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Interpretative Letters

Date
Interpretative Letters
01/15/2004
04-04 PDF Image; Rule 1.57(a)(1); Interpretation
The Division of Clearing and Intermediary Oversight permitted a futures commission merchant (FCM), at the request of its guaranteed introducing broker’s (IB) client, to “give up” to another FCM for clearing orders placed by the client. The guaranteeing FCM was sufficiently capitalized to meet all obligations it may have to the IB’s customers, and the IB would not be compensated by the second FCM in connection with orders that the client enters with the IB and that were cleared through the second FCM.
01/21/2004
04-06 PDF Image; CFTC Regulations 1.32 and 1.17; Interpretation
The Division of Clearing and Intermediary Oversight (DCIO) has issued a letter to Sentinel Management Group, Inc. to reaffirm the staff’s views concerning the application of the Commission’s segregation and net capital regulations to certain accounts managed by Sentinel. Specifically, staff has confirmed that an FCM client of Sentinel may include its proportionate interest in the total funds held in a certain account managed by Sentinel in performing the daily segregated funds computation required by Regulation 1.32, subject to applicable haircuts. Further, an FCM client may include its proprietary funds held in a certain account managed by Sentinel as a current asset in computing its minimum adjusted net capital pursuant to Regulation 1.17, subject to certain conditions, including upon Sentinel informing each FCM client that it should report its proportionate interest in the account as an investment on financial reports filed with the Commission and self-regulatory organizations.
01/28/2004
04-07 PDF Image; CFTC Regulation 1.17(d); Interpretation
The Division of Clearing and Intermediary Oversight (DCIO) responded to an inquiry from a designated self-regulatory organization (DSRO) relating to the definition of equity capital in Commission Regulation 1.17(d). The DSRO requested confirmation that a futures commission merchant (FCM) may include in its equity capital the proceeds from a subordinated loan agreement that satisfies all of the terms and conditions for equity capital set forth in Rule 1.17(d), and also provides for the possibility of several advancements of principal, or drawdowns, during the term of the loan agreement. In its opinion letter, DCIO stated that Rule 1.17(d) does not preclude including such advances, if and when made, in the firm’s equity capital, so long as each advance separately satisfies the requirements for equity capital under Rule 1.17(d).
03/05/2004
04-10 PDF Image; Rule 1.55; Interpretation
The Division of Clearing and Intermediary Oversight declined to confirm that an FCM that conducts most of its business over an Internet-based electronic trading platform could comply with the risk disclosure requirement of Rule 1.55 by including in the hard-copy account opening agreement signed by the customer a statement that the customer had visited the FCM’s website and had accessed and read the required risk disclosure statement. The Division reiterated that requirement of Rule 1.55 that where the risk discourse statement is included as a package with other materials, even in an electronic format, it must appear as the cover page or the first page and as the only material on such page.
03/24/2004
04-11 PDF Image; 4b(d) of the CEAct and Commission regulation 1.20; Interpretation
A bank requested an interpretation that a deposit account product that the Division of Clearing and Intermediary Oversight had previously interpreted as acceptable for the deposit of customer segregated funds by futures commission merchants was similarly acceptable for the deposit of customer segregated funds by derivatives clearing organizations. Based on an analysis of account, the Division issued an interpretation that the account would be acceptable as a deposit location as the account would be properly titled and covered by appropriate acknowledgements by the bank, and the funds in the account would at all times be immediately available for withdrawal on demand.
04/15/2004
04-13 PDF Image; Rule 4.13(a)(3); Interpretation
The Division of Clearing and Intermediary Oversight issued an interpretation permitting CPOs who claim registration exemption under Rule 4.13(a)(3) to offer and sell pool participants to Non-United States persons, as defined in Commission Rule 4.7(a)(1)(iv), regardless of whether such persons meet any of the sophistication criteria of Rule 4.13(a)(3)(iii). The Division noted that a Non-United States person may participate in pools operated by CPOs claiming exemption under Rule 4.13(a)(4), which imposes no trading restrictions on the pool, regardless of the person's income, net worth, or other indicia of financial sophistication.
03/22/2004
04-15 PDF Image; Section 1a(23) and Regulation 1.3 (mm); Interpretation
The Division of Clearing and Intermediary Oversight issued an interpretation that a software provider is not an introducing broker, within the meaning of section 1a(23) and regulation 1.3(mm), when it markets and distributes a trading and order management software program that allows institutional customers to directly access their futures commission merchant's order entry system through the proprietary software screen. This interpretation is based on the representations that: (1) the software provider does not solicit customers or orders for an FCM or the trading of futures contracts (customer indicate to the software provider the FCM with which they have an existing relationship or with whom they wish to trade); (2) even in response to a customer inquiry, the software provider does not recommend, propose, or encourage that customers use any particular FCM, or place any orders for futures contracts; (3) the software does not provide express "buy" or "sell" signals; (4) the fees paid to the software provider by the FCM are not associated with the fees paid to the FCM for the placement of customer orders - the fee is paid by the FCM based on the number of contracts executed with the FCM, not based on the FCM's commission or the price of the contract traded; (5) the software will be licensed only to institutional customers, not to individuals; and (6) the software provider's central business activities are the collection and distribution of data services.
07/08/2004
04-18 PDF Image; Rules 1.35(a-1)(5); 4.14(a); Interpretation
The Division of Clearing and Intermediary Oversight (DCIO) has issued an interpretation that an associated person (AP) of an introducing broker (IB) may allocate bunched orders on a post-trade basis in accordance with Commission rule 1.35(a-1)(5). Generally, APs are not deemed "eligible account managers" under that rule. However, where the AP in question is operating as a commodity trading advisor (CTA) that is exempt from registration under Commission rule 4.14(a)(5) and (a)(10) (a person exempt from registration as a commodity pool operator (CPO) who solely advises pools for which the person is exempt from CPO registration, and a person who advises no more than 15 persons during the preceding 12 months and does not hold himself out generally to the public as a CTA, respectively), the fact that the person is also registered as an AP does not disqualify him from acting as an eligible account manager permitted to allocate bunched orders on a post-traded basis in accordance with Commission rule 1.35(a-1)(5).
07/12/2004
04-19 PDF Image; Rule 1.31 - Maintaining required records; Interpretation
The Division of Clearing and Intermediary Oversight issued an interpretation that a registered FCM could retain daily and monthly trader statements and reports in Adobe PDF format, without being required to retain a third-party technical consultant under the following circumstances: (i) each record must be stored on the CD or DVD in format "filename.pdf" where "filename" represents the actual name given to the sorted record; (ii) the date and type of record must be easily discernible, whether from the file name, from an index or otherwise, and the information must be updated at least daily; and (iii) each record must be maintained in a consistent format in terms of size, font, and orientation on the page.
08/25/2004
04-23 PDF Image; Rule 4.10(d); Interpretation
The Division of Clearing and Intermediary Oversight declined to confirm that non-natural person bank account holders (Family Entities) formed by, or for the direct or indirect benefit of, wealthy family members, and in some cases long-term employees and advisers of the family members, are not pools. Requester failed to specify eligibility criteria for participants of Family Entities when asked to do so by Division staff.
09/07/2004
04-25 PDF Image; Sections 4d and 4k(1) of the CEAct; Interpretation
The Division of Clearing and Intermediary Oversight issued an interpretation that because a consulting firm and its sole member are not engaged in soliciting or accepting customer orders, the firm and its sole member are not required to be registered as an IB or AP, respectively. The Division's opinion is based primarily on representations that: (1) the firm would be compensated for its various consulting services and not for referring clients to any FCM; (2) the firm would not be in any way involved with order flow; and (3) the firm would not be compensated on a per-order basis or by a referral fee.

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