Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19177

of its contribution to the total cost of the

project.

(2) The expenditure of funds under

this subpart may be applied only to

projects for which a proposal has been

evaluated under paragraph (b) of this

section and approved by the Secretary,

except that up to $25,000 each fiscal

year may be awarded to a state out of

the state’s regular apportionment to

carry out an ‘‘enforcement agreement.’’

An enforcement agreement does not

require state matching funds.

(f) Prosecution of work. All work must

be performed in accordance with

applicable state laws or regulations,

except when such laws or regulations

are in conflict with Federal laws or

regulations such that the Federal law or

regulation prevails.

§ 253.23 Other funds.

(a) Funds for disaster assistance. (1)

The Secretary shall retain sole authority

in distributing any disaster assistance

funds made available under section

308(b) of the Act. The Secretary may

distribute these funds after he or she has

made a thorough evaluation of the

scientific information submitted, and

has determined that a commercial

fishery failure of a fishery resource

arising from natural or undetermined

causes has occurred. Funds may only be

used to restore the resource affected by

the disaster, and only by existing

methods and technology. Any fishery

resource used in computing the states’

amount under the apportionment

formula in § 253.21(a) will qualify for

funding under this section. The Federal

share of the cost of any activity

conducted under the disaster provision

of the Act shall be limited to 75 percent

of the total cost.

(2) In addition, pursuant to section

308(d) of the Act, the Secretary is

authorized to award grants to persons

engaged in commercial fisheries, for

uninsured losses determined by the

Secretary to have been suffered as a

direct result of a fishery resource

disaster. Funds may be distributed by

the Secretary only after notice and

opportunity for public comment of the

appropriate limitations, terms, and

conditions for awarding assistance

under this section. Assistance provided

under this section is limited to 75

percent of an uninsured loss to the

extent that such losses have not been

compensated by other Federal or State

programs.

(b) Funds for interstate commissions.

Funds authorized to support the efforts

of the three chartered Interstate Marine

Fisheries Commissions to develop and

maintain interstate fishery management

plans for interjurisdictional fisheries

will be divided equally among the

Commissions.

§ 253.24 Administrative requirements.

Federal assistance awards made as a

result of this Act are subject to all

Federal laws, Executive Orders, Office

of Management and Budget Circulars as

incorporated by the award; Department

of Commerce and NOAA regulations;

policies and procedures applicable to

Federal financial assistance awards; and

terms and conditions of the awards.

PART 255—[REMOVED]

4. Under the authority of 46 U.S.C.

1271–1279, part 255 is removed.

[FR Doc. 96–10664 Filed 4–30–96; 8:45 am]

BILLING CODE 3510–22–P

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 1

Early Warning Reporting

Requirements, Minimum Financial

Requirements, Prepayment of

Subordinated Debt, Gross Collection

of Exchange-Set Margin for Omnibus

Accounts and Capital Charge on

Receivables From Foreign Brokers

AGENCY: Commodity Futures Trading

Commission.

ACTION: Final rules.

SUMMARY: Rule 1.12 of the Commodity

Futures Trading Commission

(Commission or CFTC) sets forth the

financial early warning reporting

requirements for futures commission

merchants (FCMs) and introducing

brokers (IBs), which are designed to

afford the Commission and industry

self-regulatory organizations (SROs)

sufficient advance notice of a firm’s

financial or operational problems to take

such protective or remedial action as

may be needed to assure the safety of

customer funds and the integrity of the

marketplace. The Commission has

determined to adopt amendments to

Commission Rule 1.12, applicable to

FCMs only, that will: amend paragraph

(g) to require the reporting of a

reduction in net capital of 20 percent or

more within two business days and a

planned reduction in excess adjusted

net capital of 30 percent or more two

business days prior thereto, and to make

that paragraph applicable to all FCMs,

rather than just those FCMs subject to

the risk assessment reporting

requirements of Commission Rule 1.15;

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

require reporting by an FCM when-ever

its excess adjusted net capital is less

than six percent of the maintenance

margin required to support positions of

noncustomers carried by the FCM,

unless the noncustomer is itself subject

to the Commission’s minimum financial

requirements for an FCM or the

Securities and Exchange Commission’s

(SEC’s) minimum financial

requirements for a securities brokerdealer (BD).

The Commission has also determined

to adopt amendments to: Rules

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

minimum required dollar amount of

adjusted net capital for FCMs from

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

minimum required dollar amount of

adjusted net capital for 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; Rule

1.17(h)(2)(vii) with respect to the

procedure to obtain approval for

prepayment of subordinated debt; and

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 SROs and therefore should not

require changes in the operations of

most firms. In addition, the Commission

has determined that the five percent

capital charge for unsecured receivables

from a foreign broker will not apply

where the receivables represent deposits

required to maintain futures or options

positions, the foreign broker has been

granted comparability relief under

Commission Rule 30.10, and the asset is

held in accordance with the relevant

grant of relief under Rule 30.10 at the

foreign broker, with another foreign

broker that has been granted

comparability relief under Commission

Rule 30.10, or at a depository in the

same jurisdiction as either foreign

broker in accordance with Commission

Rule 30.7.

EFFECTIVE DATE: May 31, 1996.

FOR FURTHER INFORMATION CONTACT: Paul

H. Bjarnason, Jr., Chief Accountant, or

Lawrence B. Patent, Associate Chief

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, 1155 21st Street, N.W.,

Washington, D.C. 20581; telephone

(202) 418–5459 or 418–5439.
19178 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

1Rule 1.12 also requires certain reports from

FCMs, IBs, and exchange clearing organizations.

The rule amendments that have been adopted relate

only to reporting by FCMs. No changes have been

made with respect to reporting requirements

imposed on FCM applicants, IBs or IB applicants,

or clearing organizations.

2The balance of the proposed trigger event

provisions remains under consideration by the

Commission.

3The IFSG was formed in 1988 to provide a

coordinating body to address financial surveillance

issues relevant to both futures and securities

markets. It includes representatives of most of the

principal commodity and securities exchanges as

well as the National Futures Association (NFA) and

the National Association of Securities Dealers, Inc.

Staff members of the CFTC and of the SEC

frequently attend IFSG meetings as observers.

SUPPLEMENTARY INFORMATION:

I. Early Warning Rules

A. Reportable Events in General

The Commission has required each

FCM 1 to report to the Commission and

to the FCM’s designated self-regulatory

organization (DSRO) certain events

pertaining to the FCM’s financial

condition, the FCM’s procedures for

safeguarding customer and firm assets,

and its ability to monitor its financial

condition through an appropriate

system of records and reports. The

purpose of such reporting is to make the

Commission and the FCM’s DSRO

aware of circumstances that have or

potentially could have a negative impact

on the FCM’s ability to carry on normal

business operations consistent with the

Commission’s prudential requirements

and pose a potential threat to customer

funds or the FCM’s financial integrity.

Receipt of such notices results in a

heightened degree of surveillance over

the FCM by the Commission and the

DSRO. The events to be reported

include undercapitalization, the FCM’s

adjusted net capital being below its

early warning level (i.e., 150 percent of

the minimum required), failure to

maintain current books and records, the

existence of material inadequacies in

the FCM’s accounting systems or

internal controls, and the issuance of a

margin call exceeding the FCM’s

adjusted net capital. Collectively, these

are known as the Commission’s early

warning reporting requirements and are

set forth in Rule 1.12. With respect to

notices relative to reductions in capital,

one purpose of this rulemaking has been

to harmonize required notices to the

SEC and relevant futures and securities

SROs.

B. Background of This Rulemaking

On March 1, 1994, the Commission

published proposed Risk Assessment

Rules for Holding Company Systems, 59

FR 9689. Certain portions of these

proposals were adopted as final rules by

the Commission. 59 FR 66674 (Dec. 28,

1994). The proposed risk assessment

rules generally would have required,

inter alia, an FCM to notify the

Commission of certain events or

transactions that would reduce or

potentially reduce the FCM’s net

capital. These ‘‘triggering’’ events were

originally proposed to be included in a

new Rule 1.15 as part of the risk

assessment reporting rules. However,

several of the commenters on the risk

assessment proposals suggested that the

reporting of certain of these triggering

events should more appropriately be

part of the Commission’s early warning

reporting system set forth in Rule 1.12,

and the Commission agreed. Therefore,

when the Commission adopted as part

of the risk assessment rulemaking one of

the triggering provisions relating to

declines in an FCM’s adjusted net

capital, that provision was adopted as

Rule 1.12(g) instead of as a provision of

Rule 1.15, and was made applicable

only to those FCMs which are required

to file reports under Rule 1.15.2

Certain commenters on the risk

assessment proposals had suggested that

the notice provision relating to declines

in capital should be applicable to all

FCMs, not just those subject to the risk

assessment rules. The Commission

agreed, but was concerned that FCMs

which believed that they were not

subject to the risk assessment rules may

not have availed themselves of the

opportunity to comment upon the

Commission’s March 1994 risk

assessment proposals, including the

provision adopted as Rule 1.12(g).

Therefore, the Commission adopted

Rule 1.12(g) in December 1994 as

applicable only to those FCMs subject to

the risk assessment rules and at the

same time proposed to amend Rule

1.12(g) to make the reporting of capital

declines applicable to all FCMs. 59 FR

66822 (Dec. 28, 1994). In the same

Federal Register release which

announced the proposed amendment to

Rule 1.12(g), the Commission also

proposed to make certain other changes

to the early warning system as an

adjunct to its risk assessment initiative

and in response to comments received

on the March 1994 risk assessment rule

proposals which would: (1) require an

FCM to report a margin call that exceeds

its excess adjusted net capital and

remains unanswered by the close of

business on the day following the

issuance of the call (proposed Rule

1.12(f)(4)); and (2) require an FCM to

report 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 (proposed Rule

1.12(f)(5)).

The Commission originally permitted

30 days for public comment on the

proposed amendments to Rule 1.12 and

it extended the comment period for an

additional 30 days in response to a

request from the Securities Industry

Association (SIA). 60 FR 7925 (Feb. 10,

1995). The Commission received six

written comments on these proposals,

including two from contract markets

(Chicago Board of Trade (CBT) and

Chicago Mercantile Exchange (CME)),

two from trade associations (Futures

Industry Association (FIA) and SIA),

one from an FCM, Bielfeldt & Company

(Bielfeldt), and one from an associated

person, Alvin L. Goldberg. The

Commission’s Division of Trading and

Markets (Division) also received two

letters from the Intermarket Financial

Surveillance Group (IFSG),3 dated

February 22 and April 8, 1996,

respectively, which bear directly upon

one of these proposals and have been

considered along with the other

comment letters.

The Commission has carefully

considered the comments received. The

Commission has determined to adopt

the proposed amendment concerning

unanswered margin calls as proposed.

The Commission has also determined,

based upon a review of the comments

and its own reconsideration of the

proposal, that the provision of the early

warning system for FCMs requiring a

comparison of excess adjusted net

capital to six percent of the maintenance

margin level will only apply to those

positions carried by an FCM on behalf

of a noncustomer that is not itself

subject to the Commission’s minimum

financial requirements for an FCM or

the minimum financial requirements of

the SEC for a BD. The Commission is

therefore not adopting Rule 1.12(f)(5) as

proposed, which would have applied

six percent of the maintenance margin

level to all positions held in

noncustomer and proprietary accounts.

The Commission has further determined

to modify slightly the standards in Rule

1.12(g) concerning notice of substantial

declines in capital in light of the

comments received, particularly the

IFSG letters, and its own

reconsideration of the issue. The

Commission has also clarified certain

matters in response to issues raised in

the comment letters, as discussed more

fully below.

C. Reductions in Capital

As noted above, the Commission in

December 1994 added to the list of
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19179

4There are approximately 190 FCMs required to

file risk assessment reports, and the extension of

Rule 1.12(g) would cover the remaining FCMs,

approximately 70 firms.

5Certain exchanges have a similar requirement.

The rule amendment whose adoption is announced

herein is intended to induce all SROs to conform

their similar rules to the Commission requirement.

See CME Rule 972A; CBT Rule 285.03; New York

Mercantile Exchange Rule 2.14(d) and Clearing Rule

9.22(c)(i) and (ii); Commodity Exchange, Inc. Rule

7.08(a); Coffee, Sugar and Cocoa Exchange, Inc.

Clearing Rule 302(c)(i); Kansas City Board of Trade

Rule 1311.00; Kansas City Board of Trade Clearing

Corporation Rule 8.01(c); and Minneapolis Grain

Exchange Rule 2088.00.

6The SEC also has a similar rule, Rule 240.15c3–

1(e)(1), 17 CFR 240.15c3–1(e)(1)(1995), which

requires a BD to provide notice two business days

prior to withdrawals of equity capital that on a net

basis exceed in the aggregate in any 30 calendar day

period, 30 percent of the firm’s excess net capital,

or two business days after such withdrawals during

any 30 calendar day period exceed 20 percent of the

firm’s excess net capital.

7As more fully discussed below, the Commission

requested comment as to whether Rule 1.12(g)

should establish a mechanism by which the

Commission could delay or prevent an FCM from

carrying out the transaction. The SEC has authority

to restrict capital withdrawals for up to twenty

business days under certain conditions. 17 CFR

240.15c3–1(e)(3)(1995).

8 IFSG’s first letter dated February 22, 1996,

which was superseded by its April 8, 1996 letter,

recommended that the notices be made 48 hours,

rather than two business days, prior to or following

the event, and that such notices be based upon net

capital declines in either situation, rather than upon

a decline in excess adjusted net capital with respect

to prior notice. The prior notice rule adopted herein

is the same as that of the SEC adjusted to apply to

FCMs and the subsequent notice in the same as that

required by the NYSE so adjusted. FCMs that are

BDs will continue to have to file any additional

notices required by the SEC which in the case of

post-reduction notices may include some notices

triggered by haircuts.

reportable events under Rule 1.12 a new

paragraph (g), requiring that certain

FCMs (i.e., those FCMs required to file

risk assessment reports) report capital

declines which may not necessarily

result in the FCM being

undercapitalized or its capital declining

below early warning levels, but which

are sufficiently material to the FCM’s

regulatory capital to warrant enhanced

monitoring by the Commission and the

FCM’s DSRO.4

The event currently required to be

reported under Rule 1.12(g) is the

occurrence of any transaction or

condition that results in a reduction of

more than 20 percent in the adjusted net

capital of an FCM from that reported in

the most recent financial report filed

with the Commission pursuant to

Commission Rule 1.10.5 The rule draws

a distinction, with respect to when the

event must be reported, between those

events occurring in the normal course of

business and those which are

extraordinary. If the decline in adjusted

net capital is due to activities in the

normal course of an FCM’s business, the

reduction is to be reported within two

business days following the event.

These events are not normally planned

for in advance, such as operating losses,

proprietary trading losses or increased

charges against net capital. However,

where a transaction or series of

transactions is planned to be taken

which will reduce adjusted net capital

by more than 20 percent, the notice

must be filed at least two business days

in advance of the transaction or series

of transactions.6 This would permit

Commission or DSRO staff to make

further inquiries concerning the

transaction before the transaction is

effected to assure that the FCM has

adequately considered the effect of the

transaction on its overall liquidity.

Ideally, an explanation would be

included to facilitate this process. The

rule does not provide for Commission

approval or disapproval of the

transaction prior to the FCM effecting

the transaction, nor does it provide a

means for the Commission to delay or

prevent the FCM from carrying out the

transaction.7

The filing under Rule 1.12(g) is to be

made, in accordance with Rule 1.12(h),

with the regional office of the

Commission with which the FCM

normally files its financial reports under

Rule 1.10, with the principal office of

the Commission in Washington, D.C.,

with the FCM’s DSRO and with the SEC

if the FCM is also registered as a BD.

Rule 1.12(g) also provides that,

following receipt of a notice from an

FCM, the Director of the Division, or the

Director’s designee, may request

additional information concerning the

effect of the reported event on the

FCM’s financial or operational

condition. The FCM is required to

provide such additional information

within three business days, or sooner if

the Division believes prompter filing is

needed to address the condition causing

the filing of the early warning notice

and so requests.

As adopted in December 1994, Rule

1.12(g) applies only to those FCMs

which are required to file reports with

the Commission under the risk

assessment rules. Several commenters

on the Commission’s March 1994 risk

assessment proposals, including FIA

and NFA, suggested that the reporting

requirement now in paragraph (g) be

made applicable to all FCMs, not just

those required to report under Rule

1.15. The Commission agreed that this

reporting requirement serves to alert the

Commission and DSRO to potential

problems resulting from transactions

that affect an FCM directly and therefore

should not be limited to those FCMs

subject to the risk assessment rules.

Since FCMs that believed they were not

subject to the risk assessment rules may

not have taken the opportunity to

comment on the Commission’s March

1994 risk assessment rule proposals, the

Commission determined to publish

these proposed changes to Rule 1.12(g)

for comment.

All of the commenters on the

Commission’s December 1994 proposals

addressed the Commission’s proposal

concerning Rule 1.12(g). Two

commenters expressed support for the

extension of Rule 1.12(g) to all FCMs.

Three commenters noted that several

regulators and SROs had similar, but

slightly different, requirements in this

area. They further pointed out that the

IFSG was attempting to develop a

consensus on how to harmonize the

various requirements directed at the

same types of reporting and requested

that the Commission not adopt its

proposals until the IFSG completed its

study. One of these commenters, FIA,

suggested in the alternative that the

Commission adopt a ‘‘no-action’’

position to permit an FCM to follow a

related rule of its DSRO or the New

York Stock Exchange, Inc. (NYSE), as

elected by the FCM. The IFSG reported

on its harmonization efforts in its letters

to the Division dated February 22 and

April 8, 1996 and stated that the

Commission and SEC should adopt

similar rules which would require two

business days prior notice when excess

adjusted net capital is to be reduced 30

percent or more and notice within two

business when net capital has been

reduced by 20 percent or more.8

As noted above, the Commission

requested comment as to whether Rule

1.12(g) should establish a mechanism by

which the Commission could delay or

prevent an FCM from carrying out

planned transactions that would reduce

adjusted net capital by more than 20

percent. Three commenters stated that

the Commission should not be able to

delay or prevent capital reductions. A

fourth commenter, SIA, stated that for

firms dually registered as FCMs and

BDs, only the SEC should have such

authority, but it supported CFTC

authority to delay or prevent capital

reductions for other FCMs (i.e., those

not also registered as BDs). Although it

did not directly address the question

posed by the Commission, the FCM

commenter, Bielfeldt, stated that no

notice under Rule 1.12(g) should be

required with respect to capital

reductions resulting from planned

transactions. Another commenter, Mr.

Goldberg, expressed his belief that the

capital rules as written do not require
19180 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

9The IFSG’s April 8, 1996 letter made two other

suggestions in addition to those referred to above

which were that: (1) notice not be triggered by a

futures or securities transaction in the ordinary

course of business between an FCM and an affiliate

where the FCM makes payment to or on behalf of

such affiliate for such transaction and then receives

payment from such affiliate for such transaction

within two business days from the date of the

transaction; and (2) an FCM’s DSRO have discretion

to exempt the FCM from filing notice under Rule

1.12(g) where withdrawals, advances or loans in the

aggregate, on a net basis, equal $500,000 or less.

The Commission is adopting the former suggestion

as a proviso to Rule 1.12(g). As to the second

suggestion, Commission staff discussed the issue

with an IFSG representative, who stated that it was

included in the letter since the SEC rule provides

for such exemptions. The IFSG representative

further indicated that such a provision was not an

issue of concern to the futures industry members of

IFSG so the Commission is not including it in Rule

1.12(g).

10 61 FR 7080 (Feb. 26, 1996). These proposals

concerned the financial reporting cycle and the

debt-equity ratio requirements for FCMs and IBs.

11For an FCM dually registered as a BD and

taking advantage of the option available under

Commission Rule 1.10(h) to file a copy of its

Financial and Operational Combined Uniform

Single (FOCUS) Report in lieu of Form 1–FR–FCM

(which includes about one-half of all FCMs), the

calculation for subsequent notice would be based

upon ‘‘tentative net capital’’ as set forth in SEC Rule

240.15c3–1, i.e., net capital before securities

haircuts, and the calculation for prior notice would

be based upon ‘‘excess net capital.’’ The

Commission’s definition of net capital and the

SEC’s definition of tentative net capital, as well as

the Commission’s definition of excess adjusted net

capital and the SEC’s definition of excess net

capital, are for practical purposes the same.

12The Commission notes that Rule 1.12(g)(3)

provides that the Director of the Division or the

Director’s designee may require an FCM filing a

notice under Rule 1.12(g) to furnish additional

information. The Commission believes that it is

important to maintain this flexibility and this is

another reason why early warning notices should be

filed with the Commission as well as the DSRO and

not only with the latter as Bielfeldt suggested.

13See Commission Rules 1.17(a)(3)–(5) and

1.18(b), 17 CFR 1.17(a)(3)–(5) and 1.18(b) (1995).

firms to establish systems to monitor

capital on a day-to-day basis; in his

view, it is sufficient if a firm can, at a

later date, demonstrate that it was in

compliance on any date. Therefore, Mr.

Goldberg believes that the effect of

planned transactions on a firm’s capital

would not be readily determinable,

rendering a firm incapable of providing

early warning with respect to such

transactions.

There were two other comments

related to the proposed amendment of

Rule 1.12(g). Two commenters

requested clarification that notice under

the rule would not be required with

respect to repayment or prepayment of

subordinated debt, since separate notice

of such events and DSRO approval is

already required. Another commenter

stated that the calculation used in Rule

1.12(g) should be based upon net

capital, as modified by the dollar

amount of deficit and undermargined

accounts, rather than adjusted net

capital.

The Commission has carefully

considered these comments and has

determined to amend Rule 1.12(g)

consistent with the suggestions of the

IFSG.9 The Commission believes that

this action will make its rule concerning

capital reductions consistent with the

SEC’s rule and the rules of futures and

securities industry SROs in this area.

The IFSG’s letters were jointly

addressed to the Division and to the

SEC’s Division of Market Regulation

(DMR) and the Division’s staff has been

in contact with DMR staff to assure

similarity of treatment regarding early

warning notices related to capital

reductions. The Commission’s

December 1995 proposals, which are

discussed more fully below, as well as

the Commission’s February 1996

proposals,10 were intended to conform

Commission minimum financial and

related reporting requirements with

those of the SROs and SEC in various

areas, as recommended by several

participants in the Commission’s

roundtable on capital issues held on

September 18, 1995. A uniform

approach among the Commission, SEC

and the SROs with respect to notices of

major capital reductions should

simplify the reporting requirements for

FCMs that are also BDs and/or members

of more than one futures or securities

SRO, eliminating needless

inconsistencies among required notices

relating to the same types of

circumstances, and provide consistent

and sufficient information to financial

regulators and SROs to permit them to

monitor effectively the financial

condition of firms under their

jurisdiction.

The Commission notes that basing the

event requiring notice within two

business days upon a decline in net

capital rather than adjusted net capital

as currently in the rule will require

larger reductions to trigger the notice

since net capital will normally exceed

adjusted net capital. Conversely, since

the prior notice requirement will be

based upon a decline in excess adjusted

net capital rather than adjusted net

capital as currently in the rule, smaller

reductions could trigger the notice since

adjusted net capital will necessarily

exceed excess adjusted net capital,

despite the fact that the percentage

decline required to trigger prior notice

has been increased from 20 to 30

percent. The Commission believes that

it has now achieved a balanced

approach in this area that implements

its ongoing resolve to streamline its

rules and avoid unnecessary duplication

or redundant or inconsistent

requirements to the extent consistent

with customer protection. It also further

harmonizes the Commission’s rules

with SEC rules and takes account of the

ongoing harmonization project of the

IFSG.11

The Commission has also determined

not to establish a mechanism whereby it

could delay or prevent an FCM from

carrying out planned transactions that

would reduce excess adjusted net

capital by 30 percent or more. The

Commission continues to view the early

warning requirements under Rule 1.12

as essentially a mechanism for

notification of situations that have or

potentially could have a negative impact

on a firm’s ability to carry on normal

business operations consistent with the

Commission’s prudential requirements

and that pose a potential threat to

customer funds or a firm’s financial

integrity. In the case of a planned

reduction, the Commission believes that

an explanation should accompany the

notice. Although the Commission’s staff

may wish to discuss reported events

with the FCM,12 the Commission does

not believe that a formal mechanism to

delay or prevent events giving rise to a

notice under Rule 1.12(g) is warranted

at this time. The Commission currently

has the authority to require specific

reports from custodians upon the

transfer of segregated funds in certain

circumstances and also requires 100

percent segregation of customer

obligations unlike the SEC that has a

more limited requirement. These two

authorities make it less likely that there

could be a ‘‘run’’ on a futures firm or a

misappropriation of segregated funds

without additional authority to preclude

reductions of capital. Moreover, the

Commission is aware of the need for

regulators to be sensitive to the liquidity

needs of a holding company system as

a whole consistent with its

responsibilities to the regulated entity.

The Commission also wishes to

respond to the comments of Bielfeldt

and Mr. Goldberg that no notice should

be required or can be prepared with

respect to capital reductions resulting

from planned transactions. As the

Commission stated when it published

the proposals:

The Commission’s early warning rules

relating to an FCM’s level of capital

contemplate that the FCM will have systems

in place to monitor its capital levels and its

compliance with the Commission’s net

capital rules on a day-to-day basis. The

Commission requires each FCM to be able to

demonstrate its capital compliance at any

time and not just on a required formal

computation or filing date.13 Consequently,
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19181

14See Commission Rules 1.17(h)(2)(vii) and (viii),

17 CFR 1.17(h)(2)(vii) and (viii) (1995); CFTC

Interpretative Letter No. 85–17, [1984–1986

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶22,738

(Sept. 10, 1985).

15 59 FR 9689, 9706 (March 1, 1994).

16 59 FR 66822, 66823–24.

17See proposed Rule 1.15(b)(2)(iii) in the March

1994 risk assessment proposals, 59 FR 9689, 9706.

18Follow-up Report on Financial Oversight of

Stock Index Futures Markets During October 1987,

CFTC Division of Trading and Markets, at 84 (Jan.

6, 1988).

the effect of planned transactions on net

capital should be readily determinable.

The Commission further notes that

since it issued these proposals, the

failure of Barings PLC has occurred.

That failure only reinforces the need for

FCMs to have robust internal controls

and capital monitoring systems that

permit a firm to assess its financial

position on a day-to-day, if not more

frequent, basis.

In response to the request of two of

the commenters noted above, the

Commission wishes to make clear that

Rule 1.12(g) does not require separate

notice with respect to repayment or

prepayment of subordinated debt since

an FCM must always get approval for

prepayment of subordinated debt from

its DSRO as discussed more fully

below.14

D. Unanswered Margin Calls

As part of the March 1994 risk

assessment rule proposals, the

Commission had proposed Rule

1.15(b)(2)(iii), which would have

required an FCM to notify the Division

whenever aggregate cumulative losses in

all noncustomer accounts exceeded the

greater of: (A) in any 30-day period, 10

percent of the last reported consolidated

stockholders’ equity of the FCM’s parent

or $50 million, or (B) in any 12-month

period, 20 percent of the last reported

consolidated stockholders’ equity of the

FCM’s parent or $100 million.15 This

proposal was opposed by several

commenters. Some of the commenters

suggested that, as an alternative, an

FCM be required to notify the

Commission within two business days

after a margin call to a noncustomer

remains outstanding for two business

days, if the margin call exceeds 20

percent of the FCM’s adjusted net

capital.

In response to these comments, the

Commission determined in December

1994 to propose Rule 1.12(f)(4) which

would require an FCM to file an early

warning notice when a margin call on

a customer, noncustomer or omnibus

account that exceeds the firm’s excess

adjusted net capital is not answered by

the close of business on the day

following the day the call is made. The

Commission’s proposal would permit

FCMs to take into account favorable

market moves in determining whether

the margin call would be required to be

reported under this rule.16

For purposes of proposed Rule

1.12(f)(4), a margin call would mean any

deposit of funds required by the FCM to

margin, guarantee or secure a futures or

commodity option position. Thus, if,

with respect to an exchange-traded

contract, the FCM requires a deposit in

excess of the minimum required

pursuant to exchange rules, that greater

amount would be the amount used in

determining whether a call has been

collected from an account holder.

Although exchanges may exempt firms

from the requirements of Commission

Rule 1.12(f)(3), which requires notice of

issuance of a margin call in excess of a

firm’s entire adjusted net capital, the

Commission proposed not to permit the

granting of such waivers from the Rule

1.12(f)(4) notice requirement. The

Commission also requested additional

comment, however, on the originally

proposed trigger event for which Rule

1.12(f)(4) was proposed as an

alternative.17

The contract market and trade

association commenters addressed

proposed Rule 1.12(f)(4). CBT supported

the proposal. CME, FIA and SIA stated

that the rule should be based upon the

exchange minimum maintenance

margin level only, since such a rule

could otherwise be a disincentive for

FCMs to establish higher internal

margin requirements. FIA and SIA also

requested that the Commission allow

more time to meet a margin call before

notice is required if foreign customers

are involved. CBT and CME urged the

Commission to repeal Rule 1.12(f)(3),

which requires an FCM to file a notice

when an account is undermargined by

an amount in excess of the FCM’s

adjusted net capital, since it is little

used and similar to the proposal. FIA

suggested two clarifications: (1) That the

Commission state that a margin call is

usually issued on the day following the

day the account becomes

undermargined; and (2) that the

provision be applied to all commodity

interest accounts subject to margining.

FIA and SIA also requested that the

Commission define ‘‘excess adjusted net

capital.’’

The Commission has carefully

considered these comments and has

determined to adopt Rule 1.12(f)(4) as

proposed. As to whether the minimum

margin standard in the rule should be

the exchange minimum level or any

higher amount set by the FCM, the

Commission believes that FCMs

establish margin requirements for

accounts based upon an assessment of

the creditworthiness of the account

owner and that a Rule 1.12(f)(4) notice

requirement should have negligible

impact in the context of margin

requirements intended to safeguard a

firm’s financial position. Further, if the

Commission adopted the view of certain

commenters that the exchange

minimum maintenance margin level is

the appropriate level for purposes of

Rule 1.12(f)(4) and an FCM set an

account’s maintenance margin level

higher than the minimum requirement

of an exchange, the FCM would be

required to monitor the impact of the

lower exchange minimum requirement

for purposes of Rule 1.12(f)(4). The

Commission believes that such a

requirement could be more costly and

confusing to keep track of than simply

requiring an FCM to treat a margin call

for the account as a margin call under

Rule 1.12(f)(4).

Concerning the comment that more

time be allowed to meet a margin call

if foreign customers are involved, the

Commission is not persuaded that this

would be appropriate. As far back as the

October 1987 market break, the Division

noticed a disproportionate incidence of

customer defaults and liquidations

attributable to foreign traders. FCMs

were urged to establish procedures to

assure that they obtain adequate

security from foreign customers to

protect against the potential for price

fluctuations to result in aberrant margin

calls that could not be readily satisfied

by such customers and that, for the

FCM, could be unduly costly or

impossible to recover were legal action

against the customer ultimately

required.18 The Commission believes

that the events that have occurred since

1987, including the growing

internationalization of the futures

markets, and the Commission’s

determination, as discussed below, to

require gross collection of exchange-set

margin for all omnibus accounts,

including those originated by foreign

brokers, lead to the conclusion that

margin calls attributable to foreign

traders should not be given preferential

treatment in the context of the early

warning notice requirement of Rule

1.12(f)(4).

In response to FIA’s suggestions, the

Commission wishes to make clear that

a margin call is usually issued on the

business day following the business day

the account becomes undermargined

and that Rule 1.12(f)(4) as proposed and

adopted ‘‘applies to all accounts carried

by the futures commission merchant
19182 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

19See also 17 CFR 1.17(d)(3) (1995); Form 1–FR–

FCM, page 8, line 24.

20Bielfeldt further commented that haircuts on

proprietary positions should be eliminated and all

accounts should be treated similarly for capital

purposes. This comment addresses issues outside of

the scope of this rulemaking proceeding.

21Because of this determination, the

Commission’s proposal that maintenance margin

with respect to an FCM’s proprietary account shall

mean the amount of funds the FCM is required to

maintain at the clearing organization with its

clearing broker, or five percent of the value of the

contract, whichever is greater, is moot. The

Commission requested comment on that point and

CME and Bielfeldt objected to the five percent

provision, while CBT thought such a provision

should be used only in the absence of margin being

set by the exchange or clearing organization.

22This proposal would also have the effect of

increasing an FCM’s ‘‘early warning’’ level of

adjusted net capital from $75,000 to $375,000

despite the fact that Rule 1.12(b)(1) itself would not

be amended.

23More than two-thirds of IBs enter into a

guarantee agreement with an FCM in accordance

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

lieu of raising their own capital, and thus would be

unaffected by the proposed amendment.

24These proposals and others discussed below

were published at 60 FR 63995 (Dec. 13, 1995).

25 7 U.S.C. 13a–1 (1994).

26See 60 FR 63995, 63996.

27Section 6c of the Act 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. 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. See Sections 8c(a)(1) and 17(l)(1)

of the Act, 7 U.S.C. 12c(a)(1) and 21(l)(1) (1994).

28Commission Rule 170.15, 17 CFR 170.15

(1995), 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. NFA is the only

registered futures association.

29 43 FR 39956, 39972 (Sept. 8, 1978).

30On November 24, 1992, the SEC adopted rule

amendments to raise its minimum net capital

requirements for BDs 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).

* * * that are subject to margining

* * *.’’ As to the term ‘‘excess adjusted

net capital,’’ this means an FCM’s

adjusted net capital less its required

minimum adjusted net capital

computed in accordance with

Commission Rule 1.17.19 The

Commission further wishes to make

clear that the notice required by Rule

1.12(f)(4) must include account name,

date of margin call, amount of margin

call and the FCM’s excess adjusted net

capital. The Commission also believes

that Rule 1.12(f)(3) referred to above,

although somewhat similar to Rule

1.12(f)(4), should continue as a separate

early warning notice requirement.

E. Maintenance Margin Factor

Some commenters on the

Commission’s March 1994 risk

assessment proposals also suggested

that, in lieu of adopting the proposal

referred to above concerning the

reporting of losses in noncustomer

accounts, the Commission amend Rule

1.12 to add an early warning reporting

requirement to require an FCM to report

to the Commission whenever its excess

adjusted net capital is less than six

percent of the maintenance margin

requirement applicable to positions in

proprietary and noncustomers’

accounts. These commenters noted that

the CME imposes a capital requirement

on an informal basis on its clearing

members that factors in a percentage of

proprietary and noncustomers margin

requirements. The Commission

determined to propose an amendment to

Rule 1.12 in December 1994 in line with

the commenters’ suggestions.

All of the commenters on the

December 1994 proposals addressed this

provision and stated that proprietary

positions are subject to haircuts and

thus should not be included in the

calculation for an early warning notice

requirement.20 The trade association

commenters also stated that positions

held by noncustomers who are subject

to capital requirements of the

Commission, or of another regulator or

an SRO, either domestic or foreign,

should not be included in the

calculation required by Rule 1.12(f)(5).

The Commission has reconsidered its

proposal in light of these comments. As

noted above, the proposal responded to

comments on the March 1994 risk

assessment proposals which apparently

misread the CME’s requirements, since

the CME rule only adds a percentage of

noncustomer margin. The Commission

recognizes that proprietary positions are

already accounted for in the minimum

financial rule through haircuts;

however, noncustomer positions are not

and neither are they factored into the

minimum financial requirement based

upon four percent of customer funds.

Based upon the comments and its

reconsideration of the issue, the

Commission has determined not to

include proprietary accounts as a factor

in determining whether notice is

required under Rule 1.12(f)(5).21

However, noncustomer accounts will be

included in the calculation under Rule

1.12(f)(5), unless the noncustomer is

itself subject to the Commission’s

minimum financial requirements for an

FCM or the SEC’s minimum financial

requirements for a BD. This is intended

to reflect the fact that affiliates rarely

retain excess funds at the clearing firm.

The Commission will reassess whether

this exclusion is appropriate in

connection with its further review of the

capital rule as a whole.

II. Minimum Financial Requirements

for FCMs and IBs

On December 7, 1995, the

Commission voted to propose

amendments to Rule 1.17 to: (a) Increase

the required minimum dollar amount of

adjusted net capital for FCMs from

$50,000 to $250,000; 22 (b) increase the

required minimum dollar amount of

adjusted net capital for ‘‘independent’’

IBs from $20,000 to $30,000; 23 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.24

These amendments were proposed in

order to permit the Commission to use

its authority under Section 6c of the

Commodity Exchange Act (Act) 25 to

enforce compliance with what are

effectively, for the reasons discussed

when the proposals were published,26

the current minimum adjusted net

capital requirements applicable to FCMs

and independent IBs with the benefit of

all of the remedies available to the

Commission under the Act for the

enforcement of compliance with any

provision of the Act and any rule

promulgated thereunder.27 In addition,

these amendments would harmonize the

Commission’s minimum financial

requirements for FCMs and independent

IBs with the prevailing standards

established by NFA rules.28 The

amendments would also support the

objective of assuring that FCMs have a

substantial commitment to meeting their

regulatory 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 last time the

Commission increased the required

minimum dollar amount of capital for

FCMs.29 The Commission also believed

that the proposed amendments to Rule

1.17 were 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,

and 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 at least $50,000,30 or
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19183

31The Commission’s minimum dollar amount of

adjusted net capital for independent IBs has

remained unchanged at $20,000 since 1983, when

rules governing IBs were first adopted, so the

change in the dollar’s value since that time justifies

an increase to $30,000 for the minimum amount. 48

FR 35248 (Aug. 3, 1983).

32NFA minimum financial requirements for

FCMs and independent IBs based upon the number

of branches and APs are discussed in the proposing

release, 60 FR 63995, 63997.

33All SROs are required to have in effect and

enforce rules approved by the Commission

prescribing minimum financial and related

reporting requirements for member FCMs and IBs.

Such requirements must be the same as, or more

stringent than, those contained in Commission

Rules 1.10 and 1.17. See Commission Rule 1.52, 17

CFR 1.52 (1995).

34See 60 FR 63995, 63997.

35The other provisions of Rule 1.17 referred to

herein are discussed at 60 FR 63995, 63996.

36CFTC Interpretative Letter No. 85–17, [1984–

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

¶ 22,738 (Sept. 10, 1985).

37 In those rare instances where the registrant is

not a member of any SRO (which would mean that

it could not handle customer business), such a

request would be submitted to the Commission.

38The Commission made clear when it proposed

this amendment that if a firm’s subordinated debt

amounts to 25 percent of its adjusted net capital

and the firm wishes to prepay all outstanding

subordinated debt and simultaneously enter into

new subordinated debt arrangements for the same

amount, but with a different maturity date 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 long as such

conversion did not result in a reduction of 20

percent or more of the firm’s adjusted net capital.

60 FR 63995, 63997–98.

39The comment letters referred to the adjusted

net capital standard in the proposal. As noted

above, the amendments to Rule 1.12(g) as adopted

are based upon a reduction in a firm’s net capital

or excess adjusted net capital.

40This requirement is in addition to the current

requirement that each DSRO report monthly to the

regional office of the Commission nearest to it all

actions taken with respect to subordinated loan

agreements. Division of Trading and Markets

Financial and Segregation Interpretation No. 4–1,

¶ 25, 1 Comm. Fut. L. Rep. (CCH) ¶ 7114A, at 7102

(July 29, 1985).

an independent IB’s adjusted net capital

is below $30,000 yet still $20,000 or

more.31

Four comment letters were received

on the December 1995 proposals,

submitted by FIA, NFA, CBT and CME.

FIA and NFA supported the proposed

amendments to the Commission’s

minimum financial requirements for

FCMs and independent IBs. CBT and

CME supported raising the minimum

dollar amounts of the Commission’s

financial requirements to those of the

NFA for FCMs and independent IBs, but

objected to incorporating all aspects of

NFA’s minimum financial requirements

(i.e., the standards based on number of

branches and associated persons (APs))

into the Commission’s rules.32 CBT

stated that:

Many SROs have their own internal rules

to determine capital that have been

developed to address a specific need

identified by that SRO. It can be anticipated

that the NFA may develop further capital

standards to address the capital needs of the

firms for which it is primarily responsible

and although all FCMs doing customer

business are subject to these requirements, by

virtue of being members of the NFA, if such

requirements become Commission mandates,

there would be a greater responsibility placed

on the other DSROs to monitor compliance

with what are in essence another

organization’s internal capital requirements.

The Commission disagrees with this

comment. A registered futures

association cannot impose a minimum

financial requirement for its member

FCMs and IBs unless such a rule is

approved by the Commission. When the

Commission approves such a rule of the

registered futures association, the

proposed amendment would make that

standard an element of the

Commission’s minimum requirements.

Therefore, SROs effectively will be

monitoring compliance with the

minimum financial requirements for

doing Commission-regulated FCM

business, not another organization’s

internal capital requirements.33

Based upon a review of the comments

and its own consideration of these

issues, the Commission has determined

to adopt the amendments to Rule 1.17(a)

as proposed. The Commission is also

adopting conforming amendments to the

early warning level of adjusted net

capital for FCMs (new paragraph (b)(3)

of Rule 1.12), the restrictions on

withdrawals of equity capital (new

paragraph (e)(1)(iii) of Rule 1.17), and

various provisions of Rule 1.17(h)

concerning subordinated debt.34 The

Commission further notes that several

provisions of Rule 1.17 contain crossreferences to Rule 1.17(a)(1)(i)(A) and

1.17(a)(1)(ii)(A), the minimum dollar

amount of adjusted net capital for FCMs

and independent IBs, respectively.

These other provisions of Rule 1.17

restrict or require certain actions if

specified levels of adjusted net capital,

which in all cases exceed 100 percent of

the minimum dollar amount, are

breached. Thus, the amendments to

Rule 1.17(a)(1)(i)(A) and (a)(1)(ii)(A)

will have a corresponding impact on

various FCM and independent IB

activities or obligations referred to

elsewhere in Rule 1.17.35

III. Approval of Prepayment of

Subordinated Debt

The Commission also proposed in

December 1995 to codify a Division ‘‘noaction’’ letter 36 by amending

Commission Rule 1.17(h)(2)(vii)(C)

generally to require submission by an

FCM or independent IB of a request for

approval of prepayment of subordinated

debt only to its DSRO.37 However, the

Commission also proposed that dual

approval by the DSRO and the

Commission would be required if the

requested prepayment would result in a

reduction of 20 percent or more of the

firm’s adjusted net capital.38

FIA supported the amendment as

proposed, but NFA, CBT and CME each

raised objections to a requirement for

dual approval by the DSRO and the

Commission where prepayments of

subordinated debt would reduce a firm’s

adjusted net capital by at least 20

percent. The commenters stated that

DSROs have demonstrated the

capability to competently handle

prepayment of subordinated debt during

the past ten years of the no-action

period. CME stated that a firm will be

required to provide notice of a decrease

of 20 percent or more in adjusted net

capital pursuant to Rule 1.12(g), as

discussed above. CBT recommended

that the Commission make clear that a

prepayment of subordinated debt that

results in a decrease of 20 percent or

more in adjusted net capital constitutes

a reporting event to the Commission.39

NFA recommended that approval of

such prepayment should only be

required by the DSRO, which in turn

should be required to provide the

Commission with notice of any such

approvals.

The Commission has considered this

issue in light of the comments received

and the other rule amendments it is

announcing herein, particularly Rule

1.12(g) discussed above. The

Commission believes that dual approval

by the DSRO and the Commission need

not be required for prepayment of

subordinated debt, even if such

prepayment would reduce an FCM’s or

independent IB’s net capital by 20

percent or more or its excess adjusted

net capital by 30 percent or more. In

such cases, however, the DSRO must

immediately provide the Commission

with a copy of any notice of approval of

prepayment of subordinated debt issued

to an FCM or an independent IB.40

IV. Gross Collection of Exchange-Set

Margins

The Commission also proposed in

December 1995 to amend Rule 1.58,

which governs gross collection of

exchange-set margin for omnibus

accounts, to make it applicable to

omnibus accounts carried by FCMs for

foreign brokers. The Commission made

this proposal because, in view of the
19184 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

41A fuller discussion of this issue is set forth in

the proposing release. 60 FR 63995, 63998.

42This charge relates to funds deposited by an

FCM with a foreign broker for clearing transactions

on non-U.S. markets, as distinct from the exclusion

from current assets for debit/deficit accounts under

Rule 1.17(c)(2)(i), where a customer of the FCM has

a debt to the FCM.

43 43 FR 39956, 39975 (Sept. 8, 1978).

44The Joint Audit Committee (JAC) is composed

of representatives of all U.S. futures SROs. It was

established to coordinate audit and financial

surveillance, plans, policies and procedures,

particularly with respect to FCMs that are members

of more than one SRO. Responsibility for

monitoring firms that are members of more than one

SRO is allocated among the SROs under a Joint

Audit Plan in which all of the exchanges and NFA

participate.

45 17 CFR 30.10 (1995). Part 30 of the

Commission’s rules governs foreign futures and

options transactions (i.e., commodity interest

transactions entered into by a person located in the

U.S. on or subject to the rules of a foreign board

of trade) and generally requires, among other things,

that persons engaged in such transactions for or on

behalf of customers located in the U.S. register

under the Act. However, the Part 30 rules contain

an exemptive provision pursuant to which the

Commission may exempt a firm located outside the

U.S. from the application of certain of the

Commission’s rules based upon substituted

compliance by the firm with corresponding

regulatory requirements of the foreign jurisdiction

in areas such as registration, minimum financial

requirements, safeguarding of customer funds,

record-keeping and reporting requirements, and

sales practice standards, and subject to certain

conditions primarily related to the protection of

customer funds.

The relief is granted to firms designated by a

foreign entity such as the United Kingdom

Securities and Investments Board or the Association

of Futures Brokers and Dealers (U.K.). A listing of

these entities is set forth in Appendix C to the

Commission’s Part 30 rules.

46See 5 U.S.C. 553(b) (1994). Preliminary review

of data related to this charge by the Commission’s

staff indicates that these receivables are not a

substantial asset for most firms. The Commission

also notes that its staff will review firms’ financial

statements to determine if unsecured receivables

from foreign brokers are a substantial portion, such

as 25 percent, of a firm’s assets and, if so, may

undertake discussions with the firms concerning

the circumstances involved.

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

increasing internationalization of the

financial markets, and in particular the

increasing use of foreign omnibus

accounts, the Commission believed that

foreign broker omnibus accounts should

be treated in the same manner as

omnibus accounts carried for domestic

FCMs. The Commission also noted that

the proposals would conform Rule 1.58

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.

FIA, CBT and CME supported the

proposed amendment to Rule 1.58 and

the Commission has determined to

adopt this amendment as proposed.41

The Commission believes that gross

collection of exchange-set margin at the

clearing firm materially improves

financial control over the positions

carried through omnibus accounts.

V. Receivables From Foreign Brokers

Commission Rule 1.17(c)(5)(xiii)

requires that an FCM or independent IB,

when computing its adjusted net

capital, take a charge against its net

capital based upon:

Five percent of all unsecured receivables

includable under paragraph (c)(2)(ii)(D) of

this section used by the applicant or

registrant in computing ‘net capital’ and

which are not receivable from (A) a registered

futures commission merchant, or (B) a broker

or dealer which is registered as such with the

Securities and Exchange Commission.42

This provision has been unchanged

since it was adopted by the Commission

as part of the major overhaul of the

minimum financial and related

reporting requirements in 1978.43 In

1978, foreign futures business was

totally unregulated and foreign options

were banned.

By letter dated January 12, 1996 to the

Division, the Joint Audit Committee 44

requested that the Commission exempt

from the five percent capital charge set

forth in Rule 1.17(c)(5)(xiii) those

unsecured receivables from a foreign

broker that has been granted

‘‘comparability relief’’ under

Commission Rule 30.10.45

When the Commission adopted Rule

1.17(c)(5)(xiii) in 1978, there were no

Part 30 rules and the Commission had

little interaction with foreign regulators

compared to what it has in that regard

today. Indeed, many foreign

jurisdictions had no developed

regulatory structure for the futures

industry at that time. The Commission

was therefore concerned that unsecured

receivables from foreign brokers

represented greater risk to a firm’s

financial condition than those from a

registered FCM or BD, and should be

subject to an additional capital charge.

The increased cooperation among

regulators globally and enhancement of

capital standards monitoring today as

compared to 1978 justifies a

reconsideration of the appropriateness

of Commission Rule 1.17(c)(5)(xiii). The

Commission also notes that registered

FCMs and BDs today may have large

exposures in a jurisdiction such as the

U.K. and an unsecured receivable from

such an FCM or BD would not be

subject to a haircut whereas the same

receivable from a U.K. affiliate of a U.S.

firm would be subject to the five percent

charge so the five percent charge is a

regulatory rather than a location charge.

Based upon its consideration of this

issue, the Commission has determined

to add a proviso to Rule 1.17(c)(5)(xiii)

such that the haircut will not apply to

an unsecured receivable due from a

foreign broker if the receivable

represents deposits required to maintain

futures and commodity option positions

(i.e., ‘‘excess’’ deposits by an FCM with

a foreign broker are still subject to the

five percent charge), the foreign broker

has been granted comparability relief

pursuant to Commission Rule 30.10 and

the receivable is held in compliance

with the customer funds protection

requirements of the relevant

Commission order made under Rule

30.10 by the foreign broker itself, with

another foreign broker that has been

granted comparability relief under

Commission Rule 30.10, or at a

depository in the same jurisdiction as

either foreign broker that would qualify

as a depository for funds in accordance

with Commission Rule 30.7. Essentially,

the Commission is interpreting the

existing rule to treat ‘‘Rule 30.10 firms’’

akin to a registered FCM, provided the

conditions about the nature and location

of the receivable are also met. As this

relieves a burden on FCMs and

independent IBs in computing their

adjusted net capital, and follows a

request for such relief by the JAC on

behalf of the member firms of the SROs,

the Commission finds good cause that it

is unnecessary to publish this rule

amendment for public comment.46

However, although the Commission is

publishing this amendment as a final

rule, it would encourage any interested

parties to submit comments on this

amendment.

VI. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA),

5 U.S.C. 601–611 (1994), requires that

agencies, in proposing rules, consider

the impact of those rules on small

businesses. The rule amendment

discussed 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.47

With respect to IBs, the Commission

stated that it is appropriate to evaluate

within the context of a particular rule

whether some or all IBs should be

considered to be small entities and, if
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19185

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

49The proposed increase in the dollar amount of

minimum adjusted net capital for an FCM and 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, as

well as a calculation of the minimum adjusted net

capital requirement based upon a firm’s branch

offices and APs.

so, to analyze the economic impact on

such entities at that time.48 The

amendments to Rules 1.17(c)(5)(xiii)

and (h)(2)(vii) eliminate the capital

charge for unsecured receivables from

certain foreign brokers and reduce the

burden associated with the procedure to

obtain approval for prepayment of

subordinated debt, respectively.

Accordingly, these amendments impose

no additional requirements on an

independent IB. In addition, the

amendment to the minimum adjusted

net capital requirement for an IB

conforms the Commission’s requirement

to that of the NFA and therefore there

should be no impact on an IB’s financial

operations. Therefore, these 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 1980

(PRA), 44 U.S.C. 3501 et seq. (1994),

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. In

compliance with the PRA, the

Commission submitted the December

1994 proposed rule amendments and

their associated information collection

requirements to the Office of

Management and Budget. The burden

associated with that entire collection

(3038–0024) including the December

1994 proposed rule amendments, is as

follows:

Average Burden Hours Per Response:

18.00.

Number of Respondents: 1,782.

Frequency of Response: annually,

quarterly and on occasion.

The burden associated with the

December 1994 proposed rule

amendments was as follows:

Average Burden Hours Per Response:

1.00.

Number of Respondents: 12.

Frequency of Response: on occasion.

The Office of Management and Budget

approved the December 1994

submission concerning collection 3038–

0024 on February 1, 1995.

When the Commission proposed rule

amendments in December 1995, it noted

that the proposed rule amendments had

no burden,49 although Rules 1.12, 1.17

and 1.58 are part 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 the rule

amendments proposed in December

1995, is as noted above. The burden

associated with the collection required

by Rule 1.58 (3038–0026), including the

rule amendments proposed in December

1995, is as follows:

A. Reporting

Average Burden Hours Per Response:

0.04.

Number of Respondents: 100.00.

Frequency of Response: daily.

B. Recordkeeping

Average Burden Hours Per Response:

1.00.

Number of Respondents: 300.00

Frequency of Response: annually.

Persons wishing to comment on the

estimated paperwork burden associated

with these 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

submissions to OMB are available from

Joe F. Mink, CFTC Clearance Officer,

1155 21st Street, NW., 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(b), 4f(c), 4g and

8a, 7 U.S.C. 6f(b), 6f(c), 6g, and 12a, the

Commission hereby amends Part 1 of

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), by

adding a new paragraph (b)(3), by

adding paragraphs (f)(4) and (f)(5) and

by revising the introductory text of

paragraph (g), paragraph (g)(1) and

paragraph (g)(2) 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

* * * * *

(f) * * *

(4) A futures commission merchant

shall report immediately whenever any

commodity interest account it carries is

subject to a margin call, or call for other

deposits required by the futures

commission merchant, that exceeds the

futures commission merchant’s excess

adjusted net capital, determined in

accordance with § 1.17, and such call

has not been answered by the close of

business on the day following the

issuance of the call. This applies to all

accounts carried by the futures

commission merchant, whether

customer, noncustomer, or omnibus,

that are subject to margining, including

commodity futures and options. In

addition to actual margin deposits by an

account owner, a futures commission

merchant may also take account of

favorable market moves in determining

whether the margin call is required to be

reported under this paragraph.

(f)(5)(i) A futures commission

merchant shall report immediately

whenever its excess adjusted net capital

is less than six percent of the

maintenance margin required by the

futures commission merchant on all

positions held in accounts of a

noncustomer other than a noncustomer

who is subject to the minimum financial

requirements of:

(A) A futures commission merchant,

or

(B) The Securities and Exchange

Commission for a securities broker and

dealer.

(ii) For purposes of paragraph (f)(5)(i),

maintenance margin shall include all

deposits which the futures commission

merchant requires the noncustomer to

maintain in order to carry its positions

at the futures commission merchant.

(g) A futures commission merchant

shall provide written notice of a

substantial reduction in capital as

compared to that last reported in a

financial report filed with the

Commission pursuant to § 1.10. This

notice shall be provided as follows:

(1) If any event or series of events,

including any withdrawal, advance,

loan or loss cause, on a net basis, a

reduction in net capital (or, if the

futures commission merchant is

qualified to use the filing option

available under § 1.10(h), tentative net

capital as defined in the rules of the

Securities and Exchange Commission)

of 20 percent or more, notice must be

provided within two business days of
19186 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

the event or series of events causing the

reduction; and

(2) If equity capital of the futures

commission merchant or a subsidiary or

affiliate of the futures commission

merchant consolidated pursuant to

§ 1.10(f) (or 17 CFR 240.15c3–1e) would

be withdrawn by action of a stockholder

or a partner or by redemption or

repurchase of shares of stock by any of

the consolidated entities or through the

payment of dividends or any similar

distribution, or an unsecured advance or

loan would be made to a stockholder,

partner, sole proprietor, employee or

affiliate, such that the withdrawal,

advance or loan would cause, on a net

basis, a reduction in excess adjusted net

capital (or, if the futures commission

merchant is qualified to use the filing

option available under § 1.10(h), excess

net capital as defined in the rules of the

Securities and Exchange Commission)

of 30 percent or more, notice must be

provided at least two business days

prior to the withdrawal, advance or loan

that would cause the reduction:

Provided, however, That the provisions

of paragraphs (g)(1) and (g)(2) of this

section do not apply to any futures or

securities transaction in the ordinary

course of business between a futures

commission merchant and any affiliate

where the futures commission merchant

makes payment to or on behalf of such

affiliate for such transaction and then

receives payment from such affiliate for

such transaction within two business

days from the date of the transaction.

* * * * *

3. Section 1.17 is amended as follows:

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

3.2. By revising paragraph (c)(5)(xiii);

3.3. 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);

3.4. 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);

3.5. 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);

3.6. 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);

3.7. 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

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

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

3.8. 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

3.9. 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)).

* * * * *

(c) * * *

(5) * * *

(xiii) Five percent of all unsecured

receivables includable under paragraph

(c)(2)(ii)(D) of this section used by the

applicant or registrant in computing

‘‘net capital’’ and which are not

receivable from

(A) A registered futures commission

merchant, or

(B) A broker or dealer which is

registered as such with the Securities

and Exchange Commission: Provided,

however, That if the unsecured

receivable represents deposits required

to maintain futures and commodity

option positions, is receivable from a

broker which has been granted

comparability relief pursuant to § 30.10

of this chapter, and is held by the broker

itself, with another foreign broker that

has been granted comparability relief

under § 30.10 of this chapter, or at a

depository in the same jurisdiction as

either foreign broker that would qualify

as a depository for funds in accordance

with § 30.7 of this chapter, and, in the

case of customer funds, is held in

accordance with the special

requirements of the applicable

Commission order issued under § 30.10

of this chapter, there will be no charge.

* * * * *

(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.
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19187

(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, no prepayment or

special prepayment shall occur 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 selfregulatory organization. The designated

self-regulatory organization shall

immediately provide the Commission

with a copy of any notice of approval

issued where the requested prepayment

or special prepayment will result in the

reduction of the registrant’s net capital

by 20 percent or more or the registrant’s

excess adjusted net capital by 30

percent or more.

(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 April 25,

1996, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 96–10714 Filed 4–30–96; 8:45 am]

BILLING CODE 6351–01–P

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

Office of the Secretary

24 CFR Part 0

[Docket No. FR–3331–C–02]

RIN 2501–AB55

Reinstatement of Two Sections of

HUD’s Standards of Conduct

Regulation at 24 CFR Part 0;

Correction

AGENCY: Office of the Secretary,

Department of Housing and Urban

Development.

ACTION: Correction to final rule.

SUMMARY: This correction to a final rule

issued by the Department of Housing

and Urban Development (Department)

reinstates two sections of HUD’s

Standards of Conduct at 24 CFR part 0,

that pertain to ‘‘Outside employment

and other activities’’ and ‘‘Financial

interests,’’ which were deleted in a final

rule published on April 5, 1996.

DATES: Effective Date: May 6, 1996.

FOR FURTHER INFORMATION CONTACT:

Aaron Santa Anna, Assistant General

Counsel, Ethics Law Division, at (202)

708–3815, or Sam E. Hutchinson,

Associate General Counsel, Office of

Human Resources Law, (202) 708–0888;

451 Seventh Street, SW., Washington,

DC 20410. Hearing or speech-impaired

individuals may call HUD’s TDD

number (202) 708–3259. (Telephone

numbers are not toll-free.)

SUPPLEMENTARY INFORMATION: On April

5, 1996, the Department published a

final rule that revised the Department’s

Standards of Conduct regulation at 24

CFR Part 0. This final rule takes effect

on May 6, 1996. See 61 FR 15350. The

final rule removed 24 CFR part 0 in its

entirety and replaced it with a single

section that provides a cross reference to

the executive branch financial

disclosure regulations at 5 CFR part

2634 and the Standards of Ethical

Conduct for Employees of the Executive

Branch regulation at 5 CFR part 2635

(the Standards). Most of the provisions

in 24 CFR part 0 were superseded when

5 CFR parts 2634 and 2635 took effect.

Among the provisions removed from

24 CFR part 0 were two—§ 0.735–203

regarding ‘‘Outside employment and

other activities’’ and § 0.735–204

regarding ‘‘Financial interests’’—that

were not superseded by 5 CFR parts

2634 and 2635. Those two provisions

remained in effect temporarily under

the Notes following 5 CFR 2635.804 and

5 CFR 2635.403(a), as extended at 59 FR

4779–4780, 60 FR 6390–6391, and 60

FR 66857–66858 (see also appendixes

A–C to 5 CFR part 2635). The notes are

‘‘grandfather’’ provisions that currently

preserve until August 7, 1996 (or until

issuance of the agency’s supplemental

standards of ethical conduct regulation,

whichever occurs first) such

requirements for prior approval of

employment or activities, and

prohibitions on acquiring or holding a

specific financial interest, contained in

agency regulations, instructions or other

issuances in effect prior to the effective

date of the Standards. In accordance

with these grandfather provisions, the

Department is reinstating removed

sections 0.735–203 and 0.735–204 of 24

CFR, renumbered respectively as

sections 0.2 and 0.3, to avoid an

untimely lapse in enforcement authority

pending issuance of the Department’s

supplemental standards of ethical

conduct as a final rule.

On June 30, 1995, the Department

published proposed supplemental

standards of ethical conduct for its

employees. See 60 FR 34420–34426.

The proposed rule would establish

restrictions on outside employment and

activities and prohibitions on the

ownership of certain financial interests,

similar to those in 24 CFR 0.735–203

and 0.735–204. In that rulemaking

document, the Department also

proposed to revise 24 CFR part 0 by

removing all of the provisions therein

and replacing them with a residual

provision that would cross reference 5

CFR parts 2634 and 2635, as well as the

Department’s supplemental standards of

ethical conduct to be codified at 5 CFR

part 7501. Upon publication of the

Department’s supplemental standards of

ethical conduct as a final rule, the

Department will, as proposed at 60 FR

34420–34426, amend the residual cross

reference section in 24 CFR part 0 by

adding a cross reference to the

Department’s supplemental standards of

ethical conduct at 5 CFR part 7501. In