[Federal Register Volume 68, Number 23 (Tuesday, February 4, 2003)]
[Rules and Regulations]
[Pages 5545-5562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2508]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 30, and 190

RIN 3038-AB31


Denomination of Customer Funds and Location of Depositories

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is adopting a new Rule 1.49 that permits futures commission 
merchants and derivatives clearing organizations, under certain 
conditions, to deposit customer funds in foreign depositories and in 
certain currencies other than United States dollars. The Commission is 
also adopting an amendment to Appendix B of its bankruptcy rules that 
governs the distribution of property where the bankrupt futures 
commission merchant or derivatives clearing organization maintains 
customer property in depositories outside the United States or in a 
foreign currency. This new distributional framework is intended to 
assure that customers whose funds are held in a United States 
depository will not be adversely affected by a shortfall in the pool of 
funds held in a depository outside the United States that is due to the 
sovereign action of a foreign government or court. The rule replaces 
Financial and Segregation Interpretation No. 12.

EFFECTIVE DATE: March 6, 2003.

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Deputy Director, 
Compliance and Registration Section, or Michael A. Piracci, Attorney-
Advisor, Division of Clearing and Intermediary Oversight, and for 
further information regarding amendments to appendix B of part 190, 
contact Robert B. Wasserman, Associate Director, Division of Clearing 
and Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5430.

SUPPLEMENTARY INFORMATION: 

I. Background

    One of the most important functions of the Commodity Exchange Act 
(the ``Act'')\1\ and the rules thereunder is the protection of customer 
funds. Section 4d(a)(2) of the Act requires that every futures 
commission merchant (``FCM''):

    \1\ 7 U.S.C. 1 et seq (2000).

Treat and deal with all money, securities, and property received by 
such person to margin, guarantee, or secure the trades or contracts 
of any customer of such person, or accruing to such customer as the 
result of such trades or contracts, as belonging to such customer. 
Such money, securities, and property shall be separately accounted 
for and shall not be commingled with the funds of such commission 
merchant or be used to margin or guarantee the trades or contracts, 
or to secure or extend the credit, of any customer or person other 
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than the one for whom the same are held.

    Prior to 1988, the Commission, and its predecessor agency, the 
Commodity Exchange Authority, had construed this provision to require 
that customer funds deposited with an FCM relating to trading on a 
domestic exchange be held in the United States (``U.S.''), unless the 
funds were being held for a foreign-domiciled customer.\2\ In light of 
the growing internationalization of the futures and options markets, 
the Commission in 1988 issued Financial and Segregation Interpretation 
No. 12 (``Interp. 12''),\3\ which provided that, under certain 
conditions, an FCM may deposit segregated funds of customers domiciled 
in the U.S. in foreign depositories.
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    \2\ See Commodity Exchange Authority Administrative 
Determination No. 238 (Sep. 4, 1974); see also Foreign Options and 
Foreign Futures Transactions, 51 FR 12104, note 36 (Apr. 8, 1986); 
Leverage Transactions, [1982-1984 Transfer Binder] Comm. Fut. L. 
Rep. [para] 21,742 at p. 26,952, note 52 (May 25, 1983).
    \3\ Financial and Segregation Interpretation No. 12--Deposit of 
Customer Funds in Foreign Depositories, 53 FR 46911 (Nov. 21, 1988). 
The document was published in the Federal Register as a Statement of 
Agency Interpretation. It was also published in the Commodity 
Futures Law Reporter at [para] 7122 together with a series of 
Financial and Segregation Interpretations issued by the Commission's 
Division of Trading and Markets.
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    As stated above, when the Commission issued Interp. 12, it noted 
that the change in the Commission's interpretation concerning 
appropriate depositories for segregated customer funds was appropriate 
``in light of the growing internationalization of the futures and 
option markets.''\4\ In the more than 14 years since Interp. 12 was 
issued, the futures and options markets, along with almost all other 
segments of the business world, have seen greater internationalization. 
As a result, there is an increased need and desire of certain customers 
to be able to more easily conduct business in currencies other than the 
U.S. dollar.
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    \4\ Id. at 46912.
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    In the Commodity Futures Modernization Act of 2000 (the 
``CFMA''),\5\ Congress noted that ``regulatory impediments to the 
operation of global interests can compromise the competitiveness of 
[U.S.] business'' and that regulatory policy should be ``flexible to 
account for rapidly changing derivatives industry practices.''\6\ Due 
to restrictions placed on holding segregated funds offshore, U.S. 
markets and futures professionals may find themselves at a disadvantage 
to their foreign competitors. One of the purposes of the CFMA is to 
``enhance the competitive position of [U.S.] financial institutions and 
financial markets.''\7\
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    \5\ Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
    \6\ Section 126(a) of the CFMA.
    \7\ Section 2(8) of the CFMA.
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    Based upon the foregoing, on August 7, 2002, the Commission 
proposed the rule being adopted herein.\8\ The Commission received two 
comment letters on the proposed rule. The commenters were the National 
Futures Association (``NFA''), a registered futures association, and 
the Futures Industry Association (``FIA''), an industry trade 
association. Both commenters stated that they supported the proposed 
rule and amendments, but each suggested certain changes and 
clarifications that they believed would be appropriate. These 
suggestions, along with the Commission's assessment of these 
suggestions, are discussed more fully in conjunction with the 
discussion of the appropriate section of the rule and amendments.
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    \8\ 67 FR 52641 (Aug. 13, 2002).

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[[Page 5546]]

II. The New Rule and Amendments

A. New Rule 1.49

1. Definitions
    In the proposed rule, the Commission had defined the terms ``non-
money center country'' and ``non-money center currency.'' These terms, 
however, were not used elsewhere in Rule 1.49. Accordingly, the 
Commission is not including these definitions in the final rule.
2. Permissible Currencies
    The Commission is adopting Rule 1.49 to provide that FCM 
obligations owed to customers shall be held in: (1) U.S. dollars; (2) a 
currency in which funds were deposited by the customer, or converted to 
at the request of the customer, to the extent of such deposits and 
conversions; or (3) a currency in which funds have accrued to the 
customer as a result of trading on a designated contract market or 
registered derivatives transaction execution facility (``DTF''). Any 
customer may deposit foreign currency with an FCM if the FCM permits 
it, not just those customers trading contracts priced and settled in a 
foreign currency.
    As noted above, the internationalization of the futures markets has 
resulted in customers who, for many different reasons, want funds 
denominated in currencies other than the U.S. dollar. If a customer or 
prospective customer of an FCM prefers to deposit funds with an FCM in 
a currency other than the U.S. dollar, or to convert funds from one 
currency to another, the FCM should not be prevented from accepting or 
holding funds in the preferred currency of the customer or prospective 
customer.
    An FCM may not convert customer funds from one currency to another 
without customer authorization. An account agreement could provide, 
however, that by placing an order in a contract settled in a particular 
currency, a customer agrees to convert to the appropriate currency 
funds sufficient to meet the applicable margin requirement. Under Rule 
1.49(b)(2), an FCM is required to prepare and maintain a written record 
each time customer funds are converted from one currency to another. 
The record must include the date the transaction was executed, the 
currencies converted, the amount converted, and the resulting amount. 
The FCM is also required to make the information contained in this 
record available to the customer upon the customer's request. 
Additionally, the Commission noted in the proposing release that, 
pursuant to Rule 1.33(a), the FCM must include this information in the 
monthly statements provided to the customer.
    FIA noted that FCMs frequently execute multiple transactions on 
behalf of a customer throughout a trading day. NFA noted that FCMs will 
often execute foreign currency transactions using bunched orders that 
combine orders involving multiple customers, multiple counterparties, 
and multiple transactions. To provide detailed information regarding 
each transaction on the customer's monthly statement would impose a 
significant burden on the FCM. FIA asked that the Commission confirm 
its view that providing the required information on the monthly 
statement in the aggregate rather than with respect to each transaction 
would be sufficient to meet the FCM's obligation under Rule 1.33. The 
Commission concurs that such a procedure would fulfill the FCM's 
obligation under Rule 1.33. As noted in the FIA comment letter, to be 
in compliance with Rule 1.49(b)(2), an FCM must be able to prepare a 
report that provides the details of individual transactions upon a 
customer's request.
    Another aspect of the internationalization of the futures and 
options markets is the increasing number of contracts offered on 
foreign financial instruments and indices. These contracts are priced 
and settled in the currency of the underlying instrument or index. 
Accordingly, accruals resulting from trading in such instruments will 
be in currency other than U.S. dollars. Under the rule, such accruals 
may be held in the applicable currency. A customer, of course, may 
request that such accruals be converted to U.S. dollars.
    Pursuant to Interp. 12, customers had to authorize the deposit of 
foreign currency funds into foreign depositories as part of a 
subordination agreement. The Commission is eliminating this written 
authorization requirement. If a customer deposits funds with an FCM in 
a currency other than U.S. dollars, or requests a conversion of funds 
to a non-U.S. dollar currency, the customer will be aware of the fact 
that the funds are being held in a currency other than U.S. dollars. 
With regard to funds other than U.S. dollars that are held for margin 
or have accrued to the customer as a result of trading in contracts 
priced and settled in a non-U.S. currency, the Commission notes that 
the specifications for contracts traded on designated contract markets 
are widely known and generally available.\9\ Accordingly, when a 
customer trades in a futures or options contract that is priced and 
settled in a currency other than U.S. dollars, a customer should be 
aware that the margin for and accruals from such trading may be held in 
the applicable currency.
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    \9\ Section 5(b)(7) of the Act and Section 5a(d)(4) of the Act 
require contract markets and derivatives transaction execution 
facilities, respectively, to make contract specifications publicly 
available. For example, the specifications for contracts traded on 
the Chicago Mercantile Exchange are available on its Web site at: 
http://www.cme.com.
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    In the proposing release, the Commission noted ``that if a customer 
has previously not traded in contracts that are priced and settled in a 
currency other than U.S. dollars, a firm should inform the customer if 
the accruals from the trades will be held in a currency other than U.S. 
dollars.''\10\ NFA and FIA both objected to this statement, as they 
believed it seemed to impose disclosure obligations beyond those under 
Commission Rule 1.55.\11\ It was not the Commission's intention to 
impose a disclosure obligation with respect to such customers and such 
contracts. Rather, as suggested by FIA in its letter, the Commission 
``intended solely to caution FCMs to consider whether they should make 
such disclosure'' by taking into consideration the facts and 
circumstances of the particular customer.
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    \10\ 67 FR at 52643. (Emphasis added).
    \11\ Rule 1.55 permits FCMs to open an account for an 
``institutional customer'' without first furnishing the customer 
with a disclosure statement.
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3. Location of Depositories
    The rule permits an FCM or derivatives clearing organization 
(``DCO'') to hold customer funds of any denomination in the U.S. or in 
any money center country (Canada, France, Italy, Germany, Japan, and 
the United Kingdom). Hence, customer funds of any denomination could be 
held in any of the Group of Seven (``G7'') countries. The G7 countries 
represent the world's largest industrial democracies. Representatives 
from these countries meet several times a year to coordinate their 
cooperation on issues of economic policy. In this regard, the U.S. and 
its financial regulatory agencies have had successful cooperation with 
the respective financial regulatory agencies of these countries.
    Both NFA and FIA indicated a desire to have the definition of a 
money center country expanded. NFA suggested that the definition 
include ``other locations with stable currencies and other indicia that 
customer funds will be relatively secure.'' The Commission has decided 
not to expand the definition in this manner. The Commission believes 
that the establishment of a broad and

[[Page 5547]]

subjective standard, as suggested by NFA, would be unwieldy in practice 
and could require the Commission to expend significant resources. To 
make a determination as suggested by NFA would require the Commission 
to conduct a broad evaluation of, among other things, a country's 
banking, monetary, and economic policies and systems.
    FIA suggested that the Commission expand the definition to include 
any country with which the Commission has an information sharing 
arrangement. When the Commission enters into an information sharing 
arrangement with another country, it does not undertake a complete 
analysis of the country's laws, policies, and systems, as they would 
pertain to the holding of customer funds. Moreover, a country may deny 
sharing information with the Commission under these arrangements if, 
among other things, it would constitute a violation of applicable laws. 
Accordingly, the Commission has decided not to extend the definition of 
money center country as suggested by FIA.
    In addition to the money center countries, an FCM or DCO also could 
hold any particular currency in the country of origin of that 
currency,\12\ except that customer funds may not be held in any of the 
restricted countries subject to sanctions by the Office of Foreign 
Assets Control (``OFAC'') of the U.S. Department of Treasury.\13\
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    \12\ For the Euro, the country of origin includes any country 
that is a member of the European Union and has recognized the Euro 
as its official currency.
    \13\ The list of restricted countries may be viewed on OFAC's 
Web site at http://www.ustreas.gov/ofac.
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    Proposed Rule 1.49(c)(3) provided that funds could be held outside 
the U.S. only to the extent specifically authorized by the customer. It 
further required the FCM to make and maintain a written record 
detailing the terms and conditions of any such authorization. For the 
reasons explained below, the Commission has significantly revised 
paragraph (c). As revised, paragraph (c) makes clear that customer 
consent will be required only when customer funds are held outside of 
the U.S. in a jurisdiction other than a money center country or the 
country of origin of the currency.
    As discussed above, an FCM or DCO may hold customer segregated 
funds in the following denominations: (1) In U.S. dollars; (2) in the 
currency deposited by the customer or converted at the customer's 
request; or (3) in the currency in which funds have accrued to the 
customer as the result of trading on a U.S. contract market or 
registered DTF. In the absence of customer instructions to the 
contrary, the Commission believes that a customer that deposits funds 
with an FCM or DCO in a foreign currency or requests that the funds on 
deposit be converted to a foreign currency should assume that the 
currency will be held in an account outside of the U.S. in the 
currency's country of origin. Similarly, accruals in a foreign currency 
should also be deemed to be held in the country of origin.\14\ 
Consequently, the Commission has concluded that requiring an FCM or DCO 
to obtain a customer's consent to hold a foreign currency in the 
currency's country of origin is unnecessary.
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    \14\ As noted earlier, a customer may request that any such 
accruals be converted to U.S. dollars.
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    With respect to money center countries, the Commission has 
previously determined that customer segregated funds denominated in a 
foreign currency may be held in a money center country. As the 
Commission noted in proposing Rule 1.49:

    The G7 countries represent the world's largest industrial 
democracies. Furthermore, representatives from these countries meet 
several times a year to coordinate their cooperation on issues of 
economic policy. In this regard, the United States and its financial 
regulatory agencies have had successful cooperation with the 
respective financial regulatory agencies of these countries.

    In these circumstances and in the absence of customer instructions 
to the contrary, the Commission believes that it would be appropriate 
for an FCM or DCO to hold customer funds denominated in a foreign 
currency in a money center country without receiving the customer's 
prior consent.
    Because funds held outside of the U.S. other than in the currency's 
country of origin or a money center country might pose different risks 
and different operational costs and benefits, the Commission believes 
that the customer must be able to choose whether, and to what extent, 
to incur such risks and costs. The Commission, however, is not 
establishing a particular format that a customer authorization must 
follow. A customer may authorize the holding of funds outside the U.S., 
a money center country, or in a country other than the currency's 
country of origin, in writing or orally.\15\ Authorization may be 
satisfied where a customer fails to object when informed that the 
customer's funds will be held outside the U.S., a money center country, 
or in a country other than the currency's country of origin. Moreover, 
the Commission notes that, just as under Rule 1.49(b)(1)(ii) regarding 
the conversion of customer funds, authorization may be obtained as part 
of the account agreement.
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    \15\ See Peltz v. SHB Commodities, Inc., 115 F.3d 1082 (2d Cir. 
1997); [1996-1998 Transfer Binder] Comm. Fut. L. Rep. (CCH) [para] 
27,052.
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    The rule does not require that a separate customer signature be 
obtained. Rule 1.49(c) simply requires that an FCM make and maintain a 
contemporaneous written record of any customer authorization to hold 
funds outside the U.S. in a country other than the currency's country 
of origin or a money center country. An FCM may choose to comply with 
this requirement in whatever manner it finds easiest. An FCM, if it 
chooses, may comply with this requirement as part of the account 
opening documents or, if done orally, by making a written memorandum or 
notation to be placed in the customer's file. The confirmation 
statement required pursuant to Commission Rule 1.33(b) may serve the 
purpose of meeting the requirement of a written record under Rule 
1.49(c). If, after receiving the confirmation statement, the customer 
objects to the transaction, the FCM must, of course, take steps to 
address the customer's concerns.
    FCMs and DCOs should also be aware that the Financial Action Task 
Force (``FATF'') of the Organization for Economic Co-Operation and 
Development maintains a list of non-cooperative countries or 
territories with respect to anti-money laundering programs and that the 
Secretary of the Treasury may designate, in accordance with Section 311 
of the Uniting and Strengthening America by Providing Appropriate Tools 
Required to Intercept and Obstruct Terrorism (``USA PATRIOT'') Act of 
2001,\16\ certain countries as areas of primary money laundering 
concern.\17\ Before holding any customer funds in a depository in any 
of these countries or territories, FCMs and DCOs should undertake due 
diligence to assure themselves that the depository is reputable, has 
appropriate operational systems to safeguard customer funds, and has an 
adequate program to deter money laundering. \18\
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    \16\ Pub. L. 107-56; 115 Stat. 272 (2001).
    \17\ The list of non-cooperative countries and territories may 
be viewed on FATF's Web site at: http://www1.oecd.org/fatf/. 
Countries that have been designated by the Secretary of the Treasury 
as being of primary money laundering concern may be viewed on the 
Department of Treasury Web site at: http://www.ustreas.gov.
    \18\ On April 23, 2002, the Commission approved NFA Compliance 
Rule 2-9(c) and a related Interpretive Notice that set forth minimum 
standards for anti-money laundering programs of NFA FCM members.

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[[Page 5548]]

4. Qualifications of Depositories
    The Commission proposed that, if the depository is located in the 
U.S., it must be: (1) A bank or trust company; (2) an FCM registered 
with the Commission; or (3) a DCO. The Commission also proposed that, 
if the depository is located outside the U.S., it must be: (1) A bank 
or trust company that has (a) in excess of $1 billion in regulatory 
capital, or (b) commercial paper or long-term debt rated in the highest 
rating category by at least one nationally recognized statistical 
rating organization (where the bank or trust company is part of a 
holding company system, the holding company may satisfy the rating 
criterion); (2) an FCM registered with the Commission; or (3) a DCO.
    Both NFA and FIA noted that, under Commission Rule 30.7, a bank 
located outside the U.S. is recognized as a permitted depository if its 
commercial paper or long-term debt is rated in one of the two highest 
rating categories.\19\ NFA and FIA urged the Commission to make Rule 
1.49 consistent with Rule 30.7. The Commission has determined that this 
is appropriate. Accordingly, the final rule will permit the use of a 
bank outside the U.S. whose commercial paper or long-term debt is rated 
in one of the two highest rating categories of a nationally recognized 
statistical rating organization. The term ``nationally recognized 
statistical rating organization'' as used in this release refers to 
those rating organizations designated as such by the Securities and 
Exchange Commission (``SEC'').\20\ Although the Commission did not 
receive any comments on this point, in order to avoid any possible 
confusion, the Commission wishes to make clear that when using the term 
``nationally recognized statistical rating organization'' in Rules 1.49 
and 30.7, it refers to a rating organization designated as a 
``nationally recognized statistical rating organization'' by the SEC.
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    \19\ See CFTC Advisory 87-5, [1987-1990 Transfer Binder] Comm. 
Fut. L. Rep. (CCH) [para] 23,997 (Dec. 3, 1987).
    \20\ See, e.g., 17 CFR 240.15c3-1; see also 17 CFR Sec.  270.2a-
7(a)(17).
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    NFA asked the Commission to confirm that, under Rule 1.49, funds 
for the trading of security futures could be deposited with an FCM 
registered pursuant to Section 4f(a)(2) of the Act.\21\ The Commission 
confirms that an FCM registered pursuant to Section 4f(a)(2) would be a 
qualified depository for security futures funds under Rule 1.49.\22\
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    \21\ Section 4f(a)(2) of the Act provides for notice-
registration of securities broker-dealers whose only futures-related 
activity involves security futures products. See also, 66 FR 43080 
(Aug. 17, 2001).
    \22\ The Commission notes that FCMs registered pursuant to 
Section 4f(a)(2) may only accept such funds in accordance with any 
applicable rules promulgated by the SEC.
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    Only depositories that provide the FCM or DCO with the written 
acknowledgment required under Commission Rules 1.20 or 1.26 may hold 
customer funds required to be segregated.\23\ However, a DCO acting as 
a depository does not need to provide an acknowledgment letter to an 
FCM where the DCO's rules provide for the segregation of funds held on 
behalf of customers.\24\
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    \23\ Commission Rule 1.20 provides that, when an FCM or DCO 
deposits customer funds with a depository, the FCM or DCO must 
obtain and retain a written acknowledgement from the depository that 
it was informed that the funds are subject to the provisions of the 
Act and Commission regulations. Rule 1.26 requires an FCM or DCO to 
obtain such an acknowledgment in regard to the deposit of 
instruments purchased with customer funds as described under Rule 
1.25.
    \24\ See 65 FR 77993, 78009-13 (Dec. 13, 2000) (amending, among 
other things, Rules 1.20 and 1.26 to provide that a DCO acting as a 
depository does not need to provide an acknowledgement letter where 
the DCO's rules provide for the segregation of funds held on behalf 
of customers); 65 FR 82270 (Dec. 28, 2000) (moving forward the 
effective date of the amendments to Rule 1.20 and 1.26 to December 
28, 2000).
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5. Segregation Requirements
    As noted above, protection of customer funds is one of the most 
important purposes of the Act and the Commission's regulations. 
Customer funds must be segregated so as to assure that the obligations 
owed to customers will be met. Through segregation, customer funds are 
readily identifiable in the event that a registrant becomes insolvent. 
Accordingly, Rule 1.49 requires that the FCM or DCO, at the close of 
each business day, have in segregated accounts on behalf of its 
customers sufficient U.S. dollars held in the U.S. to meet all U.S. 
dollar obligations and sufficient funds in each other currency to meet 
obligations in such currency with certain permitted substitutions. The 
segregation requirements of the rule are meant to ensure that FCMs and 
DCOs maintain enough funds, and in the appropriate currency, to meet 
the obligations owed to customers.
    As noted, the rule permits limited substitutions among currencies. 
U.S. dollars held in the U.S. may be used to meet obligations 
denominated in any other currency. Money center currencies and U.S. 
dollars held in money center countries may be held to meet obligations 
denominated in currencies other than the U.S. dollar. In essence, three 
tiers of currencies have been established, U.S. dollars held in the 
U.S. (``Tier I''), U.S. dollars and money center currencies held in 
money center countries or money center currencies held in the U.S. 
(``Tier II''), and currencies other than U.S. dollars and money-center 
currencies (``Tier III''). Tier I currency could be used for any 
obligation. For U.S. dollar obligations to customers, only Tier I 
currency could be used. Tier II currencies could be used for any 
obligation except U.S. dollars. Tier III currencies could only be used 
for obligations denominated in that particular currency.

B. Recordkeeping

    The Commission is also amending Rule 1.32 to require FCMs to 
compute segregated funds on a currency-by-currency basis if they are 
held in other than U.S. dollars, in accordance with new Rule 1.49. 
Under Rule 1.49, customer funds may be held in the U.S., a money center 
country, or the country of origin of the currency. Rule 1.49 also would 
require FCMs and DCOs that hold funds in foreign currency or offshore 
to maintain records sufficient to demonstrate compliance with the 
additional segregation requirements set forth in Rule 1.49(e).

C. Bankruptcy

    In Interp. 12, the Commission noted two types of risk associated 
with holding funds offshore that might result in customers failing to 
fully recover segregated funds, either upon demand or in a bankruptcy 
or receivership, (1) currency risk and (2) location risk.\25\
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    \25\ 53 FR at 46912.
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    Currency risk is the risk of currency exchange rate fluctuations. 
This can be a concern where an FCM is in bankruptcy or receivership and 
it holds deposits denominated in currencies other than U.S. dollars. 
Due to changes in currency exchange rates, the size of the pool of 
funds available for distribution to customers and the size of claims 
against the funds may vary from day to day while the bankruptcy is 
pending, thereby exposing customers with U.S. dollar-denominated claims 
to currency risk.\26\
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    \26\ See 53 FR at 46915 (providing an example of currency risk).
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    Location risk is the risk that funds held in a foreign depository 
might not be fully recoverable by a customer upon demand or in the 
event of bankruptcy or receivership. It includes the risk that foreign 
depositories may not be cooperative with the Commission concerning 
questions of compliance with segregation requirements, or that a 
foreign court might refuse to enforce

[[Page 5549]]

provisions of the Commission's rules that prohibit a foreign depository 
from offsetting obligations of an FCM against customer funds. There is 
also a risk that, in the event of an FCM becoming insolvent, deposits 
at a foreign depository might be subject to an insolvency regime that 
is different from U.S. bankruptcy law. Additionally, a foreign 
government might limit the availability of funds by freezing or 
confiscating assets held within its jurisdiction or taking actions that 
affect its currency, even if the assets are located in the U.S.\27\
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    \27\ Presumably, certain sovereign action of a foreign 
government could affect foreign currency even if held in the U.S. 
Any discussion of sovereign risk herein pertains to non-U.S. 
currency, wherever held.
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    Pursuant to Interp. 12, before placing a customer's funds offshore, 
an FCM had to obtain from the customer a subordination agreement. In 
the agreement, the customer consented to the subordination of claims 
concerning funds held offshore or in a foreign currency to the claims 
of customers whose funds are held in U.S. dollars or in other 
currencies in the event the FCM was placed in bankruptcy or 
receivership and there were insufficient funds available for 
distribution from the funds held in that particular currency to satisfy 
customer claims against those funds. The subordination agreement was 
meant to protect customers whose funds were held in the U.S. and 
denominated in U.S. dollars from both currency and location risk that 
might result in customers receiving less than their pro-rata share of 
funds.
    In Interp. 12, the Commission stated that ``currency risk is 
similar to the price risk which can occur in cases where an FCM becomes 
insolvent while holding customer deposits in forms which fluctuate in 
value,'' using the example of Treasury securities.\28\ The Commission 
noted, however, that there were distinctions between price risk and 
currency risk, such that it was more equitable to spread the price risk 
among all customers in the event of a bankruptcy than it was the 
currency risk. First, the Commission indicated that all customers had 
the opportunity to post Treasury securities as margin, but under 
Interp. 12 only customers trading certain contracts could post foreign 
currency. Second, shortfalls in foreign currency accounts were more 
likely because of sovereign or location risk. Third, it would be easier 
and quicker for a trustee or receiver to convert Treasury securities 
held in the U.S. to cash than to convert foreign currency held offshore 
into U.S. dollars.
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    \28\ 53 FR at 46915, note 22.
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    Under Rule 1.49, subject to exchange margin rules, any customer may 
deposit foreign currency with an FCM, not just those trading certain 
contracts, provided the FCM is willing to accept foreign currency. In 
effect, such deposits would be similar to a customer depositing U.S. 
Treasury securities, which is currently permitted. In the case of a 
customer who deposits U.S. Treasury securities with an FCM to satisfy 
margin, there exists a price and liquidity risk related to the time it 
would take to convert those securities into U.S. dollars. Similarly, 
customer funds held in a foreign currency create an exposure during the 
time in which it takes to convert those currencies into U.S. dollars. 
As with converting U.S. Treasury securities, converting foreign 
currency into U.S. dollars, particularly those involving money center 
countries, is not extremely difficult. As a result, the Commission 
believes spreading currency risk among all customers is no less 
equitable than spreading price risk among all customers. Additionally, 
as discussed below, the rule and the amendment to Appendix B of the 
Commission's bankruptcy rules limit sovereign risk and protect 
customers who deposit U.S. dollars from being adversely affected due to 
the sovereign action of a foreign government or court, including the 
effect of a non-U.S. insolvency regime. As a result, the Commission 
believes spreading currency risk among all customers is no less 
equitable than spreading price risk among all customers.
    In adopting the new rule, the Commission has sought to address many 
aspects of currency and location risks through the safeguards discussed 
above. One aspect of location risk that remains, however, is sovereign 
risk. This is the risk that the actions of a foreign government or 
court might result in a shortfall in segregated funds.
    To address sovereign risk, the Commission is amending Framework 2 
of Appendix B of its bankruptcy rules to govern the distribution of 
customer funds segregated pursuant to the Act and Commission rules 
thereunder, held by an FCM or DCO in a depository outside the U.S. or 
in a foreign currency.\29\ The maintenance of customer funds in a 
depository outside the U.S. or denominated in a foreign currency would 
result, in certain circumstances, in the reduction of customer claims 
for such funds. For purposes of the bankruptcy convention, sovereign 
action of a foreign government or court would include, but not be 
limited to, the application or enforcement of statutes, rules, 
regulations, interpretations, advisories, decisions, or orders, formal 
or informal, by a federal, state, or provincial executive, legislature, 
judiciary, or government agency. Commission staff was asked whether the 
devaluation of a currency by government decree would be considered a 
sovereign action. The Commission believes such a decree would be a 
sovereign action for purposes of this bankruptcy convention. The 
Commission recognizes that it is impossible to envision every possible 
sovereign action. The Commission has purposely defined sovereign risk 
broadly so as to afford the bankruptcy trustee the ability to exercise 
its discretion and judgment to fully effectuate the purpose of this 
bankruptcy convention.
---------------------------------------------------------------------------

    \29\ The current Framework 2 sets forth a plan for distribution 
in the case of trades made on the Chicago Board of Trade-London 
International Financial Futures and Options Exchange Link 
(``Link''). Since the Link ceased operations in 1997, there is no 
need to maintain the existing Framework 2. Accordingly, the 
Commission is replacing the existing Framework 2 related to the Link 
with a new Framework 2 that addresses U.S. held segregated funds and 
non-U.S. held segregated funds.
---------------------------------------------------------------------------

    If an FCM filed, or had filed against it, a petition in bankruptcy 
and maintained customer funds in a depository located in the U.S. in a 
currency other than U.S. dollars, or in a depository outside the U.S., 
the following allocation procedure will be used to calculate the claim 
of each customer. After reducing each customer's claim by the 
percentage of the shortfall that is not attributable to sovereign 
action, certain customer claims will be further reduced based upon 
their exposure to loss attributable to sovereign action. This framework 
is designed to prevent a shortfall in funds held outside the U.S. or in 
a currency other than U.S. dollars resulting from the sovereign action 
of a foreign government or court from adversely affecting customers 
whose funds are held in U.S. dollars or in the U.S. or in a currency or 
a country other than the one undertaking the sovereign action resulting 
in the shortfall.
    NFA, in its comment letter, asked what would happen if a bankruptcy 
proceeding is commenced while a firm is in the process of converting 
customer funds between currencies. As noted in the framework, the first 
step to be taken in the event of a bankruptcy is to convert each 
customer's claim in each currency to U.S. Dollars at the exchange rate 
in effect on the Final Net Equity Determination Date as defined in

[[Page 5550]]

Commission Rule 190.01(s). Customer funds will be converted to U.S. 
Dollars from whatever currency in which the customer's funds are 
denominated as of the close of business on the Final Net Equity 
Determination Date.
    The Commission has drafted the bankruptcy convention as a means to 
give prospective bankruptcy trustees a certain amount of direction in 
the event of a bankruptcy involving customer funds denominated in 
currencies other than U.S. Dollars and held in depositories located 
throughout the world. Such a bankruptcy, however, is likely to be 
extremely complicated and it is impossible to anticipate every factual 
variant. Accordingly, the Commission, in adopting this bankruptcy 
convention, has endeavored to avoid undermining the ability of the 
trustee to use his or her own discretion and judgment as required by 
the particular facts of each bankruptcy.
    The rule and the framework to the bankruptcy appendix address the 
risks associated with holding customer funds outside the U.S. or in 
currencies other than U.S. dollars. Accordingly, the requirement that 
each customer who seeks to have funds held outside the U.S. must 
execute a separate subordination agreement has been eliminated.

III. Comments Regarding the Location of Foreign Futures or Foreign 
Options Secured Amount

    In the proposal, the Commission asked for comments as to whether, 
in light of the proposed rules, Rule 30.7 should also be amended to 
expand the types of depositories at which an FCM may hold the funds of 
foreign futures or options customers. Only NFA provided comments as to 
the expansion of Rule 30.7. NFA indicated its belief that Rule 30.7 
should be expanded to include all depositories permitted under Rule 
1.49(d)(3), as well as those already permitted under Rule 30.7. The 
Commission agrees. Accordingly, Rule 30.7 will be amended to provide 
that the funds of foreign futures or options customers may, in addition 
to those depositories already enumerated, be held at a bank or trust 
company outside the U.S. that has in excess of $1 billion of regulatory 
capital or whose commercial paper or long-term debt instrument, or if 
part of a holding company system, its holding company's commercial 
paper or long-term debt instrument, is rated in one of the two highest 
rating categories by at least one nationally recognized statistical 
rating organization.

IV. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'')\30\ requires that 
agencies, in proposing 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 in accordance with 
the RFA.\31\ The Commission has previously determined that FCMs are not 
small entities for the purpose of the RFA.\32\ Additionally, the 
Commission has determined that DCOs are not small entities for purposes 
of the RFA.\33\ The Commission notes that no comments were received 
from the public on the RFA and its relation to the new rule and rule 
amendments.
---------------------------------------------------------------------------

    \30\ 5 U.S.C. 601 et seq.
    \31\ 47 FR 18618 (April 30, 1982).
    \32\ 47 FR at 18619.
    \33\ 66 FR 45604, 45609 (Aug. 29, 2001).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This rulemaking contains information collection requirements. As 
required by the Paperwork Reduction Act of 1995, 44 U.S.C. 3507(d), the 
Commission has submitted a copy of the new rule and rule amendments to 
the Office of Management and Budget (OMB) for its review. No comments 
were received in response to the Commission's invitation in the 
proposed rules to comment on any potential paperwork burden associated 
with this regulation.

C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by Section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation under the Act. By its terms, 
Section 15(a) as amended does not require the Commission to quantify 
the costs and benefits of a new regulation or to determine whether the 
benefits of the regulation outweigh its costs. Rather, Section 15(a) 
simply requires the Commission to ``consider the costs and benefits'' 
of its action.
    Section 15(a) of the Act 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. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The new rule and rule amendments are intended to provide greater 
flexibility for FCMs, DCOs, and their customers in their methods of 
doing business. The Commission is considering the costs and benefits of 
these rules in light of the specific provisions of Section 15(a) of the 
Act:
    1. Protection of market participants and the public. To protect 
market participants and the public, the rule requires that depositories 
used to hold customer funds meet certain requirements to assure that 
customer funds are dealt with properly. Additionally, the rule includes 
a new framework to the bankruptcy appendix to protect customer funds 
held in U.S. dollars in the U.S. from being diluted if there is an 
insufficiency in the funds held outside the U.S. or in a currency other 
than U.S. dollars due to the sovereign action of a foreign government 
or court.
    2. Efficiency and competition. The rules are expected to benefit 
competition and market efficiency. The rule will help to facilitate 
continued international growth of the futures industry by permitting 
customer funds to be denominated in currencies other than U.S. dollars 
and to be held in offshore depositories.
    3. Financial integrity of futures markets and price discovery. The 
rule should have no effect, from the standpoint of imposing costs or 
creating benefits, on the financial integrity or price discovery 
function of the futures and options markets.
    4. Sound risk management practices. The Commission in adopting the 
rule and amendments has included risk-limiting features, such as 
requiring FCMs and DCOs to maintain sufficient funds to meet 
obligations in each currency, and requiring depositories to meet 
certain criteria, including signing an acknowledgment regarding the 
segregation requirements under the Act and Commission rules, to 
minimize the risks to customer funds.
    5. Other public interest considerations. The rule and amendments 
contained herein offer greater opportunity for taking full advantage of 
contracts being offered by domestic designated contract markets and 
registered DTFs and the ever increasing internationalization of the 
futures industry, while establishing safeguards for customer funds.

[[Page 5551]]

    After considering these factors, the Commission has determined to 
adopt the rule and amendments discussed above. The Commission invited 
public comment on its application of the cost-benefit provision. The 
Commission did not receive any comments regarding the application of 
the cost-benefit provision.

List of Subjects

17 CFR Part 1

    Brokers, Commodity Futures, Consumer protection.

17 CFR Part 30

    Commodity Futures, Consumer Protection

17 CFR Part 190

    Bankruptcy, Reporting and recordkeeping requirements.

    In consideration of the foregoing and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, Sections 
2(a)(1)(A), 4d, 8a(5), and 20, 7 U.S.C. 2(a)(1)(A), 6d, 12a(5), and 24, 
and 11 U.S.C. 362, 546, 548, 556 and 761-766, 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, 5, 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, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).


    2. Section 1.32 is amended by revising paragraph (a) introductory 
text 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, on a currency-by-currency basis:
* * * * *

    3. Section 1.49 is added to read as follows:


Sec.  1.49  Denomination of customer funds and location of 
depositories.

    (a) Definitions. For purposes of this section:
    (1) Money center country. This term means Canada, France, Italy, 
Germany, Japan, and the United Kingdom.
    (2) Money center currency. This term means the currency of any 
money center country and the Euro.
    (b) Permissible denominations of obligations. (1) Subject to the 
terms and conditions set forth in this section, a futures commission 
merchant's obligations to a customer shall be denominated:
    (i) In the United States dollar;
    (ii) In a currency in which funds were deposited by the customer or 
were converted at the request of the customer, to the extent of such 
deposits and conversions; or
    (iii) In a currency in which funds have accrued to the customer as 
a result of trading conducted on a designated contract market or 
registered derivatives transaction execution facility, to the extent of 
such accruals.
    (2)(i) A futures commission merchant shall prepare and maintain a 
written record of each transaction converting customer funds from one 
currency to another.
    (ii) A written record prepared under paragraph (b)(2)(i) of this 
section must include the date the transaction was executed, the 
currencies converted, the amount converted, and the resulting amount.
    (iii) The information required under paragraph (b)(2)(ii) of this 
section must be provided to the customer upon the customer's request.
    (c) Permissible locations of depositories. (1) Unless a customer 
provides instructions to the contrary, a futures commission merchant or 
a derivatives clearing organization may hold customer funds:
    (i) In the United States;
    (ii) In a money center country; or
    (iii) In the country of origin of the currency.
    (2) A futures commission merchant or derivatives clearing 
organization may hold customer funds outside the United States, in a 
jurisdiction that is not a money center country, or the country of 
origin of the currency only to the extent authorized by the customer, 
provided, that the futures commission merchant or derivatives clearing 
organization must make and maintain a written record of such 
authorization. Notwithstanding the foregoing, in no event shall a 
futures commission merchant or a derivatives clearing organization hold 
customer funds in a restricted country subject to sanctions by the 
Office of Foreign Assets Control of the U.S. Department of Treasury.
    (d) Qualifications for depositories. (1) To hold customer funds 
required to be segregated pursuant to the Act and Sec. Sec.  1.20 
through 1.30, 1.32 and 1.36, a depository must provide the depositing 
futures commission merchant or derivatives clearing organization with 
the appropriate written acknowledgment as required under Sec. Sec.  
1.20 and 1.26.
    (2) A depository, if located in the United States, must be:
    (i) A bank or trust company;
    (ii) A futures commission merchant registered as such with the 
Commission; or
    (iii) A derivatives clearing organization.
    (3) A depository, if located outside the United States, must be:
    (i) A bank or trust company:
    (A) That has in excess of $1 billion of regulatory capital; or
    (B) Whose commercial paper or long-term debt instrument or, if a 
part of a holding company system, its holding company's commercial 
paper or long-term debt instrument, is rated in one of the two highest 
rating categories by at least one nationally recognized statistical 
rating organization;
    (ii) A futures commission merchant that is registered as such with 
the Commission; or
    (iii) A derivatives clearing organization.
    (e) Segregation requirements. (1) Each futures commission merchant 
and each derivatives clearing organization must, as of the close of 
each business day, hold in segregated accounts on behalf of commodity 
or option customers:
    (i) Sufficient United States dollars, held in the United States, to 
meet all United States dollar obligations; and
    (ii) Sufficient funds in each other currency to meet obligations in 
such currency.
    (2) Notwithstanding paragraph (e)(1)(ii) of this section, assets 
denominated in one currency may be held to meet obligations denominated 
in another currency as follows:
    (i) United States dollars may be held in the United States or in 
money center countries to meet obligations denominated in any other 
currency; and
    (ii) Funds in money center currencies may be held in the United 
States or in money center countries to meet obligations denominated in 
currencies other than the United States dollar.
    (3) Each futures commission merchant and each derivatives clearing 
organization shall make and maintain records sufficient to demonstrate 
compliance with this paragraph (e).

PART 30--FOREIGN FUTURES AND FOREIGN OPTIONS TRANSACTIONS

    4. The authority citation for Part 30 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 4, 6, 6c and 12a, unless otherwise 
noted.

    5. Section 30.7 is amended by revising paragraph (c) to read as 
follows:

[[Page 5552]]

Sec.  30.7  Treatment of foreign futures or foreign options secured 
amount.

* * * * *
    (c)(1) The separate account or accounts referred to in paragraph 
(a) of this section must be maintained under an account name that 
clearly identifies them as such, with any of the following 
depositories:
    (i) A bank or trust company located in the United States;
    (ii) A bank or trust company located outside the United States:
    (A) That has in excess of $1 billion of regulatory capital; or
    (B) Whose commercial paper or long-term debt instrument or, if a 
part of a holding company system, its holding company's commercial 
paper or long-term debt instrument, is rated in one of the two highest 
rating categories by at least one nationally recognized statistical 
rating organization; or
    (C) As designated;
    (iii) A futures commission merchant registered as such with the 
Commission;
    (iv) A derivatives clearing organization;
    (v) A member of any foreign board of trade; or
    (vi) Such member or clearing organization's designated 
depositories.
    (2) Each futures commission merchant must obtain and retain in its 
files for the period provided in Sec.  1.31 of this chapter an 
acknowledgment from such depository that it was informed that such 
money, securities or property are held for or on behalf of foreign 
futures and foreign options customers and are being held in accordance 
with the provisions of these regulations.
* * * * *

PART 190--BANKRUPTCY

    6. The authority citation for Part 190 continues to read as 
follows:

    Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23, 
and 24, and 11 U.S.C. 362, 546, 548, 556 and 761-766, unless 
otherwise noted.


    7. Part 190 is amended by revising at the end of Appendix B, 
Framework 2 to read as follows:

Appendix B to Part 190--Special Bankruptcy Distributions

* * * * *

Framework 2--Special Allocation of Shortfall to Customer Claims When 
Customer Funds are Held in a Depository Outside of the United States or 
in a Foreign Currency

    The Commission has established the following allocation 
convention with respect to customer funds segregated pursuant to the 
Act and Commission rules thereunder held by a futures commission 
merchant (``FCM'') or derivatives clearing organization (``DCO'') in 
a depository outside the United States (``U.S.'') or in a foreign 
currency. The maintenance of customer funds in a depository outside 
the U.S. or denominated in a foreign currency will result, in 
certain circumstances, in the reduction of customer claims for such 
funds. For purposes of this proposed bankruptcy convention, 
sovereign action of a foreign government or court would include, but 
not be limited to, the application or enforcement of statutes, 
rules, regulations, interpretations, advisories, decisions, or 
orders, formal or informal, by a federal, state, or provincial 
executive, legislature, judiciary, or government agency. If an FCM 
enters into bankruptcy and maintains customer funds in a depository 
located in the U.S. in a currency other than U.S. dollars or in a 
depository outside the U.S., the following allocation procedures 
shall be used to calculate the claim of each customer.

I. Reduction in Claims for General Shortfall

A. Determination of losses not attributable to sovereign action

    1. Convert each customer's claim in each currency to U.S. 
Dollars at the exchange rate in effect on the Final Net Equity 
Determination Date, as defined in Sec.  190.01(s) (the ``Exchange 
Rate'').
    2. Determine the amount of assets available for distribution to 
customers. In making this calculation, include customer funds that 
would be available for distribution but for the sovereign action.
    3. Convert the amount of assets available for distribution to 
U.S. Dollars at the Exchange Rate.
    4. Determine the Shortfall Percentage that is not attributable 
to sovereign action, as follows:
[GRAPHIC] [TIFF OMITTED] TR04FE03.000

B. Allocation of Losses Not Attributable to Sovereign Action

    1. Reduce each customer's claim by the Shortfall Percentage.

II. Reduction in Claims for Sovereign Loss

A. Determination of Losses Attributable to Sovereign Action 
(``Sovereign Loss'')

    1. If any portion of a customer's claim is required to be kept 
in U.S. dollars in the U.S., that portion of the customer's claim is 
not exposed to Sovereign Loss.
    2. If any portion of a customer's claim is authorized to be kept 
in only one location and that location is:
    a. The U.S. or a location in which there is no Sovereign Loss, 
then that portion of the customer's claim is not exposed to 
Sovereign Loss.
    b. A location in which there is Sovereign Loss, then that entire 
portion of the customer's claim is exposed to Sovereign Loss.
    3. If any portion of a customer's claim is authorized to be kept 
in only one currency and that currency is:
    a. U.S. dollars or a currency in which there is no Sovereign 
Loss, then that portion of the customer's claim is not exposed to 
Sovereign Loss.
    b. A currency in which there is Sovereign Loss, then that entire 
portion of the customer's claim is exposed to Sovereign Loss.
    4. If any portion of a customer's claim is authorized to be kept 
in more than one location and:
    a. There is no Sovereign Loss in any of those locations, then 
that portion of the customer's claim is not exposed to Sovereign 
Loss.
    b. There is Sovereign Loss in one of those locations, then that 
entire portion of the customer's claim is exposed to Sovereign Loss.
    c. There is Sovereign Loss in more than one of those locations, 
then an equal share of that portion of the customer's claim will be 
exposed to Sovereign Loss in each such location.
    5. If any portion of a customer's claim is authorized to be kept 
in more than one currency and:
    a. There is no Sovereign Loss in any of those currencies, then 
that portion of the customer's claim is not exposed to Sovereign 
Loss.
    b. There is Sovereign Loss in one of those currencies, then that 
entire portion of the customer's claim is exposed to Sovereign Loss.
    c. There is Sovereign Loss in more than one of those currencies, 
then an equal share of that portion of the customer's claim will be 
exposed to Sovereign Loss.

B. Calculation of Sovereign Loss

    1. The total Sovereign Loss for each location is the difference 
between:
    a. The total customer funds deposited in depositories in that 
location and
    b. The amount of funds in that location that are available to be 
distributed to customers, after taking into account any sovereign 
action.
    2. The total Sovereign Loss for each currency is the difference 
between:
    a. The value, in U.S. dollars, of the funds held in that 
currency on the day before the sovereign action took place and
    b. The value, in U.S. dollars, of the funds held in that 
currency on the Final Net Equity Determination Date.

[[Page 5553]]

C. Allocation of Sovereign Loss

    1. Each portion of a customer's claim exposed to Sovereign Loss 
in a location will be reduced by:
[GRAPHIC] [TIFF OMITTED] TR04FE03.001

    2. Each portion of a customer's claim exposed to Sovereign Loss 
in a currency will be reduced by:
[GRAPHIC] [TIFF OMITTED] TR04FE03.002

    3. A portion of a customer's claim exposed to Sovereign Loss in 
a location or currency will not be reduced below zero. (The above 
calculations might yield a result below zero where the FCM kept more 
customer funds in a location or currency than it was authorized to 
keep.)
    4. Any amount of Sovereign Loss from a location or currency in 
excess of the total amount of funds authorized to be kept in that 
location or currency (calculated in accord with Section II.1 above) 
(``Total Excess Sovereign Loss'') will be divided among all 
customers who have authorized funds to be kept outside the U.S., or 
in currencies other than U.S. dollars, with each such customer claim 
reduced by the following amount:
[GRAPHIC] [TIFF OMITTED] TR04FE03.003

    The following examples illustrate the operation of this 
convention.

    Example 1. No shortfall in any location.


------------------------------------------------------------------------
                                                    Location(s) customer
             Customer                    Claim        has consented to
                                                      having funds held
------------------------------------------------------------------------
A.................................             $50  U.S.
B.................................        [euro]50  U.K.
C.................................        [euro]50  Germany
D.................................      [pound]300  U.K.
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                           Actual asset
                        Location                              balance
------------------------------------------------------------------------
U.S.....................................................             $50
U.K.....................................................      [pound]300
U.K.....................................................        [euro]50
Germany.................................................       [euro]50
------------------------------------------------------------------------
Note: Conversion Rates: [euro]1 = $1; [pound]1=$1.5.

    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion     Claim in U.S.
                            Customer                                   Claim           rate           dollars
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50             1.0             $50
B...............................................................        [euro]50             1.0              50
C...............................................................        [euro]50             1.0              50
D...............................................................      [pound]300             1.5             450
                                                                                 =================
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................             $50             1.0             $50  ..............  ..............             $50
U.K.....................................................      [pound]300             1.5             450  ..............  ..............             450
U.K.....................................................        [euro]50             1.0              50  ..............  ..............              50
Germany.................................................        [euro]50             1.0              50  ..............  ..............              50
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............          600.00  ..............               0          600.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    There are no shortfalls in funds held in any location. 
Accordingly, there will be no reduction of customer claims.

Claims:

----------------------------------------------------------------------------------------------------------------
                                                                   Claim in U.S.
                                                                   dollars after   Allocation of
                            Customer                              allocated non-   shortfall due    Claim after
                                                                     sovereign     to sovereign   all reductions
                                                                     shortfall        action
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50              $0             $50

[[Page 5554]]

 
B...............................................................              50               0              50
C...............................................................              50               0              50
D...............................................................             450               0             450
                                                                 -----------------
    Total.......................................................          600.00            0.00          600.00
----------------------------------------------------------------------------------------------------------------

    Example 2. Shortfall in funds held in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $100  U.S.
B..............................        [euro]50  U.K.
C..............................       [euro]100  U.K., Germany, or Japan
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                                 Actual
                           Location                              asset
                                                                balance
------------------------------------------------------------------------
U.S..........................................................        $50
U.K..........................................................  [euro]100
Germany......................................................  [euro]50
------------------------------------------------------------------------
Note: Conversion Rates: [euro]1=$1.

Reduction in Claims for General Shortfall

    There is a shortfall in the funds held in the U.S. such that 
only \1/2\ of the funds are available.
    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................            $100             1.0            $100
B...............................................................        [euro]50             1.0              50
C...............................................................       [euro]100             1.0             100
                                                                                                 ---------------
    Total.......................................................  ..............  ..............          250.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................             $50             1.0          $50.00  ..............  ..............             $50
U.K.....................................................       [euro]100             1.0             100  ..............  ..............             100
Germany.................................................        [euro]50             1.0              50  ..............  ..............             $50
                                                                                         ----------------                                ---------------
    Total...............................................  ..............  ..............          200.00  ..............  ..............          200.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action: Shortfall Percentage = (1-200/250) = (1-80%) = 
20%.
    Reduce each customer's claim by the Shortfall Percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                   Claim in U.S.
                                                                                     Allocated     dollars after
                            Customer                               Claim in US$   shortfall (non-    allocated
                                                                                    sovereign)       shortfall
----------------------------------------------------------------------------------------------------------------
A...............................................................            $100          $20.00          $80.00
B...............................................................              50           10.00           40.00
C...............................................................             100           20.00           80.00
                                                                 -----------------
    Total.......................................................          250.00           50.00          200.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    There is no shortfall due to sovereign action. Accordingly, the 
customer claims will not be further reduced.

[[Page 5555]]

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                                   Claim in U.S.
                                                                   dollars after   Allocation of
                            Customer                              allocated non-   shortfall due    Claim after
                                                                     sovereign     to sovereign   all reductions
                                                                     shortfall        action
----------------------------------------------------------------------------------------------------------------
A...............................................................             $80  ..............          $80.00
B...............................................................              40  ..............           40.00
C...............................................................              80  ..............           80.00
                                                                 -----------------
    Total.......................................................          200.00               0          200.00
----------------------------------------------------------------------------------------------------------------

    Example 3. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, not due to sovereign action.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $150  U.S.
B..............................       [euro]100  U.K.
C..............................        [euro]50  Germany
D..............................            $100  U.S.
D..............................       [euro]100  U.K. or Germany
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                                 Actual
                           Location                              asset
                                                                balance
------------------------------------------------------------------------
U.S..........................................................       $250
U.K..........................................................   [euro]50
Germany......................................................  [euro]100
 
------------------------------------------------------------------------
Note: Conversion Rates: [euro]1=$1.

Reduction in Claims for General Shortfall

    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................            $150             1.0            $150
B...............................................................       [euro]100             1.0             100
C...............................................................        [euro]50             1.0              50
D...............................................................            $100             1.0             100
                                                                                                 ---------------
D...............................................................       [euro]100             1.0             100
                                                                 -----------------
    Total.......................................................  ..............  ..............          500.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $250             1.0            $250  ..............  ..............            $250
U.K.....................................................        [euro]50             1.0              50  ..............  ..............              50
Germany.................................................       [euro]100             1.0             100  ..............  ..............             100
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............          400.00  ..............               0          400.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action: Shortfall Percentage = (1-400/500) = (1-80%) = 
20%.
    Reduce each customer's claim by the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                   Claim in U.S.
                                                                                     Allocated     dollars after
                            Customer                               Claim in US$   shortfall (non-    allocated
                                                                                    sovereign)       shortfall
----------------------------------------------------------------------------------------------------------------
A...............................................................            $150          $30.00          120.00
B...............................................................             100           20.00           80.00
C...............................................................              50           10.00           40.00
D...............................................................             200           40.00          160.00
                                                                 -----------------
----------------------------------------------------------------------------------------------------------------


[[Page 5556]]

Reduction in Claims for Shortfall Due to Sovereign Action

    There is no shortfall due to sovereign action. Accordingly, the 
claims will not be further reduced.

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                                   Claim in U.S.
                                                                   dollars after   Allocation of
                            Customer                              allocated non-   shortfall due    Claim after
                                                                     sovereign     to sovereign   all reductions
                                                                     shortfall        action
----------------------------------------------------------------------------------------------------------------
A...............................................................         $120.00  ..............            $120
B...............................................................           80.00  ..............              80
C...............................................................           40.00  ..............              40
D...............................................................          160.00               0             160
                                                                 -----------------
    Total.......................................................          400.00               0             400
----------------------------------------------------------------------------------------------------------------

    Example 4. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action.

------------------------------------------------------------------------
                                                    Location(s) where
            Customer                  Claim       customer has consented
                                                    to have funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................        [euro]50  U.K.
C..............................        [euro]50  Germany
D..............................           $100.  U.S.
D..............................       [euro]100  U.K. or Germany
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                                 Actual
                           Location                              asset
                                                                balance
------------------------------------------------------------------------
U.S..........................................................       $150
U.K..........................................................  [euro]100
Germany......................................................  [euro]100
 
------------------------------------------------------------------------
Notice: Conversion Rates: [euro]1 = $1; [yen]1= $0.01, [pound]1= $1.5.

Reduction in Claims for General Shortfall

    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50             1.0             $50
B...............................................................        [euro]50             1.0              50
C...............................................................        [euro]50             1.0              50
D...............................................................            $100             1.0             100
D...............................................................       [euro]100             1.0             100
                                                                                                 ---------------
    Total.......................................................  ..............  ..............          350.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $150             1.0            $150  ..............  ..............            $150
U.K.....................................................       [euro]100             1.0             100  ..............  ..............             100
Germany.................................................       [euro]100             1.0             100             50%              50              50
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............          350.00  ..............           50.00          300.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action: Shortfall Percentage = (1-350/350) = (1-100%) = 
0%.
    Reduce each customer's claim by the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                   Claim in U.S.
                                                                                     Allocated     dollars after
                            Customer                               Claim in US$   shortfall (non-    allocated
                                                                                    sovereign)       shortfall
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50               0          $50.00
B...............................................................              50               0           50.00
C...............................................................              50               0           50.00

[[Page 5557]]

 
D...............................................................             200               0          200.00
                                                                 -----------------
    Total.......................................................          350.00            0.00          350.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, only \1/2\ of the funds in Germany are 
available.

----------------------------------------------------------------------------------------------------------------
                                                                            Presumed location of funds
                            Customer                             -----------------------------------------------
                                                                       U.S.            U.K.           Germany
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50  ..............  ..............
B...............................................................  ..............             $50  ..............
C...............................................................  ..............  ..............             $50
D...............................................................             100  ..............             100
                                                                 -----------------
    Total.......................................................          150.00           50.00          150.00
----------------------------------------------------------------------------------------------------------------

    Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                  Allocation share of actual    Actual shortfall
                  Customer                    Allocation share             shortfall                allocated
----------------------------------------------------------------------------------------------------------------
C...........................................          $50/$150  33.3% of $50..................            $16.67
D...........................................          100/$150  66.7% of $50..................             33.33
                                                                                               -----------------
----------------------------------------------------------------------------------------------------------------

Claims After Reductions:

----------------------------------------------------------------------------------------------------------------
                                                              Claim in U.S.
                                                              dollars after     Allocation of
                         Customer                            allocated non-   shortfall due to   Claim after all
                                                                sovereign     sovereign action     reductions
                                                                shortfall       from Germany
----------------------------------------------------------------------------------------------------------------
A.........................................................               $50  ................               $50
B.........................................................                50  ................                50
C.........................................................                50            $16.67             33.33
D.........................................................               200             33.33            166.67
                                                           -------------------
    Total.................................................            350.00             50.00            300.00
----------------------------------------------------------------------------------------------------------------

    Example 5. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action and a 
shortfall in funds held in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................            $100  U.S.
B..............................        [euro]50  U.K.
C..............................       [euro]150  Germany
D..............................            $100  U.S.
D..............................      [pound]300  U.K.
D..............................       [euro]150  U.K. or Germany
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                  Actual asset
                    Location                         balance
---------------------------------------------------------------
U.S............................................            $100
U.K............................................      [pound]300
U.K............................................       [euro]200
Germany........................................      [euro]150
------------------------------------------------------------------------
Conversion Rates: [euro]1=$1; [pound]1=$1.5.

Reduction in Claims for General Shortfall

    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................            $100             1.0            $100

[[Page 5558]]

 
B...............................................................        [euro]50             1.0              50
C...............................................................       [euro]150             1.0             150
D...............................................................            $100             1.0             100
D...............................................................      [pound]300             1.5             450
D...............................................................       [euro]150             1.0             150
                                                                                                 ---------------
    Total.......................................................  ..............  ..............         1000.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $100             1.0            $100  ..............  ..............            $100
U.K.....................................................      [pound]300             1.5             450  ..............  ..............             450
U.K.....................................................       [euro]200             1.0             200  ..............  ..............             200
Germany.................................................       [euro]150             1.0             150            100%            $150               0
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............          900.00  ..............          150.00          750.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action: Shortfall Percentage = (1-900/1000)= (1--90%) = 
10%.
    Reduce each customer's claim by the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                   Claim in U.S.
                                                                                     Allocated     dollars after
                            Customer                               Claim in US$   shortfall (non-    allocated
                                                                                    sovereign)       shortfall
----------------------------------------------------------------------------------------------------------------
A...............................................................            $100          $10.00          $90.00
B...............................................................              50            5.00           45.00
C...............................................................             150           15.00          135.00
D...............................................................             700           70.00           63.00
                                                                 -----------------
    Total.......................................................         1000.00          100.00          900.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany is 
available.

----------------------------------------------------------------------------------------------------------------
                                                                            Presumed location of funds
                            Customer                             -----------------------------------------------
                                                                       U.S.            U.K.           Germany
----------------------------------------------------------------------------------------------------------------
A...............................................................            $100  ..............  ..............
B...............................................................  ..............             $50  ..............
C...............................................................  ..............  ..............            $150
D...............................................................             100             450             150
                                                                 -----------------
    Total.......................................................          200.00          500.00          300.00
----------------------------------------------------------------------------------------------------------------

    Calculation of the allocation of the shortfall due to sovereign 
action Germany ($150 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                                    Allocation
                                                                    Allocation       Share of         Actual
                            Customer                                   share          actual         shortfall
                                                                                     shortfall       allocated
----------------------------------------------------------------------------------------------------------------
C...............................................................       $150/$300     50% of $150             $75
D...............................................................        150/$300     50% of $150              75
                                                                                                 ---------------
    Total.......................................................  ..............  ..............          150.00
----------------------------------------------------------------------------------------------------------------

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                                              Claim in U.S.
                                                              dollars after     Allocation of
                         Customer                            allocated non-   shortfall due to   Claim after all
                                                                sovereign     sovereign action     reductions
                                                                shortfall       from Germany
----------------------------------------------------------------------------------------------------------------
A.........................................................               $90  ................               $90
B.........................................................                45  ................                45
C.........................................................               135               $75                60
D.........................................................               630                75               555
                                                           -------------------

[[Page 5559]]

 
    Total.................................................            900.00            150.00            750.00
----------------------------------------------------------------------------------------------------------------

    Example 6. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action, shortfall 
in funds held outside the U.S., or in a currency other than U.S. 
dollars, not due to sovereign action, and a shortfall in funds held 
in the U.S.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................        [euro]50  U.K.
C..............................             $20  U.S.
C..............................        [euro]50  Germany
D..............................           $100.  U.S.
D..............................      [pound]300  U.K.
D..............................       [euro]100  U.K., Germany, or Japan
E..............................             $80  U.S.
E..............................     [yen]10,000  Japan
------------------------------------------------------------------------


------------------------------------------------------------------------
                                                                 Actual
                           Location                              asset
                                                                balance
------------------------------------------------------------------------
U.S..........................................................       $200
U.K..........................................................  [pound]20
                                                                       0
U.K..........................................................  [euro]100
Germany......................................................   [euro]50
Japan........................................................  [yen]10,0
                                                                     00
------------------------------------------------------------------------
Conversion Rates: [pound] 1 = $1; [yen]1=$0.01, [pound] 1=$1.5.

Reduction in Claims for General Shortfall

    Convert each customer s claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50             1.0             $50
B...............................................................        [euro]50             1.0              50
C...............................................................             $20             1.0              20
C...............................................................        [euro]50             1.0              50
D...............................................................           $100.             1.0             100
D...............................................................       [euro]300             1.5             450
D...............................................................     [pound] 100             1.0             100
E...............................................................             $80             1.0              80
E...............................................................     [yen]10,000            0.01             100
                                                                                                 ---------------
    Total.......................................................  ..............  ..............         1000.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $200             1.0            $200  ..............  ..............            $200
U.K.....................................................      [pound]200             1.5             300  ..............  ..............             300
U.K.....................................................       [euro]100             1.0             100  ..............  ..............             100
Germany.................................................        [euro]50             1.0              50            100%             $50               0
Japan...................................................     [yen]10,000            0.01             100             50%              50              50
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............             750  ..............          100.00          650.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign action:
    Shortfall Percentage = (1-750/1000) = (1-75%) = 25%.
    Reduce each customer's claim by the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                   Claim in U.S.
                                                                                     Allocated     dollars after
                            Customer                              Claim in U.S.$  shortfall (non-    allocated
                                                                                    sovereign)       shortfall
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50          $12.50          $37.50

[[Page 5560]]

 
B...............................................................              50           12.50           37.50
C...............................................................              70           17.50           52.50
D...............................................................             650          162.50          487.50
E...............................................................             180           45.00          135.00
                                                                 -----------------
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany and only 
\1/2\ of the funds in Japan are available.

----------------------------------------------------------------------------------------------------------------
                                                                    Presumed location of funds
                    Customer                     ---------------------------------------------------------------
                                                       U.S.            U.K.           Germany          Japan
----------------------------------------------------------------------------------------------------------------
A...............................................             $50  ..............  ..............  ..............
B...............................................  ..............             $50  ..............  ..............
C...............................................              20  ..............             $50  ..............
D...............................................             100             450              50             $50
E...............................................              80  ..............  ..............             100
                                                 -----------------
----------------------------------------------------------------------------------------------------------------

    Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                                                      Actual
              Customer allocation                 Allocation       Allocation share of actual        shortfall
                                                     share                  shortfall                allocated
----------------------------------------------------------------------------------------------------------------
C.............................................        $50/$100  50% of $50......................             $25
D.............................................          50/100  50% of 50.......................              25
                                                                                                 ---------------
    Total.....................................  ..............  ................................              50
----------------------------------------------------------------------------------------------------------------

    Japan ($50 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                  Allocation share of actual    Actual shortfall
                  Customer                    Allocation share             shortfall                allocated
----------------------------------------------------------------------------------------------------------------
D...........................................          $50/$150  33.3% of $50..................            $16.67
E...........................................           100/150  66.6% of 50...................             33.33
                                                                                               -----------------
    Total...................................  ................  ..............................             50.00
----------------------------------------------------------------------------------------------------------------

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                             Claim in US
                                            dollars after     Allocation of     Allocation of
                Customer                   allocated non-   shortfall due to  shortfall due to   Claim after all
                                              sovereign      soverign action  sovereign action     reductions
                                              shortfall       from Germany       from Japan
----------------------------------------------------------------------------------------------------------------
A.......................................            $37.50  ................  ................             37.50
B.......................................             37.50  ................  ................             37.50
C.......................................             52.50               $25  ................             27.50
D.......................................            487.50                25             16.67            445.83
E.......................................            135.00  ................             33.33            101.67
                                         -------------------
    Total...............................            750.00             50.00             50.00            650.00
----------------------------------------------------------------------------------------------------------------

    Example 7. Shortfall in funds held outside the U.S., or in a 
currency other than U.S. dollars, due to sovereign action, where the 
FCM kept more funds than permitted in such location or currency.

------------------------------------------------------------------------
                                                   Location(s) customer
            Customer                  Claim      has consented to having
                                                        funds held
------------------------------------------------------------------------
A..............................             $50  U.S.
B..............................              50  U.S.
B..............................        [euro]50  U.K.
C..............................        [euro]50  Germany.
D..............................            100.  U.S.
D..............................       [euro]100  U.K. or Germany.
E..............................              50  U.S.
E..............................        [euro]50  U.K.
------------------------------------------------------------------------


[[Page 5561]]


------------------------------------------------------------------------
                                                                 Actual
                           Location                              asset
                                                                balance
------------------------------------------------------------------------
U.S..........................................................       $250
U.K..........................................................   [euro]50
Germany......................................................  [euro]200
------------------------------------------------------------------------

    Conversion Rates: [euro]1 = $1.

Reduction in Claims for General Shortfall

    Convert each customer's claim in each currency to U.S. Dollars:

----------------------------------------------------------------------------------------------------------------
                                                                                    Conversion
                            Customer                                   Claim           rate        Claim in US$
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50             1.0             $50
B...............................................................              50             1.0              50
B...............................................................        [euro]50             1.0              50
C...............................................................        [euro]50             1.0              50
D...............................................................      [euro]100.             1.0             100
D...............................................................       [euro]100             1.0             100
E...............................................................              50             1.0              50
E...............................................................        [euro]50             1.0              50
                                                                                                 ---------------
    Total.......................................................  ..............  ..............          500.00
----------------------------------------------------------------------------------------------------------------

    Determine assets available for distribution to customers, 
converting to U.S. dollars:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Shortfall due      Actual
                                                                            Conversion    Assets in U.S.   to sovereign    shortfall due      Amount
                        Location                              Assets           rate           dollars         action       to sovereign      actually
                                                                                                            percentage        action         available
--------------------------------------------------------------------------------------------------------------------------------------------------------
U.S.....................................................            $250             1.0            $250  ..............  ..............            $250
U.K.....................................................        [euro]50             1.0              50  ..............  ..............              50
Germany.................................................       [euro]200             1.0             200            100%             200               0
                                                                                         ----------------                -----------------
    Total...............................................  ..............  ..............          500.00  ..............             200          300.00
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Determine the percentage of shortfall that is not attributable 
to sovereign
    Shortfall Percentage = (1-500/500) = (1-100%) = 0%.
    Reduce each customer's claim by the shortfall percentage:

----------------------------------------------------------------------------------------------------------------
                                                                                                  Claim in U.S.
                                                                                  Allocated       dollars after
                         Customer                             Claim in US$     shortfall (non-      allocated
                                                                                 sovereign)         shortfall
----------------------------------------------------------------------------------------------------------------
A.........................................................               $50                $0            $50.00
B.........................................................               100                 0            100.00
C.........................................................                50                 0             50.00
D.........................................................               200                 0            200.00
E.........................................................               100                 0            100.00
                                                           -------------------
    Total.................................................            500.00              0.00            500.00
----------------------------------------------------------------------------------------------------------------

Reduction in Claims for Shortfall Due to Sovereign Action

    Due to sovereign action, none of the money in Germany is 
available.

----------------------------------------------------------------------------------------------------------------
                                                                            Presumed location of funds
                            Customer                             -----------------------------------------------
                                                                       U.S.            U.K.           Germany
----------------------------------------------------------------------------------------------------------------
A...............................................................             $50
B...............................................................              50              50
C...............................................................                                              50
D...............................................................             100                             100
E...............................................................              50              50
                                                                 -----------------
    Total.......................................................          250.00          100.00          150.00
----------------------------------------------------------------------------------------------------------------


[[Page 5562]]

    Calculation of the allocation of the shortfall due to sovereign 
action--Germany ($200 shortfall to be allocated):

----------------------------------------------------------------------------------------------------------------
                                                                  Allocation share of actual    Actual shortfall
                  Customer                    Allocation share             shortfall                allocated
----------------------------------------------------------------------------------------------------------------
C...........................................          $50/$150  33.3% of $200.................            $66.67
D...........................................         $100/$150  66.7% of $200.................           $133.33
                                                                                               -----------------
    Total...................................                                                            $200.000
----------------------------------------------------------------------------------------------------------------

    This would result in the claims of customers C and D being 
reduced below zero.
    Accordingly, the claims of customer C and D will only be reduced 
to zero, or $50 for C and $100 for D. This results in a Total Excess 
Shortfall of $50.

----------------------------------------------------------------------------------------------------------------
                                                              Allocation of     Allocation of
                     Actual shortfall                         shortfall for     shortfall for     Total excess
                                                               customer C        customer D         shortfall
----------------------------------------------------------------------------------------------------------------
$200......................................................               $50              $100               $50
----------------------------------------------------------------------------------------------------------------

    This shortfall will be divided among the remaining customers who 
have authorized funds to be held outside the U.S. or in a currency 
other than U.S. dollars.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Allocation share
                                                 Total claims of                      (column B-C/
                                                    customers     Portion of claim  column B Total--  Allocation share of actual total    Actual total
                   Customer                     permitting funds   required to be     all customer            excess shortfall          excess shortfall
                                                   to be held       int the U.S.     claims in U.S.)                                        allocated
                                                outside the U.S.
--------------------------------------------------------------------------------------------------------------------------------------------------------
B.............................................              $100               $50          $50/$200  25% of $50......................            $12.50
C.............................................                50                 0             \(1)\                                                   0
D.............................................               200               100          $100/200  50% of $50......................                25
E.............................................               100                50            50/100  25% of $50......................             12.50
                                               ------------------                                                                      -----------------
    Total.....................................            450.00                                                                                  50.00
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Claim already reduced to $0.

Claims After Reductions

----------------------------------------------------------------------------------------------------------------
                                            Claim in U.S.
                                            dollars after     Allocation of     Allocation of
                Customer                   allocated non-   shortfall due to    total excess     Claim after all
                                              sovereign     sovereign action      shortfall        reductions
                                              shortfall          Germany
----------------------------------------------------------------------------------------------------------------
A.......................................               $50                                                $50.00
B.......................................               100                               12.50             87.50
C.......................................                50                50                                   0
D.......................................               200               100                25             75.00
E.......................................               100                               12.50             87.50
    Total...............................            500.00            150.00             50.00            300.00
----------------------------------------------------------------------------------------------------------------


    Issued in Washington, DC on January 29, 2003, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-2508 Filed 2-3-03; 8:45 am]
BILLING CODE 6351-01-P