Accounting for Checks Received From a Parent or an Affiliated Entity for Regulatory Compliance Purposes

� Some futures commission merchants ("FCMs") have argued that they should be able to recognize for regulatory compliance purposes the value of checks received from affiliated entities and subject to collection or checks drawn on their own non-segregated bank accounts, i.e., checks which do not represent collected funds because they have not cleared the affiliated maker's bank account or the maker's own bank account. The Division through this Interpretation is making clear its position that the pre-clearance recognition of funds represented by checks received from a parent or affiliated entity or drawn on an intra-company account is improper for regulatory accounting and compliance purposes, including for purposes of recognizing such funds as net capital, funds in segregation or funds in a separate account. For regulatory reporting and compliance purposes, accounting for such transactions must be based upon the actual location of the funds, rather than the mere possession of uncollected checks for such funds.

As a general matter in connection with checks received from unaffiliated third parties, the convention of recognizing checks received as the equivalent of cash is entirely appropriate, unless, of course, there is reason to believe that a check may not clear the maker's bank in the normal course of business or is otherwise part of a scheme to report false or misleading financial information. However, the Division believes that the application of such a convention is inappropriate in the very limited cases of affiliated company and intra-company transactions where an important objective of the financial statements is to indicate the actual location of the funds.

It is essential that accounting for these funds in the regulatory reports accurately distinguish between current and non-current assets, segregated assets and non-segregated assets and separate account assets and non-separate account assets. This is because the recognition of funds represented by checks received but not collected in the ordinary course of business may vitiate that objective by permitting, for example, funds which are actually in an operating account to be reflected as being in the segregated account. Thus, such a recognition of funds could reflect that an entity has sufficient funds in segregation to meet its obligations to its customers, when, in fact, it could actually be undersegregated. Also, in the event that a bankruptcy on the part of the check's maker would occur before the check cleared, the funds in the source account may be offset by the bank against other obligations of the firm and never be credited to the segregated account. Thus, recognition of uncollected funds in these circumstances not only results in the preparation of inaccurate regulatory reports but also could jeopardize the safety of customer funds.

As a result, the Division is making clear its view that registrants may not recognize the transfer of funds between the bank accounts of affiliated entities or intra-company transfers for regulatory accounting and compliance purposes until such funds are finally settled, with respect to the maker's bank account and credited to the recipient's bank, either through the completion of the process of posting an item to the indicated account of the drawer, maker or other person to be charged therewith, an irrevocable wire transfer, or through obtaining and depositing a cashier's check (a check drawn on the maker's bank at the time of issuance).

In the case of intra-company transfers to a bank account containing segregated funds maintained in accordance with Section 4d(2) of the Act and related Commission regulations, only checks received from the firm's own non-segregated bank account may be deposited directly into such segregated account. Checks received from an affiliated entity to enhance segregated funds (as opposed to checks received on behalf of customers) must first be deposited in the firm's operating account before the funds are transferred to the segregated account.

If a firm suspects that it is undersegregated near the close of business, it may increase segregated funds before the end of the day by: (1) directing its bank to transfer funds from its non-segregated account to its segregated account, if both accounts are at the same bank; or (2) by making an irrevocable wire transfer or by obtaining a cashier's check, written on a non-segregated account at another bank and hand-delivering the cashier's check to the bank where the segregated account is located and obtaining a receipt. In the case of a cashier's check, while the funds might not be credited to the segregated bank account until the following day (check received by teller, but after the time for posting of deposits), they are irrevocably committed to deposit in the segregated bank account on the day of issuance by virtue of the acceptance of the cashier's check in advance by the act of issuance by the bank and delivery to a bank where the segregated account is maintained. Other similar instruments which the recipient bank would recognize as immediately available, same day, funds, may also be acceptable.

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The statements made in this Interpretation are not rules of the Commodity Futures Trading Commission, nor are they published as bearing the Commission's approval. They represent interpretations and practices followed by the Division in administering the Commodity Exchange Act and the regulations thereunder. For further information contact:

Paul H. Bjarnason, Jr., Deputy Director, or Lawrence B. Patent, Associate Chief Counsel, Division of Trading and Markets, CFTC, 2033�K St. N.W., Washington, D.C. 20581.

Telephone: (202) 254-8955.

Issued in Washington, D.C. on May 15, 1991 by the Division of Trading and Markets.


Andrea M. Corcoran


Division of Trading and Markets