[Federal Register Volume 65, Number 216 (Tuesday, November 7, 2000)]
[Rules and Regulations]
[Pages 66618-66619]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28492]


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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: Final rule.

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SUMMARY: The Commodity Futures Trading Commission. (``Commission'') is 
amending its net capital rule to expand the exemption from the five 
percent capital charge that a futures commission merchant (``FCM'') or 
introducing broker is required to take against unsecured foreign broker 
receivables in computing its adjusted net capital.\1\
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    \1\ An introducing broker (``IB'') is required to maintain 
minimum adjusted net capital of $30,000, unless the IB has entered 
into a guarantee agreement with an FCM in the form prescribed in the 
Commission's rules. The industry has commonly distinguished between 
such IBs as Guaranteed IBs and Independent IBs (``IBIs''), the 
latter being subject to the $30,000 minimum capital requirement. The 
rule changes being adopted herein affect those IBs identified as 
IBIs.

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EFFECTIVE DATE: December 7, 2000.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
Three Lafayette Center, 1155 21st Street, NW, Washington, DC 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) 353-6642; 
electronic mail [email protected].

SUPPLEMENTARY INFORMATION:

I. Rule Amendments

    On August 28, 2000, the Commission published for comment proposed 
amendments to Rule 1.17(c)(5)(xiii) (``proposing release'').\2\ The 
comment period expired on September 27, 2000. No comments were 
received. Accordingly, the Commission is adopting the amendments as 
proposed.
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    \2\ 65 FR 52051 (August 28, 2000).
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    Commission Rule 1.17(c)(5)(xiii) requires an FCM or IBI, in 
computing its adjusted net capital, to take a five percent capital 
charge on any unsecured receivables resulting from commodity futures 
and option transactions executed on foreign boards of trade and which 
are due from foreign brokers that are not registered with the 
Commission as FCMs or with the Securities and Exchange Commission 
(``SEC'') as securities brokers or dealers.\3\ As more fully set forth 
in the proposing release, Rule 1.17(c)(5)(xiii) currently permits an 
FCM or IBI to exclude from the five percent capital charge that portion 
of the unsecured receivable that represents amounts required to be on 
deposit to maintain futures and option positions transacted on foreign 
boards of trade. Deposits in excess of required margin or performance 
bond are subject to the capital charge. In addition, to be exempt from 
the capital charge, the receivable must be due from a foreign broker 
that has received confirmation of ``comparability relief'' in 
accordance with a Commission order issued under Rule 30.10 and the 
margin deposits must be held 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 which is located within the same 
jurisdiction as either foreign broker.\4\
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    \3\ Commission regulations cited herein may be found at 17 CFR 
Ch. I (2000).
    \4\ 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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    The amendments being adopted herein increase the maximum amount 
eligible for exclusion from the five percent capital charge to the 
greater of: 150 percent of the amount immediately required to support 
futures and option transactions in an account; or 100 percent of the 
maximum amount required to support futures and option transactions at 
any time during the preceding six-month period. The amendments are 
intended to provide FCMs and IBIs with greater flexibility with respect 
to their cash and risk management while also reducing costs associated 
with frequent transfers of excess margin funds out of foreign brokers 
in order to avoid the five percent capital charge.
    The amendments also eliminate the requirement that an FCM or IBI be 
responsible for monitoring the ultimate destination of margin funds 
deposited with a Rule 30.10 foreign broker in order for such funds to 
qualify for the exemption from the capital charge. As set forth in the 
proposing release, 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 structure imposed on entities that operate on U.S. futures 
exchanges. Of particular relevance is that the Commission, as part of 
the Rule 30.10 petition process, assesses the extent to which a foreign 
broker is subject to a regulatory program that imposes bona fide 
minimum financial requirements on its regulatees or members and that 
provides for the protection of customers by the segregation of funds 
and bankruptcy rules.\5\ The Commission's determination that these 
standards and protections exist and are enforced supports an easing of 
the capital charge.
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    \5\ 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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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611, 
requires that agencies, in adopting rules, consider the impact of those 
rules on small businesses. The Commission has previously established 
certain definitions of ``small entities'' to be used by the Commission 
in evaluating the impact of its rules on such entities.\6\ The 
Commission previously has determined

[[Page 66619]]

that registered FCMs are not small entities for the purposes of the 
RFA.\7\ 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 broker should be considered to be small 
entities and, if so, to analyze the economic impact on such entities at 
that time.\8\ The amendments to Rule 1.17(c)(5)(xiii) expanding the 
amount of funds that may be excluded from the foreign brokers 
receivable capital charge do not impose additional requirements on an 
IBI. Therefore, the Chairman, on behalf of the Commission, certifies 
that these regulations will not have a significant economic impact on a 
substantial number of small entities.
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    \6\ 47 FR 18618-18621 (April 30, 1982).
    \7\ 47 FR 18619-1820.
    \8\ 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 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 amends Chapter I of Title 17 of the Code of Federal 
Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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

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


    2. Section 1.17 is amended by revising paragraph (c)(5)(xiii) to 
read as follows:


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, DC, on November 1, 2000, by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-28492 Filed 11-6-00; 8:45 am]
BILLING CODE 6351-01-M