposits with the clearing organization
of a contract market, directly or with a bank or trust company acting as
custodian for such clearing organization, securities and/or property
which belong to a particular customer or option customer, such futures
commission merchant shall obtain written acknowledgment from such
clearing organization that it was informed that such securities or
property belong to customers or option customers of the futures
commission merchant making the deposit. Such acknowledgment shall be
retained as provided in Sec. 1.31.
(b) Each clearing organization of a contract market which receives
from members securities or property belonging to particular customers or
option customers of such members in lieu of money to margin, purchase,
guarantee, or secure the commodity or commodity option transactions of
such customers or option customers, or receives notice that any such
securities or property have been received by a bank or trust company
acting as custodian for such clearing organization, shall maintain, as
provided in Sec. 1.31, a record which will show separately for each
member, the dates when such securities or property were received, the
identity of the depositories or other places where such securities or
property are segregated, the dates such securities or property were
returned to the member, or otherwise disposed of, together with the
facts and circumstances of such other disposition including the
authorization therefor.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024)
[46 FR 54522, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48
FR 8435, Mar. 1, 1983]
Sec. 1.37 Customer's or option customer's name, address, and occupation recorded; record of guarantor or controller of account.
(a)(1) Each futures commission merchant, introducing broker, and
member of a contract market shall keep a record in permanent form which
shall show for each commodity futures or option account carried or
introduced by it the true name and address of the person for whom such
account is carried or introduced and the principal occupation or
business of such person as well as the name of any other person
guaranteeing such account or exercising any trading control with respect
to such account. For each such commodity option account, the records
kept by such futures commission merchant, introducing broker, and member
of a contract market must also show the name of the person who has
solicited and is responsible for each option customer's account or
assign account numbers in such a manner to identify that person.
(2) Each futures commission merchant who receives a customer's
election not to have the customer's funds separately accounted for and
segregated, in accordance with Sec. 1.68, shall keep a record in
permanent form that indicates such customer's election. The record of
such a customer election may be indicated on the record required by
paragraph (a)(1) of this section.
(b) As of the close of the market each day, each futures commission
merchant which carries an account for another futures commission
merchant, foreign broker (as defined in Sec. 15.00 of
[[Page 84]]
this chapter), member of a contract market, or other person, on an
omnibus basis shall maintain a daily record for each such omnibus
account of the total open long contracts and the total open short
contracts in each future and, for commodity option transactions, the
total open put options purchased, the total open put options granted,
the total open call options purchased, and the total open call options
granted for each commodity option expiration date.
(c) Each designated contract market shall keep a record in permanent
form, which shall show the true name, address, and principal occupation
or business of any foreign trader executing transactions on the facility
or exchange. In addition, upon request, a designated contract market
shall provide to the Commission information regarding the name of any
person guaranteeing such transactions or exercising any control over the
trading of such foreign trader.
(d) Paragraph (c) of this section shall not apply to a designated
contract market on which transactions in futures or option contracts of
foreign traders are executed through, or the resulting transactions are
maintained in, accounts carried by a registered futures commission
merchant or introduced by a registered introducing broker subject to the
provisions of paragraph (a) of this section.
(The information collection requirements contained in Sec. 1.37 were
approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0024; and in paragraph (b) under control number 3038-
0009)
[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 48
FR 35289, Aug. 3, 1983; 58 FR 28501, May 14, 1993; 66 FR 20744, Apr. 25,
2001; 66 FR 42269, Aug. 10, 2001]
Sec. 1.38 Execution of transactions.
(a) Competitive execution required; exceptions. All purchases and
sales of any commodity for future delivery, and of any commodity option,
on or subject to the rules of a contract market shall be executed openly
and competitively by open outcry or posting of bids and offers or by
other equally open and competitive methods, in the trading pit or ring
or similar place provided by the contract market, during the regular
hours prescribed by the contract market for trading in such commodity or
commodity option: Provided, however, That this requirement shall not
apply to transactions which are executed non-competitively in accordance
with written rules of the contract market which have been submitted to
and approved by the Commission, specifically providing for the non-
competitive execution of such transactions.
(b) Noncompetitive trades; exchange of futures, etc.; requirements.
Every person handling, executing, clearing, or carrying trades,
transactions or positions which are not competitively executed,
including transfer trades or office trades, or trades involving the
exchange of futures for cash commodities or the exchange of futures in
connection with cash commodity transactions, shall identify and mark by
appropriate symbol or designation all such transactions or contracts and
all orders, records, and memoranda pertaining thereto.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[46 FR 54523, Nov. 3, 1981, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.39 Simultaneous buying and selling orders of different principals; execution of, for and between principals.
(a) Conditions and requirements. A member of a contract market who
shall have in hand at the same time both buying and selling orders of
different principals for the same commodity for future delivery in the
same delivery month or the same option (both puts or both calls, with
the same underlying contract for future delivery or the same underlying
physical, expiration date and strike price) may execute such orders for
and directly between such principals at the market price, if in
conformity with written rules of such contract market which have been
approved by the Commission, and:
(1)(i) When trading is conducted in a trading pit or ring, such
orders are first offered openly and competitively by open outcry in such
trading pit or ring (A) by both bidding and offering at the same price,
and neither such bid
[[Page 85]]
nor offer is accepted, or (B) by bidding and offering to a point where
such offer is higher than such bid by not more than the minimum
permissible price fluctuation applicable to such futures contract or
commodity option on such contract market, and neither such bid nor offer
is accepted; or
(ii) When in nonpit trading in contracts of sale for future
delivery, bids and offers are posted on a board, such member (A)
pursuant to such buying order posts a bid on the board and, incident to
the execution of such selling order, accepts such bid and all other bids
posted at prices equal to or higher than the bid posted by him, or (B)
pursuant to such selling order posts an offer on the board and, incident
to the execution of such buying order, accepts such offer and all other
offers posted at prices equal to or lower than the offer posted by him;
(2) Such member executes such orders in the presence of an official
representative of such contract market designated to observe such
transactions and, by appropriate descriptive words or symbol, clearly
identifies all such transactions on his trading card or other similar
record, made at the time of execution, and notes thereon the exact time
of execution and promptly presents said record to such official
representative for verification and initialing;
(3) Such contract market keeps a record in permanent form of each
such transaction showing the transaction date, by whom executed, the
exact time of execution, quantity, and, as applicable, underlying
commodity, contract for future delivery or physical, price or premium,
whether a put or a call, and strike price; and
(4) Neither the futures commission merchant receiving nor the member
executing such orders has any interest therein, directly or indirectly,
except as a fiduciary.
(b) Large Order Execution Procedures. A member of a contract market
may execute simultaneous buying and selling orders of different
principals directly between the principals in compliance with large
order execution procedures established by written rules of the contract
market that have been approved by the Commission: Provided, That, to the
extent such large order execution procedures do not meet the conditions
and requirements of paragraph (a) of this section, the contract market
has petitioned the Commission for, and the Commission has granted, an
exemption from the conditions and requirements of paragraph (a) of this
section. Any such petition must be accompanied by proposed contract
market rules to implement the large order execution procedures. The
petition shall include:
(1) An explanation of why the proposed large order execution rules
do not comply with paragraph (a) of this section; and
(2) A description of a special surveillance program that would be
followed by the contract market in monitoring the large order execution
procedures.
The Commission may, in its discretion and upon such terms and conditions
as it deems appropriate, grant such petition for exemption if it finds
that the exemption is not contrary to the public interest and the
purposes of the provision from which exemption is sought. The petition
shall be considered concurrently with the proposed large order execution
rules.
(c) Not deemed filling orders by offset nor cross trades. The
execution of orders in compliance with the conditions herein set forth
will not be deemed to constitute the filling of orders by offset within
the meaning of paragraph (iv) of section 4b(a) of the Act, nor to
constitute cross trades within the meaning of paragraph (A) of section
4c(a) of the Act.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57008, Dec. 22, 1982; 56 FR 12344, Mar. 25, 1991; 59 FR 5525, Feb. 7,
1994]
Miscellaneous
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant and each member of a contract
market shall, upon request, furnish or cause to be furnished to the
Commission a true copy of any letter, circular, telegram, or report
published or given general
[[Page 86]]
circulation by such futures commission merchant or member which concerns
crop or market information or conditions that affect or tend to affect
the price of any commodity, and the true source of or authority for the
information contained therein.
(Approved by the Office of Management and Budget under control number
3038-0015)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.41 [Reserved]
Sec. 1.41a-1.41c [Reserved]
Secs. 1.42-1.43 [Reserved]
Sec. 1.44 Records and reports of warehouses, depositories, and other similar entities; visitation of premises.
Each contract market shall require the operators of warehouses,
depositories and other similar entities whose receipts are deliverable
in satisfaction of commodity futures contracts or options on physicals
made on or subject to the rules of such contract market:
(a) To keep records showing the stocks of each commodity traded for
future delivery or upon which option contracts are traded on such
contract market in store in such warehouses, depositories and other
similar entities by kinds, by classes, and by grades, if stored under
conditions requiring such designation or identification, and including
also lots and parcels stored specially or separately or in specially
leased space of the warehouse, depository or other similar entity;
(b) Upon call from the Commission, to report the stocks of
commodities in such warehouses, depositories and other similar entities
and to furnish information concerning stocks of each commodity traded
for future delivery or upon which option contracts are traded on such
contract market about to be transferred or in the process of being
transferred or otherwise moved into or out of such warehouses,
depositories and other similar entities, as well as any other
information concerning commodities stored in such warehouse,
depositories and other similar entities and which are or may be
available for delivery on futures contracts or options on physicals; and
(c) To permit visitation of the premises and inspection of the books
and records of such warehouses, depositories and other similar entities
by duly authorized representatives of the Commission or the Department
of Justice, and to keep all books, records, papers, and memoranda
relating to the storage and warehousing of commodities in such
warehouse, depository or other similar entity for a period of 5 years
from the date thereof.
(Approved by the Office of Management and Budget under control number
3038-0019)
(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 63035, Dec. 30, 1981; 47
FR 57009, Dec. 22, 1982]
Sec. 1.45 [Reserved]
Sec. 1.46 Application and closing out of offsetting long and short positions.
(a) Application of purchases and sales. Except with respect to
purchases or sales which are for omnibus accounts, or where the customer
has instructed otherwise, any futures commission merchant who, on or
subject to the rules of a designated contract market or registered
derivatives transaction execution facility:
(1) Purchases any commodity for future delivery for the account of
any customer when the account of such customer at the time of such
purchase has a short position in the same future of the same commodity
on the same market;
(2) Sells any commodity for future delivery for the account of any
customer when the account of such customer at the time of such sale has
a long position in the same future of the same commodity on the same
market;
(3) Purchases a put or call option for the account of any option
customer when the account of such option customer at the time of such
purchase has a short put or call option position with the same
underlying futures contract or same underlying physical, strike price,
expiration date and contract market as that purchased; or
(4) Sells a put or call option for the account of any option
customer when the account of such option customer at the time of such
sale has a long put or
[[Page 87]]
call option position with the same underlying futures contract or same
underlying physical, strike price, expiration date and contract market
as that sold shall on the same day apply such purchase or sale against
such previously held short or long futures or option position, as the
case may be, and shall, for futures transactions, promptly furnish such
customer a statement showing the financial result of the transactions
involved and, if applicable, that the account was introduced to the
futures commission merchant by an introducing broker and the names of
the futures commission merchant and introducing broker.
(b) Close-out against oldest open position. In all instances wherein
the short or long futures or option position in such customer's or
option customer's account immediately prior to such offsetting purchase
or sale is greater than the quantity purchased or sold, the futures
commission merchant shall apply such offsetting purchase or sale to the
oldest portion of the previously held short or long position: Provided,
That upon specific instructions from the customer or option customer the
offsetting transaction shall be applied as specified by the customer or
option customer without regard to the date of acquisition of the
previously held position. Such instructions may also be accepted from
any person who, by power of attorney or otherwise, actually directs
trading in the customer's or option customer's account unless the person
directing the trading is the futures commission merchant (including any
partner thereof), or is an officer, employee, or agent of the futures
commission merchant. With respect to every such offsetting transaction
that, in accordance with such specific instructions, is not applied to
the oldest portion of the previously held position, the futures
commission merchant shall clearly show on the statement issued to the
customer or option customer in connection with the transaction, that
because of the specific instructions given by or on behalf of the
customer or option customer the transaction was not applied in the usual
manner, i.e., against the oldest portion of the previously held
position. However, no such showing need be made if the futures
commission merchant has received such specific instructions in writing
from the customer or option customer for whom such account is carried.
(c) In-and-out trades; day trades. Notwithstanding the provisions of
paragraphs (a) and (b) of this section shall not be deemed to require
the application of purchases or sales closed out during the same day
(commonly known as ``in-and-out trades'' or ``day trades'') against
short or long positions carried forward from a prior date.
(d) Exceptions. The provisions of this section shall not apply to:
(1) Purchases or sales of commodity options constituting ``bona fide
hedging transactions'' pursuant to rules of the contract market which
have been adopted in accordance with the requirements of Sec. 1.61(b)
and approved by the Commission pursuant to; section 5a(a)(12)(A) of the
Act Provided, That no contract market or futures commission merchant
shall permit such option positions to be offset other than by open and
competitive execution in the trading pit or ring provided by the
contract market, during the regular hours prescribed by the contract
market for trading in such commodity option.
(2) Purchases or sales constituting ``bona fide hedging
transactions'' as defined in Sec. 1.3(z); nor
(3) Sales during a delivery period for the purpose of making
delivery during such delivery period if such sales are accompanied by
instructions to make delivery thereon, together with warehouse receipts
or other documents necessary to effectuate such delivery.
(4)-(7) [Reserved]
(8) Purchases or sales held in error accounts, including but not
limited to floor broker error accounts, and purchases or sales
identified as errors at the time they are assigned to an account that
contains other purchases or sales not identified as errors and held in
that account (``error trades''), provided that:
(i) Each error trade does not offset another error trade held in the
same account;
(ii) Each error trade is offset by open and competitive means on or
subject to the rules of a contract market by not later than the close of
business on the business day following the day the
[[Page 88]]
error trade is discovered and assigned to an error account or identified
as an error trade, unless at the close of business on the business day
following the discovery of the error trade, the relevant market has
reached a daily price fluctuation limit and the trader is unable to
offset the error trade, in which case the error trade must be offset as
soon as practicable thereafter; and
(iii) No error trade is closed out by transferring such an open
position to another account also controlled by that same trader.
(e) The statements required by paragraph (a) of this section may be
furnished to the customer or the person described in Sec. 1.33(d) by
means of electronic transmission, in accordance with Sec. 1.33(g).
(Approved by the Office of Management and Budget under control number
3038-0007)
(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7 U.S.C. 6g, 7; secs. 4g, 5,
8a; 7 U.S.C. 6g, 7, 12a)
[41 FR 3194, Jan. 21, 1976, as amended at 46 FR 54524, Nov. 3, 1981; 46
FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289, Aug.
3, 1983; 49 FR 19972, May 11, 1984; 50 FR 26, Jan. 2, 1985; 51 FR 17473,
May 13, 1986; 53 FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991; 57 FR
55085, Nov. 24, 1992; 59 FR 5526, Feb. 7, 1994; 66 FR 53517, Oct. 23,
2001]
Sec. 1.47 Requirements for classification of purchases or sales of contracts for future delivery as bona fide hedging under Sec. 1.3(z)(3) of the regulations.
(a) Any person who wishes to avail himself of the provisions of
Sec. 1.3(z)(3) of the regulations and to make purchases or sales of any
commodity for future delivery in any commodity in excess of trading and
position limits then in effect pursuant to section 4a of the Act shall
file statement with the Commission in conformity with the requirements
of this section. All or a specified portion of the transactions and
positions described in these statements shall not be considered as bona
fide hedging if such person is so notified by the Commission:
(1) Within 30 days after the Commission is furnished the information
required under paragraph (b) of this section, or
(2) Within 10 days after the Commission is furnished with the
information required under paragraph (c) of this section.
The Commission may request the person notified to file specific
additional information with the Commission to support a determination
that all, or the specified portion, of the transactions and positions be
considered as bona fide hedging transactions and positions. In such
cases, the Commission shall consider all information so filed and, by
notice to such person, shall specify the extent to which the Commission
has determined that the transactions and positions may be classified as
bona fide hedging. In no case shall transactions and positions described
be considered as bona fide hedging if they exceed the levels specified
in paragraph (d) of this section.
(b) Initial statement. Initial statements concerning the
classification of transactions and positions as bona fide hedging
pursuant to Sec. 1.3(z)(3) shall be filed with the Commission at least
30 days in advance of the date that such transactions or positions would
be in excess of limits then in effect pursuant to section 4a of the Act.
Such statements shall:
(1) Describe the transactions and positions for future delivery and
the offsetting cash positions;
(2) Set forth in detail information which will demonstrate that the
purchases and sales are economically appropriate to the reduction of
risk exposure attendant to the conduct and management of a commercial
enterprise;
(3) Contain, and upon request of the Commission be supplemented by,
such other information which is necessary to enable the Commission to
make a determination whether the particular purchases and sales for
future delivery fall within the scope of those described in section
1.3(z)(1) of the regulations;
(4) Include a statement concerning the maximum size of positions for
future delivery (both long and short) which will be acquired any time
during the next fiscal year or marketing season of the person filing or
on whose behalf the filing is made.
(5) In addition: statements filed by an agent, concerning a futures
position which would offset a cash position which the agent does not own
or has
[[Page 89]]
not contracted to buy or sell, shall contain information describing all
contractual arrangements between the agent filing and the person who
owns the commodity or holds the cash market commitment being offset;
(6) Statements concerning futures positions to be acquired against
unsold anticipated production or unfilled anticipated requirements for
manufacturing, processing or feeding shall also include the information
required under Sec. 1.48 of the regulations.
(c) Supplemental reports. Whenever the purchases or sales which a
person wishes to classify as bona fide hedging shall exceed the amount
provided in the person's most recent filing pursuant to this section or
the amount previously specified by the Commission pursuant to paragraph
(a) of this section, such person shall file with the Commission a
statement which updates the information provided in the person's most
recent filing and provides the reasons for this change at least ten days
in advance of the date that person wishes to exceed those amounts.
(d) Maximum purchases and sales. Purchases and sales for future
delivery considered bona fide hedging pursuant to Sec. 1.3(z)(3) of the
regulations shall at no time exceed the lesser of:
(1) The value fluctuation equivalent (in terms of the commodity for
future delivery) of the current cash position described in the
information most recently filed pursuant to this section, or
(2) The maximum level of long or short open positions provided in
the information most recently filed pursuant to this section or most
recently specified by the Commission pursuant to paragraph (a) of this
section.
(e) Updated reports. Reports updating the information required
pursuant to this section also shall be filed with the Commission upon
specific request.
(Approved by the Office of Management and Budget under control number
3038-0013)
[42 FR 42751, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.48 Requirements for classification of sales or purchases for future delivery as bona fide hedging of unsold anticipated production or unfilled
anticipated requirements under Sec. 1.3(z)(2) (i)(B) or
(ii)(C) of the regulations.
(a) Any person who wishes to avail himself of the provisions of
Sec. 1.3(z)(2) (i)(B) or (ii)(C) of the regulations and to make sales or
purchases for future delivery in any commodity in excess of trading and
position limits then in effect pursuant to section 4a of the Act for the
purposes of bona fide hedging shall file statements with the Commission
in conformity with the requirements of this section. All or a specified
portion of the unsold anticipated production or unfilled anticipated
requirements described in these statements shall not be considered as
offsetting positions for bona fide hedging transactions and positions if
such person is so notified by the Commission within ten days after the
Commission is furnished with the information required under paragraphs
(b) or (c) of this section. The Commission may request the person
notified to file specific additional information with the Commission to
support a determination that the statement filed accurately reflects
unsold anticipated production or unfilled anticipated requirements for
manufacturing, processing or feeding. In such cases, the Commission
shall consider all additional information so filed and, by notice to
such person, shall specify its determination as to what portion of the
production or requirements described constitutes unsold anticipated
production or unfilled anticipated requirements for the purposes of bona
fide hedging. In no case shall such transactions and positions which
offset unsold anticipated production or unfilled anticipated
requirements be considered bona fide hedging if they exceed the levels
specified in paragraph (d) of this section of the regulations.
(b) Initial statement. Initial statements concerning the
classification of transactions and positions as bona fide hedging
pursuant to Sec. 1.3(z)(2) (i)(B) or
[[Page 90]]
(ii)(C) shall be filed with the Commission at least ten days in advance
of the date that such transactions or positions would be in excess of
limits then in effect pursuant to section 4a of the Act. Such statements
shall set forth in detail for a specified operating period not in excess
of one year the person's unsold anticipated production or unfilled
anticipated requirements for processing or manufacturing or feeding and
explain the method of determination thereof, including, but not limited
to, the following information:
(1) For unsold anticipated production:
(i) Annual production of such commodity for the three complete
fiscal years preceding the current fiscal year;
(ii) Anticipated production of such commodity for a specified period
not in excess of one year;
(iii) Fixed-price forward sales of such commodity;
(iv) Unsold anticipated production of such commodity for a specified
period not in excess of one year.
(2) For unfilled anticipated requirements:
(i) Annual requirements of such commodity for processing or
manufacturing or feeding for the three complete fiscal years preceding
the current fiscal year;
(ii) Anticipated requirements of such commodity for processing or
manufacturing or feeding for a specified operating period not in excess
of one year;
(iii) Inventory and fixed-price forward purchases of such commodity,
including any quantity in process of manufacture and finished goods and
byproducts of manufacture or processing (in terms of such commodity);
(iv) Unfilled anticipated requirements of such commodity for
processing or manufacturing or feedings for a specified operating period
not in excess of one year.
(3) Additional information: Persons hedging unsold anticipated
production or unfilled anticipated requirements which are not the same
quantity or are not the same commodity as the commodity to be sold or
purchased for future delivery shall furnish this information both in
terms of the actual commodity produced or used and in terms of the
commodity to be sold or purchased for future delivery. In addition, such
persons shall explain the method for determining the ratio of conversion
between the amount of the actual unsold anticipated production or
unfilled anticipated requirements and the amount of commodity to be sold
or purchased for future delivery. Persons hedging unfilled annual
feeding requirements for livestock and poultry shall provide the number
of cattle, hogs, sheep, or poultry expected to be fed during the
specified period, not to exceed one year, and the derivation of their
annual requirements based upon these numbers. Persons filing as an agent
shall furnish this information on the basis of the fiscal or operating
year of the person on whose behalf the filing is made.
(c) Supplemental reports. Whenever the sales or purchases which a
person wishes to consider as bona fide hedging of unsold anticipated
production or unfilled anticipated requirements shall exceed the amounts
described by the figures for requirements furnished in the most recent
filing pursuant to this section or the amounts determined by the
Commission to constitute unsold anticipated production or unfilled
anticipated requirements pursuant to paragraph (a) of this section, such
person shall file with the Commission a statement which updates the
information provided in the person's most recent filing and supplies the
reason for this change at least ten days in advance of the date that
person wishes to exceed these amounts.
(d) Maximum sales and purchases. Sales or purchases for future
delivery considered as bona fide hedges pursuant to Sec. 1.3(z)(2)
(i)(B) or (ii)(C) shall at no time exceed the lesser of:
(1) A person's unsold anticipated production of unfilled anticipated
requirements as described by the information must recently filed
pursuant to this section or determined by the Commission pursuant to
paragraph (a) of this section; or
(2) A person's actual unsold anticipated production or current
unfilled anticipated requirements for the length of time specified in
the information most recently filed pursuant to this section.
[[Page 91]]
(e) Updated reports. Reports updating the information required
pursuant to this section shall also be filed with the Commission upon
specific request.
(Approved by the Office of Management and Budget under control number
3038-0013)
[42 FR 42752, Aug. 8, 1977, as amended at 46 FR 63035, Dec. 30, 1981]
Sec. 1.49 Denomination of customer funds and location of depositories.
(a) Definitions. For purposes of this section:
(1) Money center country. This term means Canada, France, Italy,
Germany, Japan, and the United Kingdom.
(2) Money center currency. This term means the currency of any money
center country and the Euro.
(b) Permissible denominations of obligations. (1) Subject to the
terms and conditions set forth in this section, a futures commission
merchant's obligations to a customer shall be denominated:
(i) In the United States dollar;
(ii) In a currency in which funds were deposited by the customer or
were converted at the request of the customer, to the extent of such
deposits and conversions; or
(iii) In a currency in which funds have accrued to the customer as a
result of trading conducted on a designated contract market or
registered derivatives transaction execution facility, to the extent of
such accruals.
(2)(i) A futures commission merchant shall prepare and maintain a
written record of each transaction converting customer funds from one
currency to another.
(ii) A written record prepared under paragraph (b)(2)(i) of this
section must include the date the transaction was executed, the
currencies converted, the amount converted, and the resulting amount.
(iii) The information required under paragraph (b)(2)(ii) of this
section must be provided to the customer upon the customer's request.
(c) Permissible locations of depositories. (1) Unless a customer
provides instructions to the contrary, a futures commission merchant or
a derivatives clearing organization may hold customer funds:
(i) In the United States;
(ii) In a money center country; or
(iii) In the country of origin of the currency.
(2) A futures commission merchant or derivatives clearing
organization may hold customer funds outside the United States, in a
jurisdiction that is not a money center country, or the country of
origin of the currency only to the extent authorized by the customer,
provided, that the futures commission merchant or derivatives clearing
organization must make and maintain a written record of such
authorization. Notwithstanding the foregoing, in no event shall a
futures commission merchant or a derivatives clearing organization hold
customer funds in a restricted country subject to sanctions by the
Office of Foreign Assets Control of the U.S. Department of Treasury.
(d) Qualifications for depositories. (1) To hold customer funds
required to be segregated pursuant to the Act and Secs. 1.20 through
1.30, 1.32 and 1.36, a depository must provide the depositing futures
commission merchant or derivatives clearing organization with the
appropriate written acknowledgment as required under Secs. 1.20 and
1.26.
(2) A depository, if located in the United States, must be:
(i) A bank or trust company;
(ii) A futures commission merchant registered as such with the
Commission; or
(iii) A derivatives clearing organization.
(3) A depository, if located outside the United States, must be:
(i) A bank or trust company:
(A) That has in excess of $1 billion of regulatory capital; or
(B) Whose commercial paper or long-term debt instrument or, if a
part of a holding company system, its holding company's commercial paper
or long-term debt instrument, is rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization;
(ii) A futures commission merchant that is registered as such with
the Commission; or
(iii) A derivatives clearing organization.
(e) Segregation requirements. (1) Each futures commission merchant
and each derivatives clearing organization must,
[[Page 92]]
as of the close of each business day, hold in segregated accounts on
behalf of commodity or option customers:
(i) Sufficient United States dollars, held in the United States, to
meet all United States dollar obligations; and
(ii) Sufficient funds in each other currency to meet obligations in
such currency.
(2) Notwithstanding paragraph (e)(1)(ii) of this section, assets
denominated in one currency may be held to meet obligations denominated
in another currency as follows:
(i) United States dollars may be held in the United States or in
money center countries to meet obligations denominated in any other
currency; and
(ii) Funds in money center currencies may be held in the United
States or in money center countries to meet obligations denominated in
currencies other than the United States dollar.
(3) Each futures commission merchant and each derivatives clearing
organization shall make and maintain records sufficient to demonstrate
compliance with this paragraph (e).
[68 FR 5551, Feb. 4, 2003]
Secs. 1.50-1.51 [Reserved]
Sec. 1.52 Self-regulatory organization adoption and surveillance of minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants. Each self-regulatory organization other than a
contract market must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for all
its members who are registered introducing brokers. Each contract market
which elects to have a category of membership for introducing brokers
must adopt, and submit for Commission approval, rules prescribing
minimum financial and related reporting requirements for all its members
who are registered introducing brokers. Each self-regulatory
organization shall submit for Commission approval any modification or
other amendments to such rules. Such requirements must be the same as,
or more stringent than, those contained in Secs. 1.10 and 1.17 and the
definition of adjusted net capital must be the same as that prescribed
in Sec. 1.17(c): Provided, however, A designated self-regulatory
organization may permit its member registrants which are registered with
the Securities and Exchange Commission as securities brokers or dealers
to file (in accordance with Sec. 1.10(h)) a copy of their Financial and
Operational Combined Uniform Single Report under the Securities Exchange
Act of 1934, Part II or Part IIA, in lieu of Form 1-FR: And, provided
further, A designated self-regulatory organization may permit its member
introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-FR-FCM.
(b) Each self-regulatory organization shall have in effect and
enforce rules submitted to the Commission pursuant to paragraph (a) of
this section and approved by the Commission.
(c) Any two or more self-regulatory organizations may file with the
Commission a plan for delegating to a designated self-regulatory
organization, for any registered futures commission merchant or any
registered introducing broker which is a member of more than one such
self-regulatory organization, the responsibility of:
(1) Monitoring and auditing for compliance with the minimum
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this
section; and
(2) Receiving the financial reports necessitated by such minimum
financial and related reporting requirements.
Such plan may also delegate the responsibility of monitoring, and
examining the books and records kept by, such registered futures
commission merchant or registered introducing broker relating to its
business of dealing in commodity futures, commodity options, and cash
commodities, insofar as such business relates to its dealings on
contract markets, as required by Sec. 1.51(a)(3) and/or part 33 of this
chapter.
(d) Any plan filed under this section may contain provisions for the
allocation of expenses reasonably incurred by
[[Page 93]]
the designated self-regulatory organization among the self-regulatory
organizations participating in such a plan.
(e) A plan's designated self-regulatory organization must report to
that plan's other self-regulatory organizations any violation of such
other self-regulatory organizations' rules and regulations for which the
responsibiity to monitor, audit or examine has been delegated to such
designated self-regulatory organization under this section.
(f) The self-regulatory organizations may, among themselves,
establish programs to provide access to any necessary financial or
related information.
(g) After appropriate notice and opportunity for comment, the
Commission may, by written notice, approve such a plan, or any part of
the plan, if it finds that the plan, or any part of it:
(1) Is necessary or appropriate to serve the public interest;
(2) Is for the protection and in the interest of customers or option
customers;
(3) Reduces multiple monitoring and auditing for compliance with the
minimum financial rules of the self-regulatory organizations submitting
the plan for any futures commission merchant or introducing broker which
is a member of more than one self-regulatory organization;
(4) Reduces multiple reporting of the financial information
necessitated by such minimum financial and related reporting
requirements by any futures commission merchant or introducing broker
which is a member of more than one self-regulatory organization;
(5) Fosters cooperation and coordination among the contract markets;
and
(6) Does not hinder the development of a registered futures
association under section 17 of the Act.
(h)(1) Upon the approval of a plan or part of one under paragraph
(g) of this section, a self-regulatory organization which is included in
such a plan shall be considered to have met its affirmative action
responsibilities under Sec. 1.51 to the extent that such
responsibilities have been delegated to a designated self-regulatory
organization.
(2) After the Commission has approved a plan or part of one under
Sec. 1.52(g), a self-regulatory organization relieved of responsibility
must notify each of its members which is subject to such a plan: (i) Of
the limited nature of its responsibility for such a member's compliance
with its minimum financial and related reporting requirements; and (ii)
of the identity of the designated self-regulatory organization which has
been delegated responsibility for such a member.
(i) The Commission may at any time, after appropriate notice and
opportunity for hearing, withdraw its approval of any plan or part of
one established under this section, if such plan or part of one ceases
to effectuate adequately the purposes of section 4(f)(b) of the Act or
of this section.
(j) Whenever a registered futures commission merchant or a
registered introducing broker holding membership in a self-regulatory
organization ceases to be a member in good standing of that self-
regulatory organization, such self-regulatory organization must, on the
same day that event takes place, give telegraphic notice of that event
to the principal office of the Commission in Washington, DC and send a
copy of that notification to such futures commission merchant or such
introducing broker.
(k) Nothing in this section shall preclude the Commission from
examining any futures commission merchant or introducing broker for
compliance with the minimum financial and related reporting requirements
to which such futures commission merchant or introducing broker is
subject.
(l) In the event a plan is not filed and/or approved for each
registered futures commission merchant or for each registered
introducing broker which is a member of more than one self-regulatory
organization, the Commission may design and, after notice and
opportunity for comment, approve a plan for those futures commission
merchants or introducing brokers which are not the subject of an
approved plan (under paragraph (g) of this section), delegating to a
designated self-regulatory
[[Page 94]]
organization the responsibilities described in paragraph (c) of this
section.
(Approved by the Office of Management and Budget under control numbers
3038-0007 and 3038-0022)
(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19, and 21; 5 U.S.C. 552, 5 U.S.C.
552b, and secs. 2(a)(11), 4b, 4f, 4g, 5a, 8a, and 17 of the Commodity
Exchange Act, 7 U.S.C. 4a(j), 6b, 6f, 6g, 7a, 12a, and 21, as amended,
92 Stat 865 et seq.)
[43 FR 39981, Sept. 8, 1978, as amended at 46 FR 63035, Dec. 30, 1981;
48 FR 35290, Aug. 3, 1983; 53 FR 4612, Feb. 17, 1988; 59 FR 5526, Feb.
7, 1994; 62 FR 4641, Jan. 31, 1997]
Sec. 1.53 Enforcement of contract market bylaws, rules, regulations, and resolutions.
Each contract market shall enforce each bylaw, rule, regulation, and
resolution, made or issued by it or by the governing board thereof or
any committee thereof, which is in effect as of July 18, 1975, and which
relates to terms and conditions in contracts of sale to be executed on
or subject to the rules of such contract market or relates to other
trading requirements, unless such bylaw, rule, regulation, or resolution
has been disapproved by the Commission pursuant to section 5a(a)(12)(A)
of the Act, or the amendment or revocation of such bylaw, rule,
regulation or resolution has been approved by the Commission pursuant to
section 5a(a)(12)(A) of the Act.
(Secs. 5, 5a, 6, 6b; 42 Stat. 1000, 1001, 49 Stat. 1497, 1498, 82 Stat.
29, 30, 31, 88 Stat. 1392, 1400, 1401, 1402; 7 U.S.C. 7, 7a, 8, 13a)
[41 FR 3194, Jan. 21, 1976, as amended at 59 FR 5526, Feb. 7, 1994]
Sec. 1.54 Contract market rules submitted to and approved or not disapproved by the Secretary of Agriculture.
Notwithstanding any provision of these rules, any bylaw, rule,
regulation, or resolution of a contract market that was submitted to the
Secretary of Agriculture pursuant or Sec. 1.38(a) or Sec. 1.39(a) of
these rules, and was either approved by the Secretary or not disapproved
by him, as of April 21, 1975, shall continue in full force and effect
unless and until disapproved, altered or supplemented by or with the
approval of the Commission. The adoption of this rule does not
constitute approval by the Commission of any contract market bylaw,
rule, regulation or resolution.
(Sec. 411, Pub. L. 93-463, 88 Stat. 1414; 7 U.S.C. 4a note)
[45 FR 2314, Jan. 11, 1980]
Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures commission merchants and introducing brokers.
(a)(1) Except as provided in 1.65, no futures commission merchant,
or in the case of an introduced account no introducing broker, may open
a commodity futures account for a customer, other than for a customer
specified in paragraph (f) of this section, unless the futures
commission merchant or introducing broker first:
(i) Furnishes the customer with a separate written disclosure
statement containing only the language set forth in paragraph (b) of
this section (except for nonsubstantive additions such as captions) or
as otherwise approved under paragraph (c) of this section; Provided,
however, that the disclosure statement may be attached to other
documents as the cover page or the first page of such documents and as
the only material on such page; and
(ii) Receives from the customer an acknowledgment signed and dated
by the customer that he received and understood the disclosure
statement.
(b) The language set forth in the written disclosure document
required by paragraph (a) of this section shall be as follows:
Risk Disclosure Statement
The risk of loss in trading commodity futures contracts can be
substantial. You should, therefore, carefully consider whether such
trading is suitable for you in light of your circumstances and financial
resources. You should be aware of the following points:
(1) You may sustain a total loss of the funds that you deposit with
your broker to establish or maintain a position in the commodity futures
market, and you may incur losses beyond these amounts. If the market
moves against your position, you may be called upon by your broker to
deposit a substantial amount of additional margin funds, on short
notice, in order to maintain your position. If you do not provide the
required funds within the time required by your broker, your position
may be liquidated at a loss, and you will be liable for any resulting
deficit in your account.
[[Page 95]]
(2) Under certain market conditions, you may find it difficult or
impossible to liquidate a position. This can occur, for example, when
the market reaches a daily price fluctuation limit (``limit move'').
(3) Placing contingent orders, such as ``stop-loss'' or ``stop-
limit'' orders, will not necessarily limit your losses to the intended
amounts, since market conditions on the exchange where the order is
placed may make it impossible to execute such orders.
(4) All futures positions involve risk, and a ``spread'' position
may not be less risky than an outright ``long'' or ``short'' position.
(5) The high degree of leverage (gearing) that is often obtainable
in futures trading because of the small margin requirements can work
against you as well as for you. Leverage (gearing) can lead to large
losses as well as gains.
(6) You should consult your broker concerning the nature of the
protections available to safeguard funds or property deposited for your
account.
ALL OF THE POINTS NOTED ABOVE APPLY TO ALL FUTURES TRADING WHETHER
FOREIGN OR DOMESTIC. IN ADDITION, IF YOU ARE CONTEMPLATING TRADING
FOREIGN FUTURES OR OPTIONS CONTRACTS, YOU SHOULD BE AWARE OF THE
FOLLOWING ADDITIONAL RISKS:
(7) Foreign futures transactions involve executing and clearing
trades on a foreign exchange. This is the case even if the foreign
exchange is formally ``linked'' to a domestic exchange, whereby a trade
executed on one exchange liquidates or establishes a position on the
other exchange. No domestic organization regulates the activities of a
foreign exchange, including the execution, delivery, and clearing of
transactions on such an exchange, and no domestic regulator has the
power to compel enforcement of the rules of the foreign exchange or the
laws of the foreign country. Moreover, such laws or regulations will
vary depending on the foreign country in which the transaction occurs.
For these reasons, customers who trade on foreign exchanges may not be
afforded certain of the protections which apply to domestic
transactions, including the right to use domestic alternative dispute
resolution procedures. In particular, funds received from customers to
margin foreign futures transactions may not be provided the same
protections as funds received to margin futures transactions on domestic
exchanges. Before you trade, you should familiarize yourself with the
foreign rules which will apply to your particular transaction.
(8) Finally, you should be aware that the price of any foreign
futures or option contract and, therefore, the potential profit and loss
resulting therefrom, may be affected by any fluctuation in the foreign
exchange rate between the time the order is placed and the foreign
futures contract is liquidated or the foreign option contract is
liquidated or exercised.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER
ASPECTS OF THE COMMODITY MARKETS
I hereby acknowledge that I have received and understood this risk
disclosure statement.
________________________________________________________________________
Date
________________________________________________________________________
Signature of Customer
(c) The Commission may approve for use in lieu of the risk
disclosure document required by paragraph (b) of this section a risk
disclosure statement approved by one or more foreign regulatory agencies
or self-regulatory organizations if the Commission determines that such
risk disclosure statement is reasonably calculated to provide the
disclosure required by paragraph (b) of this section. Notice of risk
disclosure statements that may be used to satisfy Commission disclosure
requirements, what requirements such statements meet and the
jurisdictions which accept each format will be set forth in appendix A
to this section.
(d) Any futures commission merchant, or in the case of an introduced
account any introducing broker, may open a commodity futures account for
a customer without obtaining the separate acknowledgments of disclosure
and elections required by this section and by Sec. 1.33(g), and by
Secs. 33.7 and 190.06 of this chapter, provided that:
(1) Prior to the opening of such account, the futures commission
merchant or introducing broker obtains an acknowledgment from the
customer, which may consist of a single signature at the end of the
futures commission merchant's or introducing broker's customer account
agreement, or on a separate page, of the disclosure statements and
elections specified in this section and Sec. 1.33(g), and in Secs. 33.7
and 190.06 of this chapter, and which may include authorization for the
transfer of funds from a segregated customer account to another account
of such customer, as listed directly above the signature line, provided
the customer
[[Page 96]]
has acknowledged by check or other indication next to a description of
each specified disclosure statement or election that the customer has
received and understood such disclosure statement or made such election;
and
(2) The acknowledgment referred to in paragraph (d)(1) of this
section is accompanied by and executed contemporaneously with delivery
of the disclosures and elective provisions required by this section and
Sec. 1.33(g), and by Secs. 33.7 and 190.06 of this chapter.
(e) The acknowledgment required by paragraph (a) of this section
must be retained by the futures commission merchant or introducing
broker in accordance with Sec. 1.31.
(f) A futures commission merchant or, in the case of an introduced
account an introducing broker, may open a commodity futures account for
an ``institutional customer'' as defined in Sec. 1.3(g) without
furnishing such institutional customer the disclosure statements or
obtaining the acknowledgments required under paragraph (a) of this
section, Secs. 1.33(g) and 1.65(a)(3), and Secs. 30.6(a), 33.7(a) and
190.10(c) of this chapter.
(g) This section does not relieve a futures commission merchant or
introducing broker from any other disclosure obligation it may have
under applicable law.
(h) Notwithstanding any other provision of this section or
Sec. 1.65, a person registered or required to be registered with the
Commission as a futures commission merchant pursuant to sections
4f(a)(1) or 4f(a)(2) of the Commodity Exchange Act and registered or
required to be registered with the Securities and Exchange Commission as
a broker or dealer pursuant to sections 15(b)(1) or 15(b)(11) of the
Securities Exchange Act of 1934 and rules thereunder must provide to a
customer or prospective customer, prior to the acceptance of any order
for, or otherwise handling any transaction in or in connection with, a
security futures product for a customer, the disclosures set forth in
Sec. 41.41(b)(1) of this chapter.
(Approved by the Office of Management and Budget under control number
3038-0022)
(Secs. 4b, 4c(b), 4g(1), 4l, 4o, and 8a(5), Commodity Exchange Act, 7
U.S.C. 6b, 6c(b), 6g(1), 6l, 6o, and 12a(5)(1976), and sec. 217,
Commodity Futures Trading Act of 1974, 88 Stat. 1405; secs. 2(a)(1), 4b,
4c, 4d, 4f and 8a, Commodity Exchange Act, as amended (7 U.S.C. 2, 6b,
6c, 6f and 12a))
[[Page 97]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.028
[[Page 98]]
[GRAPHIC] [TIFF OMITTED] TC05OC91.029
* * * * *
[The following language should be printed on a page other than the pages
containing the disclosure language above and may be omitted from the
required disclosure statement]
This disclosure document meets the risk disclosure requirements in
the jurisdictions
[[Page 99]]
identified below ONLY for those instruments which are specified.
United States: Commodity futures, options on commodity futures and
options on commodities subject to the Commodity Exchange Act.
United Kingdom: Futures, options on futures, options on commodities and
options on equities traded by members of the United Kingdom Securities
and Futures Authority pursuant to the Financial Services Act, 1986.
Ireland: Financial futures and options on financial futures traded by
members of futures exchanges on exchanges whose rules have been approved
by the Central Bank of Ireland under Chapter VIII of the Central Bank
Act, 1989.
[43 FR 31890, July 24, 1978, as amended at 46 FR 63035, Dec. 30, 1981;
48 FR 35290, Aug. 3, 1983; 50 FR 5383, Feb. 5, 1985; 58 FR 17503, Apr.
5, 1993; 59 FR 34380, July 5, 1994; 59 FR 38119, July 27, 1994; 60 FR
38182, July 25, 1995; 63 FR 8570, Feb. 20, 1998; 63 FR 52157, Sept. 30,
1998; 66 FR 53518, Oct. 23, 2001; 67 FR 58297, Sept. 13, 2002]
Sec. 1.56 Prohibition of guarantees against loss.
(a) For purposes of this section commodity interest means
(1) Any contract for the purchase or sale of a commodity for future
delivery; and
(2) Any contract, agreement or transaction subject to Commission
regulation under sections 4c or 19 of the Act.
(b) No futures commission merchant or introducing broker may in any
way represent that it will, with respect to any commodity interest in
any account carried by the futures commission merchant for or on behalf
of any person:
(1) Guarantee such person against loss;
(2) Limit the loss of such person; or
(3) Not call for or attempt to collect initial and maintenance
margin as established by the rules of the applicable board of trade.
(c) No person may in any way represent that a futures commission
merchant or introducing broker will engage in any of the acts or
practices described in paragraph (b) of this section.
(d) This section shall not be construed to prevent a futures
commission merchant or introducing broker from:
(1) Assuming or sharing in the losses resulting from an error or
mishandling of an order; or
(2) Participating as a general partner in a commodity pool which is
a limited partnership.
(e) This section shall not affect any guarantee entered into prior
to January 28, 1982, but this section shall apply to any extension,
modification or renewal thereof entered into after such date.
[46 FR 62844, Dec. 29, 1981, as amended at 48 FR 35291, Aug. 3, 1983]
Sec. 1.57 Operations and activities of introducing brokers.
(a) Each introducing broker must:
(1) Open and carry each customer's and option customer's account
with a carrying futures commission merchant on a fully-disclosed basis:
Provided, however, That an introducing broker which has entered into a
guarantee agreement with a futures commission merchant in accordance
with the provisions of Sec. 1.10(j) of this part must open and carry
such customer's and option customer's account with such guarantor
futures commission merchant on a fully-disclosed basis; and
(2) Transmit promptly for execution all customer and option customer
orders to:
(i) A carrying futures commission merchant; or
(ii) a floor broker, if the introducing broker identifies its
carrying futures commission merchant and that carrying futures
commission merchant is also the clearing member with respect to the
customer's or option customer's order.
(b) An introducing broker may not carry proprietary accounts, nor
may an introducing broker carry accounts in foreign futures.
(c) An introducing broker may not accept any money, securities or
property (or extend credit in lieu thereof) to margin, guarantee or
secure any trades or contracts of customers or option customers, or any
money, securities or property accruing as a result of such trades or
contracts: Provided, however, That an introducing broker may deposit a
check in a qualifying account or forward a check drawn by a customer or
option customer if:
[[Page 100]]
(1) The futures commission merchant carrying the customer's or
option customer's account authorizes the introducing broker, in writing,
to receive a check in the name of the futures commission merchant, and
the introducing broker retains such written authorization in its files
in accordance with Sec. 1.31;
(2) The check is payable to the futures commission merchant carrying
the customer's or option customer's account;
(3) The check is deposited by the introducing broker, on the same
day upon which it is received, in a bank or trust company located in the
United States in a qualifying account, or the check is mailed or
otherwise transmitted by the introducing broker to the futures
commission merchant on the same day upon which it is received;
(4) For purposes of this paragraph (c), a qualifying account shall
be deemed to be an account:
(i) Which is maintained in an account name which clearly identifies
the funds therein as belonging to commodity or option customers of the
futures commission merchant carrying the customer's or option customer's
account;
(ii) For which the bank or trust company restricts withdrawals to
withdrawals by the carrying futures commission merchant;
(iii) For which the bank or trust company prohibits the introducing
broker or anyone acting upon its behalf from withdrawing funds; and
(iv) For which the bank or trust company provides the futures
commission merchant carrying the customer's or option customer's account
with a written acknowledgment, which the futures commission merchant
must retain in its files in accordance with Sec. 1.31, that it was
informed that the funds deposited therein are those of commodity or
option customers and are being held in accordance with the provisions of
the Act and these regulations.
[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992]
Sec. 1.58 Gross collection of exchange-set margins.
(a) Each futures commission merchant which carries a commodity
futures or commodity option position for another futures commission
merchant or for a foreign broker on an omnibus basis must collect, and
each futures commission merchant and foreign broker for which an omnibus
account is being carried must deposit, initial and maintenance margin on
each position reported in accordance with Sec. 17.04 of this chapter at
a level no less than that established for customer accounts by the rules
of the applicable contract market.
(b) If the futures commission merchant which carries a commodity
futures or commodity option position for another futures commission
merchant or for a foreign broker on an omnibus basis allows a position
to be margined as a spread position or as a hedged position in
accordance with the rules of the applicable contract market, the
carrying futures commission merchant must obtain and retain a written
representation from the futures commission merchant or from the foreign
broker for which the omnibus account is being carried that each such
position is entitled to be so margined.
[61 FR 19187, May 1, 1996]
Sec. 1.59 Activities of self-regulatory organization employees, governing board members, committee members, and consultants.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Commission regulation 1.3(ee), and
includes the term ``clearing organization,'' as defined in Commission
regulation 1.3(d).
(2) Governing board member means a member, or functional equivalent
thereof, of the board of governors of a self-regulatory organization.
(3) Committee member means a member, or functional equivalent
thereof, of any committee of a self-regulatory organization.
(4) Employee means any person hired or otherwise employed on a
salaried or contract basis by a self-regulatory organization, but does
not include:
(i) Any governing board member compensated by a self-regulatory
organization solely for governing board activities; or
[[Page 101]]
(ii) Any committee member compensated by a self-regulatory
organization solely for committee activities; or
(iii) Any consultant hired by a self-regulatory organization.
(5) Material information means information which, if such
information were publicly known, would be considered important by a
reasonable person in deciding whether to trade a particular commodity
interest on a contract market. As used in this section, ``material
information'' includes, but is not limited to, information relating to
present or anticipated cash, futures, or option positions, trading
strategies, the financial condition of members of self-regulatory
organizations or members of linked exchanges or their customers or
option customers, or the regulatory actions or proposed regulatory
actions of a self-regulatory organization or a linked exchange.
(6) Non-public information means information which has not been
disseminated in a manner which makes it generally available to the
trading public.
(7) Linked exchange means: (i) any board of trade, exchange or
market outside the United States, its territories or possessions, which
has an agreement with a contract market in the United States that
permits positions in a commodity interest which have been established on
one of the two markets to be liquidated on the other market; (ii) any
board of trade, exchange or market outside the United States, its
territories or possessions, the products of which are listed on a United
States contract market or a trading facility thereof; (iii) any
securities exchange, the products of which are held as margin in a
commodity account or cleared by a securities clearing organization
pursuant to a cross-margining arrangement with a futures clearing
organization; or (iv) any clearing organization which clears the
products of any of the foregoing markets.
(8) Commodity interest means any commodity futures or commodity
option contract traded on or subject to the rules of a contract market
or linked exchange, or cash commodities traded on or subject to the
rules of a board of trade which has been designated as a contract
market.
(9) Related commodity interest means any commodity interest which is
traded on or subject to the rules of a contract market, linked exchange,
or other board of trade, exchange or market, other than the self-
regulatory organization by which a person is employed, and with respect
to which:
(i) Such employing self-regulatory organization has recognized or
established intermarket spread margins or other special margin treatment
between that other commodity interest and a commodity interest which is
traded on or subject to the rules of the employing self-regulatory
organization; or
(ii) Such other self-regulatory organization has recognized or
established intermarket spread margins or other special margin treatment
with another commodity interest as to which the person has access to
material, nonpublic information.
(10) Pooled investment vehicle means a trading vehicle organized and
operated as a commodity pool within regulation 4.10(d), and whose units
of participation have been registered under the Securities Act of 1933,
or a trading vehicle for which regulation 4.5 makes available relief
from regulation as a commodity pool operator, i.e., registered
investment companies, insurance company separate accounts, bank trust
funds, and certain pension plans.
(b) Employees of self-regulatory organizations; Self-regulatory
organization rules. (1) Each self-regulatory organization must maintain
in effect rules which have been submitted to the Commission pursuant to
Section 5a(a)(12)(A) of the Act and Sec. 1.41 (or, pursuant to section
17(j) of the Act in the case of a registered futures association) that,
at a minimum, prohibit:
(i) Employees of the self-regulatory organization from:
(A) Trading, directly or indirectly, in any commodity interest
traded on or cleared by the employing contract market or clearing
organization;
(B) Trading, directly or indirectly, in any related commodity
interest;
(C) Trading, directly or indirectly, in a commodity interest traded
on or cleared by contract markets or clearing organizations other than
the employing self-regulatory organization if
[[Page 102]]
the employee has access to material, non-public information concerning
such commodity interest;
(D) Trading, directly or indirectly, in a commodity interest traded
on or cleared by a linked exchange if the employee has access to
material, non-public information concerning such commodity interest; and
(ii) Employees of the self-regulatory organization from disclosing
to any other person any material, non-public information which such
employee obtains as a result of his or her employment at the self-
regulatory organization where such employee has or should have a
reasonable expectation that the information disclosed may assist another
person in trading any commodity interest; Provided, however, That such
rules shall not prohibit disclosures made in the course of an employee's
duties, or disclosures made to another self-regulatory organization,
linked exchange, court of competent jurisdiction or representative of
any agency or department of the federal or state government acting in
his or her official capacity.
(2) Each self-regulatory organization may adopt rules, which must be
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act
and Commission regulation 1.41 (or, pursuant to section 17(j) of the Act
in the case of a registered futures association), which set forth
circumstances under which exemptions from the trading prohibition
contained in paragraph (b)(1)(i) of this section may be granted; such
exemptions are to be administered by the self-regulatory organization on
a case-by-case basis. Specifically, such circumstances may include:
(i) Participation by an employee in pooled investment vehicles where
the employee has no direct or indirect control with respect to
transactions executed for or on behalf of such vehicles; and
(ii) Trading by an employee under circumstances enumerated by the
self-regulatory organization in rules which the self-regulatory
organization determines are not contrary to the purposes of this
regulation, the Commodity Exchange Act, the public interest, or just and
equitable principles of trade.
(c) Governing board members, committee members, and consultants;
Self-regulatory organization rules. Each self-regulatory organization
must maintain in effect rules which have been submitted to the
Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec. 1.41
(or, pursuant to Section 17(j) of the Act in the case of a registered
futures association) which provide that no governing board member,
committee member, or consultant shall use or disclose--for any purpose
other than the performance of official duties as a governing board
member, committee member, or consultant--material, non-public
information obtained as a result of the performance of such person's
official duties.
(d) Prohibited conduct. (1) No employee, governing board member,
committee member, or consultant shall:
(i) Trade for such person's own account, or for or on behalf of any
other account, in any commodity interest, on the basis of any material,
non-public information obtained through special access related to the
performance of such person's official duties as an employee, governing
board member, committee member, or consultant; or
(ii) Disclose for any purpose inconsistent with the performance of
such person's official duties as an employee, governing board member,
committee member, or consultant any material, non-public information
obtained through special access related to the performance of such
duties.
(2) No person shall trade for such person's own account, or for or
on behalf of any other account, in any commodity interest, on the basis
of any material, non-public information that such person knows was
obtained in violation of paragraph (d)(1) of this section from an
employee, governing board member, committee member, or consultant.
[58 FR 54973, Oct. 25, 1993, as amended at 65 FR 47847, Aug. 4, 2000]
Sec. 1.60 Pending legal proceedings.
(a) Every contract market shall submit to the Commission copies of
the complaint, any dispositive or partially dispositive decision, any
notice of appeal filed concerning such decisions and such further
documents as the
[[Page 103]]
Commission may thereafter request filed in any material legal proceeding
to which the contract market is a party or its property or assets is
subject.
(b) Every futures commission merchant shall sumit to the Commission
copies of any dispositive or partially dispositive decision for which a
notice of appeal has been filed, the notice of appeal and such further
documents as the Commission may thereafter request filed in any material
legal proceeding to which the futures commission merchant is a party or
its property or assets is subjects.
(c) Every contract market shall submit to the Commission copies of
the complaint, any dispositive or partially dispositive decision, any
notice of appeal filed concerning such decisions and such further
documents as the Commission may thereafter request filed in any material
legal proceeding instituted against any officer, director, or other
official of the contract market arising from conduct in such person's
capacity as a contract market official and alleging violations of:
(1) The act or any rule, regulation, or order thereunder;
(2) the constitution, bylaws or rules of the contract market; or
(3) the applicable provisions of state law relating to the duties of
officers, directors, or other officials of business organizations.
(d) Every futures commission merchant shall submit to the Commission
copies of any dispositive or partially dispositive decision concerning
which a notice of appeal has been filed, the notice of appeal, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding instituted against any person who is a
principal of the futures commission merchant (as that term is defined in
Sec. 3.1(a) of this chapter) arising from conduct in such person's
capacity as a principal of the futures commission merchant and alleging
violations of: (1) The Act or any rule, regulation, or order thereunder;
or (2) provisions of state law relating to a duty or obligation owed by
such a principal.
(e) All documents required by this section to be submitted to the
Commission shall be mailed via first-class or submitted by other more
expeditious means to the Commission's headquarters office in Washington,
DC, Attention: Office of the General Counsel. All documents required by
this section to be submitted to the Commission as to matters pending on
the effective date of the section (May 25, 1984), shall be mailed to the
Commission within 45 days of that effective date. Thereafter, all
complaints required by this section to be submitted to the Commission by
contract markets shall be mailed to the Commission within 10 days after
the initiation of the legal proceedings to which they relate, all
decisions required to be submitted by contract markets shall be mailed
within 10 days of their date of issuance, all notices of appeal required
to be submitted by contract markets shall be mailed within 10 days of
the filing or receipt by the contract market of the notice of appeal,
and all decisions and notices of appeal required to be submitted by
futures commission merchants shall be mailed within 10 days of the
filing or receipt by the futures commission merchant of the relevant
notice of appeal. For purposes of paragraph (a), (b), (c) and (d) of
this rule, a ``material legal proceeding'' includes but is not limited
to actions involving alleged violations of the Commodity Exchange Act or
the Commission's regulations. However, a legal proceeding is not
``material'' for the purposes of this rule if the proceeding is not in a
federal or state court or if the Commission is a party.
[49 FR 17750, Apr. 25, 1984]
Sec. 1.61 [Reserved]
Sec. 1.62 Contract market requirement for floor broker and floor trader registration.
(a)(1) Each contract market shall adopt, maintain in effect, and
enforce rules which have become effective pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 and which provide that no person
in or surrounding any pit, ring, post, or other place provided by such
contract market for the meeting of persons similarly engaged may:
(i) Purchase or sell for any other person any commodity for future
delivery, or any commodity option, on or subject to the rules of that
contract market,
[[Page 104]]
unless such person is registered or has been granted a temporary license
as a floor broker; or
(ii) Purchase or sell solely for such person's own account, any
commodity for future delivery, or any commodity option, on or subject to
the rules of that contract market, unless such person is registered or
has been granted a temporary license as a floor trader, or has been
granted a temporary license as a floor broker to act as a floor trader,
in accordance with section 4f of the Act and Sec. 3.11 or Sec. 3.40 of
this chapter, and such temporary license or registration has not been
terminated, revoked or withdrawn: Provided, however, That such contract
market rules must provide that a floor broker or floor trader will be
prohibited from engaging in activities requiring registration under the
Act or from representing himself to be a registrant under the Act or the
representative or agent of any registrant during the pendency of any
suspension of such person's registration or the suspension by a contract
market of access of such person to any pit, ring, post or other place
provided by such contract market for the meeting of persons engaged in
purchasing and selling any commodity for future delivery or commodity
option on or subject to the rules of that contract market.
(2) Each contract market shall also adopt, maintain in effect and
enforce rules which have become effective pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 which provide for requests for
withdrawal of floor broker or floor trader registration using Form 8-W
in accordance with Sec. 3.33 of this chapter, which require training of
floor brokers and floor traders in accordance with Sec. 3.34 of this
chapter and which require review of registration information by floor
brokers and by floor traders every three years in accordance with
Sec. 3.11(d) of this chapter.
(b) Each contract market must notify the Commission of any facts
regarding a floor broker or floor trader or an applicant for
registration as a floor broker or floor trader, or a floor trader whose
name appears on a list submitted in accordance with Sec. 1.66 in order
to qualify for a temporary no-action position thereunder, who has been
granted trading privileges at the contract market, which are set forth
as statutory disqualifications in section 8a(2) of the Act (unless such
facts result from an enforcement action filed by the Commission or a
disciplinary action taken by another contract market) or which are
terminations of floor trading privileges for cause under Sec. 9.11(c) of
this chapter within ten business days of the date upon which the
contract market first knows of such facts. Notice to the Commission
shall be sufficient if the contract market gives notice to the Director
of the Division of Clearing and Intermediary Oversight or the Director's
designee by facsimile transmission and/or first class mail or equivalent
means to the Commission at its Washington, DC office (Attn: Division of
Clearing and Intermediary Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581).
[58 FR 19589, Apr. 15, 1993; 59 FR 5700, Feb. 8, 1994, as amended at 60
FR 49334, Sept. 25, 1995; 67 FR 62351, Oct. 7, 2002]
Sec. 1.63 Service on self-regulatory organization governing boards or committees by persons with disciplinary histories.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means a ``self-regulatory
organization'' as defined in Commission regulation 1.3(ee)
(Sec. 1.3(ee)), and includes a ``clearing organization'' as defined in
Commission regulation 1.3(d) (Sec. 1.3(d)), except as defined in
paragraph (b)(6) of this section.
(2) Disciplinary committee means any person or committee of persons,
or any subcommittee thereof, that is authorized by a self-regulatory
organization to issue disciplinary charges, to conduct disciplinary
proceedings, to settle disciplinary charges, to impose disciplinary
sanctions or to hear appeals thereof.
(3) Arbitration panel means any person or panel empowered by a self-
regulatory organization to arbitrate disputes involving such
organization's members or their customers.
(4) Oversight panel means any panel authorized by a self-regulatory
organization to review, recommend or establish policies or procedures
with respect
[[Page 105]]
to the self-regulatory organization's surveillance, compliance, rule
enforcement or disciplinary responsibilities.
(5) Final decision means:
(i) A decision of a self-regulatory organization which cannot be
further appealed within the self-regulatory organization, is not subject
to the stay of the Commission or a court of competent jurisdiction, and
has not been reversed by the Commission or any court of competent
jurisdiction; or,
(ii) Any decision by an administrative law judge, a court of
competent jurisdiction or the Commission which has not been stayed or
reversed.
(6) Disciplinary offense means:
(i) Any violation of the rules of a self-regulatory organization
except those rules related to
(A) Decorum or attire,
(B) Financial requirements, or
(C) Reporting or recordkeeping unless resulting in fines aggregating
more than $5,000 within any calendar year;
(ii) Any rule violation described in subparagraphs (a)(6)(i) (A)
through (C) of this regulation which involves fraud, deceit or
conversion or results in a suspension or expulsion;
(iii) Any violation of the Act or the regulations promulgated
thereunder; or,
(iv) Any failure to exercise supervisory responsibility with respect
to acts described in paragraphs (a)(6) (i) through (iii) of this section
when such failure is itself a violation of either the rules of a self-
regulatory organization, the Act or the regulations promulgated
thereunder.
(v) A disciplinary offense must arise out of a proceeding or action
which is brought by a self-regulatory organization, the Commission, any
federal or state agency, or other governmental body.
(7) Settlement agreement means any agreement consenting to the
imposition of sanctions by a self-regulatory organization, a court of
competent jurisdiction or the Commission.
(b) Each self-regulatory organization must maintain in effect rules
which have been submitted to the Commission pursuant to section
5a(a)(12)(A) of the Act and Sec. 1.41 or, in the case of a registered
futures association, pursuant to section 17(j) of the Act, that render a
person ineligible to serve on its disciplinary committees, arbitration
panels, oversight panels or governing board who:
(1) Was found within the prior three years by a final decision of a
self-regulatory organization, an administrative law judge, a court of
competent jurisdiction or the Commission to have committed a
disciplinary offense;
(2) Entered into a settlement agreement within the prior three years
in which any of the findings or, in the absence of such findings, any of
the acts charged included a disciplinary offense;
(3) Currently is suspended from trading on any contract market, is
suspended or expelled from membership with any self-regulatory
organization, is serving any sentence of probation or owes any portion
of a fine imposed pursuant to either:
(i) A finding by a final decision of a self-regulatory organization,
an administrative law judge, a court of competent jurisdiction or the
Commission that such person committed a disciplinary offense; or,
(ii) A settlement agreement in which any of the findings or, in the
absence of such findings, any of the acts charged included a
disciplinary offense.
(4) Currently is subject to an agreement with the Commission or any
self-regulatory organization not to apply for registration with the
Commission or membership in any self-regulatory organization;
(5) Currently is subject to or has had imposed on him within the
prior three years a Commission registration revocation or suspension in
any capacity for any reason, or has been convicted within the prior
three years of any of the felonies listed in section 8a(2)(D) (ii)
through (iv) of the Act;
(6) Currently is subject to a denial, suspension or disqualification
from serving on the disciplinary committee, arbitration panel or
governing board of any self-regulatory organization as that term is
defined in section 3(a)(26) of the Securities Exchange Act of 1934.
(c) No person may serve on a disciplinary committee, arbitration
panel, oversight panel or governing board of a self-regulatory
organization if such
[[Page 106]]
person is subject to any of the conditions listed in paragraphs (b) (1)
through (6) of this section.
(d) Each self-regulatory organization shall submit to the Commission
a schedule listing all those rule violations which constitute
disciplinary offenses as defined in paragraph (a)(6) (i) of this section
and to the extent necessary to reflect revisions shall submit an amended
schedule within thirty days of the end of each calendar year. Each self-
regulatory organization must maintain and keep current the schedule
required by this section, post the schedule in a public place designed
to provide notice to members and otherwise ensure its availability to
the general public.
(e) Each self-regulatory organization shall submit to the Commission
within thirty days of the end of each calendar year a certified list of
any persons who have been removed from its disciplinary committees,
arbitration panels, oversight panels or governing board pursuant to the
requirements of this regulation during the prior year.
(f) Whenever a self-regulatory organization finds by final decision
that a person has committed a disciplinary offense and such finding
makes such person ineligible to serve on that self-regulatory
organization's disciplinary committees, arbitration panels, oversight
panels or governing board, the self-regulatory organization shall inform
the Commission of that finding and the length of the ineligibility in
any notice it is required to provide to the Commission pursuant to
either section 17(h)(1) of the Act or Commission regulation 9.11.
[55 FR 7890, Mar. 6, 1990, as amended at 58 FR 37653, July 13, 1993; 64
FR 23, Jan. 4, 1999]
Sec. 1.64 Composition of various self-regulatory organization governing boards and major disciplinary committees.
(a) Definitions. For purposes of this section:
(1) Self-regulatory organization means ``self-regulatory
organization'' as defined in Sec. 1.3(ee), not including a ``clearing
organization'' as defined in Sec. 1.3(d).
(2) Major disciplinary committee means a committee of persons who
are authorized by a self-regulatory organization to conduct disciplinary
hearings, to settle disciplinary charges, to impose disciplinary
sanctions or to hear appeals thereof in cases involving any violation of
the rules of the self-regulatory organization except those which:
(i) Are related to:
(A) Decorum or attire,
(B) Financial requirements, or
(C) Reporting or recordkeeping; and,
(ii) Do not involve fraud, deceit or conversion.
(3) Regular voting member of a governing board means any person who
is eligible to vote routinely on matters being considered by the board
and excludes those members who are only eligible to vote in the case of
a tie vote by the board.
(4) Membership interest (i) In the case of a contract market, each
of the following will be considered a different membership interest:
(A) Floor brokers,
(B) Floor traders,
(C) Futures commission merchants,
(D) Producers, consumers, processors, distributors, and
merchandisers of commodities traded on the particular contract market,
(E) Participants in a variety of pits or principal groups of
commodities traded on the particular contract market; and,
(F) Other market users or participants; except that with respect to
paragraph (c)(2) of this section, a contract market may define
membership interests according to the different pits or principal groups
of commodities traded on the contract market.
(ii) In the case of a registered futures association, each of the
following will be considered a different membership interest:
(A) Futures commission merchants,
(B) Introducing brokers,
(C) Commodity pool operators,
(D) Commodity trading advisors; and,
(E) Associated persons, except that under paragraph (c)(3) of this
section an associated person will be deemed to represent the same
membership interest as its sponsor.
(b) Each self-regulatory organization must maintain in effect
standards and
[[Page 107]]
procedures with respect to its governing board which have been submitted
to the Commission pursuant to section 5a(a)(12)(A) of the Act and
Sec. 1.41 or, when applicable to a registered futures association,
pursuant to section 17(j) of the Act, that ensure:
(1) That twenty percent or more of the regular voting members of the
board are persons who:
(i) Are knowledgeable of futures trading or financial regulation or
are otherwise capable of contributing to governing board deliberations;
and,
(ii) (A) Are not members of the self-regulatory organization,
(B) Are not currently salaried employees of the self-regulatory
organization,
(C) Are not primarily performing services for the self-regulatory
organization in a capacity other than as a member of the self-regulatory
organization's governing board, or
(D) Are not officers, principals or employees of a firm which holds
a membership at the self-regulatory organization either in its own name
or through an employee on behalf of the firm;
(2) In the case of a contract market, that ten percent or more of
the regular voting members of the governing board be comprised where
applicable of persons representing farmers, producers, merchants or
exporters of principal commodities underlying a commodity futures or
commodity option traded on the contract market; and
(3) That the board's membership includes a diversity of membership
interests. The self-regulatory organization must be able to demonstrate
that the board membership fairly represents the diversity of interests
at such self-regulatory organization and is otherwise consistent with
this regulation's composition requirements;
(c) Each self-regulatory organization must maintain in effect rules
with respect to its major disciplinary committees which have been
submitted to the Commission pursuant to section 5a(a)(12)(A) of the Act
and Sec. 1.41 or, when applicable to a registered futures association,
pursuant to section 17(j) of the Act, that ensure:
(1) That at least one member of each major disciplinary committee or
hearing panel thereof be a person who is not a member of the self-
regulatory organization whenever such committee or panel is acting with
respect to a disciplinary action in which:
(i) The subject of the action is a member of the self-regulatory
organization's:
(A) Governing board, or
(B) Major disciplinary committee; or,
(ii) Any of the charged, alleged or adjudicated contract market rule
violations involve:
(A) Manipulation or attempted manipulation of the price of a
commodity, a futures contract or an option on a futures contract, or
(B) Conduct which directly results in financial harm to a non-member
of the contract market;
(2) In the case of a contract market, that more than fifty percent
of each major disciplinary committee or hearing panel thereof include
persons representing membership interests other than that of the subject
of the disciplinary proceeding being considered;
(3) In the case of a registered futures association, that each major
disciplinary committee or hearing panel thereof include persons
representing membership interests other than that of the subject of the
disciplinary proceeding being considered; and,
(4) That each major disciplinary committee or hearing panel thereof
include sufficient different membership interests so as to ensure
fairness and to prevent special treatment or preference for any person
in the conduct of a committee's or the panel's responsibilities.
(d) Each self-regulatory organization must submit to the Commission
within thirty days after each governing board election a list of the
governing board's members, the membership interests they represent and
how the composition of the governing board otherwise meets the
requirements of Sec. 1.64(b) and the self-regulatory organization's
implementing standards and procedures.
[58 FR 37654, July 13, 1993; 59 FR 5082, Feb. 3, 1994]
Sec. 1.65 Notice of bulk transfers and disclosure obligations to customers.
(a) Notice and Disclosure to Customers. (1) Prior to transferring a
customer account to another futures commission merchant or introducing
broker other
[[Page 108]]
than at the request of the customer, a futures commission merchant or
introducing broker must obtain the customer's specific consent to the
transfer.
(2) If the customer account agreement contains a valid consent by
the customer to prospective transfers of the account, the transferor
futures commission merchant or introducing broker may transfer the
account if the customer is provided with written notice of, and a
reasonable opportunity to object to, the transfer and the customer has
not asserted an objection to the transfer or given other instructions as
to the disposition of the account. The notice to the customer must
include:
(i) A clear statement of the reason(s) for the transfer, the name,
address and telephone number of the proposed transferee firm and other
information material to the transfer;
(ii) A statement that the customer is not required to accept the
proposed transfer and may direct the transfer or firm to liquidate the
account or ransfer the account to a firm of the customer's selection;
(iii) The name, telephone number and address of a contact person at
the transferor firm to whom the customer may give instructions as to the
disposition of the account;
(iv) Notice that a failure to respond to the letter within a
specified time period, which must be a reasonable period in the
circumstances, will be deemed consent to the transfer; and
(v) A clear statement as to the means by which the customer may
object to or otherwise respond to the notice of proposed transfer.
(3) Where customer accounts are transferred to a futures commission
merchant or introducing broker, other than at the customer's request,
the transferee introducing broker or futures commission merchant must
provide each customer whose account is transferred with the risk
disclosure statements and acknowledgments required by Sec. 1.55
(domestic futures and foreign futures and options trading), and
Secs. 33.7 (domestic exchange-traded commodity options) and 190.10(c)
(non-cash margin--to be furnished by futures commission merchants only)
of this chapter and receive the required acknowledgments within sixty
days of the transfer of accounts. This requirement shall not apply:
(i) As to customers owning transferred accounts for which the
transferee futures commission merchant or introducing broker has clear
written evidence that the customer has received and acknowledged the
required disclosure documents; or
(ii) As to customers for which the transferee futures commission
merchant or introducing broker has clear evidence that such customer was
at the time the account was opened by the transferring futures
commission merchant or introducing broker, or is at the time the account
is being transferred, a customer listed in Sec. 1.55(f); or
(iii) If the transfer of accounts is made from one introducing
broker to another introducing broker guaranteed by the same futures
commission merchant pursuant to a guarantee agreement in accordance with
the requirements of Sec. 1.10(j) and such futures commission merchant
maintains the relevant acknowledgments required by Sec. 1.55(a)(1)(ii)
and Sec. 33.7(a)(1)(ii) of this chapter and can establish compliance
with Sec. 190.10(c) of this chapter.
(b) Notice to the Commission. Each futures commission merchant or
introducing broker shall file with the Commission, at least five
business days in advance of the transfer, notice of any transfer of
customer accounts carried or introduced by such futures commission
merchant or introducing broker that is not initiated at the request of
the customer, where the transfer involves the lesser of:
(1) 25 percent of the total number of customer accounts carried or
introduced by such firm if that percentage represents at least 100
accounts; or
(2) 50 percent or more of the total number of customer accounts
carried or introduced by such firm. The computation of the percentage
and number of accounts must be based on the total number of accounts
carried by the transferor futures commission merchant or introduced by
the introducing broker, irrespective of whether such accounts are
transferred to a single or multiple transferees.
[[Page 109]]
(c) The notice required by paragraph (b) of this section shall
include:
(1) The name, principal business address and telephone number of the
transferor futures commission merchant or introducing broker;
(2) The name, principal business address and telephone number of
each transferee futures commission merchant or introducing broker;
(3) The designated self-regulatory organization for the transferor
and transferee firms;
(4) A brief statement as to the reasons for the transfer;
(5) A copy of the notice to customers informing them of the proposed
transfer and providing an opportunity to object to such transfer; and
(6) A statement of the number of accounts to be transferred and the
estimated liquidating equity of the accounts to be transferred.
(d) The notice required by paragraph (b) of this section shall be
filed with the Deputy Director, Compliance and Registration Section,
Division of Clearing and Intermediary Oversight, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581; the National Futures Association Attn: Vice
President-Compliance; and the designated self-regulatory organization
for the transferor firm.
(e) In the event that the notice required by paragraph (b) of this
section cannot be filed with the Commission at least five days prior to
the account transfer, the transferee futures commission merchant or
introducing broker shall file such notice as soon as practicable and no
later than the day of the transfer. Such notice shall include a brief
statement explaining the circumstances necessitating the delay in
filing.
(f) The requirements of this section shall not affect the
obligations of a futures commission merchant or introducing broker under
the rules of a self-regulatory organization or applicable customer
account agreement with respect to transfer of accounts.
(g) If a proposed transfer is not completed in accordance with the
notice required to be filed by paragraph (b) of this section, a
corrective notice shall be filed within five business days of the date
such proposed transfer was to occur explaining why the proposed transfer
was not completed.
[58 FR 17504, Apr. 5, 1993, as amended at 60 FR 49334, Sept. 25, 1995;
63 FR 8571, Feb. 20, 1998; 67 FR 62351, Oct. 7, 2002]
Sec. 1.66 No-action positions with respect to floor traders.
(a) Notwithstanding any other provision of law, if a contract market
submits to the National Futures Association by April 26, 1993 a list of
floor traders who were granted trading privileges on that contract
market on or before April 26, 1993, and whose floor trading privileges
remain in effect, which includes the name, date of birth and social
security number of such floor traders, as well as facts regarding such
floor traders which are set forth as statutory disqualifications in
section 8a(2) of the Act if the contract market knows of such facts, and
such list is signed by the chief operating officer of the contract
market, the Commission will not commence an enforcement proceeding
against a floor trader on that list based solely upon the floor trader's
failure to register or receive a temporary license under section 4f of
the Act and Sec. 3.11 of this chapter, nor will the Commission commence
an enforcement proceeding against the contract market under Sec. 1.62
for failing to bar such floor trader from operating as such: Provided,
however, That for those floor traders listed as to whom the contract
market knows of facts set forth as statutory disqualifications in
section 8a(2) of the Act, the no-action position contained in paragraph
(a) of this section will only apply if the contract market submits a
supplemental statement signed by the chief operating officer of the
contract market stating that, in light of the Congressional mandate
requiring registration of floor traders under the Act, the contract
market acknowledges its responsibility to take affirmative action to
conduct appropriate surveillance of such floor traders. These no-action
positions shall expire upon the floor's trader being granted or denied
registration under the Act, or on June 11, 1993, whichever comes
earliest: Provided, however, That if the floor trader files
[[Page 110]]
an application for registration in accordance with Sec. 3.11 of this
chapter with the National Futures Association by June 11, 1993, the no-
action positions for the floor trader and the contract market as to the
registration of such floor trader will be extended until the floor
trader is granted or denied registration under the Act, unless an
Administrative Law Judge issues an interim order suspending the no-
action position as to such floor trader in accordance with paragraph (b)
of this section or the application for registration is withdrawn.
(b) Suspension of no-action position under paragraph (a) of this
section pursuant to section 8a(2) of the Act--(1) Notice. On the basis
of information obtained by the Commission, the Commission may at any
time serve notice upon a floor trader whose name appears on a list
submitted in accordance with paragraph (a) of this section that:
(i) The Commission alleges and is prepared to prove that such floor
trader is subject to one or more of the statutory disqualifications set
forth in section 8a(2) of the Act;
(ii) An Administrative Law Judge shall make a determination, based
upon written evidence, as to whether the floor trader is subject to such
statutory disqualification; and
(iii) If the floor trader is found to be subject to a statutory
disqualification, the no-action status of the floor trader under
paragraph (a) of this section may be suspended and the floor trader
ordered to show cause why registration should not be denied.
(2) Written submission. If the floor trader wishes to challenge the
accuracy of the allegations set forth in the notice, the floor trader
may submit written evidence limited to the type described in
Sec. 3.60(b)(1) of this chapter. Such written submission must be served
upon the Division of Enforcement and filed with the Proceedings Clerk
within twenty days of the date of service of notice to the floor trader.
(3) Reply. Within ten days of receipt of any written submission
filed by the floor trader, the Division of Enforcement may serve upon
the floor trader and file with the Proceedings Clerk a reply.
(4) Determination by Administrative Law Judge. A determination by
the Administrative Law Judge as to whether the floor trader is subject
to a statutory disqualification must be based upon the evidence of the
statutory disqualification, notice with proof of service, the written
submission, if any, filed by the floor trader in response thereto, any
written reply submitted by the Division of Enforcement and such other
papers as the Administrative Law Judge may require or permit.
(5) Suspension and order to show cause. (i) If the floor trader is
found to be subject to a statutory disqualification, the Administrative
Law Judge, within thirty days after receipt of the floor trader's
written submission, if any, and any reply thereto, shall issue an
interim order suspending the no-action status of the floor trader under
paragraph (a) of this section and requiring the floor trader to show
cause within twenty days of the date of the order why, notwithstanding
the existence of the statutory disqualification, the registration of the
floor trader should not be denied. The no-action status of the floor
trader shall be suspended, effective five days after the order to show
cause is served upon the floor trader in accordance with Sec. 3.50(a) of
this chapter, until a final order with respect to the order to show
cause has been issued: Provided, That if the sole basis upon which the
floor trader is subject to statutory disqualification is the existence
of a temporary order, judgment or decree of the type described in
section 8a(2)(C) of the Act, the order to show cause shall not be issued
and the floor trader shall be suspended until such time as the temporary
order, judgment or decree shall have expired: Provided, however, That in
no event shall the floor trader's no-action status be suspended for a
period to exceed six months.
(ii) If the floor trader is found not to be subject to a statutory
disqualification, the Administrative Law Judge shall issue an order to
that effect and the Proceedings Clerk shall promptly serve a copy of
such order on the floor trader, the Division of Clearing and
Intermediary Oversight and the Division of Enforcement. Such order shall
[[Page 111]]
be effective as a final order of the Commission fifteen days after the
date it is served upon the floor trader in accordance with the
provisions of Sec. 3.50(a) of this chapter unless a timely application
for review is filed in accordance with Sec. 10.102 of this chapter. The
appellate procedures set forth in Secs. 10.102, 10.103, 10.104, 10.106,
10.107 and 10.109 of this chapter shall apply to any appeal brought
under paragraph (c)(5)(ii) of this section.
(6) Further proceedings. If an order to show cause is issued
pursuant to paragraph (c)(5)(i) of this section, further proceedings on
such order shall be conducted in accordance with the provisions of
Sec. 3.60(b) through (j) of this chapter.
[58 FR 19589, Apr. 15, 1993; 58 FR 21776, Apr. 23, 1993, as amended at
60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 7, 2002]
Sec. 1.67 Notification of final disciplinary action involving financial harm to a customer.
(a) Definitions. For purposes of this section:
(1) Final disciplinary action means any decision by or settlement
with a contract market in a disciplinary matter which cannot be further
appealed at the contract market, is not subject to the stay of the
Commission or a court of competent jurisdiction, and has not been
reversed by the Commission or any court of competent jurisdiction.
(2) [Reserved]
(b) Upon any final disciplinary action in which a contract market
finds that a member has committed a rule violation that involved a
transaction for a customer, whether executed or not, and that resulted
in financial harm to the customer:
(1)(i) the contract market shall promptly provide written notice of
the disciplinary action to the futures commission merchant that cleared
the transaction; and,
(ii) a futures commission merchant that receives a notice, under
paragraph (b)(1)(i) of this section shall promptly provide written
notice of the disciplinary action to the customer as disclosed on its
books and records. If the customer is another futures commission
merchant, such futures commission merchant shall promptly provide the
notice to the customer.
(2) A written notice required by paragraph (b)(1) of this section
must include the principal facts of the disciplinary action and a
statement that the contract market has found that the member has
committed a rule violation that involved a transaction for the customer,
whether executed or not, and that resulted in financial harm to the
customer. For the purposes of this paragraph, a notice which includes
the information listed in Sec. 9.11(b) shall be deemed to include the
principal facts of the disciplinary action thereof.
[58 FR 37655, July 13, 1993]
Sec. 1.68 Customer election not to have funds, carried by a futures commission merchant for trading on a registered derivatives transaction execution facility,
separately accounted for and segregated.
(a) A futures commission merchant shall not separately account for
and segregate, in accordance with the provisions of section 4d of the
Act and Secs. 1.20-1.30, 1.32 and 1.36, funds received from a customer
if:
(1) The customer is an eligible contract participant as defined in
section 1a(12) of the Act;
(2) The customer's funds are being carried by the futures commission
merchant for the purpose of trading on or through the facilities of a
derivatives transaction execution facility registered under section
5a(c) of the Act;
(3) The registered derivatives transaction execution facility has
authorized, in accordance with Sec. 37.7 of this chapter, futures
commission merchants to offer eligible contract participants the right
to elect not to have funds that are being carried for purposes of
trading on or through the facilities of the registered derivatives
transaction execution facility, separately accounted for and segregated
by the futures commission merchant; and
(4) The futures commission merchant and the customer have entered
into a written agreement, signed by a person with the authority to bind
the customer, in which the customer:
[[Page 112]]
(i) Represents and warrants that the customer is an eligible
contract participant as defined in section 1a(12) of the Act;
(ii) Elects not to have its funds separately accounted for and
segregated in accordance with the provisions of section 4d of the Act
and Secs. 1.20-1.30, 1.32 and 1.36 with respect to agreements, contracts
or transactions traded on or subject to the rules of any registered
derivatives transaction execution facility that has authorized such
treatment in accordance with Sec. 37.7 of this chapter;
(iii) Acknowledges that it has been informed, and by making this
election agrees that:
(A) The customer's funds, related to agreements, contracts or
transactions on any registered derivatives transaction execution
facility that authorizes the opting out of segregation will not be
segregated from the funds of the futures commission merchant in
accordance with the provisions of section 4d of the Act and Secs. 1.20-
1.30, 1.32 and 1.36;
(B) The futures commission merchant may use such funds in the course
of the futures commission merchant's business without the prior consent
of the customer or any third party;
(C) In the event the futures commission merchant files, or has a
petition filed against it, for bankruptcy, the customer, as to those
funds that the customer has elected not to have separately accounted for
and segregated by the futures commission merchant in accordance with the
provisions of section 4d of the Act and Secs. 1.20-1.30, 1.32 and 1.36,
will not be entitled to the priority for customer claims provided for
under the Bankruptcy Code and part 190 of this chapter;
(D) The customer may not retain a security interest in assets
excluded from segregation in accordance with this section;
(E) The customer may not enter into any agreement or other
understanding with the futures commission merchant relating to the
manner in which the customer's assets will be held at the futures
commission merchant, that directly or indirectly gives the customer a
priority in bankruptcy that is equal or superior to the priority
afforded public customers under the Bankruptcy Code and part 190 of this
chapter; and
(iv) Acknowledges that the agreement shall remain in effect unless
and until the customer abrogates the agreement in accordance with
paragraph (c) of this section.
(b) In no event may money, securities or property representing those
funds that customers have elected not to have separately accounted for
and segregated by the futures commission merchant, in accordance with
this section, be held or commingled and deposited with customer funds in
the same account or accounts required to be separately accounted for and
segregated pursuant to section 4d of the Act and Secs. 1.20-1.30, 1.32
and 1.36.
(c)(1) A customer that has entered into an agreement in accordance
with paragraph (a)(4) of this section may abrogate that agreement by so
informing the futures commission merchant in writing, signed by a person
with the authority to bind the customer. The effective date of the
abrogation shall not exceed five business days from the futures
commission merchant's receipt of the customer's abrogation. The
abrogation shall not become effective if the futures commission merchant
files, or has had filed against it, a petition for bankruptcy prior to
the effective date of the abrogation.
(2) Upon the effective date of the abrogation, permitted under
paragraph (c)(1) of this section, provided that the customer's positions
in the non-segregated account are fully margined and the customer is not
in default with respect to any of its obligations to the futures
commission merchant arising out of agreements, contracts or transactions
entered on, or subject to the rules of, a registered entity, as defined
in section 1a(29) of the Act, the futures commission merchant shall
transfer to a customer segregated account:
(i) All trades or positions of the customer with respect to which
the customer had previously elected to opt out of segregation; and
(ii) All money, securities, or property held in such account to
margin, guarantee or secure such trades or positions.
[[Page 113]]
(d) Each futures commission merchant shall maintain any agreements
entered into with customers pursuant to paragraph (a) of this section
and any abrogations of such agreements, made pursuant to paragraph (c)
of this section, in accordance with Sec. 1.31.
[66 FR 20744, Apr. 25, 2001]
Sec. 1.69 Voting by interested members of self-regulatory organization governing boards and various committees.
(a) Definitions. For purposes of this section:
(1) Disciplinary committee means any person or committee of persons,
or any subcommittee thereof, that is authorized by a self-regulatory
organization to issue disciplinary charges, to conduct disciplinary
proceedings, to settle disciplinary charges, to impose disciplinary
sanctions, or to hear appeals thereof in cases involving any violation
of the rules of the self-regulatory organization except those cases
where the person or committee is authorized summarily to impose minor
penalties for violating rules regarding decorum, attire, the timely
submission of accurate records for clearing or verifying each day's
transactions or other similar activities.
(2) Family relationship of a person means the person's spouse,
former spouse, parent, stepparent, child, stepchild, sibling,
stepbrother, stepsister, grandparent, grandchild, uncle, aunt, nephew,
niece or in-law.
(3) Governing board means a self-regulatory organization's board of
directors, board of governors, board of managers, or similar body, or
any subcommittee thereof, duly authorized, pursuant to a rule of the
self-regulatory organization that has been approved by the Commission or
has become effective pursuant to either Section 5a(a)(12)(A) or 17(j) of
the Act to take action or to recommend the taking of action on behalf of
the self-regulatory organization.
(4) Oversight panel means any panel, or any subcommittee thereof,
authorized by a self-regulatory organization to recommend or establish
policies or procedures with respect to the self-regulatory
organization's surveillance, compliance, rule enforcement, or
disciplinary responsibilities.
(5) Member's affiliated firm is a firm in which the member is a
``principal,'' as defined in Sec. 3.1(a), or an employee.
(6) Named party in interest means a person or entity that is
identified by name as a subject of any matter being considered by a
governing board, disciplinary committee, or oversight panel.
(7) Self-regulatory organization means a ``self-regulatory
organization'' as defined in Sec. 1.3(ee) and includes a ``clearing
organization'' as defined in Sec. 1.3(d), but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
8) Significant action includes any of the following types of self-
regulatory organization actions or rule changes that can be implemented
without the Commission's prior approval:
(i) Any actions or rule changes which address an ``emergency'' as
defined in Sec. 1.41(a)(4)(i) through (iv) and (vi) through (viii); and,
(ii) Any changes in margin levels that are designed to respond to
extraordinary market conditions such as an actual or attempted corner,
squeeze, congestion or undue concentration of positions, or that
otherwise are likely to have a substantial effect on prices in any
contract traded or cleared at such self-regulatory organization; but
does not include any rule not submitted for prior Commission approval
because such rule is unrelated to the terms and conditions of any
contract traded at such self-regulatory organization.
(b) Self-regulatory organization rules. Each self-regulatory
organization shall maintain in effect rules that have been submitted to
the Commission pursuant to Section 5a(a)(12)(A) of the Act and Sec. 1.41
or, in the case of a registered futures association, pursuant to Section
17(j) of the Act, to address the avoidance of conflicts of interest in
the execution of its self-regulatory functions. Such rules must provide
for the following:
(1) Relationship with named party in interest--(i) Nature of
relationship. A member of a self-regulatory organization's governing
board, disciplinary committee or oversight panel must abstain from such
body's deliberations
[[Page 114]]
and voting on any matter involving a named party in interest where such
member:
(A) Is a named party in interest;
(B) Is an employer, employee, or fellow employee of a named party in
interest;
(C) Is associated with a named party in interest through a ``broker
association'' as defined in Sec. 156.1;
(D) Has any other significant, ongoing business relationship with a
named party in interest, not including relationships limited to
executing futures or option transactions opposite of each other or to
clearing futures or option transactions through the same clearing
member; or,
(E) Has a family relationship with a named party in interest.
(ii) Disclosure of relationship. Prior to the consideration of any
matter involving a named party in interest, each member of a self-
regulatory organization governing board, disciplinary committee or
oversight panel must disclose to the appropriate self-regulatory
organization staff whether he or she has one of the relationships listed
in paragraph (b)(1)(i) of this section with a named party in interest.
(iii) Procedure for determination. Each self-regulatory organization
must establish procedures for determining whether any member of its
governing board, disciplinary committees or oversight committees is
subject to a conflicts restriction in any matter involving a named party
in interest. Taking into consideration the exigency of the committee
action, such determinations should be based upon:
(A) Information provided by the member pursuant to paragraph
(b)(1)(ii) of this section; and
(B) Any other source of information that is held by and reasonably
available to the self-regulatory organization.
(2) Financial interest in a significant action--(i) Nature of
interest. A member of a self-regulatory organization's governing board,
disciplinary committee or oversight panel must abstain from such body's
deliberations and voting on any significant action if the member
knowingly has a direct and substantial financial interest in the result
of the vote based upon either exchange or non-exchange positions that
could reasonably be expected to be affected by the action.
(ii) Disclosure of interest. Prior to the consideration of any
significant action, each member of a self-regulatory organization
governing board, disciplinary committee or oversight panel must disclose
to the appropriate self-regulatory organization staff the position
information referred to in paragraph (b)(2)(iii) of this section that is
known to him or her. This requirement does not apply to members who
choose to abstain from deliberations and voting on the subject
significant action.
(iii) Procedure for determination. Each self-regulatory organization
must establish procedures for determining whether any member of its
governing board, disciplinary committees or oversight committees is
subject to a conflicts restriction under this section in any significant
action. Such determination must include a review of:
(A) Gross positions held at that self-regulatory organization in the
member's personal accounts or ``controlled accounts,'' as defined in
Sec. 1.3(j);
(B) Gross positions held at that self-regulatory organization in
proprietary accounts, as defined in Sec. 1.17(b)(3), at the member's
affiliated firm;
(C) Gross positions held at that self-regulatory organization in
accounts in which the member is a principal, as defined in Sec. 3.1(a);
(D) Net positions held at that self-regulatory organization in
``customer'' accounts, as defined in Sec. 1.17(b)(2), at the member's
affiliated firm; and,
(E) Any other types of positions, whether maintained at that self-
regulatory organization or elsewhere, held in the member's personal
accounts or the proprietary accounts of the member's affiliated firm
that the self-regulatory organization reasonably expects could be
affected by the significant action.
(iv) Bases for determination. Taking into consideration the exigency
of the significant action, such determinations should be based upon:
(A) The most recent large trader reports and clearing records
available to the self-regulatory organization;
[[Page 115]]
(B) Information provided by the member with respect to positions
pursuant to paragraph (b)(2)(ii) of this section; and,
(C) Any other source of information that is held by and reasonably
available to the self-regulatory organization.
(3) Participation in deliberations. (i) Under the rules required by
this section, a self-regulatory organization governing board,
disciplinary committee or oversight panel may permit a member to
participate in deliberations prior to a vote on a significant action for
which he or she otherwise would be required to abstain, pursuant to
paragraph (b)(2) of this section, if such participation would be
consistent with the public interest and the member recuses himself or
herself from voting on such action.
(ii) In making a determination as to whether to permit a member to
participate in deliberations on a significant action for which he or she
otherwise would be required to abstain, the deliberating body shall
consider the following factors:
(A) Wwhether the member's participation in deliberations is
necessary for the deliberating body to achieve a quorum in the matter;
and
(B) Whether the member has unique or special expertise, knowledge or
experience in the matter under consideration.
(iii) Prior to any determination pursuant to paragraph (b)(3)(i) of
this section, the deliberating body must fully consider the position
information which is the basis for the member's direct and substantial
financial interest in the result of a vote on a significant action
pursuant to paragraph (b)(2) of this section.
(4) Documentation of determination. Self-regulatory organization
governing boards, disciplinary committees, and oversight panels must
reflect in their minutes or otherwise document that the conflicts
determination procedures required by this section have been followed.
Such records also must include:
(i) The names of all members who attended the meeting in person or
who otherwise were present by electronic means;
(ii) The name of any member who voluntarily recused himself or
herself or was required to abstain from deliberations and/or voting on a
matter and the reason for the recusal or abstention, if stated; and
(iii) Information on the position information that was reviewed for
each member.
[64 FR 23, Jan. 4, 1999; 64 FR 3340, Jan. 21, 1999]
Sec. 1.70 Notification of State enforcement actions brought under the Commodity Exchange Act.
(a) Immediately upon instituting any proceeding in any Federal
district court for violation of the Act or any rule, regulation or order
thereunder against any person who is subject to suit pursuant to
sections 6d(1)-(6) of the Act, the authorized State official of the
State instituting the proceeding shall submit to the Commission a copy
of the complaint filed in the proceeding, together with a written notice
which:
(1) Indicates the names of parties to the proceeding;
(2) Indicates the provision of the Act or the rule, regulation or
order thereunder which is alleged to have been violated.
The complaint and written notice must be sent by first-class U.S. mail
or personally delivered to the Secretary, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581.
(b) Prior to instituting any proceeding in a State court for the
alleged violation of any antifraud provisions of the Act or any
antifraud rule, regulation or order thereunder against any person
registered with the Commission who is subject to suit pursuant to the
provisions of section 6d(8) of the Act, the authorized State official of
the State intending to institute the proceeding shall submit to the
Commission written notice which:
(1) Indicates the names of parties to the proposed proceeding;
(2) Indicates the provision of the Act or the rule, regulation or
order thereunder which will be alleged to have been violated;
[[Page 116]]
(3) Contains a brief statement of the facts on which the proposed
action will be based.
Except as provided in paragraph (c), this written notice must be sent by
first-class U.S. mail or personally delivered to the Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581 not less than 5 business days prior to
instituting the proceeding in State court.
(c) Where it is impracticable to provide the Commission with written
notice within the time period specified in paragraph (b) of this
section, the authorized state official must inform the Secretary of the
Commission by telephone as soon as practicable to institute a proceeding
in state court and must send the written notice required in paragraph
(b)(1) through (b)(3) of this section by facsimile or other similarly
expeditious means of written communication to the Secretary of the
Commission, prior to instituting the proceeding in state court.
(d) Immediately upon instituting any proceeding in a State court
pursuant to the provisions of section 6d(8) of the Act for alleged
violation of any antifraud provisions of the Act or any antifraud rule,
regulation or order thereunder, the authorized State official
instituting the proceeding shall submit to the Commission a copy of the
complaint filed in the proceeding. The copy of the complaint must be
sent by first class U.S. mail or personally delivered to the Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581.
[48 FR 49503, Oct. 26, 1983, as amended at 60 FR 49334, Sept. 25, 1995]
Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews
and Financial Reviews
(a) Within 60 days of the effective date of a final fee schedule for
each fiscal year, each board of trade which has been designated as a
contract market for at least one actively trading contract shall submit
a check or money order, made payable to the Commodity Futures Trading
Commission, to cover the Commission's actual costs in conducting
contract market rule enforcement reviews and financial reviews.
(b) The Commission determines fees changed fees charged to exchanges
based upon a formula which considers both actual costs and trading
volume.
(c) Checks should be sent to the attention of the Office of the
Secretariat, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
[50 FR 930, Jan. 8, 1985, as amended at 52 FR 46072, Dec. 4, 1987; 58 FR
42645, Aug. 11, 1993; 60 FR 49334, Sept. 25, 1995]