[Federal Register Volume 63, Number 166 (Thursday, August 27, 1998)]
[Rules and Regulations]
[Pages 45711-45715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23021]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1


Maintenance of Minimum Financial Requirements by Futures 
Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: Rule 1.12 of the Commodity Futures Trading Commission 
(Commission or CFTC) \1\ sets forth the early warning reporting 
requirements for futures commission merchants (FCMs) and introducing 
brokers (IBs). These requirements are designed to afford the CFTC and 
industry self-regulatory organizations (SROs) sufficient advance notice 
of a firm's financial or operational problems to take any protective or 
remedial action that may be needed to assure the safety of customer 
funds and the integrity of the marketplace.
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    \1\ Commission rules are found at 17 CFR Ch. I (1998).
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    The Commission is adopting as proposed an amendment to Rule 1.12, 
applicable to FCMs only, to require immediate notification by an FCM to 
the CFTC and its designated self-regulatory organization (DSRO) if an 
FCM knows or should know that it is in an undersegregated or 
undersecured condition, i.e., that the FCM has insufficient funds in 
accounts segregated for the benefit of customers trading on U.S. 
contract markets or has insufficient funds set aside for customers 
trading on non-U.S. markets to meet the FCM's obligations to its 
customers. The term ``funds'' in this context includes accrued amounts 
due to or from the FCM's clearing organizations and/or carrying brokers 
in connection with customer-related activities, typically the daily or 
intraday variation settlement.
    The Commission is also adopting amendments to Rule 1.12, as 
proposed, to require immediate notification of certain events 
pertaining to undercapitalization or failure to satisfy margin calls, 
where notice has been required within 24 hours. In addition, the 
Commission has determined to codify a previous staff interpretation 
that permits notices required by Rule 1.12 to be filed by facsimile in 
lieu of telegraphic means and to require immediate telephonic notice as 
well.

EFFECTIVE DATE: September 28, 1998.

FOR FURTHER INFORMATION CONTACT:
Paul H. Bjarnason, Jr., Deputy Director and Chief Accountant, or 
Lawrence B. Patent, Associate Chief Counsel, Division of Trading and 
Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W., 
Washington, D.C. 20581. Telephone (202) 418-5430.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    On January 6, 1998, the Commission proposed amendments to the early 
warning requirements set forth in Rule 1.12.\2\ These proposals 
included: (1) a new requirement for an FCM to notify the CFTC and its 
DSRO immediately (by telephone call to be followed immediately by 
telegraphic or facsimile notice) when it knows or should know that it 
is in an undersegregated or undersecured condition; (2) requiring 
immediate telephonic notice, rather

[[Page 45712]]

than notice within 24 hours, when an FCM or IB is undercapitalized or 
when an account must be liquidated, transferred or allowed to trade for 
liquidation only; and (3) codifying a previous staff interpretation 
that permits written notices to be filed by facsimile in lieu of 
telegraphic means.\3\
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    \2\ 63 FR 2188 (Jan. 14, 1998).
    \3\ The CFTC's Division of Trading and Markets has stated that 
any notice required to be transmitted to the CFTC under Rule 1.12 by 
telegraphic notice may be transmitted by facsimile machine. See 
CFTC's Advisory No. 90-2, [1987-1990] Transfer Binder] Comm. Fut. L. 
Rep. (CCH) para. 24,599 (Feb. 6, 1990). The CFTC proposes to codify 
this Advisory throughout Rule 1.12 to make clear that any written 
notice can be provided either through telegraphic means or via 
facsimile transmission.
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    The 60-day comment period expired on March 16, 1998. The Commission 
received eight comment letters. Three FCMs, GNI Incorporated (GNI), 
FIMAT USA Inc. (FIMAT) and Lind-Waldock & Company (LWC), each submitted 
a comment letter. One comment letter was submitted on behalf of six 
exchanges (Chicago Board of Trade, Chicago Mercantile Exchange (CME), 
Kansas City Board of Trade, Minneapolis Grain Exchange, New York Cotton 
Exchange and New York Mercantile Exchange, collectively referred to as 
the Exchanges). Another exchange, the Coffee, Sugar & Cocoa Exchange 
(CSCE), submitted its own comment letter. The other commenters were the 
Association of the Bar of the City of New York's Committee on Futures 
Regulation (NYC Bar), National Futures Association (NFA) and the 
Futures Industry Association (FIA).\4\ The commenters expressed concern 
about the ``should know'' portion of the reporting standard in the 
proposed undersegregation notice rule. Some of the commenters suggested 
alternatives to the proposals. These comments and alternatives are 
discussed more fully below.
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    \4\ In addition, the comment file contains a memorandum from 
Commissioner Holum's office concerning a meeting on February 10, 
1998, with staff of Cargill Investor Services, Inc. and Cargill 
Grain Division (collectively, Cargill) during which the rule 
proposals, among other things, were discussed.
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    The Commission has considered carefully the comments received. 
Based upon these comments, discussions between Commission staff and 
industry representatives and the Commission's reconsideration of this 
subject, the Commission has determined to adopt a new Rule 1.12(h) as 
proposed so that an FCM will be required to notify immediately the CFTC 
and its DSRO of an undersegregated or undersecured condition if it 
knows or should know the condition exists. The Commission has also 
provided in the preamble of this release, in response to suggestions 
from FIA and NFA, an example of the circumstances that would trigger a 
requirement to report under the new standard. The other rule amendments 
have been adopted essentially as proposed.

II. Rule Amendments

A. Undersegregation Notice

1. Proposal
    FCMs occasionally have become undersegregated as a result of market 
movements which cause deficits in the accounts they carry on behalf of 
their customers. Generally, the undersegregated condition is discovered 
as a result of the segregation calculation, which under Commission 
rules is required to be completed by noon on the business day following 
the day of the market movements. Most FCMs are able to avoid any 
undersegregated condition which might have occurred on the same 
business day for which the segregation calculation is made, using 
proprietary funds or through collection of deficits by wire transfer 
arrangements made with customers. However, this is not always the case. 
During the market downturn on October 27, 1997, the Commission was made 
aware that a few FCMs experienced undersegregation to a degree that 
they were unable to make up the shortfall from their own internal 
proprietary funds. Infusions of external capital were required in those 
cases to correct the undersegregated conditions. The Commission is also 
aware that, in at least one case, an FCM was aware that it was 
undersegregated as of the close of business on October 27, due to 
losses in the accounts of a single customer. Further, this FCM was 
aware on October 27 that it was likely this customer would default in 
its obligations to the FCM and that, as a result, the FCM would be 
undersegregated. Further, the FCM also knew that it did not have 
sufficient proprietary funds within the firm to correct the 
undersegregated condition. As explained further below, the Commission 
was notified on or about the close of business October 28--at least one 
day after the FCM was well aware of the situation.
    An evaluation of the Commission's early warning notification rules 
indicated that these rules, which require notice to the Commission 
upon, among other events, an FCM falling below the adjusted net capital 
early warning level, which is 150 percent of the minimum required, may 
not result in notice to the commission until as much as a day or a day 
and a half after the occurrence of a major market event that causes an 
undersegregated condition. In particular, on October 27, 1997, some 
firms knew that they had a major problem by noon of that day, but did 
not provide notice of these problems to the Commission until on or 
about the close of business on October 28.
    The Commission, therefore, proposed a new Rule 1.12(h) \5\ that 
would require an FCM to notify the Commission and its DSRO immediately 
after it knows or should know that funds segregated for customers 
trading on U.S. markets or set aside for customers trading on non-U.S. 
markets are less than the amount required to be segregated or set aside 
by the Commodity Exchange Act (Act) or Commission rules.\6\ In this 
context, the term ``funds'' includes funds on deposit and funds due to 
or from the FCM's clearing organizations or carrying brokers. The 
Commission's proposal would require an immediate telephone call by an 
FCM, to be followed immediately by telegraphic or facsimile notice. The 
notification to the Commission would be directed to the Division of 
Trading and Markets, to the attention of the Director and the Chief 
Accountant, and notice to the DSRO was to be directed to the person or 
unit provided for under the DSRO's rules. For example, the notice 
required by CME Rule 971 must be sent to CME's Audit Department.\7\
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    \5\The Commission proposed to redesignate current paragraph (h) 
of Rule 1.12 as paragraph (i) and to include the new rule in a new 
paragraph (h).
    \6\ Background on the segregation and set aside requirements is 
set forth at 63 FR 2188, 2189.
    \7\ The CME has a rule requiring that a FCM for which it acts as 
the DSRO provide written notice to CME within 24 hours after the FCM 
becomes aware of its failure to maintain sufficient funds in 
segregation or set aside in separate accounts. Rules of the Chicago 
Mercantile Exchange, Rule 971 Segregation and Secured Requirements  
(1997).
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2. Comments on Proposed Reporting Standard
    Most of the commenters objected to the ``should know'' standard in 
proposed new Rule 1.12(h). GNI, Cargill and LWC criticized this 
language as being too vague and granting the Commission too much 
discretion. NYC Bar and CSCE claimed that a ``should know'' standard 
would lead to overreporting by firms fearful of an enforcement action. 
Overreporting could create or exacerbate, rather than prevent or 
ameliorate, a market crisis, causing rumors to spread of problems at 
reporting firms, according to the NYC Bar and GNI. FIA expressed 
concern that this could cause the Commission to take precipitous 
action, such as ordering the transfer of accounts.
    NYC Bar also stated that ``the `should know' standard has not been 
the subject of litigation or addressed by any staff interpretations.'' 
The Commission notes that the ``should know'' standard has

[[Page 45713]]

been part of the standard for reporting undercapitalization in Rule 
1.12(a) since it was adopted 20 years ago.\8\ The Commission was 
intending to conform the reporting requirements for undersegregation 
and undercapitalization, a concept that FIMAT deemed sensible in its 
comment letter (although, as discussed below, FIMAT objected to the 
timing element). The Commission further notes that Rule 1.12(a) has 
been the subject of litigation.\9\
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    \8\ 43 FR 39956, 39969 (Sept. 8, 1978).
    \9\ See, e.g., In the Matter of First Commercial Financial 
Group, Inc., et al., CFTC Docket No. 95-10, [Current Transfer 
Binder] Comm. Fut. L. Rep. (CCH) para. 27,180 (Initial Decision Oct. 
27, 1997); In the Matter of Eagan & Company, Inc., et al. CFTC 
Docket No. 92-20, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. 
(CCH) para. 25,350 (Initial Decision July 31, 1992).
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    Some commenters suggested alternatives. FIA stated that it could 
support reporting of undersegregation subject to three conditions, 
which should be set forth in the rule itself or in the preamble of the 
Federal Register notice announcing adoption of the rule: (1) there is a 
significant undermargined account; (2) the customer makes clear that it 
is unable or unwilling to meet the margin call; and (3) the FCM is 
aware that it will be unable to transfer enough funds from its own 
accounts into segregation in a timely manner to cover the shortfall. 
NFA stated that, in extraordinary markets, an FCM may know earlier than 
the formal computation deadline of noon the following business day that 
it is undersegregated and suggested that the Commission clarify that 
this is the exception rather than the norm.
    In an effort to respond to the commenters, the Commission's staff 
explored the use of language other than ``knows or should know'' for 
the undersegregation notice requirement on an informal basis with 
representatives of entities that submitted comment letters. Following 
these discussions and Commission reconsideration of the issue, the 
Commission has determined to adopt as the standard for reporting an 
undersegregated or undersecured condition that an FCM ``knows or should 
know'' either condition exists, as the Commission proposed. Of course, 
this standard would be met if the daily calculations of segregation and 
secured amount requirements pursuant to Rules 1.32 and 30.7(f) reveal 
deficiencies. However, the requirement to report under new Rule 1.12(h) 
could also arise even before the required daily calculations of 
segregation and secured amount must be made. The Commission notes, in 
response to FIA's and NFA's suggestion referred to above, the one 
example of when the Commission would conclude that an FCM knows or 
should know that the new reporting requirement is triggered is the 
following circumstance: (1) there is a significant undermargined 
account; (2) the customer makes clear that it is unable or unwilling to 
meet the margin call; and (3) the FCM is aware that it will be unable 
to transfer enough funds from its own accounts into segregation or 
separate set-aside accounts to cover the shortfall.
    That part of the standard requiring an FCM to report when it 
``should know'' of a problem may be defined as the point at which a 
party, in the exercise of reasonable diligence, should become aware of 
an event. This is an objective standard that has been applied by courts 
on numerous occasions.\10\ As noted above, the standard ``knows or 
should know'' has been used in Commission Rule 1.12(a) for almost 20 
years, and this language is used in other federal regulations.\11\ 
Because of the severe financial consequences that could arise from an 
FCM's failure to comply with segregation and secured amount 
requirements, and to achieve consistency between the treatment of 
undercapitalization and undersegregation conditions, the Commission 
believes that it is appropriate to adopt the ``knows or should know'' 
standard for new Rule 1.12(h).
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    \10\ See, e.g., Anixter v. Home-State Production Company, 947 F. 
2d 897, 899 & n.5 (10th Cir. 1991); Maloley  v. R.J. O'Brien & 
Associates, Inc., 819 F.2d 1435, 1442-1444 (8th Cir. 1987).
    \11\ See, e.g., 17 CFR 240.14e-3 (1998); 29 CFR 1604.11 (1997).
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    By this rule change, the Commission requires reporting of serious 
problems, such as occurred on October 27, 1997, as soon as they become 
apparent to the FCM. In addition, the Commission wishes to make clear 
that an FCM cannot avoid the reporting requirement by failing to 
perform or by delaying the required segregation and secured amount 
calculations pursuant to Rules 1.32 and 30.7(f). Failure to make the 
required calculations, which are rule violations in and of themselves, 
cannot be used as an excuse for failing to report as required by new 
Rule 1.12(h).
3. Comments on When to Report
    The Commission proposed that an FCM be required to report an 
undersegregated or undersecured condition immediately by telephone, 
which is to be confirmed in writing immediately by telegraphic or 
facsimile notice. The Exchanges and FIMAT stated that, during major 
market moves, the first priority of an FCM should be to monitor 
accounts, to collect required deposits and to ensure that settlement 
variation requirements can be met. In their view, it is less important 
to perform immediately a ministerial calculation to determine whether a 
precise violation of segregation requirements has occurred than to 
address immediately all severe problems. These commenters, as well as 
GNI, NYC Bar and FIA, also noted that, given the nature of today's 
financial markets, with round-the-clock, round-the-globe trading and 
increased give-up business, it takes time for an FCM to gather and to 
review the necessary information concerning an FCM's segregation and 
secured amount requirements; moment-to-moment calculations are not 
possible. Two commenters (GNI and FIMAT) questioned whether Commission 
staff would be available at all times to receive calls if immediate 
telephonic notice is required.
    Certain commenters also suggested alternatives on this aspect of 
the proposals. FIMAT noted that, pursuant to CME Rule 971(C), it is 
already required to report undersegregation to the CME within 24 hours. 
FIMAT stated that it would not object to a similar time frame in a 
Commission rule; earlier reporting could be encouraged, but mandating 
immediate reporting is too severe in FIMAT's view. NYC Bar suggested 
that the Commission amend Rule 1.32 to require earlier completion of 
the daily segregation record (now required by noon on the following 
business day) and immediate reporting of undersegregation as of the 
earlier time.
    The Commission considered the time for reporting in connection with 
the rule proposal and determined that immediate reporting would be the 
appropriate standard. The Commission recognizes, however, that time may 
be needed for consultation by FCM staff with senior management, and it 
did not intend to foreclose that activity. The Commission also did not 
intend to require FCMs to make additional segregation calculations on a 
routine basis, but only to do so if a problem arises that could trigger 
the reporting requirement under new Rule 1.12(h). It is the 
Commission's intent that the ``knows or should know'' standard be 
implemented by FCMs using existing sources of information and 
computations. Nor does the Commission wish to accelerate the 
requirement for completion of the daily segregation record, as 
suggested by the NYC Bar, since the Commission would have to propose 
such a rule change and allow

[[Page 45714]]

further comment thereon and the Commission does not believe at this 
time that such a rule change is needed. The Commission is requiring 
that, when an FCM knows or should know that it is undersegregated or 
undersecured, it must report that immediately. As to the availability 
of Commission staff for immediate telephonic notification under new 
Rule 1.12(h), the Commission does not believe that this will be a 
problem given modern telecommunications facilities.
    After reviewing other provisions of the early warning requirements, 
the Commission proposed that notices of events that had been required 
within 24 hours (namely, when an FCM or IB is undercapitalized or when 
an account must be liquidated, transferred or allowed to trade for 
liquidation only) be made immediately. Such notifications would be 
required by telephone immediately, to be confirmed in writing by 
telegraph or facsimile. See Rule 1.12(a)(1), (f)(1), and (f)(2). 
Certain other provisions of Rule 1.12 already require immediate 
notifications. See paragraphs (e), (f)(3), (f)(4) and (f)(5) of Rule 
1.12. The Commission also proposed that these notifications be made by 
telephone as well as by telegraph or facsimile. The Commission received 
no comment on these proposals and is adopting them as proposed.\12\
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    \12\ The Commission is also adopting as proposed a correction to 
the cross-reference in Sec. 1.12(g)(2) concerning consolidation that 
now refers to ``Sec. 1.10(f)'' to read ``1.17(f)''.
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4. Comments on Where to Report
    The Commission proposed new Rule 1.12(h) to require an FCM to 
report an undersegregated or undersecured condition both to its DSRO 
and to the Commission, which is consistent with the other provisions of 
Rule 1.12. The Exchanges, FIA, GNI and LWC commented that all early 
warning notices, including those unaffected by the recent proposals, 
should be filed only with a firm's DSRO, which would in turn be 
responsible for informing the CFTC and other SROs. This would eliminate 
the requirement for a firm to report directly to the Commission. Taking 
a different viewpoint, CSCE complained that DSROs fail to share early 
warning notice information in a timely manner with other exchanges and 
clearing organizations where the FCM that filed an early warning notice 
is carrying large positions.
    The Commission did not consider this to be an issue in drafting the 
proposals, and the proposal as to where to report an undersegregated or 
undersecured condition was consistent with the other provisions of Rule 
1.12. Since time is of the essence in situations addressed by Rule 
1.12, and in light of the Commission's review of all of the comments on 
this point, the Commission has determined to adopt as proposed the 
requirement for direct notice by firms to the Commission under new Rule 
1.12(h). The Commission also wishes to note, however, that it 
encourages FCMs to communicate with their DSROs on an ongoing basis and 
believes that DSROs can perform an important role in determining when 
it is appropriate for early warning notices to be filed. In any event, 
at the point when an FCM knows or should know that it is in an 
undersegregated or undersecured condition, it must report that 
condition immediately to its DSRO and the Commission.
    The Exchanges requested that paragraphs (f)(3)-(f)(5) of Rule 1.12 
be deleted as ineffectual. These provisions require immediate reporting 
whenever (1) an FCM issues a margin call in excess of its adjusted net 
capital,\13\ (2) a margin call is not met by the close of business on 
the day following its issuance, or (3) an FCM's excess adjusted net 
capital is less than six percent of maintenance margin required on 
positions carried for noncustomers other than another FCM or a 
securities broker-dealer.
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    \13\ FIMAT commented that the existence of Rule 1.12(f)(3), 
which requires immediate reporting when an FCM issues a margin call 
in excess of its adjusted net capital, is a reason not to require 
immediate reporting of undersegregation.
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    The Commission's only proposals with respect to paragraphs (f)(3)-
(f)(5) of Rule 1.12, which were adopted in conjunction with and were 
derived from the proposals for the Commission's risk assessment rules, 
Rules 1.14 and 1.15, concerned telephonic and facsimile notice as 
described above. The Commission believes that these provisions should 
be retained, but that, if the Commission pursues further rulemaking 
concerning risk assessment, it may be appropriate at that time to 
reconsider Rule 1.12(f)(3)-(f)(5).

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994), 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments discussed herein 
would affect primarily FCMs. The amendment of one provision, 
Sec. 1.12(f)(1), would affect clearing organizations, and the amendment 
of another provision, Sec. 1.12(a)(1), would affect IBs. The Commission 
has previously determined that, based upon the fiduciary nature of FCM/
customer relationships, as well as the requirement that FCMs meet 
minimum financial requirements, FCMs should be excluded from the 
definition of small entity.\14\ Contract markets and their clearing 
organizations have also been excluded from the definition of small 
entity.\15\
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    \14\ 47 FR 18618-18621 (April 30, 1992).
    \15\ Id.
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    The amendment to Sec. 1.12(a)(1) concerning notice of 
undercapitalization affects the minority of IBs that rely upon their 
own capital to meet adjusted net capital rules, ``independent'' IBs, as 
well as FCMs. The Commission has determined to require that this notice 
be provided immediately rather than within 24 hours as previously 
required. The notification requirement will remain essentially the 
same, but the time within which to report has been shortened. The 
Commission believes that this rule amendment is necessary for the 
Commission and DSROs to be able to carry out their oversight and 
monitoring functions concerning the financial condition of futures 
industry intermediaries and to protect the customers of those firms and 
the markets. Therefore, any slight increase in the burden on an 
independent IB caused by the amendment to Rule 1.12(a)(1) is necessary 
for the Commission to fulfill its regulatory obligations.\16\
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    \16\ The Commission evaluates within the context of a particular 
rule proposal whether all or some IBs should be considered small 
entities and, if so, analyzes the impact on IBs of the proposal. 48 
FR 35248, 35276 (Aug. 3, 1983).
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    Therefore, the Chairperson, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein 
will not have a significant economic impact on a substantial number of 
small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501 et 
seq. (Supp. I 1995), 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. The 
Commission anticipates that fewer than ten FCMs per year will file 
reports under the new rule, and thus the new rule will not constitute a 
collection of information under the PRA.\17\ The group of rules (3038-
0024) of which this is a part has the following burden:

    \17\ 44 U.S.C. 3502(3) (Supp. I 1995).
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Average Burden Hours Per Response: 128

[[Page 45715]]

Number of Respondents: 1366
Frequency of Response: On ocassion

    Copies of the OMB approved information collection package 
associated with this rule may be obtained from Desk Officer, CFTC, 
Office of Management and Budget, Room 10202, NEOB, Washington, D.C. 
20503, (202) 395-7340.

List of Subjects in 17 CFR Part 1

    Commodity futures, Minimum financial and related reporting 
requirements.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act, and in particular, Sections 
4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission 
hereby amends Part 1 of chapter I of title 17 of the Code of Federal 
Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

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

    2. Section 1.12 is amended by revising paragraph (a)(1), by 
revising the first sentence of paragraph (b)(4), by adding the phrase 
``or facsimile'' after the word ``telegraphic'' in paragraphs (c) and 
(d), by revising paragraph (e), by adding the phrase ``telephonic, 
confirmed in writing by'' before the word ``telegraphic,'' by adding 
the phrase ``or facsimile,'' after the word ``telegraphic'' and by 
revising the phrase at the end which reads ``within 24 hours'' to read 
``immediately'' in paragraphs (f)(1) and (f)(2), by adding the phrase 
``telephonic, confirmed in writing by'' before the word ``telegraphic'' 
and by adding the phrase ``or facsimile,'' after the word 
``telegraphic'' in paragraph (f)(3), by adding the phrase ``by 
telephone, confirmed in writing immediately by telegraphic or facsimile 
notice,'' after the word ``immediately'' in paragraphs (f)(4) and 
(f)(5), by revising the phrase in paragraph (g)(2) which reads 
``Sec. 1.10(f)'' to read ``Sec. 1.17(f)'', by redesignating paragraphs 
(h)(1) and (h)(2) as paragraphs (i)(1) and (i)(2), respectively, by 
revising the last sentence of paragraph (i)(2), and by adding a new 
paragraph (h). The additions and revisions follow:


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

    (a) * * * 
    (1) Give telephonic notice, to be confirmed in writing by 
telegraphic or facsimile notice, as set forth in paragraph (i) of this 
section that the applicant's or registrant's adjusted net capital is 
less than required by Sec. 1.17 or by other capital rule, identifying 
the applicable capital rule. The notice must be given immediately after 
the applicant or registrant knows or should know that its adjusted net 
capital is less than required by any of the aforesaid rules to which 
the applicant or registrant is subject; and
* * * * *
    (b) * * *
    (4) For securities brokers or dealers, the amount of net capital 
specified in Rule 17a-11(b) of the Securities and Exchange Commission 
(17 CFR 240.17a-11(b)), must file written notice to that effect as set 
forth in paragraph (i) of this section within five (5) business days of 
such event. * * *
* * * * *
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or written report as required by 
Sec. 1.12, that self-regulatory organization must immediately report 
this failure by telephone, confirmed in writing immediately by 
telegraphic or facsimile notice, as provided in paragraph (i) of this 
section.
* * * * *
    (h) Whenever a person registered as a futures commission merchant 
knows or should know that the total amount of its funds on deposit in 
segregated accounts on behalf of customers, or that the total amount 
set aside on behalf of customers trading on non-United States markets, 
is less than the total amount of such funds required by the Act and the 
Commission's rules to be on deposit in segregated or secured amount 
accounts on behalf of such customers, the registrant must report 
immediately by telephone, confirmed in writing immediately by 
telegraphic or facsimile notice, such deficiency to the registrant's 
designated self-regulatory organization and the principal office of the 
Commission in Washington, D.C., to the attention of the Director and 
the Chief Accountant of the Division of Trading and Markets.
    (i) * * *
    (2) * * * Any notice or report filed with the National Futures 
Association pursuant to this paragraph shall be deemed for all purposes 
to be filed with, and to be the official record of, the Commission.

    Issued in Washington, D.C. on August 24, 1998 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-23021 Filed 8-26-98; 8:45 am]
BILLING CODE 6351-01-M