[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4570]


[[Page Unknown]]

[Federal Register: March 1, 1994]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

 

Risk Assessment for Holding Company Systems

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing for comment rules to implement the risk 
assessment provisions of the Futures Trading Practices Act of 1992. The 
proposed rules would enhance the Commission's financial surveillance 
program by providing the Commission with access to information 
concerning the activities of affiliates of registered futures 
commission merchants (``FCMs'') whose activities are reasonably likely 
to have a material impact on the financial or operational condition of 
the FCM. As proposed, these rules would require registered FCMs to 
maintain certain records concerning the financial activities of such 
material affiliates, to file certain information with the Commission on 
an annual and quarterly basis and to provide additional information to 
the Commission upon the occurrence of specified events.

DATES: Comments must be received on or before May 2, 1994.

ADDRESSES: Comments on the proposed rules should be sent to Jean A. 
Webb, Secretary of the Commission, Commodity Futures Trading 
Commission, 2033 K Street, NW., Washington, DC 20581. Reference should 
be made to ``Proposed Risk Assessment Rules.''

FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief 
Counsel, Lawrence B. Patent, Associate Chief Counsel, or Lawrence T. 
Eckert, Attorney Adviser, Division of Trading and Markets, Commodity 
Futures Trading Commission, 2033 K Street, NW., Washington, DC 20581. 
Telephone (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Background

    Following the failures of certain FCMs operating as part of a group 
of affiliated companies, the Commission requested and received new 
statutory authority, codified in the Futures Trading Practices Act of 
1992 (``FTPA''),\1\ to obtain information concerning affiliate 
activities that could pose material risks to the FCM. The Commission is 
proposing rules to implement this new authority. The proposed rules, in 
accordance with the statutory authority granted the Commission, 
establish three basic types of risk assessment requirements: (1) 
Recordkeeping; (2) reporting to the Commission of certain information 
on a routine basis; and (3) reporting to the Commission upon the 
occurrence of certain events that warrant further review.
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    \1\Pub. L. No. 102-546, 106 Stat. 3590 (1992). The FTPA was 
enacted on October 28, 1992.
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    First, the proposed rules require that FCMs maintain certain 
records. These records concern FCM risk management policies, procedures 
and systems and the activities of their affiliates that could result in 
material risks to the FCM's financial condition or operations. They 
include information concerning on-balance sheet and off-balance 
financial activities of the FCM's material affiliates, and consolidated 
financial information for the group of companies of which the FCM is a 
part.
    Second, the proposed rules would require reporting by the FCM to 
the Commission, generally on an annual basis unless significant changes 
in the reported information occur, of the risk management and affiliate 
activity information required to be maintained by the FCM. Aggregate 
information concerning the noncustomer accounts carried by the 
reporting FCM would be required on a routine quarterly basis. These 
routine reporting requirements are designed to facilitate 
identification of FCMs whose financial condition or operations may be 
affected by their relationships with affiliate firms, to provide 
Commission staff background information on the group and its activities 
to enable it to better evaluate non-routine reports and permit more 
efficient and informed responses by the Commission in emergency 
situations, to permit identification of significant changes in the 
scope, types and risk of those activities, to permit the Commission to 
better understand how the group is funded, and to provide the 
Commission with information concerning the types of affiliate 
activities that are likely to pose risks to the FCM.
    Third, the proposed rules would require that FCMs give notice to 
the Commission of certain events such as a decline in the FCM's capital 
or losses at a material affiliate exceeding specified thresholds. These 
``trigger'' events have been constructed with a view towards providing 
the Commission with notice of circumstances likely to warrant further 
scrutiny. Upon receipt of such a notice, the Commission may seek 
additional information, as warranted in the circumstances, from another 
regulator and/or from the FCM. The use of specified events triggering 
notice to the Commission is also intended to reduce the need for 
routine reports to the Commission without compromising the overall 
objectives of the risk assessment program.
    The rules contain certain required exemptions for banks and 
insurance companies and defer to certain Securities Exchange Act 
requirements in the case of broker-dealer FCMs.
    Comment is requested concerning all aspects of the proposed rules 
and specifically concerning the appropriate balance of routine 
reporting requirements, event-specific notice requirements, and use of 
statutory special call authority.

A. Current Financial Regulatory Framework

    Section 229 of the FTPA, entitled ``Risk Assessment for Holding 
Company Systems,'' added new section 4f(c)\2\ to the Commodity Exchange 
Act (``CEA'' or ``Act''). Section 4f(c) provides the Commission with 
authority to obtain information concerning activities of an FCM's 
affiliates that could pose material risks to the FCM. The Commission's 
new risk assessment authority augments long-standing provisions of the 
CEA and Commission regulations designed to safeguard funds held by FCMs 
on behalf of futures customers and to assure that FCMs maintain a 
minimum level of capital to support their obligations to customers and 
the marketplace on an ongoing basis.
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    \2\7 U.S.C. 6f(c) (Supp. IV 1992).
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    Section 4d(2) of the CEA and Commission regulations require that 
one hundred percent of customer funds and property, that is, all funds 
and property deposited to ``margin, guarantee or secure'' futures or 
commodity option positions, and all accruals thereon, be maintained for 
the exclusive benefit of the depositing customer and segregated from 
the funds of the FCM.\3\ The segregation requirement bars the use by an 
FCM of one customer's funds for any purpose other than to margin or 
secure that customer's trades and facilitates customer recovery on a 
first priority basis in the event of the bankruptcy of the FCM. Under 
Section 4d(2) and Commission rules, an FCM must always maintain 
sufficient funds in segregation to satisfy the claims of all customers 
holding accounts with positive net equities. An FCM therefore is 
required to add its own funds to the segregated customer funds account 
to cover any debit or deficit account balance of any customer by the 
close of business on the day the deficit occurs. As a consequence, if 
the segregation requirements are satisfied, an FCM's financial failure 
generally should not result in a loss of customer funds, and one 
customer's withdrawal of funds or failure to satisfy margin demands 
should not affect the funds of any other customer.\4\
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    \3\7 U.S.C. 6d(2) (1988).
    \4\See, generally, Commission Rules 1.20-1.30 and Part 190. 
Commission rules referred to herein are found at 17 CFR Ch. I 
(1993).
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    The CEA and Commission rules requiring that FCMs maintain 
regulatory capital at or above specified minimum levels buttress the 
security of customer funds and the overall financial integrity of the 
futures markets. Minimum capital requirements for FCMs are designed to 
assure that futures firms are financially sound and have liquid assets 
sufficient to sustain normal market reverses without losses to 
customers. The CFTC's financial regulations also establish an ``early 
warning'' system to identify firms whose capital levels or other 
conditions warrant intensified surveillance. This system requires 
notice to the Commission when an FCM's capital falls below 150 percent 
of its required minimum capital and when certain other conditions exist 
that constitute or could lead to capital impairment or other financial 
deficiencies.\5\
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    \5\Commission rules require, for example, that an FCM provide 
notice to the Commission if the FCM fails to keep current books and 
records, is notified by an independent public accountant of a 
material inadequacy under Rule 1.16(d)(2), becomes subject to 
trading restrictions for failure to meet a margin call or determines 
that it is carrying an account that is undermargined by an amount 
exceeding its adjusted net capital. See Commission Rule 1.12.
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    Other safeguards for customer funds established by the CEA and CFTC 
regulations include protections against the use of customer funds by 
depositories, such as banks or clearing organizations, to offset 
obligations of the FCM to the depository, limitations on investments of 
customer funds to U.S. government or municipal securities, and the 
requirement that an FCM's independent public accountant review and 
report upon the adequacy of the firm's internal controls and procedures 
for safeguarding customer assets.
    The statutory and regulatory framework administered by the 
Commission requires that each futures exchange, as a self-regulatory 
organization (``SRO''), adopt and enforce minimum financial 
requirements and reporting rules for its member FCMs that are at least 
as stringent as those established by Commission regulations. As SROs, 
the futures exchanges and the National Futures Association (``NFA''), 
an industry-wide self-regulatory organization responsible for firms 
that are not members of an exchange, have the primary direct 
responsibility to ensure the financial integrity of their member 
firms.6 The Commission is responsible for oversight of the SROs' 
financial surveillance and rule enforcement programs.
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    \6\Responsibility for routine periodic audits of 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.
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    The Commission's routine financial oversight activities include 
evaluation and monitoring of SRO financial surveillance and audit 
activities, direct audits of FCMs and introducing brokers (``IBs'') as 
a quality control check of SRO audit work, and targeted reviews of FCMs 
that have ``early warning'' conditions or have otherwise been 
identified as high risk firms. The Commission's financial oversight 
program makes use of various types of information to target firms for 
heightened surveillance and to better understand firm operations, 
including among other sources of relevant information, data identifying 
the holders of large market positions generated on a daily basis by the 
Commission's large-trader reporting system, notices of adjusted net 
capital being below early warning levels, and financial data, including 
pay and collect data, generated by the SROs' surveillance systems.

B. Purposes of Risk Assessment Authority

    The risk assessment provisions of the FTPA are designed to 
facilitate financial oversight of FCMs which are part of holding 
company groups whose activities may affect the FCM's overall financial 
condition, or where the structure of the group of companies places 
control of funding outside the FCM. As such, the risk assessment 
provisions are intended to enhance the effectiveness of existing 
safeguards of customer funds by providing the Commission with increased 
access to material information concerning the operations of affiliates 
of the FCM whose activities may expose the FCM to financial or 
operational risks. This new statutory authority recognizes that, as 
illustrated by the experience of the CFTC and other regulators with 
several recent failures of regulated brokerage firms, the operations of 
regulated FCMs may be materially affected by, and only understood in 
conjunction with, the activities of affiliated entities, many of which 
may be unregulated. Concomitantly, the effectiveness of ongoing 
financial oversight programs may depend upon access to information 
concerning risks to the FCM created by affiliate activity, and the 
efficacy of regulatory responses to financial problems at the regulated 
entity may be enhanced by access to information concerning relevant 
affiliate activity.
    For example, Commission staff and futures industry self-regulators 
worked closely with securities and banking regulators to facilitate the 
rapid wind-down of Drexel Burnham Lambert, Inc. (``DBL''), a registered 
FCM and securities broker-dealer, and to minimize adverse effects of 
the wind-down on customers and the markets. Approximately 1700 futures 
accounts were transferred from DBL to other futures firms during a two-
week period in February 1990.7 The immediate cause of DBL's 
failure was the inability of its parent firm, The Drexel Burnham 
Lambert Group, Inc. (``DBL Group''), to meet certain debt payments, 
some of which consisted of commercial paper, following a reduction of 
DBL's credit rating. DBL Group filed a bankruptcy petition on February 
13, 1990. Previously, approximately $220 million of DBL's excess 
capital had been transferred to DBL Group in the form of short-term 
loans.8
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    \7\No regulated futures customers suffered losses due to DBL's 
insolvency.
    \8\The New York Stock Exchange subsequently ordered DBL to 
maintain excess capital of $300 million.
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    In addition to monitoring and facilitating the transfer of DBL's 
futures accounts to other firms, Commission staff monitored the 
liquidation of futures positions of Drexel Burnham Lambert Trading 
Corporation (``Drexel Trading''), a noncustomer affiliate whose account 
was carried by DBL. Drexel Trading's futures account at DBL was 
apparently used to hedge its commodity trading activities in 
unregulated cash and forward markets. The wind-down of Drexel Trading's 
business thus entailed the liquidation of futures positions that were 
related to unregulated cash positions. In the course of the Drexel 
events, the availability of information concerning the developing 
problems at DBL Group and better understanding of the unregulated 
activities of Drexel Trading and other Drexel Group entities that 
carried futures positions in noncustomer accounts at DBL to manage the 
risks of related cash operations and swaps positions would have 
facilitated the Commission's financial oversight of DBL and the 
development and tailoring of regulatory responses to those events.
    Commission staff also monitored the wind-down of Stotler and 
Company (``Stotler''), a registered FCM and government securities 
broker-dealer. On July 25, 1990, Stotler Group, Inc. (``Stotler 
Group''), Stotler's parent firm, formally announced that it had 
defaulted on $750,000 of commercial paper obligations and that Stotler 
would be winding down its futures brokerage business. As those events 
unfolded, it became apparent that Stotler's FCM was dependent upon 
financing from Stotler Group, which in turn was dependent upon the 
issuance of commercial paper for its own financing. Stotler had already 
commenced informally winding down its futures brokerage business on 
July 12, 1990, following notification by the Commission that it did not 
meet minimum capital requirements, due to adjustments to Stotler's 
reported capital to correct, among other things, the failure to reflect 
in Stotler's capital computations liabilities purportedly transferred 
to Stotler Group. In a period of approximately eight weeks, Stotler, 
with the assistance and monitoring of the CFTC and self-regulatory 
authorities, transferred more than 65,000 futures customer accounts and 
customer segregated funds totaling over $309 million.9 Access to 
information concerning Stotler Group's commercial paper operations, on 
which Stotler drew for financing, would have assisted the Commission in 
its oversight of Stotler and aided in the identification of the 
developing difficulties of the Stotler entities.
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    \9\Less than one percent of customer segregated funds had not 
been returned to customers prior to the filing by Stotler and 
Stotler Group of petitions in bankruptcy on August 24, 1990. The 
remaining one percent was subsequently returned.
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    The well-publicized problems of the Metallgesellschaft AG group of 
companies provide the most recent example of the potential utility of 
information on entities affiliated with an FCM. MG Futures, Inc. (``MG 
Futures''), a registered FCM and a wholly-owned subsidiary of 
Metallgesellschaft AG, carried large, purported hedge positions in the 
energy futures markets for the MG group of companies. Large losses 
sustained by the MG Group of companies in late 1993 apparently caused 
severe cash flow problems for MG Futures, the regulated intermediary. 
The losses, which occurred at an affiliated entity, were not reflected 
in the financial reports filed by MG Futures with the Commission and 
materially affected MG Futures' funding arrangements.
    The interrelationships between FCMs and their affiliates may 
include a wide range of financial relationships that render the FCM 
dependent upon certain affiliates' financial condition or expose the 
FCM's capital to withdrawal or other impairment to support an affiliate 
experiencing funding difficulties. These types of financial 
relationships include, for example, guarantee arrangements between the 
FCM and its parent or other affiliate, arrangements to shift capital 
from the FCM to an affiliate, financing or investment relationships 
between the FCM and an affiliate, maintenance by the FCM of a futures 
account for an affiliate, and business referral arrangements or other 
forms of contractual arrangements that create financial 
interdependencies between the FCM and an affiliate. Further, even in 
the absence of direct exposure of the FCM's resources to an affiliate's 
activities pursuant to contract or common ownership, the existence of 
management or ownership linkages between the FCM and an affiliate may 
have the result that financial or operational difficulties of a closely 
linked affiliate adversely affect the FCM's credit or customer 
relationships, and thus its liquidity.
    The potential risks to FCM operations created by affiliate 
activities may be exacerbated, and the importance of ready access to 
information concerning affiliate activities heightened, by the nature 
of the affiliate activities. Because FCM activities are subject to 
minimum capital requirements designed to measure, and provide resources 
adequate to protect against, the risks of various types of 
transactions, a holding company group may elect to conduct activities 
giving rise to capital charges in unregulated affiliates rather than 
the regulated entity. As a result, activities conducted on an 
unregulated basis but that nonetheless may create significant market, 
credit or other risk exposures, may be concentrated in affiliated 
entities that are not subject to federal or state oversight.10
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    \1\0As the SEC noted in proposing its risk assessment rules for 
broker-dealers, ``the activities carried out by the affiliates of a 
broker-dealer are, in the aggregate, generally more highly leveraged 
and riskier than permitted by the net capital rule.'' 56 FR 44014, 
44015 (September 6, 1991).
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C. Statutory Risk Assessment Provisions

    The risk assessment provisions added to the CEA by the FTPA provide 
a mechanism for the Commission to obtain information concerning FCM 
affiliate activities that should facilitate both a better understanding 
of the ongoing risk exposures of the FCM and an improved ability to 
determine appropriate intervention in the event of financial 
difficulties at the FCM or in other circumstances of heightened risk. 
New Section 4f(c) of the Act authorizes the Commission to require each 
registered FCM to obtain ``such information and make and keep such 
records as the Commission, by rule or regulation, prescribes concerning 
the registered futures commission merchant's policies, procedures or 
systems for monitoring and controlling financial and operational risks 
to it resulting from the activities of any of its affiliated persons, 
other than a natural person.''11 The statute provides that the 
required records should ``describe, in the aggregate, each of the 
futures and other financial activities conducted by, and the customary 
sources of capital and funding of, those of its affiliated persons 
whose business activities are reasonably likely to have a material 
impact on the financial or operational condition of the futures 
commission merchant, including its adjusted net capital, its liquidity, 
or its ability to conduct or finance its operations.''12 The 
Commission is authorized to require, by rule or regulation, summary 
reports of such information to be filed no more frequently than 
quarterly. Section 4f(c) also authorizes the Commission to require the 
filing by FCMs of supplemental reports if, as a result of adverse 
market conditions, based on reports provided pursuant to this section, 
or other available information, the Commission ``reasonably concludes'' 
that it has concerns regarding the financial or operational condition 
of any registered FCM.13
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    \1\17 U.S.C. 6f(c)(2)(A) (Supp. IV 1992).
    \1\27 U.S.C. 6f(c)(2)(B) (Supp. IV 1992).
    \1\37 U.S.C. 6f(c)(3)(A) (Supp. IV 1992).
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    Section 4f(c) also provides that the Commission may exempt ``any 
person or class of persons'' from recordkeeping or reporting 
requirements established pursuant to that provision. In granting such 
exemptions, the Commission is directed to consider, ``among other 
factors,'' whether information of the type required is available from 
the Securities and Exchange Commission (``SEC''), a state insurance 
commission or similar state agency, a supervisory agency as defined in 
section 1101(7) of the Right to Financial Privacy Act of 197814 or 
a similar foreign regulator; the primary business of any affiliated 
person; the nature and extent of domestic or foreign regulation of the 
affiliated person's activities; the nature and extent of the FCM's 
futures and options activities; and, with respect to the FCM and its 
affiliated persons, on a consolidated basis, the amount and proportion 
of assets devoted to, and revenues derived from, activities in the U.S. 
futures markets.15 The legislative history reflects that the 
Commission ``may determine not to require information concerning 
holding companies or other affiliates of FCMs that are primarily 
engaged in nonfinancial activities such as merchandising, construction 
(other than equity investment or financing), travel services, real 
estate brokerage, consumer lending, publishing or nonfutures-related 
information processing.''16
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    \1\4The term ``supervisory agency'' is defined in section 
1101(7) of the Right to Financial Privacy Act of 1978, 12 U.S.C. 
3401(7), to include the following agencies which have the statutory 
authority to examine the financial condition, business operations, 
or records or transactions of a financial institution, holding 
company, or subsidiary thereof: (1) The Federal Deposit Insurance 
Corporation; (2) the Director, Office of Thrift Supervision; (3) the 
National Credit Union Administration; (4) the Board of Governors of 
the Federal Reserve System; (5) the Comptroller of the Currency; (6) 
the Securities and Exchange Commission; (7) the Secretary of the 
Treasury; and (8) any state banking or securities department or 
agency.
    \1\57 U.S.C. 6f(c)(9) (Supp. IV 1992).
    \1\6S. Rep. No. 22, 102d Cong., 2d Sess. 50 (1992).
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    Section 4f(c) provides that generally an FCM will be considered to 
have complied with a recordkeeping or reporting requirement adopted by 
the Commission concerning an affiliated person subject to examination 
by, or reporting requirements of, a federal banking agency if the FCM 
uses for that purpose copies of reports filed by the affiliated person 
with the relevant federal banking agency pursuant to specified 
statutory provisions. However, the Commission is authorized to require 
the FCM to obtain, maintain or report supplemental information if the 
Commission makes a finding that such information is necessary to inform 
the Commission concerning potential risks to the FCM and first requests 
the federal banking agency to expand its requirements to include the 
information.\17\
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    \17\Section 4f(c)(5) also provides that prior to making a 
request for supplemental information pursuant to section 4f(c)(3) 
with respect to an affiliated person that is subject to examination 
by or reporting requirements of a federal banking agency, the 
Commission shall notify the agency of the information requested and 
consult with the agency to determine whether the information 
required is available from the agency and for other purposes, 
``unless the Commission determines that any delay resulting from the 
consultation would be inconsistent with ensuring the financial and 
operational condition of the futures commission merchant or the 
stability or integrity of the futures markets.'' 7 U.S.C. 6f(c)(5) 
(Supp. IV 1992).
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    The risk assessment provisions of the FTPA require the Commission 
to treat any risk assessment information required to be provided to it 
pursuant to that authority as subject to the confidentiality provisions 
of section 8 of the Act. The Commission therefore is generally 
prevented from disclosing such information to third parties.\18\
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    \18\Section 8 of the Act provides generally that the Commission 
may not publish data and information that would separately disclose 
the business transactions or market positions of any person and the 
trade secrets or names of customers unless such information has been 
previously disclosed in connection with a congressional proceeding 
or an administrative or judicial proceeding brought under the Act. 7 
U.S.C. 12 (1988 & Supp. IV 1992).
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D. SEC Final Temporary Risk Assessment Regulations

    The Commission's statutory risk assessment authority is 
substantially similar to that granted to the SEC under Section 4 of the 
Market Reform Act of 1990.\19\ Pursuant to this risk assessment 
authority, the SEC has adopted ``final temporary'' rules\20\ which 
generally require securities broker-dealers to maintain and preserve 
records and file quarterly reports containing information concerning 
the financial and securities activities of the broker-dealers' material 
affiliates.\21\ The SEC's risk assessment structure includes 
recordkeeping and reporting rules applicable generally to all broker-
dealers that maintain capital equal to or greater than twenty million 
dollars or that carry customer accounts and maintain capital of 
$250,000. Under the SEC's risk assessment rules, broker-dealers are 
required to maintain an organizational chart identifying material 
associated persons, to depict the broker-dealer's risk management 
policies and procedures, to provide certain financial data on the 
affiliated system, including consolidated and consolidating financial 
statements, to provide aggregate securities and commodities positions, 
including financial instruments with off-balance sheet risk and 
concentrations of credit risk (as defined in Statement of Financial 
Accounting Standards No. 105 (``SFAS 105'')) on a disaggregated basis 
for each material associated person, and other financial and 
securities-related information. Under the SEC's risk assessment 
program, the information required to be maintained by broker-dealers 
under the recordkeeping rule generally is required to be filed within 
60 days after the end of each quarter on SEC Form 17-H.\22\
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    \19\Pub. L. No. 101-432, 104 Stat. 963 (1990).
    \20\The SEC adopted ``final temporary'' rules as an interim step 
in the adoption of final regulations to enable the agency to gain 
experience with the information obtained pursuant to its risk 
assessment rules and to evaluate the operation of the risk 
assessment program based upon review of this information. The SEC's 
Division of Market Regulation will prepare a study evaluating the 
effectiveness of the rules which will be published 90 days after the 
rules have been in full effect for two years. After evaluating 
public comment on this report, the SEC will determine what 
modifications to the rule, if any, are necessary. See 57 FR 32159, 
32161 (July 21, 1992).
    \21\57 FR 32159 (July 21, 1992).
    \22\The SEC's rules require broker-dealers to file an 
organizational chart as part of its first risk assessment filing and 
with each year-end filing. Quarterly updates are required only if a 
material change has occurred. The risk management policies must be 
filed only with the first risk assessment filing, unless a material 
change has occurred, in which case a quarterly update is required.
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    The SEC's rules include provisions designed to diminish the 
necessity for broker-dealers to create additional sets of records where 
records substantially similar to those required by the risk assessment 
rules are created for the use of other federal or state regulators. For 
example, under the SEC's rules, a broker-dealer will be deemed in 
compliance with the recordkeeping and reporting requirements concerning 
a material associated person subject to the CFTC's supervision if it 
maintains and files copies of Forms 1-FR-FCM or 1-FR-IB filed by the 
FCM or the IB, respectively, with the CFTC.23 In adopting its risk 
assessment rules, the SEC stated that these special provisions for CFTC 
registrants were appropriate ``because entities regulated by the CFTC 
are subject to recordkeeping, reporting, and supervisory requirements 
similar to those imposed by the Commission on broker-dealers.''24 
The SEC's risk assessment rules also include special provisions for 
reporting broker-dealers with respect to other types of regulated 
affiliates, including banks, insurance companies, and entities subject 
to the supervision of foreign financial regulatory authorities.
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    \2\3The CFTC and SEC, in cooperation with securities and futures 
industry self-regulatory organizations, have developed a draft of a 
new, combined Form 1-FR/FOCUS report, which will further harmonize 
and facilitate electronic financial reporting for broker-dealers and 
FCMs and will capture certain information on a regulated firm's 
derivative product positions. The draft form is expected to be 
published for public comment within the next several months.
    \2\457 FR at 32163.
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E. Coordination With Other Regulators

    The legislative history of the FTPA indicates that Congress 
intended that the Commission take into account the existing reporting 
systems of other relevant financial regulators in exercising the risk 
assessment authority conferred upon it.25 The Commission has 
consulted extensively with other financial regulators to develop, to 
the extent possible, a coordinated approach to information-gathering 
concerning regulated affiliates of FCMs. Commission staff have met with 
securities and banking regulators on multiple occasions and have 
reviewed various reports and filings required under the securities and 
banking regulatory frameworks. In particular, Commission staff have 
explored the extent to which other federal financial regulators may 
share relevant risk assessment information concerning entities subject 
to their supervision with the CFTC on a confidential basis in order 
that requirements for reporting to the CFTC with respect to such 
entities might be minimized. The Commission believes that, subject to 
appropriate confidentiality safeguards such as are afforded by section 
8 of the CEA, information-sharing among federal financial regulators 
responsible for oversight of various entities operating within the same 
holding company group should be fostered to facilitate financial 
oversight of the group and its regulated component entities and to 
minimize reporting requirements under the various individual regulatory 
structures. For example, Commission staff have explored the extent to 
which various types of event-specific information could be provided 
directly to the CFTC by the relevant regulatory authority. The staff 
also has discussed establishing lead regulator type responsibilities to 
the extent practicable.
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    \2\5S. Rep. No. 22, 102d Cong., 2d Sess. at 50.
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    Further, the Commission has given extensive consideration to the 
risk assessment rules adopted by the SEC pursuant to the risk 
assessment authority granted it in the Market Reform Act of 1990. To 
the extent possible, the Commission has designed its risk assessment 
provisions with a view towards permitting FCMs which are broker-dealers 
(or which are part of holding company groups that include a broker-
dealer) required to report pursuant to the SEC's risk assessment rules 
to use reports prepared pursuant to the SEC's requirements to fulfill 
the Commission's requirements. Generally, the Commission's proposed 
rules would require filing of a subset of the information called for by 
the SEC on a routine basis but call for certain additional information 
specific to the operations of FCMs acting as clearing firms for 
affiliated entities. The proposed rules are designed to permit the use 
of the SEC risk assessment form, Form 17-H, given appropriate 
supplementation, on an elective basis in lieu of new CFTC Form 1.15A. 
To the extent that the Commission's approach alters that of the SEC, it 
is intended to give early warning of events that would cause the CFTC 
to request further information or to seek assistance from other 
regulators and to take account of the more limited resources available 
to the Commission to assess the information provided.

II. The Proposed Rules

    Proposed Rule 1.14 would require FCMs to maintain and preserve 
certain records and information concerning, among other things, the 
organizational structure of which the FCM is part, the FCM's policies 
and systems for monitoring and controlling risks arising from the 
activities of its affiliates, consolidated and consolidating financial 
statements for the FCM and its ultimate parent company, and aggregate 
information concerning futures, forwards and financial instruments with 
off-balance sheet risk and concentrations of credit risk. Proposed Rule 
1.15 requires FCMs to file with the Commission, generally on an annual 
basis, the information required to be maintained under proposed Rule 
1.14 and to provide the Commission with notice upon the occurrence of 
certain specified events, such as large decreases in the reported 
adjusted net capital of FCMs or the equity of their parent companies.
    Maintenance of the records required under proposed Rule 1.14 and 
reporting of the data required pursuant to proposed Rule 1.15 are 
intended to impose a discipline on the FCM relative to its own risk 
management activities as well as to permit the Commission to make 
informed assessments relevant to market events and to the analysis of 
possible regulatory responses to such events. For example, risk 
assessment information may permit more effective and moderate 
management of financial market disruptions than would occur in the 
absence of pertinent information.
    The risk assessment provisions being proposed by the Commission 
would apply generally to FCMs that hold customer funds of $6,250,000 or 
greater, maintain adjusted net capital in excess of $5,000,000 or that 
are clearing members of a contract market. As proposed, however, the 
rules make special provisions for FCMs that are dually registered with 
the SEC as broker-dealers, or that are part of a holding company group 
that includes a broker-dealer, filing reports pursuant to the SEC's 
risk assessment rules. Further, in general, the proposed rules would 
allow FCMs that have affiliates subject to regulation by a federal 
banking agency, a state insurance commission or similar state agency, 
or a foreign futures authority or other relevant foreign authority to 
comply with certain reporting and recordkeeping requirements by filing 
or maintaining records that the regulated affiliate is required to file 
with the relevant regulator.

A. Definition of Material Affiliated Person

    The FTPA requires that, in general, FCMs maintain certain records 
regarding ``their affiliated persons whose business activities are 
reasonably likely to have a material impact on the financial or 
operational condition of the FCM.''26 For the purpose of 
determining which affiliated persons are covered under this standard, 
the proposed rules would define the term ``material affiliated person'' 
(``MAP'') by reference to several illustrative factors relevant to the 
activities of the FCM and its affiliate and the relationship between 
the entities. The factors specified are intended to provide guidance 
and not to be exhaustive. FCMs should consider all of the facts and 
circumstances pertinent to the identification of their affiliated 
entities whose business activities are reasonably likely to have a 
material impact on the financial or operational condition of the FCM.
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    \2\6Specifically, Section 4f(c)(2)(A) of the Act states that 
each FCM ``shall obtain such information and make and keep such 
records as the Commission, by rule or regulation prescribes 
concerning the registered (FCM's) policies, procedures or systems 
for monitoring and controlling financial and operational risks to it 
resulting from the activities of any of its affiliated persons, 
other than natural persons.'' 7 U.S.C 6f(c)(2)(A) (Supp. IV 1992). 
The term ``affiliated person'' is defined for purposes of section 
4f(c)(1)(i) of the Act to mean ``any person directly or indirectly 
controlling, controlled by or under common control with a futures 
commission merchant, as the Commission, by rule or regulation, may 
determine will effectuate the purposes of this subsection.'' Natural 
persons are generally excluded from risk assessment requirements. 7 
U.S.C. 6f(c) (2)(A) and (3)(A) (Supp. IV 1992).
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    The material affiliated person definition used in the Commission's 
proposed rules is similar to that used in SEC Rule 17h-1T.27 
However, for purposes of these rules, the Commission has used the term 
``affiliated person'' rather than ``associated person'' to avoid 
confusion with the associated person registration category described in 
section 4k of the Act28 and Commission Rule 3.12. Like the SEC 
under its risk assessment regulations, the Commission proposes to leave 
the determination as to which entities affiliated with an FCM are MAPs 
with the reporting FCM, in the first instance, based on the FCM's 
examination of all relevant facts and circumstances.
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    \2\717 CFR 240.17h-1T (1993).
    \2\87 U.S.C. 6k (1988 & Supp. IV 1992).
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    A first relevant factor in determining the materiality of an 
affiliated person is the legal relationship between the FCM and the 
affiliated person, i.e., the nature and proximity of the relationship 
between the FCM and the affiliated person. In a two-tier holding 
company structure, for example, the first tier may include the direct 
holding company parent of the FCM and several related financial service 
entities. The entities at this first tier are very likely to be 
material to the FCM in light of their close proximity and consequent 
potential for direct financial impact upon the FCM and its funding. In 
some cases, entities other than the FCM's parent and the parent's 
affiliates may be required to be deemed MAPs. For example, intermediate 
holding companies and the ultimate parent corporation may be deemed 
MAPs if, for example, a bankruptcy of the ultimate parent could 
significantly affect the FCM's ability to obtain needed credit. If, 
however, after evaluating all of the relevant facts and circumstances, 
it appears that an affiliated person in the upper tiers of a holding 
company structure could have only a remote impact on the financial or 
operational condition of the FCM, the affiliate would not be required 
to be designated as a MAP. Moreover, if the ultimate parent in a multi-
tiered holding company structure primarily is engaged in activities 
which are not related to the futures or financial markets, such as 
manufacturing or retailing, the parent would not generally be required 
to be designated a MAP. However, an ultimate parent company which is 
engaged in non-financial activities may clear its futures account 
through the FCM in order to manage the risk of cash commodity positions 
and this relationship could expose the FCM to potential risks relative 
to cash or over-the-counter trading that would render the parent 
company a MAP.
    A second factor relevant to the identification of MAPs is the 
degree of financial dependence of the FCM on its affiliate and the 
nature of the FCM's financing requirements. For example, if the FCM's 
obligations are guaranteed by a parent or other affiliate, the FCM has 
a degree of financial dependence upon the guarantor entity such that, 
absent unusual circumstances, that entity would be a MAP. Similarly, if 
the FCM relies for financing upon a parent company whose capacity to 
provide such financing depends upon the issuance of commercial paper or 
other sources of unsecured credit, the FCM would be materially affected 
by an acceleration or call by the holders of these obligations, 
especially if the FCM did not have sufficient liquid assets or 
alternative financing available to replace the financing provided by 
its parent company.
    A third materiality factor is the degree to which an FCM or its 
customers rely upon an affiliated person for operational services or 
support. If an FCM relies upon an affiliated person for significant 
operational facilities or support, the operations or financial 
difficulties of the affiliated person could materially impact the FCM's 
operations.
    Another relevant factor in the materiality determination is the 
level of market, credit and other risk present in an affiliated 
entity's activities. A high volume of over-the-counter derivative 
transactions conducted through an unregulated affiliated entity may 
give rise to market, credit, operational or other risks that require 
sophisticated risk management strategies and internal control 
procedures to protect against potential losses that could jeopardize 
the resources of the affiliate and potentially impact related entities. 
Position taking by an affiliate may also expose the affiliate to risks 
that create the potential for spillover effects upon the FCM. 
Generally, affiliated entities that assume greater risk exposures may 
incur an increased likelihood of liquidity declines or other financial 
difficulties that increase the potential for adverse effects upon the 
FCM.
    Finally, the extent to which an affiliated person has the authority 
or ability to negatively impact the FCM's capital is a factor in 
determining the materiality of the affiliated entity. The activities of 
a parent company or other affiliate that has the ability to remove 
capital from the FCM, such as for the purpose of repayment of loans or 
debt, generally are material to the FCM (e.g., a parent company of an 
FCM may have the ability to withdraw capital from a subsidiary FCM if 
the parent is unable to meet interest or principal payments on 
debt).29
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    \2\9Of course, the parent could only lawfully withdraw capital 
to the extent that the FCM would remain in compliance with the 
Commission's net capital requirements.
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B. Information Required To Be Maintained and Filed on a Routine Basis

    The proposed rules generally require two forms of risk assessment 
activity by FCMs: Recordkeeping and reporting. FCMs subject to the 
rules would generally be required to maintain specified types of 
information and to file reports of that information on a routine basis, 
in most cases annually, absent a material change in reported data. The 
categories of information called for are discussed below, with specific 
reference to the relevant recordkeeping and reporting requirements of 
the proposed rules.
1. Organizational Chart
    Proposed Rule 1.14(a)(1)(i) would require an FCM to maintain an 
organizational chart depicting the holding company structure of which 
the FCM is a part. The chart should provide an overview of the entire 
organization and identify those affiliated persons that are MAPs of the 
FCM, as determined by the registrant in accordance with the standards 
set forth in the proposed rule and discussed above. The chart should 
also indicate which MAPs file routine financial or risk exposure 
reports with the SEC, a federal banking agency, an insurance 
commissioner or other similar official or agency of a state or a 
foreign regulatory authority. In addition, the chart should indicate 
whether a MAP is a dealer or end user (or both) of financial 
instruments with off-balance sheet risk. End-users employ financial 
instruments to facilitate the management of financial risks that arise 
in the course of their business. Dealers are distinguished from end-
users by their readiness to make two-way markets in financial 
instruments, thereby providing end-users (and other dealers) with the 
financial instrument positions they seek. As proposed, Rule 
1.15(a)(1)(i) would require the FCM to file its organizational chart 
within 90 calendar days after the effective date of the rule or within 
60 calendar days of registration if that occurs after the rule's 
effective date. Where there is a material change in the information 
provided, an updated organizational chart is required to be filed 
within five calendar days after the end of the fiscal quarter in which 
the change occurred. If no material change occurs, no updates are 
required.30
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    \3\0A statement that updates required under Rule 1.15 in the 
event of a change in previously reported information are not 
required because no change sufficient to trigger the update 
requirement has occurred may be requested on the new combined 1-FR/
FOCUS report.
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2. Risk Management Policies
    Paragraph (a)(1)(ii) of proposed Rule 1.14 would require an FCM to 
maintain records relating to the FCM's procedures for monitoring and 
controlling financial and operational risks to it resulting from the 
activities of its affiliates. Like the SEC's risk assessment rules, the 
Commission's proposed rule would require that FCMs maintain and 
preserve their written policies, procedures or systems concerning 
methods for monitoring and controlling financial and operational risks 
resulting from the activities of any of their affiliated persons and 
concerning their financing and capital adequacy, including information 
regarding sources of funding and a narrative discussion by management 
of the liquidity of the material assets, the structure of debt capital 
and sources of alternative funding. Also like the SEC rule, the 
Commission's proposed rule would require the FCM to maintain written 
policies concerning trading positions and risks, such as records 
regarding reporting responsibilities for trading activities, 
limitations on trading activities and a description of the types of 
reviews conducted to monitor existing positions. However, the CFTC's 
proposed requirement relating to records of policies, procedures and 
systems with respect to trading activity, while incorporating the 
matters covered by the SEC's rules, includes specific reference to the 
FCM's internal controls with respect to the market risks, credit risks 
and other risks created by the FCM's proprietary and noncustomer 
clearing activities, reflecting risks entailed in the performance of 
the clearing function typical of FCMs operating within a holding 
company structure. These would include, for example, as specified in 
proposed Rule 1.14(a)(1)(ii), systems and policies for supervising, 
monitoring, reporting and reviewing trading activities in securities, 
futures contracts, commodity options, forward contracts or financial 
instruments such as swaps, and policies for hedging or managing risks 
created by its proprietary trading activities and reviewing hedging and 
risk management strategies of noncustomer affiliates.
    Subject to the CEA and Commission regulations, in particular any 
requirements encompassed by existing Rule 166.3, the proposed rule does 
not itself require an FCM to create specific risk management policies 
and procedures.31 It is sufficient for purposes of the risk 
assessment requirements for an FCM to document, in writing, the 
policies in place or the absence of such policies in the unlikely event 
that it operates without them. However, the Commission believes that 
from the perspective of prudent risk management, FCMs subject to these 
rules should review their existing internal controls and risk 
management systems and procedures with a view towards assuring that 
those systems are sufficient in light of the potential risks created by 
their own and their affiliates' activities. The types of risk 
management policies and internal controls referred to in the proposed 
rule, while by no means exclusive of those necessary to prudent risk 
management,32 are indicative of the types of risk management 
systems that may be warranted to address risks engendered by affiliate 
activities.
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    \3\1See 57 FR at 32165 (wherein the SEC notes that broker-
dealers need not create risk management policies for purposes of the 
SEC risk assessment requirements if none exist).
    \3\2Simulation analyses or major market move scenarios to 
measure the impact upon positions carried and upon regulatory 
capital of extreme price movements would be one tool for management 
of the risk of positions carried by the FCM, one which has been 
favorably mentioned by audit staff in oversight reviews of exchange 
financial surveillance programs. Separation of functions, periodic 
reconciliations of key accounts, daily marking-to-market of 
positions, and on-going assessments of the effectiveness of hedge 
positions, are examples of other internal controls generally 
important to an FCM's business, some of which are explicitly 
required under the CEA and Commission rules.
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    Paragraph (a)(1)(ii) of Rule 1.15 requires an FCM to file the 
information referred to above with the Commission within 90 calendar 
days from the effective date of the rule or 60 days following the FCM's 
registration if that occurs after the rule's effective date. Where 
there is a material change in the information provided, such a change 
is required to be reported to the Commission within five calendar days 
after the end of the fiscal quarter in which the change occurred. If 
there is no material change, no update is required.33
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    \3\3In this regard, the Commission's proposed rule departs from 
the SEC's reporting structure which requires similar information to 
be filed on an annual basis.
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3. Financial Statements
    The following financial statements would be required on a 
consolidated basis for the FCM and its ultimate parent company and 
would be required to be filed within 105 calendar days after the end of 
each fiscal year: (1) Balance sheet; (2) statement of income; (3) 
statement of cash flows; and (4) explanatory notes to the financial 
statements. Additionally, a consolidating balance sheet and statement 
of income must be filed annually for the FCM and its ultimate parent 
company. The consolidated and consolidating financial statements would 
be required to be prepared in accordance with United States generally 
accepted accounting principles, consistently applied (``U.S. GAAP''), 
except as indicated below. If an annual audit and certification is 
performed as an ordinary and customary part of the entity's business, 
the consolidated statements should be certified by an independent 
certified public accountant. The consolidating financial statements 
must show separately the FCM, its ultimate parent company and each MAP.
    With respect to affiliated persons that use a comprehensive set of 
accounting principles other than U.S. GAAP, a note to the financial 
statements indicating the comprehensive body of accounting principles 
used to prepare the financial statements should be included. The note 
should provide a narrative description of the items that are treated 
differently by U.S. GAAP. The consolidated financial statements also 
should be accompanied by the footnotes required by GAAP and any other 
information necessary for an understanding of the information being 
presented (e.g., the summary of significant accounting policies).
    The Commission requests comment as to whether quantification of any 
material differences in the contents of the financial statements, in 
addition to a narrative description of items treated differently from 
U.S. GAAP, should be required where accounting principles other than 
U.S. GAAP are used.
    The financial statements required to be maintained and filed 
pursuant to the proposed rules are the same as those required under the 
SEC's risk assessment program. The proposed rules, however, require the 
consolidated financial statements to be certified if an audit is 
ordinarily performed. The Commission does not believe that this should 
create any additional burdens for FCMs also subject to the SEC's 
regulations, because the proposed rules would not impose the added 
expense of an annual audit if an annual audit is not customarily 
performed. Moreover, the Commission is requesting financial statements 
to be filed on an annual basis rather than quarterly as required under 
SEC rules. However, the Commission requests comment as to whether 
consolidated and consolidating financial statements are customarily 
prepared on a quarterly basis and, if so, whether they should be 
required to be filed quarterly so as to provide more current financial 
data.
4. Aggregate Securities and Commodity Positions
    Paragraph (a)(1)(v) of proposed Rule 1.14 would require FCMs to 
maintain records of the fair market value as of the end of each fiscal 
quarter of each MAP's inventory of long and short securities and 
physical commodity positions as specified in new Form 1.15A, including 
a separate listing for each MAP of any aggregate unhedged exposure, 
other than U.S. government or agency securities, denominated in dollars 
and measured by interest rate, duration, instrument or other measure as 
specified by the reporting entity, which exceeds a Materiality 
Threshold. For purposes of the proposed rules, the term ``materiality 
threshold'' is defined as the greatest of: (i) $20 million; (ii) 10 
percent of the FCM's adjusted net capital on the most recent financial 
reports filed by the FCM with the Commission pursuant to Rule 1.10; 
(iii) 10 percent of the MAP's tangible net worth; or (iv) for an FCM 
that is required, or that has a MAP that is required, to file pursuant 
to SEC Rule 17h-2T, the Materiality Threshold specified in SEC Rule 
17h-1T.
    The Commission requests comment as to whether the Materiality 
Threshold should be applied on a product-by-product basis with respect 
to each MAP or on an aggregate basis for all transactions of a MAP with 
a single counterparty. If product-by-product differentiation is more 
appropriate for credit risk assessment purposes, what product 
breakdowns are desirable?
    The information required under this provision of the proposed rules 
is intended to encompass only the types of items which appear on the 
balance sheet of the FCM. Accordingly, records of physical (spot) 
commodities would be maintained under this paragraph and reported under 
the ``aggregate securities and commodities'' heading of Form 1.15A, 
while off-balance sheet items such as futures and forwards are covered 
in paragraph (a)(1)(vi) of proposed Rule 1.14 which concerns 
``financial instruments,'' as discussed below.
    The on-balance sheet items provide more particularity by instrument 
than required financial reports and some information relative to 
funding. Nonetheless, the Commission requests comment concerning the 
scope of the requirement for on-balance sheet information, in 
particular as to whether the specified on-balance sheet items should 
generally be required or only required where the item is part of a 
financing transaction.
    Rule 1.15 requires the information discussed above to be filed on 
Form 1.15A on an annual basis within 105 days after the end of each 
fiscal year. Quarterly updates would be required only if a change of 20 
percent or greater in a line item has occurred since the FCM's last 
filing with the Commission. Rather than require routine quarterly 
reporting of on-balance sheet aggregate securities and commodities 
information, the Commission is proposing to require quarterly updates 
only when a significant change in previously reported information has 
occurred. When filing any quarterly update referred to herein, only the 
particular line item in which the 20 percent or greater change occurred 
need be updated, not the entire form. However, an FCM may elect to file 
this information for each fiscal quarter.
    The Commission requests comment as to whether the requirement for 
quarterly updates would more appropriately be framed in terms of 
whether a ``material change,'' rather than a 20 percent change, in such 
data has occurred or whether a routine quarterly filing requirement 
would be preferable.
    The type of information required under the foregoing provisions is 
the same as that required under the SEC's interim final regulations. 
However, the information would be provided on new CFTC Form 1.15A in 
the aggregate for the FCM's MAPs rather than separately for each MAP as 
is required under the SEC's rules, unless such a presentation would 
materially understate the risk relative to stockholders' equity of any 
MAP, in which case the information must be provided separately for such 
MAP. The Commission, however, is including a proposed Part C to Form 
1.15A to elicit comment as to whether such a schedule is preferable for 
identifying MAPs that require additional review and could be used for 
reporting cases where aggregate data for all MAPs might disguise a 
particular MAP's risk. For example, Part C would require information on 
a MAP's trading book, and if a MAP maintains separate trading books for 
different types of instruments, these must be discussed separately.
    The Commission requests comment as to whether Part C should be used 
in lieu of providing the information on Parts A and B for such MAP 
separately. The Commission requests comment concerning Form 1.15A 
generally as well as concerning Part C thereof, and the Commission 
further requests comment as to whether reporting on Form 1.15A should 
generally be required separately for each MAP rather than on an 
aggregate basis for all MAPs.
    The Commission's proposed rules also incorporate a lower 
Materiality Threshold than is provided in the SEC's risk assessment 
rules, which use the greater of $100 million or 10 percent of the 
broker-dealer's tentative net capital or tangible net worth.34 The 
Commission believes that a $20 million threshold is a more realistic 
materiality figure for FCMs as opposed to generally larger broker-
dealers but requests comment on this point. To reduce reporting burdens 
for FCMs that also file under the SEC's rules or are part of a holding 
company group that includes a reporting broker-dealer, the Commission's 
proposed threshold incorporates the SEC's higher materiality threshold 
for such firms.
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    \3\4Further, Form 1.15A, unlike SEC Form 17-H, does not call for 
information concerning purchased options or risk arbitrage.
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5. Financial Instruments
    Proposed Rule 1.14(a)(1)(vi) requires FCMs to maintain records of 
the amount at the end of each fiscal quarter, on an aggregate basis for 
the FCM and its MAPs, of the notional or contractual amounts, and in 
the case of options, the value of the underlying instruments, of 
exchange-traded futures and commodity option contracts, forward 
contracts, over-the-counter commodity options, and financial 
instruments with off-balance sheet risk and financial instruments with 
concentrations of credit risk, as those terms are defined in SFAS 105, 
broken down by contract type and maturity as specified in proposed Form 
1.15A. The record must identify each instrument where credit risk with 
respect to a counterparty exceeds the Materiality Threshold. SFAS 105 
is applicable to all companies that prepare financial statements in 
accordance with GAAP and requires disclosure of information about 
financial instruments35 with off-balance sheet risk and financial 
instruments with a concentration of credit risk. As noted above, in 
contrast to paragraph (a)(1)(v) of Rule 1.14 which concerns ``on-
balance sheet'' aggregate securities and commodity positions, the 
information regarding ``financial instruments'' is intended to 
encompass off-balance sheet activities.
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    \3\5The term ``financial instrument'' is defined in SFAS 105 as 
cash, evidence of an ownership interest in an entity or a contract 
that both:
    a. Imposes on one entity a contractual obligation (1) to deliver 
cash or another financial instrument to a second entity or (2) to 
exchange financial instruments on potentially unfavorable terms with 
the second entity; and
    b. Conveys to that second entity a contractual right (1) to 
receive cash or another financial instrument from the first entity 
or (2) to exchange other financial instruments on potentially 
favorable terms with the first entity.
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    ``Off-balance sheet risk'' is defined in SFAS 105 as the risk of 
accounting loss.36 SFAS 105 defines ``credit risk'' as the 
possibility that a loss may occur from the failure of another party to 
perform under the terms of the contract. The proposed rules would 
require an FCM to separately list each instrument where the credit risk 
with respect to an individual counterparty exceeds the Materiality 
Threshold at quarter end.
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    \3\6''Accounting loss'' is further defined as the loss that may 
have to be recognized due to credit and market risk as the result of 
the obligations from a financial instrument.
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    The reporting of futures, forwards and swaps on proposed Form 1.15A 
differs slightly from that under SEC Form 17-H. While SEC Form 17-H 
breaks out only interest rate and foreign exchange swaps, proposed Form 
1.15A also includes separate entries for energy and precious metal 
swaps. The same category breakdown would also apply for reporting 
futures and forwards on proposed Form 1.15A. This is in contrast to SEC 
Form 17-H, which breaks down the reporting of futures and forward 
contracts by three categories of underlying instrument: (1) U.S. 
Treasury and mortgage-backed securities; (2) other securities; and (3) 
all others. In addition, Form 1.15A would require separate listing of 
all swaps and forwards by three different maturities: less than one 
year; one to five years; and more than five years.
    These changes are intended to take account of differences between 
banking and securities reporting of off-balance sheet exposures and 
ongoing discussions on data relative to macro-prudential, as opposed to 
micro-prudential, risk. The Commission requests comment as to whether 
additional maturity breakdowns under one year or over five years would 
be appropriate, particularly in the case of interest rate instruments.
    Rule 1.15 requires the above information to be filed on Form 1.15A 
on an annual basis within 105 days after the end of each fiscal year. 
Quarterly updates would be required within 60 calendar days after the 
end of any fiscal quarter in which a change of 20 percent or greater in 
any line item has occurred since the FCM's last filing with the 
Commission. An FCM may elect to file this information routinely for 
each fiscal quarter.
    The Commission requests comment as to whether a materiality 
standard, as compared to a quantitative threshold, should be used to 
determine whether quarterly updates are required or whether a routine 
quarterly filing requirement would be preferable to an update 
requirement triggered by a change in any line item. Comment is also 
requested as to whether any efficiencies in reporting would be achieved 
if large trader account numbers were substituted for domestic exchange 
traded futures positions.
6. Extensions of Credit
    Paragraph (a)(1)(vii) of proposed Rule 1.14 would require an FCM to 
maintain records of the aggregate amount as of quarter end of all 
material unsecured extensions of credit by each MAP, including a 
description of any extensions of credit to a single borrower which 
exceed the Materiality Threshold. Annual filing of this information 
would be required on Form 1.15A pursuant to proposed Rule 1.15. If a 
change of 20 percent or greater occurs in the information last filed 
with the Commission, a quarterly update must be filed within 60 
calendar days after the end of the fiscal quarter in which such a 
change occurred. An FCM may, at its option, file this information 
routinely for each fiscal quarter.
    The information required under this paragraph is essentially the 
same as that required under the SEC's risk assessment rules. However, 
the Commission's proposal does not break out bridge loans as a separate 
listing under this heading. Rather, a bridge loan, if material, would 
be treated the same as and be grouped together with any other material 
unsecured extensions of credit for recordkeeping and reporting purposes 
under the Commission's proposal.
7. Commercial Paper and Other Financing Information
    Paragraph (a)(1)(viii) of Rule 1.14 would require FCMs to keep 
records of the aggregate amount at fiscal quarter end of commercial 
paper, secured and unsecured borrowing, bank loans, lines of credit and 
the principal installments of long-term or medium-term debt scheduled 
to mature within one year. Under proposed Rule 1.15 this information 
would be required to be filed on Form 1.15A annually unless a change of 
20 percent or greater occurs in any of the information last filed with 
the Commission pursuant to either paragraph (a)(2)(iii) or (a)(4) of 
Rule 1.15, in which case a quarterly update would be required to be 
filed within 60 calendar days after the end of the fiscal quarter in 
which such a change occurred. An FCM may, at its option, file this 
information routinely for each fiscal quarter. The information 
discussed above is of the same nature as that called for under the 
SEC's risk assessment regulations, except that the proposed rule 
generally calls for such information to be reported in the aggregate 
for the FCM's MAPs rather than for each MAP as required under SEC 
rules.
8. Real Estate Information
    Proposed Rule 1.14(a)(1)(ix) requires FCMs to maintain information 
concerning the annual gross income derived from real estate activities, 
including mortgage loans and investments, for each MAP that derived 
more than 20 percent of its gross income (loss) from such activities 
during the fiscal year. This information would be required to be 
reported annually on Form 1.15A. The information required under the 
SEC's risk assessment rules regarding a MAP's real estate activities is 
considerably more detailed than that which would be required under the 
Commission's proposed rules. The SEC's rules require that a broker-
dealer maintain and file information regarding any real estate 
activities of a MAP, without regard to the percentage of gross income 
derived from such activities, and call for a variety of types of 
information concerning each MAP's real estate operations.37 The 
proposed rules would require reporting of the annual gross income 
derived from real estate activities for any MAP that derived more than 
20 percent of its gross income (loss) from such activities during the 
fiscal year. Although the Commission may ask for supplemental 
information concerning a MAP's real estate activities if necessary in 
the circumstances, the Commission believes that, in the first instance, 
the information requested under the proposed rules should be sufficient 
to highlight the real estate activities of those MAPs which may require 
additional review. The Commission requests comment, however, as to 
whether more detailed information, such as is called for by the SEC's 
rules, should be required.
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    \3\7For example, the SEC's rules require that a broker-dealer 
maintain and file information concerning a material associated 
person's real estate mortgage or loan investment type, a geographic 
distribution of such activities by year, the value of loans that are 
noncurrent, are in the process of foreclosure or have been 
restructured, the allowance for losses on loans and investments and 
information concerning risk concentration in the material associated 
person's investment and loan portfolio. See 17 CFR 240.17h-
1T(a)(1)(x).
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9. Information Regarding Noncustomer Accounts
    Paragraph (a)(1)(x) of Rule 1.14 would require an FCM to maintain 
on a quarterly basis the gross notional value, long and short, of open 
positions in noncustomer accounts, as that term is defined in Rule 
1.17(b)(4),38 the percentage of this value compared to the FCM's 
adjusted net capital, the percentage of the notional value of 
noncustomer accounts carried by the futures commission merchant that 
are bona fide hedging positions in accordance with Rule 1.3(z), and the 
percentage of the aggregate notional value of noncustomer accounts 
carried for the purpose of managing the risk of cash market commitments 
that mature more than 12 months from quarter end and more than 60 
months from quarter end, compared to the aggregate notional value of 
open positions in all noncustomer accounts carried by the FCM. Large 
positions carried in noncustomer accounts of an FCM may represent a 
significant exposure of the FCM to risks created by its affiliate's 
trading activities relative to cash flow or financing shortages. The 
nature of the affiliate's activities, i.e., whether the positions are 
for hedging purposes or for speculation and, if for hedging or risk 
management purposes, the maturities of the cash positions being offset, 
may bear significantly upon the risks assumed by the FCM carrying an 
affiliate's account.
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    \3\8Rule 1.17(b)(4) defines a ``noncustomer account'' as a 
commodity futures or option account carried on the books of an FCM 
``which is not included in the definition of customer or * * * 
proprietary account (as defined in Sec. 1.17(b)(3)).'' ``Proprietary 
account'' is defined in Rule 1.17(b)(3) to mean a commodity futures 
or option account carried on the books of the FCM for the FCM 
itself, or for general partners in the FCM. Essentially, the 
definition of noncustomer account includes proprietary accounts as 
defined in Rule 1.3(y) other than the account of the FCM itself or 
its general partners. Noncustomer accounts would thus include, among 
others, accounts of affiliates of the FCM that are under common 
control with the FCM, that control the FCM, or are controlled by the 
FCM.
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    The Commission believes that the size and nature of noncustomer 
accounts carried by the FCM are likely to be important components of 
risk assessment information, particularly in circumstances in which 
futures positions carried for affiliates are either not offset by, or 
are imperfectly correlated with, cash positions at the affiliate. 
Accordingly, information concerning such positions is necessary for a 
complete risk assessment evaluation of an FCM. The noncustomer account 
information that would be required under the proposed rules would, for 
the most part, be maintained by the FCM as part of its required 
recordkeeping under current rules39 and could be used to trigger 
more extensive financial oversight by the CFTC. To the extent that 
additional information is required to be maintained and reported 
concerning the maturities of cash commitments which a MAP is hedging or 
the risks of which the MAP is managing by means of futures transactions 
carried by the FCM, the information requested is material to the FCM's 
own risk management program and should be readily accessible to the 
FCM.
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    \3\9See, generally, Rule 1.35; see also Rules 1.33, 1.37 and 
1.46.
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    Rule 1.15(a)(1)(iii) would initially require filing of the 
information discussed above within 90 calendar days of the rule's 
effective date or 60 calendar days from the date of the FCM's 
registration if later. Thereafter, Rule 1.15(a)(3) would require this 
information to be filed within 60 calendar days after the end of each 
fiscal quarter. and 1.46.

C. Information Required Upon the Occurrence of Certain Events

    The proposed rules would require the majority of the required risk 
assessment information to be filed on an annual basis, with updates to 
be provided at the end of a quarter only if a change of 20 percent or 
greater has occurred in the information provided to the Commission 
since the FCM's last risk assessment filing. Only information 
concerning noncustomer accounts, which is either wholly or largely 
within the scope of the FCM's routine recordkeeping systems, would be 
required routinely on a quarterly basis. This approach differs from 
that adopted by the SEC, which generally requires routine quarterly 
reporting. In lieu of requiring routine quarterly filing of substantial 
information concerning each affiliate's activities, the Commission's 
proposed rules identify certain extraordinary events which trigger a 
required notice to the Commission. Upon receipt of notice of such an 
event, the Commission may then determine whether supplemental 
information should be requested of the FCM, in light of the 
circumstances of the FCM and its affiliated entities, the nature of the 
event triggering the notice requirement and other available information 
concerning the FCM.
    The proposed rule would require notification to the Commission upon 
the occurrence of any of eight ``triggering'' events which may indicate 
a basis for further inquiry or closer scrutiny of the FCM. In 
specifying ``triggering'' events requiring notice to the Commission, 
together with quarterly updates of significant changes in financial 
information, the Commission has endeavored to construct a reporting 
system that minimizes routine filings and operates instead to identify 
potentially significant events from a financial monitoring perspective 
that should be readily evident to the FCM, are objectively or 
quantitatively defined, evidence circumstances likely to warrant 
further review, and should occur infrequently. An FCM would be required 
to notify the Commission (by notice to the Director of the Division of 
Trading and Markets or the Director's designee)40 within three 
business days of the occurrence of any event specified in paragraph 
(b)(2) of proposed Rule 1.15 except to the extent that shorter periods 
are specified in paragraphs (b)(2)(i) and (b)(2)(viii) with respect to 
particular triggering events. After reviewing the notice filed by an 
FCM, additional information may be requested from the firm or a 
relevant regulatory agency, as determined to be necessary in the 
circumstances. The Commission requests comment, however, as to whether 
the notice of occurrence of a triggering event should be required to be 
accompanied by an explanation of the circumstances giving rise to the 
occurrence such that supplemental inquiries might be obviated in many 
cases.
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    \4\0The Director of the Division of Trading and Markets is 
generally delegated the authority to act on behalf of the Commission 
with respect to the proposed risk assessment regulations.
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    Comment is also requested, in view of the recordkeeping 
requirements of proposed Rule 1.14, as to whether any efficiencies 
would be achieved by limiting the reporting of certain information 
required on Form 1.15A to a response for a request for information in 
the event of a triggering event. In this connection, commenters should 
specifically address what routine information would be sufficient to 
provide such understanding of group activities and exposures as may be 
necessary to provide background about the liquidity management of the 
group and to assist in evaluating potential risks and the significance 
of a triggering event to the regulated FCM. Commenters should also 
address the practicability of developing particularized information on 
a sufficiently timely basis, if such information were only provided 
upon a triggering event, to assist the Commission's management of 
emergency situations. For example, when market surveillance special 
calls are made, generally a response is required within 24 hours.
    Under the proposed rule, the following events would require notice 
to the Commission.
1. Reduction in FCM's Adjusted Net Capital or Parent's Stockholders' 
Equity
    The Commission believes that a sudden major reduction in the 
adjusted net capital of an FCM or the consolidated stockholders' equity 
of the FCM's parent may be an indication of impending financial 
difficulties and should be brought to the Commission's attention. 
Accordingly, the Commission's proposed rules require that an FCM notify 
the Commission of any such reduction. Paragraph (b)(2)(i) of Rule 1.15 
requires an FCM to notify the Commission of any reduction of 20 percent 
or more in its adjusted net capital as last reported on its financial 
reports filed with the Commission pursuant to Rule 1.10. The FCM must 
provide notice within two business days of any such reduction caused by 
an activity in the normal course of business, such as an operating 
loss, proprietary trading loss or increase in charges against net 
capital, or at least two business days prior to any extraordinary 
transactions or series of transactions, such as a dividend payment or 
making of a loan. This notification requirement is essentially the same 
as that provided in Rule 921 of the Chicago Mercantile Exchange 
(``CME''), which requires that an FCM notify the CME within 48 hours 
after activities in the normal course of business or at least two 
business days prior to any extraordinary transaction or series of 
transactions that cause greater than a twenty percent reduction in the 
FCM's last reported adjusted net capital.41 SEC regulations also 
require notice in the event of withdrawals, advances or loans by a 
broker-dealer or its consolidated subsidiaries or affiliates that 
exceed certain thresholds.42
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    \4\1The Commodity Exchange, Inc. (``COMEX''), New York 
Mercantile Exchange (``NYMEX'') and Chicago Board of Trade (``CBT'') 
have adopted similar rules. See COMEX Rule 7.08(a); NYMEX Rule 
2.14(D); and CBT Rule 285.03.
    \4\217 CFR 240.15c3-1(e)(1) (1993). In general, the SEC rule 
provides that a broker-dealer or consolidated subsidiary or 
affiliate must notify the SEC: (1) Two business days prior to any 
withdrawals, advances or loans which on a net basis exceed in the 
aggregate in any 30 calendar day period 30 percent of the broker-
dealer's excess net capital; or (2) two business days after 
withdrawals, advances or loans which on a net basis exceed in the 
aggregate in any 30 calendar day period 20 percent of the broker-
dealer's excess net capital. The rule, however, is limited to the 
following types of transactions that cause an equity reduction: (1) 
Withdrawals by action of a stockholder or partner; (2) redemption or 
repurchase of stock by a consolidated entity; (3) payment of 
dividends or any similar distribution; or (4) an unsecured advance 
or loan made to a stockholder, partner, sole proprietor, employee or 
affiliate. Pursuant to SEC Rule 15c3-1(e)(3)(i), the SEC also may 
restrict for up to twenty business days any withdrawal of equity 
capital by a broker-dealer or unsecured loan or advance to a 
stockholder, partner, sole proprietor, employee or affiliate if: (1) 
Such advance or loan when aggregated with all other withdrawals, 
advances or loans on a net basis during a 30 calendar day period 
exceeds 30 percent of the broker-dealer's excess net capital; or (2) 
the SEC concludes that the withdrawal, advance or loan may be 
detrimental to the broker-dealer's financial integrity, may unduly 
jeopardize the broker-dealer's ability to repay customer claims or 
other liabilities which may cause a significant impact on the 
markets or expose the broker-dealer's customers or creditors to 
loss. 17 CFR 240.15c3-1(e)(3)(i) (1993). See also 17 CFR 240.15c3-
1(e)(2) (1993) (placing various other limitations on withdrawals of 
broker-dealer's equity capital).
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    Similarly, paragraph (b)(2)(v) of the rule requires an FCM to 
notify the Commission of any reduction of 20 percent or more of its 
parent's consolidated stockholders' equity from the date of the 
parent's last quarterly consolidated financial statements. Such notice 
must be provided within three calendar days of any such reduction.
2. Outflow of FCM's Assets
    Paragraph (b)(2)(ii) of Rule 1.15 requires an FCM to notify the 
Commission of any outflow of assets from the FCM which in the aggregate 
in any 30 calendar day period exceeds 20 percent or more of the FCM's 
excess adjusted net capital. The rule explicitly excludes, however, 
securities transactions between FCMs and their MAPs which occur in the 
ordinary course of business where payment is made within two business 
days, and aggregate withdrawals equalling $500,000 or less (computed on 
a net basis) within a 30 calendar-day period. This provision would 
enable the Commission to receive current information on matters that 
materially impact the financial resources of a futures commission 
merchant and to update the Commission's records regarding the amount of 
an entity's adjusted net capital and other financial resources 
maintained by a firm, which otherwise could become materially 
inaccurate. This notice requirement is similar to a requirement in the 
SEC's net capital rule which requires broker-dealers to notify the SEC 
of certain withdrawals of equity capital.43 The Commission's rule 
is, however, both more lenient and broader than the SEC rule. The 
Commission's proposal allows three business days for an FCM to notify 
the Commission of any transaction which falls within the proposed rule, 
as opposed to the advance notice or two business day notification 
requirements established by the SEC. However, the Commission requires 
notice of ``any outflow of assets'' that meets the criteria set forth 
in the proposed rule and therefore potentially could require notice of 
certain transactions that would not affect an entity's regulatory 
capital and therefore would not fall within the SEC's notice 
provisions.
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    \4\3See supra note 42.
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3. Losses
    Paragraph (b)(2)(iii) of proposed Rule 1.15 would require an FCM to 
notify the Commission if aggregate cumulative losses occurring in all 
noncustomer accounts (as defined in Rule 1.17(b)(4)) carried by the FCM 
exceed: (1) In any 30 day period, the greater of 10 percent of the last 
reported consolidated stockholders' equity of the FCM's parent or $50 
million; or (2) in any 12-month period, the greater of 20 percent of 
the last reported consolidated stockholders' equity of the FCM's parent 
or $100 million.
    This provision is designed to assure that the FCM alerts the 
Commission to material losses in the futures markets to the extent such 
losses are incurred by the consolidated group in noncustomer accounts 
carried by the FCM. Since reporting under this provision is triggered 
by losses in the futures markets and does not depend upon a computation 
of corporate net income pursuant to generally accepted accounting 
principles, it is a simple and relatively sensitive reporting device. 
Although the Commission recognizes that losses on futures transactions 
may be offset by corresponding gains on related cash positions, this 
notice provision is intended to permit the Commission to make early 
inquiries regarding financial strategies or positions that may be 
causing material cash flow demands on the resources of the consolidated 
group of which the FCM is a part.
    Paragraph (b)(2)(iv) of Rule 1.15 is intended to alert the 
Commission to large losses occurring at a MAP which may affect the 
consolidated group's financial stability. This provision requires an 
FCM to notify the Commission of any net loss at a MAP during any 
quarter which exceeds 30 percent of the MAP's last reported net worth 
or 20 percent of the FCM's adjusted net capital.
4. Changes in Credit or Capital Rating
    Paragraph (b)(2)(vi) of Rule 1.15 requires an FCM to notify the 
Commission of any reduction in a MAP's credit rating by Standard & 
Poor's Corporation, Moody's Investor Services, Inc. or any other 
nationally recognized rating service. As over-the-counter transactions 
may be conducted through unregulated entities that are heavily 
dependent upon high credit ratings for the conduct of their business, a 
change in credit rating may be very material to such entities' 
operations. Consequently, reporting under this provision will alert the 
Commission to events which could adversely impact the FCM or its 
consolidated group.
    Paragraph (b)(2)(vii) requires an FCM to notify the Commission if a 
MAP files a notice with a banking regulator stating that an adjustment 
to its capital category may have occurred. A reduction in capital 
category may have been due to financial or other events of which the 
Commission has not yet become aware. Under banking regulations, an 
entity subject to the supervision of the Board of Governors of the 
Federal Reserve System, the Office of Thrift Supervision, the Federal 
Deposit Insurance Corporation or the Office of the Comptroller of the 
Currency must provide written notice to its supervisory agency or 
agencies that an adjustment to the entity's capital category may have 
occurred, no later than 15 calendar days following the date that any 
material event has occurred that would cause the entity to be placed in 
a lower capital category.44
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    \4\4See 12 CFR 208.32(c)(1993); 12 CFR 565.3(c)(1993); 12 CFR 
325.102(c)(1993); and 12 CFR 6.3(c)(1993).
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5. Guarantee Agreements
    Paragraph (b)(2)(viii) of Proposed Rule 1.15 would require an FCM 
to notify the Commission three business days prior to the effective 
date of any agreement whereby the FCM agrees to guarantee the 
obligation of any affiliated entity. The Commission wishes to emphasize 
that this provision applies to agreements between the FCM and any 
affiliate and is not limited to guarantee agreements entered into with 
a MAP.45 Notice under this provision would inform the Commission 
as to new financial obligations undertaken by an FCM that may have a 
material impact upon the firm's regulatory capital and may not yet have 
been reflected in financial reports filed with the Commission. Upon 
receipt of a notice under this provision, depending upon the nature and 
extent of the guarantee, the Commission may request a current pro forma 
computation of an FCM's adjusted net capital position, which would 
indicate the potential impact on adjusted net capital of any newly 
undertaken guarantees.
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    \4\5However, the establishment of such a guarantee arrangement 
may result in the affiliate becoming a MAP.
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D. Exemptions and Special Provisions

    Under Section 4f(c), the Commission may exempt, ``under such terms 
and conditions and for such periods as the Commission shall provide,'' 
any person or class of persons from rules issued pursuant to that 
provision. Section 4f(c) of the Act directs the Commission to consider 
the following general factors in determining whether to grant such 
exemptions: (1) Whether the information requested is available from 
another supervisory agency; (2) the primary business of an affiliated 
person; (3) the nature and extent of domestic or foreign regulation of 
the affiliated person's activities; (4) the nature and extent of the 
FCM's commodity futures and options activities; and (5) the amount of 
assets and revenues derived from and involved in United States futures 
markets.
    Based upon these factors and the purposes of the risk assessment 
rules, the Commission has determined to provide an exemption for FCMs 
who, based on the amount of customer funds held and adjusted net 
capital maintained, appear to engage in only small amounts of futures 
and options activities. Further, the proposed rules provide special 
provisions for entities which are subject to the regulatory oversight 
of other domestic and foreign regulatory bodies. With respect to FCMs 
that are not otherwise exempt, the proposed rules permit an FCM, by 
application, to request individual exemptions from the rules which 
would be considered by the Commission on a case-by-case basis.
1. Exemption Based on Level of Customer Funds and Net Capital
    Preliminarily, the Commission has determined to focus its risk 
assessment program upon those FCMs which appear to be significantly 
engaged in futures and options trading or which, by virtue of their 
status as clearing members46 of exchanges may have a significant 
impact upon the financial integrity of the exchange marketplace. In 
this regard, the Commission is proposing to exempt from the risk 
assessment requirements all FCMs, other than clearing member firms, 
that hold customer funds of less than $6,250,00047 and maintain 
adjusted net capital of less than $5,000,000, calculated as of the 
FCM's fiscal year-end.48 Of course, the Commission may re-evaluate 
these customer funds and adjusted net capital levels at a later date 
should experience indicate that they are either too high or too low 
given the objective of the risk assessment rules to provide the 
Commission with data designed to reduce risks to the futures markets 
and users of regulated intermediaries transacting in these markets 
arising from the financial deterioration of an FCM or related company.
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    \4\6Rule 1.3(c) defines ``clearing member'' as any person who is 
a member of, or enjoys the privilege of clearing trades in his own 
name through, the clearing organization of a contract market.
    \4\7In determining the dollar amount of customer funds held by 
an FCM at fiscal year-end, funds required to be segregated pursuant 
to section 4d(2) of the Act and set aside pursuant to part 30 of the 
Commission's rules are required to be included. The Commission 
requests comment as to whether the calculation of customer funds for 
this purpose should be the same as that for Rule 1.17 capital 
computation purpose, i.e., whether long option values should be 
deducted.
    \4\8The Commission estimates that approximately 200 FCMs would 
be covered under the proposed rules. A substantial percentage of 
these FCMs either are dually registered as broker-dealers reporting 
under the SEC's risk assessment rules or are affiliated with a 
reporting broker-dealer, bank or insurance company.
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    Currently, the Commission requires an FCM to calculate its minimum 
adjusted net capital requirement by multiplying the amount it is 
required to segregate and set aside in special accounts for the benefit 
of its customers by four percent, subject to a minimum dollar 
requirement of $50,000.49 However, Commission Rule 170.15 provides 
that ``(e)ach person required to register as a futures commission 
merchant must become and remain a member of at least one futures 
association which is registered under section 17 of the Act and which 
provides for the membership therein of such futures commission 
merchant, unless no such futures association is so registered.'' The 
Commission approved an increase in the minimum dollar requirement for 
member FCMs of the NFA, currently the only registered futures 
association, from $50,000 to $250,000, effective December 31, 1990. 
This increase effectively requires all FCMs to maintain adjusted net 
capital of at least $250,000. Therefore, the Commission believes that 
it is appropriate to use as the minimum level for the application of 
those rules that level of customer funds carried by an FCM where an 
increase in such amount of funds will effectively cause an increase in 
the minimum adjusted net capital requirement. Based upon the NFA 
minimum dollar amount and the Commission's basic four percent 
calculation, that level is $6,250,000.
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    \4\9See Commission Rule 1.17(a)(1)(i).
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    The Commission further believes that, even if an FCM is not 
carrying any customer funds, it may be engaged in proprietary trading 
or trading for noncustomer accounts to an extent that could create the 
potential for risks to other market participants or systemic risks. The 
Commission is therefore proposing $5 million of adjusted net capital as 
an additional minimum level for application of these rules, even if a 
firm is not carrying the minimum level of customer funds of $6,250,000. 
In determining this amount, the Commission examined data concerning the 
financial condition of registered FCMs and comparable SEC rules.50
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    \5\0The comparable SEC figure is $20 million. 17 CFR 240.17h-
1T(d)(1)(iv) and 240.17h-2T(b)(1)(iv). However, given the relative 
size of securities and futures market activity, the degree of 
leverage in futures transactions, and the fact that the Commission 
is proposing a materiality threshold of $20 million, as compared to 
the SEC's $100 million, a $5 million adjusted net capital ceiling 
for exemption from these rules appears to be an appropriate level.
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    The Commission requests comment as to the appropriateness of the 
adjusted net capital and customer funds exemption levels established by 
the proposed rules.
2. Special Provisions for Certain Regulated Entities
    a. Broker-Dealers. The legislative history of section 4f(c) of the 
FTPA indicates that Congress intended that, in promulgating its risk 
assessment rules, the Commission would ``avoid imposing unnecessary 
paperwork burdens upon securities brokers or dealers regulated by the 
SEC.''\51\ As noted above, the SEC has adopted interim risk assessment 
rules which require recordkeeping and quarterly reporting of 
comprehensive information concerning material affiliates of broker-
dealers. The proposed rules derive in significant measure from the 
SEC's risk assessment rules and are intended to facilitate reporting by 
FCMs that are either also registered as broker-dealers and are required 
to report to the SEC pursuant to the SEC's rules or are part of a 
holding company group that includes a broker-dealer reporting pursuant 
to the SEC's rules. The rules also contemplate coordination with other 
regulators and the use of triggering events to diminish routine 
paperwork. In light of the SEC's risk assessment requirements, the 
Commission's proposed rules permit FCMs that are dually registered as 
securities broker-dealers or that have affiliates that are registered 
as broker-dealers to file SEC Form 17-H, the SEC's risk assessment 
information form, in partial compliance with the Commission's proposed 
rules. Generally, under proposed Rule 1.15(d)(1), an FCM that is dually 
registered as a broker-dealer or that has an affiliate that is 
registered as a broker-dealer would be deemed to be in compliance with 
all of the routine reporting requirements of proposed Rule 1.15, except 
the filing of risk management policies pursuant to paragraph (a)(1)(ii) 
of Rule 1.15\52\ and the reporting of information regarding the FCM's 
noncustomer accounts under paragraphs (a)(1)(iii) and (a)(3) of 
proposed Rule 1.15, if the FCM files SEC Form 17-H with the Commission. 
However, if the SEC filing does not include as MAPs all of the entities 
that would be MAPs of the FCM under the CFTC's rules, the SEC filing 
would be required to be supplemented to include those MAPs. Only an 
individual filing for the excluded MAP need be filed. Similarly, the 
FCM would be deemed to be in compliance with all of the recordkeeping 
requirements of proposed Rule 1.14, except for the requirements that 
the FCM maintain records concerning the FCM's risk management policies 
under paragraph (a)(1)(ii) and noncustomer accounts under paragraph 
(a)(1)(x), if the FCM maintains, in accordance with the proposed rule, 
copies of the records and reports maintained and filed on SEC Form 17-
H. The FCM would, however, be required to maintain supplemental 
information for any entities required to be treated as MAPs under the 
CFTC's rules that are not treated as MAPs for purposes of the SEC's 
rules.
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    \51\S. Rep. No. 22, 102d Cong., 2d Sess. at 50.
    \52\The relief provided does not extend to filing of risk 
management policies because although the SEC rules require filing of 
many of the same types of written policies and procedures as the 
CFTC's rules, the CFTC rule requires additional information relating 
to FCM risk management policies with respect to noncustomer trading 
activities.
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    Because SEC Form 17-H is, with respect to certain reporting 
requirements, more inclusive than the Commission's proposed reporting 
requirements, Rule 1.15(d)(1) provides an FCM with the option of either 
filing Form 17-H in its entirety, or filing the form with certain 
modifications to omit information that would not be required under the 
proposed rules. Specifically, the FCM may make the following changes to 
its Form 17-H filing: (1) The FCM need not include information on 
arbitrage and purchased options required under Items 10 and 11, 
respectively, of Part I of Form 17-H; (2) the FCM may substitute the 
real estate information required to be maintained under Rule 
1.14(a)(ix) and reported under Section V of Form 1.15A for the detailed 
information required under Section V of Form 17-H; and (3) the FCM may 
file the information required under Part II of Form 17-H on an 
aggregate basis for its MAPs rather than for each MAP as otherwise 
required, provided that if this would materially understate risk in 
relation to equity in any MAP, the information must be provided 
separately for such MAP. The FCM may use either the Commission or the 
SEC form for the latter purpose. As noted above, however, an FCM who 
qualifies under the special provisions applicable to SEC filers would 
remain responsible for maintaining and furnishing the Commission with 
information concerning the FCM's risk management policies under 
paragraph (a)(1)(ii) of proposed Rules 1.14 and 1.15 and noncustomer 
accounts under paragraphs (a)(1)(x) of proposed Rule 1.14 and 
(a)(1)(iii) and (a)(3) of proposed Rule 1.15. Moreover, the FCM would 
remain responsible for notifying the Commission of the occurrence of 
the events specified in Rule 1.15(b)(2) and providing supplemental 
information, if requested. If, however, such a ``triggering'' event 
occurs, the Division Director will attempt, in the first instance, to 
obtain any necessary supplemental information from the FCM's or its 
MAP's filings with the SEC.\53\
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    \53\A letter from the FCM or a relevant MAP acknowledging the 
Commission's right of access to relevant SEC risk assessment filings 
may be requested in these circumstances.
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    The Commission believes that compliance with the notice provisions 
of proposed Rule 1.15(b) is essential to enable the Commission to act 
expeditiously in emergency situations and to detect incipient problems. 
The Commission does not believe that such compliance should impose an 
undue burden on entities dually registered as FCMs and securities 
broker-dealers, as the events that require notification under proposed 
Rule 1.15(b) should occur infrequently.
    b. Banks. Section 4f(c)(4)(B) of the Act provides generally that a 
registered FCM shall be considered to have complied with recordkeeping 
or reporting requirements adopted by the Commission ``concerning an 
affiliated person that is subject to examination by, or reporting 
requirements of, a Federal banking agency if the [FCM] utilizes for the 
recordkeeping or reporting requirement copies of reports filed by the 
affiliated person with the Federal banking agency'' pursuant to section 
5211 of the Revised Statutes, section 9 of the Federal Reserve Act, 
section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the 
Home Owners' Loan Act or section 5 of the Bank Holding Company Act. The 
legislative history of the FTPA indicates, however, that an FCM may not 
be required under any circumstances to obtain or furnish the Commission 
with copies of examination reports.\54\
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    \54\H.R. Rep. No. 978, 102d Cong., 2d Sess. 75 (1992).
---------------------------------------------------------------------------

    With respect to an FCM with a MAP that is subject to supervision by 
a federal banking agency, the proposed rule provides that an FCM will 
be deemed to be in compliance with all of the routine reporting 
requirements of proposed Rule 1.15(a)(2) with respect to such MAP, if 
the FCM maintains in accordance with Rule 1.14 copies of all reports 
filed by the MAP with bank regulators.\55\ Paragraph (b)(2) of proposed 
Rule 1.14 provides similar treatment with respect to recordkeeping 
requirements. Generally, foreign banking organizations that are subject 
to U.S. banking regulation will be treated in the same fashion as 
domestic banks for purposes of the application of the proposed rules. 
Additionally, as part of its risk assessment program with respect to 
MAPs that are subject to the supervision of a federal banking agency, 
the Commission intends to obtain and review, on an as-needed basis, the 
Bank Holding Company Performance Report prepared by the Board of 
Governors of the Federal Reserve and/or the Uniform Bank Performance 
Report, prepared by the Federal Deposit Insurance Corporation, to gain 
further information regarding the financial activities of such MAPs.
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    \55\With respect to Form FR 2068, the Confidential Form of 
Operations required to be filed with the Board of Governors of the 
Federal Reserve System by foreign banking organizations, Commission 
staff are exploring with Federal Reserve officials procedures by 
which access to Form 2068 may be obtained on an as needed basis.
---------------------------------------------------------------------------

    c. Insurance Companies. Section 4f(c) of the Act requires that, in 
granting exemptions from the reporting and recordkeeping requirements, 
the Commission should consider, among other factors, whether 
information of the type required is available from a state insurance 
commission or similar state agency. The proposed rules would provide 
relief comparable to that provided with respect to MAPs subject to 
supervision by Federal banking agencies for MAPs subject to regulation 
by an insurance commissioner or other similar state official or agency. 
Under the proposed rule, an FCM with a MAP that is an insurance company 
would satisfy the routine reporting requirements of proposed Rule 
1.15(a)(2) with respect to such a MAP if, in the case of a mutual 
insurance company or non-public stock company, the FCM maintains in 
accordance with proposed Rule 1.14 copies of the annual reports filed 
by the parent insurance company on forms prescribed by the National 
Association of Insurance Commissioners. With respect to a MAP organized 
as a public stock company, the FCM would be required, in addition to 
maintaining state insurance reports, to maintain in accordance with 
proposed Rule 1.14 copies of the filings the insurance company makes 
under Sections 13 or 15 of the Securities Exchange Act of 1934 and 
filings made under the Investment Company Act of 1940.
    d. Firms subject to foreign regulatory supervision. With respect to 
foreign firms that are regulated in a foreign jurisdiction, the 
proposed rules would permit an FCM to maintain and file any financial 
or risk exposure reports filed by a MAP with a foreign futures 
authority, as that term is defined in section 1a(10) of the Commodity 
Exchange Act, or other foreign regulatory authority with which the 
Commission has an information-sharing agreement in effect. The proposed 
rules require that the FCM file with the Commission a copy of the 
original report as well as one copy translated into English. In the 
absence of such an information-sharing agreement, the FCM would be 
required to comply with the proposed rules with respect to foreign MAPs 
subject to foreign regulation to the same extent as unregulated 
entities.

III. Implementation Schedule

    The Commission is proposing to phase in implementation of the risk 
assessment rules in order to provide FCMs with the opportunity to make 
any internal adjustments in their financial recordkeeping and reporting 
operations which may be necessary prior to beginning compliance with 
the risk assessment rules. The proposed rules would require that FCMs 
maintain and file with the Commission the organizational chart, risk 
management policy information and noncustomer account information 
required by paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(x) of proposed 
Rule 1.14 and paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of 
proposed Rule 1.15 within 90 calendar days from the effective date of 
the proposed rules. The first annual filings for fiscal years ending 
December 31, 1994 or thereafter would be due, in accordance with the 
proposed rules, within 105 calendar days of fiscal year-end.

IV. Other Matters

    The Commission has proposed these rules recognizing the types and 
formats of information provided to other reporting agencies and based 
upon the types of information it uses to consider regulatory 
intervention in financial disruptions. Nonetheless, the Commission 
requests comment on whether alternative approaches could achieve the 
Commission's and Congress' objectives and could be reasonably 
integrated with the approaches of other financial regulators. In that 
current events have caused the Commission to need enhanced authority to 
obtain information concerning affiliate activity, the Commission will 
only consider responses to this request for alternatives that are 
sufficiently specific to reasonably convince it that the alternative 
would address the Commission's objectives.

V. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rules discussed herein will affect 
FCMs. The Commission already has established certain definitions of 
``small entities'' to be used by the Commission in evaluating the 
impact of its rules on such small entities in accordance with the 
RFA.\56\ FCMs have been determined not to be small entities under the 
RFA. Additionally, smaller FCMs generally will not be affected by the 
proposed rules because the rules exempt from their requirements certain 
smaller entities. The Commission believes that the proposals, if 
adopted, would not have a significant economic impact on smaller 
entities.
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    \56\47 FR 18618-18621 (April 30, 1982).
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    Accordingly, pursuant to Rule 3(a) of the RFA, 5 U.S.C. 605(b), the 
Chairman, on behalf of the Commission, certifies that these proposed 
rules will not have a significant economic impact on a substantial 
number of small entities. The Commission nonetheless invites comment 
from any registered FCM who believes that these rules would have a 
significant impact on its operations.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1980 (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. In compliance with the 
PRA the Commission has submitted these proposed rules and its 
associated information collection requirements to the Office of 
Management and Budget. The burden associated with this entire 
collection, including these proposed rules, is as follows:

Average Burden Hours Per Response: 18.55
Number of Respondents: 1,990
Frequency of Response: Annually and on occasion

    The burden associated with this specific proposed rule, is as 
follows:

Average Burden Hours Per Response: 3.05
Number of Respondents: 620
Frequency of Response: Annually and on occasion

    Persons wishing to comment on the estimated paperwork burden 
associated with this proposed rule should contact Gary Waxman, 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 Office, 2033 K Street, NW., 
Washington, DC 20581, (202) 254-9735.

C. Electronic Filing

    The Office of the Executive Director expects to include review of 
this proposal in any plan to enhance and refine systems to accept 
electronic filings. Should it appear that the filing of data 
electronically would expedite the purposes of collecting the 
information or provide a significant cost benefit to reporting entities 
and the Commission, the Commission will work with the reporting 
entities to define and implement a secure cost-effective reporting 
method.

List of Subjects in 17 CFR Part 1

    Financial reporting, Recordkeeping requirements, Risk assessment.

    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 proposes to amend 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 1.14 is proposed to be added to read as follows:


Sec. 1.14  Risk assessment recordkeeping requirements for futures 
commission merchants.

    (a) Requirement to maintain and preserve information. (1) Each 
futures commission merchant registered with the Commission pursuant to 
section 4d of the Act, unless exempt pursuant to paragraph (d) of this 
section, shall prepare, maintain and preserve the following 
information:
    (i) An organizational chart which includes the futures commission 
merchant and each of its affiliated persons. Included in the 
organizational chart shall be a designation of which affiliated persons 
are ``Material Affiliated Persons'' as that term is used in paragraph 
(a)(2) of this section, which Material Affiliated Persons file routine 
financial or risk exposure reports with the Securities and Exchange 
Commission, a federal banking agency, an insurance commissioner or 
other similar official or agency of a state, or a foreign regulatory 
authority, and which Material Affiliated Persons are dealers, end users 
or both;
    (ii) Written policies, procedures, or systems concerning the 
futures commission merchant's:
    (A) Method(s) for monitoring and controlling financial and 
operational risks to it resulting from the activities of any of its 
affiliated persons;
    (B) Financing and capital adequacy, including information regarding 
sources of funding, together with a narrative discussion by management 
of the liquidity of the material assets of the futures commission 
merchant, the structure of debt capital, and sources of alternative 
funding;
    (C) Establishing and maintaining internal controls with respect to 
market risk, credit risk, and other risks created by the futures 
commission merchant's proprietary and noncustomer clearing activities, 
including systems and policies for supervising, monitoring, reporting 
and reviewing trading activities in securities, futures contracts, 
commodity options, forward contracts and financial instruments; 
policies for hedging or managing risks created by trading activities or 
reviewing hedging and risk management strategies of noncustomer 
affiliates, including a description of the types of reviews conducted 
to monitor positions; and policies relating to restrictions or 
limitations on trading activities:

Provided, however, that if the futures commission merchant has no such 
written policies, procedures or systems, it must so state in writing.
    (iii) Fiscal year end consolidated and consolidating balance sheets 
for the futures commission merchant and its ultimate parent company, 
prepared in accordance with generally accepted accounting principles, 
which consolidated balance sheets shall be audited by an independent 
certified public accountant if an annual audit is performed in the 
ordinary course of business, but which otherwise may be unaudited, and 
which shall include appropriate explanatory notes. The consolidating 
balance sheet shall show separately the futures commission merchant, 
its ultimate parent company and each Material Affiliated Person;
    (iv) Fiscal year end consolidated and consolidating income 
statements and consolidated cash flow statements for the futures 
commission merchant and its ultimate parent company, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
shall include appropriate explanatory notes. The consolidating 
statements shall show separately the futures commission merchant, its 
ultimate parent company and each Material Affiliated Person;
    (v) The fair market value as of the end of each fiscal quarter of 
each Material Affiliated Person's inventory of long and short 
securities and physical commodity positions as specified in Form 1.15A, 
including a separate listing for each Material Affiliated Person of any 
aggregate unhedged exposure, other than U.S. government or agency 
securities, denominated in dollars measured by interest rate, duration, 
instrument or other measure as specified by the reporting entity, that 
exceeds the Materiality Threshold, as defined in this section, at any 
fiscal quarter end;
    (vi) The notional or contractual amounts, and in the case of 
options, the value of the underlying instruments, as of the end of each 
fiscal quarter, of exchange-traded futures and commodity option 
contracts, forward contracts, over-the-counter commodity options, and 
financial instruments with off-balance sheet risk or concentrations of 
credit risk (as those terms are used in Statement of Financial 
Accounting Standards No. 105), broken down by contract type and 
maturity, as specified in Form 1.15A. The record must identify each 
instrument or contract where the credit risk (as that term is used in 
Statement of Financial Accounting Standards No. 105) with respect to a 
counterparty exceeds the Materiality Threshold at the fiscal quarter 
end;
    (vii) The aggregate amount as of the end of each fiscal quarter of 
all material unsecured extensions of credit (not including intra-group 
receivables) with an initial or remaining maturity of less than one 
year by each Material Affiliated Person, together with the allowance 
for losses for such transactions;
    (viii) The aggregate amount as of the end of each fiscal quarter of 
commercial paper, secured and other unsecured borrowing, bank loans, 
lines of credit, or any other borrowings, and the principal 
installments of long-term or medium-term debt, scheduled to mature 
within twelve months from the most recent fiscal quarter for each 
Material Affiliated Person;
    (ix) The percentage, as of fiscal year end, of annual gross income 
or loss derived from real estate activities, including mortgage loans 
and investments in real estate, with respect to each Material 
Affiliated Person which derived greater than 20 percent of its gross 
income or loss for the fiscal year from such activities; and
    (x) The gross notional value, long and short, of open positions in 
noncustomer accounts, as defined in Sec. 1.17(b)(4), carried by the 
futures commission merchant as of the end of each fiscal quarter, the 
percentage of such aggregate notional value compared to the futures 
commission merchant's adjusted net capital, the percentage of the 
aggregate notional value of open positions in noncustomer accounts 
carried by the futures commission merchant that constitute bona fide 
hedging positions in accordance with Sec. 1.3(z), and the percentage of 
the aggregate notional value of noncustomer accounts carried for the 
purpose of managing the risk of cash market commitments that mature 
more than 12 months and 60 months, respectively, from fiscal quarter 
end compared to the aggregate notional value of open positions in all 
noncustomer accounts carried by the futures commission merchant.
    (2) The determination of whether an affiliated person of a futures 
commission merchant is a Material Affiliated Person shall involve 
consideration of all aspects of the activities of, and the relationship 
between, both entities, including without limitation, the following 
factors:
    (i) The legal relationship between the futures commission merchant 
and the affiliated person;
    (ii) The overall financing requirements of the futures commission 
merchant and the affiliated person, and the degree, if any, to which 
the futures commission merchant and the affiliated person are 
financially dependent on each other;
    (iii) The degree, if any, to which the futures commission merchant 
or its customers rely on the affiliated person for operational support 
or services in connection with the futures commission merchant's 
business;
    (iv) The level of market, credit or other risk present in the 
activities of the affiliated person; and
    (v) The extent to which the affiliated person has the authority or 
the ability to cause a withdrawal of capital from the futures 
commission merchant.
    (3) The information, reports and records required by this section 
shall be maintained and preserved, and made readily available for 
inspection in accordance with the provisions of Sec. 1.31.
    (4) For the purposes of this section and Sec. 1.15, the term 
Materiality Threshold shall mean the greatest of:
    (i) $20 million;
    (ii) 10 percent of the futures commission merchant's adjusted net 
capital as reported on its most recent financial reports filed pursuant 
to Sec. 1.10;
    (iii) 10 percent of the Material Affiliated Person's tangible net 
worth; or
    (iv) In the case of a futures commission merchant that is required, 
or that has a Material Affiliated Person that is required, to maintain 
and preserve information pursuant to Rule 240.17h-1T of this title, the 
Materiality Threshold specified in Sec. 240.17h-1T or such other risk-
assessment regulations as the Securities and Exchange Commission may 
adopt.
    (b) Special provisions with respect to material affiliated persons 
subject to the supervision of certain domestic regulators. A futures 
commission merchant shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(1)(i) and (a)(1)(iii) 
through (ix) of this section if:
    (1) The futures commission merchant is required, or has a Material 
Affiliated Person that is required, to maintain and preserve 
information pursuant to Rule 240.17h-1T of this title, or such other 
risk assessment regulations as the Securities and Exchange Commission 
may adopt, and maintains and makes available for inspection by the 
Commission in accordance with the provisions of this section copies of 
the records and reports maintained and filed on Form 17-H (or such 
other forms or reports as may be required) by such futures commission 
merchant or its Material Affiliated Person with the Securities and 
Exchange Commission pursuant to Secs. 240.17h-1T and 240.17h-2T of this 
title, or such other risk assessment regulations as the Securities and 
Exchange Commission may adopt, provided, however, that if the futures 
commission merchant has any Material Affiliated Persons for purposes of 
this section and Sec. 1.15 that are not designated as Material 
Associated Persons for purposes of Secs. 240.17h-1T and 240.17h-2T of 
this title, the futures commission merchant must also maintain the 
information required pursuant to paragraphs (a)(1)(v) through (ix) of 
this section for any such Material Affiliated Person;
    (2) In the case of a Material Affiliated Person that is subject to 
examination by, or the reporting requirements of, a Federal banking 
agency, the futures commission merchant maintains and makes available 
for inspection by the Commission in accordance with the provisions of 
this section copies of all reports submitted by such Material 
Associated Person with the Federal banking agency pursuant to section 
5211 of the Revised Statutes, section 9 of the Federal Reserve Act, 
section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the 
Home Owners' Loan Act, or section 5 of the Bank Holding Company Act of 
1956; or
    (3) In the case of a Material Affiliated Person that is subject to 
the supervision of an insurance commissioner or other similar official 
or agency of a state, the futures commission merchant maintains and 
makes available for inspection by the Commission in accordance with the 
provisions of this section copies of the annual statements with 
schedules and exhibits prepared by the Material Affiliated Person on 
forms prescribed by the National Association of Insurance Commissioners 
or by a state insurance commissioner.
    (c) Special provisions with respect to material affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A futures 
commission merchant shall be deemed to be in compliance with the 
recordkeeping requirements of paragraphs (a)(iii) through (a)(ix) of 
this section with respect to a Material Affiliated Person if such 
futures commission merchant maintains and makes available for 
inspection by the Commission in accordance with the provisions of this 
section copies of any financial or risk exposure reports filed by such 
Material Affiliated Person with a foreign futures authority or other 
relevant foreign authority. The futures commission merchant shall 
maintain a copy of the original report and a copy translated into the 
English language.
    (d) Exemptions. (1) The provisions of this section shall not apply 
to any futures commission merchant which holds funds or property of or 
for futures customers of less than $6,250,000, has less than $5,000,000 
in adjusted net capital as of the futures commission merchant's current 
fiscal year end, and is not a clearing member of an exchange.
    (2) The Commission may, upon written application by a Reporting 
Futures Commission Merchant, exempt from the provisions of this 
section, either unconditionally or on specified terms and conditions, 
any futures commission merchant affiliated with such Reporting Futures 
Commission Merchant. The term ``Reporting Futures Commission Merchant'' 
shall mean, in the case of a futures commission merchant that is 
affiliated with another registered futures commission merchant, the 
futures commission merchant which maintains the greater amount of 
adjusted net capital as last reported on financial reports filed with 
the Commission pursuant to Sec. 1.10. In granting exemptions under this 
section, the Commission shall consider, among other factors, whether 
the records required by this section concerning the Material Affiliated 
Persons of the futures commission merchant affiliated with the 
Reporting Futures Commission Merchant will be available to the 
Commission pursuant to this section or Sec. 1.15.
    (e) Location of records. A futures commission merchant required to 
maintain records concerning Material Affiliated Persons pursuant to 
this section may maintain those records either at the principal office 
of the Material Affiliated Person or at a records storage facility, 
provided that the records are located within the boundaries of the 
United States and the records are kept and available for inspection in 
accordance with Sec. 1.31. If such records are maintained at a place 
other than the futures commission merchant's principal place of 
business, the Material Affiliated Person or other entity maintaining 
the records shall file with the Commission a written undertaking, in a 
form acceptable to the Commission, signed by a duly authorized person, 
to the effect that the records will be treated as if the futures 
commission merchant were maintaining the records pursuant to this 
section and that the entity maintaining the records will permit 
examination of such records at any time, or from time to time during 
business hours, by representatives or designees of the Commission and 
promptly furnish the Commission representative or its designee true, 
correct, complete and current hard copy of any or all or any part of 
such records. The election to maintain records at the principal place 
of business of the Material Affiliated Person or at a records storage 
facility pursuant to the provisions of this paragraph shall not relieve 
the futures commission merchant required to maintain and preserve such 
records from any of its responsibilities under this section or 
Sec. 1.15.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a futures commission 
merchant concerning a Material Affiliated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. Each futures commission merchant 
subject to the requirements of this section shall maintain and preserve 
the information required by this section commencing 90 days from the 
effective date of this section.
    3. Section 1.15 is proposed to be added to read as follows:


Sec. 1.15  Risk assessment reporting requirements for futures 
commission merchants.

    (a) Reporting requirements with respect to information required to 
be maintained by Sec. 1.14. (1) Each futures commission merchant 
registered with the Commission pursuant to Section 4d of the Act, 
unless exempt pursuant to paragraph (c) of this section, shall file the 
following with the regional office with which it files periodic 
financial reports within 90 calendar days after the effective date of 
this section, provided that in the case of a futures commission 
merchant whose registration becomes effective after the effective date 
of this section, such futures commission merchant shall file the 
following within 60 calendar days after the effective date of such 
registration:
    (i) A copy of the organizational chart maintained by the futures 
commission merchant pursuant to paragraph (a)(1)(i) of Sec. 1.14. Where 
there is a material change in information provided, an updated 
organizational chart shall be filed within five calendar days after the 
end of the fiscal quarter in which the change has occurred;
    (ii) Copies of the financial, operational, and risk management 
policies, procedures and systems maintained by the futures commission 
merchant pursuant to paragraph (a)(1)(ii) of Sec. 1.14. If the futures 
commission merchant has no such written policies, procedures or 
systems, it must file a statement so indicating. Where there is a 
material change in information provided, such change shall be reported 
within five calendar days after the end of the fiscal quarter in which 
the change has occurred; and
    (iii) The aggregate notional value of open positions in noncustomer 
accounts, as defined in Sec. 1.17(b)(4), held by the futures commission 
merchant as of the end of the most recent fiscal year, the percentage 
of such aggregate notional value compared with the futures commission 
merchant's adjusted net capital as of its fiscal year end, the 
percentage of the aggregate notional value of open positions in 
noncustomer accounts carried by the futures commission merchant that 
constitute bona fide hedging positions in accordance with Sec. 1.3(z), 
and the percentage of the aggregate notional value of open positions in 
noncustomer accounts held for the purpose of managing the risks of cash 
market commitments that mature more than 12 months and 60 months, 
respectively, from the most recent fiscal quarter end, as compared to 
the aggregate notional value of open positions in all noncustomer 
accounts held by the futures commission merchant.
    (2) Each futures commission merchant registered with the Commission 
pursuant to section 4d of the Act, unless exempt pursuant to paragraph 
(c) of this section, shall file the following with the regional office 
with which it files periodic financial reports within 105 calendar days 
after the end of each fiscal year:
    (i) Fiscal year end consolidated and consolidating balance sheets 
for the futures commission merchant and its ultimate parent company, 
prepared in accordance with generally accepted accounting principles, 
which consolidated balance sheet shall be audited by an independent 
certified public accountant if an annual audit is performed in the 
ordinary course of business, but which otherwise may be unaudited, and 
which consolidated balance sheets shall include appropriate explanatory 
notes. The consolidating balance sheet shall show separately the 
futures commission merchant, its ultimate parent company and each 
Material Affiliated Person.
    (ii) Fiscal year end annual consolidated and consolidating income 
statements and consolidated cash flow statements for the futures 
commission merchant and its ultimate parent company, prepared in 
accordance with generally accepted accounting principles, which 
consolidated statements shall be audited by an independent certified 
public accountant if an annual audit is performed in the ordinary 
course of business, but which otherwise may be unaudited, and which 
consolidated statements shall include appropriate explanatory notes. 
The consolidating statements shall show separately the futures 
commission merchant, its ultimate parent company and each Material 
Affiliated Person.
    (iii) Form 1.15A. The information required to be reported on Form 
1.15A may be provided on an aggregate basis for the futures commission 
merchant's Material Affiliated Persons, provided that if this would 
materially understate the risk relative to stockholders' equity of any 
Material Affiliated Person, the required information must be provided 
separately for such Material Affiliated Person.
    (3) Each futures commission merchant registered with the Commission 
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph 
(c) of this section, shall file with the regional office with which it 
files periodic financial reports within 60 calendar days after the end 
of each fiscal quarter the aggregate notional value of open positions 
in noncustomer accounts, as defined in Sec. 1.17(b)(4), held by the 
futures commission merchant as of the end of each fiscal year, the 
percentage of such aggregate notional value compared with the futures 
commission merchant's adjusted net capital as of fiscal year end, the 
percentage of the aggregate notional value of open positions in 
noncustomer accounts carried by the futures commission merchant that 
constitute bona fide hedging positions in accordance with Sec. 1.3(z), 
and the percentage of the aggregate notional value of open positions in 
noncustomer accounts held for the purpose of managing the risk of cash 
market commitments that mature more than 12 months and 60 months, 
respectively, from fiscal quarter end compared to the aggregate 
notional value of open positions in all noncustomer accounts held by 
the futures commission merchant.
    (4) A futures commission merchant shall provide the Commission with 
updated information within 60 calendar days after the end of each 
fiscal quarter for any line item in which a change of 20% or greater 
has occurred since the futures commission merchant's last filing with 
the Commission with respect to any information required to be reported 
pursuant to paragraph (a)(2)(iii) of this section, except information 
relating to a Material Affiliated Person's real estate activities; 
provided, however, that a futures commission merchant may, at its 
option, file the information required by paragraph (a)(2)(iii) of this 
section on a routine quarterly basis.
    (5) For the purposes of this section, the term Material Affiliated 
Person shall have the meaning used in Sec. 1.14.
    (b) Notice and additional reporting requirements upon the 
occurrence of certain events. (1) A futures commission merchant shall 
notify the Director of the Division of Trading and Markets or the 
Director's designee of the occurrence of any event specified in 
paragraph (b)(2) of this section. Such notice must be provided within 
three business days of such occurrence unless a different reporting 
period is specified in paragraph (b)(2) of this section. Upon receipt 
of such notice from a futures commission merchant, the Director of the 
Division of Trading and Markets or the Director's designee may require 
that the futures commission merchant provide or cause a Material 
Affiliated Person to provide, within three business days from the date 
of request or such shorter period as the Division Director or designee 
may specify, such other information as the Division Director or 
designee determines to be necessary based upon market conditions, 
reports provided by the futures commission merchant, or other available 
information.
    (2) The following events shall require a futures commission 
merchant to notify the Director of the Division of Trading and Markets 
or the Director's designee in accordance with paragraph (b)(1) of this 
section.
    (i) Any reduction in adjusted net capital in excess of 20 percent 
of the futures commission merchant's adjusted net capital as last 
reported in financial reports filed with the Commission pursuant to 
Sec. 1.10 shall be reported as follows.
    (A) With respect to activities in the normal course of business 
(e.g., operating losses, proprietary trading losses, increased charges 
against net capital) that cause such reduction, written notification 
must be received within two business days of such reduction; and
    (B) With respect to any extraordinary transaction or series of 
transactions that will cause such reduction, written notification must 
be received at least two business days in advance of the transaction or 
the first in the series of transactions.
    (ii) Any outflow of assets from the futures commission merchant, 
including but not limited to any loans, advances, asset transfers, 
redemption or repurchase of a consolidated entity's stock, 
recapitalization of stock or payment of dividends, which withdrawal, 
advance or loan on a net basis exceeds in the aggregate in any 30 
calendar day period 20 percent or more of the futures commission 
merchant's excess adjusted net capital, provided, however, that this 
paragraph shall not apply to:
    (A) Securities transactions in the ordinary course of business 
between a futures commission merchant and a Material Affiliated Person 
where the futures commission merchant makes payment to or on behalf of 
such Material Affiliated Person for the securities transaction within 
two business days of the transaction; or
    (B) Withdrawals, advances or loans which in the aggregate in any 
thirty calendar day period, on a net basis, equal $500,000 or less.
    (iii) Aggregate, cumulative losses occurring in all non-customer 
accounts carried by the futures commission merchant, as defined in 
Sec. 1.17(b)(4), which exceed the greater of: (A) In any 30-day period, 
10 percent of the last reported consolidated stockholders' equity of 
the parent company of the futures commission merchant or $50 million; 
and (B) in any 12-month period, 20 percent of the last reported 
consolidated stockholders' equity of the parent company of the futures 
commission merchant or $100 million;
    (iv) Negative net income at a Material Associated Person during any 
quarter which is the greater of:
    (A) 30 percent of the Material Associated Person's last-reported 
net worth; or
    (B) 20 percent of the futures commission merchant's adjusted net 
capital;
    (v) A reduction of 20 percent or more of the consolidated 
stockholders' equity of the futures commission merchant's parent from 
the date of the parent's last quarterly consolidated financial 
statements;
    (vi) Any reduction in the credit rating of a Material Affiliated 
Person as reported by Standard & Poor's Corporation, Moody's Investor 
Services, Inc. or any other nationally recognized rating organization;
    (vii) Filing of a notice by a Material Associated Person with the 
Board of Governors of the Federal Reserve, the Federal Deposit 
Insurance Corporation, the Office of Thrift Supervision, or the Office 
of the Comptroller of the Currency pursuant to 12 CFR 208.32(c), 12 CFR 
325.102(c), 12 CFR 565.3(c) or 12 CFR 6.3(c), with respect to possible 
adjustment of a Material Affiliated Person's capital category; or
    (viii) Agreement by the futures commission merchant to guarantee 
any obligation of any affiliated entity, such notice to be filed within 
three business days before such guarantee is to become effective.
    (3) The reports required to be filed pursuant to paragraphs (a)(1), 
(a)(2), (a)(3) and (a)(4) of this section shall be considered filed 
when received by the regional office of the Commission with whom the 
futures commission merchant files financial reports pursuant to 
Sec. 1.10. Any notice required to be filed pursuant to paragraph (b)(1) 
of this section shall be considered filed when received at the 
Commission's principal office in Washington, DC.
    (c) Exemptions. (1) The provisions of this section shall not apply 
to any futures commission merchant which holds funds or property of or 
for futures customers of less than $6,250,000, has less than $5,000,000 
in adjusted net capital as of the futures commission merchant's fiscal 
year end, and is not a clearing member of an exchange.
    (2) The Commission may, upon written application by a Reporting 
Futures Commission Merchant, exempt from the provisions of this 
section, either unconditionally or on specified terms and conditions, 
any futures commission merchants affiliated with the Reporting Futures 
Commission merchant. The term ``Reporting Futures Commission Merchant'' 
shall mean, in the case of a futures commission merchant that is 
affiliated with another registered futures commission merchant, the 
futures commission merchant which maintains the greater amount of net 
capital as last reported on its financial reports filed with the 
Commission pursuant to Sec. 1.10. In granting exemptions under this 
section, the Commission shall consider, among other factors, whether 
the records and other information required to be maintained pursuant to 
Sec. 1.14 concerning the Material Affiliated Persons of the futures 
commission merchant affiliated with the Reporting Futures Commission 
Merchant will be available to the Commission pursuant to the provisions 
of this section.
    (d) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of certain domestic regulators. (1) In the 
case of a futures commission merchant which is required to file, or has 
a Material Affiliated Person which is required to file, Form 17-H (or 
such other forms or reports as may be required) with the Securities and 
Exchange Commission pursuant to Secs. 240.17h-2T of this title or such 
other risk assessment regulations as the Securities and Exchange 
Commission may adopt, such futures commission merchant shall be deemed 
to be in compliance with the reporting requirements of paragraphs 
(a)(1)(i) and (a)(2) of this section if the futures commission 
furnishes, in accordance with paragraph (a)(2) of this section, a copy 
of the most recent Form 17-H filed by the futures commission merchant 
or its Material Affiliated Person with the Securities and Exchange 
Commission, provided however, that if the futures commission merchant 
has designated any of its affiliated persons as Material Affiliated 
Persons for purposes of this section and Sec. 1.14 which are not 
designated as Material Associated Persons for purposes of the Form 17-H 
filed pursuant to Secs. 240.17h-1T and 240.17h-2T of this title, the 
futures commission must also file any information required pursuant to 
paragraph (a)(2)(iii) of this section with respect to any such Material 
Affiliated Person and designate any such affiliated person as a 
Material Affiliated Person on the organizational chart required as Item 
1 of Part I of Form 17-H. To comply with paragraphs (a)(1)(i) and 
(a)(2) of this section, such futures commission merchant may, at its 
option, file Form 17-H in its entirety or file such form with the 
following amendments:
    (i) The information concerning arbitrage and purchased options 
required to be reported on Items 10 and 11, respectively, of Part I of 
Form 17-H need not be included;
    (ii) The information concerning real estate activities required to 
be maintained under Rule 1.14(a)(1)(ix) and reported on Section V of 
Form 1.15A may be included in lieu of the information required under 
Section V of Part II of Form 17-H; and
    (iii) The information required to be reported on Part II of Form 
17-H may be provided on an aggregate basis for the futures commission 
merchant's Material Affiliated Persons, provided that if this would 
materially understate the risk relative to stockholders' equity of any 
Material Affiliated Person, the required information must be provided 
separately for such Material Affiliated Person.
    (2) In the case of a Material Affiliated Person that is subject to 
examination by or the reporting requirements of a Federal banking 
agency, the futures commission merchant shall be deemed to be in 
compliance with the reporting requirements of paragraph (a)(2) of this 
section with respect to such Material Affiliated Person if the futures 
commission merchant or such Material Affiliated Person maintains in 
accordance with Sec. 1.14 copies of all reports filed by the Material 
Affiliated Person with the Federal banking agency pursuant to section 
5211 of the Revised Statutes, section 9 of the Federal Reserve Act, 
section 7(a) of the Federal Deposit Insurance Act, section 10(b) of the 
Home Owners Loan Act, or section 5 of the Bank Holding Company Act of 
1956.
    (3) In the case of a futures commission merchant that has a 
Material Affiliated Person that is subject to the supervision of an 
insurance commissioner or other similar official or agency of a state, 
such futures commission merchant shall be deemed to be in compliance 
with the reporting requirements of paragraph (a)(2) of this section 
with respect to the Material Affiliated Person if:
    (i) With respect to a Material Affiliated Person organized as a 
mutual insurance company or a non-public stock company, the futures 
commission merchant maintains in accordance with Sec. 1.14 copies of 
the annual statements with schedules and exhibits prepared by the 
Material Affiliated Person on forms prescribed by the National 
Association of Insurance Commissioners or by a state insurance 
commissioner; and
    (ii) With respect to a Material Affiliated Person organized as a 
public stock company, the futures commission merchant maintains, in 
addition to the annual statements with schedules and exhibits required 
to be maintained pursuant to Sec. 1.14, copies of the filings made by 
the Material Affiliated Person pursuant to sections 13 or 15 of the 
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
    (4) No futures commission merchant shall be required to furnish to 
the Commission any examination report of any Federal banking agency or 
any supervisory recommendations or analyses contained therein with 
respect to a Material Affiliated Person that is subject to the 
regulation of a Federal banking agency. All information received by the 
Commission pursuant to this section concerning a Material Affiliated 
Person that is subject to examination by or the reporting requirements 
of a Federal banking agency shall be deemed confidential for the 
purposes of section 8 of the Act.
    (5) The furnishing of any information or documents by a futures 
commission merchant pursuant to this section shall not constitute an 
admission for any purpose that a Material Affiliated Person is 
otherwise subject to the Act.
    (e) Special provisions with respect to Material Affiliated Persons 
subject to the supervision of a Foreign Regulatory Authority. A futures 
commission merchant shall be deemed to be in compliance with the 
reporting requirements of paragraph (a)(2) of this section with respect 
to a Material Affiliated Person if such futures commission merchant 
furnishes, in accordance with the provisions of this section, copies of 
any financial or risk exposure reports filed by such Material 
Affiliated Person with a foreign futures authority or other foreign 
regulatory authority with which the Commission has entered into an 
information sharing agreement which remains in effect as of the futures 
commission merchant's fiscal year end. The futures commission merchant 
shall file a copy of the original report and a copy translated into the 
English language. For the purposes of this section, the term Foreign 
Futures Authority shall have the meaning set forth in section 1a(10) of 
the Act.
    (f) Confidentiality. All information obtained by the Commission 
pursuant to the provisions of this section from a futures commission 
merchant concerning a Material Associated Person shall be deemed 
confidential information for the purposes of section 8 of the Act.
    (g) Implementation schedule. Each futures commission merchant 
subject to the requirements of this section shall file the information 
required by paragraph (a)(1) of this section within 90 calendar days 
from the effective date of this section. Commencing December 31, 1994, 
the provisions of this section shall apply in their entirety.
Risk Assessment Report for Futures Commission Merchants CFTC Form 
1.15A--Instructions
    1. This form contains three parts. Part A is the cover page and 
includes a summary of the FCM's Material Affiliated Persons that are 
included in this report as well as the FCM's attestation. Part B 
contains information concerning the FCM's MAPs' on-balance sheet 
financial instruments (Section I); financial instruments with off-
balance sheet risk (Section II); extensions of credit (Section III); 
sources of funding for operations (Section IV); and real estate 
activities (Section V). Part C contains information for individual MAPs 
whose positions with a single counterparty exceed the Materiality 
Threshold as defined in paragraph 9 of these instructions.
    2. The information requested in Part B is to be completed in the 
aggregate for all MAPs. However, if this would materially understate 
the risk exposure relative to stockholders' equity of any MAP, an 
additional Part B must be prepared showing the required information for 
just that MAP. In addition, Part C must also be prepared for such 
separately reported MAP, if applicable.
    3. This Form contains line items for reporting numerical and other 
data required by paragraphs (a)(1)(v) through (ix) of Rule 1.14. The 
information to be provided on this Form is in addition to the reporting 
requirements of paragraphs (a)(1) (organizational chart, risk 
management policies, and initial filing of aggregate notional value of 
open positions in noncustomer accounts), (a)(2)(i) and (ii) (annual 
consolidated and consolidating balance sheets, income statements and 
cash flow statements), and (a)(3) (quarterly noncustomer account data) 
of Rule 1.15.
    4. The report is to be prepared as of the last day of the FCM's 
fiscal year or fiscal quarter if a quarterly update is required under 
Rule 1.15. This Form is to be filed within 105 calendar days after the 
end of each fiscal year. An update as to the particular line item only 
must be filed within 60 calendar days after the end of each fiscal 
quarter for which any line item change of 20 percent or more has 
occurred since the FCM's last filing with the Commission.
    5. If an FCM is affiliated with one or more other registered FCMs, 
each FCM is required to file a separate Form 1.15A. The Commission may 
exempt from the filing requirements all FCMs affiliated with an FCM 
that has been designated a ``Reporting Futures Commission Merchant'' as 
defined in Rules 1.14 and 1.15, i.e., the FCM which maintains the 
greater amount of adjusted net capital as last reported to the 
Commission. An FCM seeking designation as a Reporting Futures 
Commission Merchant must apply to the Commission for such designation 
pursuant to Rule 1.15. Pending such designation, each FCM affiliated 
with the FCM requesting such designation is required to file a separate 
Form 1.15A.
    6. Whenever a replacement cost is required to be reported, the 
methodology for determining such amount must be stated.
    7. Although specific maturities only for swaps and forwards need be 
identified, an FCM should also indicate if the maturities of any other 
instruments reported herein represent unusual risk.
    8. All amounts should be reported in thousands of U.S. dollars.
    9. The term ``Materiality Threshold'' shall mean the greatest of: 
(i) $20 million; (ii) 10 percent of the FCM's adjusted net capital as 
reported on its most recent financial report; (iii) 10 percent of the 
Material Affiliated Person's tangible net worth; or (iv) in the case of 
an FCM that is required, or that has a Material Affiliated Person that 
is required, to maintain and preserve information pursuant to SEC Rule 
240.17h-1T, the Materiality Threshold specified in that rule or such 
other risk assessment rules as the SEC may adopt.
    10. The term ``Designated Country'' shall mean Canada, France, 
Germany, Japan, Switzerland, and the United Kingdom. The term 
``Designated Currency'' shall mean Canadian dollar, French franc, 
Deutschemark, Japanese yen, Swiss franc, British pound, and European 
currency unit.

BILLING CODE 6351-01-P

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BILLING CODE 635-01-C
    Issued in Washington, DC, on February 23, 1994, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-4570 Filed 2-28-94; 8:45 am]
BILLING CODE 6351-01-P