[Federal Register Volume 59, Number 127 (Tuesday, July 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16119]


[[Page Unknown]]

[Federal Register: July 5, 1994]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 33, and 190

 

Risk Disclosure by Futures Commission Merchants, Introducing 
Brokers, Commodity Pool Operators and Commodity Trading Advisors to 
Customers; Bankruptcy Disclosure

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC) 
is amending its rules to permit registrants to deliver to customers a 
generic risk disclosure statement which will satisfy risk disclosure 
requirements applicable to domestic and foreign commodity futures and 
commodity option transactions subject to regulation by the Commission. 
The Commission also is permitting such statement to substitute for the 
special disclosure requirement related to futures-style margining of 
the options premium permitted on certain foreign exchanges. The generic 
statement may be used by firms subject to CFTC jurisdiction in lieu of 
the separate disclosure statements that will continue to be authorized 
by Commission rules. The statement, which was developed in cooperation 
with various international regulators, also is intended to satisfy the 
risk disclosure requirements of certain foreign jurisdictions who have 
implemented the language of this proposed risk disclosure statement in 
their jurisdictions in accordance with their domestic law.

EFFECTIVE DATE: July 5, 1994.

FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Robert H. 
Rosenfeld, Esq., Division of Trading and Markets, Commodity Futures 
Trading Commission, 2033 K Street, NW., Washington, DC 20581; telephone 
(202) 254-8955.

SUPPLEMENTARY INFORMATION:

Background

    On March 30, 1993, the Commodity Futures Trading Commission 
(Commission) approved for publication in the Federal Register 
amendments to its rules 1.55, 30.6, 33.7, 180.3, 190.06 and 190.10.\1\ 
Among other things, the rule amendments consolidated the foreign 
futures and foreign commodity options risk disclosure statement 
required by rule 30.6 with the domestic futures risk disclosure 
statement required by rule 1.55.
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    \1\58 FR 17495 (April 5, 1993). On May 5, 1994, the Commission 
also proposed substantial revisions to the disclosure framework 
applicable to commodity pool operators (CPOs) and commodity trading 
advisors (CTAs) designed to achieve greater simplicity, focus and 
clarity in performance history presentation, streamlining other 
required disclosures and a more concise and readable format for 
disclosure documents. 59 FR 25351 (May 16, 1994). If adopted, these 
changes would substitute Part 4 disclosure for rule 1.55 disclosure 
in certain cases.
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    In addition, rule 1.55 was amended to provide in paragraph (c) that 
the Commission may approve for use in lieu of the prescribed rule 1.55 
disclosure statement a risk disclosure statement approved by one or 
more foreign regulatory agencies or self-regulatory organizations if 
the Commission determines that such statement is reasonably calculated 
to provide the disclosures specified by rule 1.55. Rule 1.55(c) was 
adopted by the Commission to permit firms doing multinational business 
to use the same risk disclosure statement for foreign and U.S.-based 
business, thereby reducing duplicative disclosure requirements without 
sacrificing important customer protections or obscuring any special 
risks of trading outside the U.S.\2\
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    \2\See 57 FR 46101, 46103 (October 7, 1992).
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    Although initially addressed to the approval of the individual 
disclosure statements of a particular jurisdiction, the Commission in 
proposing the amendments to, among others, rule 1.55, stated that the 
rule contemplates a mechanism for eventually substituting a uniform 
disclosure format, accepted internationally, that could be used on a 
general basis and supplemented as warranted for particular kinds of 
transactions or special markets.\3\
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    \3\57 FR 46101, 46103-46104 (October 7, 1992).
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    The Commission also noted that it was considering development of a 
``plain language'' option disclosure statement and requested comment 
concerning the desirability of developing a simpler options disclosure 
statement and other possible improvements.\4\ Generally, the commenters 
who addressed this issue supported the development of a plain language 
generic options risk disclosure statement and also encouraged the 
Commission to consider incorporating the required options disclosure 
into the revised rule 1.55 statement. However, the Commission deferred 
taking such action pending the outcome of international efforts to 
develop a consolidated futures and options statement.\5\
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    \4\57 FR 46101, 46108 (October 7, 1992).
    \5\58 FR 17495, 17502 (April 5, 1993).
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    In this connection, the Commission stated that certain 
international regulators were endeavoring to develop a single risk 
disclosure statement that would be acceptable in multiple jurisdictions 
for domestic and cross-border transactions in futures and options and 
stated that:\6\
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    \6\58 FR 17495, 17497 (April 5, 1993).

    The Commission is monitoring developments in this area and 
anticipates that if a universal statement of this nature is 
developed, it will consider permitting the use of such a statement 
in lieu of the new consolidated rule 1.55 risk disclosure statement 
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as well as the options disclosure statement required by rule 33.7.

    On January 5, 1994, the Commission approved for publication in the 
Federal Register an advance notice of proposed rulemaking which 
requested comment on the text of a two-page generic risk disclosure 
statement then the subject of multilateral discussions among 
international regulators.7 The proposed text was intended to meet 
the risk disclosure requirements for both domestic and foreign 
commodity futures and commodity option products subject to regulation 
by the CFTC and thereby substitute for the statements required by rules 
1.55, 33.7 and 190.10 as well as the special disclosures related to 
futures-style margining of options permitted on certain foreign 
exchanges.8
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    \7\59 FR 1506, 1508 (January 11, 1994).
    \8\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer Binder] 
Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement relating to 
the deferred payment of option premiums, superseding separate 
disclosure addenda required by orders concerning the London 
International Financial Futures Exchange (54 FR 37636 (September 12, 
1989)), the International Petroleum Exchange (54 FR 50356 (December 
6, 1989)), and the London Futures and Options Exchange (renamed as 
the London Commodity Exchange) (54 FR 50348 (December 6, 1989)); and 
55 FR 14238 (April 17, 1990) (Sydney Futures Exchange). The text of 
the generic risk disclosure statement regarding futures-style 
margining of the options premium is substantially similar to the 
language of the addenda referred to above.
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Comments on Advance Notice and Related Text Modifications

    The Commission received comments from the National Futures 
Association (NFA), the Futures Industry Association (FIA), the Chicago 
Mercantile Exchange (CME), the Business Law Section of the American Bar 
Association (ABA), and Schulte Roth & Zabel (SRZ), a law firm. All 
commenters generally supported the Commission's proposal for a broader 
consolidated risk disclosure statement. The commenters particularly 
supported substituting the generic risk disclosure statement for the 
current rule 33.7 statement for domestic exchange-traded commodity 
options. The commenters generally believed that consolidation of risk 
disclosure statements into one concise document could increase the 
clarity of generic disclosure to customers and make the disclosure 
statement a more effective customer protection mechanism by focusing 
customers' attention on particular risks and upon obtaining adequate 
information on risks.
    In response to the Commission's query whether use of the generic 
statement should be made mandatory or discretionary, and whether any 
distinctions should be made with respect to the type of firm that 
should be permitted to use the generic statement, commenters urged the 
Commission not to eliminate the current risk disclosure statement(s) 
but rather to permit firms to choose which disclosure statement(s) to 
provide to customers. For example, firms may not wish to redesign and 
reprint disclosure statements.
    The Commission, therefore, agrees that all firms (without regard to 
whether the firms engage in cross-border business) should have the 
flexibility to determine whether they distribute to customers the new 
generic disclosure statement or the existing separate risk disclosure 
statements referred to above.
    Several commenters stated that the section on electronic execution 
systems needed clarification. Specifically, as published in the advance 
notice, paragraph 11 of the generic statement on electronic trading 
referred to the possibility that losses resulting from systems failure 
may be subject to limitations on liability. Commenters noted that 
liability limitations are not unique to electronic trade execution 
systems and may have the unintended implication that such systems are 
less safe than floor-based systems. They recommended that this language 
appear in the section on trading facilities (paragraph 10), which 
applies to all trading systems (floor and electronic). The Commission 
agrees that both floor and electronic trading venues are supported by 
systems for which certain types of features are beyond the control of 
the exchange and that liability limitations may apply to such features. 
As a consequence it believes that the foregoing alteration of the text 
is appropriate and is more satisfactory to the international regulators 
who are considering adoption of the generic risk disclosure statement, 
some of which only have electronic systems.9 The Commission 
therefore has amended the language accordingly.
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    \9\The international regulators currently prepared to permit the 
use of the generic risk disclosure statement in their jurisdictions 
and the products for which the statement may be used are specified 
in the Addendum to the statement. The Commission intends to update 
and amend the list periodically, as appropriate, in the Federal 
Register. In addition, the Commission notes that notwithstanding the 
adoption of the generic risk disclosure statement by a foreign 
jurisdiction, other disclosure requirements may continue in effect 
in such jurisdictions.
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    The advance notice of proposed rulemaking on the generic risk 
disclosure statement noted that an additional topic addressed in the 
generic statement was the risks of off-exchange trading. In particular, 
the informational working group drafting the generic statement 
concluded that such a provision, if worded appropriately, would not 
mislead or confuse customers in those jurisdictions which, for example, 
do not permit retail customers to participate in off-exchange markets. 
Although the Commission received no comments on this provision, in view 
of current public discussions related to over-the-counter derivatives, 
the Commission has decided to add the words ``and attendant risks'' at 
the end of paragraph 12 to enhance relevant disclosure in this regard. 
The Commission notes in this regard that the generic risk statement is 
intended to cause a customer to ask additional questions of its broker.
    Some commenters raised concerns as to the reference in paragraph 1 
of the proposed disclosure statement regarding the time frame for 
meeting margin calls. They believed the reference could be construed as 
overriding the terms set forth in a customer account agreement between 
the firm and its customer. The Commission wishes to clarify that the 
language of the generic risk disclosure statement is not intended to 
modify the terms and conditions of a firm's customer account agreement 
concerning the timing of margin payments (provided that these are 
consistent with the Commodity Exchange Act (CEA)) but to call to the 
customer's attention generally that failure to post margin can have 
significant consequences.
    One commenter suggested that in order to alleviate the paperwork 
burden on registrants, the Commission should not require inclusion in 
the risk disclosure statement that is delivered to customers the 
Addendum that sets forth the participating jurisdictions which have 
adopted the generic statement and the products for which the statement 
may be used. Although the Commission believes that the Addendum is 
necessary to enable firms to ensure that use of the generic statement 
for a particular product is in compliance with the applicable risk 
disclosure requirements of various jurisdictions, the Addendum 
ordinarily should not be necessary for customers who should receive 
additional or different disclosure if the generic statement is not 
accepted by a particular jurisdiction or for a particular 
product.10 Otherwise, although the Commission intends to publish, 
amend and update, as appropriate, the Addendum to the generic risk 
disclosure statement, the Commission agrees that apart from the 
limitations on its use in the U.S. to futures, options on futures and 
options on commodities, the Addendum listing participating 
jurisdictions need not be made part of the disclosure document itself. 
Firms may, however, elect to include the Addendum as long as it appears 
on a separate page after the actual risk disclosure text.
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    \1\0It is, however, important in the U.S. that there be no 
possible confusion as to what disclosure is required for options on 
equities, which are governed by U.S. securities laws. In order to be 
used in the U.S., therefore, the Addendum must reflect the products 
for which use of the generic risk disclosure statement is permitted.
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    In its advance notice, the Commission noted that the elimination of 
a Commission mandated description of options trading and other 
educational material from the mandated risk disclosure statement does 
not mean that firms do not have the obligation to provide all material 
disclosures consistent with the product traded and level of experience, 
sophistication and financial capacity of customers in compliance with 
Commission and NFA rules.11 One commenter believed that the 
streamlined disclosure statement was sufficient and that if the 
Commission believes that additional disclosures are necessary that it 
provide specific guidance on this issue.
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    \1\159 FR 1506, 1507 (January 11, 1994), citing Commission rule 
1.55(f), which provides that: ``This section [requiring distribution 
of a risk disclosure statement] does not relieve a futures 
commission merchant or introducing broker from any other disclosure 
obligation it may have under applicable law.'' See also NFA 
Compliance Rule 2-30 (``know your customer'' rule).
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    As discussed by the Commission when it adopted rule 1.55(d) 
(currently rule 1.55(f)), the obligations of a futures commission 
merchant (FCM) and introducing broker (IB) to disclose material 
information to customers arise under the CEA and other applicable law. 
The Commission further noted that the essential purpose of the rule was 
to confirm the existing obligations of an FCM or IB under the law and 
to make clear that distribution of a standard disclosure statement was 
not intended to alter those obligations.12
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    \1\2See 50 FR 5380 (February 8, 1985).
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    Because the nature and extent of the disclosure which an FCM or IB 
may be required to make to a customer necessarily must depend on the 
facts and circumstances of the particular transaction and also on the 
precise nature of the FCM's or IB's relationship to the customer, any 
attempt by the Commission to enumerate the precise scope and form of 
disclosure for all conceivable customer relationships, products and 
trading strategies would be difficult to accomplish and would diminish 
the impact of the generic statement which is intended to highlight the 
significant risks of futures and options trading and the areas where 
customers should seek additional particularized information.13 
These considerations continue to apply to the current rulemaking, which 
is intended to consolidate and improve the mandated disclosure process. 
Accordingly, nothing in the current rulemaking should be construed as 
reducing the existing obligation to make all disclosures required under 
applicable law.
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    \1\3The extent of these obligations is constantly being defined 
on a case-by-case basis in administrative and reparations 
proceedings and civil actions. Further, the language of the generic 
risk disclosure statement specifically directs the customer to 
elicit further information from the broker on certain issues.
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    Finally, one commenter suggested that the acknowledgement 
requirement should be eliminated with respect to sophisticated 
investors. The CFTC has determined not to address this matter at this 
time.

Procedure--Final Rule Amendments

    When the Commission issued its advance notice concerning the 
proposed text of a generic disclosure statement that could be adopted 
by several jurisdictions regulating futures and options transactions, 
the Commission contemplated that a further comment process could be 
necessary. However, for the reasons noted below, the Commission 
believes that a complete rulemaking record has been compiled and that 
further proposal of the text of the generic risk disclosure statement 
is unnecessary.
    Public comments received on the advance notice were unanimous in 
recommending the adoption of the generic risk disclosure statement 
(subject to minor revision), including substituting the proposed 
generic statement for the rule 33.7 statement for domestic exchange-
traded commodity options and the statement required by rule 190.10 for 
non-cash deposits as margin.14 Second, the Commission received 
comment on the generic risk disclosure proposal in connection with the 
recent amendments consolidating rules 1.55 and 30.6, which contemplated 
Commission approval of the substitution of a document which can be used 
in multiple jurisdictions.15 Third, as provided herein, the use of 
the generic risk disclosure is not mandatory, i.e., the language may be 
used but is not required to be substituted for the statements now 
required by rules 1.55, 33.7 and 190.10(c) and other disclosure 
requirements set forth in the advance notice.
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    \1\459 FR 1506, 1508 (January 11, 1994). In addition to 
expressly inviting public comment on the draft text of the generic 
risk disclosure statement to substitute for current disclosures 
contained in rules 1.55, 33.7, 190.10 and Commission orders and 
Advisories regarding disclosures related to futures-style margining 
of options premium allowed by certain foreign exchanges, the 
Commission also requested comment on whether the statement would be 
most useful if made mandatory and whether its use should be limited 
to firms doing cross-border business or more broadly.
    \1\558 FR 17495, 17497 (April 5, 1993); 57 FR 46101, 46103 
(October 7, 1992).
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    Accordingly, the final rules amend Secs. 1.55(c), 33.7 and 
190.10(c) to incorporate text which permits registrants to satisfy the 
requirements of rules 1.55, 33.7 and 190.10(c) by substituting the 
generic risk disclosure statement as set forth below, which will be 
published in a new appendix to part 1 of the Commission's regulations. 
The Commission also clarifies herein that the generic risk disclosure 
statement may be used in lieu of the special disclosure addendum to 
rule 33.7 in connection with transactions on certain foreign exchanges 
which do not collect the full option premium.

Effect of Alternate Disclosure Statement

    The Commission is hereby permitting the generic risk disclosure 
statement set forth herein in appendix A to rule 1.55(c) to be used in 
lieu of the statements required by rules 1.55 (which incorporates the 
risk-disclosure contained in Commission rule 30.6 for foreign futures 
and foreign commodity options), rule 33.7 (domestic exchange-traded 
commodity options) and the special bankruptcy disclosures of Commission 
rule 190.10(c) related to the acceptance of non-cash margin.
    The approval of the generic risk disclosure statement is not 
intended to alter disclosure requirements other than those specifically 
addressed. For example, the disclosure statement would be required to 
be delivered prior to the opening of the account and the 
acknowledgement and manner of delivery of the disclosure statement 
(i.e., as a separate written statement or in a booklet) would not be 
altered. The Commission also would not change the requirement that 
compliance with requirements related to providing customers with risk 
disclosure statements does not relieve an FCM or IB from any other 
disclosure obligation it may have under applicable law.\16\ Similarly, 
the single signature acknowledgment procedure contained in rule 1.55(d) 
would continue to apply\17\ as will the amendment to CFTC rule 
190.10(c) eliminating the requirement that the prescribed disclosure 
concerning the treatment of non-cash margin in FCM bankruptcies be 
acknowledged.\18\
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    \16\In addition to clarifying that firms have an obligation to 
disclose all material facts, the Commission also wishes to clarify 
that firms must comply with the disclosure obligations imposed by 
other regulatory authorities, U.S. or foreign.
    \17\The Commission wishes to reiterate that the single signature 
acknowledgment format may not generally be used for the endorsements 
required by rule 180.3 with respect to arbitration and other dispute 
resolution agreements except with respect to Qualified Eligible 
Participants (QEPs) as defined in rule 4.7(a)(1)(ii) and for certain 
persons or entities specifically within the scope of rule 4.5(a). 
See rule 180.3(b)(2) (as amended by 58 FR 17495 (April 5, 1993)). 
Nor would the single acknowledgment affect the obligation of an FCM 
or IB to obtain, by instrument separate and apart from the customer 
agreement, a customer's consent that the FCM may knowingly take the 
other side of a customer's order, or to transfer funds from a 
customer's segregated account to an account that is not segregated. 
See discussion in 58 FR 17495, 17499 (April 5, 1993).
    \18\The Commission notes that the generic statement discloses 
more clearly than the statement in CFTC rule 190.10(c) that cash and 
non-cash margin may be subject to the same treatment in the event of 
a firm bankruptcy.
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    The distribution of the generic risk disclosure statement also 
could substitute for the special disclosure requirements related to 
futures-style margining of option premiums permitted on certain foreign 
exchanges.
    The generic risk disclosure statement would not, however, alter the 
separate disclosure requirements concerning electronic trading systems 
or trading linkages between domestic and foreign futures exchanges that 
may be mandated by U.S. self-regulatory organizations.\19\
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    \19\See 58 FR 17495, 17496, n.7 (April 5, 1993) citing, for 
example, NFA Compliance Rule 2-28, CME rule 874 and Commodity 
Exchange Inc. rule 5.14 (addressing risk disclosure requirements 
applicable to foreign futures and options as a result of trading 
linkages between domestic and foreign exchanges). See also CME rule 
577 and Chicago Board of Trade rule 9A.20 which address the risk 
disclosure requirements applicable to users of GLOBEX, and New York 
Mercantile Exchange rule 6.22 which addresses the risk disclosure 
requirements applicable to the users of the ACCESS electronic 
trading system.
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    Finally, the Commission notes that if a firm elects to use the 
generic risk disclosure statement rather than the statement required by 
rule 190.10(c), and uses a separate subordination agreement required by 
Financial and Segregation Interpretation No. 12--``Deposit of Customer 
Funds in Foreign Depositories'' for customers depositing margin in 
foreign depositories,\20\ that statement must be separately 
acknowledged.\21\ A separate signature also would continue to be 
necessary where subordination or similar consent to contractual 
modification of certain rights is required for other purposes, such as 
for participation in cross-margining programs.\22\
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    \20\See 53 FR 46911 (November 21, 1988). The Commission stated 
that the subordination agreement discussed in Financial and 
Segregation Interpretation No. 12 may be incorporated into the rule 
190.10(c) bankruptcy disclosure document or separately executed. Id. 
at 46913-46914.
    \21\Separate acknowledgement of the rule 190.10(c)(2) disclosure 
statement in this context is a substitute for execution of a 
separate subordination agreement.
    \22\Id., citing ``Financial and Segregation Interpretation No. 
12.''
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Separate Statement

    In its previous revision of rule 1.55, the Commission included an 
amendment intended to clarify that the prescribed risk disclosure 
statement may be provided as a physically separate document or in a 
booklet containing other commodity interest account materials, as long 
as the rule 1.55 risk disclosure statement appears as the cover page or 
the first page, and is the only material on such page, by which it 
means the page immediately following the cover page.
    As the generic statement requires approximately two pages of 
printed text, the statement may appear on more than one page, provided 
that it is the only text that appears on those pages.

Application to Rule 30.3 and 30.10 Orders

    After the effective date of these rule amendments, all firms 
operating pursuant to confirmed rule 30.10 relief,\23\ and firms 
complying with the terms of an outstanding order under rule 30.3 may 
elect to use the generic risk disclosure statement or the risk 
disclosure statements mandated by rules 1.55 and 33.7 and applicable 
Commission orders, as appropriate.\24\
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    \23\Firms operating pursuant to Commission rule 30.10 relief had 
been permitted to comply with the risk disclosure requirements set 
forth in the relevant Commission orders, i.e., they could continue 
to use the text of rule 30.6 as published prior to the 1993 
revisions to Commission rules 1.55 and 30.6 (which incorporated the 
rule 30.6 disclosures for foreign futures into the rule 1.55 
disclosures for domestic futures) (see 58 FR 17496 (April 5, 1993)).
    \24\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer 
Binder] Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement 
relating to the deferred payment of option premiums for options).
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Timetable for Implementation

    Under the most recent disclosure revisions, the Commission stated 
that firms would be permitted to use existing disclosure statements 
(i.e., either separate rule 1.55, 30.6, 33.7 and 190.10(c) documents) 
up to and including July 1, 1994.\25\
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    \25\See 58 FR 17495, 17497 (April 5, 1993).
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    Although the Commission intends for the current rulemaking to take 
effect upon the publication of this Federal Register release, the 
Commission is permitting firms for a period not to exceed sixty days 
after the date herein to continue to use the separate statements 
contained in rules 1.55 and 30.6.
    Accordingly, after the date herein, firms may use either the new 
generic risk disclosure statement or the revised rule 1.55 risk 
disclosure statement (which incorporates the rule 30.6 disclosure 
statement) or, for a period not to exceed sixty days after the 
effective date of this Federal Register release, the separate rule 1.55 
and rule 30.6 risk disclosure statements to comply with relevant risk 
disclosure obligations.\26\
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    \26\See no action letter of the CFTC's Division of Trading and 
Markets dated June 8, 1994 regarding the July 1, 1994 effective date 
of the revised rule 1.55 risk disclosure statement.
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Amendment of CFR

A. 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 Paperwork Reduction Act. 
The amendments to rules 1.55, 33.7 and 190.10 do not change the burdens 
associated with those rules. The groups of rules of which they are a 
part have the following burdens:

Rule 33.7--(3038-0007)
    Average Burden Hours Per Response--50.32
    Number of Respondents--190,197
    Frequency of Response--Occasionally
Rule 190.10--(3038-0021)
    Average Burden Hours--0.35
    Number of Respondents--802
    Frequency of Response--Occasionally
    No additional burden is associated with the amendments to rules 
33.7 and 190.10.

    The burden associated with the group which encompasses rules 1.55, 
180.3 and rule 1.65 is:

Rules 1.55, 180.3 and 1.65--(3038-0022)
    Average Burden Hours Per Response--613.26
    Number of Respondents--4295
    Frequency of Response--Occasionally

    No additional burden is associated with the amendments to rule 
1.55.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), 5 U.S.C. Sec. 601 et seq., 
requires that agencies, in proposing rules, consider the impact of 
these rules on small business. In this connection, the Commission 
previously has determined that FCMs and Commodity Pool Operators should 
not be considered small entities for purposes of the RFA.\27\ With 
respect to IBs and Commodity Trading Advisors (CTAs), the Commission 
has stated that it would evaluate within the context of each proposal 
whether all or some IBs and CTAs should be considered small entities, 
and if so, that it would analyze the economic impact on them of any 
rule.\28\ Because the proposed amendments to the Commission rules 
discussed herein will not result in any significant additional burdens 
to the above mentioned registrants and may in practice result in a 
reduction of certain existing burdens, the Commission believes that the 
proposed rule amendments will not have a significant economic impact on 
such entities. Therefore, pursuant to section 3(a) of the RFA, 5 U.S.C. 
Sec. 605(b), the Acting Chairman of the Commission certifies that these 
proposed rule amendments will not have a significant economic impact on 
a substantial number of small entities.
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    \27\47 FR 18618 (April 30, 1982).
    \28\Id. (CTAs) and 48 FR 35248, 35276 (August 3, 1983) (IBs).
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List of Subjects

17 CFR Part 1

    Commodity futures, Domestic exchange-traded commodity option 
transactions.

17 CFR Part 33

    Commodity futures, Domestic exchange-traded commodity option 
transactions.

17 CFR Part 190

    Bankruptcy.

    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act, and in particular, sections 
2(a)(1), 4b, 4d, 4f and 8a of the Act, as amended, 7 U.S.C. 2, 6b, 6d, 
6f and 12a, the Commission hereby amends 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 1.55 is amended by revising paragraph (c) and by adding 
a new Appendix A to read as follows:


Sec. 1.55  Distribution of ``Risk Disclosure Statement'' by futures 
commission merchants and introducing brokers.

* * * * *
    (c) The Commission may approve for use in lieu of the risk 
disclosure document required by paragraph (b) of this section a risk 
disclosure statement approved by one or more foreign regulatory 
agencies or self-regulatory organizations if the Commission determines 
that such risk disclosure statement is reasonably calculated to provide 
the disclosure required by paragraph (b) of this section. Notice of 
risk disclosure statements that may be used to satisfy Commission 
disclosure requirements, what requirements such statements meet and the 
jurisdictions which accept each format will be set forth in appendix A 
to this section.
* * * * *

Appendix A to CFTC Rule 1.55(c)--Generic Risk Disclosure Statement

Risk Disclosure Statement for Futures and Options

    This brief statement does not disclose all of the risks and other 
significant aspects of trading in futures and options. In light of the 
risks, you should undertake such transactions only if you understand 
the nature of the contracts (and contractual relationships) into which 
you are entering and the extent of your exposure to risk. Trading in 
futures and options is not suitable for many members of the public. You 
should carefully consider whether trading is appropriate for you in 
light of your experience, objectives, financial resources and other 
relevant circumstances.

Futures

1. Effect of `Leverage' or `Gearing'
    Transactions in futures carry a high degree of risk. The amount of 
initial margin is small relative to the value of the futures contract 
so that transactions are `leveraged' or `geared'. A relatively small 
market movement will have a proportionately larger impact on the funds 
you have deposited or will have to deposit: this may work against you 
as well as for you. You may sustain a total loss of initial margin 
funds and any additional funds deposited with the firm to maintain your 
position. If the market moves against your position or margin levels 
are increased, you may be called upon to pay substantial additional 
funds on short notice to maintain your position. If you fail to comply 
with a request for additional funds within the time prescribed, your 
position may be liquidated at a loss and you will be liable for any 
resulting deficit.
2. Risk-reducing orders or strategies
    The placing of certain orders (e.g. `stop-loss' orders, where 
permitted under local law, or `stop-limit' orders) which are intended 
to limit losses to certain amounts may not be effective because market 
conditions may make it impossible to execute such orders. Strategies 
using combinations of positions, such as `spread' and `straddle' 
positions may be as risky as taking simple `long' or `short' positions.

Options

3. Variable degree of risk
    Transactions in options carry a high degree of risk. Purchasers and 
sellers of options should familiarize themselves with the type of 
option (i.e. put or call) which they contemplate trading and the 
associated risks. You should calculate the extent to which the value of 
the options must increase for your position to become profitable, 
taking into account the premium and all transaction costs.
    The purchaser of options may offset or exercise the options or 
allow the options to expire. The exercise of an option results either 
in a cash settlement or in the purchaser acquiring or delivering the 
underlying interest. If the option is on a future, the purchaser will 
acquire a futures position with associated liabilities for margin (see 
the section on Futures above). If the purchased options expire 
worthless, you will suffer a total loss of your investment which will 
consist of the option premium plus transaction costs. If you are 
contemplating purchasing deep-out-of-the-money options, you should be 
aware that the chance of such options becoming profitable ordinarily is 
remote.
    Selling (`writing' or `granting') an option generally entails 
considerably greater risk than purchasing options. Although the premium 
received by the seller is fixed, the seller may sustain a loss well in 
excess of that amount. The seller will be liable for additional margin 
to maintain the position if the market moves unfavorably. The seller 
will also be exposed to the risk of the purchaser exercising the option 
and the seller will be obligated to either settle the option in cash or 
to acquire or deliver the underlying interest. If the option is on a 
future, the seller will acquire a position in a future with associated 
liabilities for margin (see the section on Futures above). If the 
option is `covered' by the seller holding a corresponding position in 
the underlying interest or a future or another option, the risk may be 
reduced. If the option is not covered, the risk of loss can be 
unlimited.
    Certain exchanges in some jurisdictions permit deferred payment of 
the option premium, exposing the purchaser to liability for margin 
payments not exceeding the amount of the premium. The purchaser is 
still subject to the risk of losing the premium and transaction costs. 
When the option is exercised or expires, the purchaser is responsible 
for any unpaid premium outstanding at that time.

Additional risks common to futures and options

4. Terms and conditions of contracts
    You should ask the firm with which you deal about the terms and 
conditions of the specific futures or options which you are trading and 
associated obligations (e.g. the circumstances under which you may 
become obligated to make or take delivery of the underlying interest of 
a futures contract and, in respect of options, expiration dates and 
restrictions on the time for exercise). Under certain circumstances the 
specifications of outstanding contracts (including the exercise price 
of an option) may be modified by the exchange or clearing house to 
reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
    Market conditions (e.g. illiquidity) and/or the operation of the 
rules of certain markets (e.g. the suspension of trading in any 
contract or contract month because of price limits or ``circuit 
breakers'') may increase the risk of loss by making it difficult or 
impossible to effect transactions or liquidate/offset positions. If you 
have sold options, this may increase the risk of loss.
    Further, normal pricing relationships between the underlying 
interest and the future, and the underlying interest and the option may 
not exist. This can occur when, for example, the futures contract 
underlying the option is subject to price limits while the option is 
not. The absence of an underlying reference price may make it difficult 
to judge ``fair'' value.
6. Deposited cash and property
    You should familiarize yourself with the protections accorded money 
or other property you deposit for domestic and foreign transactions, 
particularly in the event of a firm insolvency or bankruptcy. The 
extent to which you may recover your money or property may be governed 
by specific legislation or local rules. In some jurisdictions, property 
which had been specifically identifiable as your own will be pro-rated 
in the same manner as cash for purposes of distribution in the event of 
a shortfall.
7. Commission and other charges
    Before you begin to trade, you should obtain a clear explanation of 
all commission, fees and other charges for which you will be liable. 
These charges will affect your net profit (if any) or increase your 
loss.
8. Transactions in other jurisdictions
    Transactions on markets in other jurisdictions, including markets 
formally linked to a domestic market, may expose you to additional 
risk. Such markets may be subject to regulation which may offer 
different or diminished investor protection. Before you trade you 
should enquire about any rules relevant to your particular 
transactions. Your local regulatory authority will be unable to compel 
the enforcement of the rules of regulatory authorities or markets in 
other jurisdictions where your transactions have been effected. You 
should ask the firm with which you deal for details about the types of 
redress available in both your home jurisdiction and other relevant 
jurisdictions before you start to trade.
9. Currency risks
    The profit or loss in transactions in foreign currency-denominated 
contracts (whether they are traded in your own or another jurisdiction) 
will be affected by fluctuations in currency rates where there is a 
need to convert from the currency denomination of the contract to 
another currency.
10. Trading facilities
    Most open-outcry and electronic trading facilities are supported by 
computer-based component systems for the order-routing, execution, 
matching, registration or clearing of trades. As with all facilities 
and systems, they are vulnerable to temporary disruption or failure. 
Your ability to recover certain losses may be subject to limits on 
liability imposed by the system provider, the market, the clearing 
house and/or member firms. Such limits may vary: you should ask the 
firm with which you deal for details in this respect.
11. Electronic trading
    Trading on an electronic trading system may differ not only from 
trading in an open-outcry market but also from trading on other 
electronic trading systems. If you undertake transactions on an 
electronic trading system, you will be exposed to risks associated with 
the system including the failure of hardware and software. The result 
of any system failure may be that your order is either not executed 
according to your instructions or is not executed at all.
12. Off-exchange transactions
    In some jurisdictions, and only then in restricted circumstances, 
firms are permitted to effect off-exchange transactions. The firm with 
which you deal may be acting as your counterparty to the transaction. 
It may be difficult or impossible to liquidate an existing position, to 
assess the value, to determine a fair price or to assess the exposure 
to risk. For these reasons, these transactions may involve increased 
risks. Off-exchange transactions may be less regulated or subject to a 
separate regulatory regime. Before you undertake such transactions, you 
should familiarize yourself with applicable rules and attendant risks.
    I hereby acknowledge that I have received and understood this risk 
disclosure statement.

----------------------------------------------------------------------
Date
----------------------------------------------------------------------
Signature of Customer
* * * * *
[The following language should be printed on a page other than the 
pages containing the disclosure language above and may be omitted from 
the required disclosure statement]

    This disclosure document meets the risk disclosure requirements in 
the jurisdictions identified below ONLY for those instruments which are 
specified.

United States: commodity futures and options on commodity futures 
subject to the Commodity Exchange Act
[other jurisdictions: etc.]

PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION 
TRANSACTIONS

    3. The authority citation for this part continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19 and 21, unless otherwise noted.

    4. Section 33.7 is amended by revising paragraph (a)(1)(i) as 
follows:


Sec. 33.7  Disclosure.

    (a)(1) * * *
    (i) Furnishes the option customer with a separate written 
disclosure statement as set forth in this section or another statement 
approved under Sec. 1.55(c) of this chapter and set forth in appendix A 
to Sec. 1.55 which the Commission finds satisfies this requirement, or 
includes either such statement in a booklet containing the customer 
account agreement and other disclosure statements required by 
Commission rules; provided, however, that if the statement contained in 
Sec. 33.7 is used it must follow the statement required by Sec. 1.55; 
and
* * * * *

PART 190--BANKRUPTCY RULES

    5. The authority citation for part 190 continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23, 
and 24 and 11 U.S.C. 362, 546, 548, 556 and 761-766.

    6. Section 190.10 is amended by revising paragraph (c)(1) as 
follows:


Sec. 190.10  General.

* * * * *
    (c)(1) Disclosure statement for non-cash margin. (1) Except as 
provided in Secs. 1.65, no commodity broker (other than a clearing 
organization) may accept property other than cash from or for the 
account of a customer to margin, guarantee, or secure a commodity 
contract unless, the commodity broker first furnishes the customer with 
the disclosure statement set forth in paragraph (c)(2) of this section 
in boldface print in at least 10 point type which may be provided as 
either a separate, written document or incorporated into the customer 
agreement, or with another statement approved under Sec. 1.55(c) of 
this chapter and set forth in appendix A to Sec. 1.55 which the 
Commission finds satisfies this requirement.
* * * * *
    Issued in Washington, DC, on June 28, 1994 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-16119 Filed 7-1-94; 8:45 am]
BILLING CODE 6351-01-P