[Federal Register Volume 66, Number 152 (Tuesday, August 7, 2001)]
[Rules and Regulations]
[Pages 41131-41133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19722]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB52


Recordkeeping Amendments to the Daily Computation of the Amount 
of Customer Funds Required To Be Segregated

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
amending Rule 1.32 to permit a futures commission merchant (``FCM''), 
in computing the amount of customer funds required to be held in 
segregated accounts pursuant to Section 4d of the Commodity Exchange 
Act (``Act''), to offset a net liquidating deficit or debit ledger 
balance in a customer's account with securities that have a ``ready 
market'', as defined by Rule 15c3-1(c)(11) of the Securities and 
Exchange Commission (``SEC''), and that are deposited by such customer 
to margin or guarantee the futures and option positions in such 
customer's account.\1\ The amendments limit the amount of the offset to 
the market value of the securities, less the applicable haircuts set 
forth in SEC Rule 15c3-1(c)(2)(vi). The amendments also require an FCM 
to maintain a security interest in the securities, including a written 
authorization to liquidate the securities at the FCM's discretion, and 
to segregate the securities in a safekeeping account with a bank, trust 
company, clearing organization of a contract market, or another FCM.
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    \1\ Commission regulations cited herein may be found at 17 CFR 
Ch. I (2000). SEC regulations cited herein may be found at 17 CFR 
Ch. II (2000). The Commodity Exchange Act may be found at 7 U.S.C. 1 
et. seq. (1994), as amended by the Commodity Futures Modernization 
Act of 2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

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EFFECTIVE DATE: August 7, 2001.

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]

SUPPLEMENTARY INFORMATION

I. Rule Amendments

    On October 31, 2000,\2\ the Commission published for comment 
proposed amendments to Rule 1.32 that would permit an FCM, in computing 
the amount of customer funds required to be held in segregated accounts 
pursuant to Section 4d of the Act, to offset a net liquidating deficit 
or a net debit balance in a customer's commodity trading account with 
securities deposited by such customer to margin or guarantee his 
account (the ``proposing release'').\3\ The comment period expired on 
December 1, 2000. The National Futures Association (``NFA'') filed the 
only comment letter. NFA supported the proposed amendments. The 
Commission is, therefore, adopting the amendments as proposed.
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    \2\ 65 FR 64904 (October 31, 2000).
    \3\ A distinction is sometimes drawn between a net liquidating 
deficit and a debit balance. A net liquidating deficit is an amount 
owed to the FCM resulting from the combination of the customer's 
debit or credit ledger balance and the mark-to-market gain or loss 
on any open positions in the customer's account. A debit balance is 
the amount owed to the FCM by the customer represented by the debit 
ledger balance, and implies that there are no open positions in the 
account.
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    Section 4d of the Act requires, among other things, that an FCM 
segregate from its own assets all money, securities, and other property 
held for customers as margin for their commodity futures and option 
contracts, as well as gains accruing to such customers from open 
futures and option positions. The statute also prohibits an FCM from 
using the money, securities, or property of one customer to margin or 
secure futures or option positions of another customer.
    Commission Regulations 1.20 through 1.30 implement the segregation 
of funds provisions of Section 4d. Rule 1.32, a related recordkeeping 
regulation, requires each FCM to prepare a daily computation which 
shows: (1) The amount of funds that an FCM is required to segregate for 
customers who are trading on U.S. commodity exchanges pursuant to the 
Act and Commission regulations; (2) the amount of funds the FCM 
actually has in segregated accounts; and (3) the amount, if any, of the 
FCM's residual interest in the customer funds segregated. The 
computations required by Rule 1.32 are hereinafter collectively 
referred to as the ``segregation computation''.\4\
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    \4\ Regulation 1.32 further requires that an FCM complete the 
segregation computation for each trading day prior to 12:00 noon on 
the next business day and that the computation, and all supporting 
data, be maintained for a five-year period in accordance with 
Commission Rule 1.31.
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    Currently, in preparing the segregation computation, an FCM may 
offset a net liquidating deficit or a net debit balance in a customer's 
commodity trading account with U.S. Treasury obligations that are 
deposited by such customer to margin or guarantee his account. An FCM 
is not permitted, however, to offset a net liquidating deficit or net 
debit balance by the value of any other readily marketable securities 
deposited by the customer.\5\
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    \5\ The proposing release contains a more detailed explanation 
of the development of the disparate treatment afforded U.S. 
Treasuries and other readily marketable securities in offsetting net 
liquidating deficits or net debit balances.
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    The amendments to Rule 1.32 permit an FCM, in computing the amount 
of customer funds required to be held in segregated accounts pursuant 
to Section 4d of the Act, to offset a net liquidating deficit or net 
debit balance in a customer's account with securities that have a 
``ready market'' as defined by SEC Rule 15c3-1(c)(11). SEC Rule 15c3-
1(c)(11) defines ``ready market'' to include a recognized established 
securities market in which there exist independent bona fide offers to 
buy and sell so that a price reasonably related to the last sales price 
or current bona fide

[[Page 41132]]

competitive bid and offer quotations can be determined for a particular 
security almost instantaneously and where payment will be received in 
settlement of a sale at such price within a relatively short time 
conforming to trade custom.\6\ Therefore the amendments expand the 
securities against which an FCM could offset a customer's net 
liquidating deficit or net debit balance from just U.S. Treasuries to 
any security that has a ready market as defined in the SEC's rule.\7\
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    \6\ The definition goes on to say that a ``ready market'' will 
also be deemed to exist where securities have been accepted as 
collateral for a loan by a bank as defined in section 3(a)(6) of the 
Securities and Exchange Act of 1934 and where the broker or dealer 
demonstrates to its Examining Authority that such securities 
adequately secure such loans as that term is defined in Rule 15c3-
1(c)(5). This portion of the definition of a ``ready market'' is not 
applicable to the amended Rule 1.32.
    \7\ For example, if a customer deposits equity securities with a 
current market value of $100,000 as margin and his account incurs a 
$20,000 trading loss, the customer's account has a net equity of 
$80,000. The current interpretations of the segregation requirement, 
however, require the FCM to maintain the full $100,000 in 
segregation. The FCM generally meets this obligation by depositing 
an additional $20,000 of its own cash or U.S. Treasury securities 
into the segregation account.
    Under amended Rule 1.32, an FCM would be permitted to offset a 
customer's net deficit or debit balance by the fair market value of 
any readily marketable securities deposited by such customer. In the 
above example, the FCM would not have to deposit $20,000 of its own 
funds into the segregation account provided that the fair market 
value of the securities, net of certain haircuts as discussed below, 
exceeded $80,000.
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    The amount of the offset is limited to the market value of the 
securities, less applicable haircuts set forth in SEC Rule 15c3-
1(c)(2)(vi).\8\ Furthermore, an FCM is required to maintain a security 
interest in the securities, including the written authorization to 
liquidate the securities at the FCM's discretion, and to segregate the 
securities in a safekeeping account with a bank, trust company, 
clearing organization of a contract market, or another FCM.\9\
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    \8\ SEC Rule 15c3-1(c)(2)(vi) sets forth haircuts that a broker 
or dealer is required to apply to investment securities in computing 
its adjusted net capital. This Rule and the haircuts are 
incorporated by reference in the Commission's net capital rule. See 
Commission Rule 1.17(c)(2)(vi)(B).
    \9\ An FCM is also required to set aside in special accounts a 
certain amount of funds for U.S.-domiciled customers who trade on 
non-U.S. commodity markets. (See Commission Rule 30.7, which 
identifies this as the ``secured amount.'') Unlike Section 4d of the 
Act and Commission Rule 1.20, which require an FCM to segregate for 
the total net liquidating equities in accounts of customers who are 
trading on U.S. markets, Rule 30.7 requires the FCM to set aside 
only an amount that equals the margin required on foreign market 
open positions, plus or minus the mark-to-market gain or loss on 
such positions. This is normally less than the net liquidating 
equity in such accounts. However, an FCM is permitted to set aside 
funds for customers trading on foreign markets in an amount which is 
calculated in the same manner as that done in determining Section 4d 
segregation requirements. If an FCM chooses to calculate its foreign 
secured amount requirement using the same method as it uses to 
calculate the segregation requirements under section 4d of the Act, 
then the FCM would be able to use the same type of offset as 
permitted under amended Rule 1.32.
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II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994), 
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.\10\ 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.\11\ In this regard, the Commission 
notes that it did not receive any comments regarding the RFA 
implications of the amendments to Rule 1.32.
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    \10\ 47 FR 18618, 18619-18620 (April 30, 1982).
    \11\ 47 FR 18619-18620.
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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 1.32 do not impose an 
information collection burden on the public.

C. Administrative Procedure Act

    The Administrative Procedure Act provides that the required 
publication of a substantive rule shall be made not less than 30 days 
before its effective date, but provides an exception for ``a 
substantive rule which grants or recognizes an exemption or relieves a 
restriction.'' \12\ Amended Rule 1.32 will relieve current restrictions 
imposed upon FCMs by permitting an FCM, in computing the amount of 
customer funds required to be held in segregated accounts pursuant to 
Section 4d of the Act, to offset a net liquidating deficit or debit 
ledger balance in a customer's account with readily marketable 
securities that were deposited by such customer to margin or guarantee 
the futures and option positions in such customer's account. 
Accordingly, the Commission has determined to make Rule 1.32 effective 
immediately.
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    \12\ 5 U.S.C. 553(d) (1994).
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D. Cost Benefit Analysis

    Section 15 of the Act, as amended by the Commodity Futures 
Modernization Act of 2000, requires the Commission to consider the 
costs and benefits of its actions before issuing a new regulation under 
the Act. The amended section 15 further specifies that costs and 
benefits shall be evaluated in light of five broad areas of market and 
public concern: protection of market participants and the public; 
efficiency, competitiveness, and financial integrity of futures 
markets; price discovery; sound risk management practices; and other 
public interest considerations.
    The Commission has considered the amendments in light of the 
factors listed above and has determined to adopt the amendments as 
proposed. In this regard, the amendments to Rule 1.32 are expected to 
increase the efficiency and competitiveness of FCMs by reducing the 
amount of capital that such FCMs are obligated to contribute to 
customer segregation accounts to cover deficit or debit balances when 
the deficits or debits may be offset by readily marketable securities 
deposited as margin by customers. Furthermore, the amendments are not 
expected to have a significant adverse impact on the protections 
currently afforded customers and market participants as FCMs will 
continue to be subject to the Commission's requirements regarding the 
segregation of customer funds and other financial requirements.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity Futures, Consumer protection, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, sections 
4d, 4f, 4g and 8a(5) thereof, 7 U.S.C. 6d, 6f, 6g and 12a(5) (1994), as 
amended by the Commodity Futures Modernization Act of 2000, Appendix E 
of Pub. L. No. 106-554, 114 Stat. 2763 (2000), 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 (1994), as

[[Page 41133]]

amended by the Commodity Futures Modernization Act of 2000, Appendix 
E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).


    2. Section 1.32 is revised to read as follows:


Sec. 1.32  Segregated account; daily computation and record.

    (a) Each futures commission merchant must compute as of the close 
of each business day:
    (1) The total amount of customer funds on deposit in segregated 
accounts on behalf of commodity and option customers;
    (2) the amount of such customer funds required by the Act and these 
regulations to be on deposit in segregated accounts on behalf of such 
commodity and option customers; and
    (3) the amount of the futures commission merchant's residual 
interest in such customer funds.
    (b) In computing the amount of funds required to be in segregated 
accounts, a futures commission merchant may offset any net deficit in a 
particular customer's account against the current market value of 
readily marketable securities, less applicable percentage deductions 
(i.e., ``securities haircuts'') as set forth in Rule 15c3-1(c)(2)(vi) 
of the Securities and Exchange Commission (17 CFR 241.15c3-
1(c)(2)(vi)), held for the same customer's account. The futures 
commission merchant must maintain a security interest in the 
securities, including a written authorization to liquidate the 
securities at the futures commission merchant's discretion, and must 
segregate the securities in a safekeeping account with a bank, trust 
company, clearing organization of a contract market, or another futures 
commission merchant. For purposes of this section, a security will be 
considered readily marketable if it is traded on a ``ready market'' as 
defined in Rule 15c3-1(c)(11)(i) of the Securities and Exchange 
Commission (17 CFR 240.15c3-1(c)(11)(i)).
    (c) The daily computations required by this section must be 
completed by the futures commission merchant prior to noon on the next 
business day and must be kept, together with all supporting data, in 
accordance with the requirements of Sec. 1.31.

    Issued in Washington, DC on August 1, 2001 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-19722 Filed 8-6-01; 8:45 am]
BILLING CODE 6351-01-P