63994 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules

Beacon (NDB) to serve Runway 15.

Controlled airspace extending upward

from 700 to 1200 feet above ground

level (AGL) is needed for aircraft

executing the approach. The intended

effect of this proposal is to provide

segregation of aircraft using instrument

approach procedures in instrument

conditions from other aircraft operating

in visual weather conditions.

DATES: Comments must be received on

or before February 29, 1996.

ADDRESSES: Send comments on the

proposal in triplicate to: Federal

Aviation Administration, Office of the

Assistant Chief Counsel, AGL–7, Rules

Docket No. 95–AGL–20, 2300 East

Devon Avenue, Des Plaines, Illinois

60018.

The official docket may be examined

in the Office of the Assistant Chief

Counsel, Federal Aviation

Administration, 2300 East Devon

Avenue, Des Plaines, Illinois. An

informal docket may also be examined

during normal business hours at the Air

Traffic Division, System Management

Branch, Federal Aviation

Administration, 2300 East Devon

Avenue, Des Plaines, Illinois.

FOR FURTHER INFORMATION CONTACT:

Eleanor J. Williams, Air Traffic Division,

System Management Branch, AGL–530,

Federal Aviation Administration, 2300

East Devon Avenue, Des Plaines, Illinois

60018, telephone (708) 294–7568.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested parties are invited to

participate in this proposed rulemaking

by submitting such written data, views,

or arguments as they may desire.

Comments that provide the factual basis

supporting the views and suggestions

presented are particularly helpful in

developing reasoned regulatory

decisions on the proposal. Comments

are specifically invited on the overall

regulatory, aeronautical, economic,

environmental, and energy-related

aspects of the proposal.

Communications should identify the

airspace docket number and be

submitted in triplicate to the address

listed above. Commenters wishing the

FAA to acknowledge receipt of their

comments on this notice must submit

with those comments a self-addressed,

stamped postcard on which the

following statement is made:

‘‘Comments to Airspace Docket No. 95–

AGL–20.’’ The postcard will be date/

time stamped and returned to the

commenter. All communications

received on or before the specified

closing date for comments will be

considered before taking action on the

proposed rule. The proposal contained

in this notice may be changed in light

of comments received. All comments

submitted will be available for

examination in the Rules Docket, FAA,

Great Lakes Region, Office of the

Assistant Chief Counsel, 2300 East

Devon Avenue, Des Plaines, Illinois,

both before and after the closing date for

comments. A report summarizing each

substantive public contact with FAA

personnel concerned with this

rulemaking will be filed in the docket.

Availability of NPRM’s

Any person may obtain a copy of the

Notice of Proposed Rulemaking (NPRM)

by submitting a request to the Federal

Aviation Administration, Office of

Public Affairs, Attention: Public Inquiry

Center, APA–230, 800 Independence

Avenue, S.W., Washington, DC 20591,

or by calling (202) 267–3484.

Communications must identify the

notice number of this NPRM. Persons

interested in being placed on a mailing

list for future NPRM’s should also

request a copy of Advisory Circular No.

11–2A, which describes the application

procedure.

The Proposal

The FAA is considering an

amendment to part 71 of the Federal

Aviation Regulations (14 CFR part 71) to

establish Class E5 airspace at Bigfork

Municipal Airport, Bigfork, MN, to

accommodate a Nondirectional Radio

Beacon (NDB) to serve Runway 15.

Controlled airspace extending upward

from 700 to 1200 feet AGL is needed to

contain aircraft executing the approach.

The intended effect of this action is to

provide segregation of aircraft using

instrument approach procedures in

instrument conditions from other

aircraft operating in visual weather

conditions. The area would be depicted

on appropriate aeronautical charts

thereby enabling pilots to

circumnavigate the area or otherwise

comply with IFR procedures. Class E

airspace designations for airspace areas

extending upward from 700 feet or more

above the surface of the earth are

published in paragraph 6005 of FAA

Order 7400.9C dated August 17, 1995,

and effective September 16, 1995, which

is incorporated by reference in 14 CFR

71.1. The Class E airspace designation

listed in this document would be

published subsequently in the Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore this, proposed regulation—(1)

is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not

a ‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule will

not have a significant economic impact

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration proposes to

amend part 71 of the Federal Aviation

Regulations (14 CFR part 71) as follows:

PART 71—[AMENDED]

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389; 14 CFR 11.69.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9C, Airspace

Designations and Reporting Points,

dated August 17, 1995, and effective

September 16, 1995, is amended as

follows:

Paragraph 6005 The Class E airspace areas

extending upward from 700 feet or more

above the surface of the earth.

* * * * *

AGL MN E5 Bigfork, MN [New]

Bigfork Municipal Airport, MN

(lat. 47°46′44.7′′ N, long. 93°39′00.6′′ W)

That airspace extending upward from 700

feet above the surface within a 7-mile radius

of the Bigfork Municipal Airport.

* * * * *

Issued in Des Plaines, Illinois on November

22, 1996.

Maureen Woods,

Acting Manager, Air Traffic Division.

FR Doc. 95–30370 Filed 12–12–95; 8:45 am]

BILLING CODE 4910–13–M
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules 63995

1 7 U.S.C. 6d(2) (1994).

2 17 CFR 30.7 (1995).

3Commission Rule 170.15 mandates that each

person required to register as an FCM become and

remain a member of a futures association which

provides for the membership therein of such FCM

unless there is no registered futures association.

National Futures Association (NFA) is the only

registered futures association. It has an FCM

membership category and virtually all FCMs are

NFA members. However, there are approximately

90 firms registered as FCMs (out of a total of

approximately 260) that do not handle customer

funds and therefore are not required to register as

FCMs. Accordingly, these firms are not required to

be NFA members pursuant to Commission Rule

170.15 but almost all of them are NFA members

anyway. However, there still are approximately ten

registered FCMs that are not members of any SRO

and thus have a current minimum dollar adjusted

net capital requirement of $100,000 under

Commission Rule 1.17(a)(1)(i)(A). Since such a

small number of firms are in this category, for ease

of discussion we shall assume that all registered

FCMs currently have a minimum dollar

requirement of adjusted net capital of $50,000

under Commission rules.

4See 43 FR 39956 (September 8, 1978).

5On November 24, 1992, the SEC also adopted

rule amendments to raise its minimum net capital

requirement for securities broker-dealers holding

customer funds, which had been $25,000, to

$250,000 in stages. The requirement increased to

$100,000 effective July 1, 1993, $175,000 effective

January 1, 1994 and to the current level of $250,000

effective July 1, 1994. See 57 FR 56973, 56990 (Dec.

2, 1992); 17 CFR § 240.15c3–1e(a)(1995).

6This trend has continued. In fiscal year 1990,

334.2 million futures and option contracts were

traded on U.S. contract markets, and that number

increased more than 50 percent in the last five years

to approximately 504.8 million in fiscal year 1995.

7 In NFA’s 1990 submission, it noted that the

average amount of funds in segregation at each FCM

more than tripled from 1980 to 1985, increasing

from $8.7 million to $28.5 million. That amount

more than tripled again in the last ten years and

now exceeds $100 million.

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 1

Minimum Financial Requirements,

Prepayment of Subordinated Debt and

Gross Collection of Exchange-Set

Margin for Omnibus Accounts

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rules.

SUMMARY: The Commodity Futures

Trading Commission (Commission)

proposes to amend: (1) Rules

1.17(a)(1)(i) and (ii) to (a) increase the

minimum required dollar amount of

adjusted net capital for futures

commission merchants (FCMs) from

$50,000 to $250,000, (b) increase the

minimum required dollar amount of

adjusted net capital for introducing

brokers (IBs) from $20,000 to $30,000,

and (c) make the amount of adjusted net

capital required by a registered futures

association for its member FCMs and

IBs an element of the Commission’s

minimum financial requirements for

FCMs and IBs; (2) Rule 1.17(h)(2)(vii)

with respect to the procedure to obtain

approval for prepayment of

subordinated debt; and (3) Rule 1.58,

which governs gross collection of

exchange-set margins for omnibus

accounts, to make it applicable to

omnibus accounts carried by FCMs for

foreign brokers. The Commission

believes that these amendments will

conform the Commission’s rules with

those of industry self-regulatory

organizations (SROs) and therefore

should not require changes in the

operations of most firms.

DATES: Comments on the proposed

amendments must be received on or

before January 12, 1996.

ADDRESSES: Comments should be sent to

Jean A. Webb, Secretary of the

Commission, Commodity Futures

Trading Commission, 1155 21st Street,

NW, Washington, DC 20581. Please refer

to ‘‘Financial Rule Amendments.’’

FOR FURTHER INFORMATION CONTACT:

Lawrence B. Patent, Associate Chief

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, 1155 21st Street, NW,

Washington, DC 20581. Telephone:

(202) 418–5439.

SUPPLEMENTARY INFORMATION:

I. Minimum Financial Requirements

A. Minimum Financial Requirements for

FCMs

Rule 1.17(a)(1)(i) requires FCMs to

maintain adjusted net capital equal to or

in excess of the greatest of: (1) $50,000,

(2) four percent of the sum of the

amount of funds required to be

segregated under Section 4d(2) of the

Commodity Exchange Act (Act) 1(i.e., for

trading in U.S. markets) and the amount

of funds required to be set aside under

Commission Rule 30.7 2 for customers

trading foreign markets (referred to as

the ‘‘secured amount’’); or (3) if an FCM

is also registered as a securities brokerdealer, the amount of net capital

required by the Securities and Exchange

Commission (SEC).3 The $50,000

minimum dollar requirement was

established in 1978 4and has remained

unchanged. On August 27, 1990, the

Commission approved amendments to

Rule 201 of the Chicago Board of Trade

(CBT) and Section 1 of NFA’s Financial

Requirements increasing their

respective FCM members’ minimum

adjusted net capital requirement to

$250,000.5 The NFA proposed the

minimum adjusted net capital increase

based upon the growth in trading

volume in the industry,6the increase in

segregated funds per FCM 7and the

decrease in the value of the dollar that

had occurred since 1978. The

Commission approved these

amendments to provide FCM customers

with the same degree of protection that

was provided by the $50,000 minimum

adjusted net capital requirement when it

was originally adopted in 1978.

Pursuant to paragraph (a)(2) of

Commission Rule 1.17, the

Commission’s minimum financial

requirements are not applicable to a

registrant that is a member of an SRO

and that conforms to the minimum

financial standards set by such SRO. As

noted above, all persons required to

register as FCMs are required to be NFA

members under Commission Rule

170.15. Consequently, when the Commission approved NFA’s amendment of

the minimum dollar amount of adjusted

net capital required of its member FCMs

in 1990, the Commission effectively

raised the dollar level of minimum

adjusted net capital for all FCMs to

$250,000.

The Commission nonetheless believes

that raising the required minimum

dollar amount of adjusted net capital for

FCMs under Commission Rule 1.17 to

that required by NFA and CBT for their

members is necessary and appropriate

for the following reasons. Section

8c(a)(1) of the Act, 7 U.S.C. 12c(a)(1)

(1994), authorizes the Commission to

discipline a member of an exchange in

accordance with the rules of that

exchange if the exchange fails to do so.

Section 17(l)(1) of the Act, 7 U.S.C.

21(1)(1) (1994), authorizes the

Commission to suspend a registered

futures association that has failed to

enforce compliance with its own rules.

However, the Commission does not

have the authority to discipline an

exchange member for violation of an

exchange rule in the absence of the

exchange’s failure to act, or to enforce

compliance with a registered futures

association’s own rule upon a member

thereof. This limitation upon the

Commission’s enforcement remedies in

the context of SRO rules does not, of

course, exist in the context of violations

of the Act or Commission regulations.

Section 6c of the Act, 7 U.S.C. 13a–1

(1994), authorizes the Commission,

whenever it appears that a person has

engaged, is engaging, or is about to

engage in any act or practice

constituting a violation of any provision

of the Act or any rule or regulation

thereunder, to bring an action to enjoin

such act or practice, or to enforce

compliance with the Act or any rule or

regulation thereunder.

The proposed amendment to Rule

1.17(a)(1)(i)(A) thus would permit the

Commission to use its authority under

Section 6c of the Act to enforce
63996 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules

8The Commission believes, for the reasons

discussed above, that an increase from $50,000 to

$250,000 is necessary and that it is unnecessary to

phase this in over time as the SEC did in that most

firms already meet the NFA requirement. The

Commission also notes that when it adopted the

current $50,000 standard in 1978, that was also a

five-fold, one-step increase in the existing standard

of $10,000 of working capital originally adopted by

the Commission’s predecessor agency, the

Commodity Exchange Authority, effective March

17, 1969. 34 FR 599 (Jan. 16, 1969).

9For example, equity capital withdrawals from an

FCM currently cannot reduce the FCM’s adjusted

net capital below $60,000 (120 percent of the

minimum amount); if the amendment proposed

herein to Rule 1.17(a)(1)(i)(A) were adopted, equity

capital withdrawals would not be permitted to

reduce the FCM’s adjusted net capital below

$300,000. Similarly, the ‘‘early warning’’ level of

adjusted net capital would increase from $75,000 to

$375,000 despite the fact that Rule 1.12(b)(1) itself

would not be amended.

10Section 1a(14) of the Act, 7 U.S.C. 1a(14)(1994),

defines an IB as ‘‘any person (except an individual

who elects to be and is registered as an associated

person of [an FCM]) engaged in soliciting or in

accepting orders for the purchase or sale of any

commodity for future delivery on or subject to the

rules of any contract market who does not accept

any money, securities or property (or extend credit

in lieu thereof) to margin, guarantee, or secure any

trades or contracts that result or may result

therefrom.’’ Commission Rule 1.3(mm), 17 CFR

1.3(mm) (1995), also includes in the definition of

an IB any person required to register as such by

virtue of Part 33 of the Commission’s rules, 17 CFR

Part 33 (1995).

11As is the case with FCMs discussed above,

virtually all registered IBs are members of NFA.

Any IB that is registered but not an NFA member

would be precluded from introducing customer

accounts to an FCM and thus could not act as an

IB.

compliance with what is effectively, for

the reasons discussed above, the current

minimum adjusted net capital

requirement applicable to FCMs with

the benefit of all of the remedies

available to it under the Act for the

enforcement of compliance with any

provision of the Act and any rule

promulgated thereunder. In addition,

this amendment would harmonize the

Commission’s minimum dollar

requirement for FCMs with the

prevailing standards established by NFA

rules and support the objective of

assuring that FCMs have a substantial

base of liquid capital from which to

meet their obligations to customers, an

objective for which an increased

requirement appears appropriate given

the increase in the amount of funds held

by FCMs and the change in the value of

the dollar since 1978.

The Commission believes it is

necessary to clarify its authority to

require the transfer of positions at such

time as a firm is no longer in

compliance with the NFA rule. The

Commission further believes that a base

minimum adjusted net capital

requirement of $250,000 is now

essential to providing both an adequate

stake in doing business in accordance

with Commission rules and otherwise to

provide a cushion sufficient with

applicable haircuts and segregation of

customer funds to permit the

Commission to act in an emergency.

The Commission also believes that the

rule amendment is necessary to

eliminate any confusion that may have

existed as to whether the Commission

could take action where an FCM’s

adjusted net capital is below $250,000

yet still exceeds $50,000.

Accordingly, the Commission is

proposing to amend Rule 1.17(a)(1)(i)(A)

to increase the minimum dollar amount

of adjusted net capital for FCMs to

$250,000.8 In light of the amount of the

proposed increase and the fact that,

unlike the situation in 1978, very few

FCMs are not members of any SRO and

that those few FCMs in that category

cannot handle customer funds, the

Commission sees no need to maintain a

higher dollar amount of required

adjusted net capital for an FCM that is

not a member of any SRO. In any event,

such FCMs would have an increase in

their adjusted net capital requirement

from the current $100,000 to the

proposed $250,000 that would apply to

all FCMs.

The Commission further notes that

several provisions of the Commission’s

minimum financial rules for FCMs, as

well as one provision of the financial

early warning system, contain crossreferences to Rule 1.17(a)(1)(i)(A).

Certain actions are restricted or required

if the specified levels of adjusted net

capital, which in all cases exceed 100

percent of the minimum dollar amount,

are breached. These include Rule

1.17(e)(1)(i) (restricting the withdrawals

of equity capital as well as the following

paragraphs of Rule 1.17 concerning

subordinated debt: paragraph

(h)(2)(vi)(C)(1) (restricting the parties to

a secured demand note (SDN) agreement

from providing in such agreement that

the unpaid principal amount of an SDN

can be reduced below a floor amount if

the value of collateral securing the SDN

declines below the unpaid principal

amount); paragraphs (h)(2)(vii)(A)(1)

and (B)(1) (restricting prepayments and

special prepayments); (h)(2)(viii)(A)(1)

(requiring suspension of repayment);

(h)(3)(ii)(A) (requiring notice of maturity

or accelerated maturity); and (h)(3)(v)(A)

(restricting use of temporary

subordinations). In addition, Rule

1.12(b)(1) establishes the ‘‘early

warning’’ minimum dollar level of

adjusted net capital as 150 percent of

the minimum dollar requirement,

triggering notice and follow-up

reporting requirements when an FCM’s

adjusted net capital is below that level.

Even though the Commission is not

amending the provisions of Rules 1.12

and 1.17 that cross-reference Rule

1.17(a)(1)(i)(A), the proposed

amendment of the latter will have a

corresponding impact on the various

FCM activities or obligations referred to

above.9

The Commission held a roundtable on

capital on September 18, 1995 where

several issues were discussed pertaining

to minimum financial requirements.

One of the issues discussed was

whether the second prong of the current

requirement, based upon four percent of

the sum of segregated customer funds

and the secured amount, should be

amended in an effort to make an FCM’s

minimum adjusted net capital

requirement reflect more closely the

risks to an FCM caused by carrying open

positions. The Commission may address

that issue in a subsequent release

following a review of empirical data

being developed by the SROs but is not

prepared to do so at this time.

B. Minimum Financial Requirements for

IBs

Rule 1.17 also requires introducing

brokers (IBs) 10 to maintain certain

prescribed minimum amounts of

adjusted net capital. Pursuant to Rule

1.17(a)(1)(ii), each person registered as

an IB must maintain adjusted net capital

equal to or in excess of the greater of:

(A) $20,000 ($40,000 for each person

registered as an IB who is not a member

of an SRO); 11 or, (B) if the IB is also a

securities broker-dealer, the amount of

net capital required by the SEC.

On October 6, 1992, the Commission

approved NFA rule amendments which,

among other things, increased the

required minimum dollar amount of

adjusted net capital for member IBs

from $20,000 to $30,000. However, the

Commission did not at that time amend

Commission Rule 1.17(a)(1)(ii)(A) to

conform to NFA’s rule amendment. The

Commission believes that since it is

now proposing to raise the minimum

dollar amount of required adjusted net

capital for FCMs as discussed above, it

is appropriate also to propose an

increase in the required minimum

dollar amount of adjusted net capital for

IBs. Accordingly, the Commission is

proposing to amend Rule

1.17(a)(1)(ii)(A) to raise the minimum

dollar amount of required net capital for

a registered IB to $30,000. For reasons

similar to those discussed above

concerning FCMs, the Commission

would eliminate any higher requirement

for an IB that is not a member of an

SRO.
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules 63997

12More than two-thirds of IBs enter into

guarantee agreements with FCMs in accordance

with Commission Rules 1.17(a)(2)(ii) and 1.10(j) in

lieu of raising their own capital.

13Section 9 of NFA’s Financial Requirements is

entitled ‘‘Introducing Broker Financial

Requirements’’ and provides as follows:

Each Member IB, except an IB operating pursuant

to a guarantee agreement which meets the

requirements set forth in CFTC Regulation 1.10(j),

must maintain ‘‘Adjusted Net Capital’’ (as defined

in Schedule A hereto) equal to or in excess of the

greatest of:

(i) $30,000; or,

(ii) $6,000 per office operated by the IB (including

the main office); or,

(iii) $3,000 for each AP sponsored by the IB; or

(iv) (for securities brokers and dealers), the

amount of net capital required by Rule 15c3–1(a) of

the Securities and Exchange Commission (17 CFR

240.15c3–1(a)).

The corresponding provision for an FCM with

respect to offices and APs is based upon ‘‘$6,000

for each remote location operated (i.e., proprietary

branch offices, main office of each guaranteed IB

and branch offices of each guaranteed IB); or,

$3,000 for each AP sponsored (including APs

sponsored by guaranteed IBs).’’ Section 1 of NFA’s

Financial Requirements.

14According to discussions with NFA staff, there

are currently less than ten FCMs and less than ten

IBs whose minimum financial requirement is based

upon the number of offices operated or APs

sponsored. As of September 30, 1995, of the

registered IBs, 1,080 operated pursuant to guarantee

agreements with an FCM and 388 were raising their

own capital.

15See proposed new paragraph (b)(3) of Rule 1.12,

which is based upon 150% of the amount of

adjusted net capital required by a registered futures

association, and is proportional to the other

elements of Rule 1.12(b).

16See the following proposed new Rule

1.17(e)(1)(iii) and the proposed new paragraphs of

Rule 1.17: (h)(2)(vi)(C)(3) (restricting reductions in

unpaid principal amount of an SDN);

(h)(2)(vii)(A)(3) (restricting prepayments);

(h)(2)(vii)(B)(3) (restricting special prepayments);

(h)(2)(viii)(A)(3) (requiring suspension of

repayment); (h)(3)(ii)(C) (requiring notice of

maturity or accelerated maturity); and (h)(3)(v)(C)

(restricting use of temporary subordinations). The

levels of adjusted net capital set forth in the

proposed new paragraphs of Rule 1.17 are 120

percent of the registered futures association’s

minimum amount, except for the provision

concerning special prepayment which would be

200 percent. These percentages correspond to the

current levels in those rules that are based upon the

minimum dollar amount.

17See Commission Rule 1.17(h) for a definition of

the term ‘‘satisfactory subordination agreement’’.

18An applicant for registration must obtain prior

written approval of NFA.

19CFTC Interpretative Letter No. 85–17, [1984–

1986 Transfer Binder] Comm. Fut. L. Rep. (CCH)

¶22,738 (Sept. 10, 1985).

This proposed amendment, like the

proposal applicable to FCMs, would

conform the Commission’s rule to the

general industry standard established by

NFA. Therefore, there should be

essentially no impact on the operations

of IBs as a result of this amendment. In

any event, the proposed amendment

would only affect the minority of IBs

who raise their own capital. Those IBs

who have entered into guarantee

agreements with FCMs would be

unaffected by the proposed

amendment.12

C. Conforming Commission and

Registered Futures Association Rules

The Commission also approved NFA

rule amendments on October 6, 1992

which provide that a member IB’s

minimum adjusted net capital

requirement, as well as that of a member

FCM, can be determined by the number

of offices it operates and the number of

APs it sponsors.13 When NFA presented

these provisions to the Commission,

NFA stated that the amount of the IB

minimum financial requirement should

be linked to the size of an IB’s operation

and that it concluded, after studying

several factors related to an IB’s

business, that the number of offices

operated or APs sponsored by an IB

were the most relevant factors to be

used in a formula establishing an IB’s

minimum financial requirement. NFA

also stated that an FCM’s minimum

financial requirement should parallel

that of an IB in this regard.14 The

Commission believes that it should

incorporate the NFA standards

concerning the number of offices or APs

sponsored into the minimum financial

requirements for FCMs and IBs in Rule

1.17, and eliminate the necessity to

amend Rule 1.17 each time NFA

amends its minimum financial

requirements in order to avoid a

recurrence of the current situation

where NFA’s minimum dollar amount

of adjusted net capital for an FCM is

$250,000 and the Commission’s

minimum is $50,000. Therefore, the

Commission is proposing to redesignate

paragraphs (a)(1)(i)(C) and (a)(1)(ii)(B) as

paragraphs (a)(1)(i)(D) and (a)(1)(ii)(C),

respectively, of Rule 1.17, and to add

new paragraphs (a)(1)(i)(C) and

(a)(1)(ii)(B) that would provide that ‘‘the

amount of adjusted net capital required

by a registered futures association of

which it is a member’’ is an element of

the Commission’s minimum financial

requirement for FCMs and IBs. The

Commission is also proposing

conforming amendments to the early

warning level of adjusted net capital for

FCMs,15 the restriction on withdrawals

of equity capital and the various

provisions of Rule 1.17(h) discussed

above concerning subordinated debt.16

II. Prepayment of Subordinated Debt

For purposes of computing net

capital, debt covered by ‘‘satisfactory

subordinated agreements’’ can be

excluded from liabilities.17 Rule

1.17(h)(2)(vii)(A) generally prohibits any

prepayment of subordinated debt for

one year following the date upon which

the governing subordination agreement

became effective. However, Rule

1.17(h)(2)(vii)(B) permits special

prepayment of subordinated debt at any

time (even during the first year)

provided that, after giving effect thereto,

the applicant’s or registrant’s adjusted

net capital does not fall below certain

amounts prescribed in the rule, which

are approximately one and one-half

times the amounts of capital required

for a normal prepayment. In addition,

no prepayment and no special

prepayment may occur unless the

registrant has obtained written approval

of its designated self-regulatory

organization (DSRO), if any, and the

Commission.18

On September 10, 1985, the

Commission’s Division of Trading and

Markets (Division) advised all registered

IBs, FCMs and SROs of its intention to

recommend to the Commission that

Rule 1.17(h)(2)(vii) be changed to

require only the DSRO’s approval for

prepayment of subordinated debt.19

‘‘The requirement for dual approval has

been in effect for approximately seven

years’’, the Division stated, ‘‘[d]uring

[which] time, the DSROs have gained

greater familiarity regarding

subordinated debt and * * * have

demonstrated * * * an ability to work

together in the area of financial

surveillance.’’ This change would

‘‘make the treatment of prepayment of

subordinated debt consistent with the

treatment of approval of new

subordinated debt or amendments to

subordinated agreements.’’

The Commission is proposing to

implement the change contemplated in

Interpretative Letter No. 85–17 by

amending Rule 1.17(h)(2)(vii) to require

submission of a request for approval of

prepayment of subordinated debt by a

registrant to the DSRO only, if any, or

to the Commission in those rare

instances where the registrant is not an

SRO member. Dual approval by the

DSRO and the Commission would be

required, however, should the requested

prepayment or special prepayment

result in a reduction of 20 percent or

more of the registrant’s adjusted net

capital. Therefore, if a firm’s

subordinated debt amounts to 25

percent of its adjusted net capital and

the firm wishes to prepay all of it and

simultaneously enter into new

subordinated debt arrangements for the

same amount, but at a different maturity

or interest rate, dual approval would not

be required since there would be no net

effect on the firm’s adjusted net capital.

Similarly, if a firm wanted to convert

subordinated debt to paid-in-capital,

dual approval would not be required so
63998 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules

20 46 FR 62864 (Dec. 29, 1981).

21 Id.

22 47 FR 21026 (May 17, 1982).

23Neither the proposing release nor the adopting

release for Rule 1.58 discuss omnibus accounts

carried on behalf of foreign brokers.

24See 53 FR 46911 (Nov. 21, 1988), reprinted in

1 Comm. Fut. L. Rep. (CCH) ¶ 7122.

25See Final CFTC Staff Report, Stock Index

Futures and Cash Market Activity—October 1987, at

pp. 192–193 (Jan. 1988) (reprinted in Comm. Fut.

L. Rep. (CCH), Special Report No. 321, Feb. 5, 1988)

and Commodity Futures Trading Commission,

Division of Economic Analysis, Report on Stock

Index Futures and Cash Market Activity During

October 1989 to the U.S. Commodity Futures

Trading Commission, at p. 143 (May 1990).

26The Commission has proposed amendments to

its Rule 1.12 to: (1) make paragraph (g), which

requires the reporting of certain reductions in

adjusted net capital, applicable to all FCMs, rather

than just those FCMs subject to the risk assessment

reporting requirements of Rule 1.15; (2) require

reporting of a margin call that exceeds an FCM’s

excess adjusted net capital which remains

unanswered by the close of business on the day

following the issuance of the call; and (3) require

reporting by an FCM whenever its excess adjusted

net capital is less than six percent of the

maintenance margin required to support proprietary

and noncustomer positions carried by the FCM. 59

FR 66822 (Dec. 28, 1994).

27SEC Rule 15c3–1(d) (17 CFR 240.15c3–1(d)

(1995)) requires that at least 30 percent of all of a

broker-dealer’s net capital consist of equity capital.

See Report of the Technical Committee of IOSCO,

‘‘Capital Requirements for Multinational Securities

Firms,’’ XV Annual Conference of the International

Organization of Securities Commissions (IOSCO),

long as such conversion did not result

in a reduction of 20 percent or more of

the firm’s adjusted net capital.

III. Gross Collection of Exchange-Set

Margins

Pursuant to Commission Rule 1.58,

each FCM which carries a commodity

futures or commodity option position

for another FCM on an omnibus basis

must collect, and each FCM for which

an omnibus account is being carried

must deposit, initial and maintenance

margin on each position reported in

accordance with Commission Rule

17.04 at a level no less than that

established for customer accounts by the

rules of the applicable contract market.

Rule 1.58 was proposed in 1981 20

following the bankruptcy of three FCMs

who cleared trades solely by means of

omnibus accounts. The Commission

was concerned that customer funds

were ‘‘being held by firms that, in

comparison to clearing FCMs, generally

[had] less capital and [were] less

equipped to handle the volatility of the

commodity markets’’.21 It is also the

case, as demonstrated during the

collapse of Barings PLC, that net

margining of an omnibus account can

mask risk to the clearing member. Thus,

the primary purposes of Rule 1.58 were

to ‘‘strengthen the industry and enhance

customer protection by moving

segregated funds into the normally

better-capitalized hands of a clearing

member’’ and to provide the

Commission and the SROs with better

information with respect to omnibus

accounts.22

As originally adopted and currently,

Rule 1.58 does not apply to omnibus

accounts carried by FCMs on behalf of

foreign brokers.23 On November 16,

1988, the Division issued Financial and

Segregation Interpretation No. 12 which,

among other things, requires FCMs to

obtain an agreement from customers

who desire to have funds held offshore

whereby such customers authorize the

subordination of their claims

attributable to funds held offshore to the

claims of other customers should the

FCM be placed in bankruptcy or

receivership. Although the Commission

is in the process of reviewing this

Interpretation from the perspective of

certain foreign currency deposits in

light of the provisions for settlement of

certain contracts traded on U.S. contract

markets by means of foreign currency,

certain statements made relative to

foreign location risk remain relevant

today. For example, in support of this

Interpretation, the Commission

expressed its concern that ‘‘in the event

of an FCM insolvency, deposits

maintained at a foreign depository

might not be handled or distributed in

accordance with United States

bankruptcy law’’ and that ‘‘both the size

of the pool of funds available for

distribution to customers and the size of

individual claims against that pool may

vary from day-to-day.’’ The Commission

further stated that ‘‘to the extent foreign

domiciled customers deposit [U.S.]

dollars in connection with United States

futures or options, such funds should be

held in the United States’’ because ‘‘the

Commission perceives no

administrative necessity for FCMs and

customers to incur the location risks

attendant to holding such dollar

deposits overseas’’.24 Likewise, the

Commission is concerned that margin

deposits maintained by a foreign broker

at a foreign depository might become

unavailable in the event of a bankruptcy

of the clearing FCM due to differences

in bankruptcy law among jurisdictions

and might be exposed to currency

fluctuations during the pendency of the

bankruptcy. In addition, the

Commission has observed that in times

of turbulent markets, such as occurred

in October 1987 and October 1989,

accounts in the names of owners with

foreign addresses had greater difficulty

meeting margin calls than did domestic

accounts, undoubtedly to some extent

due to time zone differences and

currency conversion logistics.25 In this

context, the Commission has recognized

that foreign brokers’ omnibus accounts

carried by clearing FCMs can have a

substantial impact on the financial

condition of clearing FCMs. Further, as

a result of the collapse of Barings PLC

in February 1995, the Commission’s

concern has been heightened with

respect to FCMs having a clear view of

the exposures in omnibus accounts and

the ability to assure proper handling

and segregation of customer funds.

In view of the increasing

internationalization of the financial

markets, and in particular the increasing

use of foreign omnibus accounts, the

Commission believes that foreign broker

omnibus accounts should be treated in

the same manner as omnibus accounts

carried for domestic FCMs. Thus, FCMs

carrying foreign broker omnibus

accounts would hold a higher level of

funds, have less capital exposure and be

better able to transfer positions from

such accounts in the event of a financial

disruption. Accordingly, the

Commission is proposing to expand the

application of Rule 1.58 to include

foreign brokers’ omnibus accounts

carried by FCMs. As is the case with the

proposed amendments to Rule 1.17

concerning the minimum amount of

adjusted net capital for FCMs and IBs,

the Commission is essentially proposing

to conform its rule relating to collection

of margins for omnibus accounts to the

industry practice since, as a result of

staff recommendations in rule

enforcement reviews and SRO rule

changes, all active U.S. contract markets

other than the New York Cotton

Exchange and the Philadelphia Board of

Trade require that FCMs collect margin

for omnibus accounts of foreign brokers

as well as other domestic FCMs on a

gross basis.

IV. Other Matters

As noted above, the Commission held

a roundtable on capital issues on

September 18, 1995, during which

several matters were discussed.

Although the Commission is not

presenting any specific rule proposals at

this time related to issues discussed at

the roundtable, the Commission will be

seeking additional information

concerning certain of the issues

discussed with a view towards possible

additional rule amendments. These

issues would include greater

harmonization of the CFTC/SEC

financial requirements in several areas

such as reporting requirements and

cycles, early warning requirements,26

risk assessment data elements and the

debt-equity ratio requirements with

respect to a firm’s capital.27 The
Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules 63999

Santiago, Chile 1990. The general international

standard in this connection, as recommended by

Working Party No. 3 of the Technical Committee of

IOSCO, would also apply the debt-equity

requirement to all of a firm’s capital. Although the

Commission originally proposed a debt-equity

requirement for an FCM that would have been

similar to that of a broker-dealer under SEC rules

(see 42 FR 27166, 27177 (May 26, 1977)), in

response to comments that ‘‘it would be

inappropriate to penalize a firm that maintains

capital in the form of satisfactory subordination

agreements, which is in excess of the minimum

required by regulations’’, the Commission revised

the required debt-equity total to which the 30

percent equity capital requirement applies to mean

total capital less the excess of the FCM’s adjusted

net capital, i.e., only the required minimum

adjusted net capital. See 43 FR 39956, 39965, 39976

(Sept. 8, 1978).

28Commission Rule 1.17(c)(5)(iii), 17 CFR

1.17(c)(5)(iii) (1995); CFTC Interpretative Letter 95–

65, [Current Binder] Comm. Fut. L. Rep. (CCH)

¶ 26,495 (July 26, 1995).

29See 47 FR 18618, 18619 (Apr. 30, 1982).

30See 48 FR 35248, 35275–78 (Aug. 3, 1983).

31The proposed increase in the dollar amount of

minimum adjusted net capital for an FCM and an

IB would necessitate only a change in line item 23E

of the Statement of the Computation of Minimum

Capital Requirements on Form 1–FR–FCM and in

line item 15 of that Statement on Form 1–FR–IB.

Commission is also considering a

rethinking of the no-action relief

provided to an FCM by the Division

with respect to the short options value

charge,28 and the appropriateness of a

concentration charge. Separately, the

Commission has discussed with the

Joint Audit Committee the data

necessary to evaluate any proposals for

a ‘‘risk-based’’ standard as a component

of the minimum adjusted net capital

requirements. Although the Commission

has no specific proposals in any of these

areas at this time, it nonetheless invites

commenters to address these matters if

they so choose.

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 rule amendments

proposed herein would affect FCMs and

independent IBs. The Commission has

previously determined that, based upon

the fiduciary nature of FCM/customer

relationships, as well as the requirement

that FCMs meet minimum financial

requirements, FCMs should be excluded

from the definition of small entity.29

With respect to IBs, the Commission

stated that it is appropriate to evaluate

within the context of a particular rule

proposal whether some or all IBs should

be considered to be small entities and,

if so, to analyze the economic impact on

such entities at that time.30 The

proposed amendment to Rule

1.17(h)(2)(vii) would generally reduce

the burden associated with the

procedure to obtain approval for

permissive prepayment of subordinated

debt. Accordingly, that amendment

should impose no additional

requirements on an independent IB. In

addition, the proposed amendment to

the minimum adjusted net capital

requirement for an IB would conform

the Commission’s requirement to that of

the NFA and therefore there should be

no impact on an IB’s financial

operations. Thus, if adopted, these

proposals would not have a significant

economic impact on a substantial

number of IBs. Therefore, pursuant to

Section 3(a) of the RFA, 5 U.S.C. 605(b),

the Chairman certifies that these

proposed rule amendments will not

have a significant economic impact on

a substantial number of small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of

1990, (PRA) 44 U.S.C. 3501 et seq.,

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.

While the amendments proposed herein

have no burden,31 Rules 1.12, 1.17 and

1.58 are parts of groups of rules with the

following burdens.

The burden associated with the

collection required by Rules 1.12 and

1.17 (3038–0024), including these

proposed amendments, is as follows:

Average Burden Hours Per Response:

1.50.

Number of FCM Respondents: 165.00.

Number of IB Respondents: 62.00.

Frequency of Response: 1.00.

The burden associated with the

collection required by Rule 1.58 (3038–

0026), including these proposed

amendments, is as follows:

A. Reporting

Average Burden Hours Per Response:

0.04.

Number of Respondents: 100.00.

Frequency of Response: 50.00.

B. Recordkeeping

Average Burden Hours Per Response:

1.00.

Number of Respondents: 300.00.

Frequency of Response: 1.00.

Persons wishing to comment on the

estimated paperwork burden associated

with these proposed rule amendments

should contact Jeff Hill, Office of

Management and Budget, Room 3228,

NEOB, Washington, DC 20503, (202)

395–7340. Copies of the information

collection submission to OMB are

available from Joe F. Mink, CFTC

Clearance Officer, 1155 21st Street,

N.W., Washington, DC 20581, (202)

418–5170.

List of Subjects in 17 CFR Part 1

Commodity futures, minimum

financial requirements.

In consideration of the foregoing and

pursuant to the authority contained in

the Commodity Exchange Act and, in

particular, Sections 4f, 4g and 8a(5)

thereof, 7 U.S.C. 6f, 6g and 12a(5), the

Commission hereby proposes to amend

Chapter I of Title 17 of the Code of

Federal Regulations as follows:

PART 1—GENERAL REGULATIONS

UNDER THE COMMODITY EXCHANGE

ACT

1. The authority citation for Part 1

continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a,

6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m,

6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a,

13a-1, 16, 16a, 19, 21, 23 and 24.

2. Section 1.12 is amended by

removing the word ‘‘or’’ at the end of

paragraph (b)(2), by redesignating

paragraph (b)(3) as paragraph (b)(4), and

by adding a new paragraph (b)(3) to read

as follows:

§ 1.12 Maintenance of minimum financial

requirements by futures commission

merchants and introducing brokers.

* * * * *

(b) * * *

(3) 150 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

* * * * *

3. Section 1.17 is amended as follows:

3.1. By revising paragraph (a)(1);

3.2. By removing the word ‘‘or’’ at the

end of paragraph (e)(1)(ii), by

redesignating paragraph (e)(1)(iii) as

(e)(1)(iv), and by adding a new

paragraph (e)(1)(iii);

3.3. By removing the word ‘‘or’’ at the

end of paragraph (h)(2)(vi)(C)(2), by

redesignating paragraph (h)(2)(vi)(C)(3)

as paragraph (h)(2)(vi)(C)(4), and by

adding a new paragraph (h)(2)(vi)(C)(3);

3.4. By removing the word ‘‘or’’ at the

end of paragraph (h)(2)(vii)(A)(2), by

redesignating paragraph (h)(2)(vii)(A)(3)

as paragraph (h)(2)(vii)(A)(4) and, as

redesignated, revising it, and by adding

a new paragraph (h)(2)(vii)(A)(3);

3.5. By removing the word ‘‘or’’ at the

end of paragraph (h)(2)(vii)(B)(2), by

redesignating paragraph (h)(2)(vii)(B)(3)

as paragraph (h)(2)(vii)(B)(4) and, as

redesignated, revising it, and by adding

new paragraphs (h)(2)(vii)(B)(3) and

(h)(2)(vii)(C);

3.6. By removing the word ‘‘or’’ at the

end of paragraph (h)(2)(viii)(A)(2), by

redesignating paragraph

(h)(2)(viii)(A)(3) as paragraph
64000 Federal Register / Vol. 60, No. 239 / Wednesday, December 13, 1995 / Proposed Rules

(h)(2)(viii)(A)(4), and by adding a new

paragraph (h)(2)(viii)(A)(3);

3.7. By removing the word ‘‘or’’ at the

end of paragraph (h)(3)(ii)(B), by

redesignating paragraph (h)(3)(ii)(C) as

paragraph (h)(3)(ii)(D), and by adding a

new paragraph (h)(3)(ii)(C); and

3.8. By redesignating paragraphs

(h)(3)(v) (C) and (D) as paragraphs

(h)(3)(v) (D) and (E) and by adding a

new paragraph (h)(3)(v)(C). The revised

and added paragraphs read as follows:

§ 1.17 Minimum financial requirements for

futures commission merchants and

introducing brokers.

(a)(1)(i) Except as provided in

paragraph (a)(2)(i) of this section, each

person registered as a futures

commission merchant must maintain

adjusted net capital equal to or in excess

of the greatest of:

(A) $250,000;

(B) Four percent of the following

amount: The customer funds required to

be segregated pursuant to the Act and

these regulations and the foreign futures

or foreign options secured amount, less

the market value of commodity options

purchased by customers on or subject to

the rules of a contract market or a

foreign board of trade: Provided,

however, That the deduction for each

customer shall be limited to the amount

of customer funds in such customer’s

account(s) and foreign futures and

foreign options secured amounts;

(C) The amount of adjusted net capital

required by a registered futures

association of which it is a member; or

(D) For securities brokers and dealers,

the amount of net capital required by

Rule 15c3–1(a), of the Securities and

Exchange Commission (17 CFR

240.15c3–1(a)).

(ii) Except as provided in paragraph

(a)(2) of this section, each person

registered as an introducing broker must

maintain adjusted net capital equal to or

in excess of the greatest of:

(A) $30,000;

(B) The amount of adjusted net capital

required by a registered futures

association of which it is a member; or

(C) For securities brokers and dealers,

the amount of net capital required by

Rule 15c3–1(a) of the Securities and

Exchange Commission (17 CFR

240.15c3–1(a)).

* * * * *

(e) * * *

(1) * * *

(iii) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

* * * * *

(h) * * *

(2) * * *

(vi) * * *

(C) * * *

(3) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

* * * * *

(vii) * * *

(A) * * *

(3) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

(4) For an applicant or registrant

which is also a securities broker or

dealer, the amount of net capital

specified in Rule 15c3–1d(b)(7) of the

Securities and Exchange Commission

(17 CFR 240.15c3–1d(b)(7)).

(B) * * *

(3) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

(4) For an applicant or registrant

which is also a securities broker or

dealer, the amount of net capital

specified in Rule 15c3–1d(c)(5)(ii) of the

Securities and Exchange Commission

(17 CFR 240.15c3–1d(c)(5)(ii)):

Provided, however, That no special

prepayment shall be made if pre-tax

losses during the latest three-month

period were greater than 15 percent of

current excess adjusted net capital.

(C) Notwithstanding the provisions of

paragraphs (h)(2)(vii)(A) and

(h)(2)(vii)(B) of this section, in the case

of an applicant, no prepayment or

special prepayment shall occur without

the prior written approval of the

National Futures Association; in the

case of a registrant, if the requested

prepayment or special prepayment will

result in the reduction of the registrant’s

adjusted net capital by 20 percent or

more, no prepayment or special

prepayment shall occur without the

prior written approval of the designated

self-regulatory organization, if any, and

of the Commission, or, if the requested

prepayment or special prepayment will

result in the reduction of the registrant’s

adjusted net capital by less than 20

percent without the prior written

approval of the designated selfregulatory organization, if any, or of the

Commission if the registrant is not a

member of a self-regulatory

organization.

(viii) * * *

(A) * * *

(3) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

* * * * *

(3) * * *

(ii) * * *

(C) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member; or

* * * * *

(v) * * *

(C) 120 percent of the amount of

adjusted net capital required by a

registered futures association of which it

is a member;

* * * * *

4. Section 1.58 is revised to read as

follows:

§ 1.58 Gross collection of exchange-set

margins.

(a) Each futures commission merchant

which carries a commodity futures or

commodity option position for another

futures commission merchant or for a

foreign broker on an omnibus basis must

collect, and each futures commission

merchant and foreign broker for which

an omnibus account is being carried

must deposit, initial and maintenance

margin on each position reported in

accordance with § 17.04 of this chapter

at a level no less than that established

for customer accounts by the rules of the

applicable contract market.

(b) If the futures commission

merchant which carries a commodity

futures or commodity option position

for another futures commission

merchant or for a foreign broker on an

omnibus basis allows a position to be

margined as a spread position or as a

hedged position in accordance with the

rules of the applicable contract market,

the carrying futures commission

merchant must obtain and retain a

written representation from the futures

commission merchant or from the

foreign broker for which the omnibus

account is being carried that each such

position is entitled to be so margined.

Issued in Washington, D.C. on December 7,

1995 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 95–30360 Filed 12–12–95; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Parts 202, 206, and 211

RIN 1010–AC02

Amendments to Gas Valuation

Regulations for Federal Leases

AGENCY: Minerals Management Service,

Interior.