DIVISION OF TRADING AND MARKETS

FINANCIAL AND SEGREGATION INTERPRETATION NO. 1

Safety Factors on Undermargined Accounts

        The Division of Trading and Markets has received a number of inquiries requesting clarification of the proper method for computing the amount that must be deducted from the net capital of a Futures Commission Merchant ("FCM") to arrive at its adjusted net capital in accordance with paragraphs (c)(5)(viii) and (ix) of Section 1.17 of the Commission's regulations. These inquirers have asked if there is some practical method of computing the safety factor charge that would be acceptable. This interpretation contains a practical method for computing the safety factor which the Division of Trading and Markets believes is appropriate under the regulations.

        Sections 1.17(c)(5)(viii) and (ix) of the regulations provide:

    (viii) For undermargined customer commodity futures accounts the amount of funds required in each such account to meet maintenance margin requirements of the applicable board of trade or if there are no such maintenance margin requirements clearing organization margin requirements applicable to such positions, after application of calls for margin, or other required deposits which are outstanding five business days or less until December 31, 1980, four business days or less until December 31, 1982, and three business days or less thereafter. If there are no such maintenance margin requirements or clearing organization margin requirements on such accounts, then the amount of funds required to provide margin equal to the amount necessary after application of calls for margin, or other required deposits outstanding 5 days or less until December 31, 1980, 4 days or less until December 31, 1982, and 3 days or less thereafter to restore original margin when the original margin has been depleted by 50 per cent or more. Provided, to the extent a deficit is excluded from current assets in accordance with paragraph (c)(2)(1) of this section such amount shall not also be deducted under this paragraph (c)(5)(viii).

    (ix) For undermargined non-customer and omnibus commodity futures accounts the amount of funds required in each such account to meet maintenance margin requirements of the applicable board of trade or if there are no such maintenance margin requirements clearing organization margin requirements applicable to such positions, after application of calls for margin, or other required deposits which are outstanding two business days or less.

If there are no such maintenance margin requirements or clearing organization margin requirements, then the amount of funds required to provide margin equal to the amount necessary after application of calls for margin, or other required deposits outstanding 2 days or less to restore original margin when the initial margin has been depleted by 50 per cent or more. Provided, to the extent a deficit is excluded from current assets in accordance with paragraph (c)(2)(i) of this section such amount shall not also be deducted under this paragraph (c)(5)(ix);

        The notice published in the Federal Register which promulgated the Commission's minimum financial requirements regulations (43 FR 39956, September 8, 1978) included the following explanation of how to count the days relative to the above mentioned sections of the regulations:

On Monday, market action occurs against a customer position, which results in a determination that the customer's account is undermargined, and the margin call must be sent on Tuesday. In this situation, Wednesday would be the first day the margin call would be outstanding; Thursday would be the second day; Friday the third; the following Monday the fourth; and the following Tuesday would be the fifth day. Thus, if no margin were received by the close of business on the second Tuesday, the firm would be required (on that day) to make a charge to capital. In this example, if the margin call were not made until Thursday, the firm would still be required to make a charge to capital if the funds are not received by the close of business on the second Tuesday. Of course, if a margin call is not made, a charge to capital for the undermargined amount is made immediately.

        To determine the applicable safety factor for a particular day, a futures commission merchant should:

        1.  Customer Accounts

(A)  Determine to what extent (if any) each of its customer accounts fails to meet the maintenance margin requirements of the applicable board(s) of trade as of the close of business on the capital computation date. (If there are no such maintenance margin requirements then clearing organization margin requirements applicable to such positions. If there are no such maintenance margin requirements or clearing organization margin requirements then the amount of funds required to restore original margin when the original margin has been depleted by 50 per cent or more.)

(B)  Deduct from those undermargined amounts determined in (A) the current margin calls which have been outstanding for no more than the number of business days (using the method of counting days that is described above) provided for in the regulations. Until December 31, 1980, the number of business days is five, four business days until December 31, 1982 and three business days thereafter.

        2.  Non-Customer and Omnibus Accounts

(A)  Determine to what extent (if any) each of its non-customer and omnibus accounts fails to meet the maintenance margin requirements of the applicable board(s) of trade as of the close of business on the capital computation date. (If there are no such maintenance margin requirements then clearing organization margin requirements applicable to such positions. If there are no such maintenance margin requirements or clearing organization margin requirements then the amount of funds required to restore original margin when the original margin has been depleted by 50 per cent or more.)

(B)  Deduct from these undermargined amounts determined in (A) the current margin calls which have been outstanding for no more than two business days (using the method of counting days that is described above.)

        A margin call will be considered current only to the extent that it represents a bona fide attempt to obtain funds from customers, non-customers or omnibus accounts. Any margin call which has as its primary purpose the avoidance of a safety factor charge will not be considered current. Outstanding margin calls that are older than the time allowed in the regulations and are merely called again within the allowable business-day period may not be deducted. In addition, an FCM cannot avoid taking charges against its net capital by merely calling for additional margin (over and above exchange requirements) just prior to the capital computation date from those accounts that would otherwise be subject to a safety factor.

        We have described below certain examples which should help clarify how safety factor charges relating to undermargined accounts should be determined. These examples are based on undermargined customer accounts prior to December 31, 1980. Safety factors on undermargined non-customer and omnibus accounts would be determined in the same manner except that only margin calls which have been outstanding no more than two business days could be deducted from the undermargined amount as of the capital computation date.

        In each of these examples Tuesday of the second week is the capital computation date. All changes in amounts undermargined are caused by market movements, and in each example margin calls are actually made when required. All accounts were properly margined on the Friday preceding the example periods.


A.   

 (1) (2)  (3)  (4)  (5)
DAYS:  Monday Tuesday Wednesday  Thursday  Friday Monday Tuesday
AMOUNT UNDER-MARGINED: $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000

In this example, the charge would be $5,000. This is the situation that was described in the September 8, 1978 Federal Register Notice.


B.   

  (1)  (2)  (3)  (4)
DAYS:  Monday Tuesday Wednesday  Thursday  Friday Monday Tuesday
AMOUNT UNDER-MARGINED: 0 $5,000 $5,000 $5,000 $5,000 $5,000 $5,000

In this example, there would be no charge. The $5,000 margin call has not been outstanding more than five business days, therefore, it can be deducted from the undermargined amount of $5,000 as of the capital computation date.


C.   

 (1) (2)  (3)  (4)  (5)
DAYS:  Monday Tuesday Wednesday  Thursday  Friday Monday Tuesday
AMOUNT UNDER-MARGINED: $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000

In this example the charge is $5,000. The remaining aggregate margin call of $30,000 can be deducted because it has not been outstanding for more than five business days.


D.   

 (1) (2)  (3)  (4)  (5)
DAYS:  Monday Tuesday Wednesday  Thursday  Friday Monday Tuesday
AMOUNT UNDER-MARGINED: $5,000 $5,000 $1,000 $5,000 $5,000 $5,000 $5,000

In this example the charge would be $5,000. The favorable market movement on day 1 was not sufficient to fully meet the margin call, therefore, we would consider any margin calls on day 2 as merely recalls for margin and not new calls for margin. If the favorable market movement had been sufficient on day 1 to fully meet the margin call, there would be no charge. If the reduction in margin deficiency to $1,000 on day 1 had been caused by a $4,000 cash margin deposit instead of a favorable market movement, the safety factor charge on day 5 would be only $1,000 because the market movement on day 2 would generate a current margin call.


E.   

 (1) (2)  (3)  (4)  (5)
DAYS:  Monday Tuesday Wednesday  Thursday  Friday Monday Tuesday
AMOUNT UNDER-MARGINED: $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 $3,000

In this example, the charge would be $3,000 in that the account is undermargined by $3,000 and there are no margin calls that have been outstanding for five days or less. If on day 1 there had been an unfavorable price movement of $5,000 and a cash margin deposit of $5,000, there would be no safety factor charge on day 5, even though the account would still be undermargined on day 1 by $5,000. The $5,000 market movement on day 1 would generate a current margin call.


        The statements made in this interpretation are not rules or interpretations of the Commodity Futures Trading Commission, nor are they published as bearing the Commission's official approval; they represent interpretations and practices followed by the Division of Trading and Markets in administering the financial and segregation requirements of the Commodity Exchange Act and the regulations thereunder.

FOR FURTHER INFORMATION CONTACT:

Paul H. Bjarnason, Jr., Chief Accountant
Division of Trading and Markets
Commodity Futures Trading Commission
202-418-5430

Issued in Washington, D.C., on January 10, 1979 by the Division of Trading and Markets.
Andrea M. Corcoran
Director