Risk Disclosure by Futures Commission Merchants, Introducing Brokers, Commodity Pool Operators and Commodity Trading Advisors to Customers; Bankruptcy Disclosure

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 33, and 190

Risk Disclosure by Futures Commission Merchants, Introducing

Brokers, Commodity Pool Operators and Commodity Trading Advisors to

Customers; Bankruptcy Disclosure

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)

is amending its rules to permit registrants to deliver to customers a

generic risk disclosure statement which will satisfy risk disclosure

requirements applicable to domestic and foreign commodity futures and

commodity option transactions subject to regulation by the Commission.

The Commission also is permitting such statement to substitute for the

special disclosure requirement related to futures-style margining of

the options premium permitted on certain foreign exchanges. The generic

statement may be used by firms subject to CFTC jurisdiction in lieu of

the separate disclosure statements that will continue to be authorized

by Commission rules. The statement, which was developed in cooperation

with various international regulators, also is intended to satisfy the

risk disclosure requirements of certain foreign jurisdictions who have

implemented the language of this proposed risk disclosure statement in

their jurisdictions in accordance with their domestic law.

EFFECTIVE DATE: July 5, 1994.

FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Robert H.

Rosenfeld, Esq., Division of Trading and Markets, Commodity Futures

Trading Commission, 2033 K Street, NW., Washington, DC 20581; telephone

(202) 254-8955.

SUPPLEMENTARY INFORMATION:

Background

On March 30, 1993, the Commodity Futures Trading Commission

(Commission) approved for publication in the Federal Register

amendments to its rules 1.55, 30.6, 33.7, 180.3, 190.06 and 190.10.\1\

Among other things, the rule amendments consolidated the foreign

futures and foreign commodity options risk disclosure statement

required by rule 30.6 with the domestic futures risk disclosure

statement required by rule 1.55.

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\1\58 FR 17495 (April 5, 1993). On May 5, 1994, the Commission

also proposed substantial revisions to the disclosure framework

applicable to commodity pool operators (CPOs) and commodity trading

advisors (CTAs) designed to achieve greater simplicity, focus and

clarity in performance history presentation, streamlining other

required disclosures and a more concise and readable format for

disclosure documents. 59 FR 25351 (May 16, 1994). If adopted, these

changes would substitute Part 4 disclosure for rule 1.55 disclosure

in certain cases.

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In addition, rule 1.55 was amended to provide in paragraph (c) that

the Commission may approve for use in lieu of the prescribed rule 1.55

disclosure statement a risk disclosure statement approved by one or

more foreign regulatory agencies or self-regulatory organizations if

the Commission determines that such statement is reasonably calculated

to provide the disclosures specified by rule 1.55. Rule 1.55(c) was

adopted by the Commission to permit firms doing multinational business

to use the same risk disclosure statement for foreign and U.S.-based

business, thereby reducing duplicative disclosure requirements without

sacrificing important customer protections or obscuring any special

risks of trading outside the U.S.\2\

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\2\See 57 FR 46101, 46103 (October 7, 1992).

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Although initially addressed to the approval of the individual

disclosure statements of a particular jurisdiction, the Commission in

proposing the amendments to, among others, rule 1.55, stated that the

rule contemplates a mechanism for eventually substituting a uniform

disclosure format, accepted internationally, that could be used on a

general basis and supplemented as warranted for particular kinds of

transactions or special markets.\3\

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\3\57 FR 46101, 46103-46104 (October 7, 1992).

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The Commission also noted that it was considering development of a

``plain language'' option disclosure statement and requested comment

concerning the desirability of developing a simpler options disclosure

statement and other possible improvements.\4\ Generally, the commenters

who addressed this issue supported the development of a plain language

generic options risk disclosure statement and also encouraged the

Commission to consider incorporating the required options disclosure

into the revised rule 1.55 statement. However, the Commission deferred

taking such action pending the outcome of international efforts to

develop a consolidated futures and options statement.\5\

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\4\57 FR 46101, 46108 (October 7, 1992).

\5\58 FR 17495, 17502 (April 5, 1993).

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In this connection, the Commission stated that certain

international regulators were endeavoring to develop a single risk

disclosure statement that would be acceptable in multiple jurisdictions

for domestic and cross-border transactions in futures and options and

stated that:\6\

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\6\58 FR 17495, 17497 (April 5, 1993).

The Commission is monitoring developments in this area and

anticipates that if a universal statement of this nature is

developed, it will consider permitting the use of such a statement

in lieu of the new consolidated rule 1.55 risk disclosure statement

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as well as the options disclosure statement required by rule 33.7.

On January 5, 1994, the Commission approved for publication in the

Federal Register an advance notice of proposed rulemaking which

requested comment on the text of a two-page generic risk disclosure

statement then the subject of multilateral discussions among

international regulators.7 The proposed text was intended to meet

the risk disclosure requirements for both domestic and foreign

commodity futures and commodity option products subject to regulation

by the CFTC and thereby substitute for the statements required by rules

1.55, 33.7 and 190.10 as well as the special disclosures related to

futures-style margining of options permitted on certain foreign

exchanges.8

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\7\59 FR 1506, 1508 (January 11, 1994).

\8\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer Binder]

Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement relating to

the deferred payment of option premiums, superseding separate

disclosure addenda required by orders concerning the London

International Financial Futures Exchange (54 FR 37636 (September 12,

1989)), the International Petroleum Exchange (54 FR 50356 (December

6, 1989)), and the London Futures and Options Exchange (renamed as

the London Commodity Exchange) (54 FR 50348 (December 6, 1989)); and

55 FR 14238 (April 17, 1990) (Sydney Futures Exchange). The text of

the generic risk disclosure statement regarding futures-style

margining of the options premium is substantially similar to the

language of the addenda referred to above.

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Comments on Advance Notice and Related Text Modifications

The Commission received comments from the National Futures

Association (NFA), the Futures Industry Association (FIA), the Chicago

Mercantile Exchange (CME), the Business Law Section of the American Bar

Association (ABA), and Schulte Roth & Zabel (SRZ), a law firm. All

commenters generally supported the Commission's proposal for a broader

consolidated risk disclosure statement. The commenters particularly

supported substituting the generic risk disclosure statement for the

current rule 33.7 statement for domestic exchange-traded commodity

options. The commenters generally believed that consolidation of risk

disclosure statements into one concise document could increase the

clarity of generic disclosure to customers and make the disclosure

statement a more effective customer protection mechanism by focusing

customers' attention on particular risks and upon obtaining adequate

information on risks.

In response to the Commission's query whether use of the generic

statement should be made mandatory or discretionary, and whether any

distinctions should be made with respect to the type of firm that

should be permitted to use the generic statement, commenters urged the

Commission not to eliminate the current risk disclosure statement(s)

but rather to permit firms to choose which disclosure statement(s) to

provide to customers. For example, firms may not wish to redesign and

reprint disclosure statements.

The Commission, therefore, agrees that all firms (without regard to

whether the firms engage in cross-border business) should have the

flexibility to determine whether they distribute to customers the new

generic disclosure statement or the existing separate risk disclosure

statements referred to above.

Several commenters stated that the section on electronic execution

systems needed clarification. Specifically, as published in the advance

notice, paragraph 11 of the generic statement on electronic trading

referred to the possibility that losses resulting from systems failure

may be subject to limitations on liability. Commenters noted that

liability limitations are not unique to electronic trade execution

systems and may have the unintended implication that such systems are

less safe than floor-based systems. They recommended that this language

appear in the section on trading facilities (paragraph 10), which

applies to all trading systems (floor and electronic). The Commission

agrees that both floor and electronic trading venues are supported by

systems for which certain types of features are beyond the control of

the exchange and that liability limitations may apply to such features.

As a consequence it believes that the foregoing alteration of the text

is appropriate and is more satisfactory to the international regulators

who are considering adoption of the generic risk disclosure statement,

some of which only have electronic systems.9 The Commission

therefore has amended the language accordingly.

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\9\The international regulators currently prepared to permit the

use of the generic risk disclosure statement in their jurisdictions

and the products for which the statement may be used are specified

in the Addendum to the statement. The Commission intends to update

and amend the list periodically, as appropriate, in the Federal

Register. In addition, the Commission notes that notwithstanding the

adoption of the generic risk disclosure statement by a foreign

jurisdiction, other disclosure requirements may continue in effect

in such jurisdictions.

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The advance notice of proposed rulemaking on the generic risk

disclosure statement noted that an additional topic addressed in the

generic statement was the risks of off-exchange trading. In particular,

the informational working group drafting the generic statement

concluded that such a provision, if worded appropriately, would not

mislead or confuse customers in those jurisdictions which, for example,

do not permit retail customers to participate in off-exchange markets.

Although the Commission received no comments on this provision, in view

of current public discussions related to over-the-counter derivatives,

the Commission has decided to add the words ``and attendant risks'' at

the end of paragraph 12 to enhance relevant disclosure in this regard.

The Commission notes in this regard that the generic risk statement is

intended to cause a customer to ask additional questions of its broker.

Some commenters raised concerns as to the reference in paragraph 1

of the proposed disclosure statement regarding the time frame for

meeting margin calls. They believed the reference could be construed as

overriding the terms set forth in a customer account agreement between

the firm and its customer. The Commission wishes to clarify that the

language of the generic risk disclosure statement is not intended to

modify the terms and conditions of a firm's customer account agreement

concerning the timing of margin payments (provided that these are

consistent with the Commodity Exchange Act (CEA)) but to call to the

customer's attention generally that failure to post margin can have

significant consequences.

One commenter suggested that in order to alleviate the paperwork

burden on registrants, the Commission should not require inclusion in

the risk disclosure statement that is delivered to customers the

Addendum that sets forth the participating jurisdictions which have

adopted the generic statement and the products for which the statement

may be used. Although the Commission believes that the Addendum is

necessary to enable firms to ensure that use of the generic statement

for a particular product is in compliance with the applicable risk

disclosure requirements of various jurisdictions, the Addendum

ordinarily should not be necessary for customers who should receive

additional or different disclosure if the generic statement is not

accepted by a particular jurisdiction or for a particular

product.10 Otherwise, although the Commission intends to publish,

amend and update, as appropriate, the Addendum to the generic risk

disclosure statement, the Commission agrees that apart from the

limitations on its use in the U.S. to futures, options on futures and

options on commodities, the Addendum listing participating

jurisdictions need not be made part of the disclosure document itself.

Firms may, however, elect to include the Addendum as long as it appears

on a separate page after the actual risk disclosure text.

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\1\0It is, however, important in the U.S. that there be no

possible confusion as to what disclosure is required for options on

equities, which are governed by U.S. securities laws. In order to be

used in the U.S., therefore, the Addendum must reflect the products

for which use of the generic risk disclosure statement is permitted.

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In its advance notice, the Commission noted that the elimination of

a Commission mandated description of options trading and other

educational material from the mandated risk disclosure statement does

not mean that firms do not have the obligation to provide all material

disclosures consistent with the product traded and level of experience,

sophistication and financial capacity of customers in compliance with

Commission and NFA rules.11 One commenter believed that the

streamlined disclosure statement was sufficient and that if the

Commission believes that additional disclosures are necessary that it

provide specific guidance on this issue.

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\1\159 FR 1506, 1507 (January 11, 1994), citing Commission rule

1.55(f), which provides that: ``This section [requiring distribution

of a risk disclosure statement] does not relieve a futures

commission merchant or introducing broker from any other disclosure

obligation it may have under applicable law.'' See also NFA

Compliance Rule 2-30 (``know your customer'' rule).

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As discussed by the Commission when it adopted rule 1.55(d)

(currently rule 1.55(f)), the obligations of a futures commission

merchant (FCM) and introducing broker (IB) to disclose material

information to customers arise under the CEA and other applicable law.

The Commission further noted that the essential purpose of the rule was

to confirm the existing obligations of an FCM or IB under the law and

to make clear that distribution of a standard disclosure statement was

not intended to alter those obligations.12

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\1\2See 50 FR 5380 (February 8, 1985).

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Because the nature and extent of the disclosure which an FCM or IB

may be required to make to a customer necessarily must depend on the

facts and circumstances of the particular transaction and also on the

precise nature of the FCM's or IB's relationship to the customer, any

attempt by the Commission to enumerate the precise scope and form of

disclosure for all conceivable customer relationships, products and

trading strategies would be difficult to accomplish and would diminish

the impact of the generic statement which is intended to highlight the

significant risks of futures and options trading and the areas where

customers should seek additional particularized information.13

These considerations continue to apply to the current rulemaking, which

is intended to consolidate and improve the mandated disclosure process.

Accordingly, nothing in the current rulemaking should be construed as

reducing the existing obligation to make all disclosures required under

applicable law.

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\1\3The extent of these obligations is constantly being defined

on a case-by-case basis in administrative and reparations

proceedings and civil actions. Further, the language of the generic

risk disclosure statement specifically directs the customer to

elicit further information from the broker on certain issues.

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Finally, one commenter suggested that the acknowledgement

requirement should be eliminated with respect to sophisticated

investors. The CFTC has determined not to address this matter at this

time.

Procedure--Final Rule Amendments

When the Commission issued its advance notice concerning the

proposed text of a generic disclosure statement that could be adopted

by several jurisdictions regulating futures and options transactions,

the Commission contemplated that a further comment process could be

necessary. However, for the reasons noted below, the Commission

believes that a complete rulemaking record has been compiled and that

further proposal of the text of the generic risk disclosure statement

is unnecessary.

Public comments received on the advance notice were unanimous in

recommending the adoption of the generic risk disclosure statement

(subject to minor revision), including substituting the proposed

generic statement for the rule 33.7 statement for domestic exchange-

traded commodity options and the statement required by rule 190.10 for

non-cash deposits as margin.14 Second, the Commission received

comment on the generic risk disclosure proposal in connection with the

recent amendments consolidating rules 1.55 and 30.6, which contemplated

Commission approval of the substitution of a document which can be used

in multiple jurisdictions.15 Third, as provided herein, the use of

the generic risk disclosure is not mandatory, i.e., the language may be

used but is not required to be substituted for the statements now

required by rules 1.55, 33.7 and 190.10(c) and other disclosure

requirements set forth in the advance notice.

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\1\459 FR 1506, 1508 (January 11, 1994). In addition to

expressly inviting public comment on the draft text of the generic

risk disclosure statement to substitute for current disclosures

contained in rules 1.55, 33.7, 190.10 and Commission orders and

Advisories regarding disclosures related to futures-style margining

of options premium allowed by certain foreign exchanges, the

Commission also requested comment on whether the statement would be

most useful if made mandatory and whether its use should be limited

to firms doing cross-border business or more broadly.

\1\558 FR 17495, 17497 (April 5, 1993); 57 FR 46101, 46103

(October 7, 1992).

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Accordingly, the final rules amend Secs. 1.55(c), 33.7 and

190.10(c) to incorporate text which permits registrants to satisfy the

requirements of rules 1.55, 33.7 and 190.10(c) by substituting the

generic risk disclosure statement as set forth below, which will be

published in a new appendix to part 1 of the Commission's regulations.

The Commission also clarifies herein that the generic risk disclosure

statement may be used in lieu of the special disclosure addendum to

rule 33.7 in connection with transactions on certain foreign exchanges

which do not collect the full option premium.

Effect of Alternate Disclosure Statement

The Commission is hereby permitting the generic risk disclosure

statement set forth herein in appendix A to rule 1.55(c) to be used in

lieu of the statements required by rules 1.55 (which incorporates the

risk-disclosure contained in Commission rule 30.6 for foreign futures

and foreign commodity options), rule 33.7 (domestic exchange-traded

commodity options) and the special bankruptcy disclosures of Commission

rule 190.10(c) related to the acceptance of non-cash margin.

The approval of the generic risk disclosure statement is not

intended to alter disclosure requirements other than those specifically

addressed. For example, the disclosure statement would be required to

be delivered prior to the opening of the account and the

acknowledgement and manner of delivery of the disclosure statement

(i.e., as a separate written statement or in a booklet) would not be

altered. The Commission also would not change the requirement that

compliance with requirements related to providing customers with risk

disclosure statements does not relieve an FCM or IB from any other

disclosure obligation it may have under applicable law.\16\ Similarly,

the single signature acknowledgment procedure contained in rule 1.55(d)

would continue to apply\17\ as will the amendment to CFTC rule

190.10(c) eliminating the requirement that the prescribed disclosure

concerning the treatment of non-cash margin in FCM bankruptcies be

acknowledged.\18\

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\16\In addition to clarifying that firms have an obligation to

disclose all material facts, the Commission also wishes to clarify

that firms must comply with the disclosure obligations imposed by

other regulatory authorities, U.S. or foreign.

\17\The Commission wishes to reiterate that the single signature

acknowledgment format may not generally be used for the endorsements

required by rule 180.3 with respect to arbitration and other dispute

resolution agreements except with respect to Qualified Eligible

Participants (QEPs) as defined in rule 4.7(a)(1)(ii) and for certain

persons or entities specifically within the scope of rule 4.5(a).

See rule 180.3(b)(2) (as amended by 58 FR 17495 (April 5, 1993)).

Nor would the single acknowledgment affect the obligation of an FCM

or IB to obtain, by instrument separate and apart from the customer

agreement, a customer's consent that the FCM may knowingly take the

other side of a customer's order, or to transfer funds from a

customer's segregated account to an account that is not segregated.

See discussion in 58 FR 17495, 17499 (April 5, 1993).

\18\The Commission notes that the generic statement discloses

more clearly than the statement in CFTC rule 190.10(c) that cash and

non-cash margin may be subject to the same treatment in the event of

a firm bankruptcy.

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The distribution of the generic risk disclosure statement also

could substitute for the special disclosure requirements related to

futures-style margining of option premiums permitted on certain foreign

exchanges.

The generic risk disclosure statement would not, however, alter the

separate disclosure requirements concerning electronic trading systems

or trading linkages between domestic and foreign futures exchanges that

may be mandated by U.S. self-regulatory organizations.\19\

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\19\See 58 FR 17495, 17496, n.7 (April 5, 1993) citing, for

example, NFA Compliance Rule 2-28, CME rule 874 and Commodity

Exchange Inc. rule 5.14 (addressing risk disclosure requirements

applicable to foreign futures and options as a result of trading

linkages between domestic and foreign exchanges). See also CME rule

577 and Chicago Board of Trade rule 9A.20 which address the risk

disclosure requirements applicable to users of GLOBEX, and New York

Mercantile Exchange rule 6.22 which addresses the risk disclosure

requirements applicable to the users of the ACCESS electronic

trading system.

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Finally, the Commission notes that if a firm elects to use the

generic risk disclosure statement rather than the statement required by

rule 190.10(c), and uses a separate subordination agreement required by

Financial and Segregation Interpretation No. 12--``Deposit of Customer

Funds in Foreign Depositories'' for customers depositing margin in

foreign depositories,\20\ that statement must be separately

acknowledged.\21\ A separate signature also would continue to be

necessary where subordination or similar consent to contractual

modification of certain rights is required for other purposes, such as

for participation in cross-margining programs.\22\

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\20\See 53 FR 46911 (November 21, 1988). The Commission stated

that the subordination agreement discussed in Financial and

Segregation Interpretation No. 12 may be incorporated into the rule

190.10(c) bankruptcy disclosure document or separately executed. Id.

at 46913-46914.

\21\Separate acknowledgement of the rule 190.10(c)(2) disclosure

statement in this context is a substitute for execution of a

separate subordination agreement.

\22\Id., citing ``Financial and Segregation Interpretation No.

12.''

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Separate Statement

In its previous revision of rule 1.55, the Commission included an

amendment intended to clarify that the prescribed risk disclosure

statement may be provided as a physically separate document or in a

booklet containing other commodity interest account materials, as long

as the rule 1.55 risk disclosure statement appears as the cover page or

the first page, and is the only material on such page, by which it

means the page immediately following the cover page.

As the generic statement requires approximately two pages of

printed text, the statement may appear on more than one page, provided

that it is the only text that appears on those pages.

Application to Rule 30.3 and 30.10 Orders

After the effective date of these rule amendments, all firms

operating pursuant to confirmed rule 30.10 relief,\23\ and firms

complying with the terms of an outstanding order under rule 30.3 may

elect to use the generic risk disclosure statement or the risk

disclosure statements mandated by rules 1.55 and 33.7 and applicable

Commission orders, as appropriate.\24\

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\23\Firms operating pursuant to Commission rule 30.10 relief had

been permitted to comply with the risk disclosure requirements set

forth in the relevant Commission orders, i.e., they could continue

to use the text of rule 30.6 as published prior to the 1993

revisions to Commission rules 1.55 and 30.6 (which incorporated the

rule 30.6 disclosures for foreign futures into the rule 1.55

disclosures for domestic futures) (see 58 FR 17496 (April 5, 1993)).

\24\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer

Binder] Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement

relating to the deferred payment of option premiums for options).

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Timetable for Implementation

Under the most recent disclosure revisions, the Commission stated

that firms would be permitted to use existing disclosure statements

(i.e., either separate rule 1.55, 30.6, 33.7 and 190.10(c) documents)

up to and including July 1, 1994.\25\

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\25\See 58 FR 17495, 17497 (April 5, 1993).

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Although the Commission intends for the current rulemaking to take

effect upon the publication of this Federal Register release, the

Commission is permitting firms for a period not to exceed sixty days

after the date herein to continue to use the separate statements

contained in rules 1.55 and 30.6.

Accordingly, after the date herein, firms may use either the new

generic risk disclosure statement or the revised rule 1.55 risk

disclosure statement (which incorporates the rule 30.6 disclosure

statement) or, for a period not to exceed sixty days after the

effective date of this Federal Register release, the separate rule 1.55

and rule 30.6 risk disclosure statements to comply with relevant risk

disclosure obligations.\26\

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\26\See no action letter of the CFTC's Division of Trading and

Markets dated June 8, 1994 regarding the July 1, 1994 effective date

of the revised rule 1.55 risk disclosure statement.

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Amendment of CFR

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,

imposes certain requirements on federal agencies (including the

Commission) in connection with their conducting or sponsoring any

collection of information as defined by the Paperwork Reduction Act.

The amendments to rules 1.55, 33.7 and 190.10 do not change the burdens

associated with those rules. The groups of rules of which they are a

part have the following burdens:

Rule 33.7--(3038-0007)

Average Burden Hours Per Response--50.32

Number of Respondents--190,197

Frequency of Response--Occasionally

Rule 190.10--(3038-0021)

Average Burden Hours--0.35

Number of Respondents--802

Frequency of Response--Occasionally

No additional burden is associated with the amendments to rules

33.7 and 190.10.

The burden associated with the group which encompasses rules 1.55,

180.3 and rule 1.65 is:

Rules 1.55, 180.3 and 1.65--(3038-0022)

Average Burden Hours Per Response--613.26

Number of Respondents--4295

Frequency of Response--Occasionally

No additional burden is associated with the amendments to rule

1.55.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. Sec. 601 et seq.,

requires that agencies, in proposing rules, consider the impact of

these rules on small business. In this connection, the Commission

previously has determined that FCMs and Commodity Pool Operators should

not be considered small entities for purposes of the RFA.\27\ With

respect to IBs and Commodity Trading Advisors (CTAs), the Commission

has stated that it would evaluate within the context of each proposal

whether all or some IBs and CTAs should be considered small entities,

and if so, that it would analyze the economic impact on them of any

rule.\28\ Because the proposed amendments to the Commission rules

discussed herein will not result in any significant additional burdens

to the above mentioned registrants and may in practice result in a

reduction of certain existing burdens, the Commission believes that the

proposed rule amendments will not have a significant economic impact on

such entities. Therefore, pursuant to section 3(a) of the RFA, 5 U.S.C.

Sec. 605(b), the Acting Chairman of the Commission certifies that these

proposed rule amendments will not have a significant economic impact on

a substantial number of small entities.

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\27\47 FR 18618 (April 30, 1982).

\28\Id. (CTAs) and 48 FR 35248, 35276 (August 3, 1983) (IBs).

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List of Subjects

17 CFR Part 1

Commodity futures, Domestic exchange-traded commodity option

transactions.

17 CFR Part 33

Commodity futures, Domestic exchange-traded commodity option

transactions.

17 CFR Part 190

Bankruptcy.

In consideration of the foregoing and pursuant to the authority

contained in the Commodity Exchange Act, and in particular, sections

2(a)(1), 4b, 4d, 4f and 8a of the Act, as amended, 7 U.S.C. 2, 6b, 6d,

6f and 12a, the Commission hereby amends Chapter I of Title 17 of the

Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

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 1.55 is amended by revising paragraph (c) and by adding

a new Appendix A to read as follows:

Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures

commission merchants and introducing brokers.

* * * * *

(c) The Commission may approve for use in lieu of the risk

disclosure document required by paragraph (b) of this section a risk

disclosure statement approved by one or more foreign regulatory

agencies or self-regulatory organizations if the Commission determines

that such risk disclosure statement is reasonably calculated to provide

the disclosure required by paragraph (b) of this section. Notice of

risk disclosure statements that may be used to satisfy Commission

disclosure requirements, what requirements such statements meet and the

jurisdictions which accept each format will be set forth in appendix A

to this section.

* * * * *

Appendix A to CFTC Rule 1.55(c)--Generic Risk Disclosure Statement

Risk Disclosure Statement for Futures and Options

This brief statement does not disclose all of the risks and other

significant aspects of trading in futures and options. In light of the

risks, you should undertake such transactions only if you understand

the nature of the contracts (and contractual relationships) into which

you are entering and the extent of your exposure to risk. Trading in

futures and options is not suitable for many members of the public. You

should carefully consider whether trading is appropriate for you in

light of your experience, objectives, financial resources and other

relevant circumstances.

Futures

1. Effect of `Leverage' or `Gearing'

Transactions in futures carry a high degree of risk. The amount of

initial margin is small relative to the value of the futures contract

so that transactions are `leveraged' or `geared'. A relatively small

market movement will have a proportionately larger impact on the funds

you have deposited or will have to deposit: this may work against you

as well as for you. You may sustain a total loss of initial margin

funds and any additional funds deposited with the firm to maintain your

position. If the market moves against your position or margin levels

are increased, you may be called upon to pay substantial additional

funds on short notice to maintain your position. If you fail to comply

with a request for additional funds within the time prescribed, your

position may be liquidated at a loss and you will be liable for any

resulting deficit.

2. Risk-reducing orders or strategies

The placing of certain orders (e.g. `stop-loss' orders, where

permitted under local law, or `stop-limit' orders) which are intended

to limit losses to certain amounts may not be effective because market

conditions may make it impossible to execute such orders. Strategies

using combinations of positions, such as `spread' and `straddle'

positions may be as risky as taking simple `long' or `short' positions.

Options

3. Variable degree of risk

Transactions in options carry a high degree of risk. Purchasers and

sellers of options should familiarize themselves with the type of

option (i.e. put or call) which they contemplate trading and the

associated risks. You should calculate the extent to which the value of

the options must increase for your position to become profitable,

taking into account the premium and all transaction costs.

The purchaser of options may offset or exercise the options or

allow the options to expire. The exercise of an option results either

in a cash settlement or in the purchaser acquiring or delivering the

underlying interest. If the option is on a future, the purchaser will

acquire a futures position with associated liabilities for margin (see

the section on Futures above). If the purchased options expire

worthless, you will suffer a total loss of your investment which will

consist of the option premium plus transaction costs. If you are

contemplating purchasing deep-out-of-the-money options, you should be

aware that the chance of such options becoming profitable ordinarily is

remote.

Selling (`writing' or `granting') an option generally entails

considerably greater risk than purchasing options. Although the premium

received by the seller is fixed, the seller may sustain a loss well in

excess of that amount. The seller will be liable for additional margin

to maintain the position if the market moves unfavorably. The seller

will also be exposed to the risk of the purchaser exercising the option

and the seller will be obligated to either settle the option in cash or

to acquire or deliver the underlying interest. If the option is on a

future, the seller will acquire a position in a future with associated

liabilities for margin (see the section on Futures above). If the

option is `covered' by the seller holding a corresponding position in

the underlying interest or a future or another option, the risk may be

reduced. If the option is not covered, the risk of loss can be

unlimited.

Certain exchanges in some jurisdictions permit deferred payment of

the option premium, exposing the purchaser to liability for margin

payments not exceeding the amount of the premium. The purchaser is

still subject to the risk of losing the premium and transaction costs.

When the option is exercised or expires, the purchaser is responsible

for any unpaid premium outstanding at that time.

Additional risks common to futures and options

4. Terms and conditions of contracts

You should ask the firm with which you deal about the terms and

conditions of the specific futures or options which you are trading and

associated obligations (e.g. the circumstances under which you may

become obligated to make or take delivery of the underlying interest of

a futures contract and, in respect of options, expiration dates and

restrictions on the time for exercise). Under certain circumstances the

specifications of outstanding contracts (including the exercise price

of an option) may be modified by the exchange or clearing house to

reflect changes in the underlying interest.

5. Suspension or restriction of trading and pricing relationships

Market conditions (e.g. illiquidity) and/or the operation of the

rules of certain markets (e.g. the suspension of trading in any

contract or contract month because of price limits or ``circuit

breakers'') may increase the risk of loss by making it difficult or

impossible to effect transactions or liquidate/offset positions. If you

have sold options, this may increase the risk of loss.

Further, normal pricing relationships between the underlying

interest and the future, and the underlying interest and the option may

not exist. This can occur when, for example, the futures contract

underlying the option is subject to price limits while the option is

not. The absence of an underlying reference price may make it difficult

to judge ``fair'' value.

6. Deposited cash and property

You should familiarize yourself with the protections accorded money

or other property you deposit for domestic and foreign transactions,

particularly in the event of a firm insolvency or bankruptcy. The

extent to which you may recover your money or property may be governed

by specific legislation or local rules. In some jurisdictions, property

which had been specifically identifiable as your own will be pro-rated

in the same manner as cash for purposes of distribution in the event of

a shortfall.

7. Commission and other charges

Before you begin to trade, you should obtain a clear explanation of

all commission, fees and other charges for which you will be liable.

These charges will affect your net profit (if any) or increase your

loss.

8. Transactions in other jurisdictions

Transactions on markets in other jurisdictions, including markets

formally linked to a domestic market, may expose you to additional

risk. Such markets may be subject to regulation which may offer

different or diminished investor protection. Before you trade you

should enquire about any rules relevant to your particular

transactions. Your local regulatory authority will be unable to compel

the enforcement of the rules of regulatory authorities or markets in

other jurisdictions where your transactions have been effected. You

should ask the firm with which you deal for details about the types of

redress available in both your home jurisdiction and other relevant

jurisdictions before you start to trade.

9. Currency risks

The profit or loss in transactions in foreign currency-denominated

contracts (whether they are traded in your own or another jurisdiction)

will be affected by fluctuations in currency rates where there is a

need to convert from the currency denomination of the contract to

another currency.

10. Trading facilities

Most open-outcry and electronic trading facilities are supported by

computer-based component systems for the order-routing, execution,

matching, registration or clearing of trades. As with all facilities

and systems, they are vulnerable to temporary disruption or failure.

Your ability to recover certain losses may be subject to limits on

liability imposed by the system provider, the market, the clearing

house and/or member firms. Such limits may vary: you should ask the

firm with which you deal for details in this respect.

11. Electronic trading

Trading on an electronic trading system may differ not only from

trading in an open-outcry market but also from trading on other

electronic trading systems. If you undertake transactions on an

electronic trading system, you will be exposed to risks associated with

the system including the failure of hardware and software. The result

of any system failure may be that your order is either not executed

according to your instructions or is not executed at all.

12. Off-exchange transactions

In some jurisdictions, and only then in restricted circumstances,

firms are permitted to effect off-exchange transactions. The firm with

which you deal may be acting as your counterparty to the transaction.

It may be difficult or impossible to liquidate an existing position, to

assess the value, to determine a fair price or to assess the exposure

to risk. For these reasons, these transactions may involve increased

risks. Off-exchange transactions may be less regulated or subject to a

separate regulatory regime. Before you undertake such transactions, you

should familiarize yourself with applicable rules and attendant risks.

I hereby acknowledge that I have received and understood this risk

disclosure statement.

----------------------------------------------------------------------

Date

----------------------------------------------------------------------

Signature of Customer

* * * * *

[The following language should be printed on a page other than the

pages containing the disclosure language above and may be omitted from

the required disclosure statement]

This disclosure document meets the risk disclosure requirements in

the jurisdictions identified below ONLY for those instruments which are

specified.

United States: commodity futures and options on commodity futures

subject to the Commodity Exchange Act

[other jurisdictions: etc.]

PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION

TRANSACTIONS

3. The authority citation for this part continues to read as

follows:

Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-

1, 13b, 19 and 21, unless otherwise noted.

4. Section 33.7 is amended by revising paragraph (a)(1)(i) as

follows:

Sec. 33.7 Disclosure.

(a)(1) * * *

(i) Furnishes the option customer with a separate written

disclosure statement as set forth in this section or another statement

approved under Sec. 1.55(c) of this chapter and set forth in appendix A

to Sec. 1.55 which the Commission finds satisfies this requirement, or

includes either such statement in a booklet containing the customer

account agreement and other disclosure statements required by

Commission rules; provided, however, that if the statement contained in

Sec. 33.7 is used it must follow the statement required by Sec. 1.55;

and

* * * * *

PART 190--BANKRUPTCY RULES

5. The authority citation for part 190 continues to read as

follows:

Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23,

and 24 and 11 U.S.C. 362, 546, 548, 556 and 761-766.

6. Section 190.10 is amended by revising paragraph (c)(1) as

follows:

Sec. 190.10 General.

* * * * *

(c)(1) Disclosure statement for non-cash margin. (1) Except as

provided in Secs. 1.65, no commodity broker (other than a clearing

organization) may accept property other than cash from or for the

account of a customer to margin, guarantee, or secure a commodity

contract unless, the commodity broker first furnishes the customer with

the disclosure statement set forth in paragraph (c)(2) of this section

in boldface print in at least 10 point type which may be provided as

either a separate, written document or incorporated into the customer

agreement, or with another statement approved under Sec. 1.55(c) of

this chapter and set forth in appendix A to Sec. 1.55 which the

Commission finds satisfies this requirement.

* * * * *

Issued in Washington, DC, on June 28, 1994 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 94-16119 Filed 7-1-94; 8:45 am]

BILLING CODE 6351-01-P