Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5587 

1 The RIN Number for the release published in 

the Federal Register on October 11, 2005 was 

identified as 3038–AC19. See 70 FR 58985 (October 

11, 2005). The correct RIN Number, 3038–AC05, 

has been used in this release. 

2 The October 11 Release may be accessed 

electronically on the Commission’s Web site, at 

http://www.cftc.gov/. 

3 The original deadline for the receipt for 

comments was extended from November 10th to 

November 30, 2005. See 70 FR 70749 (November 

23, 2005). 

4 The comment letters are available for inspection 

and copying at the Commission’s Washington office 

in its public reading room, Room 4072, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581. The telephone number for 

the public reading room is (202) 418–5025. The 

comment letters also are available on the 

Commission’s public Web site, at http:// 

www.cftc.gov/foia/comment05/foi05--006_1.htm. 

5 The rules of the Commission cited in this 

release may be found at 17 CFR Ch. I (2005). SEC 

rules cited in this release may be found at 17 CFR 

Ch. II (2005). 

dms.dot.gov. The docket number is FAA– 

2005–22157; Directorate Identifier 2005–CE– 

44–AD. 

Issued in Kansas City, Missouri, on January 

20, 2006. 

John Colomy, 

Acting Manager, Small Airplane Directorate, 

Aircraft Certification Service. 

[FR Doc. 06–735 Filed 2–1–06; 8:45 am] 

BILLING CODE 4910–13–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 145 and 147 

RIN 3038–AC05 

Alternative Market Risk and Credit Risk 

Capital Charges for Futures 

Commission Merchants and Specified 

Foreign Currency Forward and 

Inventory Capital Charges 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is amending Commission 

regulations that impose minimum 

financial and related reporting 

requirements upon each person 

registered as a futures commission 

merchant (‘‘FCM’’). The amended 

regulations address the capital 

computations of FCMs that are 

registered with the Securities and 

Exchange Commission (‘‘SEC’’) as 

securities brokers or dealers (‘‘FCM/ 

BDs’’), and, who, pursuant to SEC’s 

regulations governing consolidated 

supervised entities (‘‘CSEs’’), have 

received SEC approval to use internal 

mathematical models to determine the 

deductions from their capital for market 

risk and credit risk associated with their 

proprietary trading assets. Subject to the 

reporting and other requirements 

specified in the amended regulations, 

these FCM/BDs may elect to compute 

their adjusted net capital using their 

SEC-approved alternative market risk 

and credit risk capital deductions in 

lieu of CFTC requirements. The 

Commission is also adopting other rule 

amendments that address confidential 

treatment for the reports and statements 

that would be required to be filed under 

the amended regulations, and also 

address the confidential treatment of 

certain other information that all FCMs 

must file with both the Commission and 

the SEC. 

Finally, the Commission is also 

adopting amendments that will affect 

the minimum financial requirements of 

FCMs and introducing brokers (‘‘IBs’’) 

by reducing the capital deductions for 

their uncovered inventory or forward 

contracts in specified foreign currencies. 

This reduction is consistent with 

guidance currently provided by the 

Commission to FCMs and IBs. 

DATES: Effective February 2, 2006. 

FOR FURTHER INFORMATION CONTACT: 

Thomas J. Smith, Deputy Director and 

Chief Accountant, at (202) 418–5430, or 

Thelma Diaz, Special Counsel, at (202) 

418–5137, Division of Clearing and 

Intermediary Oversight, Commodity 

Futures Trading Commission, Three 

Lafayette Centre, 1155 21st Street, NW., 

Washington, DC 20581. Electronic mail: 

(tsmith@cftc.gov) or (tdiaz@cftc.gov). 

SUPPLEMENTARY INFORMATION: 

I. Background 

On October 11, 2005, the Commission 

published a release in the Federal 

Register to provide public notice of, and 

request comment on, proposed 

amendments to its capital rules.1 The 

Commission encourages interested 

persons to read the detailed analysis of 

the proposing amendments in the 

October 11 release, and has included 

citations to pertinent pages of the 

release as part of the discussion in this 

final rulemaking release.2 In response to 

the proposals issued by the 

Commission, four commenters sent 

letters that were generally supportive of 

the proposed regulations.3 The 

commenters included the National 

Futures Association (‘‘NFA’’), a 

registered futures association; Goldman, 

Sachs and Co., an FCM/BD; and two 

industry trade groups, the Futures 

Industry Association (‘‘FIA’’) and the 

Securities Industry Association 

(‘‘SIA’’).4 The comments received from 

each of these organizations are 

addressed elsewhere in this release, in 

connection with the specific 

Commission regulations discussed in 

these letters. 

II. Amendments Allowing Alternative 

Capital Computation for Proprietary 

Trading Assets of Qualifying FCM/BDs 

That Are Part of CSEs 

A. Request to Commission for 

Amendment to Rule 1.17 

As noted in the October 11 release, 

Commission Rule 1.17(a) requires each 

FCM to maintain a minimum amount of 

‘‘adjusted net capital’’, which is defined 

as the FCM’s net capital less the 

deductions, or ‘‘haircuts’’, that are 

specified in Rule 1.17(c)(5) and (8).5 For 

purposes of the required haircuts on the 

FCM’s proprietary positions in 

securities, Rule 1.17(c)(5) incorporates 

by reference percentage deductions that 

are set forth in SEC regulations 17 CFR 

240.15c3–1(c)(2)(vi) and (vii). Also, 

Commission Rule 1.17(c)(2)(ii), in a 

manner similar to the SEC’s 

requirements for BDs under 17 CFR 

240.15c3–1(c)(2)(iv), requires unsecured 

receivables arising from an FCM’s 

transactions in over-the-counter 

(‘‘OTC’’) derivatives to be excluded from 

the FCM’s current assets for purposes of 

determining the firm’s regulatory 

capital. The deductions required for 

other proprietary assets of the FCM are 

set forth in other parts of Commission 

Rule 1.17(c). 

The October 11 release also noted that 

the Commission and SEC have, to the 

extent practical, harmonized their 

respective capital rules in order to avoid 

creating inconsistent regulatory 

obligations for firms that are duallyregistered FCMs and securities brokers 

or dealers (‘‘BDs’’). This harmonization 

of capital rules extends to the 

computation of net capital and adjusted 

net capital, and to the qualifications that 

subordinated debt must meet in order to 

qualify as regulatory capital. 

Furthermore, if an FCM is also 

registered as a BD, it may file an SEC 

Form X–17a–5, ‘‘Financial and 

Operational Combined Uniform Single 

Report’’ (‘‘FOCUS Report’’) to satisfy its 

requirement to file with the Commission 

a Form 1–FR–FCM financial report. In 

particular, Commission Rule 1.10(h) 

treats Part II and Part IIA of the FOCUS 

report as acceptable substitutes for the 

Form 1–FR–FCM, provided that the 

FOCUS report includes all information 

required to be furnished on and 

submitted with Form 1–FR–FCM. Also, 

for those portions of the Form 1–FR– 

FCM that the Commission has 

designated as either publicly available 

or as exempt from mandatory public 


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5588 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

6The SEC’s new rule was published at 69 FR 

34428 (June 21, 2004). The effective date of the rule 

was August 20, 2004. 

7A detailed description of the application process 

was included in the October 11 release. See 70 FR 

at 58989. 

8The requirements for the computation of the 

deduction for market risk were summarized in the 

October 11 Release. See 70 FR at 58987–58988. 

9The requirements for the computation of the 

deduction for credit risk were summarized in the 

October 11 Release. See 70 FR at 58988–58989. 

10The SEC’s proposed rules for the Alternative 

Capital Computation were published in the Federal 

Register in 2003. 68 FR 62872 (November 6, 2003). 

11The Securities Industry Association and the 

Futures Industry Association are industry trade 

groups whose members include broker-dealers, 

futures commission merchants, and representatives 

of other segments of the securities and futures 

industries. 

12Two additional FCMs have received SEC 

approval to use the Alternative Capital 

Computation, and have received similar no-action 

positions from the Division pending the rulemaking 

process. 

13FCM/BDs using the Alternative Capital 

Computation would continue to be required, under 

Rule 1.17(c)(5)(v), to deduct the securities haircuts 

specified in SEC Rules 15c3–1(c)(2)(vi) and (vii) 

from the value of securities that are held in 

segregated accounts under Section 4d and the 

Commission’s implementing regulations and which 

were not deposited by customers. Such FCM/BDs 

would also continue to be required, when 

computing the amount of funds required to be in 

segregated accounts, to use the standard SEC 

securities haircut expressly referenced in Rule 

1.32(b), i.e., SEC Rule 15c3–1(c)(2)(vi). Rule 1.32 

applies this haircut for purposes of the permissible 

offset of any net deficit in a customer’s account 

against the current market value of readily 

marketable securities, less the SEC standard haircut, 

that are held for the same customer’s account. 

disclosure for purposes of the Freedom 

of Information Act and the Government 

in the Sunshine Act, the Commission 

extends the same treatment to those 

portions of the FOCUS Report that are 

equivalent to the Form 1–FR–FCM. The 

uniform capital computations, and 

related single-form filing requirements, 

harmonize the regulatory requirements 

imposed upon dual registrants while 

providing the Commission and SEC 

with the necessary financial information 

to assess whether firms maintain a 

minimum level of regulatory capital 

while engaging in futures and securities 

businesses. 

On June 21, 2004, the SEC adopted 

final rule amendments to its capital 

rules to provide an alternative net 

capital computation for broker-dealers 

that voluntarily elect to be supervised 

on a consolidated basis (the 

‘‘Alternative Capital Computation’’).6 As 

amended, SEC Rule 15c3–1(a)(7), (17 

CFR 240.15c3–1(a)(7)), provides that the 

SEC may approve a BD’s application, if 

submitted in accordance with the 

provisions of a new Appendix E (17 

CFR 240.15c3–1e), to use the 

Alternative Capital Computation when 

calculating its net capital.7 To the extent 

approved by the SEC, the BD using the 

Alternative Capital Computation would 

compute a total deduction for market 

risk for positions in the proprietary 

accounts of the BD, in accordance with 

the specific standards set forth in 

Appendix E.8 The BD would calculate 

its regulatory capital using this 

deduction in lieu of the haircuts that 

SEC Rules 15c3–1(c)(2)(vi) and 

(c)(2)(vii) require for the BD’s positions 

in securities. The SEC may also approve 

alternative market risk deductions for 

the BD’s proprietary positions in 

forward contracts and commodity 

futures contracts. Also, Appendix E 

provides that where the alternative 

market risk deduction has been used to 

compute the deduction on the 

underlying instrument for OTC 

derivatives of the BD, the BD would 

compute a deduction for credit risk, 

using the standards set forth in 

Appendix E, and it would use this 

deduction in lieu of the capital charges 

that SEC Rule 15c3–1(c)(2)(iv) requires 

for the BD’s credit exposures arising 

from OTC transactions in derivatives.9

As the SEC noted when first 

proposing rules for the Alternate Capital 

Computation, the required market risk 

and credit risk deductions are expected 

to be substantially smaller in amount 

than the standardized deductions.10 As 

the SEC rule amendments were being 

discussed and proposed, Commission 

staff identified that continued 

harmonization of the capital rules of the 

two agencies would require amendment 

of Rule 1.17, and communicated this to 

various market participants potentially 

affected by the difference between the 

SEC’s proposed rules and CFTC Rule 

1.17. After the SEC adopted rule 

amendments allowing BDs to apply for 

approval to use the Alternative Capital 

Computation, several FCM/BDs, along 

with representatives of the SIA and the 

FIA, contacted staff of the Commission’s 

Division of Clearing and Intermediary 

Oversight (the ‘‘Division’’) to express 

their support for Commission 

rulemaking that would allow duallyregistered FCM/BDs to use their SECapproved alternative market risk and 

credit risk deductions when computing 

their adjusted net capital under Rule 

1.17.11 In addition, two duallyregistered FCM/BDs that had received 

SEC approval for the Alternative Capital 

Computation requested no-action 

positions from Division staff, without 

which the Alternative Capital 

Computation could not be used for 

purposes of their capital computation 

and reporting requirements to the 

Commission. The Division granted such 

relief on an interim basis, to be 

superseded by such final rules as the 

Commission might eventually adopt in 

connection with the Alternative Capital 

Computation.12

B. Amendments to Rule 1.17 for FCMs 

Electing To Use SEC-Approved Capital 

Deductions. 

After consideration of the 

amendments as proposed in the October 

11 release, and in view of the comments 

that the Commission received in 

response to the proposed amendments, 

which generally supported their 

adoption, the Commission is amending 

Rule 1.17 to provide that an FCM/BD 

may elect, if the firm satisfies all of the 

requirements of a new paragraph (c)(6), 

to compute its adjusted net capital using 

alternative capital deductions that the 

SEC has approved by written order 

under 17 CFR 240.15c3–1(a)(7). The 

amended regulation permits an FCM, to 

the extent that the SEC has approved 

alternative capital deductions for the 

FCM/BD’s unsecured receivables from 

OTC transactions in derivatives, or for 

its proprietary positions in securities, 

forward contracts, or futures contracts, 

to use these same alternative capital 

deductions when computing its 

adjusted net capital under the 

Commission’s regulations. These 

alternative deductions would be used in 

lieu of the amounts that otherwise 

would be required by the following 

regulations: Rule 1.17(c)(2)(ii) for 

unsecured receivables from OTC 

derivatives transactions; Rule 

1.17(c)(5)(ii) for proprietary positions in 

forward contracts; Rule 1.17(c)(5)(v) for 

proprietary positions in securities; and 

Rule 1.17(c)(5)(x) for proprietary 

positions in futures contracts. The 

amendments do not alter or affect the 

haircuts that Rule 1.17(c)(5)(v) and Rule 

1.32(b) require for securities that are 

held in segregation under section 4d of 

the Commodity Exchange Act, because 

the alternative deductions apply solely 

to an FCM/BD’s proprietary positions.13

The terms of the amended Rule 

1.17(c)(6) has been adopted as originally 

proposed by the Commission in the 

October 11 release. The effective date 

for the amended regulations is the date 

of the publication of this release in the 

Federal Register, at which time all 

FCMs that determine to elect to use the 

Alternative Capital Computation must 

comply with the requirements of the 

amended regulations. If a firm has 

already elected to use the Alternative 

Capital Computation under earlier noaction positions issued by the Division 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5589 

14See 70 FR 58989–90. 

15The BD’s ‘‘tentative net capital’’ consists of its 

net capital before the approved deductions for 

market risk and credit risk under the SEC’s 

amended rule, and also increased by the balance 

sheet value (including counterparty net exposure) 

resulting from transactions in derivative 

instruments that would otherwise be deducted by 

virtue of paragraph (c)(2)(iv) of Rule 15c3–1. 

16Upon written application by a BD, the SEC may 

lower the threshold for the early warning 

requirement, either unconditionally or subject to 

specified terms and conditions. The SEC will 

consider various factors to determine whether the 

early warning requirement should be modified. 69 

FR at 34461. 

17 In adopting the Alternative Capital 

Computation, the SEC has also responded to 

concerns expressed by several U.S. BDs that are 

required, pursuant to a directive issued by the 

European Union (‘‘EU’’) at the end of 2002 (the 

‘‘Financial Groups Directive’’), to demonstrate 

holding company supervision that is equivalent to 

EU consolidated supervision. See ‘‘Directive 2002/ 

87/EC of the European Parliament and of the 

Council of 16 December 2002.’’ Absent a 

demonstration of comparable group-wide 

supervision, the EU may restrict or otherwise place 

conditions upon the operations of the Europeanbased affiliates of these BDs. The consolidated 

supervision requirements in the SEC’s amended 

rules provide a regulatory structure that is intended 

to satisfy the requirements of the Financial Groups 

Directive. 

18The CSE rule specifically exempts FCM 

affiliates of BDs, and other functionally regulated 

BD affiliates, from the SEC’s direct examination. 

19To minimize duplicative regulation, Appendix 

G imposes fewer requirements on holding 

companies that have elected financial holding 

company status. 

of Clearing and Intermediary Oversight, 

it may not continue to use the 

Alternative Capital Computation unless 

it maintains compliance with the 

reporting and other continuing 

obligations required by the amended 

regulations, as the earlier no-action 

positions are withdrawn as of the 

effective date of the amended 

regulations. 

In formulating the amendments to its 

rules, the Commission has taken into 

consideration that the Alternative 

Capital Computation, unlike the current 

standardized charges, is determined by 

an ongoing oversight process that results 

in individualized capital charges that 

require considerable firm-specific 

information.14 Pursuant to Commission 

Rule 1.17(a)(3), FCMs must be able to 

demonstrate to the satisfaction of the 

Commission their continuous 

compliance with their minimum 

financial requirements under the 

Commodity Exchange Act and 

implementing regulations of the 

Commission. The Commission also took 

into consideration that SEC Rule 15c3– 

1(a)(7) requires the BD to maintain at all 

times ‘‘tentative net capital’’ 15 of not 

less than $1 billion and net capital of 

not less than $500 million, and to 

provide same day notice if the BD’s 

tentative net capital is less than $5 

billion, or some other ‘‘early warning’’ 

amount specified by the SEC.16 The 

Alternative Capital Computation is also 

limited to those firms who: (i) Have in 

place an internal risk management 

system that complies with 17 CFR 

240.15c3–4 (previously applicable only 

to OTC derivatives dealers registered 

with the SEC), which addresses not only 

their market risk and credit risk, but 

also liquidity, legal and operational 

risks at the firm; and (ii) whose ultimate 

holding company and affiliates have 

consented to SEC consolidated 

supervision, i.e., they elect CSE status.17

For purposes of such consolidated 

supervision, the BD’s ultimate holding 

company and affiliated entities must 

consent to direct examination by the 

SEC, unless the holding company is 

subject to supervision by the Federal 

Reserve or foreign banking regulators 

because it is a U.S. holding company or 

foreign bank that has elected financial 

holding company status under the Bank 

Holding Company Act of 1956.18 The 

SEC has added a new Appendix G to 

Rule 15c3–1 (17 CFR 240.15c3–1g), 

which establishes the minimum 

reporting, recordkeeping, and 

notification requirements for all holding 

companies of BDs that apply for, or have 

received approval for the use of, the 

Alternative Capital Computation.19

1. Notice of Election or of Changes to 

Election 

Amended paragraph (c)(6)(ii) of Rule 

1.17 specifies that an FCM’s election to 

use the Alternative Capital Computation 

shall not be effective unless and until it 

has filed with the Commission a notice, 

addressed to the Director of the Division 

of Clearing and Intermediary Oversight, 

that is to include: (i) A copy of the SEC 

order approving its alternative market 

risk and credit risk capital charges; and 

(ii) a statement that identifies the 

amount of tentative net capital below 

which the FCM is required to provide 

notice to the SEC, and that also includes 

portions of the information made 

available to the SEC for purposes of its 

request for approval to use the 

Alternative Capital Computation, as 

follows: 

(1) A list of the categories of positions 

that the firm holds in its proprietary 

accounts, and, for each such category, a 

description of the methods that the firm 

will use to calculate its deductions for 

market risk and credit risk, and, if 

calculated separately, its deductions for 

specific risk; 

(2) A description of the 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 firm; 

(3) A description of how the firm will 

calculate current exposure and 

maximum potential exposure for its 

deductions for credit risk; 

(4) A description of how the firm will 

determine internal credit ratings of 

counterparties and internal credit risk 

weights of counterparties, if applicable; 

and 

(5) A description of the estimated 

effect of the alternative market risk and 

credit risk deductions on the amounts 

reported by the firm as net capital and 

adjusted net capital. 

Amended Rule 1.17(c)(6)(ii) also 

requires the FCM to supplement its 

statement, upon the request of the 

Commission made at any time, with any 

other explanatory information for the 

firm’s computation of its alternative 

market risk and credit risk deductions 

as the Commission may require at its 

discretion. The requests for explanatory 

information under amended Rule 

1.17(c)(6)(ii) may be made by the 

Director of the Division of Clearing and 

Intermediary Oversight, to whom, as set 

forth in Commission Rule 140.91(a)(6), 

the Commission has delegated authority 

for the functions reserved for the 

Commission under Rule 1.17. 

Amended Rule 1.17(c)(6)(ii) further 

provides that the FCM must file, as a 

supplemental notice with the Director of 

the Division of Clearing and 

Intermediary Oversight, a notice 

advising that the SEC has imposed 

additional or revised conditions after 

the date of the SEC order filed with the 

FCM’s original notice to the Director of 

the Division of Clearing and 

Intermediary Oversight. The FCM must 

also file as a supplemental notice a copy 

of any approval by the SEC of 

amendments that the firm has requested 

for its application to use the Alternative 

Capital Computation. 

An FCM is also permitted under the 

amended rule to voluntarily change its 

election, by filing with the Director of 

the Division of Clearing and 

Intermediary Oversight a written notice 

that specifies a future date as of which 

its market risk and credit risk capital 

charges will no longer be determined by 

the Alternative Capital Computation, 

but will instead be computed as 

otherwise required under the 

Commission’s rules. 

2. Conditions Under Which FCM May 

No Longer Elect Alternative Capital 

Charges 

Amended paragraph (c)(6)(iii) of Rule 

1.17 specifies that an FCM may no 

longer elect to use its SEC-approved 

alternative market risk and credit risk 


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5590 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

20Several other Commission rules include 

references to Parts II and Part IIA of the FOCUS 

report, in order to facilitate the filing of the FOCUS 

report in lieu of the Form 1–FR–FCM. The 

Commission has also amended these rules to add 

a reference to Part II CSE. In particular, conforming 

amendments have been made to the following rules: 

Rule 1.10(d)(4)(ii), which sets forth the 

requirements for ‘‘authorized signers’’ of the 

FOCUS report; Rule 1.10(f)(1), which sets forth the 

procedures required to obtain extensions of time for 

filing the FOCUS report; Rule 1.16(c)(5), which 

requires the accountant’s supplemental report on 

material inadequacies to be filed as of the same date 

as the Form 1–FR or FOCUS report; Rules 1.18(a) 

and (b)(2), which permit FOCUS filings to satisfy 

certain recordkeeping requirements of the FCM; and 

Rule 1.52(a), which permits the designated selfregulatory organization of a dual registrant to accept 

a FOCUS report in lieu of a Form 1–FR–FCM. 

21A summary of FOIA and the Sunshine Act, 

including exemptions 4 and 8, and their application 

to the Form 1–FR and FOCUS reports, was included 

in the October 11 release. See 70 FR 58991—58992. 

22A BD’s certified annual statement of financial 

condition is also publicly available under SEC Rule 

17a–5(e)(3). 

deductions, and must instead compute 

the charges otherwise required under 

Rules 1.17(c)(5) or 1.17(c)(2), upon the 

occurrence of any of the following: (i) 

The SEC revokes its approval of the 

firm’s market risk and credit risk 

deductions; (ii) the firm fails to come 

into compliance with its filing 

requirements under the proposed rule, 

after having received from the Director 

of the Division of Clearing and 

Intermediary Oversight written 

notification that the firm is not in 

compliance with its filing requirements, 

and must cease using the Alternative 

Capital Computation if it has not come 

into compliance by a date specified in 

the notice; or (iii) the Commission by 

written order finds that permitting the 

firm to continue to use such alternative 

market risk and credit risk deductions is 

no longer appropriate for the protection 

of customers of the FCM or the financial 

integrity of the futures or options 

markets. In addition, since the amended 

rule permits only dual registrants to use 

the Alternative Capital Computation, an 

FCM’s election to use the Alternative 

Capital Computation automatically 

terminates immediately, without further 

action by the Commission, if the firm 

ceases to be dually-registered as a BD. 

3. Additional Filing Requirements 

In addition to the notice and 

supplemental notices described above, 

amended paragraph (c)(6)(iv) also 

provides that any firm that elects to use 

the Alternative Capital Computation 

must file with the Commission copies of 

all additional monthly, quarterly, and 

annual reporting items that BDs who are 

approved to use the Alternative Capital 

Computation must file with SEC, as 

discussed above. The FCM must also 

file with the Commission a copy of the 

notice that it is required to file with the 

SEC whenever its tentative net capital 

falls below the amount required by the 

SEC, or of the notice filed with the SEC 

or the firm’s designated examining 

authority in regard to planned 

withdrawals of excess net capital. 

Specifically, the amended rule 

requires that the following be filed with 

the Commission, at the same time that 

originals are filed with the SEC: (i) All 

information that the firm files on a 

monthly basis with its designated 

examining authority or the SEC in 

satisfaction of SEC Rule 17a–5(a)(5)(i), 

whether by way of schedules to the 

firm’s FOCUS reports or by other filings; 

(ii) the quarterly reports required by 

SEC Rule 17a–5(a)(5)(ii); (iii) the 

supplemental annual filings as required 

by SEC Rule 17a–5(k), which consist of 

a report on management controls that is 

prepared by a registered public 

accounting firm and is filed by the firm 

concurrently with its annual audit 

report, and also a related statement, 

filed prior to the commencement of the 

accountant’s review but no later than 

December 10 of each year, that includes 

a description of the procedures agreed 

to by the firm and the accountant and 

a notice describing changes to the 

agreed-upon procedures, if any, or 

stating that there are no changes; and 

(iv) any notification to the SEC or the 

firm’s designated examining authority of 

planned withdrawals of excess net 

capital, and any notification that the 

firm is required to file with the SEC 

when its tentative net capital is below 

an amount specified by the SEC. 

4. Conforming Amendments To permit 

Filing of Part II CSE FOCUS Report 

Those BDs that use the Alternative 

Capital Computation also file a revised 

Part II to the FOCUS report, designated 

‘‘Part II CSE’’. This revised FOCUS 

report includes financial information 

that BDs previously reported in Part II 

of the FOCUS Report, and also includes 

new schedules that provide much of the 

additional information that BDs who 

use the Alternative Capital Computation 

must report on a monthly basis. In order 

to facilitate the firm’s reporting 

requirements and reduce administrative 

burden, the Commission has amended 

Rule 1.10(h) to specify that a dual 

registrant may file, in lieu of its Form 1– 

FR–FCM report, a copy of the FOCUS 

Report, Part II CSE that the firm files 

with the SEC.20

All of the commenters supported the 

Commission’s proposed amendments to 

Regulations 1.10(h) and 1.17(c)(6), 

which would have the effect of 

harmonizing capital calculations under 

the CFTC’s and SEC’s regulations. Two 

commenters, FIA and the SIA, 

recommended that the Commission 

should further take into consideration 

whether reporting and filing 

requirements under the Commission’s 

‘‘risk assessment’’ regulations, Rules 

1.14 and 1.15, might be revised to allow 

five FCMs to substitute alternative 

means of compliance, either through 

making available for inspection certain 

holding company information provided 

to the SEC under its CSE regulations, or 

through information-sharing 

arrangements between the SEC and 

CFTC. Both FIA and SIA offered to meet 

with Commission staff to discuss these 

or other alternatives for the five firms, 

in light of the consolidated supervision 

of their holding companies by the SEC. 

While not opposed to such discussions, 

the commenters have raised issues that 

exceed the scope of the proposed 

regulations, and may be addressed 

separately from the amended rules in 

this release. 

III. Treatment of Information Received 

From FCMs Electing the Alternative 

Capital Computation, and of Other 

Information Filed by FCMs and IBs 

The release published October 11 also 

announced proposed amendments to 

Commission regulations in parts 145 

and 147, which respectively implement 

the provisions of FOIA and the 

Sunshine Act. Specifically, the 

Commission proposed to amend Rules 

145 and 147 to include all Forms 1–FR 

and FOCUS reports (except for certain 

information as discussed below), plus 

all reports and statements required to be 

filed pursuant to Rule 1.17(c)(6), as 

representative examples of information 

that would be exempt from mandatory 

public disclosure under exemptions that 

are available under both FOIA and the 

Sunshine Act (Exemptions 4 and 8 

under FOIA, and the same exemptions 

under the Sunshine Act).21 The 

proposed amendments to Commission 

Rule 1.10(g), however, specified that the 

Commission would continue to make 

available upon public request the 

following information: 

(i) For each FCM or IB, the amount of 

its adjusted net capital, its minimum 

capital requirement under Rule 1.17, 

and its adjusted net capital in excess of 

its minimum capital requirement; 

(ii) The statement of financial 

condition in the certified annual 

financial report, and footnote 

disclosures thereof;22 and 

(iii) The statements related to the 

segregation of customer funds under 

section 4d of the Commodity Exchange 


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23Rule 1.10(g) currently provides, and will 

continue to provide, that all information on Forms 

1–FR and FOCUS reports that is nonpublic 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. Rule 1.10(g) also specifies the rule 

does not limit the authority of any self-regulatory 

organization to request or receive any information 

relative to its members’ financial condition. 

24See 70 FR 58993. 

25An electronic copy of the ‘‘Instructions for 

Form 1–FR–FCM’’ is available to the public on the 

Commission’s Web site, at http://www.cftc.gov/ 

files/tm/ 

tminstructionsmanualfinalseptember2004.pdf. 

26 5 U.S.C. 553(b) and (d). 

27 5 U.S.C. 553 (d). 

28As noted earlier, the amendments related to 

filing the Part II CSE version of the FOCUS report 

affect Rules 1.10, 1.18, and 1.52. 

29The Commission’s prior determination that 

there was ‘‘good cause’’ for making amendments to 

parts 145 and 147 effective immediately appears in 

44 FR 13435 (March 27, 1979) (Adoption of 

Changes to Form 1–FR and Freedom of Information 

and Sunshine Act Rules). 

30 70 FR at 58994. 

31 44 U.S.C. 3507(d). 

32 70 FR at 58994. 

Act and to customer funds that are held 

as secured amounts under Rule 30.7.23

FIA strongly endorsed the 

Commission’s proposal to amend Rules 

1.10(g), 145.5(d) and (h), and 147.3(b) to 

provide that certain financial 

information filed with the Commission 

is exempt from disclosure pursuant to 

FOIA Exemption 8. The Commission 

received no comments opposing 

adoption of these proposed 

amendments. After considering the 

proposed amendments and the 

responses by commenters, the 

Commission has decided to amend 

Rules 1.10(g), 145.5(d) and (h), and 

147.3(b) as proposed. 

IV. Amendments To Reduce Capital 

Charges for Foreign Currency Forwards 

and Inventory in Specified Currencies 

The Commission has also amended 

Commission Rule 1.17(c)(5)(ii), 

pursuant to which an FCM or IB, in 

computing its adjusted net capital, must 

deduct from its net capital specified 

percentages of the market value of its 

inventory, fixed price commitments and 

forward contracts. In general, the 

required deduction from market value 

for a forward contract that is not 

‘‘covered’’, as defined in Rule 1.17(j), is 

twenty percent. The Commission has 

amended the rule by adding a provision 

that would specify a capital charge of 

six percent for uncovered inventory and 

forward contracts in euros, British 

pounds, Canadian dollars, Japanese yen, 

or Swiss francs. Uncovered forward 

contracts and cash deposits in any other 

non-U.S. currency would remain subject 

to the capital charge of twenty percent 

currently set forth in the rule. As noted 

by the Commission when it proposed 

amending Rule 1.17 to reduce the 

charge for specified currencies to 6 

percent, the lower charge is consistent 

with the reduced currency risk of these 

foreign currencies, given their stability 

relative to the U.S. dollar. As discussed 

in the October 11 release, the reduced 

charge is also consistent with similar 

capital charges that BDs are required to 

deduct from their net capital under SEC 

regulations.24 Furthermore, the 

amendment provides greater clarity and 

transparency to the Commission’s 

capital rule, as currently the lower 

capital charge for the specified major 

non-U.S. currencies is set forth only in 

the Commission’s Form 1–FR 

Instructions Manual.25

FIA and the NFA generally supported 

this amendment, and no commenters 

expressed any objections to the 

amendment. In its comment letter, NFA 

advocated that the Commission 

undertake additional revision of 

Commission Regulation 1.17, to address 

the Commission’s required deductions 

from capital in relation to the activities 

of retail foreign exchange (FOREX) 

dealers that are registered as FCMs. As 

noted in the NFA’s letter, Division staff 

is already in the process of reviewing 

several of the issues listed in the letter, 

as part of separate guidance and/or 

future rulemaking related to FOREX. 

V. Related Matters 

A. Administrative Procedure Act 

The Administrative Procedure Act 

(‘‘APA’’) provides that the required 

publication of a substantive rule shall be 

made not less than 30 days before its 

effective date, unless the agency is 

permitted to implement an earlier 

effective date under one of the 

exceptions recognized by the APA.26

The exceptions set forth in the APA are 

as follows: (1) A substantive rule which 

grants or recognizes an exemption or 

relieves a restriction; (2) interpretative 

rules and statements of policy; or (3) as 

otherwise provided by the agency for 

good cause found and published with 

the rule.27

The amendments being made to Rule 

1.17 ‘‘grant or recognize an exemption 

or relieve a restriction’’ that harmonizes 

unnecessarily conflicting capital 

deductions that would otherwise be 

required for FCMs that have received 

SEC approval to use the Alternative 

Capital Computation. The Commission 

is also adopting other amendments that 

permit FCMs to file their Part II CSE 

FOCUS reports in lieu of their required 

Form 1–FR, which also contributes to 

the exemption or relief made available 

by amended Rule 1.17(c)(6).28

Accordingly, the Commission has 

determined to make these amendments 

effective immediately upon publication 

in the Federal Register. 

Furthermore, the Commission has 

previously found ‘‘good cause’’ for 

making FOIA and Sunshine Act 

amendments effective immediately with 

the adoption of new financial filing 

requirements for FCMs, in particular 

where the new filings are required prior 

to the expiration of 30 days from the 

publication in the rule.29 In this case, 

the no-action relief granted to firms 

prior to the adoption of the amendments 

of Rule 1.17(c)(6) will be superceded 

immediately upon the effective date of 

the amended rules in the attached 

release, and the firms will be required 

to comply with the reporting 

requirements mandated by the amended 

rules. In addition, other firms may 

receive SEC approval to use alternative 

capital charges prior to the expiration of 

30 days from the publication of this 

rule, and would therefore seek to file 

with the Commission such notices and 

statements as are required by the 

amended rule. Accordingly, the 

Commission has determined to make 

the amendments to Rules 145 and 147 

adopted in this final rulemaking 

effective immediately upon publication 

in the Federal Register. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’), 5 U.S.C. 601 et. seq., requires 

that agencies, when amending their 

rules, consider the impact of those 

amendments on small businesses. The 

Commission invited the public to 

comment on the Chairman’s 

certification that these rules would not 

have a significant economic impact on 

a substantial number of small entities.30

The Commission received no comments 

on the certification. 

C. Paperwork Reduction Act 

This rulemaking includes information 

collection requirements. As required by 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’),31 the Commission submitted a 

copy of the proposed rule amendments 

to the Office of Management and Budget 

(‘‘OMB’’) for its review. No comments 

were received in response to the 

Commission’s invitation in the 

proposed rules to comment on any 

potential paperwork burden associated 

with regulation.32


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D. Cost-Benefit Analysis 

Section 15(a) of the Act, as amended 

by section 119 of the CFMA, requires 

the Commission to consider the costs 

and benefits of its action before issuing 

a new regulation under the Act. By its 

terms, section 15(a) as amended does 

not require the Commission to quantify 

the costs and benefits of a new 

regulation or to determine whether the 

benefits of the regulation outweigh its 

costs. Rather, section 15(a) simply 

requires the Commission to ‘‘consider 

the costs and benefits’’ of its action. 

Section 15(a) of the Act further 

specifies that costs and benefits shall be 

evaluated in light of five broad areas of 

market and public concern: Protection 

of market participants and the public; 

efficiency, competitiveness, and 

financial integrity of futures markets; 

price discovery; sound risk management 

practices; and other public interest 

considerations. Accordingly, the 

Commission could in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

rule was necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

Act. 

The amended Rule 1.17(c)(6) allows 

FCM/BDs that meet the requirements of 

the rule to compute their adjusted net 

capital using the same alternative 

capital deductions that have been 

approved by the SEC. The amended 

Rule 1.17(c)(5)(ii) reduces a capital 

charge to which FCMs and IBs are 

subject under the Commission’s current 

regulations. The Commission is 

considering the costs and benefits of 

these amended rules in light of the 

specific provisions of section 15(a) of 

the Act, as follows: 

1. Protection of market participants 

and the public. The amendments to 

Rule 1.17(c)(6) provides the benefit of 

increasing the accuracy of the reflection 

of risks in the net capital charges for 

FCM/BDs approved for using the 

alternative net capital charges based on 

internal risk measurement tools, while 

bettering the Commission’s ability to 

perform appropriate financial and risk 

oversight. Furthermore, the Commission 

considers that no FCM/BD will elect to 

use the Alternative Capital Computation 

unless the costs of compliance would be 

outweighed by the benefits to such 

FCM/BD from using the alternative net 

capital charges. 

2. Efficiency and competition. The 

Commission anticipates that the 

amendments to Rule 1.17(c)(6) will 

benefit efficiency by eliminating a 

difference in the computation of net 

capital charges between the SEC and the 

CFTC for dually-registered FCM/BDs 

that have been approved by the SEC to 

use such charges. The amendments to 

Rule 1.17(c)(5)(ii) reduce the capital 

charges applicable to FCMs and IBs, 

which may therefore result in the more 

efficient utilization of their capital. 

3. Financial integrity of futures 

markets and price discovery. The 

notification and reporting requirements 

in amended Rule 1.17(c)(6) contribute to 

the benefit of ensuring that eligible 

FCMs can meet their financial 

obligations to customers and other 

market participants. Customers and 

other market participants would also 

benefit from the provisions in amended 

Rule 1.10(g), which continues to make 

publicly available certain information in 

Form 1–R and FOCUS reports related to 

capital requirements and requirements 

for customer funds to be held in 

segregated or separate accounts. The 

proposed amendments should have no 

effect, from the standpoint of imposing 

costs or creating benefits, on the price 

discovery function of such markets. 

4. Sound risk management practices. 

The alternative capital computation 

permitted under amended Rule 

1.17(c)(6) is limited to FCMs who have 

in place an internal risk management 

system that expressly addresses market 

risk, credit risk, liquidity risk, legal risk 

and operational risks at the firm. The 

amended rule also requires that the 

Commission receive copies of written 

reviews, which are to be prepared 

annually by registered public 

accountants, of the firm’s internal risk 

management control system. The 

amended rule may therefore contribute 

to the sound risk management practices 

of futures intermediaries. 

5. Other public interest 

considerations. The Commission also 

believes that the amendments to Rule 

1.17(c)(6) are beneficial in that they 

minimize what would otherwise be a 

conflict between Commission and SEC 

rules, which conflict would otherwise 

make the SEC’s opportunity for 

qualifying BDs to use alternative net 

capital charges unavailable to dually 

registered FCM/BDs, despite the 

commonality of interest and purpose for 

the CFTC and SEC minimum net capital 

rules. The amendments to Rule 

1.17(c)(5)(ii), which incorporates agency 

guidance not presently included in the 

Commission’s regulations, enhances the 

transparency of the Commission’s 

rulemaking for FCMs and IBs. 

The Commission invited, but did not 

receive, public comment on its 

application of the cost-benefit provision. 

After considering these factors, the 

Commission has determined to issue 

this final rule. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements. 

17 CFR Part 145 

Freedom of information. 

17 CFR Part 147 

Sunshine Act. 

■ Accordingly, 17 CFR Chapter I is 

amended as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24, as amended by 

the Commodity Futures Modernization Act of 

2000, Appendix E of Pub. L. 106–554, 114 

Stat. 2763 (2000). 

■ 2. Section 1.10 is amended by revising 

paragraphs (d)(4)(ii), (f)(1) introductory 

text, (g)(1), (g)(2), (g)(4), and (h) to read 

as follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(d) * * * 

(4) * * * 

(ii) If the registrant or applicant is 

registered with the Securities and 

Exchange Commission as a securities 

broker or dealer, the representative 

authorized under § 240.17a–5 of this 

title to file for the securities broker or 

dealer its Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE. In the 

case of a Form 1–FR filed via electronic 

transmission in accordance with 

procedures established by the 

Commission, such transmission must be 

accompanied by the Commissionassigned Personal Identification Number 

of the authorized signer and such 

Personal Identification Number will 

constitute and become a substitute for 

the manual signature of the authorized 

signer for the purpose of making the 

oath or affirmation referred to in this 

paragraph. 

* * * * * 

(f) Extension of time for filing 

uncertified reports. (1) In the event a 

registrant finds that it cannot file its 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5593 

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: 

* * * * * 

(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 § 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, and 

the Statement (to be filed by a futures 

commission merchant only) of Secured 

Amounts and Funds held in Separate 

Accounts for foreign futures and foreign 

options customers in accordance with 

§ 30.7 of this chapter. 

* * * * * 

(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 selfregulatory 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. 

* * * * * 

(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. 

* * * * * 

■ 3. Section 1.16 is amended by revising 

paragraph (c)(5) to read as follows: 

§ 1.16 Qualifications and reports of 

accountants. 

* * * * * 

(c) * * * 

(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 

§ 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. 

* * * * * 

■ 4. Section 1.17 is amended by revising 

paragraphs (c)(5)(ii) and adding (c)(6) to 

read as follows: 

§ 1.17 Minimum financial requirements for 

futures commission merchants and 

introducing brokers. 

* * * * * 

(c) * * * 

(5) * * * 

(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.—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. 

* * * * * 

(6) Election of alternative capital 

deductions that have received approval 

of Securities and Exchange Commission 

pursuant to § 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 § 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-thecounter transactions in derivatives, or 

for its proprietary positions in 

securities, forward contracts, or futures 

contracts, the futures commission 

merchant may use these same 


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5594 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

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 Clearing 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 Clearing 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-thecounter 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. 

(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 Clearing 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. 

* * * * * 

■ 5. Section 1.18 is amended by revising 

paragraphs (a) and (b)(2) to read as 

follows: 


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Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 5595 

§ 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 § 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. 

(b) * * * 

(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 

§ 1.10(b) will be deemed to have 

satisfied the requirements of paragraph 

(b)(1) of this section for such month. 

* * * * * 

■ 6. Section 1.52 is amended by revising 

paragraph (a) to read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) Each self-regulatory organization 

must adopt, and submit for Commission 

approval, rules prescribing minimum 

financial and related reporting 

requirements for all its members who 

are registered futures commission 

merchants. Each self-regulatory 

organization other than a contract 

market must adopt, and submit for 

Commission approval, rules prescribing 

minimum financial and related 

reporting requirements for all its 

members who are registered introducing 

brokers. Each contract market which 

elects to have a category of membership 

for introducing brokers must adopt, and 

submit for Commission approval, rules 

prescribing minimum financial and 

related reporting requirements for all its 

members who are registered introducing 

brokers. Each self-regulatory 

organization shall submit for 

Commission approval any modification 

or other amendments to such rules. 

Such requirements must be the same as, 

or more stringent than, those contained 

in §§ 1.10 and 1.17 and the definition of 

adjusted net capital must be the same as 

that prescribed in § 1.17(c): Provided, 

however, A designated self-regulatory 

organization may permit its member 

registrants which are registered with the 

Securities and Exchange Commission as 

securities brokers or dealers to file (in 

accordance with § 1.10(h)) a copy of 

their 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: And, provided further, A 

designated self-regulatory organization 

may permit its member introducing 

brokers to file a Form 1–FR–IB in lieu 

of a Form 1–FR–FCM. 

* * * * * 

PART 145—COMMISSION RECORDS 

AND INFORMATION 

■ 7. The authority citation for part 145 

continues to read as follows: 

Authority: Pub. L. 99–570, 100 Stat. 3207; 

Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23, 

81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561– 

1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93– 

463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless 

otherwise noted. 

■ 8. Section 145.5 is amended by 

revising paragraphs (d)(1) and (h) to 

read as follows: 

§ 145.5 Disclosure of nonpublic records. 

* * * * * 

(d) Trade secrets and commercial or 

financial information obtained from a 

person and privileged or confidential, 

including, but not limited to: 

(1)(i) Reports of stocks of grain, such 

as Forms 38, 38C, 38M and 38T required 

to be filed pursuant to 17 CFR 1.44; 

(ii) Statements of reporting traders on 

Form 40 required to be filed pursuant to 

17 CFR 18.04; 

(iii) Statements concerning special 

calls on positions required to be filed 

pursuant to 17 CFR part 21; 

(iv) Statements concerning 

identification of special accounts on 

Form 102 required to be filed pursuant 

to 17 CFR 17.01; 

(v) Reports required to be filed 

pursuant to parts 15 through 21 of this 

chapter; 

(vi) Reports concerning option 

positions of large traders required to be 

filed pursuant to part 16 of this chapter; 

(vii) Form 188; and 

(viii) The following reports and 

statements that are also set forth in 

paragraph (h) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1– 

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); 

* * * * * 

(h) Contained in or related to 

examinations, operating, or condition 

reports prepared by, on behalf of, or for 

the use of the Commission or any other 

agency responsible for the regulation or 

supervision of financial institutions, 

including, but not limited to the 

following reports and statements that 

are also set forth in paragraph (d)(1)(viii) 

of this section, except as specified in 17 

CFR 1.10(g)(2) or 17 CFR 31.13(m): 

Forms 1–FR required to be filed 

pursuant to 17 CFR 1.10; FOCUS reports 

that are filed in lieu of Forms 1–FR 

pursuant to 17 CFR 1.10(h); Forms 2–FR 

required to be filed pursuant to 17 CFR 

31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); and 

* * * * * 

PART 147—OPEN COMMISSION 

MEETINGS 

■ 9. The authority citation for part 147 

continues to read as follows: 

Authority: Sec. 3(a), Pub. L. 94–409, 90 

Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), 

Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) 

(Supp. V, 1975)), unless otherwise noted. 

■ 10. Section 147.3 is amended by 

revising paragraphs (b)(4)(i) and (b)(8) to 

read as follows: 

§ 147.3 General requirement of open 

meetings; grounds upon which meetings 

may be closed. 

* * * * * 

(b) * * * 

(4)(i) Disclose trade secrets and 

commercial or financial information 

obtained from a person and privileged 

or confidential including, but not 

limited to: 


wwhite on PROD1PC61 with RULES
5596 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations 

1We originally adopted the Filer Manual on April 

1, 1993, with an effective date of April 26, 1993. 

Release No. 33–6986 (April 1, 1993) [58 FR 18638]. 

We implemented the most recent update to the Filer 

Manual on November 7, 2005. See Release No. 33– 

8633 (November 1, 2005) [70 FR 67350]. 

2This is the filer assistance software we provide 

filers filing on the EDGAR system. 

3See Rule 301 of Regulation S–T (17 CFR 

232.301). 

4See Release Nos. 33–6977 (February 23, 1993) 

[58 FR 14628], IC–19284 (February 23, 1993) [58 FR 

14848], 35–25746 (February 23, 1993) [58 FR 

14999], and 33–6980 (February 23, 1993) [58 FR 

15009] in which we comprehensively discuss the 

rules we adopted to govern mandated electronic 

filing. See also Release No. 33–7122 (December 19, 

1994) [59 FR 67752], in which we made the EDGAR 

rules final and applicable to all domestic 

registrants; Release No. 33–7427 (July 1, 1997) [62 

FR 36450], in which we adopted minor 

amendments to the EDGAR rules; Release No. 33– 

7472 (October 24, 1997) [62 FR 58647], in which 

we announced that, as of January 1, 1998, we would 

not accept in paper filings that we require filers to 

submit electronically; Release No. 34–40934 

(January 12, 1999) [64 FR 2843], in which we made 

mandatory the electronic filing of Form 13F; 

Release No. 33–7684 (May 17, 1999) [64 FR 27888], 

(A) Reports of stocks of grain, such as 

Forms 38, 38C, 38M and 38T, required 

to be filed pursuant to 17 CFR 1.44; 

(B) Statements of reporting traders on 

Form 40 required to be filed pursuant to 

17 CFR 18.04; 

(C) Statements concerning special 

calls on positions required to be filed 

pursuant to 17 CFR part 21; 

(D) Statements concerning 

identification of special accounts on 

Form 102 required to be filed pursuant 

to 17 CFR 17.01; 

(E) Reports required to be filed 

pursuant to parts 15 through 21 of this 

chapter; 

(F) Reports concerning option 

positions of large traders required to be 

filed pursuant to part 16 of this chapter; 

(G) Form 188; and 

(H) The following reports and 

statements that are also set forth in 

paragraph (b)(8) of this section, except 

as specified in 17 CFR 1.10(g)(2) or 17 

CFR 31.13(m): Forms 1–FR required to 

be filed pursuant to 17 CFR 1.10; 

FOCUS reports that are filed in lieu of 

Forms 1–FR pursuant to 17 CFR 1.10(h); 

Forms 2–FR required to be filed 

pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

17 CFR 1.16(c)(5); and all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); 

* * * * * 

(8) Disclose information contained in 

or related to examination, operating, or 

condition reports prepared by, on behalf 

of, or for the use of the Commission or 

any other agency responsible for the 

regulation or supervision of financial 

institutions, including, but not limited 

to the following reports and statements 

that are also set forth in paragraph 

(b)(4)(i)(H) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1– 

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); 

* * * * * 

Issued in Washington, DC, on January 30, 

2006, by the Commission. 

Jean A. Webb, 

Secretary of the Commission. 

[FR Doc. 06–982 Filed 2–1–06; 8:45 am] 

BILLING CODE 6351–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 232 

[Release Nos. 33–8656; 34–53186; 35– 

28081; 39–2441; IC–27219] 

RIN 3235–AG96 

Adoption of Updated EDGAR Filer 

Manual 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange 

Commission (the Commission) is 

adopting revisions to the Electronic Data 

Gathering, Analysis, and Retrieval 

System (EDGAR) Filer Manual to reflect 

updates to the EDGAR system. The 

revisions are being made primarily to 

support the amended rules and forms 

adopted by the Commission requiring 

that certain open-end management 

investment companies and insurance 

company separate accounts identify in 

their EDGAR submissions information 

relating to their investment company 

type, series and classes (or contracts, in 

the case of separate accounts), and 

ticker symbols. Revisions are also being 

made to support the final rule requiring 

that Form 25–NSE be filed 

electronically. In addition, revisions are 

being made to revoke submission types 

based on the Public Utility Holding 

Company Act of 1935 which was 

repealed in the enactment of the Energy 

Policy Act of 2005. Finally, revisions are 

being made to complete the removal of 

the submission types rescinded on 

December 1, 2005 as a result of the 

adoption of securities offering reform 

initiatives. 

The revisions to the Filer Manual 

reflect changes within Volumes I and II, 

entitled EDGAR Filer Manual, Volume I: 

‘‘General Information,’’ Version 2 

(February 2006) and EDGAR Filer 

Manual, Volume II: ‘‘EDGAR Filing,’’ 

Version 3 (February 2006) respectively. 

The updated manual will be 

incorporated by reference into the Code 

of Federal Regulations. 

EFFECTIVE DATE: February 6, 2006. The 

incorporation by reference of the 

EDGAR Filer Manual is approved by the 

Director of the Federal Register as of 

February 6, 2006. 

FOR FURTHER INFORMATION CONTACT: In 

the Office of Information Technology, 

Rick Heroux, at (202) 551–8800; for 

questions concerning the rescinding of 

Public Utility Holding Company Act of 

1935 submission types, in the Division 

of Investment Management, Catherine 

A. Fisher, Assistant Director, Office of 

Public Utility Regulation at (202) 551– 

6944; for questions concerning 

Securities Offering Reform, in the 

Division of Corporation Finance, 

Herbert Scholl, Office Chief, EDGAR 

and Information Analysis at (202) 551– 

3615; for questions concerning the Form 

25–NSE filings, in the Division of 

Market Regulation, Sharon Lawson, 

Senior Special Counsel, at (202) 551– 

5605; for questions concerning the 

inclusion of series and class (contract) 

data in filings for open-end management 

investment companies and insurance 

company separate accounts, in the 

Division of Investment Management, 

Ruth Armfield Sanders, Senior Special 

Counsel, at (202) 551–6989; and, in the 

Office of Filings and Information 

Services, Shirley Slocum, at (202) 551– 

8900. 

SUPPLEMENTARY INFORMATION: Today we 

are adopting an updated EDGAR Filer 

Manual (Filer Manual). The Filer 

Manual describes the technical 

formatting requirements for the 

preparation and submission of 

electronic filings through the EDGAR 

system.1 It also describes the 

requirements for filing using 

EDGARLink 2 and the Online Forms/ 

XML Web site. 

The Filer Manual contains all the 

technical specifications for filers to 

submit filings using the EDGAR system. 

Filers must comply with the applicable 

provisions of the Filer Manual in order 

to assure the timely acceptance and 

processing of filings made in electronic 

format.3 Filers should consult the Filer 

Manual in conjunction with our rules 

governing mandated electronic filing 

when preparing documents for 

electronic submission.4


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