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[Federal Register: August 7, 2001 (Volume 66, Number 152)]
[Rules and Regulations]
[Page 41131-41133]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au01-2]

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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: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
amending 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 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 by such customer
to margin or guarantee the futures and option positions in such
customer's account.\1\ The amendments 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 amendments also require an FCM
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.
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    \1\ Commission 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). The Commodity Exchange Act may be found at 7 U.S.C. 1
et. seq. (1994), as amended by the Commodity Futures Modernization
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

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EFFECTIVE DATE: August 7, 2001.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581;
telephone (202) 418-5495; electronic mail [email protected]

SUPPLEMENTARY INFORMATION

I. Rule Amendments

    On October 31, 2000,\2\ the Commission published for comment
proposed amendments to Rule 1.32 that would permit an FCM, in computing
the amount of customer funds required to be held in segregated accounts
pursuant to Section 4d of the Act, to offset a net liquidating deficit
or a net debit balance in a customer's commodity trading account with
securities deposited by such customer to margin or guarantee his
account (the ``proposing release'').\3\ The comment period expired on
December 1, 2000. The National Futures Association (``NFA'') filed the
only comment letter. NFA supported the proposed amendments. The
Commission is, therefore, adopting the amendments as proposed.
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    \2\ 65 FR 64904 (October 31, 2000).
    \3\ A 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-to-market 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.
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    Section 4d 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 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.
    Commission Regulations 1.20 through 1.30 implement the segregation
of funds provisions of Section 4d. 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 Commission 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''.\4\
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    \4\ Regulation 1.32 further requires that an 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.
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    Currently, in preparing the segregation computation, an FCM may
offset a net liquidating deficit or a net debit balance in a customer's
commodity trading account with U.S. Treasury obligations that are
deposited by such customer to margin or guarantee his account. An FCM
is not permitted, however, to offset a net liquidating deficit or net
debit balance by the value of any other readily marketable securities
deposited by the customer.\5\
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    \5\ The proposing release contains a more detailed explanation
of the development of the disparate treatment afforded U.S.
Treasuries and other readily marketable securities in offsetting net
liquidating deficits or net debit balances.
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    The amendments to Rule 1.32 permit an FCM, in computing the amount
of customer funds required to be held in segregated accounts pursuant
to Section 4d of the Act, to offset a net liquidating deficit or net
debit balance in a customer's account with securities that have a
``ready market'' as defined by SEC Rule 15c3-1(c)(11). SEC Rule 15c3-
1(c)(11) defines ``ready market'' to include a recognized established
securities market in which there exist independent bona fide offers to
buy and sell so that a price reasonably related to the last sales price
or current bona fide

[[Page 41132]]

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.\6\ Therefore the amendments expand the
securities against which an FCM could offset a customer's net
liquidating deficit or net debit balance from just U.S. Treasuries to
any security that has a ready market as defined in the SEC's rule.\7\
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    \6\ The 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 the amended Rule 1.32.
    \7\ For example, if a customer deposits equity securities with a
current market value of $100,000 as margin and his account incurs a
$20,000 trading loss, the customer's account has a net equity of
$80,000. The current interpretations of the segregation requirement,
however, require the FCM to maintain the full $100,000 in
segregation. The FCM generally meets this obligation by depositing
an additional $20,000 of its own cash or U.S. Treasury securities
into the segregation account.
    Under amended Rule 1.32, an FCM would be permitted to offset a
customer's net deficit or debit balance by the fair market value of
any readily marketable securities deposited by such customer. In the
above example, the FCM would not have to deposit $20,000 of its own
funds into the segregation account provided that the fair market
value of the securities, net of certain haircuts as discussed below,
exceeded $80,000.
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    The amount of the offset is 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 is 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.\9\
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    \8\ SEC 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).
    \9\ An FCM is also required to set aside in special accounts a
certain amount of funds for U.S.-domiciled customers who trade on
non-U.S. commodity markets. (See Commission Rule 30.7, which
identifies this as the ``secured amount.'') Unlike Section 4d of the
Act and Commission Rule 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, Rule 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
segregation requirements. If an FCM chooses to calculate its foreign
secured amount requirement using the same method as it uses to
calculate the segregation requirements under section 4d of the Act,
then the FCM would be able to use the same type of offset as
permitted under amended Rule 1.32.
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994),
requires that agencies, in adopting rules, consider the impact of those
rules on small businesses. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its rules on such entities.\10\ 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.\11\ In this regard, the Commission
notes that it did not receive any comments regarding the RFA
implications of the amendments to Rule 1.32.
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    \10\ 47 FR 18618, 18619-18620 (April 30, 1982).
    \11\ 47 FR 18619-18620.
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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 amendments to Rule 1.32 do not impose an
information collection burden on the public.

C. Administrative Procedure Act

    The Administrative Procedure Act provides that the required
publication of a substantive rule shall be made not less than 30 days
before its effective date, but provides an exception for ``a
substantive rule which grants or recognizes an exemption or relieves a
restriction.'' \12\ Amended Rule 1.32 will relieve current restrictions
imposed upon FCMs by permitting an FCM, in computing the amount of
customer funds required to be held in segregated accounts pursuant to
Section 4d of the Act, to offset a net liquidating deficit or debit
ledger balance in a customer's account with readily marketable
securities that were deposited by such customer to margin or guarantee
the futures and option positions in such customer's account.
Accordingly, the Commission has determined to make Rule 1.32 effective
immediately.
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    \12\ 5 U.S.C. 553(d) (1994).
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D. Cost Benefit Analysis

    Section 15 of the Act, as amended by the Commodity Futures
Modernization Act of 2000, requires the Commission to consider the
costs and benefits of its actions before issuing a new regulation under
the Act. The amended section 15 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.
    The Commission has considered the amendments in light of the
factors listed above and has determined to adopt the amendments as
proposed. In this regard, the amendments to Rule 1.32 are expected to
increase the efficiency and competitiveness of FCMs by reducing the
amount of capital that such FCMs are obligated to contribute to
customer segregation accounts to cover deficit or debit balances when
the deficits or debits may be offset by readily marketable securities
deposited as margin by customers. Furthermore, the amendments are not
expected to have a significant adverse impact on the protections
currently afforded customers and market participants as FCMs will
continue to be subject to the Commission's requirements regarding the
segregation of customer funds and other financial requirements.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity Futures, Consumer protection, Reporting and
recordkeeping requirements.

    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) (1994), as
amended by the Commodity Futures Modernization Act of 2000, Appendix E
of Pub. L. No. 106-554, 114 Stat. 2763 (2000), 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 (1994), as

[[Page 41133]]

amended by the Commodity Futures Modernization Act of 2000, Appendix
E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).


    2. Section 1.32 is revised to read as follows:


Sec. 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 a written authorization to liquidate the
securities at the futures commission merchant's discretion, and must
segregate the securities in a safekeeping account with a bank, trust
company, 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 Sec. 1.31.

    Issued in Washington, DC on August 1, 2001 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-19722 Filed 8-6-01; 8:45 am]
BILLING CODE 6351-01-P
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