Release: #4181-98
For Release: August 25, 1998


WASHINGTON -- The Commodity Futures Trading Commission (CFTC) announced today that it has amended its Rule 1.12, applicable to futures commission merchants (FCMs) only, to require immediate notification by an FCM to the CFTC and to the FCMs 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 now requiring immediate notification of certain events pertaining to undercapitalization or failure to satisfy margin calls, where notice was previously required within 24 hours. In addition, the Commission is permitting notices to be filed by facsimile in addition to telegraphic means and requiring immediate telephonic notice as well.

The Commission has adopted these amendments 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 this period, the Commission believes that this rule amendment is necessary because similar circumstances may occur in the future, and if so, the relevant regulatory and self-regulatory authorities must be in a position to evaluate any problems as quickly as possible.

The Commission's intention in adopting this amendment 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 earliest possible notice of a shortfall in customer funds set aside by an FCM should facilitate a resolution of the problem with the least harmful impact upon the FCM's customers and other market participants.

The standard to be applied by FCMs in determining when to notify the Commission of problems -- when the FCM "knows or should know" that it has insufficient customer funds set aside -- is consistent with standards used elsewhere in Commission rules. The Commission does not intend this standard to require FCMs to make additional segregation calculations on a routine basis, but only to do so when a problem arises that could trigger the reporting requirements under new Rule 1.12(h). Likewise, while an FCM is required to report to the Commission and its DSRO immediately when it knows or should know of a problem, this requirement is not intended to foreclose appropriate consultation between FCM staff and senior management prior to giving the required notice.

The rule amendment will be published in the Federal Register shortly and will become effective 30 days after publication. Copies of the rule amendment may be obtained by contacting the Commission's Office of the Secretariat, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C., 20581, (202) 418-5100 or by accessing the Commission's website,