[Title 17 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2017 Edition]
[From the U.S. Government Publishing Office]



[[Page i]]

          
          
          Title 17

Commodity and Securities Exchanges


________________________

Parts 1 to 40

                         Revised as of April 1, 2017

          Containing a codification of documents of general 
          applicability and future effect

          As of April 1, 2017
                    Published by the Office of the Federal Register 
                    National Archives and Records Administration as a 
                    Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 17:
          Chapter I--Commodity Futures Trading Commission            3
  Finding Aids:
      Table of CFR Titles and Chapters........................     891
      Alphabetical List of Agencies Appearing in the CFR......     911
      List of CFR Sections Affected...........................     921

[[Page iv]]





                     ----------------------------

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus, 17 CFR 1.2 refers to 
                       title 17, part 1, section 
                       2.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
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    To determine whether a Code volume has been amended since its 
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Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
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EFFECTIVE AND EXPIRATION DATES

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OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
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PAST PROVISIONS OF THE CODE

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``[RESERVED]'' TERMINOLOGY

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Federal Regulations. An agency may add regulatory information at a 
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INCORPORATION BY REFERENCE

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established by statute and allows Federal agencies to meet the 
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This material, like any other properly issued regulation, has the force 
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    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
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    (a) The incorporation will substantially reduce the volume of 
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    (b) The matter incorporated is in fact available to the extent 
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this volume.

[[Page vii]]

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    Oliver A. Potts,
    Director,
    Office of the Federal Register.
    April 1, 2017.







[[Page ix]]



                               THIS TITLE

    Title 17--Commodity and Securities Exchanges is composed of four 
volumes. The first two volumes containing parts 1--40, and 41--199 
comprise Chapter I--Commodity Futures Trading Commission. The third 
volume contains Chapter II--Securities and Exchange Commission, parts 
200--239. The fourth volume, comprising part 240 to end, contains the 
remaining regulations of the Securities and Exchange Commission, and 
Chapter IV--Department of the Treasury. The contents of these volumes 
represent all current regulations issued by the Commodity Futures 
Trading Commission, the Securities and Exchange Commission, and the 
Department of the Treasury as of April 1, 2017.

    The OMB control numbers for the Securities and Exchange Commission 
appear in Sec.  200.800 of chapter II. For the convenience of the user, 
Sec.  200.800 is reprinted in the Finding Aids section of the volume 
containing part 240 to end.

    For this volume, Ann Worley was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of John Hyrum 
Martinez, assisted by Stephen J. Frattini.

[[Page 1]]



              TITLE 17--COMMODITY AND SECURITIES EXCHANGES




                   (This book contains parts 1 to 40)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Commodity Futures Trading Commission.............           1

[[Page 3]]



             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION




  --------------------------------------------------------------------
Part                                                                Page
1               General regulations under the Commodity 
                    Exchange Act............................           5
2               Official seal...............................         180
3               Registration................................         181
4               Commodity pool operators and commodity 
                    trading advisors........................         227
5               Off-exchange foreign currency transactions..         343
7               Registered entity rules altered or 
                    supplemented by the Commission..........         373
8

[Reserved]

9               Rules relating to review of exchange 
                    disciplinary, access denial or other 
                    adverse actions.........................         373
10              Rules of practice...........................         384
11              Rules relating to investigations............         416
12              Rules relating to reparations...............         420
13              Public rulemaking procedures................         460
14              Rules relating to suspension or disbarment 
                    from appearance and practice............         461
15              Reports--general provisions.................         464
16              Reports by contract markets and swap 
                    execution facilities....................         472
17              Reports by reporting markets, futures 
                    commission merchants, clearing members, 
                    and foreign brokers.....................         475
18              Reports by traders..........................         509
19              Reports by persons holding bona fide hedge 
                    positions pursuant to Sec.  1.3(z) of 
                    this chapter and by merchants and 
                    dealers in cotton.......................         520
20              Large trader reporting for physical 
                    commodity swaps.........................         522
21              Special calls...............................         543
22              Cleared swaps...............................         546
23              Swap dealers and major swap participants....         562
30              Foreign futures and foreign options 
                    transactions............................         628
31              Leverage transactions.......................         658

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32              Regulation of commodity option transactions.         691
33              Regulation of commodity option transactions 
                    that are options on contracts of sale of 
                    a commodity for future delivery.........         693
34              Regulation of hybrid instruments............         702
35              Swaps in an agricultural commodity 
                    (agricultural swaps)....................         703
36

[Reserved]

37              Derivatives transaction execution facilities         703
38              Designated contract markets.................         743
39              Derivatives clearing organizations..........         795
40              Provisions common to registered entities....         870

[[Page 5]]



PART 1_GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT--Table of Contents



                               Definitions

Sec.
1.1 [Reserved]
1.2 Liability of principal for act of agent.
1.3 Definitions.
1.4 Use of electronic signatures.
1.6 Anti-evasion.
1.7 Books and records requirements for security-based swap agreements.
1.8 Requests for interpretation of swaps, security-based swaps, and 
          mixed swaps.
1.9 Regulation of mixed swaps.

          Minimum Financial and Related Reporting Requirements

1.10 Financial reports of futures commission merchants and introducing 
          brokers.
1.11 Risk Management Program for futures commission merchants.
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 Reporting of segregated account computation and details regarding 
          the holding of futures customer funds
1.33 Monthly and confirmation statements.
1.34 Monthly record, ``point balance''.
1.35 Records of commodity interest and related cash or forward 
          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.
1.41-1.44 [Reserved]
1.45 [Reserved]
1.46 Application and closing out of offsetting long and short positions.
1.47-1.48 [Reserved]
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 [Reserved]
1.54 Contract market rules submitted to and approved or not disapproved 
          by the Secretary of Agriculture.
1.55 Public disclosures by futures commission merchants.
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.
1.61-1.62 [Reserved]
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.

[[Page 6]]

1.67 Notification of final disciplinary action involving financial harm 
          to a customer.
1.68 [Reserved]
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.
1.71 Conflicts of interest policies and procedures by futures commission 
          merchants and introducing brokers.
1.72 Restrictions on customer clearing arrangements.
1.73 Clearing futures commission merchant risk management.
1.74 Futures commission merchant acceptance for clearing.
1.75 Delegation of authority to the Director of the Division of Clearing 
          and Risk to establish an alternative compliance schedule to 
          comply with futures commission merchant acceptance for 
          clearing.

Appendix A to Part 1 [Reserved]
Appendix B to Part 1--Fees for Contract Market Rule Enforcement Reviews 
          and Financial Reviews
Appendix C to Part 1 [Reserved]

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 
6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9, 10a, 12, 
12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).

    Source: 41 FR 3194, Jan. 21, 1976, unless otherwise noted.

                               Definitions



Sec.  1.1  [Reserved]



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 an organized exchange or other 
trading facility.
    (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 that has clearing 
privileges such that it can process, clear and settle trades through a 
derivatives clearing organization on behalf of itself or others. The 
derivatives clearing organization need not be organized as a membership 
organization.
    (d) Clearing organization or derivatives clearing organization. This 
term means a clearinghouse, clearing association, clearing corporation, 
or similar entity, facility, system, or organization that, with respect 
to an agreement, contract, or transaction--
    (1) Enables each party to the agreement, contract, or transaction to 
substitute, through novation or otherwise, the credit of the derivatives 
clearing organization for the credit of the parties;
    (2) Arranges or provides, on a multilateral basis, for the 
settlement or netting of obligations resulting from such agreements, 
contracts, or transactions executed by participants in the derivatives 
clearing organization; or
    (3) Otherwise provides clearing services or arrangements that 
mutualize or transfer among participants in the derivatives clearing 
organization the credit risk arising from such agreements, contracts, or 
transactions executed by the participants.
    (4) Exclusions. The terms clearing organization and derivatives 
clearing organization do not include an entity, facility, system, or 
organization solely because it arranges or provides for--
    (i) Settlement, netting, or novation of obligations resulting from 
agreements, contracts or transactions, on a bilateral basis and without 
a central counterparty;

[[Page 7]]

    (ii) Settlement or netting of cash payments through an interbank 
payment system; or
    (iii) Settlement, netting, or novation of obligations resulting from 
a sale of a commodity in a transaction in the spot market for the 
commodity.
    (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 by the first 
section of Pub. L. 85-839) and motion picture box office receipts (or 
any index, measure, value or data related to such receipts), and all 
services, rights and interests (except motion picture box office 
receipts, or any index, measure, value or data related to such receipts) 
in which contracts for future delivery are presently or in the future 
dealt in.

    (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(18) of the 
Act.
    (h) Contract market; designated contract market. These terms mean a 
board of trade designated by the Commission as a contract market under 
the Act and in accordance with the provisions of part 38 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. This term means any person who uses a futures 
commission merchant, introducing broker, commodity trading advisor, or 
commodity pool operator as an agent in connection with trading in any 
commodity interest; 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 Sec. Sec.  1.37 and 1.46 and all other sections of these rules, 
regulations, and orders which do not implement sections 4d and 4f of the 
Act.
    (l) Delivery month. This term means the month of delivery specified 
in a contract of sale of any commodity for future delivery.
    (m) Eligible contract participant. This term has the meaning set 
forth in Section 1a(18) of the Act, except that:
    (1) A major swap participant, as defined in Section 1a(33) of the 
Act and paragraph (hhh) of this section, is an eligible contract 
participant;
    (2) A swap dealer, as defined in Section 1a(49) of the Act and 
paragraph (ggg) of this section, is an eligible contract participant;
    (3) A major security-based swap participant, as defined in Section 
3(a)(67) of the Securities Exchange Act of 1934 and Sec.  240.3a67-1 of 
this title, is an eligible contract participant;
    (4) A security-based swap dealer, as defined in Section 3(a)(71) of 
the Securities Exchange Act of 1934 and Sec.  240.3a71-1 of this title, 
is an eligible contract participant;
    (5)(i) A transaction-level commodity pool with one or more direct 
participants that is not an eligible contract participant is not itself 
an eligible contract participant under either Section 1a(18)(A)(iv) or 
Section 1a(18)(A)(v) of the Act for purposes of entering into 
transactions described in Sections 2(c)(2)(B)(vi) and 2(c)(2)(C)(vii) of 
the Act; and
    (ii) In determining whether a commodity pool that is a direct 
participant in a transaction-level commodity pool is an eligible 
contract participant for purposes of paragraph (m)(5)(i) of this 
section, the participants in the commodity pool that is a direct 
participant in the transaction-level commodity pool shall not be 
considered unless the transaction-level commodity pool, any

[[Page 8]]

commodity pool holding a direct or indirect interest in such 
transaction-level commodity pool, or any commodity pool in which such 
transaction-level commodity pool holds a direct or indirect interest, 
has been structured to evade subtitle A of Title VII of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act by permitting persons 
that are not eligible contract participants to participate in 
agreements, contracts, or transactions described in Section 
2(c)(2)(B)(i) or Section 2(c)(2)(C)(i) of the Act;
    (6) A commodity pool that does not have total assets exceeding 
$5,000,000 or that is not operated by a person described in subclause 
(A)(iv)(II) of Section 1a(18) of the Act is not an eligible contract 
participant pursuant to clause (A)(v) of such Section;
    (7)(i) For purposes of a swap (but not a security-based swap, 
security-based swap agreement or mixed swap) used to hedge or mitigate 
commercial risk, an entity may, in determining its net worth for 
purposes of Section 1a(18)(A)(v)(III) of the Act, include the net worth 
of any owner of such entity, provided that all the owners of such entity 
are eligible contract participants;
    (ii)(A) For purposes of identifying the owners of an entity under 
paragraph (m)(7)(i) of this section, any person holding a direct 
ownership interest in such entity shall be considered to be an owner of 
such entity; provided, however, that any shell company shall be 
disregarded, and the owners of such shell company shall be considered to 
be the owners of any entity owned by such shell company;
    (B) For purposes of paragraph (m)(7)(ii)(A) of this section, the 
term shell company means any entity that limits its holdings to direct 
or indirect interests in entities that are relying on this paragraph 
(m)(7); and
    (C) In determining whether an owner of an entity is an eligible 
contract participant for purposes of paragraph (m)(7)(i) of this 
section, an individual may be considered to be a proprietorship eligible 
contract participant only if the individual--
    (1) Has an active role in operating a business other than an entity;
    (2) Directly owns all of the assets of the business;
    (3) Directly is responsible for all of the liabilities of the 
business; and
    (4) Acquires its interest in the entity seeking to qualify as an 
eligible contract participant under paragraph (m)(7)(i) of this section 
in connection with the operation of the individual's proprietorship or 
to manage the risk associated with an asset or liability owned or 
incurred or reasonably likely to be owned or incurred by the individual 
in the operation of the individual's proprietorship; and
    (iii) For purposes of paragraph (m)(7)(i) of this section, a swap is 
used to hedge or mitigate commercial risk if the swap complies with the 
conditions in paragraph (kkk) of this section; and
    (8) Notwithstanding Section 1a(18)(A)(iv) of the Act and paragraph 
(m)(5) of this section, a commodity pool that enters into an agreement, 
contract, or transaction described in Section 2(c)(2)(B)(i) or Section 
2(c)(2)(C)(i)(I) of the Act is an eligible contract participant with 
respect to such agreement, contract, or transaction, regardless of 
whether each participant in such commodity pool is an eligible contract 
participant, if all of the following conditions are satisfied:
    (i) The commodity pool is not formed for the purpose of evading 
regulation under Section 2(c)(2)(B) or Section 2(c)(2)(C) of the Act or 
related Commission rules, regulations or orders;
    (ii) The commodity pool has total assets exceeding $10,000,000; and
    (iii) The commodity pool is formed and operated by a registered 
commodity pool operator or by a commodity pool operator who is exempt 
from registration as such pursuant to Sec.  4.13(a)(3) of this chapter.
    (n) Floor broker. This term means any person:
    (1) 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--
    (i) Any commodity for future delivery, security futures product, or 
swap; or
    (ii) Any commodity option authorized under section 4c of the Act; or
    (2) Who is registered with the Commission as a floor broker.

[[Page 9]]

    (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) Any individual, association, partnership, corporation, or 
trust--
    (i) Who is engaged in soliciting or in accepting orders for the 
purchase or sale of any commodity for future delivery; a security 
futures product; a swap; any agreement, contract, or transaction 
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; 
a commodity option authorized under section 4c of the Act; a leverage 
transaction authorized under section 19 of the Act; or acting as a 
counterparty in any agreement, contract or transaction described in 
section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
    (ii) Who, in connection with any of these activities 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) Any person that is registered as a futures commission merchant.
    (q) Member. This term means:
    (1) An individual, association, partnership, corporation, or trust--
    (i) Owning or holding membership in, or admitted to membership 
representation on, a registered entity; or
    (ii) Having trading privileges on a registered entity.
    (2) A participant in an alternative trading system that is 
designated as a contract market pursuant to section 5f of the Act is 
deemed a member of the contract market for purposes of transactions in 
security futures products through the contract market.
    (r) Net equity. (1) For futures and commodity option positions, this 
term means the credit balance which would be obtained by combining the 
margin balance of any person with the net profit or loss, if any, 
accruing on the open futures or commodity option positions of such 
person.
    (2) For swap positions other than commodity option positions, this 
term means the credit balance which would be obtained by combining the 
margin balance of any person with the net profit or loss, if any, 
accruing on the open swap positions of such person.
    (s) Net deficit. (1) For futures and commodity option positions, 
this term means the debit balance which would be obtained by combining 
the margin balance of any person with the net profit or loss, if any, 
accruing on the open futures or commodity option positions of such 
person.
    (2) For swap positions other than commodity option positions, this 
term means the debit balance which would be obtained by combining the 
margin balance of any person with the net profit or loss, if any, 
accruing on the open swap positions of such person.
    (t) Open contracts. This term means:
    (1) Positions in 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 that have 
neither been fulfilled by delivery nor been offset by other contracts of 
purchase or sale in the same commodity and delivery month;
    (2) Positions in commodity option transactions that have not 
expired, been exercised, or offset; and
    (3) Positions in Cleared Swaps, as Sec.  22.1 of this chapter 
defines that term, that have not been fulfilled by delivery; not been 
offset; not expired; and not been terminated.
    (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:
    (1) Who, in or 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--
    (i) Any commodity for future delivery, security futures product, or 
swap; or
    (ii) Any commodity option authorized under section 4c of the Act; or

[[Page 10]]

    (2) Who is registered with the Commission as a floor trader.
    (y) Proprietary account. This term means a commodity futures, 
commodity option, or swap trading account carried on the books and 
records of an individual, a partnership, corporation or other type of 
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 of customers or customer funds of 
such partnership,
    (C) The keeping of records pertaining to the trades of customers or 
customer funds 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 of customers or customer funds of 
such individual, partnership, corporation or association,
    (C) The keeping of records pertaining to the trades of customers or 
customer funds 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; or
    (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 member of a cooperative association 
of producers, within the meaning of section 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 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 for excluded 
commodities--(1) General definition. Bona fide hedging transactions and 
positions shall mean any agreement, contract or transaction in an 
excluded commodity on a designated contract market or swap execution 
facility that is a trading facility, 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.
    (iv) Notwithstanding the foregoing, no transactions or positions 
shall be classified as bona fide hedging unless

[[Page 11]]

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 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 agreement, contract, or transaction in an excluded 
commodity on a designated contract market or swap execution facility 
that is a trading facility 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 agreement, contract or transaction during the five 
last trading days.
    (ii) Purchases of any agreement, contract or transaction in an 
excluded commodity on a designated contract market or swap execution 
facility that is a trading facility 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 agreement, contract or transaction 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 in any agreement, contract or 
transaction in an excluded commodity on a designated contract market or 
swap execution facility that is a trading facility 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 agreement, contract or transaction during the five 
last trading days.
    (iv) Purchases or sales by an agent who does not own or has not 
contracted to sell or purchase the offsetting cash commodity at a fixed 
price, provided that the agent is responsible for the merchandising of 
the cash position that is being offset, and the agent has a contractual 
arrangement with the person who owns the commodity or has the cash 
market commitment being offset.
    (v) Sales and purchases described in paragraphs (z)(2)(i) through 
(iv) 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 in any agreement, contract or transaction are 
substantially related to the fluctuations in value of the actual or 
anticipated cash position, and provided that the positions in any 
agreement, contract or transaction shall not be maintained during the 
five last trading days.
    (3) Non-Enumerated cases. A designated contract market or swap 
execution facility that is a trading facility may recognize, consistent 
with the purposes of this section, transactions and positions other than 
those enumerated in paragraph (2) of this section as bona fide hedging. 
Prior to recognizing such non-enumerated transactions and positions, the 
designated contract market or swap execution facility that is a trading 
facility shall submit such rules for Commission review under section 5c 
of the Act and part 40 of this chapter.
    (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

[[Page 12]]

(i) The solicitation or acceptance of 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' 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.
    (6) A swap dealer or major swap participant as a partner, officer, 
employee, agent (or any natural person occupying a similar status or 
performing similar functions), in any capacity that involves:
    (i) The solicitation or acceptance of swaps (other than in a 
clerical or ministerial capacity); 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, security futures product, or 
swap; any agreement, contract or transaction described in section 
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option 
authorized under section 4c of the Act; any leverage transaction 
authorized under section 19 of the Act; any person registered with the 
Commission as a commodity trading advisor; or any person, who, for 
compensation or profit, and as part of a regular business, issues or 
promulgates analyses or reports concerning any of the foregoing. The 
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 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.

[[Page 13]]

    (2) Client. This term, as it relates to a commodity trading advisor, 
means any person:
    (i) To whom a commodity trading advisor provides advice, for 
compensation or profit, 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, 
security futures product or swap; any agreement, contract or transaction 
described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; 
any commodity option authorized under section 4c of the Act; any 
leverage transaction authorized under section 19 of the Act; or
    (ii) To whom, for compensation or profit, and as part of a regular 
business, the commodity trading advisor issues or promulgates analyses 
or reports concerning any of the activities referred to in paragraph 
(bb)(2)(i) of this section. The term ``client'' includes, without 
limitation, any subscriber of a commodity trading advisor.
    (cc) Commodity pool operator. This term means any person engaged in 
a business which is of the nature of a commodity pool, 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 commodity interests, including 
any commodity for future delivery, security futures product, or swap; 
any agreement, contract or transaction described in section 
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; any commodity option 
authorized under section 4c of the Act; any leverage transaction 
authorized under section 19 of the Act; or any person who is registered 
with the Commission as a commodity pool operator, 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)), a swap execution facility (as defined in 
Sec.  1.3(rrrr)), 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, a leverage transaction merchant, a 
retail foreign exchange dealer, a swap dealer, or a major swap 
participant is a member; or
    (2) If a Commission registrant other than a leverage transaction 
merchant is a member of more than one self-regulatory organization and 
such registrant is the subject of an approved plan under Sec.  1.52, 
then a self-regulatory organization delegated the responsibility by such 
a plan for monitoring and auditing such registrant for compliance with 
the minimum financial and related reporting requirements of the self-
regulatory organizations of which the registrant is a member, and for 
receiving the financial reports necessitated by such minimum financial 
and related reporting requirements from such registrant; 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, collectively, Cleared Swaps 
Customer Collateral and futures customer funds.
    (hh) Commodity option transaction; commodity option. These terms 
each mean any transaction or agreement in interstate commerce which is 
or is held

[[Page 14]]

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.
    (jj) [Reserved]
    (kk) Strike price. This term means the price, per unit, at which a 
person may purchase or sell the commodity, swap, or contract of sale of 
a commodity for future delivery that 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 
commodity, swap, or contract of sale of a commodity for future delivery 
that is the subject of a commodity option (i.e., price per unit times 
the number of units).
    (ll) [Reserved]
    (mm) Introducing broker. This term means:
    (1) Any person who, for compensation or profit, whether direct or 
indirect:
    (i) 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, security futures product, or swap; any agreement, contract or 
transaction described in section 2(c)(2)(C)(i) or section 2(c)(2)(D)(i) 
of the Act; any commodity option transaction authorized under section 
4c; or any leverage transaction authorized under section 19; or who is 
registered with the Commission as an introducing broker; and
    (ii) 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.
    (2) The term introducing broker shall not include:
    (i) Any futures commission merchant, floor broker, associated 
person, or associated person of a swap dealer or major swap participant 
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 guarantee 
in the form set forth in part B or C of Form 1-FR, executed by a 
registered futures commission merchant or retail foreign exchange 
dealer, as appropriate, 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 broker in satisfaction 
of the alternative adjusted net capital requirement set forth in Sec.  
1.17(a)(1)(iii).
    (oo) Leverage transaction merchant. This term 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. This term 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

[[Page 15]]

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 received by a futures 
commission merchant from, for, or on behalf of 30.7 customers as defined 
in Sec.  30.1 of this chapter:
    (1) To margin, guarantee, or secure foreign futures contracts and 
all money accruing to such 30.7 customers as the result of such 
contracts;
    (2) In connection with foreign options transactions representing 
premiums payable or premiums received, or to guarantee or secure 
performance on such transactions; and
    (3) All money accruing to such 30.7 customers as the result of 
trading in foreign futures contracts or foreign options.
    (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.
    (tt) Electronic signature. This term means an electronic sounds, 
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) [Reserved]
    (vv) Futures account. This term means an account that is maintained 
in accordance with the segregation requirements of sections 4d(a) and 
4d(b) of the Act and the rules thereunder.
    (ww) Securities account. This term means an account that is 
maintained in accordance with the requirements of section 15(c)(3) of 
the Securities Exchange Act of 1934 and Rule 15c3-3 thereunder.
    (xx) Foreign broker. This term means any person located outside the 
United States, its territories or possessions who is engaged in 
soliciting or in accepting orders only from persons located outside the 
United States, its territories or possessions for the purchase or sale 
of any commodity interest transaction on or subject to the rules of any 
designated contract market or swap execution facility 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.
    (yy) Commodity interest. This term means:
    (1) Any contract for the purchase or sale of a commodity for future 
delivery;
    (2) Any contract, agreement or transaction subject to a Commission 
regulation under section 4c or 19 of the Act;
    (3) Any contract, agreement or transaction subject to Commission 
jurisdiction under section 2(c)(2) of the Act; and
    (4) Any swap as defined in the Act, by the Commission, or jointly by 
the Commission and the Securities and Exchange Commission.
    (zz) Agricultural commodity. This term means:
    (1) The following commodities specifically enumerated in the 
definition of a ``commodity'' found in section 1a of the Act: Wheat, 
cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill 
feeds, butter, eggs, Solanum tuberosum (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, but not onions;
    (2) All other commodities that are, or once were, or are derived 
from, living organisms, including plant, animal and aquatic life, which 
are generally fungible, within their respective classes, and are used 
primarily for human food, shelter, animal feed or natural fiber;
    (3) Tobacco, products of horticulture, and such other commodities 
used or consumed by animals or humans as the Commission may by rule, 
regulation or

[[Page 16]]

order designate after notice and opportunity for hearing; and
    (4) Commodity-based indexes based wholly or principally on 
underlying agricultural commodities.
    (aaa) Clearing initial margin. This term means initial margin posted 
by a clearing member with a derivatives clearing organization.
    (bbb) Customer initial margin. This term means initial margin posted 
by a customer with a futures commission merchant, or by a non-clearing 
member futures commission merchant with a clearing member.
    (ccc) Initial margin. This term means money, securities, or property 
posted by a party to a futures, option, or swap as performance bond to 
cover potential future exposures arising from changes in the market 
value of the position.
    (ddd) Margin call. This term means a request from a futures 
commission merchant to a customer to post customer initial margin; or a 
request by a derivatives clearing organization to a clearing member to 
post clearing initial margin or variation margin.
    (eee) Spread margin. This term means reduced initial margin that 
takes into account correlations between certain related positions held 
in a single account.
    (fff) Variation margin. This term means a payment made by a party to 
a futures, option, or swap to cover the current exposure arising from 
changes in the market value of the position since the trade was executed 
or the previous time the position was marked to market.
    (ggg) Swap Dealer--(1) In general.The term swap dealer means any 
person who:
    (i) Holds itself out as a dealer in swaps;
    (ii) Makes a market in swaps;
    (iii) Regularly enters into swaps with counterparties as an ordinary 
course of business for its own account; or
    (iv) Engages in any activity causing it to be commonly known in the 
trade as a dealer or market maker in swaps.
    (2) Exception. The term swap dealer does not include a person that 
enters into swaps for such person's own account, either individually or 
in a fiduciary capacity, but not as a part of regular business.
    (3) Scope of designation. A person who is a swap dealer shall be 
deemed to be a swap dealer with respect to each swap it enters into, 
regardless of the category of the swap or the person's activities in 
connection with the swap. However, if a person makes an application to 
limit its designation as a swap dealer to specified categories of swaps 
or specified activities of the person in connection with swaps, the 
Commission shall determine whether the person's designation as a swap 
dealer shall be so limited. If the Commission grants such limited 
designation, such limited designation swap dealer shall be deemed to be 
a swap dealer with respect to each swap it enters into in the swap 
category or categories for which it is so designated, regardless of the 
person's activities in connection with such category or categories of 
swaps. A person may make such application to limit the categories of 
swaps or activities of the person that are subject to its swap dealer 
designation at the same time as, or after, the person's initial 
registration as a swap dealer.
    (4) De minimis exception--(i)(A) In general. Except as provided in 
paragraph (ggg)(4)(vi) of this section, a person that is not currently 
registered as a swap dealer shall be deemed not to be a swap dealer as a 
result of its swap dealing activity involving counterparties, so long as 
the swap positions connected with those dealing activities into which 
the person--or any other entity controlling, controlled by or under 
common control with the person--enters over the course of the 
immediately preceding 12 months (or following the effective date of 
final rules implementing Section 1a(47) of the Act, 7 U.S.C. 1a(47), if 
that period is less than 12 months) have an aggregate gross notional 
amount of no more than $3 billion, subject to a phase in level of an 
aggregate gross notional amount of no more than $8 billion applied in 
accordance with paragraph (ggg)(4)(ii) of this section, and an aggregate 
gross notional amount of no more than $25 million with regard to swaps 
in which the counterparty is a ``special entity'' (as that term is 
defined in Section 4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and 
Sec.  23.401(c) of this chapter), except as provided in paragraph

[[Page 17]]

(ggg)(4)(i)(B) of this section. For purposes of this paragraph, if the 
stated notional amount of a swap is leveraged or enhanced by the 
structure of the swap, the calculation shall be based on the effective 
notional amount of the swap rather than on the stated notional amount.
    (B) Utility Special Entities. (1) Solely for purposes of determining 
whether a person's swap dealing activity has exceeded the $25 million 
aggregate gross notional amount threshold set forth in paragraph 
(ggg)(4)(i)(A) of this section for swaps in which the counterparty is a 
special entity, a person may exclude ``utility operations-related 
swaps'' in which the counterparty is a ``utility special entity.''
    (2) For purposes of this paragraph (4)(i)(B), a ``utility special 
entity'' is a special entity, as that term is defined in Section 
4s(h)(2)(C) of the Act, 7 U.S.C. 6s(h)(2)(C), and Sec.  23.401(c) of 
this chapter, that:
    (i) Owns or operates electric or natural gas facilities, electric or 
natural gas operations or anticipated electric or natural gas facilities 
or operations;
    (ii) Supplies natural gas or electric energy to other utility 
special entities;
    (iii) Has public service obligations or anticipated public service 
obligations under Federal, State or local law or regulation to deliver 
electric energy or natural gas service to utility customers; or
    (iv) Is a Federal power marketing agency as defined in Section 3 of 
the Federal Power Act, 16 U.S.C. 796(19).
    (3) For purposes of this paragraph (ggg)(4)(i)(B), a ``utility 
operations-related swap'' is a swap that meets the following conditions:
    (i) A party to the swap is a utility special entity;
    (ii) A utility special entity is using the swap to hedge or mitigate 
commercial risk as defined in Sec.  50.50(c) of this chapter;
    (iii) The swap is related to an exempt commodity, as that term is 
defined in Section 1a(20) of the Act, 7 U.S.C. 1a(20), or to an 
agricultural commodity insofar as such agricultural commodity is used 
for fuel for generation of electricity or is otherwise used in the 
normal operations of the utility special entity; and
    (iv) The swap is an electric energy or natural gas swap, or the swap 
is associated with: The generation, production, purchase or sale of 
natural gas or electric energy, the supply of natural gas or electric 
energy to a utility special entity, or the delivery of natural gas or 
electric energy service to customers of a utility special entity; fuel 
supply for the facilities or operations of a utility special entity; 
compliance with an electric system reliability obligation; or compliance 
with an energy, energy efficiency, conservation, or renewable energy or 
environmental statute, regulation, or government order applicable to a 
utility special entity.
    (4) A person seeking to rely on the exclusion in paragraph 
(ggg)(4)(i)(B)(1) of this section may rely on the written 
representations of the utility special entity that it is a utility 
special entity and that the swap is a utility operations-related swap, 
as such terms are defined in paragraphs (ggg)(4)(i)(B)(2) and (3) of 
this section, respectively, unless it has information that would cause a 
reasonable person to question the accuracy of the representation. The 
person must keep such representation in accordance with Sec.  1.31.
    (ii) Phase-in procedure and staff report--(A) Phase-in period. For 
purposes of paragraph (ggg)(4)(i) of this section, except as provided in 
paragraph (ggg)(4)(vi) of this section, a person that engages in swap 
dealing activity that does not exceed the phase-in level set forth in 
paragraph (ggg)(4)(i) shall be deemed not to be a swap dealer as a 
result of its swap dealing activity until the ``phase-in termination 
date'' established as provided in paragraph (ggg)(4)(ii)(C) or (D) of 
this section. The Commission shall announce the phase-in termination 
date on the Commission Web site and publish such date in the Federal 
Register.
    (B) Staff report. No later than 30 months following the date that a 
swap data repository first receives swap data in accordance with part 45 
of this chapter, the staff of the Commission shall complete and publish 
for public comment a report on topics relating to the definition of the 
term ``swap dealer''

[[Page 18]]

and the de minimis threshold. The report should address the following 
topics, as appropriate, based on the availability of data and 
information: the potential impact of modifying the de minimis threshold, 
and whether the de minimis threshold should be increased or decreased; 
the factors that are useful for identifying swap dealing activity, 
including the application of the dealer-trader distinction for that 
purpose, and the potential use of objective tests or safe harbors as 
part of the analysis; the impact of provisions in paragraphs (ggg)(5) 
and (6) of this section excluding certain swaps from the dealer 
analysis, and potential alternative approaches for such exclusions; and 
any other analysis of swap data and information relating to swaps that 
the Commission or staff deem relevant to this rule.
    (C) Nine months after publication of the report required by 
paragraph (ggg)(4)(ii)(B) of this section, and after giving due 
consideration to that report and any associated public comment, the 
Commission may either:
    (1) Terminate the phase-in period set forth in paragraph 
(ggg)(4)(ii)(A) of this section, in which case the phase-in termination 
date shall be established by the Commission by order published in the 
Federal Register; or
    (2) Determine that it is necessary or appropriate in the public 
interest to propose through rulemaking an alternative to the $3 billion 
amount set forth in paragraph (ggg)(4)(i) of this section that would 
constitute a de minimis quantity of swap dealing in connection with 
transactions with or on behalf of customers within the meaning of 
section 1(a)(47)(D) of the Act, 7 U.S.C. 1(a)(47)(D), in which case the 
Commission shall by order published in the Federal Register provide 
notice of such determination, which order shall also establish the 
phase-in termination date.
    (D) If the phase-in termination date has not been previously 
established pursuant to paragraph (ggg)(4)(ii)(C) of this section, then 
in any event the phase-in termination date shall occur five years after 
the date that a swap data repository first receives swap data in 
accordance with part 45 of this chapter.
    (iii) Registration period for persons that can no longer take 
advantage of the exception. A person that has not registered as a swap 
dealer by virtue of satisfying the requirements of this paragraph 
(ggg)(4), but that no longer can take advantage of that de minimis 
exception, will be deemed not to be a swap dealer until the earlier of 
the date on which it submits a complete application for registration 
pursuant to Section 4s(b) of the Act, 7 U.S.C. 6s(b), or two months 
after the end of the month in which that person becomes no longer able 
to take advantage of the exception.
    (iv) Applicability to registered swap dealers. A person who 
currently is registered as a swap dealer may apply to withdraw that 
registration, while continuing to engage in swap dealing activity in 
reliance on this section, so long as that person has been registered as 
a swap dealer for at least 12 months and satisfies the conditions of 
paragraph (ggg)(4)(i) of this section.
    (v) Future adjustments to scope of the de minimis exception. The 
Commission may by rule or regulation change the requirements of the de 
minimis exception described in paragraphs (ggg)(4)(i) through (iv) of 
this section.
    (vi) Voluntary registration. Notwithstanding paragraph (ggg)(4)(i) 
of this section, a person that chooses to register with the Commission 
as a swap dealer shall be deemed to be a swap dealer.
    (5) Insured depository institution swaps in connection with 
originating loans to customers. Swaps entered into by an insured 
depository institution with a customer in connection with originating a 
loan with that customer shall not be considered in determining whether 
the insured depository institution is a swap dealer.
    (i) An insured depository institution shall be considered to have 
entered into a swap with a customer in connection with originating a 
loan, as defined in paragraphs (ggg)(5)(ii) and (iii) of this section, 
with that customer only if:
    (A) The insured depository institution enters into the swap with the 
customer no earlier than 90 days before and no later than 180 days after 
the date of execution of the applicable loan

[[Page 19]]

agreement, or no earlier than 90 days before and no later than 180 days 
after any transfer of principal to the customer by the insured 
depository institution pursuant to the loan;
    (B)(1) The rate, asset, liability or other notional item underlying 
such swap is, or is directly related to, a financial term of such loan, 
which includes, without limitation, the loan's duration, rate of 
interest, the currency or currencies in which it is made and its 
principal amount;
    (2) Such swap is required, as a condition of the loan under the 
insured depository institution's loan underwriting criteria, to be in 
place in order to hedge price risks incidental to the borrower's 
business and arising from potential changes in the price of a commodity 
(other than an excluded commodity);
    (C) The duration of the swap does not extend beyond termination of 
the loan;
    (D) The insured depository institution is:
    (1) The sole source of funds to the customer under the loan;
    (2) Committed to be, under the terms of the agreements related to 
the loan, the source of at least 10 percent of the maximum principal 
amount under the loan; or
    (3) Committed to be, under the terms of the agreements related to 
the loan, the source of a principal amount that is greater than or equal 
to the aggregate notional amount of all swaps entered into by the 
insured depository institution with the customer in connection with the 
financial terms of the loan;
    (E) The aggregate notional amount of all swaps entered into by the 
customer in connection with the financial terms of the loan is, at any 
time, not more than the aggregate principal amount outstanding under the 
loan at that time; and
    (F) If the swap is not accepted for clearing by a derivatives 
clearing organization, the insured depository institution reports the 
swap as required by section 4r of the Act, 7 U.S.C. 6r (except as 
otherwise provided in section 4r(a)(3)(A), 7 U.S.C. 6r(a)(3)(A), or 
section 4r(a)(3)(B), 7 U.S.C. 6r(a)(3)(B) of the Act).
    (ii) An insured depository institution shall be considered to have 
originated a loan with a customer if the insured depository institution:
    (A) Directly transfers the loan amount to the customer;
    (B) Is a part of a syndicate of lenders that is the source of the 
loan amount that is transferred to the customer;
    (C) Purchases or receives a participation in the loan; or
    (D) Otherwise is the source of funds that are transferred to the 
customer pursuant to the loan or any refinancing of the loan.
    (iii) The term loan shall not include:
    (A) Any transaction that is a sham, whether or not intended to 
qualify for the exclusion from the definition of the term swap dealer in 
this rule; or
    (B) Any synthetic loan, including, without limitation, a loan credit 
default swap or loan total return swap.
    (6) Swaps that are not considered in determining whether a person is 
a swap dealer. (i) Inter-affiliate activities. In determining whether a 
person is a swap dealer, that person's swaps with majority-owned 
affiliates shall not be considered. For these purposes the 
counterparties to a swap are majority-owned affiliates if one 
counterparty directly or indirectly owns a majority interest in the 
other, or if a third party directly or indirectly owns a majority 
interest in both counterparties to the swap, where ``majority interest'' 
is the right to vote or direct the vote of a majority of a class of 
voting securities of an entity, the power to sell or direct the sale of 
a majority of a class of voting securities of an entity, or the right to 
receive upon dissolution or the contribution of a majority of the 
capital of a partnership.
    (ii) Activities of a cooperative. (A) Any swap that is entered into 
by a cooperative with a member of such cooperative shall not be 
considered in determining whether the cooperative is a swap dealer, 
provided that:
    (1) The swap is subject to policies and procedures of the 
cooperative requiring that the cooperative monitors and manages the risk 
of such swap;
    (2) The cooperative reports the swap as required by Section 4r of 
the Act, 7 U.S.C. 6r (except as otherwise provided in Section 
4r(a)(3)(A) of the Act, 7

[[Page 20]]

U.S.C. 6r(a)(3)(A) or Section 4r(a)(3)(B) of the Act, 7 U.S.C. 
6r(a)(3)(B)); and
    (3) if the cooperative is a cooperative association of producers, 
the swap is primarily based on a commodity that is not an excluded 
commodity.
    (B) For purposes of this paragraph (ggg)(6)(ii), the term 
cooperative shall mean:
    (1) A cooperative association of producers as defined in section 
1a(14) of the Act, 7 U.S.C. 1a(14), or
    (2) A person chartered under Federal law as a cooperative and 
predominantly engaged in activities that are financial in nature as 
defined in section 4(k) of the Bank Holding Company Act of 1956, 12 
U.S.C. 1843(k).
    (C) For purposes of this paragraph (ggg)(6)(ii), a swap shall be 
deemed to be entered into by a cooperative association of producers with 
a member of such cooperative association of producers when the swap is 
between a cooperative association of producers and a person that is a 
member of a cooperative association of producers that is itself a member 
of the first cooperative association of producers.
    (iii) Swaps entered into for the purpose of hedging physical 
positions. In determining whether a person is a swap dealer, a swap that 
the person enters into shall not be considered, if:
    (A) The person enters into the swap for the purpose of offsetting or 
mitigating the person's price risks that arise from the potential change 
in the value of one or several--
    (1) Assets that the person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising;
    (2) Liabilities that the person owns or anticipates incurring; or
    (3) Services that the person provides, purchases, or anticipates 
providing or purchasing;
    (B) The swap represents a substitute for transactions made or to be 
made or positions taken or to be taken by the person at a later time in 
a physical marketing channel;
    (C) The swap is economically appropriate to the reduction of the 
person's risks in the conduct and management of a commercial enterprise;
    (D) The swap is entered into in accordance with sound commercial 
practices; and
    (E) The person does not enter into the swap in connection with 
activity structured to evade designation as a swap dealer.
    (iv) Swaps entered into by floor traders. In determining whether a 
person is a swap dealer, each swap that the person enters into in its 
capacity as a floor trader as defined by section 1a(23) of the Act or on 
or subject to the rules of a swap execution facility shall not be 
considered for the purpose of determining whether the person is a swap 
dealer if the person:
    (A) Is registered with the Commission as a floor trader pursuant to 
Sec.  3.11 of this chapter;
    (B) Enters into swaps with proprietary funds for that trader's own 
account solely on or subject to the rules of a designated contract 
market or swap execution facility and submits each such swap for 
clearing to a derivatives clearing organization;
    (C) Is not an affiliated person of a registered swap dealer;
    (D) Does not directly, or through an affiliated person, negotiate 
the terms of swap agreements, other than price and quantity or to 
participate in a request for quote process subject to the rules of a 
designated contract market or a swap execution facility;
    (E) Does not directly or through an affiliated person offer or 
provide swap clearing services to third parties;
    (F) Does not directly or through an affiliated person enter into 
swaps that would qualify as hedging physical positions pursuant to 
paragraph (ggg)(6)(iii) of this section or hedging or mitigating 
commercial risk pursuant to paragraph (kkk) of this section (except for 
any such swap executed opposite a counterparty for which the transaction 
would qualify as a bona fide hedging transaction);
    (G) Does not participate in any market making program offered by a 
designated contract market or swap execution facility; and
    (H) Notwithstanding the fact such person is not registered as a swap 
dealer, such person complies with Sec. Sec.  23.201, 23.202, 23.203, and 
23.600 of this chapter

[[Page 21]]

with respect to each such swap as if it were a swap dealer.
    (hhh) Major Swap Participant--(1) In general. The term major swap 
participant means any person:
    (i) That is not a swap dealer; and
    (ii)(A) That maintains a substantial position in swaps for any of 
the major swap categories, excluding both positions held for hedging or 
mitigating commercial risk, and positions maintained by any employee 
benefit plan (or any contract held by such a plan) as defined in 
paragraphs (3) and (32) of Section 3 of the Employee Retirement Income 
Security Act of 1974, 29 U.S.C. 1002, for the primary purpose of hedging 
or mitigating any risk directly associated with the operation of the 
plan;
    (B) Whose outstanding swaps create substantial counterparty exposure 
that could have serious adverse effects on the financial stability of 
the United States banking system or financial markets; or
    (C) That is a financial entity that:
    (1) Is highly leveraged relative to the amount of capital such 
entity holds and that is not subject to capital requirements established 
by an appropriate Federal banking agency (as defined in Section 1a(2) of 
the Act, 7 U.S.C. 1a(2)); and
    (2) Maintains a substantial position in outstanding swaps in any 
major swap category.
    (2) Scope of designation. A person that is a major swap participant 
shall be deemed to be a major swap participant with respect to each swap 
it enters into, regardless of the category of the swap or the person's 
activities in connection with the swap. However, if a person makes an 
application to limit its designation as a major swap participant to 
specified categories of swaps, the Commission shall determine whether 
the person's designation as a major swap participant shall be so 
limited. If the Commission grants such limited designation, such limited 
designation major swap participant shall be deemed to be a major swap 
participant with respect to each swap it enters into in the swap 
category or categories for which it is so designated, regardless of the 
person's activities in connection with such category or categories of 
swaps. A person may make such application to limit its designation at 
the same time as, or after, the person's initial registration as a major 
swap participant.
    (3) Timing requirements. A person that is not registered as a major 
swap participant, but that meets the criteria in this rule to be a major 
swap participant as a result of its swap activities in a fiscal quarter, 
will not be deemed to be a major swap participant until the earlier of 
the date on which it submits a complete application for registration as 
a major swap participant pursuant to Section 4s(a)(2) of the Act, 7 
U.S.C. 6s(a)(2), or two months after the end of that quarter.
    (4) Reevaluation period. Notwithstanding paragraph (hhh)(3) of this 
section, if a person that is not registered as a major swap participant 
meets the criteria in this rule to be a major swap participant in a 
fiscal quarter, but does not exceed any applicable threshold by more 
than twenty percent in that quarter:
    (i) That person will not be deemed a major swap participant pursuant 
to the timing requirements specified in paragraph (hhh)(3) of this 
section; but
    (ii) That person will be deemed a major swap participant pursuant to 
the timing requirements specified in paragraph (hhh)(3) of this section 
at the end of the next fiscal quarter if the person exceeds any of the 
applicable daily average thresholds in that next fiscal quarter.
    (5) Termination of status. A person that is deemed to be a major 
swap participant shall continue to be deemed a major swap participant 
until such time that its swap activities do not exceed any of the daily 
average thresholds set forth within this rule for four consecutive 
fiscal quarters after the date on which the person becomes registered as 
a major swap participant.
    (6) Calculation of status. A person shall not be deemed to be a 
``major swap participant,'' regardless of whether the criteria paragraph 
(hhh)(1) of this section otherwise would cause the person to be a major 
swap participant, provided the person meets the conditions set forth in 
paragraphs (hhh)(6)(i), (ii) or (iii) of this section.
    (i) Caps on uncollateralized exposure and notional positions.

[[Page 22]]

    (A) Maximum potential uncollateralized exposure. The express terms 
of the person's agreements or arrangements relating to swaps with its 
counterparties at no time would permit the person to maintain a total 
uncollateralized exposure of more than $100 million to all such 
counterparties, including any exposure that may result from thresholds 
or minimum transfer amounts established by credit support annexes or 
similar arrangements; and
    (B) Maximum notional amount of swap positions. The person does not 
maintain swap positions in a notional amount of more than $2 billion in 
any major category of swaps, or more than $4 billion in the aggregate 
across all major categories; or
    (ii) Caps on uncollateralized exposure plus monthly calculation.
    (A) Maximum potential uncollateralized exposure. The express terms 
of the person's agreements or arrangements relating to swaps with its 
counterparties at no time would permit the person to maintain a total 
uncollateralized exposure of more than $200 million to all such 
counterparties (with regard to swaps and any other instruments by which 
the person may have exposure to those counterparties), including any 
exposure that may result from thresholds or minimum transfer amounts 
established by credit support annexes or similar arrangements; and
    (B) Calculation of positions. (1) At the end of each month, the 
person performs the calculations prescribed by paragraph (jjj) of this 
section with regard to whether the aggregate uncollateralized outward 
exposure plus aggregate potential outward exposure as of that day 
constitute a ``substantial position'' in a major category of swaps, or 
pose ``substantial counterparty exposure that could have serious adverse 
effects on the financial stability of the United States banking system 
or financial markets''; these calculations shall disregard provisions of 
those rules that provide for the analyses to be determined based on a 
daily average over a calendar quarter; and
    (2) Each such analysis produces thresholds of no more than:
    (i) $1 billion in aggregate uncollateralized outward exposure plus 
aggregate potential outward exposure in any major category of swaps; if 
the person is subject to paragraph (jjj) of this section, by virtue of 
being a highly leveraged financial entity that is not subject to capital 
requirements established by an appropriate Federal banking agency, this 
analysis shall account for all of the person's swap positions in that 
major category (without excluding hedging positions), otherwise this 
analysis shall exclude the same hedging and related positions that are 
excluded from consideration pursuant to paragraph (jjj)(1)(i) of this 
section; or
    (ii) $2 billion in aggregate uncollateralized outward exposure plus 
aggregate potential outward exposure (without any positions excluded 
from the analysis) with regard to all of the person's swap positions.
    (iii) Calculations based on certain information. (A)(1) At the end 
of each month, the person's aggregate uncollateralized outward exposure 
with respect to its swap positions in each major swap category is less 
than $1.5 billion with respect to the rate swap category and less than 
$500 million with respect to each of the other major swap categories; 
and
    (2) At the end of each month, the sum of the amount calculated under 
paragraph (hhh)(6)(iii)(A)(1) of this section with respect to each major 
swap category and the total notional principal amount of the person's 
swap positions in each such major swap category, adjusted by the 
multipliers set forth in paragraph (jjj)(3)(ii)(1) of this section on a 
position-by-position basis reflecting the type of swap, is less than $3 
billion with respect to the rate swap category and less than $1 billion 
with respect to each of the other major swap categories; or
    (B)(1) At the end of each month, the person's aggregate 
uncollateralized outward exposure with respect to its swap positions 
across all major swap categories is less than $500 million; and
    (2) The sum of the amount calculated under paragraph 
(hhh)(6)(iii)(B)(1) of this section and the product of the total 
effective notional principal amount of the person's swap positions in 
all major swap categories multiplied by 0.15 is less than $1 billion.
    (C) For purposes of the calculations set forth in this paragraph 
(hhh)(6)(iii):

[[Page 23]]

    (1) The person's aggregate uncollateralized outward exposure for 
positions held with swap dealers shall be equal to such exposure 
reported on the most recent reports of such exposure received from such 
swap dealers; and
    (2) The person's aggregate uncollateralized outward exposure for 
positions that are not reflected in any report of exposure from a swap 
dealer (including all swap positions it holds with persons other than 
swap dealers) shall be calculated in accordance with paragraph (jjj)(2) 
of this section.
    (iv) For purposes of the calculations set forth in this paragraph 
(hhh)(6), the person shall use the effective notional amount of a 
position rather than the stated notional amount of the position if the 
stated notional amount is leveraged or enhanced by the structure of the 
position.
    (v) No presumption shall arise that a person is required to perform 
the calculations needed to determine if it is a major swap participant, 
solely by reason that the person does not meet the conditions specified 
in paragraph (hhh)(6)(i), (ii) or (iii) of this section.
    (7) Exclusions. A person who is registered as a derivatives clearing 
organization with the Commission pursuant to section 5b of the Act and 
regulations thereunder, shall not be deemed to be a major swap 
participant, regardless of whether the criteria in this paragraph (hhh) 
otherwise would cause the person to be a major swap participant.
    (iii) Category of swaps; major swap category. For purposes of 
Section 1a(33) the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this 
section, the terms major swap category, category of swaps and any 
similar terms mean any of the categories of swaps listed below. For the 
avoidance of doubt, the term swap as it is used in this paragraph (iii) 
has the meaning set forth in Section 1a(47) of the Act, 7 U.S.C. 1a(47), 
and the rules thereunder.
    (1) Rate swaps. Any swap which is primarily based on one or more 
reference rates, including but not limited to any swap of payments 
determined by fixed and floating interest rates, currency exchange 
rates, inflation rates or other monetary rates, any foreign exchange 
swap, as defined in Section 1a(25) of the Act, 7 U.S.C. 1a(25), and any 
foreign exchange option other than an option to deliver currency.
    (2) Credit swaps. Any swap that is primarily based on instruments of 
indebtedness, including but not limited to any swap primarily based on 
one or more broad-based indices related to debt instruments or loans, 
and any swap that is an index credit default swap or total return swap 
on one or more indices of debt instruments.
    (3) Equity swaps. Any swap that is primarily based on equity 
securities, including but not limited to any swap based on one or more 
broad-based indices of equity securities and any total return swap on 
one or more equity indices.
    (4) Other commodity swaps. Any swap that is not included in the rate 
swap, credit swap or equity swap categories.
    (jjj) Substantial position. (1) In general. For purposes of Section 
1a(33) of the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this section, 
the term ``substantial position'' means swap positions that equal or 
exceed any of the following thresholds in the specified major category 
of swaps:
    (i) For rate swaps:
    (A) $3 billion in daily average aggregate uncollateralized outward 
exposure; or
    (B) $6 billion in:
    (1) Daily average aggregate uncollateralized outward exposure plus
    (2) Daily average aggregate potential outward exposure.
    (ii) For credit swaps:
    (A) $1 billion in daily average aggregate uncollateralized outward 
exposure; or
    (B) $2 billion in:
    (1) Daily average aggregate uncollateralized outward exposure plus
    (2) Daily average aggregate potential outward exposure.
    (iii) For equity swaps:
    (A) $1 billion in daily average aggregate uncollateralized outward 
exposure; or
    (B) $2 billion in:
    (1) Daily average aggregate uncollateralized outward exposure plus
    (2) Daily average aggregate potential outward exposure.
    (iv) For other commodity swaps:

[[Page 24]]

    (A) $1 billion in daily average aggregate uncollateralized outward 
exposure; or
    (B) $2 billion in:
    (1) Daily average aggregate uncollateralized outward exposure plus
    (2) Daily average aggregate potential outward exposure.
    (2) Aggregate uncollateralized outward exposure--(i) In general. 
Aggregate uncollateralized outward exposure in general means the sum of 
the current exposure, obtained by marking-to-market using industry 
standard practices, of each of the person's swap positions with negative 
value in a major swap category, less the value of the collateral the 
person has posted in connection with those positions.
    (ii) Calculation of aggregate uncollateralized outward exposure. In 
calculating this amount the person shall, with respect to each of its 
swap counterparties in a given major swap category, determine the dollar 
value of the aggregate current exposure arising from each of its swap 
positions with negative value (subject to the netting provisions 
described below) in that major category by marking-to-market using 
industry standard practices; and deduct from that dollar amount the 
aggregate value of the collateral the person has posted with respect to 
the swap positions. The aggregate uncollateralized outward exposure 
shall be the sum of those uncollateralized amounts across all of the 
person's swap counterparties in the applicable major category.
    (iii) Relevance of netting agreements. (A) If the person has one or 
more master netting agreement in effect with a particular counterparty, 
the person may measure the current exposure arising from its swaps in 
any major category on a net basis, applying the terms of those 
agreements. Calculation of net current exposure may take into account 
offsetting positions entered into with that particular counterparty 
involving swaps (in any swap category) as well as security-based swaps 
and securities financing transactions (consisting of securities lending 
and borrowing, securities margin lending and repurchase and reverse 
repurchase agreements), and other financial instruments that are subject 
to netting offsets for purposes of applicable bankruptcy law, to the 
extent these are consistent with the offsets permitted by the master 
netting agreements.
    (B) Such adjustments may not take into account any offset associated 
with positions that the person has with separate counterparties.
    (iv) Allocation of uncollateralized outward exposure. If a person 
calculates current exposure with a particular counterparty on a net 
basis, as provided by paragraph (jjj)(2)(iii) of this section, the 
portion of that current exposure that should be attributed to each 
``major'' category of swaps for purposes of the substantial position 
analysis should be calculated according to the formula:

[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]

    Where: ES(MC) equals the amount of aggregate current exposure 
attributable to the entity's swap positions in the ``major'' swap 
category at issue; Enet total equals the entity's aggregate current 
exposure to the counterparty at issue, after accounting for the netting 
of positions and the posting of collateral; OTMS(MC) equals the exposure 
associated with the entity's out-of-the-money positions in swaps in the 
``major'' category at issue, subject to those netting arrangements; and 
OTMS(O) equals the exposure associated with the entity's out-of-the-
money positions in the other ``major'' categories of swaps, subject to 
those netting arrangements; and OTMnon-S equals the exposure associated 
with the entity's out-of-the-money positions associated with 
instruments, other than swaps, that are subject to those netting 
arrangements.

    (3) Aggregate potential outward exposure--(i) In general. Aggregate 
potential outward exposure in any major swap category means the sum of:

[[Page 25]]

    (A) The aggregate potential outward exposure for each of the 
person's swap positions in a major swap category that are not subject to 
daily mark-to-market margining and are not cleared by a registered or 
exempt clearing agency or derivatives clearing organization, as 
calculated in accordance with paragraph (jjj)(3)(ii) of this section; 
and
    (B) The aggregate potential outward exposure for each of the 
person's swap positions in such major swap category that are either 
subject to daily mark-to-market margining or are cleared by a registered 
or exempt clearing agency or derivatives clearing organization, as 
calculated in accordance with paragraph (jjj)(3)(iii) of this section.
    (ii) Calculation of potential outward exposure for swaps that are 
not subject to daily mark-to-market margining and are not cleared by a 
registered or exempt clearing agency or derivatives clearing 
organization--(A) In general. (1) For positions in swaps that are not 
subject to daily mark-to-market margining and are not cleared by a 
registered or exempt clearing agency or a derivatives clearing 
organization, potential outward exposure equals the total notional 
principal amount of those positions, multiplied by the following factors 
on a position-by-position basis reflecting the type of swap. For any 
swap that does not appropriately fall within any of the specified 
categories, the ``other commodities'' conversion factors set forth in 
the following Table 1 are to be used. If a swap is structured such that 
on specified dates any outstanding exposure is settled and the terms are 
reset so that the market value of the swap is zero, the remaining 
maturity equals the time until the next reset date.

                                                       Table 1--Conversion Factor Matrix for Swaps
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Foreign exchange      Precious metals
                         Residual maturity                              Interest rate         rate and gold        (except gold)      Other commodities
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less..................................................                 0.00                  0.01                  0.07                 0.10
Over one to five years............................................                 0.005                 0.05                  0.07                 0.12
Over five years...................................................                 0.015                 0.075                 0.08                 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------
                   Residual maturity                     Credit   Equity
------------------------------------------------------------------------
One year or less......................................     0.10     0.06
Over one to five years................................     0.10     0.08
Over five years.......................................     0.10     0.10
------------------------------------------------------------------------

    (2) Use of effective notional amounts. If the stated notional amount 
on a position is leveraged or enhanced by the structure of the position, 
the calculation in paragraph (jjj)(3)(ii)(A)(1) of this section shall be 
based on the effective notional amount of the position rather than on 
the stated notional amount.
    (3) Exclusion of certain positions. The calculation in paragraph 
(jjj)(3)(ii)(A)(1) of this section shall exclude:
    (i) Positions that constitute the purchase of an option, if the 
purchaser has no additional payment obligations under the position;
    (ii) Other positions for which the person has prepaid or otherwise 
satisfied all of its payment obligations; and
    (iii) Positions for which, pursuant to law or a regulatory 
requirement, the person has assigned an amount of cash or U.S. Treasury 
securities that is sufficient at all times to pay the person's maximum 
possible liability under the position, and the person may not use that 
cash or those Treasury securities for other purposes.
    (4) Adjustment for certain positions. Notwithstanding paragraph 
(jjj)(3)(ii)(A)(1) of this section, the potential outward exposure 
associated with a position by which a person buys credit protection 
using a credit default swap or index credit default swap, or associated 
with a position by which a person purchases an option for which the 
person retains additional payment obligations under the position, is 
capped at the net present value of the unpaid premiums.
    (B) Adjustment for netting agreements. Notwithstanding paragraph 
(jjj)(3)(ii)(A) of this section, for positions subject to master netting 
agreements the potential outward exposure associated with the person's 
swaps with each counterparty equals a weighted average of the potential 
outward exposure for the person's swaps

[[Page 26]]

with that counterparty as calculated under paragraph (jjj)(3)(ii)(A) of 
this section, and that amount reduced by the ratio of net current 
exposure to gross current exposure, consistent with the following 
equation as calculated on a counterparty-by-counterparty basis:

PNet = 0.4 * PGross + 0.6 * NGR * PGross

    Where: PNet is the potential outward exposure, adjusted for 
bilateral netting, of the person's swaps with a particular counterparty; 
PGross is the potential outward exposure without adjustment for 
bilateral netting as calculated pursuant to paragraph (jjj)(3)(ii)(A) of 
this section; and NGR is the ratio of the current exposure arising from 
its swaps in the major category as calculated on a net basis according 
to paragraphs (jjj)(2)(iii) and (iv) of this section, divided by the 
current exposure arising from its swaps in the major category as 
calculated in the absence of those netting procedures.

    (iii) Calculation of potential outward exposure for swaps that are 
either subject to daily mark-to-market margining or are cleared by a 
registered or exempt clearing agency or derivatives clearing 
organization. For positions in swaps that are subject to daily mark-to-
market margining or that are cleared by a registered or exempt clearing 
agency or derivatives clearing organization:
    (A) Potential outward exposure equals the potential exposure that 
would be attributed to such positions using the procedures in paragraph 
(jjj)(3)(ii) of this section multiplied by:
    (1) 0.1, in the case of positions cleared by a registered or exempt 
clearing agency or derivatives clearing organization; or
    (2) 0.2, in the case of positions that are subject to daily mark-to-
market margining but that are not cleared by a registered or exempt 
clearing agency or derivatives clearing organization.
    (B) Solely for purposes of calculating potential outward exposure:
    (1) A swap shall be considered to be subject to daily mark-to-market 
margining if, and for so long as, the counterparties follow the daily 
practice of exchanging collateral to reflect changes in the current 
exposure arising from the swap (after taking into account any other 
financial positions addressed by a netting agreement between the 
counterparties).
    (2) If the person is permitted by agreement to maintain a threshold 
for which it is not required to post collateral, the position still will 
be considered to be subject to daily mark-to-market margining for 
purposes of calculating potential outward exposure, but the total amount 
of that threshold (regardless of the actual exposure at any time), less 
any initial margin posted up to the amount of that threshold, shall be 
added to the person's aggregate uncollateralized outward exposure for 
purposes of paragraph (jjj)(1)(i)(B), (ii)(B), (iii)(B) or (iv)(B) of 
this section, as applicable.
    (3) If the minimum transfer amount under the agreement is in excess 
of $1 million, the position still will be considered to be subject to 
daily mark-to-market margining for purposes of calculating potential 
outward exposure, but the entirety of the minimum transfer amount shall 
be added to the person's aggregate uncollateralized outward exposure for 
purposes of paragraph (jjj)(1)(i)(B), (ii)(B), (iii)(B) or (iv)(B) of 
this section, as applicable.
    (4) A person may, at its discretion, calculate the potential outward 
exposure of positions in swaps that are subject to daily mark-to-market 
margining in accordance with paragraph (jjj)(3)(ii) of this section in 
lieu of calculating the potential outward exposure of such swap 
positions in accordance with this paragraph (jjj)(3)(iii).
    (4) Calculation of daily average. Measures of daily average 
aggregate uncollateralized outward exposure and daily average aggregate 
potential outward exposure shall equal the arithmetic mean of the 
applicable measure of exposure at the close of each business day, 
beginning the first business day of each calendar quarter and continuing 
through the last business day of that quarter.
    (5) Inter-affiliate activities. In calculating its aggregate 
uncollateralized outward exposure and its aggregate potential outward 
exposure, the person shall not consider its swap positions with 
counterparties that are majority-owned affiliates. For these purposes 
the counterparties to a swap are majority-owned affiliates if one 
counterparty directly or indirectly owns a majority interest in the 
other, or if a third party

[[Page 27]]

directly or indirectly owns a majority interest in both counterparties 
to the swap, where ``majority interest'' is the right to vote or direct 
the vote of a majority of a class of voting securities of an entity, the 
power to sell or direct the sale of a majority of a class of voting 
securities of an entity, or the right to receive upon dissolution or the 
contribution of a majority of the capital of a partnership.
    (kkk) Hedging or mitigating commercial risk. For purposes of Section 
1a(33) of the Act, 7 U.S.C. 1a(33) and paragraph (hhh) of this section, 
a swap position is held for the purpose of hedging or mitigating 
commercial risk when:
    (1) Such position:
    (i) Is economically appropriate to the reduction of risks in the 
conduct and management of a commercial enterprise (or of a majority-
owned affiliate of the enterprise), where the risks arise from:
    (A) The potential change in the value of assets that a person owns, 
produces, manufactures, processes, or merchandises or reasonably 
anticipates owning, producing, manufacturing, processing, or 
merchandising in the ordinary course of business of the enterprise;
    (B) The potential change in the value of liabilities that a person 
has incurred or reasonably anticipates incurring in the ordinary course 
of business of the enterprise; or
    (C) The potential change in the value of services that a person 
provides, purchases, or reasonably anticipates providing or purchasing 
in the ordinary course of business of the enterprise;
    (D) The potential change in the value of assets, services, inputs, 
products, or commodities that a person owns, produces, manufactures, 
processes, merchandises, leases, or sells, or reasonably anticipates 
owning, producing, manufacturing, processing, merchandising, leasing, or 
selling in the ordinary course of business of the enterprise;
    (E) Any potential change in value related to any of the foregoing 
arising from interest, currency, or foreign exchange rate movements 
associated with such assets, liabilities, services, inputs, products, or 
commodities; or
    (F) Any fluctuation in interest, currency, or foreign exchange rate 
exposures arising from a person's current or anticipated assets or 
liabilities; or
    (ii) Qualifies as bona fide hedging for purposes of an exemption 
from position limits under the Act; or
    (iii) Qualifies for hedging treatment under:
    (A) Financial Accounting Standards Board Accounting Standards 
Codification Topic 815, Derivatives and Hedging (formerly known as 
Statement No. 133); or
    (B) Governmental Accounting Standards Board Statement 53, Accounting 
and Financial Reporting for Derivative Instruments; and
    (2) Such position is:
    (i) Not held for a purpose that is in the nature of speculation, 
investing or trading; and
    (ii) Not held to hedge or mitigate the risk of another swap or 
security-based swap position, unless that other position itself is held 
for the purpose of hedging or mitigating commercial risk as defined by 
this rule or Sec.  240.3a67-4 of this title.
    (lll) Substantial counterparty exposure--(1) In general. For 
purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33), and paragraph 
(hhh) of this section, the term substantial counterparty exposure that 
could have serious adverse effects on the financial stability of the 
United States banking system or financial markets means a swap position 
that satisfies either of the following thresholds:
    (i) $5 billion in daily average aggregate uncollateralized outward 
exposure; or
    (ii) $8 billion in:
    (A) Daily average aggregate uncollateralized outward exposure plus
    (B) Daily average aggregate potential outward exposure.
    (2) Calculation methodology. For these purposes, the terms daily 
average aggregate uncollateralized outward exposure and daily average 
aggregate potential outward exposure shall be calculated the same way as 
is prescribed in paragraph (jjj) of this section, except that these 
amounts shall be calculated by reference to all of the person's swap 
positions, rather than by reference to a specific major swap category.
    (mmm) Financial entity; highly leveraged. (1) For purposes of 
Section 1a(33)

[[Page 28]]

of the Act, 7 U.S.C. 1a(33), and paragraph (hhh) of this section, the 
term financial entity means:
    (i) A security-based swap dealer;
    (ii) A major security-based swap participant;
    (iii) A commodity pool as defined in Section 1a(10) of the Act, 7 
U.S.C. 1a(10);
    (iv) A private fund as defined in Section 202(a) of the Investment 
Advisers Act of 1940, 15 U.S.C. 80b-2(a);
    (v) An employee benefit plan as defined in paragraphs (3) and (32) 
of Section 3 of the Employee Retirement Income Security Act of 1974, 29 
U.S.C. 1002; and
    (vi) A person predominantly engaged in activities that are in the 
business of banking or financial in nature, as defined in Section 4(k) 
of the Bank Holding Company Act of 1956, 12 U.S.C. 1843(k).
    (2) For purposes of Section 1a(33) of the Act, 7 U.S.C. 1a(33), and 
paragraph (hhh) of this section, the term highly leveraged means the 
existence of a ratio of an entity's total liabilities to equity in 
excess of 12 to 1 as measured at the close of business on the last 
business day of the applicable fiscal quarter. For this purpose, 
liabilities and equity should each be determined in accordance with U.S. 
generally accepted accounting principles; provided, however, that a 
person that is an employee benefit plan, as defined in paragraphs (3) 
and (32) of Section 3 of the Employee Retirement Income Security Act of 
1974, 29 U.S.C. 1002, may exclude obligations to pay benefits to plan 
participants from the calculation of liabilities and substitute the 
total value of plan assets for equity.
    (nnn)-(www) [Reserved]
    (xxx) Swap--(1) In general. The term swap has the meaning set forth 
in section 1a(47) of the Commodity Exchange Act.
    (2) Inclusion of particular products. (i) The term swap includes, 
without limiting the meaning set forth in section 1a(47) of the 
Commodity Exchange Act, the following agreements, contracts, and 
transactions:
    (A) A cross-currency swap;
    (B) A currency option, foreign currency option, foreign exchange 
option and foreign exchange rate option;
    (C) A foreign exchange forward;
    (D) A foreign exchange swap;
    (E) A forward rate agreement; and
    (F) A non-deliverable forward involving foreign exchange.
    (ii) The term swap does not include an agreement, contract, or 
transaction described in paragraph (xxx)(2)(i) of this section that is 
otherwise excluded by section 1a(47)(B) of the Commodity Exchange Act.
    (3) Foreign exchange forwards and foreign exchange swaps. 
Notwithstanding paragraph (xxx)(2) of this section:
    (i) A foreign exchange forward or a foreign exchange swap shall not 
be considered a swap if the Secretary of the Treasury makes a 
determination described in section 1a(47)(E)(i) of the Commodity 
Exchange Act.
    (ii) Notwithstanding paragraph (xxx)(3)(i) of this section:
    (A) The reporting requirements set forth in section 4r of the 
Commodity Exchange Act and regulations promulgated thereunder shall 
apply to a foreign exchange forward or foreign exchange swap; and
    (B) The business conduct standards set forth in section 4s(h) of the 
Commodity Exchange Act and regulations promulgated thereunder shall 
apply to a swap dealer or major swap participant that is a party to a 
foreign exchange forward or foreign exchange swap.
    (iii) For purposes of section 1a(47)(E) of the Commodity Exchange 
Act and this paragraph (xxx), the term foreign exchange forward has the 
meaning set forth in section 1a(24) of the Commodity Exchange Act.
    (iv) For purposes of section 1a(47)(E) of the Commodity Exchange Act 
and this paragraph (xxx), the term foreign exchange swap has the meaning 
set forth in section 1a(25) of the Commodity Exchange Act.
    (v) For purposes of sections 1a(24) and 1a(25) of the Commodity 
Exchange Act and this paragraph (xxx), the following transactions are 
not foreign exchange forwards or foreign exchange swaps:
    (A) A currency swap or a cross-currency swap;
    (B) A currency option, foreign currency option, foreign exchange 
option, or foreign exchange rate option; and

[[Page 29]]

    (C) A non-deliverable forward involving foreign exchange.
    (4) Insurance. (i) This paragraph is a non-exclusive safe harbor. 
The terms swap as used in section 1a(47) of the Commodity Exchange Act 
and security-based swap as used in section 1a(42) of the Commodity 
Exchange Act do not include an agreement, contract, or transaction that:
    (A) By its terms or by law, as a condition of performance on the 
agreement, contract, or transaction:
    (1) Requires the beneficiary of the agreement, contract, or 
transaction to have an insurable interest that is the subject of the 
agreement, contract, or transaction and thereby carry the risk of loss 
with respect to that interest continuously throughout the duration of 
the agreement, contract, or transaction;
    (2) Requires that loss to occur and to be proved, and that any 
payment or indemnification therefor be limited to the value of the 
insurable interest;
    (3) Is not traded, separately from the insured interest, on an 
organized market or over-the-counter; and
    (4) With respect to financial guaranty insurance only, in the event 
of payment default or insolvency of the obligor, any acceleration of 
payments under the policy is at the sole discretion of the insurer; and
    (B) Is provided:
    (1)(i) By a person that is subject to supervision by the insurance 
commissioner (or similar official or agency) of any State or by the 
United States or an agency or instrumentality thereof; and
    (ii) Such agreement, contract, or transaction is regulated as 
insurance under applicable State law or the laws of the United States;
    (2)(i) Directly or indirectly by the United States, any State or any 
of their respective agencies or instrumentalities; or
    (ii) Pursuant to a statutorily authorized program thereof; or
    (3) In the case of reinsurance only, by a person to another person 
that satisfies the conditions set forth in paragraph (xxx)(4)(i)(B) of 
this section, provided that:
    (i) Such person is not prohibited by applicable State law or the 
laws of the United States from offering such agreement, contract, or 
transaction to such person that satisfies the conditions set forth in 
paragraph (xxx)(4)(i)(B) of this section;
    (ii) The agreement, contract, or transaction to be reinsured 
satisfies the conditions set forth in paragraph (xxx)(4)(i)(A) or 
paragraph (xxx)(4)(i)(C) of this section; and
    (iii) Except as otherwise permitted under applicable State law, the 
total amount reimbursable by all reinsurers for such agreement, 
contract, or transaction may not exceed the claims or losses paid by the 
person writing the risk being ceded or transferred by such person; or
    (4) In the case of non-admitted insurance, by a person who:
    (i) Is located outside of the United States and listed on the 
Quarterly Listing of Alien Insurers as maintained by the International 
Insurers Department of the National Association of Insurance 
Commissioners; or
    (ii) Meets the eligibility criteria for non-admitted insurers under 
applicable State law; or
    (C) Is provided in accordance with the conditions set forth in 
paragraph (xxx)(4)(i)(B) of this section and is one of the following 
types of products:
    (1) Surety bond;
    (2) Fidelity bond;
    (3) Life insurance;
    (4) Health insurance;
    (5) Long term care insurance;
    (6) Title insurance;
    (7) Property and casualty insurance;
    (8) Annuity;
    (9) Disability insurance;
    (10) Insurance against default on individual residential mortgages; 
and
    (11) Reinsurance of any of the foregoing products identified in 
paragraphs (xxx)(4)(i)(C)(1) through (10) of this section; or
    (ii) The terms swap as used in section 1a(47) of the Commodity 
Exchange Act and security-based swap as used in section 1a(42) of the 
Commodity Exchange Act do not include an agreement, contract, or 
transaction that was entered into on or before the effective date of 
paragraph (xxx)(4) of this section, and that, at such time that it was 
entered into, was provided in accordance with the conditions set forth 
in paragraph (xxx)(4)(i)(B) of this section.

[[Page 30]]

    (5) State. For purposes of paragraph (xxx)(4) of this section, the 
term State means any state of the United States, the District of 
Columbia, Puerto Rico, the U.S. Virgin Islands, or any other possession 
of the United States.
    (6) Anti-Evasion:
    (i) An agreement, contract, or transaction that is willfully 
structured to evade any provision of Subtitle A of the Wall Street 
Transparency and Accountability Act of 2010, including any amendments 
made to the Commodity Exchange Act thereby (Subtitle A), shall be deemed 
a swap for purposes of Subtitle A and the rules, regulations, and orders 
of the Commission promulgated thereunder.
    (ii) An interest rate swap or currency swap, including but not 
limited to a transaction identified in paragraph (xxx)(3)(v) of this 
section, that is willfully structured as a foreign exchange forward or 
foreign exchange swap to evade any provision of Subtitle A shall be 
deemed a swap for purposes of Subtitle A and the rules, regulations, and 
orders of the Commission promulgated thereunder.
    (iii) An agreement, contract, or transaction of a bank that is not 
under the regulatory jurisdiction of an appropriate Federal banking 
agency (as defined in section 1a(2) of the Commodity Exchange Act), 
where the agreement, contract, or transaction is willfully structured as 
an identified banking product (as defined in section 402 of the Legal 
Certainty for Bank Products Act of 2000) to evade the provisions of the 
Commodity Exchange Act, shall be deemed a swap for purposes of the 
Commodity Exchange Act and the rules, regulations, and orders of the 
Commission promulgated thereunder.
    (iv) The form, label, and written documentation of an agreement, 
contract, or transaction shall not be dispositive in determining whether 
the agreement, contract, or transaction has been willfully structured to 
evade as provided in paragraphs (xxx)(6)(i) through (xxx)(6)(iii) of 
this section.
    (v) An agreement, contract, or transaction that has been willfully 
structured to evade as provided in paragraphs (xxx)(6)(i) through 
(xxx)(6)(iii) of this section shall be considered in determining whether 
a person that so willfully structured to evade is a swap dealer or major 
swap participant.
    (vi) Notwithstanding the foregoing, no agreement, contract, or 
transaction structured as a security (including a security-based swap) 
under the securities laws (as defined in section 3(a)(47) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))) shall be deemed 
a swap pursuant to this paragraph (xxx)(6) or shall be considered for 
purposes of paragraph (xxx)(6)(v) of this section.
    (yyy) Narrow-based security index as used in the definition of 
``security-based swap''--(1) In general. Except as otherwise provided in 
paragraphs (zzz) and (aaaa) of this section, for purposes of section 
1a(42) of the Commodity Exchange Act, the term narrow-based security 
index has the meaning set forth in section 1a(35) of the Commodity 
Exchange Act, and the rules, regulations and orders of the Commission 
thereunder.
    (2) Tolerance period for swaps traded on designated contract 
markets, swap execution facilities, and foreign boards of trade. 
Notwithstanding paragraph (yyy)(1) of this section, solely for purposes 
of swaps traded on or subject to the rules of a designated contract 
market, swap execution facility, or foreign board of trade, a security 
index underlying such swaps shall not be considered a narrow-based 
security index if:
    (i)(A) A swap on the index is traded on or subject to the rules of a 
designated contract market, swap execution facility, or foreign board of 
trade for at least 30 days as a swap on an index that was not a narrow-
based security index; or
    (B) Such index was not a narrow-based security index during every 
trading day of the six full calendar months preceding a date no earlier 
than 30 days prior to the commencement of trading of a swap on such 
index on a market described in paragraph (yyy)(2)(i)(A) of this section; 
and
    (ii) The index has been a narrow-based security index for no more 
than 45 business days over three consecutive calendar months.
    (3) Tolerance period for security-based swaps traded on national 
securities exchanges or security-based swap execution facilities. 
Notwithstanding paragraph

[[Page 31]]

(yyy)(1) of this section, solely for purposes of security-based swaps 
traded on a national securities exchange or security-based swap 
execution facility, a security index underlying such security-based 
swaps shall be considered a narrow-based security index if:
    (i)(A) A security-based swap on the index is traded on a national 
securities exchange or security-based swap execution facility for at 
least 30 days as a security-based swap on a narrow-based security index; 
or
    (B) Such index was a narrow-based security index during every 
trading day of the six full calendar months preceding a date no earlier 
than 30 days prior to the commencement of trading of a security-based 
swap on such index on a market described in paragraph (yyy)(3)(i)(A) of 
this section; and
    (ii) The index has been a security index that is not a narrow-based 
security index for no more than 45 business days over three consecutive 
calendar months.
    (4) Grace period. (i) Solely with respect to a swap that is traded 
on or subject to the rules of a designated contract market, swap 
execution facility, or foreign board of trade, an index that becomes a 
narrow-based security index under paragraph (yyy)(2) of this section 
solely because it was a narrow-based security index for more than 45 
business days over three consecutive calendar months shall not be a 
narrow-based security index for the following three calendar months.
    (ii) Solely with respect to a security-based swap that is traded on 
a national securities exchange or security-based swap execution 
facility, an index that becomes a security index that is not a narrow-
based security index under paragraph (yyy)(3) of this section solely 
because it was not a narrow-based security index for more than 45 
business days over three consecutive calendar months shall be a narrow-
based security index for the following three calendar months.
    (zzz) Meaning of ``issuers of securities in a narrow-based security 
index'' as used in the definition of ``security-based swap'' as applied 
to index credit default swaps.
    (1) Notwithstanding paragraph (yyy)(1) of this section, and solely 
for purposes of determining whether a credit default swap is a security-
based swap under the definition of ``security-based swap'' in section 
3(a)(68)(A)(ii)(III) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(68)(A)(ii)(III), as incorporated in section 1a(42) of the 
Commodity Exchange Act, the term issuers of securities in a narrow-based 
security index means issuers of securities included in an index 
(including an index referencing loan borrowers or loans of such 
borrowers) in which:
    (i)(A) There are nine or fewer non-affiliated issuers of securities 
that are reference entities included in the index, provided that an 
issuer of securities shall not be deemed a reference entity included in 
the index for purposes of this section unless:
    (1) A credit event with respect to such reference entity would 
result in a payment by the credit protection seller to the credit 
protection buyer under the credit default swap based on the related 
notional amount allocated to such reference entity; or
    (2) The fact of such credit event or the calculation in accordance 
with paragraph (zzz)(1)(i)(A)(1) of this section of the amount owed with 
respect to such credit event is taken into account in determining 
whether to make any future payments under the credit default swap with 
respect to any future credit events;
    (B) The effective notional amount allocated to any reference entity 
included in the index comprises more than 30 percent of the index's 
weighting;
    (C) The effective notional amount allocated to any five non-
affiliated reference entities included in the index comprises more than 
60 percent of the index's weighting; or
    (D) Except as provided in paragraph (zzz)(2) of this section, for 
each reference entity included in the index, none of the criteria in 
paragraphs (zzz)(1)(i)(D)(1) through (8) of this section is satisfied:
    (1) The reference entity included in the index is required to file 
reports pursuant to section 13 or section 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));

[[Page 32]]

    (2) The reference entity included in the index is eligible to rely 
on the exemption provided in rule 12g3-2(b) under the Securities 
Exchange Act of 1934 (17 CFR 240.12g3-2(b));
    (3) The reference entity included in the index has a worldwide 
market value of its outstanding common equity held by non-affiliates of 
$700 million or more;
    (4) The reference entity included in the index (other than a 
reference entity included in the index that is an issuing entity of an 
asset-backed security as defined in section 3(a)(77) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)) has outstanding notes, 
bonds, debentures, loans, or evidences of indebtedness (other than 
revolving credit facilities) having a total remaining principal amount 
of at least $1 billion;
    (5) The reference entity included in the index is the issuer of an 
exempted security as defined in section 3(a)(12) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(12)) (other than any municipal 
security as defined in section 3(a)(29) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(29)));
    (6) The reference entity included in the index is a government of a 
foreign country or a political subdivision of a foreign country;
    (7) If the reference entity included in the index is an issuing 
entity of an asset-backed security as defined in section 3(a)(77) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), such asset-
backed security was issued in a transaction registered under the 
Securities Act of 1933 (15 U.S.C. 77a et seq.) and has publicly 
available distribution reports; and
    (8) For a credit default swap entered into solely between eligible 
contract participants as defined in section 1a(18) of the Commodity 
Exchange Act:
    (i) The reference entity included in the index (other than a 
reference entity included in the index that is an issuing entity of an 
asset-backed security as defined in section 3(a)(77) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(77))) makes available to the 
public or otherwise makes available to such eligible contract 
participant information about the reference entity included in the index 
pursuant to rule 144A(d)(4) under the Securities Act of 1933 (17 CFR 
230.144A(d)(4));
    (ii) Financial information about the reference entity included in 
the index (other than a reference entity included in the index that is 
an issuing entity of an asset-backed security as defined in section 
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77))) 
is otherwise publicly available; or
    (iii) In the case of a reference entity included in the index that 
is an issuing entity of an asset-backed security as defined in section 
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), 
information of the type and level included in publicly available 
distribution reports for similar asset-backed securities is publicly 
available about both the reference entity included in the index and such 
asset-backed security; and
    (ii)(A) The index is not composed solely of reference entities that 
are issuers of exempted securities as defined in section 3(a)(12) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(12)), as in effect on 
the date of enactment of the Futures Trading Act of 1982 (other than any 
municipal security as defined in section 3(a)(29) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(29))), as in effect on the date 
of enactment of the Futures Trading Act of 1982; and
    (B) Without taking into account any portion of the index composed of 
reference entities that are issuers of exempted securities as defined in 
section 3(a)(12) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(12)), as in effect on the date of enactment of the Futures 
Trading Act of 1982 (other than any municipal security as defined in 
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(29))), the remaining portion of the index would be within the 
term ``issuer of securities in a narrow-based security index'' under 
paragraph (zzz)(1)(i) of this section.
    (2) Paragraph (zzz)(1)(i)(D) of this section will not apply with 
respect to a reference entity included in the index if:
    (i) The effective notional amounts allocated to such reference 
entity comprise less than five percent of the index's weighting; and

[[Page 33]]

    (ii) The effective notional amounts allocated to reference entities 
included in the index that satisfy paragraph (zzz)(1)(i)(D) of this 
section comprise at least 80 percent of the index's weighting.
    (3) For purposes of this paragraph (zzz):
    (i) A reference entity included in the index is affiliated with 
another reference entity included in the index (for purposes of 
paragraph (zzz)(3)(iv) of this section) or another entity (for purposes 
of paragraph (zzz)(3)(v) of this section) if it controls, is controlled 
by, or is under common control with, that other reference entity 
included in the index or other entity, as applicable; provided that each 
reference entity included in the index that is an issuing entity of an 
asset-backed security as defined in section 3(a)(77) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)) will not be considered 
affiliated with any other reference entity included in the index or any 
other entity that is an issuing entity of an asset-backed security.
    (ii) Control for purposes of this section means ownership of more 
than 50 percent of the equity of a reference entity included in the 
index (for purposes of paragraph (zzz)(3)(iv) of this section) or 
another entity (for purposes of paragraph (zzz)(3)(v) of this section), 
or the ability to direct the voting of more than 50 percent of the 
voting equity of a reference entity included in the index (for purposes 
of paragraph (zzz)(3)(iv) of this section) or another entity (for 
purposes of paragraph (zzz)(3)(v) of this section).
    (iii) In identifying a reference entity included in the index for 
purposes of this section, the term reference entity includes:
    (A) An issuer of securities;
    (B) An issuer of securities that is an issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)); and
    (C) An issuer of securities that is a borrower with respect to any 
loan identified in an index of borrowers or loans.
    (iv) For purposes of calculating the thresholds in paragraphs 
(zzz)(1)(i)(A) through (1)(i)(C) of this section, the term reference 
entity included in the index includes a single reference entity included 
in the index or a group of affiliated reference entities included in the 
index as determined in accordance with paragraph (zzz)(3)(i) of this 
section (with each reference entity included in the index that is an 
issuing entity of an asset-backed security as defined in section 
3(a)(77) of the Act (15 U.S.C. 78c(a)(77)) being considered a separate 
reference entity included in the index).
    (v) For purposes of determining whether one of the criterion in 
either paragraphs (zzz)(1)(i)(D)(1) through (zzz)(1)(i)(D)(4) of this 
section or paragraphs (zzz)(1)(iv)(D)(8)(i) and (a)(1)(iv)(D)(8)(ii) of 
this section is met, the term reference entity included in the index 
includes a single reference entity included in the index or a group of 
affiliated entities as determined in accordance with paragraph 
(zzz)(3)(i) of this section (with each issuing entity of an asset-backed 
security as defined in section 3(a)(77) of the Act (15 U.S.C. 
78c(a)(77)) being considered a separate entity).
    (aaaa) Meaning of ``narrow-based security index'' as used in the 
definition of ``security-based swap'' as applied to index credit default 
swaps.
    (1) Notwithstanding paragraph (yyy)(1) of this section, and solely 
for purposes of determining whether a credit default swap is a security-
based swap under the definition of ``security-based swap'' in section 
3(a)(68)(A)(ii)(I) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(68)(A)(ii)(I), as incorporated in section 1a(42) of the Commodity 
Exchange Act, the term narrow-based security index means an index in 
which:
    (i)(A) The index is composed of nine or fewer securities or 
securities that are issued by nine or fewer non-affiliated issuers, 
provided that a security shall not be deemed a component of the index 
for purposes of this section unless:
    (1) A credit event with respect to the issuer of such security or a 
credit event with respect to such security would result in a payment by 
the credit protection seller to the credit protection buyer under the 
credit default swap based on the related notional amount allocated to 
such security; or

[[Page 34]]

    (2) The fact of such credit event or the calculation in accordance 
with paragraph (aaaa)(1)(i)(A)(1) of this section of the amount owed 
with respect to such credit event is taken into account in determining 
whether to make any future payments under the credit default swap with 
respect to any future credit events;
    (B) The effective notional amount allocated to the securities of any 
issuer included in the index comprises more than 30 percent of the 
index's weighting;
    (C) The effective notional amount allocated to the securities of any 
five non-affiliated issuers included in the index comprises more than 60 
percent of the index's weighting; or
    (D) Except as provided in paragraph (aaaa)(2) of this section, for 
each security included in the index, none of the criteria in paragraphs 
(aaaa)(1)(i)(D)(1) through (8) is satisfied:
    (1) The issuer of the security included in the index is required to 
file reports pursuant to section 13 or section 15(d) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d));
    (2) The issuer of the security included in the index is eligible to 
rely on the exemption provided in rule 12g3-2(b) under the Securities 
Exchange Act of 1934 (17 CFR 240.12g3-2(b));
    (3) The issuer of the security included in the index has a worldwide 
market value of its outstanding common equity held by non-affiliates of 
$700 million or more;
    (4) The issuer of the security included in the index (other than an 
issuer of the security that is an issuing entity of an asset-backed 
security as defined in section 3(a)(77) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(77))) has outstanding notes, bonds, 
debentures, loans or evidences of indebtedness (other than revolving 
credit facilities) having a total remaining principal amount of at least 
$1 billion;
    (5) The security included in the index is an exempted security as 
defined in section 3(a)(12) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(12)) (other than any municipal security as defined in 
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(29)));
    (6) The issuer of the security included in the index is a government 
of a foreign country or a political subdivision of a foreign country;
    (7) If the security included in the index is an asset-backed 
security as defined in section 3(a)(77) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(77)), the security was issued in a transaction 
registered under the Securities Act of 1933 (15 U.S.C. 77a et seq.) and 
has publicly available distribution reports; and
    (8) For a credit default swap entered into solely between eligible 
contract participants as defined in section 1a(18) of the Commodity 
Exchange Act:
    (i) The issuer of the security included in the index (other than an 
issuer of the security that is an issuing entity of an asset-backed 
security as defined in section 3(a)(77) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(77))) makes available to the public or 
otherwise makes available to such eligible contract participant 
information about such issuer pursuant to rule 144A(d)(4) of the 
Securities Act of 1933 (17 CFR 230.144A(d)(4));
    (ii) Financial information about the issuer of the security included 
in the index (other than an issuer of the security that is an issuing 
entity of an asset-backed security as defined in section 3(a)(77) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77))) is otherwise 
publicly available; or
    (iii) In the case of an asset-backed security as defined in section 
3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(77)), 
information of the type and level included in public distribution 
reports for similar asset-backed securities is publicly available about 
both the issuing entity and such asset-backed security; and
    (ii)(A) The index is not composed solely of exempted securities as 
defined in section 3(a)(12) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(12)), as in effect on the date of enactment of the Futures 
Trading Act of 1982 (other than any municipal security as defined in 
section 3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(29))), as in effect on the date of enactment of the Futures 
Trading Act of 1982; and

[[Page 35]]

    (B) Without taking into account any portion of the index composed of 
exempted securities as defined in section 3(a)(12) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(12)), as in effect on the date of 
enactment of the Futures Trading Act of 1982 (other than any municipal 
security as defined in section 3(a)(29) of the Securities Exchange Act 
of 1934 (15 U.S.C. 78c(a)(29))), the remaining portion of the index 
would be within the term ``narrow-based security index'' under paragraph 
(aaaa)(1)(i) of this section.
    (2) Paragraph (aaaa)(1)(i)(D) of this section will not apply with 
respect to securities of an issuer included in the index if:
    (i) The effective notional amounts allocated to all securities of 
such issuer included in the index comprise less than five percent of the 
index's weighting; and
    (ii) The securities that satisfy paragraph (aaaa)(1)(i)(D) of this 
section comprise at least 80 percent of the index's weighting.
    (3) For purposes of this paragraph (aaaa):
    (i) An issuer of securities included in the index is affiliated with 
another issuer of securities included in the index (for purposes of 
paragraph (aaaa)(3)(iv) of this section) or another entity (for purposes 
of paragraph (aaaa)(3)(v) of this section) if it controls, is controlled 
by, or is under common control with, that other issuer or other entity, 
as applicable; provided that each issuer of securities included in the 
index that is an issuing entity of an asset-backed security as defined 
in section 3(a)(77) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(77)) will not be considered affiliated with any other issuer of 
securities included in the index or any other entity that is an issuing 
entity of an asset-backed security.
    (ii) Control for purposes of this section means ownership of more 
than 50 percent of the equity of an issuer of securities included in the 
index (for purposes of paragraph (aaaa)(3)(iv) of this section) or 
another entity (for purposes of paragraph (aaaa)(3)(v) of this section), 
or the ability to direct the voting of more than 50 percent of the 
voting equity an issuer of securities included in the index (for 
purposes of paragraph (aaaa)(3)(iv) of this section) or another entity 
(for purposes of paragraph (aaaa)(3)(v) of this section).
    (iii) In identifying an issuer of securities included in the index 
for purposes of this section, the term issuer includes:
    (A) An issuer of securities; and
    (B) An issuer of securities that is an issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(77)).
    (iv) For purposes of calculating the thresholds in paragraphs 
(zzz)(1)(i)(A) through (1)(i)(C) of this section, the term issuer of the 
security included in the index includes a single issuer of securities 
included in the index or a group of affiliated issuers of securities 
included in the index as determined in accordance with paragraph 
(aaaa)(3)(i) of this section (with each issuer of securities included in 
the index that is an issuing entity of an asset-backed security as 
defined in section 3(a)(77) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(77)) being considered a separate issuer of securities 
included in the index).
    (v) For purposes of determining whether one of the criterion in 
either paragraphs (aaaa)(1)(i)(D)(1) through (aaaa)(1)(i)(D)(4) of this 
section or paragraphs (aaaa)(1)(iv)(D)(8)(i) and (aaaa)(1)(iv)(D)(8)(ii) 
of this section is met, the term issuer of the security included in the 
index includes a single issuer of securities included in the index or a 
group of affiliated entities as determined in accordance with paragraph 
(aaaa)(3)(i) of this section (with each issuing entity of an asset-
backed security as defined in section 3(a)(77) of the Act (15 U.S.C. 
78c(a)(77)) being considered a separate entity).
    (bbbb) Futures contracts on certain foreign sovereign debt. The term 
security-based swap as used in section 3(a)(68) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78c(a)(68)), as incorporated in section 
1a(42) of the Commodity Exchange Act, does not include an agreement, 
contract, or transaction that is based on or references a qualifying 
foreign futures contract (as defined in rule 3a12-8 under the Securities 
Exchange Act of 1934 (17 CFR

[[Page 36]]

240.3a12-8)) on the debt securities of any one or more of the foreign 
governments enumerated in rule 3a12-8 under the Securities Exchange Act 
of 1934 (17 CFR 240.3a12-8), provided that such agreement, contract, or 
transaction satisfies the following conditions:
    (1) The futures contract that the agreement, contract, or 
transaction references or upon which the agreement, contract, or 
transaction is based is a qualifying foreign futures contract that 
satisfies the conditions of rule 3a12-8 under the Securities Exchange 
Act of 1934 (17 CFR 240.3a12-8) applicable to qualifying foreign futures 
contracts;
    (2) The agreement, contract, or transaction is traded on or through 
a board of trade (as defined in the Commodity Exchange Act);
    (3) The debt securities upon which the qualifying foreign futures 
contract is based or referenced and any security used to determine the 
cash settlement amount pursuant to paragraph (bbbb)(4) of this section 
were not registered under the Securities Act of 1933 (15 U.S.C. 77 et 
seq.) or the subject of any American depositary receipt registered under 
the Securities Act of 1933;
    (4) The agreement, contract, or transaction may only be cash 
settled; and
    (5) The agreement, contract or transaction is not entered into by 
the issuer of the debt securities upon which the qualifying foreign 
futures contract is based or referenced (including any security used to 
determine the cash payment due on settlement of such agreement, contract 
or transaction), an affiliate (as defined in the Securities Act of 1933 
(15 U.S.C. 77 et seq.) and the rules and regulations thereunder) of the 
issuer, or an underwriter of such issuer's debt securities.
    (cccc) Cleared Swaps Customer. This term has the meaning provided in 
Sec.  22.1 of this chapter.
    (dddd) Cleared Swaps Customer Account. This term has the meaning 
provided in Sec.  22.1 of this chapter.
    (eeee) Cleared Swaps Customer Collateral. This term has the meaning 
provided in Sec.  22.1 of this chapter.
    (ffff) Confirmation. When used in reference to a futures commission 
merchant, introducing broker, or commodity trading advisor, this term 
means documentation (electronic or otherwise) that memorializes 
specified terms of a transaction executed on behalf of a customer. When 
used in reference to a swap dealer or major swap participant, this term 
has the meaning set forth in Sec.  23.500 of this chapter.
    (gggg) Customer Account. This term references both a Cleared Swaps 
Customer Account and a Futures Account, as defined by paragraphs (dddd) 
and (vv) of this section.
    (hhhh) Electronic trading facility. This term means a trading 
facility that--
    (1) Operates by means of an electronic or telecommunications 
network; and
    (2) Maintains an automated audit trail of bids, offers, and the 
matching of orders or the execution of transactions on the facility.
    (iiii) Futures customer. This term means any person who uses a 
futures commission merchant, introducing broker, commodity trading 
advisor, or commodity pool operator as an agent in connection with 
trading in any contract for the purchase of sale of a commodity for 
future delivery or any option on such contract; 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 futures customer within the 
meaning of sections 4d(a) and 4d(b) 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 futures customer within the meaning of the Act and Sec. Sec.  
1.37 and 1.46 and all other sections of these rules, regulations, and 
orders which do not implement sections 4d and 4f of the Act.
    (jjjj) Futures customer funds. This term means all money, 
securities, and property received by a futures commission merchant or by 
a derivatives clearing organization from, for, or on behalf of, futures 
customers:
    (1) To margin, guarantee, or secure contracts for future delivery on 
or subject to the rules of a contract market or derivatives clearing 
organization, as the case may be, and all money accruing to such futures 
customers as the result of such contracts; and

[[Page 37]]

    (2) In connection with a commodity option transaction on or subject 
to the rules of a contract market, or derivatives clearing organization, 
as the case may be:
    (i) To be used as a premium for the purchase of a commodity option 
transaction for a futures customer;
    (ii) As a premium payable to a futures customer;
    (iii) To guarantee or secure performance of a commodity option by a 
futures 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 a futures customer.
    (3) Notwithstanding paragraphs (1) and (2) of this definition, the 
term ``futures 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.
    (kkkk) Order. This term means an instruction or authorization 
provided by a customer to a futures commission merchant, introducing 
broker or commodity trading advisor regarding trading in a commodity 
interest on behalf of the customer.
    (llll) Organized exchange. This term means a trading facility that--
    (1) Permits trading--
    (i) By or on behalf of a person that is not an eligible contract 
participant; or
    (ii) By persons other than on a principal-to-principal basis; or
    (2) Has adopted (directly or through another nongovernmental entity) 
rules that--
    (i) Govern the conduct of participants, other than rules that govern 
the submission of orders or execution of transactions on the trading 
facility; and
    (ii) Include disciplinary sanctions other than the exclusion of 
participants from trading.
    (mmmm) Prudential regulator. This term has the meaning given to the 
term in section 1a(39) of the Commodity Exchange Act and includes the 
Board of Governors of the Federal Reserve System, the Office of the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
the Farm Credit Administration, and the Federal Housing Finance Agency, 
as applicable to the swap dealer or major swap participant. The term 
also includes the Federal Deposit Insurance Corporation, with respect to 
any financial company as defined in section 201 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act or any insured depository 
institution under the Federal Deposit Insurance Act, and with respect to 
each affiliate of any such company or institution.
    (nnnn) Registered entity. This term means:
    (1) A board of trade designated as a contract market under section 5 
of the Act;
    (2) A derivatives clearing organization registered under section 5b 
of the Act;
    (3) A board of trade designated as a contract market under section 
5f of the Act;
    (4) A swap execution facility registered under section 5h of the 
Act;
    (5) A swap data repository registered under section 21 of the Act; 
and
    (6) With respect to a contract that the Commission determines is a 
significant price discovery contract, any electronic trading facility on 
which the contract is executed or traded.
    (oooo) Registrant. This term means: a commodity pool operator; 
commodity trading advisor; futures commission merchant; introducing 
broker; leverage transaction merchant; floor broker; floor trader; major 
swap participant; retail foreign exchange dealer; or swap dealer that is 
subject to these regulations; or an associated person of any of the 
foregoing other than an associated person of a swap dealer or major swap 
participant.
    (pppp) Retail forex customer. This term means a person, other than 
an eligible contract participant as defined in section 1a(18) of the 
Act, acting on its own behalf and trading in any account, agreement, 
contract or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of 
the Act.
    (qqqq) Swap data repository. This term means any person that 
collects and maintains information or records with respect to 
transactions or positions in, or the terms and conditions of, swaps

[[Page 38]]

entered into by third parties for the purpose of providing a centralized 
recordkeeping facility for swaps.
    (rrrr) Swap execution facility. This term means a trading system or 
platform in which multiple participants have the ability to execute or 
trade swaps by accepting bids and offers made by multiple participants 
in the facility or system, through any means of interstate commerce, 
including any trading facility, that--
    (1) Facilitates the execution of swaps between persons; and
    (2) Is not a designated contract market.
    (ssss) Trading facility. This term has the meaning set forth in 
section 1a(51) of the Act.

[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 
section of the printed volume and at www.fdsys.gov.



Sec.  1.4  Electronic signatures, acknowledgments and verifications.

    For purposes of complying with any provision in the Commodity 
Exchange Act or the rules or regulations in this Chapter I that requires 
a swap transaction to be acknowledged by a swap dealer or major swap 
participant or a document to be signed or verified by a customer of a 
futures commission merchant or introducing broker, a retail forex 
customer of a retail foreign exchange dealer or futures commission 
merchant, a pool participant or a client of a commodity trading advisor, 
or a counterparty of a swap dealer or major swap participant, an 
electronic signature executed by the customer, retail forex customer, 
participant, client, counterparty, swap dealer, or major swap 
participant will be sufficient, if the futures commission merchant, 
retail foreign exchange dealer, introducing broker, commodity pool 
operator, commodity trading advisor, swap dealer, or major swap 
participant elects generally to accept electronic signatures, 
acknowledgments or verifications or another Commission rule permits the 
use of electronic signatures for the purposes listed above; Provided, 
however, That the electronic signature must comply with applicable 
Federal laws and other Commission rules; And, Provided further, That the 
futures commission merchant, retail foreign exchange dealer, introducing 
broker, commodity pool operator, commodity trading advisor, swap dealer, 
or major swap participant must adopt and use 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.

[77 FR 66320, Nov. 2, 2012]



Sec.  1.6  Anti-evasion.

    (a) It shall be unlawful to conduct activities outside the United 
States, including entering into agreements, contracts, and transactions 
and structuring entities, to willfully evade or attempt to evade any 
provision of the Commodity Exchange Act as enacted by Subtitle A of the 
Wall Street Transparency and Accountability Act of 2010 or the rules, 
regulations, and orders of the Commission promulgated thereunder 
(Subtitle A).
    (b) The form, label, and written documentation of an agreement, 
contract, or transaction, or an entity, shall not be dispositive in 
determining whether the agreement, contract, or transaction, or entity, 
has been entered into or structured to willfully evade as provided in 
paragraph (a) of this section.
    (c) An activity conducted outside the United States to evade as 
provided in paragraph (a) of this section shall be subject to the 
provisions of Subtitle A.
    (d) Notwithstanding the foregoing, no agreement, contract, or 
transaction structured as a security (including a security-based swap) 
under the securities laws (as defined in section 3(a)(47) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))) shall be deemed 
a swap pursuant to this section.

[77 FR 48354, Aug. 13, 2012]



Sec.  1.7  Books and records requirements for security-based swap 
agreements.

    (a) A person registered as a swap data repository under section 21 
of the Commodity Exchange Act and the rules and regulations thereunder:

[[Page 39]]

    (1) Shall not be required to keep and maintain additional books and 
records regarding security-based swap agreements other than the books 
and records regarding swaps required to be kept and maintained pursuant 
to section 21 of the Commodity Exchange Act and the rules and 
regulations thereunder; and
    (2) Shall not be required to collect and maintain additional data 
regarding security-based swap agreements other than the data regarding 
swaps required to be collected and maintained by such persons pursuant 
to section 21 of the Commodity Exchange Act and the rules and 
regulations thereunder.
    (b) A person shall not be required to keep and maintain additional 
books and records, including daily trading records, regarding security-
based swap agreements other than the books and records regarding swaps 
required to be kept and maintained by such persons pursuant to section 
4s of the Commodity Exchange Act and the rules and regulations 
thereunder if such person is registered as:
    (1) A swap dealer under section 4s(a)(1) of the Commodity Exchange 
Act and the rules and regulations thereunder;
    (2) A major swap participant under section 4s(a)(2) of the Commodity 
Exchange Act and the rules and regulations thereunder;
    (3) A security-based swap dealer under section 15F(a)(1) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78o-10(a)(1)) and the rules 
and regulations thereunder; or
    (4) a major security-based swap participant under section 15F(a)(2) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(a)(2)) and the 
rules and regulations thereunder.
    (c) The term security-based swap agreement has the meaning set forth 
in section 1a(47)(A)(v) of the Commodity Exchange Act.

[77 FR 48354, Aug. 13, 2012]



Sec.  1.8  Requests for interpretation of swaps, security-based swaps, 
and mixed swaps.

    (a) In general. Any person may submit a request to the Commission 
and the Securities and Exchange Commission to provide a joint 
interpretation of whether a particular agreement, contract, or 
transaction (or class thereof) is:
    (1) A swap, as that term is defined in section 1a(47) of the 
Commodity Exchange Act and the rules and regulations promulgated 
thereunder;
    (2) A security-based swap, as that term is defined in section 1a(42) 
of the Commodity Exchange Act and the rules and regulations promulgated 
thereunder; or
    (3) A mixed swap, as that term is defined in section 1a(47)(D) of 
the Commodity Exchange Act and the rules and regulations promulgated 
thereunder.
    (b) Request process. In making a request pursuant to paragraph (a) 
of this section, the requesting person must provide the Commission and 
the Securities and Exchange Commission with the following:
    (1) All material information regarding the terms of the agreement, 
contract, or transaction (or class thereof);
    (2) A statement of the economic characteristics and purpose of the 
agreement, contract, or transaction (or class thereof);
    (3) The requesting person's determination as to whether the 
agreement, contract, or transaction (or class thereof) should be 
characterized as a swap, a security-based swap, or both, (i.e., a mixed 
swap), including the basis for such determination; and
    (4) Such other information as may be requested by the Commission or 
the Securities and Exchange Commission.
    (c) Request withdrawal. A person may withdraw a request made 
pursuant to paragraph (a) of this section at any time prior to the 
issuance of a joint interpretation or joint proposed rule by the 
Commission and the Securities and Exchange Commission in response to the 
request; provided, however, that notwithstanding such withdrawal, the 
Commission and the Securities and Exchange Commission may provide a 
joint interpretation of whether the agreement, contract, or transaction 
(or class thereof) is a swap, a security-based swap, or both (i.e., a 
mixed swap).
    (d) Request by the Commission or the Securities and Exchange 
Commission. In the absence of a request for a joint interpretation under 
paragraph (a) of this section:

[[Page 40]]

    (1) If the Commission or the Securities and Exchange Commission 
receives a proposal to list, trade, or clear an agreement, contract, or 
transaction (or class thereof) that raises questions as to the 
appropriate characterization of such agreement, contract, or transaction 
(or class thereof) as a swap, a security-based swap, or both (i.e., a 
mixed swap), the Commission or the Securities and Exchange Commission, 
as applicable, promptly shall notify the other of the agreement, 
contract, or transaction (or class thereof); and
    (2) The Commission or the Securities and Exchange Commission, or 
their Chairmen jointly, may submit a request for a joint interpretation 
as described in paragraph (a) of this section; such submission shall be 
made pursuant to paragraph (b) of this section, and may be withdrawn 
pursuant to paragraph (c) of this section.
    (e) Timeframe for joint interpretation. (1) If the Commission and 
the Securities and Exchange Commission determine to issue a joint 
interpretation as described in paragraph (a) of this section, such joint 
interpretation shall be issued within 120 days after receipt of a 
complete submission requesting a joint interpretation under paragraph 
(a) or (d) of this section.
    (2) The Commission and the Securities and Exchange Commission shall 
consult with the Board of Governors of the Federal Reserve System prior 
to issuing any joint interpretation as described in paragraph (a) of 
this section.
    (3) If the Commission and the Securities and Exchange Commission 
seek public comment with respect to a joint interpretation regarding an 
agreement, contract, or transaction (or class thereof), the 120-day 
period described in paragraph (e)(1) of this section shall be stayed 
during the pendency of the comment period, but shall recommence with the 
business day after the public comment period ends.
    (4) Nothing in this section shall require the Commission and the 
Securities and Exchange Commission to issue any joint interpretation.
    (5) If the Commission and the Securities and Exchange Commission do 
not issue a joint interpretation within the time period described in 
paragraph (e)(1) or (e)(3) of this section, each of the Commission and 
the Securities and Exchange Commission shall publicly provide the 
reasons for not issuing such a joint interpretation within the 
applicable timeframes.
    (f) Joint proposed rule. (1) Rather than issue a joint 
interpretation pursuant to paragraph (a) of this section, the Commission 
and the Securities and Exchange Commission may issue a joint proposed 
rule, in consultation with the Board of Governors of the Federal Reserve 
System, to further define one or more of the terms swap, security-based 
swap, or mixed swap.
    (2) A joint proposed rule described in paragraph (f)(1) of this 
section shall be issued within the timeframe for issuing a joint 
interpretation set forth in paragraph (e) of this section.

[77 FR 48354, Aug. 13, 2012]



Sec.  1.9  Regulation of mixed swaps.

    (a) In general. The term mixed swap has the meaning set forth in 
section 1a(47)(D) of the Commodity Exchange Act.
    (b) Regulation of bilateral uncleared mixed swaps entered into by 
dually-registered dealers or major participants. A mixed swap that is 
neither executed on nor subject to the rules of a designated contract 
market, national securities exchange, swap execution facility, security-
based swap execution facility, or foreign board of trade; that will not 
be submitted to a derivatives clearing organization or registered or 
exempt clearing agency to be cleared; and where at least one party is 
registered with the Commission as a swap dealer or major swap 
participant and also with the Securities and Exchange Commission as a 
security-based swap dealer or major security-based swap participant, 
shall be subject to:
    (1) The following provisions of the Commodity Exchange Act, and the 
rules and regulations promulgated thereunder:
    (i) Examinations and information sharing: sections 4s(f) and 8 of 
the Commodity Exchange Act;
    (ii) Enforcement: sections 2(a)(1)(B), 4(b), 4b, 4c, 4s(h)(1)(A), 
4s(h)(4)(A), 6(c), 6(d), 6c, 6d, 9, 13(a), 13(b), and 23 of the 
Commodity Exchange Act;

[[Page 41]]

    (iii) Reporting to a swap data repository: section 4r of the 
Commodity Exchange Act;
    (iv) Real-time reporting: section 2(a)(13) of the Commodity Exchange 
Act;
    (v) Capital: section 4s(e) of the Commodity Exchange Act; and
    (vi) Position Limits: section 4a of the Commodity Exchange Act; and
    (2) The provisions of the Federal securities laws, as defined in 
section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(47)), and the rules and regulations promulgated thereunder.
    (c) Process for determining regulatory treatment for other mixed 
swaps--(1) In general. Any person who desires or intends to list, trade, 
or clear a mixed swap (or class thereof) that is not subject to 
paragraph (b) of this section may request the Commission and the 
Securities and Exchange Commission to issue a joint order permitting the 
requesting person (and any other person or persons that subsequently 
lists, trades, or clears that mixed swap) to comply, as to parallel 
provisions only, with specified parallel provisions of either the 
Commodity Exchange Act or the Securities Exchange Act of 1934 (15 U.S.C. 
78a et seq.), and the rules and regulations thereunder (collectively, 
specified parallel provisions), instead of being required to comply with 
parallel provisions of both the Commodity Exchange Act and the 
Securities Exchange Act of 1934. For purposes of this paragraph (c), 
parallel provisions means comparable provisions of the Commodity 
Exchange Act and the Securities Exchange Act of 1934 that were added or 
amended by the Wall Street Transparency and Accountability Act of 2010 
with respect to swaps and security-based swaps, and the rules and 
regulations thereunder.
    (2) Request Process. A person submitting a request pursuant to 
paragraph (c)(1) of this section must provide the Commission and the 
Securities and Exchange Commission with the following:
    (i) All material information regarding the terms of the specified, 
or specified class of, mixed swap;
    (ii) The economic characteristics and purpose of the specified, or 
specified class of, mixed swap;
    (iii) The specified parallel provisions, and the reasons the person 
believes such specified parallel provisions would be appropriate for the 
mixed swap (or class thereof); and
    (iv) An analysis of:
    (A) The nature and purposes of the parallel provisions that are the 
subject of the request;
    (B) The comparability of such parallel provisions;
    (C) The extent of any conflicts or differences between such parallel 
provisions; and
    (D) Such other information as may be requested by the Commission or 
the Securities and Exchange Commission.
    (3) Request withdrawal. A person may withdraw a request made 
pursuant to paragraph (c)(1) of this section at any time prior to the 
issuance of a joint order under paragraph (c)(4) of this section by the 
Commission and the Securities and Exchange Commission in response to the 
request.
    (4) Issuance of orders. In response to a request under paragraph 
(c)(1) of this section, the Commission and the Securities and Exchange 
Commission, as necessary to carry out the purposes of the Wall Street 
Transparency and Accountability Act of 2010, may issue a joint order, 
after notice and opportunity for comment, permitting the requesting 
person (and any other person or persons that subsequently lists, trades, 
or clears that mixed swap) to comply, as to parallel provisions only, 
with the specified parallel provisions (or another subset of the 
parallel provisions that are the subject of the request, as the 
Commissions determine is appropriate), instead of being required to 
comply with parallel provisions of both the Commodity Exchange Act and 
the Securities Exchange Act of 1934. In determining the contents of such 
joint order, the Commission and the Securities and Exchange Commission 
may consider, among other things:
    (i) The nature and purposes of the parallel provisions that are the 
subject of the request;
    (ii) The comparability of such parallel provisions; and
    (iii) The extent of any conflicts or differences between such 
parallel provisions.

[[Page 42]]

    (5) Timeframe. (i) If the Commission and the Securities and Exchange 
Commission determine to issue a joint order as described in paragraph 
(c)(4) of this section, such joint order shall be issued within 120 days 
after receipt of a complete request for a joint order under paragraph 
(c)(1) of this section, which time period shall be stayed during the 
pendency of the public comment period provided for in paragraph (c)(4) 
of this section and shall recommence with the business day after the 
public comment period ends.
    (ii) Nothing in this section shall require the Commission and the 
Securities and Exchange Commission to issue any joint order.
    (iii) If the Commission and the Securities and Exchange Commission 
do not issue a joint order within the time period described in paragraph 
(c)(5)(i) of this section, each of the Commission and the Securities and 
Exchange Commission shall publicly provide the reasons for not issuing 
such a joint order within that timeframe.

[77 FR 48354, Aug. 13, 2012]

          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 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

[[Page 43]]

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 as of the close of 
business each month. Each Form 1-FR-FCM must be filed no later than 17 
business days after the date for which the report is made.
    (ii) In addition to the monthly 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 of its 
fiscal year, which must be certified by an independent public accountant 
in accordance with Sec.  1.16, and must be filed no later than 60 days 
after the close of the 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. Each 
Form 1-FR-IB must be filed no later than 17 business 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 which 
must be certified by an

[[Page 44]]

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.
    (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 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 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.
    (5) Each futures commission merchant must file with the Commission 
the measure of the future commission merchant's leverage as of the close 
of the business each month. For purpose of this section, the term 
``leverage'' shall be defined by a registered futures association of 
which the futures commission merchant is a member. The futures 
commission merchant is required to file the leverage information with 
the Commission within 17 business days of the close of the futures 
commission merchant's month end.
    (c) Where to file reports. (1) Form 1-FR filed by an introducing 
broker pursuant to paragraph (b)(2) of this section need be filed only 
with, and will be considered filed when received by, the National 
Futures Association. Other reports or information provided for in this 
section will be considered filed when received by the Regional office of 
the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located (as set forth in 
Sec.  140.02 of this chapter) and by the designated self-regulatory 
organization, if any; and reports or other information required to be 
filed by this section by an applicant for registration will be 
considered filed when received by the National Futures Association. Any 
report or information 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.

[[Page 45]]

    (2)(i) All filings or other notices prepared by a futures commission 
merchant pursuant to this section must be submitted to the Commission in 
electronic form using a form of user authentication assigned in 
accordance with procedures established by or approved by the Commission, 
and otherwise in accordance with instructions issued by or approved by 
the Commission, if the futures commission merchant 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. 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 must be filed electronically.
    (ii) Except as provided in paragraph (h) of this section, all 
filings or other notices or applications prepared by an introducing 
broker or applicant for registration as an introducing broker or futures 
commission merchant pursuant to this section must be filed 
electronically in accordance with electronic filing procedures 
established by the National Futures Association. In the case of a Form 
1-FR-IB that is required to be certified by an independent public 
accountant in accordance with Sec.  1.16, a paper copy of any such 
filing with the original manually signed certification must be 
maintained by the introducing broker or applicant for registration as an 
introducing broker in accordance with Sec.  1.31.
    (3) Any information required of a registrant by a self-regulatory 
organization pursuant to paragraph (b)(4) of this section need be 
furnished only to such self-regulatory organization and the Commission, 
and any information required of an applicant by the National Futures 
Association pursuant to paragraph (b)(4) of this section need be 
furnished only to the National Futures Association and the Commission.
    (4) 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) Statements of income (loss) and 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, 
the statement of secured amounts and funds held in separate accounts for 
30.7 customers (as defined in Sec.  30.1 of this chapter) in accordance 
with Sec.  30.7 of this chapter, and the statement of cleared swaps 
customer segregation requirements and funds in cleared swaps customer 
accounts under section 4d(f) of the Act 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;

[[Page 46]]

    (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 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, 
the statement of secured amounts and funds held in separate accounts for 
30.7 customers (as defined in Sec.  30.1 of this chapter) in accordance 
with Sec.  30.7 of the chapter, and the statement of cleared swaps 
customers segregation requirements and funds in cleared swaps customer 
accounts under section 4d(f) of the Act 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, the statement of secured amounts and funds held in 
separate accounts for 30.7 customers (as defined in Sec.  30.1 of this 
chapter) in accordance with Sec.  30.7 of this chapter, and the 
statement of cleared swaps customer segregation requirements and funds 
in cleared swaps customer accounts under section 4d(f) of the Act, 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. The individual making such oath or 
affirmation must be:
    (i) If the registrant or applicant is a sole proprietorship, the 
proprietor; if a partnership, any general partner; if a corporation, the 
chief executive officer or chief financial officer; and, if a limited 
liability company or limited liability partnership, the chief executive 
officer, the chief financial officer, the manager, the managing member, 
or those members vested with the management authority for the limited 
liability company or limited liability partnership; or
    (ii) If the registrant or applicant is registered with the 
Securities and Exchange Commission as a securities broker or dealer, the 
representative authorized under Sec.  240.17a-5 of this title to file 
for the securities broker or dealer its Financial and Operational 
Combined Uniform Single Report under the

[[Page 47]]

Securities Exchange Act of 1934, part II, part IIA, or part II CSE.
    (iii) In the case of a Form 1-FR filed via electronic transmission 
in accordance with procedures established by or approved by the 
Commission, such transmission must be accompanied by the user 
authentication assigned to the authorized signer under such procedures, 
and the use of such user authentication 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. An applicant that does not so notify 
the National Futures Association will be deemed to have elected the 
calendar year as its fiscal year.
    (2) (i) A registrant must continue to use its elected fiscal year, 
calendar or otherwise, unless a change in such fiscal year has been 
approved pursuant to this paragraph (e)(2).
    (ii) Futures commission merchant registrants. (A) A futures 
commission merchant may file with its designated self-regulatory 
organization an application to change its fiscal year, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission a 
copy of any notice it receives from the designated self-regulatory 
organization to approve or deny the registrant's application to change 
its fiscal year. A written notice of approval shall become effective 
upon the filing by the registrant of a copy with the Commission, and a 
written notice of denial shall be effective as of the date of the 
notice.
    (B) A futures commission merchant that is registered with the 
Securities and Exchange Commission as a securities broker or dealer may 
file with its designated self-regulatory organization copies of any 
notice or application filed with its designated examining authority, 
pursuant to Sec.  240.17a-5(d)(1)(i) of this title, for a change in 
fiscal year or ``as of'' date for its annual audited financial 
statement. The registrant must also file immediately with the designated 
self-regulatory organization and the Commission copies of any notice it 
receives from its designated examining authority to approve or deny the 
registrant's request for change in fiscal year or ``as of'' date. Upon 
the receipt by the designated self-regulatory organization and the 
Commission of copies of any such notice of approval, the change in 
fiscal year or ``as of'' date referenced in the notice shall be deemed 
approved under this paragraph (e)(2).
    (C) Any copy that under this paragraph (e)(2) is required to be 
filed with the Commission shall be filed with the regional office of the 
Commission with jurisdiction over the state in which the registrant's 
principal place of business is located, and any copy or application to 
be filed with the designated self-regulatory organization shall be filed 
at its principal place of business.
    (iii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application to change its 
fiscal year, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with the 
National Futures Association copies of any notice or application filed 
with its designated examining authority, pursuant to Sec.  240.17a-
5(d)(1)(i) of this title, for a change in fiscal year or ``as of'' date 
for its annual audited financial statement. The registrant must also 
file immediately with the National Futures Association copies of any 
notice it receives from its designated examining authority to approve or 
deny the registrant's request for change in fiscal year or ``as of'' 
date. Upon the receipt by the National Futures Association of copies of 
any such notice of approval, the change in fiscal year or ``as of'' date 
referenced in the notice shall be

[[Page 48]]

deemed approved under this paragraph (e)(2).
    (f) Extension of time for filing uncertified reports. (1) In the 
event a registrant finds that it cannot file its Form 1-FR, or, in 
accordance with paragraph (h) of this section, its Financial and 
Operational Combined Uniform Single Report under the Securities Exchange 
Act of 1934, part II, part IIA, or part II CSE (FOCUS report), for any 
period within the time specified in paragraphs (b)(1)(i) or (b)(2)(i) of 
this section without substantial undue hardship, it may request approval 
for an extension of time, as follows:
    (i) Futures commission merchant registrants. (A) A futures 
commission merchant may file with its designated self-regulatory 
organization an application for extension of time, a copy of which the 
registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission a 
copy of any notice it receives from the designated self-regulatory 
organization to approve or deny the registrant's request for extension 
of time. A written notice of approval shall become effective upon the 
filing by the registrant of a copy with the Commission, and a written 
notice of denial shall be effective as of the date of the notice.
    (B) A futures commission merchant that is registered with the 
Securities and Exchange Commission as a securities broker or dealer may 
file with its designated self-regulatory organization a copy of any 
application that the registrant has filed with its designated examining 
authority, pursuant to Sec.  240.17-a5(l)(5) of this title, for an 
extension of time to file its FOCUS report. The registrant must also 
file immediately with the designated self-regulatory organization and 
the Commission copies of any notice it receives from its designated 
examining authority to approve or deny the requested extension of time. 
Upon receipt by the designated self-regulatory organization and the 
Commission of copies of any such notice of approval, the requested 
extension of time referenced in the notice shall be deemed approved 
under this paragraph (f)(1).
    (C) Any copy that under this subparagraph (f)(1)(i) is required to 
be filed with the Commission shall be filed with the regional office of 
the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located.
    (ii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application for extension 
of the time, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with the 
National Futures Association copies of any application that the 
registrant has filed with its designated examining authority, pursuant 
to Sec.  240.17-a5(l)(5) of this title, for an extension of time to file 
its FOCUS report. The registrant must also file immediately with the 
National Futures Association copies of any notice it receives from its 
designated examining authority to approve or deny the requested 
extension of time. Upon the receipt by the National Futures Association 
of a copy of any such notice of approval, the requested extension of 
time referenced in the notice shall be deemed approved under this 
paragraph (f)(1)(ii).
    (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 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 for filing the 
report. Notice of such application must be filed with the regional 
office of the Commission with jurisdiction over the state in which the 
applicant's principal place of business is located concurrently with the 
filing of

[[Page 49]]

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.
    (g) Public availability of reports. (1) Forms 1-FR filed pursuant to 
this section, and FOCUS reports filed in lieu of Forms 1-FR pursuant to 
paragraph (h) of this section, will be treated as exempt from mandatory 
public disclosure for purposes of the Freedom of Information Act and the 
Government in the Sunshine Act and parts 145 and 147 of this chapter, 
except for the information described in paragraph (g)(2) of this 
section.
    (2) The following information in Forms 1-FR, and the same or 
equivalent information in FOCUS reports filed in lieu of Forms 1-FR, 
will be publicly available:
    (i) The amount of the applicant's or registrant's adjusted net 
capital; the amount of its minimum net capital requirement under Sec.  
1.17 of this chapter; and the amount of its adjusted net capital in 
excess of its minimum net capital requirement; and
    (ii) The following statements and footnote disclosures thereof: the 
Statement of Financial Condition in the certified annual financial 
reports of futures commission merchants and introducing brokers; 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, 
the Statement (to be filed by a futures commission merchant only) of 
Secured Amounts and Funds held in Separate Accounts for 30.7 Customers 
(as defined in Sec.  30.1 of this chapter) in accordance with Sec.  30.7 
of this chapter, and the Statement (to be filed by futures commission 
merchants only) of Cleared Swaps Customer Segregation Requirements and 
Funds in Cleared Swaps Customer Accounts under section 4d(f) of the Act.
    (3) [Reserved]
    (4) All information that is exempt from mandatory public disclosure 
under paragraph (g)(1) of this section 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 that 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, Part IIA, or Part II CSE (FOCUS Report), 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 
FOCUS Report; and Provided, further, That a certified FOCUS Report filed 
by an introducing broker or applicant for registration as an introducing 
broker in lieu of a certified Form 1-FR-IB must be filed according to 
National Futures Association rules, either in paper form or 
electronically, in accordance with procedures established by the 
National Futures Association, and if filed electronically, a paper copy 
of such filing with the original manually signed certification must be 
maintained by such introducing broker or applicant in accordance with 
Sec.  1.31.
    (i) Filing option available to an introducing broker or applicant 
for registration as an introducing broker which is also a country 
elevator. Any introducing

[[Page 50]]

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 
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 or retail foreign exchange 
dealer 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, retail foreign 
exchange dealer, 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; 
and, if the firm is a limited liability company or limited liability 
partnership, either the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.
    (2) No futures commission merchant or retail foreign exchange dealer 
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) of this part or Sec.  
5.6(b) of this chapter, as applicable; or
    (ii) There is filed against the futures commission merchant or 
retail foreign exchange dealer 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 Sec.  3.55, 3.56 or 3.60 of this chapter.
    (3) A retail foreign exchange dealer may enter into a guarantee 
agreement only with an introducing broker as defined in Sec.  5.1(f)(1) 
of this chapter. A retail foreign exchange dealer may not enter into a 
guarantee agreement with an introducing broker as defined in Sec.  
1.3(mm) of this part.
    (4) 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.
    (5)(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

[[Page 51]]

such suspension, revocation or withdrawal.
    (ii) If the registration of the futures commission merchant or 
retail foreign exchange dealer 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.
    (6) 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 or retail foreign exchange dealer and the 
introducing broker;
    (ii) For good cause shown, by either party giving written notice of 
its intention to terminate the agreement, 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 or retail foreign exchange dealer 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 or retail foreign 
exchange dealer and the introducing broker.
    (7) The termination of a guarantee agreement by a futures commission 
merchant, retail foreign exchange dealer or an introducing broker, or 
the expiration of such an agreement, shall not relieve any party from 
any liability or obligation arising from acts or omissions which 
occurred during the term of the agreement.
    (8) An introducing broker may not simultaneously be a party to more 
than one guarantee agreement: Provided, however, That the provisions of 
this paragraph (j)(8) shall not be deemed to preclude an introducing 
broker from entering into a guarantee agreement with another futures 
commission merchant or retail foreign exchange dealer if the introducing 
broker, futures commission merchant or retail foreign exchange dealer 
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)(6) 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)(8) shall not be deemed to preclude an 
introducing broker from entering into a guarantee agreement with another 
futures commission merchant or retail foreign exchange dealer if the 
futures commission merchant or retail foreign exchange dealer 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)(6)(ii) of this section.
    (9)(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)(6) of this section, or that is due to expire in accordance 
with the provisions of paragraph (j)(5)(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

[[Page 52]]

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: Provided, however, that an introducing broker as defined in Sec.  
5.1(f)(1) of this chapter that is party to a guarantee agreement that 
has been terminated or that has expired 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 a new guarantee agreement effective on or before 
the termination or expiration date of the terminating or expiring 
guarantee agreement.
    (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)(9)(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)(6)(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)(iii) 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 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: Provided, however, that an introducing broker as defined in Sec.  
5.1(f)(1) of this chapter that is party to a guarantee agreement that 
has been terminated must cease doing business as an introducing broker 
from and after the effective date of such termination, and may not 
resume doing business as an introducing broker as defined in Sec.  
5.1(f)(1) of this chapter unless and until it files a new guarantee 
agreement.
    (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

[[Page 53]]

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]

    Editorial Note: For Federal Register citations affecting Sec.  1.10, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec.  1.11  Risk Management Program for futures commission merchants.

    (a) Applicability. Nothing in this section shall apply to a futures 
commission merchant that 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 from soliciting or accepting 
orders for the purchase or sale of any commodity interest.
    (b) Definitions. For purposes of this section:
    (1) Business unit means any department, division, group, or 
personnel of a futures commission merchant or any of its affiliates, 
whether or not identified as such that:
    (i) Engages in soliciting or in accepting orders for the purchase or 
sale of any commodity interest 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; or
    (ii) Otherwise handles segregated funds, including managing, 
investing, and overseeing the custody of segregated funds, or any 
documentation in connection therewith, other than for risk management 
purposes; and
    (iii) Any personnel exercising direct supervisory authority of the 
performance of the activities described in paragraph (b)(1)(i) or (ii) 
of this section.
    (2) Customer means a futures customer as defined in Sec.  1.3, 
Cleared Swaps Customer as defined in Sec.  22.1 of this chapter, and 
30.7 customer as defined in Sec.  30.1 of this chapter.
    (3) Governing body means the proprietor, if the futures commission 
merchant is a sole proprietorship; a general partner, if the futures 
commission merchant is a partnership; the board of directors if the 
futures commission merchant is a corporation; the chief executive 
officer, the chief financial officer, the manager, the managing member, 
or those members vested with the management authority if the futures 
commission merchant is a limited liability company or limited liability 
partnership.
    (4) Segregated funds means money, securities, or other property held 
by a futures commission merchant in separate accounts pursuant to Sec.  
1.20 for futures customers, pursuant to Sec.  22.2 of this chapter for 
Cleared Swaps Customers, and pursuant to Sec.  30.7 of this chapter for 
30.7 customers.
    (5) Senior management means, any officer or officers specifically 
granted the authority and responsibility to fulfill the requirements of 
senior management by the governing body.
    (c) Risk Management Program. (1) Each futures commission merchant 
shall establish, maintain, and enforce a system of risk management 
policies and procedures designed to monitor and manage the risks 
associated with the activities of the futures commission merchant as 
such. For purposes of this section, such policies and procedures shall 
be referred to collectively as a ``Risk Management Program.''
    (2) Each futures commission merchant shall maintain written policies 
and procedures that describe the Risk Management Program of the futures 
commission merchant.
    (3) The Risk Management Program and the written risk management 
policies and procedures, and any material changes thereto, shall be 
approved in writing by the governing body of the futures commission 
merchant.
    (4) Each futures commission merchant shall furnish a copy of its 
written risk management policies and procedures to the Commission and 
its designated self-regulatory organization upon application for 
registration and thereafter upon request.
    (d) Risk management unit. As part of the Risk Management Program, 
each

[[Page 54]]

futures commission merchant shall establish and maintain a risk 
management unit with sufficient authority; qualified personnel; and 
financial, operational, and other resources to carry out the risk 
management program established pursuant to this section. The risk 
management unit shall report directly to senior management and shall be 
independent from the business unit.
    (e) Elements of the Risk Management Program. The Risk Management 
Program of each futures commission merchant shall include, at a minimum, 
the following elements:
    (1) Identification of risks and risk tolerance limits. (i) The Risk 
Management Program shall take into account market, credit, liquidity, 
foreign currency, legal, operational, settlement, segregation, 
technological, capital, and any other applicable risks together with a 
description of the risk tolerance limits set by the futures commission 
merchant and the underlying methodology in the written policies and 
procedures. The risk tolerance limits shall be reviewed and approved 
quarterly by senior management and annually by the governing body. 
Exceptions to risk tolerance limits shall be subject to written policies 
and procedures.
    (ii) The Risk Management Program shall take into account risks posed 
by affiliates, all lines of business of the futures commission merchant, 
and all other trading activity engaged in by the futures commission 
merchant. The Risk Management Program shall be integrated into risk 
management at the consolidated entity level.
    (iii) The Risk Management Program shall include policies and 
procedures for detecting breaches of risk tolerance limits set by the 
futures commission merchant, and alerting supervisors within the risk 
management unit and senior management, as appropriate.
    (2) Periodic Risk Exposure Reports. (i) The risk management unit of 
each futures commission merchant shall provide to senior management and 
to its governing body quarterly written reports setting forth all 
applicable risk exposures of the futures commission merchant; any 
recommended or completed changes to the Risk Management Program; the 
recommended time frame for implementing recommended changes; and the 
status of any incomplete implementation of previously recommended 
changes to the Risk Management Program. For purposes of this section, 
such reports shall be referred to as ``Risk Exposure Reports.'' The Risk 
Exposure Reports also shall be provided to the senior management and the 
governing body immediately upon detection of any material change in the 
risk exposure of the futures commission merchant.
    (ii) Furnishing to the Commission. Each futures commission merchant 
shall furnish copies of its Risk Exposure Reports to the Commission 
within five (5) business days of providing such reports to its senior 
management.
    (3) Specific risk management considerations. The Risk Management 
Program of each futures commission merchant shall include, but not be 
limited to, policies and procedures necessary to monitor and manage the 
following risks:
    (i) Segregation risk. The written policies and procedures shall be 
reasonably designed to ensure that segregated funds are separately 
accounted for and segregated or secured as belonging to customers as 
required by the Act and Commission regulations and must, at a minimum, 
include or address the following:
    (A) A process for the evaluation of depositories of segregated 
funds, including, at a minimum, documented criteria that any depository 
that will hold segregated funds, including an entity affiliated with the 
futures commission merchant, must meet, including criteria addressing 
the depository's capitalization, creditworthiness, operational 
reliability, and access to liquidity. The criteria should further 
consider the extent to which segregated funds are concentrated with any 
depository or group of depositories. The criteria also should include 
the availability of deposit insurance and the extent of the regulation 
and supervision of the depository;
    (B) A program to monitor an approved depository on an ongoing basis 
to assess its continued satisfaction of the futures commission 
merchant's established criteria, including a thorough

[[Page 55]]

due diligence review of each depository at least annually;
    (C) An account opening process for depositories, including 
documented authorization requirements, procedures that ensure that 
segregated funds are not deposited with a depository prior to the 
futures commission merchant receiving the acknowledgment letter required 
from such depository pursuant to Sec. Sec.  1.20, and 22.2 and 30.7 of 
this chapter, and procedures that ensure that such account is properly 
titled to reflect that it is holding segregated funds pursuant to the 
Act and Commission regulations;
    (D) A process for establishing a targeted amount of residual 
interest that the futures commission merchant seeks to maintain as its 
residual interest in the segregated funds accounts and such process must 
be designed to reasonably ensure that the futures commission merchant 
maintains the targeted residual amounts and remains in compliance with 
the segregated funds requirements at all times. The policies and 
procedures must require that senior management, in establishing the 
total amount of the targeted residual interest in the segregated funds 
accounts, perform appropriate due diligence and consider various 
factors, as applicable, relating to the nature of the futures commission 
merchant's business including, but not limited to, the composition of 
the futures commission merchant's customer base, the general 
creditworthiness of the customer base, the general trading activity of 
the customers, the types of markets and products traded by the 
customers, the proprietary trading of the futures commission merchant, 
the general volatility and liquidity of the markets and products traded 
by customers, the futures commission merchant's own liquidity and 
capital needs, and the historical trends in customer segregated fund 
balances, including undermargined amounts and net deficit balances in 
customers' accounts. The analysis and calculation of the targeted amount 
of the future commission merchant's residual interest must be described 
in writing with the specificity necessary to allow the Commission and 
the futures commission merchant's designated self-regulatory 
organization to duplicate the analysis and calculation and test the 
assumptions made by the futures commission merchant. The adequacy of the 
targeted residual interest and the process for establishing the targeted 
residual interest must be reassessed periodically by Senior Management 
and revised as necessary;
    (E) A process for the withdrawal of cash, securities, or other 
property from accounts holding segregated funds, where the withdrawal is 
not for the purpose of payments to or on behalf of the futures 
commission merchant's customers. Such policies and procedures must 
satisfy the requirements of Sec.  1.23, Sec.  22.17 of this chapter, or 
Sec.  30.7 of this chapter, as applicable;
    (F) A process for assessing the appropriateness of specific 
investments of segregated funds in permitted investments in accordance 
with Sec.  1.25. Such policies and procedures must take into 
consideration the market, credit, counterparty, operational, and 
liquidity risks associated with such investments, and assess whether 
such investments comply with the requirements in Sec.  1.25 including 
that the futures commission merchant manage the permitted investments 
consistent with the objectives of preserving principal and maintaining 
liquidity;
    (G) Procedures requiring the appropriate separation of duties among 
individuals responsible for compliance with the Act and Commission 
regulations relating to the protection and financial reporting of 
segregated funds, including the separation of duties among personnel 
that are responsible for advising customers on trading activities, 
approving or overseeing cash receipts and disbursements (including 
investment operations), and recording and reporting financial 
transactions. The policies and procedures must require that any movement 
of funds to affiliated companies and parties are properly approved and 
documented;
    (H) A process for the timely recording of all transactions, 
including transactions impacting customers' accounts, in the firm's 
books of record;
    (I) A program for conducting annual training of all finance, 
treasury, operations, regulatory, compliance, settlement, and other 
relevant officers and

[[Page 56]]

employees regarding the segregation requirements for segregated funds 
required by the Act and regulations, the requirements for notices under 
Sec.  1.12, procedures for reporting suspected breaches of the policies 
and procedures required by this section to the chief compliance officer, 
without fear of retaliation, and the consequences of failing to comply 
with the segregation requirements of the Act and regulations; and
    (J) Policies and procedures for assessing the liquidity, 
marketability and mark-to-market valuation of all securities or other 
non-cash assets held as segregated funds, including permitted 
investments under Sec.  1.25, to ensure that all non-cash assets held in 
the customer segregated accounts, both customer-owned securities and 
investments in accordance with Sec.  1.25, are readily marketable and 
highly liquid. Such policies and procedures must require daily 
measurement of liquidity needs with respect to customers; assessment of 
procedures to liquidate all non-cash collateral in a timely manner and 
without significant effect on price; and application of appropriate 
collateral haircuts that accurately reflect market and credit risk.
    (ii) Operational risk. The Risk Management Program shall include 
automated financial risk management controls reasonably designed to 
prevent the placing of erroneous orders, including those that exceed 
pre-set capital, credit, or volume thresholds. The Risk Management 
Program shall ensure that the use of automated trading programs is 
subject to policies and procedures governing the use, supervision, 
maintenance, testing, and inspection of such programs.
    (iii) Capital risk. The written policies and procedures shall be 
reasonably designed to ensure that the futures commission merchant has 
sufficient capital to be in compliance with the Act and the regulations, 
and sufficient capital and liquidity to meet the reasonably foreseeable 
needs of the futures commission merchant.
    (4) Supervision of the Risk Management Program. The Risk Management 
Program shall include a supervisory system that is reasonably designed 
to ensure that the policies and procedures required by this section are 
diligently followed.
    (f) Review and testing. (1) The Risk Management Program of each 
futures commission merchant shall be reviewed and tested on at least an 
annual basis, or upon any material change in the business of the futures 
commission merchant that is reasonably likely to alter the risk profile 
of the futures commission merchant.
    (2) The annual reviews of the Risk Management Program shall include 
an analysis of adherence to, and the effectiveness of, the risk 
management policies and procedures, and any recommendations for 
modifications to the Risk Management Program. The annual testing shall 
be performed by qualified internal audit staff that are independent of 
the business unit, or by a qualified third party audit service reporting 
to staff that are independent of the business unit. The results of the 
annual review of the Risk Management Program shall be promptly reported 
to and reviewed by the chief compliance officer, senior management, and 
governing body of the futures commission merchant.
    (3) Each futures commission merchant shall document all internal and 
external reviews and testing of its Risk Management Program and written 
risk management policies and procedures including the date of the review 
or test; the results; any deficiencies identified; the corrective action 
taken; and the date that corrective action was taken. Such documentation 
shall be provided to Commission staff, upon request.
    (g) Distribution of risk management policies and procedures. The 
Risk Management Program shall include procedures for the timely 
distribution of its written risk management policies and procedures to 
relevant supervisory personnel. Each futures commission merchant shall 
maintain records of the persons to whom the risk management policies and 
procedures were distributed and when they were distributed.
    (h) Recordkeeping. (1) Each futures commission merchant shall 
maintain copies of all written approvals required by this section.
    (2) All records or reports, including, but not limited to, the 
written policies

[[Page 57]]

and procedures and any changes thereto that a futures commission 
merchant is required to maintain pursuant to this regulation shall be 
maintained in accordance with Sec.  1.31 and shall be made available 
promptly upon request to representatives of the Commission.

[78 FR 68620, Nov. 14, 2013]



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 notice, as set forth in paragraph (n) 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 immediately after the 
applicant or registrant knows or should have known 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) Provide together with such notice documentation, in such form as 
necessary, to adequately reflect the applicant's or registrant's capital 
condition as of any date on which such person's adjusted net capital is 
less than the minimum required; Provided, however, that if the applicant 
or registrant cannot calculate or otherwise immediately determine its 
financial condition, it must provide the notice required by paragraph 
(a)(1) of this section and include in such notice a statement that the 
entity cannot presently calculate its financial condition. The applicant 
or registrant must provide similar documentation of its financial 
condition for other days as the Commission may request.
    (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 minimum dollar amount required by Sec.  
1.17(a)(1)(i)(A);
    (2) 110 percent of the amount required by Sec.  1.17(a)(1)(i)(B);
    (3) 150 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member, unless such 
amount has been determined by a margin-based capital computation set 
forth in the rules of the registered futures association, and such 
amount meets or exceeds the amount of adjusted net capital required 
under the margin-based capital computation set forth in Sec.  
1.17(a)(1)(i)(B), in which case the required percentage is 110 percent, 
or
    (4) For securities brokers or dealers, the amount of net capital 
specified in Rule 17a-11(c) of the Securities and Exchange Commission 
(17 CFR 240.17a-11(c)), must file notice to that effect, as set forth in 
paragraph (n) of this section, as soon as possible and no later than 
twenty-four (24) hours of such event.
    (c) If an applicant or registrant at any time fails to make or keep 
current the books and records required by these regulations, such 
applicant or registrant must, on the same day such event occurs, provide 
notice of such fact as specified in paragraph (n) of this section, 
specifying the books and records which have not been made or which are 
not current, and as soon as possible, but not later than forty-eight 
(48) hours after giving such notice, file a report as required by 
paragraph (n) of this section 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 the 
existence of any material inadequacy, as specified

[[Page 58]]

in Sec.  1.16(d)(2), such applicant or registrant must give notice of 
such material inadequacy, as provided in paragraph (n) of this section, 
as soon as possible but not later than twenty-four (24) hours of 
discovering or being notified of the material inadequacy. The applicant 
or registrant must file, in the manner provided for under paragraph (n) 
of this section, a report stating what steps have been and are being 
taken to correct the material inadequacy within forty-eight (48) hours 
of filing its notice of the material inadequacy.
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or report as required by this 
section, that self-regulatory organization must immediately report this 
failure by notice, as provided in paragraph (n) of this section.
    (f)(1) [Reserved]
    (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 immediately give notice, as 
provided in paragraph (n) of this section, of such a determination.
    (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 immediately provide notice, as provided in paragraph (n) 
of this section, of such a determination to the designated self-
regulatory organization and the Commission. 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, 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 its own account, all such accounts 
shall be combined.
    (4) A futures commission merchant shall provide immediate notice, as 
provided in paragraph (n) of this section, 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, cleared swaps, 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 provide immediate notice, 
as provided in paragraph (n) of this section, 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 
or dealer.
    (ii) For purposes of paragraph (f)(5)(i) of this section, 
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 notice, as provided 
in

[[Page 59]]

paragraph (n) of this section, 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 as provided in paragraph (n) of this 
section within two business days of the event or series of events 
causing the reduction stating the reason for the reduction and steps the 
futures commission merchant will be taking to ensure an appropriate 
level of net capital is maintained by the futures commission merchant; 
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 a limited liability company 
member 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, limited liability company member, 
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 as provided in paragraph (n) of this section 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, 
or upon a reasonable belief that a substantial reduction in capital has 
occurred or will occur, the Director of the Division of Swap Dealer 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 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 trading on designated 
contract markets, or the amount of funds on deposit in segregated 
accounts for customers transacting in Cleared Swaps under part 22 of 
this chapter, or the total amount set aside on behalf of customers 
trading on non-United States markets under part 30 of this chapter, is 
less than the total amount of such funds required by the Act and the 
regulations to be on deposit in segregated or secured amount accounts on 
behalf of such customers, the registrant must report such deficiency 
immediately by notice to the registrant's designated self-regulatory 
organization and the Commission, as provided in paragraph (n) of this 
section.
    (i) A futures commission merchant must provide immediate notice, as 
set forth in paragraph (n) of this section, whenever it discovers or is 
informed that it has invested funds held for futures customers trading 
on designated contract markets pursuant to Sec.  1.20, Cleared Swaps 
Customer Collateral, as

[[Page 60]]

defined in Sec.  22.1 of this chapter, or 30.7 customer funds, as 
defined in Sec.  30.1 of this chapter, in instruments that are not 
permitted investments under Sec.  1.25, or has otherwise violated the 
requirements governing the investment of funds belonging to customers 
under Sec.  1.25.
    (j) A futures commission merchant must provide immediate notice, as 
provided in paragraph (n) of this section, whenever the futures 
commission merchant does not hold a sufficient amount of funds in 
segregated accounts for futures customers under Sec.  1.20, in 
segregated accounts for Cleared Swaps Customers under part 22 of this 
chapter, or in secured amount accounts for customers trading on foreign 
markets under part 30 of this chapter to meet the futures commission 
merchant's targeted residual interest in the segregated or secured 
amount accounts pursuant to its policies and procedures required under 
Sec.  1.11, or whenever the futures commission merchant's amount of 
residual interest is less than the sum of the undermargined amounts in 
its customer accounts as determined at the point in time that the firm 
is required to maintain the undermargined amounts under Sec.  1.22, and 
Sec. Sec.  22.2 and 30.7 of this chapter.
    (k) A futures commission merchant must provide immediate notice, as 
provided in paragraph (n) of this section, whenever the futures 
commission merchant, or the futures commission merchant's parent or 
material affiliate, experiences a material adverse impact to its 
creditworthiness or ability to fund its obligations, including any 
change that could adversely impact the firm's liquidity resources.
    (l) A futures commission merchant must provide prompt notice, but in 
no event later than 24 hours, as provided in paragraph (n) of this 
section, whenever the futures commission merchant experiences a material 
change in its operations or risk profile, including a change in the 
senior management of the futures commission merchant, the establishment 
or termination of a line of business, or a material adverse change in 
the futures commission merchant's clearing arrangements.
    (m) A futures commission merchant must provide notice, if the 
futures commission merchant has been notified by the Securities and 
Exchange Commission, a securities self-regulatory organization, or a 
futures self-regulatory organization, that it is the subject of a formal 
investigation. A futures commission merchant must provide a copy of any 
examination report issued to the futures commission merchant by the 
Securities and Exchange Commission or a securities self-regulatory 
organization. A futures commission merchant must provide the Commission 
with notice of any correspondence received from the Securities and 
Exchange Commission or a securities self-regulatory organization that 
raises issues with the adequacy of the futures commission merchant's 
capital position, liquidity to meet its obligations or otherwise operate 
its business, or internal controls. The notices and examination reports 
required by this section must be filed in a prompt manner, but in no 
event later than 24 hours of the reportable event, and must be filed in 
accordance with paragraph (n) of the section; Provided, however, that a 
futures commission merchant is not required to file a notice or copy of 
an examination report with the Securities and Exchange Commission, a 
securities self-regulatory organization, or a futures self-regulatory 
organization if such entity originally provided the communication or 
report to the futures commission merchant.
    (n) Notice. (1) Every notice and report required to be filed by this 
section by a futures commission merchant or a self-regulatory 
organization must be filed with the Commission, with the designated 
self-regulatory organization, if any, and with the Securities and 
Exchange Commission, if such registrant is a securities broker or 
dealer. Every notice and report required to be filed by this section by 
an applicant for registration as a futures commission merchant must be 
filed with the National Futures Association (on behalf of the 
Commission), with the designated self-regulatory organization, if any, 
and with the Securities and Exchange Commission, if such applicant is a 
securities broker or dealer. Every notice or report that is required to 
be filed by this section by a futures commission

[[Page 61]]

merchant or a self-regulatory organization must include a discussion of 
how the reporting event originated and what steps have been, or are 
being taken, to address the reporting event.
    (2) Every notice and report which an introducing broker or applicant 
for registration as an introducing broker is required to 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. Every notice or 
report that is required to be filed by this section by an introducing 
broker or applicant for registration as an introducing broker must 
include a discussion of how the reporting event originated and what 
steps have been, or are being taken, to address the reporting event.
    (3) Every notice or report that is required to be filed by a futures 
commission merchant with the Commission or with a designated self-
regulatory organization under this section must be in writing and must 
be filed via electronic transmission using a form of user authentication 
assigned in accordance with procedures established by or approved by the 
Commission, and otherwise in accordance with instructions issued by or 
approved by the Commission; Provided, however, that if the registered 
futures commission merchant cannot file the notice or report using the 
electronic transmission approved by the Commission due to a transmission 
or systems failure, the futures commission merchant must immediately 
contact the Commission's regional office with jurisdiction over the 
futures commission merchant as provided in Sec.  140.02 of this chapter, 
and by email to [email protected] Any such electronic submission must 
clearly indicate the futures commission merchant on whose behalf such 
filing is made and the use of such user authentication in submitting 
such filing will constitute and become a substitute for the manual 
signature of the authorized signer.

(Approved by the Office of Management and Budget under control number 
3038-0024)

[43 FR 39969, Sept. 8, 1978]

    Editorial Note: For Federal Register citations affecting Sec.  1.12, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



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 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

[[Page 62]]

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;
    (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

[[Page 63]]

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 
Sec. Sec.  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 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

[[Page 64]]

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 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

[[Page 65]]

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 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

[[Page 66]]

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 (2) of this section must be filed via electronic transmission using 
a form of user authentication assigned in accordance with procedures 
established by or approved by the Commission, and otherwise in 
accordance with instructions issued by or approved by the Commission. 
Any such electronic submission must clearly indicate the registrant on 
whose behalf such filing is made and the use of such user authentication 
in submitting such filing will constitute and become a substitute for 
the manual signature of the authorized signer.
    (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 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

[[Page 67]]

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 Sec. Sec.  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 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

[[Page 68]]

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, as amended at 
78 FR 68625, Nov. 14, 2013]



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 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.

[[Page 69]]

    (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. Sec.  1.3, and 30.7 customer, as defined in Sec.  30.1 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; Provided, however, that a certified public accountant 
engaged to conduct an examination of a futures commission merchant must 
be registered with the Public Company Accounting Oversight Board and 
must have undergone an examination by the Public Company Accounting 
Oversight Board, and may not be subject to a permanent or temporary bar 
to engage in the examination of public issuers or brokers or dealers 
registered with the Securities and Exchange Commission as a result of a 
Public Company Accounting Oversight Board disciplinary hearing.
    (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.
    (4) The governing body of each futures commission merchant must 
ensure that the certified public accountant engaged is duly qualified to 
perform an audit of the futures commission merchant. Such an evaluation 
of the qualifications of the certified public accountant should include, 
among other issues, the certified public accountant's experience in 
auditing futures commission merchants, the depth of the certified public 
accountant's staff, the certified public accountant's knowledge of the 
Act and Regulations, the size and geographic location of the futures 
commission merchant, and the independence of the certified public 
accountant. The governing body should

[[Page 70]]

also review and consider the inspection reports issued by the Public 
Company Accounting Oversight Board as part of the assessment of the 
qualifications of the public accountant to perform an audit of the 
futures commission merchant.
    (c) Accountant's reports--(1) Technical requirements. The 
accountant's report must:
    (i) Be dated;
    (ii) Indicate the city and State where issued; and
    (iii) Identify without detailed enumeration the financial statements 
covered by the report.
    (2) Representations as to the audit. The accountant's report must 
state whether the audit was made in accordance with the auditing 
standards adopted by the Public Company Accounting Oversight Board, and 
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 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, Part IIA, or 
Part II CSE, 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(a)(2) of the Act 
and these regulations and the secured amount requirements of the Act

[[Page 71]]

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(a)(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 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

[[Page 72]]

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)(1) Extension of time for filing audited reports. In the event a 
registered futures commission merchant or a registered introducing 
broker finds that it cannot file, without substantial undue hardship, 
its certified financial statements and schedules for any year within the 
time specified in Sec.  1.10 (b)(1)(ii) or Sec.  1.10 (b)(2)(ii) of this 
part, as applicable, such registrants may request approval for an 
extension of time, as follows:
    (i) Futures commission merchant registrants. (A) A futures 
commission merchant may file with its designated self-regulatory 
organization an application for an extension of time, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission a 
copy of any notice it receives from the designated self-regulatory 
organization to approve or deny the registrant's request for extension 
of time. A written notice of approval shall become effective upon the 
filing by the registrant of a copy with the Commission, and a written 
notice of denial shall be effective as of the date of the notice.
    (B) A futures commission merchant that is registered with the 
Securities and Exchange Commission as a securities broker or dealer may 
file with its designated self-regulatory organization a copy of any 
application that the registrant has filed with its designated examining 
authority, pursuant to Sec.  240.17-a5(l)(1)of this title, for an 
extension of time to file audited annual financial statements. The 
registrant must also file immediately with the designated self-
regulatory organization and the Commission copies of any notice it 
receives from its designated examining authority to approve or deny the 
requested extension of time. Upon receipt by the designated self-
regulatory organization and the Commission of copies of any such notice 
of approval, the requested extension of time referenced in the notice 
shall be deemed approved under this paragraph (f)(1)(i).
    (C) Any copy that under this paragraph is required to be filed with 
the Commission must be filed via electronic transmission using a form of 
user authentication assigned in accordance with procedures established 
by or approved by the Commission, and otherwise in accordance with 
instructions issued by or approved by the Commission. Any such 
electronic submission must clearly indicate the registrant on whose 
behalf such filing is made and the use of such user authentication in 
submitting such filing will constitute and become a substitute for the 
manual signature of the authorized signer.
    (ii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application for extension 
of time, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with the 
National Futures Association copies of any application that the 
registrant has filed with its designated examining authority, pursuant 
to Sec.  240.17-a5(l)(1) of this title, for an extension of time to file 
audited annual financial statements. The registrant must also file 
immediately with the National Futures Association copies of any notice 
it receives from its designated examining authority to approve or deny 
the requested extension of time. Upon the receipt by the National 
Futures Association of a copy of any such notice of approval, the 
requested extension of time referenced in the notice shall be deemed 
approved under this paragraph (f)(1)(ii).
    (2) Exemption requests. 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

[[Page 73]]

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 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

[[Page 74]]

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 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; 69 FR 41426, 
July 9, 2004; 69 FR 49798, Aug. 12, 2004; 71 FR 5593, Feb. 2, 2006; 77 
FR 66320, Nov. 2, 2012; 78 FR 68625, Nov. 14, 2013]



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) $1,000,000;
    (B) The futures commission merchant's risk-based capital 
requirement, computed as eight percent of the total risk margin 
requirement for positions carried by the futures commission merchant in 
customer accounts and noncustomer 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) [Reserved]
    (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) $45,000;
    (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)(iii) 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 operation 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 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

[[Page 75]]

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, or who cannot certify to the 
Commission immediately upon request and demonstrate with verifiable 
evidence that it has sufficient access to liquidity to continue 
operating as a going concern, 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 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. This term means a futures customer as defined in Sec.  
1.3, a cleared over the counter customer as defined in paragraph (b)(10) 
of this section, and a 30.7 customer as defined in Sec.  30.1 of this 
chapter.
    (3) Proprietary account means an account in which commodity futures, 
options or cleared over the counter derivative positions are 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 an account in which commodity futures, 
options or cleared over the counter derivative positions are carried on 
the books of the applicant or registrant which is either:
    (i) An account that is not included in the definition of customer 
(as defined in Sec.  1.17(b)(2)) or proprietary account (as defined in 
Sec.  1.17(b)(3)), or
    (ii) An account for a foreign-domiciled person trading futures or 
options on a foreign board of trade, and such account is a proprietary 
account as defined in Sec.  1.3(y) of this title, but is not

[[Page 76]]

a proprietary account as defined in Sec.  1.17(b)(3).
    (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.
    (7) Customer account. This term means an account in which commodity 
futures, options or cleared over the counter derivative positions are 
carried on the books of the applicant or registrant which is an account 
that is included in the definition of customer as defined in Sec.  
1.17(b)(2).
    (8) Risk margin for an account means the level of maintenance margin 
or performance bond required for the customer or noncustomer positions 
by the applicable exchanges or clearing organizations, and, where margin 
or performance bond is required only for accounts at the clearing 
organization, for purposes of the FCM's risk-based capital calculations 
applying the same margin or performance bond requirements to customer 
and noncustomer positions in accounts carried by the FCM, subject to the 
following.
    (i) Risk margin does not include the equity component of short or 
long option positions maintained in an account;
    (ii) The maintenance margin or performance bond requirement 
associated with a long option position may be excluded from risk margin 
to the extent that the value of such long option position does not 
reduce the total risk maintenance or performance bond requirement of the 
account that holds the long option position;
    (iii) The risk margin for an account carried by a futures commission 
merchant which is not a member of the exchange or the clearing 
organization that requires collection of such margin should be 
calculated as if the futures commission merchant were such a member; and
    (iv) If a futures commission merchant does not possess sufficient 
information to determine what portion of an account's total margin 
requirement represents risk margin, all of the margin required by the 
exchange or the clearing organization that requires collection of such 
margin for that account, shall be treated as risk margin.
    (9) Cleared over the counter derivative positions means ``over the 
counter derivative instrument'' (as defined in 12 U.S.C. 4421) positions 
of any person in accounts carried on the books of the futures commission 
merchant and cleared by any organization permitted to clear such 
instruments under the laws of the relevant jurisdiction.
    (10) Cleared over the counter customer means any person that is not 
a proprietary person as defined in Sec.  1.3(y) and for whom the futures 
commission merchant carries on its books one or more accounts for the 
over the counter-cleared derivative positions of such person.
    (c) Definitions: For the purposes of this section:
    (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 commodity 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 commodity 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 commodity 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

[[Page 77]]

    (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 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;

[[Page 78]]

    (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 guarantee 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 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

[[Page 79]]

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, 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 commodity--No charge.
    (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) Inventory and forward contracts in those foreign currencies that 
are purchased or sold for future delivery on or subject to the rules of 
a contract market, and which are covered by an open futures contract.--
No charge
    (E) Inventory and forward contracts in euros, British pounds, 
Canadian dollars, Japanese yen, or Swiss francs, and which are not 
covered by an open futures contract or commodity option.--6 percent of 
the market value.
    (F) 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.
    (G) 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 that invests funds deposited by futures customers as 
defined in Sec.  1.3, Cleared Swaps Customers as defined in Sec.  22.1 
of this chapter, and 30.7 customers as defined in Sec.  30.1 of this 
chapter in securities as permitted investments under Sec.  1.25, the 
deductions specified in Rule 240.15c3-1(c)(2)(vi) or Rule 240.15c3-
1(c)(2)(vii) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi) and 17 CFR 240.15c3-

[[Page 80]]

1(c)(2)(vii)) (``securities haircuts''). Futures commission merchants 
that establish and enforce written policies and procedures to assess the 
credit risk of commercial paper, convertible debt instruments, or 
nonconvertible debt instruments in accordance with Rule 240.15c3-
1(c)(2)(vi) of the Securities and Exchange Commission (17 CFR 240.15c3-
1(c)(2)(vi)) may apply the lower haircut percentages specified in Rule 
240.15c3-1(c)(2)(vi) for such commercial paper, convertible debt 
instruments and nonconvertible debt instruments. Futures commission 
merchants must maintain their written policies and procedures in 
accordance with Sec.  1.31;
    (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 no more than one business day. 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 no more than one business day, 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. 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 paragraph (c)(5) of this section;
    (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 no more than 
one business day. 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 
no more than one business day 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. 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 paragraph shall be the lesser of the value 
attributable to such asset pursuant to the margin rules of the 
applicable board of trade, or the market value of such asset after 
application of the percentage deductions specified in paragraph (c)(5) 
of this section;

[[Page 81]]

    (x) In the case of open futures contracts or cleared OTC derivative 
positions 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 commodity 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 options 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 the 
foreign futures or foreign options secured amount, as Sec.  1.3(rr) 
defines such term, 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) Election of alternative capital deductions that have received 
approval of Securities and Exchange Commission pursuant to Sec.  
240.15c3-1(a)(7) of this title.
    (i) Any futures commission merchant that is also registered with the 
Securities and Exchange Commission as a securities broker or dealer, and 
who also satisfies the other requirements of this paragraph (c)(6), may 
elect to compute its adjusted net capital using the alternative capital 
deductions that, under Sec.  240.15c3-1(a)(7) of this title, the 
Securities and Exchange Commission has approved by written order. To the 
extent that a futures commission merchant is permitted by the Securities 
and Exchange Commission to use alternative capital deductions for its 
unsecured receivables from over-the-counter transactions in derivatives, 
or

[[Page 82]]

for its proprietary positions in securities, forward contracts, or 
futures contracts, the futures commission merchant may use these same 
alternative capital deductions when computing its adjusted net capital, 
in lieu of the deductions that would otherwise be required by paragraph 
(c)(2)(ii) of this section for its unsecured receivables from over-the-
counter derivatives transactions; by paragraph (c)(5)(ii) of this 
section for its proprietary positions in forward contracts; by paragraph 
(c)(5)(v) of this section for its proprietary positions in securities; 
and by paragraph (c)(5)(x) of this section for its proprietary positions 
in futures contracts.
    (ii) Notifications of election or of changes to election. (A) No 
election to use the alternative market risk and credit risk deductions 
referenced in paragraph (c)(6)(i) of this section shall be effective 
unless and until the futures commission merchant has filed with the 
Commission, addressed to the Director of the Division of Swap Dealer and 
Intermediary Oversight, a notice that is to include a copy of the 
approval order of the Securities and Exchange Commission referenced in 
paragraph (c)(6)(i) of this section, and to include also a statement 
that identifies the amount of tentative net capital below which the 
futures commission merchant is required to provide notice to the 
Securities and Exchange Commission, and which also provides the 
following information: a list of the categories of positions that the 
futures commission merchant holds in its proprietary accounts, and, for 
each such category, a description of the methods that the futures 
commission merchant will use to calculate its deductions for market risk 
and credit risk, and also, if calculated separately, deductions for 
specific risk; a description of the value at risk (VaR) models to be 
used for its market risk and credit risk deductions, and an overview of 
the integration of the models into the internal risk management control 
system of the futures commission merchant; a description of how the 
futures commission merchant will calculate current exposure and maximum 
potential exposure for its deductions for credit risk; a description of 
how the futures commission merchant will determine internal credit 
ratings of counterparties and internal credit risk weights of 
counterparties, if applicable; and a description of the estimated effect 
of the alternative market risk and credit risk deductions on the amounts 
reported by the futures commission merchant as net capital and adjusted 
net capital.
    (B) A futures commission merchant must also, upon the request of the 
Commission at any time, supplement the statement described in paragraph 
(c)(6)(ii)(A) of this section, by providing any other explanatory 
information regarding the computation of its alternative market risk and 
credit risk deductions as the Commission may require at its discretion.
    (C) A futures commission merchant must also file the following 
supplemental notices with the Director of the Division and Clearing and 
Intermediary Oversight:
    (1) A notice advising that the Securities and Exchange Commission 
has imposed additional or revised conditions for the approval evidenced 
by the order referenced in paragraph (c)(6)(i) of this section, and 
which describes the new or revised conditions in full, and
    (2) A notice which attaches a copy of any approval by the Securities 
and Exchange Commission of amendments that a futures commission merchant 
has requested for its application, filed under 17 CFR 240.15c3-1e, to 
use alternative market risk and credit risk deductions approved by the 
Securities and Exchange Commission.
    (D) A futures commission merchant may voluntarily change its 
election to use the alternative market risk and credit risk deductions 
referenced in paragraph (c)(6)(i) of this section, by filing with the 
Director of the Division of Swap Dealer and Intermediary Oversight a 
written notice specifying a future date as of which it will no longer 
use the alternative market risk and credit risk deductions, and will 
instead compute such deductions in accordance with the requirements 
otherwise applicable under paragraph (c)(2)(ii) of this section for 
unsecured receivables from over-the-counter derivatives transactions; by 
paragraph (c)(5)(ii) of this section for proprietary positions in 
forward contracts; by paragraph (c)(5)(v)

[[Page 83]]

of this section for proprietary positions in securities; and by 
paragraph (c)(5)(x) of this section for proprietary positions in futures 
contracts.
    (iii) Conditions under which election terminated. A futures 
commission merchant may no longer elect to use the alternative market 
risk and credit risk deductions referenced in paragraph (c)(6)(i) of 
this section, and shall instead compute the deductions otherwise 
required under paragraph (c)(2)(ii) of this section for unsecured 
receivables from over-the-counter derivatives transactions; by paragraph 
(c)(5)(ii) of this section for proprietary positions in forward 
contracts; by paragraph (c)(5)(v) of this section for proprietary 
positions in securities; and by paragraph (c)(5)(x) of this section for 
proprietary positions in futures contracts, upon the occurrence of any 
of the following:
    (A) The Securities and Exchange Commission revokes its approval of 
the market risk and credit risk deductions for such futures commission 
merchant;
    (B) A futures commission merchant fails to come into compliance with 
its filing requirements under this paragraph (c)(6), after having 
received from the Director of the Division of Swap Dealer and 
Intermediary Oversight written notification that the firm is not in 
compliance with its filing requirements, and must cease using 
alternative capital deductions permitted under this paragraph (c)(6) if 
it has not come into compliance by a date specified in the notice; or
    (C) The Commission by written order finds that permitting the 
futures commission merchant to continue to use such alternative market 
risk and credit risk deductions is no longer necessary or appropriate 
for the protection of customers of the futures commission merchant or of 
the integrity of the futures or options markets.
    (iv) Additional filing requirements. Any futures commission merchant 
that elects to use the alternative market risk and credit risk 
deductions referenced in paragraph (c)(6)(i) of this section must file 
with the Commission, in addition to the filings required by paragraph 
(c)(6)(ii) of this section, copies of any and all of the following 
documents, at such time as the originals are filed with the Securities 
and Exchange Commission:
    (A) Information that the futures commission merchant files on a 
monthly basis with its designated examining authority or the Securities 
and Exchange Commission, whether by way of schedules to its FOCUS 
reports or by other filings, in satisfaction of 17 CFR 240.17a-
5(a)(5)(i);
    (B) The quarterly reports required by 17 CFR 240.17a-5(a)(5)(ii);
    (C) The supplemental annual filings as required by 17 CFR 240.17a-
5(k);
    (D) Any notification to the Securities and Exchange Commission or 
the futures commission merchant's designated examining authority of 
planned withdrawals of excess net capital; and
    (E) Any notification that the futures commission merchant is 
required to file with the Securities and Exchange Commission when its 
tentative net capital is below an amount specified by the Securities and 
Exchange Commission.
    (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 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

[[Page 84]]

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 or limited liability company 
member 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.
    (D) In the case of a limited liability company, the sum of its 
capital accounts of limited liability company members, 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 limited liability company member 
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, limited liability company member, 
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)(iii)(A) of this section;
    (ii) For a futures commission merchant or applicant therefor, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
    (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

[[Page 85]]

    (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 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

[[Page 86]]

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)(1) The Commission may by order restrict, for a period up to 
twenty business days, any withdrawal by a futures commission merchant of 
equity capital, or any unsecured advance or loan to a stockholder, 
partner, limited liability company member, sole proprietor, employee or 
affiliate, if:
    (i) Such withdrawal, advance or loan would cause, when aggregated 
with all other withdrawals, advances or loans during a 30 calendar day 
period from 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), a net 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, and
    (ii) The Commission, based on the facts and information available, 
concludes that any such withdrawal, advance or loan may be detrimental 
to the financial integrity of the futures commission merchant, or may 
unduly jeopardize its ability to meet customer obligations or other 
liabilities that may cause a significant impact on the markets.
    (2) The futures commission merchant may file with the Secretary of 
the Commission a written petition to request rescission of the order 
issued under paragraph (g)(1) of this section. The petition filed by the 
futures commission merchant must specify the facts and circumstances 
supporting its request for rescission. The Commission shall respond in 
writing to deny the futures commission merchant's petition for 
rescission, or, if the Commission determines that the order issued under 
paragraph (g)(1) of this section should not remain in effect, the order 
shall be rescinded.
    (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

[[Page 87]]

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 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 amount of 
such payment (or in the case of an applicant 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

[[Page 88]]

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 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

[[Page 89]]

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 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)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
    (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)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
    (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)).
    (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

[[Page 90]]

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)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 125 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
    (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 
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)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 120 
percent

[[Page 91]]

of the amount required by paragraph (a)(1)(i)(B) of this section;
    (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 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

[[Page 92]]

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 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

[[Page 93]]

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 appropriate minimum dollar amount required by 
paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
    (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)(iii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;

[[Page 94]]

    (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 at 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

[[Page 95]]

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 that incorporate adjusted net capital 
requirements in effect prior to September 30, 2004. Any subordination 
agreement that incorporates the adjusted net capital requirements in 
paragraphs (h)(2)(vi)(C)(2), (h)(2)(vii)(A)(2) and (B)(2), 
(h)(2)(viii)(A)(2), (h)(3)(ii)(B), and (h)(3)(v)(B) of this section, as 
in effect prior to September 30, 2004, and which has been deemed to be 
satisfactorily subordinated pursuant to this section prior to September 
30, 2004, shall continue to be deemed a satisfactory subordination 
agreement until the maturity of such agreement. In the event, however, 
that such agreement is amended or renewed for any reason, then such 
agreement shall not be deemed a satisfactory subordination agreement 
unless the amended or renewed agreement meets the requirements of this 
section.
    (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

[[Page 96]]

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, 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 CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



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, Part IIA, or Part II CSE 
(FOCUS report) in lieu of Form 1-FR-FCM or Form 1-FR-IB, the account 
classification subdivisions specified on such FOCUS report, or 
categories that are in accord with generally accepted accounting 
principles. Each person so registered shall prepare and keep current 
such records.

[[Page 97]]

    (b)(1) Each applicant or registrant must make and keep as a record 
in accordance with Sec.  1.31 formal computations of its adjusted net 
capital and of its minimum financial requirements pursuant to Sec.  1.17 
or the requirements of the designated self-regulatory organization to 
which it is subject as of the close of business each month. Such 
computations must be completed and made available for inspection by any 
representative of the National Futures Association, in the case of an 
applicant, or of the Commission or designated self-regulatory 
organization, if any, in the case of a registrant, within 17 business 
days after the date for which the computations are made, commencing the 
first month end after the date the application for registration is 
filed.
    (2) An applicant or registrant that has filed a monthly Form 1-FR or 
Statement of Financial and Operational Combined Uniform Single Report 
under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II 
CSE (FOCUS report) in accordance with the requirements of Sec.  1.10(b) 
will be deemed to have satisfied the requirements of paragraph (b)(1) of 
this section for such month.
    (c) 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 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; 69 FR 49800, Aug. 12, 2004; 71 FR 5594, Feb. 2, 
2006]

                 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  Futures customer funds to be segregated and separately 
accounted for.

    (a) General. A futures commission merchant must separately account 
for all futures customer funds and segregate such funds as belonging to 
its futures customers. A futures commission merchant shall deposit 
futures customer funds under an account name that clearly identifies 
them as futures customer funds and shows that such funds are segregated 
as required by sections 4d(a) and 4d(b) of the Act and by this part. A 
futures commission merchant must at all times maintain in the separate 
account or accounts money, securities and property in an amount at least 
sufficient in the aggregate to cover its total obligations to all 
futures customers as computed under paragraph (i) of this section. The 
futures commission merchant must perform appropriate due diligence as 
required by Sec.  1.11 on any and all locations of futures customer 
funds, as specified in paragraph (b) of this section, to ensure that the 
location in which the futures commission merchant has deposited such 
funds is a financially sound entity.
    (b) Location of futures customer funds. A futures commission 
merchant may deposit futures customer funds, subject to the risk 
management policies and procedures of the futures commission merchant 
required by Sec.  1.11, with the following depositories:
    (1) A bank or trust company;

[[Page 98]]

    (2) A derivatives clearing organization; or
    (3) Another futures commission merchant.
    (c) Limitation on the holding of futures customer funds outside of 
the United States. A futures commission merchant may hold futures 
customer funds with a depository outside of the United States only in 
accordance with Sec.  1.49.
    (d) Written acknowledgment from depositories. (1) A futures 
commission merchant must obtain a written acknowledgment from each bank, 
trust company, derivatives clearing organization, or futures commission 
merchant prior to or contemporaneously with the opening of an account by 
the futures commission merchant with such depositories; provided, 
however, that a written acknowledgment need not be obtained from a 
derivatives clearing organization that has adopted and submitted to the 
Commission rules that provide for the segregation of futures customer 
funds in accordance with all relevant provisions of the Act and the 
rules and orders promulgated thereunder.
    (2) The written acknowledgment must be in the form as set out in 
appendix A to this part.
    (3)(i) A futures commission merchant shall deposit futures customer 
funds only with a depository that agrees to provide the director of the 
Division of Swap Dealer and Intermediary Oversight, or any successor 
division, or such director's designees, with direct, read-only 
electronic access to transaction and account balance information for 
futures customer accounts.
    (ii) The written acknowledgment must contain the futures commission 
merchant's authorization to the depository to provide direct, read-only 
electronic access to futures customer account transaction and account 
balance information to the director of the Division of Swap Dealer and 
Intermediary Oversight, or any successor division, or such director's 
designees, without further notice to or consent from the futures 
commission merchant.
    (4) A futures commission merchant shall deposit futures customer 
funds only with a depository that agrees to provide the Commission and 
the futures commission merchant's designated self-regulatory 
organization with a copy of the executed written acknowledgment no later 
than three business days after the opening of the account or the 
execution of a new written acknowledgment for an existing account, as 
applicable. The Commission must receive the written acknowledgment from 
the depository via electronic means, in a format and manner determined 
by the Commission. The written acknowledgment must contain the futures 
commission merchant's authorization to the depository to provide the 
written acknowledgment to the Commission and to the futures commission 
merchant's designated self-regulatory organization without further 
notice to or consent from the futures commission merchant.
    (5) A futures commission merchant shall deposit futures customer 
funds only with a depository that agrees that accounts containing 
customer funds may be examined at any reasonable time by the director of 
the Division of Swap Dealer and Intermediary Oversight or the director 
of the Division of Clearing and Risk, or any successor divisions, or 
such directors' designees, or an appropriate officer, agent or employee 
of the futures commission merchant's designated self-regulatory 
organization. The written acknowledgment must contain the futures 
commission merchant's authorization to the depository to permit any such 
examination to take place without further notice to or consent from the 
futures commission merchant.
    (6) A futures commission merchant shall deposit futures customer 
funds only with a depository that agrees to reply promptly and directly 
to any request from the director of the Division of Swap Dealer and 
Intermediary Oversight or the director of the Division of Clearing and 
Risk, or any successor divisions, or such directors' designees, or an 
appropriate officer, agent or employee of the futures commission 
merchant's designated self-regulatory organization for confirmation of 
account balances or provision of any other information regarding or 
related to an account. The written acknowledgment must contain the 
futures commission merchant's authorization to the depository to reply 
promptly and directly as

[[Page 99]]

required by this paragraph without further notice to or consent from the 
futures commission merchant.
    (7) The futures commission merchant shall promptly file a copy of 
the written acknowledgment with the Commission in the format and manner 
specified by the Commission no later than three business days after the 
opening of the account or the execution of a new written acknowledgment 
for an existing account, as applicable.
    (8) A futures commission merchant shall obtain a new written 
acknowledgment within 120 days of any changes in the following:
    (i) The name or business address of the futures commission merchant;
    (ii) The name or business address of the bank, trust company, 
derivatives clearing organization or futures commission merchant 
receiving futures customer funds; or
    (iii) The account number(s) under which futures customer funds are 
held.
    (9) A futures commission merchant shall maintain each written 
acknowledgment readily accessible in its files in accordance with Sec.  
1.31, for as long as the account remains open, and thereafter for the 
period provided in Sec.  1.31.
    (e) Commingling. (1) A futures commission merchant may for 
convenience commingle the futures customer funds that it receives from, 
or on behalf of, multiple futures customers in a single account or 
multiple accounts with one or more of the depositories listed in 
paragraph (b) of this section.
    (2) A futures commission merchant shall not commingle futures 
customer funds with the money, securities or property of such futures 
commission merchant, or with any proprietary account of such futures 
commission merchant, or use such funds to secure or guarantee the 
obligation of, or extend credit to, such futures commission merchant or 
any proprietary account of such futures commission merchant; provided, 
however, a futures commission merchant may deposit proprietary funds in 
segregated accounts as permitted under Sec.  1.23.
    (3) A futures commission merchant may not commingle futures customer 
funds with funds deposited by 30.7 customers as defined in Sec.  30.1 of 
this chapter and set aside in separate accounts as required by part 30 
of this chapter, or with funds deposited by Cleared Swaps Customers as 
defined in Sec.  22.1 of this chapter and held in segregated accounts 
pursuant to section 4d(f) of the Act; provided, however, that a futures 
commission merchant may commingle futures customer funds with funds 
deposited by 30.7 customers or Cleared Swaps Customers if expressly 
permitted by a Commission regulation or order, or by a derivatives 
clearing organization rule approved in accordance with Sec.  39.15(b)(2) 
of this chapter.
    (f) Limitation on use of futures customer funds. (1) A futures 
commission merchant shall treat and deal with the funds of a futures 
customer as belonging to such futures customer. A futures commission 
merchant shall not use the funds of a futures customer to secure or 
guarantee the commodity interests, or to secure or extend the credit, of 
any person other than the futures customer for whom the funds are held.
    (2) A futures commission merchant shall obligate futures customer 
funds to a derivatives clearing organization, a futures commission 
merchant, or any depository solely to purchase, margin, guarantee, 
secure, transfer, adjust or settle trades, contracts or commodity option 
transactions of futures customers; provided, however, that a futures 
commission merchant is permitted to use the funds belonging to a futures 
customer that are necessary in the normal course of business to pay 
lawfully accruing fees or expenses on behalf of the futures customer's 
positions including commissions, brokerage, interest, taxes, storage and 
other fees and charges.
    (3) No person, including any derivatives clearing organization or 
any depository, that has received futures 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 futures 
customers of the futures commission merchant which deposited such funds.
    (g) Derivatives clearing organizations--(1) General. All futures 
customer funds received by a derivatives clearing organization from a 
member to purchase, margin, guarantee, secure or settle the trades, 
contracts or commodity options

[[Page 100]]

of the clearing member's futures customers and all money accruing to 
such futures customers as the result of trades, contracts or commodity 
options so carried shall be separately accounted for and segregated as 
belonging to such futures customers, and a derivatives clearing 
organization shall not hold, use or dispose of such futures customer 
funds except as belonging to such futures customers. A derivatives 
clearing organization shall deposit futures customer funds under an 
account name that clearly identifies them as futures customer funds and 
shows that such funds are segregated as required by sections 4d(a) and 
4d(b) of the Act and by this part.
    (2) Location of futures customer funds. A derivatives clearing 
organization may deposit futures customer funds with a bank or trust 
company, which may include a Federal Reserve Bank with respect to 
deposits of a derivatives clearing organization that is designated by 
the Financial Stability Oversight Council to be systemically important.
    (3) Limitation on the holding of futures customer funds outside of 
the United States. A derivatives clearing organization may hold futures 
customer funds with a depository outside of the United States only in 
accordance with Sec.  1.49.
    (4) Written acknowledgment from depositories. (i) A derivatives 
clearing organization must obtain a written acknowledgment from each 
depository prior to or contemporaneously with the opening of a futures 
customer funds account; provided, however, that a derivatives clearing 
organization is not required to obtain a written acknowledgment from a 
Federal Reserve Bank with which it has opened a futures customer funds 
account.
    (ii) The written acknowledgment must be in the form as set out in 
appendix B to this part.
    (iii) A derivatives clearing organization shall deposit futures 
customer funds only with a depository that agrees to provide the 
Commission with a copy of the executed written acknowledgment no later 
than three business days after the opening of the account or the 
execution of a new written acknowledgment for an existing account, as 
applicable. The Commission must receive the written acknowledgment from 
the depository via electronic means, in a format and manner determined 
by the Commission. The written acknowledgment must contain the 
derivatives clearing organization's authorization to the depository to 
provide the written acknowledgment to the Commission without further 
notice to or consent from the derivatives clearing organization.
    (iv) A derivatives clearing organization shall deposit futures 
customer funds only with a depository that agrees to reply promptly and 
directly to any request from the director of the Division of Clearing 
and Risk or the director of the Division of Swap Dealer and Intermediary 
Oversight, or any successor divisions, or such directors' designees, for 
confirmation of account balances or provision of any other information 
regarding or related to an account. The written acknowledgment must 
contain the derivatives clearing organization's authorization to the 
depository to reply promptly and directly as required by this paragraph 
without further notice to or consent from the derivatives clearing 
organization.
    (v) A derivatives clearing organization shall promptly file a copy 
of the written acknowledgment with the Commission in the format and 
manner specified by the Commission no later than three business days 
after the opening of the account or the execution of a new written 
acknowledgment for an existing account, as applicable.
    (vi) A derivatives clearing organization shall obtain a new written 
acknowledgment within 120 days of any changes in the following:
    (A) The name or business address of the derivatives clearing 
organization;
    (B) The name or business address of the depository receiving futures 
customer funds; or
    (C) The account number(s) under which futures customer funds are 
held.
    (vii) A derivatives clearing organization shall maintain each 
written acknowledgment readily accessible in its files in accordance 
with Sec.  1.31, for as long as the account remains open, and thereafter 
for the period provided in Sec.  1.31.

[[Page 101]]

    (5) Commingling. (i) A derivatives clearing organization may for 
convenience commingle the futures customer funds that it receives from, 
or on behalf of, multiple futures commission merchants in a single 
account or multiple accounts with one or more of the depositories listed 
in paragraph (g)(2) of this section.
    (ii) A derivatives clearing organization shall not commingle futures 
customer funds with the money, securities or property of such 
derivatives clearing organization or with any proprietary account of any 
of its clearing members, or use such funds to secure or guarantee the 
obligations of, or extend credit to, such derivatives clearing 
organization or any proprietary account of any of its clearing members.
    (iii) A derivatives clearing organization may not commingle funds 
held for futures customers with funds deposited by clearing members on 
behalf of their 30.7 customers as defined in Sec.  30.1 of this chapter 
and set aside in separate accounts as required by part 30 of this 
chapter, or with funds deposited by clearing members on behalf of their 
Cleared Swaps Customers as defined in Sec.  22.1 of this chapter and 
held in segregated accounts pursuant section 4d(f) of the Act; provided, 
however, that a derivatives clearing organization may commingle futures 
customer funds with funds deposited by clearing members on behalf of 
their 30.7 customers or Cleared Swaps Customers if expressly permitted 
by a Commission regulation or order, or by a derivatives clearing 
organization rule approved in accordance with Sec.  39.15(b)(2) of this 
chapter.
    (h) Immediate availability of bank and trust company deposits. All 
futures customer funds deposited by a futures commission merchant or a 
derivatives clearing organization with a bank or trust company must be 
immediately available for withdrawal upon the demand of the futures 
commission merchant or derivatives clearing organization.
    (i) Requirements as to amount. (1) For purposes of this paragraph 
(i), the term ``account'' shall mean the entries on the books and 
records of a futures commission merchant pertaining to the futures 
customer funds of a particular futures customer.
    (2) The futures commission merchant must reflect in the account that 
it maintains for each futures customer the net liquidating equity for 
each such customer, calculated as follows: The market value of any 
futures customer funds that it receives from such customer, as adjusted 
by:
    (i) Any uses permitted under paragraph (f) of this section;
    (ii) Any accruals on permitted investments of such collateral under 
Sec.  1.25 that, pursuant to the futures commission merchant's customer 
agreement with that customer, are creditable to such customer;
    (iii) Any gains and losses with respect to contracts for the 
purchase or sale of a commodity for future delivery and any options on 
such contracts;
    (iv) Any charges lawfully accruing to the futures customer, 
including any commission, brokerage fee, interest, tax, or storage fee; 
and
    (v) Any appropriately authorized distribution or transfer of such 
collateral.
    (3) If the market value of futures customer funds in the account of 
a futures customer is positive after adjustments, then that account has 
a credit balance. If the market value of futures customer funds in the 
account of a futures customer is negative after adjustments, then that 
account has a debit balance.
    (4) The futures commission merchant must maintain in segregation an 
amount equal to the sum of any credit balances that the futures 
customers of the futures commission merchant have in their accounts. 
This balance may not be reduced by any debit balances that the futures 
customers of the futures commission merchants have in their accounts.

  Appendix A to Sec.  1.20--Futures Commission Merchant Acknowledgment 
       Letter for CFTC Regulation 1.20 Customer Segregated Account

[Date]
[Name and Address of Bank, Trust Company, Derivatives Clearing 
Organization or Futures Commission Merchant]

    We refer to the Segregated Account(s) which [Name of Futures 
Commission Merchant] (``we'' or ``our'') have opened or will open with 
[Name of Bank, Trust Company,

[[Page 102]]

Derivatives Clearing Organization or Futures Commission Merchant] 
(``you'' or ``your'') entitled:

[Name of Futures Commission Merchant] [if applicable, add ``FCM Customer 
Omnibus Account''] CFTC Regulation 1.20 Customer Segregated Account 
under Sections 4d(a) and 4d(b) of the Commodity Exchange Act [and, if 
applicable, ``, Abbreviated as [short title reflected in the 
depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively the ``Funds'') of 
customers who trade commodities, options, swaps, and other products, as 
required by Commodity Futures Trading Commission (``CFTC'') Regulations, 
including Regulation 1.20, as amended; that the Funds held by you, 
hereafter deposited in the Account(s) or accruing to the credit of the 
Account(s), will be separately accounted for and segregated on your 
books from our own funds and from any other funds or accounts held by us 
in accordance with the provisions of the Commodity Exchange Act, as 
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended; 
and that the Funds must otherwise be treated in accordance with the 
provisions of Section 4d of the Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Funds may not be 
used by you or by us to secure or guarantee any obligations that we 
might owe to you, and they may not be used by us to secure or obtain 
credit from you. You further acknowledge and agree that the Funds in the 
Account(s) shall not be subject to any right of offset or lien for or on 
account of any indebtedness, obligations or liabilities we may now or in 
the future have owing to you. This prohibition does not affect your 
right to recover funds advanced in the form of cash transfers, lines of 
credit, repurchase agreements or other similar liquidity arrangements 
you make in lieu of liquidating non-cash assets held in the Account(s) 
or in lieu of converting cash held in the Account(s) to cash in a 
different currency.
    In addition, you agree that the Account(s) may be examined at any 
reasonable time by the director of the Division of Swap Dealer and 
Intermediary Oversight of the CFTC or the director of the Division of 
Clearing and Risk of the CFTC, or any successor divisions, or such 
directors' designees, or an appropriate officer, agent or employee of 
our designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take place 
without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other information 
regarding or related to the Account(s) from the director of the Division 
of Swap Dealer and Intermediary Oversight of the CFTC or the director of 
the Division of Clearing and Risk of the CFTC, or any successor 
divisions, or such directors' designees, or an appropriate officer, 
agent, or employee of [Name of DSRO], acting in its capacity as our 
DSRO, and this letter constitutes the authorization and direction of the 
undersigned on our behalf to release the requested information without 
further notice to or consent from us.
    You further acknowledge and agree that, pursuant to authorization 
granted by us to you previously or herein, you have provided, or will 
promptly provide following the opening of the Account(s), the director 
of the Division of Swap Dealer and Intermediary Oversight of the CFTC, 
or any successor division, or such director's designees, with 
technological connectivity, which may include provision of hardware, 
software, and related technology and protocol support, to facilitate 
direct, read-only electronic access to transaction and account balance 
information for the Account(s). This letter constitutes the 
authorization and direction of the undersigned on our behalf for you to 
establish this connectivity and access if not previously established, 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to the 
above information and access requests will be made in accordance with, 
and subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information or access request, in order to 
provide for the secure transmission and delivery of the requested 
information or access to the appropriate recipient(s). We will not hold 
you responsible for acting pursuant to any information or access request 
from the director of the Division of Swap Dealer and Intermediary 
Oversight of the CFTC or the director of the Division of Clearing and 
Risk of the CFTC, or any successor divisions, or such directors' 
designees, or an appropriate officer, agent, or employee of [Name of 
DSRO], acting in its capacity as our DSRO, upon which you have relied 
after having taken measures in accordance with your applicable policies 
and procedures to assure that such request was provided to you by an 
individual authorized to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we

[[Page 103]]

acknowledge that you will have no obligation to release the Funds held 
in the Account(s), except upon instruction of the Trustee in Bankruptcy 
or pursuant to the Order of the respective U.S. Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, nothing 
contained herein shall be construed as limiting your right to assert any 
right of offset or lien on assets that are not Funds maintained in the 
Account(s), or to impose such charges against us or any proprietary 
account maintained by us with you. Further, it is understood that 
amounts represented by checks, drafts or other items shall not be 
considered to be part of the Account(s) until finally collected. 
Accordingly, checks, drafts and other items credited to the Account(s) 
and subsequently dishonored or otherwise returned to you or reversed, 
for any reason, and any claims relating thereto, including but not 
limited to claims of alteration or forgery, may be charged back to the 
Account(s), and we shall be responsible to you as a general endorser of 
all such items whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the Account(s) 
and the balances maintained therein are in conformity with the Act and 
CFTC regulations without any further inquiry, provided that, in the 
ordinary course of your business as a depository, you have no notice of 
or actual knowledge of a potential violation by us of any provision of 
the Act or the CFTC regulations that relates to the segregation of 
customer funds; and you shall not in any manner not expressly agreed to 
herein be responsible to us for ensuring compliance by us with such 
provisions of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have under 
the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree or 
levy relates in whole or in part to the Account(s). In any event, you 
shall not be liable by reason of any action or omission to act pursuant 
to any such order, judgment, decree or levy, to us or to any other 
person, firm, association or corporation even if thereafter any such 
order, decree, judgment or levy shall be reversed, modified, set aside 
or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of doubt, 
regardless of a change in the name of either party. This letter 
agreement supersedes and replaces any prior agreement between the 
parties in connection with the Account(s), including but not limited to 
any prior acknowledgment letter agreement, to the extent that such prior 
agreement is inconsistent with the terms hereof. In the event of any 
conflict between this letter agreement and any other agreement between 
the parties in connection with the Account(s), this letter agreement 
shall govern with respect to matters specific to Section 4d of the Act 
and the CFTC's regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to the 
principles of choice of law.
    Please acknowledge that you agree to abide by the requirements and 
conditions set forth above by signing and returning to us the enclosed 
copy of this letter agreement, and that you further agree to provide a 
copy of this fully executed letter agreement directly to the CFTC (via 
electronic means in a format and manner determined by the CFTC) and to 
[Name of DSRO], acting in its capacity as our DSRO. We hereby authorize 
and direct you to provide such copies without further notice to or 
consent from us, no later than three business days after opening the 
Account(s) or revising this letter agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Bank, Trust Company, Derivatives Clearing Organization or 
Futures Commission Merchant]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
DATE:

      Appendix B to Sec.  1.20--Derivatives Clearing Organization 
   Acknowledgment Letter for CFTC Regulation 1.20 Customer Segregated 
                                 Account

[Date]

[Name and Address of Bank or Trust Company]

    We refer to the Segregated Account(s) which [Name of Derivatives 
Clearing Organization] (``we'' or ``our'') have opened or will open with 
[Name of Bank or Trust Company] (``you'' or ``your'') entitled:

[Name of Derivatives Clearing Organization] Futures Customer Omnibus 
Account, CFTC Regulation 1.20 Customer Segregated Account under Sections 
4d(a) and 4d(b) of the Commodity Exchange Act [and, if applicable, ``, 
Abbreviated as [short title reflected in the depository's electronic 
system]'']

Account Number(s): [ ]


[[Page 104]]


(collectively, the ``Account(s)'').

    You acknowledge that we have opened or will open the above-
referenced Account(s) for the purpose of depositing, as applicable, 
money, securities and other property (collectively the ``Funds'') of 
customers who trade commodities, options, swaps, and other products, as 
required by Commodity Futures Trading Commission (``CFTC'') Regulations, 
including Regulation 1.20, as amended; that the Funds held by you, 
hereafter deposited in the Account(s) or accruing to the credit of the 
Account(s), will be separately accounted for and segregated on your 
books from our own funds and from any other funds or accounts held by us 
in accordance with the provisions of the Commodity Exchange Act, as 
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended; 
and that the Funds must otherwise be treated in accordance with the 
provisions of Section 4d of the Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Funds may not be 
used by you or by us to secure or guarantee any obligations that we 
might owe to you, and they may not be used by us to secure or obtain 
credit from you. You further acknowledge and agree that the Funds in the 
Account(s) shall not be subject to any right of offset or lien for or on 
account of any indebtedness, obligations or liabilities we may now or in 
the future have owing to you. This prohibition does not affect your 
right to recover funds advanced in the form of cash transfers, lines of 
credit, repurchase agreements or other similar liquidity arrangements 
you make in lieu of liquidating non-cash assets held in the Account(s) 
or in lieu of converting cash held in the Account(s) to cash in a 
different currency.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other information 
regarding or related to the Account(s) from the director of the Division 
of Clearing and Risk of the CFTC or the director of the Division of Swap 
Dealer and Intermediary Oversight of the CFTC, or any successor 
divisions, or such directors' designees, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to release 
the requested information without further notice to or consent from us.
    The parties agree that all actions on your part to respond to the 
above information requests will be made in accordance with, and subject 
to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide for 
the secure transmission and delivery of the requested information to the 
appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Clearing and 
Risk of the CFTC or the director of the Division of Swap Dealer and 
Intermediary Oversight of the CFTC, or any successor divisions, or such 
directors' designees, upon which you have relied after having taken 
measures in accordance with your applicable policies and procedures to 
assure that such request was provided to you by an individual authorized 
to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Funds held 
in the Account(s), except upon instruction of the Trustee in Bankruptcy 
or pursuant to the Order of the respective U.S. Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, nothing 
contained herein shall be construed as limiting your right to assert any 
right of offset or lien on assets that are not Funds maintained in the 
Account(s), or to impose such charges against us or any proprietary 
account maintained by us with you. Further, it is understood that 
amounts represented by checks, drafts or other items shall not be 
considered to be part of the Account(s) until finally collected. 
Accordingly, checks, drafts and other items credited to the Account(s) 
and subsequently dishonored or otherwise returned to you or reversed, 
for any reason, and any claims relating thereto, including but not 
limited to claims of alteration or forgery, may be charged back to the 
Account(s), and we shall be responsible to you as a general endorser of 
all such items whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the Account(s) 
and the balances maintained therein are in conformity with the Act and 
CFTC regulations without any further inquiry, provided that, in the 
ordinary course of your business as a depository, you have no notice of 
or actual knowledge of a potential violation by us of any provision of 
the Act or the CFTC regulations that relates to the segregation of 
customer funds; and you shall not in any manner not expressly agreed to 
herein be responsible to us for ensuring compliance by us with such 
provisions of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have under 
the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree or 
levy relates in whole or in part to the Account(s). In any event, you 
shall not be liable by reason of any action or omission to act pursuant 
to any such order, judgment, decree or levy, to

[[Page 105]]

us or to any other person, firm, association or corporation even if 
thereafter any such order, decree, judgment or levy shall be reversed, 
modified, set aside or vacated.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of doubt, 
regardless of a change in the name of either party. This letter 
agreement supersedes and replaces any prior agreement between the 
parties in connection with the Account(s), including but not limited to 
any prior acknowledgment letter agreement, to the extent that such prior 
agreement is inconsistent with the terms hereof. In the event of any 
conflict between this letter agreement and any other agreement between 
the parties in connection with the Account(s), this letter agreement 
shall govern with respect to matters specific to Section 4d of the Act 
and the CFTC's regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to the 
principles of choice of law.
    Please acknowledge that you agree to abide by the requirements and 
conditions set forth above by signing and returning to us the enclosed 
copy of this letter agreement, and that you further agree to provide a 
copy of this fully executed letter agreement directly to the CFTC (via 
electronic means in a format and manner determined by the CFTC). We 
hereby authorize and direct you to provide such copy without further 
notice to or consent from us, no later than three business days after 
opening the Account(s) or revising this letter agreement, as applicable.

[Name of Derivatives Clearing Organization]

By:

Print Name:

Title:

ACKNOWLEDGED AND AGREED:

[Name of Bank or Trust Company]

By:

Print Name:

Title:

Contact Information: [Insert phone number and email address]

DATE:

[78 FR 68627, Nov. 14, 2013, as amended at 79 FR 26832, May 12, 2014; 81 
FR 53267, Aug. 12, 2016]



Sec.  1.21  Care of money and equities accruing to futures customers.

    All money received directly or indirectly by, and all money and 
equities accruing to, a futures commission merchant from any derivatives 
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 futures customer shall be considered as accruing to such 
futures customer within the meaning of the Act and these regulations. 
Such money and equities shall be treated and dealt with as belonging to 
such futures customer in accordance with the provisions of the Act and 
these regulations. Money and equities accruing in connection with 
futures 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 futures customers having open 
trades, contracts, or commodity option positions which if closed would 
result in a credit to such futures customers.

[77 FR 66321, Nov. 2, 2012]



Sec.  1.22  Use of futures customer funds restricted.

    (a) No futures commission merchant shall use, or permit the use of, 
the futures customer funds of one futures 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 futures customer.
    (b) Futures customer funds shall not be used to carry trades or 
positions of the same futures customer other than in contracts for the 
purchase of sale of any commodity for future delivery or for options 
thereon traded through the facilities of a designated contract market.
    (c)(1) The undermargined amount for a futures customer's account is 
the amount, if any, by which:
    (i) The total amount of collateral required for that futures 
customer's positions in that account, at the time or times referred to 
in paragraph (c)(2) of this section, exceeds
    (ii) The value of the futures customer funds for that account, as 
calculated in Sec.  1.20(i)(2).
    (2) Each futures commission merchant must compute, based on the 
information available to the futures commission merchant as of the close 
of each business day,

[[Page 106]]

    (i) The undermargined amounts, based on the clearing initial margin 
that will be required to be maintained by that futures commission 
merchant for its futures customers, at each derivatives clearing 
organization of which the futures commission merchant is a member, at 
the point of the daily settlement (as described in Sec.  39.14 of this 
chapter) that will complete during the following business day for each 
such derivatives clearing organization less
    (ii) Any debit balances referred to in Sec.  1.20(i)(4) included in 
such undermargined amounts.
    (3)(i) Prior to the Residual Interest Deadline, such futures 
commission merchant must maintain residual interest in segregated funds 
that is at least equal to the computation set forth in paragraph (c)(2) 
of this section. Where a futures commission merchant is subject to 
multiple Residual Interest Deadlines, prior to each Residual Interest 
Deadline, such futures commission merchant must maintain residual 
interest in segregated funds that is at least equal to the portion of 
the computation set forth in paragraph (c)(2) of this section 
attributable to the clearing initial margin required by the derivatives 
clearing organization making such settlement.
    (ii) A futures commission merchant may reduce the amount of residual 
interest required in paragraph (c)(3)(i) of this section to account for 
payments received from or on behalf of undermargined futures customers 
(less the sum of any disbursements made to or on behalf of such 
customers) between the close of the previous business day and the 
Residual Interest Deadline.
    (4) For purposes of paragraph (c)(2) of this section, a futures 
commission merchant should include, as clearing initial margin, customer 
initial margin that the futures commission merchant will be required to 
maintain, for that futures commission merchant's futures customers, at 
another futures commission merchant.
    (5) Residual Interest Deadline defined. (i) Except as provided in 
paragraph (c)(5)(ii) of this section, the Residual Interest Deadline 
shall be the time of the settlement referenced in paragraph (c)(2)(i) 
or, as appropriate, (c)(4), of this section.
    (ii) Starting on November 14, 2014 and during the phase-in period 
described in paragraph (c)(5)(iii) of this section, the Residual 
Interest Deadline shall be 6:00 p.m. Eastern Time on the date of the 
settlement referenced in paragraph (c)(2)(i) or, as appropriate, (c)(4), 
of this section.
    (iii)(A) No later than May 16, 2016, the staff of the Commission 
shall complete and publish for public comment a report addressing, to 
the extent information is practically available, the practicability (for 
both futures commission merchants and customers) of moving that deadline 
from 6:00 p.m. Eastern Time on the date of the settlement referenced in 
paragraph (c)(2)(i) or, as appropriate, (c)(4), of this section to the 
time of that settlement (or to some other time of day), including 
whether and on what schedule it would be feasible to do so, and the 
costs and benefits of such potential requirements. Staff shall, using 
the Commission's Web site, solicit public comment and shall conduct a 
public roundtable regarding specific issues to be covered by such 
report.
    (B) Nine months after publication of the report required by 
paragraph (c)(5)(iii)(A) of this section, the Commission may (but shall 
not be required to) do either of the following:
    (1) Terminate the phase-in period through rulemaking, in which case 
the phase-in period shall end as of a date established by a final rule 
published in the Federal Register, which date shall be no less than one 
year after the date such rule is published; or
    (2) Determine that it is necessary or appropriate in the public 
interest to propose through rulemaking a different Residual Interest 
Deadline. In that event, the Commission shall establish, if necessary, a 
phase-in schedule in the final rule published in the Federal Register.
    (C) If the phase-in schedule has not been terminated or revised 
pursuant to paragraph (c)(5)(iii)(B) of this section, then the Residual 
Interest Deadline shall remain 6:00 p.m. Eastern Time on the date of the 
settlement referenced in paragraph (c)(2)(i) or, as appropriate, (c)(4) 
of this section until such time

[[Page 107]]

that the Commission takes further action through rulemaking.

[78 FR 68631, Nov. 14, 2013, as amended at 80 FR 15509, Mar. 24, 2015]



Sec.  1.23  Interest of futures commission merchant in segregated 
futures customer funds; additions and withdrawals.

    (a)(1) The provision in sections 4d(a)(2) and 4d(b) of the Act and 
the provision in Sec.  1.20 that prohibit the commingling of futures 
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 futures customer funds segregated as 
required by the Act and the regulations in this part and set apart for 
the benefit of futures customers; nor shall such provisions be construed 
to prevent a futures commission merchant from adding to such segregated 
futures 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 of this part, as it may deem necessary to ensure any 
and all futures customers' accounts from becoming undersegregated at any 
time.
    (2) If a futures commission merchant discovers at any time that it 
is holding insufficient funds in segregated accounts to meet its 
obligations under Sec. Sec.  1.20 and 1.22, the futures commission 
merchant shall immediately deposit sufficient funds into segregation to 
bring the account into compliance.
    (b) A futures commission merchant may not withdraw funds, except 
withdrawals that are made to or for the benefit of futures customers, 
from an account or accounts holding futures customer funds unless the 
futures commission merchant has prepared the daily segregation 
calculation required by Sec.  1.32 as of the close of business on the 
previous business day. A futures commission merchant that has completed 
its daily segregation calculation may make withdrawals, in addition to 
withdrawals that are made to or for the benefit of futures customers, to 
the extent of its actual residual financial interest in funds held in 
segregated futures accounts, adjusted to reflect market activity and 
other events that may have decreased the amount of the firm's residual 
financial interest since the close of business on the previous business 
day, including the withdrawal of securities held in segregated 
safekeeping accounts held by a bank, trust company, derivatives clearing 
organization or other futures commission merchant. Such withdrawal(s), 
however, shall not result in the funds of one futures customer being 
used to purchase, margin or carry the trades, contracts or commodity 
options, or extend the credit of any other futures customer or other 
person.
    (c) Notwithstanding paragraphs (a) and (b) of this section, each 
futures commission merchant shall establish a targeted residual interest 
(i.e., excess funds) that is in an amount that, when maintained as its 
residual interest in the segregated funds accounts, reasonably ensures 
that the futures commission merchant shall remain in compliance with the 
segregated funds requirements at all times. Each futures commission 
merchant shall establish policies and procedures designed to reasonably 
ensure that the futures commission merchant maintains the targeted 
residual amounts in segregated funds at all times. The futures 
commission merchant shall maintain sufficient capital and liquidity, and 
take such other appropriate steps as are necessary, to reasonably ensure 
that such amount of targeted residual interest is maintained as the 
futures commission merchant's residual interest in the segregated funds 
accounts at all times. In determining the amount of the targeted 
residual interest, the futures commission merchant shall analyze all 
relevant factors affecting the amounts in segregated funds from time to 
time, including without limitation various factors, as applicable, 
relating to the nature of the futures commission merchant's business 
including, but not limited to, the composition of the futures commission 
merchant's customer base, the general creditworthiness of the customer 
base, the general trading activity of the customers, the types of 
markets and products traded by the customers, the proprietary trading of 
the futures commission merchant, the general volatility and liquidity of 
the

[[Page 108]]

markets and products traded by customers, the futures commission 
merchant's own liquidity and capital needs, and the historical trends in 
customer segregated fund balances and debit balances in customers' and 
undermargined accounts. The analysis and calculation of the targeted 
amount of the future commission merchant's residual interest must be 
described in writing with the specificity necessary to allow the 
Commission and the futures commission merchant's designated self-
regulatory organization to duplicate the analysis and calculation and 
test the assumptions made by the futures commission merchant. The 
adequacy of the targeted residual interest and the process for 
establishing the targeted residual interest must be reassessed 
periodically by the futures commission merchant and revised as 
necessary.
    (d) Notwithstanding any other paragraph of this section, a futures 
commission merchant may not withdraw funds, in a single transaction or a 
series of transactions, that are not made to or for the benefit of 
futures customers from futures accounts if such withdrawal(s) would 
exceed 25 percent of the futures commission merchant's residual interest 
in such accounts as reported on the daily segregation calculation 
required by Sec.  1.32 and computed as of the close of business on the 
previous business day, unless:
    (1) The futures commission merchant's chief executive officer, chief 
finance officer or other senior official that is listed as a principal 
of the futures commission merchant on its Form 7-R and is knowledgeable 
about the futures commission merchant's financial requirements and 
financial position pre-approves in writing the withdrawal, or series of 
withdrawals;
    (2) The futures commission merchant files written notice of the 
withdrawal or series of withdrawals, with the Commission and with its 
designated self-regulatory organization immediately after the chief 
executive officer, chief finance officer or other senior official as 
described in paragraph (d)(1) of this section pre-approves the 
withdrawal or series of withdrawals. The written notice must:
    (i) Be signed by the chief executive officer, chief finance officer 
or other senior official as described in paragraph (d)(1) of this 
section that pre-approved the withdrawal, and give notice that the 
futures commission merchant has withdrawn or intends to withdraw more 
than 25 percent of its residual interest in segregated accounts holding 
futures customer funds;
    (ii) Include a description of the reasons for the withdrawal or 
series of withdrawals;
    (iii) List the amount of funds provided to each recipient and each 
recipient's name;
    (iv) Include the current estimate of the amount of the futures 
commission merchant's residual interest in the futures accounts after 
the withdrawal;
    (v) Contain a representation by the chief executive officer, chief 
finance officer or other senior official as described in paragraph 
(d)(1) of this section that pre-approved the withdrawal, or series of 
withdrawals, that, after due diligence, to such person's knowledge and 
reasonable belief, the futures commission merchant remains in compliance 
with the segregation requirements after the withdrawal. The chief 
executive officer, chief finance officer or other senior official as 
described in paragraph (d)(1) of this section must consider the daily 
segregation calculation as of the close of business on the previous 
business day and any other factors that may cause a material change in 
the futures commission merchant's residual interest since the close of 
business the previous business day, including known unsecured futures 
customer debits or deficits, current day market activity and any other 
withdrawals made from the futures accounts; and
    (vi) Any such written notice filed with the Commission must be filed 
via electronic transmission using a form of user authentication assigned 
in accordance with procedures established by or approved by the 
Commission, and otherwise in accordance with instruction issued by or 
approved by the Commission. Any such electronic submission must clearly 
indicate the registrant on whose behalf such filing is made and the use 
of such user authentication in submitting such filing will constitute

[[Page 109]]

and become a substitute for the manual signature of the authorized 
signer. Any written notice filed must be followed up with direct 
communication to the Regional office of the Commission that has 
supervisory authority over the futures commission merchant whereby the 
Commission acknowledges receipt of the notice; and
    (3) After making a withdrawal requiring the approval and notice 
required in paragraphs (d)(1) and (2) of this section, and before the 
completion of its next daily segregated funds calculation, no futures 
commission merchant may make any further withdrawals from accounts 
holding futures customer funds, except to or for the benefit of futures 
customers, without, for each withdrawal, obtaining the approval required 
under paragraph (d)(1) of this section and filing a written notice in 
the manner specified under paragraph (d)(2) of this section with the 
Commission and its designated self-regulatory organization signed by the 
chief executive officer, chief finance officer, or other senior 
official. The written notice must:
    (i) List the amount of funds provided to each recipient and each 
recipient's name;
    (ii) Disclose the reason for each withdrawal;
    (iii) Confirm that the chief executive officer, chief finance 
officer, or other senior official (and identify of the person if 
different from the person who signed the notice) pre-approved the 
withdrawal in writing;
    (iv) Disclose the current estimate of the futures commission 
merchant's remaining total residual interest in the segregated accounts 
holding futures customer funds after the withdrawal; and
    (v) Include a representation that, after due diligence, to the best 
of the notice signatory's knowledge and reasonable belief the futures 
commission merchant remains in compliance with the segregation 
requirements after the withdrawal.
    (e) If a futures commission merchant withdraws funds from futures 
accounts that are not made to or for the benefit of futures customers, 
and the withdrawal causes the futures commission merchant to not hold 
sufficient funds in the futures accounts to meet its targeted residual 
interest, as required to be computed under Sec.  1.11, the futures 
commission merchant should deposit its own funds into the futures 
accounts to restore the account balance to the targeted residual 
interest amount by the close of business on the next business day, or, 
if appropriate, revise the futures commission merchant's targeted amount 
of residual interest pursuant to the policies and procedures required by 
Sec.  1.11. Notwithstanding the foregoing, if a the futures commission 
merchant's residual interest in customer accounts is less than the 
amount required by Sec.  1.22 at any particular point in time, the 
futures commission merchant must immediately restore the residual 
interest to exceed the sum of such amounts. Any proprietary funds 
deposited in the futures accounts must be unencumbered and otherwise 
compliant with Sec.  1.25, as applicable.

[78 FR 68632, Nov. 14, 2013, as amended at 79 FR 44126, July 30, 2014]



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 
derivatives clearing organization or in memberships in or obligations of 
any contract market; or
    (b) Money held by any derivatives 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 futures customers of such futures commission merchant.

[77 FR 66322, Nov. 2, 2012]



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 
derivatives clearing organization may invest customer money 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);

[[Page 110]]

    (ii) General obligations of any State or of any political 
subdivision thereof (municipal securities);
    (iii) Obligations of any United States government corporation or 
enterprise sponsored by the United States government (U.S. agency 
obligations);
    (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 fully guaranteed as to principal and interest 
by the United States under the Temporary Liquidity Guarantee Program as 
administered by the Federal Deposit Insurance Corporation (commercial 
paper);
    (vi) Corporate notes or bonds fully guaranteed as to principal and 
interest by the United States under the Temporary Liquidity Guarantee 
Program as administered by the Federal Deposit Insurance Corporation 
(corporate notes or bonds); and
    (vii) Interests in money market mutual funds.
    (2)(i) In addition, a futures commission merchant or derivatives 
clearing organization may buy and sell the permitted investments listed 
in paragraphs (a)(1)(i) through (vii) of this section pursuant to 
agreements for resale or repurchase of the instruments, in accordance 
with the provisions of paragraph (d) of this section.
    (ii) A futures commission merchant or a derivatives clearing 
organization may sell securities deposited by customers as margin 
pursuant to agreements to repurchase subject to the following:
    (A) Securities subject to such repurchase agreements must be 
``highly liquid'' as defined in paragraph (b)(1) of this section.
    (B) Securities subject to such repurchase agreements must not be 
``specifically identifiable property'' as defined in Sec.  190.01(kk) of 
this chapter.
    (C) The terms and conditions of such an agreement to repurchase must 
be in accordance with the provisions of paragraph (d) of this section.
    (D) Upon the default by a counterparty to a repurchase agreement, 
the futures commission merchant or derivatives clearing organization 
shall act promptly to ensure that the default does not result in any 
direct or indirect cost or expense to the customer.
    (3) Obligations issued by the Federal National Mortgage Association 
or the Federal Home Loan Mortgage Association are permitted while these 
entities operate under the conservatorship or receivership of the 
Federal Housing Finance Authority with capital support from the United 
States.
    (b) General terms and conditions. A futures commission merchant or a 
derivatives clearing organization is required to manage the permitted 
investments consistent with the objectives of preserving principal and 
maintaining liquidity and according to the following specific 
requirements:
    (1) Liquidity. Investments must be ``highly liquid'' such that they 
have the ability to be converted into cash within one business day 
without material discount in value.
    (2) Restrictions on instrument features. (i) With the exception of 
money market mutual funds, no permitted investment may contain an 
embedded derivative of any kind, except as follows:
    (A) The issuer of an instrument otherwise permitted by this section 
may have an option to call, in whole or in part, at par, the principal 
amount of the instrument before its stated maturity date; or
    (B) An instrument that meets the requirements of paragraph 
(b)(2)(iv) of this section may provide for a cap, floor, or collar on 
the interest paid; provided, however, that the terms of such instrument 
obligate the issuer to repay the principal amount of the instrument at 
not less than par value upon maturity.
    (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)(2)(iv) of this section, and it may not otherwise 
constitute a derivative instrument.
    (iv)(A) Adjustable rate securities are permitted, subject to the 
following requirements:

[[Page 111]]

    (1) The interest payments on variable rate securities must 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, the one-month or three-month LIBOR rate, or the interest rate 
of any fixed rate instrument that is a permitted investment listed in 
paragraph (a)(1) of this section;
    (2) The interest payment, in any period, on floating rate securities 
must be determined solely by reference, 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, the one-month or three-
month LIBOR rate, or the interest rate of any fixed rate instrument that 
is a permitted investment listed in paragraph (a)(1) of this section;
    (3) Benchmark rates must be expressed in the same currency as the 
adjustable rate securities that reference them; and
    (4) No interest payment on an adjustable rate security, in any 
period, can be a negative amount.
    (B) For purposes of this paragraph, the following definitions shall 
apply:
    (1) The term adjustable rate security means, a floating rate 
security, a variable rate security, or both.
    (2) The term floating rate security means a security, the terms of 
which provide for the adjustment of its interest rate whenever a 
specified interest rate changes and that, at any time until the final 
maturity of the instrument or the period remaining until the principal 
amount can be recovered through demand, can reasonably be expected to 
have market value that approximates its amortized cost.
    (3) The term variable rate security means a security, the terms of 
which provide for the adjustment of its interest rate on set dates (such 
as the last day of a month or calendar quarter) and that, upon each 
adjustment until the final maturity of the instrument or the period 
remaining until the principal amount can be recovered through demand, 
can reasonably be expected to have a market value that approximates its 
amortized cost.
    (v) Certificates of deposit 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.
    (vi) Commercial paper and corporate notes or bonds must meet the 
following criteria:
    (A) The size of the issuance must be greater than $1 billion;
    (B) The instrument must be denominated in U.S. dollars; and
    (C) The instrument must be fully guaranteed as to principal and 
interest by the United States for its entire term.
    (3) Concentration--(i) Asset-based concentration limits for direct 
investments. (A) Investments in U.S. government securities shall not be 
subject to a concentration limit.
    (B) Investments in U.S. agency obligations may not exceed 50 percent 
of the total assets held in segregation by the futures commission 
merchant or derivatives clearing organization.
    (C) Investments in each of commercial paper, corporate notes or 
bonds and certificates of deposit may not exceed 25 percent of the total 
assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (D) Investments in municipal securities may not exceed 10 percent of 
the total assets held in segregation by the futures commission merchant 
or derivatives clearing organization.
    (E) Subject to paragraph (b)(3)(i)(G) of this section, investments 
in money market mutual funds comprising only U.S. government securities 
shall not be subject to a concentration limit.
    (F) Subject to paragraph (b)(3)(i)(G) of this section, investments 
in money market mutual funds, other than those described in paragraph 
(b)(3)(i)(E) of this section, may not exceed 50 percent of the total 
assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (G) Investments in money market mutual funds comprising less than $1 
billion in assets and/or which have a management company comprising less 
than $25 billion in assets, may not exceed 10 percent of the total 
assets held

[[Page 112]]

in segregation by the futures commission merchant or derivatives 
clearing organization.
    (ii) Issuer-based concentration limits for direct investments. (A) 
Securities of any single issuer of U.S. agency obligations held by a 
futures commission merchant or derivatives clearing organization may not 
exceed 25 percent of total assets held in segregation by the futures 
commission merchant or derivatives clearing organization.
    (B) Securities of any single issuer of municipal securities, 
certificates of deposit, commercial paper, or corporate notes or bonds 
held by a futures commission merchant or derivatives clearing 
organization may not exceed 5 percent of total assets held in 
segregation by the futures commission merchant or derivatives clearing 
organization.
    (C) Interests in any single family of money market mutual funds 
described in paragraph (b)(3)(i)(F) of this section may not exceed 25 
percent of total assets held in segregation by the futures commission 
merchant or derivatives clearing organization.
    (D) Interests in any individual money market mutual fund described 
in paragraph (b)(3)(i)(F) of this section may not exceed 10 percent of 
total assets held in segregation by the futures commission merchant or 
derivatives clearing organization.
    (E) For purposes of determining compliance with the issuer-based 
concentration limits set forth in this section, securities issued by 
entities that are affiliated, as defined in paragraph (b)(5) 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.
    (iii) Concentration limits for agreements to repurchase--(A) 
Repurchase agreements. For purposes of determining compliance with the 
asset-based and issuer-based concentration limits set forth in this 
section, securities sold by a futures commission merchant or derivatives 
clearing organization subject to agreements to repurchase shall be 
combined with securities held by the futures commission merchant or 
derivatives clearing organization as direct investments.
    (B) Reverse repurchase agreements. For purposes of determining 
compliance with the asset-based and issuer-based concentration limits 
set forth in this section, securities purchased by a futures commission 
merchant or derivatives clearing organization subject to agreements to 
resell shall be combined with securities held by the futures commission 
merchant or derivatives clearing organization as direct investments.
    (iv) Treatment of customer-owned securities. For purposes of 
determining compliance with the asset-based and issuer-based 
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 derivatives clearing organization are not 
included in total assets held in segregation by the derivatives clearing 
organization.
    (v) Counterparty concentration limits. Securities purchased by a 
futures commission merchant or derivatives clearing organization from a 
single counterparty, or from one or more counterparties under common 
ownership or control, subject to an agreement to resell the securities 
to the counterparty or counterparties, shall not exceed 25 percent of 
total assets held in segregation or under Sec.  30.7 of this chapter by 
the futures commission merchant or derivatives clearing organization.
    (4) Time-to-maturity. (i) 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.
    (ii) For purposes of determining the time-to-maturity of the 
portfolio, an instrument that is set forth in paragraphs (a)(1)(i) 
through (vii) of this section may be treated as having a one-day time-
to-maturity if the following terms and conditions are satisfied:
    (A) The instrument is deposited solely on an overnight basis with a 
derivatives clearing organization pursuant to the terms and conditions 
of a collateral

[[Page 113]]

management program that has become effective in accordance with Sec.  
39.4 of this chapter;
    (B) The instrument is one that the futures commission merchant owns 
or has an unqualified right to pledge, is not subject to any lien, and 
is deposited by the futures commission merchant into a segregated 
account at a derivatives clearing organization;
    (C) The derivatives clearing organization prices the instrument each 
day based on the current mark-to-market value; and
    (D) The derivatives clearing organization reduces the assigned value 
of the instrument each day by a haircut of at least 2 percent.
    (5) 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 
derivatives clearing organization shall not invest customer funds in 
obligations of an entity affiliated with the derivatives 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 derivatives clearing 
organization may invest customer funds in a fund affiliated with that 
futures commission merchant or derivatives clearing organization.
    (c) Money market mutual funds. The following provisions will apply 
to the investment of customer funds in money market mutual funds (the 
fund).
    (1) 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.
    (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.
    (3) A futures commission merchant or derivatives 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 futures 
commission merchant or derivatives clearing organization in accordance 
with Sec.  1.26. The futures commission merchant or the derivatives 
clearing organization shall obtain the acknowledgment letter required by 
Sec.  1.26 from an entity that has substantial control over the fund 
shares purchased with customer funds and has the knowledge and authority 
to facilitate redemption and payment or transfer of the customer funds. 
Such entity may include the fund sponsor or depository acting as 
custodian for fund shares.
    (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 derivatives clearing organization by that 
time.
    (5)(i) General requirement for redemption of interests. A fund shall 
be legally obligated to redeem an interest and to make payment in 
satisfaction thereof by the business day following a redemption request, 
and the futures commission merchant or derivatives clearing organization 
shall retain documentation demonstrating compliance with this 
requirement.
    (ii) Exception. A fund may provide for the postponement of 
redemption and payment due to any of the following circumstances:
    (A) For any period during which there is a non-routine closure of 
the Fedwire or applicable Federal Reserve Banks;
    (B) For any period:
    (1) During which the New York Stock Exchange is closed other than 
customary week-end and holiday closings; or
    (2) During which trading on the New York Stock Exchange is 
restricted;
    (C) For any period during which an emergency exists as a result of 
which:
    (1) Disposal by the company of securities owned by it is not 
reasonably practicable; or

[[Page 114]]

    (2) It is not reasonably practicable for such company fairly to 
determine the value of its net assets;
    (D) For any period as the Securities and Exchange Commission may by 
order permit for the protection of security holders of the company;
    (E) For any period during which the Securities and Exchange 
Commission has, by rule or regulation, deemed that:
    (1) Trading shall be restricted; or
    (2) An emergency exists; or
    (F) For any period during which each of the conditions of Sec.  
270.22e-3(a)(1) through (3) of this title are met.
    (6) The agreement pursuant to which the futures commission merchant 
or derivatives 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.
    (7) The appendix to this section sets forth language that will 
satisfy the requirements of paragraph (c)(5) of this section.
    (d) Repurchase and reverse repurchase agreements. A futures 
commission merchant or derivatives clearing organization may buy and 
sell the permitted investments listed in paragraphs (a)(1)(i) through 
(vii) 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) Permitted 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) A futures commission merchant or derivatives clearing 
organization shall not enter into an agreement to repurchase or resell 
with a counterparty that is an affiliate of the futures commission 
merchant or derivatives clearing organization, respectively. 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.
    (4) The transaction is executed in compliance with the concentration 
limit requirements applicable to the securities transferred to the 
customer segregated custodial account in connection with the agreements 
to repurchase referred to in paragraphs (b)(3)(iii)(A) and (B) of this 
section.
    (5) 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 (13) of this section and which 
states that the parties thereto intend the transaction to be treated as 
a purchase and sale of securities.
    (6) The term of the agreement is no more than one business day, or 
reversal of the transaction is possible on demand.
    (7) Securities transferred to the futures commission merchant or 
derivatives clearing organization under the agreement are held in a 
safekeeping account with a bank as referred to in paragraph (d)(2) of 
this section, a Federal Reserve Bank, a derivatives clearing 
organization, or the Depository Trust Company in an account that 
complies with the requirements of Sec.  1.26.
    (8) The futures commission merchant or the derivatives 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 derivatives 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;

[[Page 115]]

    (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.
    (9) The transfer of securities to the customer segregated custodial 
account is made on a delivery versus payment basis in immediately 
available funds. The transfer of funds to the customer segregated cash 
account is made on a payment versus delivery basis. 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 derivatives 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 
derivatives clearing organization's customer segregated custodial 
account is made simultaneously with the disbursement of funds from the 
futures commission merchant's or derivatives clearing organization's 
customer segregated cash account at the custodian bank. On the sale or 
resale of securities, the futures commission merchant's or derivatives 
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.
    (10) A written confirmation to the futures commission merchant or 
derivatives 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 
derivatives clearing organization is issued once the transaction is 
reversed.
    (11) 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.
    (12) An actual transfer of securities to the customer segregated 
custodial account 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.''
    (13) The agreement makes clear that, in the event of the bankruptcy 
of the futures commission merchant or derivatives 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 derivatives 
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 may deposit unencumbered securities of the type 
specified in this section, which it owns for its own account, into a 
customer account. A futures commission merchant must include such 
securities, transfers of securities, and disposition of proceeds from 
the sale or maturity of such securities 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, derivatives 
clearing organization, or other registered futures commission merchant 
in accordance with the provisions of Sec.  1.20 part. For purposes of 
this section and Sec. Sec.  1.27, 1.28, 1.29, and 1.32, securities of 
the type specified by this section that are owned by the futures 
commission merchant and deposited into a customer account shall be 
considered customer funds until such investments are withdrawn from 
segregation in accordance with the provisions of Sec.  1.23. Investments 
permitted by Sec.  1.25 that are owned by the futures commission 
merchant and deposited into a futures customer account pursuant to Sec.  
1.26 shall be considered futures customer funds until such investments 
are

[[Page 116]]

withdrawn from segregation in accordance with Sec.  1.23. Investments 
permitted by Sec.  1.25 that are owned by the futures commission 
merchant and deposited into a Cleared Swaps Customer Account, as defined 
in Sec.  22.1 of this chapter, shall be considered Cleared Swaps 
Customer Collateral, as defined in Sec.  22.1 of this chapter, until 
such investments are withdrawn from segregation in accordance with Sec.  
22.17 of this chapter.

 Appendix to Sec.  1.25--Money Market Mutual Fund Prospectus Provisions 
            Acceptable for Compliance With Section 1.25(c)(5)

    Upon receipt of a proper redemption request submitted in a timely 
manner and otherwise in accordance with the redemption procedures set 
forth in this prospectus, the [Name of Fund] will redeem the requested 
shares and make a payment to you in satisfaction thereof no later than 
the business day following the redemption request. The [Name of Fund] 
may postpone and/or suspend redemption and payment beyond one business 
day only as follows:
    a. For any period during which there is a non-routine closure of the 
Fedwire or applicable Federal Reserve Banks;
    b. For any period (1) during which the New York Stock Exchange is 
closed other than customary week-end and holiday closings or (2) during 
which trading on the New York Stock Exchange is restricted;
    c. For any period during which an emergency exists as a result of 
which (1) disposal of securities owned by the [Name of Fund] is not 
reasonably practicable or (2) it is not reasonably practicable for the 
[Name of Fund] to fairly determine the net asset value of shares of the 
[Name of Fund];
    d. For any period during which the Securities and Exchange 
Commission has, by rule or regulation, deemed that (1) trading shall be 
restricted or (2) an emergency exists;
    e. For any period that the Securities and Exchange Commission, may 
by order permit for your protection; or
    f. For any period during which the [Name of Fund,] as part of a 
necessary liquidation of the fund, has properly postponed and/or 
suspended redemption of shares and payment in accordance with federal 
securities laws.

[76 FR 78798, Dec. 19, 2011, as amended at 77 FR 66322, Nov. 2, 2012; 78 
FR 68633, Nov. 14, 2013]



Sec.  1.26  Deposit of instruments purchased with futures customer funds.

    (a) Each futures commission merchant who invests futures customer 
funds in instruments described in Sec.  1.25, except for investments in 
money market mutual funds, shall separately account for such instruments 
as futures customer funds and segregate such instruments as funds 
belonging to such futures customers in accordance with the requirements 
of Sec.  1.20. Each derivatives clearing organization which invests 
money belonging or accruing to futures customers of its clearing members 
in instruments described in Sec.  1.25, except for investments in money 
market mutual funds, shall separately account for such instruments as 
customer funds and segregate such instruments as customer funds 
belonging to such futures customers in accordance with Sec.  1.20.
    (b) Each futures commission merchant or derivatives clearing 
organization which invests futures customer funds in money market mutual 
funds, as permitted by Sec.  1.25, shall separately account for such 
funds and segregate such funds as belonging to such futures customers. 
Such funds shall be deposited under an account name that clearly shows 
that they belong to futures customers and are segregated as required by 
sections 4d(a) and 4d(b) of the Act and by this part. Each futures 
commission merchant or derivatives clearing organization, upon opening 
such an account, shall obtain and maintain readily accessible in its 
files in accordance with Sec.  1.31, for as long as the account remains 
open, and thereafter for the period provided in Sec.  1.31, a written 
acknowledgment and shall file such acknowledgment in accordance with the 
requirements of Sec.  1.20. In the event such funds are held directly 
with the money market mutual fund or its affiliate, the written 
acknowledgment shall be in the form as set out in appendix A or B to 
this section. In the event such funds are held with a depository, the 
written acknowledgment shall be in the form as set out in appendix A or 
B to Sec.  1.20. In either case, the written acknowledgment shall be 
obtained, provided to the Commission and designated self-regulatory 
organizations, and retained as required under Sec.  1.20.

[[Page 117]]

  Appendix A to Sec.  1.26--Futures Commission Merchant Acknowledgment 
Letter for CFTC Regulation 1.26 Customer Segregated Money Market Mutual 
                              Fund Account

[Date]
[Name and Address of Money Market Mutual Fund]

    We propose to invest funds held by [Name of Futures Commission 
Merchant] (``we'' or ``our'') on behalf of our customers in shares of 
[Name of Money Market Mutual Fund] (``you'' or ``your'') under 
account(s) entitled (or shares issued to):

[Name of Futures Commission Merchant] [if applicable, add ``FCM Customer 
Omnibus Account''] CFTC Regulation 1.26 Customer Segregated Money Market 
Mutual Fund Account under Sections 4d(a) and 4d(b) of the Commodity 
Exchange Act [and, if applicable, ``, Abbreviated as [short title 
reflected in the depository's electronic system]'']
Account Number(s): [ ]
(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who trade 
commodities, options, swaps and other products (``Commodity 
Customers''), as required by Commodity Futures Trading Commission 
(``CFTC'') Regulation 1.26, as amended; that the Shares held by you, 
hereafter deposited in the Account(s) or accruing to the credit of the 
Account(s), will be separately accounted for and segregated on your 
books from our own funds and from any other funds or accounts held by us 
in accordance with the provisions of the Commodity Exchange Act, as 
amended (the ``Act''), and part 1 of the CFTC's regulations, as amended; 
and that the Shares must otherwise be treated in accordance with the 
provisions of Section 4d of the Act and CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Shares may not be 
used by you or by us to secure or guarantee any obligations that we 
might owe to you, and they may not be used by us to secure or obtain 
credit from you. You further acknowledge and agree that the Shares in 
the Account(s) shall not be subject to any right of offset or lien for 
or on account of any indebtedness, obligations or liabilities we may now 
or in the future have owing to you.
    In addition, you agree that the Account(s) may be examined at any 
reasonable time by the director of the Division of Swap Dealer and 
Intermediary Oversight of the CFTC or the director of the Division of 
Clearing and Risk of the CFTC, or any successor divisions, or such 
directors' designees, or an appropriate officer, agent or employee of 
our designated self-regulatory organization (``DSRO''), [Name of DSRO], 
and this letter constitutes the authorization and direction of the 
undersigned on our behalf to permit any such examination to take place 
without further notice to or consent from us.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other account 
information regarding or related to the Account(s) from the director of 
the Division of Swap Dealer and Intermediary Oversight of the CFTC or 
the director of the Division of Clearing and Risk of the CFTC, or any 
successor divisions, or such directors' designees, or an appropriate 
officer, agent, or employee of [Name of DSRO], acting in its capacity as 
our DSRO, and this letter constitutes the authorization and direction of 
the undersigned on our behalf to release the requested information 
without further notice to or consent from us.
    You further acknowledge and agree that, pursuant to the 
authorization granted by us to you previously or herein, you have 
provided, or will provide following the opening of the Account(s), the 
director of the Division of Swap Dealer and Intermediary Oversight of 
the CFTC, or any successor division, or such director's designees, with 
technological connectivity, which may include provision of hardware, 
software, and related technology and protocol support, to facilitate 
direct, read-only electronic access to transaction and account balance 
information for the Account(s). This letter constitutes the 
authorization and direction of the undersigned on our behalf for you to 
establish this connectivity and access if not previously established, 
without further notice to or consent from us.
    The parties agree that all actions on your part to respond to the 
above information and access requests will be made in accordance with, 
and subject to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information or access request, in order to 
provide for the secure transmission and delivery of the requested 
information or access to the appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information or access request from the director of the Division of Swap 
Dealer and Intermediary Oversight of the CFTC or the director of the 
Division of Clearing and Risk of the CFTC, or any successor divisions, 
or such directors' designees, or an appropriate officer, agent, or 
employee of [Name of DSRO], acting in its capacity as our DSRO, upon 
which you have relied after having taken measures in accordance with 
your applicable policies and procedures to assure that such request was 
provided to you

[[Page 118]]

by an individual authorized to make such a request.
    In the event we become subject to either a voluntary or involuntary 
petition for relief under the U.S. Bankruptcy Code, we acknowledge that 
you will have no obligation to release the Shares held in the 
Account(s), except upon instruction of the Trustee in Bankruptcy or 
pursuant to the Order of the respective U.S. Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, nothing 
contained herein shall be construed as limiting your right to assert any 
right of offset or lien on assets that are not Shares maintained in the 
Account(s), or to impose such charges against us or any proprietary 
account maintained by us with you. Further, it is understood that 
amounts represented by checks, drafts or other items shall not be 
considered to be part of the Account(s) until finally collected. 
Accordingly, checks, drafts and other items credited to the Account(s) 
and subsequently dishonored or otherwise returned to you or reversed, 
for any reason and any claims relating thereto, including but not 
limited to claims of alteration or forgery, may be charged back to the 
Account(s), and we shall be responsible to you as a general endorser of 
all such items whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the Account(s) 
and the balances maintained therein are in conformity with the Act and 
CFTC regulations without any further inquiry, provided that, in the 
ordinary course of your business as a depository, you have no notice of 
or actual knowledge of a potential violation by us of any provision of 
the Act or the CFTC regulations that relates to the segregation of 
customer funds; and you shall not in any manner not expressly agreed to 
herein be responsible to us for ensuring compliance by us with such 
provisions of the Act and CFTC regulations; however, the aforementioned 
presumption does not affect any obligation you may otherwise have under 
the Act or CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree or 
levy relates in whole or in part to the Account(s). In any event, you 
shall not be liable by reason of any action or omission to act pursuant 
to such order, judgment, decree or levy, to us or to any other person, 
firm, association or corporation even if thereafter any such order, 
decree, judgment or levy shall be reversed, modified, set aside or 
vacated.
    We are permitted to invest customers' funds in money market mutual 
funds pursuant to CFTC Regulation 1.25. That rule sets forth the 
following conditions, among others, with respect to any investment in a 
money market mutual fund:
    (1) The net asset value of the fund must be computed by 9:00 a.m. of 
the business day following each business day and be made available to us 
by that time;
    (2) The fund must be legally obligated to redeem an interest in the 
fund and make payment in satisfaction thereof by the close of the 
business day following the day on which we make a redemption request 
except as otherwise specified in CFTC Regulation 1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must not 
contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns, and for the avoidance of doubt, 
regardless of a change in the name of either party. This letter 
agreement supersedes and replaces any prior agreement between the 
parties in connection with the Account(s), including but not limited to 
any prior acknowledgment letter agreement, to the extent that such prior 
agreement is inconsistent with the terms hereof. In the event of any 
conflict between this letter agreement and any other agreement between 
the parties in connection with the Account(s), this letter agreement 
shall govern with respect to matters specific to Section 4d of the Act 
and the CFTC's regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to the 
principles of choice of law.
    Please acknowledge that you agree to abide by the requirements and 
conditions set forth above by signing and returning to us the enclosed 
copy of this letter agreement, and that you further agree to provide a 
copy of this fully executed letter agreement directly to the CFTC (via 
electronic means in a format and manner determined by the CFTC) and to 
[Name of DSRO], acting in its capacity as our DSRO, in accordance with 
CFTC Regulation 1.20. We hereby authorize and direct you to provide such 
copies without further notice to or consent from us, no later than three 
business days after opening the Account(s) or revising this letter 
agreement, as applicable.

[Name of Futures Commission Merchant]
By:
Print Name:
Title:
ACKNOWLEDGED AND AGREED:
[Name of Money Market Mutual Fund]
By:
Print Name:
Title:
Contact Information: [Insert phone number and email address]
Date:

[[Page 119]]

      Appendix B to Sec.  1.26--Derivatives Clearing Organization 
Acknowledgment Letter for CFTC Regulation 1.26 Customer Segregated Money 
                       Market Mutual Fund Account

[Date]

[Name and Address of Money Market Mutual Fund]

    We propose to invest funds held by [Name of Derivatives Clearing 
Organization] (``we'' or ``our'') on behalf of customers in shares of 
[Name of Money Market Mutual Fund] (``you'' or ``your'') under 
account(s) entitled (or shares issued to):

[Name of Derivatives Clearing Organization] Futures Customer Omnibus 
Account, CFTC Regulation 1.26 Customer Segregated Money Market Mutual 
Fund Account under Sections 4d(a) and 4d(b) of the Commodity Exchange 
Act [and, if applicable, ``, Abbreviated as [short title reflected in 
the depository's electronic system]'']

Account Number(s): [ ]

(collectively, the ``Account(s)'').

    You acknowledge that we are holding these funds, including any 
shares issued and amounts accruing in connection therewith 
(collectively, the ``Shares''), for the benefit of customers who trade 
commodities, options, swaps and other products, as required by Commodity 
Futures Trading Commission (``CFTC'') Regulation 1.26, as amended; that 
the Shares held by you, hereafter deposited in the Account(s) or 
accruing to the credit of the Account(s), will be separately accounted 
for and segregated on your books from our own funds and from any other 
funds or accounts held by us in accordance with the provisions of the 
Commodity Exchange Act, as amended (the ``Act''), and part 1 of the 
CFTC's regulations, as amended; and that the Shares must otherwise be 
treated in accordance with the provisions of Section 4d of the Act and 
CFTC regulations thereunder.
    Furthermore, you acknowledge and agree that such Shares may not be 
used by you or by us to secure or guarantee any obligations that we 
might owe to you, and they may not be used by us to secure or obtain 
credit from you. You further acknowledge and agree that the Shares in 
the Account(s) shall not be subject to any right of offset or lien for 
or on account of any indebtedness, obligations or liabilities we may now 
or in the future have owing to you.
    You agree to reply promptly and directly to any request for 
confirmation of account balances or provision of any other information 
regarding or related to the Account(s) from the director of the Division 
of Clearing and Risk of the CFTC or the director of the Division of Swap 
Dealer and Intermediary Oversight of the CFTC, or any successor 
divisions, or such directors' designees, and this letter constitutes the 
authorization and direction of the undersigned on our behalf to release 
the requested information without further notice to or consent from us.
    The parties agree that all actions on your part to respond to the 
above information requests will be made in accordance with, and subject 
to, such usual and customary authorization verification and 
authentication policies and procedures as may be employed by you to 
verify the authority of, and authenticate the identity of, the 
individual making any such information request, in order to provide for 
the secure transmission and delivery of the requested information to the 
appropriate recipient(s).
    We will not hold you responsible for acting pursuant to any 
information request from the director of the Division of Clearing and 
Risk of the CFTC or the director of the Division of Swap Dealer and 
Intermediary Oversight of the CFTC, or any successor divisions, or such 
directors' designees, upon which you have relied after having taken 
measures in accordance with your applicable policies and procedures to 
assure that such request was provided to you by an individual authorized 
to make such a request.
    In the event that we become subject to either a voluntary or 
involuntary petition for relief under the U.S. Bankruptcy Code, we 
acknowledge that you will have no obligation to release the Shares held 
in the Account(s), except upon instruction of the Trustee in Bankruptcy 
or pursuant to the Order of the respective U.S. Bankruptcy Court.
    Notwithstanding anything in the foregoing to the contrary, nothing 
contained herein shall be construed as limiting your right to assert any 
right of offset or lien on assets that are not Shares maintained in the 
Account(s), or to impose such charges against us or any proprietary 
account maintained by us with you. Further, it is understood that 
amounts represented by checks, drafts or other items shall not be 
considered to be part of the Account(s) until finally collected. 
Accordingly, checks, drafts and other items credited to the Account(s) 
and subsequently dishonored or otherwise returned to you or reversed, 
for any reason, and any claims relating thereto, including but not 
limited to claims of alteration or forgery, may be charged back to the 
Account(s), and we shall be responsible to you as a general endorser of 
all such items whether or not actually so endorsed.
    You may conclusively presume that any withdrawal from the Account(s) 
and the balances maintained therein are in conformity with the Act and 
CFTC regulations without any further inquiry, provided that, in the 
ordinary course of your business as a depository, you have no notice of 
or actual knowledge of a potential violation by us of any provision of 
the Act or the CFTC regulations that relates to the segregation of 
customer

[[Page 120]]

funds; and you shall not in any manner not expressly agreed to herein be 
responsible to us for ensuring compliance by us with such provisions of 
the Act and CFTC regulations; however, the aforementioned presumption 
does not affect any obligation you may otherwise have under the Act or 
CFTC regulations.
    You may, and are hereby authorized to, obey the order, judgment, 
decree or levy of any court of competent jurisdiction or any 
governmental agency with jurisdiction, which order, judgment, decree or 
levy relates in whole or in part to the Account(s). In any event, you 
shall not be liable by reason of any action or omission to act pursuant 
to any such order, judgment, decree or levy, to us or to any other 
person, firm, association or corporation even if thereafter any such 
order, decree, judgment or levy shall be reversed, modified, set aside 
or vacated.
    We are permitted to invest customers' funds in money market mutual 
funds pursuant to CFTC Regulation 1.25. That rule sets forth the 
following conditions, among others, with respect to any investment in a 
money market mutual fund:
    (1) The net asset value of the fund must be computed by 9:00 a.m. of 
the business day following each business day and be made available to us 
by that time;
    (2) The fund must be legally obligated to redeem an interest in the 
fund and make payment in satisfaction thereof by the close of the 
business day following the day on which we make a redemption request 
except as otherwise specified in CFTC Regulation 1.25(c)(5)(ii); and,
    (3) The agreement under which we invest customers' funds must not 
contain any provision that would prevent us from pledging or 
transferring fund shares.
    The terms of this letter agreement shall remain binding upon the 
parties, their successors and assigns and, for the avoidance of doubt, 
regardless of a change in the name of either party. This letter 
agreement supersedes and replaces any prior agreement between the 
parties in connection with the Account(s), including but not limited to 
any prior acknowledgment letter agreement, to the extent that such prior 
agreement is inconsistent with the terms hereof. In the event of any 
conflict between this letter agreement and any other agreement between 
the parties in connection with the Account(s), this letter agreement 
shall govern with respect to matters specific to Section 4d of the Act 
and the CFTC's regulations thereunder, as amended.
    This letter agreement shall be governed by and construed in 
accordance with the laws of [Insert governing law] without regard to the 
principles of choice of law.
    Please acknowledge that you agree to abide by the requirements and 
conditions set forth above by signing and returning to us the enclosed 
copy of this letter agreement, and that you further agree to provide a 
copy of this fully executed letter agreement directly to the CFTC (via 
electronic means in a format and manner determined by the CFTC) in 
accordance with CFTC Regulation 1.20. We hereby authorize and direct you 
to provide such copy without further notice to or consent from us, no 
later than three business days after opening the Account(s) or revising 
this letter agreement, as applicable.
[Name of Derivatives Clearing Organization]

By:

Print Name:

Title:

ACKNOWLEDGED AND AGREED:

[Name of Money Market Mutual Fund]

By:

Print Name:

Title:

Contact Information: [Insert phone number and email address]

DATE:

[78 FR 68634, Nov. 14, 2013, as amended at 79 FR 26833, May 12, 2014]



Sec.  1.27  Record of investments.

    (a) Each futures commission merchant which invests customer funds, 
and each derivatives clearing organization which invests customer funds 
of its clearing members' 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 or current market value of securities 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;
    (6) The date on which such investments were liquidated or otherwise 
disposed of and the amount of money or current market value of 
securities received on such disposition, if any; and
    (7) The name of the person to or through whom such investments were 
disposed of; and
    (8) Daily valuation for each instrument and readily available 
documentation supporting the daily valuation for each instrument. Such 
supporting documentation must be sufficient to enable auditors to verify 
the valuations

[[Page 121]]

and the accuracy of any information from external sources used in those 
valuations.
    (b) Each derivatives 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; 70 FR 28204, May 17, 
2005; 77 FR 66322, Nov. 2, 2012]



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  Gains and losses resulting from investment of customer funds.

    (a) The investment of customer funds in instruments described in 
Sec.  1.25 shall not prevent the futures commission merchant or 
derivatives clearing organization so investing such funds from receiving 
and retaining as its own any incremental income or interest income 
resulting therefrom.
    (b) The futures commission merchant or derivatives clearing 
organization, as applicable, shall bear sole responsibility for any 
losses resulting from the investment of customer funds in instruments 
described in Sec.  1.25. No investment losses shall be borne or 
otherwise allocated to the customers of the futures commission merchant 
and, if customer funds are invested by a derivatives clearing 
organization in its discretion, to the futures commission merchant.

[78 FR 68637, Nov. 14, 2013]



Sec.  1.30  Loans by futures commission merchants; treatment of proceeds.

    Nothing in the regulations in this chapter shall prevent a futures 
commission merchant from lending its own funds to customers on 
securities and property pledged by such customers, or from repledging or 
selling such securities and property pursuant to specific written 
agreement with such customers. The proceeds of such loans used to 
purchase, margin, guarantee, or secure the trades, contracts, or 
commodity options of customers shall be treated and dealt with by a 
futures commission merchant as belonging to such customers, in 
accordance with and subject to the provisions of the Act and these 
regulations. A futures commission merchant may not loan funds on an 
unsecured basis to finance customers' trading, nor may a futures 
commission merchant loan funds to customers secured by the customer 
accounts of such customers.

[78 FR 68637, Nov. 14, 2013]

                              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 in their original form (for paper 
records) or native file format (for electronic records) 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; Provided, however, That records 
of any swap or related cash or forward transaction shall be kept until 
the termination, maturity, expiration, transfer, assignment, or novation 
date of the transaction and for a period of five years after such date. 
Records of oral communications kept pursuant to Sec. Sec.  1.35(a) and 
23.202(a)(1) and (b)(1) of

[[Page 122]]

this chapter shall be kept for a period of one year. All such books and 
records shall be open to inspection by any representative of the 
Commission, or the United States Department of Justice. For purposes of 
this section, native file format means an electronic file that exists in 
the format in which it was originally created.
    (2) Persons required to keep books and records by the Act or by 
these regulations shall produce such records in a form specified by any 
representative of the Commission. Such production shall be made, 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 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, books and 
records required to be kept by the Act or by these regulations may be 
stored 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) of this section) for the required time period 
under the conditions set forth in this paragraph (b); Provided, however, 
For electronic records, such storage media must preserve the native file 
format of the electronic records as required by paragraph (a)(1) of this 
section.
    (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-required 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

[[Page 123]]

    (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 compatible data processing media as defined in Sec.  
15.00(d) 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;
    (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

[[Page 124]]

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, written orders required to be kept 
pursuant to Sec.  1.35(a), (a-1)(1), (a-1)(2) and (d), and paper copies 
of electronically filed certified Forms 1-FR and FOCUS Reports with the 
original manually signed certification 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; 71 FR 67465, Nov. 22, 2006; 77 FR 
66323, Nov. 2, 2012; 77 FR 75541, Dec. 21, 2012]



Sec.  1.32  Reporting of segregated account computation and details 
regarding the holding of futures customer funds.

    (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 futures customer funds on deposit in 
segregated accounts on behalf of futures customers;
    (2) The amount of such futures customer funds required by the Act 
and these regulations to be on deposit in segregated accounts on behalf 
of such futures customers; and
    (3) The amount of the futures commission merchant's residual 
interest in such futures customer funds.
    (b) In computing the amount of futures customer funds required to be 
in segregated accounts, a futures commission merchant may offset any net 
deficit in a particular futures customer's account against the current 
market value of readily marketable securities, less applicable 
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 futures customer's account. Futures 
commission merchants that establish and enforce written policies and 
procedures to assess the credit risk of commercial paper, convertible 
debt instruments, or nonconvertible debt instruments in accordance with 
Rule 240.15c3-1(c)(2)(vi) of the Securities and Exchange Commission (17 
CFR 240.15c3-1(c)(2)(vi)) may apply the lower haircut percentages 
specified in Rule 240.15c3-1(c)(2)(vi) for such commercial paper, 
convertible debt instruments and nonconvertible debt instruments. 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, derivatives clearing organization, 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) Each futures commission merchant is required to document its 
segregation computation required by paragraph (a) of this section by 
preparing a Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Commodity Exchanges contained 
in the Form 1-FR-FCM as of the close of each business day. Nothing in 
this paragraph shall affect the requirement that a futures commission 
merchant at all times maintain sufficient money, securities and property 
to cover its total obligations to all futures customers, in accordance 
with Sec.  1.20.
    (d) Each futures commission merchant is required to submit to the 
Commission and to the firm's designated self-regulatory organization

[[Page 125]]

the daily Statement of Segregation Requirements and Funds in Segregation 
for Customers Trading on U.S. Commodity Exchanges required by paragraph 
(c) of this section by noon the following business day.
    (e) Each futures commission merchant shall file the Statement of 
Segregation Requirements and Funds in Segregation for Customers Trading 
on U.S. Commodity Exchanges required by paragraph (c) of this section in 
an electronic format using a form of user authentication assigned in 
accordance with procedures established or approved by the Commission.
    (f) Each futures commission merchant is required to submit to the 
Commission and to the firm's designated self-regulatory organization a 
report listing the names of all banks, trust companies, futures 
commission merchants, derivatives clearing organizations, or any other 
depository or custodian holding futures customer funds as of the 
fifteenth day of the month, or the first business day thereafter, and 
the last business day of each month. This report must include:
    (1) The name and location of each entity holding futures customer 
funds;
    (2) The total amount of futures customer funds held by each entity 
listed in paragraph (f)(1) of this section; and
    (3) The total amount of cash and investments that each entity listed 
in paragraph (f)(1) of this section holds for the futures commission 
merchant. The futures commission merchant must report the following 
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 of a State (municipal securities);
    (iii) General obligation issued by any enterprise sponsored by the 
United States (government sponsored enterprise securities);
    (iv) Certificates of deposit issued by a bank;
    (v) Commercial paper fully guaranteed as to principal and interest 
by the United States under the Temporary Liquidity Guarantee Program as 
administered by the Federal Deposit Insurance Corporation;
    (vi) Corporate notes or bonds fully guaranteed as to principal and 
interest by the United States under the Temporary Liquidity Guarantee 
Program as administered by the Federal Deposit Insurance Corporation; 
and
    (vii) Interests in money market mutual funds.
    (g) Each futures commission merchant must report the total amount of 
futures customer-owned securities held by the futures commission 
merchant as margin collateral and must list the names and locations of 
the depositories holding such margin collateral.
    (h) Each futures commission merchant must report the total amount of 
futures customer funds that have been used to purchase securities under 
agreements to resell the securities (reverse repurchase transactions).
    (i) Each futures commission merchant must report which, if any, of 
the depositories holding futures customer funds under paragraph (f)(1) 
of this section are affiliated with the futures commission merchant.
    (j) Each futures commission merchant shall file the detailed list of 
depositories required by paragraph (f) of this section by 11:59 p.m. the 
next business day in an electronic format using a form of user 
authentication assigned in accordance with procedures established or 
approved by the Commission.
    (k) Each futures commission merchant shall retain its daily 
segregation computation and the Statement of Segregation Requirements 
and Funds in Segregation for Customers Trading on U.S. Commodity 
Exchanges required by paragraph (c) of this section, and its detailed 
list of depositories required by paragraph (f) of this section, together 
with all supporting documentation, in accordance with the requirements 
of Sec.  1.31.

[66 FR 41133, Aug. 7, 2001, as amended at 68 FR 5551, Feb. 4, 2003; 77 
FR 66323, Nov. 2, 2012; 78 FR 68637, Nov. 14, 2013]



Sec.  1.33  Monthly and confirmation statements.

    (a) Monthly statements. Each futures commission merchant must 
promptly furnish in writing to each customer, and to each foreign 
futures or foreign options customer, as defined by Sec.  30.1 of this 
chapter, as of the close of the last

[[Page 126]]

business day of each month or as of any regular monthly date selected, 
except for accounts in which there are neither open contracts 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 futures customer and foreign futures or 
foreign options customer position--
    (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 futures customer funds or foreign futures or foreign 
options secured amount, as defined by Sec.  1.3(rr), carried with the 
futures commission merchant.
    (2) For each commodity option position and foreign option position--
    (i) All commodity options and foreign options purchased, sold, 
exercised, or expired during the monthly reporting period, identified by 
underlying futures contract or underlying commodity, strike price, 
transaction date, and expiration date;
    (ii) The open commodity option and foreign option positions carried 
for such customer or foreign futures or foreign options customer as of 
the end of the monthly reporting period, identified by underlying 
futures contract or underlying commodity, 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 related customer funds carried in such customer's 
account(s) or any related foreign futures or foreign options secured 
amount carried in the account(s) of a foreign futures or foreign options 
customer.
    (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.
    (3) For each Cleared Swaps Customer position--
    (i) The Cleared Swaps, as Sec.  22.1 of this chapter defines that 
term, carried by the futures commission merchant for the Cleared Swaps 
Customer;
    (ii) The net unrealized profits or losses in all Cleared Swaps 
marked to the market;
    (iii) Any Cleared Swaps Customer Collateral carried with the futures 
commission merchant; and
    (4) A detailed accounting of all financial charges and credits to 
customers and foreign futures or foreign options customers, during the 
monthly reporting period, including all customer funds and any foreign 
futures or foreign options secured amount, received from or disbursed to 
customers or foreign futures or foreign options customers, as well as 
realized profits and losses.
    (b) Confirmation statement. Each futures commission merchant must, 
not later than the next business day after any commodity interest or 
commodity option transaction, including any foreign futures or foreign 
options transactions, furnish to each customer or foreign futures or 
foreign options customer:
    (1) A written confirmation of each commodity futures transaction 
caused to be executed by it for the customer.
    (2) A written confirmation of each Cleared Swap carried by the 
futures commission merchant, containing at least the following 
information:
    (i) The unique swap identifier, as required by Sec.  45.4(a) of this 
chapter, for each Cleared Swap and the date each Cleared Swap was 
executed;
    (ii) The product name of each Cleared Swap;
    (iii) The price at which the Cleared Swap was executed;
    (iv) The date of maturity for each Cleared Swap; and
    (v) The derivatives clearing organization through which it is 
cleared.

[[Page 127]]

    (3) To each option customer, a written confirmation of each 
commodity option transaction, containing at least the following 
information:
    (i) The 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 commodity;
    (v) The final exercise date of the commodity option purchased or 
sold; and
    (vi) The date the commodity option transaction was executed.
    (4) 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.
    (5) Notwithstanding the provisions of paragraphs (b)(1) through 
(b)(4) of this section, a commodity interest 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 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, 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)

[[Page 128]]

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; 77 FR 
66323, Nov. 2, 2012]



Sec.  1.34  Monthly record, ``point balance''.

    (a) With respect to commodity futures transactions, 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) With respect to commodity option transactions, 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 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 commodity (by option expiration date), and by strike price.

[77 FR 66324, Nov. 2, 2012]



Sec.  1.35  Records of commodity interest and related cash or 
forward transactions.

    (a) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of designated contract markets or swap 
execution facilities--(1) Futures commission merchants, retail foreign 
exchange dealers, and certain introducing brokers. Each futures 
commission merchant, retail foreign exchange dealer, and introducing 
broker that has generated over the preceding three years more than $5 
million in aggregate gross revenues from its activities as an 
introducing broker, shall:
    (i) Keep full, complete, and systematic records (including all 
pertinent data and memoranda) of all transactions relating to its 
business of dealing in commodity interests and related cash or forward 
transactions, which shall include all orders (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, which have been prepared in 
the course of its business of dealing in commodity interests and related 
cash or forward transactions (for purposes of this section, all records 
described in this paragraph (a)(1)(i) are referred to as ``commodity 
interest and related records'');
    (ii) If such person is a member of a designated contract market or 
swap execution facility, retain and produce for inspection 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, the designated contract market or the swap 
execution facility (for purposes of this section, all records described 
in this paragraph (a)(1)(ii) are referred to as ``original source 
documents,'' and, together with commodity

[[Page 129]]

interest and related records, ``transaction records''); and
    (iii) Keep all oral and written communications provided or received 
concerning quotes, solicitations, bids, offers, instructions, trading, 
and prices that lead to the execution of a transaction in a commodity 
interest and any related cash or forward transactions (but not oral 
communications that lead solely to the execution of a related cash or 
forward transaction), whether transmitted by telephone, voicemail, 
facsimile, instant messaging, chat rooms, electronic mail, mobile 
device, or other digital or electronic media (for purposes of this 
section, all communications described in this paragraph (a)(1)(iii) are 
referred to as ``oral pre-trade communications'' if transmitted orally 
or as ``written pre-trade communications'' if transmitted in writing, 
and all such communications are referred to collectively as ``pre-trade 
communications'').
    (2) Registered members of designated contract markets or swap 
execution facilities. Each introducing broker that is not subject to 
paragraph (a)(1) of this section and is a member of a designated 
contract market or swap execution facility, and each member of a 
designated contract market or swap execution facility that is registered 
or required to be registered with the Commission as a floor trader, 
commodity pool operator, commodity trading advisor, swap dealer, or 
major swap participant, shall keep:
    (i) All transaction records; and
    (ii) All written pre-trade communications.
    (3) Other introducing brokers. Each introducing broker that is not 
subject to paragraph (a)(1) or (2) of this section shall keep:
    (i) All commodity interest and related records; and
    (ii) All written pre-trade communications.
    (4) Floor broker members of designated contract markets or swap 
execution facilities. Each member of a designated contract market or 
swap execution facility that is registered or required to be registered 
with the Commission as a floor broker shall keep:
    (i) All transaction records;
    (ii) All written pre-trade communications; and
    (iii) All oral pre-trade communications that lead to the purchase or 
sale of any commodity for future delivery, security futures product, 
swap, or commodity option authorized under section 4c of the Commodity 
Exchange Act for the account of any person other than such floor broker.
    (5) Form and manner. All records required to be kept pursuant to 
paragraphs (a)(1), (2), (3), and (4) of this section shall be kept in a 
form and manner that:
    (i) Permits prompt, accurate, and reliable location, access, and 
retrieval of any particular record, data, or information; and
    (ii) Other than pre-trade communications, allows for identification 
of a particular transaction.
    (6) Unregistered members of designated contract markets or swap 
execution facilities. Each member of a designated contract market or 
swap execution facility that is not registered or required to be 
registered with the Commission in any capacity, shall keep all 
transaction records; provided that such records need not include 
transmissions by short message service (SMS) or multimedia messaging 
service (MMS).
    (7) Definition of related cash or forward transaction. For purposes 
of this section, ``related cash or forward transaction'' means a 
purchase or sale for immediate or deferred physical shipment or delivery 
of an asset related to a commodity interest transaction where the 
commodity interest transaction and the related cash or forward 
transaction are used to hedge, mitigate the risk of, or offset one 
another.
    (8) Other requirements. Each futures commission merchant, retail 
foreign exchange dealer, introducing broker, and member of a designated 
contract market or swap execution facility shall retain the records 
required to be kept by this section 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.

[[Page 130]]

    (9) Alternative Compliance Schedule. (i) The Commission may in its 
discretion establish an alternative compliance schedule for the 
requirement to record oral communications under paragraph (a)(1) or (4) 
of this section that is found to be technologically or economically 
impracticable for an affected entity that seeks, in good faith, to 
comply with the requirement to record oral communications under 
paragraph (a)(1) or (4) of this section within a reasonable time period 
beyond the date on which compliance by such affected entity is otherwise 
required.
    (ii) A request for an alternative compliance schedule under 
paragraph (a)(9)(i) of this section shall be acted upon within 30 days 
from the time such a request is received, or it shall be deemed 
approved.
    (iii) The Commission hereby delegates to the Director of the 
Division of Swap Dealer and Intermediary Oversight or such other 
employee or employees as the Director may designate from time to time, 
the authority to exercise the discretion. Notwithstanding such 
delegation, in any case in which a Commission employee delegated 
authority under this paragraph believes it appropriate, he or she may 
submit to the Commission for its consideration the question of whether 
an alternative compliance schedule should be established. The delegation 
of authority in this paragraph shall not prohibit the Commission, at its 
election, from exercising the authority set forth in paragraph (a)(9)(i) 
of this section.
    (iv) Relief granted under paragraph (a)(9)(i) of this section shall 
not cause an affected entity to be out of compliance or deemed in 
violation of any recordkeeping requirements.
    (b) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of designated contract markets and swap 
execution facilities: Recording of customers' orders. (1) Each futures 
commission merchant, each retail foreign exchange dealer, each 
introducing broker, and each member of a designated contract market or 
swap execution facility receiving a customer's order that cannot 
immediately be entered into a trade matching engine shall immediately 
upon receipt thereof prepare a written record of the order including the 
account identification, except as provided in paragraph (b)(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 commodity option orders, the time, to 
the nearest minute, the order is transmitted for execution.
    (2)(i) Each member of a designated contract market who on the floor 
of such designated contract market receives a 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 
designated contract market, shall immediately upon receipt thereof 
prepare a written record of the order in non-erasable ink, including the 
account identification, except as provided in paragraph (b)(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.
    (ii) Except as provided in paragraph (b)(3) of this section:
    (A) Each member of a designated contract market who on the floor of 
such designated 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 member of a designated contract market 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 designated contract market for execution:
    (1) The member placing such order immediately upon placement of the 
order shall record the order and time of

[[Page 131]]

placement to the nearest minute on a sequentially-numbered trading card 
maintained in accordance with the requirements of paragraph (f) 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 (f) 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 designated contract market 
personnel or the clearing member.
    (3)(i) The requirements of paragraph (b)(2)(ii) of this section will 
not apply if a designated contract market maintains in effect rules 
which provide for an exemption where:
    (A) A member of a designated contract market places with another 
member of such designated 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 (f) 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 (b)(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 designated contract market reporting the 
execution from the floor of the designated contract market of a 
customer's order or the order of another member of the designated 
contract market received in accordance with paragraphs (b)(2)(i) or 
(b)(2)(ii)(A) of this section, shall record on a written record of the 
order, including the account identification, except as provided in 
paragraph (b)(5) of this section, and order number, by time-stamp or 
other timing device, the date and time to the nearest minute such report 
of execution is made. Each member of a designated contract market shall 
submit the written records of customer orders or orders from other 
designated contract market members to designated contract market 
personnel or to the clearing member responsible for the collection of 
orders prepared pursuant to this paragraph. The execution price and 
other information reported on the order tickets must be written in non-
erasable ink.
    (5) Post-execution allocation of bunched orders. Specific customer 
account identifiers for accounts included in bunched orders executed on 
designated contract markets or swap execution facilities need not be 
recorded at time of order placement or upon report of execution if the 
requirements of paragraphs (b)(5)(i) through (v) of this section are 
met. Specific customer account identifiers for accounts included in 
bunched orders involving swaps need not be included in confirmations or 
acknowledgments provided by swap dealers or major swap participants 
pursuant to Sec.  23.501(a) of this chapter if the requirements of 
paragraphs (b)(5)(i) through (v) of this section are met.
    (i) Eligible account managers for orders executed on designated 
contract markets or swap execution facilities. The person placing and 
directing the allocation of an order eligible for post-execution 
allocation must have been granted written investment discretion with 
regard to participating customer accounts. The following persons shall 
qualify as eligible account managers for trades executed on designated 
contract markets or swap execution facilities:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec.  
4.14(a)(3) of this chapter;
    (B) An investment adviser registered with the Securities and 
Exchange Commission pursuant to the Investment Advisers Act of 1940 or 
with a state

[[Page 132]]

pursuant to applicable state law or excluded or exempt from registration 
under such Act or applicable state law or rule;
    (C) A bank, insurance company, trust company, or savings and loan 
association subject to federal or state regulation;
    (D) A foreign adviser that exercises discretionary trading authority 
solely over the accounts of non-U.S. persons, as defined in Sec.  
4.7(a)(1)(iv) of this chapter;
    (E) A futures commission merchant registered with the Commission 
pursuant to the Act; or
    (F) An introducing broker registered with the Commission pursuant to 
the Act.
    (ii) Eligible account managers for orders executed bilaterally. The 
person placing and directing the allocation of an order eligible for 
post-execution allocation must have been granted written investment 
discretion with regard to participating customer accounts. The following 
persons shall qualify as eligible account managers for trades executed 
bilaterally:
    (A) A commodity trading advisor registered with the Commission 
pursuant to the Act or excluded or exempt from registration under the 
Act or the Commission's rules, except for entities exempt under Sec.  
4.14(a)(3) of this chapter;
    (B) A futures commission merchant registered with the Commission 
pursuant to the Act; or
    (C) An introducing broker registered with the Commission pursuant to 
the Act.
    (iii) Information. Eligible account managers shall make the 
following information available to customers upon request:
    (A) The general nature of the allocation methodology the account 
manager will use;
    (B) 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; and
    (C) Summary or composite data sufficient for that customer to 
compare its results with those of other comparable customers and, if 
applicable and consistent with Sec. Sec.  155.3(a)(1) and 155.4(a)(1) of 
this chapter, any account in which the account manager has an interest.
    (iv) Allocation. Orders eligible for post-execution allocation must 
be allocated by an eligible account manager in accordance with the 
following:
    (A) Allocations must be made as soon as practicable after the entire 
transaction is executed, but in any event no later than the following 
times: For cleared trades, account managers must provide allocation 
information to futures commission merchants no later than a time 
sufficiently before the end of the day the order is executed to ensure 
that clearing records identify the ultimate customer for each trade. For 
uncleared trades, account managers must provide allocation information 
to the counterparty no later than the end of the calendar day that the 
swap was executed.
    (B) Allocations must be fair and equitable. No account or group of 
accounts may receive consistently favorable or unfavorable treatment.
    (C) The allocation methodology must be sufficiently objective and 
specific to permit independent verification of the fairness of the 
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
    (v) Records. (A) Eligible account managers shall keep and must make 
available upon request of any representative of the Commission, the 
United States Department of Justice, or other appropriate regulatory 
agency, the information specified in paragraph (b)(5)(iii) of this 
section.
    (B) Eligible account managers shall keep and must make available 
upon request of any representative of the Commission, the United States 
Department of Justice, or other appropriate regulatory agency, records 
sufficient to demonstrate that all allocations meet the standards of 
paragraph (b)(5)(iv) of this section and to permit the reconstruction of 
the handling of the order from the time of placement by the account 
manager to the allocation to individual accounts.
    (C) Futures commission merchants, introducing brokers, or commodity 
trading advisors that execute orders or that carry accounts eligible for 
post-execution allocation, and members of

[[Page 133]]

designated contract markets or swap execution facilities that execute 
such orders, must maintain records that, as applicable, identify each 
order subject to post-execution allocation and the accounts to which 
contracts executed for such order are allocated.
    (D) In addition to any other remedies that may be available under 
the Act or otherwise, if the Commission has reason to believe that an 
account manager has failed to provide information requested pursuant to 
paragraph (b)(5)(v)(A) or (b)(5)(v)(B) of this section, the Commission 
may inform in writing any designated contract market, swap execution 
facility, swap dealer, or major swap participant, and that designated 
contract market, swap execution facility, swap dealer, or major swap 
participant shall prohibit the account manager from submitting orders 
for execution except for liquidation of open positions and no futures 
commission merchant shall accept orders for execution on any designated 
contract market, swap execution facility, or bilaterally from the 
account manager except for liquidation of open positions.
    (E) Any account manager that believes he or she is or may be 
adversely affected or aggrieved by action taken by the Commission under 
paragraph (b)(5)(v)(D) of this section shall have the opportunity for a 
prompt hearing in accordance with the provisions of Sec.  21.03(g) of 
this chapter.
    (c)(1) Futures commission merchants, introducing brokers, and 
members of designated contract markets and swap execution facilities. 
Upon request of the designated contract market or swap execution 
facility, the Commission, or the United States Department of Justice, 
each futures commission merchant, introducing broker, and member of a 
designated contract market or swap execution facility shall request from 
its customers and, upon receipt thereof, provide to the requesting body 
documentation of cash transactions underlying exchanges of futures or 
swaps for cash commodities or exchanges of futures or swaps in 
connection with cash commodity transactions.
    (2) Customers. Each customer of a futures commission merchant, 
introducing broker, or member of a designated contract market or swap 
execution facility shall create, retain, and produce upon request of the 
designated contract market or swap execution facility, the Commission, 
or the United States Department of Justice documentation of cash 
transactions underlying exchanges of futures or swaps for cash 
commodities or exchanges of futures or swaps 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 (c), 
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.
    (d) Futures commission merchants, retail foreign exchange dealers, 
introducing brokers, and members of derivatives clearing organizations 
clearing trades executed on designated contract markets and swap 
execution facilities. Each futures commission merchant, each retail 
foreign exchange dealer, and each member of a derivatives clearing 
organization clearing trades executed on a designated contract market or 
swap execution facility and, for purposes of paragraph (d)(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 all charges against and credits to such 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):

[[Page 134]]

    (i) All commodity futures transactions executed for such account, 
including the date, price, quantity, market, commodity and future;
    (ii) All retail forex transactions executed for such account, 
including the date, price, quantity, and currency;
    (iii) 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 commodity, strike price, and details of the purchase price of 
the option, including premium, mark-up, commission and fees; and
    (iv) All swap transactions executed for such account, including the 
date, price, quantity, market, commodity, swap, and, if cleared, the 
derivatives clearing organization; 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 retail forex transactions executed on that day for such 
account, including the date, price, quantity, currency and the person 
who whom such transaction was made;
    (iii) 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 commodity, 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;
    (iv) All swap transactions executed on that day, including the date, 
price, quantity, market, commodity, swap, the person for whom such 
transaction was made, and, if cleared, the derivatives clearing 
organization; and
    (v) In the case of an introducing broker, the record or journal 
required by this paragraph (d)(3) shall also include the futures 
commission merchant or retail foreign exchange dealer carrying the 
account for which each commodity futures, retail forex, commodity 
option, and swap 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), the requirements of paragraphs (d)(1) and (d)(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 futures, retail 
forex, commodity option, or swap books and records are maintained, at 
the expense of such person, reproduced copies which show the records as 
specified in paragraphs (d)(1) and (d)(2) of this section, on request of 
any representatives of the Commission or the U.S. Department of Justice.
    (e) Members of derivatives clearing organizations clearing trades 
executed on designated contract markets and swap execution facilities. 
In the daily record or journal required to be kept under paragraph 
(d)(3) of this section, each member of a derivatives clearing 
organization clearing trades executed on a designated contract market or 
swap execution facility 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.
    (f) Members of designated contract markets. (1) Each member of a 
designated contract market who, in the place provided by the designated 
contract market for the meeting of persons similarly engaged, executes 
purchases or sales of any commodity for future delivery, commodity 
option, or swap on or subject to the rules of such designated 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, quantity, and, as applicable, underlying 
commodity, contract for future delivery, or swap, 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

[[Page 135]]

broker or floor trader with whom the transaction was executed, and the 
opposite clearing member (if such opposite clearing member is made known 
to the member).
    (2) Each member of a designated 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 designated contract market must identify on his 
or her trading cards the purchases and sales executed during the opening 
and closing periods designated by the designated contract market.
    (4) Trading cards prepared by a member of a designated contract 
market 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 designated contract 
market and submitted pursuant to paragraph (f)(7)(i) of this section 
must be time-stamped promptly to the nearest minute upon collection by 
either the designated contract market or the relevant clearing member.
    (6) Each member of a designated contract market shall be accountable 
for all trading cards prepared 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 designated contract 
market must:
    (i) Be submitted to designated 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 for 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 submitted as often as is practicable to 
the designated contract market or relevant clearing member; 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 the collection schedule for trading cards and provided further, 
that the member is accountable for any trading card that subsequently is 
rewritten pursuant to paragraph (f)(6) of this section.
    (8) Each member of a designated contract market must use a new 
trading card at the beginning of each designated 30-minute interval (or 
such lesser interval as may be determined appropriate) or as may be 
required pursuant hereto.
    (g) Members of derivatives clearing organizations clearing trades 
executed on designated contract markets and swap execution facilities. 
(1) Each member of a derivatives clearing organization clearing trades 
executed on a designated contract market or swap execution facility 
shall maintain a single record which shall show for each futures, 
option, or swap trade: the transaction date, time, quantity, and, as 
applicable, underlying commodity, contract for future delivery, or swap, 
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 types. The customer

[[Page 136]]

type indicator shall show, with respect to each person executing the 
trade, whether such person:
    (i) Was trading for his or her own account, or an account for which 
he or she has discretion;
    (ii) Was trading for his or her clearing member's house account;
    (iii) Was trading for another member present on the exchange floor, 
or an account controlled by such other member; or
    (iv) Was trading for any other type of customer.
    (2) The record required by this paragraph (g) shall also show, by 
appropriate and uniform symbols, any transaction which is made non-
competitively in accordance with the provisions of subpart J of part 38 
of this chapter, 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 (g) 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.

[77 FR 66324, Nov. 2, 2012, as amended at 77 FR 75541, Dec. 21, 2012; 80 
FR 80255, Dec. 24, 2015]



Sec.  1.36  Record of securities and property received from customers.

    (a) Each futures commission merchant and each retail foreign 
exchange dealer shall maintain, as provided in Sec.  1.31, a record of 
all securities and property received from customers or retail forex 
customers in lieu of money to margin, purchase, guarantee, or secure the 
commodity interests of such customers or retail forex customers. Such 
record shall show separately for each customer or retail forex customer: 
A description of the securities or property received; the name and 
address of such customer or retail forex 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 or 
held; the dates of deposits and withdrawals from such depositories; and 
the dates of return of such securities or property to such customer or 
retail forex customer, or other disposition thereof, together with the 
facts and circumstances of such other disposition. In the event any 
futures commission merchant deposits with a derivatives clearing 
organization, directly or with a bank or trust company acting as 
custodian for such derivatives clearing organization, securities and/or 
property which belong to a particular customer, such futures commission 
merchant shall obtain written acknowledgment from such derivatives 
clearing organization that it was informed that such securities or 
property belong to customers of the futures commission merchant making 
the deposit. Such acknowledgment shall be retained as provided in Sec.  
1.31.
    (b) Each derivatives clearing organization which receives from 
members securities or property belonging to particular customers of such 
members in lieu of money to margin, purchase, guarantee, or secure the 
commodity interests of such customers, or receives notice that any such 
securities or property have been received by a bank or trust company 
acting as custodian for such derivatives 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.

[77 FR 66328, Nov. 2, 2012]



Sec.  1.37  Customer's name, address, and occupation recorded; record 
of guarantor or controller of account.

    (a) Each futures commission merchant, retail foreign exchange 
dealer, introducing broker, and member of a contract market shall keep a 
record in permanent form which shall show for each commodity interest 
account carried or introduced by it the true name and address of the 
person for whom such account is carried or introduced

[[Page 137]]

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 
customer's account or assign account numbers in such a manner to 
identify that person.
    (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 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 in 
each swap 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 and swap execution facility 
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 or swap execution facility 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 or swap execution facility on which transactions in 
futures, swaps or options (other than swaps) 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.

[77 FR 66328, Nov. 2, 2012]



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 or a 
swap execution facility who shall have at the same time both buying and 
selling orders of different principals for the same swap, 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 commodity, expiration date

[[Page 138]]

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 or swap execution facility which have been approved 
by or self-certified to 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 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 non-pit trading in swaps or 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 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 or swap execution facility 
designated to observe such transactions and, by appropriate descriptive 
words or symbol, clearly identifies all such transactions on his trading 
card or other record, made at the time of execution, and notes thereon 
the exact time of execution and promptly presents or makes available 
said record to such official representative for verification and 
initialing, as appropriate;
    (3) Such swap execution facility or contract market keeps a record 
in permanent form of each such transaction showing all transaction 
details required to be captured by the Act, Commission rule or 
regulation; and
    (4) Neither the futures commission merchant, other registrant 
receiving nor the member executing such orders has any interest therein, 
directly or indirectly, except as a fiduciary.
    (b) Large order execution procedures. (1) A member of a contract 
market or a swap execution facility may execute simultaneous buying and 
selling orders of different principals directly between the principals 
in compliance with Commission regulations and large order execution 
procedures established by written rules of the contract market or swap 
execution facility that have been approved by or self-certified to 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 or swap execution facility 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 or swap execution facility rules to implement the large order 
execution procedures. The petition shall include:
    (i) An explanation of why the proposed large order execution rules 
do not comply with paragraph (a) of this section; and
    (ii) A description of a special surveillance program that would be 
followed by the contract market or swap execution facility in monitoring 
the large order execution procedures.
    (2) 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 purpose of the provision from which explanation is sought. The 
petition shall be considered concurrently with the proposed large order 
execution rules.
    (c) Not deemed filling orders by offset. 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 section 
4b(a) of the Act.

[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; 77 FR 66329, Nov. 2, 2012]

[[Page 139]]

                              Miscellaneous



Sec.  1.40  Crop, market information letters, reports; copies required.

    Each futures commission merchant, each retail foreign exchange 
dealer, each introducing broker, and each member of a contract market or 
a swap execution facility shall, upon request, furnish or cause to be 
furnished to the Commission a true copy of any letter, circular, 
telecommunication, or report published or given general circulation by 
such futures commission merchant, retail foreign exchange dealer, 
introducing broker, member or eligible contract participant which 
concerns crop or market information or conditions that affect or tend to 
affect the price of any commodity, including any exchange rate, and the 
true source of or authority for the information contained therein.

[77 FR 66329, Nov. 2, 2012]



Sec. Sec.  1.41-1.45  [Reserved]



Sec.  1.46  Application and closing out of offsetting long and short positions.

    (a) Application of purchases and sales. (1) Except with respect to 
purchases or sales which are for omnibus accounts, or where the customer 
or account controller has instructed otherwise, any futures commission 
merchant who, on or subject to the rules of a designated contract 
market:
    (i) 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;
    (ii) 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;
    (iii) Purchases a put or call option for the account of any customer 
when the account of such customer at the time of such purchase has a 
short put or call option position with the same underlying futures 
contract or same underlying commodity, strike price, expiration date and 
contract market as that purchased; or
    (iv) Sells a put or call option for the account of any customer when 
the account of such customer at the time of such sale has a long put or 
call option position with the same underlying futures contract or same 
underlying commodity, 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.
    (2) Any futures commission merchant or retail foreign exchange 
dealer who:
    (i) Engages in a retail forex transaction involving the purchase of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such purchase has 
an open retail forex transaction for the sale of the same currency;
    (ii) Engages in a retail forex transaction involving the sale of any 
currency for the account of any retail forex customer when the account 
of such retail forex customer at the time of such sale has an open 
retail forex transaction for the purchase of the same currency;
    (iii) Purchases a put or call option involving foreign currency for 
the account of any customer when the account of such customer at the 
time of such purchase has a short put or call option position with the 
same underlying currency, strike price, and expiration date as that 
purchased; or
    (iv) Sells a put or call option involving foreign currency for the 
account of any customer when the account of such customer at the time of 
such sale has a long put or call option position with the same 
underlying currency, strike price, and expiration date as that sold--
shall immediately apply such purchase or sale against such previously 
held opposite transaction, and shall promptly furnish such retail forex

[[Page 140]]

customer a statement showing the financial result of the transactions 
involved and, if applicable, that the account was introduced to the 
futures commission merchant or retail foreign exchange dealer by an 
introducing broker and the names of the futures commission merchant or 
retail foreign exchange dealer, and the introducing broker.
    (b) Close-out against oldest open position. In all instances wherein 
the short or long futures, retail forex transaction or option position 
in such customer's or retail forex customer's account immediately prior 
to such offsetting purchase or sale is greater than the quantity 
purchased or sold, the futures commission merchant or retail foreign 
exchange dealer 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 the offsetting 
transaction shall be applied as specified by the customer without regard 
to the date of acquisition of the previously held position; and 
Provided, further, that a futures commission merchant or retail foreign 
exchange dealer, if permitted by the rules of a registered futures 
association, may offset, at the customer's request, retail forex 
transactions of the same size, even if the customer holds other 
transactions of a different size, but in each case must offset the 
transaction against the oldest transaction of the same size. Such 
instructions may also be accepted from any person who, by power of 
attorney or otherwise, actually directs trading in the customer's or 
retail forex customer's account unless the person directing the trading 
is the futures commission merchant or retail foreign exchange dealer 
(including any partner thereof), or is an officer, employee, or agent of 
the futures commission merchant or retail foreign exchange dealer. 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 or retail 
foreign exchange dealer shall clearly show on the statement issued to 
the customer or retail forex customer in connection with the 
transaction, that because of the specific instructions given by or on 
behalf of the customer or retail forex 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 or retail foreign exchange dealer has 
received such specific instructions in writing from the customer or 
retail forex 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

[[Page 141]]

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 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]

    Editorial Note: For Federal Register citations affecting Sec.  1.46, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec. Sec.  1.47-1.48  [Reserved]



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, 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 Sec. Sec.  1.20 
through 1.30, 1.32 and 1.36, a depository must provide the depositing

[[Page 142]]

futures commission merchant or derivatives clearing organization with 
the appropriate written acknowledgment as required under Sec. Sec.  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 that has in excess of $1 billion of 
regulatory capital;
    (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, 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, as amended at 76 FR 44264, July 25, 2011; 77 
FR 66330, Nov. 2, 2012]



Sec. Sec.  1.50-1.51  [Reserved]



Sec.  1.52  Self-regulatory organization adoption and surveillance of
minimum financial requirements.

    (a) For purposes of this section, the following terms are defined as 
follows:
    (1) Examinations expert is defined as a Nationally recognized 
accounting and auditing firm with substantial expertise in audits of 
futures commission merchants, risk assessment and internal control 
reviews, and is an accounting and auditing firm that is acceptable to 
the Commission; and
    (2) Self-regulatory organization means a contract market (as defined 
in Sec.  1.3(h)) or a registered futures association under section 17 of 
the Act. The term ``self-regulatory organization'' for purpose of this 
section does not include a swap execution facility (as defined in Sec.  
1.3(rrrr)).
    (b)(1) Each self-regulatory organization must adopt rules 
prescribing minimum financial and related reporting requirements for 
members who are registered futures commission merchants or registered 
retail foreign exchange dealers. Each self-regulatory organization other 
than a contract market must adopt rules prescribing minimum financial 
and related reporting requirements for members who are registered 
introducing brokers. The self-regulatory organization's minimum 
financial and related reporting requirements must be the same as, or 
more stringent than, the requirements contained in Sec. Sec.  1.10 and 
1.17, for futures commission merchants and introducing brokers, and 
Sec. Sec.  5.7 and 5.12 of this chapter for retail foreign exchange 
dealers; provided, however, that a self-regulatory organization may 
permit its member registrants that 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 
(``FOCUS Report''), Part II, Part IIA, or Part II CSE, as applicable, in 
lieu of Form 1-FR; provided, further, that such self-regulatory 
organization must require such member registrants to provide all 
information in Form 1-FR that is not included in the FOCUS Report

[[Page 143]]

Part II, Part IIA, or Part CSE provided by such member registrant. The 
definition of adjusted net capital must be the same as that prescribed 
in Sec.  1.17(c) for futures commission merchants and introducing 
brokers, and Sec.  5.7(b)(2) of this chapter for futures commission 
merchants offering or engaging in retail forex transactions and for 
retail foreign exchange dealers.
    (2) In addition to the requirements set forth in paragraph (b)(1) of 
this section, each self-regulatory organization that has a futures 
commission merchant member registrant must adopt rules prescribing risk 
management requirements for futures commission merchant member 
registrants that shall be the same as, or more stringent than, the 
requirements contained in Sec.  1.11.
    (c)(1) Each self-regulatory organization must establish and operate 
a supervisory program that includes written policies and procedures 
concerning the application of such supervisory program in the 
examination of its member registrants for the purpose of assessing 
whether each member registrant is in compliance with the applicable 
self-regulatory organization and Commission regulations governing 
minimum net capital and related financial requirements, the obligation 
to segregate customer funds, risk management requirements, financial 
reporting requirements, recordkeeping requirements, and sales practice 
and other compliance requirements. The supervisory program also must 
address the following elements:
    (i) Adequate levels and independence of examination staff. A self-
regulatory organization must maintain staff of an adequate size, 
training, and experience to effectively implement a supervisory program. 
Staff of the self-regulatory organization, including officers, 
directors, and supervising committee members, must maintain independent 
judgment and its actions must not impair its independence nor appear to 
impair its independence in matters related to the supervisory program. 
The self-regulatory organization must provide annual ethics training to 
all staff with responsibilities for the supervisory program.
    (ii) Ongoing surveillance. A self-regulatory organization's ongoing 
surveillance of member registrants must include the review and analysis 
of financial reports and regulatory notices filed by member registrants 
with the designated self-regulatory organization.
    (iii) High-risk firms. A self-regulatory organization's supervisory 
program must include procedures for identifying member registrants that 
are determined to pose a high degree of potential financial risk, 
including the potential risk of loss of customer funds. High-risk member 
registrants must include firms experiencing financial or operational 
difficulties, failing to meet segregation or net capital requirements, 
failing to maintain current books and records, or experiencing material 
inadequacies in internal controls. Enhanced monitoring for high risk 
firms should include, as appropriate, daily review of net capital, 
segregation, and secured calculations, to assess compliance with self-
regulatory organization and Commission requirements.
    (iv) On-site examinations. (A) A self-regulatory organization must 
conduct routine periodic on-site examinations of member registrants. 
Member futures commission merchants and retail foreign exchange dealers 
must be subject to on-site examinations no less frequently than once 
every eighteen months. A self-regulatory organization shall establish a 
risk-based method of establishing the scope of each on-site examination; 
provided, however, that the scope of each on-site examination of a 
futures commission merchant or retail foreign exchange dealer must 
include an assessment of whether the registrant is in compliance with 
applicable Commission and self-regulatory organization minimum capital, 
customer fund protection, recordkeeping, and reporting requirements.
    (B) A self-regulatory organization other than a contract market must 
establish the frequency of on-site examinations of member introducing 
brokers that do not operate pursuant to guarantee agreements with 
futures commission merchants or retail foreign exchange dealers using a 
risk-based approach, which takes into consideration

[[Page 144]]

the time elapsed since the self-regulatory organization's previous 
examination of the introducing broker.
    (C) A self-regulatory organization must conduct on-site examinations 
of member registrants in accordance with uniform examination programs 
and procedures that have been submitted to the Commission.
    (v) Adequate documentation. A self-regulatory organization must 
adequately document all aspects of the operation of the supervisory 
program, including the conduct of risk-based scope setting and the risk-
based surveillance of high-risk member registrants, and the imposition 
of remedial and punitive action(s) for material violations.
    (2) In addition to the requirements set forth in paragraph (c)(1) of 
this section, the supervisory program of a self-regulatory organization 
that has a registered futures commission merchant member must satisfy 
the following requirements:
    (i) The supervisory program must set forth in writing the 
examination standards that the self-regulatory organization must apply 
in its examination of its registered futures commission merchant member. 
The supervisory program must be based on controls testing and 
substantive testing, and must address all areas of risk to which the 
futures commission merchant can reasonably be foreseen to be subject. 
The supervisory program must be based on an understanding of the 
internal control environment to determine the nature, timing and extent 
of the controls and substantive testing to be performed. The 
determination as to which elements of the supervisory program are to be 
performed on any examination must be based on the risk profile of each 
registered futures commission merchant member.
    (ii) All aspects of the supervisory program, including the standards 
pursuant to paragraph (c)(2)(iii) of this section, must, at minimum, 
conform to auditing standards issued by the Public Company Accounting 
Oversight Board as such standards would be applicable to a non-financial 
statement audit. These standards would include the training and 
proficiency of the auditor, due professional care in the performance of 
work, consideration of fraud in an audit, audit risk and materiality in 
conducting an audit, planning and supervision, understanding the entity 
and its environment and assessing the risks of material misstatement, 
performing audit procedures in response to assessed risk and evaluating 
the audit evidence obtained, auditor's communication with those charged 
with governance, and communicating internal control matters identified 
in an audit.
    (iii) The supervisory program must, at a minimum, have standards 
addressing the following:
    (A) The ethics of an examiner;
    (B) The independence of an examiner;
    (C) The supervision, review, and quality control of an examiner's 
work product;
    (D) The evidence and documentation to be reviewed and retained in 
connection with an examination;
    (E) The sampling size and techniques used in an examination;
    (F) The examination risk assessment process;
    (G) The examination planning process;
    (H) Materiality assessment;
    (I) Quality control procedures to ensure that the examinations 
maintain the level of quality expected;
    (J) Communications between an examiner and the regulatory oversight 
committee, or the functional equivalent of the regulatory oversight 
committee, of the self-regulatory organization of which the futures 
commission merchant is a member;
    (K) Communications between an examiner and a futures commission 
merchant's audit committee of the board of directors or other similar 
governing body;
    (L) Analytical review procedures;
    (M) Record retention; and
    (N) Required items for inclusion in the examination report, such as 
repeat violations, material items, and high risk issues. The examination 
report is intended solely for the information and use of the self-
regulatory organizations and the Commission, and is not intended to be 
and should not be used by any other person or entity.
    (iv) A self-regulatory organization must cause an examinations 
expert to evaluate the supervisory program and

[[Page 145]]

such self-regulatory organization's application of the supervisory 
program at least once every three years.
    (A) The self-regulatory organization must obtain from such 
examinations expert a written report on findings and recommendations 
issued under the consulting services standards of the American Institute 
of Certified Public Accountants that includes the following:
    (1) A statement that the examinations expert has evaluated the 
supervisory program, including the sufficiency of the risk-based 
approach and the internal controls testing thereof, and comments and 
recommendations in connection with such evaluation from such 
examinations expert;
    (2) A statement that the examinations expert has evaluated the 
application of the supervisory program by the self-regulatory 
organization, and comments and recommendations in connection with such 
evaluation from such examinations expert; and
    (3) The examinations expert's report should include an analysis of 
the supervisory program's design to detect material weaknesses in an 
entity's internal control environment;
    (4) A discussion and recommendation of any new or best practices as 
prescribed by industry sources, including, but not limited to, those 
from the American Institute of Certified Public Accountants, the Public 
Company Accounting Oversight Board, the Institute of Internal Auditors, 
and The Risk Management Association.
    (B) The self-regulatory organization must provide the written report 
to the Commission no later than thirty days following the receipt 
thereof. The self-regulatory organization may also provide to the 
Commission a response, in writing, to any of the findings, comments or 
recommendations made by the examinations expert. Upon resolution of any 
questions or comments raised by the Commission, and upon written notice 
from the Commission that it has no further comments or questions on the 
supervisory program as amended (by reason of the examinations expert's 
proposals, considerations of the Commission's questions or comments, or 
otherwise), the self-regulatory organization shall commence applying 
such supervisory program as the standard for examining its registered 
futures commission merchant members for all examinations conducted with 
an ``as-of'' date later than the date of the Commission's written 
notification.
    (v) The supervisory program must require the self-regulatory 
organization to report to its risk and/or audit committee of the board 
of directors, or a functional equivalent committee, with timely reports 
of the activities and findings of the supervisory program to assist the 
risk and/or audit committee of the board of directors, or a functional 
equivalent committee, to fulfill its responsibility of overseeing the 
examination function.
    (vi) The initial supervisory program shall be established as 
follows. Within 180 days following the effective date of this section, 
or such other time as the Commission may approve, the self-regulatory 
organization shall submit a proposed supervisory program to the 
Commission for its review and comment, together with a written report 
that includes the elements found in paragraphs (c)(2)(iv)(A)(1) and (3) 
of this section from an examinations expert who has evaluated the 
supervisory program. The self-regulatory organization may provide the 
Commission a written response to any findings, comments or 
recommendations made by the examinations expert. Upon resolution of any 
questions or comments raised by the Commission, and upon written notice 
from the Commission that it has no further comments or questions on the 
proposed supervisory program as amended (by reason of the considerations 
of the Commission's questions or comments or otherwise), the self-
regulatory organizations shall commence applying such supervisory 
program as the standard for examining its members that are registered as 
futures commission merchants for all examinations conducted with an 
``as-of'' date later than the date of the Commission's written 
notification.
    (vii) The examinations expert's report, the self-regulatory 
organization's response, as well as any information concerning the 
supervisory program or any review conducted pursuant to the program that 
is obtained by the examinations expert, is confidential. Except

[[Page 146]]

as expressly provided for in this section, such information may not be 
disclosed to anyone not involved in the review process.
    (d)(1) 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, retail 
foreign exchange dealer, or introducing broker that is a member of more 
than one such self-regulatory organization, the function of:
    (i) Monitoring and examining for compliance with the minimum 
financial and related reporting requirements and risk management 
requirements, including policies and procedures relating to the receipt, 
holding, investing and disbursement of customer funds, adopted by such 
self-regulatory organizations and the Commission in accordance with 
paragraphs (b) and (c) of this section; and
    (ii) Receiving the financial reports and notices necessitated by 
such minimum financial and related reporting requirements; provided, 
however, that the self-regulatory organization that delegates the 
functions set forth in this paragraph (d)(1) shall remain responsible 
for its member registrants' compliance with the regulatory obligations, 
and if such self-regulatory organization becomes aware that a delegated 
function is not being performed as required under this section, the 
self-regulatory organization shall promptly take any necessary steps to 
address any noncompliance.
    (2) If a plan established pursuant to paragraph (d)(1) of this 
section applies to any registered futures commission merchant, then such 
plan must include the following elements:
    (i) The Joint Audit Committee. The self-regulatory organizations 
that choose to participate in the plan shall form a Joint Audit 
Committee, consisting of all self-regulatory organizations in the plan 
as members. The members of the Joint Audit Committee shall establish, 
operate and maintain a Joint Audit Program in accordance with the 
requirements of this section to ensure an effective and a high quality 
program for examining futures commission merchants, to designate the 
designated self-regulatory organizations that will be responsible for 
the examinations of futures commission merchants pursuant to the Joint 
Audit Program, and to satisfy such additional obligations set forth in 
this section in order to facilitate the examinations of futures 
commission merchants by their respective designated self-regulatory 
organizations.
    (ii) The Joint Audit Program. The Joint Audit Program must, at 
minimum, satisfy the following requirements.
    (A) The purpose of the Joint Audit Program must be to assess whether 
each registered futures commission merchant member of the Joint Audit 
Committee self-regulatory organization members is in compliance with the 
Joint Audit Program and Commission regulations governing minimum net 
capital and related financial requirements, the obligation to segregate 
customer funds, risk management requirements, including policies and 
procedures relating to the receipt, holding, investment, and 
disbursement of customer funds, financial reporting requirements, 
recordkeeping requirements, and sales practice and other compliance 
requirements.
    (B) The Joint Audit Program must include written policies and 
procedures concerning the application of the Joint Audit Program in the 
examination of the registered futures commission merchant members of the 
Joint Audit Committee self-regulatory organization members.
    (C)(1) Adequate levels and independence of examination staff. A 
designated self-regulatory organization must maintain staff of an 
adequate size, training, and experience to effectively implement the 
Joint Audit Program. Staff of the designated self-regulatory 
organization, including officers, directors, and supervising committee 
members, must maintain independent judgment and its actions must not 
impair its independence nor appear to impair its independence in matters 
related to the Joint Audit Program. The designated self-regulatory 
organization must provide annual ethics training to all staff with 
responsibilities for the Joint Audit Program.

[[Page 147]]

    (2) Ongoing surveillance. A designated self-regulatory 
organization's ongoing surveillance of futures commission merchant 
member registrants over which it has oversight responsibilities must 
include the review and analysis of financial reports and regulatory 
notices filed by such member registrants with the designated self-
regulatory organization.
    (3) High-risk firms. The Joint Audit Program must include procedures 
for identifying futures commission merchant member registrants over 
which it has oversight responsibilities that are determined to pose a 
high degree of potential financial risk, including the potential risk of 
loss of customer funds. High-risk member registrants must include firms 
experiencing financial or operational difficulties, failing to meet 
segregation or net capital requirements, failing to maintain current 
books and records, or experiencing material inadequacies in internal 
controls. Enhanced monitoring for high risk firms should include, as 
appropriate, daily review of net capital, segregation, and secured 
calculations, to assess compliance with self-regulatory and Commission 
requirements.
    (4) On-site examinations. A designated self-regulatory organization 
must conduct routine periodic on-site examinations of futures commission 
merchant member registrants over which it has oversight 
responsibilities. Such member registrants must be subject to on-site 
examinations no less frequently than once every eighteen months. A 
designated self-regulatory organization shall establish a risk-based 
method of establishing the scope of each on-site examination, provided, 
however, that the scope of each on-site examination of a futures 
commission merchant must include an assessment of whether the registrant 
is in compliance with applicable Commission and self-regulatory 
organization minimum capital, customer fund protection, recordkeeping, 
and reporting requirements. A designated self-regulatory organization 
must conduct on-site examinations of futures commission merchant 
registrants in accordance with the Joint Audit Program.
    (D) The Joint Audit Committee members must adequately document all 
aspects of the operation of the Joint Audit Program, including the 
conduct of risk-based scope setting and the risk-based surveillance of 
high-risk member registrants, and the imposition of remedial and 
punitive action(s) for material violations.
    (E) The Joint Audit Program must set forth in writing the 
examination standards that a designated self-regulatory organization 
must apply in its examination of a registered futures commission 
merchant. The Joint Audit Program must be based on controls testing and 
substantive testing, and must address all areas of risk to which the 
futures commission merchant can reasonably be foreseen to be subject. 
The Joint Audit Program must be based on an understanding of the 
internal control environment to determine the nature, timing and extent 
of the controls and substantive testing to be performed. The 
determination as to which elements of the Joint Audit Program are to be 
performed on any examination must be based on the risk profile of each 
registered futures commission merchant.
    (F) All aspects of the Joint Audit Program, including the standards 
required pursuant to paragraph (d)(2)(ii)(G) of this section, must, at 
minimum, conform to auditing standards issued by the Public Company 
Accounting Oversight Board as such standards would be applicable to a 
non-financial statement audit. These standards would include the 
training and proficiency of the auditor, due professional care in the 
performance of work, consideration of fraud in an audit, audit risk and 
materiality in conducting an audit, planning and supervision, 
understanding the entity and its environment and assessing the risks of 
material misstatement, performing audit procedures in response to 
assessed risk and evaluating the audit evidence obtained, auditor's 
communication with those charged with governance, and communicating 
internal control matters identified in an audit.
    (G) The Joint Audit Program must have standards addressing those 
items listed in paragraph (c)(2)(iii) of this section.
    (H) The initial Joint Audit Program shall be established as follows. 
Within

[[Page 148]]

180 days following the effective date of this section, or such other 
time as the Commission may approve, the Joint Audit Committee members 
shall submit a proposed initial Joint Audit Program to the Commission 
for its review and comment, together with a written report that includes 
the elements found in paragraphs (d)(2)(ii)(I)(1) and (d)(2)(ii)(I)(3) 
of this section from an examinations expert who has evaluated the Joint 
Audit Program. The Joint Audit Committee members may also provide to the 
Commission a response, in writing, to any of the findings, comments or 
recommendations made by the examinations expert. Upon resolution of any 
questions or comments raised by the Commission, and upon written notice 
from the Commission that it has no further comments or questions on the 
proposed Joint Audit Program as amended (by reason of the considerations 
of the Commission's questions or comments or otherwise), the designated 
self-regulatory organizations shall commence applying such Joint Audit 
Program as the standard for examining their respective registered 
futures commission merchants for all examinations conducted with an 
``as-of'' date later than the date of the Commission's written 
notification.
    (I) Following the establishment of the Joint Audit Program, no less 
frequently than once every three years, the Joint Audit Committee 
members must cause an examinations expert to evaluate the Joint Audit 
Program and each designated self-regulatory organization's application 
of the Joint Audit Program. The Joint Audit Committee members must 
obtain from such examinations expert a written report, and must provide 
the written report to the Commission no later than forty-five days prior 
to the annual meeting of the members of the Joint Audit Committee to be 
held in that year pursuant to paragraph (d)(2)(iii)(A) of this section. 
The Joint Audit Committee members may also provide to the Commission a 
response, in writing, to any of the findings, comments or 
recommendations made by the examinations expert. The examinations 
expert's written report must include the following:
    (1) A statement that the examinations expert has evaluated the Joint 
Audit Program, including the sufficiency of the risk-based approach and 
the internal controls testing thereof, and comments and recommendations 
in connection with such evaluation from such examinations expert;
    (2) A statement that the examinations expert has evaluated the 
application of the Joint Audit Program by each designated self-
regulatory organization, and comments and recommendations in connection 
with such evaluation from such examinations expert;
    (3) The examinations expert's report on findings and recommendations 
issued under the consulting services standards of the American Institute 
of Certified Public Accountants and should include an analysis of the 
supervisory program's design to detect material weaknesses in an 
entities internal control environment; and
    (4) A discussion and recommendation of any new or best practices as 
prescribed by industry sources, including, but not limited to, those 
from the American Institute of Certified Public Accountants, the Public 
Company Accounting Oversight Board, the Internal Audit Association and 
The Risk Management Association.
    (J) The examinations expert's report, the Joint Audit Committee's 
response, as well as any information concerning the supervisory program 
or any review conducted pursuant to the program that is obtained by the 
examinations expert, is confidential. Except as expressly provided for 
in paragraphs (d)(2)(ii)(G) or (d)(2)(ii)(H) of this section, such 
information may not be disclosed to anyone not involved in the review 
process.
    (K) The Joint Audit Program must require each Joint Audit Committee 
member to provide to its risk and/or audit committee of the board of 
directors, or a functionally equivalent committee, with timely reports 
of the activities and findings of the Joint Audit Program to assist the 
risk and/or audit committee of the board of directors, or a functionally 
equivalent committee, in fulfilling its responsibility of overseeing the 
examination function.
    (iii) Meetings of the Joint Audit Committee. (A) No less frequently 
than once every year, the Joint Audit Committee

[[Page 149]]

members must meet to consider whether changes to the Joint Audit Program 
are appropriate, and in considering such, in meetings corresponding to 
the written report obtained from an examinations expert pursuant to 
paragraph (d)(2)(ii)(I) of this section, the Joint Audit Committee 
members must consider such written report, including the results of the 
examinations expert's assessment of the Joint Audit Program and any 
additional recommendations. The Commission's questions, comments and 
proposals must also be considered. Upon written notice from the 
Commission that it has no further comments or questions on the Joint 
Audit Program as amended (by reason of the examinations expert's 
proposals, considerations of the Commission's questions, comments and 
proposals, or otherwise), the designated self-regulatory organizations 
shall commence applying such Joint Audit Program as the standard for 
examining their respective registered futures commission merchants for 
all examinations conducted with an ``as-of'' date later than the date of 
the Commission's written notification.
    (B) In addition to the items considered in paragraph (d)(2)(iii)(A) 
of this section, the Joint Audit Committee members must consider the 
following items during the annual meeting:
    (1) The role of the Joint Audit Committee and its members as it 
relates to self-regulatory organization responsibilities;
    (2) Developing and maintaining the Joint Audit Program for all 
designated self-regulatory organizations to follow with no exceptions;
    (3) Coordinating self-regulatory organization responsibilities with 
those of independent certified public accountants, the Commission and 
other regulators and self-regulatory organizations (e.g., the Securities 
and Exchange Commission, the Financial Industry Regulatory Authority, 
and others, as the case may be for futures commission merchants subject 
to regulation by multiple regulators and self-regulatory organizations);
    (4) Coordinating and sharing information between the Joint Audit 
Committee members, including issues and industry concerns in connection 
with examinations of futures commission merchants;
    (5) Identifying industry regulatory reporting issues and financial 
and operational internal control issues and modifying the Joint Audit 
Program accordingly;
    (6) Issuing risk alerts for futures commission merchants and/or 
designated self-regulatory organization examiners on an as-needed basis 
as issues arise;
    (7) Issuing an annual examination alert for certified public 
accountants and designated self-regulatory organization examiners;
    (8) Responding to industry issues;
    (9) Providing industry feedback to Commission proposals; and
    (10) Developing and maintaining a standard of ethics and 
independence with which all examination units of the Joint Audit 
Committee members must comply.
    (C) Minutes must be taken of all meetings and distributed to all 
members on a timely basis.
    (D) The Commission must receive timely prior notice of each meeting, 
have to right to attend and participate in each meeting and receive 
written copies of the reports and minutes required pursuant to 
paragraphs (d)(2)(ii)(J) and (d)(2)(iii)(C) of this section, 
respectively.
    (3) The plan referenced in paragraph (d)(1) of this section shall 
not be effective without Commission approval pursuant to paragraph (h) 
of this section.
    (e) Any plan filed under this section may contain provisions for the 
allocation of expenses reasonably incurred by designated self-regulatory 
organizations among the self-regulatory organizations participating in 
such a plan.
    (f) A plan's designated self-regulatory organizations must report 
to:
    (1) That plan's other self-regulatory organizations any violation of 
such other self-regulatory organizations' rules and regulations for 
which the responsibility to monitor or examine has been delegated to 
such designated self-regulatory organization under this section; and
    (2) The Director of the Division of Swap Dealer and Intermediary 
Oversight of the Commission any violation of a self-regulatory 
organization's rules

[[Page 150]]

and regulations or any violation of the Commission's regulations for 
which the responsibility to monitor, audit, or examine has been 
delegated to such designated self-regulatory organization under this 
section.
    (g) The Joint Audit Committee members may, among themselves, 
establish programs to provide access to any necessary financial or 
related information.
    (h) 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;
    (3) Reduces multiple monitoring and multiple examining for 
compliance with the minimum financial rules of the Commission and of the 
self-regulatory organizations submitting the plan of any futures 
commission merchant, retail foreign exchange dealer, or introducing 
broker that 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, retail foreign exchange 
dealer, or introducing broker that is a member of more than one self-
regulatory organization;
    (5) Fosters cooperation and coordination among the self-regulatory 
organizations; and
    (6) Does not hinder the development of a registered futures 
association under section 17 of the Act.
    (i) After the Commission has approved a plan, or part thereof, under 
paragraph (h) of this section, a self-regulatory organization delegating 
the functions described in paragraph (d)(1) of this section must notify 
each of its members that are subject to such a plan:
    (1) Of the limited scope of the delegating self-regulatory 
organization's responsibility for such a member's compliance with the 
Commission's and self-regulatory organization's minimum financial and 
related reporting requirements; and
    (2) Of the identity of the designated self-regulatory organization 
that has been delegated responsibility for such a member; provided, 
however, that the self-regulatory organization that delegates, pursuant 
to paragraph (d) of this section, the functions set forth in paragraphs 
(b) and (c) of this section shall remain responsible for its member 
registrants' compliance with the regulatory obligations, and if such 
self-regulatory organization becomes aware that a delegated function is 
not being performed as required under this section, the self-regulatory 
organization shall promptly take any necessary steps to address any 
noncompliance.
    (j) The Commission may at any time, after appropriate notice and 
opportunity for hearing, withdraw its approval of any plan, or part 
thereof, established under this section, if such plan, or part thereof, 
ceases to adequately effectuate the purposes of section 4f(b) of the Act 
or of this section.
    (k) Whenever a registered futures commission merchant, a registered 
retail foreign exchange dealer, 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 electronic notice of that event to the Commission at its 
Washington, DC, headquarters and send a copy of that notification to 
such futures commission merchant, retail foreign exchange dealer, or 
introducing broker.
    (l) Nothing in this section shall preclude the Commission from 
examining any futures commission merchant, retail foreign exchange 
dealer, or introducing broker for compliance with the minimum financial 
and related reporting requirements, and the risk management 
requirements, as applicable, to which such futures commission merchant, 
retail foreign exchange dealer, or introducing broker is subject.
    (m) In the event a plan is not filed and/or approved for each 
registered futures commission merchant, retail foreign exchange dealer, 
or introducing broker that is a member of more than one self-regulatory 
organization, the

[[Page 151]]

Commission may design and, after notice and opportunity for comment, 
approve a plan for those futures commission merchants, retail foreign 
exchange dealers, or introducing brokers that are not the subject of an 
approved plan (under paragraph (h) of this section), delegating to a 
designated self-regulatory organization the responsibilities described 
in paragraph (d) of this section.

[78 FR 68638, Nov. 14, 2013]



Sec.  1.53  [Reserved]



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  Public disclosures by futures commission merchants.

    (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.
    (2) The funds you deposit with a futures commission merchant for 
trading futures positions are not protected by insurance in the event of 
the bankruptcy or insolvency of the futures commission merchant, or in 
the event your funds are misappropriated.
    (3) The funds you deposit with a futures commission merchant for 
trading futures positions are not protected by the Securities Investor 
Protection Corporation even if the futures commission merchant is 
registered with the Securities and Exchange Commission as a broker or 
dealer.
    (4) The funds you deposit with a futures commission merchant are 
generally not guaranteed or insured by a derivatives clearing 
organization in the event of the bankruptcy or insolvency of the futures 
commission merchant, or if the futures commission merchant is otherwise 
unable to refund your funds. Certain derivatives clearing organizations, 
however, may have programs that provide limited insurance to customers. 
You should inquire of your futures commission merchant whether your 
funds will be insured by a derivatives clearing organization and you 
should understand the benefits and limitations of such insurance 
programs.
    (5) The funds you deposit with a futures commission merchant are not 
held by the futures commission merchant in a separate account for your 
individual benefit. Futures

[[Page 152]]

commission merchants commingle the funds received from customers in one 
or more accounts and you may be exposed to losses incurred by other 
customers if the futures commission merchant does not have sufficient 
capital to cover such other customers' trading losses.
    (6) The funds you deposit with a futures commission merchant may be 
invested by the futures commission merchant in certain types of 
financial instruments that have been approved by the Commission for the 
purpose of such investments. Permitted investments are listed in 
Commission Regulation 1.25 and include: U.S. government securities; 
municipal securities; money market mutual funds; and certain corporate 
notes and bonds. The futures commission merchant may retain the interest 
and other earnings realized from its investment of customer funds. You 
should be familiar with the types of financial instruments that a 
futures commission merchant may invest customer funds in.
    (7) Futures commission merchants are permitted to deposit customer 
funds with affiliated entities, such as affiliated banks, securities 
brokers or dealers, or foreign brokers. You should inquire as to whether 
your futures commission merchant deposits funds with affiliates and 
assess whether such deposits by the futures commission merchant with its 
affiliates increases the risks to your funds.
    (8) You should consult your futures commission merchant concerning 
the nature of the protections available to safeguard funds or property 
deposited for your account.
    (9) 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'').
    (10) All futures positions involve risk, and a ``spread'' position 
may not be less risky than an outright ``long'' or ``short'' position.
    (11) 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.
    (12) In addition to the risks noted in the paragraphs enumerated 
above, you should be familiar with the futures commission merchant you 
select to entrust your funds for trading futures positions. The 
Commodity Futures Trading Commission requires each futures commission 
merchant to make publicly available on its Web site firm specific 
disclosures and financial information to assist you with your assessment 
and selection of a futures commission merchant. Information regarding 
this futures commission merchant may be obtained by visiting our Web 
site, www.[Web site address].

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:

    (13) 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.
    (14) 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

[[Page 153]]

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; Provided, however, that an FCM also provides 
a customer with the risk disclosure statement required by paragraph (b) 
of this section and obtains the customer's acknowledgment that it has 
read and understands the disclosure document.
    (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 
Sec. Sec.  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 acknowledgement 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, consents 
and elections specified in this section and Sec.  1.33(g), and in 
Sec. Sec.  33.7, 155.3(b)(2), 155.4(b)(2), 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 has 
acknowledged by check or other indication next to a description of each 
specified disclosure statement, consent or election that the customer 
has received and understood such disclosure statement or made such 
consent or 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 Sec. Sec.  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 Sec. Sec.  1.33(g) and 1.65(a)(3), and Sec. Sec.  30.6(a), 
33.7(a), 155.3(b)(2), 155.4(b)(2) 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 154]]

[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]


[[Page 155]]


[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]

                                * * * * *

[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 156]]

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.

    (i) Notwithstanding any other provision of this section, no futures 
commission merchant may enter into a customer account agreement or first 
accept funds from a customer, unless the futures commission merchant 
discloses to the customer all information about the futures commission 
merchant, including its business, operations, risk profile, and 
affiliates, that would be material to the customer's decision to entrust 
such funds to and otherwise do business with the futures commission 
merchant and that is otherwise necessary for full and fair disclosure. 
In connection with the disclosure of such information, the futures 
commission merchant shall provide material information about the topics 
described in paragraph (k) of this section, expanding upon such 
information as necessary to keep such disclosure from being misleading, 
whether through omission or otherwise. The futures commission merchant 
shall also disclose the same information required by this paragraph to 
all customers existing on the effective date of this paragraph even if 
the futures commission merchant and such existing customers have 
previously entered into a customer account agreement or the futures 
commission merchant has already accepted funds from such existing 
customers. The futures commission merchant shall update the information 
required by this section as and when necessary, but at least annually, 
to keep such information accurate and complete and shall promptly 
disclose such updated information to all of its customers. In connection 
with such obligation to update information, the futures commission 
merchant shall take into account any material change to its business 
operation, financial condition and other factors material to the 
customer's decision to entrust the customer's funds and otherwise do 
business with the futures commission merchant since its most recent 
disclosure pursuant to this paragraph, and for this purpose shall 
without limitation consider events that require periodic reporting 
required to be filed pursuant to Sec.  1.12. For purposes of this 
section, the disclosures required pursuant to this paragraph will be 
referred to as the ``Disclosure Documents.'' The Disclosure Documents 
shall provide a detailed table of contents referencing and describing 
the Disclosure Documents.
    (j)(1) Each futures commission merchant shall make the Disclosure 
Documents available to each customer to whom disclosure is required 
pursuant to paragraph (i) of this section (for purposes of this section, 
its ``FCM Customers'') and to the general public.
    (2) A futures commission merchant shall make the Disclosure 
Documents available to FCM Customers and to the general public by 
posting a copy of the Disclosure Documents on the futures commission 
merchant's Web site. A futures commission merchant, however, may use an 
electronic means other than its Web site to make the Disclosure 
Documents available to its FCM Customers; provided that:
    (i) The electronic version of the Disclosure Documents shall be 
presented in a format that is readily communicated to the FCM Customers. 
Information is readily communicated to the FCM Customers if it is 
accessible to the ordinary computer user by means of commonly available 
hardware and software and if the electronically delivered document is 
organized in substantially the same manner as would be required for a 
paper document with respect to the order of presentation and the 
relative prominence of information; and
    (ii) A complete paper copy of the Disclosure Documents shall be 
provided to an FCM Customer upon request.
    (k) Specific topics. The futures commission merchant shall provide 
material information about the following specific topics:

[[Page 157]]

    (1) The futures commission merchant's name, address of its principal 
place of business, phone number, fax number, and email address;
    (2) The name, title, business address, business background, areas of 
responsibility, and the nature of the duties of each person that is 
defined as a principal of the futures commission merchant pursuant to 
Sec.  3.1 of this chapter;
    (3) The significant types of business activities and product lines 
engaged in by the futures commission merchant, and the approximate 
percentage of the futures commission merchant's assets and capital that 
are used in each type of activity;
    (4) The futures commission merchant's business on behalf of its 
customers, including types of customers, markets traded, international 
businesses, and clearinghouses and carrying brokers used, and the 
futures commission merchant's policies and procedures concerning the 
choice of bank depositories, custodians, and counterparties to permitted 
transactions under Sec.  1.25;
    (5) The material risks, accompanied by an explanation of how such 
risks may be material to its customers, of entrusting funds to the 
futures commission merchant, including, without limitation, the nature 
of investments made by the futures commission merchant (including credit 
quality, weighted average maturity, and weighted average coupon); the 
futures commission merchant's creditworthiness, leverage, capital, 
liquidity, principal liabilities, balance sheet leverage and other lines 
of business; risks to the futures commission merchant created by its 
affiliates and their activities, including investment of customer funds 
in an affiliated entity; and any significant liabilities, contingent or 
otherwise, and material commitments;
    (6) The name of the futures commission merchant's designated self-
regulatory organization and its Web site address and the location where 
the annual audited financial statements of the futures commission 
merchant is made available;
    (7) Any material administrative, civil, enforcement, or criminal 
complaints or actions filed against the FCM where such complaints or 
actions have not concluded, and any enforcement complaints or actions 
filed against the FCM during the last three years;
    (8) A basic overview of customer fund segregation, futures 
commission merchant collateral management and investments, futures 
commission merchants, and joint futures commission merchant/broker 
dealers;
    (9) Information on how a customer may obtain information regarding 
filing a complaint about the futures commission merchant with the 
Commission or with the firm's designated self-regulatory organization; 
and
    (10) The following financial data as of the most recent month-end 
when the Disclosure Document is prepared:
    (i) The futures commission merchant's total equity, regulatory 
capital, and net worth, all computed in accordance with U.S. Generally 
Accepted Accounting Principles and Sec.  1.17, as applicable;
    (ii) The dollar value of the futures commission merchant's 
proprietary margin requirements as a percentage of the aggregate margin 
requirement for futures customers, Cleared Swaps Customers, and 30.7 
customers;
    (iii) The smallest number of futures customers, Cleared Swaps 
Customers, and 30.7 customers that comprise 50 percent of the futures 
commission merchant's total funds held for futures customers, Cleared 
Swaps Customers, and 30.7 customers, respectively;
    (iv) The aggregate notional value, by asset class, of all non-
hedged, principal over-the-counter transactions into which the futures 
commission merchant has entered;
    (v) The amount, generic source and purpose of any committed 
unsecured lines of credit (or similar short-term funding) the futures 
commission merchant has obtained but not yet drawn upon;
    (vi) The aggregated amount of financing the futures commission 
merchant provides for customer transactions involving illiquid financial 
products for which it is difficult to obtain timely and accurate prices; 
and
    (vii) The percentage of futures customer, Cleared Swaps Customer, 
and 30.7 customer receivable balances that the futures commission 
merchant had

[[Page 158]]

to write-off as uncollectable during the past 12-month period, as 
compared to the current balance of funds held for futures customers, 
Cleared Swaps Customers, and 30.7 customers; and
    (11) A summary of the futures commission merchant's current risk 
practices, controls and procedures.
    (l) In addition to the foregoing, each futures commission merchant 
shall adopt policies and procedures reasonably designed to ensure that 
advertising and solicitation activities by each such futures commission 
merchant and any introducing brokers associated with such futures 
commission merchant are not misleading to its FCM Customers in 
connection with their decision to entrust funds to and otherwise do 
business with such futures commission merchant.
    (m) The Disclosure Document required by paragraph (i) of this 
section is in addition to the Risk Disclosure Statement required under 
paragraph (a) of this section.
    (n) All Disclosure Documents, with each Disclosure Document dated 
the date of first use, shall be maintained in accordance with Sec.  1.31 
and shall be made available promptly upon request to representatives of 
its designated self-regulatory organization, representatives of the 
Commission, and representatives of applicable prudential regulators.
    (o)(1) Each futures commission merchant shall make the following 
financial information publicly available on its Web site:
    (i) The daily Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Exchanges for the most current 
12-month period;
    (ii) The daily Statement of Secured Amounts and Funds Held in 
Separate Accounts for 30.7 Customers Pursuant to Commission Regulation 
30.7 for the most current 12-month period;
    (iii) The daily Statement of Cleared Swaps Customer Segregation 
Requirements and Funds in Cleared Swaps Customer Accounts Under Section 
4d(f) of the Act for the most current 12-month period;
    (iv) A summary schedule of the futures commission merchant's 
adjusted net capital, net capital, and excess net capital, all computed 
in accordance with Sec.  1.17 and reflecting balances as of the month-
end for the 12 most recent months;
    (v) The Statement of Financial Condition, the Statement of 
Segregation Requirements and Funds in Segregation for Customers Trading 
on U.S. Exchanges, the Statement of Secured Amounts and Funds Held in 
Separate Accounts for 30.7 Customers Pursuant to Commission Regulation 
30.7, the Statement of Cleared Swaps Customer Segregation Requirements 
and Funds in Cleared Swaps Customer Accounts Under Section 4d(f) of the 
Act, an all related footnotes to the above schedules that are part of 
the futures commission merchant's most current certified annual report 
pursuant to Sec.  1.16; and
    (vi) The Statement of Segregation Requirements and Funds in 
Segregation for Customers Trading on U.S. Exchanges, the Statement of 
Secured Amounts and Funds Held in Separate Accounts for 30.7 Customers 
Pursuant to Commission Regulation30.7, and the Statement of Cleared 
Swaps Customer Accounts Under Section 4d(f) of the Act that are part of 
the futures commission merchant's unaudited Form 1-FR-FCM or Financial 
and Operational Combined Uniform Single Report under the Securities 
Exchange Act of 1934 (``FOCUS Report'') for the most current 12-month 
period.
    (2) To the extent any of the financial data identified in paragraph 
(1) of this section is amended, the FCM must clearly notate that the 
data has been amended.
    (3) Each futures commission merchant must include a statement on its 
Web site that is available to the public that financial information 
regarding the futures commission merchant, including how the futures 
commission merchant invests and holds customer funds, may be obtained 
from the National Futures Association and include a link to the Web site 
of the National Futures Association's Basic System where information 
regarding the futures commission merchant's investment of customer funds 
is maintained.
    (4) Each futures commission merchant must include a statement on its 
Web site that is available to the public

[[Page 159]]

that additional financial information on all futures commission 
merchants is available from the Commodity Futures Trading Commission, 
and include a link to the Commodity Futures Trading Commission's Web 
page for financial data for futures commission merchants.

[43 FR 31890, July 24, 1978]

    Editorial Note: For Federal Register citations affecting Sec.  1.55, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec.  1.56  Prohibition of guarantees against loss.

    (a) [Reserved]
    (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 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) must open and carry such customer's account with such guarantor 
futures commission merchant on a fully-disclosed basis; and
    (2) Transmit promptly for execution all 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 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 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 if:
    (1) The futures commission merchant carrying the 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 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:

[[Page 160]]

    (i) Which is maintained in an account name which clearly identifies 
the funds therein as belonging to customers of the futures commission 
merchant carrying the 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 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 customers and are being held in 
accordance with the provisions of the Act and the regulations in this 
chapter.

[48 FR 35291, Aug. 3, 1983, as amended at 57 FR 23143, June 2, 1992; 77 
FR 66330, Nov. 2, 2012]



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 Sec.  1.3(ee), and includes the term 
``clearing organization,'' as defined in Sec.  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
    (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 or a swap execution facility, or to clear 
a swap contract through a derivatives clearing organization. As used in 
this section, ``material information'' includes, but is not limited to, 
information relating to present or anticipated cash positions, commodity 
interests, trading strategies, the financial condition of members of 
self-regulatory organizations or members of linked exchanges or their 
customers, or the regulatory actions or proposed regulatory actions of a 
self-regulatory organization or a linked exchange.

[[Page 161]]

    (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 or swap execution facility 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, swap execution facility, 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, commodity option 
or swap contract traded on or subject to the rules of a contract market, 
a swap execution facility or linked exchange, or cleared by a 
derivatives clearing organization, 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, swap execution 
facility, linked exchange, or other board of trade, exchange, or market, 
or cleared by a derivatives clearing organization, 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 the meaning of Sec.  4.10(d) of this 
chapter, and whose units of participation have been registered under the 
Securities Act of 1933, or a trading vehicle for which Sec.  4.5 of this 
chapter 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 5c(c) of the Act and part 40 of this chapter (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, swap execution 
facility, or clearing organization;
    (B) Trading, directly or indirectly, in any related commodity 
interest;
    (C) Trading, directly or indirectly, in a commodity interest traded 
on contract markets or swap execution facilities or cleared by 
derivatives clearing organizations other than the employing self-
regulatory organization if 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

[[Page 162]]

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; 
Registered futures association rules. Each registered futures 
association must maintain in effect rules which have been submitted to 
the Commission pursuant to section 17(j) of the Act 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; 77 
FR 66330, Nov. 2, 2012]



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 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

[[Page 163]]

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. Sec.  1.61-1.62  [Reserved]



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 Sec.  1.3(ee), and includes a ``clearing 
organization'' as defined in 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.

[[Page 164]]

    (4) Oversight panel means any panel authorized by a self-regulatory 
organization to review, recommend or establish policies or procedures 
with respect 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 5c(c) of 
the Act and part 40 of this chapter 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,

[[Page 165]]

oversight panel or governing board of a self-regulatory organization if 
such 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, and post the schedule on the self-regulatory 
organization's Web site so that it is 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; 77 FR 66331, Nov. 2, 2012]



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

[[Page 166]]

represent the same membership interest as its sponsor.
    (b) Each self-regulatory organization must maintain in effect 
standards and 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]

[[Page 167]]



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 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 
Sec. Sec.  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. Sec.  
1.55(a)(1)(ii) and 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

[[Page 168]]

transferor futures commission merchant or introduced by the introducing 
broker, irrespective of whether such accounts are transferred to a 
single or multiple transferees.
    (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 Swap Dealer 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; 78 FR 22419, Apr. 
16, 2013]



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

[[Page 169]]

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 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

[[Page 170]]

the Proceedings Clerk shall promptly serve a copy of such order on the 
floor trader, the Division of Swap Dealer and Intermediary Oversight and 
the Division of Enforcement. Such order shall 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 Sec. Sec.  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; 78 FR 22419, Apr. 
16, 2013]



Sec.  1.67  Notification of final disciplinary action involving 
financial harm to a customer.

    (a) Definitions. For purposes of this section:
    Final disciplinary action means any decision by or settlement with a 
contract market or swap execution facility in a disciplinary matter 
which cannot be further appealed at the contract market or swap 
execution facility, 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.
    (b) Upon any final disciplinary action in which a contract market or 
swap execution facility 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 or swap execution facility shall promptly 
provide written notice of the disciplinary action to the futures 
commission merchant or other registrant; and
    (ii) A futures commission merchant or other registrant 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 or other registrant, such futures commission 
merchant or other registrant shall promptly provide 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 or swap execution facility 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) of this 
chapter shall be deemed to include the principal facts of the 
disciplinary action thereof.

[77 FR 66331, Nov. 2, 2012]



Sec.  1.68  [Reserved]



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

[[Page 171]]

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 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

[[Page 172]]

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;
    (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.

[[Page 173]]

    (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;
    (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

[[Page 174]]

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]



Sec.  1.71  Conflicts of interest policies and procedures by futures
commission merchants and introducing brokers.

    (a) Definitions. For purposes of this section, the following terms 
shall be defined as provided.
    (1) Affiliate. This term means, with respect to any person, a person 
controlling, controlled by, or under common control with, such person.
    (2) Business trading unit. This term means any department, division, 
group, or personnel of a futures commission merchant or introducing 
broker or any of its affiliates, whether or not identified as such, that 
performs, or personnel exercising direct supervisory authority over the 
performance of, any pricing (excluding price verification for risk 
management purposes), trading, sales, marketing, advertising, 
solicitation, structuring, or brokerage activities on behalf of a 
futures commission merchant or introducing broker or any of its 
affiliates.
    (3) Clearing unit. This term means any department, division, group, 
or personnel of a futures commission merchant or any of its affiliates, 
whether or not identified as such, that performs, or personnel 
exercising direct supervisory authority over the performance of, any 
proprietary or customer clearing activities on behalf of a futures 
commission merchant or any of its affiliates.
    (4) Derivative. This term means:
    (i) A contract for the purchase or sale of a commodity for future 
delivery;
    (ii) A security futures product;
    (iii) A swap;
    (iv) Any agreement, contract, or transaction described in section 
2(c)(2)(C)(i) or section 2(c)(2)(D)(i) of the Act; and
    (v) Any commodity option authorized under section 4c of the Act; and 
(vi) any leverage transaction authorized under section 19 of the Act.
    (5) Non-research personnel. This term means any employee of the 
business trading unit or clearing unit, or any other employee of the 
futures commission merchant or introducing broker, other than an 
employee performing a legal or compliance function, who is not directly 
responsible for, or otherwise not directly involved in, research or 
analysis intended for inclusion in a research report.
    (6) Public appearance. This term means any participation in a 
conference call, seminar, forum (including an interactive electronic 
forum) or other public speaking activity before 15 or more persons 
(individuals or entities), or interview or appearance before one or more 
representatives of the media, radio, television or print media, or the 
writing of a print media article, in which a research analyst makes a 
recommendation or offers an opinion concerning a derivatives 
transaction. This term does not include a password-protected Webcast, 
conference call or similar event with 15 or more existing customers, 
provided that all of the event participants previously received the most 
current research report or other documentation that contains the 
required applicable disclosures, and that the research analyst appearing 
at the event corrects and updates during the public appearance any 
disclosures in the research report that are inaccurate, misleading, or 
no longer applicable.
    (7) Research analyst. This term means the employee of a futures 
commission merchant or introducing broker who is primarily responsible 
for, and any employee who reports directly or indirectly to such 
research analyst in connection with, preparation of the substance of a 
research report relating to any derivative, whether or not any such 
person has the job title of ``research analyst.''
    (8) Research department. This term means any department or division 
that is principally responsible for preparing the substance of a 
research report relating to any derivative on behalf of a futures 
commission merchant or introducing broker, including a department or 
division contained in an affiliate of a futures commission merchant or 
introducing broker.
    (9) Research report. This term means any written communication 
(including electronic) that includes an analysis of

[[Page 175]]

the price or market for any derivative, and that provides information 
reasonably sufficient upon which to base a decision to enter into a 
derivatives transaction. This term does not include:
    (i) Communications distributed to fewer than 15 persons;
    (ii) Commentaries on economic, political or market conditions;
    (iii) Statistical summaries of multiple companies' financial data, 
including listings of current ratings;
    (iv) Periodic reports or other communications prepared for 
investment company shareholders or commodity pool participants that 
discuss individual derivatives positions in the context of a fund's past 
performance or the basis for previously-made discretionary decisions;
    (v) Any communications generated by an employee of the business 
trading unit that is conveyed as a solicitation for entering into a 
derivatives transaction, and is conspicuously identified as such; and
    (vi) Internal communications that are not given to current or 
prospective customers.
    (b) Policies and procedures. (1) Except as provided in paragraph 
(b)(2) of this section, each futures commission merchant and introducing 
broker subject to this rule must adopt and implement written policies 
and procedures reasonably designed to ensure that the futures commission 
merchant or introducing broker and its employees comply with the 
provisions of this rule.
    (2) Small Introducing Brokers. An introducing broker that has 
generated, over the preceding 3 years, $5 million or less in aggregate 
gross revenues from its activities as an introducing broker must 
establish structural and institutional safeguards reasonably designed to 
ensure that the activities of any person within the firm relating to 
research or analysis of the price or market for any commodity or 
derivative are separated by appropriate informational partitions within 
the firm from the review, pressure, or oversight of persons whose 
involvement in trading or clearing activities might potentially bias the 
judgment or supervision of the persons.
    (c) Research analysts and research reports--(1) Restrictions on 
relationship with research department. (i) Non-research personnel shall 
not direct a research analyst's decision to publish a research report of 
the futures commission merchant or introducing broker, and non-research 
personnel shall not direct the views and opinions expressed in a 
research report of the futures commission merchant or introducing 
broker.
    (ii) No research analyst may be subject to the supervision or 
control of any employee of the futures commission merchant's or 
introducing broker's business trading unit or clearing unit, and no 
employee of the business trading unit or clearing unit may have any 
influence or control over the evaluation or compensation of a research 
analyst.
    (iii) Except as provided in paragraph (c)(1)(iv) of this section, 
non-research personnel, other than the board of directors and any 
committee thereof, shall not review or approve a research report of the 
futures commission merchant or introducing broker before its 
publication.
    (iv) Non-research personnel may review a research report before its 
publication as necessary only to verify the factual accuracy of 
information in the research report, to provide for non-substantive 
editing, to format the layout or style of the research report, or to 
identify any potential conflicts of interest, provided that:
    (A) Any written communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be made either through authorized legal or compliance 
personnel of the futures commission merchant or introducing broker or in 
a transmission copied to such personnel; and
    (B) Any oral communication between non-research personnel and 
research department personnel concerning the content of a research 
report must be documented and made either through authorized legal or 
compliance personnel acting as an intermediary or in a conversation 
conducted in the presence of such personnel.
    (2) Restrictions on communications. Any written or oral 
communication by

[[Page 176]]

a research analyst to a current or prospective customer relating to any 
derivative must not omit any material fact or qualification that would 
cause the communication to be misleading to a reasonable person.
    (3) Restrictions on research analyst compensation. A futures 
commission merchant or introducing broker may not consider as a factor 
in reviewing or approving a research analyst's compensation his or her 
contributions to the futures commission merchant's or introducing 
broker's trading or clearing business. Except for communicating client 
or customer feedback, ratings and other indicators of research analyst 
performance to research department management, no employee of the 
business trading unit or clearing unit of the futures commission 
merchant or introducing broker may influence the review or approval of a 
research analyst's compensation.
    (4) Prohibition of promise of favorable research. No futures 
commission merchant or introducing broker may directly or indirectly 
offer favorable research, or threaten to change research, to an existing 
or prospective customer as consideration or inducement for the receipt 
of business or compensation.
    (5) Disclosure requirements--(i) Ownership and material conflicts of 
interest. A futures commission merchant or introducing broker must 
disclose in research reports and a research analyst must disclose in 
public appearances whether the research analyst maintains a financial 
interest in any derivative of a type, class, or category that the 
research analyst follows, and the general nature of the financial 
interest.
    (ii) Prominence of disclosure. Disclosures and references to 
disclosures must be clear, comprehensive, and prominent. With respect to 
public appearances by research analysts, the disclosures required by 
paragraph (c)(5) of this section must be conspicuous.
    (iii) Records of public appearances. Each futures commission 
merchant and introducing broker must maintain records of public 
appearances by research analysts sufficient to demonstrate compliance by 
those research analysts with the applicable disclosure requirements 
under paragraph (c)(5) of this section.
    (iv) Third-party research reports. (A) For the purposes of paragraph 
(c)(5)(iv) of this section, ``independent third-party research report'' 
shall mean a research report, in respect of which the person or entity 
producing the report:
    (1) Has no affiliation or business or contractual relationship with 
the distributing futures commission merchant or introducing broker, or 
that futures commission merchant's or introducing broker's affiliates, 
that is reasonably likely to inform the content of its research reports; 
and
    (2) Makes content determinations without any input from the 
distributing futures commission merchant or introducing broker or from 
the futures commission merchant's or introducing broker's affiliates.
    (B) Subject to paragraph (c)(5)(iv)(C) of this section, if a futures 
commission merchant or introducing broker distributes or makes available 
any independent third-party research report, the futures commission 
merchant or introducing broker must accompany the research report with, 
or provide a web address that directs the recipient to, the current 
applicable disclosures, as they pertain to the futures commission 
merchant or introducing broker, required by this section. Each futures 
commission merchant and introducing broker must establish written 
policies and procedures reasonably designed to ensure the completeness 
and accuracy of all applicable disclosures.
    (C) The requirements of paragraph (c)(5)(iv)(B) of this section 
shall not apply to independent third-party research reports made 
available by a futures commission merchant or introducing broker to its 
customers:
    (1) Upon request; or
    (2) Through a Web site maintained by the futures commission merchant 
or introducing broker.
    (6) Prohibition of retaliation against research analysts. No futures 
commission merchant or introducing broker, and no employee of a futures 
commission merchant or introducing broker who is involved with the 
futures commission merchant's or introducing broker's trading or 
clearing activities, may, directly or indirectly, retaliate against

[[Page 177]]

or threaten to retaliate against any research analyst employed by the 
futures commission merchant or introducing broker or its affiliates as a 
result of an adverse, negative, or otherwise unfavorable research report 
or public appearance written or made, in good faith, by the research 
analyst that may adversely affect the futures commission merchant's or 
introducing broker's present or prospective trading or clearing 
activities.
    (7) Small Introducing Brokers. An introducing broker that has 
generated, over the preceding 3 years, $5 million or less in aggregate 
gross revenues from its activities as an introducing broker is exempt 
from the requirements set forth in this paragraph (c).
    (d) Clearing activities. (1) No futures commission merchant shall 
permit any affiliated swap dealer or major swap participant to directly 
or indirectly interfere with, or attempt to influence, the decision of 
the clearing unit personnel of the futures commission merchant to 
provide clearing services and activities to a particular customer, 
including but not limited to a decision relating to the following:
    (i) Whether to offer clearing services and activities to a 
particular customer;
    (ii) Whether to accept a particular customer for the purposes of 
clearing derivatives;
    (iii) Whether to submit a customer's transaction to a particular 
derivatives clearing organization;
    (iv) Whether to set or adjust risk tolerance levels for a particular 
customer;
    (v) Whether to accept certain forms of collateral from a particular 
customer; or
    (vi) Whether to set a particular customer's fees for clearing 
services based upon criteria that are not generally available and 
applicable to other customers of the futures commission merchant.
    (2) Each futures commission merchant shall create and maintain an 
appropriate informational partition between business trading units of an 
affiliated swap dealer or major swap participant and clearing unit 
personnel of the futures commission merchant to reasonably ensure 
compliance with the Act and the prohibitions specified in paragraph 
(d)(1) of this section. At a minimum, such informational partitions 
shall require that:
    (i) No employee of a business trading unit of an affiliated swap 
dealer or major swap participant may review or approve the provision of 
clearing services and activities by clearing unit personnel of the 
futures commission merchant, make any determination regarding whether 
the futures commission merchant accepts clearing customers, or in any 
way condition or tie the provision of trading services upon or to the 
provision of clearing services or otherwise participate in the provision 
of clearing services by improperly incentivizing or encouraging the use 
of the affiliated futures commission merchant. Any employee of a 
business trading unit of an affiliated swap dealer or major swap 
participant may participate in the activities of the futures commission 
merchant as necessary for (A) participating in default management 
undertaken by a derivatives clearing organization during an event of 
default; and (B) transferring, liquidating, or hedging any proprietary 
or customer positions during an event of default;
    (ii) No employee of a business trading unit of an affiliated swap 
dealer or major swap participant shall supervise, control, or influence 
any employee of a clearing unit of the futures commission merchant; and
    (iii) No employee of the business trading unit of an affiliated swap 
dealer or major swap participant shall influence or control compensation 
or evaluation of any employee of the clearing unit of the futures 
commission merchant.
    (e) Undue influence on customers. Each futures commission merchant 
and introducing broker must adopt and implement written policies and 
procedures that mandate the disclosure to its customers of any material 
incentives and any material conflicts of interest regarding the decision 
of a customer as to the trade execution and/or clearing of the 
derivatives transaction.
    (f) Records. All records that a futures commission merchant or 
introducing broker is required to maintain pursuant to this regulation 
shall be maintained in accordance with Commission Regulation Sec.  1.31 
and shall be made

[[Page 178]]

available promptly upon request to representatives of the Commission.

[77 FR 20198, Apr. 3, 2012]



Sec.  1.72  Restrictions on customer clearing arrangements.

    No futures commission merchant providing clearing services to 
customers shall enter into an arrangement that:
    (a) Discloses to the futures commission merchant or any swap dealer 
or major swap participant the identity of a customer's original 
executing counterparty;
    (b) Limits the number of counterparties with whom a customer may 
enter into a trade;
    (c) Restricts the size of the position a customer may take with any 
individual counterparty, apart from an overall limit for all positions 
held by the customer at the futures commission merchant;
    (d) Impairs a customer's access to execution of a trade on terms 
that have a reasonable relationship to the best terms available; or
    (e) Prevents compliance with the timeframes set forth in Sec.  
1.74(b), Sec.  23.610(b), or Sec.  39.12(b)(7) of this chapter.

[77 FR 21306, Apr. 9, 2012]



Sec.  1.73  Clearing futures commission merchant risk management.

    (a) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish risk-based limits in the proprietary account and in 
each customer account based on position size, order size, margin 
requirements, or similar factors;
    (2) Screen orders for compliance with the risk-based limits in 
accordance with the following:
    (i) When a clearing futures commission merchant provides electronic 
market access or accepts orders for automated execution, it shall use 
automated means to screen orders for compliance with the limits;
    (ii) When a clearing futures commission merchant accepts orders for 
non-automated execution, it shall establish and maintain systems of risk 
controls reasonably designed to ensure compliance with the limits;
    (iii) When a clearing futures commission merchant accepts 
transactions that were executed bilaterally and then submitted for 
clearing, it shall establish and maintain systems of risk management 
controls reasonably designed to ensure compliance with the limits;
    (iv) When a firm executes an order on behalf of a customer but gives 
it up to another firm for clearing,
    (A) The clearing futures commission merchant shall establish risk-
based limits for the customer, and enter into an agreement in advance 
with the executing firm that requires the executing firm to screen 
orders for compliance with those limits in accordance with paragraph 
(a)(2)(i) or (ii) as applicable; and
    (B) The clearing futures commission merchant shall establish and 
maintain systems of risk management controls reasonably designed to 
ensure compliance with the limits.
    (v) When an account manager bunches orders on behalf of multiple 
customers for execution as a block and post-trade allocation to 
individual accounts for clearing:
    (A) The futures commission merchant that initially clears the block 
shall establish risk-based limits for the block account and screen the 
order in accordance with paragraph (a)(2)(i) or (ii) as applicable;
    (B) The futures commission merchants that clear the allocated trades 
on behalf of customers shall establish risk-based limits for each 
customer and enter into an agreement in advance with the account manager 
that requires the account manager to screen orders for compliance with 
those limits; and
    (C) The futures commission merchants that clear the allocated trades 
on behalf of customers shall establish and maintain systems of risk 
management controls reasonably designed to ensure compliance with the 
limits.
    (3) Monitor for adherence to the risk-based limits intra-day and 
overnight;
    (4) Conduct stress tests under extreme but plausible conditions of 
all positions in the proprietary account and in each customer account 
that could pose material risk to the futures

[[Page 179]]

commission merchant at least once per week;
    (5) Evaluate its ability to meet initial margin requirements at 
least once per week;
    (6) Evaluate its ability to meet variation margin requirements in 
cash at least once per week;
    (7) Evaluate its ability to liquidate, in an orderly manner, the 
positions in the proprietary and customer accounts and estimate the cost 
of the liquidation at least once per quarter; and
    (8) Test all lines of credit at least once per year.
    (b) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall:
    (1) Establish written procedures to comply with this regulation; and
    (2) Keep full, complete, and systematic records documenting its 
compliance with this regulation.
    (3) All records required to be maintained pursuant to these 
regulations shall be maintained in accordance with Commission Regulation 
1.31 (17 CFR 1.31) and shall be made available promptly upon request to 
representatives of the Commission and to representatives of applicable 
prudential regulators.

[77 FR 21306, Apr. 9, 2012]



Sec.  1.74  Futures commission merchant acceptance for clearing.

    (a) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall coordinate with each derivatives 
clearing organization on which it clears to establish systems that 
enable the futures commission merchant, or the derivatives clearing 
organization acting on its behalf, to accept or reject each trade 
submitted to the derivatives clearing organization for clearing by or 
for the futures commission merchant or a customer of the futures 
commission merchant as quickly as would be technologically practicable 
if fully automated systems were used; and
    (b) Each futures commission merchant that is a clearing member of a 
derivatives clearing organization shall accept or reject each trade 
submitted by or for it or its customers as quickly as would be 
technologically practicable if fully automated systems were used; a 
clearing futures commission merchant may meet this requirement by:
    (1) Establishing systems to pre-screen orders for compliance with 
criteria specified by the clearing futures commission merchant;
    (2) Establishing systems that authorize a derivatives clearing 
organization to accept or reject on its behalf trades that meet, or fail 
to meet, criteria specified by the clearing futures commission merchant; 
or
    (3) Establishing systems that enable the clearing futures commission 
merchant to communicate to the derivatives clearing organization 
acceptance or rejection of each trade as quickly as would be 
technologically practicable if fully automated systems were used.

[77 FR 21307, Apr. 9, 2012]



Sec.  1.75  Delegation of authority to the Director of the Division of 
Clearing and Risk to establish an alternative compliance schedule to 
comply with futures commission merchant acceptance for clearing.

    (a) The Commission hereby delegates to the Director of the Division 
of Clearing and Risk or such other employee or employees as the Director 
may designate from time to time, the authority to establish an 
alternative compliance schedule for requirements of Sec.  1.74 for swaps 
that are found to be technologically or economically impracticable for 
an affected futures commission merchant that seeks, in good faith, to 
comply with the requirements of Sec.  1.74 within a reasonable time 
period beyond the date on which compliance by such futures commission 
merchant is otherwise required.
    (b) A request for an alternative compliance schedule under this 
section shall be acted upon by the Director of the Division of Clearing 
and Risk within 30 days from the time such a request is received, or it 
shall be deemed approved.
    (c) An exception granted under this section shall not cause a 
registrant to be out of compliance or deemed in violation of any 
registration requirements.
    (d) Notwithstanding any other provision of this section, in any case 
in

[[Page 180]]

which a Commission employee delegated authority under this section 
believes it appropriate, he or she may submit to the Commission for its 
consideration the question of whether an alternative compliance schedule 
should be established. Nothing in this section shall be deemed to 
prohibit the Commission, at its election, from exercising the authority 
delegated in this section.

[77 FR 21307, Apr. 9, 2012]



                  Sec. Appendix A to Part 1 [Reserved]



  Sec. 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 charged to exchanges based upon a 
formula that 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; 77 FR 66332, Nov. 2, 
2012]



                  Sec. Appendix C to Part 1 [Reserved]



PART 2_OFFICIAL SEAL--Table of Contents



Sec.
2.1 Description.
2.2 Authority to affix seal.
2.3 Prohibitions against misuse of seal.
2.4 Employee Recreation Association's use of Commission seal.

    Authority: 7 U.S.C. 2a(11).



Sec.  2.1  Description.

    Pursuant to section 2(a)(10) of the Commodity Exchange Act, as 
amended, 7 U.S.C. 4(i), the Commodity Futures Trading Commission has 
adopted an official seal (the ``Seal''), the description of which is as 
follows:
    (a) An American bald eagle in black and white holding the scales of 
balanced interests over a black and white wheel of commerce and a 
farmer's plow, also in black and white. These symbols are enclosed with 
an inner red octagon and a blue outer octagon representing traditional 
futures contract trading pits. Around the outside of the octagons are 
the words ``Commodity Futures Trading Commission'' separated by two 
stars from the year ``1975,'' the first year of the Commission's 
existence.
    (b) The Seal of the Commodity Futures Trading Commission is 
illustrated as follows:

[GRAPHIC(S) NOT AVAILABLE IF TIFF FORMAT]



Sec.  2.2  Authority to affix seal.

    (a) The following officials of the Commodity Futures Trading 
Commission are authorized to affix the Seal to appropriate documents and 
other materials of the Commission for all purposes including those 
authorized by 28 U.S.C. 1733(b) (relating to authenticated copies of 
agency documents used as evidence): The Chairman and all Commissioners, 
the General Counsel, the Executive Director, the Directors of Divisions, 
and the Secretariat.
    (b) The officials named in paragraph (a) of this section, may 
redelegate, and authorize redelegation of this authority, except that 
the Secretary may redelegate this authority only to the Deputy 
Secretary.

[41 FR 9552, Mar. 5, 1976, as amended at 51 FR 37177, Oct. 20, 1986]

[[Page 181]]



Sec.  2.3  Prohibitions against misuse of seal.

    (a) Fraudulently or wrongfully affixing or impressing the Seal to or 
upon any certificate, instrument, document or paper or with knowledge of 
its fraudulent character, or with wrongful or fraudulent intent, using, 
buying, procuring, selling or transferring to another any such paper is 
punishable under section 1017 of title 18, U.S. Code.
    (b) Falsely making, forging, counterfeiting, mutilating, or altering 
the Seal, or knowingly using a fraudulent or altered Seal or possessing 
any such Seal knowingly is punishable under section 506 of title 18, 
U.S. Code.



Sec.  2.4  Employee Recreation Association's use of Commission seal.

    (a) As a specific exception to the provisions of 17 CFR 2.2 and 2.3, 
the Commodity Futures Trading Commission Employee Recreation Association 
(``Association'') is hereby authorized to use the Commission seal as an 
imprint upon sport apparel (e.g., hats, clothing, accessories, etc.) and 
novelty items (e.g., office mugs, lanyards, badge holders, stationary 
items, among other);
    (b) The Association may sell or distribute above said items 
imprinted with the Commission seal to members of the Association or 
others to meet its fundraising goals and/or in conjunction with its 
sports, social or similar events.

[72 FR 29247, May 25, 2007]



PART 3_REGISTRATION--Table of Contents



                         Subpart A_Registration

Sec.
3.1 Definitions.
3.2 Registration processing by the National Futures Association; 
          notification and duration of registration.
3.3 Chief compliance officer.
3.4 Registration in one capacity not included in registration in any 
          other capacity.
3.5-3.9 [Reserved]
3.10 Registration of futures commission merchants, retail foreign 
          exchange dealers, introducing brokers, commodity trading 
          advisors, commodity pool operators, swap dealers, major swap 
          participants and leverage transaction merchants.
3.11 Registration of floor brokers and floor traders.
3.12 Registration of associated persons of futures commission merchants, 
          retail foreign exchange dealers, introducing brokers, 
          commodity trading advisors, commodity pool operators and 
          leverage transaction merchants.
3.13-3.20 [Reserved]
3.21 Exemption from fingerprinting requirement in certain cases.
3.22 Supplemental filings.
3.23-3.29 [Reserved]
3.30 Current address for purpose of delivery of communications from the 
          Commission or the National Futures Association.
3.31 Deficiencies, inaccuracies, and changes, to be reported.
3.33 Withdrawal from registration.

                      Subpart B_Temporary Licenses

3.40 Temporary licensing of applicants for associated person, floor 
          broker or floor trader registration.
3.42 Termination.
3.43 Relationship to registration.
3.44 Temporary licensing of applicants for guaranteed introducing broker 
          registration.
3.45 Restrictions upon activities.
3.46 Termination.
3.47 Relationship to registration.

       Subpart C_Denial, Suspension or Revocation of Registration

3.50 Service.
3.51 Withdrawal of application for registration.
3.52-3.54 [Reserved]
3.55 Suspension and revocation of registration pursuant to section 8a(2) 
          of the Act.
3.56 Suspension or modification of registration pursuant to section 
          8a(11) of the Act.
3.57 Proceedings under section 8a(2)(E) of the Act.
3.60 Procedure to deny, condition, suspend, revoke or place restrictions 
          upon registration pursuant to sections 8a(2), 8a(3) and 8a(4) 
          of the Act.
3.61 Extensions of time for proceedings brought under Sec.  3.55, Sec.  
          3.56 and Sec.  3.60 of this part.
3.62 [Reserved]
3.63 Service of order issued by an Administrative Law Judge or the 
          Commission.
3.64 Procedure to lift or modify conditions or restrictions.

             Subpart D_Notice Under Section 4k(5) of the Act

3.70 Notification of certain information regarding associated persons.

[[Page 182]]

            Subpart E_Delegation and Reservation of Authority

3.75 Delegation and reservation of authority.

Appendix A to Part 3--Interpretive Statement with Respect to Section 
          8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity 
          Exchange Act
Appendix B to Part 3--Statement of Acceptable Practices With Respect to 
          Ethics Training

    Authority: 5 U.S.C. 552, 552b; 7 U.S.C. 1a, 2, 6a, 6b, 6b-1, 6c, 6d, 
6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 6s, 8, 9, 9a, 12, 12a, 13b, 13c, 
16a, 18, 19, 21, and 23, as amended by Title VII of Pub. L. 111-203, 124 
Stat. 1376.

    Source: 45 FR 80491, Dec. 5, 1980, unless otherwise noted.



                         Subpart A_Registration



Sec.  3.1  Definitions.

    (a) Principal. Principal means, with respect to an entity that is an 
applicant for registration, a registrant or a person required to be 
registered under the Act or the regulations in this part:
    (1) If the entity is organized as a sole proprietorship, the 
proprietor and chief compliance officer; if a partnership, any general 
partner and chief compliance officer; if a corporation, any director, 
the president, chief executive officer, chief operating officer, chief 
financial officer, chief compliance officer, and any person in charge of 
a principal business unit, division or function subject to regulation by 
the Commission; if a limited liability company or limited liability 
partnership, any director, the president, chief executive officer, chief 
operating officer, chief financial officer, chief compliance officer, 
the manager, managing member or those members vested with the management 
authority for the entity, and any person in charge of a principal 
business unit, division or function subject to regulation by the 
Commission; and, in addition, any person occupying a similar status or 
performing similar functions, having the power, directly or indirectly, 
through agreement or otherwise, to exercise a controlling influence over 
the entity's activities that are subject to regulation by the 
Commission;
    (2)(i) Any individual who directly or indirectly, through agreement, 
holding company, nominee, trust or otherwise, is either the owner of ten 
percent or more of the outstanding shares of any class of equity 
securities, other than non-voting securities, is entitled to vote or has 
the power to sell or direct the sale of ten percent or more of the 
outstanding shares of any class of equity securities, other than non-
voting securities, is entitled to receive ten percent or more of the 
profits of the entity, or has the power to exercise a controlling 
influence over the entity's activities that are subject to regulation by 
the Commission; or
    (ii) Any person other than an individual that is the direct owner of 
ten percent or more of the outstanding shares of any class of equity 
securities, other than non-voting securities; or
    (3) Any person that has contributed ten percent or more of the 
capital of the entity, provided, however, that if such capital 
contribution consists of subordinated debt contributed by either:
    (i) An unaffiliated bank insured by the Federal Deposit Insurance 
Corporation,
    (ii) An unaffiliated ``foreign bank,'' as defined in 12 CFR 
211.21(n) that currently operates an ``office of a foreign bank,'' as 
defined in 12 CFR 211.21(t), which is licensed under 12 CFR 211.24(a),
    (iii) Such unaffiliated office of a foreign bank that is licensed, 
or
    (iv) An insurance company subject to regulation by any State, such 
bank, foreign bank, office of a foreign bank, or insurance company will 
not be deemed to be a principal for purposes of this section, provided 
such debt is not guaranteed by another party not listed as a principal.
    (4) Any individual who, directly or indirectly, creates or uses a 
trust, proxy, power of attorney, pooling arrangement or any other 
contract, arrangement, or device with the purpose or effect of divesting 
such person of direct or indirect ownership of an equity security of the 
entity, other than a non-voting security, or preventing the vesting of 
such ownership, or of avoiding making a contribution of ten percent or 
more of the capital of the entity, as part of a plan or scheme to evade 
being deemed a principal of the entity,

[[Page 183]]

shall be deemed to be a principal of the entity.
    (b) Current. As used in this subpart, a Form 8-R is current if, 
subsequent to the filing of that form and continuously thereafter, the 
registrant or principal has been either registered or affiliated with a 
registrant as a principal.
    (c) Sponsor. Sponsor means the futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator or leverage transaction merchant which makes the 
certification required by Sec.  3.12 of this part for the registration 
of an associated person of such sponsor.
    (d)-(e) [Reserved]
    (f) Section 4s Implementing Regulation. Section 4s Implementing 
Regulation means a regulation the Commission issues pursuant to section 
4s(e), 4s(f), 4s(g), 4s(h), 4s(i), 4s(j), 4s(k) or 4s(l) of the Act.
    (g) Swap Definitional Regulation. Swap Definitional Regulation means 
a regulation the Commission issues to further define the term ``swap 
dealer,'' ``major swap participant'' or ``swap'' in section 1a(49), 
1a(33) or 1a(47) of the Act, respectively, pursuant to the Dodd-Frank 
Wall Street Reform and Consumer Protection Act.
    (h) Swaps activities. Swaps activities means, with respect to a 
registrant, such registrant's activities related to swaps and any 
product used to hedge such swaps, including, but not limited to, 
futures, options, other swaps or security-based swaps, debt or equity 
securities, foreign currency, physical commodities, and other 
derivatives.
    (i) Board of directors. Board of directors means the board of 
directors, board of governors, or equivalent governing body of a 
registrant.

[49 FR 5521, Feb. 13, 1984, and 49 FR 8217, Mar. 5, 1984, as amended at 
49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2, 1992; 66 FR 53518, Oct. 
23, 2001; 72 FR 63979, Nov. 14, 2007; 75 FR 55424, Sept. 10, 2010; 77 FR 
2626, Jan. 19, 2012; 77 FR 3590, Jan. 25, 2012; 77 FR 20200, Apr. 3, 
2012; 77 FR 51903, Aug. 28, 2012]



Sec.  3.2  Registration processing by the National Futures Association;
notification and duration of registration.

    (a) Except as otherwise provided in any rule, regulation or order of 
the Commission, the registration functions of the Commission set forth 
in subpart A, subpart B and subpart C of this part shall be performed by 
the National Futures Association, in accordance with such rules, 
consistent with the provisions of the Act and this part, applicable to 
registrations granted under the Act that the National Futures 
Association may adopt and are approved by the Commission pursuant to 
section 17(j) of the Act.
    (b) Notwithstanding any other provision of this part, the original 
of any registration form, any schedule or supplement thereto, any 
fingerprint card or other document required by this part to be filed 
with both the Commission and the National Futures Association, may be 
filed with either the Commission or the National Futures Association if:
    (1) A legible, accurate, and complete photocopy of that form, 
schedule, supplement, fingerprint card, or other document is filed 
simultaneously with the National Futures Association or the Commission, 
respectively, and
    (2) Such photocopy contains an original signature and date in each 
place where such signature and date is required on the original form, 
schedule, supplement, fingerprint card, or other document.
    (c) The National Futures Association shall notify the registrant, or 
the sponsor in the case of an applicant for registration as an 
associated person, and each designated contract market and swap 
execution facility that has granted the applicant trading privileges in 
the case of an applicant for registration as a floor broker or floor 
trader, if registration has been granted under the Act.
    (1) If an applicant for registration as an associated person 
receives a temporary license in accordance with Sec.  3.40, the National 
Futures Association shall notify the sponsor that only a temporary 
license has been granted.
    (2) If an applicant for registration as a floor broker or floor 
trader receives a

[[Page 184]]

temporary license in accordance with Sec.  3.40, the National Futures 
Association shall notify the designated contract market or swap 
execution facility that has granted the applicant trading privileges 
that only a temporary license has been granted.
    (3)(i) If an applicant for registration as a swap dealer or major 
swap participant pursuant to Sec.  3.10(a)(1)(v) files a Form 7-R and a 
Form 8-R and fingerprint card for each natural person who is a principal 
of the applicant, accompanied by such documentation as may be required 
to demonstrate compliance with each of the Section 4s Implementing 
Regulations, as defined in Sec.  3.1(f), as are applicable to it, in 
accordance with the terms of the Section 4s Implementing Regulations, 
the National Futures Association shall notify the swap dealer or major 
swap participant, as the case may be, that it is provisionally 
registered.
    (ii) Subsequent to providing notice of provisional registration to 
an applicant for registration as a swap dealer or major swap 
participant, the National Futures Association shall determine whether 
the documentation submitted pursuant to Sec.  3.10(a)(1)(v) by the 
applicant demonstrates compliance with the Section 4s Implementing 
Regulation to which it pertains; Provided, that where the National 
Futures Association has notified the applicant that it is provisionally 
registered, the applicant must supplement its registration application 
by providing such documentation as may be required to demonstrate 
compliance with each Section 4s Implementing Regulation that the 
Commission issues subsequent to the date the National Futures 
Association notifies the applicant that it is provisionally registered.
    (iii) On and after the date on which the National Futures 
Association confirms that the applicant for registration as a swap 
dealer or major swap participant has demonstrated its initial compliance 
with the applicable requirements of each of the Section 4s Implementing 
Regulations and all other applicable registration requirements under the 
Act and Commission regulations, the provisional registration of the 
applicant shall cease and it shall be registered as a swap dealer or 
major swap participant, as the case may be.
    (d) Any registration form, any schedule or supplement thereto, any 
fingerprint card or other document required by this part or any rule of 
the National Futures Assocation to be filed with the National Futures 
Association shall be deemed for all purposes to have been filed with, 
and to be the official record of, the Commission.

[49 FR 39530, Oct. 9, 1984, as amended at 53 FR 8431, Mar. 15, 1988; 54 
FR 19558, May 8, 1989; 67 FR 38874, June 6, 2002; 77 FR 2626, Jan. 19, 
,2012; 77 FR 51904, Aug. 28, 2012]



Sec.  3.3  Chief compliance officer.

    (a) Designation. Each futures commission merchant, swap dealer, and 
major swap participant shall designate an individual to serve as its 
chief compliance officer, and provide the chief compliance officer with 
the responsibility and authority to develop, in consultation with the 
board of directors or the senior officer, appropriate policies and 
procedures to fulfill the duties set forth in the Act and Commission 
regulations relating to the swap dealer's or major swap participant's 
swaps activities, or to the futures commission merchant's business as a 
futures commission merchant and to ensure compliance with the Act and 
Commission regulations relating to the swap dealer's or major swap 
participant's swaps activities, or to the futures commission merchant's 
business as a futures commission merchant.
    (1) The chief compliance officer shall report to the board of 
directors or the senior officer of the futures commission merchant, swap 
dealer, or major swap participant. The board of directors or the senior 
officer shall appoint the chief compliance officer, shall approve the 
compensation of the chief compliance officer, and shall meet with the 
chief compliance officer at least once a year and at the election of the 
chief compliance officer.
    (2) Only the board of directors or the senior officer of the futures 
commission merchant, swap dealer, or major swap participant may remove 
the chief compliance officer.
    (b) Qualifications. The individual designated to serve as chief 
compliance officer shall have the background and

[[Page 185]]

skills appropriate for fulfilling the responsibilities of the position. 
No individual disqualified, or subject to disqualification, from 
registration under section 8a(2) or 8a(3) of the Act may serve as a 
chief compliance officer.
    (c) Submission with registration. Each application for registration 
as a futures commission merchant under Sec.  3.10, a swap dealer under 
Sec.  23.21, or a major swap participant under Sec.  23.21, must include 
a designation of a chief compliance officer by submitting a Form 8-R for 
the chief compliance officer as a principal of the applicant pursuant to 
Sec.  3.10(a)(2).
    (d) Chief compliance officer duties. The chief compliance officer's 
duties shall include, but are not limited to:
    (1) Administering the registrant's policies and procedures 
reasonably designed to ensure compliance with the Act and Commission 
regulations;
    (2) In consultation with the board of directors or the senior 
officer, resolving any conflicts of interest that may arise;
    (3) Taking reasonable steps to ensure compliance with the Act and 
Commission regulations relating to the swap dealer's or major swap 
participant's swaps activities, or to the futures commission merchant's 
business as a futures commission merchant;
    (4) Establishing procedures, in consultation with the board of 
directors or the senior officer, for the remediation of noncompliance 
issues identified by the chief compliance officer through a compliance 
office review, look-back, internal or external audit finding, self-
reported error, or validated complaint;
    (5) Establishing procedures, in consultation with the board of 
directors or the senior officer, for the handling, management response, 
remediation, retesting, and closing of noncompliance issues; and
    (6) Preparing and signing the annual report required under 
paragraphs (e) and (f) of this section.
    (e) Annual report. The chief compliance officer annually shall 
prepare a written report that covers the most recently completed fiscal 
year of the futures commission merchant, swap dealer, or major swap 
participant, and provide the annual report to the board of directors or 
the senior officer. The annual report shall, at a minimum:
    (1) Contain a description of the written policies and procedures, 
including the code of ethics and conflicts of interest policies, of the 
futures commission merchant, swap dealer, or major swap participant;
    (2) Review each applicable requirement under the Act and Commission 
regulations, and with respect to each:
    (i) Identify the policies and procedures that are reasonably 
designed to ensure compliance with the requirement under the Act and 
Commission regulations;
    (ii) Provide an assessment as to the effectiveness of these policies 
and procedures; and
    (iii) Discuss areas for improvement, and recommend potential or 
prospective changes or improvements to its compliance program and 
resources devoted to compliance;
    (3) List any material changes to compliance policies and procedures 
during the coverage period for the report;
    (4) Describe the financial, managerial, operational, and staffing 
resources set aside for compliance with respect to the Act and 
Commission regulations, including any material deficiencies in such 
resources; and
    (5) Describe any material non-compliance issues identified, and the 
corresponding action taken.
    (f) Furnishing the annual report to the Commission. (1) Prior to 
furnishing the annual report to the Commission, the chief compliance 
officer shall provide the annual report to the board of directors or the 
senior officer of the futures commission merchant, swap dealer, or major 
swap participant for its review. Furnishing the annual report to the 
board of directors or the senior officer shall be recorded in the board 
minutes or otherwise, as evidence of compliance with this requirement.
    (2)(i) Except as provided in paragraph (f)(2)(ii) of this section, 
the annual report shall be furnished electronically to the Commission 
not more than 90 days after the end of the fiscal year of the futures 
commission merchant, swap dealer, or major swap participant.
    (ii) The annual report of a swap dealer or major swap participant 
that is eligible to comply with a substituted

[[Page 186]]

compliance regime for paragraph (e) of this section pursuant to a 
comparability determination of the Commission may be furnished to the 
Commission electronically up to 15 days after the date on which the 
comparable annual report must be completed under the requirements of the 
applicable substituted compliance regime. If the substituted compliance 
regime does not specify a date by which the comparable annual report 
must be completed, then the annual report shall be furnished to the 
Commission by the date specified in paragraph (f)(2)(i) of this section.
    (3) The report shall include a certification by the chief compliance 
officer or chief executive officer of the registrant that, to the best 
of his or her knowledge and reasonable belief, and under penalty of law, 
the information contained in the annual report is accurate and complete.
    (4) The futures commission merchant, swap dealer, or major swap 
participant shall promptly furnish an amended annual report if material 
errors or omissions in the report are identified. An amendment must 
contain the certification required under paragraph (f)(3) of this 
section.
    (5) A futures commission merchant, swap dealer, or major swap 
participant may request from the Commission an extension of time to 
furnish its annual report, provided the registrant's failure to timely 
furnish the report could not be eliminated by the registrant without 
unreasonable effort or expense. Extensions of the deadline will be 
granted at the discretion of the Commission.
    (6) A futures commission merchant, swap dealer, or major swap 
participant may incorporate by reference sections of an annual report 
that has been furnished within the current or immediately preceding 
reporting period to the Commission. If the futures commission merchant, 
swap dealer, or major swap participant is registered in more than one 
capacity with the Commission, and must submit more than one annual 
report, an annual report submitted as one registrant may incorporate by 
reference sections in the annual report furnished within the current or 
immediately preceding reporting period as the other registrant.
    (g) Recordkeeping. (1) The futures commission merchant, swap dealer, 
or major swap participant shall maintain:
    (i) A copy of the registrant's policies and procedures reasonably 
designed to ensure compliance with the Act and Commission regulations;
    (ii) Copies of materials, including written reports provided to the 
board of directors or the senior officer in connection with the review 
of the annual report under paragraph (e) of this section; and
    (iii) Any records relevant to the annual report, including, but not 
limited to, work papers and other documents that form the basis of the 
report, and memoranda, correspondence, other documents, and records that 
are created, sent or received in connection with the annual report and 
contain conclusions, opinions, analyses, or financial data related to 
the annual report.
    (2) All records or reports that a futures commission merchant, swap 
dealer, or major swap participant are required to maintain pursuant to 
this section shall be maintained in accordance with Sec.  1.31 and shall 
be made available promptly upon request to representatives of the 
Commission and to representatives of the applicable prudential 
regulator, as defined in 1a(39) of the Act.
    (h) Delegation of authority. The Commission hereby delegates to the 
Director of the Division of Swap Dealer and Intermediary Oversight, or 
such other employee or employees as the Director may designate from time 
to time, the authority to grant extensions of time, as set forth in 
paragraph (f)(5) of this section. Notwithstanding such delegation, in 
any case in which a Commission employee delegated authority under this 
paragraph believes it appropriate, he or she may submit to the 
Commission for its consideration the question of whether an extension of 
time should be granted. The delegation of authority in this paragraph 
shall not prohibit the Commission, at its election, from exercising the 
authority set forth in paragraph (f)(5) of this section.

[77 FR 20200, Apr. 3, 2012, as amended at 78 FR 68645, Nov. 14, 2013; 81 
FR 80566, Nov. 16, 2016]

[[Page 187]]



Sec.  3.4  Registration in one capacity not included in registration 
in any other capacity.

    (a) Except as may be otherwise provided in the Act or in any rule, 
regulation, or order of the Commission, each futures commission 
merchant, retail foreign exchange dealer, swap dealer, major swap 
participant, floor broker, floor trader of any commodity for future 
delivery, commodity trading advisor, commodity pool operator, 
introducing broker, leverage transaction merchant, and associated person 
(other than an associated person of a swap dealer or major swap 
participant) must register as such under the Act. Except as may be 
otherwise provided in the Act or in any rule, regulation, or order of 
the Commission, registration in one capacity under the Act shall not 
include registration in any other capacity.
    (b) Except as may be provided in any rule, regulation or order of 
the Commission, registration as an associated person in one capacity 
shall not include registration as an associated person in any other 
capacity: Provided, however, That an associated person who is sponsored 
by a registrant, which itself is registered in more than one capacity, 
need register only once to act as an associated person of the 
registrant, and shall be deemed to be an associated person of such 
registrant, in each such capacity.

[49 FR 39530, Oct. 9, 1984, as amended at 58 FR 19590, Apr. 15, 1993; 75 
FR 55424, Sept. 10, 2010; 77 FR 2626, Jan. 19, 2012; 77 FR 51904, Aug. 
28, 2012]



Sec. Sec.  3.5-3.9  [Reserved]



Sec.  3.10  Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading 
advisors, commodity pool operators, swap dealers, major swap
participants and leverage transaction merchants.

    (a) Application for registration. (1)(i) Except as provided in 
paragraph (a)(3) of this section, application for registration as a 
futures commission merchant, retail foreign exchange dealer, swap 
dealer, major swap participant, introducing broker, commodity pool 
operator, commodity trading advisor, or leverage transaction merchant 
must be on Form 7-R, completed and filed with the National Futures 
Association in accordance with the instructions thereto.
    (ii) Applicants for registration as a futures commission merchant, 
retail foreign exchange dealer or introducing broker must accompany 
their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in 
accordance with the provisions of Sec.  1.10 of this chapter: Provided, 
however, That an applicant for registration as a futures commission 
merchant or introducing broker which is registered with the Securities 
and Exchange Commission as a securities broker or dealer may accompany 
its Form 7-R with a copy of its Financial and Operational Combined 
Uniform Single Report under the Securities Exchange Act of 1934, Part II 
or Part II A, in accordance with the provisions of Sec.  1.10(h) of this 
chapter.
    (iii) Applicants for registration as a commodity pool operator must 
accompany their Form 7-R with the financial statements described in 
Sec.  4.13(c) of this chapter.
    (iv) Applicants for registration as a leverage transaction merchant 
must accompany their Form 7-R with a Form 2-FR in accordance with the 
provisions of Sec.  31.13 of this chapter.
    (v)(A) Applicants for registration as a swap dealer or major swap 
participant must accompany their Form 7-R with such documentation as may 
be required to demonstrate compliance with each Section 4s Implementing 
Regulation, as defined in Sec.  3.1(f), applicable to them, in 
accordance with the terms of the Section 4s Implementing Regulation; 
Provided, however, that for the purposes of this paragraph (a)(1)(v) the 
term ``compliance'' includes the term ``the ability to comply,'' to the 
extent that a particular Section 4s Implementing Regulation may require 
demonstration of the ability to comply with a requirement thereunder.
    (B) The filing of the Form 7-R and accompanying documentation by the 
applicant swap dealer or major swap participant authorizes the 
Commission to conduct on-site inspection of the applicant to determine 
compliance with the Section 4s Implementing Regulations applicable to 
it.

[[Page 188]]

    (C)(1) At any time prior to the latest effective date of the Swap 
Definitional Regulations, defined in Sec.  3.1(g), any person may apply 
to be registered as a swap dealer or major swap participant.
    (2) By no later than the latest effective date of the Swap 
Definitional Regulations, each person who is a swap dealer or major swap 
participant on that date must apply to be registered as a swap dealer or 
major swap participant, as the case may be.
    (3) From and after the latest effective date of the Swap 
Definitional Regulations, each person who intends to engage in business 
as a swap dealer or major swap participant must apply to be registered 
as a swap dealer or major swap participant, as the case may be.
    (D)(1) Where an applicant for registration as a swap dealer or major 
swap participant to whom the National Futures Association has provided 
notice of provisional registration under Sec.  3.2(c)(3) fails to 
demonstrate compliance with a Section 4s Implementing Regulation, the 
National Futures Association will notify the applicant that its 
application is deficient, whereupon the applicant must withdraw its 
registration application, it must not engage in any new activity as a 
swap dealer or major swap participant, as the case may be, and the 
applicant shall cease to be provisionally registered; Provided, that in 
the event the applicant fails to withdraw its registration application 
or cure the deficiency within 90 days following receipt of notice from 
the National Futures Association that its application is deficient, the 
application will be deemed withdrawn and thereupon its provisional 
registration shall cease; Provided further, that upon written request by 
the applicant submitted to the Commission, the Commission may in its 
discretion extend the time by which the applicant must cure the 
deficiency.
    (2) The provisions of the foregoing paragraph (a)(1)(v)(D)(1) of 
this section shall supplement and be in addition to any other activities 
in which the National Futures Association engages under the Act and 
Commission regulations in connection with processing an application for 
registration as a swap dealer or major swap participant.
    (E) Unless specifically reserved in the applicable swap 
documentation, no withdrawal, deemed withdrawal, cessation or revocation 
of registration as a swap dealer or major swap participant pursuant to 
paragraph (a)(1)(v), (b), or (d) of this section shall constitute a 
termination event, force majeure, an illegality, increased costs, a 
regulatory change, or a similar event under a swap (including any 
related credit support arrangement) that would permit a party to 
terminate, renegotiate, modify, amend or supplement one or more 
transactions under the swap.
    (2) Each Form 7-R filed in accordance with the requirements of 
paragraph (a)(1)(i) of this section must be accompanied by a Form 8-R, 
completed in accordance with the instructions thereto and executed by 
each natural person who is a principal of the applicant, and must be 
accompanied by the fingerprints of that principal on a fingerprint card 
provided by the National Futures Association for that purpose: Provided, 
however, that if such principal is a director who qualifies for the 
exemption from the fingerprint requirement pursuant to Sec.  3.21(c) or 
has a current Form 8-R on file with the Commission or the National 
Futures Association, the fingerprints of that principal do not need to 
accompany the Form 7-R.
    (3) Notice registration as a futures commission merchant or 
introducing broker for certain securities brokers or dealers. (i) Any 
broker or dealer that is registered with the Securities and Exchange 
Commission may be registered as a futures commission merchant or 
introducing broker, as applicable, by following such procedures for 
notice registration as may be specified by the National Futures 
Association, if--
    (A) The broker or dealer limits its solicitation of orders, 
acceptance of orders, or execution of orders, or placing of orders on 
behalf of others involving any contracts of sale of any commodity for 
future delivery, on or subject to the rules of any contract market, to 
security futures products as defined in section 1a(44) of the Act;
    (B) The registration of the broker or dealer is not suspended 
pursuant to an order of the Securities and Exchange Commission; and

[[Page 189]]

    (C) The broker or dealer is a member of a national securities 
association registered pursuant to section 15A(a) of the Securities 
Exchange Act of 1934.
    (ii) The registration will be effective upon the filing of the 
notice prescribed by the National Futures Association in accordance with 
the instructions thereto.
    (b) Duration of registration. (1) A person registered as a futures 
commission merchant, retail foreign exchange dealer, swap dealer, major 
swap participant, introducing broker, commodity pool operator, commodity 
trading advisor, or leverage transaction merchant in accordance with 
paragraph (a) of this section will continue to be so registered until 
the effective date of any revocation or withdrawal of such registration. 
Upon effectiveness of any revocation or withdrawal of registration, such 
person will immediately be prohibited from engaging in new 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 registration.
    (2) A person registered as an introducing broker who was a party to 
a guarantee agreement with a futures commission merchant in accordance 
with Sec.  1.10(j) of this chapter will have its registration cease 
thirty days after the termination of such guarantee agreement unless the 
procedures set forth in Sec.  1.10(j)(8) of this chapter are followed.
    (c) Exemption from registration for certain persons. (1) A person 
trading solely for proprietary accounts, as defined in Sec.  1.3(y) of 
this chapter, is not required to register as a futures commission 
merchant: Provided, that such person remains subject to all other 
provisions of the Act and of the rules, regulations and orders 
thereunder.
    (2)(i) A foreign broker, as defined in Sec.  1.3(xx) of this 
chapter, is not required to register as a futures commission merchant if 
it submits any commodity interest transactions executed bilaterally, on 
or subject to the rules of a designated contract market, or on or 
subject to the rules of a swap execution facility, for clearing on an 
omnibus basis through a futures commission merchant registered in 
accordance with section 4d of the Act.
    (ii) A foreign broker acting in accordance with paragraph (c)(2)(i) 
of this section is not required to comply with those provisions of the 
Act and of the rules, regulations and orders thereunder applicable 
solely to any registered futures commission merchant or any person 
required to be so registered.
    (3)(i) A person located outside the United States, its territories 
or possessions engaged in the activity of: An introducing broker, as 
defined in Sec.  1.3(mm) of this chapter; a commodity trading advisor, 
as defined in Sec.  1.3(bb) of this chapter; or a commodity pool 
operator, as defined in Sec.  1.3(nn) of this chapter, in connection 
with any commodity interest transaction executed bilaterally or made on 
or subject to the rules of any designated contract market or swap 
execution facility only on behalf of persons located outside the United 
States, its territories or possessions, is not required to register in 
such capacity provided that any such commodity interest transaction is 
submitted for clearing through a futures commission merchant registered 
in accordance with section 4d of the Act.
    (ii) A person acting in accordance with paragraph (c)(3)(i) of this 
section remains subject to section 4o of the Act, but otherwise is not 
required to comply with those provisions of the Act and of the rules, 
regulations and orders thereunder applicable solely to any person 
registered in such capacity, or any person required to be so registered.
    (4) A person located outside the United States, its territories or 
possessions that is exempt from registration as a futures commission 
merchant in accordance with Sec.  30.10 of this chapter is not required 
to register as an introducing broker in accordance with section 4d of 
the Act if:
    (i) Such a person is affiliated with a futures commission merchant 
registered in accordance with section 4d of the Act;
    (ii) Such a person introduces, on a fully-disclosed basis in 
accordance with Sec.  1.57 of this chapter, any institutional customer, 
as defined in Sec.  1.3(g) of this

[[Page 190]]

chapter, to a registered futures commission merchant for the purpose of 
trading on a designated contract market;
    (iii) Such person's affiliated futures commission merchant has filed 
with the National Futures Association (Attn: Vice President, Compliance) 
an acknowledgement that the affiliated futures commission merchant will 
be jointly and severally liable for any violations of the Act or the 
Commission's regulations committed by such person in connection with 
those introducing activities, whether or not the affiliated futures 
commission merchant submits for clearing any trades resulting from those 
introducing activities; and
    (iv) Such person does not solicit any person located in the United 
States, its territories or possessions for trading on a designated 
contract market, nor does such person handle the customer funds of any 
person located in the United States, its territories or possessions for 
the purpose of trading on any designated contract market.
    (v) For the purposes of this paragraph, a person shall be affiliated 
with a futures commission merchant if such a person:
    (A) Owns 50 percent or more of the futures commission merchant;
    (B) Is owned 50 percent or more by the futures commission merchant; 
or
    (C) Is owned 50 percent or more by a third person that also owns 50 
percent or more of the futures commission merchant.
    (5) In determining whether a person is a swap dealer, the activities 
of a registered swap dealer with respect to which such person is an 
associated person shall not be considered.
    (d) On a date to be established by the National Futures Association, 
and in accordance with procedures established by the National Futures 
Association, each registrant as a futures commission merchant, retail 
foreign exchange dealer, swap dealer, major swap participant, 
introducing broker, commodity pool operator, commodity trading advisor, 
or leverage transaction merchant shall, on an annual basis, review and 
update registration information maintained with the National Futures 
Association. The failure to complete the review and update within thirty 
days following the date established by the National Futures Association 
shall be deemed to be a request for withdrawal from registration, which 
shall be processed in accordance with the provisions of Sec.  3.33(f).

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 49 
FR 5522, Feb. 13, 1984; 49 FR 39530, Oct. 9, 1984; 57 FR 23144, June 2, 
1992; 66 FR 43082, Aug. 17, 2001; 66 FR 53518, Oct. 23, 2001; 67 FR 
38874, June 6, 2002; 67 FR 41166, June 17, 2002; 72 FR 35920, July 2, 
2007; 72 FR 63979, Nov. 14, 2007; 73 FR 54071, Sept. 18, 2008; 75 FR 
55424, Sept. 10, 2010; 77 FR 2626, Jan. 19, 2012; 77 FR 51904, Aug. 28, 
2012]



Sec.  3.11  Registration of floor brokers and floor traders.

    (a) Application for registration. (1) Application for registration 
as a floor broker or floor trader must be on Form 8-R, if as an 
individual, or Form 7-R, if as a non-natural person, and must be 
completed and filed with the National Futures Association in accordance 
with the instructions thereto. Each Form 7-R filed in accordance with 
this paragraph (a) must be accompanied by a Form 8-R, completed in 
accordance with the instructions thereto and executed by each individual 
who is a principal of the applicant, and each individual responsible for 
entry of orders from that applicant's own account. Each Form 8-R filed 
in accordance with this paragraph (a) must be accompanied by the 
fingerprints of the applicant on a fingerprint card provided for that 
purpose by the National Futures Association, except that a fingerprint 
card need not be filed by any applicant who has a current Form 8-R on 
file with the Commission or the National Futures Association.
    (2) An applicant for registration as a floor broker or floor trader 
will not be registered or issued a temporary license as a floor broker 
or floor trader unless the applicant has been granted trading privileges 
by a board of trade designated as a contract market or registered as a 
swap execution facility by the Commission.
    (3) When the Commission or the National Futures Association 
determines that an applicant for registration as a

[[Page 191]]

floor broker or floor trader is not disqualified from such registration 
or temporary license, the National Futures Association will notify the 
applicant and any contract market or swap execution facility that has 
granted the applicant trading privileges that the applicant's 
registration or temporary license as a floor broker or floor trader is 
granted.
    (b) Duration of registration. A person registered as a floor broker 
or floor trader in accordance with paragraph (a) of this section, and 
whose registration has neither been revoked nor withdrawn, will continue 
to be so registered unless such person's trading privileges on all 
contract markets and swap execution facilities have ceased: provided, 
that if a floor broker or floor trader whose trading privileges on all 
contract markets and swap execution facilities have ceased for reasons 
unrelated to any Commission action or any contract market or swap 
execution facility disciplinary proceeding and whose registration is not 
revoked, suspended or withdrawn is granted trading privileges as a floor 
broker or floor trader, respectively, by any contract market or swap 
execution facility where such person held such privileges within the 
preceding sixty days, such registration as a floor broker or floor 
trader, respectively, shall be deemed to continue and no new Form 7-R, 
Form 8-R or Form 3-R record of a change to Form 7-R or Form 8-R need be 
filed solely on the basis of the resumption of trading privileges. A 
floor broker or floor trader is prohibited from engaging in activities 
requiring registration under the Act or from representing such person to 
be a registrant under the Act or the representative or agent of any 
registrant during the pendency of any suspension of such registration or 
of all such trading privileges. Each contract market and swap execution 
facility that has granted trading privileges to a person who is 
registered, or has applied for registration, as a floor broker or floor 
trader, must provide notice in accordance with Sec.  3.31(d) after such 
person's trading privileges on such contract market or swap execution 
facility have ceased.
    (c) Exceptions. A registered floor broker need not also register as 
a floor trader in order to engage in activity as a floor trader.

[77 FR 51905, Aug. 28, 2012]



Sec.  3.12  Registration of associated persons of futures commission
merchants, retail foreign exchange dealers, introducing brokers, 
commodity trading advisors, commodity pool operators and 
leverage transaction merchants.

    (a) Registration required. It shall be unlawful for any person to be 
associated with a futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant as an associated person unless 
that person shall have registered under the Act as an associated person 
of that sponsoring futures commission merchant, retail foreign exchange 
dealer, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant in accordance with the 
procedures in paragraphs (c), (d), (f), or (i), of this section or is 
exempt from such registration pursuant to paragraph (h) of this section.
    (b) Duration of registration. A person registered in accordance with 
paragraphs (c), (d), (f), or (i) of this section and whose registration 
has not been revoked will continue to be so registered until the 
revocation or withdrawal of the registration of each of the registrant's 
sponsors, or until the cessation of the association of the registrant 
with each of the registrant's sponsors. Such person will be prohibited 
from engaging in activities requiring registration under the Act or from 
representing himself or herself to be a registrant under the Act or the 
representative or agent of any registrant during the pendency of any 
suspension of his or her registration, or his or her sponsor's 
registration. Each of the registrant's sponsors must file a notice in 
accordance with Sec.  3.31(c) reporting the termination of the 
association of the associated person.
    (c) Application for registration. Except as otherwise provided in 
paragraphs (d), (f), and (i) of this section, application for 
registration as an associated person in any capacity must be on

[[Page 192]]

Form 8-R, completed and filed in accordance with the instructions 
thereto.
    (1) No person will be registered as an associated person in 
accordance with this paragraph (c) unless a person duly authorized by 
the sponsor certifies that:
    (i) It is the intention of the sponsor to hire or otherwise employ 
the applicant as an associated person and that it will do so within 
thirty days after the receipt of the notification provided in accordance 
with paragraph (c)(4) of this section and that the applicant will not be 
permitted to engage in any activity requiring registration as an 
associated person until the applicant is registered as such in 
accordance with this section;
    (ii) The sponsor has verified the information supplied by the 
applicant in response to the questions on Form 8-R which relate to the 
applicant's education and employment history during the preceding three 
years.
    (iii) To the best of the sponsor's knowledge, information, and 
belief, all of the publicly available information supplied by the 
applicant on Form 8-R is accurate and complete: Provided, That it is 
unlawful for the sponsor to make the certification required by this 
paragraph (c)(1)(iii) if the sponsor knew or should have known that any 
of that information is not accurate and complete; and
    (2) The certification required by paragraph (c)(1) of this section 
must be submitted concurrently with the Form 8-R.
    (3) Each Form 8-R filed in accordance with the requirements of 
paragraph (c) of this section must be accompanied by the fingerprints of 
the applicant on a fingerprint card provided for that purpose by the 
National Futures Association.
    (4) When the Commission or the National Futures Association 
determines that an applicant for registration as an associated person is 
not unfit for such registration, it will notify the sponsor that has 
made the certifications required by paragraph (c)(1) of this section 
that the applicant's registration as an associated person is granted 
contingent upon the sponsor hiring or otherwise employing the applicant 
as such within thirty days.
    (d) Special temporary licensing and registration procedures for 
certain persons--(1) Registration terminated within the preceding 60 
days. Except as otherwise provided in paragraphs (f) and (i) of this 
section, any person whose registration as an associated person in any 
capacity has terminated within the preceding 60 days and who becomes 
associated with a new sponsor will be granted a temporary license to act 
in the capacity of an associated person of such sponsor upon filing by 
that sponsor with the National Futures Association a Form 8-R, completed 
in accordance with the instructions thereto and, if applicable, a 
Supplemental Sponsor Certification Statement filed on behalf of the new 
sponsor (who must meet the requirements set forth in Sec.  
3.60(b)(2)(i)(A) and (B)) stating that the new sponsor will supervise 
the applicant in accordance with conditions identical to those agreed to 
by the previous sponsor, which includes certifications stating:
    (i) That such person has been hired or is otherwise employed by that 
sponsor;
    (ii) That such person's registration as an associated person in any 
capacity is not suspended or revoked;
    (iii) That such person is eligible to be registered or temporarily 
licensed in accordance with this paragraph (d);
    (iv) Whether there is a pending adjudicatory proceeding under 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec.  3.55, Sec.  
3.56 or Sec.  3.60 or if, within the preceding 12 months, the Commission 
has permitted the withdrawal of an application for registration in any 
capacity after instituting the procedures provided in Sec.  3.51 and, if 
so, that the sponsor has been given a copy of the notice of the 
institution of a proceeding in connection therewith; and
    (v) That the sponsor has received a copy of the notice of the 
institution of a proceeding if the applicant has certified, in 
accordance with paragraph (d)(1)(iv) of this section, that there is a 
proceeding pending against the applicant as described in that paragraph 
or that the Commission has permitted the withdrawal of an application 
for registration as described in that paragraph.

[[Page 193]]

    (2) Any temporary license granted pursuant to paragraph (d)(1) of 
this section shall be terminated immediately upon notice to the sponsor 
of the person granted the temporary license that, within 20 days 
following the date the temporary license was issued, the National 
Futures Association has not received the applicant's fingerprints.
    (3) A temporary license received in accordance with paragraph (d)(1) 
of this section shall be subject to the provisions of Sec. Sec.  3.42 
and 3.43.
    (4) The certifications permitted by paragraphs (d)(1)(i) and (v) of 
this section must be filed by a person duly authorized by the sponsor. 
The certifications permitted by paragraphs (d)(1)(ii)-(iv) must be filed 
by the applicant for registration as an associated person.
    (e) Retention of records. The sponsor must retain in accordance with 
Sec.  1.31 of this chapter such records as are necessary to support the 
certifications required by this section.
    (f) Reporting of dual and multiple associations. (1)(i) Except as 
otherwise provided in paragraph (f)(4) of this section, a person who is 
already registered as an associated person in any capacity whose 
registration is not subject to conditions or restrictions may become 
associated as an associated person with another sponsor if the new 
sponsor (who must meet the requirements set forth in Sec.  3.60(b)(2)(i) 
(A) and (B)) files with the National Futures Association a Form 8-R in 
accordance with the instructions thereto.
    (ii) NFA shall notify each sponsor of the associated person that the 
associated person has applied to become associated with another sponsor.
    (iii) Each sponsor of the associated person shall supervise that 
associated person and each sponsor is jointly and severally responsible 
for the conduct of the associated person with respect to the:
    (A) Solicitation or acceptance of customers' orders,
    (B) Solicitation of funds, securities, or property for a 
participation in a commodity pool,
    (C) Solicitation of a client's or prospective client's discretionary 
account,
    (D) Solicitation or acceptance of leverage customers' orders for 
leverage transactions, and
    (E) Associated person's supervision of any person or persons engaged 
in any of the foregoing solicitations or acceptances, with respect to 
any customers common to it and any other futures commission merchant, 
retail foreign exchange dealer, introducing broker, commodity trading 
advisor, commodity pool operator, or leverage transaction merchant with 
which the associated person is associated.
    (2) Upon receipt by the National Futures Association of a Form 8-R 
filed in accordance with paragraph (f)(1) of this section from an 
associated person, the associated person named therein shall be 
registered as an associated person of the new sponsor.
    (3) A person who is simultaneously associated with more than one 
sponsor in accordance with the provisions of paragraphs (f)(1) and 
(f)(2) of this section shall be required, upon receipt of notice from 
the National Futures Association, to file with the National Futures 
Association his fingerprints on a fingerprint card provided by the 
National Futures Association for that purpose as well as such other 
information as the National Futures Association may require. The 
National Futures Association may require such a filing every two years, 
or at such greater period of time as the National Futures Association 
may deem appropriate, after the associated person has become associated 
with a new sponsor in accordance with the requirements of paragraphs 
(f)(1) and (f)(2) of this section.
    (4) If a person is associated with a futures commission merchant, 
with a retail foreign exchange dealer, or with an introducing broker and 
he directs customers seeking a managed account to use the services of a 
commodity trading advisor(s) approved by the futures commission 
merchant, retail foreign exchange dealer or introducing broker and all 
such customers' accounts solicited or accepted by the associated person 
are carried by the futures commission merchant, retail foreign exchange 
dealer or introduced by the introducing broker with which the associated 
person is associated, such a person shall

[[Page 194]]

be deemed to be associated solely with the futures commission merchant, 
retail foreign exchange dealer or introducing broker and may not also 
register as an associated person of the commodity trading advisor(s).
    (5)(i)(A) A person who is already registered as an associated person 
in any capacity whose registration is not subject to conditions or 
restrictions may become associated as an associated person of a swap 
dealer or major swap participant if the swap dealer or major swap 
participant meets the requirements set forth in Sec.  3.60(b)(2)(i)(A).
    (B) A person who is already associated as an associated person of a 
swap dealer or major swap participant may become registered as an 
associated person of a futures commission merchant, retail foreign 
exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator, or leverage transaction merchant if the futures 
commission merchant, retail foreign exchange dealer, introducing broker, 
commodity trading advisor, commodity pool operator, or leverage 
transaction merchant with which the person intends to associate meets 
the requirements set forth in Sec.  3.60(b)(2)(i)(A) and (B).
    (ii) Each sponsor and each swap dealer and/or major swap participant 
with whom the person is associated shall supervise that associated 
person, and each sponsor and each swap dealer and/or major swap 
participant is jointly and severally responsible for the conduct of the 
associated person with respect to the:
    (A) Solicitation or acceptance of customer orders,
    (B) Solicitation of funds, securities or property for a 
participation in a commodity pool,
    (C) Solicitation of a client's or prospective client's discretionary 
account,
    (D) Solicitation or acceptance of leverage customers' orders for 
leverage transactions,
    (E) Solicitation or acceptance of swaps, and
    (F) Associated person's supervision of any person or persons engaged 
in any of the foregoing solicitations or acceptances, with respect to 
any customers common to it and any futures commission merchant, retail 
foreign exchange dealer, introducing broker, commodity trading advisor, 
commodity pool operator, leverage transaction merchant, swap dealer, or 
major swap participant with which the associated person is associated.
    (g) Petitions for exemption. Any person adversely affected by the 
operation of this section may file a petition with the Secretary of the 
Commission, which petition must set forth with particularity the reasons 
why that person believes that an applicant should be exempted from the 
requirements of this section and why such an exemption would not be 
contrary to the public interest and the purposes of the provision from 
which exemption is sought. The petition will be granted or denied by the 
Commission on the basis of the papers filed. The Commission may grant 
such a petition 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 may be granted subject to such terms and 
conditions as the Commission may find appropriate.
    (h) Exemption from registration. (1) A person is not required to 
register as an associated person in any capacity if that person is:
    (i) Registered under the Act as a futures commission merchant, 
retail foreign exchange dealer, swap dealer, major swap participant, 
floor broker, or as an introducing broker;
    (ii) Engaged in the solicitation of funds, securities, or property 
for a participation in a commodity pool, or the supervision of any 
person or persons so engaged, pursuant to registration with the 
Financial Industry Regulatory Authority as a registered representative, 
registered principal, limited representative or limited principal, and 
that person does not engage in any other activity subject to regulation 
by the Commission;
    (iii) The chief operating officer, general partner or other person 
in the supervisory chain-of-command, provided the futures commission 
merchant, retail foreign exchange dealer, introducing broker, commodity 
trading advisor, commodity pool operator, or leverage transaction 
merchant engages in commodity interest related activity

[[Page 195]]

for customers as no more than ten percent of its total revenue on an 
annual basis, the firm is not subject to a pending proceeding brought by 
the Commission or a self-regulatory organization alleging fraud or 
failure to supervise, and has not been found in such a proceeding to 
have committed fraud or failed to supervise, as required by the Act, the 
rules promulgated thereunder or the rules of a self-regulatory 
organization, the person for whom exemption is sought and the person 
designated in accordance with paragraphs (h)(1)(iii)(C) or 
(h)(1)(iii)(D) of this section are listed as principals of the firm, the 
fitness examination conducted by the National Futures Association with 
respect to these persons discloses no derogatory information that would 
disqualify any of such persons as a principal or as an associated 
person, and the firm files with the National Futures Association 
corporate or partnership resolutions stating that:
    (A) Such supervisory person is not authorized to:
    (1) Solicit or accept customers', retail forex customers', or 
leverage customers' orders,
    (2) Solicit a client's or prospective client's discretionary 
account,
    (3) Solicit funds, securities or property for a participation in a 
commodity pool, or
    (4) Exercise any line supervisory authority over those persons so 
engaged;
    (B) Such supervisory person has no authority with respect to hiring, 
firing or other personnel matters involving persons engaged in 
activities subject to regulation under the Act;
    (C) Another person (or persons) designated therein, who is 
registered as an associated person(s) or who has applied for 
registration as an associated person(s) and is not subject to a pending 
proceeding brought by the Commission or a self-regulatory organization 
alleging fraud or failure to supervise, and has not been found in such a 
proceeding to have committed fraud or failed to supervise, as required 
by the Act, the rules promulgated thereunder or the rules of a self-
regulatory organization, holds and exercises full and final supervisory 
authority, including authority to hire and fire personnel, over the 
customer commodity interest related activities of the firm; and
    (D) If the person (or persons) so designated in accordance with 
paragraph (h)(1)(iii)(C) of this section ceases to have the authority 
referred to therein, the firm will notify the National Futures 
Association within twenty days of such occurrence by means of a 
subsequent resolution which resolution must also include the name of 
another associated person (or persons) who has been vested with full 
supervisory authority, including authority to hire and fire personnel, 
over the customer commodity interest related activities of the firm in 
the event that all of those previously designated in accordance with 
paragraph (h)(1)(iii)(C) of this section have been relieved of such 
authority. Subsequent changes in supervisory authority shall be reported 
in the same manner; or
    (iv) Engaged in any activity as an associated person, as defined in 
Sec.  1.3(aa) of this chapter, from a location outside the United 
States, its territories or possessions, and limits such activities to 
customers located outside the United States, its territories or 
possessions.
    (2) A person is not required to register as an associated person of 
a commodity trading advisor if that person is:
    (i) Registered as a commodity trading advisor, if that person is 
associated with a commodity trading advisor; or
    (ii) Exempt from registration as a commodity trading advisor 
pursuant to the provisions of Sec.  4.14(a)(1), Sec.  4.14(a)(2) or 
Sec.  4.14(a) (8) of this chapter or is associated with a person who is 
so exempt from registration: Provided, That the provisions of paragraph 
(h)(2)(ii) of this section shall not apply to the solicitation of a 
client's or prospective client's discretionary account, or the 
supervision of any person or persons so engaged, by, for or on behalf of 
a commodity trading advisor which is:
    (A) Not exempt from registration pursuant to the provisions of Sec.  
4.14(a)(1), Sec.  4.14(a)(2) or Sec.  4.14(a)(8) of this chapter or
    (B) Registered as a commodity trading advisor notwithstanding the 
availability of that exemption.

[[Page 196]]

    (3) A person is not required to register as an associated person of 
a commodity pool operator if that person is:
    (i) Registered as a commodity pool operator, if that person is 
associated with a commodity pool operator;
    (ii) Exempt from registration as a commodity pool operator pursuant 
to the provisions of Sec.  4.13 of this chapter or is associated with a 
person who is so exempt from registration: Provided, That the provisions 
of paragraph (h)(3)(ii) of this section shall not apply to the 
solicitation of funds, securities, or property for a participation in a 
commodity pool, or the supervision of any person or persons so engaged, 
by, for, or on behalf of a commodity pool operator which is
    (A) Not exempt from registration pursuant to the provisions of Sec.  
4.13 of this chapter or
    (B) Registered as a commodity pool operator notwithstanding the 
availability of that exemption; or
    (iii) Where a commodity pool is operated or to be operated by two or 
more commodity pool operators, registered as an associated person of one 
of the pool operators of the commodity pool in accordance with the 
provisions of paragraphs (c), (d), (f), or (i) of this section: 
Provided, That each such commodity pool operator shall be jointly and 
severally liable for the conduct of that associated person in the 
solicitation of funds, securities, or property for participation in the 
commodity pool, or the supervision of any person or persons so engaged, 
regardless of whether that associated person is registered as an 
associated person of each such commodity pool operator.
    (i) Special registration or temporary licensing procedures when 
previous sponsor's registration ceases. (1) Any person whose 
registration as an associated person in any capacity was not subject to 
conditions or restrictions, and was terminated within the preceding 
sixty days because the previous sponsor's registration was revoked or 
withdrawn, and who becomes associated with a new sponsor, will be 
registered as an associated person of such new sponsor upon the mailing 
by that new sponsor to the National Futures Association of written 
certifications stating:
    (i) That such person has been hired or is otherwise employed by that 
sponsor;
    (ii) That such person's registration as an associated person in any 
capacity is not suspended or revoked;
    (iii) That such person is eligible to be registered in accordance 
with paragraph (i) of this section;
    (iv) Whether there is a pending adjudicatory proceeding under 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act or Sec.  3.55, 3.56 or 
3.60 or if, within the preceding twelve months, the Commission has 
permitted the withdrawal of an application for registration in any 
capacity after instituting the procedures provided in Sec.  3.51 and, if 
so, that the sponsor has been given a copy of the notice of the 
institution of a proceeding in connection therewith;
    (v) That the new sponsor has received a copy of the notice of the 
institution of a proceeding if the applicant for registration has 
certified, in accordance with paragraph (i)(1)(iv) of this section, that 
there is a proceeding pending against the applicant as described in that 
paragraph or that the Commission has permitted the withdrawal of an 
application for registration as described in that paragraph; and
    (vi) That the new sponsor will be responsible for supervising all 
activities of the person in connection with the sponsor's business as a 
registrant under the Act. Provided, however, That if such person's prior 
registration as an associated person was subject to conditions or 
restrictions, the new sponsor (who must meet the requirements set forth 
in Sec.  3.60(b)(2)(i) (A) and (B) of this part) must also file a signed 
Supplemental Sponsor Certification Statement that contains conditions 
identical to those agreed to by the original sponsor and, in such case, 
the person will be granted a temporary license, subject to the 
provisions of Sec. Sec.  3.41, 3.42 and 3.43 of this part.
    (2) The certifications required by paragraphs (i)(1)(i), (i)(1)(v), 
and (i)(1)(vi) of this section must be signed and dated by an officer, 
if the sponsor is a corporation, a general partner, if a partnership, or 
the proprietor, if a sole proprietorship. The certifications required by 
paragraphs (i)(1)(ii)-(iv) of this section must be signed and dated

[[Page 197]]

by the applicant for registration as an associated person.
    (3) A person who is registered in accordance with the provisions of 
paragraph (i)(1) of this section shall be required, upon receipt of 
notice from the National Futures Association, to file with the National 
Futures Association his fingerprints on a fingerprint card provided by 
the National Futures Association for that purpose as well as such other 
information as the National Futures Association may require. The 
National Futures Association may require such a filing every two years, 
or at such greater period of time as the National Futures Association 
may deem appropriate, after the associated person has become associated 
with a new sponsor in connection with the requirements of paragraph 
(i)(1) of this section.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980]

    Editorial Note: For Federal Register citations affecting Sec.  3.12, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



Sec. Sec.  3.13-3.20  [Reserved]



Sec.  3.21  Exemption from fingerprinting requirement in certain cases.

    (a) Any person who is required by this part to submit a fingerprint 
card may file, or cause to be filed, in lieu of such card:
    (1) A legible, accurate and complete photocopy of a fingerprint card 
that has been submitted to the Federal Bureau of Investigation for 
identification and appropriate processing and of each report, record, 
and notation made available by the Federal Bureau of Investigation with 
respect to that fingerprint card if such identification and processing 
has been completed satisfactorily by the Federal Bureau of Investigation 
not more than ninety days prior to the filing with the National Futures 
Association of the photocopy;
    (2) A statement that such person's application for initial 
registration in any capacity was granted within the preceding ninety 
days, provided that the provisions of this paragraph (a)(2) shall not be 
applicable to any person who, by Commission rule, regulation, or order, 
was not required to file a fingerprint card in connection with such 
application for initial registration; or
    (3) A statement that such person has a current Form 8-R on file with 
the Commission or the National Futures Association.
    (b) Each photocopy and statement filed in accordance with the 
provisions of paragraph (a)(1) or (a)(2) of this section must be signed 
and dated. Such signature shall constitute a certification by that 
individual that the photocopy or statement is accurate and complete and 
must be made by:
    (1) With respect to the fingerprints of an associated person: An 
officer, if the sponsor is a corporation; a general partner, if a 
partnership; or the sole proprietor, if a sole proprietorship;
    (2) With respect to fingerprints of a floor broker or individual 
floor trader: The applicant for registration; and with respect to 
fingerprints of each individual who is responsible for entry of orders 
from the account of a floor trader that is a non-natural person, the 
applicant for registration, or
    (3) With respect to the fingerprints of a principal: An officer, if 
the futures commission merchant, retail foreign exchange dealer, swap 
dealer, major swap participant, commodity trading advisor, commodity 
pool operator, introducing broker, floor trader that is a non-natural 
person, or leverage transaction merchant with which the principal will 
be affiliated is a corporation; a general partner, if a partnership; or 
the sole proprietor, if a sole proprietorship.
    (c) Outside directors. Any futures commission merchant, retail 
foreign exchange dealer, swap dealer, major swap participant, 
introducing broker, commodity pool operator, commodity trading advisor, 
floor trader that is a non-natural person, or leverage transaction 
merchant that has a principal who is a director but is not also an 
officer or employee of the firm may, in lieu of submitting a fingerprint 
card in accordance with the provisions of Sec.  3.10(a)(2), file a 
``Notice Pursuant to Rule 3.21(c)'' with the National Futures 
Association. Such notice shall state, if true, that such outside 
director:
    (1) Is not engaged in:

[[Page 198]]

    (i) The solicitation or acceptance of customers' orders or retail 
forex customers' orders,
    (ii) The solicitation of funds, securities or property for a 
participation in a commodity pool,
    (iii) The solicitation of a client's or prospective client's 
discretionary account,
    (iv) The solicitation of leverage customers' orders for leverage 
transactions,
    (v) The solicitation or acceptance of a swap agreement;
    (2) Does not regularly have access to the keeping, handling or 
processing of:
    (i) Transactions involving ``commodity interests,'' as that term is 
defined in Sec.  1.3(yy);
    (ii) Customer funds, retail forex customer funds, leverage customer 
funds, foreign futures or foreign options secured amount, or adjusted 
net capital; or
    (3) Does not have direct supervisory responsibility over persons 
engaged in the activities referred to in paragraphs (c)(1) and (c)(2) of 
this section; and
    (4) The Notice Pursuant to Rule 3.21(c) shall also include:
    (i) The name of the futures commission merchant, retail foreign 
exchange dealer, swap dealer, major swap participant, introducing 
broker, commodity trading advisor, commodity pool operator, floor trader 
that is a non-natural person, leverage transaction merchant, or 
applicant for registration in any of these capacities of which the 
person is an outside director;
    (ii) The nature of the duties of the outside director for whom 
exemption under paragraph (c) of this section is sought;
    (iii) The internal controls used to ensure that the outside director 
for whom exemption under this paragraph (c) is sought does not have 
access to the keeping, handling or processing of the items described in 
paragraphs (c)(2)(i) and (ii) of this section; and
    (iv) The reasons why the outside director believes he should be 
exempted from the fingerprint requirement and why such an exemption 
would not be contrary to the public interest and the purposes of the 
provision from which exemption is sought.
    (d) A firm that has filed a Notice Pursuant to Rule 3.21(c) with 
respect to an outside director described therein must file with the 
National Futures Association on behalf of such outside director a Form 
8-R, completed in accordance with the instructions thereto and executed 
by the outside director. The exemption provided for in paragraph (c) of 
this section is limited solely to the outside director's fingerprint 
requirement and does not affect any other duties or responsibilities of 
the firm or the outside director under the Act or the rules set forth in 
this chapter. In appropriate cases, the Commission and the National 
Futures Association may require further information from the firm with 
respect to any outside director referred to in a Notice Pursuant to Rule 
3.21(c).
    (e) Foreign natural persons. (1) For purposes of this paragraph (e):
    (i) The term foreign natural person means any natural person who has 
not resided in the United States since reaching the age of 18 years.
    (ii) The term certifying firm means:
    (A) For any natural person that is a principal or associated person 
of a futures commission merchant, retail foreign exchange dealer, swap 
dealer, major swap participant, introducing broker, commodity pool 
operator, commodity trading advisor, leverage transaction merchant, 
floor broker, or floor trader, such futures commission merchant, retail 
foreign exchange dealer, swap dealer, major swap participant, 
introducing broker, commodity pool operator, commodity trading advisor, 
leverage transaction merchant, floor broker, or floor trader; and
    (B) For any natural person that is responsible for, or directs, the 
entry of orders from a floor broker's or floor trader's own account, 
such floor broker or floor trader.
    (2) Any obligation in this part to provide a fingerprint card for a 
foreign natural person shall be deemed satisfied with respect to a 
certifying firm if:
    (i) Such certifying firm causes a criminal history background check 
of such foreign natural person to be performed; and
    (ii) The criminal history background check:

[[Page 199]]

    (A) Is of a type that would reveal all matters listed under Sections 
8a(2)(D) or 8a(3)(D), (E), or (H) of the Act relating to such foreign 
natural person;
    (B) Does not reveal any matters that constitute a disqualification 
under Sections 8a(2) or 8a(3) of the Act, other than those disclosed to 
the National Futures Association; and
    (C) Is completed not more than one calendar year prior to the date 
that such certifying firm submits the certification described in 
paragraph (e)(2)(iii) of this section;
    (iii) A person authorized by such certifying firm submits, in 
reliance on such criminal history background check, a certification by 
such certifying firm to the National Futures Association, that:
    (A) States that the conditions of paragraphs (e)(2)(i) and (ii) of 
this section have been satisfied; and
    (B) Is signed by a person authorized by such certifying firm to make 
such certification.
    (3) The certifying firm shall maintain, in accordance with Sec.  
1.31 of this chapter, records documenting that the criminal history 
background check performed pursuant to paragraph (e)(2)(i) of this 
section was completed and the results thereof.

[48 FR 35297, Aug. 3, 1983, as amended at 49 FR 5525, Feb. 13, 1984; 54 
FR 19558, May 8, 1989; 57 FR 23148, June 2, 1992; 58 FR 19592, Apr. 15, 
1993; 66 FR 53518, Oct. 23, 2001; 75 FR 55425, Sept. 10, 2010; 77 FR 
2627, Jan. 19, 2012; 77 FR 51906, Aug. 28, 2012; 81 FR 18747, Apr. 1, 
2016]



Sec.  3.22  Supplemental filings.

    Notwithstanding any other provision of this chapter, the Commission, 
the Directors of the Division of Swap Dealer and Intermediary Oversight 
or Division of Enforcement or either Director's designee, or the 
National Futures Association may, at any time, give written notice to 
any registrant, applicant for registration, or person required to be 
registered:
    (a)(1) That derogatory information has come to the attention of the 
staff of the Commission or the National Futures Association which, if 
true, could constitute grounds upon which to base a determination that 
the person is unfit to become, or to remain, registered or temporarily 
licensed in accordance with the Act or the regulations thereunder and 
setting forth such information in the notice and requesting the person 
to provide evidence mitigating the seriousness of the statutory 
disqualification set forth in the notice and evidence that the person 
has undergone rehabilitation, or
    (2) That the Commission or the National Futures Association has 
undertaken a routine or periodic review of the registrant's fitness to 
remain registered or temporarily licensed; and
    (b) That the person, or any individual who, based upon his or her 
relationship with that person is required to file a Form 8-R in 
accordance with the requirements of this part, as applicable, must, 
within such period of time as the Commission or the National Futures 
Association may specify, complete and file with the Commission or the 
National Futures Association a current Form 7-R, or if appropriate, a 
Form 8-R, in accordance with the instructions thereto.
    (c) Failure to provide the information required under paragraph (b) 
of this section is a violation of the Commission's regulations which 
itself constitutes grounds upon which to base a determination that the 
person is unfit to become or to remain so registered.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 8049, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 49 
FR 39532, Oct. 9, 1984; 53 FR 8433, Mar. 15, 1988; 57 FR 23148, June 2, 
1992; 67 FR 62351, Oct. 7, 2002; 77 FR 51906, Aug. 28, 2012; 78 FR 
22419, Apr. 16, 2013]



Sec. Sec.  3.23-3.29  [Reserved]



Sec.  3.30  Current address for purpose of delivery of communications 
from the Commission or the National Futures Association.

    (a) The address of each registrant, applicant for registration, and 
principal, as submitted on the application for registration (Form 7-R or 
Form 8-R) or as submitted on the biographical supplement (Form 8-R) 
shall be deemed to be the address for delivery to the registrant, 
applicant or principal for

[[Page 200]]

any communications from the Commission or the National Futures 
Association, including any summons, complaint, reparation claim, order, 
subpoena, special call, request for information, notice, and other 
written documents or correspondence, unless the registrant, applicant or 
principal specifies another address for this purpose: Provided that the 
Commission or the National Futures Association may address any 
correspondence relating to a biographical supplement submitted for or on 
behalf of a principal to the futures commission merchant, retail foreign 
exchange dealer, swap dealer, major swap participant, introducing 
broker, commodity pool operator, commodity trading advisor, floor trader 
that is a non-natural person, or leverage transaction merchant with 
which the principal is affiliated and may address any correspondence 
relating to an associated person to the futures commission merchant, 
retail foreign exchange dealer, swap dealer, major swap participant, 
introducing broker, commodity pool operator, commodity trading advisor, 
floor trader that is a non-natural person, or leverage transaction 
merchant with which the associated person or the applicant for 
registration is or will be associated as an associated person.
    (b) Each registrant, while registered and for two years after 
termination of registration, and each principal, while affiliated and 
for two years after termination of affiliation, must notify in writing 
the National Futures Association of any change of the address on the 
application for registration, biographical supplement, or other address 
filed with the National Futures Association for the purpose of receiving 
communications from the Commission or the National Futures Association. 
Failure to file a required response to any communication sent to the 
latest such address filed with the National Futures Association that is 
caused by a failure to notify in writing the National Futures 
Association of an address change may result in an order of default and 
award of claimed monetary damages or other appropriate order in any 
National Futures Association or Commission proceeding, including a 
reparation proceeding brought under part 12 of this chapter.

[77 FR 51906, Aug. 28, 2012]



Sec.  3.31  Deficiencies, inaccuracies, and changes, to be reported.

    (a)(1) Each applicant or registrant as a futures commission 
merchant, retail foreign exchange dealer, swap dealer, major swap 
participant, commodity trading advisor, commodity pool operator, 
introducing broker, floor trader that is a non-natural person or 
leverage transaction merchant shall, in accordance with the instructions 
thereto, promptly correct any deficiency or inaccuracy in Form 7-R or 
Form 8-R that no longer renders accurate and current the information 
contained therein, with the exception of any change that requires 
withdrawal from registration under Sec.  3.33. Each such correction 
shall be prepared and filed in accordance with the instructions thereto 
to create a Form 3-R record of such change.
    (2) Where a registrant has changed its form of organization to or 
from a sole proprietorship, the registrant must request withdrawal from 
registration in accordance with Sec.  3.33.
    (3) Where any person becomes a principal of an applicant or 
registrant subsequent to the filing of the applicant's or registrant's 
current Form 7-R:
    (i) If the new principal is not a natural person, the registrant 
shall update such Form 7-R to create a Form 3-R record of change.
    (ii) If the new principal is a natural person, the registrant shall 
file a Form 8-R, completed in accordance with the instructions thereto 
and executed by such person who is a principal of the registrant and who 
was not listed on the registrant's initial application for registration 
or any amendment thereto.
    (b) Each applicant or registrant as a floor broker, floor trader or 
associated person, and each principal of a futures commission merchant, 
retail foreign exchange dealer, swap dealer, major swap participant, 
commodity trading advisor, commodity pool operator, introducing broker, 
floor trader that is a non-natural person, or leverage transaction 
merchant must, in accordance with the instructions thereto, promptly 
correct any deficiency or inaccuracy

[[Page 201]]

in the Form 8-R or supplemental statement thereto to create a Form 3-R 
record of change.
    (c)(1) After the filing of a Form 8-R or updating a Form 8-R to 
create a Form 3-R record of change by or on behalf of any person for the 
purpose of permitting that person to be an associated person of a 
futures commission merchant, retail foreign exchange dealer, commodity 
trading advisor, commodity pool operator, introducing broker, or a 
leverage transaction merchant, that futures commission merchant, retail 
foreign exchange dealer, commodity trading advisor, commodity pool 
operator, introducing broker or leverage transaction merchant must, 
within thirty days after the occurrence of either of the following, file 
a notice thereof with the National Futures Association indicating:
    (i) The failure of that person to become associated with the futures 
commission merchant, retail foreign exchange dealer, commodity trading 
advisor, commodity pool operator, introducing broker, or leverage 
transaction merchant, and the reasons therefor; or
    (ii) The termination of the association of the associated person 
with the futures commission merchant, retail foreign exchange dealer, 
commodity trading advisor, commodity pool operator, introducing broker, 
or leverage transaction merchant, and the reasons therefor.
    (2) Each person registered as, or applying for registration as, a 
futures commission merchant, retail foreign exchange dealer, swap 
dealer, major swap participant, commodity trading advisor, commodity 
pool operator, introducing broker, floor trader that is a non-natural 
person, or leverage transaction merchant must, within thirty days after 
the termination of the affiliation of a principal with the registrant or 
applicant, file a notice thereof with the National Futures Association.
    (3) Any notice required by paragraph (c) of this section must be 
filed on Form 8-T or on a Uniform Termination Notice for Securities 
Industry Registration.
    (d) Each contract market or swap execution facility that has granted 
trading privileges to a person who is registered, has received a 
temporary license, or has applied for registration as a floor broker or 
floor trader, must notify the National Futures Association within sixty 
days after such person has ceased having trading privileges on such 
contract market or swap execution facility.

(Approved by the Office of Management and Budget under control number 
3038-0023)

[45 FR 80491, Dec. 5, 1980, as amended at 47 FR 27551, June 25, 1982; 48 
FR 35297, Aug. 3, 1983; 49 FR 5525, Feb. 13, 1984; 49 FR 39533, Oct. 9, 
1984; 51 FR 34460, Sept. 29, 1986; 53 FR 8433, Mar. 15, 1988; 54 FR 
19558, May 8, 1989; 58 FR 19592, Apr. 15, 1993; 66 FR 53518, Oct. 23, 
2001; 67 FR 38875, June 6, 2002; 72 FR 63104, Nov. 8, 2007; 75 FR 55426, 
Sept. 10, 2010; 77 FR 2628, Jan. 19, 2012; 77 FR 51907, Aug. 28, 2012]



Sec.  3.33  Withdrawal from registration.

    (a) A futures commission merchant, retail foreign exchange dealer, 
swap dealer, major swap participant, introducing broker, commodity 
trading advisor, commodity pool operator, floor trader that is a non-
natural person, or leverage transaction merchant must request that its 
registration be withdrawn prior to any voluntary resolution to file 
articles (or a certificate) of dissolution (or cancellation), and upon 
notice of any involuntary dissolution initiated by a third-party. A 
futures commission merchant, retail foreign exchange dealer, swap 
dealer, major swap participant, introducing broker, commodity trading 
advisor, commodity pool operator, leverage transaction merchant, floor 
broker or floor trader may request that its registration be withdrawn in 
accordance with the requirements of this section if:
    (1) The registrant has ceased, or has not commenced, engaging in 
activities requiring registration in such capacity;
    (2) The registrant is exempt from registration in such capacity; or
    (3) The registrant is excluded from the persons or any class of 
persons required to be registered in such capacity: Provided, That the 
National Futures Association or the Commission, as appropriate, may 
consider separately each capacity for which withdrawal is requested in 
acting upon such a request.
    (b) A request for withdrawal from registration as a futures 
commission

[[Page 202]]

merchant, retail foreign exchange dealer, swap dealer, major swap 
participant, introducing broker, commodity trading advisor, commodity 
pool operator, floor trader that is a non-natural person, or leverage 
transaction merchant must be made on Form 7-W, and a request for 
withdrawal from registration as a floor broker or individual floor 
trader must be made on Form 8-W, completed and filed with the National 
Futures Association in accordance with the instructions thereto. The 
request for withdrawal must be made by a person duly authorized by the 
registrant and must specify:
    (1) The name of the registrant for which withdrawal is being 
requested;
    (2) The registration capacities for which withdrawal is being 
requested;
    (3) The name, address, and telephone number of the person who will 
have custody of the books and records of the registrant; the address 
where such books and records will be located; and a statement that such 
person is authorized to make them available in accordance with the 
requirements of Sec.  1.31 of this chapter;
    (4) The applicable basis under paragraph (a) of this section for 
requesting withdrawal for each capacity for which withdrawal is 
requested.
    (5) If withdrawal is requested under paragraph (a)(2) or (a)(3) of 
this section, then, with respect to each capacity for which withdrawal 
is requested, the section of the Act, regulations, or other authority 
permitting the exemption or exclusion, and the circumstances which 
entitle the registrant to claim such exemption or exclusion.
    (6) If a basis for withdrawal from registration under paragraph 
(a)(1) of this section is that the registrant has ceased engaging in 
activities requiring registration, then, with respect to each capacity 
for which the registrant has ceased such activities:
    (i) That all customer, retail forex customer or option customer 
agreements, if any, have been terminated;
    (ii) That all customer, retail forex customer or option customer 
positions, if any, have been transferred on behalf of customers or 
option customers or closed;
    (iii) That all customer, retail forex customer or option customer 
cash balances, securities, or other property, if any, have been 
transferred on behalf of customers, retail forex customers or option 
customers or returned, and that there are no obligations to customers, 
retail forex customers or option customers outstanding;
    (iv) In the case of a commodity pool operator, that all interests 
in, and assets of, any commodity pool have been redeemed, distributed, 
or transferred, on behalf of the participants therein, and that there 
are no obligations to such participants outstanding;
    (v) In the case of a leverage transaction merchant:
    (A) Either that all leverage customer agreements, if any, and all 
leverage contracts have been terminated, and that all leverage customer 
cash balances, securities or other property, if any, have been returned, 
or
    (B) Alternatively, that pursuant to Commission approval, the 
leverage contract obligations of the leverage transaction merchant have 
been assumed by another leverage transaction merchant and all leverage 
customer cash balances, securities or other property, if any, have been 
transferred to such leverage transaction merchant on behalf of leverage 
customers or returned, and that there are no obligations to leverage 
customers outstanding;
    (vi) The nature and extent of any pending customer, retail forex 
customer, option customer, leverage customer, swap counterparty or 
commodity pool participant claims against the registrant, and, to the 
best of the registrant's knowledge and belief, the nature and extent of 
any anticipated or threatened customer, option customer, leverage 
customer, swap counterparty or commodity pool participant claims against 
the registrant;
    (vii) In the case of a futures commission merchant or a retail 
foreign exchange dealer which is a party to a guarantee agreement, that 
all such agreements have been or will be terminated in accordance with 
the provisions of Sec.  1.10(j) of this chapter not more than thirty 
days after the filing of the request for withdrawal from registration;

[[Page 203]]

    (viii) In the case of a swap dealer, that the person will not engage 
in any new activity described in the definition of the term ``swap 
dealer'' in section 1a(49) of the Act, as such term may be further 
defined by the Commission; and
    (ix) In the case of a major swap participant, that the person will 
not engage in any new activity described in the definition of the term 
``major swap participant'' in section 1a(33) of the Act, as such term 
may be further defined by the Commission.
    (c) Where a leverage transaction merchant is requesting withdrawal 
from registration in that capacity and the basis for withdrawal under 
paragraph (a)(1) of this section is that it has ceased engaging in 
activities requiring registration, the request for withdrawal must be 
accompanied by a form 2-FR which contains the information specified in 
Sec.  31.13(f) of this chapter as of a date not more than 30 days prior 
to the date of the withdrawal request.
    (d) [Reserved]
    (e) A request for withdrawal from registration as a futures 
commission merchant, retail foreign exchange dealer, swap dealer, major 
swap participant, introducing broker, commodity pool operator, commodity 
trading advisor, floor trader that is a non-natural person, or leverage 
transaction merchant on Form 7-W, and a request for withdrawal from 
registration as a floor broker or individual floor trader on Form 8-W, 
must be filed with the National Futures Association and a copy of such 
request must be sent by the National Futures Association within three 
business days of the receipt of such withdrawal request to the Commodity 
Futures Trading Commission, Division of Swap Dealer and Intermediary 
Oversight, Three Lafayette Centre, 1155 21st Street NW., Washington, DC 
20581. In addition, any floor broker or individual floor trader 
requesting withdrawal from registration must file a copy of his or her 
Form 8-W with each contract market or swap execution facility that has 
granted him or her trading privileges, and any floor trader that is a 
non-natural person requesting withdrawal from registration must file a 
copy of its Form 7-W with each contract market or swap execution 
facility that has granted it trading privileges. Within three business 
days of any determination by the National Futures Association under 
Sec.  3.10(d) to treat the failure by a registrant to file an annual 
Form 7-R as a request for withdrawal, the National Futures Association 
shall send the Commission notice of that determination.
    (f) A request for withdrawal from registration will become effective 
on the thirtieth day after receipt of such request by the National 
Futures Association, or earlier upon written notice from the National 
Futures Association (with the written concurrence of the Commission) of 
the granting of such request, unless prior to the effective date:
    (1) The Commission or the National Futures Association has 
instituted a proceeding to suspend or revoke such registration;
    (2) The Commission or the National Futures Association imposes, or 
gives notice by mail which notice shall be complete upon mailing, that 
it intends to impose terms or conditions upon such withdrawal from 
registration;
    (3) The Commission or the National Futures Association notifies the 
registrant by mail, which notice shall be complete upon mailing, or the 
registrant otherwise is notified that it is the subject of an 
investigation to determine, among other things, whether such registrant 
has violated, is violating, or is about to violate the Act, rules, 
regulations or orders adopted thereunder;
    (4) The Commission or the National Futures Association requests from 
the registrant further information pertaining to its request for 
withdrawal from registration; or
    (5) The Commission or National Futures Association determines that 
it would be contrary to the requirements of the Act, or of any rule, 
regulation or order thereunder, or to the public interest to permit such 
withdrawal from registration.
    (g) Withdrawal from registration in one capacity does not constitute 
withdrawal from registration in any other capacity.
    (h) Withdrawal from registration does not constitute a release from 
liability for any violation of the Act or

[[Page 204]]

of any rule, regulation, or order thereunder.

(Approved by the Office of Management and Budget under control number 
3038-0008)

[46 FR 48917, Oct. 5, 1981]

    Editorial Note: For Federal Register citations affecting Sec.  3.33, 
see the List of CFR Sections Affected, which appears in the Finding Aids 
section of the printed volume and at www.fdsys.gov.



                      Subpart B_Temporary Licenses



Sec.  3.40  Temporary licensing of applicants for associated person, 
floor broker or floor trader registration.

    (a) Notwithstanding any other provision of these regulations and 
pursuant to the terms and conditions of this subpart:
    (1) The National Futures Association may grant a temporary license 
to any applicant for registration as an associated person upon the 
contemporaneous filing with the National Futures Association of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto; and
    (ii) The sponsor's certification required by Sec.  3.12(c): 
Provided, however, that the fingerprints of the applicant on a 
fingerprint card provided by the National Futures Association for that 
purpose must be filed with the National Futures Association within 20 
days following the date the temporary license is issued; and, provided 
further, that failure to file the fingerprints within this period will 
result in the termination of the temporary license immediately upon 
notice to the applicant's sponsor that the National Futures Association 
has not received the applicant's fingerprints.
    (2) The National Futures Association may grant a temporary license 
to any applicant for registration as a floor broker or individual floor 
trader upon the contemporaneous filing with the National Futures 
Association of:
    (i) A Form 8-R, properly completed in accordance with the 
instructions thereto;
    (ii) The fingerprints of the applicant on a fingerprint card 
provided by the National Futures Association for that purpose;
    (iii) A Supplemental Sponsor Certification Statement executed by a 
sponsor meeting the requirements under Sec.  3.60(b)(2)(i), if the 
applicant is subject to an order imposing conditions on the applicant's 
registration; and
    (iv) Evidence that the applicant has been granted trading privileges 
by a contract market or swap execution facility that has filed with the 
National Futures Association a certification signed by its chief 
operating officer with respect to the review of an applicant's 
employment, credit and other history in connection with the granting of 
trading privileges.
    (b) The failure of an applicant or the applicant's sponsor to 
respond to a request by the Commission or the National Futures 
Association for clarification of any information set forth in the 
application of the applicant or for the resubmission of fingerprints in 
accordance with such request will be deemed to constitute a withdrawal 
of the applicant's registration application and shall result in the 
immediate termination of the applicant's temporary license.
    (c) Subject to the provisions of Sec.  3.42 and all of the 
obligations imposed on such registrants under the Act (in particular, 
section 14 thereof) and the rules, regulations, and orders thereunder, 
an applicant for registration as an associated person who has received 
notification that a temporary license has been granted may act in the 
capacity of an associated person, an applicant for registration as a 
floor trader who has received written notification that a temporary 
license has been granted may act in the capacity of a floor trader, and 
an applicant for registration as a floor broker who has received written 
notification that a temporary license has been granted may act in the 
capacity of a floor broker.

[67 FR 38876, June 6, 2002, as amended at 77 FR 51908, Aug. 28, 2012]



Sec.  3.42  Termination.

    (a) A temporary license issued pursuant to Sec.  3.40 shall 
terminate:
    (1) Five days after service upon the applicant of a notice by the 
Commission or the National Futures Association pursuant to Sec.  3.60 of 
this part that the applicant for registration may be

[[Page 205]]

found subject to a statutory disqualification from registration;
    (2) Immediately upon termination of the association of the applicant 
for registration as an associated person with the registrant which filed 
the sponsorship certification, or immediately upon loss of trading 
privileges by an applicant for registration as a floor broker or floor 
trader on all contract markets and swap execution facilities which filed 
the certification described in Sec.  3.40;
    (3) Immediately upon the withdrawal of the registration application 
pursuant to Sec.  3.40;
    (4) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time permitted 
under sections 6(e), 6b, or 6c(d) of the Act;
    (5) Immediately upon failure to pay the full amount of a reparation 
order within the time permitted under section 14(f) of the Act;
    (6) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, swap execution facility or registered futures 
association within the time specified in section 10(g) of the National 
Futures Association's Code of Arbitration or the comparable time period 
specified in the rules of a contract market or other appropriate 
arbitration forum.
    (7) Immediately upon the revocation or withdrawal of the 
registration of the applicant's sponsor; or
    (8) Immediately upon notice to the applicant and the applicant's 
sponsor or the contract market or swap execution facility that has 
granted the applicant trading privileges that:
    (i) The applicant failed to disclose relevant disciplinary history 
information on the applicant's Form 8-R; or
    (ii) An event has occurred leading to a required disclosure on the 
applicant's Form 8-R.
    (b) Upon termination, the applicant may not engage in any activity 
which requires registration with the Commission as an associated person, 
floor broker or floor trader.

[49 FR 8219, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58 
FR 19594, Apr. 15, 1993; 67 FR 38876, June 6, 2002; 77 FR 51908, Aug. 
28, 2012]



Sec.  3.43  Relationship to registration.

    (a) A temporary license shall not be deemed to be a registration or 
to confer any right to such registration.
    (b) Unless a temporary license has terminated pursuant to Sec.  
3.42, a temporary license shall become a registration with the 
Commission upon the earlier of:
    (1) A determination by the National Futures Association that the 
applicant is qualified for registration as an associated person, floor 
broker or floor trader; or
    (2) The expiration of six months from the date of issuance unless a 
notice has been issued under Sec.  3.60 of the initiation of a 
proceeding to deny registration under section 8a(2) or 8a(3) of the Act.

[49 FR 8219, Mar. 5, 1984, as amended at 49 FR 39534, Oct. 9, 1984; 54 
FR 19559, May 8, 1989; 58 FR 19595, Apr. 15, 1993]



Sec.  3.44  Temporary licensing of applicants for guaranteed 
introducing broker registration.

    (a) Notwithstanding any other provisions of these regulations, and 
pursuant to the terms and conditions of this subpart, the National 
Futures Association may grant a temporary license to any applicant for 
registration as an introducing broker upon the contemporaneous filing 
with the National Futures Association of:
    (1) A properly completed guarantee agreement (Form 1-FR part B) from 
a futures commission merchant or retail foreign exchange dealer which is 
eligible to enter into such an agreement pursuant to Sec.  1.10(j)(2) of 
this chapter;
    (2) A Form 7-R properly completed in accordance with the 
instructions thereto;
    (3) A Form 8-R for the applicant, if a sole proprietor, and each 
principal (including each branch office manager) thereof, properly 
completed in accordance with the instructions thereto, all of whom would 
be eligible for a temporary license if they had applied as associated 
persons.

[[Page 206]]

    (4) A certification executed by a person duly authorized by the 
futures commission merchant or retail foreign exchange dealer that has 
executed the guarantee agreement required by paragraph (a)(1) of this 
section, stating that:
    (i) The futures commission merchant or retail foreign exchange 
dealer has verified the information on the Forms 8-R filed pursuant to 
paragraph (a)(3) of this section which relate to education and 
employment history of the applicant's principals (including each branch 
office manager) thereof during the preceding three years; and
    (ii) To the best of the futures commission merchant's or retail 
foreign exchange dealer's knowledge, information, and belief, all of the 
publicly available information supplied by the applicant and its 
principals and each branch office manager of the applicant on the Form 
7-R and Forms 8-R, as appropriate, is accurate and complete; and
    (5) The fingerprints of the applicant, if a sole proprietor, and of 
each principal (including each branch office manager) thereof on 
fingerprint cards provided by the National Futures Association for that 
purpose.
    (b) The effective date of a guarantee agreement filed in accordance 
with paragraph (a)(1) of this section is the date upon which the 
temporary license is granted by the National Futures Association.
    (c) An applicant that fails to respond in accordance with a written 
request by the Commission or the National Futures Association for 
clarification of any information set forth in the application of the 
applicant or any principal (including any branch office manager) thereof 
or for the resubmission of a fingerprint card will be deemed to have 
withdrawn its registration application and the temporary license issued 
to such applicant and any associated person thereof shall terminate 
immediately.

[51 FR 45760, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 57 
FR 23151, June 2, 1992; 64 FR 1728, Jan. 12, 1999; 67 FR 38876, June 6, 
2002; 75 FR 55427, Sept. 10, 2010; 77 FR 51908, Aug. 28, 2012]



Sec.  3.45  Restrictions upon activities.

    (a) Subject to the provisions of Sec.  3.46 of this subpart and all 
of the obligations imposed on such registrants under the Act (in 
particular, section 14 thereof) and the rules, regulations and orders 
thereunder, an applicant for registration as an introducing broker who 
has received written notification that a temporary license has been 
granted may act in the capacity of a guaranteed introducing broker.
    (b) An applicant for registration as an introducing broker who has 
received a temporary license may be guaranteed by a futures commission 
merchant or retail foreign exchange dealer other than the futures 
commission merchant or retail foreign exchange dealer which provided the 
initial guarantee agreement described in Sec.  3.44(a)(1) of this 
subpart: Provided, That, at least 10 days prior to the effective date of 
the termination of the existing guarantee agreement in accordance with 
the provisions of Sec.  1.10 (j)(5) of this chapter, or such other 
period of time as the National Futures Association may allow for good 
cause shown, the applicant files with the National Futures Association--
    (1) Written notice of such termination and
    (2) A new guarantee agreement with another futures commission 
merchant or retail foreign exchange dealer effective the day following 
the last effective date of the existing guarantee agreement.

[51 FR 45761, Dec. 22, 1986, as amended at 75 FR 55427, Sept. 10, 2010]



Sec.  3.46  Termination.

    (a) A temporary license issued pursuant to Sec.  3.44 shall 
terminate:
    (1) Five days after service upon the applicant of a notice by the 
National Futures Association that the applicant for registration may be 
found subject to a statutory disqualification from registration;
    (2) Immediately upon termination of the applicant's guarantee 
agreement in accordance with Sec.  1.10(j)(4)(ii) or (j)(5) of this 
chapter, unless a new guarantee agreement is filed in accordance with 
Sec.  3.45(b);

[[Page 207]]

    (3) Immediately upon the failure of an applicant to respond to a 
written request by the Commission or the National Futures Association 
for clarification of information set forth in the application of the 
applicant or any principal (including any branch office manager) thereof 
or for the resubmission of a fingerprint card pursuant to Sec.  3.44(c) 
in accordance with such request;
    (4) Immediately upon the revocation or withdrawal of the guarantor 
futures commission merchant's registration;
    (5) Immediately upon the withdrawal of the registration application 
pursuant to Sec.  3.44(c);
    (6) Immediately upon failure to comply with an order to pay a civil 
monetary penalty, restitution, or disgorgement within the time permitted 
under section 6(e), 6b, or 6c(d) of the Act;
    (7) Immediately upon failure to pay the full amount of a reparation 
order within the time permitted under section 14(f) of the Act;
    (8) Immediately upon failure to comply with an award in an 
arbitration proceeding conducted pursuant to the rules of a designated 
contract market, swap execution facility, or registered futures 
association within the time specified in section 10(g) of the National 
Futures Association's Code of Arbitration or the comparable time period 
specified in the rules of a contract market, swap execution facility, or 
other appropriate arbitration forum.
    (9) Whenever a person not listed as a principal on the applicant's 
initial registration application becomes a principal under Sec.  3.1(a); 
or
    (10) Immediately upon notice to the applicant and the guarantor 
futures commission merchant that:
    (i) The applicant or any principal (including any branch officer 
manager) failed to disclose relevant disciplinary history information on 
the applicant's Form 7-R or on a principal's Form 8-R; or
    (ii) An event has occurred leading to a required disclosure on the 
applicant's Form 7-R or on a principal's Form 8-R.
    (b) Upon termination, the applicant may not engage in any activity 
which requires registration as an introducing broker.

[51 FR 45761, Dec. 22, 1986, as amended at 53 FR 8435, Mar. 15, 1988; 58 
FR 19595, Apr. 15, 1993; 67 FR 38876, June 6, 2002; 77 FR 51908, Aug. 
28, 2012]



Sec.  3.47  Relationship to registration.

    (a) A temporary license shall not be deemed to be a registration or 
to confer any right to such registration.
    (b) Unless a temporary license has terminated, a temporary license 
shall become a registration upon the earlier of:
    (1) A determination by the National Futures Association that the 
applicant is qualified for registration as an introducing broker; or
    (2) The expiration of six months from the date of issuance unless a 
notice has been issued under Sec.  3.60 of the initiation of a 
proceeding to deny registration under sections 8a(2) or 8a(3) of the 
Act.

[51 FR 45761, Dec. 22, 1986, as amended at 58 FR 19595, Apr. 15, 1993]



       Subpart C_Denial, Suspension or Revocation of Registration

    Source: 49 FR 8220, Mar. 5, 1984, unless otherwise noted.



Sec.  3.50  Service.

    (a) For purposes of this subpart, service upon an applicant or 
registrant will be sufficient if mailed by registered mail or certified 
mail return receipt requested properly addressed to the applicant or 
registrant at the address shown on his application or any amendment 
thereto, and will be complete upon mailing. Where a party effects 
service by mail, the time within which the person served may respond 
thereto shall be increased by three days.
    (b) A copy of any notice served in accordance with paragraph (a) of 
this section shall also be served upon:
    (1) Any registrant sponsoring the applicant or registrant pursuant 
to the provisions of Sec.  3.12 of this part if the applicant or 
registrant is an individual registered as or applying for registration 
as an associated person; or
    (2) Any futures commission merchant or retail foreign exchange 
dealer which

[[Page 208]]

has entered into a guarantee agreement in accordance with Sec.  1.10(j) 
of this chapter, if the applicant or registrant is registered as or 
applying for registration as an introducing broker.
    (c) Documents served upon the Division of Swap Dealer and 
Intermediary Oversight or upon the Division of Enforcement or filed with 
the Commission under this subpart shall be considered served or filed 
only upon actual receipt at the Commission's Washington, DC office, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
    (d) Except for the documents which may be served under Sec.  3.51, 
any documents served upon an applicant or registrant or upon the 
Division of Swap Dealer and Intermediary Oversight or the Division of 
Enforcement or filed with the Commission under this subpart shall be 
concurrently filed with the Proceedings Clerk, together with proof of 
service, in accordance with the provisions of Sec.  10.12 (d) and (e) of 
this chapter.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 60 
FR 49334, Sept. 25, 1995; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 
7, 2002; 75 FR 55427, Sept. 10, 2010; 78 FR 22419, Apr. 16, 2013]



Sec.  3.51  Withdrawal of application for registration.

    (a) Notice. Whenever information comes to the attention of the 
Commission that an applicant for initial registration in any capacity 
under the Act may be found subject to a statutory disqualification under 
sections 8a(2) or 8a(3) of the Act, the Commission may serve written 
notice upon the applicant, which notice shall specify the statutory 
disqualifications to which the applicant may be subject and advise the 
applicant that:
    (1) The information, if true, is a basis upon which the applicant's 
registration may be denied;
    (2) Unless the applicant voluntarily withdraws the application, it 
may be necessary to institute the denial procedures described in this 
subpart; and
    (3) If the applicant does not confirm in writing that the applicant 
wishes to have the application given further consideration, the 
application of the applicant will be deemed to have been withdrawn.
    (b) The applicant must serve the written confirmation referred to in 
paragraph (a)(3) of this section upon the Secretary of the Commission on 
or before twenty days after the date the notice described in paragraph 
(a) of this section is served.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992]



Sec. Sec.  3.52-3.54  [Reserved]



Sec.  3.55  Suspension and revocation of registration pursuant to
section 8a(2) of the Act.

    (a) Notice. On the basis of information obtained by the Commission, 
the Commission may at any time serve notice upon a registrant in any 
capacity under the Act that:
    (1) The Commission alleges and is prepared to prove that the 
registrant is subject to one or more of the statutory disqualifications 
set forth in section 8a(2) of the Act;
    (2) An Administrative Law Judge shall make a determination, based 
upon written evidence, as to whether the registrant is subject to such 
statutory disqualification; and
    (3) If the registrant is found to be subject to a statutory 
disqualification, the registration of the registrant may be suspended 
and the registrant ordered to show cause why such registration should 
not be revoked.
    (b) Written submission. If the registrant wishes to challenge the 
accuracy of the allegations set forth in the notice, the registrant may 
submit written evidence limited to the type described in Sec.  
3.60(b)(1) of this part. 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 registrant.
    (c) Reply. Within ten days of receipt of any written submission 
filed by the registrant, the Division of Enforcement may serve upon the 
registrant and file with the Proceedings Clerk a reply.
    (d) Determination by Administrative Law Judge. A determination by 
the Administrative Law Judge as to whether the registrant is subject to 
a statutory disqualification must be based upon

[[Page 209]]

the evidence of the statutory disqualification, notice with proof of 
service, the written submission, if any, filed by the registrant 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.
    (e) Suspension and order to show cause. (1) If the registrant is 
found to be subject to a statutory disqualification, the Administrative 
Law Judge, within thirty days after receipt of the registrant's written 
submission, if any, and any reply thereto, shall issue an interim order 
suspending the registration of the registrant and requiring the 
registrant to show cause within twenty days of the date of the order 
why, notwithstanding the existence of the statutory disqualification, 
the registration of the registrant should not be revoked. The 
registration of the registrant shall be suspended, effective five days 
after the order to show cause is served upon the registrant in 
accordance with Sec.  3.50(a), until a final order with respect to the 
order to show cause has been issued: Provided, That if the sole basis 
upon which the registrant 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 registrant shall be suspended until such time as 
the temporary order, judgment or decree shall have expired: Provided, 
however, That in no event shall the registrant be suspended for a period 
to exceed six months.
    (2) If the registrant 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 registrant, the Division of Swap Dealer and 
Intermediary Oversight and the Division of Enforcement. Such order shall 
be effective as a final order of the Commission fifteen days after the 
date it is served upon the registrant in accordance with the provisions 
of Sec.  3.50(a) of this part unless a timely application for review is 
filed in accordance with Sec.  10.102 of this chapter. The appellate 
procedures set forth in Sec. Sec.  10.102, 10.103, 10.104, 10.106, 
10.107 and 10.109 of this chapter shall apply to any appeal brought 
under paragraph (e)(2) of this section.
    (f) Further proceedings. If an order to show cause is issued 
pursuant to paragraph (e)(1) of this section, further proceedings on 
such order shall be conducted in accordance with the provisions of Sec.  
3.60(b)-(j) of this part.

[49 FR 8220, Mar. 5, 1984, as amended at 57 FR 23151, June 2, 1992; 58 
FR 19595, Apr. 15, 1993; 60 FR 54801, Oct. 26, 1995; 67 FR 62351, Oct. 
7, 2002; 78 FR 22419, Apr. 16, 2013]



Sec.  3.56  Suspension or modification of registration pursuant 
to section 8a(11) of the Act.

    (a) Notice. (1) On the basis of information obtained by the 
Commission, the Commission may at any time serve written notice upon a 
registrant in any capacity under the Act that:
    (i) The Commission alleges and is prepared to prove, by reference to 
an information, indictment or complaint authorized by a United States 
Attorney or an appropriate official of any State that the registrant is 
charged with the commission of or participation in a crime involving a 
violation of the Act or a violation of any other provision of Federal or 
State law that would reflect on the honesty or the fitness of the person 
to act as a fiduciary that is punishable by imprisonment for a term 
exceeding one year, and that continued registration of the person may 
pose a threat to the public interest or may threaten to impair public 
confidence in any market regulated by the Commission;
    (ii) An Administrative Law Judge shall make a determination, based 
upon written evidence and any oral hearing granted, as to whether the 
registrant is charged with the Commission of or participation in such a 
crime and whether the continued registration of the person may pose a 
threat to the public interest or may threaten to impair public 
confidence in any market regulated by the Commission; and
    (iii) If the registrant is found to be charged with the commission 
of or participation in such a crime and it is found that the continued 
registration of the person may pose a threat to the public interest or 
may threaten to impair public confidence in any market

[[Page 210]]

regulated by the Commission, the registration of the registrant shall be 
suspended or modified.
    (2) The notice referred to in paragraph (a) of this section shall 
include a short and plain statement that the continued registration of 
the registrant may pose a threat to the public interest or may threaten 
to impair public confidence in any market regulated by the Commission.
    (b) Response. (1) If the registrant wishes to challenge the accuracy 
of the allegations in the notice, the registrant may submit written 
evidence as to:
    (i) The registrant's identity;
    (ii) The existence of a clerical error in any record documenting the 
information, indictment or complaint;
    (iii) The nature of the information, indictment or complaint; or
    (iv) The statement accompanying the notice referred to in paragraph 
(a)(2) of this section and, in an effort to have his registration 
modified rather than suspended, the Supplemental Sponsor Certification 
Statement signed by a sponsor, supervising floor broker or, in the case 
of a floor trader, a supervising registrant, principal, contract market, 
or swap execution facility, as appropriate for the registrant in 
accordance with Sec.  3.60(b)(2)(i) and who meets the standards set 
forth in Sec.  3.60(b)(2)(i)(A) and (C).
    (2) The registrant may also request an oral hearing, which shall 
include a statement of the issues to be addressed, a list of any 
witnesses to be called, a summary of the testimony to be elicited and 
copies of any documents to be introduced. An oral hearing shall be 
granted upon request.
    (3) Such written submissions 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 registrant under paragraph (a) of 
this section.
    (c) Reply. Within ten days of receipt of any written submission 
filed by the registrant, the Division of Enforcement may serve upon the 
registrant and file with the Proceedings Clerk a reply.
    (d) Oral hearing. An oral hearing shall be conducted pursuant to 
such sections of the Commission's Rules of Practice, 17 CFR part 10, as 
the Administrative Law Judge deems necessary and in a manner which shall 
ensure that the proceeding is resolved expeditiously.
    (e) Determination by Administrative Law Judge. (1) A determination 
by the Administrative Law Judge as to whether the Division of 
Enforcement has shown by a preponderance of the evidence that the 
registrant is charged with the commission of or participation in a crime 
as set forth in the notice and that the continued registration of the 
registrant may pose a threat to the public interest or may threaten to 
impair public confidence in any market regulated by the Commission must 
be based upon the evidence of service, the response, if any, filed by 
the registrant, any written reply submitted by the Division of 
Enforcement and such other papers as the Administrative Law Judge may 
require or permit, and the oral hearing, if any. If the Division of 
Enforcement has made the required showings, the Administrative Law 
Judge, within thirty days after the last written submission or the oral 
hearing, shall issue an order suspending or modifying the registration 
of the registrant. If the Division of Enforcement has not made the 
required showings, the Administrative Law Judge, within thirty days 
after the last written submission or the oral hearing, shall issue an 
order to that effect. The Administrative Law Judge's order shall include 
a written determination setting forth the basis for his ruling.
    (2) The Proceedings Clerk shall promptly serve a copy of such order 
on the registrant, the Division of Swap Dealer and Intermediary 
Oversight and the Division of Enforcement. Such Order shall be effective 
as a final order of the Commission fifteen days after the date it is 
served upon the registrant in accordance with the provisions of Sec.  
3.50(a) unless a timely application for review is filed in accordance 
with Sec.  10.102 of this chapter. The appellate procedures set forth in 
Sec. Sec.  10.102, 10.103, 10.104, 10.106, 10.107 and 10.109 of this 
chapter shall apply to any appeal brought under paragraph (e)(2) of this 
section.
    (f) Any order of suspension or modification issued under this 
section shall

[[Page 211]]

remain in effect until such information, indictment, or complaint is 
disposed of or until terminated by the Commission.
    (g) On disposition of such information, indictment, or complaint, 
the Commission may issue and serve on such registrant a notice under 
Sec.  3.55 or Sec.  3.60 to suspend, restrict, or revoke the 
registration of such person.
    (h) A finding of not guilty or other disposition of the charge shall 
not preclude the Commission from thereafter instituting any other 
proceedings under the Act or its rules.
    (i) A person aggrieved by an order issued under this section may 
obtain review of such order in the same manner and on the same terms and 
conditions as are provided in section 6(c) of the Act.

[58 FR 19595, Apr. 15, 1993, as amended at 60 FR 54801, Oct. 26, 1995; 
67 FR 62351, Oct. 7, 2002; 77 FR 51908, Aug. 28, 2012; 78 FR 22419, Apr. 
16, 2013]



Sec.  3.57  Proceedings under section 8a(2)(E) of the Act.

    The Commission will not initiate a proceeding under section 8a(2)(E) 
of the Act, if respondeat superior is the sole basis upon which the 
registrant may be found subject to a statutory disqualification.



Sec.  3.60  Procedure to deny, condition, suspend, revoke or place 
restrictions upon registration pursuant to sections 8a(2), 
8a(3) and 8a(4) of the Act.

    (a) Notice. On the basis of information obtained by the Commission, 
the Commission may at any time give written notice to any applicant for 
registration or any registrant in any capacity under the Act that:
    (1) The Commission alleges and is prepared to prove that the 
registrant or applicant is subject to one or more of the statutory 
disqualifications set forth in section 8a(2), 8a(3) or 8a(4) of the Act;
    (2) The allegations set forth in the notice, if true, constitute a 
basis upon which registration may be denied, granted upon conditions, 
suspended, revoked or restricted;
    (3) The applicant or registrant is entitled to file a response 
within thirty days of the date of service of the notice to challenge the 
evidentiary basis of the statutory disqualification set forth in the 
notice or show cause why, notwithstanding the accuracy of those 
allegations, registration should nevertheless be granted, or granted 
upon condition, or should not be conditioned, suspended, revoked or 
restricted; and
    (4) If the applicant or registrant does not file a timely response 
to the notice:
    (i) The applicant or registrant will be deemed to have waived his 
right to a hearing on all issues and the facts stated in the notice 
shall be deemed to be true and conclusive for the purpose of finding 
that the applicant or registrant is subject to a statutory 
disqualification under sections 8a(2), 8a(3) or 8a(4) of the Act; and
    (ii) A presiding officer may thereafter decide whether to issue an 
order of default in accordance with paragraph (g) of this section to 
deny, condition, suspend, revoke, or place restrictions upon 
registration based solely upon the facts set forth in the notice.
    (b) Response. Within thirty days after service upon the applicant or 
registrant of a notice issued in accordance with the provisions of 
paragraph (a) of this section, the applicant or registrant shall file a 
response with the Proceedings Clerk and serve a copy of the response on 
the Division of Enforcement.
    (1) In the response, the applicant or registrant shall state whether 
he challenges the evidentiary basis of the statutory disqualification 
set forth in the notice. The grounds for such a challenge shall include 
evidence as to:
    (i) The applicant's or registrant's identity,
    (ii) The existence of a clerical error in any record documenting the 
statutory disqualification,
    (iii) The nature or date of the statutory disqualification,
    (iv) The post-conviction modification of any record of conviction, 
or
    (v) The favorable disposition of any appeal.


The applicant or registrant shall state the nature of each challenge and 
submit a verified statement or affidavit to support facts material to 
each challenge raised in the response.

[[Page 212]]

    (2)(i) In the response, if the person is not an associated person, a 
floor broker or a floor trader or an applicant for registration in any 
of those capacities, the applicant or registrant shall also state 
whether he or she intends to show that registration would not pose a 
substantial risk to the public despite the existence of the 
disqualification set forth in the notice. If the person is an associated 
person, a floor broker or a floor trader or an applicant for 
registration in any of those capacities, the applicant or registrant 
shall also state whether he or she intends to show that full, 
conditioned or restricted registration would not pose a substantial risk 
to the public despite the existence of the disqualification set forth in 
the notice. If the person is an associated person or an applicant for 
registration as an associated person and intends to make such a showing, 
he or she must also submit a letter signed by an officer or general 
partner authorized to bind the sponsor whereby the sponsor agrees to 
sign a Supplemental Sponsor Certification Statement and supervise 
compliance with any conditions or restrictions that may be imposed on 
the applicant or registrant as a result of a statutory disqualification 
proceeding under this section; if the person is a floor broker or a 
floor trader or an applicant for registration in either capacity and 
intends to make such a showing, he or she must, in the case of a floor 
broker or applicant for registration as a floor broker, also submit a 
letter signed by his employer or if he or she has no employer by another 
floor broker or, in the case of a floor trader or applicant for 
registration as a floor trader, also submit a letter signed by an 
officer of the floor trader's clearing member, if such officer is a 
registrant or a principal of a registrant, or the chief operating 
officer of each contract market or swap execution facility that has 
granted trading privileges, whereby the employer or floor broker, 
appropriate registrant, principal or chief operating officer (on behalf 
of the contract market or swap execution facility) agrees to sign a 
Supplemental Sponsor Certification Statement and supervise compliance 
with any conditions or restrictions that may be imposed on the applicant 
or registrant as a result of a statutory disqualification proceeding 
under this section; provided, that, with respect to such sponsor, 
supervising employer or floor broker, supervising registrant or 
principal:
    (A) An adjudicatory proceeding pursuant to the provisions of 
sections 6(c), 6(d), 6c, 6d, 8a or 9 of the Act is not pending; and
    (B) In the case of a sponsor which is a futures commission merchant, 
a retail foreign exchange dealer or a leverage transaction merchant, the 
sponsor is not subject to the reporting requirements of Sec.  1.12(b), 
Sec.  5.6(b) or Sec.  31.7(b) of this chapter, respectively; and
    (C) Such person is not barred from service on self-regulatory 
organization governing boards or committees based on disciplinary 
history in accordance with Sec.  1.63 of this chapter.
    (ii) If, in the response, the applicant or registrant states that he 
intends to make the showing referred to in paragraph (b)(2)(i) of this 
section, he shall also, within fifteen days after filing his initial 
response under paragraph (b) of this section, file with the Proceedings 
Clerk and serve a copy on the Division of Enforcement a submission which 
includes a statement of the applicant, registrant or his attorney 
identifying and summarizing the testimony of each witness whom the 
applicant or registrant intends to have testify in support of facts 
material to his showing, and copies of all documents which the applicant 
or registrant intends to introduce to support facts material to his 
showing. The factors forming the basis for a disqualified applicant's or 
registrant's showing referred to in paragraph (b)(2)(i) of this section 
may include:
    (A) Evidence mitigating the seriousness of the wrongdoing underlying 
the statutory disqualification set forth in the notice;
    (B) Evidence that the applicant or registrant has undergone 
rehabilitation since the time of the wrongdoing underlying the statutory 
disqualification; and
    (C) If the person is an associated person, floor broker or floor 
trader or an applicant for registration in any of those capacities, 
evidence that the applicant's or registrant's registration on

[[Page 213]]

a conditioned or restricted basis would be subject to supervisory 
controls likely both to detect future wrongdoing by the applicant or 
registrant and protect the public from any harm arising from the 
applicant's or registrant's future wrongdoing, including proposed 
conditions or restrictions.
    (c) Reply. Within thirty days after the latter of the date the 
applicant or registrant serves a copy of the response on the Division of 
Enforcement (if no further submission is to be made in accordance with 
paragraph (b)(2)(ii) of this section), or the date the applicant or 
registrant serves a copy of the further submission made in accordance 
with paragraph (b)(2)(ii) of this section on the Division of 
Enforcement, the Division of Enforcement shall file a reply thereto with 
the Proceedings Clerk and serve a copy of the reply on the applicant or 
registrant. The Division of Enforcement's reply shall include either:
    (1) A motion for summary disposition stating that there are no 
genuine issues of material fact to be determined and that registration 
should be denied or revoked, based upon the applicant's or registrant's 
response and further submission, if any, and any other materials which 
are attached to the reply and would be admissible under Sec.  10.91 of 
this chapter; or
    (2) A description of factual issues raised in the applicant's or 
registrant's response and further submission, if any, that the Division 
of Enforcement regards as material and disputed. Such a reply shall also 
include the identity and a summary of the expected testimony of each 
witness whom the Division intends to have testify, and copies of all 
documents which the Division intends to introduce.
    (d) Oral Presentation. Within thirty days of the date the Division 
of Enforcement files its reply in accordance with the provisions of 
paragraph (c) of this section to the applicant's or registrant's 
response and further submission, if any, the Administrative Law Judge 
shall issue an order:
    (1) If the Administrative Law Judge finds, based on the motion for 
summary disposition, that a party is entitled to judgment as a matter of 
law, granting, denying, suspending, or revoking the registration of an 
applicant or registrant, or dismissing the notice issued in accordance 
with paragraph (a) of this section, and such order shall be made in 
accordance with the standards set forth in paragraphs (e) and (f) of 
this section; or
    (2) Notifying the parties of a time and place of hearing. At such 
hearing, the parties shall be limited to presentation of witnesses and 
documents listed in previous filings except, for good cause shown, the 
parties may request that the witness and document lists be supplemented 
for purposes of rebuttal. Such oral hearing shall be conducted in 
accordance with Sec. Sec.  10.61-10.81 and 10.83 of this chapter. The 
Administrative Law Judge shall file an initial decision after completion 
of the oral hearing in accordance with the standards set forth in 
paragraphs (e) and (f) of this section.
    (3) Upon notice that the Administrative Law Judge has concluded that 
an oral presentation is appropriate, the parties may elect to 
participate by telephone in accordance with the terms set forth in Sec.  
12.209(b) of this chapter. To effect such an election, the party shall 
file a notice with the Proceedings Clerk and serve a copy on all 
opposing parties within fifteen days of the date the Administrative Law 
Judge's notice is served. The filing of an election to participate by 
telephone will be deemed a waiver of the party's right to a full oral 
hearing on the parties' material disputes of fact. The Administrative 
Law Judge shall schedule a telephonic hearing only if all parties to the 
proceeding elect such a procedure. The Administrative Law Judge shall 
conduct such a hearing in accordance with Sec.  12.209(b) of this 
chapter. Following the hearing, the Administrative Law Judge shall issue 
a written decision in accordance with the standards set forth in 
paragraphs (e) and (f) of this section.
    (e) Determination by Administrative Law Judge--Standards of Proof. 
The Administrative Law Judge's written determination shall specifically 
consider whether the Division of Enforcement has shown by a 
preponderance of the evidence that the applicant or registrant is 
subject to the statutory disqualification set forth in the notice issued 
by the Commission and, where appropriate:

[[Page 214]]

    (1) In actions involving statutory disqualifications set forth in 
section 8a(2) of the Act, whether the applicant or registrant has made a 
clear and convincing showing that full, conditioned or restricted 
registration would not pose a substantial risk to the public despite the 
existence of the statutory disqualification; or
    (2) In actions involving statutory disqualifications set forth in 
sections 8a(3) or 8a(4) of the Act, whether the applicant or registrant 
has shown by a preponderance of the evidence that full, conditioned or 
restricted registration would not pose a substantial risk to the public 
despite the existence of the statutory disqualification.
    (f) Determination of Administrative Law Judge--Findings. In making 
his written determination, the Administrative Law Judge shall set forth 
the facts material to his conclusion and provide an explanation of his 
decision in light of the statutory disqualification set forth in the 
notice and, where appropriate, his findings regarding:
    (1) Evidence mitigating the seriousness of the wrongdoing underlying 
the applicant's or registrant's statutory disqualification;
    (2) Evidence that the applicant or registrant has undergone 
rehabilitation since the time of the wrongdoing underlying the statutory 
disqualification; and
    (3) If the person is an associated person, a floor broker or a floor 
trader or an applicant for registration in any of those capacities, 
evidence that the applicant's or registrant's registration on a 
conditioned or restricted basis would be subject to supervisory controls 
likely both to detect future wrongdoing by the applicant or registrant 
and protect the public from any harm arising from future wrongdoing by 
the applicant or registrant. Any decision providing for a conditioned or 
restricted registration shall take into consideration the applicant's or 
registrant's statutory disqualification and the time period remaining on 
such statutory disqualification, and shall fix a time period after which 
the registrant and his or her sponsor, supervising employer or floor 
broker, or supervising registrant, principal, contract market, or swap 
execution facility may petition to lift or modify the conditions or 
restrictions in accordance with Sec.  3.64.
    (g) Default. The procedures for obtaining a default order and the 
setting aside of a default order in a proceeding instituted under this 
section shall follow the procedures set forth in Sec. Sec.  10.93 and 
10.94 of this chapter.
    (h) Settlements--(1) When offers may be made. Parties may, at any 
time during the course of the proceeding, propose offers of settlement. 
All offers of settlement shall be in writing.
    (2) Content of offer. Each offer of settlement made by a respondent 
shall:
    (i) Acknowledge service of the notice;
    (ii) Admit the jurisdiction of the Commission with respect to the 
matters set forth in the notice;
    (iii) Include a waiver of:
    (A) A hearing,
    (B) All post-hearing procedures,
    (C) Judicial review, and
    (D) Any objection to the staff's participation in the Commission's 
consideration of the offer;
    (iv) Stipulate the record basis on which an order may be entered, 
which may consist solely of the notice and any findings contained in the 
offer of settlement; and
    (v) Consent to the entry of an order reflecting the terms of 
settlement agreed upon, including, where appropriate:
    (A) Findings that the respondent is subject to statutory 
disqualification under sections 8a(2), 8a(3), or 8a(4) of the Act, and
    (B) The revocation, suspension, denial or granting of full 
registration or imposition of conditioned or restricted registration.
    (3) Submission of offer. Offers of settlement made by a respondent 
shall be submitted in writing to the Division of Enforcement, which 
shall present them to the Commission with the Division's recommendation. 
The respondent will be informed if the recommendation will be 
unfavorable, in which event the offer shall not be presented to the 
Commission unless the respondent so requests. Any offer of settlement 
not presented to the Commission shall be null and void with respect to 
any acknowledgment, admission, waiver, stipulation or consent contained 
in the offer

[[Page 215]]

and shall not be used in any manner in the proceeding by any party 
thereto.
    (4) Acceptance of offer. The offer of settlement will only be deemed 
accepted upon issuance by the Commission of an opinion and order based 
on the offer. Upon issuance of the opinion and order, the proceeding 
shall be terminated as to the respondent involved and so noted on the 
docket by the Proceedings Clerk.
    (5) Rejection of offer. When an offer of settlement is rejected, the 
party making the offer shall be notified by the Division of Enforcement 
and the offer of settlement shall be deemed withdrawn. A rejected offer 
of settlement and any documents relating thereto shall not constitute a 
part of the record in the proceeding; and the offer will be null and 
void with respect to any acknowledgment, admission, waiver, stipulation 
or consent contained in the offer and shall not be used in any manner in 
the proceeding by any party thereto.
    (i) Effect of the Administrative Law Judge's Determination. The 
Administrative Law Judge's written determination shall become the final 
decision of the Commission thirty days following the date the 
Proceedings Clerk serves the determination on the parties unless:
    (1) One or more of the parties files and serves a timely notice of 
appeal in accordance with Sec.  10.102 of this chapter; or
    (2) The Commission issues an order staying the effective date of the 
determination and notifying the parties of its intention to undertake 
sua sponte review in accordance with Sec.  10.105 of this chapter.
    (j) Appeal. Following the filing of a notice of appeal, the rules of 
appellate procedure set forth in Sec. Sec.  10.102, 10.103, 10.104, 
10.106, 10.107 and 10.109 of this chapter shall apply to any proceeding 
brought under this section.
    (k) With the exception of Sec. Sec.  10.2 through 10.5, 10.7 through 
10.12(a) (1), 10.12(a) (3) through 10.12(g), 10.26(a)-(d), 10.34, 10.43, 
10.44 and 10.84 of this chapter, or unless otherwise provided in 
Sec. Sec.  3.50 through 3.64 of this part, the provisions of the 
Commission's Rules of Practice in part 10 of this chapter shall not 
apply in any proceeding brought under this part to deny, suspend, 
revoke, restrict or condition registration pursuant to sections 8a(2), 
8a(3) or 8a(4) of the Commodity Exchange Act.
    (l) The failure of any sponsor, supervising employer or floor 
broker, or supervising registrant, principal, contract market, or swap 
execution facility to fulfill its obligations with respect to 
supervision or monitoring of a conditioned or restricted registrant as 
agreed to in the Supplemental Sponsor Certification Statement shall be 
deemed a violation of this rule under the Act.

[57 FR 23152, June 2, 1992, as amended at 58 FR 19596, Apr. 15, 1993; 60 
FR 54801, Oct. 26, 1995; 75 FR 55428, Sept. 10, 2010; 77 FR 51908, Aug. 
28, 2012]



Sec.  3.61  Extensions of time for proceedings brought under 
Sec.  3.55, Sec.  3.56, and Sec.  3.60 of this part.

    (a) In general. Except as otherwise provided by law or by these 
rules, for good cause shown, the Commission or an Administrative Law 
Judge before whom a proceeding brought under Sec.  3.55, Sec.  3.56 or 
Sec.  3.60 is then pending, on their own motion or the motion of a 
party, may at any time extend or shorten the time limit prescribed by 
those rules for filing any document. In any instance in which a time 
limit is not prescribed for an action to be taken concerning any matter, 
the Commission or the Administrative Law Judge may set a time limit for 
that action.
    (b) Motions for extension of time. Absent extraordinary 
circumstances, in any instance in which a time limit that has been 
prescribed for an action to be taken concerning any matter exceeds seven 
days from the date of the order establishing the time limit, requests 
for extension of time shall be filed at least five (5) days prior to the 
expiration of the time limit and shall explain why an extension of time 
is necessary.

[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993]

[[Page 216]]



Sec.  3.62  [Reserved]



Sec.  3.63  Service of order issued by an Administrative Law 
Judge or the Commission.

    A copy of any order issued pursuant to Sec.  3.60 of this part shall 
be served promptly upon the applicant or registrant, the Division of 
Swap Dealer and Intermediary Oversight, the Division of Enforcement, the 
National Futures Association, and any contract markets where the 
applicant or registrant is a member or has trading privileges in 
accordance with the provisions of Sec.  3.50(a) of this part.

[57 FR 23154, June 2, 1992, as amended at 67 FR 62351, Oct. 7, 2002; 78 
FR 22419, Apr. 16, 2013]



Sec.  3.64  Procedure to lift or modify conditions or restrictions.

    (a) Petition. The registrant and his sponsor or supervising floor 
broker may file a petition with the Proceedings Clerk and serve a copy 
of the petition on the Division of Enforcement to lift or modify 
conditions or restrictions on the registrant's registration.
    (1) The petition may be filed after the period specified in the 
order imposing the conditioned or restricted registration.
    (2) In the petition, the registrant and his or her sponsor, 
supervising employer or floor broker, or supervising registrant, 
principal, contract market, or swap execution facility shall be limited 
to a showing, by affidavit, that the conditions or restrictions have 
been satisfied pursuant to the order which imposed them. The affidavit 
must be sworn to by a person with actual knowledge of the registrant's 
activities on behalf of the sponsor, supervising employer or floor 
broker, or supervising registrant, principal, contract market or swap 
execution facility.
    (b) Response. (1) Within thirty days of receipt of the petition, 
pursuant to paragraph (a) of this section, the Division of Enforcement 
shall file a response with the Proceedings Clerk. The response must 
include a recommendation by the Division of Enforcement as to whether to 
continue the conditions or restrictions, modify the conditions or 
restrictions, or to allow for a full registration.
    (2) If the Division of Enforcement agrees with the petitioner's 
request to lift or modify conditions or restrictions on the petitioner's 
registration, it shall so recommend to the Commission. Such 
recommendation will only be deemed accepted upon issuance by the 
Commission of an order lifting or modifying conditions or restrictions 
on the petitioner's registration. Such order shall be so noted on the 
docket by the Proceedings Clerk.
    (c) Oral presentation. If the Division of Enforcement requests a 
continuation, or a modification other than in accordance with the terms 
of the petition, of the restrictions or conditions on the registration, 
the Administrative Law Judge shall, within thirty days of the date that 
the response is filed pursuant to paragraph (b) of this section, 
determine whether an oral presentation is appropriate to the reliable 
resolution of the registrant's petition.
    (1) If the Administrative Law Judge determines that an oral 
presentation is appropriate, he shall notify the parties of his 
determination and shall schedule and conduct an oral hearing in 
accordance with Sec. Sec.  10.61 through 10.81 of this chapter. 
Following the hearing, the Administrative Law Judge shall issue a 
written decision or an order.
    (2) If the Administrative Law Judge concludes that an oral 
presentation is unnecessary, he shall notify the parties and issue a 
written decision or an order.
    (d) Effect of the Administrative Law Judge's determination. The 
Administrative Law Judge's written determination shall become the final 
decision of the Commission thirty days following the date the 
Proceedings Clerk serves the determination on the registrant, the 
registrant's sponsor, supervising employer or floor broker, or 
supervising registrant, principal or contract market, and the Division 
of Enforcement unless one or more of the parties files a timely notice 
of appeal in accordance with Sec.  10.102 of this chapter.
    (e) Appeal. Following the filing of a notice of appeal, the rules of 
appellate procedure set forth in Sec. Sec.  10.102, 10.103, 10.104, 
10.106, 10.107 and 10.109 of this

[[Page 217]]

chapter shall apply to any proceeding brought under this section.

[57 FR 23154, June 2, 1992, as amended at 58 FR 19597, Apr. 15, 1993; 60 
FR 54801, Oct. 26, 1995; 77 FR 51909, Aug. 28, 2012]



             Subpart D_Notice Under Section 4k(5) of the Act



Sec.  3.70  Notification of certain information regarding associated 
persons.

    (a) Notice. A registrant must notify the Commission under section 
4k(5) of the Act of any facts regarding an associated person of the 
registrant or an applicant for registration as an associated person whom 
it has sponsored pursuant to the provisions of Sec.  3.12 of this part 
or whom it intends to hire or otherwise employ as an associated person 
which are set forth as statutory disqualifications in section 8a(2) of 
the Act within ten business days of the date upon which the registrant 
first knows or should have known such facts. Notice to the Commission 
shall be sufficient if the registrant gives notice to the Director of 
the Division of Swap Dealer and Intermediary Oversight or the Director's 
designee by telephone and confirms such notice in writing by certified 
or registered mail or equivalent means to the Commission at its 
Washington, DC office (Attn: Deputy Director, Registration and 
Compliance Branch, Division of Swap Dealer and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581).
    (b) Unlawful to act as an associated person. Upon the earlier of 
notification to the Commission by the registrant pursuant to paragraph 
(a) of this section, or actual receipt of notice to the registrant 
pursuant to Sec.  3.50(b)(1) of this part, that an associated person of 
the registrant or an applicant for registration as an associated person 
may be subject to a statutory disqualification as set forth in section 
8a(2) of the Act, it shall be unlawful for the registrant to permit such 
person to act in the capacity of an associated person of the registrant 
until the Commission determines that such person should nonetheless be 
registered.
    (c) Proceedings under subpart C. Upon notification to the Commission 
by the registrant under paragraph (a) of this section, the Commission 
may promptly issue notice under Sec.  3.55 or Sec.  3.60 of this part, 
as appropriate, to suspend and revoke the registration of the associated 
person of the registrant or to deny the registration of the applicant 
for registration as an associated person of the registrant.

[49 FR 8223, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 60 
FR 49334, Sept. 25, 1995; 67 FR 62351, 62352, Oct. 7, 2002; 78 FR 22419, 
Apr. 16, 2013]



            Subpart E_Delegation and Reservation of Authority



Sec.  3.75  Delegation and reservation of authority.

    (a) The Commission hereby delegates, until such time as it orders 
otherwise, to the Director of the Division of Swap Dealer and 
Intermediary Oversight or his or her designee the authority to grant or 
deny requests filed pursuant to Sec.  3.12(g). The Director of the 
Division of Swap Dealer and Intermediary Oversight may submit to the 
Commission for its consideration any matter which has been delegated to 
him pursuant to Sec.  3.12(g). The Commission hereby delegates, until 
such time as it orders otherwise, the authority to perform all functions 
specified in subparts B through D of this part to the persons authorized 
to perform them thereunder.
    (b) Nothing in this subpart shall prevent the Commission from 
exercising the authority delegated therein.
    (c) The Commission reserves to itself the decision in any case to 
proceed by order, upon notice and hearing, to deny, suspend, condition 
or restrict the registration of any person pursuant to sections 8a(2), 
8a(3) and 8a(4) of the Act.
    (d) Nothing in this part shall affect the authority of the 
Commission to institute a proceeding pursuant to section 6(c) of the 
Act.
    (e) The Commission may, by order of delegation, authorize a futures 
association registered pursuant to section 17 of the Act to perform all 
or any portion of the registration functions under subparts B through D 
in accordance with rules or procedures adopted by such futures 
association and submitted to the

[[Page 218]]

Commission pursuant to section 17(j) of the Act and subject to the 
applicable provisions of the Act.

[49 FR 8224, Mar. 5, 1984, as amended at 57 FR 23155, June 2, 1992; 59 
FR 5315, Feb. 4, 1994; 77 FR 51909, Aug. 28, 2012]



  Sec. Appendix A to Part 3--Interpretative Statement With Respect to 
 Section 8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity 
                              Exchange Act

                        Section 8a(2) (C) and (E)

    The provisions of sections 8a(2)-8a(4) of the Commodity Exchange Act 
(``Act'') establish a system of statutory disqualifications pursuant to 
which the Commission may find an applicant or registrant unfit for 
registration and vest the Commission with wide discretion to deny, 
condition, suspend, restrict or revoke the registration of any person 
subject to one or more of the disqualifications set forth therein. The 
Commission recognizes that the full exercise of its authority under 
these provisions of the Act may have unintended results. In particular, 
the exercise of such authority may, in certain cases, impede the 
efficient enforcement of the Act and the various federal and state 
securities acts.
    At this time, the Commission cannot anticipate all of the 
circumstances under which it may elect not to exercise its authority 
under sections 8a(2)-8a(4). Until the Commission has gained experience 
with these provisions of the Act, such determinations generally must be 
made on a case-by-case basis. Nonetheless, the Commission has identified 
two paragraphs of section 8a(2) of the Act which it has determined to 
interpret more narrowly than required.
    Section 8a(2)(C). Section 8a(2) of the Act authorizes the Commission 
to deny, condition, suspend or restrict the registration of any person 
``upon notice, but without a hearing'' and to revoke the registration of 
any person ``with such hearing as may be appropriate,'' if such person 
is subject to one or more of the disqualifications described in 
paragraphs (A)-(H). Section 8a(2)(C) authorizes the Commission to affect 
the registration of any person:

    ``if such person is permanently or temporarily enjoined by order, 
judgment, or decree of any court of competent jurisdiction * * * , 
including an order entered pursuant to an agreement of settlement to 
which the Commission or any Federal or State agency or other 
governmental body is a party, from (i) acting as a futures commission 
merchant, introducing broker, floor broker, floor trader, commodity 
trading advisor, commodity pool operator, associated person of any 
registrant under the Act, securities broker, securities dealer, 
municipal securities broker, municipal securities dealer, transfer 
agent, clearing agency, securities information processor, investment 
advisor, investment company, or affiliated person or employee of any of 
the foregoing or (ii) engaging in or continuing any activity involving 
any transaction in or advice concerning contracts of sale of a commodity 
for future delivery, concerning matters subject to Commission regulation 
under section 4c or 19 of the Act, or concerning securities;''

    The Commission believes that a person enjoined from acting in a 
certain capacity as described in section 8a(2)(C)(i), even if the order 
of injunction is entered into pursuant to an agreement of settlement, 
similarly should be prohibited from acting in any other capacity which 
requires registration with the Commission. Therefore, the Commission 
does not intend to limit its authority under section 8a(2)(C)(i) of the 
Act.
    However, the Commission is also aware that it has often initiated 
proceedings in which the sole relief sought was an injunction from 
engaging in certain conduct. In such circumstances, the Commission has 
accepted offers of settlement which provide that the findings set forth 
in the settlement will not form the sole basis for the denial, 
suspension or revocation of such person's registration with the 
Commission. The Commission does not wish to impede the resolution by 
negotiated settlement of such proceedings. Therefore, the Commission has 
determined that it will not exercise its authority under section 
8a(2)(C)(ii) of the Act with respect to any person temporarily or 
permanently enjoined by agreement of settlement from engaging in any 
conduct described in that paragraph, if the agreement of settlement 
clearly restricts the use of such order of injunction or any findings 
set forth therein in subsequent or collateral proceedings.
    Thus, a provision in the agreement of settlement to the effect, 
inter alia, that the findings set forth in the agreement will not form 
the sole basis upon which the registration of such person may be 
affected will preclude a collateral proceeding under section 
8a(2)(C)(ii) where the sole basis for such proceeding is the agreement 
of settlement. Unless otherwise precluded in the agreement of 
settlement, however, the person will be collaterally estopped from 
denying the findings set forth therein, whether or not admitted, in any 
other subsequent or collateral proceeding and such findings may, in 
conjunction with the findings in such subsequent or collateral 
proceeding, form a basis for affecting the registration of that person 
or imposing such other sanctions as may be deemed appropriate.
    Section 8a(2)(E) of the Act authorizes the Commission to affect the 
registration of any person:


[[Page 219]]


    If such person, within ten years preceding the filing of the 
application or at any time thereafter, has been found in a proceeding 
brought by the Commission or any Federal or State agency or other 
governmental body, or by agreement of settlement to which the Commission 
or any Federal or State agency or other governmental body is a party, 
(i) to have violated any provision of this Act, [the securities acts], 
chapter 96 of title 18 of the United States Code, or any similar statute 
of a State or foreign jurisdiction, or any rule, regulation, or order 
under any such statutes, or the rules of the Municipal Securities 
Rulemaking Board where such violation involves embezzlement, theft, 
extortion, fraud, fraudulent conversion, misappropriation of funds, 
securities or property, forgery, counterfeiting, false pretenses, 
bribery, or gambling, or (ii) to have willfully aided, abetted, 
counseled, commanded, induced, or procured such violation by any other 
person;

    As in section 8a(2)(C)(ii), the Commission will not exercise its 
authority under section 8a(2)(E) of the Act with respect to any person 
subject to a statutory disqualification thereunder, if the findings are 
part of an agreement of settlement which clearly restricts the use of 
such findings by inclusion of a provision to the effect, inter alia, 
that the findings set forth in the agreement will not form the sole 
basis upon which the registration of such person may be affected.
    Section 2(a)(1)(A) of the Act, inter alia, codifies the legal 
concept of respondant superior by providing that a futures commission 
merchant, introducing broker, commodity trading advisor, commodity pool 
operator or leverage transaction merchant may be held liable for the 
conduct of an associated person sponsored by such registrant. * Thus, 
findings of the type described in paragraph (E) may be entered against a 
registrant solely because such registrant is responsible, under section 
2(a)(1)(A) of the Act, for the conduct of its associated persons. As 
prescribed in Sec.  3.57 of the Commission's regulations, however, the 
Commission will not exercise its authority under section 8a(2)(E) to 
affect the registration of such registrant, if respondant superior is 
the sole basis for finding that the registrant is subject to a statutory 
disqualification.
---------------------------------------------------------------------------

    * Specifically, section 2(a)(1)(A)(iii) of the Act provides in part, 
that 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.'' 7 U.S.C. 4 (1982).
---------------------------------------------------------------------------

    The Commission notes that section 8a(3)(C) and 8a(4) authorize the 
Commission to affect the registration of a person if it is found, after 
notice and opportunity for a hearing, that such person ``failed 
reasonably to supervise another person, who is subject to such person's 
supervision, with a view to preventing violations of this Act or [the 
securities acts], or of any of the rules, regulation or orders 
thereunder, and the person subject to supervision committed such a 
violation * * *'' In this connection, the Commission believes that any 
proceeding to affect the registration of a registrant against which 
findings have been made solely pursuant to section 2(a)(1)(A) of the Act 
is more appropriately initiated under the provisions of section 8a(3)(C) 
and 8a(4).
    Section 8a(2)(E) may also be interpreted to authorize the Commission 
to affect the registration of any person if the findings described 
therein are made in a proceeding initiated by a private party either in 
a court of law or in a reparations proceeding under section 14 of the 
Act. At the present time, however, the Commission does not intend to 
exercise its authority under section 8a(2)(E) on the basis of such 
findings. The Commission believes that such proceedings are intended 
primarily to provide restitution to the customer and are not intended to 
be punitive in nature. Therefore, it may not be appropriate to use 
findings in such proceedings to affect the registration of any person 
under section 8a(2)(E).
    At the same time, however, such findings may form the basis of a 
proceeding against a person under the provisions of section 8a(3)(M) and 
8a(4), which authorize the Commission, after notice and opportunity for 
a hearing, to deny, condition, suspend, restrict or revoke the 
registration of any person if ``there is other good cause.'' Similarly, 
such findings may form the basis for a proceeding against a registrant 
under sections 8a(3)(C) and 8a(4) for the failure of such registrant 
``reasonably to supervise another person, who is subject to such 
person's supervision, with a view to preventing violations of this Act * 
* * or of any of the rules, regulations or orders thereunder * * *'' 
Moreover, because the Commission views actions by private parties as an 
important adjunct to the Commission's own enforcement proceedings, the 
Commission intends to monitor carefully decisions in such proceedings 
and may amend this interpretation if deemed appropriate.

                        Section 8a(3) (J) and (M)

    Section 8a(3) authorizes the Commission to refuse to register an 
applicant for registration if, after notice and opportunity for a 
hearing, the applicant is found subject to one or more of the 
disqualifications described in paragraphs (A)-(M). Section 8a(4) 
authorizes the Commission, after notice and opportunity for a hearing, 
to condition, suspend,

[[Page 220]]

restrict, or revoke the registration of any person subject to a 
disqualification under section 8a(3).
    Section 8a(3)(J) authorizes the Commission to affect the 
registration of any person if:

    If such person is subject to an outstanding order denying, 
suspending, or expelling such person from membership in a contract 
market, a registered futures association, any other self-regulatory 
organization or any foreign regulatory body that the Commission 
recognizes as having a comparable regulatory program, or barring or 
suspending such person from being associated with any member or members 
of such contract market, association, self-regulatory organization, or 
foreign regulatory body.

    The Commission interprets the term ``self-regulatory organization'' 
to include, in addition to a contract market and a registered futures 
association, any self-regulatory organization as defined in section 
3(a)(26) of the Securities Exchange Act of 1934. Thus, a self-regulatory 
organization includes any national securities exchange, any registered 
securities association, any registered clearing agency and the Municipal 
Securities Rulemaking Board.
    Section 8a(3)(M). Section 8a(3)(M) authorizes the Commission to 
affect the registration of any person if ``there is other good cause''. 
Specifically, the Commission interprets paragraph (M) to authorize the 
Commission to refuse to register such person in any new capacity, if 
such person, or any principal of such person, is the subject of an 
administrative proceeding brought by the Commission to revoke the 
existing registration of such person in any other capacity, pending a 
final decision in such administrative proceeding. The Commission 
believes it would be inconsistent to register a person in a new 
capacity, thereby determining that such person is qualified to be 
registered, while simultaneously seeking to revoke such person's 
registration in a different capacity because such person's conduct 
disqualifies him from registration.
    Similarly, the Commission interprets paragraph (M) to authorize the 
Commission to refuse to register, register conditionally or otherwise 
affect the registration of any person if such person has consented, in 
connection with an agreement of settlement with a contract market, a 
registered futures association, or any other self-regulatory 
organization, to comply with an undertaking to withdraw all forms of 
existing or pending registration and/or not to apply for registration 
with the National Futures Association or the Commission in any capacity. 
Such person's effort to violate his or her prior undertaking to withdraw 
from and/or not to apply for registration shall be considered to 
constitute ``other good cause'' under paragraph (M). The Commission 
believes that allowing such a person to be registered would be 
inappropriate and inconsistent with the intention of parties to the 
prior settlement agreement. The failure to withdraw or the attempt to 
register in the face of such an undertaking would indicate the lack of 
fair and honest dealing which the Commission believes constitutes 
``other good cause'' for denying, revoking or conditioning registration 
under the Act. The Commission also believes that allowing registration 
in such a situation would be inconsistent with both Section 8a(2)(A), 
which authorizes the Commission to refuse to register, to register 
conditionally, or to revoke, suspend or place restrictions upon the 
registration of any person if such person's prior registration has been 
suspended (and the period of such suspension has not expired) or has 
been revoked, and Section 8a(3)(J), which authorizes the Commission to 
refuse to register or to register conditionally any person if he or she 
is subject to an outstanding order denying, suspending, or expelling 
such person from membership in a contract market, a registered futures 
association, or any other self-regulatory organization.
    Good cause to affect a person's registration also exists: (1) If the 
operations of such person disrupt or would tend to disrupt orderly 
market conditions, or cause or would tend to cause sudden or 
unreasonable fluctuations or unwarranted changes in the price of 
commodities or contracts for future delivery of commodities or commodity 
options; (2) if such person has used or is using in its name a term such 
as ``board of trade'', ``clearing corporation'' or ``exchange'' in a 
misleading context, or uses any terms in its representations to the 
public which may indicate that the person is a contract market or a 
member of a contract market when such is not the case, or has used or is 
using a misleading name which would tend to suggest to the public that 
the person is affiliated with another person when that is not the case 
or that the person is engaged in a commodity-related business when the 
person is not in fact substantially so engaged, or has failed to 
disclose to the public an agency relationship with another person when 
such failure could mislead the public; (3) if such person is subject to 
an outstanding order denying, suspending or revoking the license of such 
person by a licensing authority, such as a state real estate or 
insurance commission; and (4) if such person has failed to answer the 
inquiries or requests for further information concerning an application 
for registration filed with the Commission.
    This listing, of course, is not exclusive. In general, the 
Commission interprets paragraph (M) to authorize the Commission to 
affect the registration of any person if, as a result of any act or 
pattern of conduct attributable to such person, although never the 
subject of formal action or proceeding before

[[Page 221]]

either a court or governmental agency, such person's potential disregard 
of or inability to comply with the requirements of the Act or the rules, 
regulations or order thereunder, or such person's moral turpitude, or 
lack of honesty or financial responsibility is demonstrated to the 
Commission.
    Any inability to deal fairly with the public and consistent with 
just and equitable principles of trade may render an applicant or 
registrant unfit for registration, given the high ethical standards 
which must prevail in the industry.
    The Commission has further addressed ``other good cause'' under 
Section 8a(3)(M) of the Act in issuing guidance letters on assessing the 
fitness of floor brokers, floor traders or applicants in either 
category:

[First guidance letter]

December 4, 1997

Robert K. Wilmouth, President, National Futures Association, 200 West 
          Madison Street, Chicago, IL 60606-3447

Re: Adverse Registration Actions with Respect to Floor Brokers, Floor 
          Traders and Applicants for Registration in Either Category

    Dear Mr. Wilmouth: As you know, the Commission on June 26, 1997, 
approved for publication in the Federal Register a Notice and Order 
concerning adverse registration actions by the National Futures 
Association (``NFA'') with respect to registered floor brokers 
(``FBs''), registered floor traders (``FTs'') and applicants for 
registration in either category. 62 Fed. Reg. 36050 (July 3, 1997). The 
Notice and Order authorized NFA to grant or to maintain, either with or 
without conditions or restrictions, FB or FT registration where NFA 
previously would have forwarded the case to the Commission for review of 
disciplinary history. The Commission has worked with its staff to 
determine which of the pending matters could efficiently be returned to 
NFA for handling, and such matters have been forwarded to NFA. The 
Commission will continue to accept or to act upon requests for 
exemption, and the Commission staff will consider requests for ``no-
action'' opinions with respect to applicable registration requirements.
    By this correspondence, the Commission is issuing guidance that 
provides NFA further direction on how it expects NFA to exercise its 
delegated power, based upon the experience of the Commission and the 
staff with the registration review process during the past three years. 
This guidance will help ensure that NFA exercises its delegated power in 
a manner consistent with Commission precedent.
    In exercising its delegated authority, NFA, of course, needs to 
apply all of the provisions of Sections 8a(2) and (3) of the Commodity 
Exchange Act (``Act''). \1\ In that regard, NFA should consider the 
matters in which the Commission has taken action in the past and 
endeavor to seek similar registration restrictions, conditions, 
suspensions, denials, or revocations under similar circumstances.
---------------------------------------------------------------------------

    \1\ 7 U.S.C. 12a(2) and (3) (1994). The letter is intended to 
supplement, not to supersede, other guidance provided in the past to 
NFA. In this regard, the NFA should continue to follow other guidance 
provided by the Commission or its staff.
---------------------------------------------------------------------------

    One of the areas in which NFA appears to have had the most 
uncertainty is with regard to previous self-regulatory organization 
(``SRO'') disciplinary actions. Commission Rule 1.63 \2\ provides clear 
guidelines for determining whether a person's history of ``disciplinary 
offenses'' should preclude service on SRO governing boards or 
committees. \3\ In determining whether to grant or to maintain, either 
with or without conditions or restrictions, FB or FT registration, NFA 
should, as an initial matter, apply the Rule 1.63(a)(6) criteria to 
those registered FBs, registered FTs and applicants for registration in 
either category. However, NFA should be acting based upon any such 
offenses that occurred within the previous five years, rather than the 
three years provided

[[Page 222]]

for in Rule 1.63(c). NFA should consider disciplinary actions taken by 
an SRO as that term is defined in Section 3(a)(26) of the Securities 
Exchange Act of 1934 no differently from disciplinary actions taken by 
an SRO in the futures industry as defined in Rule 1.3(ee). \4\ 
Application of the Rule 1.63 criteria, as modified, to these matters 
will aid NFA in making registration determinations that are reasonably 
consonant with Commission views. \5\ NFA should focus on the nature of 
the underlying conduct rather than the sanction imposed by an SRO. Thus, 
if a disciplinary action would not come within the coverage of Rule 1.63 
but for the imposition of a short suspension of trading privileges (such 
as for a matter involving fighting, use of profane language or minor 
recordkeeping violations), NFA could exercise discretion, as has the 
Commission, not to institute a statutory disqualification case. On the 
other hand, conduct that falls clearly within the terms of Rule 1.63, 
such as violations of rules involving potential harm to customers of the 
exchange, should not be exempt from review simply because the exchange 
imposed a relatively minor sanction.
---------------------------------------------------------------------------

    \2\ Commission rules referred to herein are found at 17 CFR Ch. I.
    \3\ Rule 1.63(c) provides that a person is ineligible from serving 
on an SRO's disciplinary committees, arbitration panels, oversight 
panels or governing board if, as provided in Rule 1.63(b), the person, 
inter alia: (1) within the past three years has been found by a final 
decision of an SRO, an administrative law judge, a court of competent 
jurisdiction or the Commission to have committed a disciplinary offense; 
or (2) within the past three years has entered into 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.
    Rule 1.63(a)(6) provides that a ``disciplinary offense'' includes: 
(i) any violation of the rules of an SRO except those rules related to 
(A) decorum or attire, (B) financial requirements, or (C) reporting or 
record-keeping unless resulting in fines aggregating more than $5,000 
within any calendar year; (ii) any rule violation described in 
subparagraphs (A) through (C) above that 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 an act 
described in paragraphs (i) through (iii) above when such failure is 
itself a violation of either the rules of an SRO, the Act or the 
regulations promulgated thereunder.
    \4\ Thus, for example, a disciplinary action taken by the Chicago 
Board Options Exchange or the National Association of Securities 
Dealers, Inc. should be considered in a manner similar to a disciplinary 
action of the Chicago Board of Trade or NFA.
    \5\ In reviewing these matters, the NFA should bear in mind recent 
Commission precedent which allows for reliance on settled disciplinary 
proceedings in some circumstances. See In the Matter of Michael J. 
Clark, [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 27,032 
(Apr. 22, 1997) (``other good cause'' under Section 8a(3)(M) of the Act 
exists based upon a pattern of exchange disciplinary actions resulting 
in significant sanctions for serious rule violations--whether 
settlements or adjudications), aff'd sub nom., Clark v. Commodity 
Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999) 
(unpublished).
---------------------------------------------------------------------------

    The Commission has treated the registration process and the SRO 
disciplinary process as separate matters involving separate 
considerations. The fact that the Commission has not pursued its own 
enforcement case in a particular situation does not necessarily mean 
that the Commission considers the situation to be a minor matter for 
which no registration sanctions are appropriate. Further, the Commission 
believes that it and NFA, entities with industry-wide perspective and 
responsibilities, are the appropriate bodies, rather than any individual 
exchange, to decide issues relating to registration status, which can 
affect a person's ability to function in the industry well beyond the 
jurisdiction of a particular exchange. Thus, NFA's role is in no way 
related to review of exchange sanctions for particular conduct, but 
rather it is the entirely separate task of determining whether an FB's 
or FT's conduct should impact his or her registration.
    NFA also should look to Commission precedent in selecting conditions 
or restrictions to be imposed, such as a dual trading ban where a person 
has been involved in disciplinary offenses involving customer abuse. 
Where conditions or restrictions are imposed, or agreed upon, NFA also 
should follow Commission precedent, under which such conditions or 
restrictions generally have been imposed for a two-year period.
    The Commission has required sponsorship for conditioned FBs and FTs 
when their disciplinary offenses have involved noncompetitive trading 
and fraud irrespective of the level of sanctions imposed by an SRO. 
Indeed, but for a sponsorship requirement there would be no one 
routinely watching and responsible for the activities of these 
registrants. Absent sponsorship, such FBs and FTs would only be subject 
to routine Commission and exchange surveillance. The Commission's rules 
are premised upon the judgment that requiring FTs and FBs to have 
sponsors to ensure their compliance with conditions is both appropriate 
and useful. See Rule 3.60(b)(2)(i).
    A question has arisen whether, if NFA is required to prove up the 
underlying facts of an SRO disciplinary action, the exchanges can 
provide information on exchange disciplinary proceedings directly to 
NFA. Although Section 8c(a)(2) of the Act states that an exchange shall 
not disclose the evidence for a disciplinary action except to the person 
disciplined and to the Commission, Section 8a(10) of the Act allows the 
Commission to authorize any person to perform any portion of the 
registration functions under the Act, notwithstanding any other 
provision of law. The effective discharge of the delegated registration 
function requires NFA to have access to the exchange evidence. Thus, the 
Commission believes that Section 8a(10) may reasonably be interpreted to 
allow the disclosure of information from exchange disciplinary 
proceedings directly to NFA despite the provisions of Section 8c(a)(2).
    Nothing in the Notice and Order affects the Commission's authority 
to review the granting of a registration application by NFA in the 
performance of Commission registration functions, including review of 
the sufficiency of conditions or restrictions imposed by NFA, to review 
the determination by NFA not to take action to affect an existing 
registration, or to take its own action to address a statutory 
disqualification. Moreover, the Commission Order contemplates that to 
allow for appropriate Commission oversight of NFA's exercise of this 
delegated authority, NFA will provide for the Commission's review 
quarterly schedules of all applicants

[[Page 223]]

cleared for registration and all registrants whose registrations are 
maintained without adverse action by NFA's Registration, Compliance, 
Legal Committee despite potential statutory disqualifications.
    The Commission will continue to monitor NFA activities through 
periodic rule enforcement reviews, and NFA remains subject to the 
present requirement that it monitor compliance with the conditions and 
restrictions imposed on conditioned and restricted registrants.
    Sincerely,

Jean A. Webb, Secretary of the Commission

[Second guidance letter]

April 13, 2000

Robert K. Wilmouth, President, National Futures Association, 200 West 
          Madison Street, Chicago, IL 60606-3447

Re: Use of Exchange Disciplinary Actions as ``Other Good Cause'' to 
          Affect Floor Broker/Floor Trader Registration

    Dear Mr. Wilmouth:

                     I. Introduction and Background

    In July 1997, the Commission issued a Notice and Order authorizing 
the National Futures Association (``NFA'') to grant or to maintain, 
either with or without conditions or restrictions, floor broker (``FB'') 
or floor trader (``FT'') registration where NFA previously would have 
forwarded the case to the Commission for review of disciplinary history. 
\1\ By letter dated December 4, 1997 (``Guidance Letter''), the 
Commission provided further direction on how the Commission expected NFA 
to exercise its delegated power and to ensure that NFA exercised its 
delegated power in a manner consistent with Commission precedent.
---------------------------------------------------------------------------

    \1\ Registration Actions by National Futures Association With 
Respect to Floor Brokers, Floor Traders and Applicants for Registration 
in Either Category, 62 FR 36050 (July 3, 1997).
---------------------------------------------------------------------------

    The Commission has determined to revise the Guidance Letter. 
Specifically, the Commission is revising the portion of the Guidance 
Letter that addresses the use of exchange disciplinary actions as 
``other good cause'' to affect FB and FT registrations. The Commission 
has made this determination following its own reconsideration of the 
issue and at the urging of industry members. \2\
---------------------------------------------------------------------------

    \2\ See letters submitted by James Bowe, former president of the New 
York Board of Trade (``NYBOT''), dated October 13, 1999, Christopher 
Bowen, general counsel of the New York Mercantile Exchange (``NYMEX''), 
dated October 18, 1999, and the Joint Compliance Committee (``JCC''), 
dated February 2, 2000. The JCC consists of senior compliance officials 
from all domestic futures exchanges and the NFA (i.e., the domestic 
self-regulatory organizations (``SROs'')). In addition, staff from the 
Contract Markets Section of the Commission's Division of Swap Dealer and 
Intermediary Oversight attend the JCC meetings as observers. The JCC was 
established to aid in the development of improved compliance systems 
through joint efforts and information-sharing among the SROs. Commission 
staff have also discussed this issue with SRO staff.
---------------------------------------------------------------------------

    The Guidance Letter pointed out that, in exercising its delegated 
authority, NFA must apply all of the provisions of Sections 8a(2) and 
(3) of the Commodity Exchange Act (``Act''). \3\ In particular, Section 
8a(3)(M) of the Act authorizes the Commission to refuse to register or 
to register conditionally any person if it is found, after opportunity 
for hearing, that there is other good cause for statutory 
disqualification from registration beyond the specifically listed 
grounds in Sections 8a(2) and 8a(3) of the Act. The Commission held in 
In the Matter of Clark that statutory disqualification under the ``other 
good cause'' provision of Section 8a(3)(M) may arise on the basis of, 
among other things, a pattern of exchange disciplinary actions alleging 
serious rule violations that result in significant sanctions, and that 
it is immaterial whether the sanctions imposed resulted from a fully-
adjudicated disciplinary action or an action that was taken following a 
settlement. \4\
---------------------------------------------------------------------------

    \3\ 7 U.S.C. 12a(2) and (3) (1994).
    \4\ In the Matter of Clark, [1996-1998 Transfer Binder] Comm. Fut. 
L. Rep. (CCH) ] 27,032 (Apr. 22, 1997), aff'd sub nom., Clark v. 
Commodity Futures Trading Commission, No. 97-4228 (2d Cir. June 4, 1999) 
(unpublished).
---------------------------------------------------------------------------

    The Guidance Letter recommended the application of the provisions of 
Commission Rule 1.63 \5\ as criteria to aid in assessing the impact of 
an FB or FT applicant's or registrant's previous disciplinary history on 
the person's fitness to be registered, with the exception that NFA 
should be acting based on disciplinary history from the previous five 
years, rather than the three years provided for in Rule 1.63. \6\ The 
Guidance Letter also

[[Page 224]]

noted that NFA should consider disciplinary actions taken not only by 
futures industry SROs but also those taken by SROs as defined in Section 
3(a)(26) of the Securities Exchange Act of 1934 (``1934 Act''), 
including settled disciplinary actions.
---------------------------------------------------------------------------

    \5\ Commission rules referred to in this letter are found at 17 CFR 
Ch. 1.
    \6\ Rule 1.63 provides, among other things, that a person is 
ineligible from serving on SRO disciplinary committees, arbitration 
panels, oversight panels or governing boards if that person, inter alia, 
entered into a settlement agreement within the past three years in which 
any of the findings or, in the absence of such findings, any of the acts 
charged included a disciplinary offense.
    Rule 1.63(a)(6) defines a ``disciplinary offense'' to include:
    (i) any violation of the rules of an SRO except those rules related 
to (A) decorum or attire, (B) financial requirements, or (C) reporting 
or record-keeping unless resulting in fines aggregating more than $5,000 
within any calendar year; (ii) any rule violation described in 
subparagraphs (A) through (C) above that 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 an act 
described in paragraphs (i) through (iii) above when such failure is 
itself a violation of either the rules of an SRO, the Act or the 
regulations promulgated thereunder.
---------------------------------------------------------------------------

                          II. Revised Guidance

    As stated above, the Commission has determined to revise the 
Guidance Letter. From this point forward, NFA should cease using Rule 
1.63 as the basis to evaluate the impact of an FB or FT applicant's or 
registrant's disciplinary history on his or her fitness to be 
registered. Instead, as Clark stated, when reviewing disciplinary 
history to assess the fitness to be registered of an FB, FT, or 
applicant in either category, a pattern of exchange disciplinary actions 
alleging serious rule violations that result in significant sanctions 
will trigger the ``other good cause'' provision of Section 8a(3)(M). The 
``pattern'' should consist of at least two final exchange disciplinary 
actions, whether settled or adjudicated.
    NFA also should consider initiating proceedings to affect the 
registration of the FB or FT, even if there is only a single exchange 
action against the FB or FT, if the exchange action was based on 
allegations of particularly egregious misconduct or involved numerous 
instances of misconduct occurring over a long period of time. If, 
however, a proceeding is initiated based on a single exchange action 
that was disposed of by settlement, NFA may have to prove up the 
underlying misconduct. Furthermore, traditional principles of collateral 
estoppel apply to adjudicated actions, whether they are being considered 
individually or as part of a pattern. \7\
---------------------------------------------------------------------------

    \7\ Clark at 44,929.
---------------------------------------------------------------------------

    As provided by the Guidance Letter, ``exchange disciplinary 
actions'' would continue to include disciplinary actions taken by both 
futures industry SROs and SROs as defined in Section 3(a)(26) of the 
1934 Exchange Act. Furthermore, NFA should review an applicant's or 
registrant's disciplinary history for the past five years. \8\ At least 
one of the actions forming the pattern, however, must have become final 
after Clark was decided by the Commission on April 22, 1997. Finally, 
``serious rule violations'' consist of, or are substantially related to, 
charges of fraud, customer abuse, other illicit trading practices, or 
the obstruction of an exchange investigation.
---------------------------------------------------------------------------

    \8\ The Commission generally looked at a five-year period of 
disciplinary history. On occasion, however, the Commission examined a 
longer period of an applicant's or registrant's disciplinary history. 
For example, the Commission revoked the registration of one FB on the 
basis of exchange disciplinary cases that extended back six years, see 
Clark, 2 Comm. Fut. L. Rep. (CCH) ] 27,032, and denied an application 
for registration as an FT on the basis of exchange disciplinary cases 
that extended back seven years, see In the Matter of Castellano, [1987-
1990 Transfer Binder] Comm. Fut. L. Rep. (CCH) ] 24,360 (Nov. 23, 1988), 
summarily aff'd (May 29, 1990), reh. denied [1990-1992 Transfer Binder] 
Comm. Fut. L. Rep. ] 24,870 (June 26, 1990), aff'd sub nom. Castellano 
v. CFTC, Docket No. 90-2298 (7th Cir. Nov. 20, 1991).
---------------------------------------------------------------------------

    Congress, the courts and the Commission have indicated the 
importance of considering an applicant's history of exchange 
disciplinary actions in assessing that person's fitness to register. \9\ 
Furthermore, NFA's review of exchange disciplinary actions within the 
context of the registration process should not simply mirror the 
disciplinary actions undertaken by the exchanges. The two processes are 
separate matters that involve separate considerations. As part of their 
ongoing self-regulatory obligations, exchanges must take disciplinary 
action \10\ and such disciplinary matters necessarily focus on the 
specific misconduct that forms the allegation. In a statutory 
disqualification action, however, NFA must determine whether the 
disciplinary history of an FB, FT or applicant over the preceding five 
years should impact his or her registration. Additionally, NFA possesses 
industry-wide perspective and responsibilities. As such, NFA, rather 
than an individual exchange, should decide registration status issues, 
since those issues affect an individual's status within the industry as 
a whole, well beyond the jurisdiction of a particular exchange.
---------------------------------------------------------------------------

    \9\ Letter dated July 14, 1995, from Mary L. Schapiro to R. Patrick 
Thompson, President, New York Mercantile Exchange (unpublished). See 
also Castellano, supra note 8.
    \10\ See Rule 1.51(a)(7).
---------------------------------------------------------------------------

    The Commission also wants to clarify to the fullest extent possible 
that its power to delegate the authority to deny or condition

[[Page 225]]

the registration of an FB, FT, or an applicant for registration in 
either category permits exchanges to disclose to NFA all evidence 
underlying exchange disciplinary actions, notwithstanding the language 
of Section 8c(a)(2) of the Act. \11\ The Commission's power to delegate 
stems from Section 8a(10) of the Act, which permits delegation of 
registration functions, including statutory disqualification actions, to 
any person in accordance with rules adopted by such person and submitted 
to the Commission for approval or for review under Section 17(j) of the 
Act, ``notwithstanding any other provision of law.'' Certainly, Section 
8c(a)(2) qualifies as ``any other provision of law.'' Furthermore, the 
effective discharge of the delegated function requires NFA to have 
access to the exchange evidence. Thus, the exercise of the delegated 
authority pursuant to Section 8a(10) permits the exchanges to disclose 
all evidence underlying disciplinary actions to NFA. \12\
---------------------------------------------------------------------------

    \11\ Section 8c(a)(2) states, in relevant part, that ``[A]n exchange 
* * * shall not disclose the evidence therefor, except to the person who 
is suspended, expelled, disciplined, or denied access, and to the 
Commission.''
    \12\ Of course, the Commission could request records from the 
exchange and forward them to NFA. The Commission believes that this is 
an unnecessary administrative process and that NFA should obtain the 
records it needs to carry out the delegated function of conducting 
disciplinary history reviews directly from the exchanges. In this 
context and pursuant to Commission orders authorizing NFA to institute 
adverse registration actions, NFA should be viewed as standing in the 
shoes of the Commission.
---------------------------------------------------------------------------

    This letter supersedes the Guidance Letter to the extent discussed 
above. In all other aspects, the Guidance Letter and other guidance 
provided by the Commission or its staff remain in effect. Therefore, NFA 
should continue to follow Commission precedent when selecting conditions 
or restrictions to be imposed. For example, NFA should impose a dual 
trading ban where customer abuse is involved and any conditions or 
restrictions imposed should be for a two-year period. Furthermore, NFA 
should require sponsorship for conditioned FBs or FTs when their 
disciplinary offenses involve noncompetitive trading and fraud.
    Nothing in the Notice and Order or this letter affects the 
Commission's authority to review the granting of a registration 
application by NFA in the performance of Commission registration 
functions, including review of the sufficiency of conditions or 
restrictions imposed by NFA, to review the determination by NFA not to 
take action to affect an existing registration, or to take its own 
action to address a statutory disqualification. Moreover, the Commission 
Order contemplates that to allow for appropriate Commission oversight of 
NFA's exercise of this delegated authority, NFA will provide for the 
Commission's review quarterly schedules of all applicants cleared for 
registration and all registrants whose registrations are maintained 
without adverse action by NFA's Registration, Compliance, Legal 
Committee despite potential statutory disqualifications.
    The Commission will continue to monitor NFA activities through 
periodic rule enforcement reviews, and NFA remains subject to the 
present requirement that it monitor compliance with the conditions and 
restrictions imposed on conditioned and restricted registrants.

    Sincerely,
Jean A. Webb,
Secretary of the Commission.

[49 FR 8224, Mar. 5, 1984, as amended at 58 FR 19597, Apr. 15, 1993; 59 
FR 5315, Feb. 4, 1994; 61 FR 58628, Nov. 18, 1996; 66 FR 53518, Oct. 23, 
2001; 67 FR 62352, Oct. 7, 2002; 78 FR 22419, Apr. 16, 2013]



   Sec. Appendix B to Part 3--Statement of Acceptable Practices With 
                       Respect to Ethics Training

    (a) The provisions of Section 4p(b) of the Act (7 U.S.C. 6p(b) 
(1994)) set forth requirements regarding training of registrants as to 
their responsibilities to the public. This section requires the 
Commission to issue regulations requiring new registrants to attend 
ethics training sessions within six months of registration, and all 
registrants to attend such training on a periodic basis. The awareness 
and maintenance of professional ethical standards are essential elements 
of a registrant's fitness. Further, the use of ethics training programs 
is relevant to a registrant's maintenance of adequate supervision, a 
requirement under Rule 166.3.
    (b)(1) The Commission recognizes that technology has provided new, 
faster means of sharing and distributing information. In view of the 
foregoing, the Commission has chosen to allow registrants to develop 
their own ethics training programs. Nevertheless, futures industry 
professionals may want guidance as to the role of ethics training. 
Registrants may wish to consider what ethics training should be 
retained, its format, and how it might best be implemented. Therefore, 
the Commission finds it appropriate to issue this Statement of 
Acceptable Practices regarding appropriate training for registrants, as 
interpretative guidance for intermediaries on fitness and supervision. 
Commission registrants may look to this Statement of Acceptable 
Practices as a ``safe harbor'' concerning acceptable procedures in this 
area.

[[Page 226]]

    (2) The Commission believes that section 4p(b) of the Act reflects 
an intent by Congress that industry professionals be aware, and remain 
abreast, of their continuing obligations to the public under the Act and 
the regulations thereunder. The text of the Act provides guidance as to 
the nature of these responsibilities. As expressed in section 4p(b) of 
the Act, personnel in the industry have an obligation to the public to 
observe the Act, the rules of the Commission, the rules of any 
appropriate self-regulatory organizations or contract markets (which 
would also include registered derivatives transaction execution 
facilities), or other applicable federal or state laws or regulations. 
Further, section 4p(b) acknowledges that registrants have an obligation 
to the public to observe ``just and equitable principles of trade.''
    (3) Additionally, section 4p(b) reflects Congress' intent that 
registrants and their personnel retain an up-to-date knowledge of these 
requirements. The Act requires that registrants receive training on a 
periodic basis. Thus, it is the intent of Congress that Commission 
registrants remain current with regard to the ethical ramifications of 
new technology, commercial practices, regulations, or other changes.
    (c) The Commission believes that training should be focused to some 
extent on a person's registration category, although there will 
obviously be certain principles and issues common to all registrants and 
certain general subjects that should be taught. Topics to be addressed 
include:
    (1) An explanation of the applicable laws and regulations, and the 
rules of self-regulatory organizations or contract markets and 
registered derivatives transaction execution facilities;
    (2) The registrant's obligation to the public to observe just and 
equitable principles of trade;
    (3) How to act honestly and fairly and with due skill, care and 
diligence in the best interests of customers and the integrity of the 
market;
    (4) How to establish effective supervisory systems and internal 
controls;
    (5) Obtaining and assessing the financial situation and investment 
experience of customers;
    (6) Disclosure of material information to customers; and
    (7) Avoidance, proper disclosure and handling of conflicts of 
interest.
    (d) An acceptable ethics training program would apply to all of a 
firm's associated persons and its principals to the extent they are 
required to register as associated persons. Additionally, personnel of 
firms that rely on their registration with other regulators, such as the 
Securities and Exchange Commission, should be provided with ethics 
training to the extent the Act and the Commission's regulations apply to 
their business.
    (e) As to the providers of such training, the Commission believes 
that classes sponsored by independent persons, firms, or industry 
associations would be acceptable. It would also be permissible to 
conduct in-house training programs. Further, registrants should 
ascertain the credentials of any ethics training providers they retain. 
Thus, persons who provide ethics training should be required to provide 
proof of satisfactory completion of the proficiency testing requirements 
applicable to the registrant and evidence of three years of relevant 
industry or pedagogical experience in the field. This industry 
experience might include the practice of law in the fields of futures or 
securities, or employment as a trader or risk manager at a brokerage or 
end-user firm. Likewise, the Commission believes that registrants should 
employ as ethics training providers only those persons they reasonably 
believe in good faith are not subject to any investigations or to bars 
to registration or to service on a self-regulatory organization 
governing board or disciplinary panel.
    (f)(1) With regard to the frequency and duration of ethics training, 
it is permissible for a firm to require training on whatever periodic 
basis and duration the registrant (and relevant self-regulatory 
organizations) deems appropriate. It may even be appropriate not to 
require any such specific requirements as, for example, where ethics 
training could be termed ongoing. For instance, a small entity, sole 
proprietorship, or even a small section in an otherwise large firm, 
might satisfy its obligation to remain current with regard to ethics 
obligations by distribution of periodicals, legal cases, or advisories. 
Use of the latest information technology, such as Internet websites, can 
be useful in this regard. In such a context, there would be no 
structured classes, but the goal should be a continuous awareness of 
changing industry standards. A corporate culture to maintain high 
ethical standards should be established on a continuing basis.
    (2) On the other hand, larger firms which transact business with a 
larger segment of the public may wish to implement a training program 
that requires periodic classwork. In such a situation, the Commission 
believes it appropriate for registrants to maintain such records as 
evidence of attendance and of the materials used for training. In the 
case of a floor broker or floor trader, the applicable contract market 
or registered derivatives transaction execution facility should maintain 
such evidence on behalf of its member. This evidence of ethics training 
could be offered to demonstrate fitness and overall compliance during 
audits by self-regulatory organizations, and during reviews of contract 
market or registered derivatives transaction execution facility 
operations.

[[Page 227]]

    (g) The methodology of such training may also be flexible. Recent 
innovations in information technology have made possible new, fast, and 
cost-efficient ways for registrants to maintain their awareness of 
events and changes in the commodity interest markets. In this regard, 
the Commission recognizes that the needs of a firm will vary according 
to its size, personnel, and activities. No format of classes will be 
required. Rather, such training could be in the form of formal class 
lectures, video presentation, Internet transmission, or by simple 
distribution of written materials. These options should provide 
sufficiently flexible means for adherence to Congressional intent in 
this area.
    (h) Finally, it should be noted that self-regulatory organizations 
and industry associations will have a significant role in this area. 
Such organizations may have separate ethics and proficiency standards, 
including ethics training and testing programs, for their own members.

[66 FR 53521, Oct. 23, 2001]



PART 4_COMMODITY POOL OPERATORS AND COMMODITY TRADING 
ADVISORS--Table of Contents



        Subpart A_General Provisions, Definitions and Exemptions

Sec.
4.1 Requirements as to form.
4.2-4.4 [Reserved]
4.5 Exclusion for certain otherwise regulated persons from the 
          definition of the term ``commodity pool operator.''
4.6 Exclusion for certain otherwise regulated persons from the 
          definition of the term ``commodity trading advisor.''
4.7 Exemption from certain part 4 requirements for commodity pool 
          operators with respect to offerings to qualified eligible 
          persons and for commodity trading advisors with respect to 
          advising qualified eligible persons.
4.8 Exemption from certain requirements of rule 4.26 with respect to 
          pools offered or sold in certain offerings exempt from 
          registration under the Securities Act.
4.9 [Reserved]
4.10 Definitions.
4.11 Exemption from section 4n(3)(B).
4.12 Exemption from provisions of part 4.
4.13 Exemption from registration as a commodity pool operator.
4.14 Exemption from registration as a commodity trading advisor.
4.15 Continued applicability of antifraud section.
4.16 Prohibited representations.
4.17 Severability.

                   Subpart B_Commodity Pool Operators

4.20 Prohibited activities.
4.21 Required delivery of pool Disclosure Document.
4.22 Reporting to pool participants.
4.23 Recordkeeping.
4.24 General disclosures required.
4.25 Performance disclosures.
4.26 Use, amendment and filing of Disclosure Document.
4.27 Additional reporting by advisors of certain large commodity pools.

                  Subpart C_Commodity Trading Advisors

4.30 Prohibited activities.
4.31 Required delivery of Disclosure Document to prospective clients.
4.32 [Reserved]
4.33 Recordkeeping.
4.34 General disclosures required.
4.35 Performance disclosures.
4.36 Use, amendment and filing of Disclosure Document.

                          Subpart D_Advertising

4.40 [Reserved]
4.41 Advertising by commodity pool operators, commodity trading 
          advisors, and the principals thereof.

Appendix A to Part 4--Form CPO-PQR
Appendix B to Part 4--Adjustments for Additions and Withdrawals in the 
          Computation of Rate of Return
Appendix C to Part 4--Form CTA-PR

    Authority: 7 U.S.C. 1a, 2, 6(c), 6b, 6c, 6l, 6m, 6n, 6o, 12a, and 
23.

    Source: 46 FR 26013, May 8, 1981, unless otherwise noted.



        Subpart A_General Provisions, Definitions and Exemptions



Sec.  4.1  Requirements as to form.

    (a) Each document distributed pursuant to this part 4 must be:
    (1) Clear and legible;
    (2) Paginated; and
    (3) Fastened in a secure manner.
    (b) Information that is required to be ``prominently'' disclosed 
under this part 4 must be displayed in capital letters and in boldface 
type.
    (c) Where a document is distributed through an electronic medium:
    (1) The requirements of paragraphs (a) of this section shall mean 
that required information must be presented in a format that is readily 
communicated to the recipient. For purposes of this paragraph (c), 
information is

[[Page 228]]

readily communicated to the recipient if it is accessible to the 
ordinary user by means of commonly available hardware and software and 
if the electronically delivered document is organized in substantially 
the same manner as would be required for a paper document with respect 
to the order of presentation and the relative prominence of information. 
Where a table of contents is required, the electronic document must 
either include page numbers in the text or employ a substantially 
equivalent cross-reference or indexing method or tool;
    (2) The requirements of paragraph (b) of this section shall mean 
that such information must be presented in capital letters and boldface 
type or, as warranted in the context, another manner reasonably 
calculated to draw the recipient's attention to the information and 
accord it greater prominence than the surrounding text; and
    (3) A complete paper version of the document that complies with the 
applicable provisions of this part 4 must be provided to the recipient 
upon request.
    (d) If graphic, image or audio material is included in a document 
delivered to a prospective or existing client or pool participant, and 
such material cannot be reproduced in an electronic filing, a fair and 
accurate narrative description, tabular representation or transcript of 
the omitted material must be included in the filed version of the 
document. Inclusion of such material in a Disclosure Document shall be 
subject to the requirements of Sec.  4.24(v) in the case of pool 
Disclosure Documents, and Sec.  4.34(n) in the case of commodity trading 
advisor Disclosure Documents.

(Approved by the Office of Management and Budget under control number 
3038-0005)

[46 FR 26013, May 8, 1981, as amended at 46 FR 63035, Dec. 30, 1981; 62 
FR 39115, July 22, 1997]



Sec. Sec.  4.2-4.4  [Reserved]



Sec.  4.5  Exclusion for certain otherwise regulated persons from 
the definition of the term ``commodity pool operator.''

    (a) Subject to compliance with the provisions of this section, the 
following persons, and any principal or employee thereof, shall be 
excluded from the definition of the term ``commodity pool operator'' 
with respect to the operation of a qualifying entity specified in 
paragraph (b) of this section:
    (1) An investment company registered as such under the Investment 
Company Act of 1940;
    (2) An insurance company subject to regulation by any State;
    (3) A bank, trust company or any other such financial depository 
institution subject to regulation by any State or the United States; and
    (4) A trustee of, a named fiduciary of (or a person designated or 
acting as a fiduciary pursuant to a written delegation from or other 
written agreement with the named fiduciary) or an employer maintaining a 
pension plan that is subject to title I of the Employee Retirement 
Income Security Act of 1974; Provided, however, That for purposes of 
this Sec.  4.5 the following employee benefit plans shall not be 
construed to be pools:
    (i) A noncontributory plan, whether defined benefit or defined 
contribution, covered under title I of the Employee Retirement Income 
Security Act of 1974;
    (ii) A contributory defined benefit plan covered under title IV of 
the Employee Retirement Income Security Act of 1974; Provided, however, 
That with respect to any such plan to which an employee may voluntarily 
contribute, no portion of an employee's contribution is committed as 
margin or premiums for futures or options contracts;
    (iii) A plan defined as a governmental plan in section 3(32) of 
title I of the Employee Retirement Income Security Act of 1974;
    (iv) Any employee welfare benefit plan that is subject to the 
fiduciary responsibility provisions of the Employee Retirement Income 
Security Act of 1974; and
    (v) A plan defined as a church plan in Section 3(33) of title I of 
the Employee Retirement Income Security Act of 1974 with respect to 
which no election has been made under 26 U.S.C. 410(d).
    (b) For the purposes of this section, the term ``qualifying entity'' 
means:
    (1) With respect to any person specified in paragraph (a)(1) of this 
section,

[[Page 229]]

an investment company registered as such under the Investment Company 
Act of 1940;
    (2) With respect to any person specified in paragraph (a)(2) of this 
section, a separate account established and maintained or offered by an 
insurance company pursuant to the laws of any State or territory of the 
United States, under which income gains and losses, whether or not 
realized, from assets allocated to such account, are, in accordance with 
the applicable contract, credited to or charged against such account, 
without regard to other income, gains, or losses of the insurance 
company;
    (3) With respect to any person specified in paragraph (a)(3) of this 
section, the assets of any trust, custodial account or other separate 
unit of investment for which it is acting as a fiduciary and for which 
it is vested with investment authority; and
    (4) With respect to any person specified in paragraph (a)(4) of this 
section, and subject to the proviso thereof, a pension plan that is 
subject to title I of the Employee Retirement Income Security Act of 
1974; Provided, however, That such entity will be operated in the manner 
specified in paragraph (c)(2) of this section.
    (c) Any person who desires to claim the exclusion provided by this 
section shall file electronically a notice of eligibility with the 
National Futures Association through its electronic exemption filing 
system; Provided, however, That a plan fiduciary who is not a named 
fiduciary as described in paragraph (a)(4) of this section may claim the 
exclusion through the notice filed by the named fiduciary.
    (1) The notice of eligibility must contain the following 
information:
    (i) The name of such person;
    (ii) The applicable subparagraph of paragraph (a) of this section 
pursuant to which such person is claiming exclusion;
    (iii) The name of the qualifying entity which such person intends to 
operate pursuant to the exclusion; and
    (iv) The applicable subparagraph of paragraph (b) of this section 
pursuant to which such entity is a qualifying entity.
    (2) The notice of eligibility must contain representations that such 
person will operate the qualifying entity specified therein in a manner 
such that the qualifying entity:
    (i) Will disclose in writing to each participant, whether existing 
or prospective, that the qualifying entity is operated by a person who 
has claimed an exclusion from the definition of the term ``commodity 
pool operator'' under the Act and, therefore, who is not subject to 
registration or regulation as a pool operator under the Act; Provided, 
that such disclosure is made in accordance with the requirements of any 
other federal or state regulatory authority to which the qualifying 
entity is subject. The qualifying entity may make such disclosure by 
including the information in any document that its other Federal or 
State regulator requires to be furnished routinely to participants or, 
if no such document is furnished routinely, the information may be 
disclosed in any instrument establishing the entity's investment 
policies and objectives that the other regulator requires to be made 
available to the entity's participants; and
    (ii) Will submit to such special calls as the Commission may make to 
require the qualifying entity to demonstrate compliance with the 
provisions of this Sec.  4.5(c); Provided, however, that the making of 
such representations shall not be deemed a substitute for compliance 
with any criteria applicable to commodity futures or commodity options 
trading established by any regulator to which such person or qualifying 
entity is subject.
    (iii) Furthermore, if the person claiming the exclusion is an 
investment company registered as such under the Investment Company Act 
of 1940, then the notice of eligibility must also contain 
representations that such person will operate the qualifying entity as 
described in Rule 4.5(b)(1) in a manner such that the qualifying entity:
    (A) Will use commodity futures or commodity options contracts, or 
swaps solely for bona fide hedging purposes within the meaning and 
intent of Rules 1.3(z)(1) and 151.5 (17 CFR 1.3(z)(1) and 151.5); 
Provided however, That in addition, with respect to positions in 
commodity futures or commodity option

[[Page 230]]

contracts, or swaps which do not come within the meaning and intent of 
Rules 1.3(z)(1) and 151.5, a qualifying entity may represent that the 
aggregate initial margin and premiums required to establish such 
positions will not exceed five percent of the liquidation value of the 
qualifying entity's portfolio, after taking into account unrealized 
profits and unrealized losses on any such contracts it has entered into; 
and, Provided further, That in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount as defined in 
Rule 190.01(x) (17 CFR 190.01(x)) may be excluded in computing such five 
percent; or
    (B) The aggregate net notional value of commodity futures, commodity 
options contracts, or swaps positions not used solely for bona fide 
hedging purposes within the meaning and intent of Rules 1.3(z)(1) and 
151.5 (17 CFR 1.3(z)(1) and 151.5), determined at the time the most 
recent position was established, does not exceed 100 percent of the 
liquidation value of the pool's portfolio, after taking into account 
unrealized profits and unrealized losses on any such positions it has 
entered into. For the purpose of this paragraph:
    (1) The term ``notional value'' shall be calculated for each futures 
position by multiplying the number of contracts by the size of the 
contract, in contract units (taking into account any multiplier 
specified in the contract), by the current market price per unit, for 
each such option position by multiplying the number of contracts by the 
size of the contract, adjusted by its delta, in contract units (taking 
into account any multiplier specified in the contract), by the strike 
price per unit, for each such retail forex transaction, by calculating 
the value in U.S. Dollars for such transaction, at the time the 
transaction was established, excluding for this purpose the value in 
U.S. Dollars of offsetting long and short transactions, if any, and for 
any cleared swap by the value as determined consistent with the terms of 
17 CFR part 45; and
    (2) The person may net futures contracts with the same underlying 
commodity across designated contract markets and foreign boards of 
trade; and swaps cleared on the same designated clearing organization 
where appropriate; and (C) Will not be, and has not been, marketing 
participations to the public as or in a commodity pool or otherwise as 
or in a vehicle for trading in the commodity futures, commodity options, 
or swaps markets.
    (3) The notice of eligibility must be filed with the National 
Futures Association prior to the date upon which such person intends to 
operate the qualifying entity pursuant to the exclusion provided by this 
section.
    (4) The notice of eligibility shall be effective upon filing.
    (5) Annual notice. Each person who has filed a notice of exclusion 
under this section must affirm on an annual basis the notice of 
exemption from registration, withdraw such exemption due to the 
cessation of activities requiring registration or exemption therefrom, 
or withdraw such exemption and apply for registration within 60 days of 
the calendar year end through National Futures Association's electronic 
exemption filing system.
    (d)(1) Each person who has claimed an exclusion hereunder must, in 
the event that any of the information contained or representations made 
in the notice of eligibility becomes inaccurate or incomplete, amend the 
notice electronically through National Futures Association's electronic 
exemption filing system as may be necessary to render the notice of 
eligibility accurate and complete.
    (2) This amendment required by paragraph (d)(1) of this section 
shall be filed within fifteen business days after the occurrence of such 
event.
    (e) An exclusion claimed hereunder shall cease to be effective upon 
any change which would render:
    (1) A person as to whom such exclusion has been claimed ineligible 
under paragraph (a) of this section;
    (2) The entity for which such exclusion has been claimed ineligible 
under paragraph (b) of this section; or
    (3) Either the representations made pursuant to paragraph (c)(2) of 
this section inaccurate or the continuation of such representations 
false or misleading.

[[Page 231]]

    (f) Any notice required to be filed hereunder must be filed by a 
representative duly authorized to bind the person specified in paragraph 
(a) of this section.
    (g) The filing of a notice of eligibility or the application of 
``non-pool status'' under this section will not affect the ability of a 
person to qualify for an exemption from registration as a commodity pool 
operator under Sec.  4.13 in connection with the operation of another 
trading vehicle that is not covered under this Sec.  4.5.

[50 FR 15882, Apr. 23, 1985; 50 FR 18859, May 3, 1985, as amended at 58 
FR 6374, Jan. 28, 1993; 58 FR 43793, Aug. 18, 1993; 65 FR 24128, Apr. 
25, 2000; 65 FR 25980, May 4, 2000; 67 FR 77410, Dec. 18, 2002; 68 FR 
47230, Aug. 8, 2003; 72 FR 1662, Jan. 16, 2007; 77 FR 11283, Feb. 24, 
2012; 77 FR 17328, Mar. 26, 2012]



Sec.  4.6  Exclusion for certain otherwise regulated persons from 
the definition of the term ``commodity trading advisor.''

    (a) Subject to compliance with the provisions of this section, the 
following persons, and any principal or employee thereof, shall be 
excluded from the definition of the term ``commodity trading advisor:''
    (1) An insurance company subject to regulation by any State, or any 
wholly-owned subsidiary or employee thereof; Provided, however, That its 
commodity interest advisory activities are solely incidental to the 
conduct of the insurance business of the insurance company as such; and
    (2) A person who is excluded from the definition of the term 
``commodity pool operator'' by Sec.  4.5; Provided, however, That:
    (i) Its commodity interest advisory activities are solely incidental 
to its operation of those trading vehicles for which Sec.  4.5 provides 
relief; and
    (ii) Where necessary, prior to providing any commodity interest 
trading advice to any such trading vehicle the person files a notice of 
eligibility as specified in Sec.  4.5 to claim the relief available 
under that section.
    (3) A swap dealer registered with the Commission as such pursuant to 
the Act or excluded or exempt from registration under the Act or the 
Commission's regulations; Provided, however, That the commodity interest 
and swap advisory activities of the swap dealer are solely incidental to 
the conduct of its business as a swap dealer.
    (b) Any person who has claimed an exclusion under this Sec.  4.6 
must submit to such special calls as the Commission may make to require 
the person to demonstrate compliance with the provisions of paragraph 
(a) of this section.
    (c) An exclusion claimed under this Sec.  4.6 shall cease to be 
effective upon any change which would render the person claiming the 
exclusion ineligible under paragraph (a) of this section.

[52 FR 41984, Nov. 2, 1987, as amended at 77 FR 9822, Feb. 17, 2012]



Sec.  4.7  Exemption from certain part 4 requirements for commodity 
pool operators with respect to offerings to qualified eligible persons
and for commodity trading advisors with respect to advising 
qualified eligible persons.

    This section is organized as follows: Paragraph (a) contains 
definitions for the purposes of Sec.  4.7; paragraph (b) contains the 
relief available to commodity pool operators under Sec.  4.7; paragraph 
(c) contains the relief available to commodity trading advisors under 
Sec.  4.7; paragraph (d) concerns the Notice of Claim for Exemption 
under Sec.  4.7; and paragraph (e) addresses the effect of an 
insignificant deviation from a term, condition or requirement of Sec.  
4.7.
    (a) Definitions. Paragraph (a)(1) of this section contains general 
definitions, paragraph (a)(2) of this section contains the definition of 
the term qualified eligible person with respect to those persons who do 
not need to satisfy the Portfolio Requirement and paragraph (a)(3) of 
this section contains the definition of the term qualified eligible 
person with respect to those persons who must satisfy the Portfolio 
Requirement. For the purposes of this section:
    (1) In general--(i) Affiliate of, or a person affiliated with, a 
specified person means a person that directly or indirectly through one 
or more persons, controls, is controlled by, or is under common control 
with the specified person.
    (ii) Exempt account means the account of a qualified eligible person 
that is directed or guided by a commodity

[[Page 232]]

trading advisor pursuant to an effective claim for exemption under Sec.  
4.7.
    (iii) Exempt pool means a pool that is operated pursuant to an 
effective claim for exemption under Sec.  4.7.
    (iv) Non-United States person means:
    (A) A natural person who is not a resident of the United States;
    (B) A partnership, corporation or other entity, other than an entity 
organized principally for passive investment, organized under the laws 
of a foreign jurisdiction and which has its principal place of business 
in a foreign jurisdiction;
    (C) An estate or trust, the income of which is not subject to United 
States income tax regardless of source;
    (D) An entity organized principally for passive investment such as a 
pool, investment company or other similar entity; Provided, That units 
of participation in the entity held by persons who do not qualify as 
Non-United States persons or otherwise as qualified eligible persons 
represent in the aggregate less than 10% of the beneficial interest in 
the entity, and that such entity was not formed principally for the 
purpose of facilitating investment by persons who do not qualify as Non-
United States persons in a pool with respect to which the operator is 
exempt from certain requirements of part 4 of the Commission's 
regulations by virtue of its participants being Non-United States 
persons; and
    (E) A pension plan for the employees, officers or principals of an 
entity organized and with its principal place of business outside the 
United States.
    (v) Portfolio Requirement means that a person:
    (A) Owns securities (including pool participations) of issuers not 
affiliated with such person and other investments with an aggregate 
market value of at least $2,000,000;
    (B) Has had on deposit with a futures commission merchant, for its 
own account at any time during the six-month period preceding either the 
date of sale to that person of a pool participation in the exempt pool 
or the date that the person opens an exempt account with the commodity 
trading advisor, at least $200,000 in exchange-specified initial margin 
and option premiums, together with required minimum security deposit for 
retail forex transactions (as defined in Sec.  5.1(m) of this chapter) 
for commodity interest transactions; or
    (C) Owns a portfolio comprised of a combination of the funds or 
property specified in paragraphs (a)(1)(v)(A) and (B) of this section in 
which the sum of the funds or property includable under paragraph 
(a)(1)(v)(A), expressed as a percentage of the minimum amount required 
thereunder, and the amount of futures margin and option premiums 
includable under paragraph (a)(1)(v)(B), expressed as a percentage of 
the minimum amount required thereunder, equals at least one hundred 
percent. An example of a composite portfolio acceptable under this 
paragraph (a)(1)(v)(C) would consist of $1,000,000 in securities and 
other property (50% of paragraph (a)(1)(v)(A)) and $100,000 in exchange-
specified initial margin and option premiums (50% of paragraph 
(a)(1)(v)(B)).
    (vi) United States means the United States, its states, territories 
or possessions, or an enclave of the United States government, its 
agencies or instrumentalities.
    (2) Persons who do not need to satisfy the Portfolio Requirement to 
be qualified eligible persons. Qualified eligible person means any 
person, acting for its own account or for the account of a qualified 
eligible person, who the commodity pool operator reasonably believes, at 
the time of the sale to that person of a pool participation in the 
exempt pool, or who the commodity trading advisor reasonably believes, 
at the time that person opens an exempt account, is:
    (i)(A) A futures commission merchant registered pursuant to section 
4d of the Act, or a principal thereof;
    (B) A retail foreign exchange dealer registered pursuant to section 
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
    (C) A swap dealer registered pursuant to section 4s(a)(1) of the 
Act, or a principal thereof;
    (ii) A broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934, or a principal thereof;
    (iii) A commodity pool operator registered pursuant to section 4m of 
the

[[Page 233]]

Act, or a principal thereof; Provided, That the pool operator:
    (A) Has been registered and active as such for two years; or
    (B) Operates pools which, in the aggregate, have total assets in 
excess of $5,000,000;
    (iv) A commodity trading advisor registered pursuant to section 4m 
of the Act, or a principal thereof; Provided, That the trading advisor:
    (A) Has been registered and active as such for two years; or
    (B) Provides commodity interest trading advice to commodity accounts 
which, in the aggregate, have total assets in excess of $5,000,000 
deposited at one or more futures commission merchants;
    (v) An investment adviser registered pursuant to section 203 of the 
Investment Advisers Act of 1940 (``Investment Advisers Act'') or 
pursuant to the laws of any state, or a principal thereof; Provided, 
That the investment adviser:
    (A) Has been registered and active as such for two years; or
    (B) Provides securities investment advice to securities accounts 
which, in the aggregate, have total assets in excess of $5,000,000 
deposited at one or more registered securities brokers;
    (vi) A ``qualified purchaser'' as defined in section 2(a)(51)(A) of 
the Investment Company Act of 1940 (the ``Investment Company Act'');
    (vii) A ``knowledgeable employee'' as defined in Sec.  270.3c-5 of 
this title;
    (viii)(A) With respect to an exempt pool:
    (1) The commodity pool operator, commodity trading advisor or 
investment adviser of the exempt pool offered or sold, or an affiliate 
of any of the foregoing;
    (2) A principal of the exempt pool or the commodity pool operator, 
commodity trading advisor or investment adviser of the exempt pool, or 
of an affiliate of any of the foregoing;
    (3) An employee of the exempt pool or the commodity pool operator, 
commodity trading advisor or investment adviser of the exempt pool, or 
of an affiliate of any of the foregoing (other than an employee 
performing solely clerical, secretarial or administrative functions with 
regard to such person or its investments) who, in connection with his or 
her regular functions or duties, participates in the investment 
activities of the exempt pool, other commodity pools operated by the 
pool operator of the exempt pool or other accounts advised by the 
trading advisor or the investment adviser of the exempt pool, or by the 
affiliate; Provided, That such employee has been performing such 
functions and duties for or on behalf of the exempt pool, pool operator, 
trading advisor, investment adviser or affiliate, or substantially 
similar functions or duties for or on behalf of another person engaged 
in providing commodity interest, securities or other financial services, 
for at least 12 months;
    (4) Any other employee of, or an agent engaged to perform legal, 
accounting, auditing or other financial services for, the exempt pool or 
the commodity pool operator, commodity trading advisor or investment 
adviser of the exempt pool, or any other employee of, or agent so 
engaged by, an affiliate of any of the foregoing (other than an employee 
or agent performing solely clerical, secretarial or administrative 
functions with regard to such person or its investments); Provided, That 
such employee or agent:
    (i) Is an accredited investor as defined in Sec.  230.501(a)(5) or 
(6) of this title; and
    (ii) Has been employed or engaged by the exempt pool, commodity pool 
operator, commodity trading advisor, investment adviser or affiliate, or 
by another person engaged in providing commodity interest, securities or 
other financial services, for at least 24 months;
    (5) The spouse, child, sibling or parent of a person who satisfies 
the criteria of paragraph (a)(2)(viii)(A)(1), (2), (3) or (4) of this 
section; Provided, That:
    (i) An investment in the exempt pool by any such family member is 
made with the knowledge and at the direction of the person; and
    (ii) The family member is not a qualified eligible person for the 
purposes of paragraph (a)(3)(xi) of this section;
    (6)(i) Any person who acquires a participation in the exempt pool by 
gift, bequest or pursuant to an agreement relating to a legal separation 
or divorce from a person listed in paragraph

[[Page 234]]

(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section;
    (ii) The estate of any person listed in paragraph 
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section; or
    (iii) A company established by any person listed in paragraph 
(a)(2)(viii)(A)(1), (2), (3), (4) or (5) of this section exclusively for 
the benefit of (or owned exclusively by) that person and any person 
listed in paragraph (a)(2)(viii)(A)(6)(i) or (ii) of this section;
    (B) With respect to an exempt account:
    (1) An affiliate of the commodity trading advisor of the exempt 
account;
    (2) A principal of the commodity trading advisor of the exempt 
account or of an affiliate of the trading advisor;
    (3) An employee of the commodity trading advisor of the exempt 
account or of an affiliate of the trading advisor (other than an 
employee performing solely clerical, secretarial or administrative 
functions with regard to such person or its investments) who, in 
connection with his or her regular functions or duties, participates in 
the investment activities of the trading advisor or the affiliate; 
Provided, That such employee has been performing such functions and 
duties for or on behalf of the trading advisor or the affiliate, or 
substantially similar functions or duties for or on behalf of another 
person engaged in providing commodity interest, securities or other 
financial services, for at least 12 months;
    (4) Any other employee of, or an agent engaged to perform legal, 
accounting, auditing or other financial services for, the commodity 
trading advisor of the exempt account or any other employee of, or agent 
so engaged by, an affiliate of the trading advisor (other than an 
employee or agent performing solely clerical, secretarial or 
administrative functions with regard to such person or its investments); 
Provided, That such employee or agent:
    (i) Is an accredited investor as defined in Sec.  230.501(a)(5) or 
(a)(6) of this title; and
    (ii) Has been employed or engaged by the commodity trading advisor 
or the affiliate, or by another person engaged in providing commodity 
interest, securities or other financial services, for at least 24 
months; or
    (5) The spouse, child, sibling or parent of the commodity trading 
advisor of the exempt account or of a person who satisfies the criteria 
of paragraph (a)(2)(viii)(B)(1), (2), (3) or (4) of this section; 
Provided, That:
    (i) The establishment of an exempt account by any such family member 
is made with the knowledge and at the direction of the person; and
    (ii) The family member is not a qualified eligible person for the 
purposes of paragraph (a)(3)(xi) of this section;
    (6)(i) Any person who acquires an interest in an exempt account by 
gift, bequest or pursuant to an agreement relating to a legal separation 
or divorce from a person listed in paragraph (a)(2)(viii)(B)(1), (2), 
(3), (4) or (5) of this section;
    (ii) The estate of any person listed in paragraph 
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section; or
    (iii) A company established by any person listed in paragraph 
(a)(2)(viii)(B)(1), (2), (3), (4) or (5) of this section exclusively for 
the benefit of (or owned exclusively by) that person and any person 
listed in paragraph (a)(2)(viii)(B)(6)(i) or (ii) of this section;
    (ix) A trust; Provided, That:
    (A) The trust was not formed for the specific purpose of either 
participating in the exempt pool or opening an exempt account; and
    (B) The trustee or other person authorized to make investment 
decisions with respect to the trust, and each settlor or other person 
who has contributed assets to the trust, is a qualified eligible person;
    (x) An organization described in section 501(c)(3) of the Internal 
Revenue Code (the ``IRC''); Provided, That the trustee or other person 
authorized to make investment decisions with respect to the 
organization, and the person who has established the organization, is a 
qualified eligible person;
    (xi) A Non-United States person;
    (xii)(A) An entity in which all of the unit owners or participants, 
other than the commodity trading advisor claiming relief under this 
section, are qualified eligible persons;
    (B) An exempt pool; or
    (C) Notwithstanding paragraph (a)(3) of this section, an entity as 
to which a

[[Page 235]]

notice of eligibility has been filed pursuant to Sec.  4.5 which is 
operated in accordance with such rule and in which all unit owners or 
participants, other than the commodity trading advisor claiming relief 
under this section, are qualified eligible persons.
    (3) Persons who must satisfy the Portfolio Requirement to be 
qualified eligible persons. Qualified eligible person means any person 
who the commodity pool operator reasonably believes, at the time of the 
sale to that person of a pool participation in the exempt pool, or any 
person who the commodity trading advisor reasonably believes, at the 
time that person opens an exempt account, satisfies the Portfolio 
Requirement and is:
    (i) An investment company registered under the Investment Company 
Act or a business development company as defined in section 2(a)(48) of 
such Act not formed for the specific purpose of either investing in the 
exempt pool or opening an exempt account;
    (ii) A bank as defined in section 3(a)(2) of the Securities Act of 
1933 (the ``Securities Act'') or any savings and loan association or 
other institution as defined in section 3(a)(5)(A) of the Securities Act 
acting for its own account or for the account of a qualified eligible 
person;
    (iii) An insurance company as defined in section 2(13) of the 
Securities Act acting for its own account or for the account of a 
qualified eligible person;
    (iv) A plan established and maintained by a state, its political 
subdivisions, or any agency or instrumentality of a state or its 
political subdivisions, for the benefit of its employees, if such plan 
has total assets in excess of $5,000,000;
    (v) An employee benefit plan within the meaning of the Employee 
Retirement Income Security Act of 1974; Provided, That the investment 
decision is made by a plan fiduciary, as defined in section 3(21) of 
such Act, which is a bank, savings and loan association, insurance 
company, or registered investment adviser; or that the employee benefit 
plan has total assets in excess of $5,000,000; or, if the plan is self-
directed, that investment decisions are made solely by persons that are 
qualified eligible persons;
    (vi) A private business development company as defined in section 
202(a)(22) of the Investment Advisers Act;
    (vii) An organization described in section 501(c)(3) of the IRC, 
with total assets in excess of $5,000,000;
    (viii) A corporation, Massachusetts or similar business trust, or 
partnership, limited liability company or similar business venture, 
other than a pool, which has total assets in excess of $5,000,000, and 
is not formed for the specific purpose of either participating in the 
exempt pool or opening an exempt account;
    (ix) A natural person whose individual net worth, or joint net worth 
with that person's spouse at the time of either his purchase in the 
exempt pool or his opening of an exempt account would qualify him as an 
accredited investor as defined in Sec.  230.501(a)(5) of this title;
    (x) A natural person who would qualify as an accredited investor as 
defined in Sec.  203.501(a)(6) of this title;
    (xi) A pool, trust, insurance company separate account or bank 
collective trust, with total assets in excess of $5,000,000, not formed 
for the specific purpose of either participating in the exempt pool or 
opening an exempt account, and whose participation in the exempt pool or 
investment in the exempt account is directed by a qualified eligible 
person; or
    (xii) Except as provided for the governmental entities referenced in 
paragraph (a)(3)(iv) of this section, if otherwise authorized by law to 
engage in such transactions, a governmental entity (including the United 
States, a state, or a foreign government) or political subdivision 
thereof, or a multinational or supranational entity or an 
instrumentality, agency, or department of any of the foregoing.
    (b) Relief available to commodity pool operators. Upon filing the 
notice required by paragraph (d) of this section, and subject to 
compliance with the conditions specified in paragraph (d) of this 
section, any registered commodity pool operator who offers or sells 
participations in a pool solely to qualified eligible persons in an 
offering which

[[Page 236]]

qualifies for exemption from the registration requirements of the 
Securities Act pursuant to section 4(2) of that Act or pursuant to 
Regulation S, 17 CFR 230.901 et seq., and any bank registered as a 
commodity pool operator in connection with a pool that is a collective 
trust fund whose securities are exempt from registration under the 
Securities Act pursuant to section 3(a)(2) of that Act and are offered 
or sold, without marketing to the public, solely to qualified eligible 
persons, may claim any or all of the following relief with respect to 
such pool:
    (1) Disclosure relief. (i) Exemption from the specific requirements 
of Sec. Sec.  4.21, 4.24, 4.25 and 4.26 with respect to each exempt 
pool; Provided, That if an offering memorandum is distributed in 
connection with soliciting prospective participants in the exempt pool, 
such offering memorandum must include all disclosures necessary to make 
the information contained therein, in the context in which it is 
furnished, not misleading; and that the following statement is 
prominently disclosed on the cover page of the offering memorandum, or, 
if none is provided, immediately above the signature line on the 
subscription agreement or other document that the prospective 
participant must execute to become a participant in the pool:

    ``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING 
COMMISSION IN CONNECTION WITH POOLS WHOSE PARTICIPANTS ARE LIMITED TO 
QUALIFIED ELIGIBLE PERSONS, AN OFFERING MEMORANDUM FOR THIS POOL IS NOT 
REQUIRED TO BE, AND HAS NOT BEEN, FILED WITH THE COMMISSION. THE 
COMMODITY FUTURES TRADING COMMISSION DOES NOT PASS UPON THE MERITS OF 
PARTICIPATING IN A POOL OR UPON THE ADEQUACY OR ACCURACY OF AN OFFERING 
MEMORANDUM. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS 
NOT REVIEWED OR APPROVED THIS OFFERING OR ANY OFFERING MEMORANDUM FOR 
THIS POOL.''

    (ii) Exemption from disclosing the past performance of exempt pools 
in the Disclosure Document of non-exempt pools except to the extent that 
such past performance is material to the non-exempt pool being offered; 
Provided, That a pool operator that has claimed exemption hereunder and 
elects not to disclose any such performance in the Disclosure Document 
of non-exempt pools shall state in a footnote to the performance 
disclosure therein that the operator is operating or has operated exempt 
pools whose performance is not disclosed in this Disclosure Document.
    (2) Periodic reporting relief. Exemption from the specific 
requirements of Sec. Sec.  4.22(a) and (b); Provided, That a statement 
signed and affirmed in accordance with Sec.  4.22(h) is prepared and 
distributed to pool participants no less frequently than quarterly 
within 30 calendar days after the end of the reporting period. This 
statement must be presented and computed in accordance with generally 
accepted accounting principles and indicate:
    (i) The net asset value of the exempt pool as of the end of the 
reporting period;
    (ii) The change in net asset value from the end of the previous 
reporting period; and
    (iii) The net asset value per outstanding unit of participation in 
the exempt pool as of the end of the reporting period.
    (A) Either the net asset value per outstanding participation unit in 
the exempt pool as of the end of the reporting period, or
    (B) The total value of the participant's interest or share in the 
exempt pool as of the end of the reporting period.
    (iv) Where the pool is comprised of more than one ownership class or 
series, the net asset value of the series or class on which the account 
statement is reporting, and the net asset value per unit or value of the 
participant's share, also must be included in the statement required by 
this paragraph (b)(2); except that, for a pool that is a series fund 
structured with a limitation on liability among the different series, 
the account statement required by this paragraph (b)(2) is not required 
to include the consolidated net asset value of all series of the pool.
    (v) A commodity pool operator of a pool that meets the conditions 
specified in Sec.  4.22(d)(2)(i) to present and compute the commodity 
pool's financial statements contained in the Annual

[[Page 237]]

Report other than in accordance with generally accepted accounting 
principles and has filed notice pursuant to Sec.  4.22(d)(2)(iii) may 
also use the alternative accounting principles, standards or practices 
identified in the notice with respect to the computation and 
presentation of the account statement.
    (3) Annual report relief. (i) Exemption from the specific 
requirements of Sec.  4.22(c) of this part; Provided, that within 90 
calendar days after the end of the exempt pool's fiscal year or the 
permanent cessation of trading, whichever is earlier, the commodity pool 
operator electronically files with the National Futures Association and 
distributes to each participant in lieu of the financial information and 
statements specified by that section, an annual report for the exempt 
pool, affirmed in accordance with Sec.  4.22(h) which contains, at a 
minimum:
    (A) A Statement of Financial Condition as of the close of the exempt 
pool's fiscal year (elected in accordance with Sec.  4.22(g));
    (B) A Statement of Operations for that year;
    (C) Appropriate footnote disclosure and such further material 
information as may be necessary to make the required statements not 
misleading. For a pool that invests in other funds, this information 
must include, but is not limited to, separately disclosing the amounts 
of income, management and incentive fees associated with each investment 
in an investee fund that exceeds five percent of the pool's net assets. 
The income, management and incentive fees associated with an investment 
in an investee fund that is less than five percent of the pool's net 
assets may be combined and reported in the aggregate with the income, 
management and incentive fees of other investee funds that, 
individually, represent an investment of less than five percent of the 
pool's net assets. If the commodity pool operator is not able to obtain 
the specific amounts of management and incentive fees charged by an 
investee fund, the commodity pool operator must disclose the percentage 
amounts and computational basis for each such fee and include a 
statement that the CPO is not able to obtain the specific fee amounts 
for this fund;
    (D) Where the pool is comprised of more than one ownership class or 
series, information for the series or class on which the financial 
statements are reporting should be presented in addition to the 
information presented for the pool as a whole; except that, for a pool 
that is a series fund structured with a limitation on liability among 
the different series, the financial statements are not required to 
include consolidated information for all series.
    (ii) Legend. If a claim for exemption has been made pursuant to this 
section, the commodity pool operator must make a statement to that 
effect on the cover page of each annual report.
    (4) Recordkeeping relief. Exemption from the specific requirements 
of Sec.  4,23; Provided, That the commodity pool operator must maintain 
the reports referred to in paragraphs (b)(2) and (3) of this section and 
all books and records prepared in connection with his activities as the 
pool operator of the exempt pool (including, without limitation, records 
relating to the qualifications of qualified eligible persons and 
substantiating any performance representations). Books and records that 
are not maintained at the pool operator's main business office shall be 
maintained by one or more of the following: the pool's administrator, 
distributor or custodian, or a bank or registered broker or dealer 
acting in a similar capacity with respect to the pool. Such books and 
records must be made available to any representative of the Commission, 
the National Futures Association and the United States Department of 
Justice in accordance with the provisions of Sec.  1.31.
    (5) If the pool operator does not maintain its books and records at 
its main business office, the pool operator shall:
    (i) At the time it registers with the Commission or delegates its 
recordkeeping obligations, whichever is later, file a statement that:
    (A) Identifies the name, main business address, and main business 
telephone number of the person(s) who will be keeping required books and 
records in lieu of the pool operator;
    (B) Sets forth the name and telephone number of a contact for each

[[Page 238]]

person who will be keeping required books and records in lieu of the 
pool operator;
    (C) Specifies, by reference to the respective paragraph of this 
section, the books and records that such person will be keeping; and
    (D) Contains representations from the pool operator that:
    (1) It will promptly amend the statement if the contact information 
or location of any of the books and records required to be kept by this 
section changes, by identifying in such amendment the new location and 
any other information that has changed;
    (2) It remains responsible for ensuring that all books and records 
required by this section are kept in accordance with Sec.  1.31;
    (3) Within 48 hours after a request by a representative of the 
Commission, it will obtain the original books and records from the 
location at which they are maintained, and provide them for inspection 
at the pool operator's main business office; Provided, however, that if 
the original books and records are permitted to be, and are maintained, 
at a location outside the United States, its territories or possessions, 
the pool operator will obtain and provide such original books and 
records for inspection at the pool operator's main business office 
within 72 hours of such a request; and
    (4) It will disclose in the pool's Disclosure Document the location 
of its books and records that are required under this section.
    (ii) The pool operator shall also file electronically with the 
National Futures Association a statement from each person who will be 
keeping required books and records in lieu of the pool operator wherein 
such person:
    (A) Acknowledges that the pool operator intends that the person keep 
and maintain required pool books and records;
    (B) Agrees to keep and maintain such records required in accordance 
with Sec.  1.31 of this chapter; and
    (C) Agrees to keep such required books and records open to 
inspection by any representative of the Commission, the National Futures 
Association, or the United States Department of Justice in accordance 
with Sec.  1.31 of this chapter.
    (c) Relief available to commodity trading advisors. Upon filing the 
notice required by paragraph (d) of this section, and subject to 
compliance with the conditions specified in paragraph (d) of this 
section, any registered commodity trading advisor who anticipates 
directing or guiding the commodity interest accounts of qualified 
eligible persons may claim any or all of the following relief with 
respect to the accounts of qualified eligible persons who have given due 
consent to their account being an exempt account under Sec.  4.7:
    (1) Disclosure relief. (i) Exemption from the specific requirements 
of Sec. Sec.  4.31, 4.34, 4.35 and 4.36; Provided, That if the commodity 
trading advisor delivers a brochure or other disclosure statement to 
such qualified eligible persons, such brochure or statement shall 
include all additional disclosures necessary to make the information 
contained therein, in the context in which it is furnished, not 
misleading; and that the following statement is prominently displayed on 
the cover page of the brochure or statement or, if none is provided, 
immediately above the signature line of the agreement that the client 
must execute before it opens an account with the commodity trading 
advisor:

    ``PURSUANT TO AN EXEMPTION FROM THE COMMODITY FUTURES TRADING 
COMMISSION IN CONNECTION WITH ACCOUNTS OF QUALIFIED ELIGIBLE PERSONS, 
THIS BROCHURE OR ACCOUNT DOCUMENT IS NOT REQUIRED TO BE, AND HAS NOT 
BEEN, FILED WITH THE COMMISSION. THE COMMODITY FUTURES TRADING 
COMMISSION DOES NOT PASS UPON THE MERITS OF PARTICIPATING IN A TRADING 
PROGRAM OR UPON THE ADEQUACY OR ACCURACY OF COMMODITY TRADING ADVISOR 
DISCLOSURE. CONSEQUENTLY, THE COMMODITY FUTURES TRADING COMMISSION HAS 
NOT REVIEWED OR APPROVED THIS TRADING PROGRAM OR THIS BROCHURE OR 
ACCOUNT DOCUMENT.''

    (ii) Exemption from disclosing the past performance of exempt 
accounts in the Disclosure Document for non-exempt accounts except to 
the extent that such past performance is material to the non-exempt 
account being offered; Provided, That a commodity

[[Page 239]]

trading advisor that has claimed exemption hereunder and elects not to 
disclose any such performance in the Disclosure Document for non-exempt 
accounts shall state in a footnote to the performance disclosure therein 
that the advisor is advising or has advised exempt accounts for 
qualified eligible persons whose performance is not disclosed in this 
Disclosure Document.
    (2) Recordkeeping relief. Exemption from the specific requirements 
of Sec.  4.33; Provided, That the commodity trading advisor must 
maintain, at its main business office, all books and records prepared in 
connection with his activities as the commodity trading advisor of 
qualified eligible persons (including, without limitation, records 
relating to the qualifications of such qualified eligible persons and 
substantiating any performance representations) and must make such books 
and records available to any representative of the Commission, the 
National Futures Association and the United States Department of Justice 
in accordance with the provisions of Sec.  1.31.
    (d) Notice of claim for exemption. (1) A notice of a claim for 
exemption under this section must:
    (i) Provide the name, main business address, main business telephone 
number and the National Futures Association commodity pool operator or 
commodity trading advisor identification number of the person claiming 
the exemption;
    (ii)(A) Where the claimant is a commodity pool operator, provide the 
name(s) of the pool(s) for which the request is made; Provided, That a 
single notice representing that the pool operator anticipates operating 
single-investor pools may be filed to claim exemption for single-
investor pools and such notice need not name each such pool;
    (B) Where the claimant is a commodity trading advisor, contain a 
representation that the trading advisor anticipates providing commodity 
interest trading advice to qualified eligible persons;
    (iii) Contain representations that:
    (A) Neither the commodity pool operator or commodity trading advisor 
nor any of its principals is subject to any statutory disqualification 
under section 8a(2) or 8a(3) of the Act unless such disqualification 
arises from a matter which was previously disclosed in connection with a 
previous application for registration if such registration was granted 
or which was disclosed more than thirty days prior to the filing of the 
notice under this paragraph (d);
    (B) The commodity pool operator or commodity trading advisor will 
comply with the applicable requirements of Sec.  4.7; and
    (C) Where the claimant is a commodity pool operator, that the exempt 
pool will be offered and operated in compliance with the applicable 
requirements of Sec.  4.7;
    (iv) Specify the relief claimed under Sec.  4.7;
    (v) Where the claimant is a commodity pool operator, state the 
closing date of the offering or that the offering will be continuous;
    (vi) Be filed by a representative duly authorized to bind the 
commodity pool operator or commodity trading advisor;
    (vii) Be filed electronically with the National Futures Association 
through its electronic exemption filing system; and
    (viii)(A)(1) Where the claimant is a commodity pool operator, except 
as provided in paragraph (d)(1)(ii)(A) of this section with respect to 
single-investor pools and in paragraph (d)(1)(viii)(A)(2) of this 
section, be received by the National Futures Association:
    (i) Before the date the pool first enters into a commodity interest 
transaction, if the relief claimed is limited to that provided under 
paragraphs (b)(2), (3) and (4) of this section; or
    (ii) Prior to any offer or sale of any participation in the exempt 
pool if the claimed relief includes that provided under paragraph (b)(1) 
of this section.
    (2) Where participations in a pool have been offered or sold in full 
compliance with part 4, the notice of a claim for exemption may be filed 
with the National Futures Association at any time; Provided, That the 
claim for exemption is otherwise consistent with the duties of the 
commodity pool operator and the rights of pool participants and that the 
commodity pool operator

[[Page 240]]

notifies the pool participants of his intention, absent objection by the 
holders of a majority of the units of participation in the pool who are 
unaffiliated with the commodity pool operator within twenty-one days 
after the date of the notification, to file a notice of claim for 
exemption under Sec.  4.7 and such holders have not objected within such 
period. A commodity pool operator filing a notice under this paragraph 
(d)(1)(viii)(A)(2) shall either provide disclosure and reporting in 
accordance with the requirements of part 4 to those participants 
objecting to the filing of such notice or allow such participants to 
redeem their units of participation in the pool within three months of 
the filing of such notice.
    (B) Where the claimant is a commodity trading advisor, be received 
by the Commission before the date the trading advisor first enters into 
an agreement to direct or guide the commodity interest account of a 
qualified eligible person pursuant to Sec.  4.7.
    (2) The notice will be effective upon receipt by the National 
Futures Association with respect to each pool for which it was made 
where the claimant is a commodity pool operator and otherwise generally 
where the claimant is a commodity trading advisor; Provided, That any 
notice which does not include all the required information shall not be 
effective, and that if at the time the National Futures Association 
receives the notice an enforcement proceeding brought by the Commission 
under the Act or the regulations is pending against the pool operator or 
trading advisor or any of its principals, the exemption will not be 
effective until twenty-one calendar days after receipt of the notice by 
the National Futures Association and that in such case an exemption may 
be denied by the Commission or the National Futures Association or made 
subject to such conditions as the Commission or the National Futures 
Association may impose.
    (3) Any exemption claimed hereunder shall cease to be effective upon 
any change which would cause the commodity pool operator of an exempt 
pool to be ineligible for the relief claimed with respect to such pool 
or which would cause a commodity trading advisor to be ineligible for 
the relief claimed. The pool operator or trading advisor must promptly 
file a notice advising the National Futures Association of such change.
    (4)(i) Any exemption from the requirements of Sec.  4.21, Sec.  
4.22, Sec.  4.23, Sec.  4.24, Sec.  4.25 or Sec.  4.26 claimed hereunder 
with respect to a pool shall not affect the obligation of the commodity 
pool operator to comply with all other applicable provisions of part 4, 
the Act and the Commission's rules and regulations, with respect to the 
pool and any other pool the pool operator operates or intends to 
operate.
    (ii) Any exemption from the requirements of Sec.  4.31, Sec.  4.33, 
Sec.  4.34, Sec.  4.35 or Sec.  4.36 claimed hereunder shall not affect 
the obligation of the commodity trading advisor to comply with all other 
applicable provisions of part 4, the Act and the Commission's rules and 
regulations, with respect to any qualified eligible person and any other 
client to which the commodity trading advisor provides or intends to 
provide commodity interest trading advice.
    (e) Insignificant deviations from a term, condition or requirement 
of Sec.  4.7. (1) A failure to comply with a term or condition of Sec.  
4.7 will not result in the loss of the exemption with respect to a 
particular pool or client if the commodity pool operator or the 
commodity trading advisor relying on the exemption shows that:
    (i) The failure to comply did not pertain to a term, condition or 
requirement directly intended to protect that particular qualified 
eligible person;
    (ii) The failure to comply was insignificant with respect to the 
exempt pool as a whole or to the particular exempt account; and
    (iii) A good faith and reasonable attempt was made to comply with 
all applicable terms, conditions and requirements of Sec.  4.7.
    (2) A transaction made in reliance on Sec.  4.7 must comply with all 
applicable terms, conditions and requirements of Sec.  4.7. Where an 
exemption is established only through reliance upon paragraph (e)(1) of 
this section, the failure to

[[Page 241]]

comply shall nonetheless be actionable by the Commission.

[65 FR 47854, Aug. 4, 2000, as amended at 67 FR 77411, Dec. 18, 2002; 68 
FR 47231, Aug. 8, 2003; 71 FR 8942, Feb. 22, 2006; 72 FR 1662, Jan. 16, 
2007; 74 FR 57590, Nov. 9, 2009; 75 FR 55428, Sept. 10, 2010; 77 FR 
11284, Feb. 24, 2012; 77 FR 17329, Mar. 26, 2012; 77 FR 54358, Sept. 5, 
2012; 78 FR 52333, Aug. 22, 2013; 81 FR 85154, Nov. 25, 2016]



Sec.  4.8  Exemption from certain requirements of rule 4.26 with 
respect to pools offered or sold in certain offerings exempt
from registration under the Securities Act.

    (a) Notwithstanding paragraph (d) of Sec.  4.26 and subject to the 
conditions specified herein, the registered commodity pool operator of a 
pool offered or sold solely to ``accredited investors'' as defined in 17 
CFR 230.501 in an offering exempt from the registration requirements of 
the Securities Act of 1933 pursuant to Rule 505 or 506 of Regulation D, 
17 CFR 230.505 or 230.506, may solicit, accept and receive funds, 
securities and other property from prospective participants in that pool 
upon filing with the National Futures Association and providing to such 
participants the Disclosure Document for the pool.
    (b) Notwithstanding paragraph (d) of Sec.  4.26 and subject to the 
conditions specified herein, the registered commodity pool operator of a 
pool offered or sold in an offering exempt from the registration 
requirements of the Securities Act of 1933 pursuant to Rule 505 or 506 
of Regulation D, 17 CFR 230.505 or 230.506, that is operated in 
compliance with, and has filed the notice required by Sec.  4.12(b) may 
solicit, accept and receive funds, securities and other property from 
prospective participants in that pool upon filing with the National 
Futures Association and providing to such participants the Disclosure 
Document for the pool.
    (c) The relief provided under Sec.  4.8 is not available if an 
enforcement proceeding brought by the Commission under the Act or the 
regulations is pending against the commodity pool operator or any of its 
principals or if the commodity pool operator or any of its principals is 
subject to any statutory disqualification under Sec. Sec.  8a(2) or 
8a(3) of the Act.

[57 FR 34865, Aug. 7, 1992; 57 FR 41173, Sept. 9, 1992, as amended at 60 
FR 38182, July 25, 1995; 72 FR 1662, Jan. 16, 2007]



Sec.  4.9  [Reserved]



Sec.  4.10  Definitions.

    For purposes of this part:
    (a) [Reserved]
    (b) Net asset value means total assets minus total liabilities, 
determined in accord with generally accepted accounting principles, with 
each position in a commodity interest accounted for at fair market 
value.
    (c) Participant means any person that has any direct financial 
interest in a pool (e.g., a limited partner).
    (d)(1) Pool means any investment trust, syndicate or similar form of 
enterprise operated for the purpose of trading commodity interests.
    (2) Multi-advisor pool means a pool in which:
    (i) No commodity trading advisor is allocated or intended to be 
allocated more than twenty-five percent of the pool's funds available 
for commodity interest trading; and
    (ii) No investee pool is allocated or intended to be allocated more 
than twenty-five percent of the pool's net asset value.
    (3) Principal-protected pool means a pool (commonly referred to as a 
``guaranteed pool'') that is designed to limit the loss of the initial 
investment of its participants.
    (4) Investee pool means any pool in which another pool or account 
participates or invests, e.g., as a limited partner thereof.
    (5) Major investee pool means, with respect to a pool, any investee 
pool that