[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Rules and Regulations]
[Pages 49784-49800]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18349]


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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: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
amending several of its regulations relating to the minimum financial 
and related reporting requirements for futures commission merchants 
(``FCMs'') and introducing brokers (``IBs''). The amended regulations 
require an FCM, when calculating its minimum adjusted net capital 
requirement, to include a computation based on the risk maintenance 
margin levels of positions carried in customer and noncustomer 
accounts. The required calculation is identical to capital calculations 
that each FCM currently is required to perform pursuant to the rules of 
self-regulatory organizations, including one derivatives clearing 
organization. The Commission also is adopting conforming margin-based 
computations for purposes of the Commission's equity capital, 
subordination agreement and ``early warning'' requirements for FCMs. 
The margin-based computations required by the final rule replace 
computations in the Commission's regulations that had been based on the 
amount of funds held by an FCM to margin, guarantee, or secure futures 
and option positions carried on behalf of customers. Furthermore, the 
Commission is amending its regulations to reduce the time periods for 
FCMs and IBs to report events specified in the Commission's early 
warning requirements. Finally, the Commission also is adopting 
amendments to streamline the financial statement reporting requirements 
for FCMs and IBs.

DATES: Effective Date: September 30, 2004.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Associate Deputy 
Director and Chief Accountant, 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

[[Page 49785]]

20581. Electronic mail: ([email protected]) or ([email protected]).

SUPPLEMENTARY INFORMATION: 

I. Summary of Rule Amendments as Proposed by the Commission

    Section 4f(b) of the Commodity Exchange Act (the ``Act'') 
authorizes the Commission, by regulation, to impose minimum financial 
and related reporting requirements on FCMs and IBs.\1\ On July 9, 2003, 
the Commission issued a release proposing amendments to Commission 
Rules 1.10, 1.12, 1.16, 1.17, and 1.18, which set forth certain minimum 
financial and related reporting requirements for FCMs and IBs (the 
``Proposing Release'').\2\ The key element of the Proposing Release was 
a proposal to amend Rule 1.17(a) to require margin-based, also referred 
to as ``risk-based,'' capital computations for an FCM's calculation of 
its minimum adjusted net capital requirement. The Proposing Release 
also included conforming amendments to other paragraphs of Rule 1.17 
that set forth capital computations that FCMs must perform for purposes 
related to their equity capital and subordination agreements, and to 
capital computations in Rule 1.12 that FCMs must make to comply with 
the Commission's ``early warning'' requirements. Other rule amendments 
in the Proposing Release proposed to shorten the time periods specified 
in Commission rules for FCMs and IBs to report certain financial events 
to the Commission, and to reduce the time periods before which an FCM 
is required to take a capital charge for outstanding margin calls on 
its customer and noncustomer accounts. Lastly, the Proposing Release 
included proposed revisions of Rules 1.10, 1.16 and 1.18 in order to 
amend the requirements for the financial statements that FCMs and IBs 
must file with the Commission.
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    \1\ The Act is codified at 7 U.S.C. 1 et seq. (2003), and 
section 4f(b) of the Act is codified at 7 U.S.C. 6f(b). The 
Commission's rules cited in this final rulemaking may be found at 17 
CFR Ch. 1 (2003).
    \2\ 68 FR 40835 (July 9, 2003). The Proposing Release may be 
accessed electronically through the Commission's Web site http://www.cftc.gov/.
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    The Commission received ten letters in response to its request for 
comments on the proposed rule amendments in the Proposing Release.\3\ 
Of these ten comments, five were from individual firms registered as 
FCMs,\4\ and two were from industry trade associations, the National 
Introducing Brokers Association (``NIBA'') and the Futures Industry 
Association (``FIA''). The National Futures Association (``NFA''),\5\ 
the Joint Audit Committee (``JAC''),\6\ and a former Commission staff 
member also submitted comment letters.\7\ These comments are discussed 
in more detail later in this supplementary information section.
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    \3\ The comment letters are available for inspection and copying 
at the Commission's Washington office in its public reading room, 
Room 4072, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581. The telephone number for the public reading 
room is (202) 418-5025. The comment letters also are available on 
the Commission's public Web site at http://www.cftc.gov/foia/
comment03/foi03--009--1.htm.
    \4\ Comment letters were filed by Cargill Investor Services, 
Inc.; Fimat USA, Inc.; Man Financial Inc.; R.J. O'Brien & 
Associates, Inc.; and Carr Futures Inc.
    \5\ NFA is a registered futures association pursuant to section 
17 of the Act.
    \6\ The JAC is a committee formed by futures exchanges and other 
self-regulatory organizations to coordinate audit and financial 
surveillance activities of FCMs.
    \7\ Paul H. Bjarnason, Jr. filed a comment letter.
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    The Commission, after further consideration, including 
consideration of the comments, has determined to adopt the following: 
(1) A requirement that an FCM include, as part of the calculation of 
its minimum adjusted net capital requirement, a computation based on 
the maintenance margin levels of the positions or transactions carried 
by the FCM in customer and noncustomer accounts, including futures, 
option on futures, and other transactions that the Commission has, by 
order or otherwise, approved for carrying in customer segregated 
accounts in accordance with section 4d of the Act or that are carried 
by the FCM in noncustomer accounts; \8\ (2) a conforming capital 
computation for early warning purposes, but which has been modified 
from the version proposed in the Proposing Release; and (3) other 
capital computations for purposes of an FCM's subordination agreements 
and equity capital, which have also been modified, as specified herein, 
from the versions that were originally proposed. Further, the 
Commission has determined to adopt amendments relating to the financial 
reporting requirements of FCMs and IBs as proposed in the Proposing 
Release.
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    \8\ The Proposing Release explained that the term 
``noncustomer'' is defined by Rule 1.17(b)(4) and generally refers 
to an entity affiliated with an FCM, including certain employees and 
officers of an FCM. 68 FR at 40838.
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    Each of the rule amendments that the Commission has determined to 
adopt is discussed more fully in Parts II through VI of this 
supplementary information section, first by summarizing the background 
of the proposed rule amendment, then by summarizing the comments 
received in response, and finally by specifying the modifications, if 
any, that have been made to the final rule as adopted after 
consideration of the comments received.\9\ The Commission also 
encourages interested persons to read the detailed analysis in the 
Proposing Release for each of the proposed rule amendments. Citations 
to the pertinent pages of the Proposing Release have been included as 
part of the discussion in this final rulemaking release of the 
amendments being adopted by the Commission.
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    \9\ Part V summarizes the Commission's determination to not 
adopt as part of this final rulemaking the proposed amendments to 
reduce the time periods before which an FCM is required, pursuant to 
Rule 1.17(c)(5), to take a capital charge for outstanding margin 
calls on its customer and noncustomer accounts.
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    As discussed in the Proposing Release, Rule 1.10 requires FCMs to 
prepare Forms 1-FR-FCM to file financial information with the 
Commission and their designated self-regulatory organization. The 
Commission advised in the Proposing Release that it would make 
conforming amendments to the Form 1-FR-FCM to reflect risk-based 
capital and changes to the early warning reporting requirements, if 
adopted by the Commission.\10\ The Commission has approved such 
conforming amendments to the Form 1-FR-FCM, and the revised form is 
available to FCMs upon request from the Commission.\11\
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    \10\ 68 FR at 40838, fn. 13. See 60 FR at 40840 -- 40842.
    \11\ Requests for the form should be addressed to the 
Commission's Office of the Secretariat, Three Lafayette Centre, 1155 
21st Street, NW., Washington, DC 20581.
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    Rule 1.10(d)(1) provides that each Form 1-FR-FCM, which is not 
required to be certified by an independent public accountant, must be 
completed in accordance with the instructions to the Form. The 
Commission issued a Form 1-FR-FCM Instruction Manual in 1989, and the 
Manual has not been revised since it was issued. Accordingly, the 
Commission has approved proposed changes to the 1-FR-FCM Instruction 
Manual to conform the Manual to rule amendments adopted in this final 
rulemaking. The Instruction Manual is available electronically on the 
Commission's Web site and hard copies may be obtained by contacting the 
Commission.\12\
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    \12\ Requests for the Form 1-FR-FCM Instruction Manual should be 
addressed to the Commission's Office of the Secretariat, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
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II. Risk-Based Capital Requirements

    The Commission's capital requirement for FCMs is set forth in Rule 
1.17(a)(1)(i)(A)-(D), which, prior to the amendments adopted by this 
rulemaking, required an FCM to maintain minimum adjusted net capital

[[Page 49786]]

equal to, or in excess of, the greatest of the following:
    a. $250,000;
    b. Four percent of an amount, hereinafter to referred as the 
``Segregated Amount,'' that equals the total of the funds required to 
be segregated for customers trading on U.S. commodity markets pursuant 
to section 4d(a)(2) of the Act, including the funds of customers 
trading on registered derivatives transaction execution facilities that 
have elected to opt-out of segregation pursuant to Rule 1.68, and the 
funds required to be secured for customers trading on foreign commodity 
markets pursuant to Rule 30.7, 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 (NFA presently being the only such association) of 
which the FCM is a member; or
    d. For FCMs that also are registered with the U.S. Securities and 
Exchange Commission (``SEC'') as securities brokers or dealers, the 
amount of net capital required by SEC Rule 15c3-1(a).\13\
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    \13\ The SEC rules cited in this release may be found at 17 CFR 
Ch. 2 (2003).
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    In the Proposing Release, the Commission noted various limitations 
in the current net capital rule that could be addressed by requiring 
capital computations based on the margin levels of customer and 
noncustomer positions carried by the FCM, in lieu of the capital 
computation now required to be based on the Segregated Amount. For 
example, a primary limitation of the Segregated Amount is that it does 
not include noncustomer positions and therefore does not fully reflect 
the extent to which an FCM is financially exposed to commodity 
positions that it carries for both customers and noncustomers.\14\ The 
Commission accordingly proposed amendments to Rule 1.17(a)(1)(i)(B) 
that would delete the computation that is based upon the Segregated 
Amount, and would require in its place a computation based on the 
aggregate of: (i) Eight percent of the ``risk margin'' requirement on 
futures and option on futures positions carried in customer accounts; 
and (ii) four percent of the ``risk margin'' requirement on futures and 
option on futures positions carried in noncustomer accounts.\15\ As 
noted in the Proposing Release, in proposing this requirement the 
Commission was intending to frame a margin-based capital computation 
that would be identical to the margin-based minimum net capital 
computation that several futures self-regulatory organizations, 
including one derivatives clearing organization, have adopted for 
determining the risk-based capital requirements of their respective 
member-FCMs.\16\
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    \14\ The Commission discussed in detail other limitations to the 
capital rule based upon the Segregated Amount in the Proposing 
Release. 68 FR at 40837-40.
    \15\ As discussed in the Proposing Release, U.S. commodity 
exchanges and numerous foreign commodity exchanges use the Standard 
Portfolio Analysis of Risk (``SPAN'') margining system for 
calculating margin requirements on a portfolio of futures and option 
positions. The SPAN maintenance margin level consists of a ``risk'' 
component and an ``equity'' component. The risk component covers 
potential future losses in the portfolio value. Such losses include 
a market move against a futures position or a short (written) 
option. The equity component (option premium, marked-to-the market 
daily) reflects the asset represented by long option positions or 
the liability represented by short (written) option positions in the 
portfolio. Id.
    \16\ As of January 1, 1998, the Clearing Corporation (formerly 
the Board of Trade Clearing Corporation), the Chicago Board of 
Trade, and the Chicago Mercantile Exchange have all adopted margin-
based minimum capital requirements for their respective clearing 
member firms. The NFA adopted similar risk-based minimum capital 
requirements for its member FCMs effective October 31, 2000. All of 
these organizations use the same percentages of risk maintenance 
margin that the Commission has proposed for its amended net capital 
rule. 68 FR at 40837-8.
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    For purposes of the proposed risk-based minimum adjusted net 
capital requirement, the Commission proposed new or amended definitions 
in Rule 1.17(b) for the terms ``customer account,'' ``noncustomer 
account,'' and ``risk margin requirement.'' \17\ In general, the term 
``customer account'' would be defined by Rule 1.17(b)(7) to 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-domiciled customers trading on foreign boards of 
trade. 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 (Rule 1.17(b)(2)) or proprietary account (Rule 
1.17(b)(3)), and also would include noncustomer accounts for foreign-
domiciled persons trading on foreign boards of trade. The term ``risk 
margin'' requirement for an account would be defined by a new Rule 
1.17(b)(8), which in the Proposing Release was defined to mean the 
level of maintenance margin, or performance bond, that the exchange 
\18\ 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 several additional 
requirements.
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    \17\ 68 FR at 40847-8.
    \18\ The applicable exchange rules would include those of 
foreign exchanges and those of designated contract markets 
(``DCMs'') and derivatives transaction execution facilities 
(``DTEFs'') governed by the Act. Also, the proposed definition of 
``customer account'' in Rule 1.17(b)(7) would extend to FCM 
customers trading on DTEFs. Such customers are included in the 
definition of customer in Rule 1.3(k), which is incorporated by 
reference in Rule 1.17(b)(2), and all customers included within Rule 
1.17(b)(2) are also included in the definition set forth in Rule 
1.17(b)(7).
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    Upon further review, the Commission has determined that the 
definition proposed for Rule 1.17(b)(8) does not adequately encompass 
all of the margin or performance bond that FCMs, in accordance with the 
requirements of the futures organizations to which they belong, 
currently include in their margin-based capital computations. By 
limiting the computation to ``futures contracts and options on futures 
contracts'', the proposed rule might have been interpreted to exclude 
non-futures positions or transactions that the Commission has 
authorized to be held in customer accounts pursuant to section 4d of 
the Act, or the non-futures positions or transactions that an FCM 
elects to hold in noncustomer accounts. For example, options on 
securities that are held in commodity customer accounts pursuant to 
section 4d of the Act under the terms and conditions of Commission 
approved cross-margining programs are included in FCMs' risk-based 
margin calculations under the current rules of self-regulatory 
organizations. In addition, over-the-counter contracts and options that 
FCMs hold in section 4d customer accounts pursuant to Commission orders 
also are currently included in the FCMs' risk-based capital 
computations. Furthermore, by limiting the computation to margin 
required ``by the exchange on which a position or portfolio of futures 
contracts and/or options on futures contracts is traded'', the proposed 
rule does not reflect the growing diversity in the types of positions 
that FCMs may be able to carry for customers and noncustomers, 
including positions that are not traded on a DCM or DTEF, but are 
cleared by a derivatives clearing organization.\19\
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    \19\ In particular, clearing members of the New York Mercantile 
Exchange (``NYMEX'') currently maintain accounts for customers 
clearing products that are listed, but not traded, on the NYMEX 
exchange. The margin requirements for such products are established 
by NYMEX as a derivatives clearing organization. See Commission 
order dated February 2, 2004, supplementing the Commission's prior 
order dated May 30, 2002. A copy of the order is available on the 
Commission's Web site at http://www.cftc.gov/files/tm/tmnymexotcorder021004.pdf.

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[[Page 49787]]

    Accordingly, the Commission has determined to modify the definition 
it originally proposed to set forth in Rule 1.17(b)(8) for the risk 
margin requirement for an account. As modified, an account's risk 
margin requirement would mean the level of maintenance margin, or 
performance bond, that the FCM is required under the rules of an 
exchange (or by a clearing organization if the required margin level is 
established not by an exchange but rather by a clearing organization) 
to collect from the owner of a customer account or noncustomer account 
for all positions, whether futures positions or non-futures positions, 
held in such accounts.\20\ This definition would be subject to several 
additional requirements, which also were included in the definition 
originally described in the Proposing Release. First, the definition of 
risk margin would not include the equity component of short or long 
option positions maintained in an account. Second, 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.\21\ Third, the risk margin for an account carried by a 
futures commission merchant which is not a member of the exchange or 
the clearing organization that requires collection of such margin 
should be calculated as if the futures commission merchant were such a 
member. Finally, if an FCM does not possess sufficient information to 
determine what portion of an account's total margin requirement 
represents risk margin, the proposed definition would require that the 
FCM treat as risk margin all of the margin required by the exchange, 
clearing organization, or other FCM or entity for that account. For 
example, if customer or noncustomer positions are executed on a foreign 
board of trade and the FCM does not possess sufficient information to 
determine what portion of the foreign board of trade's required margin 
is risk margin as defined under Rule 1.17(b)(8), the FCM is required to 
include the entire margin requirement in its risk-based capital 
computation.
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    \20\ For some limited classes of customer accounts, primarily 
those of non-clearing exchange members trading for their own 
accounts only, the rules of three DCMs permit member FCMs to refrain 
from collecting the exchange-established maintenance margin levels 
otherwise required by such rules for positions held in customer 
accounts and noncustomer accounts. All of the organizations that 
have adopted risk-based capital rules for FCMs (the NFA, a 
derivatives clearing organization and two DCMs, as identified in 
footnote 16) require their member FCMs to disregard such exceptions 
when computing their minimum net capital requirements. The 
Commission intends Rule 1.17, as adopted herein, to impose the same 
requirement. FCMs must therefore include in their adjusted net 
capital requirements the exchange-established maintenance margin 
levels for all positions in the accounts held by the FCM for its 
customers and noncustomers.
    It should also be noted that such rules may permit the exchange 
or clearinghouse to increase margin requirements to reflect 
circumstances other than changes in SPAN measurements. For example, 
an exchange may require an FCM to collect more than the standard 
margin from a specific customer due to credit or other concerns. The 
definition of risk margin, both as originally proposed and herein 
adopted, would include such margin.
    \21\ There is generally no risk to the FCM associated with a 
long option position, because the maximum potential loss is the full 
option premium, which is paid by the customer in full at the 
inception of the transaction. However, because long option positions 
that hedge other futures and option positions in a portfolio will 
reduce the total margin requirement of the portfolio, SPAN includes 
a risk maintenance margin component to protect against a decline in 
the market value of such long option positions. The Proposing 
Release proposed to allow FCMs to deduct from their risk margin 
requirements the maintenance margin for long option positions that 
are not hedging other futures or option positions. 68 FR at 40838.
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    The commenters overwhelmingly endorsed the Commission's proposal to 
eliminate the capital computation based upon the Segregated Amount, and 
supported the application of minimum adjusted net capital requirements 
based upon risk maintenance margin. The commenters also did not object 
to any of the definitions proposed by the Commission to implement risk-
based capital requirements. However, FIA and two individual commenters 
endorsed conducting further analysis of the margin-based capital 
requirements of the NFA and other self-regulatory organizations, with 
which the Commission rule, as amended, will now be consistent, for the 
purpose of identifying possible enhancements that might be made to the 
Commission's rules.\22\ FIA offered to undertake such an analysis, in 
coordination with the self-regulatory organizations, and with the 
participation of the Commission expressly welcomed.
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    \22\ For example, FIA suggested examining such rules to 
determine whether they reflected advances in risk management made 
since 1998. An FCM also proposed that the Commission's rule should 
grant a credit of 25 percent for each dollar of margin that an FCM 
carries in excess of that required by the exchange, and Mr. 
Bjarnason identified other possible modifications for the Commission 
to consider.
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    FIA offered a recommendation that it believed might accelerate the 
adoption of any changes that received the endorsement of the 
participants in the proposed analysis. Under FIA's proposal, Rule 
1.17(a) would be amended to delete the current capital computation 
based on the Segregated Amount, but no additional amendments would be 
made to Rule 1.17(a) to specify a risk-based capital computation. FIA 
suggested, and NFA agreed, that any recommendations resulting from the 
proposed review of margin-based capital requirements could be put into 
effect by NFA's amendment of its rules, because NFA's risk-based 
capital requirements apply to all FCMs.
    The Commission welcomes and encourages the commitment of industry 
resources towards an active and continuous evaluation of the capital 
requirements set forth in the Commission's rules. The Commission 
believes that the analysis proposed in FIA's letter is neither 
precluded by, nor inconsistent with, the Commission's immediate 
adoption of the proposed risk-based capital requirements for FCMs. Any 
proposals for further amendment to these risk-based capital rules would 
be evaluated by the Commission in light of all the Act's financial 
safeguards for monitoring the financial integrity of futures 
intermediaries, and the Commission can thereafter publish for public 
comment in the Federal Register such amendments as it proposes to 
adopt.
    The Commission has considered the comments received and is adopting 
as final the amendments to Rule 1.17(a) and (b) as set forth in the 
Proposing Release, with the modification discussed earlier to the 
definition of risk margin in Rule 1.17(b)(8). As amended, Rule 
1.17(a)(1)(i)(B) will no longer be based upon the Segregated Amount, 
but will instead include the following capital computation: Eight 
percent of the total risk margin requirement for all positions carried 
by the FCM in customer accounts, plus four percent of the total risk 
margin requirement for all positions carried by the FCM in noncustomer 
accounts. As discussed earlier, the definition of the risk margin 
requirement for an account is set forth in a new Rule 1.17(b)(8), and 
is determined generally by subtracting from the maintenance margin that 
the rules of an exchange or clearinghouse requires an FCM to collect 
from the owner of a customer or noncustomer account: (i) The equity 
component of each position; and (ii) the maintenance margin for each 
long option position that is not held to hedge other positions in the 
account. However, as noted in the Proposing Release, the Commission 
understands that calculating the maintenance margin on specific long 
option positions in a portfolio may require a certain amount of manual 
processing under current back office operating procedures, which some

[[Page 49788]]

FCMs may wish to forego because it would not materially reduce their 
risk-based minimum capital requirement.\23\ Accordingly, the amended 
rule permits, but does not require, an FCM to exclude the risk 
maintenance margin for long options that do not hedge other positions 
maintained in the account.
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    \23\ 68 FR at 40838.
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    The amended rule further provides that if the risk margin 
associated with cleared positions cannot be determined by the FCM, the 
firm will be required to apply the specified percentages for customer 
and noncustomer accounts to the total margin required by the exchange, 
clearing organization, other futures commission merchant or entity for 
the customer and noncustomer positions carried. In addition, as noted 
in the Proposing Release, the new margin-based capital computations 
will not apply to proprietary (i.e., firm-owned) accounts. Rule 
1.17(c)(5)(x) currently includes proprietary positions in the 
calculation of adjusted net capital to the extent that uncovered 
proprietary positions (i.e., positions that are not hedged by cash 
market transactions) result in a charge or ``haircut'' to the firm's 
net capital based on clearinghouse or exchange margin requirements.\24\
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    \24\ 68 FR at 40837-8.
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III. Early Warning Requirements Under Rule 1.12

    Pursuant to Commission Rule 1.12, an FCM or IB must comply with 
several requirements upon the occurrence of predefined events that may 
raise concerns regarding the firm's ability to meet its obligations to 
the market, safeguard customer funds, or otherwise continue normal 
business operations. The requirements in Rule 1.12, which include 
notices that the FCM or IB must file with the Commission and the firm's 
designated self-regulatory organization (``DSRO''),\25\ enhance the 
ability of the Commission and the DSRO to respond with a heightened 
degree of surveillance, as may be necessary or prudent, in light of the 
possibility of deteriorating operating or financial conditions at a 
firm. The requirements in Rule 1.12 are therefore generally referred to 
as ``early warning'' requirements.
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    \25\ The Commission explained in the Proposing Release that a 
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. 68 FR at 40840, fn. 17.
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    Paragraph (b) of Rule 1.12 currently provides that if an FCM 
maintains adjusted net capital that is equal to or in excess of the 
minimum adjusted net capital required by Rule 1.17(a)(1)(i), but below 
a specified level that is greater than the FCMs' required minimum (to 
be referred to hereafter as the ``early warning capital level''), then 
the FCM is required to meet specified notice requirements and to file 
with the Commission and the firm's DSRO monthly unaudited financial 
statements. The early warning capital level required under Rule 1.12(b) 
equals the greatest of the following:
    a. $375,000;
    b. Six percent of the Segregated Amount;
    c. 150 percent of the amount of adjusted net capital required by a 
registered futures association (i.e., NFA) 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 17a-
11(b).
    Paragraph (c) of Rule 1.12 currently requires an FCM or IB to 
provide same day notice to the Commission and its DSRO of any failure 
to make or keep current the books and records that are required by the 
Commission's regulations, and the firm also must file within five 
business days after giving such notice a written report that describes 
what steps have been and are being taken to correct the situation. 
Paragraph (d) of Rule 1.12 requires an FCM or IB to provide notice, 
within three business days, to the Commission and its DSRO if the firm 
discovers or is notified by its independent public accountant of the 
existence of any material inadequacy in the internal controls of the 
firm. Within five business days after providing the required notice, 
the FCM or IB also must file a written report stating what steps have 
been and are being taken to correct the material inadequacy in its 
internal controls.

A. Early Warning Capital Levels for FCMs

    The amendment proposed for Rule 1.12(b) would replace the early 
warning capital level computation that is based on six percent of the 
Segregated Amount held by an FCM with a computation based upon 150 
percent of an FCM's minimum adjusted net capital requirement, as 
determined by the margin-based capital requirements in Rule 
1.17(a)(1)(i)(B), as amended. The Commission also proposed to amend 
Rule 1.12(b) to require that any FCM that did not meet or exceed its 
early warning capital level (whether based on the margin-based capital 
computation or one of the other computations set forth in Rule 
1.17(a)(1)(i)) to submit written notice within 24 hours, instead of the 
five business days presently allowed under the Commission's rule. 
Moreover, the Commission proposed to delete the requirement in Rule 
1.12(b) for monthly unaudited financial statements from an FCM that had 
failed to meet its early warning capital level, because this provision 
would become moot upon the Commission's adoption of a proposed 
amendment to Rule 1.10, discussed below, that would require all FCMs to 
file unaudited financial statements on a monthly basis, instead of on a 
quarterly basis as is currently required under Rule 1.10.\26\
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    \26\ 68 FR at 40842. The Proposing Release also included 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 Proposing Release noted a recommendation from the JAC that the 
Commission eliminate from Rule 1.12 not only the monthly filing 
requirement, but also the requirement that an FCM failing to meet or 
exceed its early warning capital level provide notice to the Commission 
and its DSRO. The Commission, however, expressed concern that 
eliminating the notice requirement could diminish the Commission's and 
the DSRO's ability to react promptly to potential financial crises at 
an FCM. To assist the Commission with its analysis of this issue, the 
Commission invited comment from interested parties on whether the 
proposed 150 percent early warning capital level would be appropriate 
under a risk-based capital rule or whether it should be adjusted or 
eliminated.
    All of the comments received by the Commission recommended against 
establishing an early warning capital level for margin-based capital 
requirements. According to FIA, the proposed amendment is unnecessary 
since risk-based capital requirements encourage FCMs to maintain 
capital in excess of their required minimums, reflecting the fact that 
margin-based capital requirements are more sensitive to significant 
market moves than are capital requirements based on customer segregated 
funds.\27\ FIA further suggested that the proposed amendment is 
unnecessary because DSROs employ a variety of methods to identify and 
to

[[Page 49789]]

monitor their member FCMs that may be experiencing financial stress. 
For example, NFA requires each FCM for which it is the DSRO to report a 
variety of information on a daily basis, including the FCM's SPAN 
margin calculation, the FCM's segregation requirements and the amount 
of funds actually held in segregation. FIA stated its belief that 
information that the exchanges receive on a daily basis, such as 
clearing house variation margin pay and collect information, along with 
other reported information that is available to them, provides the 
exchanges with sufficient data with which to monitor the capital of a 
member FCM on a daily basis, if necessary.
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    \27\ When an exchange increases margin requirements to reflect 
significant market moves, an FCM's margin-based capital requirements 
will increase as well. FIA asserted that FCMs therefore will 
maintain some level of excess capital, as a matter of necessity as 
well as prudent business practice, to enable them to respond to the 
more immediate effect that significant market moves have on their 
risk-based capital requirements.
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    The JAC stated that the financial surveillance procedures 
implemented by the exchanges and the NFA should provide sufficient 
advance notice of a firm's inability to meet its minimum capital 
requirement. The JAC also noted that Rule 1.12 itself includes other 
requirements that serve to provide the Commission and self-regulatory 
organizations with notice of events that could impair the financial 
viability of an FCM. Such requirements include those set forth in 
paragraphs (c) and (d) which, as stated above, relate to notice 
requirements to report deficiencies in the FCM's books and records or 
internal controls. The JAC further noted that Rule 1.12(g)(1-2) 
requires an FCM to provide written notice within two business days if 
any event or series of events cause a 20 percent or more reduction in 
the FCM's net capital from the amount last reported to the Commission 
in a financial report, and a minimum of two days advance notice prior 
to any withdrawal of equity capital or any unsecured advance or loan to 
any of the designated persons in the rule, if such withdrawal, advance 
or loan would cause a 30 percent or more net reduction in the FCM's 
excess adjusted net capital.
    Finally, FIA also noted that institutional clients generally insist 
that their FCMs maintain capital above any applicable early warning 
capital level, making the early warning capital level an FCM's 
effective minimum adjusted net capital requirement. Accordingly, FIA 
and three other commenters stated that many FCMs would be required to 
maintain amounts of capital well in excess of 150 percent of the 
minimum adjusted net capital requirement if the early warning capital 
level were established at 150 percent of margin-based adjusted net 
capital requirements.
    The Commission appreciates the detailed and insightful comments 
received in response to its proposal to establish an early warning 
capital level for capital computations that are based on the FCM's 
margin requirements. As the Commission has previously explained, the 
requirements in Rule 1.12 ``are designed to afford [the Commission] and 
industry self-regulatory organizations sufficient advance notice of a 
firm's financial or operational problems to take any protective or 
remedial action that may be needed to assure the safety of customer 
funds and the integrity of the marketplace.'' \28\ After considering 
the comments, the Commission continues to believe that the effective 
implementation of the financial safeguards of the Act and its 
regulations requires provisions that establish a period for prompt 
reporting that a firm's adjusted net capital does not meet or exceed a 
specified level in excess of the FCM's minimum adjusted net capital 
requirement. Such provisions enhance the ability of the Commission and 
DSRO to adjust appropriately the level of monitoring of the FCM's 
activities when there appears to be circumstances that may detract from 
the FCM's ability to safeguard customer funds or otherwise satisfy its 
financial obligations. Moreover, the provisions in other paragraphs of 
Rule 1.12 cannot alone serve to provide immediate, sufficient notice to 
the Commission of a material change in a firm's net capital 
requirements. For example, Rule 1.12(g)(1), which requires notice to 
the Commission if the amount of the FCM's net capital declines by a 
specified percentage, does not result in notice to the Commission if 
the FCM experiences a material increase in its minimum capital 
requirement, and the FCM does not take appropriate steps to increase 
its adjusted net capital. Absent Rule 1.12(b), the Commission would not 
receive notice of the change in such firm's capital position until the 
increase in the FCM's minimum adjusted net capital requirement had 
exceeded the amount of adjusted net capital maintained by the FCM.\29\
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    \28\ 63 FR 45711 (August 27, 1998) (final rule adopting 
amendments to shorten the time periods for filing 
undercapitalization and undersegregation notices required by Rule 
1.12).
    \29\ The JAC letter included the comment that the Commission 
might consider, as an alternative to an early warning capital level, 
modifying Rule 1.12(g)(2) to require notification if an FCM's excess 
net capital decreases by more than 30 percent due to an increase in 
its risk-based capital requirement. Unlike the JAC's other proposal, 
it is difficult to gauge the sufficiency of the notice that would be 
provided under this proposal, as compared to the requirements of the 
Commission's existing rule or proposed amended rule.
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    However, further review of data available from FCM financial 
reports filed with the Commission does indicate that the Commission's 
supervisory concerns can be addressed satisfactorily by an early 
warning capital level that is based on a different threshold percentage 
of an FCM's margin-based, or risk-based, minimum adjusted net capital 
requirement. The JAC comment letter objected that, by its analysis, the 
proposed requirement of 150 percent of a firm's risk-based minimum 
capital requirement would adversely affect the FCM industry as a whole 
by resulting in an onerous increase in FCM capital requirements as 
compared to the Commission's current rule. The JAC therefore proposed 
that the Commission should consider an alternative that would be lower 
than 150 percent of an FCM's margin-based minimum adjusted net capital 
requirement, if the Commission believed it necessary to retain an early 
warning capital level. The JAC stated that it believed that the 
adoption of such an alternative could produce an early warning capital 
level that more closely parallels the current early warning capital 
level based upon six percent of the Segregated Amount, and would 
therefore be far less burdensome upon FCMs and customers.
    Commission staff has performed its own analysis of the effects of a 
revised early warning capital level equal to 110 percent of an FCM's 
minimum adjusted net capital requirement, as determined by the margin-
based requirements adopted by this rule. The analysis indicates that 
the revised level would cause FCMs to remain subject to an obligation 
to provide notice to the Commission and DSROs in advance of the 
undercapitalization of the firm, but that the burden of such an 
obligation for the industry as a whole would be no greater than 
experienced under the Commission's current regulations. Based on 
financial data for all 182 FCMs as of May 31, 2004, the analysis 
indicates that 60 of the 182 FCMs would be subject to a risk-based 
minimum capital requirement, with the remaining 122 FCMs subject to 
either the SEC's minimum capital requirement or the Commission's 
$250,000 minimum. Of the 60 FCMs subject to risk-based capital 
requirements, the early warning capital level of roughly half would be 
lower if determined by an amount equal to 110 percent of risk-based 
capital rather than 6 percent of capital based on segregated funds, and 
the early warning capital level of the other firms would be higher and, 
again, in every case the early warning capital requirements, if 
triggered, would, like the minimum capital requirements, be driven by 
the particular risk characteristics of the

[[Page 49790]]

positions carried by the individual firm in question. Furthermore, all 
of the firms whose early warning capital level would be greater under 
the amended rule already hold adjusted net capital in amounts that 
exceed the revised requirement of 110 percent of their margin-based 
minimum adjusted net capital requirement. Thus, replacing the existing 
requirement of 6 percent of the Segregated Amount with the revised 
early warning capital level requirement would not require any FCM to 
increase its adjusted net capital in order to comply with the amended 
rule.
    In consideration of the foregoing, the Commission believes that a 
revised early warning capital level of 110 percent of the FCM's margin-
based minimum capital requirement would retain an advance notice 
requirement that enhances the ability of the Commission and DSROs to 
monitor effectively the financial condition of FCMs, while still 
remaining consistent with the goal of aligning an FCM's capital 
requirements with the risks of its activities. In addition, the 
Commission is in the process of enhancing its financial surveillance 
capabilities over firms and market participants through the use of 
automated systems that will utilize market position data and FCM 
financial data to assist Commission staff with identifying situations 
that could adversely impact an FCM's ability to safeguard customer 
funds and meet its financial obligations to the market. These automated 
programs will permit Commission staff to conduct stress testing and 
other scenario testing of the positions held by both market 
participants and FCMs to gauge the potential impact on such entities 
based upon the positions they hold. The Commission is therefore 
amending Rule 1.12(b)(2) to delete the early warning capital level 
based upon the Segregated Amount, and to set forth in its place an 
early warning capital level equal to 110 percent of the FCM's margin-
based capital requirement as determined by amended Rule 
1.17(a)(1)(i)(B).
    Adopting the amendment to paragraph (b)(2) of Rule 1.12 also will 
necessitate a change to paragraph (b)(3) of the rule, which currently 
sets forth an early warning capital level equal to ``150 percent of the 
amount of adjusted net capital required by a registered futures 
association of which [a firm] is a member.'' As noted above, every FCM 
must comply with the capital requirements of NFA, a registered futures 
association. Furthermore, as detailed above, NFA's risk-based capital 
rule includes a risk-based requirement that is identical to the risk-
based capital computation being adopted by the Commission.\30\ The 
Commission is therefore amending Rule 1.12(b)(3) to reduce to 110 
percent the required percentage of adjusted net capital that is based 
on a margin-based capital computation set forth in the rules of a 
registered futures association, if the amount of such margin-based 
adjusted net capital meets or exceeds the amount computed under the 
margin-based computation set forth in Rule 1.17(a)(1)(i)(B). This 
amendment will help ensure that the same percentage of adjusted net 
capital will be required as early warning capital whenever a margin-
based computation in the rules of a registered futures association is 
the same as the margin-based computation in the Commission's rules.
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    \30\ The margin-based capital computation included the NFA's 
capital requirements for its members is currently set forth in ] 
7001 of the NFA Manual, Section 1(a)(vi) (2004).
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    The Commission also received comments from the FIA and NFA 
objecting to its proposal to reduce the reporting period set forth in 
Rule 1.12(b). Currently, Rule 1.12(b) requires that an FCM who ``knows 
or should have known'' that its adjusted net capital is below the early 
warning level to file a written notice ``within five (5) business days 
of such event.'' With the objective of harmonizing the Commission's 
rule with the SEC's early warning rule, the Proposing Release included 
a proposal to amend the phrase five business days to read 24 hours.\31\ 
In response, the NFA and FIA expressed concerns that the amended rule 
failed to recognize that although FCMs make daily computations of their 
capital, whenever such computations are made intra-month they are based 
on estimates only. Moreover, FCMs generally do not complete their daily 
capital computations until late afternoon, and, given that FCMs conduct 
business internationally, FIA stated that it would be ``impossible to 
confirm these numbers'' within 24 hours from when such daily capital 
computations are made. FIA and NFA therefore argued that FCMs should be 
permitted to continue to use established procedures to confirm their 
estimates and provide notice, if required, within five business days of 
the original estimated daily capital computation. Moreover, FIA stated 
that it believed that it would be inappropriate to require early 
warning notices based on unconfirmed estimates because such early 
warning notices are publicly available.
---------------------------------------------------------------------------

    \31\ SEC Rule 17a-11(c) requires notice by no later than 24 
hours after the broker-dealer's net capital falls below the SEC's 
required early warning level.
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    The Commission believes that the concerns expressed by these 
commenters would be addressed by the ``know or should have known'' 
standard already set forth in the rule. This same standard applies to 
other notices required by the Commission's rules, and, with reference 
to the undersegregation notices required under Rule 1.12(h), the 
Commission has previously interpreted this standard as follows:

    That part of the standard requiring an FCM to report when it 
``should know'' of a problem may be defined as the point at which a 
party, in the exercise of reasonable diligence, should become aware 
of an event.\32\
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    \32\ 63 FR 45711, 45713 (August 27, 1988) (adopting rules that 
would also apply ``know or should have known'' standard for 
undersegregation notices pursuant to Rule 1.12(h)).

    With respect to the event at issue, i.e. adjusted net capital that 
is less than the required early warning capital level set forth in Rule 
1.12(b), but still greater than the minimum required to avoid becoming 
undercapitalized under Rule 1.12(a), it appears that reasonable 
diligence on the part of the FCM may include expeditious confirmation 
of daily, intra-month estimates that have been made in good faith and 
are otherwise in compliance with Commission regulations. Hence, if 
confirmation of such estimates were both timely and reasonably 
necessary, it would be consistent with the amended rule for an FCM to 
file its required notice within 24 hours of confirmation of such 
estimates, and compliance with the amended rule would not be impossible 
under procedures now used by FCMs. The Commission therefore believes it 
appropriate to amend Rule 1.12(b) as proposed in the Proposing Release, 
and is hereby amending the rule to require an FCM to file written 
notice with the Commission and with the FCM's DSRO within 24 hours 
after it knows or should have known that its adjusted net capital is 
less than the early warning capital level.

B. Early Warning Requirements: Firm's Books and Records and Internal 
Controls

    Rule 1.12(c) currently requires any FCM or IB that at any time 
fails to make or keep current books and records required by Commission 
regulations to be maintained to provide notice on the same day that 
such event occurs. The notice must specify the books and records that 
have not been made or are not current, and within five business days 
after providing such notice the FCM or IB must file a written report

[[Page 49791]]

stating what steps have been and are being taken to correct the 
situation. Paragraph (d) of Rule 1.12 requires an FCM or IB that 
discovers, or is notified by an independent public accountant pursuant 
to Rule 1.16(e)(2), of the existence of any material inadequacy as 
specified in Rule 1.16(d)(2), to provide notice within three business 
days, and within five business days after giving such notice to file a 
written report stating what steps have been and are being taken to 
correct the material inadequacy.
    For paragraphs (c) and (d) of Rule 1.12, the Proposing Release 
proposed to reduce the notice and reporting time frames specified 
within these paragraphs to be the same as the time frames provided in 
corresponding SEC regulations governing registered securities broker-
dealers. Specifically, the proposed revisions would require an FCM or 
IB: (i) To transmit within 48 hours the required report stating what 
the FCM or IB has done or is doing to correct the situation that has 
caused the firm to fail to maintain current books and records; and (ii) 
to notify the Commission within 24 hours of discovering a material 
inadequacy in its accounting systems, and to transmit the required 
report within 48 hours of such discovery.\33\ None of the commenters 
objected to the proposed shorter periods in Rules 1.12(c) and (d) for 
FCMs and IBs to file the required notices and reports related to their 
books and records and internal controls. The Commission is adopting as 
final the amendments to paragraphs (c) and (d) as proposed in the 
Proposing Release.\34\
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    \33\ 68 FR at 40842-3.
    \34\ The JAC proposed that the Commission also consider, in 
addition to the rule amendments that the Commission had proposed in 
the Proposing Release to paragraphs (b), (c) and (d) of Rule 1.12, 
an amendment to delete paragraph (f)(5) from Rule 1.12. Rule 
1.12(f)(5) currently obligates an FCM to provide notice immediately 
whenever its excess adjusted net capital is less than 6 percent of 
the maintenance margin required by the FCM on all positions in 
accounts of a noncustomer. The JAC stated that it believed that this 
regulation would no longer be necessary because the risk-based 
capital requirement includes an assessment for an FCM's exposure to 
noncustomer positions. Commission staff is reviewing this proposal 
for possible future publication as a proposed rule, with request for 
public comment.
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IV. Satisfactory Subordination Agreements and Equity Capital

    Commission Rule 1.17(c)(4)(i) permits an FCM or IB, in computing 
its adjusted net capital, to exclude liabilities that are subordinated 
to the claims of the firm's general creditors if such subordinated 
liabilities arise under ``satisfactory subordination agreements'' as 
defined in Rule 1.17(h). The criteria set forth in Rule 1.17(h) for 
such ``satisfactory'' subordination agreements include several 
limitations upon the FCM's or IB's ability to repay or prepay the 
subordinated obligation. By way of such limitations, the Commission 
seeks to enhance the stability and permanence of the firm's capital, 
and to prevent the firm's subordinated debt lenders from withdrawing 
firm capital to the detriment of the general creditors.
    One of the payment limitations specified in Rule 1.17(h) prohibits 
any prepayment of the subordinated loan after the first year of the 
agreement unless the firm maintains adjusted net capital in excess of 
the minimum amount that would otherwise be required under Rule 
1.17(a).\35\ Specifically, Rule 1.17(h)(2)(vii)(A) restricts 
subordinated debt prepayments if such prepayments would cause the FCM's 
or IB's adjusted net capital to be less than the greater of:
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    \35\ Prior to the end of the first year, Rule 1.17(h)(2)(vii) 
generally prohibits any prepayment of the subordinated loan 
irrespective of whether the firm holds sufficient excess capital.
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    a. 120 percent of the minimum dollar amount specified for FCMs in 
1.17(a)(1)(i)(A) or for IBs in 1.17(a)(1)(iii)(A) (for FCMs, the 
required amount would be $300,000, or 120 percent of $250,000; for IB's 
the required amount would be $36,000); \36\
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    \36\ 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 proposed technical amendments to 
various subparagraphs of Rule 1.17(h), and also to Rule 1.17(e), to 
correct all references within those rules to 1.17(a)(1)(ii)(A) to 
read 1.17(a)(1)(iii)(A). 68 FR at 40843. The Commission has further 
determined that Rules 1.10(j)(8)(ii)(A) and 1.17(a)(2)(ii) require 
similar revision, as these rules also include references to 
paragraph (a)(1)(ii) of Rule 1.17. The Commission is therefore 
adopting amendments to Rules 1.17(h) and (e) as proposed, and also 
is adopting similar amendments to Rules 1.10(j)(8) and 1.17(a)(2). 
As amended, the existing references within these rules to paragraph 
(a)(1)(ii) of Rule 1.17 will be revised to read (a)(1)(iii).
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    b. For FCMs, 7 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 
15c3-1d(b)(7).
    Several other provisions of Rule 1.17(h) also specify percentages 
of minimum adjusted net capital to restrict repayments or require 
action by firms in connection with their satisfactory subordination 
agreements. These provisions specify percentages applicable to each of 
the alternative adjusted net capital computations set forth in Rule 
1.17(a), including capital computations based upon the Segregated 
Amount. For example, Rule 1.17(h)(3)(ii) and (h)(2)(viii)(A) require 
FCMs to suspend any repayment of their subordination agreements, and to 
provide notice of maturity/accelerated maturity to the Commission, if 
the FCM's payment obligations, then due or maturing within a specified 
period, would result in adjusted net capital of less than 6 percent of 
the Segregated Amount. Furthermore, an FCM whose adjusted net capital 
would be less than 7 percent of the Segregated Amount is subject to 
restrictions under Rule 1.17(h)(2)(vi)(C) on any reductions of the 
unpaid principal balance under a secured demand note subordination 
agreement,\37\ and also subject to restrictions under Rule 
1.17(h)(3)(v) on the use of temporary subordinations.\38\ Finally, Rule 
1.17(h)(2)(vii)(B) restricts ``special prepayments'' by FCMs whose 
adjusted net capital would be less than 10 percent of the Segregated 
Amount.\39\ In light of the amendments to Rule 1.17(a) adopted by this 
rulemaking, the capital computations within Rule 1.17(h) that are based 
on the Segregated Amount must also be amended. Furthermore, similar 
amendments are also required for Commission Rule 1.17(e), which sets 
forth the requirements for a firm's ``debt-equity total'', i.e., the 
total of the outstanding principal amount of satisfactory subordination 
agreements plus the firm's ``equity capital''.\40\ One of the 
provisions of Rule 1.17(e) requires a specified percentage of minimum 
adjusted net capital based on the

[[Page 49792]]

Segregated Amount as a condition for permitting an FCM or IB to make 
withdrawals of equity capital. Specifically, any withdrawal of equity 
capital is prohibited if, among other things, it would result in 
adjusted net capital of less than 6 percent of the Segregated Amount.
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    \37\ The subordination agreement may provide for the FCM or IB 
to receive either (i) cash or (ii) a demand note that is payable to 
the FCM or IB and secured by cash or securities that satisfy 
requirements set forth in the rule.
    \38\ Pursuant to several conditions specified in the rule, an 
FCM or IB may qualify for approval of a temporary satisfactory 
subordination agreement that has a stated term of no more than 45 
days.
    \39\ ``Special prepayments'' is the term used in Rule 1.17 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 minimum 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).
    \40\ Rule 1.17(e) requires the firm to hold 30 percent of the 
total as equity capital. Rule 1.17(d)(1) defines the term ``equity 
capital'' to include retained earnings and other specified forms of 
investment. The term also includes funds received under 
subordination agreements that are not only satisfactory under Rule 
1.17(h), but also meet other, more restrictive criteria specified in 
Rule 1.17(d).
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    In the Proposing Release, the Commission proposed to conform all of 
the computations in paragraphs (e) and (h) of Rule 1.17 that refer to 
the Segregated Amount to refer instead to the risk-based capital 
computation that was proposed in Rule 1.17(a)(1)(i)(B).\41\ The 
Commission stated that the proposed amendments would: (i) Eliminate 
calculations based on the Segregated Amount; (ii) adopt calculations 
based on the required maintenance 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 Rule 1.17(e) and (h).\42\ Thus, for example, 
where Rule 1.17(e) included a calculation based upon six percent of the 
Segregated Amount, the Commission proposed to eliminate this 
calculation and require 150 percent of an FCM's risk-based minimum 
adjusted net capital requirement. Using this approach for purposes of 
an FCM's equity capital and satisfactory subordination agreements would 
result in required percentages of risk-based minimum adjusted net 
capital of either 150 percent or 175 percent, except that an FCM would 
be required to hold 250 percent of risk-based minimum adjusted net 
capital in order to make ``special prepayments'' under a satisfactory 
subordination agreement.
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    \41\ 68 FR at 40843-4.
    \42\ The cited paragraphs also contain references to 
1.17(a)(1)(ii)(A), which has been redesignated 1.17(a)(1)(iii)(A). 
The Commission therefore also proposed, and is now adopting, a 
technical amendment to correct the references in these paragraphs to 
read as 1.17(a)(1)(iii)(A).
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    Of the ten comment letters received by the Commission, the majority 
had no comments on these proposed conforming revisions to Rule 1.17(e) 
and (h). One FCM proposed 125 percent as a specific alternative 
percentage for the Commission to consider for all of the applicable 
provisions of Rule 1.17(e) and (h), while the NFA suggested using 120 
percent, which is the same percentage that Rules 1.17(e) and (h) 
currently require in the case of minimum adjusted net capital 
computations that are based on the capital requirements of a registered 
futures association. The JAC suggested that the Commission might 
consider reducing the proposed percentages, but did not make any 
specific recommendations for the percentages to be included in Rules 
1.17(e) and (h).
    Upon further consideration, the Commission notes that in all but 
one of the relevant paragraphs of Rules 1.17(e) and (h), the required 
percentage of minimum adjusted net capital is 120 percent, regardless 
of whether the FCM's capital computation is based on a registered 
futures association's capital requirements or on the FCM's required 
minimum dollar amount ($250,000). This similarity is the product of the 
Commission's determination in 1995, when proposing to amend Rules 
1.17(e) and (h) to include capital computations that would be based on 
the capital requirements of a registered futures association, to apply 
the same percentages as then required for capital computations based 
upon the minimum dollar amount set forth in Rule 1.17(a)(1)(i)(A).\43\ 
Accordingly, the Commission has determined to take the same approach 
here and reduce to 120 percent all but one of the percentages proposed 
in the Proposing Release for Rules 1.17(e) and (h). The exception in 
the amended rule will be in paragraph (h)(2)(vii)(B), which restricts 
``special prepayments'' made under satisfactory subordination 
agreements, and requires a computation of 200 percent of an FCM's 
minimum adjusted net capital that is based on a minimum dollar amount, 
i.e., 200 percent of $250,000. In light of the comments received on the 
enhanced responsiveness of margin-based capital requirements to 
significant major market moves, the Commission believes that it is 
sufficient for the purposes of the identified paragraph to amend the 
rule to require 125 percent of minimum adjusted net capital that is 
based on an FCM's margin-based capital requirements. The Commission is 
therefore adopting the amendments to Rule 1.17(e) and (h) as set forth 
in the Proposing Release, with the following modifications: (1) the 
required percentage of risk-based minimum adjusted net capital will be 
120 percent for subparagraphs (e)(1)(ii), (h)(2)(vi)(C)(2), 
(h)(2)(vii)(A)(2), (h)(2)(viii)(A)(2), (h)(3)(ii)(B), and (h)(3)(v)(B) 
of Rule 1.17; and, (2) in subparagraph (h)(2)(vii)(B)(2), the required 
percentage will be 125 percent of an FCM's risk-based minimum adjusted 
net capital requirement as determined under amended Rule 
1.17(a)(1)(i)(B).
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    \43\ The Commission's approach is described in the Federal 
Register release proposing these amendments in 1995. 60 FR 63995, 
63997, fn. 16. (Dec. 13, 1995). The proposed rules were adopted in 
1996. 60 FR 19177 (May 1, 1996). These rules were therefore adopted 
prior to NFA's amendment of its capital rule, in 2000, to include a 
computation based upon maintenance margin.
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    The Commission also proposed in the Proposing Release to amend Rule 
1.17(h)(3)(vii) to ``grandfather'' in agreements that, prior to the 
effective date of the final rules as adopted, had been determined to be 
satisfactory subordination agreements pursuant to Rule 1.17(h).\44\ No 
commenter objected to this proposal, and the Commission adopts the 
amendment as proposed.
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    \44\ 68 FR at 40843.
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V. Capital Charge for Undermargined Accounts Under Rule 1.17(c)(5)

    Commission Rule 1.17(c)(5)(viii) requires an FCM, in computing its 
adjusted net capital, to take a reduction (i.e., capital charge) from 
its net capital for any customer account that is undermargined and the 
margin call issued to the customer has not been answered by the third 
business day following the issuance of the call. Rule 1.17(c)(5)(ix) 
requires an FCM to take 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. The capital charge under Rule 
1.17(c)(5)(viii) and (ix) is equal to the amount of funds required in 
the undermargined account to meet maintenance margin requirements of 
the applicable board of trade that the futures or options contracts 
were executed on or the clearing organization that cleared such 
transactions. For both customer and noncustomer accounts, the 
Commission issued proposed rule amendments that would reduce the 
collection period before a capital charge would have to be taken to one 
business day following the issuance of a margin call.\45\
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    \45\ 68 FR at 40839-40.
---------------------------------------------------------------------------

    Several commenters expressly acknowledged that payment by 
electronic means within one day after the issuance of a margin call 
reflects the current practice of the industry in many instances, 
especially with respect to institutional customers. FIA, NFA, and all 
five of the individual FCMs, however, expressly objected to shortening 
the period under Rule 1.17(c)(5)(viii) for outstanding margin calls for 
customer accounts. The prevailing theme of these comments is that there 
remain instances in which meeting a margin call within one day may not 
be possible, and is unrelated to any impaired financial capacity of the 
customer to ultimately meet the margin call.
    FIA also expressed its view that it is not necessary to reduce the 
period

[[Page 49793]]

currently applicable to customer accounts to achieve the Commission's 
objectives. FIA pointed out that margin-based capital requirements are 
sufficient to address the Commission's concerns articulated in the 
Proposing Release, particularly the fact that the futures industry has 
recently experienced significant increases in the number of products 
offered on futures markets, and the higher volatility associated with 
some of these products. Several of FIA's comments also questioned the 
Commission's assumption concerning the ease and convenience of meeting 
margin calls in one day through the electronic transfer of funds. 
First, FIA observed that an international client might receive a margin 
call after the closing hours of banks where its accounts are 
maintained, or during a holiday schedule applicable in the bank's 
location. FIA further stated that it might take more than the 
prescribed period to resolve funds that have been mistakenly 
misdirected. Finally, FIA pointed out that retail clients generally 
continue to meet margin calls by means of a check rather than a wire 
transfer.
    Two FCMs and the NIBA commented that a number of small to medium 
business entities, including small commercial hedgers and agricultural 
interests, also meet margin calls through check payments. In many 
cases, according to one FCM, the cost of using a wire transfer could be 
a significant percentage of the margin call. If the FCM does not 
require that its customers incur such wire transfer fees, the FCM will 
incur a capital charge for serving this market. Another FCM commented 
that the costs of requiring payment by wire transfer, for which most 
bank charge substantial fees, would impose a burden on the market 
participation of these customers, and the increased cost associated 
with servicing this market segment could result in higher commissions 
and lower market access for the retail customer.
    For those FCMs with a retail client base, therefore, FIA stated 
that it is impractical to expect the receipt of margin payment within 
less than three business days. FIA further noted that a number of U.S. 
futures contracts are denominated in a foreign currency, and it can 
take two business days to settle a wire transfer for many of these 
currencies. One FCM noted that even with only a moderate retail and 
foreign customer base, it anticipated having to double or triple its 
daily undermargined capital charge.
    Apart from issues related to the use of wire transfers to meet 
margin calls, FIA and NFA also expressed concerns that the shorter time 
period contemplated by the Commission might be insufficient for 
institutional trading managers to meet their margin calls. FIA noted 
its understanding that the reconciliation process for trades executed 
on behalf of institutional trading managers can extend into the 
business day following the trade date, resulting from a number of 
factors, including late give-ins. Because these entities actively 
manage their cash assets, excess cash must be invested early in the day 
in order to enhance available yield, and these trading managers 
establish early morning cut-off times for the receipt of margin calls. 
Although trading managers generally receive preliminary margin calls 
before the early morning cut-off, the size of the call may not be 
confirmed until after the established cut-off time, thus possibly 
resulting in delays beyond the one-business-day period being proposed 
by the Commission.
    Upon reviewing the comments received, the Commission has determined 
not to adopt the proposed amendments to Rules 1.17(c)(5)(viii) and (ix) 
that were set forth in the Proposing Release. The amendments were not 
proposed in response to observed specific deficiencies in the FCMs' 
processes for the collection of margin, and the Commission is persuaded 
that the existing Commission and exchange rules continue to reinforce 
the industry's own practices for collecting margin as soon as possible, 
while taking into consideration circumstances that may result in margin 
not being paid within one day of the issuance of a margin call which 
are commercially reasonable and not indicative of any impaired 
financial capacity of the recipient to ultimately meet the margin call.

VI. Financial Reporting Requirements

    The Proposing Release included amendments to Rule 1.10(b) to 
require each FCM to file an unaudited Form 1-FR-FCM, or FOCUS Report 
for an FCM also registered with the SEC as a securities broker or 
dealer, with the Commission and with the FCM's DSRO as of the end of 
each month, including the FCM's fiscal year end. Such financial reports 
are required to be filed within 17 business days of the end of each 
month.\46\ The preparation of such monthly financial reports also would 
satisfy an FCM's requirement to prepare and to maintain a monthly 
formal computation of its adjusted net capital under Rule 1.18(b).\47\ 
The Commission also proposed to facilitate Form 1-FR filings by 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).\48\ 
FIA, NFA and the JAC expressed support for the proposals to amend Rules 
1.10(b), 1.10(d)(4) and 1.18. The Commission has determined to amend 
Rules 1.10(b) and 1.18 as proposed, but to revise the text amendments 
that were suggested for Rule 1.10(d)(4) in the Proposing Release.
---------------------------------------------------------------------------

    \46\ 68 FR at 40840, 40845.
    \47\ 68 FR at 40841, 40848.
    \48\ 68 FR at 40841, 40846.
---------------------------------------------------------------------------

A. Oath and Affirmation Requirements

    Rule 1.10(d)(4) seeks to ensure that the required oath or 
affirmation is provided by persons that have authority to bind the FCM 
or IB, who also have an appropriate level of ongoing financial and/or 
managerial responsibility for the financial information provided in the 
reports filed with the Commission, and who should be bound by the 
personal attestation. Consistent with this purpose, Rule 1.10(d)(4) 
currently requires the signature of a chief operating officer, chief 
financial officer, general partner, or sole proprietor, if the FCM or 
IB is organized as a corporation, partnership or sole proprietorship, 
respectively.
    As noted in the Proposing Release, the existing list of approved 
individuals in Rule 1.10(d)(4) does not address other organizational 
structures under which FCMs and IBs may conduct their business, 
specifically, limited liability companies (``LLCs''). All fifty states 
and the District of Columbia have passed statutes in recent years 
allowing formation of LLCs within their jurisdictions.\49\ LLCs are 
unincorporated entities that, in accordance with the relevant LLC 
statute, may be managed by their members directly or by managers whose 
duties are defined by the statute and/or by agreement of the 
members.\50\ While some LLCs include the positions of chief executive 
officer and chief financial officer, others do not. As of February 29, 
2004, at least 40 of the 177 registered FCMs were organized as LLCs.
---------------------------------------------------------------------------

    \49\ Susan P. Hamill, The Origins Behind the Limited Liability 
Company, 59 Ohio St. L.J. 1459 (1998).
    \50\ Larry E. Ribstein and Robert R. Keatinge, Ribstein and 
Keatinge on Limited Liability Companies, Sec. Sec.  1.3, 1.6, and 
8.2 (2003).
---------------------------------------------------------------------------

    In response to the need to modernize Rule 1.10(d)(4), the Proposing 
Release suggested revisions to the rule that would be consistent with 
amendments then pending to Part 4 of the Commission's rules.\51\ The 
proposed amendments focused on the authority of the signer to bind the 
FCM or IB, but the Commission believes that it is

[[Page 49794]]

additionally appropriate to ensure that persons who submit financial 
information to the Commission hold positions within the firm that 
require meaningful familiarity with, and responsibility for, the 
ongoing operations and finances of the firm. The Commission has 
therefore determined to adopt amendments to Rule 1.10(d)(4) to 
designate, for each form of business organization, the officers or 
other individuals from whom the oath or affirmation would be required, 
as follows: if a sole proprietorship, the proprietor; if a partnership, 
any general partner; if a corporation, the chief executive officer or 
chief financial officer; and, if a limited liability company or limited 
liability partnership, the chief executive officer, the chief financial 
officer, the manager, the managing member, or those members vested with 
the management authority for the limited liability company or limited 
liability partnership.\52\ As amended, Rule 1.10(d)(4) uses some of the 
same terms that were adopted by the Commission when modernizing 
Commission Regulation 3.1(a) in 2001 to recognize the existence of 
limited liability companies.\53\
---------------------------------------------------------------------------

    \51\ 68 FR at 40841.
    \52\ A limited liability partnership is a general partnership 
which, as a result of a filing with the secretary of state (and, in 
some cases, the maintenance of a certain level of insurance and the 
payment of an annual fee to the state) limits the vicarious 
liability of the partners. See Larry E. Ribstein and Robert R. 
Keatinge, Ribstein and Keatinge on Limited Liability Companies, 
Sec.  16.28 (2003).
    \53\ Commission Regulation 3.1(a) specifies those ``principals'' 
that are required under the Act to register with the Commission. 
Rule 3.1(a)(1) includes as principals ``any director, the president, 
chief executive officer, chief operating officer, chief financial 
officer, the manager, managing member or those members vested with 
the management authority'' for a limited liability company or 
limited liability partnership.
---------------------------------------------------------------------------

    The Proposing Release also proposed to amend Rule 1.10(d)(4) to 
permit the oath or affirmation, if the registrant or applicant is 
registered with the SEC as a securities broker or dealer, to be 
provided by the representative authorized under SEC Rule 17a-5. The 
Commission adopts this amendment as proposed in the Proposing Release.

B. Filings With NFA and Other Reporting Requirements

    The Commission proposed to amend Rule 1.10(c) to provide that an IB 
would file an unaudited Form 1-FR-IB solely with NFA.\54\ The Proposing 
Release additionally invited comment on whether, and under what 
conditions, the Commission should amend its rules to permit IBs to file 
annual certified financial statements solely with NFA. NFA supported 
having IBs file solely with NFA both unaudited and audited financial 
reports, and no commenters objected to these proposals. Having 
considered these proposals, the Commission hereby amends Rule 1.10(c) 
to provide that IBs will file the unaudited Form 1-FRs required by Rule 
1.10(b)(2)(i), and the annual certified financial statements required 
by Rule 1.10(b)(2)(ii), with NFA only.
---------------------------------------------------------------------------

    \54\ 68 FR at 40842, 40845.
---------------------------------------------------------------------------

    The Proposing Release included amendments that would permit an 
FCM's or IB's DSRO, or, as applicable, its designated examining 
authority under SEC rules, to approve the FCM's or IB's application for 
change in fiscal year under Rule 1.10(e), or an application for an 
extension of time to file an audited or unaudited financial statement 
under Rules 1.10(f) or 1.16(f), subject to specified conditions.\55\ 
The Commission is adopting as final the proposed amendments to Rules 
1.10(e) and (f) and 1.16(f), with some modifications from the versions 
set forth in the Proposing Release. These modifications have been made 
to reflect the amendments to Rule 1.10(c) that will require IBs to file 
their uncertified and certified financial reports solely with NFA.\56\
---------------------------------------------------------------------------

    \55\ 68 FR at 40841-2, 40846-40847.
    \56\ Most significantly, the modified versions eliminate the 
requirement that IBs file with the Commission copies of their 
applications for changes in fiscal year or extended filing 
deadlines, or the notices approving or denying such applications.
---------------------------------------------------------------------------

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 invited the public to 
comment on the Chairman's certification that these rules would not have 
a significant economic impact on a substantial number of small 
entities.\57\ The Commission received no comments on the certification.
---------------------------------------------------------------------------

    \57\ 68 FR at 40844.
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    This rulemaking includes information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (``PRA''),\58\ the 
Commission submitted a copy of the proposed rule amendments to the 
Office of Management and Budget (``OMB'') for its review. No comments 
were received in response to the Commission's invitation in the 
proposed rules to comment on any potential paperwork burden associated 
with regulation.\59\
---------------------------------------------------------------------------

    \58\ 44 U.S.C. 3507(d).
    \59\ 68 FR at 40844.
---------------------------------------------------------------------------

C. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation under the Act. By its terms, 
section 15(a) as amended does not require the Commission to quantify 
the costs and benefits of a new regulation or to determine whether the 
benefits of the regulation outweigh its costs. Rather, section 15(a) 
simply requires the Commission to ``consider the costs and benefits'' 
of its action.
    Section 15(a) of the Act further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The amended rules adopted by the Commission pertain to the minimum 
financial and related reporting requirements for FCMs and IBs.\60\ 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:
---------------------------------------------------------------------------

    \60\ 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 amended 
rules for 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 amended reporting requirements will be minimized by amended rules 
that will streamline filing requirements. In addition, the amended 
rules will ``grandfather'' in existing satisfactory subordination

[[Page 49795]]

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 amended rules will benefit efficiency by 
eliminating duplicate filings and otherwise streamlining reporting 
requirements for FCMs and IBs. The amended rules 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 
amended rules 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 amended rules 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 amended rules for capital 
requirements seek to reflect appropriately the level of risk that 
different activities and obligations of FCMs and IBs may pose to their 
financial condition. The amended rules may therefore contribute to the 
sound risk management practices of futures intermediaries.
    5. Other public interest considerations. The Commission believes 
that the amended 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.
    The Commission invited, but did not receive, public comment on its 
application of the cost-benefit provision. After considering these 
factors, the Commission has determined to issue this final rule.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.


0
For the reasons presented above, the Commission hereby amends 17 CFR 
part 1 as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).


0
2. Section 1.10 is amended by revising paragraphs (b)(1), (b)(2)(i), 
(c), (d)(4), (e), and (f) 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.
    (ii) In addition to the monthly financial reports required by 
paragraph (b)(1)(i) of this section, each person registered as a 
futures commission merchant must file a Form 1-FR-FCM as of the close 
of its fiscal year, which must be certified by an independent public 
accountant in accordance with Sec.  1.16, and must be filed no later 
than 90 days after the close of the futures commission merchant's 
fiscal year: Provided, however, that a registrant which is registered 
with the Securities and Exchange Commission as a securities broker or 
dealer must file this report not later than the time permitted for 
filing an annual audit report under Sec.  240.17a-5(d)(5) of this 
title.
    (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) or (b)(2)(ii) 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 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.
    (2) Any report filed pursuant to paragraph (b)(1) 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 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 information required of a registrant by a self-regulatory 
organization pursuant to paragraph (b)(4) of this section need be 
furnished only to such self-regulatory organization and the Commission, 
and any information required of a registrant by the National Futures 
Association pursuant to paragraph (b)(4) of this section need be 
furnished only to the National Futures Association and the Commission.
    (4) 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 individual making such oath or 
affirmation must be:
    (i) If the registrant or applicant is a sole proprietorship, the 
proprietor; if a partnership, any general partner; if a corporation, 
the chief executive officer or chief financial officer; and, if a 
limited liability company or limited liability partnership, the chief 
executive officer, the chief financial officer, the manager, the 
managing member, or those members vested with the management authority 
for the limited liability company or limited liability partnership; or

[[Page 49796]]

    (ii) If the registrant or applicant is registered with the 
Securities and Exchange Commission as a securities broker or dealer, 
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) Election of fiscal year. (1) An applicant wishing to establish 
a fiscal year other than the calendar year may do so by notifying the 
National Futures Association of its election of such fiscal year, in 
writing, concurrently with the filing of the Form 1-FR pursuant to 
paragraph (a)(2) of this section, but in no event may such fiscal year 
end more than one year from the date of the Form 1-FR filed pursuant to 
paragraph (a)(2) of this section. An applicant that does not so notify 
the National Futures Association will be deemed to have elected the 
calendar year as its fiscal year.
    (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) Futures commission merchant registrants. (A) A futures 
commission merchant 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.
    (B) A futures commission merchant 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).
    (C) 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, and any copy or 
application to be filed with the designated self-regulatory 
organization shall be filed at its principal place of business.
    (iii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application to change its 
fiscal year, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities 
and Exchange Commission as a securities broker or dealer may file with 
the National Futures Association 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 National Futures Association 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 National Futures Association 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).
    (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) Futures commission merchant registrants. (A) A futures 
commission merchant 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.
    (B) A futures commission merchant 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).
    (C) Any copy that under this subparagraph (f)(1)(i) 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.
    (ii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application for extension 
of the time, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities 
and Exchange Commission as a securities broker or dealer may file with 
the National Futures Association copies 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

[[Page 49797]]

must also file immediately with the National Futures Association copies 
of any notice it receives from its designated examining authority to 
approve or deny the requested extension of time. Upon the receipt by 
the National Futures Association of a copy of any such notice of 
approval, the requested extension of time referenced in the notice 
shall be deemed approved under this subparagraph (f)(1(ii).
    (2) In the event an applicant finds that it cannot file its report 
for any period within the time specified in paragraph (b)(4) of this 
section without substantial undue hardship, it may file with the 
National Futures Association an application for an extension of time to 
a specified date which may not be more than 90 days after the date as 
of which the financial statements were to have been filed. The 
application must state the reasons for the requested extension and must 
contain an agreement to file the report on or before the specified 
date. The application must be received by the National Futures 
Association before the time specified in paragraph (b)(4) of this 
section for filing the report. Notice of such application must be filed 
with the regional office of the Commission with jurisdiction over the 
state in which the applicant's principal place of business is located 
concurrently with the filing of such application with the National 
Futures Association. Within ten calendar days after receipt of the 
application for an extension of time, the National Futures Association 
shall:
    (i) Notify the applicant of the grant or denial of the requested 
extension; or
    (ii) Indicate to the applicant that additional time is required to 
analyze the request, in which case the amount of time needed will be 
specified.
* * * * *

0
3. Section 1.12 is amended by revising paragraphs (a)(1), (b)(1), 
(b)(2), (b)(3), (b)(4), (c), (d), (e), (f), (h) and (i)(1) to read as 
follows:


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

    (a) * * *
    (1) Give telephonic notice, to be confirmed in writing by facsimile 
notice, as set forth in paragraph (i) of this section that the 
applicant's or registrant's adjusted net capital is less than required 
by Sec.  1.17 or by other capital rule, identifying the applicable 
capital rule. The notice must be given immediately after the applicant 
or registrant knows or should know that its adjusted net capital is 
less than required by any of the aforesaid rules to which the applicant 
or registrant is subject; and
* * * * *
    (b) * * *
    (1) 150 percent of the minimum dollar amount required by Sec.  
1.17(a)(1)(i)(A);
    (2) 110 percent of the amount required by Sec.  1.17(a)(1)(i)(B);
    (3) 150 percent of the amount of adjusted net capital required by a 
registered futures association of which it is a member, unless such 
amount has been determined by a margin-based capital computation set 
forth in the rules of the registered futures association, and such 
amount meets or exceeds the amount of adjusted net capital required 
under the margin-based capital computation set forth in Sec.  
1.17(a)(1)(i)(B), in which case the required percentage is 110 percent, 
or
    (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) 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.
    (e) Whenever any self-regulatory organization learns that a member 
registrant has failed to file a notice or written report as required by 
Sec.  1.12, that self-regulatory organization must immediately report 
this failure by telephone, confirmed in writing immediately by 
facsimile notice, as provided in paragraph (i) of this section.
    (f)(1) Whenever a clearing organization determines that any 
position it carries for one of its clearing members which is registered 
as a futures commission merchant or as a leverage transaction merchant 
must be liquidated immediately, transferred immediately or that the 
trading of any account of such futures commission merchant or such 
leverage transaction merchant shall be only for the purposes of 
liquidation, because that clearing member has failed to meet a call for 
margin or to make other required deposits, the clearing organization 
must immediately give telephonic notice, confirmed in writing 
immediately by facsimile notice, of such a determination to the 
principal office of the Commission at Washington, DC.
    (2) Whenever a registered futures commission merchant determines 
that any position it carries for another registered futures commission 
merchant or for a registered leverage transaction merchant must be 
liquidated immediately, transferred immediately or that the trading of 
any account of such futures commission merchant or leverage transaction 
merchant shall be only for purposes of liquidation, because the other 
futures commission merchant or the leverage transaction merchant has 
failed to meet a call for margin or to make other required deposits, 
the carrying futures commission merchant must immediately give 
telephonic notice, confirmed in writing immediately by facsimile 
notice, of such a determination to the principal office of the 
Commission at Washington, DC.
    (3) Whenever a registered futures commission merchant determines 
that an account which it is carrying is undermargined by an amount 
which exceeds the futures commission merchant's adjusted net capital 
determined in accordance with Sec.  1.17, the futures commission 
merchant must immediately give telephonic notice, confirmed in writing 
immediately by facsimile notice, of such a determination to the 
designated self-regulatory organization and the principal office of the 
Commission at Washington, DC. This paragraph (f)(3) shall apply to any 
account carried by the futures commission merchant, whether a customer, 
noncustomer, omnibus or proprietary account. For purposes of this 
paragraph (f)(3), if any person has an interest of 10 percent or more 
in ownership or equity in, or guarantees, more than one account, or has 
guaranteed an account in addition to his own account, all such accounts 
shall be combined. A designated self-regulatory organization may grant 
an exemption from the provisions of this paragraph to a futures 
commission merchant with respect to any particular account on a 
continuous basis provided

[[Page 49798]]

the designated self-regulatory organization documents the reasons for 
granting such an exemption and continues to monitor any such account.
    (4) A futures commission merchant shall report immediately by 
telephone, confirmed immediately in writing by facsimile notice, 
whenever any commodity interest account it carries is subject to a 
margin call, or call for other deposits required by the futures 
commission merchant, that exceeds the futures commission merchant's 
excess adjusted net capital, determined in accordance with Sec.  1.17, 
and such call has not been answered by the close of business on the day 
following the issuance of the call. This applies to all accounts 
carried by the futures commission merchant, whether customer, 
noncustomer, or omnibus, that are subject to margining, including 
commodity futures and options. In addition to actual margin deposits by 
an account owner, a futures commission merchant may also take account 
of favorable market moves in determining whether the margin call is 
required to be reported under this paragraph.
    (5)(i) A futures commission merchant shall report immediately by 
telephone, confirmed immediately in writing by facsimile notice, 
whenever its excess adjusted net capital is less than six percent of 
the maintenance margin required by the futures commission merchant on 
all positions held in accounts of a noncustomer other than a 
noncustomer who is subject to the minimum financial requirements of:
    (A) A futures commission merchant, or
    (B) The Securities and Exchange Commission for a securities broker 
and dealer.
    (ii) For purposes of paragraph (f)(5)(i) of this section, 
maintenance margin shall include all deposits which the futures 
commission merchant requires the noncustomer to maintain in order to 
carry its positions at the futures commission merchant.
* * * * *
    (h) Whenever a person registered as a futures commission merchant 
knows or should know that the total amount of its funds on deposit in 
segregated accounts on behalf of customers, or that the total amount 
set aside on behalf of customers trading on non-United States markets, 
is less than the total amount of such funds required by the Act and the 
Commission's rules to be on deposit in segregated or secured amount 
accounts on behalf of such customers, the registrant must report such 
deficiency immediately by telephone notice, confirmed immediately in 
writing by facsimile notice, to the registrant's designated self-
regulatory organization and the principal office of the Commission in 
Washington, DC, to the attention of the Director and the Chief 
Accountant of the Division of Clearing and Intermediary Oversight.
    (i)(1) Every notice and written report required to be given or 
filed by this section (except for notices required by paragraph (f) of 
this section) by a futures commission merchant, an applicant for 
registration as a futures commission merchant or a self-regulatory 
organization must be filed with the regional office of the Commission 
with jurisdiction over the state in which the applicant's or 
registrant's principal place of business is located, with the 
designated self-regulatory organization, if any, with the Securities 
and Exchange Commission, if such applicant or registrant is a 
securities broker or dealer, and with the National Futures Association, 
if the firm is an applicant. In addition, every notice required to be 
given by this section must also be filed with the principal office of 
the Commission in Washington, DC. Each statement of financial 
condition, each statement of the computation of the minimum capital 
requirements pursuant to Sec.  1.17 of this part, and each schedule of 
segregation requirements and funds on deposit in segregation required 
by this section must be filed in accordance with the provisions of 
Sec.  1.10(d) of this part unless otherwise indicated.
* * * * *

0
4. Section 1.16 is amended by revising paragraph (f) to read as 
follows:


Sec.  11.16  Qualifications and reports of accountants.

* * * * *
    (f)(1) Extension of time for filing audited reports. In the event a 
registered futures commission merchant or a registered introducing 
broker finds that it cannot file, without substantial undue hardship, 
its certified financial statements and schedules for any year within 
the time specified in Sec.  1.10 (b)(1)(ii) or Sec.  1.10 (b)(2)(ii) of 
this part, as applicable, such registrants may request approval for an 
extension of time, as follows:
    (i) Futures commission merchant registrants. (A) A futures 
commission merchant may file with its designated self-regulatory 
organization an application for an 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.
    (B) A futures commission merchant 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)(i).
    (C) Any copy that under this paragraph (f)(1)(i) 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.
    (ii) Introducing broker registrants. (A) An introducing broker may 
file with the National Futures Association an application for extension 
of time, which shall be approved or denied in writing.
    (B) An introducing broker that is registered with the Securities 
and Exchange Commission as a securities broker or dealer may file with 
the National Futures Association copies 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 National Futures Association copies of any notice 
it receives from its designated examining authority to approve or deny 
the requested extension of time. Upon the receipt by the National 
Futures Association of a copy of any such notice of approval, the 
requested extension of time referenced in the notice shall be deemed 
approved under this paragraph (f)(1)(ii).
    (2) Exemption requests. On the written request of any designated 
self-regulatory organization or registrant, or

[[Page 49799]]

on its own motion, the Commission may grant an extension of time or an 
exemption from any of the certified financial reporting requirements of 
this chapter either unconditionally or on specified terms and 
conditions.
* * * * *

0
5. Section 1.17 is amended by:
0
a. revising paragraphs (a)(1)(i)(B) and (b)(4),
0
b. adding new paragraphs (b)(7) and (b)(8), and
0
c. revising paragraphs (e)(1)(i), (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), 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 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 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 futures commission merchant is 
required to collect under the rules of an exchange, or the rules of a 
clearing organization if the level of margin to be collected is not 
determined by the rules of an exchange, from the owner of a customer 
account or noncustomer 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 a futures 
commission merchant which is not a member of the exchange or the 
clearing organization that requires collection of such margin should be 
calculated as if the futures commission merchant 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 represents risk margin, all of the margin required by the 
exchange or the clearing organization that requires collection of such 
margin for that account, shall be treated as risk margin.
* * * * *
    (e)(1) * * *
    (i) 120 percent of the appropriate minimum dollar amount required 
by paragraphs (a)(1)(i)(A) or (a)(1)(iii)(A) of this section;
    (ii) For a futures commission merchant or applicant therefor, 120 
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, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (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, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (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, 125 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (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, 120 
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, 120 
percent of the amount required by paragraph (a)(1)(i)(B) of this 
section;
* * * * *
    (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, 120 
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 September 30, 2004. 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 September 30, 2004, and which has been 
deemed to be satisfactorily subordinated pursuant to this section prior 
to September 30, 2004, shall continue to be deemed a satisfactory 
subordination agreement until the

[[Page 49800]]

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.
* * * * *

0
6. Section 1.18 is 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 monthly 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(b) 
will be deemed to have satisfied the requirements of paragraph (b)(1) 
of this section for such month.
* * * * *

    Issued in Washington, DC, on August 5, 2004, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 04-18349 Filed 8-11-04; 8:45 am]
BILLING CODE 6351-01-P