This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

58985 

Vol. 70, No. 195 

Tuesday, October 11, 2005 

1The rules of the Commission cited in this release 

may be found at 17 CFR Ch. I (2005). SEC rules 

cited in this release may be found at 17 CFR Ch. 

II (2005). 

2Commission Rule 1.17(c)(5)(v) provides that the 

haircuts for an FCM’s proprietary securities are ‘‘the 

percentages specified in Rule 240.15c3–1(c)(2)(vi) 

of the Securities and Exchange Commission (17 

CFR 240.15c3–1(c)(2)(vi)) (‘securities haircuts’) and 

100 percent of the value of ‘nonmarketable 

securities’ as specified in Rule 240.15c3–1(c)(2)(vii) 

of the Securities and Exchange Commission (17 

CFR 240.15c3–1(c)(2)(vii)).’’ 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 145 and 147 

RIN 3038–AC19 

Alternative Market Risk and Credit Risk 

Capital Charges for Futures 

Commission Merchants and Specified 

Foreign Currency Forward and 

Inventory Capital Charges 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Proposed rules. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is issuing this release to 

propose amendments to Commission 

rules that impose minimum financial 

and related reporting requirements upon 

each person registered as a futures 

commission merchant (‘‘FCM’’). 

Pursuant to rule amendments that 

became effective in August of 2004, the 

Securities and Exchange Commission 

(‘‘SEC’’) has established a method for 

securities brokers or dealers (‘‘BDs’’) 

that voluntarily elect SEC consolidated 

supervision for their ultimate holding 

companies and affiliates, and that also 

meet specified minimum capital and 

other requirements, to request approval 

to use internal mathematical models to 

determine their capital deductions for 

market risk and credit risk associated 

with their proprietary trading assets. 

Under the rule amendments that are 

proposed in this release, FCMs that are 

also BDs (‘‘FCM/BDs’’) would have the 

option, subject to the reporting and 

other requirements that are specified in 

the proposed rulemaking, of electing to 

compute their adjusted net capital using 

their SEC-approved alternative market 

risk and credit risk capital deductions in 

lieu of CFTC requirements. The 

Commission is also proposing other rule 

amendments that address confidential 

treatment for the reports and statements 

that would be required to be filed under 

the proposed amendments, and also to 

address the confidential treatment of 

certain other information that all FCM/ 

BDs must file with both the Commission 

and the SEC. 

Finally, the Commission is also 

proposing rule amendments in this 

release that would amend the minimum 

financial requirements of FCMs and 

introducing brokers (‘‘IBs’’) by reducing 

the capital deductions for their 

uncovered inventory or forward 

contracts in specified foreign currencies. 

The proposed reduction is consistent 

with guidance currently provided by the 

Commission to FCMs and IBs. 

DATES: Comments must be received on 

or before November 10, 2005. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AC19, by any of 

the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: secretary@cftc.gov. Include 

‘‘Proposed Amendment to Rule 1.17’’ in 

the subject line of the message. 

• Fax: (202) 418–5521. 

• Mail: Send to Jean A. Webb, 

Secretary of the Commission, 

Commodity Futures Trading 

Commission, 1155 21st Street, NW., 

Washington DC 20581. 

• Courier: Same as Mail above. 

All comments received will be posted 

without change to http://www.cftc.gov, 

including any personal information 

provided. 

FOR FURTHER INFORMATION CONTACT: 

Thomas J. Smith, Associate Deputy 

Director and Chief Accountant, at (202) 

418–5430, or Thelma Diaz, Special 

Counsel, at (202) 418–5137, Division of 

Clearing and Intermediary Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, D.C. 

20581. Electronic mail: 

(tsmith@cftc.gov) or (tdiaz@cftc.gov). 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Capital Charges for Proprietary 

Trading Assets 

Commission Rule 1.17(a) requires 

each FCM to maintain a minimum 

amount of ‘‘adjusted net capital’’, which 

is defined as the FCM’s net capital less 

the deductions, or ‘‘haircuts’’, that are 

specified in Rule 1.17(c)(5) and (8).1 For 

purposes of the required haircuts on the 

FCM’s proprietary positions in 

securities, Rule 1.17(c)(5) incorporates 

by reference percentage deductions that 

are set forth in SEC regulations 17 CFR 

240.15c3–1(c)(2)(vi) and (vii).2 Also, 

Commission Rule 1.17(c)(2)(ii), in a 

manner similar to the SEC’s 

requirements for BDs under 17 CFR 

240.15c3–1(c)(2)(iv), requires unsecured 

receivables arising from an FCM’s 

transactions in over-the-counter 

(‘‘OTC’’) derivatives to be excluded from 

the FCM’s current assets for purposes of 

determining the firm’s regulatory 

capital. The deductions required for 

other proprietary assets of the FCM are 

set forth in other parts of Commission 

Rule 1.17(c). 

The Commission and SEC have, to the 

extent practical, harmonized their 

respective capital rules in order to avoid 

creating inconsistent regulatory 

obligations for firms that are duallyregistered FCMs and BDs. This 

harmonization of capital rules extends 

to the computation of net capital and 

adjusted net capital, and to the 

qualifications that subordinated debt 

must meet in order to qualify as 

regulatory capital. Furthermore, if an 

FCM is also registered as a BD, it may 

file an SEC Form X–17a–5, ‘‘Financial 

and Operational Combined Uniform 

Single Report’’ (‘‘FOCUS Report’’) to 

satisfy its requirement to file with the 

Commission a Form 1–FR–FCM 

financial report. In particular, 

Commission Rule 1.10(h) treats Part II 

and Part IIA of the FOCUS report as 

acceptable substitutes for the Form 1– 

FR–FCM, provided that the FOCUS 

report includes all information required 

to be furnished on and submitted with 

Form 1–FR–FCM. Also, for those 

portions of the Form 1–FR–FCM that the 

Commission has designated as either 

publicly available or as exempt from 

mandatory public disclosure for 

purposes of the Freedom of Information 

Act and the Government in the 

Sunshine Act, the Commission extends 

58986 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

3The SEC’s new rule was published at 69 FR 

34428 (June 21, 2004). The effective date of the rule 

was August 20, 2004. 

4As an example of the haircuts required by SEC 

Rule 15c3–1(c)(2)(vi), the haircut for equity 

securities is equal to 15 percent of the market value 

of the greater of the long or short equity position 

plus 15 percent of the market value of the lesser 

position, but only to the extent this position 

exceeds 25 percent of the greater position. The 

deduction for securities with no ready market is 100 

percent under SEC Rule 15c3–1(c)(2)(vii). 

5The BD’s ‘‘tentative net capital’’ consists of its 

net capital before the approved deductions for 

market and credit risk under the SEC’s amended 

rule, and also increased by the balance sheet value 

(including counterparty net exposure) resulting 

from transactions in derivative instruments that 

would otherwise be deducted by virtue of 

paragraph (c)(2)(iv) of Rule 15c3–1. 6Upon written application by a BD, the SEC may 

lower the threshold for the early warning 

requirement, either unconditionally or subject to 

specified terms and conditions. The SEC will 

consider various factors to determine whether the 

requirement is unnecessary. 69 FR at 34461. 7The additional conditions that may be imposed 

on the BD include restricting the BD’s business on 

a product-specific, category-specific or general 

basis; requiring submission of a plan to increase its 

net capital or tentative net capital; requiring more 

frequent reporting; requiring modifications to the 

BD’s internal risk management control procedures; 

or requiring capital deductions using the SEC’s 

standardized haircuts. See 17 CFR 240.15c3–1e(e). 

8The CSE rule specifically exempts FCM 

affiliates of BDs, and other functionally regulated 

BD affiliates, from the SEC’s direct examination. 

9To minimize duplicative regulation, Appendix 

G imposes fewer requirements on holding 

companies that have elected financial holding 

company status. 

10See ‘‘Directive 2002/87/EC of the European 

Parliament and of the Council of 16 December 

2002.’’

11The SEC’s proposed rules for the Alternative 

Capital Computation were published in the Federal 

Register in 2003. 68 FR 62872 (November 6, 2003). 

12The Securities Industry Association and the 

Futures Industry Association are industry trade 

the same treatment to those portions of 

the FOCUS Report that are equivalent to 

the Form 1–FR–FCM. The uniform 

capital computations, and related 

single-form filing requirements, 

harmonize the regulatory requirements 

imposed upon dual registrants while 

providing the Commission and SEC 

with the necessary financial information 

to assess whether firms maintain a 

minimum level of regulatory capital 

while engaging in futures and securities 

businesses. 

B. SEC Amendments To Establish 

Alternative Capital Deductions 

On June 21, 2004, the SEC adopted 

final rule amendments to its capital 

rules to provide an ‘‘alternative net 

capital computation for broker-dealers 

that voluntarily elect to be supervised 

on a consolidated basis,’’ (the 

‘‘Alternative Capital Computation’’).3 As 

amended, SEC Rule 15c3–1(a)(7), (17 

CFR 240.15c3–1(a)(7)), provides that the 

SEC may approve a BD’s application, if 

submitted in accordance with the 

provisions of a new Appendix E (17 

CFR 240.15c3–1e), for approval to use 

the Alternative Capital Computation 

when calculating its net capital. To the 

extent approved by the SEC, the BD 

using the Alternative Capital 

Computation would compute a total 

‘‘deduction for market risk’’ for 

positions in the proprietary accounts of 

the BD, in accordance with the specific 

standards set forth in Appendix E (the 

standards are discussed in Part II of this 

release). The BD would calculate its 

regulatory capital using this deduction 

in lieu of the haircuts that SEC Rules 

15c3–1(c)(2)(vi) and (c)(2)(vii) require 

for the BD’s positions in securities.4 The 

SEC may also approve alternative 

market risk deductions for the BD’s 

proprietary positions in forward 

contracts and commodity futures 

contracts. Also, Appendix E provides 

that where the alternative market risk 

deduction has been used to compute the 

deduction on the underlying instrument 

for OTC derivatives of the BD, the BD 

would compute a ‘‘deduction for credit 

risk,’’ using the standards set forth in 

Appendix E, and it would use this 

deduction in lieu of the capital charges 

that SEC Rule 15c3–1(c)(2)(iv) requires 

for the BD’s credit exposures arising 

from OTC transactions in derivatives. 

The amended SEC rules limit the 

availability of the Alternative Capital 

Computation to BDs that comply with 

enhanced net capital, notification, 

recordkeeping, and reporting 

requirements. SEC Rule 15c3–1(a)(7) 

requires the BD to maintain at all times 

‘‘tentative net capital’’ 5 of not less than 

$1 billion and net capital of not less 

than $500 million, and to provide same 

day notice if the BD’s tentative net 

capital is less than $5 billion, or some 

other ‘‘early warning’’ amount specified 

by the SEC.6 The amended rules specify 

that the SEC’s response to an early 

warning notice may include imposing 

additional conditions on the use of the 

Alternative Capital Computation.7

The Alternative Capital Computation 

is also limited to those BDs who: (i) 

Have in place an internal risk 

management system that complies with 

17 CFR 240.15c3–4 (previously 

applicable only to OTC derivatives 

dealers registered with the SEC), which 

addresses not only their market risk and 

credit risk, but also liquidity, legal and 

operational risks at the firm; and (ii) 

whose ultimate holding company and 

affiliates have consented to SEC 

consolidated supervision, i.e., they 

become a ‘‘consolidated supervised 

entity’’ (‘‘CSE’’). For purposes of such 

consolidated supervision, the BD’s 

ultimate holding company and affiliated 

entities must consent to direct 

examination by the SEC, unless the 

holding company is subject to 

supervision by the Federal Reserve or 

foreign banking regulators because it is 

a U.S. holding company or foreign bank 

that has elected financial holding 

company status under the Bank Holding 

Company Act of 1956.8 The SEC has 

added a new Appendix G to Rule 15c3–

1 (17 CFR 240.15c3–1g), which 

establishes the minimum reporting, 

recordkeeping, and notification 

requirements for all holding companies 

of BDs that apply for, or have received 

approval for the use of, the Alternative 

Capital Computation.9

In adopting the Alternative Capital 

Computation, the SEC has also 

responded to concerns expressed by 

several U.S. BDs that are required, 

pursuant to a directive issued by the 

European Union (‘‘EU’’) at the end of 

2002 (the ‘‘Financial Groups Directive’’), 

to demonstrate holding company 

supervision that is equivalent to EU 

consolidated supervision.10 Absent a 

demonstration of comparable groupwide supervision, the EU may restrict or 

otherwise place conditions upon the 

operations of the European-based 

affiliates of these BDs. The consolidated 

supervision requirements in the SEC’s 

amended rules provide a regulatory 

structure that is intended to satisfy the 

requirements of the Financial Groups 

Directive. 

As the SEC noted when first 

proposing rules for the Alternate Capital 

Computation, the required market risk 

and credit risk deductions are expected 

to be substantially smaller in amount 

than the standardized deductions.11 As 

the SEC rule amendments were being 

discussed and proposed, Commission 

staff identified that continued 

harmonization of the capital rules of the 

two agencies would require amendment 

of Rule 1.17, and communicated this to 

various market participants potentially 

affected by the difference between the 

SEC’s proposed rules and Rule 1.17. 

After the SEC adopted rule amendments 

allowing BDs to apply for approval to 

use the Alternative Capital 

Computation, several FCM/BDs, along 

with representatives of the Securities 

Industry Association and the Futures 

Industry Association, contacted staff of 

the Commission’s Division of Clearing 

and Intermediary Oversight (the 

‘‘Division’’) to express their support for 

Commission rulemaking that would 

allow dually-registered FCM/BDs to use 

their SEC-approved alternative market 

risk and credit risk deductions when 

computing their adjusted net capital 

under Rule 1.17.12 In addition, two 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58987 

groups whose members include broker-dealers, 

futures commission merchants, and representatives 

of other segments of the securities and futures 

industries. 

13The multiplication factor may be increased 

based upon the number of exceptions observed 

during model backtesting, which the BD is required 

to perform, but may not be less than three. 

14 Incorporating VaR models into the firm’s 

capital calculations offers the firm the advantage of 

increasing its ability to recognize the correlations 

and hedges in its trading portfolio, and reducing its 

capital charge for market risk as a consequence. For 

example, as the SEC has noted, its fixed-percentage 

securities haircuts recognize only limited hedging 

activities, and do not account for historical 

correlations between foreign securities and U.S. 

securities or between equity securities and debt 

securities. According to the SEC, by ‘‘failing to 

recognize offsets from these correlations between 

and within asset classes, the fixed percentage 

haircut method may cause firms with large, diverse 

portfolios to reserve capital that actually 

overcompensates for market risk.’’ 62 FR 68011, 

68014 (December 30, 1997) (SEC concept release 

regarding the extent to which statistical models 

might be considered for use in setting the capital 

requirements for a BD’s proprietary positions). 

15The relevant risk factors, prices, or spreads are 

designed to represent a negative movement greater 

than, or equal to, the worst ten-day movement over 

the four years preceding the calculation of the 

greatest loss. 

16 If historical data is insufficient, the SEC 

requires the deduction for positions for which 

scenario analysis is used to be the largest loss 

within a three standard deviation movement in 

those risk factors, prices, or spreads over a ten-day 

period, multiplied by an appropriate liquidity 

adjustment factor. 

17 68 FR at 62872. 

18The SEC first proposed rules for OTC 

derivatives dealers in 1997, and stated that they 

were consistent with the market risk capital 

requirements adopted by the U.S. banking agencies. 

62 FR 67940, 67947 (December 30, 1997). 

19The Basel Committee on Banking Supervision 

is a committee of banking supervisory authorities 

established in 1974 by the central-bank Governors 

of the Group of Ten countries. It consists of senior 

representatives of bank supervisory authorities and 

central banks from Belgium, Canada, France, 

Germany, Italy, Japan, Luxembourg, Netherlands, 

Sweden, Switzerland, United Kingdom and the 

United States. It usually meets at the Bank for 

International Settlements in Basel, where its 

permanent Secretariat is located. 

20 In 1988, the Basel Committee published a 

document titled the ‘‘International Convergence of 

Capital Measurement and Capital Standards’’ (the 

‘‘Basel Capital Accord’’), which set forth an agreed 

framework for measuring capital adequacy and the 

minimum requirements for capital for banking 

institutions. There have been several amendments 

to the Basel Capital Accord in the intervening years, 

including, in January of 1996, the ‘‘Amendment to 

the Capital Accord to Incorporate Market Risks.’’

Most recently, the Basel Committee issued a revised 

framework in June of 2004 (‘‘Basel II’’) that amends 

provisions related to credit risk and adds provisions 

to address operational risk. 

21See, generally, 61 FR 47358 (September 6, 

1996) (final rules adopted by federal banking 

Continued 

dually-registered FCM/BDs that had 

received SEC approval for the 

Alternative Capital Computation 

requested no-action positions from 

Division staff, without which the 

Alternative Capital Computation could 

not be used for purposes of their capital 

computation and reporting requirements 

to the Commission. The Division 

granted such relief on an interim basis, 

to be superseded by such final rules as 

the Commission might eventually adopt 

in connection with the Alternative 

Capital Computation. 

II. SEC Requirements for BDs Using 

Alternative Capital Computation 

A. SEC Appendix E Requirements for 

Computation of Alternative Deductions 

for Market Risk and Credit Risk. 

1. Deduction for Market Risk. 

The computation for the alternative 

market risk deduction is set forth in 

paragraph (b) of the new Appendix E 

(17 CFR 240.15c3–1e(b)), and is the sum 

of the following: 

• For proprietary positions for which 

the SEC has approved the BD’s use of 

‘‘value at risk’’ (‘‘VaR’’) models, ‘‘the 

VaR of the positions multiplied by the 

appropriate multiplication factor,’’

which is initially set at three.13 VaR 

models are mathematical models that 

are used to generate a summary measure 

of market risk for a portfolio of assets, 

and the VaR of a portfolio can be 

expressed in terms of the estimated loss 

in value, over a given time period, that 

is expected to be equaled or exceeded 

with a given, small probability. Under 

Appendix E, the loss estimates under 

the BD’s VaR models must use price 

changes equivalent to a ten business-day 

period movement in rates and prices, 

and a confidence level of 99 percent, 

i.e., the VaR of the BD’s positions can 

be expressed as the ten business-day 

loss that is expected to be equaled or 

exceeded 1 percent of the time.14

Appendix E also requires that the BD 

monitor whether the ‘‘multiplication 

factor’’ should be increased, by 

requiring the BD to conduct backtesting 

of the model beginning three months 

after the BD begins using the VaR model 

to calculate market risk. Backtesting 

‘‘exceptions’’ will be determined by 

comparing the actual daily net trading 

profit or loss of the BD with the 

corresponding VaR measure generated 

by its model. As further specified in 

Appendix E, on the last business day of 

each quarter, the BD must identify the 

number of business days, for each of the 

past 250 business days, for which the 

actual net trading loss exceeded the 

corresponding VaR measure. The BD 

will then use, until it obtains the next 

quarter’s backtesting results, the 

multiplication factor indicated in the 

table included in Appendix E, which 

increases the required multiplication 

factor based on the number of 

backtesting exceptions. 

• For any positions for which the VaR 

model does not incorporate ‘‘specific 

risk,’’ which is the risk that any 

position, particularly one with no ready 

market, does not have price moves that 

correlate to broad market moves, an 

additional deduction must be included 

in the BD’s computation of its 

alternative market risk deduction. As 

part of the review of the BD’s 

application, the SEC will review the 

BD’s methodology for determining 

specific risk deductions. 

• For proprietary positions for which 

the SEC has approved the use of 

‘‘scenario analysis,’’ the required 

deduction is the greatest loss, as 

indicated by the analysis, resulting from 

a range of adverse movements in 

relevant risk factors, prices, or spreads 

for the positions,15 or is some multiple 

of the greatest loss based on the 

liquidity of the positions subject to 

scenario analysis.16 This deduction is 

subject to a ‘‘floor,’’ so that irrespective 

of the deduction otherwise indicated 

under scenario analysis, the resulting 

deduction for market risk must be at 

least $25 per 100 share equivalent 

contract for equity positions, or one-half 

of one percent of the face value of the 

contract for all other types of contracts. 

• For all remaining proprietary 

positions for which the SEC has not 

approved the BD’s use of VaR models or 

scenario analysis, the standard 

deductions specified in SEC rules 17 

CFR 240.15c3–1(c)(2)(vi), (c)(2)(vii), and 

applicable appendices to § 240.15c3–1. 

When first proposing the Alternative 

Capital Computation, the SEC noted that 

it had been modeled on rule 

amendments previously adopted by the 

SEC for OTC derivatives dealers in 

1998.17 In turn, the rules for OTC 

derivatives dealers parallel those that 

U.S. banking agencies had adopted in 

1996 to require banks to compute a 

market risk charge, and to establish 

standards for the internally-generated 

market risk estimates that banks could 

use to compute the charge.18 The rules 

adopted by the banking agencies 

implemented recommendations of the 

Basel Committee on Banking 

Supervision (‘‘Basel Committee’’),19

which recognized the growing use of 

VaR models as part of the risk 

management procedures of 

internationally active banks with large 

trading portfolios.20 The rules adopted 

by the banking agencies implemented 

capital charges for the market risks 

incurred by such banks, and approved 

the use of proprietary VaR models as 

part of the calculation of the required 

market risk charges, subject to the 

models satisfying certain ‘‘qualitative’’

and ‘‘quantitative’’ conditions.21 These 

58988 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

agencies to require market risk capital charge and 

adopting standards for the ‘‘internal models’’

approach for calculation of the charge). 

22The table in Appendix E that provides the 

required VaR multiplication factor is consistent 

with the recommendations made by the Basel 

Committee in 1996. See ‘‘Supervisory Framework 

for the Use of Backtesting in Conjunction with the 

Internal Models Approach to Market Risk Capital 

Requirements’’ (January 1996). 

23The required market risk factors under the 

SEC’s rule include not only specific risk for 

individual positions, but also the following general 

market risks: (i) Risks arising from the non-linear 

price characteristics of derivatives and the 

sensitivity of the market value of those positions to 

changes in the volatility of the derivatives’

underlying rates and prices; (ii) empirical 

correlations with and across risk factors or, 

alternatively, risk factors sufficient to cover all the 

market risk inherent in the positions in the 

proprietary or other trading accounts of the BD, 

including interest rate risk, equity price risk, foreign 

exchange risk, and commodity price risk; and (iii) 

where applicable, spread risk, and segments of the 

yield curve sufficient to capture differences in 

volatility and imperfect correlation of rates along 

the yield curve for securities and derivatives that 

are sensitive to different interest rates. 

24Appendix E assigns specific credit weights, 

ranging from 20 percent to 150 percent, based either 

on the ratings made by a nationally recognized 

statistical rating organization or internally by the 

firm. A BD may request approval to determine 

credit risk weights based on internal calculations. 

The BD must make and keep current a record of the 

basis for the credit rating, and credit risk weight, 

for each counterparty. 25The SEC stated that the 8 percent multiplier is 

consistent with the calculation of credit risk in the 

OTC derivatives dealer rules and applicable 

requirements in Basel Committee publications, and 

is designed to dampen leverage to help ensure that 

the firm maintains a safe level of capital. 26The SEC may approve a shorter time horizon 

(but not less than ten business days), based on a 

review of the BD’s procedures for managing 

collateral, the daily mark-to-market of the collateral, 

and the BD’s ability to call for additional collateral 

daily. 27Appendix E requires that for each counterparty 

with a credit risk weight of 20 percent or less, the 

concentration charge is 5 percent of the amount of 

the current exposure to the counterparty that is in 

excess of 5 percent of the BD’s tentative net capital; 

for each counterparty with a credit risk weight of 

greater than 20 percent but less than 50 percent, the 

charge is 20 percent of the current exposure to the 

counterparty that is in excess of 5 percent of the 

BD’s tentative net capital; and for each counterparty 

with a credit risk weight of greater than 50 percent, 

the charge is 50 percent of the current exposure to 

the counterparty that is in excess of 5 percent of the 

BD’s tentative net capital. 

28The Derivatives Policy Group (‘‘DPG’’) consists 

of several U.S. firms that are most active in the OTC 

derivatives market. The DPG was formed at the 

request of the SEC to address the public policy 

issues arising from the activities of unregistered 

affiliates of BDs. In March of 1995 the DPG 

published its ‘‘Framework for Voluntary Oversight, 

a Framework for Voluntary Oversight of the OTC 

Derivatives Activities of Securities Firm Affiliates 

to Promote Confidence and Stability in Financial 

Markets,’’ under which the members of the DPG 

agreed to report voluntarily to the SEC on their 

activities in the OTC derivatives market. 

conditions included the requirement of 

an appropriate multiplication factor, 

initially set at three and increased as 

indicated by backtesting results.22

The amended SEC rules similarly 

specify several qualitative and 

quantitative requirements for the VaR 

models used by those BDs that are 

approved to use the Alternative Capital 

Computation. The qualitative 

requirements set forth in Appendix E 

include certain requirements already 

described above, i.e., those related to the 

multiplication factors applied to VaR 

based on backtesting results, and also 

include the following: (i) VaR models 

used to calculate market risk or credit 

risk must be integrated into the daily 

internal risk management system of the 

BD; (ii) VaR models must be reviewed 

both periodically (by either the BD’s 

internal audit staff or an outside 

auditor) and annually (by a registered 

public accounting firm, as that term is 

defined in section 2(a)(12) of the 

Sarbanes-Oxley Act of 2002 (15 U.S.C. 

7201 et seq.); and (iii) the BD must have, 

for purposes of incorporating specific 

risk into its VaR model, methodologies 

in place to capture liquidity, event, and 

default risk adequately for each 

position. Other requirements for the 

models used to calculate deductions for 

specific risk include that they explain 

the historical price variation in the 

portfolio; capture concentration in terms 

of magnitude and changes in 

composition; be robust to an adverse 

environment; and be validated through 

backtesting. 

The quantitative requirements for the 

VaR models are also set forth in 

Appendix E, and in addition to the 

requirement, described above, for 

market risk VaR models to be based on 

a 99 percent confidence level and tenday holding period, also include the 

following: (i) The VaR model must use 

an effective historical observation 

period of at least one year; (ii) the BD 

must consider the effects of market 

stress in its construction of the model; 

(iii) the historical data sets used for the 

models must be updated at least 

monthly and reassessed whenever 

market prices or volatilities change 

significantly; and (iv) the VaR model 

must take into account and incorporate 

all significant, identifiable market risk 

factors applicable to positions in the 

accounts of the BD.23 An additional 

quantitative requirement, related to the 

VaR models used for the BD’s deduction 

for credit risk, is discussed below. 

2. Deduction for Credit Risk 

To determine its alternative deduction 

‘‘for credit risk on transactions in 

derivative instruments (if [Appendix E] 

is used to calculate a deduction for 

market risk on those instruments),’’

Appendix E requires the BD to compute 

three separate capital charges and add 

them together. As set forth in 17 CFR 

240.15c3–1e(c), the alternative 

deduction for credit risk is an amount 

equal to the sum of the following three 

charges: 

(1) A ‘‘counterparty exposure charge’’

in an amount equal to the sum of the 

following: (i) The net replacement value 

in the account of each counterparty that 

is insolvent, or in bankruptcy, or that 

has senior unsecured long-term debt in 

default; and (ii) For each of the BD’s 

other counterparties, a ‘‘credit 

equivalent amount’’ (generally speaking, 

the extent to which, after taking into 

account available collateral and 

enforceable netting agreements, the BD 

is exposed to the creditworthiness of the 

counterparty, both in terms of the 

current cost of replacing the positive 

cash flow under the OTC agreement if 

the counterparty were to default, and in 

terms of the potential for the 

replacement cost to increase over the 

length of the contract, due to 

movements in the rates or prices 

underlying the contract (the firm’s 

‘‘maximum potential exposure’’)), 

multiplied by the ‘‘credit risk weight’’ of 

the counterparty (counterparties with 

lower credit ratings have higher credit 

risk weights),24 multiplied by 8 

percent.25 ‘‘Maximum potential 

exposure’’ will be determined using a 

VaR model, which, like the market risk 

VaR model, must use a 99 percent 

confidence level, but the price changes 

will be equivalent to a one-year 

movement in rates and prices.26 The 

VaR for maximum potential exposure 

must also be multiplied by a 

multiplication factor, which will be 

initially set at one, but is also subject to 

increases based on backtesting 

exceptions, in accordance with a 

schedule of multiplication factors that 

has been proposed by the BD and 

approved by the SEC. 

(2) A ‘‘concentration charge by 

counterparty,’’ which is the total 

determined by adding together, for each 

counterparty of a given credit risk 

weight, a specified percentage of the 

amount of the BD’s current exposure to 

the counterparty that is in excess of 5 

percent of the BD’s tentative net 

capital.27

(3) A ‘‘portfolio concentration charge’’

of 100 percent of the amount of the BD’s 

aggregate current exposure for all 

counterparties in excess of 50 percent of 

the tentative net capital of the BD. 

The SEC has stated that the provisions 

related to OTC derivatives in the 

amended rules are based on its 

experience with the reporting provided 

by the Derivatives Policy Group,28 and 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58989 

29 68 FR at 62879. 

30See ‘‘Framework for Supervisory Information 

about Derivatives and Trading Activities,’’

published in September of 1998 by the Basel 

Committee and IOSCO. IOSCO provides an 

international cooperative forum for securities 

regulatory agencies, and its member securities 

agencies regulate more than 90 percent of the 

world’s securities markets. 31 69 FR at 34428. 

also with the SEC’s regulation of OTC 

derivatives dealers.29 The provisions for 

OTC derivatives also reflect the 

reporting recommendations made by the 

Basel Committee and the Technical 

Committee of the International 

Organization of Securities Commissions 

(‘‘IOSCO’’) in a joint report issued in 

1995 and revised in 1998, which 

included recommendations for the 

reporting by banks and securities firms 

related to the credit risk of their OTC 

derivatives, particularly their current 

and potential credit exposures to their 

counterparties, the credit quality of their 

counterparties, and the concentration of 

credit risk with these counterparties.30

B. SEC Application Process 

The approval process under 

Appendix E of SEC Rule 15c3–1 is 

initiated by the filing of an application 

by the BD, which is required to: (i) 

Describe the mathematical models used 

to price positions and to compute 

market risk and credit risk capital 

deductions, and explain how the 

models meet the required quantitative 

and qualitative standards set forth in 

SEC regulations; (ii) describe the BD’s 

internal risk management control 

system and how that system satisfies the 

requirements set forth in SEC 

regulations; (iii) include corrected or 

updated information going forward as 

appropriate; and (iv) provide a written 

undertaking and certain information 

from the BD’s holding company. 

Furthermore, the BD must amend or 

resubmit an application to obtain SEC 

approval of any material change to its 

approved mathematical models. The 

SEC may approve the application in 

whole or in part, and the SEC may 

revoke its approval upon certain 

conditions. The SEC delegates to the 

Director of the SEC’s Division of Market 

Regulation the authority to undertake 

specific activities and determinations 

under the rule, including the authority 

to approve any amendments to the BD’s 

application. If a BD decides it no longer 

wishes to continue using its approved 

alternative market risk and credit risk 

charges, it must give notice to the SEC 

45 days (or a shorter or longer period as 

approved by SEC) prior to the BD 

ceasing use of the approved models and 

reverting to the standard haircuts. The 

SEC has also specified in Appendix E, 

at paragraph (a)(11), that the BD’s 

approval to use the Alternative Capital 

Computation may be revoked by SEC 

order, upon a finding that the 

exemption is no longer necessary or 

appropriate in the public interest or for 

the protection of investors. The rule 

further states that in making its finding, 

the SEC will consider the compliance 

history of the BD related to its use of 

models, the financial and operational 

strength of the BD and its ultimate 

holding company, the BD’s compliance 

with its internal risk management 

controls, and the holding company’s 

compliance with its written undertaking 

with the SEC. 

C. Reporting Required by SEC for the 

Alternative Capital Computation 

To implement other conditions for the 

use of the Alternative Capital 

Computation, the SEC also amended its 

Rule 17a–5 (17 CFR 240.17a–5), which 

sets forth financial reporting 

requirements applicable to all BDs. In 

addition to the information otherwise 

required under SEC Rule 17a–5(a), a BD 

that uses the Alternative Capital 

Computation must, on a monthly basis, 

file reports that include: (i) Regular risk 

reports supplied to the BD’s senior 

management in the format described in 

the application; (ii) for each product for 

which the BD calculates a deduction for 

market risk in accordance with 

Appendix E, the product category and 

the amount of the deduction for market 

risk; (iii) a graph reflecting, for each 

business line, the daily intra-month 

VaR; (iv) the aggregate value at risk for 

the BD; (v) for each product for which 

the BD uses scenario analysis, the 

product category and the deduction for 

market risk; and (vi) credit risk 

information on derivatives exposures. 

More specifically, the credit risk 

information to be filed for OTC 

derivatives exposures includes: (i) The 

BD’s overall current exposure; (ii) its 

current exposure (including 

commitments) listed by counterparty for 

the 15 largest exposures; (iii) the 10 

largest commitments listed by 

counterparty; (iv) the BD’s maximum 

potential exposure listed by 

counterparty for the 15 largest 

exposures; (v) the BD’s aggregate 

maximum potential exposure; (vi) a 

summary report reflecting the BD’s 

current and maximum potential 

exposures by credit rating category; and 

(vii) a summary report reflecting the 

BD’s current exposure for each of the 

top ten countries to which the BD is 

exposed (by residence of the main 

operating group of the counterparty). 

The amended SEC Rule 17a–5(a) also 

requires quarterly reports that include: 

(i) the number of business days for 

which the actual daily net trading loss 

exceeded the corresponding daily VaR; 

and (ii) the results of backtesting of all 

internal models used to compute 

allowable capital, including VaR and 

credit risk models, indicating the 

number of backtesting exceptions. BDs 

approved to use the Alternative Capital 

Computation must also file supplements 

to their annual financial statements, 

which under amended SEC Rule 17a–

5(k) are to consist of: (i) An accountant’s 

report on management controls 

(indicating the results of the review 

made by a registered public accounting 

firm of the BD’s internal risk 

management control system); and (ii) a 

related statement, made prior to 

commencement of the accountant’s 

review, that describes the review 

procedures agreed to by the BD and the 

accountant. 

III. Proposed Rules for FCMs Registered 

as BDs To Use Their SEC-Approved 

Capital Charges 

The SEC, in adopting its rules 

permitting alternative capital charges 

incorporating VaR measurements for 

qualifying BDs subject to consolidated 

supervision, commented that ‘‘the 

alternative method of computing net 

capital responds to [broker and dealer] 

requests to align their supervisory risk 

management practices and regulatory 

capital requirements more closely.’’ 31

Absent the changes that are being 

proposed in this release to Commission 

Rule 1.17, the potential for reduced 

capital charges that is available to dual 

registrants under the Alternative Capital 

Computation would not be available 

under the Commission’s rules. As a 

result, FCM/BDs would be faced with 

potentially complex capital 

computations and compliance burdens. 

Given the commonality of purpose 

between the capital charges required by 

the SEC for BD registrants and by the 

Commission for FCM registrants, the 

Commission is therefore proposing to 

permit dual registrants that have 

qualified for the exemption under the 

SEC’s net capital rule to use the same 

alternative charges with respect to their 

calculation of minimum CFTC net 

capital, subject to the general 

requirement that the Commission 

receive the same notices and the 

monthly, quarterly and annual reporting 

information, as described above, that the 

SEC’s amended rules require FCM/BDs 

to provide to the SEC. As for holding 

company information that is provided to 

the SEC under the new Appendix G to 

SEC Rule 15c3–1, or as part of the 

58990 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

32To comply with SEC Rule 17h–2T, BDs file SEC 

Form 17–H, and Commission Rule 1.15(d)(1) allows 

FCM/BDs to comply with the requirements in Rules 

1.15(a)(1)(i) and (a)(2) by filing copies with the 

Commission of their Forms 17–H, if these are 

additionally supplemented to ensure that the 

Commission receives all of the information required 

under Rule 1.15. 

33FCM/BDs using the Alternative Capital 

Computation would continue to be required, under 

Rule 1.17(c)(5)(v), to deduct the securities haircuts 

specified in SEC Rules 15c3–1(c)(2)(vi) and (vii) 

from the value of securities that are held in 

segregated accounts under Section 4d and the 

Commission’s implementing regulations and which 

were not deposited by customers. Such FCM/BDs 

would also continue to be required, when 

computing the amount of funds required to be in 

segregated accounts, to use the standard SEC 

securities haircut expressly referenced in Rule 

1.32(b), i.e., SEC Rule 15c3–1(c)(2)(vi). Rule 1.32 

applies this haircut for purposes of the permissible 

offset of any net deficit in a customer’s account 

against the current market value of readily 

marketable securities, less the SEC standard haircut, 

that are held for the same customer’s account. 

34As noted earlier, SEC Rule 15c3–1(a)(7)(ii) 

requires same-day notice to the SEC if the BD’s 

tentative net capital is less than $5 billion, or a 

lower amount that has been agreed to by the SEC. 

application that the BD files with the 

SEC to request approval to use the 

Alternative Capital Computation, the 

proposed rules in the release do not 

require the Commission’s receipt of 

such holding company information, 

because such information is being 

provided to the SEC for purposes of the 

SEC’s consolidated supervision of the 

holding company. 

In formulating the proposed 

amendments, the Commission has taken 

into consideration that the Alternative 

Capital Computation, unlike the current 

standardized charges, is determined by 

an ongoing oversight process that results 

in individualized capital charges that 

require considerable firm-specific 

information. Pursuant to Commission 

Rule 1.17(a)(3), FCMs must be able to 

demonstrate to the satisfaction of the 

Commission their compliance with their 

minimum financial requirements under 

the Commodity Exchange Act and 

implementing regulations of the 

Commission. The proposed 

amendments to Rule 1.17 would enable 

FCM/BDs to elect to use their SEC 

approved capital charges in satisfaction 

of their requirements under Rule 1.17, 

subject to compliance with FCM 

notification and filing requirements that 

would promote the Commission’s risk 

oversight of FCMs, given their critically 

important role as risk intermediaries in 

the futures and options markets. 

The Commission is not proposing any 

amendments in this release to Rules 

1.14 and 1.15, pursuant to which FCMs 

are required to maintain and report 

‘‘risk assessment’’ information to the 

Commission concerning the FCM’s 

material affiliates. The SEC imposes 

similar requirements on BDs, through 

SEC Rules 17h–1T and 17h–2T, for 

recordkeeping and reporting on the 

material affiliates of the BD. A firm that 

is dually registered as a BD and an FCM 

must comply with the risk assessment 

regulations of the SEC and the 

Commission, but Commission Rule 

1.15(d)(1) permits FCM/BDs to meet 

their filing requirements by providing 

copies to the Commission of the risk 

assessment documents that are filed 

with the SEC.32

Given the overlap between 

information that the SEC requires under 

the newly adopted Appendix G and 

under SEC Rules 17h–1T and 17h–2T, 

the SEC amended its rules so that BDs 

whose holding companies are directly 

examined by the SEC are relieved of 

having to also meet the filing obligations 

required by SEC Rules 17h–1T and 17h–

2T. Because the Commission does not 

require holding company information 

under the amendments to Rule 1.17 

proposed in this release, the proposed 

rule amendments do not duplicate the 

filing requirements of Commission 

Rules 1.14 and 1.15. FCM/BDs that elect 

to use the Alternative Capital 

Computation will therefore continue to 

be required to comply with the 

provisions of Rules 1.14 and 1.15. 

A. Proposal to Permit FCMs To Elect To 

Use Their SEC-Approved Capital 

Charges 

The Commission proposes to amend 

paragraph (c)(6) of Rule 1.17 by 

providing that an FCM/BD may elect, if 

it satisfies the requirements of proposed 

paragraph (c)(6), to compute its adjusted 

net capital using alternative capital 

deductions that the SEC has approved 

by written order under 17 CFR 

240.15c3–1(a)(7). To the extent that the 

SEC has approved alternative capital 

deductions for the FCM/BD’s unsecured 

receivables from OTC transactions in 

derivatives, or for its proprietary 

positions in securities, forward 

contracts, or futures contracts, the FCM/ 

BD may use these same alternative 

capital deductions when computing its 

adjusted net capital. These alternative 

deductions would be used in lieu of the 

amounts that otherwise would be 

required by the following regulations: 

Rule 1.17(c)(2)(ii) for unsecured 

receivables from OTC derivatives 

transactions; Rule 1.17(c)(5)(ii) for 

proprietary positions in forward 

contracts; Rule 1.17(c)(5)(v) for 

proprietary positions in securities; and 

Rule 1.17(c)(5)(x) for proprietary 

positions in futures contracts. The 

proposed rulemaking would not alter or 

affect the haircuts that Rule 1.17(c)(5)(v) 

and Rule 1.32(b) require for securities 

that are held in segregation under 

Section 4d of the Commodity Exchange 

Act, because the alternative deductions 

apply solely to an FCM/BD’s proprietary 

positions.33

B. Proposed Requirements for FCMs 

Electing the Alternative Capital 

Computation 

1. Notice of Election or of Changes to 

Election 

Proposed paragraph (c)(6)(ii) of Rule 

1.17 would specify that an FCM’s 

election to use the Alternative Capital 

Computation would not be effective 

unless and until it has filed with the 

Commission a notice, addressed to the 

Director of the Division of Clearing and 

Intermediary Oversight, that is to 

include: (i) A copy of the SEC order 

approving its alternative market risk and 

credit risk capital charges; and (ii) a 

statement that identifies the amount of 

tentative net capital below which the 

FCM is required to provide notice to the 

SEC, and that also includes portions of 

the information made available to the 

SEC for purposes of its request for 

approval to use the Alternative Capital 

Computation, as follows: 34

(1) A list of the categories of positions 

that the firm holds in its proprietary 

accounts, and, for each such category, a 

description of the methods that the firm 

will use to calculate its deductions for 

market risk and credit risk, and, if 

calculated separately, its deductions for 

specific risk; 

(2) A description of the VaR models 

to be used for its market risk and credit 

risk deductions, and an overview of the 

integration of the models into the 

internal risk management control 

system of the firm; 

(3) A description of how the firm will 

calculate current exposure and 

maximum potential exposure for its 

deductions for credit risk; 

(4) A description of how the firm will 

determine internal credit ratings of 

counterparties and internal credit risk 

weights of counterparties, if applicable; 

and 

(5) A description of the estimated 

effect of the alternative market risk and 

credit risk deductions on the amounts 

reported by the firm as net capital and 

adjusted net capital. 

Proposed Rule 1.17(c)(6)(ii) would 

also require the FCM to supplement its 

statement, upon the request of the 

Commission made at any time, with any 

other explanatory information for the 

firm’s computation of its alternative 

market risk and credit risk deductions 

as the Commission may require at its 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58991 

35Because the proposed rule would permit only 

dual registrants to use the Alternative Capital 

Computation, an FCM’s election to use the 

Alternative Capital Computation would 

automatically terminate immediately, without 

further action by the Commission, if it ceases to be 

dually-registered as a BD. 

36Several other Commission rules include 

references to Parts II and Part IIA of the FOCUS 

report, in order to facilitate the filing of the FOCUS 

report in lieu of the Form 1–FR–FCM. The 

Commission also proposes be amend these rules to 

add a reference to Part II CSE. In particular, the 

Commission proposes to amend the following rules: 

Rule 1.10(d)(4)(ii), which sets forth the 

requirements for ‘‘authorized signers’’ of the 

FOCUS report; Rule 1.10(f)(1), which sets forth the 

procedures required to obtain extensions of time for 

filing the FOCUS report; Rule 1.16(c)(5), which 

requires the accountant’s supplemental report on 

material inadequacies to be filed as of the same date 

as the Form 1–FR or FOCUS report; Rules 1.18(a) 

and (b)(2), which permit FOCUS filings to satisfy 

certain recordkeeping requirements of the FCM; and 

Rule 1.52(a), which permits the designated selfregulatory organization of a dual registrant to accept 

a FOCUS report in lieu of a Form 1–FR–FCM. 

37The statement of financial condition, which 

consists of a balance sheet showing assets, 

liabilities and ownership equity; the computations 

for net capital and minimum capital requirements; 

and the statements related to the segregation of 

customer funds under Section 4d of the Commodity 

Exchange Act. See 17 CFR 1.10g. Since 1995, the 

Commission routinely has published on its Web site 

Continued 

discretion. The requests for explanatory 

information under proposed Rule 

1.17(c)(6)(ii) may be made by the 

Director of the Division of Clearing and 

Intermediary Oversight, to whom, as set 

forth in Commission Rule 140.91(a)(6), 

the Commission has delegated authority 

for the functions reserved for the 

Commission under Rule 1.17. 

Proposed Rule 1.17(c)(6)(ii) would 

further provide that the FCM must file, 

as a supplemental notice with the 

Director of the Division of Clearing and 

Intermediary Oversight, a notice 

advising that the SEC has imposed 

additional or revised conditions after 

the date of the SEC order filed with the 

FCM’s original notice to the Director of 

the Division of Clearing and 

Intermediary Oversight. The FCM must 

also file as a supplemental notice a copy 

of any approval by the SEC of 

amendments that the firm has requested 

for its application to use the Alternative 

Capital Computation. 

An FCM would also be permitted 

under the proposed rule to voluntarily 

change its election, by filing with the 

Director of the Division of Clearing and 

Intermediary Oversight a written notice 

that specifies a future date as of which 

its market risk and credit risk capital 

charges will no longer be determined by 

the Alternative Capital Computation, 

but will instead be computed as 

otherwise required under the 

Commission’s rules. 

2. Conditions UNDER Which FCM May 

No Longer Elect Alternative Capital 

Charges 

Proposed paragraph (c)(6)(iii) of Rule 

1.17 would provide that an FCM may no 

longer elect to use its SEC-approved 

alternative market risk and credit risk 

deductions, and shall instead compute 

the charges otherwise required under 

Rules 1.17(c)(5) or 1.17(c)(2), upon the 

occurrence of any of the following: (i) 

The SEC revokes its approval of the 

firm’s market risk and credit risk 

deductions; (ii) the firm fails to come 

into compliance with its filing 

requirements under the proposed rule, 

after having received from the Director 

of the Division of Clearing and 

Intermediary Oversight written 

notification that the firm is not in 

compliance with its filing requirements, 

and must cease using the Alternative 

Capital Computation if it has not come 

into compliance by a date specified in 

the notice; or (iii) the Commission by 

written order finds that permitting the 

firm to continue to use such alternative 

market risk and credit risk deductions is 

no longer appropriate for the protection 

of customers of the FCM or the financial 

integrity of the futures or options 

markets.35

3. Additional Filing Requirements 

In addition to the notice and 

supplemental notices described above, 

proposed paragraph (c)(6)(iv) of Rule 

1.17 would also provide that any firm 

that elects to use the Alternative Capital 

Computation must file with the 

Commission copies of all additional 

monthly, quarterly, and annual 

reporting items that BDs who are 

approved to use the Alternative Capital 

Computation must file with SEC, as 

discussed above. The FCM would also 

be required to file with the Commission 

a copy of the notice that it must file with 

the SEC whenever its tentative net 

capital falls below the amount required 

by the SEC, or of the notice filed with 

the SEC or the firm’s designated 

examining authority in regard to 

planned withdrawals of excess net 

capital. 

Specifically, the proposed rule would 

require the following to be filed with the 

Commission, at the same time that 

originals are filed with the SEC: 

(1) All information that the firm files 

on a monthly basis with its designated 

examining authority or the SEC in 

satisfaction of SEC Rule 17a–5(a)(5)(i), 

whether by way of schedules to the 

firm’s FOCUS reports or by other filings; 

(2) The quarterly reports required by 

SEC Rule 17a–5(a)(5)(ii); 

(3) The supplemental annual filings as 

required by SEC Rule 17a–5(k), which 

consist of a report on management 

controls that is prepared by a registered 

public accounting firm and is filed by 

the firm concurrently with its annual 

audit report, and also a related 

statement, filed prior to the 

commencement of the accountant’s 

review but no later than December 10 of 

each year, that includes a description of 

the procedures agreed to by the firm and 

the accountant and a notice describing 

changes to the agreed-upon procedures, 

if any, or stating that there are no 

changes; and 

(4) Any notification to the SEC or the 

firm’s designated examining authority of 

planned withdrawals of excess net 

capital, and any notification that the 

firm is required to file with the SEC 

when its tentative net capital is below 

an amount specified by the SEC. 

BDs that use the Alternative Capital 

Computation also file a revised Part II to 

the FOCUS report, designated ‘‘Part II 

CSE’’. This revised FOCUS report 

includes financial information that BDs 

previously reported in Part II of the 

FOCUS Report, and also includes new 

schedules that provide much of the 

additional information that BDs who 

use the Alternative Capital Computation 

must report on a monthly basis. In order 

to facilitate the firm’s reporting 

requirements and reduce administrative 

burden, the Commission proposes to 

amend Rule 1.10(h) to specify that a 

dual registrant may file, in lieu of its 

Form 1–FR–FCM report, a copy of the 

FOCUS Report, Part II CSE that the firm 

files with the SEC.36

C. Treatment of Information Received 

From FCMs Electing the Alternative 

Capital Computation 

1. The Freedom of Information and 

Sunshine Acts 

The Freedom of Information Act, 5 

U.S.C. 552 et seq. (‘‘FOIA’’), provides 

generally that the public has a right of 

access to federal agency records except 

to the extent such records, or portions 

of them, are protected from disclosure 

by one (or more) of nine narrow 

exemptions. The Government in the 

Sunshine Act, 5 U.S.C. 552b (‘‘Sunshine 

Act’’), enacted to ensure that agency 

action is open to public scrutiny, 

contains identical exceptions. 

Accordingly, the Commission is 

required by the FOIA and the Sunshine 

Act to make public its records and 

actions unless a specific exemption is 

available. 

Historically, portions of the Form 1–

FR and FOCUS reports that are filed 

with the Commission under Rule 1.10 

have been available to the public.37

58992 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

selected financial information for every FCM from 

the publicly available statements and schedules 

listed in rule 1.10(g): (1) Total adjusted net capital; 

(2) minimum capital requirement; (3) adjusted net 

capital in excess of the minimum requirement; (4) 

customer funds that the Commission requires to be 

held in segregated accounts in accordance with 

Section 4d of the Act; and (5) customer funds that 

the Commission requires to be held in secured 

accounts in accordance with Part 30 of the 

Commission’s regulations. 

38See 17 CFR 145.5 and 147.3. Those portions 

are: the Statement of Income (Loss); the Statement 

of Cash Flows; the Statement of Changes in 

Ownership Equity; the Statement of Changes in 

Liabilities Subordinated to the Claims of General 

Creditors Pursuant to a Satisfactory Subordination 

Agreement; the Statement of Changes in Financial 

Position; the Computation for Determination of 

Reserve Requirements for Broker-Dealers under 

(SEC) Rule 15c3–3; the Statement denoted 

‘‘Exemptive Provision Under (SEC) Rule 15c3–3;’’

the Statement of Ownership Equity and 

Subordinated Liabilities maturing or proposed to be 

withdrawn within the next six months and 

accruals, which have not been deducted in the 

computation of net capital, and the Recap thereof; 

the Statement of Financial and Operational Data; 

and the accountant’s report on material 

inadequacies filed under Rule 1.16(c)(5). The 

foregoing include items that all FCMs and IBs are 

required to file, and also include items that are filed 

only by BDs that file FOCUS reports in lieu of Form 

1–FR. 

39Both the FOIA exemption (b)(4) and 

Commission rule 145.5(d) exempt from disclosure 

matters that are ‘‘trade secrets and commercial or 

financial information obtained from a person and 

privileged or confidential.’’

40As noted, the Sunshine Act exemptions are 

identical to their FOIA counterparts. The 

Commission’s Sunshine Act obligations are codified 

in its Part 147 rules, 17 CFR 147. 

41The Senate Report accompanying the Sunshine 

Act states that: [The term is] intended to include 

banks, savings and loan associations, credit unions, 

brokers and dealers in securities or commodities, 

exchanges dealing in securities or commodities, 

such as the New York Stock Exchange, investment 

companies, investment advisors, self-regulatory 

organizations subject to 15 U.S.C. 78s, and 

institutional managers as defined in 15 U.S.C. 78m. 

S. Rep. No. 354, 94th Cong., 1st Sess. 24 (1975). 

(emphasis supplied). 

42Accordingly, several district courts have 

interpreted the term ‘‘financial institutions’’ broadly 

for purposes of FOIA exemption 8. See Mermelstein 

v. SEC, 629 F.Supp.672, 673–75 (D.D.C. 1986) 

(Congress did not take a restrictive view of 

‘‘financial institutions’’ and intended to include 

securities exchanges); Berliner, Zisser, Walter & 

Gallegos, P.C. v. SEC, 962 F.Supp. 1348, 1352–53 

(D. Colo. 1997) (including investment advisors, as 

fiduciaries who direct and make important 

investment decisions, in the definition ‘‘furthers 

Exemption 8’s dual purposes of protecting the 

integrity of financial institutions and facilitating 

cooperation between the SEC and the entities 

regulated by it’’); Feshbach v. SEC, 5 F.Supp. 2d 

774, 781 (N.D. Cal. 1997) (the term financial 

institution encompasses self-regulatory 

organizations such as the NASD). 

43The Uniting and Strengthening America by 

Providing Appropriate Tools Required to Intercept 

and Obstruct Terrorism Act of 2001, Pub. L. 107–

56, 115 Stat. 272 (2001). 

44Section 509(2) of the Gramm-Leach-Bliley Act 

includes as federal functional regulators the Board 

of Governors of the Federal Reserve System; the 

Office of the Comptroller of the Currency; the Board 

of Directors of the Federal Deposit Insurance 

Corporation; the Director of the Office of Thrift 

Supervision; the National Credit Union 

Administration Board; and the Securities and 

Exchange Commission. 

As a separate matter, the Chairman of the 

Commission is a member of the President’s Working 

Group on Financial Markets, along with the 

Secretary of the Treasury, the Chairman of the 

Board of Governors of the Federal Reserve System, 

and the Chairman of the Securities and Exchange 

Commission. The Working Group was formed with 

the goal of enhancing the integrity, efficiency, 

orderliness, and competitiveness of the U.S. 

financial markets and maintaining investor 

confidence. See Executive Order 12631 (March 18, 

1988). 

45 Generally, Title V of the Gramm-Leach-Bliley 

Act limits the instances in which a financial 

institution may disclose nonpublic personal 

information about a consumer to nonaffiliated third 

parties, and requires a financial institution to 

disclose to all of its customers the institution’s 

privacy policies and practices with respect to 

information sharing with both affiliates and 

nonaffiliated third parties. 

46Berliner, Zisser, Walter & Gallegos, supra. 

47The Commission noted the increased 

significance of FCMs in global financial markets 

when proposing, and subsequently adopting, 

amendments to Rule 1.10 to require that Form 1–

FR—FCM reports and equivalent FOCUS reports be 

filed on a monthly rather than quarterly basis. 69 

FR 49874 (August 12, 2004). 

48Pub. L. 106–554, App. E, 114 Stat. 2763 (2000). 

Other portions of these reports currently 

are exempt from disclosure 38 as 

confidential commercial or financial 

information pursuant to Commission 

regulation 145.5(d), which tracks the 

language of its FOIA counterpart, 

exemption (b)(4).39 Similarly, 

Commission meetings (or portions of 

meetings) may be ‘‘closed’’ under the 

Sunshine Act where the Commission 

determines that open meetings will 

likely reveal information protected by 

an exemption.40

The Commission believes that the 

filings required by the proposed 

amendments, as well as certain portions 

of the Form 1–FR and FOCUS reports 

presently filed with the Commission 

pursuant to Rule 1.10, also are protected 

from disclosure by FOIA and Sunshine 

Act exemption (8), pursuant to which 

the Commission is authorized to 

withhold from the public matters 

‘‘contained in or related to examination, 

operating, or condition reports prepared 

by, on behalf of, or for the use of an 

agency responsible for the regulation or 

supervision of financial institutions.’’ 5 

U.S.C. 552(b)(8) and 5 U.S.C. 552b(c)(8). 

Commission Rules 145.5(h) and 

147.3(b)(8) similarly provide that the 

Commission generally will not make 

public matters that are ‘‘contained in or 

related to examinations, operating, or 

condition reports prepared by, on behalf 

of, or for the use of the Commission or 

any other agency responsible for the 

regulation or supervision of financial 

institutions.’’

Because the term ‘‘financial 

institution’’ is not defined either in the 

FOIA or its legislative history, courts 

have relied on the legislative history of 

the Government in the Sunshine Act,41

a statute in pari materia with the FOIA, 

to take an inclusionary and expansive 

view of the term.42 The Commission is 

aware that no court directly has 

considered whether Commission 

registrants are financial institutions for 

purposes of either exemption 8; the 

Commission believes, however, that the 

language of the Sunshine Act’s 

legislative history contemplates the 

inclusion of commodities professionals, 

including futures commission 

merchants, designated contract markets, 

derivatives transaction execution 

facilities, commodity pool operators and 

commodity trading advisors. Recent 

legislation bolsters this view. The USA 

PATRIOT Act 43 defines FCMs, CPOs 

and CTAs as financial institutions for 

purposes of the anti-money laundering 

requirements of the Bank Secrecy Act, 

31 U.S.C. 5311 et seq.; 31 U.S.C. 

5312(c), and identifies the Commission 

as a ‘‘federal functional regulator.’’ 44

Similarly, Section 5g(a) of the 

Commodity Exchange Act provides that 

any FCM, CTA, CPO or IB that is subject 

to the Commission’s jurisdiction with 

respect to any financial activity shall be 

treated as a financial institutions for 

purposes of the privacy requirements in 

Title V of the Gramm-Leach-Bliley Act. 

7 U.S.C. 7b–2(a).45

The primary purposes of FOIA 

exemption 8 have been described as 

‘‘protecting the integrity of financial 

institutions and facilitating cooperation 

between [agencies] and the entities 

regulated by [them].’’ 46 In light of the 

expanded activities and growing impact 

of FCMs as financial institutions,47 and 

the delineation in the Commodity 

Futures Modernization Act of 2000 

(‘‘CFMA’’) 48 of the Commission’s 

oversight role with respect to all 

Commission registrants, these goals are 

especially desirable. 

2. Proposed Amendments to Parts 1, 

145, and 147 

In light of these considerations, the 

Commission proposes to treat as 

nonpublic certain financial information 

filed with it by FCMs and BDs. Under 

the proposed amendments to Rule 

1.10(g), statements of financial 

condition in monthly FOCUS reports, 

the full computations of net capital, and 

the minimum capital requirements in 

monthly FOCUS reports would no 

longer be publicly available. The 

express mandates of the Commodity 

Exchange Act, however, support the 

Commission’s determination that 

certain information that is filed in Form 

1–FR and FOCUS reports remain 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58993 

49Rule 1.10(g) currently provides, and will 

continue to provide, that all information on Forms 

1–FR and FOCUS reports that is nonpublic will be 

available for official use by any official or employee 

of the United States or any State, by any selfregulatory organization of which the person filing 

such report is a member, by the National Futures 

Association in the case of an applicant, and by any 

other person to whom the Commission believes 

disclosure of such information is in the public 

interest. Rule 1.10(g) also specifies that the rule 

does not limit the authority of any self-regulatory 

organization to request or receive any information 

relative to its members’ financial condition. 

50Certain of this information would continue to 

be exempt from disclosure under FOIA exemption 

4 as well. 

51Rule 31.13 requires leverage transaction 

merchants (‘‘LTMs’’) to file with the Commission 

financial condition information using ‘‘Forms 2–

FR,’’ and provides that certain information in such 

reports shall be deemed public. For a number of 

years there have been no registered LTMs, and the 

Commission is not proposing any amendments to 

Rule 31.13 in this release. 

52The accountant’s report on material 

inadequacies filed in accordance with Rule 

1.16(c)(5), which is already included in Rules 145 

and 147 as exempt from disclosure under FOIA 

Exemption 4, would also be included as exempt 

from disclosure under FOIA Exemption 8. 

53The term ‘‘cover,’’ as used in the Commission’s 

capital rule, is defined in Rule 1.17(j). 

54An electronic copy of the ‘‘Instructions for 

Form 1–FR–FCM’’ is available to the public on the 

Commission’s Web site, at http://www.cftc.gov/ 

files/tm/ 

tminstructionsmanualfinalseptember2004.pdf. 

55See NYSE Interpretation Handbook, 

Interpretation /01 to Rule 15c3–1b(a)(3)(ix) (2003). 

56Letter from Michael A. Macchiaroli, Division of 

Market Regulation, Securities and Exchange 

Commission, to Philadelphia Stock Exchange, Inc., 

February 14, 1986, (SEC Staff No Action Letter) 

reprinted at 1986 WL 67696. An SEC Commission 

release issued in 1993 also includes the statement 

that the charge applied to uncovered forward 

contracts in major currencies is 6 percent, and 20 

percent for other currencies. See 58 FR 27486, fn. 

34 (May 10, 1993). 

57As of 2002, two of the national currencies 

referred to in the 1986 SEC Staff No Action Letter—

the Deutschemark and the French franc—have been 

replaced as legal tender by the euro. 

publicly available. As proposed to be 

amended, Rule 1.10(g) would provide 

that the following information in Forms 

1–FR and FOCUS reports would be 

publicly available: (i) The amounts for 

a registrant’s adjusted net capital, its 

minimum capital requirement under 

Rule 1.17, and its adjusted net capital in 

excess of its minimum capital 

requirement; (ii) the statement of 

financial condition in the certified 

annual financial report, and footnote 

disclosures thereof; and (iii) the 

statements related to customer funds 

that the Commission requires to be held 

in segregated accounts in accordance 

with Section 4d of the Commodity 

Exchange Act, or in secured accounts in 

accordance with Part 30 of the 

Commission’s regulations.49 Such 

information provides insight into the 

financial resources of an FCM relative to 

its aggregate obligations and assures that 

market users may assess the financial 

integrity of the intermediaries they 

employ in their trading activities. 

Accordingly, the Commission 

proposes to amend Rules 145.5 and 

147.3 to exempt from mandatory public 

disclosure, pursuant to FOIA exemption 

8,50 the following specific categories of 

information, except as provided for in 

Rules 1.10(g) and 31.13: 

(1) Forms 1–FR required to be filed 

pursuant to Rule 1.10; 

(2) FOCUS reports that are filed in 

lieu of Forms 1–FR pursuant to Rule 

1.10(h); 

(3) Forms 2–FR51 required to be filed 

pursuant to Rule 31.13; and 

(4) All reports and statements 

required to be filed pursuant to Rule 

1.17(c)(6).52

IV. Proposed Amendment To Reduce 

Capital Charges for Foreign Currency 

Forwards and Inventory in Specified 

Currencies 

The Commission is further proposing 

to amend Commission Rule 

1.17(c)(5)(ii), pursuant to which an FCM 

or IB, in computing its adjusted net 

capital, must deduct from its net capital 

specified percentages of the market 

value of its inventory, fixed price 

commitments and forward contracts. 

Such capital charges, which are 

imposed in percentages of up to twenty 

percent of market value, are reduced if 

the FCM’s or IB’s inventory, fixed price 

commitments or forward contracts are 

covered (i.e., hedged) by an open futures 

contract or commodity option.53 For 

example, the capital charge for a 

forward contract that is covered by an 

open futures contract is ten percent, 

which is less than the twenty percent 

capital charge applied to an uncovered 

forward contract. Rule 1.17(c)(5)(ii) also 

includes a proviso that eliminates any 

capital charge for inventory and forward 

contracts that are in a foreign currency 

purchased or sold for future delivery on 

or subject to the rules of a contract 

market, and which are covered by an 

open futures contract. 

The Commission provides written 

instructions to assist FCMs in the 

preparation of their Form 1–FR reports 

(‘‘Form 1–FR–FCM Instructions 

Manual’’).54 As described in the Form 

1–FR–FCM Instructions Manual, those 

assets, liabilities, forward contracts, and 

fixed price commitments of an FCM or 

IB that are denominated in the same 

foreign currency are to be factored 

together, and any net balance that is not 

covered is subject to a capital charge. 

The Form 1–FR–FCM Instructions 

Manual further provides that the 

applicable capital charge is twenty 

percent unless such uncovered net 

foreign currency balances are in euros, 

British pounds, Japanese yen, Canadian 

dollars, and Swiss francs, in which case 

the capital charge is six percent. This 

reduced capital charge is less than that 

strictly called for by Commission Rule 

1.17(c)(5)(ii), which would require an 

FCM to take a twenty percent charge, 

but is consistent with similar capital 

charges that BDs are required to deduct 

from their net capital under SEC 

regulations. The New York Stock 

Exchange Interpretation Handbook 

(‘‘NYSE Handbook’’), which provides 

general guidance for the financial 

reports prepared by BDs, instructs them 

to treat uncovered balances in foreign 

currencies as ‘‘inventory,’’ and to take a 

six percent capital charge for balances 

held in seven identified foreign 

currencies, and a twenty percent capital 

charge for other foreign currencies.55 In 

support of this instruction, the NYSE 

Handbook cites a 1986 SEC no-action 

letter that lists certain ‘‘major’’ non-U.S. 

currencies, and further equates the 

haircut for unhedged forward positions 

in such currencies with the haircut 

applicable to the unhedged underlying 

currency, which ‘‘is set at 6 

[percent].’’ 56 The foreign currencies in 

the SEC letter include the same national 

currencies specified in the 

Commission’s Form 1–FR–FCM 

Instructions Manual.57

As noted in the earlier summary of 

Rule 1.17(c)(5)(ii), there is no capital 

charge for the covered inventory and 

forward contracts of FCMs and IBs in 

foreign currencies that are purchased or 

sold for future delivery on, or subject to 

the rules of, a contract market. For all 

inventory and forward contracts that are 

not covered, however, Rule 1.17(c)(5)(ii) 

establishes a capital charge of twenty 

percent, and the Commission therefore 

proposes to amend the rule by adding a 

provision that would specify a capital 

charge of six percent for uncovered 

inventory and forward contracts in 

euros, British pounds, Canadian dollars, 

Japanese yen, or Swiss francs. 

Uncovered forward contracts and cash 

deposits in any other non-U.S. currency 

would remain subject to the capital 

charge of twenty percent currently set 

forth in the rule. 

The Commission believes that the 

proposed amendment would be 

consistent with the reduced currency 

risk of these foreign currencies, given 

their stability relative to the U.S. dollar. 

The proposed amendment would also 

provide greater clarity and transparency 

to the Commission’s capital rule, as 

currently the lower capital charge for 

the specified major non-U.S. currencies 

58994 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

58 47 FR 18618 (April 30, 1982). 

59 47 FR at 18619. 

60 47 FR at 18618, 18620. 

61Moreover, many IBs are exempted from 

meeting the requirement to file financial Forms 1–

FR under the provisions of Rule 1.10(b), which 

exempts those IBs that operate pursuant to an FCM 

guarantee agreement that satisfies the requirements 

of Rule 1.10(h). Generally, at least two-thirds of 

registered IBs operate pursuant to a guarantee 

agreement. 

62 44 U.S.C. 3507(d). 

63When adopting it new rules in June of 2004, 

the SEC’s PRA analysis used an estimate of eleven 

BDs that would compute their net capital using the 

alternative market risk and credit risk deductions. 

69 FR at 34451. 

is set forth only in the Commission’s 

Form 1–FR Instructions Manual. 

V. 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 

previously has established certain 

definitions of ‘‘small entities’’ to be used 

by the Commission in evaluating the 

impact of its rules on such entities in 

accordance with the RFA.58 The 

Commission has determined previously 

that FCMs are not small entities for the 

purpose of the RFA.59 With respect to 

IBs, the Commission has determined to 

evaluate within the context of a 

particular rule proposal whether all or 

some IBs would be considered ‘‘small 

entities’’ for purposes of the RFA and, 

if so, to analyze at that time the 

economic impact on IBs of any such 

rule.60

The Commission has previously 

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

that Part 145 rules relating to 

Commission records and information do 

not have a significant economic impact 

on a substantial number of small 

entities. Also, the proposed 

amendments to Rule 1.17(c)(6) would 

apply to FCMs only and therefore would 

have no economic impact on IBs. 

Because the proposed amendment to 

Rule 1.17(c)(5)(ii) reduces the capital 

charge that an IB would otherwise be 

required to incur under the 

Commission’s existing regulations, the 

proposed amendment should have no 

adverse economic impact on an IB’s 

financial operations.61 Therefore, the 

Chairman, on behalf of the Commission, 

hereby certifies, pursuant to 5 U.S.C. 

605(b), that the action proposed to be 

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 

(‘‘PRA’’) 62 imposes certain 

requirements on federal agencies 

(including the Commission) in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. 

Except for the proposed revision of Rule 

1.17(c)(6), the other amendments being 

proposed would not, if approved, 

require a new collection of information 

on the part of any entities that would be 

subject to the proposed rule 

amendments. Pursuant to the PRA, the 

Commission has submitted a copy of 

this section to the Office of Management 

and Budget (‘‘OMB’’) for its review. 

Collection of Information. 

(Regulations and Forms Pertaining to 

the Financial Integrity of the 

Marketplace, OMB Control Number 

3038–0024.) 

Under the proposed amendment to 

Rule 1.17(c)(6), an FCM that voluntarily 

elects to use the Alternative Capital 

Computation would be required to file 

with the Commission a statement that 

includes information filed with its 

application to the SEC made under 17 

CFR 240.15c3–1e, and would also be 

required to file copies of the monthly, 

quarterly and annual filings that BDs 

using SEC-approved alternative capital 

charges are required to file with the 

SEC. The collection of information 

required by Rule 1.17(c)(6) is necessary 

for the Commission’s oversight of the 

FCM’s compliance with its minimum 

financial requirements under the 

Commodity Exchange Act and 

implementing regulations of the 

Commission. The Commission estimates 

that as of September 2005, in addition 

to the two FCM/BDs that have already 

received approval orders from the SEC 

to use alternative capital charges, there 

are eight other FCM/BDs who may elect 

to use the alternative capital charges 

that would be permitted under the 

proposed Rule 1.17(c)(6).63 Assuming 

that a total of ten FCM/BDs elect to use 

the Alternative Capital Computation, 

the Commission estimates a minimal 

increase in the annual reporting burden 

associated with OMB Collection of 

Information Control No. 3038–004, as 

each of these registrants can satisfy the 

Commission’s filing requirements by 

filing copies of documents that the 

FCM/BD will be required to file with the 

SEC. The Commission has therefore 

determined that the proposed 

amendment to Rule 1.17(c)(6) would 

increase by 90 hours the total annual 

reporting burden associated with the 

above-referenced collection of 

information, which has been approved 

previously by OMB. Moreover, much of 

the required monthly information will 

be provided as schedules included in 

the Part II CSE FOCUS reports that 

FCM/BDs electronically file with both 

the Commission and the SEC. The 

estimated burden of the proposed 

amendments to Rule 1.17 was 

calculated as follows: 

Estimated number of respondents: 10. 

Reports annually by each respondent: 

18. 

Total annual responses: 180. 

Estimated average number of hours 

per response: 0.5. 

Annual reporting burden: 90. 

Copies of the information collection 

submission to OMB are available from 

the CFTC Clearance Officer, 1155 21st 

Street, NW., Washington, DC 20581 

(202) 418–5160. The Commission 

considers comments by the public on 

this proposed collection of information 

in—

Evaluating whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

Evaluating the accuracy of the 

Commission’s estimate of the burden of 

the proposed collection of information, 

including the validity of the 

methodology and assumptions used; 

Enhancing the quality, utility, and 

clarity of the information to be 

collected; and 

Minimizing the burden of the 

collection of information on those who 

are to respond, including through the 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology, 

e.g., permitting electronic submission of 

responses. 

Organizations and individuals 

desiring to submit comments on the 

information collection should contact 

the Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503, 

Attn: Desk Officer of the Commodity 

Futures Commission. OMB is required 

to make a decision concerning the 

collection of information contained in 

these proposed regulations between 30 

and 60 days after publication of this 

document in the Federal Register. 

Therefore, a comment to OMB is best 

assured of having its full effect if OMB 

receives it within 30 days of 

publication. This does not affect the 

deadline for the public to comment to 

the Commission on the proposed 

regulations. 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58995 

64Section 4f(b) of the Act prohibits persons from 

becoming registered as FCMs or IBs if they do not 

meet the minimum financial requirements set forth 

in either the Commission’s regulations or in such 

Commission-approved requirements as may be 

established by the contract markets and derivatives 

transaction execution facilities of which the FCM or 

IB is a member. 

C. Cost-Benefit Analysis 

Section 15(a) of the Act, as amended 

by Section 119 of the CFMA, requires 

the Commission to consider the costs 

and benefits of its action before issuing 

a new regulation under the Act. By its 

terms, Section 15(a) as amended does 

not require the Commission to quantify 

the costs and benefits of a new 

regulation or to determine whether the 

benefits of the regulation outweigh its 

costs. Rather, Section 15(a) simply 

requires the Commission to ‘‘consider 

the costs and benefits’’ of its action. 

Section 15(a) of the Act 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. Accordingly, the 

Commission could in its discretion give 

greater weight to any one of the five 

enumerated areas and could in its 

discretion determine that, 

notwithstanding its costs, a particular 

rule was necessary or appropriate to 

protect the public interest or to 

effectuate any of the provisions or to 

accomplish any of the purposes of the 

Act. 

The proposed amendment to Rule 

1.17(c)(6) would permit FCM/BDs that 

meet the requirements of the proposed 

rule to compute their adjusted net 

capital using the same alternative 

capital deductions that have been 

approved by the SEC.64 The proposed 

amendment to Rule 1.17(c)(5)(ii) would 

reduce a capital charge to which FCMs 

and IBs are subject under the 

Commission’s current regulations. The 

Commission is considering the costs 

and benefits of these proposed rules in 

light of the specific provisions of 

Section 15(a) of the Act, as follows: 

1. Protection of market participants 

and the public. The proposed 

amendment to Rule 1.17(c)(6) provides 

the benefit of increasing the accuracy of 

the reflection of risks in the net capital 

charges for FCM/BDs approved for using 

the alternative net capital charges based 

on internal risk measurement tools, 

while bettering the Commission’s ability 

to perform appropriate financial and 

risk oversight. Furthermore, as the 

proposed rule would be an option 

available to requesting FCM/BDs but not 

a requirement, the Commission 

considers that no FCM/BD will request 

to use the charges unless the costs of 

compliance would be outweighed by the 

benefits to such FCM/BD from using the 

alternative net capital charges. 

2. Efficiency and competition. The 

Commission anticipates that the 

proposed amendment to Rule 1.17(c)(6) 

will benefit efficiency by eliminating a 

difference in the computation of net 

capital charges between the SEC and the 

CFTC for dually-registered FCM/BDs 

that have been approved by the SEC to 

use such charges. The proposed 

amendment to Rule 1.17(c)(5)(ii) will 

reduce the capital charges applicable to 

FCMs and IBs, which may therefore 

result in the more efficient utilization of 

their capital. 

3. Financial integrity of futures 

markets and price discovery. The 

notification and reporting requirements 

in proposed Rule 1.17(c)(6) contribute to 

the benefit of ensuring that eligible 

FCMs can meet their financial 

obligations to customers and other 

market participants. Customers and 

other market participants would also 

benefit from the provisions in proposed 

Rule 1.10(g) that would continue to 

make publicly available certain 

information in Form 1–FR and FOCUS 

reports related to capital requirements 

and requirements for customer funds to 

be held in segregated or separate 

accounts. The proposed amendments 

should have no effect, from the 

standpoint of imposing costs or creating 

benefits, on the price discovery function 

of such markets. 

4. Sound risk management practices. 

The alternative capital computation 

permitted under proposed Rule 

1.17(c)(6) is limited to FCMs who have 

in place an internal risk management 

system that expressly addresses market 

risk, credit risk, liquidity risk, legal risk 

and operational risks at the firm. The 

proposed rule also requires that the 

Commission receive copies of written 

reviews, which are to be prepared 

annually by registered public 

accountants, of the firm’s internal risk 

management control system. The 

proposed amendment may therefore 

contribute to the sound risk 

management practices of futures 

intermediaries. 

5. Other public interest 

considerations. The Commission also 

believes that the proposed amendment 

to Rule 1.17(c)(6) is beneficial in that it 

minimizes what would otherwise be a 

conflict between the Commission and 

SEC rules, which conflict would 

otherwise make the SEC’s opportunity 

for qualifying BDs to use alternative net 

capital charges unavailable to dually 

registered FCM/BDs, despite the 

commonality of interest and purpose for 

the CFTC and SEC minimum net capital 

rules. The proposed amendment to Rule 

1.17(c)(5)(ii), which will incorporate 

agency guidance not presently included 

in the Commission’s regulations, will 

enhance the transparency of the 

Commission’s rulemaking for FCMs and 

IBs. 

After considering these factors, the 

Commission has determined to propose 

the amendments discussed above. The 

Commission invites public comment on 

its application of the cost-benefit 

provision. Commenters also are invited 

to submit any data that they may have 

quantifying the costs and benefits of the 

proposal with their comment letters. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements. 

17 Part 145 

Freedom of information. 

17 Part 147 

Sunshine Act. 

Accordingly, 17 CFR Chapter I is 

proposed to be amended 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, 5, 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, as amended by 

the Commodity Futures Modernization Act of 

2000, Appendix E of Pub.L. No. 106–554, 114 

Stat. 2763 (2000). 

2. Section 1.10 is proposed to be 

amended by revising paragraphs 

(d)(4)(ii), (f)(1) introductory text, (g)(1), 

(g)(2), (g)(4), and (h) to read as follows: 

§ 1.10 Financial reports of futures 

commission merchants and introducing 

brokers. 

* * * * * 

(d) * * * 

(4) * * * 

(ii) If the registrant or applicant is 

registered with the Securities and 

Exchange Commission as a securities 

broker or dealer, the representative 

authorized under § 240.17a–5 of this 

title to file for the securities broker or 

dealer its Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE. In the 

58996 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

case of a Form 1–FR filed via electronic 

transmission in accordance with 

procedures established by the 

Commission, such transmission must be 

accompanied by the Commissionassigned Personal Identification Number 

of the authorized signer and such 

Personal Identification Number will 

constitute and become a substitute for 

the manual signature of the authorized 

signer for the purpose of making the 

oath or affirmation referred to in this 

paragraph. 

* * * * * 

(f) Extension of time for filing 

uncertified reports. (1) In the event a 

registrant finds that it cannot file its 

Form 1–FR, or, in accordance with 

paragraph (h) of this section, its 

Financial and Operational Combined 

Uniform Single Report under the 

Securities Exchange Act of 1934, Part II, 

Part IIA, or Part II CSE (FOCUS report), 

for any period within the time specified 

in paragraphs (b)(1)(i) or (b)(2)(i) of this 

section without substantial undue 

hardship, it may request approval for an 

extension of time, as follows: 

* * * * * 

(g) Public availability of reports. (1) 

Forms 1–FR filed pursuant to this 

section, and FOCUS reports filed in lieu 

of Forms 1–FR pursuant to paragraph 

(h) of this section, will be treated as 

exempt from mandatory public 

disclosure for purposes of the Freedom 

of Information Act and the Government 

in the Sunshine Act and parts 145 and 

147 of this chapter, except for the 

information described in paragraph 

(g)(2) of this section. 

(2) The following information in 

Forms 1–FR, and the same or equivalent 

information in FOCUS reports filed in 

lieu of Forms 1–FR, will be publicly 

available: 

(i) The amount of the applicant’s or 

registrant’s adjusted net capital; the 

amount of its minimum net capital 

requirement under § 1.17 of this 

chapter; and the amount of its adjusted 

net capital in excess of its minimum net 

capital requirement; and 

(ii) The following statements and 

footnote disclosures thereof: the 

Statement of Financial Condition in the 

certified annual financial reports of 

futures commission merchants and 

introducing brokers; the Statements (to 

be filed by a futures commission 

merchant only) of Segregation 

Requirements and Funds in Segregation 

for customers trading on U.S. 

commodity exchanges and for 

customers’ dealer options accounts, and 

the Statement (to be filed by a futures 

commission merchant only) of Secured 

Amounts and Funds held in Separate 

Accounts for foreign futures and foreign 

options customers in accordance with 

§ 30.7 of this chapter. 

(3) * * * 

(4) All information that is exempt 

from mandatory public disclosure under 

paragraph (g)(1) of this section will, 

however, be available for official use by 

any official or employee of the United 

States or any State, by any selfregulatory organization of which the 

person filing such report is a member, 

by the National Futures Association in 

the case of an applicant, and by any 

other person to whom the Commission 

believes disclosure of such information 

is in the public interest. Nothing in this 

paragraph (g) will limit the authority of 

any self-regulatory organization to 

request or receive any information 

relative to its members’ financial 

condition. 

* * * * * 

(h) Filing option available to a futures 

commission merchant or an introducing 

broker that is also a securities broker or 

dealer. Any applicant or registrant 

which is registered with the Securities 

and Exchange Commission as a 

securities broker or dealer may comply 

with the requirements of this section by 

filing (in accordance with paragraphs 

(a), (b), (c), and (j) of this section) a copy 

of its Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE (FOCUS 

report), in lieu of Form 1–FR: Provided, 

however, That all information which is 

required to be furnished on and 

submitted with Form 1–FR is provided 

with such FOCUS report. 

* * * * * 

3. Section 1.16 is proposed to be 

amended by revising paragraph (c)(5) to 

read as follows: 

§ 1.16 Qualifications and reports of 

accountants. 

* * * * * 

(c) * * * 

(5) Accountant’s report on material 

inadequacies. A registrant must file 

concurrently with the annual audit 

report a supplemental report by the 

accountant describing any material 

inadequacies found to exist or found to 

have existed since the date of the 

previous audit. An applicant must file 

concurrently with the audit report a 

supplemental report by the accountant 

describing any material inadequacies 

found to exist as of the date of the Form 

1–FR being filed: Provided, however, 

That if such applicant is registered with 

the Securities and Exchange 

Commission as a securities broker or 

dealer, and it files (in accordance with 

§ 1.10(h)) a copy of its Financial and 

Operational Combined Uniform Single 

Report under the Securities Exchange 

Act of 1934, Part II, Part IIA, or Part II 

CSE, in lieu of Form 1–FR, the 

accountant’s supplemental report must 

be made as of the date of such report. 

The supplemental report must indicate 

any corrective action taken or proposed 

by the applicant or registrant in regard 

thereto. If the audit did not disclose any 

material inadequacies, the supplemental 

report must so state. 

* * * * * 

4. Section 1.17 is proposed to be 

amended by revising paragraph (c)(5)(ii) 

and adding (c)(6) to read as follows: 

§ 1.17 Minimum financial requirements for 

futures commission merchants and 

introducing brokers. 

* * * * * 

(c) * * * 

(5) * * * 

(ii) In the case of all inventory, fixed 

price commitments and forward 

contracts, the applicable percentage of 

the net position specified as follows: 

(A) Inventory which is currently 

registered as deliverable on a contract 

market and covered by an open futures 

contract or by a commodity option on a 

physical.—No charge. 

(B) Inventory which is covered by an 

open futures contract or commodity 

option.—5 percent of the market value. 

(C) Inventory which is not covered.—

20 percent of the market value. 

(D) Inventory and forward contracts in 

those foreign currencies that are 

purchased or sold for future delivery on 

or subject to the rules of a contract 

market, and which are covered by an 

open futures contract.—No charge. 

(E) Inventory and forward contracts in 

euros, British pounds, Canadian dollars, 

Japanese yen, or Swiss francs, and 

which are not covered by an open 

futures contract or commodity option.—

6 percent of the market value. 

(F) Fixed price commitments (open 

purchases and sales) and forward 

contracts which are covered by an open 

futures contract or commodity option.—

10 percent of the market value. 

(G) Fixed price commitments (open 

purchases and sales) and forward 

contracts which are not covered by an 

open futures contract or commodity 

option.—20 percent of the market value. 

* * * * * 

(6) Election of alternative capital 

deductions that have received approval 

of Securities and Exchange Commission 

pursuant to section 240.15c3–1(a)(7) of 

this title. (i) Any futures commission 

merchant that is also registered with the 

Securities and Exchange Commission as 

a securities broker or dealer, and who 

also satisfies the other requirements of 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58997 

this paragraph (c)(6), may elect to 

compute its adjusted net capital using 

the alternative capital deductions that, 

under section 240.15c3–1(a)(7) of this 

title, the Securities and Exchange 

Commission has approved for it by 

written order. To the extent that a 

futures commission merchant is 

permitted by the Securities and 

Exchange Commission to use alternative 

capital deductions for its unsecured 

receivables from over-the-counter 

transactions in derivatives, or for its 

proprietary positions in securities, 

forward contracts, or futures contracts, 

the futures commission merchant may 

use these same alternative capital 

deductions when computing its 

adjusted net capital, in lieu of the 

deductions that would otherwise be 

required by paragraph (c)(2)(ii) of this 

section for its unsecured receivables 

from over-the-counter derivatives 

transactions; by paragraph (c)(5)(ii) of 

this section for its proprietary positions 

in forward contracts; by paragraph 

(c)(5)(v) of this section for its 

proprietary positions in securities; and 

by paragraph (c)(5)(x) of this section for 

its proprietary positions in futures 

contracts. 

(ii) Notifications of election or of 

changes to election. (A) No election to 

use the alternative market risk and 

credit risk deductions referenced in 

paragraph (c)(6)(i) of this section shall 

be effective unless and until the futures 

commission merchant has filed with the 

Commission, addressed to the Director 

of the Division of Clearing and 

Intermediary Oversight, a notice that is 

to include a copy of the approval order 

of the Securities and Exchange 

Commission referenced in paragraph 

(c)(6)(i) of this section, and to include 

also a statement that identifies the 

amount of tentative net capital below 

which the futures commission merchant 

is required to provide notice to the 

Securities and Exchange Commission, 

and which also provides the following 

information: A list of the categories of 

positions that the futures commission 

merchant holds in its proprietary 

accounts, and, for each such category, a 

description of the methods that the 

futures commission merchant will use 

to calculate its deductions for market 

risk and credit risk, and also, if 

calculated separately, deductions for 

specific risk; a description of the value 

at risk (VaR) models to be used for its 

market risk and credit risk deductions, 

and an overview of the integration of the 

models into the internal risk 

management control system of the 

futures commission merchant; a 

description of how the futures 

commission merchant will calculate 

current exposure and maximum 

potential exposure for its deductions for 

credit risk; a description of how the 

futures commission merchant will 

determine internal credit ratings of 

counterparties and internal credit risk 

weights of counterparties, if applicable; 

and a description of the estimated effect 

of the alternative market risk and credit 

risk deductions on the amounts reported 

by the futures commission merchant as 

net capital and adjusted net capital. 

(B) A futures commission merchant 

must also, upon the request of the 

Commission at any time, supplement 

the statement described in paragraph 

(c)(6)(ii)(A) of this section, by providing 

any other explanatory information 

regarding the computation of its 

alternative market risk and credit risk 

deductions as the Commission may 

require at its discretion. 

(C) A futures commission merchant 

must also file the following 

supplemental notices with the Director 

of the Division and Clearing and 

Intermediary Oversight: 

(1) A notice advising that the 

Securities and Exchange Commission 

has imposed additional or revised 

conditions for the approval evidenced 

by the order referenced in paragraph 

(c)(6)(i) of this section, and which 

describes the new or revised conditions 

in full, and 

(2) A notice which attaches a copy of 

any approval by the Securities and 

Exchange Commission of amendments 

that a futures commission merchant has 

requested for its application, filed under 

17 CFR 240.15c3–1e, to use alternative 

market risk and credit risk deductions 

approved by the Securities and 

Exchange Commission. 

(D) A futures commission merchant 

may voluntarily change its election to 

use the alternative market risk and 

credit risk deductions referenced in 

paragraph (c)(6)(i) of this section, by 

filing with the Director of the Division 

of Clearing and Intermediary Oversight 

a written notice specifying a future date 

as of which it will it no longer use the 

alternative market risk and credit risk 

deductions, and will instead compute 

such deductions in accordance with the 

requirements otherwise applicable 

under paragraph (c)(2)(ii) of this section 

for unsecured receivables from over-thecounter derivatives transactions; by 

paragraph (c)(5)(ii) of this section for 

proprietary positions in forward 

contracts; by paragraph (c)(5)(v) of this 

section for proprietary positions in 

securities; and by paragraph (c)(5)(x) of 

this section for proprietary positions in 

futures contracts. 

(iii) Conditions under which election 

terminated. A futures commission 

merchant may no longer elect to use the 

alternative market risk and credit risk 

deductions referenced in paragraph 

(c)(6)(i) of this section, and shall instead 

compute the deductions otherwise 

required under paragraph (c)(2)(ii) of 

this section for unsecured receivables 

from over-the-counter derivatives 

transactions; by paragraph (c)(5)(ii) of 

this section for proprietary positions in 

forward contracts; by paragraph (c)(5)(v) 

of this section for proprietary positions 

in securities; and by paragraph (c)(5)(x) 

of this section for proprietary positions 

in futures contracts, upon the 

occurrence of any of the following: 

(A) The Securities and Exchange 

Commission revokes its approval of the 

market risk and credit risk deductions 

for such futures commission merchant; 

(B) A futures commission merchant 

fails to come into compliance with its 

filing requirements under this paragraph 

(c)(6), after having received from the 

Director of the Division of Clearing and 

Intermediary Oversight written 

notification that the futures commission 

merchant is not in compliance with its 

filing requirements, and that it must 

cease using the alternative capital 

deductions permitted under this 

paragraph (c)(6) if it has not come into 

compliance by a date specified in the 

notice; or 

(C) The Commission by written order 

finds that permitting the futures 

commission merchant to continue to use 

such alternative market risk and credit 

risk deductions is no longer necessary 

or appropriate for the protection of 

customers of the futures commission 

merchant or of the integrity of the 

futures or options markets. 

(iv) Additional filing requirements. 

Any futures commission merchant that 

elects to use the alternative market risk 

and credit risk deductions referenced in 

paragraph (c)(6)(i) of this section must 

file with the Commission, in addition to 

the filings required by paragraph 

(c)(6)(ii) of this section, copies of any 

and all of the following documents, at 

such time as the originals are filed with 

the Securities and Exchange 

Commission: 

(A) Information that the futures 

commission merchant files on a 

monthly basis with its designated 

examining authority or the Securities 

and Exchange Commission, whether by 

way of schedules to its FOCUS reports 

or by other filings, in satisfaction of 17 

CFR 240.17a–5(a)(5)(i); 

(B) The quarterly reports required by 

17 CFR 240.17a–5(a)(5)(ii); 

(C) The supplemental annual filings 

as required by 17 CFR 240.17a–5(k); 

58998 Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 

(D) Any notification to the Securities 

and Exchange Commission or the 

futures commission merchant’s 

designated examining authority of 

planned withdrawals of excess net 

capital; and 

(E) Any notification that the futures 

commission merchant is required to file 

with the Securities and Exchange 

Commission when its tentative net 

capital is below an amount specified by 

the Securities and Exchange 

Commission. 

* * * * * 

5. Section 1.18 is proposed to be 

amended by revising paragraphs (a) and 

(b)(2) to read as follows: 

§ 1.18 Records for and relating to financial 

reporting and monthly computation by 

futures commission merchants and 

introducing brokers. 

(a) No person shall be registered as a 

futures commission merchant or as an 

introducing broker under the Act 

unless, commencing on the date his 

application for such registration is filed, 

he prepares and keeps current ledgers or 

other similar records which show or 

summarize, with appropriate references 

to supporting documents, each 

transaction affecting his asset, liability, 

income, expense and capital accounts, 

and in which (except as otherwise 

permitted in writing by the 

Commission) all his asset, liability and 

capital accounts are classified into 

either the account classification 

subdivisions specified on Form 1–FR–

FCM or Form 1–FR–IB, respectively, or, 

if such person is registered with the 

Securities and Exchange Commission as 

a securities broker or dealer and he files 

(in accordance with § 1.10(h)) a copy of 

his Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE (FOCUS 

report) in lieu of Form 1–FR–FCM or 

Form 1–FR–IB, the account 

classification subdivisions specified on 

such Report, or categories that are in 

accord with generally accepted 

accounting principles. Each person so 

registered shall prepare and keep 

current such records. 

(b) * * * 

(2) An applicant or registrant that has 

filed a monthly Form 1–FR or Statement 

of Financial and Operational Combined 

Uniform Single Report under the 

Securities Exchange Act of 1934, Part II, 

Part IIA, or Part II CSE (FOCUS report) 

in accordance with the requirements of 

§ 1.10(b) will be deemed to have 

satisfied the requirements of paragraph 

(b)(1) of this section for such month. 

* * * * * 

6. Section 1.52 is proposed to be 

amended by revising paragraph (a) to 

read as follows: 

§ 1.52 Self-regulatory organization 

adoption and surveillance of minimum 

financial requirements. 

(a) Each self-regulatory organization 

must adopt, and submit for Commission 

approval, rules prescribing minimum 

financial and related reporting 

requirements for all its members who 

are registered futures commission 

merchants. Each self-regulatory 

organization other than a contract 

market must adopt, and submit for 

Commission approval, rules prescribing 

minimum financial and related 

reporting requirements for all its 

members who are registered introducing 

brokers. Each contract market which 

elects to have a category of membership 

for introducing brokers must adopt, and 

submit for Commission approval, rules 

prescribing minimum financial and 

related reporting requirements for all its 

members who are registered introducing 

brokers. Each self-regulatory 

organization shall submit for 

Commission approval any modification 

or other amendments to such rules. 

Such requirements must be the same as, 

or more stringent than, those contained 

in §§ 1.10 and 1.17 and the definition of 

adjusted net capital must be the same as 

that prescribed in § 1.17(c): Provided, 

however, A designated self-regulatory 

organization may permit its member 

registrants which are registered with the 

Securities and Exchange Commission as 

securities brokers or dealers to file (in 

accordance with § 1.10(h)) a copy of 

their Financial and Operational 

Combined Uniform Single Report under 

the Securities Exchange Act of 1934, 

Part II, Part IIA, or Part II CSE, in lieu 

of Form 1–FR: And, provided further, A 

designated self-regulatory organization 

may permit its member introducing 

brokers to file a Form 1–FR–IB in lieu 

of a Form 1–FR–FCM. 

* * * * * 

PART 145—COMMISSION RECORDS 

AND INFORMATION 

7. The authority citation for part 145 

continues to read as follows: 

Authority: Pub. L. 99–570, 100 Stat. 3207; 

Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23, 

81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561–

1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93–

463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless 

otherwise noted. 

8. Section 145.5 is proposed to be 

amended by revising paragraphs (d)(1) 

and (h) to read as follows: 

§ 145.5 Disclosure of nonpublic records. 

* * * * * 

(d) Trade secrets and commercial or 

financial information obtained from a 

person and privileged or confidential, 

including, but not limited to: 

(1)(i) Reports of stocks of grain, such 

as Forms 38, 38C, 38M and 38T required 

to be filed pursuant to 17 CFR 1.44; 

(ii) Statements of reporting traders on 

Form 40 required to be filed pursuant to 

17 CFR 18.04; 

(iii) Statements concerning special 

calls on positions required to be filed 

pursuant to 17 CFR part 21; 

(iv) Statements concerning 

identification of special accounts on 

Form 102 required to be filed pursuant 

to 17 CFR 17.01; 

(v) Reports required to be filed 

pursuant to parts 15 through 21 of this 

chapter; 

(vi) Reports concerning option 

positions of large traders required to be 

filed pursuant to part 16 of this chapter; 

(vii) Form 188; and 

(viii) The following reports and 

statements that are also set forth in 

paragraph (h) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1–

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); 

* * * * * 

(h) Contained in or related to 

examinations, operating, or condition 

reports prepared by, on behalf of, or for 

the use of the Commission or any other 

agency responsible for the regulation or 

supervision of financial institutions, 

including, but not limited to the 

following reports and statements that 

are also set forth in paragraph (d)(1)(viii) 

of this section, except as specified in 17 

CFR 1.10(g)(2) or 17 CFR 31.13(m): 

Forms 1–FR required to be filed 

pursuant to 17 CFR 1.10; FOCUS reports 

that are filed in lieu of Forms 1–FR 

pursuant to 17 CFR 1.10(h); Forms 2–FR 

required to be filed pursuant to 17 CFR 

31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); and 

* * * * * 

PART 147—OPEN COMMISSION 

MEETINGS 

9. The authority citation for part 147 

continues to read as follows: 

Federal Register / Vol. 70, No. 195 / Tuesday, October 11, 2005 / Proposed Rules 58999 

Authority: Sec. 3(a), Pub. L. 94–409, 90 

Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), 

Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) 

(Supp. V, 1975)), unless otherwise noted. 

10. Section 147.3 is proposed to be 

amended by revising paragraphs (b)(4)(i) 

and (b)(8) to read as follows: 

§ 147.3 General requirement of open 

meetings; grounds upon which meetings 

may be closed. 

* * * * * 

(b) * * * 

(4)(i) Disclose trade secrets and 

commercial or financial information 

obtained from a person and privileged 

or confidential including, but not 

limited to: 

(A) Reports of stocks of grain, such as 

Forms 38, 38C, 38M and 38T, required 

to be filed pursuant to 17 CFR 1.44; 

(B) Statements of reporting traders on 

Form 40 required to be filed pursuant to 

17 CFR 18.04; 

(C) Statements concerning special 

calls on positions required to be filed 

pursuant to 17 CFR part 21; 

(D) Statements concerning 

identification of special accounts on 

Form 102 required to be filed pursuant 

to 17 CFR 17.01; 

(E) Reports required to be filed 

pursuant to parts 15 through 21 of this 

chapter; 

(F) Reports concerning option 

positions of large traders required to be 

filed pursuant to part 16 of this chapter; 

(G) Form 188; and 

(H) The following reports and 

statements that are also set forth in 

paragraph (b)(8) of this section, except 

as specified in 17 CFR 1.10(g)(2) or 17 

CFR 31.13(m): Forms 1–FR required to 

be filed pursuant to 17 CFR 1.10; 

FOCUS reports that are filed in lieu of 

Forms 1–FR pursuant to 17 CFR 1.10(h); 

Forms 2–FR required to be filed 

pursuant to 17 CFR 31.13; the 

accountant’s report on material 

inadequacies filed in accordance with 

17 CFR 1.16(c)(5); and all reports and 

statements required to be filed pursuant 

to 17 CFR 1.17(c)(6); 

* * * * * 

(8) Disclose information contained in 

or related to examination, operating, or 

condition reports prepared by, on behalf 

of, or for the use of the Commission or 

any other agency responsible for the 

regulation or supervision of financial 

institutions, including, but not limited 

to the following reports and statements 

that are also set forth in paragraph 

(b)(4)(i)(H) of this section, except as 

specified in 17 CFR 1.10(g)(2) or 17 CFR 

31.13(m): Forms 1–FR required to be 

filed pursuant to 17 CFR 1.10; FOCUS 

reports that are filed in lieu of Forms 1–

FR pursuant to 17 CFR 1.10(h); Forms 

2–FR required to be filed pursuant to 17 

CFR 31.13; the accountant’s report on 

material inadequacies filed in 

accordance with 17 CFR 1.16(c)(5); and 

all reports and statements required to be 

filed pursuant to 17 CFR 1.17(c)(6); 

* * * * * 

Issued in Washington, DC, on October 4, 

2005 by the Commission. 

Jean A. Webb, 

Secretary of the Commission. 

[FR Doc. 05–20258 Filed 10–7–05; 8:45 am] 

BILLING CODE 6351–01–P 

SOCIAL SECURITY ADMINISTRATION 

20 CFR Parts 404 and 416 

[Regulations Nos. 4 and 16] 

RIN–0960–AE93 

Exemption of Work Activity as a Basis 

for a Continuing Disability Review 

AGENCY: Social Security Administration 

(SSA). 

ACTION: Notice of proposed rulemaking. 

SUMMARY: We are proposing to amend 

our regulations to include rules to carry 

out section 221(m) of the Social Security 

Act (the Act). Section 221(m) affects our 

rules for when we will conduct a 

continuing disability review if you work 

and receive benefits under title II of the 

Act based on disability. (We interpret 

this section to include you if you 

receive both title II disability benefits 

and Supplemental Security Income 

(SSI) payments based on disability.) It 

also affects our rules on how we 

evaluate work activity when we decide 

if you have engaged in substantial 

gainful activity for purposes of 

determining whether your disability has 

ended. In addition, section 221(m) of 

the Act affects certain other standards 

we use when we determine whether 

your disability continues or ends. We 

are also proposing to make certain other 

revisions to our regulations for how we 

determine whether your disability 

continues or ends. These other proposed 

revisions would codify our existing 

operating instructions for how we 

consider certain work at the last two 

steps of our continuing disability review 

process. In addition, we are proposing 

to incorporate into our disability 

regulations some rules which are 

contained in another part of our 

regulations and which apply if you are 

using a ticket under the Ticket to Work 

and Self-Sufficiency program (the Ticket 

to Work program). Finally, we are 

proposing to amend our regulations to 

eliminate the secondary substantial 

gainful activity amount that we 

currently use to evaluate work you did 

as an employee before January 2001. 

DATES: To be sure that your comments 

are considered, we must receive them 

by December 12, 2005. 

ADDRESSES: You may give us your 

comments by: using our Internet facility 

(i.e., Social Security Online) at http:// 

policy.ssa.gov/pnpublic.nsf/LawsRegs or 

the Federal eRulemaking Portal: http:// 

www.regulations.gov; e-mail to 

regulations@ssa.gov; telefax to (410) 

966–2830; or letter to the Commissioner 

of Social Security, PO Box 17703, 

Baltimore, MD 21235–7703. You may 

also deliver them to the Office of 

Regulations, Social Security 

Administration, 100 Altmeyer Building, 

6401 Security Boulevard, Baltimore, MD 

21235–6401, between 8 a.m. and 4:30 

p.m. on regular business days. 

Comments are posted on our Internet 

site, or you may inspect them physically 

on regular business days by making 

arrangements with the contact person 

shown in this preamble. 

Electronic Version: The electronic file 

of this document is available on the date 

of publication in the Federal Register at 

http://www.access.gpo.gov/su_docs/ 

aces/aces140.html. It is also available 

on the Internet site for SSA (i.e., Social 

Security Online) at http:// 

www.socialsecurity.gov/regulations/. 

FOR FURTHER INFORMATION CONTACT: 

Kristine Erwin-Tribbitt, Policy Analyst, 

Office of Program Development and 

Research, Social Security 

Administration, 6401 Security 

Boulevard, Baltimore, Maryland 21235–

6401. Call (410) 965–3353 or TTY (410) 

966–5609 for information about these 

proposed rules. For information on 

eligibility or filing for benefits, call our 

national toll-free number 1 (800) 772–

1213 or TTY 1 (800) 325–0778. You may 

also contact Social Security Online at 

http://www.socialsecurity.gov/. 

SUPPLEMENTARY INFORMATION: 

What is the purpose of this notice of 

proposed rulemaking (NPRM)? 

In this NPRM, we propose to amend 

our disability regulations to carry out 

section 221(m) of the Act. These 

proposed changes would apply to you if 

you are a working beneficiary who is 

entitled to Social Security disability 

benefits under title II of the Act and you 

have received such benefits for at least 

24 months. If you are a person who 

meets these requirements, we propose to 

change our rules on when we will start 

a continuing disability review to decide 

whether you are still disabled. In 

addition, we propose to amend our rules 

to provide that, under the medical