64904 Federal Register / Vol. 65, No. 211 / Tuesday, October 31, 2000 / Proposed Rules

1Commission regulations cited herein may be

found at 17 CFR Ch. I (2000). SEC regulations cited

herein may be found at 17 CFR Ch. II (2000).

Section 4d(2) of the Act may be found at 7 U.S.C.

§ 6d(2) (1994).

2Regulation 1.32 further requires that the FCM

complete the segregation computation for each

trading day prior to 12:00 noon on the next business

day and that the computation, and all supporting

data, be maintained for a five-year period in

accordance with Commission Rule 1.31. 3Commodity Exchange Authority Administrative

Determination No. 171 (Aug. 13, 1959). 4A distinction is sometimes drawn between a net

liquidating deficit and a debit balance. A net

liquidating deficit is an amount owed to the FCM

resulting from the combination of the customer’s

debit or credit ledger balance and the mark-tomarket gain or loss on any open positions in the

customer’s account. A debit balance is the amount

owed to the FCM by the customer represented by

the debit ledger balance, and implies that there are

no open positions in the account. For purposes of

this proposal, a net liquidating deficit also includes

customers’ accounts with debit ledger balances and

no open positions.

a location where the requirements of this AD

can be accomplished.

Note 4: The subject of this AD is addressed

in French airworthiness directive 2000–059–

302(B), dated February 9, 2000.

Issued in Renton, Washington, on October

25, 2000.

Donald L. Riggin,

Acting Manager, Transport Airplane

Directorate, Aircraft Certification Service.

[FR Doc. 00–27948 Filed 10–30–00; 8:45 am]

BILLING CODE 4910–13–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 1

RIN 3038–AB52

Recordkeeping; Amendments to the

Daily Computation of the Amount of

Customer Funds Required To Be

Segregated

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rules.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’) is

proposing to amend Commission Rule

1.32 to permit a futures commission

merchant (‘‘FCM’’), in computing the

amount of customer funds required to

be held in segregated accounts pursuant

to section 4d(2) of the Commodity

Exchange Act (‘‘Act’’), to offset a net

liquidating deficit or debit ledger

balance in a customer’s account with

securities that have a ‘‘ready market’’ as

defined by Rule 15c3–1(c)(11) of the

Securities and Exchange Commission

(‘‘SEC’’) and that are deposited as

margin by such customer.1 The proposal

would limit the amount of the offset to

the market value of the securities, less

the applicable haircuts set forth in SEC

Rule 15c3–1(c)(2)(vi). The FCM would

also be required to maintain a security

interest in the securities, including a

written authorization to liquidate the

securities at the FCM’s discretion, and

to segregate the securities in a

safekeeping account with a bank, trust

company, clearing organization of a

contract market, or another FCM.

DATES: Comments must be received on

or before November 30, 2000.

ADDRESSES: Comments should be

mailed to Jean A. Webb, Secretary,

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC

20581. In addition, comments may be

sent by facsimile to (202) 418–5521, or

by electronic mail to secretary@cftc.gov.

Reference should be made to

‘‘Recordkeeping—Futures Commission

Merchants’ Daily Computation of the

Customer Segregated Amounts.’’

FOR FURTHER INFORMATION CONTACT:

Thomas J. Smith, Special Counsel,

Division of Trading and Markets,

Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW., Washington, DC

20581; telephone (202) 418–5495;

electronic mail tsmith@cftc.gov; or

Henry J. Matecki, Financial Audit and

Review Branch, Commodity Futures

Trading Commission, 300 S. Riverside

Plaza, Room 1600–N, Chicago, IL 60606;

telephone (312) 886–3217; electronic

mail hmatecki@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Offsetting Customer Net Liquidating

Deficits or Debit Ledger Balances With

Securities That Have a ‘‘Ready Market’’

A. Background

Section 4d(2) of the Act requires,

among other things, that an FCM

segregate from its own assets all money,

securities, and other property held for

customers as margin for their

commodity futures and option

contracts, as well as any gains accruing

to such customers from open futures

and option positions. The statute also

prohibits an FCM from using the money,

securities, or property of one customer

to margin or secure futures or option

positions of another customer. The

segregation requirement is intended to:

Protect customers who are dealing with

an FCM by assuring the FCM has funds

available to readily liquidate its

obligations to its customers; assure an

FCM has funds available to meet its

daily variation margin obligations to the

clearing organizations of contract

markets; and prohibit an FCM from

misappropriating customer funds for its

own purposes.

Commission Regulations 1.20 through

1.30 implement the segregation of funds

provisions of Section 4d(2) of the Act.

Rule 1.32, a related recordkeeping

regulation, requires each FCM to

prepare a daily computation which

shows: (1) The amount of funds that an

FCM is required to segregate for

customers who are trading on U.S.

commodity exchanges pursuant to the

Act and the Commission’s regulations;

(2) the amount of funds the FCM

actually has in segregated accounts; and

(3) the amount, if any, of the FCM’s

residual interest in the customer funds

segregated. The computations required

by Rule 1.32 are hereinafter collectively

referred to as the ‘‘segregation

computation’’. 2

In 1959, the Commodity Exchange

Authority (‘‘CEA’’), the predecessor

agency of the Commission, issued

Administrative Determination No. 171

(‘‘AD No. 171’’) in which it expressed

the opinion that if an FCM elects to

accept securities from a customer as

margin, the securities, for purposes of

computing the segregation computation,

must be handled separately from the

money deposited by, or due to, other

customers.3 The AD further provided

that any net liquidating deficit in the

account of a customer who deposited

securities as margin was required to be

covered by a deposit in segregation of an

equivalent amount of the FCM’s own

money. This effectively required an

FCM who held securities for a particular

customer to segregate for the full value

of those securities even though the

customer’s account liquidated to a

deficit. For example, if a customer had

a credit ledger balance of $3,000 and a

mark-to-market loss on open positions

of $4,200, that customer’s account

would liquidate to a deficit of $1,200.4

If that customer also had securities with

a market value of $50,000 on deposit

with the FCM as margin for his

commodity account, the FCM would be

required to include in its daily

segregation computation, a $50,000

segregation requirement for that

customer. The FCM would not have

been able to reduce the value of the

security by the $1,200 net liquidating

deficit.

The rationale for this treatment was

that securities, unlike cash, are not

fungible. Therefore, if an FCM became

insolvent, a customer whose securities

could be identified to that customer

might be in a position to reclaim those

securities free of any pro rata

distribution. If the customer who

deposited these ‘‘specifically

identifiable’’ securities had been

Federal Register / Vol. 65, No. 211 / Tuesday, October 31, 2000 / Proposed Rules 64905

5The provisions of that statute relevant to the

futures industry have been amended since that time

and current law is codified in 11 U.S.C. 362, 546,

548, 556 and 761–766 (1994). The Commission’s

bankruptcy Rules are contained in 17 CFR part 190

(1999).

6 Division of Trading and Markets Advisory on

Treatment of Government Securities Deposited as

Customer Funds, reprinted in [1980–1982 Transfer

Binder] Comm. Fut. L. Rep. (CCH) ¶ 21,101 (Nov.

3, 1980) (the ‘‘November 1980 Advisory’’).

7The JAC is comprised of representatives of the

audit and compliance departments of the domestic

SROs and the National Futures Association. The

JAC coordinates the industry’s audit and ongoing

surveillance activities to promote a uniform

framework of self-regulation.

8SEC Rule 15c3–1(c)(2)(vi) sets forth haircuts that

a broker or dealer is required to apply to investment

securities in computing its adjusted net capital.

This Rule and the haircuts are incorporated by

reference in the Commission’s net capital rule. See

Commission Rule 1.17(c)(2)(vi)(B).

9The definition goes on to say that a ‘‘ready

market’’ will also be deemed to exist where

securities have been accepted as collateral for a loan

by a bank as defined in section 3(a)(6) of the

Securities and Exchange Act of 1934 and where the

broker or dealer demonstrates to its Examining

Authority that such securities adequately secure

such loans as that term is defined in Rule 15c3–

1(c)(5). This portion of the definition of a ‘‘ready

market’’ is not applicable to this proposal.

10Of course should there be a shortfall in the

funds available to pay all customers, the net amount

owed would be included among the claims of all

customers and be subject to pro rata distribution of

available assets.

11 It should also be noted that the Commission

requires an FCM to set aside in special accounts a

certain amount of funds for those of its U.S.-

domiciled customers who trade on non-U.S.

commodity markets. (See Commission Regulation

30.7, which identifies this as the ‘‘secured

amount.’’) Unlike section 4d(2) of the Act and

Commission Regulation 1.20, which require an

FCM to segregate for the total net liquidating

equities in accounts of customers who are trading

on U.S. markets, Regulation 30.7 requires the FCM

to set-aside only an amount that equals the margin

required on foreign market open positions, plus or

minus the mark-to-market gain or loss on such

positions. This is normally less than the net

liquidating equity in such accounts. However, an

FCM is permitted to set-aside funds for customers

trading on foreign markets in an amount which is

calculated in the same manner as that done in

determining section 4d(2) segregation requirements.

If the FCM chooses to calculate its foreign secured

amount requirement using the same method as it

uses to calculate the segregation requirements

under section 4d(2) of the Act, then the FCM would

be able to use the same type of offset as permitted

under the proposed change to Rule 1.32.

12 47 FR 18618, 18619–18620 (April 30, 1982).

allowed to build up a deficit in his

account and the FCM had not deposited

enough of its own money into

segregation to cover the deficit, the

amount of money available in the

segregated accounts to pay other

customers would be insufficient.

The concerns raised by the CEA were

subsequently addressed by the passage

of the Bankruptcy Reform Act of 1978

which provided that a commodity

futures customer could not reclaim

specifically identifiable property that

would exceed such customer’s pro rata

share of the FCM’s bankruptcy estate.5

In recognition of this change, the

Commission’s Division of Trading and

Markets (‘‘Division of T&M’’) issued an

advisory wherein it set forth a no-action

position applicable to FCMs with

respect to the segregation computation

when customers’ accounts incur net

liquidating deficits.6 In the advisory, the

Division of T&M stated that it would not

recommend that the Commission

commence an enforcement action

against an FCM based solely upon the

FCM’s use of customer-owned U.S.

Treasury Bills, U.S. Treasury Notes, or

U.S. Treasury Bonds (collectively

‘‘Treasuries’’) in connection with the

segregation computation provided that

certain conditions were met, including

that: (1) The FCM maintained a security

interest in the Treasuries, which

included written authorization to

liquidate the Treasuries at the FCM’s

discretion in order to protect the FCM

and to cover any deficit in the

customer’s account; and (2) the

Treasuries were segregated in

safekeeping accounts with a bank, trust

company, clearing organization of a

contract market, or another FCM as

provided by the Act and Commission

regulations.

B. Proposed Rule Amendments

The Joint Audit Committee (‘‘JAC’’)

has asked the Commission to amend

Rule 1.32 to permit an FCM to offset a

customer’s net liquidating deficit with

securities deposited by such customer

that have a ‘‘ready market’’ as defined

in SEC Rule 15c3–1(c)(11).7 The amount

of the offset would be limited to the

market value of the securities, less

applicable haircuts set forth in SEC Rule

15c3–1(c)(2)(vi). 8 Furthermore, an FCM

would be required to maintain a

security interest in the securities,

including the written authorization to

liquidate the securities at the FCM’s

discretion, and to segregate the

securities in a safekeeping account with

a bank, trust company, clearing

organization of a contract market, or

another FCM.

SEC Rule 15c3–1(c)(11) defines

‘‘ready market’’ to include a recognized

established securities market in which

there exists independent bona fide

offers to buy and sell so that a price

reasonably related to the last sales price

or current bona fide competitive bid and

offer quotations can be determined for a

particular security almost

instantaneously and where payment

will be received in settlement of a sale

at such price within a relatively short

time conforming to trade custom.9

Therefore, if adopted, the proposal

would expand the securities against

which an FCM could offset a customer’s

liquidating deficit from just Treasuries

to any security which has a ready

market as defined in the SEC’s rule. In

the example set forth above, the FCM

would be required to segregate $48,800

for the customer ($50,000 in securities

less the $1,200 liquidating deficit),

rather than $50,000 as is currently

required.

The Commission believes that the

proposal recognizes both the economic

and legal realities that exist in such a

situation. Economically, the FCM is

liable to its customer for only $48,800,

not the amount represented by the

current value of the securities it is

holding for the customer, and should be

required to segregate only the amount it

owes its customer. Likewise, current

bankruptcy rules recognize this

economic reality by permitting the FCM

to liquidate the securities, apply the

proceeds against the liquidating deficit,

and return the net balance owed to the

customer.10

The Commission invites interested

parties to comment on the proposed

amendments. In particular, the

Commission is interested in obtaining

views regarding whether the types of

securities that would be permitted to

offset customer net liquidating deficits

should be further restricted in any way,

for example, to securities which are

deemed acceptable for margin, or

performance bond, under exchange

rules.11

II. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act

(‘‘RFA’’), 5 U.S.C. 601–611, requires that

agencies, in proposing rules, consider

the impact of those rules on small

businesses. The proposed rule

amendments discussed herein would

affect FCMs. The Commission has

previously determined that, based upon

the fiduciary nature of FCM/customer

relationships, as well as the requirement

that FCMs meet minimum financial

requirements, FCMs should be excluded

from the definition of small entity.12

B. Paperwork Reduction Act

The Paperwork Reduction Act of

1995, 44 U.S.C. 3501 et seq. (Supp. I

1995), imposes certain requirements on

federal agencies (including the

Commission) to review rules and rule

amendments to evaluate the information

collection burden that they impose on

the public. The Commission believes

that the proposed amendments to Rule

64906 Federal Register / Vol. 65, No. 211 / Tuesday, October 31, 2000 / Proposed Rules

1.32 do not impose an information

collection burden on the public.

List of Subjects in 17 CFR Part 1

Brokers, Commodity Futures.

In consideration of the foregoing and

pursuant to the authority contained in

the Commodity Exchange Act and, in

particular, sections 4d, 4f, 4g and 8a(5)

thereof, 7 U.S.C. 6d, 6f, 6g and 12a(5),

the Commission hereby proposes to

amend Chapter I of Title 17 of the Code

of Federal Regulations as follows:

PART 1—GENERAL REGULATIONS

UNDER THE COMMODITY EXCHANGE

ACT

1. The authority citation for Part 1

continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a,

6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m,

6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,

13a–1, 16, 16a, 19, 21, 23, and 24.

2. Section 1.32 is proposed to be

revised to read as follows:

§ 1.32 Segregated account; daily

computation and record.

(a) Each futures commission merchant

must compute as of the close of each

business day:

(1) The total amount of customer

funds on deposit in segregated accounts

on behalf of commodity and option

customers;

(2) The amount of such customer

funds required by the Act and these

regulations to be on deposit in

segregated accounts on behalf of such

commodity and option customers; and

(3) The amount of the futures

commission merchant’s residual interest

in such customer funds.

(b) In computing the amount of funds

required to be in segregated accounts, a

futures commission merchant may offset

any net deficit in a particular customer’s

account against the current market value

of readily marketable securities, less

applicable percentage deductions (i.e.,

‘‘securities haircuts’’) as set forth in

Rule 15c3–1(c)(2)(vi) of the Securities

and Exchange Commission (17 CFR

241.15c3–1(c)(2)(vi)), held for the same

customer’s account. The futures

commission merchant must maintain a

security interest in the securities,

including the written authorization to

liquidate the securities at the futures

commission merchant’s discretion, and

must segregate the securities in a

safekeeping account with a bank, trust

company, clearing organization of a

contract market, or another futures

commission merchant. For purposes of

this section, a security will be

considered readily marketable if it is

traded on a ‘‘ready market’’ as defined

in Rule 15c3–1(c)(11)(i) of the Securities

and Exchange Commission (17 CFR

240.15c3–1(c)(11)(i)).

(c) The daily computations required

by this section must be completed by

the futures commission merchant prior

to noon on the next business day and

must be kept, together with all

supporting data, in accordance with the

requirements of § 1.31.

Issued in Washington D.C. on October 25,

2000 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 00–27914 Filed 10–30–00; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 925

[SPATS No. MO–033–FOR]

Missouri Regulatory Program and

Abandoned Mine Land Reclamation

Plan

AGENCY: Office of Surface Mining

Reclamation and Enforcement, Interior.

ACTION: Proposed rule; public comment

period and opportunity for public

hearing.

SUMMARY: The Office of Surface Mining

Reclamation and Enforcement (OSM) is

announcing receipt of a proposed

amendment to the Missouri regulatory

program (Missouri program) and the

Missouri Abandoned Mine Land

Reclamation Plan (Missouri plan) under

the Surface Mining Control and

Reclamation Act of 1977 (SMCRA).

Missouri proposes revisions to its rules

pertaining to surface mining

performance requirements, special

mining activities, prohibitions and

limitations on mining in certain areas

and areas unsuitable for mining,

permitting requirements, bond and

insurance requirements, definitions and

general requirements, and abandoned

mine land reclamation requirements.

Missouri intends to revise its program to

be consistent with the corresponding

Federal regulations, to provide

additional safeguards, to clarify

ambiguities, and to improve operational

efficiency.

This document gives the times and

locations that the Missouri program and

the proposed amendment to that

program are available for your

inspection, the comment period during

which your may submit written

comments on the amendment, and the

procedures that we will follow for the

public hearing, if one is requested.

DATES: We will accept written

comments until 4:00 p.m., c.s.t.,

November 30, 2000. If requested, we

will hold a public hearing on the

amendment on November 27, 2000. We

will accept requests to speak at the

hearing until 4:00 p.m., c.s.t. on

November 15, 2000.

ADDRESSES: You should mail or hand

deliver written comments and requests

to speak at the hearing to John W.

Coleman, Mid-Continent Regional

Coordinating Center, at the address

listed below.

You may review copies of the

Missouri program, the amendment, a

listing of any scheduled public hearings,

and all written comments received in

response to this document at the

addresses listed below during normal

business hours, Monday through Friday,

excluding holidays. You may receive

one free copy of the amendment by

contacting OSM’s Mid-Continent

Regional Coordinating Center.

John W. Coleman, Mid-Continent

Regional Coordinating Center, Office of

Surface Mining, Alton Federal Building,

501 Belle Street, Alton, Illinois 62002,

Telephone: (618) 463–6460.

Missouri Department of Natural

Resources, Land Reclamation Program,

205 Jefferson Street, P.O. Box 176,

Jefferson City, Missouri 65102,

Telephone: (573) 751–4041.

FOR FURTHER INFORMATION CONTACT: John

W. Coleman, Mid-Continent Regional

Coordinating Center. Telephone: (618)

463–6460. Internet:

jcoleman@mcrgw.osmre.gov.

SUPPLEMENTARY INFORMATION:

I. Background on the Missouri Program

and the Missouri Plan

On November 21, 1980, the Secretary

of Interior conditionally approved the

Missouri program. You can find general

background information on the Missouri

program, including the Secretary’s

findings, the disposition of comments,

and the conditions of approval in the

November 21, 1980, Federal Register

(45 FR 77017). You can find later

actions on the Missouri program at 30

CFR 925.12, 925.15, and 925.16.

On January 29, 1982, the Secretary of

the Interior approved the Missouri plan.

Background information on the

Missouri plan, including the Secretary’s

findings, the disposition of comments,

and the approval of the plan can be

found in the January 29, 1982, Federal

Register (47 FR 4253). Subsequent

actions concerning the Missouri plan

and amendments to the plan can be

found at 30 CFR 925.25.