[Federal Register: November 7, 2000 (Volume 65, Number 216)]
[Rules and Regulations]
[Page 66618-66619]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



17 CFR Part 1

RIN 3038-AB54

Minimum Financial Requirements for Futures Commission Merchants
and Introducing Brokers; Amendment to the Capital Charge on Unsecured
Receivables Due From Foreign Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.


SUMMARY: The Commodity Futures Trading Commission. (``Commission'') is
amending its net capital rule to expand the exemption from the five
percent capital charge that a futures commission merchant (``FCM'') or
introducing broker is required to take against unsecured foreign broker
receivables in computing its adjusted net capital.\1\

    \1\ An introducing broker (``IB'') is required to maintain
minimum adjusted net capital of $30,000, unless the IB has entered
into a guarantee agreement with an FCM in the form prescribed in the
Commission's rules. The industry has commonly distinguished between
such IBs as Guaranteed IBs and Independent IBs (``IBIs''), the
latter being subject to the $30,000 minimum capital requirement. The
rule changes being adopted herein affect those IBs identified as

EFFECTIVE DATE: December 7, 2000.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Center, 1155 21st Street, NW, Washington, DC 20581;
telephone (202) 418-5495; electronic mail tsmith@cftc.gov; or Henry J.
Matecki, Financial Audit and Review Branch, Division of Trading and
Markets, Commodity Futures Trading Commission, 300 South Riverside
Plaza, Suite 1600 North, Chicago, IL 60606; telephone (312) 353-6642;
electronic mail hmatecki@cftc.gov.


I. Rule Amendments

    On August 28, 2000, the Commission published for comment proposed
amendments to Rule 1.17(c)(5)(xiii) (``proposing release'').\2\ The
comment period expired on September 27, 2000. No comments were
received. Accordingly, the Commission is adopting the amendments as

    \2\ 65 FR 52051 (August 28, 2000).

    Commission Rule 1.17(c)(5)(xiii) requires an FCM or IBI, in
computing its adjusted net capital, to take a five percent capital
charge on any unsecured receivables resulting from commodity futures
and option transactions executed on foreign boards of trade and which
are due from foreign brokers that are not registered with the
Commission as FCMs or with the Securities and Exchange Commission
(``SEC'') as securities brokers or dealers.\3\ As more fully set forth
in the proposing release, Rule 1.17(c)(5)(xiii) currently permits an
FCM or IBI to exclude from the five percent capital charge that portion
of the unsecured receivable that represents amounts required to be on
deposit to maintain futures and option positions transacted on foreign
boards of trade. Deposits in excess of required margin or performance
bond are subject to the capital charge. In addition, to be exempt from
the capital charge, the receivable must be due from a foreign broker
that has received confirmation of ``comparability relief'' in
accordance with a Commission order issued under Rule 30.10 and the
margin deposits must be held by the foreign broker itself, another
foreign broker that has received confirmation of Rule 30.10
``comparability relief,'' or at a depository that qualifies as a
depository pursuant to Rule 30.7 and which is located within the same
jurisdiction as either foreign broker.\4\

    \3\ Commission regulations cited herein may be found at 17 CFR
Ch. I (2000).
    \4\ Under Rule 30.10 and Appendix A thereto, the Commission may
exempt a foreign firm from compliance with certain Commission rules
provided that a comparable regulatory system exists in the firm's
home country and that certain safeguards are in place to protect
U.S. customers, including an information-sharing arrangement between
the Commission and the firm's home country regulator or self-
regulatory organization (``SRO''). Once the Commission determines
that the foreign jurisdiction's regulatory structure offers
comparable regulatory oversight, the Commission issues an order
granting general relief subject to certain conditions. Foreign firms
seeking confirmation of this relief must make certain
representations set forth in the Rule 30.10 order issued to the
regulator or SRO from the firm's home country. Appendix C to Part 30
lists those foreign regulators and SROs that have been issued a Rule
30.10 order by the Commission.
    Rule 30.7(c) sets forth acceptable depositories for funds
deposited by U.S. customers with foreign brokers for futures and
option trading on foreign boards of trade.

    The amendments being adopted herein increase the maximum amount
eligible for exclusion from the five percent capital charge to the
greater of: 150 percent of the amount immediately required to support
futures and option transactions in an account; or 100 percent of the
maximum amount required to support futures and option transactions at
any time during the preceding six-month period. The amendments are
intended to provide FCMs and IBIs with greater flexibility with respect
to their cash and risk management while also reducing costs associated
with frequent transfers of excess margin funds out of foreign brokers
in order to avoid the five percent capital charge.
    The amendments also eliminate the requirement that an FCM or IBI be
responsible for monitoring the ultimate destination of margin funds
deposited with a Rule 30.10 foreign broker in order for such funds to
qualify for the exemption from the capital charge. As set forth in the
proposing release, by granting Rule 30.10 ``comparability relief'' to a
foreign broker, the Commission has made a determination that the
foreign broker is subject to a regulatory structure that is comparable
to the structure imposed on entities that operate on U.S. futures
exchanges. Of particular relevance is that the Commission, as part of
the Rule 30.10 petition process, assesses the extent to which a foreign
broker is subject to a regulatory program that imposes bona fide
minimum financial requirements on its regulatees or members and that
provides for the protection of customers by the segregation of funds
and bankruptcy rules.\5\ The Commission's determination that these
standards and protections exist and are enforced supports an easing of
the capital charge.

    \5\ The specific elements examined in evaluating whether a
particular foreign regulatory program provides a basis for
permitting substituted compliance for purposes of exemptive relief
pursuant to Rule 30.10 are set forth in Appendix A to Part 30.

II. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611,
requires that agencies, in adopting rules, consider the impact of those
rules on small businesses. The Commission has previously established
certain definitions of ``small entities'' to be used by the Commission
in evaluating the impact of its rules on such entities.\6\ The
Commission previously has determined

[[Page 66619]]

that registered FCMs are not small entities for the purposes of the
RFA.\7\ With respect to IBIs, the Commission stated that it is
appropriate to evaluate within the context of a particular rule whether
some or all introducing broker should be considered to be small
entities and, if so, to analyze the economic impact on such entities at
that time.\8\ The amendments to Rule 1.17(c)(5)(xiii) expanding the
amount of funds that may be excluded from the foreign brokers
receivable capital charge do not impose additional requirements on an
IBI. Therefore, the Chairman, on behalf of the Commission, certifies
that these regulations will not have a significant economic impact on a
substantial number of small entities.

    \6\ 47 FR 18618-18621 (April 30, 1982).
    \7\ 47 FR 18619-1820.
    \8\ 48 FR 35248, 35275-78 (August 3, 1983).

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et seq. (Supp.
I 1995), imposes certain requirements on federal agencies (including
the Commission) to review rules and rule amendments to evaluate the
information collection burden that they impose on the public. The
Commission believes that the amendments to Rule 1.17(c)(5)(xiii) will
impose a minimal information collection burden on the public, namely
those FCMs and IBIs who wish to take advantage of the exemption will be
required to maintain a record of the margins required to be on deposit
with a foreign broker over the preceding six month period. However,
this burden is believed to be minimal when compared to the capital
savings to be generated by the exclusion of increased amounts from the
capital charge.

List of Subjects in 17 CFR Part 1

    Brokers, Commodity futures.

    In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act and, in particular, Sections
4(b), 4f, 4g, and 8a(5) thereof, 7 U.S.C. 6(b), 6d, 6g, and 12a(5), the
Commission hereby amends Chapter I of Title 17 of the Code of Federal
Regulations as follows:


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

    Authority. 7 U.S.C. 1a, 2, 2a, 4, 4a, 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.

    2. Section 1.17 is amended by revising paragraph (c)(5)(xiii) to
read as follows:

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

* * * * *
    (c) * * *
    (5) * * *
    (xiii) Five percent of all unsecured receivables includable under
paragraph (c)(2)(ii)(D) of this section used by the applicant or
registrant in computing ``net capital'' and which are not due from:
    (A) A registered futures commission merchant;
    (B) A broker or dealer that is registered as such with the
Securities and Exchange Commission; or
    (C) A foreign broker that has been granted comparability relief
pursuant to Sec. 30.10 of this chapter, Provided, however, that the
amount of the unsecured receivable not subject to the five percent
capital charge is no greater than 150 percent of the current amount
required to maintain futures and option positions in accounts with the
foreign broker, or 100 percent of such greater amount required to
maintain futures and option positions in the accounts at any time
during the previous six-month period, and Provided, that, in the case
of customer funds, such account is treated in accordance with the
special requirements of the applicable Commission order issued under
Sec. 30.10 of this chapter.
* * * * *

    Issued in Washington, DC, on November 1, 2000, by the
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-28492 Filed 11-6-00; 8:45 am]

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