U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre 

1155 21st Street, NW, Washington, DC 20581 

Telephone: (202) 418-5438 

Facsimile: (202) 418-5547 

jcarley@cftc.gov

Division of Clearing and 

Intermediary Oversight

James L. Carley 

Director 

CFTC letter No. 05-14 

July 25, 2005 

No-Action 

Division of Clearing and Intermediary Oversight 

 Re: No-Action Relief from Commission Rules 1.14 and 1.15

Dear : 

 This is in response to your letter dated March 8, 2005, to the Division of Clearing and 

Intermediary Oversight (“Division”) of the Commodity Futures Trading Commission 

(“Commission”). By your correspondence, you request that “X” not be required to comply with 

certain risk assessment reporting and recordkeeping requirements set forth in Commission Rules 

1.14 and 1.15.1

 Based upon your representations, we understand the facts to be as follows. “X” is a 

wholly-owned subsidiary of “Y”. “X” is registered with the Commission as a futures 

commission merchant (“FCM”), and with the Securities and Exchange Commission (“SEC”) as a 

broker-dealer (“BD”). “X” is also registered as an investment advisor under the Investment 

Advisors Act of 1940. “X” sells foreign securities on an agency basis to U.S. institutional 

customers that clear through its Paris affiliate. “X” also participates in private placement and 

advisory activities and engages in proprietary matched book transactions using repurchase and 

reverse repurchase agreements collateralized by U.S. government securities. “X” currently does 

not engage in any futures activities on behalf of customers or on a proprietary basis. 

 Rules 1.14 and 1.15 set forth certain risk assessment recordkeeping and reporting 

requirements, respectively, for FCMs, which permit the Commission to obtain information 

concerning activities of FCM affiliates that could pose material risks to the FCM. The 

Commission adopted these rules in response to the failures of certain FCMs operating within 

holding company structures.2

 Specifically, Rule 1.14 requires an FCM to maintain and preserve 

certain records and information regarding, among other things, the organizational structure of 

which the FCM is a part, and the FCM’s policies and systems for: (i) monitoring and controlling 

 

1

 Commission rules referred to herein may be found at 17 C.F.R. Ch. I (2005). 

2

 59 Fed. Reg. 66674 (December 28, 1994). 
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2

risks arising from the activities of its affiliates; (ii) financing and capital adequacy; and (iii) 

establishing and maintaining internal controls with respect to market, credit and other risks 

created by the FCM’s proprietary and noncustomer clearing activities. Rule 1.15 requires an 

FCM to file with the Commission, generally on an annual basis, the information required to be 

maintained under Rule 1.14. An FCM that is dually registered with the SEC as a BD may file 

SEC Form 17-H in partial compliance with the Commission’s rules.3

 The relief available to 

FCM/BDs under this provision, however, does not extend to certain policies, procedures and 

systems detailing the market, credit and other risks created by the firm’s proprietary and 

noncustomer clearing activities arising from its function as a clearing member for futures and 

options contracts.4

 In support of your request, you stated that “X” has not conducted any futures brokerage 

activities since its inception and does not plan to conduct such activities in the future. You also 

stated that “X”, as a BD/FCM, files with the SEC a Form 17-H and makes available for 

inspection by the SEC all supporting documentation. However, the Commission did not grant a 

complete exemption from Rules 1.14 and 1.15 for firms filing a Form 17-H with the SEC. The 

Commission did not exempt SEC filers from the filing of risk management policies in 

accordance with Rule 1.15(a)(1)(ii), which the Commission noted should require only a one-time 

filing (absent material changes). Further, if certain affiliates of the FCM would be considered 

material affiliated persons (“MAPs”) under the Commission’s rules, but were not so identified in 

the SEC filings, the SEC filing must be supplemented to include those MAPs. In addition, an 

FCM that experiences substantial capital reductions must report them in accordance the early 

warning requirements of Commission Rule 1.12. 

 “X” bases its request for relief from compliance with the Commission’s risk assessment 

rules on its assertion that it has conducted no futures-related activity since its inception and that it 

has no present intention to conduct such activity. The Commission also noted when it adopted 

its risk assessment rules that the risk management policies requirement pertains to activities 

involving instruments, such as securities or swaps, that are generally outside of the 

Commission’s transactional jurisdiction.5

 Firms that are registered FCMs must comply with the 

regulatory requirements pertaining to FCMs, regardless of the extent, at any given time, of their 

involvement in commodities activities.6

 Accordingly, based upon the representations in your 

letter, the Division does not believe that “X” has demonstrated special circumstances to justify 

granting the relief sought. “X” may, however, continue to rely upon the exemption from certain 

 

3

 Rules 1.14(b)(1) and 1.15(d)(1)(referencing SEC Rules 240.17h-1T and -2T, respectively). 

4

 Rules 1.14(a)(1)(ii) and 1.15(a)(1)(ii). 

5

 59 Fed. Reg. 66674, at 66684-85. 

6

 See, e.g., Commission Rules 4.13(e)(1) and 4.14(c)(1), pertaining to commodity pool 

operators and commodity trading advisors, respectively; see also Premex, Inc. v. CFTC, 785 

F.2d. 1403 (9th Cir. 1986). 
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provisions of Commission Rules 1.14 and 1.15 applicable to those firms that file Form 17-H with 

the SEC. 

 If you have any questions concerning this correspondence, please contact Andrew 

Chapin, an attorney on my staff, at (202) 418-5465. 

Very truly yours, 

James L. Carley 

Director