Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices 67841

1See Vision and Strategies for the Future: Facing

the Challenges of 1997 through 2002, published by

the Commission (September 1997).

2 7 U.S.C. 1 et seq.

3See Commodity Exchange Authority

Administrative Determination No. 238 (September

4, 1974).

4 53 FR 46911 (November 21, 1988).

extent of any unfilled balances. In the event

the limits established for that period have

been exhausted by previous entries, such

products shall be charged to the limits set

forth in this directive.

In carrying out the above directions, the

Commissioner of Customs should construe

entry into the United States for consumption

to include entry for consumption into the

Commonwealth of Puerto Rico.

The Committee for the Implementation of

Textile Agreements has determined that

these actions fall within the foreign affairs

exception of the rulemaking provisions of 5

U.S.C. 553(a)(1).

Sincerely,

J. Hayden Boyd,

Acting Chairman, Committee for the

Implementation of Textile Agreements.

[FR Doc. 97–33918 Filed 12–29–97; 8:45 am]

BILLING CODE 3510–DR–F

COMMODITY FUTURES TRADING

COMMISSION

Concept Release on the Denomination

of Customer Funds and the Location of

Depositories

AGENCY: Commodity Futures Trading

Commission.

ACTION: Request for comment.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’) is

publishing this release to obtain the

views of the public on how to address

risks related to holding segregated funds

offshore or in foreign currencies. The

Commission wishes to consider how to

update and otherwise to revise existing

regulatory standards to avoid inhibiting

transnational commodity futures

activities or causing undue costs or

operational inconvenience, without

increasing risks to market participants.

This initiative is part of the

Commission’s recently adopted strategic

plan, which includes ensuring ‘‘sound

financial practices of clearing

organizations and firms holding

customer funds’’ and facilitating ‘‘the

continued development of an effective,

flexible, regulatory environment

responsive to evolving market

conditions.’’ 1

The Commodity Exchange Act

(‘‘Act’’) 2 requires that all money,

securities and property received by

futures commission merchants

(‘‘FCMs’’) to margin, guarantee, or

secure customer trades or contracts on

domestic contract markets, or accruing

to customers as a result of these trades

or contracts, be segregated. Until 1988,

the Commission generally required that

such money, securities and property

(hereinafter collectively referred to as

‘‘customer funds’’) be held in the United

States (‘‘U.S.’’) with the exception of

certain funds held on behalf of nonU.S.-domiciled customers.3

In November 1988, the Commission

issued Financial and Segregation

Interpretation No. 12, ‘‘Deposit of

Customer Funds in Foreign

Depositories’’ (‘‘Interpretation No. 12’’).4

Interpretation No. 12 permits customer

funds to be held in depositories located

outside of the U.S., subject to

limitations and conditions intended for

the protection of these funds. At the

time Interpretation No. 12 was issued,

the Commission stated its intention to

‘‘monitor experience under this

interpretation * * * to alter or

supplement the conditions for keeping

segregated funds offshore as such

experience renders advisable.’’ Various

developments since 1988 make it

appropriate to revisit this area.

Date: Comments must be received on

or before March 2, 1998.

FOR FURTHER INFORMATION CONTACT:

France M.T. Maca, Special Counsel,

Division of Trading and Markets,

Commodity Futures Trading

Commission, Three Lafayette Center,

1155 21st Street, N.W. Washington, D.C.

20581. Telephone: (202) 418–5482.

Table of Contents

I. Background

A. Current Regulatory Requirements

1. Commodity Regulation

2. Bankruptcy Regulation

3. Banking Regulation

B. Developments Since the Issuance of

Interpretation No. 12

II. Policy Considerations

A. Goals

B. Risks

III. Potential Approaches

A. Permissible Denominations of Obligations

1. Alternatives

2. Discussion

B. Permissible Denominations of Assets

1. Alternatives

2. Discussion

C. Permissible Locations of Segregated

Funds

1. Alternatives

2. Discussion

D. Qualifications of Depositories

1. Alternatives

2. Discussion

E. Segregation and Net Capital Treatment

1. Alternatives

2. Discussion

F. Bankruptcy Treatment

1. Alternatives

2. Discussion

IV. A Specific Approach

V. Request for Comment

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Regulatory Requirements

1. Commodity Regulation

The maintenance and location of

customer funds is prescribed by Section

4d of the Act which requires that each

FCM:

Treat and deal with all money, securities,

and property received by such [FCM] to

margin, guarantee, or secure the trades or

contracts of any customer of such [FCM], or

accruing to such customer as the result of

such trades or contracts, as belonging to such

customer. Such money, securities, and

property shall be separately accounted for

and shall not be commingled with the funds

of such [FCM] or be used to margin or

guarantee the trades or contracts, or to secure

or extend the credit, of any customer or

person other than the one from whom the

same are held.

It further provides that:

It shall be unlawful for any person,

including but not limited to any clearing

agency of a contract market and any

depository, that has received any money,

securities, or property for deposit in a

separate account as provided in paragraph (2)

of this section, to hold, dispose of, or use any

such money, securities, or property as

belonging to the depositing [FCM] or any

person other than the customers of such

[FCM].

The Commission’s segregation

requirements are set forth in Regulations

1.20–1.30, 1.32 and 1.36, 17 CFR 1.20–

1.30, 1.32 and 1.36. They provide,

among other things, that a customer’s

funds: must be accounted for separately

by the FCM; may not be commingled

with the FCM’s own funds or those of

any other person; must be available

immediately upon demand; and must be

used only to margin or to secure

contracts traded on or subject to the

rules of a designated contract market.

Neither Section 4d of the Act nor these

regulations address the holding of

customer funds offshore or in foreign

currencies.

Interpretation No. 12 permits the

deposit of U.S. customer funds offshore,

subject to conditions intended to ensure

consistency with the segregation

requirements of the Act and ‘‘generally

to prevent the dilution of customer

funds held in segregation in the United

States.’’ Accordingly, Interpretation No.

12 limits the circumstances under

which funds may be held offshore;

requires specified qualifications for

foreign depositories; requires a certain
67842 Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices

5These criteria are detailed in Part III C infra.

6Commission staff has interpreted this

requirement to apply with respect to funds

denominated in foreign currencies, wherever held.

See, fn. 11 infra and accompanying text.

7 48 FR 8716 (1983).

8See Part 190 proposal, 46 Fed. Reg. 57535 (1981)

(the ‘‘Proposing Release’’).

9Commodity options accounts do not constitute

a separate class to the extent they relate to

transactions subject to regulation under the Act and

the Commission’s regulations, because FCMs are

permitted to commingle funds required to be

segregated. Section 4d(2) of the Act, 7 U.S.C. 6d(2);

Commission’s Regulations 190.01 and 1.3(hh).

10 The Commission requirement that customer

funds be available upon demand results in these

funds being categorized by banks as demand

deposits. A bill to repeal the prohibition on the

payment of interest on demand deposits was

introduced by Rep. Metcalf on July 31, 1997, and

is currently pending. See H.R. 2323, 105th Cong.,

1st Sess. (1997).

11However, Commission staff has interpreted the

subordination requirement of Interpretation No. 12

to be applicable to customer funds denominated in

foreign currencies, wherever held.

12 Interpretation No. 12 ‘‘has the effect of making

overseas customers less willing to use U.S. futures

markets because it imposes a subordination

requirement on foreign currency deposits that is

obsolete in today’s global economy * * *.’’ (Letter

dated November 4, 1997, to the Commission from

the Chicago Mercantile Exchange). A number of

brokerage firms interviewed by Commission staff in

connection with reviewing the requirements of

Interpretation No. 12 expressed the same view.

amount of funds to be held in dollars in

the U.S.; and requires that customers

whose funds are deposited offshore

subordinate their claims against

segregated funds to those of customers

whose funds are deposited in the U.S.

or in other currencies.

More specifically, Interpretation No.

12 permits customer funds, including

funds of U.S. customers, to be held

offshore subject to the following

conditions:

1. With respect to U.S.-domiciled

customers, only funds held for trading

contracts that are priced and settled in

a foreign currency may be held in

foreign depositories;

2. FCMs must segregate sufficient

funds in dollars in the U.S. to meet all

dollar-denominated obligations to

customers;

3. Customer funds may be held only

in the country of origin of the applicable

currency or in a country with which the

Commission has an information sharing

arrangement;

4. Foreign depositories must meet

Commission Regulation 30.7(c)

criteria; 5 and

5. FCMs must obtain from customers

a subordination agreement whereby the

customer authorizes the deposit of its

funds in a foreign depository and

subordinates its claim thereto to the

claims of customers whose accounts are

denominated in U.S. dollars.6 The

subordination agreement would be

activated in the event the FCM is placed

in bankruptcy or receivership and there

are insufficient customer funds

available for distribution to satisfy all

customer claims.

2. Bankruptcy Regulation

Subchapter IV of Chapter 7 of the

Bankruptcy Code (11 U.S.C.) accords

customers of an insolvent commodity

broker priority in the distribution of

customer property:

The trustee shall distribute customer

property ratably to customers on the basis

and to the extent of such customers’ allowed

net equity claims, and in priority to all other

claims, except claims * * * attributable to

the administration of customer property.

In 1983, the Commission adopted Part

190 of its regulations to implement the

Bankruptcy Reform Act of 1978.7 Part

190 recognizes different account classes

to permit ‘‘the implementation of the

principle of pro rata distribution so that

the differing segregation requirements

with respect to different classes of

accounts benefit customer claimants

based on the class of account for which

they were imposed.’’ 8 The account

classes are: futures accounts, foreign

futures accounts, leverage accounts,

commodity options accounts, and

delivery accounts.9 Futures and options

accounts that trade foreign currency

contracts, contain foreign currencies, or

are located offshore are not recognized

as a separate account class. The

subordination agreement required by

Interpretation No. 12, in effect, results

in these accounts being treated as

belonging to separate account classes in

the event of an FCM’s bankruptcy.

3. Banking Regulation

Prior to 1988, the Board of Governors

of the Federal Reserve had a policy

discouraging banks in the U.S. from

accepting deposits of foreign currencies.

Shortly after the Commission issued

Interpretation No. 12, in order to

address the needs of contracts settled in

foreign currencies, the Board changed

its policy and began to allow banks

located in the U.S. to accept foreign

currency deposits.

Regulation Q (12 CFR § 217) generally

prohibits U.S. banks from paying

interest on demand deposits. 10

Regulation Q does not prohibit foreign

branches of U.S. banks from paying

interest on demand deposits, provided

that the U.S. bank does not expressly

guarantee repayment of the deposits in

the U.S.

B. Developments Since the Issuance of

Interpretation No. 12

At the time Interpretation No. 12 was

issued, the Commission stated its

intention to ‘‘monitor experience under

this interpretation * * * to alter or

supplement the conditions for keeping

segregated funds offshore as such

experience renders advisable.’’ Various

developments since 1988 make it

appropriate to revisit this area. First, as

noted above, when Interpretation No. 12

was issued, U.S. banks generally did not

hold foreign currencies in the U.S.

Therefore, Interpretation No. 12 does

not explicitly address risks related to

customer funds denominated in foreign

currencies and held in the U.S.11

Second, since 1988, U.S. contract

markets have listed many futures and

option contracts that are priced and

settled in foreign currencies. The use of

foreign currencies in connection with

trading these contracts, particularly the

use of currencies of countries that are

major financial centers, has become

commonplace. Third, trading volume in

the competing offshore and over-thecounter markets has increased

dramatically since 1988, raising

competitiveness concerns in the

industry. Fourth, industry sources have

expressed the view to Commission staff

that the subordination requirement of

Interpretation No. 12 is cumbersome,

unnecessarily penalizes customers who

deposit foreign currencies with FCMs,

and is an impediment to access to the

U.S. futures markets for non-U.S.

customers who may be reluctant to

subordinate their claims.12

Finally, several FCMs and a clearing

organization have requested permission

to maintain in offshore accounts

customer funds denominated in foreign

currencies. The FCMs represented that

holding funds offshore would better

serve the needs of their foreigndomiciled clientele. The clearing

organization contended that it could

draw interest on customer funds held

offshore, which would permit it to be

more competitive. Interpretation No. 12

allows customer funds to be held

offshore only if ‘‘such funds are used to

margin, guarantee, or secure positions in

a contract traded on a domestic contract

market that is priced and settled in a

foreign currency’’ and only with the

express consent and subordination of

the customer. Moreover, Interpretation

No. 12 clearly states the Commission’s

belief that ‘‘some constraints are

necessary to prevent the transfer of

funds overseas for reasons unrelated to

trading in the relevant contracts.’’

Accordingly, a clearing organization

could not move and maintain customer

funds offshore except as permitted by

Interpretation No. 12 or unless it
Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices 67843

13 Indeed, on a case by case basis, the Division of

Trading and Markets has permitted customer funds

to be maintained by clearing organizations in

London and Mexico City.

obtained relief from the requirements

thereof.13

II. Policy Considerations

A. Goals

The protection of customer funds is a

cornerstone of the Act and the

Commission’s regulations. Typically,

U.S. market participants deposit dollars

or dollar-denominated assets with their

FCM. These assets are held in

segregation in the U.S. Increasingly,

however, there appears to be a need or

desire to hold customer funds overseas

or in non-U.S. dollar denominations.

Historically, the Commission has

proceeded with caution in allowing

customer funds to be held offshore or

denominated in foreign currencies and

intends to continue to do so.

Nevertheless, at this juncture, the

Commission wishes to take a

comprehensive look at the needs and

practices of the industry in evaluating

possible revisions of its requirements.

Three distinct questions must be

considered: (1) Whether and under what

circumstances customers may choose to

have segregated funds deposited

offshore or denominated in foreign

currencies; (2) whether and under what

circumstances FCMs may choose to

hold segregated funds offshore or in

foreign currencies; and (3) whether and

under what circumstances clearing

organizations may choose to hold

segregated funds offshore or in foreign

currencies.

In each case, the extent of the need or

desire for holding customer funds

offshore or in foreign currencies must be

assessed against the related risks. Risk

limiting measures must be considered,

and the question of who should bear the

risks that cannot be eliminated must be

explored. One of the premises of

Interpretation No. 12 is that customers

whose accounts are denominated in

U.S. dollars must be insulated from the

risks resulting from an FCM holding

funds offshore or in foreign currencies.

The continuing viability of this premise

has been questioned by some industry

participants.

The Commission encourages

commenters to describe their current

practices and to provide a detailed

analysis of the reasons for their desire

or need to keep segregated funds

offshore. Commenters should discuss

related risks and how these risks should

be addressed for the protection of

customers. Commenters should also

explain how revisions to the current

requirements could affect their business.

B. Risks

Holding segregated funds offshore or

in foreign currencies creates three types

of risk:

—currency risk;

—depository risk; and

—sovereign risk.

Currency risk arises when an

obligation is denominated in one

currency and the asset held to meet that

obligation is in another currency.

Fluctuations in exchange rates can

cause the amount of the obligation to

change at a different rate than the value

of the asset, thereby resulting in

insufficient funds in segregation to meet

the obligation.

Depository risk is the danger that a

depository holding customer funds may

be unable or unwilling to release those

funds on demand. This risk, of course,

exists with domestic depositories but

contains additional elements overseas,

particularly insofar as the Commission’s

knowledge of, or authority over, foreign

depositories may be less.

Sovereign risk is the chance that a

foreign government might take action

preventing a depository or an FCM from

releasing customer funds despite the

requirements of Section 4d of the Act.

III. Potential Approaches

This part of the concept release sets

forth a number of possible methods to

address the risks described above and

the issues that have arisen since

Interpretation No. 12 was issued. Some

of the listed methods are existing

requirements; others are measures

suggested by industry members or

devised by Commission staff. The listing

of potential approaches in this concept

release is designed only to elicit public

comment. It is not intended as an

endorsement or to indicate a willingness

on the part of the Commission to adopt

these approaches or to abandon existing

provisions.

The Commission requests

commenters to indicate their preferred

alternatives from among those listed or

to suggest other methods. The

alternatives are organized into six

categories. These categories represent

potential avenues for dealing with the

risks described above. They are:

—the permissible denominations of

FCMs’ obligations to their customers;

—the permissible denominations of

assets held in segregation;

—the permissible locations of

segregated funds;

—the qualifications of non-U.S.

depositories;

—the segregation and net capital

treatment of customer funds held

offshore or in foreign currencies; and

—the bankruptcy treatment of these

funds.

The first five categories above

primarily involve steps that could

reduce risks. The last category involves

steps that could be taken to allocate

losses equitably in the event that

shortfalls in segregated funds

nevertheless occur. The list of potential

choices in each area of intervention

generally proceeds from most restrictive

to least restrictive. Each option may

address more than one type of risk, and

choices within one section are not

necessarily mutually exclusive.

Moreover, a choice under one area may

affect a choice in another. For example,

choices under section C, relating to

countries where segregated funds may

be held, must be made in conjunction

with related requirements under section

E, regarding the segregation treatment of

customer funds. Each section is

followed with a brief discussion of the

potential impact of listed choices. A

variety of overall approaches can be

constructed by selecting different

combinations.

Because the Commission generally

favors an approach that emphasizes

prophylactic measures, most listed

choices are intended to reduce relevant

risks. However, the Commission

recognizes that all risks cannot be

prevented. Accordingly, possible

procedures also are included to alleviate

the consequences of residual risks, i.e.,

any risks that cannot be effectively

eliminated.

A. Permissible Denominations of

Obligations

1. Alternatives

An FCM’s obligation to a customer

may be denominated in a currency other

than U.S. dollars:

a. In connection with contracts priced

and settled in that currency.

b. (i) In connection with contracts

priced and settled in that currency; or

(ii) if the customer is domiciled

overseas.

c. If the currency is acceptable for

margin purposes on a U.S. contract

market.

d. With the customer’s written

authorization.

e. Other, please specify.

2. Discussion

As noted above, because currencies

fluctuate at different rates, where

obligations are denominated in one

currency and assets held to meet these

obligations are denominated in another,
67844 Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices

14However, potential imbalances would be

mitigated by other measures such as a requirement

that FCMs take a haircut in their net capital

computation for any unhedged foreign currencies.

See Part III E infra.

15The Act enables the Commission to enter into

various types of cooperative arrangements with

foreign futures authorities. See, e.g., Sections 8(a)(1)

and 12(f)(2) of the Act.

16The G7 is a group of industrialized countries.

It includes: the U.S., Canada, France, Germany,

Italy, Japan and the United Kingdom. For purposes

of determining major money centers, Switzerland is

often added to the list.

17SEC no action letter from Michael Macchiaroli

to Douglas Preston of the Securities Industry

Association [1992 Transfer Binder], SEC Rep. (CCH)

¶ 76,245 (August 21, 1992). Subject to certain

conditions, the Market Regulation Division would

not recommend any enforcement action against

broker dealers who hold money market instruments

in a ‘‘major money market’’ if they do not take a

one hundred percent haircut on these instruments

in calculating net capital under Rule 15c3–1 of the

Securities Exchange Act of 1934. The letter lists

twenty-four countries that are considered as major

money markets. These countries are: Australia;

Austria; Belgium; Canada; Denmark; Finland;

France; Germany; Greece; Hong Kong; Ireland; Italy;

Japan; Luxembourg; the Netherlands; New Zealand;

Norway; Portugal; Singapore; Spain; Sweden;

Switzerland; the United States; the United

Kingdom.

18When Interpretation No. 12 was issued, no

contracts priced and settled in a foreign currency

were traded on U.S. contract markets. However, two

applications were pending before the Commission

for designation of such contracts. Currently, many

contracts that margin and settle in foreign

currencies are traded on U.S. contract markets.

an imbalance may result between assets

and obligations resulting in insufficient

funds in segregation to meet the

obligations. Accordingly, the

denomination of both assets and

obligations to customers must be

considered.

Discussions with participants in the

industry indicate that, under current

practices, the agreement signed by a

customer opening an account with an

FCM usually specifies either that

obligations to the customer are in U.S.

dollars, unless otherwise agreed, or that

the customer will be paid in the

currency it deposits or in which any

earnings are accrued. The discussions

also indicate, however, that these

principles are not uniformly applied

and indeed that some FCMs may not

have a clear agreement with their

customers regarding the currencies in

which customers are to be paid. This

should be clarified as it may ultimately

dictate whether gains and losses

resulting from currency fluctuations

will accrue to, or be borne by, the FCM

or its customers. The choices made for

this section must be considered in close

conjunction with those made for the

next section relating to permissible

denomination of assets.

B. Permissible Denominations of Assets

1. Alternatives

Assets held in segregation may be

denominated in a foreign currency only:

a. In connection with contracts priced

and settled in that currency.

b. (i) In connection with contracts

priced and settled in that currency; or

(ii) if the customer is domiciled

overseas.

c. If the currency is acceptable for

margin purposes on a U.S. contract

market.

d. With the customer’s written

authorization.

e. Other, please specify.

2. Discussion

Current Interpretation No. 12 permits

the deposit offshore of funds ‘‘used to

margin, guarantee, or secure positions in

a contract traded on a domestic contract

market that is priced and settled in a

foreign currency or accrue to such a

customer as a result of positions in such

contracts.’’ Provided that FCMs

recompute the asset/obligation balance

on a daily basis, any choice above

would effectively address currency risk.

Absent a requirement to rebalance asset/

obligations daily, only choice (a) could

result in a ‘‘natural’’ balance. The other

choices would not ensure the

continuous balance of assets and

obligations.14 Commenters should

indicate whether alternatives (b), (c),

and (d) should be limited further to

specific currencies.

C. Permissible Locations of Segregated

Funds

1. Alternatives

Segregated funds may be held at an

approved depository in any of the

following geographic locations

(commenters should choose the

appropriate combination):

a. The U.S.

b. The country of origin of the

currency in which the related contract

is priced and settled.

c. A country with which the

Commission has an information sharing

arrangement.15

d. For a limited period of time, the

country in which the customer is

domiciled, and only for operational ease

in receiving and disbursing funds from

and to customers living in foreign

countries and trading on U.S. contract

markets.

e. Without time limitation, the

country of domicile of the customer.

f. The G7 countries (plus

Switzerland).16

g. Some or all of the twenty-four

countries that the Securities and

Exchange Commission (‘‘SEC’’)

considers as major money centers.17

h. Other, please specify.

2. Discussion

Choice (a), requiring funds to be held

in the U.S., is more restrictive than the

current Interpretation No. 12 approach.

This choice is more viable now than it

was at the time Interpretation No. 12

was issued because, as noted above, in

the interim, the Federal Reserve

changed its policy concerning foreign

currency deposits in the U.S.

Nevertheless, the Commission

recognizes that it could impose

additional costs on the industry. The

requirement that segregated funds be

held in the country of origin of the

currency (choice (b)) is a current

Interpretation No. 12 requirement.

Under choice (b), an increase in the

number of currencies in which contracts

traded in U.S. contract markets settle

would automatically trigger additional

countries as permissible segregated

funds locations.18 This choice may

result in countries being added and

taken off the list of permissible locations

based on contract designations at any

given time.

Choice (c) also reflects current

Interpretation No. 12. In 1988, the

Commission had an information sharing

arrangement with the Australian

National Companies and Securities

Commission and with the United

Kingdom Securities and Investments

Board. The Commission currently has

information sharing or cooperation

arrangements with regulators of over

fifteen foreign jurisdictions. While the

existence of a framework of cooperation

with the Commission is a positive

factor, other factors, such as economic

and political soundness of the country,

also are important. Choices (f) and (g)

would limit possible depository

countries to countries generally

considered to be secure and to have

sophisticated regulatory regimes.

Alternative (e) would permit FCMs to

hold customer funds offshore for

operational convenience in any country

where an FCM’s customer is domiciled.

D. Qualifications of Depositories

1. Alternatives

To qualify to hold segregated funds, a

depository must provide the depositing

FCM the segregation acknowledgment

required by Commission Regulation

1.20 and:

a. Must be located in the U.S.

b. If located offshore, must have a

branch or correspondent in the U.S.

which guarantees repayment in the U.S.

in the event the foreign depository fails

to fulfill its obligation for any reason.
Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices 67845

19Pursuant to CFTC Advisory 87–5 (1987–1990

CCH Transfer Binder ¶ 23,997), FCMs are required

to disclose on their Form 1–FR the identity of

offshore depositories. Any bank or trust company

located outside the U.S. whose commercial paper

or long term debt is rated in one of the two highest

rating categories by Standard & Poors Corporation

or Moody’s Investors Service, Inc. is deemed

automatically recognized. FCMs must submit an

application for recognition of other non-U.S.

located banks and trust companies not meeting this

standard. Such banks or trust companies are

deemed recognized unless the Division gives the

FCM notice to the contrary within 60 days

following receipt of the application. No such

application has been received.

20As noted above, the special provisions of the

Bankruptcy Code applicable to the bankruptcy of

commodity brokers generally require that in the

event of the bankruptcy or insolvency of an FCM

all segregated funds be distributed on a pro rata

basis to customers of the same class.

21 17 C.F.R. 190 Appendix B. Appendix B, which

governs the distribution of property where a

bankrupt FCM holds cross-margin funds, while

intended to assure that non-cross-margining

customers of such an FCM will not be adversely

affected by a shortfall in the pool of cross-margining

funds, modified the applicable distributional rules

such that the required subordination is more

limited.

22Some industry members believe that the risk

that a foreign government would freeze deposits

within its borders is ‘‘remote, especially when

dealing with the major global currencies.’’ They

recommend that the Commission exempt deposits

of the major currencies, wherever held, from all

aspects of Interpretation No. 12. See letter dated

October 16, 1997, to Chairperson Born from the

Chicago Board of Trade.

c. If located offshore, must have a

branch or correspondent in the U.S.

which guarantees repayment in the U.S.

in the event the foreign depository fails

to fulfill its obligation for any reason

other than sovereign action.

d. If located offshore, must be an FCM

or a designated bank or trust company

as defined in Advisory 87–5.19

e. Some combination of the elements

of alternatives (a) through d.

f. Other, please specify.

2. Discussion

Alternative (d), which relies on the

commercial paper or long term debt

rating of foreign depositories, is the

current Interpretation No. 12

requirement. Alternative (b) would

effectively address location risk (both

sovereign and depository risks) by

requiring a repayment guarantee in the

U.S. whatever the cause of the shortfall.

However, as noted above, it appears that

banks would not be allowed to pay

interest if an unconditional guarantee

were given. Accordingly, choice (b)

would be unsatisfactory where customer

funds are held offshore for the purpose

of yielding interest. Alternative (c)

would address only depository risk.

E. Segregation and Net Capital

Treatment

1. Alternatives

a. Customer funds must be segregated

only in accounts payable in the U.S. No

account located or payable outside the

U.S. is considered an acceptable

segregated deposit.

b. A percentage of excess segregated

funds on deposit in non-U.S. locations

(e.g., ten to twenty-five percent) may be

recognized as good segregated assets.

c. Only funds received from foreigndomiciled customers may be held

offshore. However, they will not be

considered to be properly segregated.

Segregated funds may be held

offshore and/or in foreign currencies:

d. Provided that sufficient funds are

held in each currency to meet all

obligations in that currency, as

computed daily.

e. Provided that sufficient U.S. dollars

are segregated in a U.S. depository to

meet all U.S. dollar obligations. To the

extent other currencies are segregated in

foreign depositories, excess U.S. dollars

(e.g., 10%) must be held in the U.S. as

a cushion.

f. Provided that alternative sources of

funding such as dedicated lines of

credit, in a form acceptable to the

Commission, are available to cover

shortfalls or delays in payment.

g. Some combination of the elements

of alternatives (c) through (e).

h. Other, please specify.

2. Discussion

Under alternative (a), funds deposited

by customers for trading on U.S.

contract markets would be held in the

U.S. only. This is founded on the

proposition that futures and options

positions are carried in the U.S., and

therefore, the need for these funds, for

variation settlements and for standing

margin is in the U.S. Having these funds

in the U.S. ensures that the funds will

be available and subject to U.S. law in

the event of insolvency and that they

will be distributed according to the

Bankruptcy Code and the regulations

thereunder.

Alternative (b) would recognize a

percentage of excess segregated funds

held offshore as properly segregated. All

other segregated funds would be

required to be held in the U.S.

Alternative (c) would set no limit on the

amount of foreign-domiciled customer

funds held in offshore locations;

however, these funds would not be

recognized as good segregated funds.

Under alternative (d) customer funds

could be properly segregated offshore,

subject to daily balancing of assets and

obligations in each currency. This

would address currency risk, but not

location risk. Under alternative (e), all

dollar obligations would be matched by

U.S. dollars held in segregation in the

U.S. An FCM could hold foreign

currencies in segregation. As a

protection against currency rate

fluctuations, however, the FCM would

be required to hold additional U.S.

dollars in the U.S. Alternatives (a)

through (e) all are intended to prevent

the occurrence of shortfalls. Alternative

(f) provides a method to cover shortfalls

should they occur. As noted, these

alternatives are not necessarily mutually

exclusive.

F. Bankruptcy Treatment 20

1. Alternatives

a. Customers whose funds are held

offshore or in foreign currencies must

subordinate their claims against these

funds to those of customers whose

funds are segregated in the U.S. and in

U.S. dollars in the same manner as

under current Interpretation No. 12.

b. Customers whose funds are held

offshore or in foreign currencies must

subordinate their claims against these

funds to those of customers whose

funds are segregated in the U.S. and in

U.S. dollars in the same manner as in

Appendix B to the Commission’s

Bankruptcy regulations.21

c. Customers whose funds are held

offshore or in foreign currencies must

subordinate their claims against these

funds to claims of customers whose

funds are segregated in the U.S. and in

U.S. dollars in the event there are

shortfalls as a result of sovereign

action. 22

d. In the event of bankruptcy of an

FCM or foreign depository, segregated

funds in each currency will constitute a

separate pool, and each customer will

recover to the extent that there are funds

in the pool against which the customer

holds a claim.

e. In the event of bankruptcy of an

FCM or foreign depository, all

segregated funds will constitute a single

pool and will be distributed pro rata

without regard to the location or

denomination of these funds.

f. Other, please specify.

2. Discussion

The majority of measures considered

earlier in this release were intended to

minimize risks. This section deals with

apportioning losses should they occur.

Alternative (a) is the requirement of

current Interpretation No. 12. As noted
67846 Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices

23This approach combines, with some

modifications, choices (A)(1)(c), (B)(1)(c), (C)(1)(a),

(D)(1)(a), (E)(1)(a), and (F)(1)(a).

above, to ensure that in the event of an

FCM bankruptcy customers whose

funds are held in the U.S. and in U.S.

dollars will not share pro rata in

possible shortfalls in customer funds

held offshore, Interpretation No. 12

requires that customers who deposit

funds denominated in a foreign

currency subordinate their claims to

those of customers with U.S. dollar

claims. Alternative (b) would use the

same device in a manner that would be

less adverse to customers with funds

denominated in foreign currencies.

Under alternative (c), the subordination

would be activated only in the event

shortfalls resulted from sovereign

action. Other losses would be shared

pro rata.

Alternative (d) would pay each

customer a pro rata share of the

currency pool(s) against which it had a

claim. In certain circumstances, this

alternative could be inequitable to

customers with foreign-denominated

claims. For example, the bankruptcy of

a depository could result in shortfalls in

foreign currencies of the type held by

the depository. Under this alternative,

the shortfalls would be shared only by

customers with claims against those

currencies. However, some of these

customers may not have had funds in

that depository or any responsibility for

its selection.

As noted above, the Bankruptcy Code

and regulations require pro rata sharing

among customers in each account class.

Accordingly, this alternative would

require the Commission to amend its

bankruptcy regulations to define each

currency pool as a separate account

class. By sharing all available customer

funds among all customers without

regard to the segregation locations,

alternative (e) furthers the view that

shortfalls should be shared among all

customers without regard to the

denomination or location of customer

funds.

IV. A Specific Approach

To illustrate the interrelationship of

choices under the various headings and

to assist the Commission further in

reaching a resolution of the issues, staff

has prepared a specific formulation

combining choices from each category.23

The Commission is not endorsing this

approach at this time, but the

Commission believes that receiving

comments on it would provide a

valuable supplement to the other

comments. This approach would

address the concern that current

regulatory standards may impede access

to the U.S. futures market by

eliminating the subordination

agreement currently required by

Interpretation No. 12. To facilitate the

receipt of funds from offshore

customers, this approach, however,

would permit FCMs to maintain

operating accounts in non-U.S.

depositories. Under this approach:

—Funds used by an FCM to meet its

obligations to customers who trade on

U.S. contract markets must be

segregated in accounts payable in the

U.S. That is, no account located or

payable outside of the U.S. would be

considered an acceptable segregated

depository. In addition:

—As an operational convenience, an

FCM would be permitted to receive

commodity margin funds into nonU.S. accounts from customers located

outside the U.S. However, funds in

these accounts would not be

recognized as segregated assets. This

means that customer funds in

accounts located outside of the U.S.

would not have to be transferred to

the U.S. An FCM would be

considered in compliance with the

segregation rules as long as there were

sufficient funds segregated in the U.S.

to cover its obligations to all of its

customers, including the non-U.S.

customers whose funds had not yet

been transferred to the U.S.

—A deposit of any customers’ funds

into an account outside of the U.S.

would result in an increase in the

FCM’s segregated liability to its

customers. The FCM’s excess

segregated funds would be used to

cover the credit to the customer’s

account. This coverage must be made

immediately upon receipt of the funds

in the non-U.S. account.

—An FCM would be permitted to

recognize as segregated assets foreign

currencies credited to the FCM in

segregated foreign currency accounts

with banks located in the U.S. as long

as the account balances were payable

in the U.S. The non-U.S. currencies

which would be recognized as

segregated assets would be limited to

those foreign currencies which would

have been identified as acceptable for

margin purposes by the contract

markets on which the FCM’s

customers trade.

—An FCM must take appropriate action

to maintain a balance between the

currencies it had in segregated

accounts and its obligations to

customers denominated in the same

foreign currency. To achieve this, an

FCM must perform a daily calculation

of the balance between its foreign

currency deposits and its obligations

to its customers in those currencies,

including U.S. dollars. This

calculation must be performed as part

of the daily segregation calculation.

Imbalances must be corrected by the

day following the ‘‘as of’’ date of the

calculation. An appropriate capital

charge must be taken on any

imbalances, pursuant to the

Commission’s net capital rule,

regardless of any rebalancing

achieved the following day.

This approach would not compel an

FCM to transfer any funds into the U.S.,

provided the FCM had sufficient excess

segregated assets in the U.S. FCMs

could maintain accounts in non-U.S.

locations and use such accounts to take

in deposits from foreign-domiciled

customers and to make disbursements.

However, the funds contained in these

accounts would not count towards

meeting the FCM’s segregated liability.

Although funds in these accounts would

not qualify as good segregated funds,

they could qualify for net capital

purposes, provided the accounts met the

requirements of the net capital rule,

which are less stringent than those of

the segregation rule.

V. Request for Comment

The Commission requests comment

on the need for and effectiveness of the

various alternatives and, in particular,

on the ‘‘specific approach.’’ In

formulating their choices, commenters

should consider the following factors:

(a) FCMs increasingly have a customer

base offshore; (b) U.S. banks are

currently prohibited by the Board of

Governors of the Federal Reserve from

paying interest on demand deposits

while unguaranteed offshore deposits

may yield interest; (c) some U.S.

depositories are reluctant to hold a

substantial amount of foreign

currencies; (d) as the volume of

contracts that are priced and settled in

foreign currencies increases, the need to

deposit customer funds denominated in

foreign currencies also increases; (e) the

enforceability of the subordination

agreement has not been tested and is not

clear in the event of a bankruptcy

adjudicated by a non-U.S. court; and (f)

other steps outside the Commission’s

purview could help reduce the risks

related to customer funds held offshore

or in foreign currencies, such as steps to

facilitate the movement of foreign

currencies through the Fedwire.

The Commission encourages

commenters to provide information on

their current business practices and how

they could be affected by the methods

listed in this release and any additional
Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Notices 67847

methods they propose. The Commission

also requests comment on the

practicality of the various methods.

Finally, the Commission requests

comment on whether it is appropriate to

allow exchanges and/or clearing

organizations to hold customer funds

offshore without the customers’ express

authorization and without a direct

operational necessity. If so, commenters

should indicate what conditions and

limitations should be imposed. The

Commission welcomes any cost-benefit

analysis commenters care to provide in

support of their choices.

The Commission requests that

commenters, in making their choice

among the proposed alternatives or in

indicating other alternatives, clearly

indicate whether the provision should

apply at the FCM level and/or at the

clearing level. The Commission will

give serious consideration to the

comments in determining an

appropriate manner in which to revise

the requirements set forth in

Interpretation No. 12. The Commission

wishes: (a) To facilitate access to the

United States markets for the growing

international customer base using them;

(b) to reduce the regulatory burden,

where practicable, on FCMs and

clearing organizations that accept

customer deposits in foreign

denominations and use foreign

depositories; and (c) to maintain the

safety of customer funds.

Issued in Washington, DC on December 23,

1997, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–33955 Filed 12–29–97; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

Sunshine Act Meeting

AGENCY HOLDING THE MEETING:

Commodity Futures Trading

Commission.

TIME AND DATE: 2:00 p.m., Wednesday,

January 28, 1998.

PLACE: 1155 21st St., N.W., Washington,

D.C., 9th Floor Conference Room.

STATUS: Closed.

MATTERS TO BE CONSIDERED:

Enforcement Objectives.

CONTACT PERSON FOR MORE INFORMATION:

Jean A. Webb, 202–418–5100.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–34062 Filed 12-24-97; 11:12 am]

BILLING CODE 6351–01–M

COMMODITY FUTURES TRADING

COMMISSION

Sunshine Act Meeting

AGENCY HOLDING THE MEETING:

Commodity Futures Trading

Commission.

TIME AND DATE: 2:00 p.m., Thursday,

January 29, 1998.

PLACE: 1155 21st St., N.W., Washington,

D.C., 9th Floor Conference Room.

STATUS: Closed.

MATTERS TO BE CONSIDERED:

Enforcement Matters.

CONTACT PERSON FOR MORE INFORMATION:

Jean A. Webb, 202–418–5100.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–34068 Filed 12–24–97; 11:12

am]

BILLING CODE 6351–01–M

DEPARTMENT OF DEFENSE

Office of the Secretary

Submission for OMB Review;

Comment Request

ACTION: Notice.

The Department of Defense has

submitted to OMB for clearance, the

following proposal for collection of

information under the provisions of the

Paperwork Reduction Act (44 U.S.C.

Chapter 35).

Title, Associated Form, and OMB

Number: Statement of Claimant

Requesting Recertified Check; DD Form

2660; OMB Number 0730–0002.

Type of Request: Reinstatement.

Number of Respondents: 315,000.

Responses per Respondent: .1

Annual Responses: 315,000.

Average Burden per Response: 5

minutes.

Annual Burden Hours: 26,250.

Needs and Uses: DD Form 2660, ‘‘The

Statement of Claimant Requesting

Recertified Check,’’ is used to ascertain

pertinent information needed by the

Department of Defense in order to

reissue checks to payees, if the checks

have not been negotiated to financial

institutions within one year of the date

of their issuance, when an original

check has been lost, not received,

damaged, stolen, etc. the form will be

completed by the payee who was issued

the original check. The information

provided on this form will be used in

determining whether a check may be

reissued to the named payee.

Affected Public: Individuals or

households.

Frequency: On occasion.

Respondent’s Obligation: Required to

obtain or retain benefits.

OMB Desk Officer: Mr. Edward C.

Springer.

Written comments and

recommendations on the proposed

information collection should be sent to

Mr. Springer at the Office of

Management and Budget, Desk Officer

for DoD, Room 10236, New Executive

Office Building, Washington, DC 20503.

DOD Clearance Officer: Mr. Robert

Cushing.

Written requests for copies of the

information collection proposal should

be sent to Mr. Cushing, WHS/DIOR,

1215 Jefferson Davis Highway, Suite

1204, Arlington, VA 22202–4302.

Dated: December 22, 1997.

L.M. Bynum,

Alternate OSD Federal Register Liaison

Officer, Department of Defense.

[FR Doc. 97–33786 Filed 12–29–97; 8:45 am]

BILLING CODE 5000–04–M

DEPARTMENT OF DEFENSE

Office of the Secretary of Defense

Notice of Closed Meeting

AGENCY: Defense Intelligence Agency;

Joint Military Intelligence College; DoD.

ACTION: Notice of closed meeting.

SUMMARY: Pursuant to the provisions of

Subsection (d) of Section 10 of Public

Law 92–463, as amended by Section 5

of Public Law 94–409, notice is hereby

given that a closed meeting of the DIA

Joint Military Intelligence College Board

of Visitors has been scheduled as

follows:

DATES: Monday 12 January 1998, 0800

to 1800; and Tuesday, 13 January 1998,

0800 to 1200.

ADDRESSES: Joint Military Intelligence

College, Washington, DC 20340–5100.

FOR FURTHER INFORMATION CONTACT:

Mr. A. Denis Clift, President, DIA Joint

Military Intelligence College,

Washington, DC 20340–5100 (202/231–

3344).

SUPPLEMENTARY INFORMATION: The entire

meeting is devoted to the discussion of

classified information as defined in

Section 552b(c)(1), Title 5 of the U.S.

Code and therefore will be closed. The

Board will discuss several current

critical intelligence issues and advice

the Director, DIA, as to the successful

accomplishment of the mission assigned

to the Joint Military Intelligence College.