Federal Register / Vol. 63, No. 115 /Tuesday, June 16, 1998 /Rules and Regulations 32725

1 63 FR 12713 (March 16, 1998).

§ 73.50 [Amended]

2. § 73.50 is amended as follows:

* * * * *

R–5002A Warren Grove, NJ [Amended]

By removing ‘‘Using agency. Commander,

108th Tactical Fighter Wing, New Jersey Air

National Guard, McGuire AFB, NJ,’’ and

adding ‘‘Using agency. Air National Guard,

108th Air Refueling Wing, McGuire AFB,

NJ.’’

R–5002B Warren Grove, NJ [Amended]

By removing ‘‘Using agency. Commander,

108th Tactical Fighter Wing, New Jersey Air

National Guard, McGuire AFB, NJ,’’ and

adding ‘‘Using agency. Air National Guard,

108th Air Refueling Wing, McGuire AFB,

NJ.’’

R–5002C Warren Grove, NJ [Amended]

By removing ‘‘Using agency. Commander,

108th Tactical Fighter Wing, New Jersey Air

National Guard, McGuire AFB, NJ,’’ and

adding ‘‘Using agency. Air National Guard,

108th Air Refueling Wing, McGuire AFB,

NJ.’’

R–5002D Warren Grove, NJ [Amended]

By removing ‘‘Using agency. Commander,

108th Tactical Fighter Wing, New Jersey Air

National Guard, McGuire AFB, NJ,’’ and

adding ‘‘Using agency. Air National Guard,

108th Air Refueling Wing, McGuire AFB,

NJ.’’

R–5002E Warren Grove, NJ [Amended]

By removing ‘‘Using agency. Commander,

108th Tactical Fighter Wing, New Jersey Air

National Guard, McGuire AFB, NJ,’’ and

adding ‘‘Using agency. Air National Guard,

108th Air Refueling Wing, McGuire AFB,

NJ.’’

* * * * *

§ 73.52 [Amended]

3. § 73.52 is amended as follows:

* * * * *

R–5203 Oswego, NY [Amended]

By removing ‘‘Using agency. 24th Air

Division/DOTS, Griffiss AFB, NY,’’ and

adding ‘‘Using agency. Air National Guard,

Northeast Air Defense Sector/DOS, Rome,

NY.’’

* * * * *

Issued in Washington, DC, on June 8, 1998.

Reginald C. Matthews,

Acting Program Director for Air Traffic

Airspace Management.

[FR Doc. 98–15957 Filed 6–15–98; 8:45 am]

BILLING CODE 4910–13–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 1

Minimum Financial Requirements for

Futures Commission Merchants

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final rule.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’) is

amending its minimum financial

requirements for futures commission

merchants (‘‘FCMs’’). The amendment

will eliminate a charge presently

required to be taken by FCMs in the

computation of the amount of their net

capital. This charge is commonly

referred to as the ‘‘short option value

charge’’ (‘‘SOV charge’’). The

Commission is rescinding this charge,

because it has found that the charge is

not closely correlated to the actual risk

of the customers’ short option positions

and, in any event, there are other

protections in place to address this risk.

EFFECTIVE DATE: July 16, 1998.

FOR FURTHER INFORMATION CONTACT: Paul

H. Bjarnason, Jr., Chief Accountant, or

Lawrence B. Patent, Associate Chief

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, 1155 21st Street, N.W.

Washington, D.C. 20581; telephone

(202) 418–5459 or 418–5439.

SUPPLEMENTARY INFORMATION:

I. Background

The minimum adjusted net capital

requirement for an FCM is currently the

greatest of: (A) $250,000; (B) four

percent of the customer funds required

to be segregated pursuant to the

Commodity Exchange Act and the

foreign futures or foreign options

secured amount, less the market value

of commodity options purchased by

customers on or subject to the rules of

a contract market or a foreign board of

trade: Provided, however, that the

deduction for each customer shall be

limited to the amount of customer funds

in such customer’s account(s) and

foreign futures and foreign options

secured amounts; (C) the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or (D) for securities brokers

and dealers, the amount of net capital

required by Rule 15c3–1(a) of the

Securities and Exchange Commission

(17 CFR 240.15c3–1(a)).

In calculating the amount of adjusted

net capital needed to meet the minimum

requirement, FCMs are presently

required under Commission Rule

1.17(c)(5)(iii) to deduct a capital charge,

based upon four percent of the market

value of commodity options granted

(sold) by option customers on or subject

to the rules of a contract market or a

foreign board of trade. The Commission

adopted this provision in 1982 to

require that an FCM recognize the risk

involved in customers selling or going

short an option. Under this provision,

an FCM is required to take this charge,

regardless of the trading strategy of the

customer. Some customers have used a

short option position in combination

with another futures or commodity

option position, such as an inter-month

spread position. Although such a

position would involve less risk than a

naked position, the SOV charge would

be the same or, perhaps, greater.

On March 9, 1998, the Commission

proposed an amendment to the

minimum financial requirements for

futures commission merchants which

would eliminate Rule 1.17(c)(5)(iii).1

The Commission received two (2)

comment letters. Both supported

elimination of the charge. One letter was

jointly signed by representatives from

each of seven (7) U.S. commodity

exchanges and the other was filed by an

FCM.

The effect of the amendment is to

decrease the amount of charges taken

against capital in the computation of net

capital. The reduction in capital charges

taken by an FCM will result in an

increase in the stated amount of

adjusted net capital of an FCM carrying

short option positions in customer

accounts. The total amount of the

increase in an FCM’s net capital would

depend on the quantity and value of

short options carried in the accounts of

the FCM’s customers.

As stated in the proposing release, the

Commission proposed to rescind this

rule, because the charge is not closely

correlated to the actual risk of the

options carried on behalf of customers

and, in any event, there are other

protections in place to address the risk

of short options. In particular, the

Standard Portfolio Analysis of Risk

(‘‘SPAN’’) margining system has been

effectively used in setting appropriate

levels of risk margin, and there are

many other non-capital protections.

These protections include effective selfregulatory organization (‘‘SRO’’) audit

and financial surveillance programs and

modern risk management and control

systems at FCMs. All of the comments

received on the Commission’s proposal

to rescind the SOV charge confirmed

these views. Moreover, no comments

were received which provided any

reason to believe that the SOV charge

should not be rescinded.

II. Summary of Comments

A. Portfolio Margining System

Commenters noted that the four

percent capital charge is not closely

correlated to the actual risk of customer
32726 Federal Register / Vol. 63, No. 115 /Tuesday, June 16, 1998 /Rules and Regulations

2 47 FR 18619–18620 (April 30, 1982).

3Pub. L. No. 104–13, 109 Stat. 163 (1995).

short option positions and that,

subsequent to the adoption of Rule

1.17(c)(5)(iii), the SPAN margining

system was developed. SPAN uses

option pricing models to calculate the

theoretical gains and losses on an option

at various market prices of the

underlying commodity and is a

significant improvement in measuring

the risk of an option. All U.S.

commodity exchanges and many foreign

exchanges have adopted SPAN to assess

option risk. In addition, SPAN

recognizes trading strategies in which

short option positions are risk reducing

and SPAN has been tested and proven

to assess adequately the risk in the

customer’s portfolio.

B. Large Trader Positions

Commenters also noted that the

commodity exchanges closely monitor

large trader positions in each contract

market to identify those market

participants that may pose a financial

risk to the FCM carrying their account.

This includes option positions at

clearing firms carrying option

customers’ accounts. Safeguards such as

intraday variation margin calls,

continuous monitoring of the markets

and direct contact with the FCMs alert

the exchanges to any potential

problems.

C. Financial Surveillance

Commenters further noted that

additional protection exists in the form

of capital and segregation requirements

for FCMs. Commission regulations

require FCMs not only to maintain a

minimum amount of adjusted net

capital, but also to maintain a sufficient

amount of excess adjusted net capital. In

the event an FCM’s adjusted net capital

falls below an early warning level,

generally 150% of the minimum dollar

amount (e.g., 6% of customer segregated

funds), the FCM is required to notify the

Commission within five (5) business

days. The FCM must continue filing

financial reports monthly until the

FCM’s adjusted net capital is at or above

the early warning level for three

consecutive months. In calculating

adjusted net capital, FCMs must deduct

deficits and any undermargined

amounts in customer accounts. With

respect to the segregation requirements,

an FCM is required to deposit customer

funds in accounts designated for the

benefit of customers. The FCM must

also make a daily calculation showing

whether there are sufficient funds in

segregated accounts.

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA)

5 U.S.C. 601 et seq., requires that

agencies, in proposing rules, consider

the impact of those rules on small

businesses. The Commission has

previously determined that FCMs are

not ‘‘small entities’’ for purposes of the

RFA.2 Therefore, the Chairperson, on

behalf of the Commission, hereby

certifies, pursuant to 5 U.S.C. 605(b),

that the action taken herein will not

have a significant economic impact on

a substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of

1995 3 imposes certain requirements on

federal agencies (including the

Commission) in connection with their

conducting or sponsoring any collection

of information as defined by the

Paperwork Reduction Act. While this

proposed rule has no burden, the group

of rules (3038–0024) of which this is a

part has the following burden:

Average burden hours per response:

128.

Number of respondents: 235.

Frequency of response: Monthly.

Copies of the OMB-approved

information collection package

associated with this rule may be

obtained from the Desk Officer, CFTC,

Office of Management and Budget,

Room 10202, NEOB Washington, DC

20503, (202) 395–7340.

List of Subjects in 17 CFR Part 1

Brokers, Commodity futures,

Consumer protection, Net capital

requirements, Reporting and

recordkeeping requirements.

In consideration of the foregoing and

pursuant to the authority contained in

the Commodity Exchange Act and, in

particular, Sections 4f, 4g and 8a(5)

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

Commission hereby amends 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.

§ 1.17 [Amended]

2. Section 1.17(c)(5)(iii) is removed

and reserved.

Issued in Washington, DC on June, 10,

1998, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98–15975 Filed 6–15–98; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Parts 1 and 33

Final Rulemaking Permitting FuturesStyle Margining of Commodity Options

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final rule.

SUMMARY: The Commodity Futures

Trading Commission (‘‘Commission’’) is

repealing Commission Regulation

33.4(a)(2) and amending Commission

Regulation 33.7(b). The Commission

also is implementing technical

amendments to its regulations imposing

financial and segregation requirements

on futures commission merchants

(‘‘FCMs’’) and introducing brokers

(‘‘IBs’’).

Regulation 33.4(a)(2) requires the

purchaser of a commodity option to pay

the full option premium at the initiation

of the transaction. Regulation 33.7

requires an FCM, or an IB in the case of

an introduced account, to provide each

option customer with a written option

disclosure statement prior to the

opening of the account.

The repeal of Regulation 33.4(a)(2)

will permit commodity options to be

margined using a ‘‘futures-style’’

margining system. Futures-style

margining requires both the purchaser

(‘‘long’’) and the seller (‘‘short’’) of a

commodity option to post risk-based,

original margin upon entering into an

option position. During the life of the

option, the option value is marked to

market daily, and gains and losses are

posted to the accounts of the long and

short position holders. The repeal does

not impose an obligation on exchanges

to adopt futures-style margining for

commodity options. Exchanges may

continue to use their current option

margining systems. Any exchange

wishing to implement futures-style

margining must submit proposed rules

for Commission review pursuant to

Section 5a(a)(12)(A) of the Commodity

Exchange Act (‘‘Act’’) and Commission

Regulation 1.41.

Regulation 33.7(b) sets forth the terms

of the disclosure statement and