[Federal Register: February 2, 2006 (Volume 71, Number 22)]
[Rules and Regulations]
[Page 5587-5596]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02fe06-3]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 145 and 147
RIN 3038-AC05
Alternative Market Risk and Credit Risk Capital Charges for
Futures Commission Merchants and Specified Foreign Currency Forward and
Inventory Capital Charges
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission ("Commission" or
"CFTC") is amending Commission regulations that impose minimum
financial and related reporting requirements upon each person
registered as a futures commission merchant ("FCM"). The amended
regulations address the capital computations of FCMs that are
registered with the Securities and Exchange Commission ("SEC") as
securities brokers or dealers ("FCM/BDs"), and, who, pursuant to
SEC's regulations governing consolidated supervised entities
("CSEs"), have received SEC approval to use internal mathematical
models to determine the deductions from their capital for market risk
and credit risk associated with their proprietary trading assets.
Subject to the reporting and other requirements specified in the
amended regulations, these FCM/BDs may elect to compute their adjusted
net capital using their SEC-approved alternative market risk and credit
risk capital deductions in lieu of CFTC requirements. The Commission is
also adopting other rule amendments that address confidential treatment
for the reports and statements that would be required to be filed under
the amended regulations, and also address the confidential treatment of
certain other information that all FCMs must file with both the
Commission and the SEC.
Finally, the Commission is also adopting amendments that will
affect the minimum financial requirements of FCMs and introducing
brokers ("IBs") by reducing the capital deductions for their
uncovered inventory or forward contracts in specified foreign
currencies. This reduction is consistent with guidance currently
provided by the Commission to FCMs and IBs.
DATES: Effective February 2, 2006.
FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and
Chief Accountant, at (202) 418-5430, 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 20581. Electronic mail: ([email protected])
or ([email protected]).
SUPPLEMENTARY INFORMATION:
I. Background
On October 11, 2005, the Commission published a release in the
Federal Register to provide public notice of, and request comment on,
proposed amendments to its capital rules.\1\ The Commission encourages
interested persons to read the detailed analysis of the proposing
amendments in the October 11 release, and has included citations to
pertinent pages of the release as part of the discussion in this final
rulemaking release.\2\ In response to the proposals issued by the
Commission, four commenters sent letters that were generally supportive
of the proposed regulations.\3\ The commenters included the National
Futures Association ("NFA"), a registered futures association;
Goldman, Sachs and Co., an FCM/BD; and two industry trade groups, the
Futures Industry Association ("FIA") and the Securities Industry
Association ("SIA").\4\ The comments received from each of these
organizations are addressed elsewhere in this release, in connection
with the specific Commission regulations discussed in these letters.
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\1\ The RIN Number for the release published in the Federal
Register on October 11, 2005 was identified as 3038-AC19. See 70 FR
58985 (October 11, 2005). The correct RIN Number, 3038-AC05, has
been used in this release.
\2\ The October 11 Release may be accessed electronically on the
Commission's Web site, at http://www.cftc.gov/.
\3\ The original deadline for the receipt for comments was
extended from November 10th to November 30, 2005. See 70 FR 70749
(November 23, 2005).
\4\ 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/comment05/foi05--006_1.htm.
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II. Amendments Allowing Alternative Capital Computation for Proprietary
Trading Assets of Qualifying FCM/BDs That Are Part of CSEs
A. Request to Commission for Amendment to Rule 1.17
As noted in the October 11 release, Commission Rule 1.17(a)
requires each FCM to maintain a minimum amount of "adjusted net
capital", which is defined as the FCM's net capital less the
deductions, or "haircuts", that are specified in Rule 1.17(c)(5) and
(8).\5\ For purposes of the required haircuts on the FCM's proprietary
positions in securities, Rule 1.17(c)(5) incorporates by reference
percentage deductions that are set forth in SEC regulations 17 CFR
240.15c3-1(c)(2)(vi) and (vii). Also, Commission Rule 1.17(c)(2)(ii),
in a manner similar to the SEC's requirements for BDs under 17 CFR
240.15c3-1(c)(2)(iv), requires unsecured receivables arising from an
FCM's transactions in over-the-counter ("OTC") derivatives to be
excluded from the FCM's current assets for purposes of determining the
firm's regulatory capital. The deductions required for other
proprietary assets of the FCM are set forth in other parts of
Commission Rule 1.17(c).
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\5\ The rules of the Commission cited in this release may be
found at 17 CFR Ch. I (2005). SEC rules cited in this release may be
found at 17 CFR Ch. II (2005).
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The October 11 release also noted that the Commission and SEC have,
to the extent practical, harmonized their respective capital rules in
order to avoid creating inconsistent regulatory obligations for firms
that are dually-registered FCMs and securities brokers or dealers
("BDs"). This harmonization of capital rules extends to the
computation of net capital and adjusted net capital, and to the
qualifications that subordinated debt must meet in order to qualify as
regulatory capital. Furthermore, if an FCM is also registered as a BD,
it may file an SEC Form X-17a-5, "Financial and Operational Combined
Uniform Single Report" ("FOCUS Report") to satisfy its requirement
to file with the Commission a Form 1-FR-FCM financial report. In
particular, Commission Rule 1.10(h) treats Part II and Part IIA of the
FOCUS report as acceptable substitutes for the Form 1-FR-FCM, provided
that the FOCUS report includes all information required to be furnished
on and submitted with Form 1-FR-FCM. Also, for those portions of the
Form 1-FR-FCM that the Commission has designated as either publicly
available or as exempt from mandatory public
[[Page 5588]]
disclosure for purposes of the Freedom of Information Act and the
Government in the Sunshine Act, the Commission extends the same
treatment to those portions of the FOCUS Report that are equivalent to
the Form 1-FR-FCM. The uniform capital computations, and related
single-form filing requirements, harmonize the regulatory requirements
imposed upon dual registrants while providing the Commission and SEC
with the necessary financial information to assess whether firms
maintain a minimum level of regulatory capital while engaging in
futures and securities businesses.
On June 21, 2004, the SEC adopted final rule amendments to its
capital rules to provide an alternative net capital computation for
broker-dealers that voluntarily elect to be supervised on a
consolidated basis (the "Alternative Capital Computation").\6\ As
amended, SEC Rule 15c3-1(a)(7), (17 CFR 240.15c3-1(a)(7)), provides
that the SEC may approve a BD's application, if submitted in accordance
with the provisions of a new Appendix E (17 CFR 240.15c3-1e), to use
the Alternative Capital Computation when calculating its net
capital.\7\ To the extent approved by the SEC, the BD using the
Alternative Capital Computation would compute a total deduction for
market risk for positions in the proprietary accounts of the BD, in
accordance with the specific standards set forth in Appendix E.\8\ The
BD would calculate its regulatory capital using this deduction in lieu
of the haircuts that SEC Rules 15c3-1(c)(2)(vi) and (c)(2)(vii) require
for the BD's positions in securities. The SEC may also approve
alternative market risk deductions for the BD's proprietary positions
in forward contracts and commodity futures contracts. Also, Appendix E
provides that where the alternative market risk deduction has been used
to compute the deduction on the underlying instrument for OTC
derivatives of the BD, the BD would compute a deduction for credit
risk, using the standards set forth in Appendix E, and it would use
this deduction in lieu of the capital charges that SEC Rule 15c3-
1(c)(2)(iv) requires for the BD's credit exposures arising from OTC
transactions in derivatives.\9---------------------------------------------------------------------------
\6\ The SEC's new rule was published at 69 FR 34428 (June 21,
2004). The effective date of the rule was August 20, 2004.
\7\ A detailed description of the application process was
included in the October 11 release. See 70 FR at 58989.
\8\ The requirements for the computation of the deduction for
market risk were summarized in the October 11 Release. See 70 FR at
58987-58988.
\9\ The requirements for the computation of the deduction for
credit risk were summarized in the October 11 Release. See 70 FR at
58988-58989.
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As the SEC noted when first proposing rules for the Alternate
Capital Computation, the required market risk and credit risk
deductions are expected to be substantially smaller in amount than the
standardized deductions.\10\ As the SEC rule amendments were being
discussed and proposed, Commission staff identified that continued
harmonization of the capital rules of the two agencies would require
amendment of Rule 1.17, and communicated this to various market
participants potentially affected by the difference between the SEC's
proposed rules and CFTC Rule 1.17. After the SEC adopted rule
amendments allowing BDs to apply for approval to use the Alternative
Capital Computation, several FCM/BDs, along with representatives of the
SIA and the FIA, contacted staff of the Commission's Division of
Clearing and Intermediary Oversight (the "Division") to express their
support for Commission rulemaking that would allow dually-registered
FCM/BDs to use their SEC-approved alternative market risk and credit
risk deductions when computing their adjusted net capital under Rule
1.17.\11\ In addition, two dually-registered FCM/BDs that had received
SEC approval for the Alternative Capital Computation requested no-
action positions from Division staff, without which the Alternative
Capital Computation could not be used for purposes of their capital
computation and reporting requirements to the Commission. The Division
granted such relief on an interim basis, to be superseded by such final
rules as the Commission might eventually adopt in connection with the
Alternative Capital Computation.\12---------------------------------------------------------------------------
\10\ The SEC's proposed rules for the Alternative Capital
Computation were published in the Federal Register in 2003. 68 FR
62872 (November 6, 2003).
\11\ The Securities Industry Association and the Futures
Industry Association are industry trade groups whose members include
broker-dealers, futures commission merchants, and representatives of
other segments of the securities and futures industries.
\12\ Two additional FCMs have received SEC approval to use the
Alternative Capital Computation, and have received similar no-action
positions from the Division pending the rulemaking process.
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B. Amendments to Rule 1.17 for FCMs Electing To Use SEC-Approved
Capital Deductions.
After consideration of the amendments as proposed in the October 11
release, and in view of the comments that the Commission received in
response to the proposed amendments, which generally supported their
adoption, the Commission is amending Rule 1.17 to provide that an FCM/
BD may elect, if the firm satisfies all of the requirements of a new
paragraph (c)(6), to compute its adjusted net capital using alternative
capital deductions that the SEC has approved by written order under 17
CFR 240.15c3-1(a)(7). The amended regulation permits an FCM, to the
extent that the SEC has approved alternative capital deductions for the
FCM/BD's unsecured receivables from OTC transactions in derivatives, or
for its proprietary positions in securities, forward contracts, or
futures contracts, to use these same alternative capital deductions
when computing its adjusted net capital under the Commission's
regulations. These alternative deductions would be used in lieu of the
amounts that otherwise would be required by the following regulations:
Rule 1.17(c)(2)(ii) for unsecured receivables from OTC derivatives
transactions; Rule 1.17(c)(5)(ii) for proprietary positions in forward
contracts; Rule 1.17(c)(5)(v) for proprietary positions in securities;
and Rule 1.17(c)(5)(x) for proprietary positions in futures contracts.
The amendments do not alter or affect the haircuts that Rule
1.17(c)(5)(v) and Rule 1.32(b) require for securities that are held in
segregation under section 4d of the Commodity Exchange Act, because the
alternative deductions apply solely to an FCM/BD's proprietary
positions.\13---------------------------------------------------------------------------
\13\ FCM/BDs using the Alternative Capital Computation would
continue to be required, under Rule 1.17(c)(5)(v), to deduct the
securities haircuts specified in SEC Rules 15c3-1(c)(2)(vi) and
(vii) from the value of securities that are held in segregated
accounts under Section 4d and the Commission's implementing
regulations and which were not deposited by customers. Such FCM/BDs
would also continue to be required, when computing the amount of
funds required to be in segregated accounts, to use the standard SEC
securities haircut expressly referenced in Rule 1.32(b), i.e., SEC
Rule 15c3-1(c)(2)(vi). Rule 1.32 applies this haircut for purposes
of the permissible offset of any net deficit in a customer's account
against the current market value of readily marketable securities,
less the SEC standard haircut, that are held for the same customer's
account.
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The terms of the amended Rule 1.17(c)(6) has been adopted as
originally proposed by the Commission in the October 11 release. The
effective date for the amended regulations is the date of the
publication of this release in the Federal Register, at which time all
FCMs that determine to elect to use the Alternative Capital Computation
must comply with the requirements of the amended regulations. If a firm
has already elected to use the Alternative Capital Computation under
earlier no-action positions issued by the Division
[[Page 5589]]
of Clearing and Intermediary Oversight, it may not continue to use the
Alternative Capital Computation unless it maintains compliance with the
reporting and other continuing obligations required by the amended
regulations, as the earlier no-action positions are withdrawn as of the
effective date of the amended regulations.
In formulating the amendments to its rules, the Commission has
taken into consideration that the Alternative Capital Computation,
unlike the current standardized charges, is determined by an ongoing
oversight process that results in individualized capital charges that
require considerable firm-specific information.\14\ Pursuant to
Commission Rule 1.17(a)(3), FCMs must be able to demonstrate to the
satisfaction of the Commission their continuous compliance with their
minimum financial requirements under the Commodity Exchange Act and
implementing regulations of the Commission. The Commission also took
into consideration that SEC Rule 15c3-1(a)(7) requires the BD to
maintain at all times "tentative net capital" \15\ of not less than
$1 billion and net capital of not less than $500 million, and to
provide same day notice if the BD's tentative net capital is less than
$5 billion, or some other "early warning" amount specified by the
SEC.\16\ The Alternative Capital Computation is also limited to those
firms who: (i) Have in place an internal risk management system that
complies with 17 CFR 240.15c3-4 (previously applicable only to OTC
derivatives dealers registered with the SEC), which addresses not only
their market risk and credit risk, but also liquidity, legal and
operational risks at the firm; and (ii) whose ultimate holding company
and affiliates have consented to SEC consolidated supervision, i.e.,
they elect CSE status.\17\ For purposes of such consolidated
supervision, the BD's ultimate holding company and affiliated entities
must consent to direct examination by the SEC, unless the holding
company is subject to supervision by the Federal Reserve or foreign
banking regulators because it is a U.S. holding company or foreign bank
that has elected financial holding company status under the Bank
Holding Company Act of 1956.\18\ The SEC has added a new Appendix G to
Rule 15c3-1 (17 CFR 240.15c3-1g), which establishes the minimum
reporting, recordkeeping, and notification requirements for all holding
companies of BDs that apply for, or have received approval for the use
of, the Alternative Capital Computation.\19---------------------------------------------------------------------------
\14\ See 70 FR 58989-90.
\15\ The BD's "tentative net capital" consists of its net
capital before the approved deductions for market risk and credit
risk under the SEC's amended rule, and also increased by the balance
sheet value (including counterparty net exposure) resulting from
transactions in derivative instruments that would otherwise be
deducted by virtue of paragraph (c)(2)(iv) of Rule 15c3-1.
\16\ Upon written application by a BD, the SEC may lower the
threshold for the early warning requirement, either unconditionally
or subject to specified terms and conditions. The SEC will consider
various factors to determine whether the early warning requirement
should be modified. 69 FR at 34461.
\17\ In adopting the Alternative Capital Computation, the SEC
has also responded to concerns expressed by several U.S. BDs that
are required, pursuant to a directive issued by the European Union
("EU") at the end of 2002 (the "Financial Groups Directive"), to
demonstrate holding company supervision that is equivalent to EU
consolidated supervision. See "Directive 2002/87/EC of the European
Parliament and of the Council of 16 December 2002." Absent a
demonstration of comparable group-wide supervision, the EU may
restrict or otherwise place conditions upon the operations of the
European-based affiliates of these BDs. The consolidated supervision
requirements in the SEC's amended rules provide a regulatory
structure that is intended to satisfy the requirements of the
Financial Groups Directive.
\18\ The CSE rule specifically exempts FCM affiliates of BDs,
and other functionally regulated BD affiliates, from the SEC's
direct examination.
\19\ To minimize duplicative regulation, Appendix G imposes
fewer requirements on holding companies that have elected financial
holding company status.
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1. Notice of Election or of Changes to Election
Amended paragraph (c)(6)(ii) of Rule 1.17 specifies that an FCM's
election to use the Alternative Capital Computation shall not be
effective unless and until it has filed with the Commission a notice,
addressed to the Director of the Division of Clearing and Intermediary
Oversight, that is to include: (i) A copy of the SEC order approving
its alternative market risk and credit risk capital charges; and (ii) a
statement that identifies the amount of tentative net capital below
which the FCM is required to provide notice to the SEC, and that also
includes portions of the information made available to the SEC for
purposes of its request for approval to use the Alternative Capital
Computation, as follows:
(1) A list of the categories of positions that the firm holds in
its proprietary accounts, and, for each such category, a description of
the methods that the firm will use to calculate its deductions for
market risk and credit risk, and, if calculated separately, its
deductions for specific risk;
(2) A description of the VaR models to be used for its market risk
and credit risk deductions, and an overview of the integration of the
models into the internal risk management control system of the firm;
(3) A description of how the firm will calculate current exposure
and maximum potential exposure for its deductions for credit risk;
(4) A description of how the firm will determine internal credit
ratings of counterparties and internal credit risk weights of
counterparties, if applicable; and
(5) A description of the estimated effect of the alternative market
risk and credit risk deductions on the amounts reported by the firm as
net capital and adjusted net capital.
Amended Rule 1.17(c)(6)(ii) also requires the FCM to supplement its
statement, upon the request of the Commission made at any time, with
any other explanatory information for the firm's computation of its
alternative market risk and credit risk deductions as the Commission
may require at its discretion. The requests for explanatory information
under amended Rule 1.17(c)(6)(ii) may be made by the Director of the
Division of Clearing and Intermediary Oversight, to whom, as set forth
in Commission Rule 140.91(a)(6), the Commission has delegated authority
for the functions reserved for the Commission under Rule 1.17.
Amended Rule 1.17(c)(6)(ii) further provides that the FCM must
file, as a supplemental notice with the Director of the Division of
Clearing and Intermediary Oversight, a notice advising that the SEC has
imposed additional or revised conditions after the date of the SEC
order filed with the FCM's original notice to the Director of the
Division of Clearing and Intermediary Oversight. The FCM must also file
as a supplemental notice a copy of any approval by the SEC of
amendments that the firm has requested for its application to use the
Alternative Capital Computation.
An FCM is also permitted under the amended rule to voluntarily
change its election, by filing with the Director of the Division of
Clearing and Intermediary Oversight a written notice that specifies a
future date as of which its market risk and credit risk capital charges
will no longer be determined by the Alternative Capital Computation,
but will instead be computed as otherwise required under the
Commission's rules.
2. Conditions Under Which FCM May No Longer Elect Alternative Capital
Charges
Amended paragraph (c)(6)(iii) of Rule 1.17 specifies that an FCM
may no longer elect to use its SEC-approved alternative market risk and
credit risk
[[Page 5590]]
deductions, and must instead compute the charges otherwise required
under Rules 1.17(c)(5) or 1.17(c)(2), upon the occurrence of any of the
following: (i) The SEC revokes its approval of the firm's market risk
and credit risk deductions; (ii) the firm fails to come into compliance
with its filing requirements under the proposed rule, after having
received from the Director of the Division of Clearing and Intermediary
Oversight written notification that the firm is not in compliance with
its filing requirements, and must cease using the Alternative Capital
Computation if it has not come into compliance by a date specified in
the notice; or (iii) the Commission by written order finds that
permitting the firm to continue to use such alternative market risk and
credit risk deductions is no longer appropriate for the protection of
customers of the FCM or the financial integrity of the futures or
options markets. In addition, since the amended rule permits only dual
registrants to use the Alternative Capital Computation, an FCM's
election to use the Alternative Capital Computation automatically
terminates immediately, without further action by the Commission, if
the firm ceases to be dually-registered as a BD.
3. Additional Filing Requirements
In addition to the notice and supplemental notices described above,
amended paragraph (c)(6)(iv) also provides that any firm that elects to
use the Alternative Capital Computation must file with the Commission
copies of all additional monthly, quarterly, and annual reporting items
that BDs who are approved to use the Alternative Capital Computation
must file with SEC, as discussed above. The FCM must also file with the
Commission a copy of the notice that it is required to file with the
SEC whenever its tentative net capital falls below the amount required
by the SEC, or of the notice filed with the SEC or the firm's
designated examining authority in regard to planned withdrawals of
excess net capital.
Specifically, the amended rule requires that the following be filed
with the Commission, at the same time that originals are filed with the
SEC: (i) All information that the firm files on a monthly basis with
its designated examining authority or the SEC in satisfaction of SEC
Rule 17a-5(a)(5)(i), whether by way of schedules to the firm's FOCUS
reports or by other filings; (ii) the quarterly reports required by SEC
Rule 17a-5(a)(5)(ii); (iii) the supplemental annual filings as required
by SEC Rule 17a-5(k), which consist of a report on management controls
that is prepared by a registered public accounting firm and is filed by
the firm concurrently with its annual audit report, and also a related
statement, filed prior to the commencement of the accountant's review
but no later than December 10 of each year, that includes a description
of the procedures agreed to by the firm and the accountant and a notice
describing changes to the agreed-upon procedures, if any, or stating
that there are no changes; and (iv) any notification to the SEC or the
firm's designated examining authority of planned withdrawals of excess
net capital, and any notification that the firm is required to file
with the SEC when its tentative net capital is below an amount
specified by the SEC.
4. Conforming Amendments To permit Filing of Part II CSE FOCUS Report
Those BDs that use the Alternative Capital Computation also file a
revised Part II to the FOCUS report, designated "Part II CSE". This
revised FOCUS report includes financial information that BDs previously
reported in Part II of the FOCUS Report, and also includes new
schedules that provide much of the additional information that BDs who
use the Alternative Capital Computation must report on a monthly basis.
In order to facilitate the firm's reporting requirements and reduce
administrative burden, the Commission has amended Rule 1.10(h) to
specify that a dual registrant may file, in lieu of its Form 1-FR-FCM
report, a copy of the FOCUS Report, Part II CSE that the firm files
with the SEC.\20---------------------------------------------------------------------------
\20\ Several other Commission rules include references to Parts
II and Part IIA of the FOCUS report, in order to facilitate the
filing of the FOCUS report in lieu of the Form 1-FR-FCM. The
Commission has also amended these rules to add a reference to Part
II CSE. In particular, conforming amendments have been made to the
following rules: Rule 1.10(d)(4)(ii), which sets forth the
requirements for "authorized signers" of the FOCUS report; Rule
1.10(f)(1), which sets forth the procedures required to obtain
extensions of time for filing the FOCUS report; Rule 1.16(c)(5),
which requires the accountant's supplemental report on material
inadequacies to be filed as of the same date as the Form 1-FR or
FOCUS report; Rules 1.18(a) and (b)(2), which permit FOCUS filings
to satisfy certain recordkeeping requirements of the FCM; and Rule
1.52(a), which permits the designated self-regulatory organization
of a dual registrant to accept a FOCUS report in lieu of a Form 1-
FR-FCM.
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All of the commenters supported the Commission's proposed
amendments to Regulations 1.10(h) and 1.17(c)(6), which would have the
effect of harmonizing capital calculations under the CFTC's and SEC's
regulations. Two commenters, FIA and the SIA, recommended that the
Commission should further take into consideration whether reporting and
filing requirements under the Commission's "risk assessment"
regulations, Rules 1.14 and 1.15, might be revised to allow five FCMs
to substitute alternative means of compliance, either through making
available for inspection certain holding company information provided
to the SEC under its CSE regulations, or through information-sharing
arrangements between the SEC and CFTC. Both FIA and SIA offered to meet
with Commission staff to discuss these or other alternatives for the
five firms, in light of the consolidated supervision of their holding
companies by the SEC. While not opposed to such discussions, the
commenters have raised issues that exceed the scope of the proposed
regulations, and may be addressed separately from the amended rules in
this release.
III. Treatment of Information Received From FCMs Electing the
Alternative Capital Computation, and of Other Information Filed by FCMs
and IBs
The release published October 11 also announced proposed amendments
to Commission regulations in parts 145 and 147, which respectively
implement the provisions of FOIA and the Sunshine Act. Specifically,
the Commission proposed to amend Rules 145 and 147 to include all Forms
1-FR and FOCUS reports (except for certain information as discussed
below), plus all reports and statements required to be filed pursuant
to Rule 1.17(c)(6), as representative examples of information that
would be exempt from mandatory public disclosure under exemptions that
are available under both FOIA and the Sunshine Act (Exemptions 4 and 8
under FOIA, and the same exemptions under the Sunshine Act).\21\ The
proposed amendments to Commission Rule 1.10(g), however, specified that
the Commission would continue to make available upon public request the
following information:
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\21\ A summary of FOIA and the Sunshine Act, including
exemptions 4 and 8, and their application to the Form 1-FR and FOCUS
reports, was included in the October 11 release. See 70 FR 58991--
58992.
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(i) For each FCM or IB, the amount of its adjusted net capital, its
minimum capital requirement under Rule 1.17, and its adjusted net
capital in excess of its minimum capital requirement;
(ii) The statement of financial condition in the certified annual
financial report, and footnote disclosures thereof;\22\ and
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\22\ A BD's certified annual statement of financial condition is
also publicly available under SEC Rule 17a-5(e)(3).
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(iii) The statements related to the segregation of customer funds
under section 4d of the Commodity Exchange
[[Page 5591]]
Act and to customer funds that are held as secured amounts under Rule
30.7.\23---------------------------------------------------------------------------
\23\ Rule 1.10(g) currently provides, and will continue to
provide, that all information on Forms 1-FR and FOCUS reports that
is nonpublic will, however, be available for official use by any
official or employee of the United States or any State, by any self-
regulatory organization of which the person filing such report is a
member, by the National Futures Association in the case of an
applicant, and by any other person to whom the Commission believes
disclosure of such information is in the public interest. Rule
1.10(g) also specifies the rule does not limit the authority of any
self-regulatory organization to request or receive any information
relative to its members' financial condition.
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FIA strongly endorsed the Commission's proposal to amend Rules
1.10(g), 145.5(d) and (h), and 147.3(b) to provide that certain
financial information filed with the Commission is exempt from
disclosure pursuant to FOIA Exemption 8. The Commission received no
comments opposing adoption of these proposed amendments. After
considering the proposed amendments and the responses by commenters,
the Commission has decided to amend Rules 1.10(g), 145.5(d) and (h),
and 147.3(b) as proposed.
IV. Amendments To Reduce Capital Charges for Foreign Currency Forwards
and Inventory in Specified Currencies
The Commission has also amended Commission Rule 1.17(c)(5)(ii),
pursuant to which an FCM or IB, in computing its adjusted net capital,
must deduct from its net capital specified percentages of the market
value of its inventory, fixed price commitments and forward contracts.
In general, the required deduction from market value for a forward
contract that is not "covered", as defined in Rule 1.17(j), is twenty
percent. The Commission has amended the rule by adding a provision that
would specify a capital charge of six percent for uncovered inventory
and forward contracts in euros, British pounds, Canadian dollars,
Japanese yen, or Swiss francs. Uncovered forward contracts and cash
deposits in any other non-U.S. currency would remain subject to the
capital charge of twenty percent currently set forth in the rule. As
noted by the Commission when it proposed amending Rule 1.17 to reduce
the charge for specified currencies to 6 percent, the lower charge is
consistent with the reduced currency risk of these foreign currencies,
given their stability relative to the U.S. dollar. As discussed in the
October 11 release, the reduced charge is also consistent with similar
capital charges that BDs are required to deduct from their net capital
under SEC regulations.\24\ Furthermore, the amendment provides greater
clarity and transparency to the Commission's capital rule, as currently
the lower capital charge for the specified major non-U.S. currencies is
set forth only in the Commission's Form 1-FR Instructions Manual.\25---------------------------------------------------------------------------
\24\ See 70 FR 58993.
\25\ An electronic copy of the "Instructions for Form 1-FR-
FCM" is available to the public on the Commission's Web site, at
href=
"http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/tm/tminstructionsmanualfinalseptember2004.pdf"
shape=
"rect">http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/files/tm/tminstructionsmanualfinalseptember2004.pdf
.
---------------------------------------------------------------------------
FIA and the NFA generally supported this amendment, and no
commenters expressed any objections to the amendment. In its comment
letter, NFA advocated that the Commission undertake additional revision
of Commission Regulation 1.17, to address the Commission's required
deductions from capital in relation to the activities of retail foreign
exchange (FOREX) dealers that are registered as FCMs. As noted in the
NFA's letter, Division staff is already in the process of reviewing
several of the issues listed in the letter, as part of separate
guidance and/or future rulemaking related to FOREX.
V. Related Matters
A. Administrative Procedure Act
The Administrative Procedure Act ("APA") provides that the
required publication of a substantive rule shall be made not less than
30 days before its effective date, unless the agency is permitted to
implement an earlier effective date under one of the exceptions
recognized by the APA.\26\ The exceptions set forth in the APA are as
follows: (1) A substantive rule which grants or recognizes an exemption
or relieves a restriction; (2) interpretative rules and statements of
policy; or (3) as otherwise provided by the agency for good cause found
and published with the rule.\27---------------------------------------------------------------------------
\26\ 5 U.S.C. 553(b) and (d).
\27\ 5 U.S.C. 553 (d).
---------------------------------------------------------------------------
The amendments being made to Rule 1.17 "grant or recognize an
exemption or relieve a restriction" that harmonizes unnecessarily
conflicting capital deductions that would otherwise be required for
FCMs that have received SEC approval to use the Alternative Capital
Computation. The Commission is also adopting other amendments that
permit FCMs to file their Part II CSE FOCUS reports in lieu of their
required Form 1-FR, which also contributes to the exemption or relief
made available by amended Rule 1.17(c)(6).\28\ Accordingly, the
Commission has determined to make these amendments effective
immediately upon publication in the Federal Register.
---------------------------------------------------------------------------
\28\ As noted earlier, the amendments related to filing the Part
II CSE version of the FOCUS report affect Rules 1.10, 1.18, and
1.52.
---------------------------------------------------------------------------
Furthermore, the Commission has previously found "good cause" for
making FOIA and Sunshine Act amendments effective immediately with the
adoption of new financial filing requirements for FCMs, in particular
where the new filings are required prior to the expiration of 30 days
from the publication in the rule.\29\ In this case, the no-action
relief granted to firms prior to the adoption of the amendments of Rule
1.17(c)(6) will be superceded immediately upon the effective date of
the amended rules in the attached release, and the firms will be
required to comply with the reporting requirements mandated by the
amended rules. In addition, other firms may receive SEC approval to use
alternative capital charges prior to the expiration of 30 days from the
publication of this rule, and would therefore seek to file with the
Commission such notices and statements as are required by the amended
rule. Accordingly, the Commission has determined to make the amendments
to Rules 145 and 147 adopted in this final rulemaking effective
immediately upon publication in the Federal Register.
---------------------------------------------------------------------------
\29\ The Commission's prior determination that there was "good
cause" for making amendments to parts 145 and 147 effective
immediately appears in 44 FR 13435 (March 27, 1979) (Adoption of
Changes to Form 1-FR and Freedom of Information and Sunshine Act
Rules).
---------------------------------------------------------------------------
B. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601 et. seq.,
requires that agencies, when amending their rules, consider the impact
of those amendments 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.\30\ The Commission received no comments on the
certification.
---------------------------------------------------------------------------
\30\ 70 FR at 58994.
---------------------------------------------------------------------------
C. Paperwork Reduction Act
This rulemaking includes information collection requirements. As
required by the Paperwork Reduction Act of 1995 ("PRA"),\31\ 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.\32---------------------------------------------------------------------------
\31\ 44 U.S.C. 3507(d).
\32\ 70 FR at 58994.
---------------------------------------------------------------------------
[[Page 5592]]
D. 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 Rule 1.17(c)(6) allows FCM/BDs that meet the
requirements of the rule to compute their adjusted net capital using
the same alternative capital deductions that have been approved by the
SEC. The amended Rule 1.17(c)(5)(ii) reduces a capital charge to which
FCMs and IBs are subject under the Commission's current regulations.
The Commission is considering the costs and benefits of these amended
rules in light of the specific provisions of section 15(a) of the Act,
as follows:
1. Protection of market participants and the public. The amendments
to Rule 1.17(c)(6) provides the benefit of increasing the accuracy of
the reflection of risks in the net capital charges for FCM/BDs approved
for using the alternative net capital charges based on internal risk
measurement tools, while bettering the Commission's ability to perform
appropriate financial and risk oversight. Furthermore, the Commission
considers that no FCM/BD will elect to use the Alternative Capital
Computation unless the costs of compliance would be outweighed by the
benefits to such FCM/BD from using the alternative net capital charges.
2. Efficiency and competition. The Commission anticipates that the
amendments to Rule 1.17(c)(6) will benefit efficiency by eliminating a
difference in the computation of net capital charges between the SEC
and the CFTC for dually-registered FCM/BDs that have been approved by
the SEC to use such charges. The amendments to Rule 1.17(c)(5)(ii)
reduce the capital charges applicable to FCMs and IBs, which may
therefore result in the more efficient utilization of their capital.
3. Financial integrity of futures markets and price discovery. The
notification and reporting requirements in amended Rule 1.17(c)(6)
contribute to the benefit of ensuring that eligible FCMs can meet their
financial obligations to customers and other market participants.
Customers and other market participants would also benefit from the
provisions in amended Rule 1.10(g), which continues to make publicly
available certain information in Form 1-R and FOCUS reports related to
capital requirements and requirements for customer funds to be held in
segregated or separate accounts. The proposed amendments 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 alternative capital
computation permitted under amended Rule 1.17(c)(6) is limited to FCMs
who have in place an internal risk management system that expressly
addresses market risk, credit risk, liquidity risk, legal risk and
operational risks at the firm. The amended rule also requires that the
Commission receive copies of written reviews, which are to be prepared
annually by registered public accountants, of the firm's internal risk
management control system. The amended rule may therefore contribute to
the sound risk management practices of futures intermediaries.
5. Other public interest considerations. The Commission also
believes that the amendments to Rule 1.17(c)(6) are beneficial in that
they minimize what would otherwise be a conflict between Commission and
SEC rules, which conflict would otherwise make the SEC's opportunity
for qualifying BDs to use alternative net capital charges unavailable
to dually registered FCM/BDs, despite the commonality of interest and
purpose for the CFTC and SEC minimum net capital rules. The amendments
to Rule 1.17(c)(5)(ii), which incorporates agency guidance not
presently included in the Commission's regulations, enhances the
transparency of the Commission's rulemaking for FCMs and IBs.
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
17 CFR Part 1
Brokers, Commodity futures, Reporting and recordkeeping
requirements.
17 CFR Part 145
Freedom of information.
17 CFR Part 147
Sunshine Act.
0
Accordingly, 17 CFR Chapter I is amended 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 (d)(4)(ii), (f)(1)
introductory text, (g)(1), (g)(2), (g)(4), and (h) to read as follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(d) * * *
(4) * * *
(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, Part IIA, or Part II CSE. 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.
* * * * *
(f) Extension of time for filing uncertified reports. (1) In the
event a registrant finds that it cannot file its
[[Page 5593]]
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, Part IIA, or Part II CSE
(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:
* * * * *
(g) Public availability of reports. (1) Forms 1-FR filed pursuant
to this section, and FOCUS reports filed in lieu of Forms 1-FR pursuant
to paragraph (h) of this section, will be treated as exempt from
mandatory public disclosure for purposes of the Freedom of Information
Act and the Government in the Sunshine Act and parts 145 and 147 of
this chapter, except for the information described in paragraph (g)(2)
of this section.
(2) The following information in Forms 1-FR, and the same or
equivalent information in FOCUS reports filed in lieu of Forms 1-FR,
will be publicly available:
(i) The amount of the applicant's or registrant's adjusted net
capital; the amount of its minimum net capital requirement under Sec.
1.17 of this chapter; and the amount of its adjusted net capital in
excess of its minimum net capital requirement; and
(ii) The following statements and footnote disclosures thereof: the
Statement of Financial Condition in the certified annual financial
reports of futures commission merchants and introducing brokers; the
Statements (to be filed by a futures commission merchant only) of
Segregation Requirements and Funds in Segregation for customers trading
on U.S. commodity exchanges and for customers' dealer options accounts,
and the Statement (to be filed by a futures commission merchant only)
of Secured Amounts and Funds held in Separate Accounts for foreign
futures and foreign options customers in accordance with Sec. 30.7 of
this chapter.
* * * * *
(4) All information that is exempt from mandatory public disclosure
under paragraph (g)(1) of this section will, however, be available for
official use by any official or employee of the United States or any
State, by any self-regulatory organization of which the person filing
such report is a member, by the National Futures Association in the
case of an applicant, and by any other person to whom the Commission
believes disclosure of such information is in the public interest.
Nothing in this paragraph (g) will limit the authority of any self-
regulatory organization to request or receive any information relative
to its members' financial condition.
* * * * *
(h) Filing option available to a futures commission merchant or an
introducing broker that is also a securities broker or dealer. Any
applicant or registrant which is registered with the Securities and
Exchange Commission as a securities broker or dealer may comply with
the requirements of this section by filing (in accordance with
paragraphs (a), (b), (c), and (j) of this section) a copy of its
Financial and Operational Combined Uniform Single Report under the
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE
(FOCUS report), in lieu of Form 1-FR: Provided, however, That all
information which is required to be furnished on and submitted with
Form 1-FR is provided with such FOCUS report.
* * * * *
0
3. Section 1.16 is amended by revising paragraph (c)(5) to read as
follows:
Sec. 1.16 Qualifications and reports of accountants.
* * * * *
(c) * * *
(5) Accountant's report on material inadequacies. A registrant must
file concurrently with the annual audit report a supplemental report by
the accountant describing any material inadequacies found to exist or
found to have existed since the date of the previous audit. An
applicant must file concurrently with the audit report a supplemental
report by the accountant describing any material inadequacies found to
exist as of the date of the Form 1-FR being filed: Provided, however,
That if such applicant is registered with the Securities and Exchange
Commission as a securities broker or dealer, and it files (in
accordance with Sec. 1.10(h)) a copy of its Financial and Operational
Combined Uniform Single Report under the Securities Exchange Act of
1934, Part II, Part IIA, or Part II CSE, in lieu of Form 1-FR, the
accountant's supplemental report must be made as of the date of such
report. The supplemental report must indicate any corrective action
taken or proposed by the applicant or registrant in regard thereto. If
the audit did not disclose any material inadequacies, the supplemental
report must so state.
* * * * *
0
4. Section 1.17 is amended by revising paragraphs (c)(5)(ii) and adding
(c)(6) to read as follows:
Sec. 1.17 Minimum financial requirements for futures commission
merchants and introducing brokers.
* * * * *
(c) * * *
(5) * * *
(ii) In the case of all inventory, fixed price commitments and
forward contracts, the applicable percentage of the net position
specified below:
(A) Inventory which is currently registered as deliverable on a
contract market and covered by an open futures contract or by a
commodity option on a physical.--No charge.
(B) Inventory which is covered by an open futures contract or
commodity option.--5 percent of the market value.
(C) Inventory which is not covered.--20 percent of the market
value.
(D) Inventory and forward contracts in those foreign currencies
that are purchased or sold for future delivery on or subject to the
rules of a contract market, and which are covered by an open futures
contract.--No charge
(E) Inventory and forward contracts in euros, British pounds,
Canadian dollars, Japanese yen, or Swiss francs, and which are not
covered by an open futures contract or commodity option.--6 percent of
the market value.
(F) Fixed price commitments (open purchases and sales) and forward
contracts which are covered by an open futures contract or commodity
option.--10 percent of the market value.
(G) Fixed price commitments (open purchases and sales) and forward
contracts which are not covered by an open futures contract or
commodity option.--20 percent of the market value.
* * * * *
(6) Election of alternative capital deductions that have received
approval of Securities and Exchange Commission pursuant to Sec.
240.15c3-1(a)(7) of this title.
(i) Any futures commission merchant that is also registered with
the Securities and Exchange Commission as a securities broker or
dealer, and who also satisfies the other requirements of this paragraph
(c)(6), may elect to compute its adjusted net capital using the
alternative capital deductions that, under Sec. 240.15c3-1(a)(7) of
this title, the Securities and Exchange Commission has approved by
written order. To the extent that a futures commission merchant is
permitted by the Securities and Exchange Commission to use alternative
capital deductions for its unsecured receivables from over-the-counter
transactions in derivatives, or for its proprietary positions in
securities, forward contracts, or futures contracts, the futures
commission merchant may use these same
[[Page 5594]]
alternative capital deductions when computing its adjusted net capital,
in lieu of the deductions that would otherwise be required by paragraph
(c)(2)(ii) of this section for its unsecured receivables from over-the-
counter derivatives transactions; by paragraph (c)(5)(ii) of this
section for its proprietary positions in forward contracts; by
paragraph (c)(5)(v) of this section for its proprietary positions in
securities; and by paragraph (c)(5)(x) of this section for its
proprietary positions in futures contracts.
(ii) Notifications of election or of changes to election. (A) No
election to use the alternative market risk and credit risk deductions
referenced in paragraph (c)(6)(i) of this section shall be effective
unless and until the futures commission merchant has filed with the
Commission, addressed to the Director of the Division of Clearing and
Intermediary Oversight, a notice that is to include a copy of the
approval order of the Securities and Exchange Commission referenced in
paragraph (c)(6)(i) of this section, and to include also a statement
that identifies the amount of tentative net capital below which the
futures commission merchant is required to provide notice to the
Securities and Exchange Commission, and which also provides the
following information: a list of the categories of positions that the
futures commission merchant holds in its proprietary accounts, and, for
each such category, a description of the methods that the futures
commission merchant will use to calculate its deductions for market
risk and credit risk, and also, if calculated separately, deductions
for specific risk; a description of the value at risk (VaR) models to
be used for its market risk and credit risk deductions, and an overview
of the integration of the models into the internal risk management
control system of the futures commission merchant; a description of how
the futures commission merchant will calculate current exposure and
maximum potential exposure for its deductions for credit risk; a
description of how the futures commission merchant will determine
internal credit ratings of counterparties and internal credit risk
weights of counterparties, if applicable; and a description of the
estimated effect of the alternative market risk and credit risk
deductions on the amounts reported by the futures commission merchant
as net capital and adjusted net capital.
(B) A futures commission merchant must also, upon the request of
the Commission at any time, supplement the statement described in
paragraph (c)(6)(ii)(A) of this section, by providing any other
explanatory information regarding the computation of its alternative
market risk and credit risk deductions as the Commission may require at
its discretion.
(C) A futures commission merchant must also file the following
supplemental notices with the Director of the Division and Clearing and
Intermediary Oversight:
(1) A notice advising that the Securities and Exchange Commission
has imposed additional or revised conditions for the approval evidenced
by the order referenced in paragraph (c)(6)(i) of this section, and
which describes the new or revised conditions in full, and
(2) A notice which attaches a copy of any approval by the
Securities and Exchange Commission of amendments that a futures
commission merchant has requested for its application, filed under 17
CFR 240.15c3-1e, to use alternative market risk and credit risk
deductions approved by the Securities and Exchange Commission.
(D) A futures commission merchant may voluntarily change its
election to use the alternative market risk and credit risk deductions
referenced in paragraph (c)(6)(i) of this section, by filing with the
Director of the Division of Clearing and Intermediary Oversight a
written notice specifying a future date as of which it will no longer
use the alternative market risk and credit risk deductions, and will
instead compute such deductions in accordance with the requirements
otherwise applicable under paragraph (c)(2)(ii) of this section for
unsecured receivables from over-the-counter derivatives transactions;
by paragraph (c)(5)(ii) of this section for proprietary positions in
forward contracts; by paragraph (c)(5)(v) of this section for
proprietary positions in securities; and by paragraph (c)(5)(x) of this
section for proprietary positions in futures contracts.
(iii) Conditions under which election terminated. A futures
commission merchant may no longer elect to use the alternative market
risk and credit risk deductions referenced in paragraph (c)(6)(i) of
this section, and shall instead compute the deductions otherwise
required under paragraph (c)(2)(ii) of this section for unsecured
receivables from over-the-counter derivatives transactions; by
paragraph (c)(5)(ii) of this section for proprietary positions in
forward contracts; by paragraph (c)(5)(v) of this section for
proprietary positions in securities; and by paragraph (c)(5)(x) of this
section for proprietary positions in futures contracts, upon the
occurrence of any of the following:
(A) The Securities and Exchange Commission revokes its approval of
the market risk and credit risk deductions for such futures commission
merchant;
(B) A futures commission merchant fails to come into compliance
with its filing requirements under this paragraph (c)(6), after having
received from the Director of the Division of Clearing and Intermediary
Oversight written notification that the firm is not in compliance with
its filing requirements, and must cease using alternative capital
deductions permitted under this paragraph (c)(6) if it has not come
into compliance by a date specified in the notice; or
(C) The Commission by written order finds that permitting the
futures commission merchant to continue to use such alternative market
risk and credit risk deductions is no longer necessary or appropriate
for the protection of customers of the futures commission merchant or
of the integrity of the futures or options markets.
(iv) Additional filing requirements. Any futures commission
merchant that elects to use the alternative market risk and credit risk
deductions referenced in paragraph (c)(6)(i) of this section must file
with the Commission, in addition to the filings required by paragraph
(c)(6)(ii) of this section, copies of any and all of the following
documents, at such time as the originals are filed with the Securities
and Exchange Commission:
(A) Information that the futures commission merchant files on a
monthly basis with its designated examining authority or the Securities
and Exchange Commission, whether by way of schedules to its FOCUS
reports or by other filings, in satisfaction of 17 CFR 240.17a-
5(a)(5)(i);
(B) The quarterly reports required by 17 CFR 240.17a-5(a)(5)(ii);
(C) The supplemental annual filings as required by 17 CFR 240.17a-
5(k);
(D) Any notification to the Securities and Exchange Commission or
the futures commission merchant's designated examining authority of
planned withdrawals of excess net capital; and
(E) Any notification that the futures commission merchant is
required to file with the Securities and Exchange Commission when its
tentative net capital is below an amount specified by the Securities
and Exchange Commission.
* * * * *
0
5. Section 1.18 is amended by revising paragraphs (a) and (b)(2) to
read as follows:
[[Page 5595]]
Sec. 1.18 Records for and relating to financial reporting and monthly
computation by futures commission merchants and introducing brokers.
(a) No person shall be registered as a futures commission merchant
or as an introducing broker under the Act unless, commencing on the
date his application for such registration is filed, he prepares and
keeps current ledgers or other similar records which show or summarize,
with appropriate references to supporting documents, each transaction
affecting his asset, liability, income, expense and capital accounts,
and in which (except as otherwise permitted in writing by the
Commission) all his asset, liability and capital accounts are
classified into either the account classification subdivisions
specified on Form 1-FR-FCM or Form 1-FR-IB, respectively, or, if such
person is registered with the Securities and Exchange Commission as a
securities broker or dealer and he files (in accordance with Sec.
1.10(h)) a copy of his Financial and Operational Combined Uniform
Single Report under the Securities Exchange Act of 1934, Part II, Part
IIA, or Part II CSE (FOCUS report) in lieu of Form 1-FR-FCM or Form 1-
FR-IB, the account classification subdivisions specified on such FOCUS
report, or categories that are in accord with generally accepted
accounting principles. Each person so registered shall prepare and keep
current such records.
(b) * * *
(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, Part IIA, or
Part II CSE (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.
* * * * *
0
6. Section 1.52 is amended by revising paragraph (a) to read as
follows:
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants. Each self-regulatory organization other than a
contract market must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each contract
market which elects to have a category of membership for introducing
brokers must adopt, and submit for Commission approval, rules
prescribing minimum financial and related reporting requirements for
all its members who are registered introducing brokers. Each self-
regulatory organization shall submit for Commission approval any
modification or other amendments to such rules. Such requirements must
be the same as, or more stringent than, those contained in Sec. Sec.
1.10 and 1.17 and the definition of adjusted net capital must be the
same as that prescribed in Sec. 1.17(c): Provided, however, A
designated self-regulatory organization may permit its member
registrants which are registered with the Securities and Exchange
Commission as securities brokers or dealers to file (in accordance with
Sec. 1.10(h)) a copy of their Financial and Operational Combined
Uniform Single Report under the Securities Exchange Act of 1934, Part
II, Part IIA, or Part II CSE, in lieu of Form 1-FR: And, provided
further, A designated self-regulatory organization may permit its
member introducing brokers to file a Form 1-FR-IB in lieu of a Form 1-
FR-FCM.
* * * * *
PART 145--COMMISSION RECORDS AND INFORMATION
0
7. The authority citation for part 145 continues to read as follows:
Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389
(5 U.S.C. 4a(j)); unless otherwise noted.
0
8. Section 145.5 is amended by revising paragraphs (d)(1) and (h) to
read as follows:
Sec. 145.5 Disclosure of nonpublic records.
* * * * *
(d) Trade secrets and commercial or financial information obtained
from a person and privileged or confidential, including, but not
limited to:
(1)(i) Reports of stocks of grain, such as Forms 38, 38C, 38M and
38T required to be filed pursuant to 17 CFR 1.44;
(ii) Statements of reporting traders on Form 40 required to be
filed pursuant to 17 CFR 18.04;
(iii) Statements concerning special calls on positions required to
be filed pursuant to 17 CFR part 21;
(iv) Statements concerning identification of special accounts on
Form 102 required to be filed pursuant to 17 CFR 17.01;
(v) Reports required to be filed pursuant to parts 15 through 21 of
this chapter;
(vi) Reports concerning option positions of large traders required
to be filed pursuant to part 16 of this chapter;
(vii) Form 188; and
(viii) The following reports and statements that are also set forth
in paragraph (h) of this section, except as specified in 17 CFR
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant
to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR
pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to
17 CFR 31.13; the accountant's report on material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); and all reports and statements
required to be filed pursuant to 17 CFR 1.17(c)(6);
* * * * *
(h) Contained in or related to examinations, operating, or
condition reports prepared by, on behalf of, or for the use of the
Commission or any other agency responsible for the regulation or
supervision of financial institutions, including, but not limited to
the following reports and statements that are also set forth in
paragraph (d)(1)(viii) of this section, except as specified in 17 CFR
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant
to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR
pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to
17 CFR 31.13; the accountant's report on material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); and all reports and statements
required to be filed pursuant to 17 CFR 1.17(c)(6); and
* * * * *
PART 147--OPEN COMMISSION MEETINGS
0
9. The authority citation for part 147 continues to read as follows:
Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j) (Supp. V, 1975)), unless otherwise noted.
0
10. Section 147.3 is amended by revising paragraphs (b)(4)(i) and
(b)(8) to read as follows:
Sec. 147.3 General requirement of open meetings; grounds upon which
meetings may be closed.
* * * * *
(b) * * *
(4)(i) Disclose trade secrets and commercial or financial
information obtained from a person and privileged or confidential
including, but not limited to:
[[Page 5596]]
(A) Reports of stocks of grain, such as Forms 38, 38C, 38M and 38T,
required to be filed pursuant to 17 CFR 1.44;
(B) Statements of reporting traders on Form 40 required to be filed
pursuant to 17 CFR 18.04;
(C) Statements concerning special calls on positions required to be
filed pursuant to 17 CFR part 21;
(D) Statements concerning identification of special accounts on
Form 102 required to be filed pursuant to 17 CFR 17.01;
(E) Reports required to be filed pursuant to parts 15 through 21 of
this chapter;
(F) Reports concerning option positions of large traders required
to be filed pursuant to part 16 of this chapter;
(G) Form 188; and
(H) The following reports and statements that are also set forth in
paragraph (b)(8) of this section, except as specified in 17 CFR
1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed pursuant
to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1-FR
pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to
17 CFR 31.13; the accountant's report on material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); and all reports and statements
required to be filed pursuant to 17 CFR 1.17(c)(6);
* * * * *
(8) Disclose information contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of the Commission or any other agency responsible for the
regulation or supervision of financial institutions, including, but not
limited to the following reports and statements that are also set forth
in paragraph (b)(4)(i)(H) of this section, except as specified in 17
CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1-FR required to be filed
pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms
1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR required to be filed
pursuant to 17 CFR 31.13; the accountant's report on material
inadequacies filed in accordance with 17 CFR 1.16(c)(5); and all
reports and statements required to be filed pursuant to 17 CFR
1.17(c)(6);
* * * * *
Issued in Washington, DC, on January 30, 2006, by the
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 06-982 Filed 2-1-06; 8:45 am]
BILLING CODE 6351-01-P