[Federal Register Volume 60, Number 239 (Wednesday, December 13, 1995)]
[Proposed Rules]
[Pages 63994-64000]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30360]



=======================================================================
-----------------------------------------------------------------------

[[Page 63995]]


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) <SUP>1(i.e., for 
trading in U.S. markets) and the amount of funds required to be set 
aside under Commission Rule 30.7 <SUP>2 for customers trading foreign 
markets (referred to as the ``secured amount''); or (3) if an FCM is 
also registered as a securities broker-dealer, the amount of net 
capital required by the Securities and Exchange Commission (SEC).<SUP>3 
The $50,000 minimum dollar requirement was established in 1978 
<SUP>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.<SUP>5 The NFA proposed the minimum adjusted net capital 
increase based upon the growth in trading volume in the 
industry,<SUP>6the increase in segregated funds per FCM <SUP>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.

    \1\ 7 U.S.C. 6d(2) (1994).
    \2\ 17 CFR 30.7 (1995).
    \3\ Commission 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.
    \4\ See 43 FR 39956 (September 8, 1978).
    \5\ On 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 Sec. 240.15c3-1e(a)(1995).
    \6\ This 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.
---------------------------------------------------------------------------

    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 Com-mission 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 

[[Page 63996]]
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.<SUP>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.

    \8\ The 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).
---------------------------------------------------------------------------

    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 cross-references 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.<SUP>9

    \9\ For 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.
---------------------------------------------------------------------------

    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) <SUP>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); <SUP>11 or, (B) if the IB is also a securities 
broker-dealer, the amount of net capital required by the SEC.

    \10\ Section 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).
    \11\ As 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.
---------------------------------------------------------------------------

    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. 

[[Page 63997]]

    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.<SUP>12

    \12\ More 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.
---------------------------------------------------------------------------

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.<SUP>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.<SUP>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,<SUP>15 the restriction on withdrawals of equity 
capital and the various provisions of Rule 1.17(h) discussed above 
concerning subordinated debt.<SUP>16

    \13\ Section 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.
    \14\ According 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.
    \15\ See 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).
    \16\ See 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.
---------------------------------------------------------------------------

II. Prepayment of Subordinated Debt

    For purposes of computing net capital, debt covered by 
``satisfactory subordinated agreements'' can be excluded from 
liabilities.<SUP>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.<SUP>18

    \17\ See Commission Rule 1.17(h) for a definition of the term 
``satisfactory subordination agreement''.
    \18\ An applicant for registration must obtain prior written 
approval of NFA.
---------------------------------------------------------------------------

    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.<SUP>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.''

    \19\ CFTC Interpretative Letter No. 85-17, [1984-1986 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para.22,738 (Sept. 10, 1985).
---------------------------------------------------------------------------

    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 

[[Page 63998]]
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 <SUP>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''.<SUP>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.<SUP>22

    \20\ 46 FR 62864 (Dec. 29, 1981).
    \21\ Id.
    \22\ 47 FR 21026 (May 17, 1982).
---------------------------------------------------------------------------

    As originally adopted and currently, Rule 1.58 does not apply to 
omnibus accounts carried by FCMs on behalf of foreign brokers.<SUP>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''.<SUP>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.<SUP>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.

    \23\ Neither the proposing release nor the adopting release for 
Rule 1.58 discuss omnibus accounts carried on behalf of foreign 
brokers.
    \24\ See 53 FR 46911 (Nov. 21, 1988), reprinted in 1 Comm. Fut. 
L. Rep. (CCH) para. 7122.
    \25\ See 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).
---------------------------------------------------------------------------

    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,<SUP>26 risk 
assessment data elements and the debt-equity ratio requirements with 
respect to a firm's capital.<SUP>27 The 

[[Page 63999]]
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,<SUP>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.

    \26\ The 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).
    \27\ SEC 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), 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).
    \28\ Commission 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) para. 26,495 (July 26, 1995).
---------------------------------------------------------------------------

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.<SUP>29

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

    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.<SUP>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.

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

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,<SUP>31 Rules 1.12, 1.17 and 1.58 are 
parts of groups of rules with the following burdens.

    \31\ The 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.
---------------------------------------------------------------------------

    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:


Sec. 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 

[[Page 64000]]
(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:


Sec. 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 self-regulatory 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:


Sec. 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 Sec. 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