[Federal Register Volume 59, Number 248 (Wednesday, December 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31828]


[Federal Register: December 28, 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: Final rules.

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SUMMARY: On March 1, 1994, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for comment proposed rules to 
implement the risk assessment authority set forth in Section 4f(c) of 
the Commodity Exchange Act (the ``Proposal'').1 The comment period 
on the proposal was scheduled to expire on May 2, 1994. However, the 
Commission twice extended the comment period to ensure that interested 
parties had an adequate opportunity to submit comments. Initially, the 
Commission extended the comment period on the entire set of rule 
proposals to July 1, 1994. The comment period on the proposed 
provisions regarding the maintenance and filing by futures commission 
merchants (``FCMs'') of an organizational chart delineating major 
affiliated persons, risk management policies, procedures and systems, 
consolidated and consolidating financial statements, and information 
concerning the occurrence of certain ``trigger'' events, expired at 
that time. Subsequently, the Commission extended the comment period on 
the proposed provisions regarding reporting of certain data concerning 
affiliate positions and noncustomer accounts carried by the FCM to 
September 1, 1994. As discussed herein, the Commission has adopted 
final rules with respect to maintenance and filing of organizational 
charts, risk management policies, procedures and systems, consolidated 
and consolidating financial statements and trigger events relating to 
events occurring at the FCM. Final action on the balance of the 
Proposal has been deferred following further review and consultation 
with other regulators.

    \1\59 FR 9689.
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EFFECTIVE DATE: December 31, 1994.

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 N.W., Washington D.C. 20581. 
Telephone (202) 254-8955.

SUPPLEMENTARY INFORMATION

I. Background

    Following the failures of certain FCMs operating within holding 
company structures, the Commission requested and received new statutory 
authority, enacted as part of the Futures Trading Practices Act of 1992 
(``FTPA''),2 to obtain information concerning activities of FCM 
affiliates that could pose material risks to the FCM. New Section 
4f(c)3 of the Commodity Exchange Act (``CEA'' or ``Act'') 
authorizes the Commission to require each registered FCM to obtain, 
inter alia, ``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.''4 Section 4f(c) 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.''5 The statute further grants 
the Commission the authority to require, by rule or regulation, summary 
reports of such information to be filed no more frequently than 
quarterly and 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.6
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    \2\Pub. L. No. 102-546, 106 Stat. 3590 (1992). The FTPA was 
enacted on October 28, 1992.
    \3\7 U.S.C. 6f(c)(Supp. IV 1992). For a more detailed discussion 
regarding the background and purpose of the Commission's statutory 
risk assessment authority, see 59 FR 9689-92 (March 1, 1994).
    \4\7 U.S.C. 6f(c)(2)(A)(Supp. IV 1992).
    \5\7 U.S.C. 6f(c)(2)(B)(Supp. IV 1992).
    \6\7 U.S.C. 6f(c)(3)(A) and 6f(c)(3)(B)(Supp. IV 1992).
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    The Commission's statutory risk assessment authority is similar to 
that granted to the Securities and Exchange Commission (``SEC'') in 
Section 4 of the Market Reform Act of 1990.7 Pursuant to its risk 
assessment authority, the SEC adopted on July 21, 1992 ``final 
temporary'' rules8 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.9 The SEC 
adopted ``final temporary'' rules as an interim step in the adoption of 
final regulations to enable the agency to gain familiarity with 
information filed pursuant to the risk assessment rules and to evaluate 
the operation of the risk assessment program.10 In formulating the 
proposed rules, the CFTC gave extensive consideration to the risk 
assessment rules adopted by the SEC and consulted extensively with the 
SEC and other federal financial regulators in an effort to develop, to 
the extent possible, a coordinated approach to implementation of its 
risk assessment authority.11
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    \7\Pub. L. No. 101-432, 104 Stat. 963 (1990).
    \8\See 57 FR 32159, 32161 (July 21, 1992).
    \9\57 FR 32159.
    \1\0The SEC plans to review the operation of its risk assessment 
regulations early next year, after the rules have been in effect for 
over two years. See 57 FR 32159 at 32161.
    \1\1See Letter from Andrea M. Corcoran, Director, Division of 
Trading and Markets, CFTC, to Brandon Becker, Director, Division of 
Market Regulation, SEC (October 11, 1994); Letter from the Honorable 
Barbara Pedersen Holum, Acting Chairman, CFTC, to the Honorable 
Arthur Levitt, Chairman, SEC (October 11, 1994); Letter from the 
Honorable Barbara Pedersen Holum, Acting Chairman, CFTC, to the 
Honorable Alan Greenspan, Chairman, Board of Governors of the 
Federal Reserve System (October 11, 1994); Letter from the Honorable 
Arthur Levitt, Chairman, SEC, to the Honorable Mary L. Schapiro, 
Chairman, CFTC (October 31, 1994); Letter from Brandon Becker, 
Director, Division of Market Regulation, SEC, to Andrea M. Corcoran, 
Director, Division of Trading and Markets, CFTC (December 13, 1994).
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    On March 1, 1994, the Commission published for comment proposed 
rules to implement its statutory risk assessment authority. The 
proposed rules generally would have required the maintenance and 
reporting of information concerning the activities of affiliates of 
registered FCMs whose activities are reasonably likely to have a 
material impact on the financial or operational condition of the FCM. 
Proposed Rule 1.14(a)(2) defined such affiliates as ``Material 
Affiliated Persons'' (``MAPs'') of the FCM and set forth criteria to be 
considered by FCMs in determining which of their affiliates would 
constitute MAPs for purposes of the risk assessment 
requirements.12
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    \1\2The ``material affiliated person'' definition used in the 
Commission's Proposal is similar to that used in the SEC's risk 
assessment rules. However, for purposes of the Proposal and these 
rules, the Commission has used the term ``affiliated person'' rather 
than ``associated person'', as used in the SEC's rules, to avoid 
confusion with the associated person registration category described 
in Section 4k of the Act and Commission Rule 3.12.
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    The Proposal included two rules, a rule requiring that certain 
records be maintained (proposed Rule 1.14) and a rule requiring 
reporting of certain information to the Commission (proposed Rule 
1.15), as well as a proposed form, proposed Form 1.15A, on which an FCM 
would report the majority of the information required to be reported 
under the reporting rule. Proposed Rule 1.14 would have required FCMs 
to maintain and preserve certain records and information concerning, 
among other things, the organizational structure of which the FCM is a 
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 would have required 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 of the occurrence of specified events, such as large 
decreases in the reported adjusted net capital of the FCM or the equity 
of its parent company.
    The Proposal would have applied generally to FCMs that hold 
customer funds of $6,250,000 or greater, maintain adjusted net capital 
in excess of $5,000,000 or are clearing members of a contract market. 
However, the proposed rules included exemptive provisions for FCMs 
dually registered with the SEC as broker-dealers or operating within a 
holding company group that includes a broker-dealer filing reports 
pursuant to the SEC's risk assessment rules. Further, the proposed 
rules would have permitted 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 regulatory authority with which the Commission has an 
information-sharing agreement 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.
    The Commission received twenty-three comment letters on the 
provisions of the Proposal relating to maintenance and filing of 
organizational charts, risk management policies, consolidated and 
consolidating financial statements, and ``trigger event'' reporting, 
for which, following extension of the comment period, comments were due 
by July 1, 1994.13 The majority of the com- menters either 
supported, or noted their understanding of, the objectives of the 
proposed rules. Several commenters, however, criticized the scope of 
the proposed rules, and a number of commenters urged the Commission to 
reconcile any differences between the SEC's risk assessment rules and 
the Commission's proposed rules. Generally, commenters requested 
additional time to update (if necessary) one-time filings required 
under the proposed rules (i.e., the organizational chart and risk 
management policies, procedures and systems) and to file notice with 
the Commission upon the occurrence of the trigger events specified in 
the Proposal. A number of commenters requested that the Commission 
focus its trigger event reporting system on conditions occurring at the 
FCM rather than at an affiliate or parent of the FCM. Certain 
commenters requested that general exemptive authority be retained to 
permit the Commission to address on a case-by-case basis special 
problems of compliance for some firms in, for example, preparing 
consolidating financial reports or obtaining access to information 
concerning foreign affiliates. Comments addressed to specific 
provisions of the proposed rules and the Commission's resolution of the 
issues raised by such comments are discussed below in the context of 
the relevant provisions of the final rules.
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    \1\3The commenters included thirteen FCMs, four self-regulatory 
organizations (``SROs''), three trade associations, one government 
agency, one bar association and one law firm representing Commission 
registrants. The Commission received thirteen comment letters on the 
balance of the proposal, on which comments were due by September 1, 
1994.
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    Based upon its review of the comments received concerning the 
Proposal, consultation with other federal regulators and further 
consideration, the Commission has determined to bifurcate the 
rulemaking and to defer, pending further review and consultation with 
other regulators, action on the proposed provisions requiring reporting 
of information relating to FCMs' noncustomer accounts, financial 
position and other information relating to FCMs' material affiliates 
proposed to be required on Form 1.15A, and notice of the occurrence of 
certain trigger events at material affiliates. The Commission expects 
to continue to consult with the SEC and other regulators in the 
interest of maximizing harmonization, minimizing duplication and 
developing consensus on the information most useful to furthering 
effective entity-based supervision, consistent with past and continuing 
efforts to harmonize rules and interpretations concerning financial 
requirements. In particular, the Commission has indicated that it 
intends to work with the other financial regulators in connection with 
any determination on the position reporting section of the Proposal in 
the interest of developing common data elements to make filings more 
efficient and compatible.\14\
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    \14\See correspondence cited in note 11, supra.
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II. Summary of Rules 1.14 and 1.15

    The Commission believes that Rules 1.14 and 1.15, as adopted, are 
responsive to the concerns of commenters, while also meeting the 
regulatory objectives of the risk assessment authority conferred by the 
Act. As adopted, and subject to the terms and conditions stated 
therein, Rules 1.14 and 1.15 establish two basic types of risk 
assessment requirements: (1) recordkeeping; and (2) reporting to the 
Commission of certain information on a routine basis. In addition, the 
Commission has amended its financial early warning rule, Rule 1.12, to 
require reporting to the Commission upon the occurrence of certain 
events at the reporting FCM that warrant further review.
    Rule 1.14 will require that FCMs maintain certain records. These 
records include: (1) an organizational chart depicting the various 
entities with which the FCM is affiliated and identifying the FCM's 
MAPs; (2) the FCM's policies, procedures and systems to manage the 
risks to the FCM's financial condition or operations arising from the 
activities of its affiliates; and (3) consolidated and consolidating 
financial statements. Rule 1.15 will require reporting to the 
Commission of the information required to be maintained by the FCM, 
either on a one-time basis (absent significant changes in the reported 
information), with respect to the FCM's organizational chart and risk 
management policies, or annually with respect to consolidated and 
consolidating financial statements. With respect to the proposed 
provision requiring ``trigger event'' reporting of a reduction of 
greater than 20 percent in an FCM's adjusted net capital, the 
Commission has determined to include this notice requirement in its 
existing financial early warning system, which is set forth in Rule 
1.12. 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. By separate Federal Register release, the 
Commission is proposing to make this early warning notice requirement 
applicable to all FCMs. The Commission also is proposing two additional 
early warning notice provisions, which would require notice to the 
Commission in the event that: (1) a margin call that exceeds an FCM's 
excess adjusted net capital remains unanswered by the close of business 
on the day following the issuance of the call; and (2) an FCM's excess 
adjusted net capital falls below six percent of the maintenance margin 
required to be held or posted for all non-customer and proprietary 
positions carried by the FCM. With respect to an FCM's proprietary 
account positions, maintenance margin shall mean the amount of funds 
the FCM is required to maintain at the exchange's clearing organization 
or with its clearing broker, or five percent of the value of the 
contract, whichever is greater.
    The rules being adopted will 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 are clearing members of a contract market. 
The rules, however, include special exemptive provisions for FCMs that 
are dually registered with the SEC as securities broker-dealers 
(including government securities broker-dealers) or that are part of a 
holding company group that includes a securities broker-dealer filing 
reports pursuant to the SEC's risk assessment rules. Further, the rules 
allow FCMs that have affiliates subject to regulation by a federal 
banking agency, a state insurance commission or similar state agency to 
comply with certain reporting and recordkeeping requirements by filing 
records that the regulated affiliate is required to file with the 
relevant regulator. Similarly, in the case of affiliates subject to 
regulation by a foreign futures authority or other relevant foreign 
regulatory authority, the Commission will accept the maintenance or 
filing of records required by such authority if either there is an 
information-sharing agreement in effect which permits the Commission to 
obtain the type of information required under these rules or the FCM 
agrees to use its best efforts to obtain from the foreign firm and to 
cause the foreign firm to provide, directly or through its foreign 
regulator, any supplemental financial information the Commission may 
request and no blocking statute or other restriction precludes the 
communication of such information to the Commission.
    The following discussion focuses principally on changes in or 
clarifications of the proposed rules made in the final rules. 
Additional background information relevant to these final rules may be 
found in the Federal Register release accompanying the Commission's 
Proposal.

III. Discussion

A. Definition of Material Affiliated Person

    Section 4f(c) provides that FCMs shall maintain and report 
information as prescribed by the Commission concerning their affiliated 
persons15 ``whose business activities are reasonably likely to 
have a material impact on the financial or operational condition of the 
[FCM].''16 For the purpose of determining which of an FCM's 
affiliated persons are engaged in business activities that are 
reasonably likely to have a material impact on the financial or 
operational condition of the FCM, proposed Rule 1.14(a)(2) defined the 
term ``material affiliated person.'' Proposed Rule 1.14(a)(2) stated 
that the determination as to whether an affiliate is a MAP ``shall 
involve consideration of all aspects of the activities of, and the 
relationship between,'' the FCM and the affiliate, including, without 
limitation, several illustrative factors relevant to the activities of, 
and the relationship between, the FCM and its affiliate.17 In the 
Federal Register release accompanying the proposed rules, the 
Commission stated that the factors specified in the proposed rule were 
intended to provide guidance and not to be exhaustive.18 Proposed 
Rule 1.14(a)(2) included the following list of factors which an FCM 
should consider in determining whether an affiliated person is a MAP: 
(1) 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; (2) the degree of financial dependence of the 
FCM on its affiliate and the nature of the FCM's financing 
requirements; (3) the degree to which the FCM or its customers rely 
upon an affiliated person for operational services or support; (4) the 
level of market, credit and other risk present in an affiliated 
entity's activities; and (5) the extent to which an affiliated person 
has the authority or ability to negatively impact the FCM's capital. As 
noted in the Proposal, the Commission's statutory risk assessment 
provisions generally apply to affiliates other than natural 
persons.19
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    \1\5Section 4f(c) (1)(i) defines ``affiliated person'' as ``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.''
    \1\6See Section 4f(c)(2)(B) of the Act, 7 U.S.C. 6f(c)(2)(B) 
(Supp. IV 1992).
    \1\759 FR at 9693.
    \1\8Id.
    \1\97 U.S.C. 6f(c) (2)(A) and (3)(A) (Supp. IV 1992); see 59 FR 
at 9693 n. 26. In this connection, the Commission staff expects to 
take the position that certain sole shareholder Subchapter ``S'' 
corporations will be treated as natural persons but that 
partnerships will not, consistent with guidance issued by the SEC. 
Letter from Michael A. Macchiaroli, Associate Director, Division of 
Market Regulation, SEC to Douglas G. Preston, Esq., Securities 
Industry Association at 3 (September 20, 1993).
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    Commenters who addressed the provisions of Rule 1.14(a)(2) 
concerning determinations as to whether an affiliated person is a MAP 
generally did not object to the five factors set forth in the proposed 
rule but sought clarification or modification of certain aspects of 
this provision. As a threshold matter, two commenters suggested that, 
although the statutory risk assessment provisions refer to affiliated 
persons other than natural persons, the Commission should clarify that 
FCMs would not be required to obtain information concerning their 
natural person affiliates by explicitly excluding natural persons from 
the MAP definition. The Commission agrees that such an exclusion is 
appropriate for the sake of clarity and has revised the MAP definition 
as suggested. The remaining comments concerning the MAP definition 
generally fell within one of three categories: (1) requests for 
clarification as to the degree of an FCM's liability for good faith 
errors in failing to classify an affiliate as a MAP; (2) requests that 
the Commission conform its MAP definition to the ``material associated 
person'' definition adopted by the SEC; and (3) requests for 
clarification as to the standards to be used in determining whether an 
affiliate is a MAP.
    The issue that appeared to be of greatest concern to commenters on 
the MAP definition related to the Commission's position that an FCM 
should be responsible, in the first instance, for determining whether 
an affiliate is a MAP. Several commenters urged the Commission to make 
clear that an FCM who makes a good faith determination that an 
affiliate is not a MAP would not be subject to enforcement action for 
violation of Rule 1.14 in the event that the Commission subsequently 
concluded that such a determination was erroneous. The Commission 
believes that determinations by an FCM as to an affiliate's status made 
in good faith and in the exercise of reasonable diligence based upon 
consideration of the factors set forth in the rule, together with all 
other relevant facts and circumstances, would not, standing alone, be 
made the basis of an enforcement proceeding against the FCM.20 The 
Commission stresses, however, that FCMs who are uncertain as to whether 
an affiliate is a MAP may seek informal guidance from Commission staff 
in particular cases and that, in light of the statutory objective of 
enhancing access to information about potential risks, the FCM should 
give careful consideration to the potential for its affiliates to pose 
material risks to the FCM in various contingencies, thereby warranting 
their characterization as MAPs.
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    \2\0A pattern of noncompliance, however, may be inconsistent 
with claims of reasonable diligence and provide a basis for further 
review and action by the Commission. On a related point, one 
commenter requested that the Commission apply a ``best efforts and 
good faith'' standard with respect to a United States FCM attempting 
to obtain information concerning its foreign MAPs. This commenter 
contended that an FCM located in the United States would likely have 
difficulty ascertaining and verifying from its foreign MAPs the 
information necessary to determine whether a trigger event has 
occurred because foreign companies engaging in trading and business 
activities in global markets regard such information as highly 
confidential, even with respect to their United States affiliates. 
Although the Commission has deferred action on the proposed trigger 
events relating to MAPs, the Commission believes that generally an 
FCM would be required to exercise reasonable diligence in obtaining 
information concerning its foreign MAPs or causing such MAPs to 
provide information to the Commission.
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    Other commenters on the MAP definition requested that the 
Commission conform its MAP definition with the SEC's definition of 
``material associated person.'' With only minor exceptions, the MAP 
definition set forth in the Commission's Proposal is the same as that 
adopted by the SEC in its risk assessment regulations. With respect to 
the first factor to be considered in determining which affiliates are 
MAPs, i.e., the legal relationship between the FCM and the affiliate, 
the Commission noted that in the context of multi-tiered holding 
company structures, if the ultimate parent is engaged in activities 
unrelated to the futures or financial markets, the parent generally 
would not be required to be designated as a MAP. In the Federal 
Register release accompanying its temporary risk assessment rules, the 
SEC made a similar statement, noting that ``absent unusual 
circumstances,'' an ultimate parent not engaged in securities-related 
activities would not be required to be designated a MAP. Several 
commenters requested that the Commission confirm that it agrees with 
the SEC's apparently broader language on this point. One commenter also 
requested that the Commission confirm that, although a parent company's 
maintenance of a futures account at a subsidiary FCM may be a fact or 
circumstance to be considered in determining whether an affiliate is a 
MAP, the existence of such an account does not automatically make the 
ultimate parent a MAP, absent a conclusion that the account creates a 
relationship that may significantly affect the finances or operations 
of the FCM.
    As noted in the Federal Register release accompanying the Proposal, 
the Commission believes that if the ultimate parent in a multi-tiered 
holding company structure primarily is engaged in activities that are 
not related to the futures or financial markets, such as manufacturing 
or retailing, the parent generally would not be required to be 
designated a MAP.21 However, an FCM in a holding company group may 
have substantial exposure to its parent by reason of carrying or 
clearing the parent's futures account and thus the parent company would 
be a MAP even though its line of business does not directly involve the 
futures or financial markets. In a typical scenario, an ultimate parent 
company engaged in non-financial activities might maintain a futures 
account at an FCM in the holding company group in order to establish 
futures positions to manage the risk of cash commodity positions. This 
relationship, although it may involve a relatively small portion of the 
assets of the parent, may comprise a substantial portion of the 
positions carried by the FCM and thus could expose the FCM to potential 
risks of withdrawal or modification of the parent's business with the 
FCM or of default on the positions carried. However, if the only 
relationship between the FCM and the ultimate parent is that the FCM 
carries the ultimate parent's futures account and that account is not 
material in the overall context of the FCM's operations, the ultimate 
parent would not become a MAP solely on the basis of its futures 
account at the reporting FCM. Thus, the FCM should carefully evaluate 
the potential risks to which it is exposed as a result of the futures 
accounts which it carries or clears on behalf of a parent entity in 
making its determination as to whether its parent is a MAP.22 
Further, as the Commission noted in the release accompanying the 
proposed rules, if obligations of the FCM are guaranteed by a parent or 
other affiliate, the FCM is financially dependent upon the guarantor to 
an extent that, absent unusual circumstances, would require designation 
of the guarantor entity as a MAP.23
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    \2\159 FR at 9694.
    \2\2For the purpose of determining whether the account is of 
material size, the appropriate benchmark is the size (capital) of 
the FCM rather than that of the parent or other affiliate. Moreover, 
as account sizes may change significantly over time, the FCM should 
periodically evaluate the need to treat such affiliates as MAPs.
    \2\3See 59 FR at 9694. Some futures exchanges require guarantees 
of member FCMs' proprietary and noncustomer obligations by the FCM's 
parent. See Chicago Mercantile Exchange Rules 901G and 901L; Parent 
Guarantee Policy Statement adopted in July 1986 under Board of Trade 
Clearing Corporation Bylaw 401; Commodity Clearing Corporation Rule 
9; Comex Clearing Association Rule 20; and New York Mercantile 
Exchange Rule 9.20.
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    Finally, several commenters requested that the Commission confirm 
that FCMs may employ a materiality standard in applying the factors 
enumerated for consideration in determining whether an affiliate is a 
MAP. As noted above, the threshold question with respect to whether an 
FCM should identify an affiliate as a MAP is whether the affiliate's 
activities are material in respect of their reasonably anticipatable 
impact on the FCM. However, materiality should not be determined on a 
factor-by-factor basis but, rather, in the aggregate, based upon the 
potential impact of all of the itemized factors taken together and the 
overall relationship between the FCM and its affiliate. Thus, an 
affiliate's activities may not appear likely to have a material impact 
on the FCM's financial or operational condition if each factor set 
forth in the rule is analyzed in isolation, but may nonetheless be 
required to be designated as a MAP when all relevant factors are 
cumulated.
    The Commission has determined to adopt the MAP definition as 
proposed, with an additional provision expressly excluding natural 
person affiliates.24
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    \2\4Rule 1.14(a)(3).
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B. Information Required to be Maintained and Filed on a Routine Basis

    The final rules generally require two forms of risk assessment 
activity by FCMs: recordkeeping and reporting. FCMs subject to the 
rules are required to maintain specified types of information and to 
file this information either on a one-time basis, absent a material 
change in reported data, or annually. The categories of information 
called for are discussed below, with specific reference to the relevant 
recordkeeping and reporting requirements of the final rules.
1. Organizational Chart
    Proposed Rule 1.14 required that an FCM maintain an organizational 
chart depicting the holding company structure of which the FCM is a 
part. As proposed, the organizational chart was required to identify 
those affiliated persons that are MAPs of the FCM, determined in 
accordance with the standards discussed above, and to 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. The 
Commission also proposed to require that the chart indicate whether a 
MAP is a dealer or end-user (or both) of financial instruments with 
off-balance sheet risk.
    Several commenters opposed, or questioned the regulatory necessity 
of, a requirement that FCMs identify whether an affiliate is an end-
user or dealer of financial instruments with off-balance sheet risk. 
Two commenters also expressed concern that the definition of a dealer 
as set forth in the Proposal, i.e., an entity prepared to make two-way 
markets in financial instruments,25 is overly broad and 
recommended that a quantitative test be added to the dealer definition 
to assure that a MAP engages in a minimum number of transactions before 
being required to be identified as a dealer. Similarly, one commenter 
suggested that the terms ``end-user'' and ``dealer'' were ambiguous and 
requested that they be more precisely defined. The Commission did not 
propose a more specific definition for end-user or dealer because it 
recognizes that an organizational chart can provide only an outline of 
the organizational context in which an entity operates and highlight 
MAPs engaged in a broad category of transactions about which further 
information would be necessary in order to understand the specific 
nature of the entity's activities.
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    \2\559 FR at 9694.
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    The Commission believes that it is appropriate, in the first 
instance, for the FCM to determine whether a particular MAP is a dealer 
or both a dealer and end-user but has eliminated the requirement to 
designate MAPs acting only as end-users. In cases in which the FCM is 
uncertain as to whether a MAP is an end-user or a dealer, it may 
resolve that uncertainty by using both categories since there is no 
penalty for such a characterization. The identification of a MAP as a 
dealer or as both a dealer and end-user under Rule 1.14(a)(1) is for 
the purpose of the risk assessment regulations only and would not 
establish or imply that the entity is a dealer or end-user in financial 
instruments for any other purpose. An affiliate that is only an end-
user of financial instruments with off-balance sheet risk need not be 
separately identified as such.
    One commenter remarked that the Commission should not require the 
inclusion of all affiliates on the organizational chart but, rather, 
should require only the inclusion of MAPs and other affiliates that are 
necessary to understand the FCM's corporate structure. This commenter 
stated that requiring all affiliates to be included in the chart would 
be too burdensome given the large number of affiliated companies in 
certain corporate structures and that many of these affiliated persons 
are likely to have little substance, to be inactive, or both. The 
Commission believes that an organizational chart containing all of an 
FCM's affiliates is essential to provide a comprehensive view of the 
corporate context in which the FCM operates.26 Although some FCMs 
may have many affiliates, the Commission does not believe that FCMs 
would be unduly burdened by the requirement of a one-time filing 
(absent material changes) of a complete organizational chart. 
Consequently, with the modification discussed above with respect to 
designation of ``end-user'' MAPs, the Commission is adopting the 
provision relating to the content of the organizational chart as 
proposed.
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    \2\6The SEC's risk assessment rules also require that the 
organizational chart indicate all affiliates. 17 CFR 240.17h-
1T(a)(1)(i)(1994). However, the SEC staff indicate that they may 
give further guidance where the reporting firm is part of a U.S. 
holding company with a related offshore holding com- pany.
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    Under the proposed rules, an FCM would be required to file its 
organizational chart within ninety calendar days after the effective 
date of the rule or within sixty calendar days of registration if that 
occurred after the rule's effective date. The proposed rules also 
required an updated organizational chart to be filed within five 
calendar days after the end of any fiscal quarter in which a material 
change in the information provided occurred. No comments were received 
with respect to the time periods for initial filing of the 
organizational chart. The Commission is adopting an implementation 
schedule under which currently registered FCMs will be required to make 
initial filings of their organizational charts and risk management 
policies by April 30, 1995. FCMs whose registration becomes effective 
after December 31, 1994 will be required to make such filings within 60 
calendar days after the effective date of registration or by April 30, 
1995, whichever comes later.
    Several commenters objected to the five calendar day period for 
filing of updated charts reflecting material changes and recommended 
that the Commission modify this provision to require filing of the 
updated chart within sixty days after the end of the fiscal quarter in 
which the material change occurred in order to harmonize this timeframe 
with that of the SEC. In order to minimize the burdens on firms dually 
registered as FCMs and broker-dealers and to ease compliance burdens 
generally, the Commission has determined to modify these filing 
deadlines as suggested. Accordingly, the final rule requires that an 
FCM file an updated organizational chart within sixty days after the 
end of any fiscal quarter in which a material change in the information 
required to be provided has occurred. If no material change occurs, no 
updates are required.
2. Risk Management Policies.
    Paragraph (a)(1)(ii) of proposed Rules 1.14 and 1.15, respectively, 
would require an FCM to maintain and file with the Commission records 
relating to the FCM's procedures for monitoring and controlling 
material financial and operational risks to it resulting from the 
activities of its affiliates. This provision was modeled upon the 
comparable provision of the SEC's risk assessment rules. However, the 
Commission's proposed provisions describing the types of policies, 
procedures and systems of which records are to be maintained and filed 
by the FCM, while incorporating the matters covered by the SEC's rules, 
also make specific reference to the FCM's internal controls with 
respect to the market risk, credit risk and other risks created by the 
FCM's proprietary and noncustomer clearing activities. This addition to 
the SEC's description of the written policies, procedures and systems 
to be maintained and filed reflects risks particular to a typical 
function of FCMs operating within a holding company structure.
    A number of commenters requested clarification as to which entity's 
risk management policies, i.e., the FCM's policies or those of its 
affiliates, would be required to be maintained by the FCM under the 
rule. These commenters stated generally that an FCM's risk management 
policies should focus on its own credit and market risk monitoring 
procedures as distinguished from whatever procedures an affiliate 
maintains. Two commenters stated that this provision of the proposed 
rules could be interpreted to require a report of a MAP's policies and 
procedures as they affect the FCM and a discussion by the FCM of the 
hedging and risk management strategies of its noncustomer affiliates. 
Three other commenters appeared concerned that the Proposal would place 
an affirmative duty on an FCM's affiliates to maintain, and to create 
if none exist, written policies for their trading activities.
    As noted above and as discussed in the Federal Register release 
accompanying the proposed rules, proposed Rules 1.14(a)(1)(ii) and 
1.15(a)(1)(ii) would require FCMs to maintain and file ``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 . . . .''27 The 
proposed rules would not require an FCM to maintain or obtain an 
affiliate's risk management policies, nor would an FCM be required to 
discuss in its written policies and procedures the hedging and risk 
management strategies of its affiliates. FCMs would be required only to 
maintain and file information concerning their own risk management 
policies.
---------------------------------------------------------------------------

    \2\759 FR at 9694 (emphasis added).
---------------------------------------------------------------------------

    Further, the proposed rules would require an FCM to maintain and to 
file with the Commission, but not by virtue of these rules to create, 
risk management policies and procedures.28 However, the 
Commission's rules, like those of the SEC with respect to broker-
dealers, would require that if an FCM operates under informal or oral 
policies or procedures, it must summarize those policies in written 
form and file them with the Commission.29 For purposes of the risk 
assessment requirements, it is sufficient 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. This application of the 
rule is consistent with the SEC's approach to its risk assessment 
rules.30 Two commenters expressed the view that the Commission's 
risk assessment rules should affirmatively require FCMs to develop and 
maintain written financial, operational and risk management policies. 
These commenters believed that regulations that would require FCMs to 
maintain and file but not necessarily to create risk management 
policies and procedures would not effectuate the objectives underlying 
the statutory grant of risk assessment authority.
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    \2\8However, as noted below and in the Proposal, other 
provisions of the CEA and Commission regulations may require such 
policies.
    \2\9Letter from Michael A. Macchiaroli, Associate Director, 
Division of Market Regulation, SEC to Douglas G. Preston, Esq., 
Securities Industry Association at 4 (September 20, 1993).
    \3\0See 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).
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    The Commission believes that under the existing regulatory 
structure, FCMs are affirmatively required to maintain certain risk 
management procedures. For example, under Rule 166.3 and other 
Commission rules, FCMs are required to maintain appropriate internal 
controls over their operations and to diligently supervise the handling 
of accounts and all other activities relating to their business as a 
Commission registrant.31 The Commission believes that in the 
interest of prudent risk management, FCMs subject to these rules should 
review their existing internal controls and risk management policies, 
procedures and systems to assure that they are sufficient in light of 
the potential risks created by their own and their affiliates' 
activities. The Commission believes that requiring FCMs to establish 
risk management policies was not a principal objective of the risk 
assessment program contemplated by Section 4f(c). However, additional 
guidance as to prudent risk management and internal controls may be 
provided outside of this rulemaking.32
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    \3\1See, e.g., 17 CFR 166.3 (1994)(``[e]ach Commission 
registrant . . . must diligently supervise the handling by its 
partners, officers, employees and agents . . . of all commodity 
interest accounts carried, operated, advised or introduced by the 
registrant and all other activities of its partners, officers, 
employees or agents . . . relating to its business as a Commission 
registrant.'') Other risk management requirements imposed on FCMs by 
the Act or Commission regulations include daily marking-to-market of 
positions, periodic reconciliations of key accounts, and maintenance 
of current books and records. See generally 17 CFR 1.17, 1.18, 1.32 
and 1.34 (1994).
    \3\2Guidance in this area has been provided by the international 
regulatory community in ``Operational and Financial Risk Management 
Control Mechanisms for Over-the-Counter Derivatives Activities of 
Regulated Securities Firms,'' issued by the Technical Committee of 
the International Organization of Securities Commissions (IOSCO) 
(July, 1994), which includes a compilation of other relevant sources 
including, e.g., ``Risk Management Guidelines for Derivatives,'' 
Basle Committee on Bank Supervision (July, 1994).
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    Paragraph (a)(1)(ii) of proposed Rule 1.15 would have required an 
FCM to file its risk management policies within ninety calendar days 
after the effective date of the rule or within sixty calendar days of 
registration if that occurs after the rule's effective date. Proposed 
Rule 1.15(a)(1)(ii) further required an FCM to file an update within 
five calendar days after the end of any fiscal quarter in which a 
material change in the information provided occurred.
    One self-regulatory organization commenter opposed the proposed 
rule's filing requirement with respect to risk management policies and 
procedures, stating that such a requirement would create voluminous 
paper filings without providing any benefit to the Commission. As an 
alternative, the commenter suggested that the Commission require the 
FCM to file such policies on an as-needed basis. Several commenters 
opposed the requirement that updates to the policies and procedures 
filed with the Commission be provided within five calendar days after 
the end of the fiscal quarter in which a material change occurred. 
These commenters stated, among other things, that such a timeframe is 
unrealistic for FCMs with a large number of MAPs and stressed that the 
SEC's risk assessment regulations allow broker-dealers to report 
material changes in risk management policies and procedures within 
sixty days after the end of the fiscal quarter in which the change 
occurred. Further, two commenters requested additional guidance as to 
what the Commission would consider to be a material change in risk 
management policies that would require the filing of updated 
information.
    The Commission believes that the filing of information relating to 
the FCM's risk management policies and procedures, particularly in 
conjunction with the organizational chart required to be filed under 
these rules, provides basic foundational information concerning the 
context in which an FCM operates. This requirement should not impose 
any significant burden upon FCMs because it does not call for the 
creation of any new procedures or reports. Moreover, risk management 
information is required to be filed only on a one-time basis as part of 
the FCM's initial filing with the Commission, absent subsequent 
material changes. With respect to determining what changes are material 
for purposes of the rule, the Commission believes that the assessment 
of the materiality of a modification must necessarily be made by the 
FCM on a case-by-case basis, upon consideration of whether a given 
change is likely to materially affect the FCM's ability to achieve the 
particular risk management goal of the relevant policy, procedure or 
system. Uncertainty as to whether a change is material can be resolved 
in favor of filing without undue burden or expense.
    However, for the reasons discussed above with respect to filing 
requirements for the FCM's organizational chart, the Commission has 
determined to modify proposed Rule 1.15(a)(1)(ii) with respect to the 
deadline for filing updated risk management policies and procedures. 
The Commission has determined to adopt a requirement that an FCM file 
revised risk management information within sixty days after the end of 
any fiscal quarter in which a material change of information has 
occurred. As is the case with respect to the rules pertaining to the 
filing of an organizational chart, if no material change occurs, no 
updates are required.

3. Financial Statements

    Proposed Rules 1.14(a)(1)(iii) and 1.15(a)(2)(i) and (ii) would 
have required maintenance and filing of the following financial 
statements on a consolidated basis for the FCM and its ultimate parent 
company: (1) balance sheet; (2) statement of income; (3) statement of 
cash flows; and (4) explanatory notes to the financial statements. 
These proposed provisions also would have required a consolidating 
balance sheet and statement of income for the FCM and its ultimate 
parent company. Several commenters, including a trade association 
commenting on behalf of its member FCMs, pointed out that the highest 
level MAP within an organization may not necessarily be the ultimate 
parent company. Accordingly, these commenters recommended that the 
Commission revise the proposed rules such that financial statements 
would be required only for the FCM and the highest level MAP within the 
FCM's organizational structure. Further, a number of commenters 
requested that this provision be revised so as not to require 
consolidation on an individual MAP-by-MAP basis. These commenters noted 
that many firms do not currently consolidate in this manner in the 
course of their normal closing process and that failure to revise the 
Proposal as recommended would require such firms to change their 
financial consolidation process, causing undue burden and expense. Two 
commenters, a trade association representing FCMs and an FCM, noted 
that in some firms the consolidated balance sheet is prepared entirely 
by automation and requested that the Commission retain exemptive 
authority in order to address cases in which compliance would create 
special hardship, such as where consolidating balance sheets on the 
required basis are not routinely generated and to do so would be unduly 
burdensome. As noted below, the Commission has expressly retained 
authority to grant exemptions in order to address situations such as 
those raised by the commenters, which may warrant formulation of an 
alternate data set that is more practicable for the FCM to provide yet 
yields comparable information. Further, various commenters noted that 
SEC staff have indicated that under the SEC's risk assessment rules, 
broker-dealers need only provide financial statements for their 
ultimate holding company if such holding company is a MAP.33 SEC 
staff have also stated that for the purposes of preparing consolidated 
financial statements, broker-dealers may combine insignificant non-MAPs 
in a single entry in the financial statements.34
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    \3\3Letter from Michael A. Macchiaroli, Associate Director, 
Division of Market Regulation, SEC to Douglas G. Preston, Esq., 
Securities Industry Association at 5 (September 20, 1993).
    \3\4Id.
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    The Commission has revised proposed Rules 1.14(a)(1)(iii) and (iv) 
and 1.15(a)(2)(i) and (ii) in light of the comments received and the 
approach followed by the SEC. Final Rules 1.14(a)(1)(iii) and (iv) and 
1.15(a)(2)(i) and (ii) require, therefore, that consolidated and 
consolidating financial statements be maintained and filed for the 
highest level MAP within the FCM's organizational structure, and must 
include the FCM and its other MAPs. Further, these rules allow an FCM 
to maintain and submit the consolidating balance sheet and income 
statement which its highest level MAP prepares as part of its internal 
financial reporting process. The FCM would, however, be required under 
Rule 1.15(a)(2)(iii) to provide the Commission with additional 
information if such information were determined to be necessary for a 
complete understanding of a particular MAP's financial impact on the 
FCM's organizational group. Rules 1.14(a)(1)(iii) and (iv) require the 
FCM to maintain in accordance with those rules any additional 
information that the Commission may require pursuant to Rule 
1.15(a)(2)(iii).
    As under the Proposal, the final rules require that the 
consolidated and consolidating financial statements required to be 
filed with the Commission be prepared in accordance with United States 
generally accepted accounting principles, consistently applied (``U.S. 
GAAP''). 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 and a narrative 
description of the items treated differently by U.S. GAAP must be 
included. In this regard, the Commission requested 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. One self-
regulatory organization believed that such quantification would be 
necessary from a regulatory perspective in order to provide for easier 
comparative analysis of information. Conversely, a trade association 
was strongly of the view that the regulations should not require 
anything more than disclosure of the particular non-U.S. GAAP 
accounting principles used by the firm, apparently concluding that both 
quantification of material differences between the accounting standards 
and a narrative description of items treated differently by U.S. GAAP 
are unnecessary. The Commission continues to believe that a description 
of the differences between U.S. GAAP and the non-U.S. GAAP method used 
by the FCM's affiliate will facilitate understanding and analysis of 
filings. However, in the interests of minimizing reporting burdens, the 
Commission has determined to forego requiring quantification of 
material differences between the U.S. GAAP and non-U.S. GAAP methods 
employed by an FCM's affiliate at this time. Accordingly, the 
Commission is adopting this aspect of the rule as proposed.
    Proposed Rule 1.15(a)(2) would have required financial statements 
to be filed on an annual basis, within 105 days of fiscal year-end, 
rather than quarterly as required under SEC rules. The Commission 
requested 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. One self-regulatory organization 
commented that financial information received 105 days after the FCM's 
fiscal year-end would be stale and that requiring quarterly information 
would not make the information more timely or useful. This commenter 
contended that the annual audited Form 1-FR along with quarterly 
statements would provide the Commission with the critical financial 
information it needs. While the information provided on Form 1-FR is of 
obvious value, Form 1-FR does not, however, provide the same degree of 
financial information relating to the FCM's organizational group as 
would be included in consolidated and consolidating financial 
statements for the FCM and its highest level MAP. The Commission 
continues to believe that annual filing of FCMs' consolidated and 
consolidating financial statements, in combination with other financial 
information currently required by the Commission, such as Form 1-FR, 
will strike an appropriate balance between providing the Commission 
with relevant financial information while imposing the lowest possible 
burden on the FCM required to produce such information. Accordingly, 
the Commission has determined to adopt this provision of the rule as 
proposed.
    Finally, in connection with the Commission's proposed annual filing 
requirement, one commenter noted that the FCM and its ultimate parent 
may have different fiscal year-ends and requested confirmation that the 
annual filing deadline for financial statements is 105 calendar days 
after the end of the fiscal year for both the FCM and its ultimate 
parent. As adopted, Rule 1.15(a)(2) requires an FCM to file 
consolidated and consolidating financial statements for the FCM and the 
highest level MAP within the FCM's organizational structure within 105 
calendar days of the FCM's fiscal year-end. To the extent that the 
highest level MAP within the FCM's organizational structure has a 
fiscal year-end different from that of the FCM, the FCM should include 
both the most recent certified statements and any interim uncertified 
statements of the MAP. Initial filings will be required to be made by 
May 15, 1995.

C. Information Required Upon the Occurrence of Certain Events

    In lieu of requiring routine quarterly filing of position data for 
each of the FCM's material affiliates as is mandated under the SEC's 
risk assessment rules, the Commission's Proposal was designed to call 
for a combination of annual filings and ad hoc reporting in situations 
in which heightened financial scrutiny would be warranted. To this end, 
proposed Rule 1.15(b)(2) identified certain key events relative to the 
financial condition of the FCM and its material affiliates the 
occurrence of which would require notice to the Commission. Proposed 
Rule 1.15(b)(2) set forth eight such ``triggering'' events: (1) a 
reduction of greater than 20% in an FCM's adjusted net capital; (2) an 
``outflow'' of an FCM's assets exceeding, in any 30-day period, 20% or 
more of the FCM's excess adjusted net capital; (3) losses in 
noncustomer accounts held by the FCM exceeding the greater of (a) $50 
million or 10 percent of the FCM's parent's consolidated stockholders' 
equity in 30 days or (b) $100 million or 20% of the FCM's parent's 
stockholders' equity in 12 months; (4) a net loss at a MAP exceeding 
30% of the MAP's net worth or 20% of the FCM's adjusted net capital; 
(5) a 20% reduction in the consolidated stockholders' equity of an 
FCM's parent; (6) a reduction in a MAP's credit rating; (7) a MAP's 
filing of a notice with a banking regulator of a possible capital 
category adjustment; and (8) an FCM's entering into an agreement to 
guarantee an obligation of an affiliate. Under proposed Rule 
1.15(b)(1), 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)35 within three business days of the 
occurrence of any trigger event unless a shorter period was specified 
with respect to a particular triggering event.
---------------------------------------------------------------------------

    \3\5The Director of the Division of Trading and Markets is 
generally delegated the authority to act on behalf of the Commission 
with respect to the risk assessment regulations.
---------------------------------------------------------------------------

    Comments concerning the proposed triggering events can be divided 
into two categories: (1) general comments that address the concept of 
trigger event reporting and issues generally relating to all proposed 
trigger events; and (2) comments relevant to specific proposed trigger 
events. The majority of commenters on the subject of trigger event 
reporting appeared to agree with the concept of a trigger event 
reporting system, citing, for example, the consequent reduction in 
routinely reported data that could result from the use of an event-
driven reporting approach. However, several commenters opposed this 
approach, contending that this aspect of the Proposal exceeded the 
Commission's statutory authority to obtain supplemental data, i.e., its 
authority to request information on an as-needed basis to augment an 
FCM's routine filings, and/or would require the reporting of 
information from entities beyond the Commission's jurisdiction. One 
commenter argued that the authority to obtain supplemental information 
provided to the Commission in the FTPA is to be used to complement risk 
assessment quarterly reports, not to substitute for them. One commenter 
opposed the trigger event structure proposed by the Commission on the 
grounds that the Commission's existing capital requirements and large 
trader reporting system are sufficient to meet the Commission's risk 
assessment objectives. Several commenters, however, including a trade 
association representing its member FCMs, recommended that trigger 
events relating to the activities of FCMs be included in the 
Commission's net capital or early warning rules and made applicable to 
all FCMs rather than only to those FCMs subject to the risk assessment 
regulations.
    As discussed below, the Commission has determined to take action at 
this time only on the first of the proposed triggering events, i.e., 
notice to the Commission upon a twenty percent or greater decrease in 
an FCM's adjusted net capital. As recommended by some commenters, this 
notice requirement is being adopted as an amendment to Rule 1.12, the 
Commission's early warning rule. However, this notice requirement will 
initially apply only to FCMs subject to the risk assessment 
regulations. The Commission is proposing by separate Federal Register 
release to make this notice requirement applicable to all FCMs.
    The statutory risk assessment provisions were specifically designed 
to permit the Commission to obtain information concerning entities over 
which it does not exercise regulatory jurisdiction and which thus might 
present risks to regulated firms yet lie beyond the Commission's 
information-gathering authority. Further, the Commission is not 
requesting information directly from the affiliates of FCMs, but rather 
from the FCM itself. Moreover, the trigger reporting approach 
contemplated under the Proposal was designed to provide the Commission 
with information concerning material affiliate activity which may or 
may not consist of futures transactions that would be reflected in 
large trader reports and which is not addressed by existing minimum 
capital requirements.36
---------------------------------------------------------------------------

    \3\6For example, noncustomer futures positions do not affect an 
FCM's adjusted net capital level because noncustomer accounts are 
not required to be segregated pursuant to Rule 1.20.
---------------------------------------------------------------------------

    Many of the commenters, while supportive of the concept of 
requiring notice to the Commission upon the occurrence of triggering 
events, suggested that such triggering events should relate solely to 
events that could have a direct effect on the FCM's financial condition 
and that the Commission should delete any trigger events that relate to 
a change in a MAP's financial condition. One commenter, for example, 
recommended that proposed Rules 1.15(b)(2)(iv) (large net loss at a 
MAP), 1.15(b)(2)(v) (20% reduction in FCM's parent's consolidated 
stockholder's equity), 1.15(b)(2)(vi) (reduction in a MAP's credit 
rating) and 1.15(b)(2)(vii) (MAP's filing of a notice of a possible 
capital category adjustment with a banking regulator) be deleted. 
Finally, one commenter requested that if the Commission decides not to 
delete all trigger events that arise as a result of a change at a MAP, 
the Commission should modify the filing deadline with respect to these 
notices to five calendar days after the end of the month in which the 
event occurred.
    The FTPA granted the Commission the authority to obtain information 
concerning affiliate activities that could pose material risks to the 
FCM. While certain of the proposed trigger events would initially 
affect an FCM's MAP, these events were designed so as to signal 
conditions at a MAP that are likely to present a material potential for 
a direct impact upon the financial and operational condition of the 
FCM. However, the Commission has determined to proceed in this phase of 
the rulemaking only with the first of the eight proposed trigger 
events, i.e., trigger event reporting upon a twenty percent or greater 
reduction in an FCM's adjusted net capital. Further, as noted above, by 
separate Federal Register release, the Commission is proposing to 
include certain additional notice requirements as part of its early 
warning notice system applicable to all FCMs.
    As proposed, Rule 1.15(b)(2)(i) would have required 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 1.10.37 As noted above, 
several commenters recommended that this trigger event be included in 
Commission Rule 1.17, the Commission's net capital rule, or in the 
Commission's financial early warning requirements set forth in Rule 
1.12, rather than in the risk assessment rules, to ensure their 
applicability to all FCMs rather than only those FCMs subject to the 
Commission's risk assessment regulations. The Commission agrees with 
the view that this ``net capital trigger'' should apply to all FCMs and 
has determined to make this provision part of its financial early 
warning system. Accordingly, the Commission is amending its Rule 1.12 
financial early warning requirements to include the notice requirement 
set forth in proposed Rule 1.15(b)(2)(i).38 Initially, this new 
requirement will apply only to those FCMs who are subject to the 
Commission's risk assessment rules. However, by separate Federal 
Register release, the Commission is proposing to extend this new early 
warning notice requirement to all FCMs.
---------------------------------------------------------------------------

    \3\7Similarly, proposed Rule 1.15(b)(2)(ii) would have required 
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 
Commission has determined to defer consideration of this trigger 
event.
    \3\8This requirement is being adopted as Rule 1.12(g).
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    As the Commission is adopting this trigger event as part of its 
early warning system, the Commission has adopted the provision without 
any modification of the timeframe within which notice must be provided 
to the Commission. As adopted, Rule 1.12(g) requires that the FCM 
provide notice to the Commission within two business days of any 
reduction in its adjusted net capital of twenty percent or greater 
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 that cause such a reduction, 
such as a dividend payment or making of a loan.
    Proposed Rule 1.15(b)(1) provided that, after reviewing a notice 
filed by an FCM, the Commission could request additional information 
from the firm or a relevant regulatory agency, as determined to be 
necessary in the circumstances. The Commission requested comment 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. The Commission received six responses to its 
request for comment on this aspect of the proposed rule, including 
comments by two trade associations, three FCMs and one self-regulatory 
organization. An FCM and a self-regulatory organization expressed the 
view that an explanation of the circumstances giving rise to the need 
for the notice would be helpful and should accompany the notice of an 
occurrence of a trigger event. However, the other four commenters on 
this issue argued that such an explanation would not be helpful, noting 
that given the short time period permitted in which to provide notice 
to the Commission, i.e., generally three business days, it is unlikely 
that a complete and helpful explanation could be provided. Based upon 
the comments received and the Commission's review of the issue, the 
final rules do not include a requirement for explanation of the 
circumstances giving rise to the twenty percent or greater reduction in 
the FCM's adjusted net capital. As provided in proposed Rule 1.15(b) 
and adopted in Rule 1.12(g), however, the Commission may, if it deems 
it necessary, require supplemental information from the FCM regarding 
the notice filed with the Commission.
    Proposed Rule 1.15(b)(2)(iii) would have required an FCM to notify 
the Commission when an FCM's aggregate cumulative losses in all non-
customer accounts exceeded the greater of: (A) in any thirty-day 
period, ten percent of the last reported consolidated stockholders' 
equity of the FCM's parent or $50 million; and (B) in any twelve-month 
period, twenty percent of the last reported stockholders' equity of the 
FCM's parent or $100 million. Several commenters opposed this proposed 
requirement contending, for example, that this trigger event would not 
be an accurate indicator of potential financial problems at an FCM 
because it does not take into consideration the effects of offsetting 
cash positions that are maintained on affiliates' books. These 
commenters suggested, as an alternative, that the Commission adopt a 
requirement that an FCM notify the Commission within two business days 
after a margin call to a non-customer that exceeds twenty percent of 
the FCM's adjusted net capital remains outstanding for two business 
days. These commenters also suggested that the Commission adopt as an 
additional trigger event a reporting requirement that an FCM notify the 
Commission whenever the FCM's excess net capital is less than 6 percent 
of the maintenance margin required to be held or posted by the FCM to 
support the proprietary and noncustomer positions carried by the FCM. 
As noted by these commenters, the Chicago Mercantile Exchange currently 
imposes a related capital requirement on its clearing members on an 
informal basis. In light of these comments and recommendations, the 
Commission has determined not to adopt Rule 1.15(b)(2)(iii) as proposed 
but is proposing to amend Rule 1.12 to include new paragraphs (f)(4) 
and (f)(5) thereof to include these notice requirements. These 
proposals appear elsewhere in this edition of the Federal Register. 
Proposed Rule 1.12(f)(4) would require notice to be filed whenever an 
account carried by an FCM, whether customer, noncustomer or omnibus, is 
subject to a margin call that exceeds the FCM's excess adjusted net 
capital and such call is not satisfied by the close of business on the 
day following the issuance of the call. Proposed Rule 1.12(f)(5) would 
require notice from an FCM whenever its excess adjusted net capital is 
less than six percent of the total of: (i) maintenance margin required 
by the FCM on noncustomer account positions; and (ii) maintenance 
margin applicable to an FCM's proprietary positions. With respect to an 
FCM's proprietary account positions, maintenance margin shall mean the 
amount of funds the FCM is required to maintain at the exchange's 
clearing organization or with its clearing broker, or five percent of 
the value of the contract, whichever is greater.
    The Commission has determined to defer action on the remaining six 
trigger reporting events set forth in the Proposal pending further 
review.

D. Exemptions and Special Provisions

    As proposed, the risk assessment rules would provide an exemption 
from all recordkeeping and reporting requirements under proposed Rules 
1.14 and 1.15 for FCMs who, based on the amount of customer funds held 
and adjusted net capital maintained, appear to have very limited 
futures and commodity options activities. Further, the proposed rules 
would 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 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
    Proposed Rules 1.14(d)(1) and 1.15(c)(1) would have provided an 
exemption from the risk assessment regulations for all FCMs, other than 
clearing member firms, that hold customer funds of less than $6,250,000 
and maintain adjusted net capital of less than $5,000,000, calculated 
as of the FCM's fiscal year-end. The Commission received comment on all 
three conditions to applicability of the exemption.
    First, two commenters stated that the rules should not require all 
FCMs that are clearing firms to comply with the rules. One of these 
commenters, a self-regulatory organization, argued that such a 
requirement unfairly discriminates against clearing firms, which are 
already subject to exchange risk management and surveillance systems. 
The other commenter, a bar association, expressed the view that the 
distinction between clearing FCMs and non-clearing FCMs is an 
inappropriate line of demarcation for determining which firms should be 
subject to the risk assessment requirements. One trade association 
commenter representing FCMs, however, took the opposite view and noted 
its support of the Commission's decision to require all clearing FCMs 
to comply with the rules. The Commission believes that FCMs that are 
clearing members of exchanges have the potential, by virtue of their 
clearing status, to create risks to the clearing organizations and 
other clearing members that differ in kind and degree from those 
created by non-clearing FCMs.\39\
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    \39\One commenter noted that proposed Rules 1.14(d)(1) and 
1.15(c)(1) could be interpreted to exempt all non-clearing member 
FCMs. The text of the rule has been modified to more clearly reflect 
the Commission's intention in this regard.
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    The Commission requested comment as to the appropriateness of the 
adjusted net capital and customer funds\40\ exemption levels set forth 
in the proposed rules.\41\ In this regard, two commenters contended 
that both levels were too low and that the rules consequently might not 
exempt FCMs whose activities do not pose risks sufficient to warrant 
the imposition of risk assessment reporting burdens. One of these 
commenters recommended that the customer funds and adjusted net capital 
levels should, at a minimum, be doubled or made consistent with the 
levels established by the SEC in its risk assessment regulations.\42\ 
Additionally, one commenter stated that the level of adjusted net 
capital maintained by an FCM should not determine whether an FCM is 
exempt from the risk assessment requirements because this use of 
adjusted net capital as an exemption benchmark might encourage 
potentially exempt FCMs to maintain a small capital base.
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    \40\The Commission requested comment as to whether the 
calculation of customer funds for this purpose should be the same as 
that for Rule 1.17 capital computation purposes, i.e., whether long 
option values should be deducted. One commenter responded to this 
request and stated that the calculation of customer funds should be 
the same for both Rule 1.17 and the risk assessment rules. The 
Commission has determined to adopt this approach for the sake of 
maintaining consistent treatment between the risk assessment rules 
and the Commission's net capital rule. Accordingly, in determining 
an FCM's customer funds level for purposes of these risk assessment 
rules, the computation should be made net of fully paid long 
options.
    \41\The Commission notes that different exemption levels may be 
determined to be applicable for purposes of position reporting 
requirements to be addressed in the second phase of this rulemaking.
    \42\The SEC's risk assessment rules generally provide an 
exemption for broker-dealers that: (1) maintain capital of less than 
$20,000,000; (2) do not hold funds or securities for, or owe money 
or securities to customers; and (3) do not carry customer accounts. 
In no case is a broker-dealer subject to the SEC's requirements if 
it maintains capital of less than $250,000. See 17 CFR 240.17h-1T(d) 
and 240.17h-2T(b).
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    The Commission noted in the Federal Register release accompanying 
the proposed rules that it chose $6,250,000 in customer funds as an 
initial level for applicability of the risk assessment requirements 
because, based upon current Commission and National Futures Association 
(``NFA'') requirements, that is the level whereby an increase in the 
amount of customer funds held by the FCM will require an increase in 
its adjusted net capital requirement above the minimum requirement.\43\ 
The Commission also noted that given the relative size of securities 
and futures market activity, the degree of leverage in futures 
transactions, and the fact that the Commission proposed a materiality 
threshold of $20 million for determining whether an FCM would be 
required to report certain financial information concerning its 
MAPs,\44\ (as compared to the SEC's $100 million materiality 
threshold), a $5 million adjusted net capital ceiling for exemption 
from these rules appeared to be an appropriate level. The adjusted net 
capital level criterion was included in the rule as an additional 
safeguard so that FCMs which do not carry customer funds and are not 
clearing members are not automatically exempted from the risk 
assessment rules.
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    \43\Rule 1.17(a)(1)(i) 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. 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. Thus, based upon 
the NFA's minimum dollar requirement and the Commission's capital 
requirement of four percent of segregated funds, an FCM holding any 
amount greater than $6,250,000 in customer funds is required to 
increase its adjusted net capital level above NFA's $250,000.
    \44\See proposed Rule 1.14(a)(4) setting the level of a MAP's 
financial activity at which an FCM would have been required under 
the Proposal to separately list financial information concerning 
that MAP.
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    The Commission is adopting the exemptive provision as proposed but 
will review the operation of the exemptive levels following 
implementation of the risk assessment rules and may also revisit these 
levels with respect to those portions of the Proposal that have been 
deferred for further consultation and review.
2. Special Provisions for Certain Regulated Entities
    a. Broker-Dealers. The proposed rules were developed after 
extensive review of, and consultation with the SEC concerning, the 
SEC's risk assessment rules. Like the proposed rules, the final rules 
adopted herein are intended to produce a coordinated reporting 
structure for FCMs that either are also registered as broker-dealers 
and subject to the SEC's risk assessment rules or are part of a holding 
company group that includes a broker-dealer reporting pursuant to the 
SEC's rules. Proposed Rules 1.14(b)(1) and 1.15(d)(1) and these same 
provisions of the final rules permit FCMs that are, or that have 
affiliates that are, registered broker-dealers or registered government 
securities 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 registered as a broker-dealer or that has an affiliate 
registered as a broker-dealer would be deemed to be in compliance with 
all of the routine reporting requirements of proposed Rule 1.15,\45\ 
except the filing of risk management policies pursuant to paragraph 
(a)(1)(ii) 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. Similar relief is provided in Rule 1.14 with respect to 
recordkeeping requirements.
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    \45\These requirements included all reporting requirements of 
proposed Rule 1.15 except the trigger reporting requirements set 
forth in proposed Rule 1.15(b). Part I of Form 17-H includes an 
organizational chart and consolidated and consolidating financial 
statements.
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    Commenters addressing this provision generally stated that the 
Commission should accept Form 17-H from dually registered entities in 
full compliance with Commission requirements. As the Commission has 
determined to defer adoption of final rules regarding position 
reporting and trigger reporting concerning FCM affiliates, FCMs that 
report, or have affiliates who report, under the SEC's risk assessment 
rules will have few, if any, additional requirements under the final 
rules adopted herein. FCMs filing SEC Form 17-H have the option under 
Rule 1.15(d)(1) of filing Form 17-H with the Commission in its entirety 
or without the information required under Part II of the Form 17-H. 
Such FCMs will be required to file with the Commission on a one-time 
basis (absent material changes) copies of their risk management 
policies, procedures and systems in accordance with Commission 
requirements. The relief provided does not extend to filing of risk 
management policies because although the SEC's rules require filing of 
most of the same types of written policies and procedures as the 
Commission's rules, the Commission's requirements relating to records 
of policies, procedures and systems with respect to trading activity 
include 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 include, for 
example, as specified in 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 with 
respect to supervision of noncustomer accounts. In addition, the relief 
provided under Rules 1.14(b)(1) and 1.15(d)(1) does not extend to 
trigger reporting requirements under the rule. Accordingly, the FCM 
would remain responsible for notifying the Commission of the occurrence 
of a twenty percent or greater decrease in adjusted net capital as set 
forth in new paragraph (g) of Rule 1.12 and providing supplemental 
information, if requested.\46\ Finally, an FCM that is also registered 
as a broker-dealer, and plans to file Form 17-H pursuant to Rule 
1.15(d)(1), is required to supplement its organizational chart to 
include those MAPs, if any, that would be MAPs for purposes of the 
Commission's rules but not for purposes of its SEC filing.
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    \46\Certain exchanges have a similar requirement. See Chicago 
Mercantile Exchange Rule 972A; Chicago Board of Trade Rule 285.03; 
New York Mercantile Exchange Rule 2.14(d) and Clearing Rule 
9.22(c)(i) and (ii); Commodity Exchange, Inc. Rule 7.08(a); Coffee, 
Sugar and Cocoa Exchange, Inc. Clearing Rule 302(c)(i); Kansas City 
Board of Trade Rule 1311.00; Kansas City Board of Trade Clearing 
Corporation Rule 8.01(c); and Minneapolis Grain Exchange Rule 
2088.00.
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    b. Banks. With respect to an FCM with a MAP that is subject to 
supervision by a federal banking agency, the Proposal provided that an 
FCM would 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 the relevant bank regulator.\47\ 
Paragraph (b)(2) of proposed Rule 1.14 provided similar treatment with 
respect to recordkeeping requirements. Those commenters who addressed 
this aspect of the Proposal overwhelmingly favored the Commission's 
approach of providing relief from the regulations where a MAP is 
subject to the supervision of a federal banking regulator. The comments 
received in this area generally requested an expansion of the relief 
proposed and/or requested clarification regarding particular provisions 
of the Proposal. One commenter requested that the Commission conform 
proposed Rules 1.14(b)(2) and 1.15(d)(2), such that a bank would not be 
required to file an organizational chart with the Commission. In this 
regard, the Commission understands that Form FR Y-6 (``Annual Report of 
Bank Holding Companies'') includes, among other things, a corporate 
organizational chart. All FCMs must file an organizational chart but if 
one has been prepared for banking regulators that will provide the 
information required under these rules, such a chart can be used for 
this purpose, provided that the additional information required under 
these rules, e.g., designation of MAPs, is included.
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    \47\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.
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    Further, one commenter expressed the view that the Proposal was 
unclear as to whether the FCM or its MAP must maintain copies of those 
reports submitted by the MAP with its federal banking regulator. 
Proposed Rule 1.14(b)(2) would require the FCM to maintain and make 
available ``copies of all reports submitted by [a MAP to] the Federal 
banking agency. . . .'' Proposed Rule 1.15(d)(2) stated that the FCM or 
its MAP may maintain such reports in order to be eligible for the 
exemption. The Commission intends this exemption to be available with 
respect to FCMs that have MAPs that are subject to the supervision of a 
federal banking agency provided that either the FCM or its MAP, as the 
FCM and the relevant MAP determine to be appropriate, maintains the 
reports specified in the rule. The final rules have been modified to 
clarify this point. Of course, if the MAP is the repository for reports 
required to be maintained, the Commission must be afforded access to 
such reports on the same terms and to the same extent as it would if 
the FCM held such records directly and the FCM will remain responsible 
for assuring that the Commission has access to the required records.
    The Federal Register release accompanying the Commission's proposed 
rules also stated that, 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 
Commission's rules.\48\ One commenter requested that the Commission 
codify this similarity of treatment by providing in its regulations 
that a United States regulated foreign banking organization will be 
treated in the same manner as United States banks and United States 
bank holding companies, that is, that it would only be required to make 
available to the Commission what it files with the relevant U.S. 
banking regulator.\49\ The Commission agrees that such clarification is 
helpful and has modified the language of the Proposal in this regard. 
Accordingly, under Rule 1.15(d)(2) an FCM that has a MAP that is either 
a foreign banking organization or a domestic banking organization, 
subject to examination by, or the reporting requirements of, a federal 
banking agency will be deemed to be in compliance with the reporting 
requirements of Rule 1.15(a)(2) (i.e., filing of annual consolidated 
and consolidating financial statements) 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. Rule 1.14(b)(2) provides similar 
treatment with respect to recordkeeping requirements. With respect to 
foreign banks, FCMs (or the MAP) may either maintain what the foreign 
bank files with the U.S. banking authorities or, if the foreign bank 
has no U.S. nexus, the reports that would be required to be maintained 
or filed would be determined as if the bank were a non-bank foreign 
firm.\50\
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    \48\59 FR at 9701.
    \49\Commission staff have discussed the risk assessment 
proposals with the domestic banking regulators, and they have 
confirmed that they will cooperate with the Commission in developing 
mechanisms for sharing information from such reports to assist the 
Commission in discharging its supervisory responsibilities.
    \50\This analysis is more relevant to the deferred part of these 
proposals relating to position information although it may also be 
relevant to ``consolidating'' decisions.
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    c. Firms Subject to Foreign Regulatory Supervision. With respect to 
foreign MAPs that are regulated in a foreign jurisdiction, proposed 
Rules 1.14(c) and 1.15(e) permitted 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,\51\ or other foreign regulatory authority, with 
which the Commission has an information-sharing agreement in effect. 
Several commenters pointed out that proposed Rules 1.14 and 1.15 appear 
to differ in their treatment of this subject. Proposed Rule 1.14(c) 
states that in order for an FCM to take advantage of the exemption 
provided therein from recordkeeping requirements the FCM is required to 
maintain copies of any financial or risk disclosure report filed by the 
FCM's MAP ``with a foreign futures authority or other relevant foreign 
authority.'' Proposed Rule 1.15(e), however, requires an FCM to 
maintain copies of such reports filed ``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 [FCM's] fiscal year end.'' The Commission 
notes that the different language in Proposed Rules 1.14(c) and 1.15(e) 
was deliberate and was intended to provide a broader exemption with 
respect to recordkeeping than reporting. This discrepancy is, in any 
event, eliminated under the revised provisions as adopted, as discussed 
below.
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    \51\Section 1a(10) defines the term ``foreign futures 
authority'' as ``any foreign government, or any department, agency, 
governmental body, or regulatory organization empowered by a foreign 
government to administer or enforce a law, rule, or regulation as it 
relates to a futures or options matter, or any department or agency 
of a political subdivision of a foreign government empowered to 
administer or enforce a law, rule, or regulation as it relates to a 
futures or options matter.''
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    Three commenters requested that the Commission accept information 
the FCM's MAP files with any home country regulator in compliance with 
the Commission's risk assessment regulations rather than limiting 
exemptions to foreign MAPs that file information with a foreign futures 
authority with which the Commission has an information-sharing 
agreement. These commenters stated that this treatment would be 
consistent with the SEC's practice of accepting information which the 
foreign MAP files with its home country regulator even though such 
information may not conform in content or frequency of filing with the 
SEC's regulations.
    Recognizing that the Commission does not yet have information-
sharing agreements with all jurisdictions in which FCM MAPs may be 
reporting to foreign regulators but that such reports may nonetheless 
be accessible from the FCM for risk assessment purposes, the Commission 
has modified proposed Rule 1.15(e), the exemptive provision for MAPs 
subject to the supervision of a foreign regulatory authority. As 
adopted, Rule 1.15(e) provides that an FCM shall be deemed to be in 
compliance with the routine reporting requirements of the risk 
assessment regulations if the FCM files with the Commission copies of 
any financial or risk exposure reports filed with a foreign regulator, 
provided that: (1) the FCM agrees to use its best efforts to obtain 
from the foreign firm and to cause the foreign firm to provide, 
directly or through its foreign regulator, any supplemental information 
the Commission may request and the foreign jurisdiction in which the 
MAP is located does not have a blocking statute or other restriction 
that would preclude the provision of such supplemental information; or 
(2) the foreign regulator with whom the MAP files such reports has a 
current information-sharing agreement with the Commission which would 
permit the Commission to obtain the type of information called for 
under the risk assessment rules.
4. Reporting FCMs
    Proposed Rules 1.14(d)(2) and 1.15(c)(2) provided a mechanism 
whereby only one FCM within an organizational structure would be 
required to comply with the Commission's risk assessment regulations. 
These proposed provisions stated generally that the Commission could, 
upon written application, exempt an FCM affiliated with a ``Reporting 
Futures Commission Merchant'' from the recordkeeping and reporting 
requirements of the rules. Proposed Rules 1.14(d)(2) and 1.15(c)(2) 
defined a Reporting Futures Commission Merchant as the FCM which 
maintains the greater amount of adjusted net capital as compared to any 
other FCM(s) within the same holding company structure that is subject 
to the risk assessment reporting requirements. A trade association 
responding on behalf of its members noted that there may be exceptions 
to the general rule that the FCM with the greatest amount of adjusted 
net capital should be the Reporting Futures Commission Merchant. This 
commenter noted, for example, that a broker-dealer/FCM that files 
reports under the SEC's risk assessment rules may have an affiliate 
that would be the Reporting Futures Commission Merchant under the 
definition set forth in the Proposal. In this case the commenter noted 
that it would be appropriate to allow the broker-dealer/FCM to be the 
Reporting Futures Commission Merchant. The commenter also urged that 
the Commission would likely be overburdened with initial exemption 
requests and that the Commission should permit FCMs to rely upon an 
exemption provided under Rules 1.14(d)(2) and 1.15(c)(2) upon filing of 
their requests, pending a response from the Commission.
    In order to accommodate circumstances where it is more appropriate 
for an FCM other than the FCM with the greater amount of adjusted net 
capital to be deemed the reporting FCM and in order to minimize 
administrative burdens on Commission staff, the final rules permit an 
FCM to file a self-executing notice with the Commission identifying as 
the Reporting FCM an FCM other than the FCM within the organizational 
structure with the greater amount of adjusted net capital and 
explaining the basis for the designation of the reporting FCM. The rule 
provides that the Commission has thirty days from receipt of the notice 
to object to the designation of a particular FCM as the Reporting FCM. 
After this period of time, the notice is deemed effective. 
Additionally, the definition of Reporting Futures Commission Merchant 
has been modified to include either the FCM within an affiliated group 
with the greatest amount of adjusted net capital or an FCM acting as 
the Reporting Broker or Dealer pursuant to the SEC's risk assessment 
rules. Accordingly, an FCM acting as the Reporting Broker or Dealer 
under the SEC's risk assessment rules need not file a notice of 
exemption with the Commission in order to be deemed the Reporting 
Futures Commission Merchant under Rules 1.14(d)(2) and 1.15(c)(2) as 
adopted.
    The exemptions provided under Rules 1.14(d)(2) and 1.15(c)(2) do 
not extend to the maintenance and filing of risk management policies, 
procedures and systems by FCMs affiliated with the Reporting Futures 
Commission Merchant. Consequently, such affiliate FCMs must maintain 
their risk management policies, procedures and systems in accordance 
with Rule 1.14(a)(1)(ii), and the Reporting Futures Commission Merchant 
must file, in accordance with Rule 1.15(a)(1)(ii), a copy of its own 
risk management policies, procedures and systems as well as those of 
its affiliated FCMs. However, if such policies, procedures and systems 
are identical in all respects, the Reporting Futures Commission 
Merchant may so indicate when it makes it filing under Rule 
1.15(a)(1)(ii).
5. General Exemptive Authority
    In response to requests from certain commenters, the Commission has 
reserved, in Rules 1.14(d)(3) and 1.15(c)(3), authority to exempt any 
FCM from any of the provisions of either Rule 1.14 or Rule 1.15 if the 
Commission finds that the exemption is not contrary to the public 
interest and the purposes of the provisions from which the exemption is 
sought. The Commission may grant the exemption subject to such terms 
and conditions as it may find appropriate. This exemptive authority is 
similar to that set forth in Commission Rule 4.12(a) with respect to 
provisions of the Part 4 rules governing commodity pool operators and 
commodity trading advisors. The Commission envisions that it may 
entertain requests for exemption from FCMs that are particularly 
concerned about consolidating financial reports or the availability of 
information concerning foreign MAPs, for example.

IV. Effective Date

    The Commission has determined to require the initial filings and 
reports herein based on an ``as of'' date of December 31, 1994. The 
Commission has further determined, however, that with respect to the 
filing of an organizational chart and risk management policies, 
procedures and systems, an FCM shall have an additional thirty days to 
make such filing beyond the ninety days originally proposed. 
Accordingly, such filings must be made initially by April 30, 1995 
instead of March 31, 1995 as proposed. Similarly, with respect to 
consolidating and consolidated financial statements, the first such 
reports for fiscal years ending December 31, 1994 must be filed no 
later than May 15, 1995, which is 135 days following the fiscal year-
end rather than the 105 days proposed.

V. Confidentiality

    Several commenters expressed concerns about the confidentiality 
protection afforded to the information prepared and submitted pursuant 
to the Commission's regulations. Specifically, these commenters, while 
recognizing that the information received under these rules will be 
treated as confidential for purposes of Section 8 of the Act, 
nonetheless were concerned about the rules of certain SROs which 
require their members to file with them copies of any financial reports 
required to be filed with any other regulatory or self-regulatory 
authority. One commenter recommended, however, that notices provided to 
the Commission upon the occurrence of a trigger event should be 
provided to all SROs to alert them to any potential problems. The 
Commission recognizes the sensitivity of certain information required 
to be reported under these rules. In this regard, the Commission plans 
to make the information reported to it available only on an as-needed 
basis, as determined in its sole discretion.

VI. 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.52 FCMs have been determined not to be small entities under 
the RFA. Additionally, smaller FCMs generally will not be affected by 
the final rules because the rules exempt from their requirements 
certain smaller entities. The Commission believes that these rules will 
not have a significant economic impact on smaller entities.
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    \5\247 FR 18618-18621 (April 30, 1982).
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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 rules and their associated 
information collection requirements to the Office of Management and 
Budget (``OMB''). The burden associated with this entire collection, 
including these rules, is as follows:

Average Burden Hours Per Response: 18.00
Number of Respondents: 1,782
Frequency of Response: annually and on occasion

    The burden associated with these specific rules, is as follows:
Average Burden Hours Per Response: 2.50
Number of Respondents: 412
Frequency of Response: annually and on occasion

    Persons wishing to comment on the estimated paperwork burden 
associated with these rules should contact Jeff Hill, Office of 
Management and Budget, room 3228, NEOB, Washington, DC 20503 (202) 395-
7340. Copies of the information collection submission to OMB are 
available from Joe F. Mink, CFTC Clearance Office, 2033 K Street, NW., 
Washington, DC 20581, (202) 254-9735.

C. Electronic Filing

    Any person filing information under these rules who wishes to 
explore electronic filing with the Commission may contact Charles E. 
Tanner, Director of the Office of Information Resources Management, on 
202-653-7495. 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 is amending part 1 of chapter 1 of title 17 of the Code of 
Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 
12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

    2. Section 1.12 is amended by redesignating paragraph (g) as 
paragraph (h) and by adding new paragraph (g) to read as follows:


Sec. 1.12  Maintenance of minimum financial requirements by futures 
commission merchants and introducing brokers.

* * * * *
    (g) A futures commission merchant required to file reports under 
Sec. 1.15 and any futures commission merchant affiliated with such a 
futures commission merchant shall provide written notice of 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. This 
notice shall be provided as follows:
    (1) With respect to activities in the normal course of business 
(e.g., operating losses, proprietary trading losses, increased charges 
against net capital) that cause reduction, written notification must be 
received within two business days of such reduction; and
    (2) 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.
    (3) 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 (as that term is defined in 
Sec. 1.14(a)(2)) 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.
* * * * *
    3. Section 1.12 is further amended by revising the references in 
the first sentences of paragraphs (a)(1) and (b)(3) and in paragraph 
(e) to ``paragraph (g) of this section'' to read ``paragraph (h) of 
this section'' and by revising the reference in the last sentence of 
newly designated paragraph (h)(2) to ``this paragraph (g)'' to read 
``this paragraph (h).''
    4. Section 1.14 is 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 in 
financial instruments with off-balance sheet risk and, if a Material 
Affiliated Person is such a dealer, whether it is also an end-user of 
such instruments;
    (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 
supervising accounts carried for 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 highest level Material Affiliated Person within the futures 
commission merchant's organizational structure, which shall include the 
futures commission merchant and its other Material Affiliated Persons, 
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 sheets may be those prepared by the futures commission 
merchant's highest level Material Affiliated Person as part of its 
internal financial reporting process. Any additional information 
required to be filed under Sec. 1.15(a)(2)(iii) shall also be 
maintained and preserved; and
    (iv) Fiscal year-end consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the futures commission merchant's 
organizational structure, which shall include the futures commission 
merchant and its other Material Affiliated Persons, 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 may be those prepared by the futures commission merchant's 
highest level Material Affiliated Person as part of its internal 
financial reporting process. Any additional information required to be 
filed under Sec. 1.15(a)(2)(iii) shall also be maintained and 
preserved.
    (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) For purposes of this section and Sec. 1.15, the term Material 
Affiliated Person does not include a natural person.
    (4) 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.
    (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), (a)(1)(iii) and 
(a)(1)(iv) of this section with respect to a Material Affiliated Person 
if:
    (1) The futures commission merchant is required, or that Material 
Affiliated Person is required, to maintain and preserve information, or 
such information is maintained and preserved by the futures commission 
merchant on behalf of the Material Affiliated Person, pursuant to 
Sec. 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;
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) that is subject to examination by, or the 
reporting requirements of, a Federal banking agency, the futures 
commission merchant or such Material Affiliated Person 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 to 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 or such Material 
Affiliated Person 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)(1)(iii) and (a)(1)(iv) of 
this section with respect to a Material Affiliated Person if such 
futures commission merchant maintains and makes available, or causes 
such Material Affiliated Person to make 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 foreign 
regulatory authority, provided that: (1) the futures commission 
merchant agrees to use its best efforts to obtain from the Material 
Affiliated Person and to cause the Material Affiliated Person to 
provide, directly or through its foreign futures authority or other 
foreign regulatory authority, any supplemental information the 
Commission may request and there is no statute or other bar in the 
foreign jurisdiction that would preclude the futures commission 
merchant, the Material Affiliated Person, the foreign futures authority 
or other foreign regulatory authority from providing such information 
to the Commission; or (2) the foreign futures authority or other 
foreign regulatory authority with whom the Material Affiliated Person 
files such reports has entered into an information-sharing agreement 
with the Commission which is in effect as of the futures commission 
merchant's fiscal year-end and which will allow the Commission to 
obtain the type of information required herein. The futures commission 
merchant shall maintain 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.
    (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 and has less than 
$5,000,000 in adjusted net capital as of the futures commission 
merchant's current fiscal year-end; provided, however, that such 
futures commission merchant 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, other than paragraph (a)(1)(ii) 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 unless another futures commission merchant is 
acting as the Reporting Broker or Dealer under Sec. 240.17h-2T of this 
title, or the Commission permits another futures commission merchant to 
act as the Reporting Futures Commission Merchant. 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. A 
request for exemption filed under this paragraph (d)(2) shall explain 
the basis for the designation of a particular futures commission 
merchant as the Reporting Futures Commission Merchant and will become 
effective on the thirtieth day after receipt of such request by the 
Commission unless the Commission objects to the request by that date.
    (3) The Commission may exempt any futures commission merchant from 
any provision of this section if it finds that the exemption is not 
contrary to the public interest and the purposes of the provisions from 
which the exemption is sought. The Commission may grant the exemption 
subject to such terms and conditions as it may find appropriate.
    (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, except as set forth in paragraph (c) of this section, 
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 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. (1) Each futures commission merchant 
registered as of December 31, 1994 and subject to the requirements of 
this section shall maintain and preserve the information required by 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing April 
30, 1995 and the information required by paragraphs (a)(1)(iii) and 
(a)(1)(iv) of this section commencing May 15, 1995 or, if December 31, 
1994 is not the futures commission merchant's fiscal year-end, 135 
calendar days following the first fiscal year-end occurring after 
December 31, 1994.
    (2) Each futures commission merchant whose registration becomes 
effective after December 31, 1994 and is subject to the requirements of 
this section shall maintain and preserve the information required by 
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing 60 
calendar days after registration become effective and the information 
required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this section 
commencing 105 calendar days following the first fiscal year-end 
occurring after registration becomes effective.
    5. Section 1.15 is 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 and with its designated self-regulatory organization 
by no later than April 30, 1995, provided that in the case of a futures 
commission merchant whose registration becomes effective after December 
31, 1994, such futures commission merchant shall file the following 
within 60 calendar days after the effective date of such registration, 
or by April 30, 1995, whichever comes later:
    (i) A copy of the organizational chart maintained by the futures 
commission merchant pursuant to paragraph (a)(l)(i) of Sec. 1.14. Where 
there is a material change in information provided, an updated 
organizational chart shall be filed within sixty calendar days after 
the end of the fiscal quarter in which the change has occurred; and
    (ii) Copies of the financial, operational, and risk management 
policies, procedures and systems maintained by the futures commission 
merchant pursuant to paragraph (a)(l)(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 sixty calendar days after the end of the fiscal quarter in which 
the change has occurred.
    (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 or, if a filing is made pursuant to a 
written notice issued under paragraph (a)(2)(iii) of this section, 
within the time period specified in the written notice:
    (i) Fiscal year-end consolidated and consolidating balance sheets 
for the highest level Material Affiliated Person within the futures 
commission merchant's organizational structure, which shall include the 
futures commission merchant and its other Material Affiliated Persons, 
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 consolidated balance sheets shall include appropriate explanatory 
notes. The consolidating balance sheets may be those prepared by the 
futures commission merchant's highest level Material Affiliated Person 
as part of its internal financial reporting process;
    (ii) Fiscal year-end annual consolidated and consolidating income 
statements and consolidated cash flow statements for the highest level 
Material Affiliated Person within the futures commission merchant's 
organizational structure, which shall include the futures commission 
merchant and its other Material Affiliated Persons, 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 may be those prepared by the futures 
commission merchant's highest level Material Affiliated Person as part 
of its internal financial reporting process; and
    (iii) Upon receiving written notice from any representative of the 
Commission and within the time period specified in the written notice, 
such additional information which the Commission determines is 
necessary for a complete understanding of a particular affiliate's 
financial impact on the futures commission merchant's organizational 
structure.
    (3) For the purposes of this section, the term Material Affiliated 
Person shall have the meaning used in Sec. 1.14.
    (4) The reports required to be filed pursuant to paragraph (a)(1) 
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 and by the designated 
self-regulatory organization, and the reports required to be filed 
pursuant to paragraph (a)(2) 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.
    (b) [Reserved]
    (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 and has less than 
$5,000,000 in adjusted net capital as of the futures commission 
merchant's fiscal year-end; provided, however, that such futures 
commission merchant 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, other than paragraph (a)(1)(ii) 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 net capital 
as last reported on its financial reports filed with the Commission 
pursuant to Sec. 1.10 unless another futures commission merchant is 
acting as the Reporting Broker or Dealer under Sec. 240.17h-2T of this 
title or the Commission permits another futures commission merchant to 
act as the Reporting Futures Commission Merchant. 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. A request for 
exemption filed under this paragraph (c)(2) shall explain the basis for 
the designation of a particular futures commission merchant as the 
Reporting Futures Commission Merchant and will become effective on the 
thirtieth day after receipt of such request by the Commission unless 
the Commission objects to the request by that date. The Reporting 
Futures Commission Merchant must submit the information required by 
paragraph (a)(1)(ii) of this section on behalf of its affiliated 
futures commission merchants.
    (3) The Commission may exempt any futures commission merchant from 
any provision of this section if it finds that the exemption is not 
contrary to the public interest and the purposes of the provisions from 
which the exemption is sought. The Commission may grant the exemption 
subject to such terms and conditions as it may find appropriate.
    (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 Sec. 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 merchant 
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 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 without the 
information required under Part II of Form 17-H.
    (2) In the case of a Material Affiliated Person (including a 
foreign banking organization) 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 or such Material Affiliated Person 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 or such Material 
Affiliated Person 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, or causes such Material Affiliated Person to make available, 
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, provided that: (1) the futures commission merchant agrees to 
use its best efforts to obtain from the Material Affiliated Person and 
to cause the Material Affiliated Person to provide, directly or through 
its foreign futures authority or other foreign regulatory authority, 
any supplemental information the Commission may request and there is no 
statute or other bar in the foreign jurisdiction that would preclude 
the futures commission merchant, the Material Affiliated Person, the 
foreign futures authority or other foreign regulatory authority from 
providing such information to the Commission; or (2) the foreign 
futures authority or other foreign regulatory authority with whom the 
Material Affiliated Person files such reports has entered into an 
information sharing agreement with the Commission which is in effect as 
of the futures commission merchant's fiscal year-end and which will 
allow the Commission to obtain the type of information required herein. 
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 
registered as of December 31, 1994 and subject to the requirements of 
this section shall file the information required by paragraph (a)(1) of 
this section no later than April 30, 1995 and the information required 
by paragraph (a)(2) of this section no later than May 15, 1995. Each 
futures commission merchant whose registration becomes effective after 
December 31, 1994 and is subject to the requirements of this section 
shall file the information required by paragraph (a)(1) of this section 
within 60 calendar days after registration is granted, or by April 30, 
1995, whichever comes later and the information required by paragraph 
(a)(2) of this section within 105 calendar days after registration is 
granted or by May 15, 1995, whichever comes later.

    Issued in Washington, DC on December 21, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-31828 Filed 12-27-94; 8:45 am]
BILLING CODE 6351-01-P