DIVISION OF CLEARING AND INTERMEDIARY OVERSIGHT

FINANCIAL AND SEGREGATION INTERPRETATION NO. 3-1

Interpretation Relating to Receivables Secured by Warehouse Receipts or Electronic Shipping 

Certificates or Secured by Commissions Withheld from Customer Account Executives 

The net capital treatment that Commission Regulation 1.171 requires for certain secured 

receivables was addressed by the Division of Trading and Markets, the predecessor to the 

Division of Clearing and Intermediary Oversight (“Division”) in Financial and Segregation 

Interpretation No. 3 – Interpretation Relating to Secured Receivables, issued on May 9, 1979 

(hereinafter, “Interpretation No. 3”). Interpretation No. 3 is hereby withdrawn and superseded in 

its entirety by this Financial and Segregation Interpretation No. 3-1, which the Division is issuing 

to provide more comprehensive guidance to futures commission merchants (“FCMs”) with 

respect to receivables arising from customer and noncustomer2

 financing described below, and 

which is secured by commodity warehouse receipts (“warehouse receipts”) or electronic 

shipping certificates (“shipping certificates”) deliverable for futures contracts on a designated 

contract market (“DCM”).3 This Financial and Segregation Interpretation 3-1 also reconfirms 

the Division’s earlier interpretation as to receivables secured by commissions withheld from 

customer account executives. 

I. Background 

Subject to enumerated exceptions, unsecured receivables are excluded from current 

assets by FCMs and introducing brokers (“IBs”) in computing their adjusted net capital under 

Commission Regulation 1.17(c)(2). FCMs and IBs are permitted, however, to include secured 

receivables as current assets in computing adjusted net capital. For a receivable to be considered 

secured under Commission Regulation 1.17(c)(3), the receivable must be secured by readily 

marketable collateral that is otherwise unencumbered and can be readily converted into cash. In 

 

1

 Commission regulations cited herein may be found at 17 C.F.R. Ch 1 (2010). 

2

 The term noncustomer is defined in Regulation 1.17(b)(4), and refers generally to certain affiliates of the FCM. 

 

3

 The Chicago Board of Trade, a DCM, has adopted rules to implement shipping certificates as the sole instrument 

of delivery for certain contracts traded on the exchange. These DCM rules include requirements for the applicable 

commodities and approved shippers, including requirements for letters of credit and/or or bond deposits of cash, 

treasuries, or other collateral from the shippers to the DCM. 
addition, the FCM either must have possession or control of the collateral, or must have a 

perfected security interest in the collateral within the meaning of the laws of the state in which 

the collateral is located. Further, the amount of the receivable that is considered secured is 

limited to the market value of the collateral, less any applicable percentage deductions under 

Regulation 1.17(c)(5) (which specifies applicable net capital haircuts for various classes of 

assets). 

II. Receivables Secured by Warehouse Receipts 

The Division has received an inquiry from the Joint Audit Committee regarding the 

proper net capital treatment of receivables secured by warehouse receipts. Such receivables may 

arise when an FCM finances a delivery on a futures contract for a customer or noncustomer, or 

when it makes a loan to its customer or noncustomer -- crediting the proceeds to the customer’s 

or noncustomer’s commodity futures trading account -- and the loan is secured by warehouse 

receipts that DCM rules permit the FCM to accept as margin.4 Consistent with the preceding 

discussion concerning 1.17(c)(3), the Division notes that receivables from customers and 

noncustomers secured by warehouse receipts or shipping certificates may be classified as current 

assets, subject to the conditions and limitations described below: 

• The warehouse receipt must be deliverable on a futures contract listed by a DCM, and 

also must be issued by a warehouse that is located within the United States and certified 

by a DCM for delivery on its futures contracts. A warehouse receipt that does not meet 

these conditions is not deemed readily marketable. These conditions, in addition to the 

existence of a ready market for the spot commodity underlying the receipt, help ensure 

that there are alternate methods of liquidating the warehouse receipt including the 

delivery of the warehouse receipt at the expiration of a futures contract for the 

commodity, or by factoring such receipt to a commercial entity. In particular, by 

requiring that the warehouse receipt be deliverable on a futures contract listed by a DCM, 

 

4

 As noted in the original Interpretation No. 3, such secured lending or financing for customers and noncustomers 

occasionally has been confused with the treatment of "advances on cash commodities" addressed in Commission 

Regulation 1.17(c)(2)(ii)(A). The Division’s guidance in this area has not changed since the prior interpretation, and 

remains as follows: 

“For purposes of clarification, an advance on cash commodities would arise only in a situation where an FCM has 

entered into a contract to purchase cash commodities for future delivery and in connection with that contract 

makes an unsecured advance to the seller representing a portion of the purchase price.” 

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the Division aims to ensure that the commodity underlying the warehouse receipt is of 

commercially desirable grade and quality and that appropriate financial, insurance, and 

internal control safeguards will be in place at the issuing warehouse, to provide additional 

assurance as to the consistency of value of such warehouse receipt.5

• Although shipping certificates differ from warehouse receipts in that they are not 

documents of title, liquidity concerns are abated in the following circumstances, and 

shipping certificates are deemed equivalent to warehouse receipts with respect to their 

net capital treatment when: 

o the FCM is financing deliveries for its customers or noncustomers, or loaning 

proceeds credited to a customer’s or noncustomer’s futures trading account, and 

shipping certificates deposited by the customer or noncustomer are used to secure 

the resulting receivable; 

o the shipping certificate is the sole instrument deliverable against the futures 

contract for which the delivery is financed or loan proceeds deposited to the 

customer’s or noncustomer’s account; and 

o the delivery rules of the exchange or derivatives clearing organization (“DCO”) 

provide that should there be a failure to load out on a shipping certificate the 

exchange or DCO itself shall provide 100% market value in the form of cash 

and/or warehouse receipts to the holder of the shipping certificate. 

• The warehouse receipt or shipping certificate must be owned legally and beneficially by 

the person from whom the receivable is owed and otherwise be unencumbered. 

 

5

 The Commission previously has determined that a warehouse receipt being deliverable on a futures contract listed 

by a contract market provided additional assurance as to the value of inventory. In adopting an amendment to 

Regulation 1.17, the Commission described a comment recommending, for inventory covered by futures that 

“receipted (registered) inventory which meets the contract specifications of the underlying futures be allowed full 

market value (not subject to a safety factor).” In adopting an amendment to reduce the applicable charge, the 

Commission stated that it believed the comment had merit, and the rationale provided by the contract market was 

“that such receipted inventory is specifically required to meet contract specifications and is readily available for 

delivery on futures contracts. Additionally, there is the added assurance of deliverability from the registration and 

inspection requirements of the contract market which employs such a system.” 43 Fed. Reg. 39956 at 39964 (Sept. 

8, 1978). 

3
• Receivables from customers and noncustomers secured by qualifying warehouse receipts 

or shipping certificates will be deemed secured only to the extent of their “collateral 

market value”, as defined below. Any outstanding amount of the receivable in excess of 

the collateral market value of the warehouse receipts or shipping certificates must be 

classified as a non-current asset, and therefore excluded from the FCM’s net capital. 

• The collateral market value of the warehouse receipt or shipping certificate shall be the 

spot market value of the commodities represented by the warehouse receipts or shipping 

certificates, less a deduction in the same amount as the inventory haircut specified in 

Commission Regulation 1.17(c)(5)(ii). For uncovered inventory, the required haircut 

under Commission Regulation 1.17(c)(5)(ii)(C) is twenty percent (20%). If, however, 

the customer or noncustomer that owns and deposits a warehouse receipt or shipping 

certificate also holds futures positions in its trading account with the FCM that are 

covered by the warehouse receipt or shipping certificate, and that trading account also is 

collateral for the financed delivery or loan, the applicable inventory haircut under 

Commission Regulation 1.17(c)(5)(ii)(A) or (B) is permitted. Only the futures positions 

of the customer or noncustomer, and not the proprietary futures positions of the FCM, 

may serve as cover for the warehouse receipt or shipping certificate, because the FCM 

does not own the warehouse receipt or shipping certificate held as collateral. 6

III. Warehouse Receipts Deposited as Margin or Performance Bond 

The Division is also clarifying the appropriate treatment of warehouse receipts and 

shipping certificates that have been deposited by the customer and accepted by the FCM as 

performance bond or margin for the customer’s regulated trading account. Such warehouse 

receipts and electronic shipping certificates are required to be held in segregated or secured 

amount accounts together with other property deposited as performance bond or margin, and are 

reported accordingly in the financial statements and schedules of the FCM’s Form 1-FR-FCM 

 

6

 The FCM’s own proprietary futures positions may serve as cover for warehouse receipts and shipping certificates 

that are owned by the FCM. The inventory haircuts in Commission Regulation 1.17 apply to warehouse receipts 

owned by the FCM for cash commodities, and also apply to those shipping certificates owned by the FCM that meet 

the criteria described above, including being the sole instrument of delivery and subject to payment by the exchange 

or DCO upon failure of the shipper to load out. Shipping certificates owned by the FCM that do not meet such 

criteria are subject to the haircuts specified for fixed price commitments in Regulation 1.17(c)(5)(ii)(F) and (G). 

4
financial report. However, CFTC Regulation 1.32 does not permit any debit deficit in a 

customer’s regulated trading account to be reduced or offset by such warehouse receipts or 

shipping certificates.7

 

Any customer-owned warehouse receipt or shipping certificates that collateralizes a loan 

made by the FCM to the customer, the cash proceeds of which are actually deposited to the 

customer’s regulated trading account, should not be included in the FCM’s segregation 

requirement or as assets held in segregation. Such warehouse receipts or shipping certificates are 

being used to secure the loan, and not as performance bond or margin for the customer’s 

regulated account. 

IV. Withheld Commissions 

 Customer deficits normally represent debts of the customers to the FCM and are not the 

debts of those customers' account executives. The Division believes that an FCM may properly 

withhold commissions to secure customers' deficits only by agreement with account executives. 

Consequently, the commissions owed to account executives cannot be considered adequate 

security for customer deficits unless there are legally enforceable written agreements between the 

FCM and the account executives that specifically provide the FCM the right to withhold 

commissions due the account executives to secure customer deficits. These arrangements also 

must specify the manner in which commissions will be withheld and the extent to which they 

may be withheld. 

 In order to treat account executives’ commissions payable as security for customers’ 

deficits, the FCM must demonstrate its ability to withhold commissions, and that it actually has 

withheld the applicable commissions in order for the Division to consider the Commission’s 

requirement of possession or perfection of the security interest satisfied. The FCM must 

continue to withhold the commissions until the customer has repaid the deficit. Deficits only can 

be considered secured to the extent that commissions can be and have been withheld. For 

example, if an FCM has a customer account that is in deficit by $30,000 and has withheld 

 

7

 As discussed above, for net capital purposes under Regulation 1.17, warehouse receipts and shipping certificates 

deposited to margin an account may under certain circumstances secure the customer receivable resulting from a 

debit deficit in the account to the extent of the collateral market value of the warehouse receipts or shipping 

certificates. 

5
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commissions of $10,000 from the customer's account executive pursuant to a legally enforceable 

written agreement, the FCM may treat only $10,000 of the deficit as secured for net capital 

purposes. 

 Commissions withheld from account executives to secure deficits must be earned and 

reflected as liabilities whenever the FCM prepares a capital computation. In addition, 

commissions withheld from account executives cannot be used to offset or reduce the applicable 

safety factor charges for under-margined accounts required by Regulation 1.17(c)(5)(viii) 

because the commissions do not represent margin payments made by customers. 

**** 

The statements made in this interpretation are not rules or interpretations of the 

Commodity Futures Trading Commission, nor are they published as bearing the Commission's 

approval. Rather, they are interpretations and practices followed by the Division of Clearing and 

Intermediary Oversight in administering the Commodity Exchange Act and the regulations 

thereunder. 

FOR FURTHER INFORMATION CONTACT: Thomas Smith, Deputy Director and 

Chief Accountant, Thelma Diaz, Associate Director, or Jennifer Bauer, Special Counsel, 

Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, 

1155 21st St, N.W., Washington, D.C. 20581. 

Issued in Washington, D.C. on June 21, 2010 by the Division of Clearing and 

Intermediary Oversight. 

 

ANANDA K. RADHAKRISHNAN 

DIRECTOR