For Release: January 7, 1998
CFTC SEEKS PUBLIC COMMENT ON PROPOSED AMENDMENTS TO ITS RULE 1.12 THAT WILL REQUIRE AN FCM TO NOTIFY IMMEDIATELY THE CFTC WHEN IT BECOMES UNDERSEGREGATED OR UNDERSECURED
WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it is proposing amendments to its Rule 1.12, applicable to futures commission merchants (FCMs) only, that will require immediate notification by an FCM to the CFTC and its designated self-regulatory organization (DSRO) if an FCM knows or should know that it is in an undersegregated or undersecured condition: i.e., the FCM has insufficient funds in accounts segregated for the benefit of customers trading on U.S. contract markets or has insufficient funds set aside for customers trading on non-U.S. markets to meet the FCM's obligations to its customers.
The term "funds" in this context includes accrued amounts due to or from the FCM's clearing organizations and/or carrying brokers in connection with customer-related activities, typically, the daily or intraday variation settlement.
The Commission is also proposing to require immediate notification of certain events pertaining to undercapitalization or failure to satisfy margin calls, where notice is currently required within 24 hours. In addition, the Commission proposes to codify a previous staff interpretation that permits notices to be filed by facsimile in addition to telegraphic means and to require immediate telephonic notice as well.
The Commission is making this proposal concerning an FCM's undersegregated or undersecured condition based in part on its experience during the sharp market drop on October 27, 1997. As a result of market activity on that date, certain FCMs had difficulty meeting their segregated funds requirements. Although no FCM experienced a financial failure during October, the Commission believes that this rule amendment is necessary because situations like this may occur in the future and if a troubled FCM is unable to obtain additional funds, extraordinary measures may be necessary, such as transferring or liquidating positions. The earliest possible notice of such an event should facilitate a resolution of the problem with the least harmful impact upon the FCM's customers and other market participants. The Commission's intention in making this proposal is to enhance market protection for all market participants by allowing remedial measures to be taken that will avert a "domino effect" on other firms and market participants when a particular firm experiences financial or operational difficulties.
The Commission expects the proposal to be published in the Federal Register next week and has provided a 60-day comment period. The proposal will be available on the Commission's Internet Home Page (www.cftc.gov) and also may be obtained by contacting the Commission's Office of the Secretariat at (202) 418-5100.