[Federal Register Volume 65, Number 167 (Monday, August 28, 2000)]
[Proposed Rules]
[Pages 52051-52054]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21904]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB54


Minimum Financial Requirements for Futures Commission Merchants 
and Introducing Brokers; Amendment to the Capital Charge on Unsecured 
Receivables Due From Foreign Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing to amend Rule 1.17(c)(5)(xiii) which requires a futures 
commission merchant (``FCM'') or an independent introducing broker 
(``IBI''), when computing its adjusted net capital, to take a capital 
charge for certain unsecured receivables due from foreign brokers.\1\ 
The capital charge is equal to five percent of the unsecured receivable

[[Page 52052]]

balance. In computing the capital charge, however, the FCM or IBI may 
exclude that portion of the unsecured receivable that represents the 
amount required to be on deposit to maintain futures and option 
positions (i.e., margin or performance bond requirements) on a foreign 
board of trade provided that certain conditions are met. The foreign 
broker must have received confirmation of ``comparability relief'' 
pursuant to Rule 30.10 from the Commission and the margin deposit must 
be held by the foreign broker itself, by another foreign broker granted 
Rule 30.10 ``comparability relief,'' or by a depository in the same 
jurisdiction as either foreign broker that would qualify as a 
depository for funds under Rule 30.7. In addition, to be exempt from 
the capital charge, customer funds must be held by the foreign broker 
in compliance with any conditions imposed by the applicable Rule 30.10 
order.
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    \1\ Commission regulations cited herein may be found at 17 CFR 
Ch. I (2000).
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    The proposal would amend the current rule by increasing the amount 
of the unsecured receivable that is eligible to be exempt from the 
capital charge from the minimum amount required to maintain futures and 
option positions to the greater of: 150 percent of the amount required 
to maintain the current futures and option positions in the account; or 
100 percent of the greatest amount required to support futures and 
option positions in the account at any time during the preceding six-
month period. The proposal also would continue to require the foreign 
broker to receive Rule 30.10 ``comparability relief'' but would not 
condition the exemption on the margin deposits be held by the foreign 
broker itself, another foreign broker granted Rule 30.10 
``comparability relief,'' or with a depository in the same jurisdiction 
as either foreign broker that would qualify as a depository for funds 
under Rule 30.7.

DATES: Comments must be received on or before September 27, 2000.

ADDRESSES: Comments should be mailed to: Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, N.W., Washington, D.C. 20581. In addition, comments may be sent 
by facsimile to (202) 418-5521, or by electronic mail to 
[email protected]. Reference should be made to ``Capital Charge on 
Unsecured Receivables Due from Foreign Brokers.''

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581; 
telephone (202) 418-5495; electronic mail [email protected]; or Henry J. 
Matecki, Financial Audit and Review Branch, Division of Trading and 
Markets, Commodity Futures Trading Commission, 300 South Riverside 
Plaza, Suite 1600 North, Chicago, IL 60606; telephone (312) 886-3217; 
electronic mail [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    In 1978, the Commission implemented major revisions to its 
regulations governing the minimum financial requirements for FCMs.\2\ 
As part of these revisions, the Commission adopted Rule 
1.17(c)(5)(xiii) which required an FCM, in computing its adjusted net 
capital, to take a capital charge for unsecured receivables resulting 
from commodity futures and option transactions executed on foreign 
boards of trade and which were due from foreign brokers that were not 
registered with the Commission as FCMs or with the Securities and 
Exchange Commission (``SEC'') as securities brokers or dealers. The 
capital charge was equal to five percent of the unsecured receivable 
balance.
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    \2\ 43 FR 39956 (September 8, 1978).
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    The Commission had minimal interaction with foreign regulators and 
limited experience with trading on foreign futures and option markets 
when it adopted Rule 1.17(c)(5)(xiii). The capital charge reflected the 
Commission's concern that unsecured receivables from foreign brokers 
represented a greater risk to an FCM's financial condition than 
comparable receivables due from registered FCMs or securities brokers 
or dealers which, under Commission and SEC capital rules, are required 
to maintain sufficient liquid assets to cover liabilities associated 
with funds received to maintain or carry futures and option positions 
on foreign boards of trade.
    Subsequently, the Commission gained greater experience with foreign 
futures and option trading. In this regard, in 1987 the Commission 
adopted Part 30 of its regulations to govern the domestic offer and 
sale of futures and option contracts traded on foreign boards of 
trade.\3\ Furthermore, in 1996 the Commission, citing an enhancement of 
capital standards monitoring and an increased cooperation among 
regulators globally, amended Rule 1.17(c)(5)(xiii) to exclude from the 
five percent capital charge that portion of the unsecured receivable 
that represented amounts required to be on deposit to maintain futures 
and option positions transacted on foreign boards of trade.\4\ Deposits 
in excess of required margin or performance bond continued to be 
subject to the capital charge. In addition, to be exempt from the 
capital charge, the receivable had to be due from a foreign broker that 
had received confirmation of ``comparability relief'' in accordance 
with a Commission order issued under Rule 30.10 and the margin deposits 
had to be held by the foreign broker itself, another foreign broker 
that had received confirmation of Rule 30.10 ``comparability relief,'' 
or at a depository that qualified as a depository pursuant to Rule 30.7 
and which was located within the same jurisdiction as either foreign 
broker.\5\
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    \3\ 52 FR 28980 (August 5, 1987). The Part 30 rules generally 
extended the Commission's existing customer protection requirements 
for products offered or sold on contract markets in the United 
States to foreign futures and option products sold to United States 
customers by foreign firms. Specifically, the Part 30 rules include 
requirements with respect to registration, risk disclosure, capital 
adequacy, protection of customer funds, recordkeeping and 
transaction reporting, sales practices and compliance procedures 
that are generally comparable to those applicable to transactions 
conducted on or subject to the rules of U.S. contract markets.
    \4\ 61 FR 19177, 19184 (May 1, 1996).
    \5\ Under Rule 30.10 and Appendix A thereto, the Commission may 
exempt a foreign firm from compliance with certain Commission rules 
provided that a comparable regulatory system exists in the firm's 
home country and that certain safeguards are in place to protect 
U.S. customers, including an information-sharing arrangement between 
the Commission and the firm's home country regulator or self-
regulatory organization (``SRO''). Once the Commission determines 
that the foreign jurisdiction's regulatory structure offers 
comparable regulatory oversight, the Commission issues an order 
granting general relief subject to certain conditions. Foreign firms 
seeking confirmation of this relief must make certain 
representations set forth in the Rule 30.10 order issued to the 
regulator or SRO from the firm's home country. Appendix C to Part 30 
lists those foreign regulators and SROs that have been issued a Rule 
30.10 order by the Commission.
    Rule 30.7(c) sets forth acceptable depositories for funds 
deposited by U.S. customers with foreign brokers for futures and 
option trading on foreign boards of trade.
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II. Proposal

    The Joint Audit Committee (``JAC'') has asked the Commission to 
amend Rule 1.17(c)(5)(xiii) to expand the capital charge exemption on 
unsecured receivables from a foreign broker that has received 
``comparability relief'' under Rule 30.10, but is not a registered FCM 
or a registered securities broker or dealer.\6\ Specifically, the JAC 
has asked that the exemption be expanded to include balances in excess 
of required

[[Page 52053]]

margin deposits. In support of its request, the JAC has stated that 
FCMs and IBIs generally deposit amounts in excess of required margin 
with foreign brokers as part of prudent risk management policies. In 
addition, the JAC has stated that increasing the amount of the deposit 
subject to the exclusion would allow FCMs to leave more funds on 
deposit with a foreign broker, thereby reducing costs associated with 
frequent transfers of funds between an FCM or IBI and a foreign broker. 
Accordingly, the JAC has asked that the amount exempted from the 
capital charge be expanded to a ``reasonable amount of funds'' to 
support the commodity futures and option trading activity conducted 
through the foreign broker.
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    \6\ The JAC is comprised of representatives of the audit and 
compliance departments of the domestic SROs and the National Futures 
Association. The JAC coordinates the industry's audit and ongoing 
surveillance activities to promote a uniform framework of self-
regulation.
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    The Commission agrees with the JAC in principle and is proposing to 
amend Rule 1.17(c)(5)(xiii) in this regard. The Commission believes, 
however, that the phrase ``reasonable amount'' is overly broad and 
subject to a wide range of interpretation. Therefore, for purposes of 
Rule 1.17(c)(5)(xiii), the maximum amount eligible for exclusion from 
the five percent capital charge is proposed to be the greater of: (1) 
150 percent of the amount currently required to support futures and 
option transactions in an account; or (2) 100 percent of the maximum 
amount required to support futures and option transactions at any time 
during the preceding six-month period. The Commission believes that the 
proposed amendment would provide the cash management flexibility that 
the JAC has requested on behalf of its member FCMs and IBIs without 
unnecessarily broadening the capital charge exemption. The Commission 
further believes that the proposal would provide greater legal 
certainty than the phrase ``reasonable amount.''
    The JAC also has asked the Commission to amend Rule 
1.17(c)(5)(xiii) to eliminate the requirement that an FCM or IBI be 
responsible for monitoring the ultimate destination of funds deposited 
with a foreign broker in order for such funds to be exempt from the 
capital charge. As set forth above, to be exempt from the capital 
charge, the funds must be held in accordance with the mandates of the 
applicable Rule 30.10 order by the foreign broker itself, another 
foreign broker that has received confirmation of Rule 30.10 
``comparability relief,'' or at a depository that qualifies as a 
depository pursuant to Rule 30.7 and is within the jurisdiction of 
either foreign broker. In support of its request, the JAC has stated 
that requiring FCMs and IBIs to monitor the flow of funds deposited 
with a foreign broker is impractical from an operational standpoint and 
overly burdensome.
    By granting Rule 30.10 ``comparability relief'' to a foreign 
broker, the Commission has made a determination that the foreign broker 
is subject to a regulatory structure that is comparable to the 
regulatory structure imposed on entities that operate on U.S. exchanges 
by the Commodity Exchange Act and Commission regulations.\7\ Of 
particular relevance to the relief requested by the JAC, the 
Commission, as part of the Rule 30.10 petition process, assesses the 
extent to which a foreign regulator's or SRO's regulatory program 
imposes bona fide minimum financial requirements on its regulatees or 
members as well as the protections afforded customers by the 
segregation of funds and the bankruptcy rules.\8\ The Commission's 
determination that standards and protections exist pursuant to the 
foreign regulatory structure supports an easing of the capital charge.
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    \7\ U.S.C. 1 et seq. (1994).
    \8\ The specific elements examined in evaluating whether a 
particular foreign regulatory program provides a basis for 
permitting substituted compliance for purposes of exemptive relief 
pursuant to Rule 30.10 are set forth in Appendix A to Part 30.
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    Furthermore, the proposed amendments to the capital rule do not 
alter a foreign broker's obligation to comply with the applicable Rule 
30.10 order when dealing with the funds of U.S. customers trading on 
foreign futures and option markets nor an FCM's or IBI's obligation to 
comply with applicable provisions of Part 30. Accordingly, the 
Commission is proposing to amend Rule 1.17(c)(5)(xiii) to eliminate the 
requirement that, to be exempt from the capital charge, margin deposits 
must be held by the foreign broker itself, another foreign broker 
granted Rule 30.10 ``comparability relief,'' or a depository in the 
same jurisdiction as either foreign broker that qualifies as a 
depository for funds under Rule 30.7.

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The rule amendments discussed herein 
would affect registered FCMs and IBIs. 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.\9\
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    \9\ 47 FR 18618-18621 (April 30, 1982).
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    With respect to IBIs, the Commission stated that it is appropriate 
to evaluate within the context of a particular rule whether some or all 
introducing brokers should be considered to be small entities and, if 
so, to analyze the economic impact on such entities at that time.\10\ 
The proposed amendments to Rule 1.17(c)(5)(xiii) do not impose 
additional requirements on an IBI. Thus, on behalf of the Commission, 
the Chairman certifies that the proposed amendments will not have a 
significant economic impact on a substantial number of small entities.
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    \10\ 48 FR 35248, 35275-78 (August 3, 1983).
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B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. (Supp. 
I 1995), imposes certain requirements on federal agencies (including 
the Commission) to review rules and rule amendments to evaluate the 
information collection burden that they impose on the public. The 
Commission believes that the proposed amendments to Rule 
1.17(c)(5)(xiii) will impose a minimal information collection burden on 
the public, namely those FCMs and IBIs who wish to take advantage of 
the exemption will be required to maintain a record of the margins 
required to be on deposit with a foreign broker over the preceding six 
month period. However, this burden is believed to be minimal when 
compared to the capital savings to be generated by the exclusion of 
increased amounts from the capital charge.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures.

    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, Sections 
4(b), 4f, 4g and 8a(5) thereof, 7 U.S.C. 6(b), 6d, 6g and 12a(5), the 
Commission hereby proposes to amend 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 1.17 is proposed to be amended by revising paragraph 
(c)(5)(xiii) to read as follows:

[[Page 52054]]

Sec. 1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

* * * * *
    (c) * * *
    (5) * * *
    (xiii) Five percent of all unsecured receivables includable under 
paragraph (c)(2)(ii)(D) of this section used by the applicant or 
registrant in computing ``net capital'' and which are not due from:
    (A) A registered futures commission merchant;
    (B) A broker or dealer that is registered as such with the 
Securities and Exchange Commission; or
    (C) A foreign broker that has been granted comparability relief 
pursuant to Sec. 30.10 of this chapter, Provided, however, that the 
amount of the unsecured receivable not subject to the five percent 
capital charge is no greater than 150 percent of the current amount 
required to maintain futures and option positions in accounts with the 
foreign broker, or 100 percent of such greater amount required to 
maintain futures and option positions in the accounts at any time 
during the previous six-month period, and Provided that, in the case of 
customer funds, such account is treated in accordance with the special 
requirements of the applicable Commission order issued under Sec. 30.10 
of this chapter.
* * * * *

    Issued in Washington D.C. on August 23, 2000 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-21904 Filed 8-25-00; 8:45 am]
BILLING CODE 6351-01-P