CFTC Letter 04-21

CFTC letter No. 04-21

August 16, 2004

No-Action

Division of Clearing and Intermediary Oversight

Mr. Joseph D. Sanguedolce 

Chairman, Joint Audit Committee 

C/O New York Mercantile Exchange 

One North End Avenue, 14th Floor 

New York, NY 10282-1101 

Dear Mr. Sanguedolce: 

This is in response to your letter dated July 30, 2004, on behalf of the Joint Audit Committee (the “ JAC 

Request Letter”) to the Division of Clearing and Intermediary Oversight (the “Division” or “DCIO”) of 

the Commodity Futures Trading Commission, in which you request the staff of DCIO to issue a noaction or interpretative letter confirming that FCMs that are non-public entities may temporarily 

continue to treat as equity capital mandatorily redeemable interests that otherwise would be required to 

be reclassified as liabilities under Statement of Financial Accounting Standards No. 150 (“FAS 150”). 

In the JAC Request Letter, you appropriately note that the Division of Market Regulation of the 

Securities and Exchange Commission has issued such a no-action letter applicable to its non-public 

registered broker-dealers through the end of the first annual period beginning after December 15, 2003

[1], in order to provide such broker-dealers adequate time for any necessary amendment of agreements 

and capital structures that provide mandatorily redeemable interests. As you have stated, without 

equivalent relief for non-public futures commission merchants the existence of mandatory redemption 

provisions may cause equity to be reclassified as debt under FAS 150, which may then cause such 

entities to be in non-compliance with Commission minimum capital and debt-equity ratio standards. 

The Division agrees that this issue, identified by the Securities Industry Association with respect to 

broker-dealers, may be equally applicable to non-public futures commission merchants. Accordingly, 

the Division will not recommend enforcement action to the Commission with respect to any non-public 

futures commission merchant that does not reclassify as debt mandatorily redeemable interests under 

FAS 150 for the first annual period beginning December 15, 2003, for the purpose of Commission 

regulatory minimum capital computations and debt-equity ratios. This temporary relief shall no longer 

apply for fiscal periods beginning after December 15, 2004. In addition, this temporary relief shall only 

apply to entities’ regulatory computations of net capital and debt-equity ratios and not to any other 

financial statements of the entity prepared in accordance with generally accepted accounting principles. 

In addition, any non-public futures commission merchant that intends to rely on this no-action relief 

with respect to its computation of minimum net capital and debt-equity ratios should inform its 

designated self-regulatory organization of its intention. 

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CFTC Letter 04-21

The position taken herein is based upon the representations that have been made to DCIO. Any different, 

changed, or omitted facts or conditions might require DCIO to reach a different conclusion. Further, this 

letter represents the position of DCIO only and does not necessarily represent the views of the 

Commission or any other division or office of the Commission. 

If you have any questions concerning this correspondence, please contact Jennifer C.P. Bauer or Thelma 

Diaz, attorneys on my staff, at (202) 418-5430. 

Very truly yours, 

Thomas J. Smith 

Associate Deputy Director 

and Chief Accountant 

[1] Letter from Michael A. Macchiaroli, Division of Market Regulation, to Marshall J. Levinson, 

Securities Industry Association, dated Feb. 19, 2004. 

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