[Federal Register Volume 68, Number 131 (Wednesday, July 9, 2003)]
[Proposed Rules]
[Pages 40835-40848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17218]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

RIN 3038-AB64


Minimum Financial and Related Reporting Requirements for Futures 
Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
proposing to amend certain of its minimum financial and related 
reporting requirements for futures commission merchants (``FCMs'') and 
introducing brokers (``IBs''). Regulations currently require FCMs to 
maintain minimum adjusted net capital that is the greatest of: 
$250,000; 4 percent of customer funds required to be segregated by the 
Commodity Exchange Act (``Act'') and the Commission's regulations; the 
amount of adjusted net capital required by a registered futures 
association; or for those FCMs that also are registered as securities 
brokers or dealers with the Securities and Exchange Commission 
(``SEC''), the amount of net capital required by specified SEC 
regulations. This proposed rule would delete that part of the minimum 
adjusted net capital requirement that is based on segregated customer 
funds and replace it with an amount based on maintenance margin levels 
of futures and options positions carried by an FCM. The proposed 
amendment would reflect risk-based capital rules that have already been 
adopted by a clearing organization, two exchanges and the National 
Futures Association (``NFA'').
    The Commission also is proposing to reduce the time periods allowed 
before an FCM must take a capital charge for outstanding margin calls. 
The Commission is further proposing conforming amendments to capital 
computations that FCMs must perform for purposes related to equity 
capital, subordination agreements and the Commission's ``early 
warning'' requirements. The Commission also is proposing to reduce the 
time frames for

[[Page 40836]]

FCMs to report certain events. The proposed time frames would be 
consistent with those currently provided in SEC rules applicable to 
securities brokers and dealers. The Commission also is proposing to 
amend reporting requirements for FCMs or IBs to streamline Commission 
procedures and to eliminate unnecessary filing requirements.

DATES: Comments must be received on or before September 8, 2003.

ADDRESSES: Comments may be sent to Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581. Attn.: Secretariat. In addition, comments may be sent by 
facsimile to (202) 418-5521, or by electronic mail to 
[email protected]. References should be made to ``Proposed Rules for 
Risk-Based Capital.''

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director, at 
(202) 418-5495 or Thelma Diaz, Special Counsel, at (202) 418-5137, 
Division of Clearing and Intermediary Oversight, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581. Electronic mail: ([email protected]) or 
([email protected]).

SUPPLEMENTARY INFORMATION:

I. Background--Financial Safeguards

    As part of its regulatory responsibilities, the Commission monitors 
the financial integrity of the commodity futures and options markets 
and the intermediaries that market participants employ in their trading 
activities. The Commission's financial and related recordkeeping and 
reporting rules are part of a system of financial safeguards that also 
includes exchange and clearinghouse risk management and financial 
surveillance systems, exchange and clearinghouse rules and policies on 
clearing and settlements, and financial and operational controls and 
risk management employed by market intermediaries themselves.
    Two primary financial safeguards under the Act are: (1) The 
requirement that FCMs segregate from their own assets all money and 
property belonging to their customers; and (2) the imposition of 
minimum capital requirements for FCMs and IBs.\1\ The requirement that 
FCMs segregate customer funds is set forth in section 4d(a)(2) of the 
Act. Section 4d(a)(2) requires, among other things, that an FCM 
segregate from its own assets all money, securities, and other property 
held for customers as margin for their commodity futures and option 
contracts, as well as any gains accruing to such customers from open 
futures and option positions.
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    \1\ 7 U.S.C. 1 et seq. (2000).
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    Commission Rules 1.20 through 1.30, as well as 1.32 and 1.36 
implement the segregation of funds provisions of section 4d(a)(2) of 
the Act for FCMs holding funds for customers trading on U.S. commodity 
futures and options markets.\2\ These rules require FCMs to maintain, 
in segregated accounts, all of the money and other property deposited 
by customers to margin their futures and option positions on U.S. 
markets, as well as any funds accruing to such customers from open 
futures and option positions. The rules are intended to ensure that an 
FCM has readily available sufficient funds to meet its obligations, on 
a dollar-for-dollar basis, to its customers trading on U.S. futures and 
options markets at all times.
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    \2\ Commission regulations may be found at 17 CFR Ch. 1 (2002).
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    Rule 30.7 sets forth an FCM's obligation to secure funds of U.S.-
domiciled customers trading on non-U.S. futures and options markets. 
Rule 30.7 requires an FCM to maintain in secured accounts funds and 
other property deposited by a U.S.-domiciled customer that represents 
required margin deposits for open futures and option positions on 
foreign markets, as well as any unrealized gains accruing on such open 
positions. The funds required to be segregated for customers trading on 
U.S. commodity markets pursuant to Section 4d(a)(2) and the funds 
required to be secured for customers trading on foreign commodity 
markets pursuant to Rule 30.7 hereinafter will be referred to jointly 
as the ``Segregated Amount.''
    Section 4f(b) of the Act provides that in order to register as an 
FCM or IB a person must meet such minimum financial requirements as the 
Commission may by regulation prescribe. Commission rules that set forth 
the minimum financial and related reporting requirements for FCMs and 
IBs include Rules 1.10, 1.12, 1.16, 1.17, and 1.18. Commission Rules 
1.10 and 1.16 set forth requirements for the periodic reporting of the 
financial condition of FCMs and IBs, while Commission Rule 1.12 
requires ``early warning'' reporting of predefined events as they 
occur. The minimum requirements for the IB's or FCM's adjusted net 
capital, equity capital and subordinated agreements are set forth in 
Commission Rule 1.17. Rule 1.18 requires FCMs and IBs to prepare and to 
maintain formal adjusted net capital computations as of the close of 
business each month.\3\
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    \3\ In addition, FCMs are required by Rules 1.14 and 1.15 to 
maintain and to provide to the Commission certain information 
regarding affiliated entities.
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    The Commission's minimum financial requirements protect customers 
and other market participants by requiring FCMs and IBs to maintain 
minimum levels of liquid assets in excess of their liabilities to 
finance their business activities. In the event of a shortfall in the 
Segregated Amount, the Commission's minimum net capital requirement 
provides protection to customers by requiring FCMs to maintain a 
minimum level of assets that are readily available to be contributed to 
cover the shortfall. The minimum capital requirement also protects 
customers and market participants by ensuring that the FCM remains 
solvent while waiting for margin calls to be met.

II. Proposed Risk-Based Capital Requirement for FCMs

A. The Commission's Current Capital Requirement

    The Commission's net capital requirement is set forth in Rule 
1.17(a)(1)(i)(A)-(D) and requires an FCM to maintain adjusted net 
capital equal to, or in excess of, the greatest of the following:
    a. $250,000;
    b. Four percent of the Segregated Amount, less the market value of 
options purchased by customers for which the full premiums have been 
paid;
    c. The amount of adjusted net capital required by a registered 
futures association of which the FCM is a member; \4\ or
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    \4\ The NFA is a registered futures association that has adopted 
minimum capital rules for its member FCMs.
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    d. For FCMs that also are registered with the SEC as securities 
brokers or dealers, the amount of net capital required by SEC Rule 
15c3-1(a).\5\
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    \5\ 17 CFR 240.15c3-1(a).
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    In addition to the Commission's minimum capital requirements, FCMs 
also are subject to minimum capital requirements adopted by the self-
regulatory organizations (``SROs'') of which they are members.\6\ The 
SROs' capital requirements are required to be no less stringent than 
the Commission's minimum capital requirement.\7\
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    \6\ Rule 1.3(ee) defines an SRO as a contract market as defined 
in Rule 1.3(h) or a registered futures association under section 17 
of the Act.
    \7\ For example, New York Mercantile Exchange (``NYMEX'') Rule 
9.21 requires clearing members to maintain minimum net capital that 
is the greater of $5,000,000 or the minimum capital required by Rule 
1.17.

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[[Page 40837]]

    The current capital rule generally has worked well as a measure of 
the minimum amount of capital an FCM needs in order to augment the 
Segregated Amount to provide protection for customer funds and to meet 
the FCM's responsibility of maintaining orderly markets. In recent 
years, however, the scope of and participants in the commodity business 
have changed. Trading is conducted on a 24-hour a day basis on markets 
worldwide. FCMs have become significant participants in this global 
marketplace as evidenced by increasing numbers of U.S. and foreign 
customers trading on U.S. and foreign markets through FCMs and the 
increasing amount of customer funds held by FCMs.\8\ The types of 
participants in the marketplace also have shifted from primarily 
agricultural traders to highly sophisticated money managers and 
financial institutions trading a wide variety of products, with the 
greatest volume of trading being in interest rate and stock index 
contracts.
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    \8\ Based upon financial reports filed with the Commission, FCMs 
held on behalf of their customers approximately $30 billion as of 
September 1995 and approximately $69 billion as of April 2003.
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    The framework for the current capital rule was developed in 1978 
and now should be modernized to reflect these changes. The current 
capital rule does factor in the risk inherent in the positions carried 
by an FCM for its customers' accounts to the extent that the amount of 
capital required is based on a percentage of the Segregated Amount, 
which, in turn, is partly a function of the margin (or performance 
bond) required on open futures and option positions. There are, 
however, a number of material limitations on the current method used to 
calculate required net capital.
    A primary limitation is that the Segregated Amount does not fully 
reflect the extent to which an FCM is exposed to commodity positions it 
carries for both customers and noncustomers.\9\ For example, the 
Segregated Amount does not include funds held by an FCM on behalf of 
foreign-domiciled customers trading on foreign commodity markets, nor 
does it include funds held by an FCM on behalf of noncustomers trading 
on either U.S. or foreign futures and options markets. Furthermore, the 
Segregated Amount does not include letters of credit deposited as 
margin or reflect the additional risks posed by open positions in 
customer accounts that liquidate to a deficit. Finally, calculating 
minimum capital as a percentage of the Segregated Amount subjects an 
FCM to a higher requirement in situations where the FCM requires 
additional margin from customers or carries free credit balances for 
its customers, despite the risk reducing effect of holding higher 
levels of customer funds.
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    \9\ Noncustomer accounts are defined in Rule 1.17(b)(4) and 
generally are accounts of entities affiliated with the FCM and the 
accounts of certain employees of the FCM.
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    To address the concerns noted above and to conform the Commission's 
capital requirements to those implemented by the NFA, two exchanges and 
a clearing organization, the Commission is proposing to adopt a minimum 
capital requirement calculated as a percentage of the margin required 
on all domestic and foreign futures and option accounts carried by the 
FCM on behalf of customers and noncustomers, instead of as a percentage 
of the Segregated Amount.

B. Proposed Risk-Based Capital Requirement

1. Overview of the Proposed Risk-Based Capital Computation
    Margin-based (or risk-based) capital rules have been adopted and 
put into effect by the Board of Trade Clearing Corporation (``BOTCC''), 
Chicago Board of Trade (``CBOT''), Chicago Mercantile Exchange 
(``CME''), and NFA. BOTCC, CBOT, and CME adopted risk-based components 
to their respective minimum capital requirements for clearing member 
firms effective January 1, 1998. NFA adopted a risk-based capital 
component to its minimum capital requirements for member FCMs effective 
October 31, 2000.
    Based upon the effectiveness of these rules as implemented at these 
organizations, the U.S. commodity exchanges and NFA, through the Joint 
Audit Committee (``JAC''), have requested that the Commission amend its 
capital rule by eliminating the calculation based on the Segregated 
Amount and adopting a calculation based on the required maintenance 
margin levels for customer and noncustomer futures and option positions 
carried by an FCM.\10\ An additional benefit to FCMs of adopting the 
proposed risk-based capital requirement is that it would simplify 
adjusted net capital reporting requirements for FCMs. Commission Rule 
1.17 includes among the categories from which an FCM's required net 
capital is determined ``[t]he amount of adjusted net capital required 
by a registered futures association of which [the FCM] is a member.'' 
Because all registered FCMs that handle customer funds are required to 
be members of NFA, the NFA's adoption of a risk based capital 
requirement, which is modeled on the requirement implemented by BOTCC, 
CBT, and CME, has effectively required almost all FCMs to perform 
adjusted net capital computations that are based both on percentages of 
maintenance margin levels of futures and options positions and on 
percentages of the Segregated Amount.
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    \10\ The JAC is comprised of representatives of the audit and 
financial compliance departments of the SROs.
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    U.S. commodity exchanges and numerous foreign commodity exchanges 
use the Standard Portfolio Analysis of Risk (``SPAN'') margining system 
for calculating margin requirements on futures and option positions. 
SPAN is a system developed and maintained by the CME that calculates 
maintenance margin levels in an account containing both futures and 
option positions on the basis of overall portfolio risk. Commodity 
exchanges attempt to set maintenance margin levels that exceed the one-
day price change for 95 percent to 99 percent of the trading days based 
upon statistical analyses of day-to-day price changes over a varied 
number of trading days.\11\
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    \11\ For more detailed information on the SPAN margining system, 
see the report Review of Standard Portfolio Analysis of Risk 
(``SPAN'') Margin System as implemented by the Chicago Mercantile 
Exchange, Board of Trade Clearing Corporation, and the Chicago Board 
of Trade, prepared by the Commission's Division of Trading and 
Markets and issued in April 2001. The report is available on the 
Commission's Web site: http://www.cftc.gov.
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    The SPAN maintenance margin level has two components:
    1. The risk component, which covers potential future losses in the 
portfolio value. Such losses would include a market move against a 
futures position or a short (written) option; and
    2. The equity component (option premium, marked-to-the market 
daily), which reflects the asset represented by long option positions 
or the liability represented by short (written) option positions in the 
portfolio.
    The proposal would set the minimum capital requirement at the 
aggregate of eight percent of the risk maintenance margin level on 
customer accounts and four percent of the risk maintenance margin level 
on noncustomer accounts. The equity component of the SPAN maintenance 
margin level would not be included in the capital computation. 
Furthermore, as more fully discussed below, the risk maintenance margin 
imposed on long option positions that were not hedging other futures or 
option positions could be excluded from the computation. Proprietary 
(i.e., firm-owned) accounts would be excluded

[[Page 40838]]

from the risk-based capital computation, because such positions 
currently are included in the calculation of adjusted net capital to 
the extent that uncovered proprietary positions result in a charge or 
``haircut'' to net capital based on clearinghouse or exchange margin 
requirements.\12\ The proposed computation will hereinafter be referred 
to as ``Risk-Based Capital.''\13\
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    \12\ See Commission Rule 1.17(c)(5)(x).
    \13\ The Commission also would amend the financial Form 1-FR-FCM 
if it were to adopt final rules for Risk-Based Capital.
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    For purposes of the proposed rule, ``customer accounts'' would 
include the account of any customer as defined by Rule 1.17(b)(2), 
which includes customers as defined by Rule 1.3(k), option customers as 
defined by Rules 1.3(jj) and 32.1(c), and foreign futures and foreign 
option customers as defined by Rule 30.1(c), and also would include the 
accounts of foreign customers trading on foreign commodity exchanges. 
The term ``noncustomer account'' would continue to be defined by Rule 
1.17(b)(4) as an account that is not included in the definition of 
either customer or proprietary account in Rule 1.17, and would also 
include noncustomer accounts for foreign domiciled persons trading on 
foreign exchanges. The term ``noncustomer'' generally refers to 
accounts of entities affiliated with an FCM, including certain 
employees and officers of an FCM.
    Generally, there is no risk to the FCM associated with a long 
option position because the maximum potential loss is the full option 
premium, which is required to be paid by the customer at the inception 
of the transaction. As previously noted, however, SPAN computes the 
margin for an account on a portfolio basis and long option positions 
may hedge other futures and option positions in a portfolio, thereby 
reducing the total margin requirement on the portfolio. Accordingly, 
SPAN includes a risk maintenance margin component for long option 
positions to protect against a decrease in the market value of long 
options that may be hedging other futures and option positions.
    The propsal would permit an FCM to deduct the risk maintenance 
margin on long options that were not hedging other futures or option 
positions from the Risk-Based Capital computation. The Commission, 
however, understands that, under current back office operating 
procedures, calculating the maintenance margin on specific long option 
positions included in a portfolio may require a certain amount of 
manual processing, which some FCMs may wish to forgo if the amount 
would not materially increase their minimum capital requirement. 
Accordingly, the rule as proposed would not prohibit an FCM from 
including the risk maintenance margin for long options that do not 
hedge other futures and option positions in its Risk-Based Capital 
computation, if it elected to do so.
    The proposal would set the Risk-Based Capital requirement at eight 
percent of customer risk maintenance margin and four percent of 
noncustomer risk maintenance margin, which are the same percentages 
that have been implemented under the existing exchange and NFA risk-
based capital rules. The lower four percent factor applied to risk 
margin requirements in noncustomers' accounts is based upon the beliefs 
of BOTCC, CBT, CME and the NFA that affiliates and employees pose less 
credit risk to FCMs and the clearing system.
    If an FCM cannot determine the risk margin associated with cleared 
positions, the proposal would require the firm to apply the specified 
percentages to the total margin required by the exchange, clearing 
organization, other futures commission merchant or entity for the 
customer and noncustomer positions carried. This would be consistent 
with the approach taken by FCMs today for futures and option positions 
that they carry that are executed on foreign contract markets that do 
not use the SPAN margining system.
2. Accounts Included in the Risk-Based Net Capital Computation
    Calculations of minimum required capital under the current method 
based on the Segregated Amount and the proposed Risk-Based Capital 
method would differ with respect to the types of accounts included in 
the calculation. These differences are summarized in the following 
table.

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 Are the following types of
 accounts factored into the    Current segregated    Proposed risk-based
 calculation of required net     amount capital      capital requirement
          capital?                 requirement
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U.S.-domiciled customers      Yes.................  Yes.
 trading on U.S. exchanges.
Foreign-domiciled customers   Yes.................  Yes.
 trading on U.S. exchanges.
U.S.-domiciled customers      Yes.................  Yes.
 trading on foreign
 exchanges.
Foreign-domiciled customers   No..................  Yes.
 trading on foreign
 exchanges.
Accounts liquidating to a     No..................  Yes.
 deficit.
Accounts with letters of      No..................  Yes.
 credit for performance bond.
Noncustomer accounts........  No..................  Yes.
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    The proposed Risk-Based Capital computation includes several types 
of accounts that affect the risk to an FCM inherent in commodity 
positions carried by its customers and noncustomers, and that are not 
included in the current Segregated Amount computation. Therefore, the 
Commission believes Risk-Based Capital may reflect the actual risk to 
FCMs better than the current Segregated Amount calculation of minimum 
required capital. Particularly, the proposed Risk-Based Capital 
computation would include futures and option positions carried by an 
FCM for noncustomers trading on U.S. and foreign commodity markets and 
foreign-domiciled customers trading on foreign futures and options 
markets, none of which currently are included in the minimum capital 
computation.
    The proposed Risk-Based Capital computation also would include the 
risk maintenance margin on open futures and option positions that are 
carried in customer and noncustomer accounts that liquidate to a 
deficit. In such situations, an FCM is required to deposit its own 
funds into the segregated account in order to cover the customer's 
deficit. However, the capital requirement that is based upon the 
Segregated Amount does not reflect the positions of the customer that 
is in deficit.\14\
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    \14\ In computing its adjusted net capital, an FCM is required 
by Rule 1.17(c)(2)(i) to exclude from current assets the balance of 
any customer account that liquidates to a deficit or contains a 
debit ledger balance and such customer fails to answer a margin call 
or request for other deposits within one business day.

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[[Page 40839]]

    Finally, customer and noncustomer accounts margined by letters of 
credit would be included in the Risk-Based Capital computation under 
the proposal. Such accounts currently have no effect on a firm's 
capital computation, because a letter of credit is not included in the 
Segregated Amount until the letter of credit is actually drawn upon.
3. Effect of Certain Events on the Risk-Based Net Capital Requirement
    Certain events would have different effects on required capital 
under a Segregated Amount-based capital requirement as compared to the 
proposed Risk-Based Capital requirement. These differences are 
summarized in the following chart.

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                                                             Effect on net capital requirement
                  Event                  -----------------------------------------------------------------------
                                            Segregated amount-based             Proposed risk-based rule
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Excess margin deposited by a customer...  Increase...................  No effect.
Excess margin withdrawn by customer.....  Decrease...................  No effect.
Firm increases margin required from a     Increase when customer       No effect.
 customer.                                 deposits extra margin.
Exchange increases margin requirements..  Increase when funds are      Immediate increase.
                                           collected from customer.
Customer or noncustomer establishes       No immediate effect........  Immediate increase.
 riskier positions (indicated by
 increased risk margin requirement in
 trading account).
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    Generally, Risk-Based Capital bases required levels of capital on 
the risks inherent in the futures and options positions that the FCM 
carries for customers and noncustomers. Conversely, the Segregated 
Amount computation is based upon the amount of funds the FCM is 
required to segregate or secure on behalf of its customers trading on 
U.S. and foreign commodity markets. Thus, an FCM that collects 
additional funds from its customer as a cushion for an increase in the 
market risks posed by the customer's portfolio is required by 
Commission rules to maintain a higher amount of capital, even though 
such additional funds reduce the FCM's overall exposure to a default by 
such customer. In contrast, an FCM that does not require a customer to 
deposit additional margin would not have an increase in its capital 
requirement, even though the firm may be more exposed to an increase in 
the market risk associated with the customer's portfolio. The proposed 
Risk-Based Capital computation, which is based upon a percentage of the 
risk maintenance margin on a portfolio of positions, would require the 
FCM to have higher minimum capital when the market risks associated 
with positions in the portfolio increases regardless of whether the FCM 
collected additional margin from the customer. Excess customer funds or 
margin held by an FCM would continue to be protected and regulated 
under the Commission's segregation requirements.
4. Impact of Adopting Risk-Based Capital
    There were 169 registered FCMs as of April 30, 2003, of which 75 
also were registered securities brokers or dealers with the SEC. The 
required regulatory capital for these 169 firms reflects an increase of 
more than $389 million, on a net basis, as a result of replacing 
adjusted net capital requirements that are currently based on the 
Segregated Amount with the risk-based capital requirements that are 
currently implemented by BOTCC, CBT, CME and the NFA. The following 
chart details the net increase for both sole FCMs and dually-registered 
firms.

------------------------------------------------------------------------
                                     Effect of risk-
                                     based capital on     Total for all
                                      total capital           firms
                                       requirement
------------------------------------------------------------------------
Number of FCMs also registered as
 BDs with SEC:
    19...........................  Increase...........      $244,688,814
    2............................  Decrease...........        ($415,526)
    54...........................  No change..........                 0
        Total: 75
Number of FCMs not registered as
 BDs with SEC:
    17...........................  Increase...........      $171,045,445
    24...........................  Decrease...........     ($25,476,295)
    53...........................  No change..........                 0
        Total: 94
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    Of the 75 dually-registered FCMs, 19 had an increase in their 
minimum capital requirements totaling approximately $245 million. Two 
firms realized a reduction in minimum net capital requirements totaling 
approximately $416,000. The minimum net capital for 54 firms did not 
change. The minimum capital requirement for these 54 firms was 
determined by SEC rules or the Commission's $250,000 minimum.
    Of the 94 FCMs that were not dual registrants, 17 had a higher 
minimum capital requirement totaling approximately $171 million under 
Risk-Based Capital than under the Segregated Amount requirement. 
Minimum capital requirements decreased by approximately $25 million for 
24 sole FCMs. Fifty-three FCMs had no change in their minimum capital 
requirements with the adoption of Risk-Based Capital. These 53 firms 
were subject to the Commission's $250,000 minimum.

III. Capital Charge for Undermargined Accounts

    Commission Rule 1.17(c)(5)(viii) requires an FCM to take a capital 
charge for any customer account that is undermargined if the margin 
call issued

[[Page 40840]]

to the customer has not been answered by the third business day 
following the issuance of the call. Rule 1.17(c)(5)(ix) similarly 
requires a capital charge for noncustomer accounts if a noncustomer 
fails to answer a margin call by the second business day following the 
issuance of the call. When first adopted, these rules allowed 
collection periods of five business days for customer accounts and four 
business days for noncustomer accounts following the issuance of a 
margin call before a capital charge had to be taken. In 1980, the 
number of days was reduced to three business days for customer accounts 
and two business days for noncustomer accounts in recognition of the 
increased use of electronic communication for issuing and collecting 
margin calls.\15\
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    \15\ 45 FR 79416 (December 1, 1980). Under the current rule, if 
a customer account first experiences a margin deficiency on Monday, 
the FCM would issue a margin call to the customer on Tuesday. If the 
margin call had not been answered by the close of business on 
Friday, the FCM would be required to take a capital charge for its 
capital computation as of Friday for the amount of the margin 
deficiency on Monday.
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    The Commission is now proposing to reduce the collection period 
before a capital charge would have to be taken to one business day 
following the issuance of a margin call for both customer and 
noncustomer accounts. The Commission is making this proposal in 
recognition of: (i) The advancements in electronic communications and 
the ability to transfer funds electronically which allow market 
participants to more easily meet a margin call; (ii) the increase in 
the number of products offered on futures markets since 1980, and the 
higher volatility associated with some of these products; and (iii) the 
expansion in the scope of FCM operations, including outside of the 
United States. In addition, the Commission believes the proposed 
amendment is consistent with the proposal to adopt a Risk-Based Capital 
computation.
    An effective margining system is a key component of a sound 
financial risk management system. Such financial risk management should 
include a correlation between the time permitted for margin collection 
and the performance bonds or risk margin levels established for each 
contract. Because the Commission is proposing minimum capital 
requirements based on a percentage of risk maintenance margin required, 
not collected, a corresponding change to the allowed collection period 
for margin deficiencies is being proposed.
    As noted previously, the SPAN margining system is intended to 
result in a level of maintenance margin that is expected to cover the 
probable one-day price move for a particular futures or option contract 
95 percent to 99 percent of the time. Because price moves of that 
magnitude do not occur each day, the Commission believes it is 
appropriate to allow an FCM a reasonable period of time to collect the 
margin calls from customers and noncustomers prior to imposing a 
capital charge. However, with the increased use of electronic 
communications and electronic funds transfers, an FCM should be able to 
minimize the risks inherent in an account that has become 
undermargined. Reducing the period of time for collection to one 
business day from the date the margin call was issued for the purpose 
of taking charges against net capital would reflect the additional risk 
posed by a longer collection time than is necessary to transfer funds 
using current technology. It would also serve as an additional 
incentive to FCMs to issue margin calls and to collect margin promptly. 
An example of when a margin charge would have to be taken is as 
follows: on Monday a customer's or noncustomer's account becomes 
undermargined for the first time; the FCM makes a call to the customer 
or noncustomer for additional margin on Tuesday; if the margin 
deficiency is not collected by the close of business Wednesday, then 
any capital computation prepared as of the close of business Wednesday 
would include a capital charge for the margin deficiency.

IV. Financial Reporting Requirements for FCMs and IBs

A. Introduction

    FCMs and IBs are required to be in compliance with the net capital 
rule at all times and to be able to demonstrate that compliance 
whenever requested to do so. Such close monitoring and awareness of 
capital positions is necessary in the high risk, high volatility 
futures trading business. Likewise, a sound financial surveillance 
program recognizes the need to monitor the financial condition of an 
FCM or IB through the regular collection of financial information. The 
Commission is proposing several amendments to Rules 1.10, 1.12, 1.16 
and 1.18 that: (i) Reflect advances in technology that permit more 
rapid reporting, (ii) increase regulatory efficiency by harmonizing 
reporting requirements under comparable Commission and SEC rules, (iii) 
promote direct supervision of FCMs and IBs by SROs subject to 
Commission oversight, and (iv) streamline the Commission's reporting 
requirements by eliminating unnecessary filings. The proposed 
streamlined procedures and filing requirements are consistent with the 
oversight role envisioned for the Commission under the Commodity 
Futures Modernization Act of 2000 (``CFMA'') which includes among its 
stated purposes ``to transform the role of the [Commission] to 
oversight of the futures market'' and ``to streamline and eliminate 
unnecessary regulation for the commodity futures exchanges and other 
entities regulated under the Commodity Exchange Act''.\16\
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    \16\ Section 2 of the CFMA, Pub. L. 106-554, Appendix E, 114 
Stat. 2763 (2000).
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B. Monthly Filing of Financial Reports by FCMs

    The Commission conducts its monitoring of the financial condition 
of FCMs both directly and through coordination with the SROs. Pursuant 
to Commission Rule 1.52, an SRO must adopt, submit for Commission 
approval, and thereafter enforce minimum financial and related 
reporting requirements for its member FCMs.
    Commission Rule 1.10 requires an FCM to file an unaudited Form 1-
FR-FCM report on a quarterly basis with the Commission and with its 
designated self-regulatory organization (``DSRO'').\17\ FCMs that also 
are registered as securities brokers or dealers may elect to file, in 
lieu of a Form 1-FR-FCM, a copy of their unaudited Financial and 
Operational Combined Uniform Single Report under the Securities and 
Exchange Act of 1934, Part II or Part IIA (``FOCUS Report'').\18\ FCM 
financial reports must be filed with the Commission and with an FCM's 
DSRO within 17 business days of the end of the fiscal quarter.
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    \17\ The DSRO is the self-regulatory organization that, pursuant 
to Commission Rule 1.52, is primarily responsible for monitoring an 
FCM's compliance with minimum financial and related reporting 
requirements, receiving and reviewing an FCM's financial reports, 
and auditing the FCM's books and records.
    \18\ The requirements for the FOCUS Report are set forth in SEC 
Rule 17a-5.
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    The Commission is proposing to amend Rule 1.10 to require each FCM 
to file an unaudited Form 1-FR-FCM or FOCUS Report with the Commission 
and with the FCM's DSRO as of the end of each month, including the 
FCM's fiscal year end. The FCM would be required to file the financial 
reports within 17 business days of the end of each month.
    When the Commission initially adopted its financial reporting 
rules, quarterly reporting by FCMs was determined to be sufficient for 
adequate and timely monitoring of the FCM's financial condition. 
Commodity exchanges and NFA, however, have

[[Page 40841]]

since recognized the need for more frequent filing of financial 
information by FCMs due to the substantial increase in the volume of 
business conducted in the futures and options markets and the high 
volatility of the markets in which FCMs operate. The NFA and CME 
currently require FCMs for which they are DSRO to file financial 
reports on a monthly basis.\19\ Because the Commission receives copies 
of all financial reports filed at the SRO level, for most FCMs the 
Commission already receives monthly financial reports.
---------------------------------------------------------------------------

    \19\ Section 1(b) of NFA Rulebook and CME Rule 970C.1.
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    The Commission believes it is appropriate to amend its rules to 
require FCMs to report their financial condition monthly. Monthly 
filing would permit closer financial surveillance for any remaining 
entities that file quarterly, and would be consistent with the rules of 
the SROs that have already caused monthly reporting to be widely 
required. More frequent reporting allows SROs and the Commission to 
identify adverse financial trends sooner than is possible with 
quarterly filing. In addition, since most FCMs currently file monthly 
financial reports with their DSRO, a Commission regulation requiring 
FCMs to file monthly financial reports with the Commission and with the 
applicable DSRO should pose minimal additional burden on FCMs. 
Furthermore, an FCM's preparation of a monthly financial report would 
satisfy its requirement to prepare a monthly net capital computation 
under Rule 1.18.\20\
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    \20\ Rule 1.18(b) requires an FCM to prepare and to maintain a 
formal computation of its net capital as of the close of business 
each month. The formal net capital computation must be completed 
within 17 business days of the end of the month.
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C. Requirements for Oath or Affirmation Filed With Form 1-FR

    The Commission also is proposing to ease Form 1-FR filing 
requirements for FCMs and IBs by expanding the list of persons from 
whom the Commission would accept the oath or affirmation that is 
required by Rule 1.10(d)(4).\21\ Pursuant to this rule, the individual 
providing the oath or affirmation attests to the truth and accuracy of 
the information provided in the Form 1-FR, to the best knowledge and 
belief of the individual. The oath or affirmation must be provided by 
one of the following individuals: If the FCM or IB is a sole 
proprietorship, the sole proprietor; if the FCM or IB is a partnership, 
a general partner; or if the FCM or IB is a corporation, the chief 
executive officer or chief financial officer.\22\
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    \21\ Not all IBs file a Form 1-FR-IB. An IB that operates 
pursuant to an FCM guarantee agreement that satisfies the 
requirements of Rule 1.10(h) is exempt from filing the form, which 
otherwise would be required from the IB pursuant to Rule 
1.10(b)(2)(i). Generally, at least two-thirds of registered IBs 
operate pursuant to a guarantee agreement.
    \22\ Rule 1.10(d)(4) also provides that in the case of a Form 1-
FR filed with the Commission via electronic transmission, such 
transmission must be accompanied by the Commission-assigned Personal 
Identification Number of the authorized signer and such Personal 
Identification Number will constitute and become a substitute for 
the manual signature of the authorized signer for the purpose of 
making the oath or affirmation.
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    The list of individuals that appears in Rule 1.10(d) also appears 
in other Commission regulations that designate permitted signatories 
for required filings by commodity pool operators (``CPOs'') and 
commodity trading advisers (``CTAs''). The Commission recently has 
issued a release that proposes to revise these rules for CPOs and CTAs, 
as the ``existing list may be unnecessarily restrictive in that it 
leaves no room for other organizational structures under which CPOs and 
CTAs operate--e.g., limited liability companies.''\23\ The list in Rule 
1.10(d)(4) similarly does not address all organizational structures 
under which FCMs and IBs operate. The Commission is therefore proposing 
to amend the rule to provide that the oath or affirmation may be made 
by either (i) a representative duly authorized to bind the FCM or IB, 
or, (ii) if the FCM or IB also is registered with the SEC as a 
securities broker or dealer, a representative authorized to file the 
FOCUS Report for the broker or dealer under SEC Rule 17a-5 (17 CFR 
240.17a-5).
---------------------------------------------------------------------------

    \23\ 68 FR 12622 (March 17, 2003).
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D. Extensions of Time To File Unaudited and Audited Financial Reports

    Commission Rule 1.10(f)(1) provides that if an FCM or IB determines 
that it cannot file its unaudited Form 1-FR prior to the due date, it 
may file an application with the Commission for an extension of time to 
a specified date, which may not be more than 90 days after the original 
due date. The FCM or IB also is required to file a copy of the 
application for extension with its DSRO.
    In addition to unaudited filings, Commission Rule 1.10 also 
requires that FCMs and IBs file audited financial statements and 
schedules on an annual basis. To request an extension of time for 
filing the annual audited financial report, the FCM or IB may file an 
application with the Commission pursuant to Commission Rule 1.16(f). 
Notice of the application must be filed by the FCM or IB with its DSRO.
    Several exchanges have adopted rules or procedures to process 
requests from their member FCMs for extensions of time to file 
unaudited financial statements. In addition, in 1993 the SEC amended 
its rules to provide authority to the designated examining authority 
(``DEA'') of a broker or dealer to grant or deny a request for 
extension of time to file its unaudited FOCUS Report.\24\ This has 
resulted in some requests for filing extensions being reviewed and 
acted upon by the Commission, DSRO staff and DEA staff.
---------------------------------------------------------------------------

    \24\ 58 FR 45838 (August 31, 1993).
---------------------------------------------------------------------------

    The Commission proposes to provide greater clarity and uniformity 
to this area by amending Rules 1.10(f) and 1.16(f). The amended rules 
would provide that the DSRO of an FCM or IB may approve an application 
for an extension of time to file an unaudited or audited financial 
report, provided that the FCM or IB files with the Commission a copy of 
its DSRO's written approval or denial of the request to extend the time 
for filing the Form
1-FR. A registrant must file a copy of its application, and a copy of 
any notices it receives from the designated self regulatory 
organization to approve or deny its application, with the regional 
office of the Commission where the FCM or IB is required to file its 
unaudited or audited financial statements.
    The Commission also is proposing that if the FCM or IB also is 
registered as a securities broker or dealer with the SEC (a ``dual 
registrant'') and has filed with its DEA a request for an extension of 
time to file its unaudited monthly FOCUS Report or audited annual 
financial statements, no separate application to its applicable DSRO 
would be required, but the dual registrant would be required to file 
with its DSRO and the Commission a copy of the application made to the 
FCM's or IB's DEA. Immediately upon the DEA's approval or denial of the 
request to extend the time for filing the unaudited monthly FOCUS 
Reports or audited annual financial statements, the dual registrant 
would be required to file a copy of such approval or denial with the 
Commission and its DSRO.

E. Change in Fiscal Year End

    Commission Rule 1.10(e) provides that an FCM or IB must continue to 
use its elected fiscal year, unless a change is approved upon written 
application to the Commission and a notice of the change is filed with 
the FCM's or IB's DSRO. The Commission generally has approved such 
applications provided that the applicant files certified financial 
statements within 15 months of the as of date of its last certified

[[Page 40842]]

financial statements and the certified financial statements cover the 
full period from the as of date of the previous certified financial 
statements. In addition, SEC rules provide for DEA approval in 
connection with changes to the fiscal year or ``as of'' date for the 
annual audited financial statements of a broker or dealer.\25\
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    \25\ SEC Rule 17a-5(m) requires that a securities broker or 
dealer notify its DEA and the SEC offices located in Washington, DC 
and the region where the broker or dealer has its principal place of 
business ``in the event any broker-dealer finds it necessary to 
change its fiscal year.'' The notice must contain a detailed 
explanation for the change, and any change in the ``as of'' date for 
the annual audit financial statements must be approved by the DEA 
under SEC Rule 17a-5(d)(1)(i).
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    The Commission is proposing to amend Rule 1.10(e) to provide that a 
DSRO may approve an FCM's or IB's application for a change in fiscal 
year, provided that the FCM or IB files with the Commission a copy of 
its application, and also files a copy of its DSRO's written approval 
or denial of a change in fiscal year end, in order to permit Commission 
staff to know when certified annual financial reports are to be 
filed.\26\ The Commission also is proposing that any dual registrant 
that has filed a notice or application with its DEA to request a change 
to its fiscal year or ``as of'' date would not need to file a separate 
application with its DSRO, but the dual registrant would need to file 
with its DSRO and the Commission a copy of the notice or application 
filed by the registrant with its DEA. Further, immediately upon the 
approval or denial of the request to change the dual registrant's 
fiscal year or ``as of'' date, the dual registrant would be required to 
file a copy of such approval or denial with the Commission and its 
DSRO.
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    \26\ Rule 1.10(b)(1)(ii) requires that FCMs file reports that 
are ``as of the close of its fiscal year'' and filed ``no later than 
90 days after the close'' of the fiscal year, or, if the FCM is also 
registered as a securities broker or dealer, no later than the 60 
day period provided under SEC Rule 17a-5(d)(5).
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F. Filings by Introducing Brokers of Form 1-FR With NFA

    Commission Rule 1.10(b) requires an IB to file with the Commission 
and with NFA on a semiannual basis an unaudited Form 1-FR-IB, or its 
FOCUS Report if the IB is also registered with the SEC as a securities 
broker or dealer. The IBs are required to file the unaudited financial 
reports within 17 business days of the as of date of the reports.
    The Commission currently has direct access to a database maintained 
by NFA that includes the financial information reported by IBs on a 
Form 1-FR-IB or FOCUS Report. Therefore, the Commission is proposing to 
amend Rule 1.10(c) to provide that an IB must file an unaudited Form 1-
FR-IB solely with NFA.\27\
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    \27\ The proposed amendment will be similar to existing 
provisions in 1.10(c) that provide that guarantee agreements need be 
filed solely with the NFA.
---------------------------------------------------------------------------

    Furthermore, the Commission invites comment on whether, and under 
what conditions, it should amend its rules to permit IBs to file annual 
certified financial statements solely with NFA. NFA would input the 
financial information into the database and would provide copies of the 
annual reports to the Commission upon request.

V. Early Warning Requirements

    Commission Rule 1.12 requires an FCM to file notices and meet other 
requirements if certain predefined financial events occur that may 
raise concerns regarding the FCM's ability to continue its normal 
operations and to safeguard customer funds. The requirements in Rule 
1.12 are generally referred to as ``early warning requirements.''

A. Adjusted Net Capital That Is Below the Early Warning Level

    An FCM whose adjusted net capital falls below a level specified in 
Rule 1.12(b), the early warning level, is required to meet the notice 
and monthly filing requirements that are set forth in 1.12(b)(4).\28\ 
The FCM must file written notice within five business days with the 
Commission and its DSRO, and the FCM must also file a Form 1-FR-FCM or 
FOCUS Report as of the close of business for the month in which the 
FCM's adjusted net capital is less than the required early warning 
level. Rule 1.12(b) further requires the FCM to continue to file 
monthly Forms 1-FR-FCM or FOCUS Reports, as opposed to filing quarterly 
reports that would ordinarily be required under Rule 1.10, until the 
end of a period of three successive months during which the adjusted 
net capital of the FCM remains at a level equal to or greater than the 
early warning level.
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    \28\ The level of adjusted net capital that is required under 
Rule 1.12(b) equals the greatest of the following:
    a. $375,000;
    b. Six percent of the Segregated Amount, less the market value 
of options purchased by customers for which the full premiums have 
been paid;
    c. 150 percent of the amount of adjusted net capital required by 
a registered futures association of which the FCM is a member; or
    d. for FCMs that also are registered with SEC as securities 
brokers or dealers, the amount of net capital required by SEC Rule 
17a-11(b).
    The Commission is proposing a technical amendment to Rule 
1.12(b) to correct the reference to SEC Rule 17a-11(b), which the 
SEC has redesignated as 17a-11(c). 58 FR 37655 (July 13, 1993.)
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    The Commission is proposing to eliminate the monthly filing 
requirement in Rule 1.12(b), because this provision will become 
unnecessary if Rule 1.10 is amended to require that all FCMs file 
monthly financial reports with the Commission and with their DSRO. The 
Commission also is retaining the requirement under Rule 1.12(b) that 
the FCM provide notice to the Commission and to the firm's DSRO that 
its adjusted net capital has fallen below 150 percent of its minimum 
capital requirement. In addition, the Commission is proposing to amend 
Rule 1.12(b) to provide that the early warning notice be filed with the 
Commission and with the firm's DSRO within 24 hours, instead of within 
five business days. This amendment would make the Commission's rule 
consistent with the SEC's early warning rule, which also requires that 
notice be provided promptly, within 24 hours.\29\
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    \29\ SEC Rule 17a-11(c), (17 CFR 240.17a-11(c)).
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    The JAC has requested that the Commission eliminate the early 
warning requirement since FCMs will be required to file monthly 
financial reports under the amended rules. The Commission, however, is 
concerned that eliminating the early warning notice requirement will 
diminish the DSRO's and Commission's ability to react promptly to 
potential financial crises at an FCM that has experienced a decrease in 
capital. The Commission, however, invites interested parties to comment 
on this aspect of the proposal, including on whether the 150 percent 
early warning level is appropriate or whether it should be adjusted or 
eliminated.

B. Failure To Maintain Current Books and Records and of Material 
Inadequacy in Internal Accounting Controls

    Rule 1.12(c) requires an FCM or IB to notify the Commission if it 
fails to maintain current books and records that it is required to keep 
pursuant to Commission regulations. The FCM or IB must give such notice 
on the same day that the event occurs that causes it to not maintain 
current books and records. The notice must specify the books and 
records that have not been made or that are not current. The FCM or IB 
also is required to file a written report setting forth the steps 
taken, or that are being taken, to correct the situation within five 
business days of filing the initial notice.
    Rule 1.12(d) requires an FCM or IB to notify the Commission within 
three business days of discovering or being

[[Page 40843]]

notified by an independent public accountant of a material inadequacy 
in its accounting system, internal accounting controls, procedures for 
safeguarding customer and firm assets, or other systems. The FCM or IB 
also is required to file a written report setting forth the steps 
taken, or that are being taken, to correct the material inadequacy 
within five business days of the original notice.
    The Commission is proposing to amend Rule 1.12(c) and (d) so that 
the time frames for reporting a failure to maintain current books and 
records and for reporting a material inadequacy in accounting systems 
are consistent with the time frames established by SEC rules for 
securities brokers and dealers. The Commission and SEC have attempted, 
to the extent possible, to develop capital and financial reporting 
rules that are consistent in order to simplify and to clarify the rules 
and procedures for firms that are dually-registered as securities 
brokers or dealers and FCMs or IBs. SEC Rule 17a-11(d) and (e) are 
analogous to Commission Rule 1.12(c) and (d). SEC Rule 17a-11(d), 
however, requires a broker or dealer to transmit within 48 hours a 
report to the SEC stating what the broker or dealer has done or is 
doing to correct the situation that has caused it to fail to maintain 
current books and records. SEC Rule 17a-11(e) requires a broker or 
dealer to notify the SEC within 24 hours of discovering a material 
inadequacy in its accounting systems and to transmit a report to the 
SEC within 48 hours of such discovery.
    The Commission believes that financial surveillance would be 
improved if all FCMs and IBs, whether dual registrants or not, were 
required to file notices with the Commission in accordance with the 
earlier thresholds required by the SEC. The time frames in the 
Commission's rules were adopted in 1978 and have not been amended since 
then to reflect advances in technology that may help ensure more prompt 
reporting. The Commission further believes that FCMs and IBs and 
brokers and dealers would benefit if the Commission's and SEC's rules 
were harmonized so that the same time frames apply for compliance with 
both agencies.

VI. Equity Capital and Subordinated Agreements

    The Commission also is proposing to make conforming changes to Rule 
1.17(e) and Rule 1.17(h), as these rules also include adjusted net 
capital requirements that are based upon percentages of the Segregated 
Amount. Pursuant to these rules, an FCM \30\ must maintain adjusted net 
capital in excess of its minimum adjusted net capital requirement in 
order to undertake or avoid undertaking certain actions in connection 
with the FCM's equity capital and subordination agreements.\31\ Thus, 
for example, Rule 1.17(e) prohibits the withdrawal of equity capital 
from an FCM if, among other conditions, the FCM's adjusted net capital 
after giving effect to such withdrawals would be less than the greatest 
of:
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    \30\ Both FCMs and IBs must maintain specified levels of 
adjusted net capital for purposes of the actions that are either 
restricted or required under Regulations 1.17(e) and 1.17(h). Only 
FCMs, however, are required to include in their capital computations 
the funds that FCMs are required to segregate and set aside for the 
FCMs' customers. The discussion in this proposal is therefore 
limited to FCMs, since the proposed change relates to adjusted net 
capital computations that are based on funds required to be 
segregated and set aside for the FCMs' customers.
    \31\ Subordination agreements that meet the requirements of Rule 
1.17(h) will be deemed ``satisfactory subordination agreements,'' 
thus permitting an FCM, pursuant to Rule 1.17(c)(4)(i), to exclude 
the subordinated debt that is governed by these agreements as 
liabilities when computing net capital.
---------------------------------------------------------------------------

    a. 120 percent of the minimum dollar amount in 1.17(a)(1)(i)(A) or 
(a)(1)(ii)(A); \32\
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    \32\ The Commission redesignated paragraph (a)(1)(ii)(A) of Rule 
1.17 as paragraph (a)(1)(iii)(A) in 2001. 66 FR 53510 (October 23, 
2001). The Commission therefore also proposes a technical amendment 
to Rule 1.17(e) to correct the reference to 1.17(a)(1)(ii)(A) to 
read 1.17(a)(1)(iii)(A).
---------------------------------------------------------------------------

    b. Six percent of the Segregated Amount;
    c. 120 percent of the amount of adjusted net capital required by a 
registered futures association of which the FCM is a member; or
    d. For FCMs that also are registered with the SEC as securities 
brokers or dealers, the amount of net capital required by SEC Rule 
15c3-1(e).
    Similarly, several paragraphs of Rule 1.17 that address 
subordination agreements--(h)(2)(vi)(C) (restricting reductions of the 
unpaid principal balance under a secured demand note subject to a 
subordination agreement); (h)(2)(vii)(A) (restricting prepayments) and 
(B) (restricting special prepayments); \33\ (h)(2)(viii)(A) (requiring 
suspension of repayment); (h)(3)(ii) (requiring notice of maturity or 
accelerated maturity) and (h)(3)(v) (restricting use of temporary 
subordinations)--also include adjusted net capital calculations that 
refer to specified percentages of the Segregated Amount.\34\ The 
required percentages range from six percent to ten percent, all of 
which exceed the percentage (four percent) applied to the Segregated 
Amount for purposes of the minimum adjusted net capital requirement 
under Rule 1.17(a).
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    \33\ ``Special prepayments'' is the term used by the rule for 
prepayments made under revolving subordinated agreements. Because 
revolving agreements may permit prepayments at any time, such 
payments ordinarily would conflict with Rule 1.17(h)(2)(vii) 
(prohibiting prepayment within one year of the date upon which the 
governing subordination agreement became effective.) In 1982, the 
Commission determined that special prepayments would be acceptable 
if subject to various conditions, including a higher level of 
adjusted net capital (10 percent of segregated funds) than is 
required for prepayments that are subject to the one-year 
restriction (7 percent of segregated funds.) 47 FR 22352 (May 24, 
1982).
    \34\ The cited paragraphs contain references to 
1.17(a)(1)(ii)(A), which has been redesignated. (See discussion in 
footnote 31 of this release.) The Commission is proposing a 
technical amendment to change the reference to read as 
1.17(a)(1)(iii)(A).
---------------------------------------------------------------------------

    The Commission therefore is proposing to amend paragraphs (e) and 
(h) of Rule 1.17 to conform to the risk-based capital requirement that 
the Commission is proposing for Rule 1.17(a). The proposed amendments 
to paragraphs (e) and (h) of Rule 1.17 would: (i) Eliminate 
calculations based on the Segregated Amount; (ii) adopt calculations 
based on the required margin for customer and noncustomer futures and 
option positions carried by an FCM; and (iii) apply percentage 
requirements that reflect the same proportional increase currently 
required under 1.17(e) and (h). Thus, for example, where Rule 1.17(e) 
included a calculation based upon six percent of the Segregated Amount, 
the Commission proposes to eliminate this calculation and require 150 
percent of the Risk-Based Capital amount that the Commission is 
proposing for FCMs under Rule 1.17(a)(1)(B).
    The Commission also is proposing to ``grandfather'' in agreements 
that, prior to the effective date of the proposed amendments, have been 
determined to be satisfactory subordination agreements pursuant to Rule 
1.17(h). The Commission is proposing to amend paragraph (h)(3)(vii) of 
Rule 1.17 to provide that any such agreement would continue to be 
deemed satisfactory until its maturity, so long as the agreement is not 
amended or renewed. If for any reason the agreement is amended or 
renewed, such amended or renewed agreement must comply with Rule 1.17 
as amended.\35\
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    \35\ Rule 1.17(h)(3)(vii) presently applies to satisfactory 
subordination agreements that were entered into prior to the date 
that Rule 1.17(h) first became effective (December 20, 1978). The 
Commission provided a period of up to five years for such agreements 
to come into compliance with Rule 1.17(h), and this period has long 
since expired. The Commission therefore is also proposing technical 
amendments to eliminate provisions in Rule 1.17(h)(3)(viii) that are 
applicable to satisfactory subordination agreements that were 
entered into prior to December 20, 1978.

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[[Page 40844]]

VII. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission previously has 
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.\36\ The Commission has determined previously 
that FCMs are not small entities for the purpose of the RFA.\37\ With 
respect to IBs, the Commission has determined to evaluate within the 
context of a particular rule proposal whether all or some IBs would be 
considered ``small entities'' for purposes of the Regulatory 
Flexibility Act and, if so, to analyze the economic impact on IBs of 
any such rule at that time.\38\ Several of the proposed amendments 
would apply to FCMs only and therefore would have no economic impact on 
IBs (proposed amendments to Regulations 1.12(b), 1.17(a), 1.17(c), 
1.17(e) and 1.17(h)). The proposed amendments to Regulations 1.10, 1.16 
and 1.18 would reduce reporting requirements applicable to IBs, because 
financial reports that the IB must now file with both the Commission 
and the NFA would be filed with the NFA only. Proposed amendments to 
Regulation 1.12, which would shorten reporting time frames to the same 
periods required by comparable SEC rules, should have no economic 
impact on an IB that is also registered as a securities broker or 
dealer with SEC. Moreover, the advances in technology since 1978 would 
reduce the effect, if any, of the proposed Rule 1.12 amendments on 
those IBs that are not registered with the SEC. Therefore, the 
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 
U.S.C. 605(b), that the action proposed to be taken herein will not 
have a significant economic impact on a substantial number of small 
entities. The Commission invites the public to comment on the 
significance of the economic impact of the proposed rules, if any, on 
IBs.
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    \36\ 47 FR 18618 (April 30, 1982).
    \37\ 47 FR at 18619.
    \38\ 47 FR at 18618, 18620.
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B. Paperwork Reduction Act

    The proposed rulemaking includes information collection 
requirements as a result of the proposed amendment to Regulation 1.10, 
which would require FCMs to prepare and file unaudited financial 
reports on a monthly rather than a quarterly basis. The Paperwork 
Reduction Act of 1995 (``PRA'') \39\ imposes certain requirements on 
federal agencies (including the Commission) in connection with their 
conducting or sponsoring any collection of information as defined by 
the PRA. Pursuant to the PRA, the Commission has submitted a copy of 
this section to the Office of Management and Budget (``OMB'') for its 
review.
---------------------------------------------------------------------------

    \39\ 44 U.S.C. 3507(d).

Collection Of Information. (Regulations and Forms Pertaining to the 
---------------------------------------------------------------------------
Financial Integrity of the Marketplace, OMB Control Number 3038-0024.)

    FCMs currently prepare and file quarterly unaudited financial 
reports under Rule 1.10, and they also prepare and file monthly capital 
computations under Rule 1.18. Under the proposed amendment to Rule 
1.10, FCMs would file unaudited financial reports on a monthly basis, 
which would also satisfy the existing monthly reporting requirement of 
Rule 1.18. The Commission has therefore determined that the proposed 
amendments to Rule 1.10 and Rule 1.18 would increase by 537 hours the 
total annual reporting burden associated with the above-referenced 
collection of information, which has been approved previously by OMB.
    The estimated burden of the proposed amendments to Rule 1.10 and 
Rule 1.18 was calculated as follows:
    The burden associated with Rule 1.10 is expected to be 5,577 hours 
as a result of the proposed amendment to Rule 1.10, which represents an 
increase of 3,687 hours:
    Estimated number of respondents: 169.
    Reports annually by each respondent: 12.
    Total annual responses: 2,028.
    Estimated average number of hours per response: 2.75.
    Annual reporting burden: 5,577.
    The existing burden associated with Commission Rule 1.18 is 
expected to decline to zero as a result of the proposed amendment to 
Rule 1.18, which represents a decrease of 3,150 hours.
    Copies of the information collection submission to OMB are 
available from the CFTC Clearance Officer, 1155 21st Street, NW., 
Washington, DC 20581 (202) 418-5160. The Commission considers comments 
by the public on this proposed collection of information in--
    Evaluating whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    Evaluating the accuracy of the Commission's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
    Enhancing the quality, utility, and clarity of the information to 
be collected; and
    Minimizing the burden of the collection of information on those who 
are to respond, including through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology, e.g., permitting electronic 
submission of responses.
    Organizations and individuals desiring to submit comments on the 
information collection should contact the Office of Information and 
Regulatory Affairs, Office of Management and Budget, Room 10235, New 
Executive Office Building, Washington, DC 20503, Attn: Desk Officer of 
the Commodity Futures Commission. OMB is required to make a decision 
concerning the collection of information contained in these proposed 
regulations between 30 and 60 days after publication of this document 
in the Federal Register. Therefore, a comment to OMB is best assured of 
having its full effect if OMB receives it within 30 days of 
publication. This does not affect the deadline for the public to 
comment to the Commission on the proposed regulations.

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

[[Page 40845]]

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 proposed rulemaking consists of several proposed amendments to 
regulations pertaining to the minimum financial and related reporting 
requirements for FCMs and IBs.\40\ The Commission is considering the 
costs and benefits of these various proposed rules in light of the 
specific provisions of section 15(a) of the Act, as follows:
---------------------------------------------------------------------------

    \40\ Section 4f(b) of the Act prohibits persons from becoming 
registered as FCMs or IBs if they do not meet the minimum financial 
requirements set forth in either the Commission's regulations or in 
such Commission-approved requirements as may be established by the 
contract markets and derivatives transaction execution facilities of 
which the FCM or IB is a member.
---------------------------------------------------------------------------

    1. Protection of market participants and the public. The proposed 
amendments to reporting requirements provide the benefit of aiding the 
Commission and DSROs to monitor the financial condition of futures 
intermediaries and to protect the customers of those firms and the 
markets. The Commission anticipates that the costs of compliance with 
the proposed reporting requirements would be minimized by proposed 
amendments to streamline filing requirements. In addition, the proposed 
rules would ``grandfather'' in existing satisfactory subordination 
agreements, meaning that FCMs or IBs would incur no costs to comply 
with proposed amendments to Rule 1.17, unless such agreements would be 
amended or renewed for other reasons.
    2. Efficiency and competition. As stated above, the Commission 
anticipates that the proposed amendments will benefit efficiency by 
eliminating duplicate filings and otherwise streamlining reporting 
requirements for FCMs and IBs. The proposed amendments should have no 
effect, from the standpoint of imposing costs or creating benefits, on 
competition in the futures and options markets.
    3. Financial integrity of futures markets and price discovery. The 
proposed amendments contribute to the benefit of ensuring that FCMs and 
IBs can meet their financial obligations to customers and other market 
participants, thus contributing to the financial integrity of the 
futures and options markets as a whole. The proposed amendments should 
have no effect, from the standpoint of imposing costs or creating 
benefits, on the price discovery function of such markets.
    4. Sound risk management practices. The proposed capital standards 
seek to reflect appropriately the level of risk that different 
activities and obligations of FCMs and IBs may pose to their financial 
condition. The proposed amendments may therefore contribute to the 
sound risk management practices of futures intermediaries.
    5. Other public interest considerations. The Commission also 
believes that the proposed rules are beneficial in that they harmonize 
Commission and SEC rules with respect to time frames for reporting 
conditions that may be potentially adverse to the financial condition 
of the FCM or IB.
    After considering these factors, the Commission has determined to 
propose the amendments discussed above. The Commission invites public 
comment on its application of the cost-benefit provision. Commenters 
also are invited to submit any data that they may have quantifying the 
costs and benefits of the proposal with their comment letters.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

    For the reasons presented above, 17 CFR Part 1 is proposed to be 
amended 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. No. 106-
554, 114 Stat. 2763 (2000).

    2. Section 1.10 is proposed to be amended by:
    a. Adding the word ``monthly'' before the words ``financial 
reports'' and removing the parenthetical phrase in paragraph 
(b)(1)(ii);
    b. Removing the last sentence of paragraph (e)(1); and
    c. Removing paragraph (f)(2) and
    d. Revising paragraphs (b)(1)(i), (b)(2)(i), (c), (d)(4), (e)(2), 
and (f)(1) to read as follows:


Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (b) Filing of financial reports. (1)(i) Except as provided in 
paragraphs (b)(3) and (h) of this section, each person registered as a 
futures commission merchant must file a Form 1-FR-FCM as of the close 
of business each month. Each Form 1-FR-FCM must be filed no later than 
17 business days after the date for which the report is made.
* * * * *
    (2)(i) Except as provided in paragraphs (b)(3) and (h) of this 
section, and except for an introducing broker operating pursuant to a 
guarantee agreement which is not also a securities broker or dealer, 
each person registered as an introducing broker must file a Form 1-FR-
IB semiannually as of the middle and the close of each fiscal year 
unless the introducing broker elects, pursuant to paragraph (e)(1) of 
this section, to file a Form 1-FR-IB semiannually as of the middle and 
the close of each calendar year. Each Form 1-FR-IB must be filed no 
later than 17 business days after the date for which the report is 
made.
* * * * *
    (c) Where to file reports. (1) A report filed by an introducing 
broker pursuant to paragraph (b)(2)(i) of this section need be filed 
only with, and will be considered filed when received by, the National 
Futures Association. Other reports provided for in this section will be 
considered filed when received by the regional office of the Commission 
with jurisdiction over the state in which the registrant's principal 
place of business is located (except that a registrant under the 
jurisdiction of the Commission's Western Regional Office must file such 
reports with the Southwestern Regional Office) and by the designated 
self-regulatory organization, if any; and reports required to be filed 
by this section by an applicant for registration will be considered 
filed when received by the National Futures Association and by the 
regional office of the Commission with jurisdiction over the state in 
which the applicant's principal place of business is located (except 
that an applicant under the jurisdiction of the Commission's Western 
Regional Office must file such reports with the Southwestern Regional 
Office).
    (2) Any report filed pursuant to paragraph (b)(1), (b)(2), or 
(b)(4) of this section or Sec.  1.12(a) which need not be certified in 
accordance with Sec.  1.16 may be submitted to the Commission in 
electronic form using a Commission-assigned Personal Identification 
Number, and otherwise in accordance with instructions issued by the 
Commission, if the futures commission

[[Page 40846]]

merchant, introducing broker or a designated self-regulatory 
organization has provided the Commission with the means necessary to 
read and to process the information contained in such report.
    (3) Any guarantee agreement entered into between a futures 
commission merchant and an introducing broker in accordance with the 
provisions of this section need be filed only with, and will be 
considered filed when received by, the National Futures Association.
    (d) * * *
    (4) Attached to each Form 1-FR filed pursuant to this section must 
be an oath or affirmation that to the best knowledge and belief of the 
individual making such oath or affirmation the information contained in 
the Form 1-FR is true and correct. The oath or affirmation must be made 
by:
    (i) a representative duly authorized to bind the applicant or 
registrant; or
    (ii) if the registrant or applicant is registered with the 
Securities and Exchange Commission as a securities broker or dealer, by 
the representative authorized under Sec.  240.17a-5 of this title to 
file for the securities broker or dealer its Financial and Operational 
Combined Uniform Single Report under the Securities Exchange Act of 
1934, part II or part IIA. In the case of a Form 1-FR filed via 
electronic transmission in accordance with procedures established by 
the Commission, such transmission must be accompanied by the 
Commission-assigned Personal Identification Number of the authorized 
signer and such Personal Identification Number will constitute and 
become a substitute for the manual signature of the authorized signer 
for the purpose of making the oath or affirmation referred to in this 
paragraph.
    (e) * * *
    (2) (i) A registrant must continue to use its elected fiscal year, 
calendar or otherwise, unless a change in such fiscal year has been 
approved pursuant to this paragraph (e)(2).
    (ii) A registrant may file with its designated self-regulatory 
organization an application to change its fiscal year, a copy of which 
the registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self regulatory 
organization. The registrant must file immediately with the Commission 
a copy of any notice it receives from the designated self regulatory 
organization to approve or deny the registrant's application to change 
its fiscal year. A written notice of approval shall become effective 
upon the filing by the registrant of a copy with the Commission, and a 
written notice of denial shall be effective as of the date of the 
notice.
    (iii) A registrant that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with its 
designated self-regulatory organization copies of any notice or 
application filed with its designated examining authority, pursuant to 
Sec.  240.17a-5(d)(1)(i) of this title, for a change in fiscal year or 
``as of'' date for its annual audited financial statement. The 
registrant must also file immediately with the designated self 
regulatory organization and the Commission copies of any notice it 
receives from its designated examining authority to approve or deny the 
registrant's request for change in fiscal year or ``as of'' date. Upon 
the receipt by the designated self-regulatory organization and the 
Commission of copies of any such notice of approval, the change in 
fiscal year or ``as of'' date referenced in the notice shall be deemed 
approved under this paragraph (e)(2).
    (iv) Any copy that under this paragraph (e)(2) is required to be 
filed with the Commission shall be filed with the regional office of 
the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located (except that such a 
notice of approval for a registrant under the jurisdiction of the 
Commission's Western Regional Office must be filed with the 
Commission's Southwestern Regional Office), and any copy or application 
to be filed with the designated self-regulatory organization shall be 
filed at its principal place of business.
    (f) Extension of time for filing uncertified reports. (1) In the 
event a registrant finds that it cannot file its Form 1-FR, or, in 
accordance with paragraph (h) of this section, its Financial and 
Operational Combined Uniform Single Report under the Securities 
Exchange Act of 1934, part II or part IIA (FOCUS report), for any 
period within the time specified in paragraphs (b)(1)(i) or (b)(2)(i) 
of this section without substantial undue hardship, it may request 
approval for an extension of time, as follows:
    (i) A registrant may file with its designated self-regulatory 
organization an application for extension of time, a copy of which the 
registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission 
a copy of any notice it receives from the designated self regulatory 
organization to approve or deny the registrant's request for extension 
of time. A written notice of approval shall become effective upon the 
filing by the registrant of a copy with the Commission, and a written 
notice of denial shall be effective as of the date of the notice.
    (ii) A registrant that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with its 
designated self-regulatory organization a copy of any application that 
the registrant has filed with its designated examining authority, 
pursuant to Sec.  240.17-a5(l)(5) of this title, for an extension of 
time to file its FOCUS report. The registrant must also file 
immediately with the designated self-regulatory organization and the 
Commission copies of any notice it receives from its designated 
examining authority to approve or deny the requested extension of time. 
Upon receipt by the designated self-regulatory organization and the 
Commission of copies of any such notice of approval, the requested 
extension of time referenced in the notice shall be deemed approved 
under this paragraph (f)(1).
    (iii) Any copy that under this paragraph (f)(1) is required to be 
filed with the Commission shall be filed with the regional office of 
the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located (except that a 
registrant under the jurisdiction of the Commission's Western Regional 
Office must file the required copies with the Commission's Southwestern 
Regional Office) (See Sec.  1.16(f) for extension of the time for 
filing certified financial statements.)
    3. Section 1.12 is proposed to be amended by:
    a. Revising paragraphs (b)(1), (b)(2), (b)(4), (c) and (d), and
    b. Removing the words ``telegraphic or'' from paragraphs (e), 
(f)(1), (f)(2), (f)(3), (f)(4), (f)(5)(i), and (h) to read as follows:


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

* * * * *
    (b) * * *
    (1) 150 percent of the minimum dollar amount required by paragraph 
(a)(1)(i)(A) of Sec.  1.17;
    (2) 150 percent of the amount required by paragraph (a)(1)(i)(B) of 
Sec.  1.17;
    (3) * * *
    (4) For securities brokers or dealers, the amount of net capital 
specified in Rule 17a-11(c) of the Securities and Exchange Commission 
(17 CFR 240.17a-11(c)), must file written notice to that effect as set 
forth in paragraph (i)

[[Page 40847]]

of this section within twenty-four (24) hours of such event.
    (c) If an applicant or registrant at any time fails to make or keep 
current the books and records required by these regulations, such 
applicant or registrant must, on the same day such event occurs, 
provide facsimile notice of such fact, specifying the books and records 
which have not been made or which are not current, and within forty-
eight (48) hours after giving such notice file a written report stating 
what steps have been and are being taken to correct the situation.
    (d) Whenever any applicant or registrant discovers or is notified 
by an independent public accountant, pursuant to Sec.  1.16(e)(2) of 
this chapter, of the existence of any material inadequacy, as specified 
in Sec.  1.16(d)(2) of this chapter, such applicant or registrant must 
give facsimile notice of such material inadequacy within twenty-four 
(24) hours, and within forty-eight (48) hours after giving such notice 
file a written report stating what steps have been and are being taken 
to correct the material inadequacy.
    4. Section 1.16 is proposed to be amended by:
    a. Revising paragraph (f)(1), and
    b. Removing paragraph (f)(2) and redesignating paragraph (f)(3) as 
paragraph (f)(2), as follows:


Sec.  1.16.  Qualifications and reports of accountants.

* * * * *
    (f) Extension of time for filing audited reports. (1) In the event 
a registrant finds that it cannot file its certified financial 
statements and schedules for any year within the time specified in 
Sec.  1.10 without substantial undue hardship, it may request approval 
for an extension of time, as follows:
    (i) A registrant may file with its designated self-regulatory 
organization an application for extension of time, a copy of which the 
registrant must file with the Commission. The application shall be 
approved or denied in writing by the designated self-regulatory 
organization. The registrant must file immediately with the Commission 
a copy of any notice it receives from the designated self regulatory 
organization to approve or deny the registrant's request for extension 
of time. A written notice of approval shall become effective upon the 
filing by the registrant of a copy with the Commission, and a written 
notice of denial shall be effective as of the date of the notice.
    (ii) A registrant that is registered with the Securities and 
Exchange Commission as a securities broker or dealer may file with its 
designated self regulatory organization a copy of any application that 
the registrant has filed with its designated examining authority, 
pursuant to Sec.  240.17-a5(l)(1) of this title, for an extension of 
time to file audited annual financial statements. The registrant must 
also file immediately with the designated self-regulatory organization 
and the Commission copies of any notice it receives from its designated 
examining authority to approve or deny the requested extension of time. 
Upon receipt by the designated self-regulatory organization and the 
Commission of copies of any such notice of approval, the requested 
extension of time referenced in the notice shall be deemed approved 
under this paragraph (f)(1).
    (iii) Any copy that under this paragraph (f) is required to be 
filed with the Commission shall be filed with the regional office of 
the Commission with jurisdiction over the state in which the 
registrant's principal place of business is located (except that a 
registrant under the jurisdiction of the Commission's Western Regional 
Office must file the required copies with the Commission's Southwestern 
Regional Office).
    5. Section 1.17 is proposed to be amended by:
    a. revising paragraphs (a)(1)(i)(B), (b)(4), (e)(1)(ii), 
(h)(2)(vi)(C)(1) and (2), (h)(2)(vii)(A)(1) and (2), (h)(2)(vii)(B)(1) 
and (2), (h)(2)(viii)(A)(1) and (2), (h)(3)(ii)(A) and (B), 
(h)(3)(v)(A) and (B) and (h)(3)(vii);
    b. adding new paragraphs (b)(7) and (b)(8);
    c. revising the words ``three business days'' to read ``one 
business day'' in both the first and second sentences of paragraph 
(c)(5)(viii);
    d. revising the words ``three business days'' to read ``one 
business day'' in both the first and second sentences of paragraph 
(c)(5)(ix); and
    e. revising the reference to ``(a)(1)(ii)(A)'' to read 
``(a)(1)(iii)(A)'' in paragraph (e)(1)(i) to read as follows:


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

    (a)(1)(i) * * *
    (B) The futures commission merchant's risk-based capital 
requirement computed as follows:
    (1) Eight percent of the total risk margin requirement (as defined 
in Sec.  1.17(b)(8)) for all futures and options on futures positions 
carried by the futures commission merchant in customer accounts (as 
defined in Sec.  1.17(b)(7)), plus
    (2) Four percent of the total risk margin requirement (as defined 
in Sec.  1.17(b)(8)) for all futures and options on futures positions 
carried by the futures commission merchant in noncustomer accounts (as 
defined in Sec.  1.17(b)(4)).
* * * * *
    (b) * * *
    (4) ``Noncustomer account'' means a commodity futures or option 
account carried on the books of the applicant or registrant which is 
either:
    (i) An account that is not included in the definition of customer 
(as defined in Sec.  1.17(b)(2)) or proprietary account (as defined in 
Sec.  1.17(b)(3)), or
    (ii) An account for a foreign-domiciled person trading futures or 
options on a foreign board of trade, and such account is a proprietary 
account as defined in Sec.  1.3(y) of this title, but is not a 
proprietary account as defined in Sec.  1.17(b)(3).
* * * * *
    (7) ``Customer account'' means a commodity futures or option 
account carried on the books of the applicant or registrant which is 
either:
    (i) An account that is included in the definition of customer (as 
defined in Sec.  1.17(b)(2)), or
    (ii) An account for a foreign-domiciled person trading on a foreign 
board of trade, where such account for the foreign-domiciled person is 
not a proprietary account (as defined in Sec.  1.17 (b)(3)) or a 
noncustomer account (as defined in Sec.  1.17(b)(4)(ii)).
    (8) ``Risk margin'' for an account means the level of maintenance 
margin or performance bond that the exchange on which a position or 
portfolio of futures contracts and/or options on futures contracts is 
traded requires its members to collect from the owner of the account, 
subject to the following:
    (i) Risk margin does not include the equity component of short or 
long option positions maintained in an account;
    (ii) The maintenance margin or performance bond requirement 
associated with a long option position may be excluded from risk margin 
to the extent that the value of such long option position does not 
reduce the total risk maintenance or performance bond requirement of 
the account that holds the long option position;
    (iii) The risk margin for an account carried by an FCM which is not 
a member of the exchange on which the positions are traded should be 
calculated as if the FCM were such a member; and
    (iv) If a futures commission merchant does not possess sufficient 
information to determine what portion of an account's total margin 
requirement

[[Page 40848]]

represents risk margin, all of the margin required by the exchange, 
clearing organization, or other futures commission merchant or entity 
for that account, shall be treated as risk margin.
* * * * *
    (e)(1) * * *
    (ii) For a futures commission merchant or applicant therefor, 175 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(2)(vi)(C) * * *
    (1) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 175 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(2)(vii)(A) * * *
    (1) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 175 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(2)(B) * * *
    (1) 200 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 250 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(2)(viii)(A) * * *
    (1) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (2) For a futures commission merchant or applicant therefor, 150 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(3)(ii) * * *
    (A) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 150 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (h)(v) * * *
    (A) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (B) For a futures commission merchant or applicant therefor, 175 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (vii) Subordination agreements that incorporate adjusted net 
capital requirements in effect prior to [The Effective Date of the Rule 
Amendment]. Any subordination agreement that incorporates the adjusted 
net capital requirements in paragraphs (h)(2)(vi)(C)(2), 
(h)(2)(vii)(A)(2) and (B)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B), and 
(h)(3)(v)(B) of this section as in effect prior to [The Effective Date 
of the Rule Amendment] and which has been deemed to be satisfactorily 
subordinated pursuant to this section prior to [The Effective Date of 
the Rule Amendment] shall continue to be deemed a satisfactory 
subordination agreement until the maturity of such agreement. In the 
event, however, that such agreement is amended or renewed for any 
reason, then such agreement shall not be deemed a satisfactory 
subordination agreement unless the amended or renewed agreement meets 
the requirements of this section.
    6. Section 1.18 is proposed to be amended by revising paragraph (b) 
to read as follows:


Sec.  1.18  Records for and relating to financial reporting and monthly 
computation by futures commission merchants and introducing brokers.

* * * * *
    (b)(1) Each applicant or registrant must make and keep as a record 
in accordance with Sec.  1.31 formal computations of its adjusted net 
capital and of its minimum financial requirements pursuant to Sec.  
1.17 or the requirements of the designated self-regulatory organization 
to which it is subject as of the close of business each month. Such 
computations must be completed and made available for inspection by any 
representative of the National Futures Association, in the case of an 
applicant, or of the Commission or designated self-regulatory 
organization, if any, in the case of a registrant, within 17 business 
days after the date for which the computations are made, commencing the 
first month end after the date the application for registration is 
filed.
    (2) An applicant or registrant that has filed a Form 1-FR or 
Statement of Financial and Operational Combined Uniform Single Report 
under the Securities Exchange Act of 1934, Part II or Part IIA (FOCUS 
report) in accordance with the requirements of Sec.  1.10 will be 
deemed to have satisfied the requirements of paragraph (b)(1) of this 
section.

    Issued in Washington, DC, on July 1, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-17218 Filed 7-8-03; 8:45 am]
BILLING CODE 6351-01-P