Risk Assessment for Holding Company Systems
Federal RegisterDec 28, 1994
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Risk Assessment for Holding Company Systems
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: On March 1, 1994, the Commodity Futures Trading Commission
(``CFTC'' or ``Commission'') published for comment proposed rules to
implement the risk assessment authority set forth in Section 4f(c) of
the Commodity Exchange Act (the ``Proposal'').1 The comment period
on the proposal was scheduled to expire on May 2, 1994. However, the
Commission twice extended the comment period to ensure that interested
parties had an adequate opportunity to submit comments. Initially, the
Commission extended the comment period on the entire set of rule
proposals to July 1, 1994. The comment period on the proposed
provisions regarding the maintenance and filing by futures commission
merchants (``FCMs'') of an organizational chart delineating major
affiliated persons, risk management policies, procedures and systems,
consolidated and consolidating financial statements, and information
concerning the occurrence of certain ``trigger'' events, expired at
that time. Subsequently, the Commission extended the comment period on
the proposed provisions regarding reporting of certain data concerning
affiliate positions and noncustomer accounts carried by the FCM to
September 1, 1994. As discussed herein, the Commission has adopted
final rules with respect to maintenance and filing of organizational
charts, risk management policies, procedures and systems, consolidated
and consolidating financial statements and trigger events relating to
events occurring at the FCM. Final action on the balance of the
Proposal has been deferred following further review and consultation
with other regulators.
\1\59 FR 9689.
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EFFECTIVE DATE: December 31, 1994.
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel, Lawrence B. Patent, Associate Chief Counsel, or Lawrence T.
Eckert, Attorney Adviser, Division of Trading and Markets, Commodity
Futures Trading Commission, 2033 K Street N.W., Washington D.C. 20581.
Telephone (202) 254-8955.
SUPPLEMENTARY INFORMATION
I. Background
Following the failures of certain FCMs operating within holding
company structures, the Commission requested and received new statutory
authority, enacted as part of the Futures Trading Practices Act of 1992
(``FTPA''),2 to obtain information concerning activities of FCM
affiliates that could pose material risks to the FCM. New Section
4f(c)3 of the Commodity Exchange Act (``CEA'' or ``Act'')
authorizes the Commission to require each registered FCM to obtain,
inter alia, ``such information and make and keep such records as the
Commission, by rule or regulation, prescribes concerning the registered
futures commission merchant's policies, procedures or systems for
monitoring and controlling financial and operational risks to it
resulting from the activities of any of its affiliated persons, other
than a natural person.''4 Section 4f(c) provides that the required
records should ``describe, in the aggregate, each of the futures and
other financial activities conducted by, and the customary sources of
capital and funding of, those of its affiliated persons whose business
activities are reasonably likely to have a material impact on the
financial or operational condition of the futures commission merchant,
including its adjusted net capital, its liquidity, or its ability to
conduct or finance its operations.''5 The statute further grants
the Commission the authority to require, by rule or regulation, summary
reports of such information to be filed no more frequently than
quarterly and supplemental reports if, as a result of adverse market
conditions, based on reports provided pursuant to this section, or
other available information, the Commission ``reasonably concludes''
that it has concerns regarding the financial or operational condition
of any registered FCM.6
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\2\Pub. L. No. 102-546, 106 Stat. 3590 (1992). The FTPA was
enacted on October 28, 1992.
\3\7 U.S.C. 6f(c)(Supp. IV 1992). For a more detailed discussion
regarding the background and purpose of the Commission's statutory
risk assessment authority, see 59 FR 9689-92 (March 1, 1994).
\4\7 U.S.C. 6f(c)(2)(A)(Supp. IV 1992).
\5\7 U.S.C. 6f(c)(2)(B)(Supp. IV 1992).
\6\7 U.S.C. 6f(c)(3)(A) and 6f(c)(3)(B)(Supp. IV 1992).
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The Commission's statutory risk assessment authority is similar to
that granted to the Securities and Exchange Commission (``SEC'') in
Section 4 of the Market Reform Act of 1990.7 Pursuant to its risk
assessment authority, the SEC adopted on July 21, 1992 ``final
temporary'' rules8 which generally require securities broker-
dealers to maintain and preserve records and file quarterly reports
containing information concerning the financial and securities
activities of the broker-dealers' material affiliates.9 The SEC
adopted ``final temporary'' rules as an interim step in the adoption of
final regulations to enable the agency to gain familiarity with
information filed pursuant to the risk assessment rules and to evaluate
the operation of the risk assessment program.10 In formulating the
proposed rules, the CFTC gave extensive consideration to the risk
assessment rules adopted by the SEC and consulted extensively with the
SEC and other federal financial regulators in an effort to develop, to
the extent possible, a coordinated approach to implementation of its
risk assessment authority.11
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\7\Pub. L. No. 101-432, 104 Stat. 963 (1990).
\8\See 57 FR 32159, 32161 (July 21, 1992).
\9\57 FR 32159.
\1\0The SEC plans to review the operation of its risk assessment
regulations early next year, after the rules have been in effect for
over two years. See 57 FR 32159 at 32161.
\1\1See Letter from Andrea M. Corcoran, Director, Division of
Trading and Markets, CFTC, to Brandon Becker, Director, Division of
Market Regulation, SEC (October 11, 1994); Letter from the Honorable
Barbara Pedersen Holum, Acting Chairman, CFTC, to the Honorable
Arthur Levitt, Chairman, SEC (October 11, 1994); Letter from the
Honorable Barbara Pedersen Holum, Acting Chairman, CFTC, to the
Honorable Alan Greenspan, Chairman, Board of Governors of the
Federal Reserve System (October 11, 1994); Letter from the Honorable
Arthur Levitt, Chairman, SEC, to the Honorable Mary L. Schapiro,
Chairman, CFTC (October 31, 1994); Letter from Brandon Becker,
Director, Division of Market Regulation, SEC, to Andrea M. Corcoran,
Director, Division of Trading and Markets, CFTC (December 13, 1994).
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On March 1, 1994, the Commission published for comment proposed
rules to implement its statutory risk assessment authority. The
proposed rules generally would have required the maintenance and
reporting of information concerning the activities of affiliates of
registered FCMs whose activities are reasonably likely to have a
material impact on the financial or operational condition of the FCM.
Proposed Rule 1.14(a)(2) defined such affiliates as ``Material
Affiliated Persons'' (``MAPs'') of the FCM and set forth criteria to be
considered by FCMs in determining which of their affiliates would
constitute MAPs for purposes of the risk assessment
requirements.12
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\1\2The ``material affiliated person'' definition used in the
Commission's Proposal is similar to that used in the SEC's risk
assessment rules. However, for purposes of the Proposal and these
rules, the Commission has used the term ``affiliated person'' rather
than ``associated person'', as used in the SEC's rules, to avoid
confusion with the associated person registration category described
in Section 4k of the Act and Commission Rule 3.12.
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The Proposal included two rules, a rule requiring that certain
records be maintained (proposed Rule 1.14) and a rule requiring
reporting of certain information to the Commission (proposed Rule
1.15), as well as a proposed form, proposed Form 1.15A, on which an FCM
would report the majority of the information required to be reported
under the reporting rule. Proposed Rule 1.14 would have required FCMs
to maintain and preserve certain records and information concerning,
among other things, the organizational structure of which the FCM is a
part, the FCM's policies and systems for monitoring and controlling
risks arising from the activities of its affiliates, consolidated and
consolidating financial statements for the FCM and its ultimate parent
company, and aggregate information concerning futures, forwards and
financial instruments with off-balance sheet risk and concentrations of
credit risk. Proposed Rule 1.15 would have required FCMs to file with
the Commission, generally on an annual basis, the information required
to be maintained under proposed Rule 1.14 and to provide the Commission
with notice of the occurrence of specified events, such as large
decreases in the reported adjusted net capital of the FCM or the equity
of its parent company.
The Proposal would have applied generally to FCMs that hold
customer funds of $6,250,000 or greater, maintain adjusted net capital
in excess of $5,000,000 or are clearing members of a contract market.
However, the proposed rules included exemptive provisions for FCMs
dually registered with the SEC as broker-dealers or operating within a
holding company group that includes a broker-dealer filing reports
pursuant to the SEC's risk assessment rules. Further, the proposed
rules would have permitted FCMs that have affiliates subject to
regulation by a federal banking agency, a state insurance commission or
similar state agency, or a foreign futures authority or other relevant
foreign regulatory authority with which the Commission has an
information-sharing agreement to comply with certain reporting and
recordkeeping requirements by filing or maintaining records that the
regulated affiliate is required to file with the relevant regulator.
The Commission received twenty-three comment letters on the
provisions of the Proposal relating to maintenance and filing of
organizational charts, risk management policies, consolidated and
consolidating financial statements, and ``trigger event'' reporting,
for which, following extension of the comment period, comments were due
by July 1, 1994.13 The majority of the com- menters either
supported, or noted their understanding of, the objectives of the
proposed rules. Several commenters, however, criticized the scope of
the proposed rules, and a number of commenters urged the Commission to
reconcile any differences between the SEC's risk assessment rules and
the Commission's proposed rules. Generally, commenters requested
additional time to update (if necessary) one-time filings required
under the proposed rules (i.e., the organizational chart and risk
management policies, procedures and systems) and to file notice with
the Commission upon the occurrence of the trigger events specified in
the Proposal. A number of commenters requested that the Commission
focus its trigger event reporting system on conditions occurring at the
FCM rather than at an affiliate or parent of the FCM. Certain
commenters requested that general exemptive authority be retained to
permit the Commission to address on a case-by-case basis special
problems of compliance for some firms in, for example, preparing
consolidating financial reports or obtaining access to information
concerning foreign affiliates. Comments addressed to specific
provisions of the proposed rules and the Commission's resolution of the
issues raised by such comments are discussed below in the context of
the relevant provisions of the final rules.
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\1\3The commenters included thirteen FCMs, four self-regulatory
organizations (``SROs''), three trade associations, one government
agency, one bar association and one law firm representing Commission
registrants. The Commission received thirteen comment letters on the
balance of the proposal, on which comments were due by September 1,
1994.
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Based upon its review of the comments received concerning the
Proposal, consultation with other federal regulators and further
consideration, the Commission has determined to bifurcate the
rulemaking and to defer, pending further review and consultation with
other regulators, action on the proposed provisions requiring reporting
of information relating to FCMs' noncustomer accounts, financial
position and other information relating to FCMs' material affiliates
proposed to be required on Form 1.15A, and notice of the occurrence of
certain trigger events at material affiliates. The Commission expects
to continue to consult with the SEC and other regulators in the
interest of maximizing harmonization, minimizing duplication and
developing consensus on the information most useful to furthering
effective entity-based supervision, consistent with past and continuing
efforts to harmonize rules and interpretations concerning financial
requirements. In particular, the Commission has indicated that it
intends to work with the other financial regulators in connection with
any determination on the position reporting section of the Proposal in
the interest of developing common data elements to make filings more
efficient and compatible.\14\
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\14\See correspondence cited in note 11, supra.
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II. Summary of Rules 1.14 and 1.15
The Commission believes that Rules 1.14 and 1.15, as adopted, are
responsive to the concerns of commenters, while also meeting the
regulatory objectives of the risk assessment authority conferred by the
Act. As adopted, and subject to the terms and conditions stated
therein, Rules 1.14 and 1.15 establish two basic types of risk
assessment requirements: (1) recordkeeping; and (2) reporting to the
Commission of certain information on a routine basis. In addition, the
Commission has amended its financial early warning rule, Rule 1.12, to
require reporting to the Commission upon the occurrence of certain
events at the reporting FCM that warrant further review.
Rule 1.14 will require that FCMs maintain certain records. These
records include: (1) an organizational chart depicting the various
entities with which the FCM is affiliated and identifying the FCM's
MAPs; (2) the FCM's policies, procedures and systems to manage the
risks to the FCM's financial condition or operations arising from the
activities of its affiliates; and (3) consolidated and consolidating
financial statements. Rule 1.15 will require reporting to the
Commission of the information required to be maintained by the FCM,
either on a one-time basis (absent significant changes in the reported
information), with respect to the FCM's organizational chart and risk
management policies, or annually with respect to consolidated and
consolidating financial statements. With respect to the proposed
provision requiring ``trigger event'' reporting of a reduction of
greater than 20 percent in an FCM's adjusted net capital, the
Commission has determined to include this notice requirement in its
existing financial early warning system, which is set forth in Rule
1.12. Upon receipt of such a notice, the Commission may seek additional
information, as warranted in the circumstances, from another regulator
and/or from the FCM. By separate Federal Register release, the
Commission is proposing to make this early warning notice requirement
applicable to all FCMs. The Commission also is proposing two additional
early warning notice provisions, which would require notice to the
Commission in the event that: (1) a margin call that exceeds an FCM's
excess adjusted net capital remains unanswered by the close of business
on the day following the issuance of the call; and (2) an FCM's excess
adjusted net capital falls below six percent of the maintenance margin
required to be held or posted for all non-customer and proprietary
positions carried by the FCM. With respect to an FCM's proprietary
account positions, maintenance margin shall mean the amount of funds
the FCM is required to maintain at the exchange's clearing organization
or with its clearing broker, or five percent of the value of the
contract, whichever is greater.
The rules being adopted will apply generally to FCMs that hold
customer funds of $6,250,000 or greater, maintain adjusted net capital
in excess of $5,000,000 or are clearing members of a contract market.
The rules, however, include special exemptive provisions for FCMs that
are dually registered with the SEC as securities broker-dealers
(including government securities broker-dealers) or that are part of a
holding company group that includes a securities broker-dealer filing
reports pursuant to the SEC's risk assessment rules. Further, the rules
allow FCMs that have affiliates subject to regulation by a federal
banking agency, a state insurance commission or similar state agency to
comply with certain reporting and recordkeeping requirements by filing
records that the regulated affiliate is required to file with the
relevant regulator. Similarly, in the case of affiliates subject to
regulation by a foreign futures authority or other relevant foreign
regulatory authority, the Commission will accept the maintenance or
filing of records required by such authority if either there is an
information-sharing agreement in effect which permits the Commission to
obtain the type of information required under these rules or the FCM
agrees to use its best efforts to obtain from the foreign firm and to
cause the foreign firm to provide, directly or through its foreign
regulator, any supplemental financial information the Commission may
request and no blocking statute or other restriction precludes the
communication of such information to the Commission.
The following discussion focuses principally on changes in or
clarifications of the proposed rules made in the final rules.
Additional background information relevant to these final rules may be
found in the Federal Register release accompanying the Commission's
Proposal.
III. Discussion
A. Definition of Material Affiliated Person
Section 4f(c) provides that FCMs shall maintain and report
information as prescribed by the Commission concerning their affiliated
persons15 ``whose business activities are reasonably likely to
have a material impact on the financial or operational condition of the
[FCM].''16 For the purpose of determining which of an FCM's
affiliated persons are engaged in business activities that are
reasonably likely to have a material impact on the financial or
operational condition of the FCM, proposed Rule 1.14(a)(2) defined the
term ``material affiliated person.'' Proposed Rule 1.14(a)(2) stated
that the determination as to whether an affiliate is a MAP ``shall
involve consideration of all aspects of the activities of, and the
relationship between,'' the FCM and the affiliate, including, without
limitation, several illustrative factors relevant to the activities of,
and the relationship between, the FCM and its affiliate.17 In the
Federal Register release accompanying the proposed rules, the
Commission stated that the factors specified in the proposed rule were
intended to provide guidance and not to be exhaustive.18 Proposed
Rule 1.14(a)(2) included the following list of factors which an FCM
should consider in determining whether an affiliated person is a MAP:
(1) the legal relationship between the FCM and the affiliated person,
i.e., the nature and proximity of the relationship between the FCM and
the affiliated person; (2) the degree of financial dependence of the
FCM on its affiliate and the nature of the FCM's financing
requirements; (3) the degree to which the FCM or its customers rely
upon an affiliated person for operational services or support; (4) the
level of market, credit and other risk present in an affiliated
entity's activities; and (5) the extent to which an affiliated person
has the authority or ability to negatively impact the FCM's capital. As
noted in the Proposal, the Commission's statutory risk assessment
provisions generally apply to affiliates other than natural
persons.19
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\1\5Section 4f(c) (1)(i) defines ``affiliated person'' as ``any
person directly or indirectly controlling, controlled by, or under
common control with a futures commission merchant, as the
Commission, by rule or regulation, may determine will effectuate the
purposes of this subsection.''
\1\6See Section 4f(c)(2)(B) of the Act, 7 U.S.C. 6f(c)(2)(B)
(Supp. IV 1992).
\1\759 FR at 9693.
\1\8Id.
\1\97 U.S.C. 6f(c) (2)(A) and (3)(A) (Supp. IV 1992); see 59 FR
at 9693 n. 26. In this connection, the Commission staff expects to
take the position that certain sole shareholder Subchapter ``S''
corporations will be treated as natural persons but that
partnerships will not, consistent with guidance issued by the SEC.
Letter from Michael A. Macchiaroli, Associate Director, Division of
Market Regulation, SEC to Douglas G. Preston, Esq., Securities
Industry Association at 3 (September 20, 1993).
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Commenters who addressed the provisions of Rule 1.14(a)(2)
concerning determinations as to whether an affiliated person is a MAP
generally did not object to the five factors set forth in the proposed
rule but sought clarification or modification of certain aspects of
this provision. As a threshold matter, two commenters suggested that,
although the statutory risk assessment provisions refer to affiliated
persons other than natural persons, the Commission should clarify that
FCMs would not be required to obtain information concerning their
natural person affiliates by explicitly excluding natural persons from
the MAP definition. The Commission agrees that such an exclusion is
appropriate for the sake of clarity and has revised the MAP definition
as suggested. The remaining comments concerning the MAP definition
generally fell within one of three categories: (1) requests for
clarification as to the degree of an FCM's liability for good faith
errors in failing to classify an affiliate as a MAP; (2) requests that
the Commission conform its MAP definition to the ``material associated
person'' definition adopted by the SEC; and (3) requests for
clarification as to the standards to be used in determining whether an
affiliate is a MAP.
The issue that appeared to be of greatest concern to commenters on
the MAP definition related to the Commission's position that an FCM
should be responsible, in the first instance, for determining whether
an affiliate is a MAP. Several commenters urged the Commission to make
clear that an FCM who makes a good faith determination that an
affiliate is not a MAP would not be subject to enforcement action for
violation of Rule 1.14 in the event that the Commission subsequently
concluded that such a determination was erroneous. The Commission
believes that determinations by an FCM as to an affiliate's status made
in good faith and in the exercise of reasonable diligence based upon
consideration of the factors set forth in the rule, together with all
other relevant facts and circumstances, would not, standing alone, be
made the basis of an enforcement proceeding against the FCM.20 The
Commission stresses, however, that FCMs who are uncertain as to whether
an affiliate is a MAP may seek informal guidance from Commission staff
in particular cases and that, in light of the statutory objective of
enhancing access to information about potential risks, the FCM should
give careful consideration to the potential for its affiliates to pose
material risks to the FCM in various contingencies, thereby warranting
their characterization as MAPs.
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\2\0A pattern of noncompliance, however, may be inconsistent
with claims of reasonable diligence and provide a basis for further
review and action by the Commission. On a related point, one
commenter requested that the Commission apply a ``best efforts and
good faith'' standard with respect to a United States FCM attempting
to obtain information concerning its foreign MAPs. This commenter
contended that an FCM located in the United States would likely have
difficulty ascertaining and verifying from its foreign MAPs the
information necessary to determine whether a trigger event has
occurred because foreign companies engaging in trading and business
activities in global markets regard such information as highly
confidential, even with respect to their United States affiliates.
Although the Commission has deferred action on the proposed trigger
events relating to MAPs, the Commission believes that generally an
FCM would be required to exercise reasonable diligence in obtaining
information concerning its foreign MAPs or causing such MAPs to
provide information to the Commission.
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Other commenters on the MAP definition requested that the
Commission conform its MAP definition with the SEC's definition of
``material associated person.'' With only minor exceptions, the MAP
definition set forth in the Commission's Proposal is the same as that
adopted by the SEC in its risk assessment regulations. With respect to
the first factor to be considered in determining which affiliates are
MAPs, i.e., the legal relationship between the FCM and the affiliate,
the Commission noted that in the context of multi-tiered holding
company structures, if the ultimate parent is engaged in activities
unrelated to the futures or financial markets, the parent generally
would not be required to be designated as a MAP. In the Federal
Register release accompanying its temporary risk assessment rules, the
SEC made a similar statement, noting that ``absent unusual
circumstances,'' an ultimate parent not engaged in securities-related
activities would not be required to be designated a MAP. Several
commenters requested that the Commission confirm that it agrees with
the SEC's apparently broader language on this point. One commenter also
requested that the Commission confirm that, although a parent company's
maintenance of a futures account at a subsidiary FCM may be a fact or
circumstance to be considered in determining whether an affiliate is a
MAP, the existence of such an account does not automatically make the
ultimate parent a MAP, absent a conclusion that the account creates a
relationship that may significantly affect the finances or operations
of the FCM.
As noted in the Federal Register release accompanying the Proposal,
the Commission believes that if the ultimate parent in a multi-tiered
holding company structure primarily is engaged in activities that are
not related to the futures or financial markets, such as manufacturing
or retailing, the parent generally would not be required to be
designated a MAP.21 However, an FCM in a holding company group may
have substantial exposure to its parent by reason of carrying or
clearing the parent's futures account and thus the parent company would
be a MAP even though its line of business does not directly involve the
futures or financial markets. In a typical scenario, an ultimate parent
company engaged in non-financial activities might maintain a futures
account at an FCM in the holding company group in order to establish
futures positions to manage the risk of cash commodity positions. This
relationship, although it may involve a relatively small portion of the
assets of the parent, may comprise a substantial portion of the
positions carried by the FCM and thus could expose the FCM to potential
risks of withdrawal or modification of the parent's business with the
FCM or of default on the positions carried. However, if the only
relationship between the FCM and the ultimate parent is that the FCM
carries the ultimate parent's futures account and that account is not
material in the overall context of the FCM's operations, the ultimate
parent would not become a MAP solely on the basis of its futures
account at the reporting FCM. Thus, the FCM should carefully evaluate
the potential risks to which it is exposed as a result of the futures
accounts which it carries or clears on behalf of a parent entity in
making its determination as to whether its parent is a MAP.22
Further, as the Commission noted in the release accompanying the
proposed rules, if obligations of the FCM are guaranteed by a parent or
other affiliate, the FCM is financially dependent upon the guarantor to
an extent that, absent unusual circumstances, would require designation
of the guarantor entity as a MAP.23
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\2\159 FR at 9694.
\2\2For the purpose of determining whether the account is of
material size, the appropriate benchmark is the size (capital) of
the FCM rather than that of the parent or other affiliate. Moreover,
as account sizes may change significantly over time, the FCM should
periodically evaluate the need to treat such affiliates as MAPs.
\2\3See 59 FR at 9694. Some futures exchanges require guarantees
of member FCMs' proprietary and noncustomer obligations by the FCM's
parent. See Chicago Mercantile Exchange Rules 901G and 901L; Parent
Guarantee Policy Statement adopted in July 1986 under Board of Trade
Clearing Corporation Bylaw 401; Commodity Clearing Corporation Rule
9; Comex Clearing Association Rule 20; and New York Mercantile
Exchange Rule 9.20.
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Finally, several commenters requested that the Commission confirm
that FCMs may employ a materiality standard in applying the factors
enumerated for consideration in determining whether an affiliate is a
MAP. As noted above, the threshold question with respect to whether an
FCM should identify an affiliate as a MAP is whether the affiliate's
activities are material in respect of their reasonably anticipatable
impact on the FCM. However, materiality should not be determined on a
factor-by-factor basis but, rather, in the aggregate, based upon the
potential impact of all of the itemized factors taken together and the
overall relationship between the FCM and its affiliate. Thus, an
affiliate's activities may not appear likely to have a material impact
on the FCM's financial or operational condition if each factor set
forth in the rule is analyzed in isolation, but may nonetheless be
required to be designated as a MAP when all relevant factors are
cumulated.
The Commission has determined to adopt the MAP definition as
proposed, with an additional provision expressly excluding natural
person affiliates.24
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\2\4Rule 1.14(a)(3).
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B. Information Required to be Maintained and Filed on a Routine Basis
The final rules generally require two forms of risk assessment
activity by FCMs: recordkeeping and reporting. FCMs subject to the
rules are required to maintain specified types of information and to
file this information either on a one-time basis, absent a material
change in reported data, or annually. The categories of information
called for are discussed below, with specific reference to the relevant
recordkeeping and reporting requirements of the final rules.
1. Organizational Chart
Proposed Rule 1.14 required that an FCM maintain an organizational
chart depicting the holding company structure of which the FCM is a
part. As proposed, the organizational chart was required to identify
those affiliated persons that are MAPs of the FCM, determined in
accordance with the standards discussed above, and to indicate which
MAPs file routine financial or risk exposure reports with the SEC, a
federal banking agency, an insurance commissioner or other similar
official or agency of a state or a foreign regulatory authority. The
Commission also proposed to require that the chart indicate whether a
MAP is a dealer or end-user (or both) of financial instruments with
off-balance sheet risk.
Several commenters opposed, or questioned the regulatory necessity
of, a requirement that FCMs identify whether an affiliate is an end-
user or dealer of financial instruments with off-balance sheet risk.
Two commenters also expressed concern that the definition of a dealer
as set forth in the Proposal, i.e., an entity prepared to make two-way
markets in financial instruments,25 is overly broad and
recommended that a quantitative test be added to the dealer definition
to assure that a MAP engages in a minimum number of transactions before
being required to be identified as a dealer. Similarly, one commenter
suggested that the terms ``end-user'' and ``dealer'' were ambiguous and
requested that they be more precisely defined. The Commission did not
propose a more specific definition for end-user or dealer because it
recognizes that an organizational chart can provide only an outline of
the organizational context in which an entity operates and highlight
MAPs engaged in a broad category of transactions about which further
information would be necessary in order to understand the specific
nature of the entity's activities.
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\2\559 FR at 9694.
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The Commission believes that it is appropriate, in the first
instance, for the FCM to determine whether a particular MAP is a dealer
or both a dealer and end-user but has eliminated the requirement to
designate MAPs acting only as end-users. In cases in which the FCM is
uncertain as to whether a MAP is an end-user or a dealer, it may
resolve that uncertainty by using both categories since there is no
penalty for such a characterization. The identification of a MAP as a
dealer or as both a dealer and end-user under Rule 1.14(a)(1) is for
the purpose of the risk assessment regulations only and would not
establish or imply that the entity is a dealer or end-user in financial
instruments for any other purpose. An affiliate that is only an end-
user of financial instruments with off-balance sheet risk need not be
separately identified as such.
One commenter remarked that the Commission should not require the
inclusion of all affiliates on the organizational chart but, rather,
should require only the inclusion of MAPs and other affiliates that are
necessary to understand the FCM's corporate structure. This commenter
stated that requiring all affiliates to be included in the chart would
be too burdensome given the large number of affiliated companies in
certain corporate structures and that many of these affiliated persons
are likely to have little substance, to be inactive, or both. The
Commission believes that an organizational chart containing all of an
FCM's affiliates is essential to provide a comprehensive view of the
corporate context in which the FCM operates.26 Although some FCMs
may have many affiliates, the Commission does not believe that FCMs
would be unduly burdened by the requirement of a one-time filing
(absent material changes) of a complete organizational chart.
Consequently, with the modification discussed above with respect to
designation of ``end-user'' MAPs, the Commission is adopting the
provision relating to the content of the organizational chart as
proposed.
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\2\6The SEC's risk assessment rules also require that the
organizational chart indicate all affiliates. 17 CFR 240.17h-
1T(a)(1)(i)(1994). However, the SEC staff indicate that they may
give further guidance where the reporting firm is part of a U.S.
holding company with a related offshore holding com- pany.
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Under the proposed rules, an FCM would be required to file its
organizational chart within ninety calendar days after the effective
date of the rule or within sixty calendar days of registration if that
occurred after the rule's effective date. The proposed rules also
required an updated organizational chart to be filed within five
calendar days after the end of any fiscal quarter in which a material
change in the information provided occurred. No comments were received
with respect to the time periods for initial filing of the
organizational chart. The Commission is adopting an implementation
schedule under which currently registered FCMs will be required to make
initial filings of their organizational charts and risk management
policies by April 30, 1995. FCMs whose registration becomes effective
after December 31, 1994 will be required to make such filings within 60
calendar days after the effective date of registration or by April 30,
1995, whichever comes later.
Several commenters objected to the five calendar day period for
filing of updated charts reflecting material changes and recommended
that the Commission modify this provision to require filing of the
updated chart within sixty days after the end of the fiscal quarter in
which the material change occurred in order to harmonize this timeframe
with that of the SEC. In order to minimize the burdens on firms dually
registered as FCMs and broker-dealers and to ease compliance burdens
generally, the Commission has determined to modify these filing
deadlines as suggested. Accordingly, the final rule requires that an
FCM file an updated organizational chart within sixty days after the
end of any fiscal quarter in which a material change in the information
required to be provided has occurred. If no material change occurs, no
updates are required.
2. Risk Management Policies.
Paragraph (a)(1)(ii) of proposed Rules 1.14 and 1.15, respectively,
would require an FCM to maintain and file with the Commission records
relating to the FCM's procedures for monitoring and controlling
material financial and operational risks to it resulting from the
activities of its affiliates. This provision was modeled upon the
comparable provision of the SEC's risk assessment rules. However, the
Commission's proposed provisions describing the types of policies,
procedures and systems of which records are to be maintained and filed
by the FCM, while incorporating the matters covered by the SEC's rules,
also make specific reference to the FCM's internal controls with
respect to the market risk, credit risk and other risks created by the
FCM's proprietary and noncustomer clearing activities. This addition to
the SEC's description of the written policies, procedures and systems
to be maintained and filed reflects risks particular to a typical
function of FCMs operating within a holding company structure.
A number of commenters requested clarification as to which entity's
risk management policies, i.e., the FCM's policies or those of its
affiliates, would be required to be maintained by the FCM under the
rule. These commenters stated generally that an FCM's risk management
policies should focus on its own credit and market risk monitoring
procedures as distinguished from whatever procedures an affiliate
maintains. Two commenters stated that this provision of the proposed
rules could be interpreted to require a report of a MAP's policies and
procedures as they affect the FCM and a discussion by the FCM of the
hedging and risk management strategies of its noncustomer affiliates.
Three other commenters appeared concerned that the Proposal would place
an affirmative duty on an FCM's affiliates to maintain, and to create
if none exist, written policies for their trading activities.
As noted above and as discussed in the Federal Register release
accompanying the proposed rules, proposed Rules 1.14(a)(1)(ii) and
1.15(a)(1)(ii) would require FCMs to maintain and file ``their written
policies, procedures, or systems concerning methods for monitoring and
controlling financial and operational risks resulting from the
activities of any of their affiliated persons . . . .''27 The
proposed rules would not require an FCM to maintain or obtain an
affiliate's risk management policies, nor would an FCM be required to
discuss in its written policies and procedures the hedging and risk
management strategies of its affiliates. FCMs would be required only to
maintain and file information concerning their own risk management
policies.
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\2\759 FR at 9694 (emphasis added).
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Further, the proposed rules would require an FCM to maintain and to
file with the Commission, but not by virtue of these rules to create,
risk management policies and procedures.28 However, the
Commission's rules, like those of the SEC with respect to broker-
dealers, would require that if an FCM operates under informal or oral
policies or procedures, it must summarize those policies in written
form and file them with the Commission.29 For purposes of the risk
assessment requirements, it is sufficient for an FCM to document, in
writing, the policies in place or the absence of such policies in the
unlikely event that it operates without them. This application of the
rule is consistent with the SEC's approach to its risk assessment
rules.30 Two commenters expressed the view that the Commission's
risk assessment rules should affirmatively require FCMs to develop and
maintain written financial, operational and risk management policies.
These commenters believed that regulations that would require FCMs to
maintain and file but not necessarily to create risk management
policies and procedures would not effectuate the objectives underlying
the statutory grant of risk assessment authority.
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\2\8However, as noted below and in the Proposal, other
provisions of the CEA and Commission regulations may require such
policies.
\2\9Letter from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, SEC to Douglas G. Preston, Esq.,
Securities Industry Association at 4 (September 20, 1993).
\3\0See 57 FR at 32165 (wherein the SEC notes that broker-
dealers need not create risk management policies for purposes of the
SEC risk assessment requirements if none exist).
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The Commission believes that under the existing regulatory
structure, FCMs are affirmatively required to maintain certain risk
management procedures. For example, under Rule 166.3 and other
Commission rules, FCMs are required to maintain appropriate internal
controls over their operations and to diligently supervise the handling
of accounts and all other activities relating to their business as a
Commission registrant.31 The Commission believes that in the
interest of prudent risk management, FCMs subject to these rules should
review their existing internal controls and risk management policies,
procedures and systems to assure that they are sufficient in light of
the potential risks created by their own and their affiliates'
activities. The Commission believes that requiring FCMs to establish
risk management policies was not a principal objective of the risk
assessment program contemplated by Section 4f(c). However, additional
guidance as to prudent risk management and internal controls may be
provided outside of this rulemaking.32
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\3\1See, e.g., 17 CFR 166.3 (1994)(``[e]ach Commission
registrant . . . must diligently supervise the handling by its
partners, officers, employees and agents . . . of all commodity
interest accounts carried, operated, advised or introduced by the
registrant and all other activities of its partners, officers,
employees or agents . . . relating to its business as a Commission
registrant.'') Other risk management requirements imposed on FCMs by
the Act or Commission regulations include daily marking-to-market of
positions, periodic reconciliations of key accounts, and maintenance
of current books and records. See generally 17 CFR 1.17, 1.18, 1.32
and 1.34 (1994).
\3\2Guidance in this area has been provided by the international
regulatory community in ``Operational and Financial Risk Management
Control Mechanisms for Over-the-Counter Derivatives Activities of
Regulated Securities Firms,'' issued by the Technical Committee of
the International Organization of Securities Commissions (IOSCO)
(July, 1994), which includes a compilation of other relevant sources
including, e.g., ``Risk Management Guidelines for Derivatives,''
Basle Committee on Bank Supervision (July, 1994).
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Paragraph (a)(1)(ii) of proposed Rule 1.15 would have required an
FCM to file its risk management policies within ninety calendar days
after the effective date of the rule or within sixty calendar days of
registration if that occurs after the rule's effective date. Proposed
Rule 1.15(a)(1)(ii) further required an FCM to file an update within
five calendar days after the end of any fiscal quarter in which a
material change in the information provided occurred.
One self-regulatory organization commenter opposed the proposed
rule's filing requirement with respect to risk management policies and
procedures, stating that such a requirement would create voluminous
paper filings without providing any benefit to the Commission. As an
alternative, the commenter suggested that the Commission require the
FCM to file such policies on an as-needed basis. Several commenters
opposed the requirement that updates to the policies and procedures
filed with the Commission be provided within five calendar days after
the end of the fiscal quarter in which a material change occurred.
These commenters stated, among other things, that such a timeframe is
unrealistic for FCMs with a large number of MAPs and stressed that the
SEC's risk assessment regulations allow broker-dealers to report
material changes in risk management policies and procedures within
sixty days after the end of the fiscal quarter in which the change
occurred. Further, two commenters requested additional guidance as to
what the Commission would consider to be a material change in risk
management policies that would require the filing of updated
information.
The Commission believes that the filing of information relating to
the FCM's risk management policies and procedures, particularly in
conjunction with the organizational chart required to be filed under
these rules, provides basic foundational information concerning the
context in which an FCM operates. This requirement should not impose
any significant burden upon FCMs because it does not call for the
creation of any new procedures or reports. Moreover, risk management
information is required to be filed only on a one-time basis as part of
the FCM's initial filing with the Commission, absent subsequent
material changes. With respect to determining what changes are material
for purposes of the rule, the Commission believes that the assessment
of the materiality of a modification must necessarily be made by the
FCM on a case-by-case basis, upon consideration of whether a given
change is likely to materially affect the FCM's ability to achieve the
particular risk management goal of the relevant policy, procedure or
system. Uncertainty as to whether a change is material can be resolved
in favor of filing without undue burden or expense.
However, for the reasons discussed above with respect to filing
requirements for the FCM's organizational chart, the Commission has
determined to modify proposed Rule 1.15(a)(1)(ii) with respect to the
deadline for filing updated risk management policies and procedures.
The Commission has determined to adopt a requirement that an FCM file
revised risk management information within sixty days after the end of
any fiscal quarter in which a material change of information has
occurred. As is the case with respect to the rules pertaining to the
filing of an organizational chart, if no material change occurs, no
updates are required.
3. Financial Statements
Proposed Rules 1.14(a)(1)(iii) and 1.15(a)(2)(i) and (ii) would
have required maintenance and filing of the following financial
statements on a consolidated basis for the FCM and its ultimate parent
company: (1) balance sheet; (2) statement of income; (3) statement of
cash flows; and (4) explanatory notes to the financial statements.
These proposed provisions also would have required a consolidating
balance sheet and statement of income for the FCM and its ultimate
parent company. Several commenters, including a trade association
commenting on behalf of its member FCMs, pointed out that the highest
level MAP within an organization may not necessarily be the ultimate
parent company. Accordingly, these commenters recommended that the
Commission revise the proposed rules such that financial statements
would be required only for the FCM and the highest level MAP within the
FCM's organizational structure. Further, a number of commenters
requested that this provision be revised so as not to require
consolidation on an individual MAP-by-MAP basis. These commenters noted
that many firms do not currently consolidate in this manner in the
course of their normal closing process and that failure to revise the
Proposal as recommended would require such firms to change their
financial consolidation process, causing undue burden and expense. Two
commenters, a trade association representing FCMs and an FCM, noted
that in some firms the consolidated balance sheet is prepared entirely
by automation and requested that the Commission retain exemptive
authority in order to address cases in which compliance would create
special hardship, such as where consolidating balance sheets on the
required basis are not routinely generated and to do so would be unduly
burdensome. As noted below, the Commission has expressly retained
authority to grant exemptions in order to address situations such as
those raised by the commenters, which may warrant formulation of an
alternate data set that is more practicable for the FCM to provide yet
yields comparable information. Further, various commenters noted that
SEC staff have indicated that under the SEC's risk assessment rules,
broker-dealers need only provide financial statements for their
ultimate holding company if such holding company is a MAP.33 SEC
staff have also stated that for the purposes of preparing consolidated
financial statements, broker-dealers may combine insignificant non-MAPs
in a single entry in the financial statements.34
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\3\3Letter from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, SEC to Douglas G. Preston, Esq.,
Securities Industry Association at 5 (September 20, 1993).
\3\4Id.
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The Commission has revised proposed Rules 1.14(a)(1)(iii) and (iv)
and 1.15(a)(2)(i) and (ii) in light of the comments received and the
approach followed by the SEC. Final Rules 1.14(a)(1)(iii) and (iv) and
1.15(a)(2)(i) and (ii) require, therefore, that consolidated and
consolidating financial statements be maintained and filed for the
highest level MAP within the FCM's organizational structure, and must
include the FCM and its other MAPs. Further, these rules allow an FCM
to maintain and submit the consolidating balance sheet and income
statement which its highest level MAP prepares as part of its internal
financial reporting process. The FCM would, however, be required under
Rule 1.15(a)(2)(iii) to provide the Commission with additional
information if such information were determined to be necessary for a
complete understanding of a particular MAP's financial impact on the
FCM's organizational group. Rules 1.14(a)(1)(iii) and (iv) require the
FCM to maintain in accordance with those rules any additional
information that the Commission may require pursuant to Rule
1.15(a)(2)(iii).
As under the Proposal, the final rules require that the
consolidated and consolidating financial statements required to be
filed with the Commission be prepared in accordance with United States
generally accepted accounting principles, consistently applied (``U.S.
GAAP''). With respect to affiliated persons that use a comprehensive
set of accounting principles other than U.S. GAAP, a note to the
financial statements indicating the comprehensive body of accounting
principles used to prepare the financial statements and a narrative
description of the items treated differently by U.S. GAAP must be
included. In this regard, the Commission requested comment as to
whether quantification of any material differences in the contents of
the financial statements, in addition to a narrative description of
items treated differently from U.S. GAAP, should be required where
accounting principles other than U.S. GAAP are used. One self-
regulatory organization believed that such quantification would be
necessary from a regulatory perspective in order to provide for easier
comparative analysis of information. Conversely, a trade association
was strongly of the view that the regulations should not require
anything more than disclosure of the particular non-U.S. GAAP
accounting principles used by the firm, apparently concluding that both
quantification of material differences between the accounting standards
and a narrative description of items treated differently by U.S. GAAP
are unnecessary. The Commission continues to believe that a description
of the differences between U.S. GAAP and the non-U.S. GAAP method used
by the FCM's affiliate will facilitate understanding and analysis of
filings. However, in the interests of minimizing reporting burdens, the
Commission has determined to forego requiring quantification of
material differences between the U.S. GAAP and non-U.S. GAAP methods
employed by an FCM's affiliate at this time. Accordingly, the
Commission is adopting this aspect of the rule as proposed.
Proposed Rule 1.15(a)(2) would have required financial statements
to be filed on an annual basis, within 105 days of fiscal year-end,
rather than quarterly as required under SEC rules. The Commission
requested comment as to whether consolidated and consolidating
financial statements are customarily prepared on a quarterly basis and,
if so, whether they should be required to be filed quarterly so as to
provide more current financial data. One self-regulatory organization
commented that financial information received 105 days after the FCM's
fiscal year-end would be stale and that requiring quarterly information
would not make the information more timely or useful. This commenter
contended that the annual audited Form 1-FR along with quarterly
statements would provide the Commission with the critical financial
information it needs. While the information provided on Form 1-FR is of
obvious value, Form 1-FR does not, however, provide the same degree of
financial information relating to the FCM's organizational group as
would be included in consolidated and consolidating financial
statements for the FCM and its highest level MAP. The Commission
continues to believe that annual filing of FCMs' consolidated and
consolidating financial statements, in combination with other financial
information currently required by the Commission, such as Form 1-FR,
will strike an appropriate balance between providing the Commission
with relevant financial information while imposing the lowest possible
burden on the FCM required to produce such information. Accordingly,
the Commission has determined to adopt this provision of the rule as
proposed.
Finally, in connection with the Commission's proposed annual filing
requirement, one commenter noted that the FCM and its ultimate parent
may have different fiscal year-ends and requested confirmation that the
annual filing deadline for financial statements is 105 calendar days
after the end of the fiscal year for both the FCM and its ultimate
parent. As adopted, Rule 1.15(a)(2) requires an FCM to file
consolidated and consolidating financial statements for the FCM and the
highest level MAP within the FCM's organizational structure within 105
calendar days of the FCM's fiscal year-end. To the extent that the
highest level MAP within the FCM's organizational structure has a
fiscal year-end different from that of the FCM, the FCM should include
both the most recent certified statements and any interim uncertified
statements of the MAP. Initial filings will be required to be made by
May 15, 1995.
C. Information Required Upon the Occurrence of Certain Events
In lieu of requiring routine quarterly filing of position data for
each of the FCM's material affiliates as is mandated under the SEC's
risk assessment rules, the Commission's Proposal was designed to call
for a combination of annual filings and ad hoc reporting in situations
in which heightened financial scrutiny would be warranted. To this end,
proposed Rule 1.15(b)(2) identified certain key events relative to the
financial condition of the FCM and its material affiliates the
occurrence of which would require notice to the Commission. Proposed
Rule 1.15(b)(2) set forth eight such ``triggering'' events: (1) a
reduction of greater than 20% in an FCM's adjusted net capital; (2) an
``outflow'' of an FCM's assets exceeding, in any 30-day period, 20% or
more of the FCM's excess adjusted net capital; (3) losses in
noncustomer accounts held by the FCM exceeding the greater of (a) $50
million or 10 percent of the FCM's parent's consolidated stockholders'
equity in 30 days or (b) $100 million or 20% of the FCM's parent's
stockholders' equity in 12 months; (4) a net loss at a MAP exceeding
30% of the MAP's net worth or 20% of the FCM's adjusted net capital;
(5) a 20% reduction in the consolidated stockholders' equity of an
FCM's parent; (6) a reduction in a MAP's credit rating; (7) a MAP's
filing of a notice with a banking regulator of a possible capital
category adjustment; and (8) an FCM's entering into an agreement to
guarantee an obligation of an affiliate. Under proposed Rule
1.15(b)(1), an FCM would be required to notify the Commission (by
notice to the Director of the Division of Trading and Markets or the
Director's designee)35 within three business days of the
occurrence of any trigger event unless a shorter period was specified
with respect to a particular triggering event.
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\3\5The Director of the Division of Trading and Markets is
generally delegated the authority to act on behalf of the Commission
with respect to the risk assessment regulations.
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Comments concerning the proposed triggering events can be divided
into two categories: (1) general comments that address the concept of
trigger event reporting and issues generally relating to all proposed
trigger events; and (2) comments relevant to specific proposed trigger
events. The majority of commenters on the subject of trigger event
reporting appeared to agree with the concept of a trigger event
reporting system, citing, for example, the consequent reduction in
routinely reported data that could result from the use of an event-
driven reporting approach. However, several commenters opposed this
approach, contending that this aspect of the Proposal exceeded the
Commission's statutory authority to obtain supplemental data, i.e., its
authority to request information on an as-needed basis to augment an
FCM's routine filings, and/or would require the reporting of
information from entities beyond the Commission's jurisdiction. One
commenter argued that the authority to obtain supplemental information
provided to the Commission in the FTPA is to be used to complement risk
assessment quarterly reports, not to substitute for them. One commenter
opposed the trigger event structure proposed by the Commission on the
grounds that the Commission's existing capital requirements and large
trader reporting system are sufficient to meet the Commission's risk
assessment objectives. Several commenters, however, including a trade
association representing its member FCMs, recommended that trigger
events relating to the activities of FCMs be included in the
Commission's net capital or early warning rules and made applicable to
all FCMs rather than only to those FCMs subject to the risk assessment
regulations.
As discussed below, the Commission has determined to take action at
this time only on the first of the proposed triggering events, i.e.,
notice to the Commission upon a twenty percent or greater decrease in
an FCM's adjusted net capital. As recommended by some commenters, this
notice requirement is being adopted as an amendment to Rule 1.12, the
Commission's early warning rule. However, this notice requirement will
initially apply only to FCMs subject to the risk assessment
regulations. The Commission is proposing by separate Federal Register
release to make this notice requirement applicable to all FCMs.
The statutory risk assessment provisions were specifically designed
to permit the Commission to obtain information concerning entities over
which it does not exercise regulatory jurisdiction and which thus might
present risks to regulated firms yet lie beyond the Commission's
information-gathering authority. Further, the Commission is not
requesting information directly from the affiliates of FCMs, but rather
from the FCM itself. Moreover, the trigger reporting approach
contemplated under the Proposal was designed to provide the Commission
with information concerning material affiliate activity which may or
may not consist of futures transactions that would be reflected in
large trader reports and which is not addressed by existing minimum
capital requirements.36
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\3\6For example, noncustomer futures positions do not affect an
FCM's adjusted net capital level because noncustomer accounts are
not required to be segregated pursuant to Rule 1.20.
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Many of the commenters, while supportive of the concept of
requiring notice to the Commission upon the occurrence of triggering
events, suggested that such triggering events should relate solely to
events that could have a direct effect on the FCM's financial condition
and that the Commission should delete any trigger events that relate to
a change in a MAP's financial condition. One commenter, for example,
recommended that proposed Rules 1.15(b)(2)(iv) (large net loss at a
MAP), 1.15(b)(2)(v) (20% reduction in FCM's parent's consolidated
stockholder's equity), 1.15(b)(2)(vi) (reduction in a MAP's credit
rating) and 1.15(b)(2)(vii) (MAP's filing of a notice of a possible
capital category adjustment with a banking regulator) be deleted.
Finally, one commenter requested that if the Commission decides not to
delete all trigger events that arise as a result of a change at a MAP,
the Commission should modify the filing deadline with respect to these
notices to five calendar days after the end of the month in which the
event occurred.
The FTPA granted the Commission the authority to obtain information
concerning affiliate activities that could pose material risks to the
FCM. While certain of the proposed trigger events would initially
affect an FCM's MAP, these events were designed so as to signal
conditions at a MAP that are likely to present a material potential for
a direct impact upon the financial and operational condition of the
FCM. However, the Commission has determined to proceed in this phase of
the rulemaking only with the first of the eight proposed trigger
events, i.e., trigger event reporting upon a twenty percent or greater
reduction in an FCM's adjusted net capital. Further, as noted above, by
separate Federal Register release, the Commission is proposing to
include certain additional notice requirements as part of its early
warning notice system applicable to all FCMs.
As proposed, Rule 1.15(b)(2)(i) would have required an FCM to
notify the Commission of any reduction of 20 percent or more in its
adjusted net capital as last reported on its financial reports filed
with the Commission pursuant to Rule 1.10.37 As noted above,
several commenters recommended that this trigger event be included in
Commission Rule 1.17, the Commission's net capital rule, or in the
Commission's financial early warning requirements set forth in Rule
1.12, rather than in the risk assessment rules, to ensure their
applicability to all FCMs rather than only those FCMs subject to the
Commission's risk assessment regulations. The Commission agrees with
the view that this ``net capital trigger'' should apply to all FCMs and
has determined to make this provision part of its financial early
warning system. Accordingly, the Commission is amending its Rule 1.12
financial early warning requirements to include the notice requirement
set forth in proposed Rule 1.15(b)(2)(i).38 Initially, this new
requirement will apply only to those FCMs who are subject to the
Commission's risk assessment rules. However, by separate Federal
Register release, the Commission is proposing to extend this new early
warning notice requirement to all FCMs.
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\3\7Similarly, proposed Rule 1.15(b)(2)(ii) would have required
an FCM to notify the Commission of any outflow of assets from the
FCM which in the aggregate in any 30 calendar day period exceeds 20
percent or more of the FCM's excess adjusted net capital. The
Commission has determined to defer consideration of this trigger
event.
\3\8This requirement is being adopted as Rule 1.12(g).
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As the Commission is adopting this trigger event as part of its
early warning system, the Commission has adopted the provision without
any modification of the timeframe within which notice must be provided
to the Commission. As adopted, Rule 1.12(g) requires that the FCM
provide notice to the Commission within two business days of any
reduction in its adjusted net capital of twenty percent or greater
caused by an activity in the normal course of business, such as an
operating loss, proprietary trading loss or increase in charges against
net capital, or at least two business days prior to any extraordinary
transactions or series of transactions that cause such a reduction,
such as a dividend payment or making of a loan.
Proposed Rule 1.15(b)(1) provided that, after reviewing a notice
filed by an FCM, the Commission could request additional information
from the firm or a relevant regulatory agency, as determined to be
necessary in the circumstances. The Commission requested comment as to
whether the notice of occurrence of a triggering event should be
required to be accompanied by an explanation of the circumstances
giving rise to the occurrence such that supplemental inquiries might be
obviated in many cases. The Commission received six responses to its
request for comment on this aspect of the proposed rule, including
comments by two trade associations, three FCMs and one self-regulatory
organization. An FCM and a self-regulatory organization expressed the
view that an explanation of the circumstances giving rise to the need
for the notice would be helpful and should accompany the notice of an
occurrence of a trigger event. However, the other four commenters on
this issue argued that such an explanation would not be helpful, noting
that given the short time period permitted in which to provide notice
to the Commission, i.e., generally three business days, it is unlikely
that a complete and helpful explanation could be provided. Based upon
the comments received and the Commission's review of the issue, the
final rules do not include a requirement for explanation of the
circumstances giving rise to the twenty percent or greater reduction in
the FCM's adjusted net capital. As provided in proposed Rule 1.15(b)
and adopted in Rule 1.12(g), however, the Commission may, if it deems
it necessary, require supplemental information from the FCM regarding
the notice filed with the Commission.
Proposed Rule 1.15(b)(2)(iii) would have required an FCM to notify
the Commission when an FCM's aggregate cumulative losses in all non-
customer accounts exceeded the greater of: (A) in any thirty-day
period, ten percent of the last reported consolidated stockholders'
equity of the FCM's parent or $50 million; and (B) in any twelve-month
period, twenty percent of the last reported stockholders' equity of the
FCM's parent or $100 million. Several commenters opposed this proposed
requirement contending, for example, that this trigger event would not
be an accurate indicator of potential financial problems at an FCM
because it does not take into consideration the effects of offsetting
cash positions that are maintained on affiliates' books. These
commenters suggested, as an alternative, that the Commission adopt a
requirement that an FCM notify the Commission within two business days
after a margin call to a non-customer that exceeds twenty percent of
the FCM's adjusted net capital remains outstanding for two business
days. These commenters also suggested that the Commission adopt as an
additional trigger event a reporting requirement that an FCM notify the
Commission whenever the FCM's excess net capital is less than 6 percent
of the maintenance margin required to be held or posted by the FCM to
support the proprietary and noncustomer positions carried by the FCM.
As noted by these commenters, the Chicago Mercantile Exchange currently
imposes a related capital requirement on its clearing members on an
informal basis. In light of these comments and recommendations, the
Commission has determined not to adopt Rule 1.15(b)(2)(iii) as proposed
but is proposing to amend Rule 1.12 to include new paragraphs (f)(4)
and (f)(5) thereof to include these notice requirements. These
proposals appear elsewhere in this edition of the Federal Register.
Proposed Rule 1.12(f)(4) would require notice to be filed whenever an
account carried by an FCM, whether customer, noncustomer or omnibus, is
subject to a margin call that exceeds the FCM's excess adjusted net
capital and such call is not satisfied by the close of business on the
day following the issuance of the call. Proposed Rule 1.12(f)(5) would
require notice from an FCM whenever its excess adjusted net capital is
less than six percent of the total of: (i) maintenance margin required
by the FCM on noncustomer account positions; and (ii) maintenance
margin applicable to an FCM's proprietary positions. With respect to an
FCM's proprietary account positions, maintenance margin shall mean the
amount of funds the FCM is required to maintain at the exchange's
clearing organization or with its clearing broker, or five percent of
the value of the contract, whichever is greater.
The Commission has determined to defer action on the remaining six
trigger reporting events set forth in the Proposal pending further
review.
D. Exemptions and Special Provisions
As proposed, the risk assessment rules would provide an exemption
from all recordkeeping and reporting requirements under proposed Rules
1.14 and 1.15 for FCMs who, based on the amount of customer funds held
and adjusted net capital maintained, appear to have very limited
futures and commodity options activities. Further, the proposed rules
would provide special provisions for entities which are subject to the
regulatory oversight of other domestic and foreign regulatory bodies.
With respect to FCMs that are not otherwise exempt, the rules permit an
FCM, by application, to request individual exemptions from the rules
which would be considered by the Commission on a case-by-case basis.
1. Exemption based on level of customer funds and net capital
Proposed Rules 1.14(d)(1) and 1.15(c)(1) would have provided an
exemption from the risk assessment regulations for all FCMs, other than
clearing member firms, that hold customer funds of less than $6,250,000
and maintain adjusted net capital of less than $5,000,000, calculated
as of the FCM's fiscal year-end. The Commission received comment on all
three conditions to applicability of the exemption.
First, two commenters stated that the rules should not require all
FCMs that are clearing firms to comply with the rules. One of these
commenters, a self-regulatory organization, argued that such a
requirement unfairly discriminates against clearing firms, which are
already subject to exchange risk management and surveillance systems.
The other commenter, a bar association, expressed the view that the
distinction between clearing FCMs and non-clearing FCMs is an
inappropriate line of demarcation for determining which firms should be
subject to the risk assessment requirements. One trade association
commenter representing FCMs, however, took the opposite view and noted
its support of the Commission's decision to require all clearing FCMs
to comply with the rules. The Commission believes that FCMs that are
clearing members of exchanges have the potential, by virtue of their
clearing status, to create risks to the clearing organizations and
other clearing members that differ in kind and degree from those
created by non-clearing FCMs.\39\
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\39\One commenter noted that proposed Rules 1.14(d)(1) and
1.15(c)(1) could be interpreted to exempt all non-clearing member
FCMs. The text of the rule has been modified to more clearly reflect
the Commission's intention in this regard.
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The Commission requested comment as to the appropriateness of the
adjusted net capital and customer funds\40\ exemption levels set forth
in the proposed rules.\41\ In this regard, two commenters contended
that both levels were too low and that the rules consequently might not
exempt FCMs whose activities do not pose risks sufficient to warrant
the imposition of risk assessment reporting burdens. One of these
commenters recommended that the customer funds and adjusted net capital
levels should, at a minimum, be doubled or made consistent with the
levels established by the SEC in its risk assessment regulations.\42\
Additionally, one commenter stated that the level of adjusted net
capital maintained by an FCM should not determine whether an FCM is
exempt from the risk assessment requirements because this use of
adjusted net capital as an exemption benchmark might encourage
potentially exempt FCMs to maintain a small capital base.
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\40\The Commission requested comment as to whether the
calculation of customer funds for this purpose should be the same as
that for Rule 1.17 capital computation purposes, i.e., whether long
option values should be deducted. One commenter responded to this
request and stated that the calculation of customer funds should be
the same for both Rule 1.17 and the risk assessment rules. The
Commission has determined to adopt this approach for the sake of
maintaining consistent treatment between the risk assessment rules
and the Commission's net capital rule. Accordingly, in determining
an FCM's customer funds level for purposes of these risk assessment
rules, the computation should be made net of fully paid long
options.
\41\The Commission notes that different exemption levels may be
determined to be applicable for purposes of position reporting
requirements to be addressed in the second phase of this rulemaking.
\42\The SEC's risk assessment rules generally provide an
exemption for broker-dealers that: (1) maintain capital of less than
$20,000,000; (2) do not hold funds or securities for, or owe money
or securities to customers; and (3) do not carry customer accounts.
In no case is a broker-dealer subject to the SEC's requirements if
it maintains capital of less than $250,000. See 17 CFR 240.17h-1T(d)
and 240.17h-2T(b).
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The Commission noted in the Federal Register release accompanying
the proposed rules that it chose $6,250,000 in customer funds as an
initial level for applicability of the risk assessment requirements
because, based upon current Commission and National Futures Association
(``NFA'') requirements, that is the level whereby an increase in the
amount of customer funds held by the FCM will require an increase in
its adjusted net capital requirement above the minimum requirement.\43\
The Commission also noted that given the relative size of securities
and futures market activity, the degree of leverage in futures
transactions, and the fact that the Commission proposed a materiality
threshold of $20 million for determining whether an FCM would be
required to report certain financial information concerning its
MAPs,\44\ (as compared to the SEC's $100 million materiality
threshold), a $5 million adjusted net capital ceiling for exemption
from these rules appeared to be an appropriate level. The adjusted net
capital level criterion was included in the rule as an additional
safeguard so that FCMs which do not carry customer funds and are not
clearing members are not automatically exempted from the risk
assessment rules.
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\43\Rule 1.17(a)(1)(i) requires an FCM to calculate its minimum
adjusted net capital requirement by multiplying the amount it is
required to segregate and set aside in special accounts for the
benefit of its customers by four percent, subject to a minimum
dollar requirement of $50,000. However, Commission Rule 170.15
provides that ``[e]ach person required to register as a futures
commission merchant must become and remain a member of at least one
futures association which is registered under section 17 of the Act
and which provides for the membership therein of such futures
commission merchant, unless no such futures association is so
registered.'' The Commission approved an increase in the minimum
dollar requirement for member FCMs of the NFA, currently the only
registered futures association, from $50,000 to $250,000, effective
December 31, 1990. This increase effectively requires all FCMs to
maintain adjusted net capital of at least $250,000. Thus, based upon
the NFA's minimum dollar requirement and the Commission's capital
requirement of four percent of segregated funds, an FCM holding any
amount greater than $6,250,000 in customer funds is required to
increase its adjusted net capital level above NFA's $250,000.
\44\See proposed Rule 1.14(a)(4) setting the level of a MAP's
financial activity at which an FCM would have been required under
the Proposal to separately list financial information concerning
that MAP.
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The Commission is adopting the exemptive provision as proposed but
will review the operation of the exemptive levels following
implementation of the risk assessment rules and may also revisit these
levels with respect to those portions of the Proposal that have been
deferred for further consultation and review.
2. Special Provisions for Certain Regulated Entities
a. Broker-Dealers. The proposed rules were developed after
extensive review of, and consultation with the SEC concerning, the
SEC's risk assessment rules. Like the proposed rules, the final rules
adopted herein are intended to produce a coordinated reporting
structure for FCMs that either are also registered as broker-dealers
and subject to the SEC's risk assessment rules or are part of a holding
company group that includes a broker-dealer reporting pursuant to the
SEC's rules. Proposed Rules 1.14(b)(1) and 1.15(d)(1) and these same
provisions of the final rules permit FCMs that are, or that have
affiliates that are, registered broker-dealers or registered government
securities broker-dealers to file SEC Form 17-H, the SEC's risk
assessment information form, in partial compliance with the
Commission's proposed rules. Generally, under proposed Rule 1.15(d)(1),
an FCM that is registered as a broker-dealer or that has an affiliate
registered as a broker-dealer would be deemed to be in compliance with
all of the routine reporting requirements of proposed Rule 1.15,\45\
except the filing of risk management policies pursuant to paragraph
(a)(1)(ii) of proposed Rule 1.15, if the FCM files SEC Form 17-H with
the Commission. However, if the SEC filing does not include as MAPs all
of the entities that would be MAPs of the FCM under the CFTC's rules,
the SEC filing would be required to be supplemented to include those
MAPs. Similar relief is provided in Rule 1.14 with respect to
recordkeeping requirements.
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\45\These requirements included all reporting requirements of
proposed Rule 1.15 except the trigger reporting requirements set
forth in proposed Rule 1.15(b). Part I of Form 17-H includes an
organizational chart and consolidated and consolidating financial
statements.
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Commenters addressing this provision generally stated that the
Commission should accept Form 17-H from dually registered entities in
full compliance with Commission requirements. As the Commission has
determined to defer adoption of final rules regarding position
reporting and trigger reporting concerning FCM affiliates, FCMs that
report, or have affiliates who report, under the SEC's risk assessment
rules will have few, if any, additional requirements under the final
rules adopted herein. FCMs filing SEC Form 17-H have the option under
Rule 1.15(d)(1) of filing Form 17-H with the Commission in its entirety
or without the information required under Part II of the Form 17-H.
Such FCMs will be required to file with the Commission on a one-time
basis (absent material changes) copies of their risk management
policies, procedures and systems in accordance with Commission
requirements. The relief provided does not extend to filing of risk
management policies because although the SEC's rules require filing of
most of the same types of written policies and procedures as the
Commission's rules, the Commission's requirements relating to records
of policies, procedures and systems with respect to trading activity
include specific reference to the FCM's internal controls with respect
to the market risks, credit risks and other risks created by the FCM's
proprietary and noncustomer clearing activities, reflecting risks
entailed in the performance of the clearing function typical of FCMs
operating within a holding company structure. These include, for
example, as specified in Rule 1.14(a)(1)(ii), systems and policies for
supervising, monitoring, reporting and reviewing trading activities in
securities, futures contracts, commodity options, forward contracts or
financial instruments such as swaps, and policies for hedging or
managing risks created by its proprietary trading activities and with
respect to supervision of noncustomer accounts. In addition, the relief
provided under Rules 1.14(b)(1) and 1.15(d)(1) does not extend to
trigger reporting requirements under the rule. Accordingly, the FCM
would remain responsible for notifying the Commission of the occurrence
of a twenty percent or greater decrease in adjusted net capital as set
forth in new paragraph (g) of Rule 1.12 and providing supplemental
information, if requested.\46\ Finally, an FCM that is also registered
as a broker-dealer, and plans to file Form 17-H pursuant to Rule
1.15(d)(1), is required to supplement its organizational chart to
include those MAPs, if any, that would be MAPs for purposes of the
Commission's rules but not for purposes of its SEC filing.
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\46\Certain exchanges have a similar requirement. See Chicago
Mercantile Exchange Rule 972A; Chicago Board of Trade Rule 285.03;
New York Mercantile Exchange Rule 2.14(d) and Clearing Rule
9.22(c)(i) and (ii); Commodity Exchange, Inc. Rule 7.08(a); Coffee,
Sugar and Cocoa Exchange, Inc. Clearing Rule 302(c)(i); Kansas City
Board of Trade Rule 1311.00; Kansas City Board of Trade Clearing
Corporation Rule 8.01(c); and Minneapolis Grain Exchange Rule
2088.00.
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b. Banks. With respect to an FCM with a MAP that is subject to
supervision by a federal banking agency, the Proposal provided that an
FCM would be deemed to be in compliance with all of the routine
reporting requirements of proposed Rule 1.15(a)(2) with respect to such
MAP, if the FCM maintains in accordance with Rule 1.14 copies of all
reports filed by the MAP with the relevant bank regulator.\47\
Paragraph (b)(2) of proposed Rule 1.14 provided similar treatment with
respect to recordkeeping requirements. Those commenters who addressed
this aspect of the Proposal overwhelmingly favored the Commission's
approach of providing relief from the regulations where a MAP is
subject to the supervision of a federal banking regulator. The comments
received in this area generally requested an expansion of the relief
proposed and/or requested clarification regarding particular provisions
of the Proposal. One commenter requested that the Commission conform
proposed Rules 1.14(b)(2) and 1.15(d)(2), such that a bank would not be
required to file an organizational chart with the Commission. In this
regard, the Commission understands that Form FR Y-6 (``Annual Report of
Bank Holding Companies'') includes, among other things, a corporate
organizational chart. All FCMs must file an organizational chart but if
one has been prepared for banking regulators that will provide the
information required under these rules, such a chart can be used for
this purpose, provided that the additional information required under
these rules, e.g., designation of MAPs, is included.
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\47\With respect to Form FR 2068, the Confidential Form of
Operations required to be filed with the Board of Governors of the
Federal Reserve System by foreign banking organizations, Commission
staff are exploring with Federal Reserve officials procedures by
which access to Form 2068 may be obtained on an as-needed basis.
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Further, one commenter expressed the view that the Proposal was
unclear as to whether the FCM or its MAP must maintain copies of those
reports submitted by the MAP with its federal banking regulator.
Proposed Rule 1.14(b)(2) would require the FCM to maintain and make
available ``copies of all reports submitted by [a MAP to] the Federal
banking agency. . . .'' Proposed Rule 1.15(d)(2) stated that the FCM or
its MAP may maintain such reports in order to be eligible for the
exemption. The Commission intends this exemption to be available with
respect to FCMs that have MAPs that are subject to the supervision of a
federal banking agency provided that either the FCM or its MAP, as the
FCM and the relevant MAP determine to be appropriate, maintains the
reports specified in the rule. The final rules have been modified to
clarify this point. Of course, if the MAP is the repository for reports
required to be maintained, the Commission must be afforded access to
such reports on the same terms and to the same extent as it would if
the FCM held such records directly and the FCM will remain responsible
for assuring that the Commission has access to the required records.
The Federal Register release accompanying the Commission's proposed
rules also stated that, generally, foreign banking organizations that
are subject to U.S. banking regulation will be treated in the same
fashion as domestic banks for purposes of the application of the
Commission's rules.\48\ One commenter requested that the Commission
codify this similarity of treatment by providing in its regulations
that a United States regulated foreign banking organization will be
treated in the same manner as United States banks and United States
bank holding companies, that is, that it would only be required to make
available to the Commission what it files with the relevant U.S.
banking regulator.\49\ The Commission agrees that such clarification is
helpful and has modified the language of the Proposal in this regard.
Accordingly, under Rule 1.15(d)(2) an FCM that has a MAP that is either
a foreign banking organization or a domestic banking organization,
subject to examination by, or the reporting requirements of, a federal
banking agency will be deemed to be in compliance with the reporting
requirements of Rule 1.15(a)(2) (i.e., filing of annual consolidated
and consolidating financial statements) with respect to such MAP, if
the FCM maintains in accordance with Rule 1.14 copies of all reports
filed by the MAP with bank regulators. Rule 1.14(b)(2) provides similar
treatment with respect to recordkeeping requirements. With respect to
foreign banks, FCMs (or the MAP) may either maintain what the foreign
bank files with the U.S. banking authorities or, if the foreign bank
has no U.S. nexus, the reports that would be required to be maintained
or filed would be determined as if the bank were a non-bank foreign
firm.\50\
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\48\59 FR at 9701.
\49\Commission staff have discussed the risk assessment
proposals with the domestic banking regulators, and they have
confirmed that they will cooperate with the Commission in developing
mechanisms for sharing information from such reports to assist the
Commission in discharging its supervisory responsibilities.
\50\This analysis is more relevant to the deferred part of these
proposals relating to position information although it may also be
relevant to ``consolidating'' decisions.
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c. Firms Subject to Foreign Regulatory Supervision. With respect to
foreign MAPs that are regulated in a foreign jurisdiction, proposed
Rules 1.14(c) and 1.15(e) permitted an FCM to maintain and file any
financial or risk exposure reports filed by a MAP with a foreign
futures authority, as that term is defined in Section 1a(10) of the
Commodity Exchange Act,\51\ or other foreign regulatory authority, with
which the Commission has an information-sharing agreement in effect.
Several commenters pointed out that proposed Rules 1.14 and 1.15 appear
to differ in their treatment of this subject. Proposed Rule 1.14(c)
states that in order for an FCM to take advantage of the exemption
provided therein from recordkeeping requirements the FCM is required to
maintain copies of any financial or risk disclosure report filed by the
FCM's MAP ``with a foreign futures authority or other relevant foreign
authority.'' Proposed Rule 1.15(e), however, requires an FCM to
maintain copies of such reports filed ``with a foreign futures
authority or other foreign regulatory authority with which the
Commission has entered into an information sharing agreement which
remains in effect as of the [FCM's] fiscal year end.'' The Commission
notes that the different language in Proposed Rules 1.14(c) and 1.15(e)
was deliberate and was intended to provide a broader exemption with
respect to recordkeeping than reporting. This discrepancy is, in any
event, eliminated under the revised provisions as adopted, as discussed
below.
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\51\Section 1a(10) defines the term ``foreign futures
authority'' as ``any foreign government, or any department, agency,
governmental body, or regulatory organization empowered by a foreign
government to administer or enforce a law, rule, or regulation as it
relates to a futures or options matter, or any department or agency
of a political subdivision of a foreign government empowered to
administer or enforce a law, rule, or regulation as it relates to a
futures or options matter.''
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Three commenters requested that the Commission accept information
the FCM's MAP files with any home country regulator in compliance with
the Commission's risk assessment regulations rather than limiting
exemptions to foreign MAPs that file information with a foreign futures
authority with which the Commission has an information-sharing
agreement. These commenters stated that this treatment would be
consistent with the SEC's practice of accepting information which the
foreign MAP files with its home country regulator even though such
information may not conform in content or frequency of filing with the
SEC's regulations.
Recognizing that the Commission does not yet have information-
sharing agreements with all jurisdictions in which FCM MAPs may be
reporting to foreign regulators but that such reports may nonetheless
be accessible from the FCM for risk assessment purposes, the Commission
has modified proposed Rule 1.15(e), the exemptive provision for MAPs
subject to the supervision of a foreign regulatory authority. As
adopted, Rule 1.15(e) provides that an FCM shall be deemed to be in
compliance with the routine reporting requirements of the risk
assessment regulations if the FCM files with the Commission copies of
any financial or risk exposure reports filed with a foreign regulator,
provided that: (1) the FCM agrees to use its best efforts to obtain
from the foreign firm and to cause the foreign firm to provide,
directly or through its foreign regulator, any supplemental information
the Commission may request and the foreign jurisdiction in which the
MAP is located does not have a blocking statute or other restriction
that would preclude the provision of such supplemental information; or
(2) the foreign regulator with whom the MAP files such reports has a
current information-sharing agreement with the Commission which would
permit the Commission to obtain the type of information called for
under the risk assessment rules.
4. Reporting FCMs
Proposed Rules 1.14(d)(2) and 1.15(c)(2) provided a mechanism
whereby only one FCM within an organizational structure would be
required to comply with the Commission's risk assessment regulations.
These proposed provisions stated generally that the Commission could,
upon written application, exempt an FCM affiliated with a ``Reporting
Futures Commission Merchant'' from the recordkeeping and reporting
requirements of the rules. Proposed Rules 1.14(d)(2) and 1.15(c)(2)
defined a Reporting Futures Commission Merchant as the FCM which
maintains the greater amount of adjusted net capital as compared to any
other FCM(s) within the same holding company structure that is subject
to the risk assessment reporting requirements. A trade association
responding on behalf of its members noted that there may be exceptions
to the general rule that the FCM with the greatest amount of adjusted
net capital should be the Reporting Futures Commission Merchant. This
commenter noted, for example, that a broker-dealer/FCM that files
reports under the SEC's risk assessment rules may have an affiliate
that would be the Reporting Futures Commission Merchant under the
definition set forth in the Proposal. In this case the commenter noted
that it would be appropriate to allow the broker-dealer/FCM to be the
Reporting Futures Commission Merchant. The commenter also urged that
the Commission would likely be overburdened with initial exemption
requests and that the Commission should permit FCMs to rely upon an
exemption provided under Rules 1.14(d)(2) and 1.15(c)(2) upon filing of
their requests, pending a response from the Commission.
In order to accommodate circumstances where it is more appropriate
for an FCM other than the FCM with the greater amount of adjusted net
capital to be deemed the reporting FCM and in order to minimize
administrative burdens on Commission staff, the final rules permit an
FCM to file a self-executing notice with the Commission identifying as
the Reporting FCM an FCM other than the FCM within the organizational
structure with the greater amount of adjusted net capital and
explaining the basis for the designation of the reporting FCM. The rule
provides that the Commission has thirty days from receipt of the notice
to object to the designation of a particular FCM as the Reporting FCM.
After this period of time, the notice is deemed effective.
Additionally, the definition of Reporting Futures Commission Merchant
has been modified to include either the FCM within an affiliated group
with the greatest amount of adjusted net capital or an FCM acting as
the Reporting Broker or Dealer pursuant to the SEC's risk assessment
rules. Accordingly, an FCM acting as the Reporting Broker or Dealer
under the SEC's risk assessment rules need not file a notice of
exemption with the Commission in order to be deemed the Reporting
Futures Commission Merchant under Rules 1.14(d)(2) and 1.15(c)(2) as
adopted.
The exemptions provided under Rules 1.14(d)(2) and 1.15(c)(2) do
not extend to the maintenance and filing of risk management policies,
procedures and systems by FCMs affiliated with the Reporting Futures
Commission Merchant. Consequently, such affiliate FCMs must maintain
their risk management policies, procedures and systems in accordance
with Rule 1.14(a)(1)(ii), and the Reporting Futures Commission Merchant
must file, in accordance with Rule 1.15(a)(1)(ii), a copy of its own
risk management policies, procedures and systems as well as those of
its affiliated FCMs. However, if such policies, procedures and systems
are identical in all respects, the Reporting Futures Commission
Merchant may so indicate when it makes it filing under Rule
1.15(a)(1)(ii).
5. General Exemptive Authority
In response to requests from certain commenters, the Commission has
reserved, in Rules 1.14(d)(3) and 1.15(c)(3), authority to exempt any
FCM from any of the provisions of either Rule 1.14 or Rule 1.15 if the
Commission finds that the exemption is not contrary to the public
interest and the purposes of the provisions from which the exemption is
sought. The Commission may grant the exemption subject to such terms
and conditions as it may find appropriate. This exemptive authority is
similar to that set forth in Commission Rule 4.12(a) with respect to
provisions of the Part 4 rules governing commodity pool operators and
commodity trading advisors. The Commission envisions that it may
entertain requests for exemption from FCMs that are particularly
concerned about consolidating financial reports or the availability of
information concerning foreign MAPs, for example.
IV. Effective Date
The Commission has determined to require the initial filings and
reports herein based on an ``as of'' date of December 31, 1994. The
Commission has further determined, however, that with respect to the
filing of an organizational chart and risk management policies,
procedures and systems, an FCM shall have an additional thirty days to
make such filing beyond the ninety days originally proposed.
Accordingly, such filings must be made initially by April 30, 1995
instead of March 31, 1995 as proposed. Similarly, with respect to
consolidating and consolidated financial statements, the first such
reports for fiscal years ending December 31, 1994 must be filed no
later than May 15, 1995, which is 135 days following the fiscal year-
end rather than the 105 days proposed.
V. Confidentiality
Several commenters expressed concerns about the confidentiality
protection afforded to the information prepared and submitted pursuant
to the Commission's regulations. Specifically, these commenters, while
recognizing that the information received under these rules will be
treated as confidential for purposes of Section 8 of the Act,
nonetheless were concerned about the rules of certain SROs which
require their members to file with them copies of any financial reports
required to be filed with any other regulatory or self-regulatory
authority. One commenter recommended, however, that notices provided to
the Commission upon the occurrence of a trigger event should be
provided to all SROs to alert them to any potential problems. The
Commission recognizes the sensitivity of certain information required
to be reported under these rules. In this regard, the Commission plans
to make the information reported to it available only on an as-needed
basis, as determined in its sole discretion.
VI. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. 601-611 (1988),
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The rules discussed herein will affect
FCMs. The Commission already has established certain definitions of
``small entities'' to be used by the Commission in evaluating the
impact of its rules on such small entities in accordance with the
RFA.52 FCMs have been determined not to be small entities under
the RFA. Additionally, smaller FCMs generally will not be affected by
the final rules because the rules exempt from their requirements
certain smaller entities. The Commission believes that these rules will
not have a significant economic impact on smaller entities.
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\5\247 FR 18618-18621 (April 30, 1982).
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B. 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 PRA. In compliance with the
PRA the Commission has submitted these rules and their associated
information collection requirements to the Office of Management and
Budget (``OMB''). The burden associated with this entire collection,
including these rules, is as follows:
Average Burden Hours Per Response: 18.00
Number of Respondents: 1,782
Frequency of Response: annually and on occasion
The burden associated with these specific rules, is as follows:
Average Burden Hours Per Response: 2.50
Number of Respondents: 412
Frequency of Response: annually and on occasion
Persons wishing to comment on the estimated paperwork burden
associated with these rules should contact Jeff Hill, Office of
Management and Budget, room 3228, NEOB, Washington, DC 20503 (202) 395-
7340. Copies of the information collection submission to OMB are
available from Joe F. Mink, CFTC Clearance Office, 2033 K Street, NW.,
Washington, DC 20581, (202) 254-9735.
C. Electronic Filing
Any person filing information under these rules who wishes to
explore electronic filing with the Commission may contact Charles E.
Tanner, Director of the Office of Information Resources Management, on
202-653-7495. The Commission will work with the reporting entities to
define and implement a secure, cost-effective reporting method.
List of Subjects in 17 CFR Part 1
Financial reporting, Recordkeeping requirements, Risk assessment.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, sections
4f(b), 4f(c) 4g and 8a, 7 U.S.C. 6f(b), 6f(c), 6g and 12a, the
Commission is amending part 1 of chapter 1 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 1.12 is amended by redesignating paragraph (g) as
paragraph (h) and by adding new paragraph (g) to read as follows:
Sec. 1.12 Maintenance of minimum financial requirements by futures
commission merchants and introducing brokers.
* * * * *
(g) A futures commission merchant required to file reports under
Sec. 1.15 and any futures commission merchant affiliated with such a
futures commission merchant shall provide written notice of any
reduction in adjusted net capital in excess of 20 percent of the
futures commission merchant's adjusted net capital as last reported in
financial reports filed with the Commission pursuant to Sec. 1.10. This
notice shall be provided as follows:
(1) With respect to activities in the normal course of business
(e.g., operating losses, proprietary trading losses, increased charges
against net capital) that cause reduction, written notification must be
received within two business days of such reduction; and
(2) With respect to any extraordinary transaction or series of
transactions that will cause such reduction, written notification must
be received at least two business days in advance of the transaction or
the first in the series of transactions.
(3) Upon receipt of such notice from a futures commission merchant,
the Director of the Division of Trading and Markets or the Director's
designee may require that the futures commission merchant provide or
cause a Material Affiliated Person (as that term is defined in
Sec. 1.14(a)(2)) to provide, within three business days from the date
of request or such shorter period as the Division Director or designee
may specify, such other information as the Division Director or
designee determines to be necessary based upon market conditions,
reports provided by the futures commission merchant, or other available
information.
* * * * *
3. Section 1.12 is further amended by revising the references in
the first sentences of paragraphs (a)(1) and (b)(3) and in paragraph
(e) to ``paragraph (g) of this section'' to read ``paragraph (h) of
this section'' and by revising the reference in the last sentence of
newly designated paragraph (h)(2) to ``this paragraph (g)'' to read
``this paragraph (h).''
4. Section 1.14 is added to read as follows:
Sec. 1.14 Risk assessment recordkeeping requirements for futures
commission merchants.
(a) Requirement to maintain and preserve information.
(1) Each futures commission merchant registered with the Commission
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph
(d) of this section, shall prepare, maintain and preserve the following
information:
(i) An organizational chart which includes the futures commission
merchant and each of its affiliated persons. Included in the
organizational chart shall be a designation of which affiliated persons
are ``Material Affiliated Persons'' as that term is used in paragraph
(a)(2) of this section, which Material Affiliated Persons file routine
financial or risk exposure reports with the Securities and Exchange
Commission, a federal banking agency, an insurance commissioner or
other similar official or agency of a state, or a foreign regulatory
authority, and which Material Affiliated Persons are dealers in
financial instruments with off-balance sheet risk and, if a Material
Affiliated Person is such a dealer, whether it is also an end-user of
such instruments;
(ii) Written policies, procedures, or systems concerning the
futures commission merchant's:
(A) Method(s) for monitoring and controlling financial and
operational risks to it resulting from the activities of any of its
affiliated persons;
(B) Financing and capital adequacy, including information regarding
sources of funding, together with a narrative discussion by management
of the liquidity of the material assets of the futures commission
merchant, the structure of debt capital, and sources of alternative
funding;
(C) Establishing and maintaining internal controls with respect to
market risk, credit risk, and other risks created by the futures
commission merchant's proprietary and noncustomer clearing activities,
including systems and policies for supervising, monitoring, reporting
and reviewing trading activities in securities, futures contracts,
commodity options, forward contracts and financial instruments;
policies for hedging or managing risks created by trading activities or
supervising accounts carried for noncustomer affiliates, including a
description of the types of reviews conducted to monitor positions; and
policies relating to restrictions or limitations on trading activities:
Provided, however, that if the futures commission merchant has no such
written policies, procedures or systems, it must so state in writing;
(iii) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the futures
commission merchant's organizational structure, which shall include the
futures commission merchant and its other Material Affiliated Persons,
prepared in accordance with generally accepted accounting principles,
which consolidated balance sheets shall be audited by an independent
certified public accountant if an annual audit is performed in the
ordinary course of business, but which otherwise may be unaudited, and
which shall include appropriate explanatory notes. The consolidating
balance sheets may be those prepared by the futures commission
merchant's highest level Material Affiliated Person as part of its
internal financial reporting process. Any additional information
required to be filed under Sec. 1.15(a)(2)(iii) shall also be
maintained and preserved; and
(iv) Fiscal year-end consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary
course of business, but which otherwise may be unaudited, and which
shall include appropriate explanatory notes. The consolidating
statements may be those prepared by the futures commission merchant's
highest level Material Affiliated Person as part of its internal
financial reporting process. Any additional information required to be
filed under Sec. 1.15(a)(2)(iii) shall also be maintained and
preserved.
(2) The determination of whether an affiliated person of a futures
commission merchant is a Material Affiliated Person shall involve
consideration of all aspects of the activities of, and the relationship
between, both entities, including without limitation, the following
factors:
(i) The legal relationship between the futures commission merchant
and the affiliated person;
(ii) The overall financing requirements of the futures commission
merchant and the affiliated person, and the degree, if any, to which
the futures commission merchant and the affiliated person are
financially dependent on each other;
(iii) The degree, if any, to which the futures commission merchant
or its customers rely on the affiliated person for operational support
or services in connection with the futures commission merchant's
business;
(iv) The level of market, credit or other risk present in the
activities of the affiliated person; and
(v) The extent to which the affiliated person has the authority or
the ability to cause a withdrawal of capital from the futures
commission merchant.
(3) For purposes of this section and Sec. 1.15, the term Material
Affiliated Person does not include a natural person.
(4) The information, reports and records required by this section
shall be maintained and preserved, and made readily available for
inspection, in accordance with the provisions of Sec. 1.31.
(b) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(i), (a)(1)(iii) and
(a)(1)(iv) of this section with respect to a Material Affiliated Person
if:
(1) The futures commission merchant is required, or that Material
Affiliated Person is required, to maintain and preserve information, or
such information is maintained and preserved by the futures commission
merchant on behalf of the Material Affiliated Person, pursuant to
Sec. 240.17h-1T of this title, or such other risk assessment
regulations as the Securities and Exchange Commission may adopt, and
maintains and makes available for inspection by the Commission in
accordance with the provisions of this section copies of the records
and reports maintained and filed on Form 17-H (or such other forms or
reports as may be required) by such futures commission merchant or its
Material Affiliated Person with the Securities and Exchange Commission
pursuant to Secs. 240.17h-1T and 240.17h-2T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission may adopt;
(2) In the case of a Material Affiliated Person (including a
foreign banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant or such Material Affiliated Person maintains and
makes available for inspection by the Commission in accordance with the
provisions of this section copies of all reports submitted by such
Material Associated Person to the Federal banking agency pursuant to
section 5211 of the Revised Statutes, section 9 of the Federal Reserve
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b)
of the Home Owners' Loan Act, or section 5 of the Bank Holding Company
Act of 1956; or
(3) In the case of a Material Affiliated Person that is subject to
the supervision of an insurance commissioner or other similar official
or agency of a state, the futures commission merchant or such Material
Affiliated Person maintains and makes available for inspection by the
Commission in accordance with the provisions of this section copies of
the annual statements with schedules and exhibits prepared by the
Material Affiliated Person on forms prescribed by the National
Association of Insurance Commissioners or by a state insurance
commissioner.
(c) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(iii) and (a)(1)(iv) of
this section with respect to a Material Affiliated Person if such
futures commission merchant maintains and makes available, or causes
such Material Affiliated Person to make available, for inspection by
the Commission in accordance with the provisions of this section copies
of any financial or risk exposure reports filed by such Material
Affiliated Person with a foreign futures authority or other foreign
regulatory authority, provided that: (1) the futures commission
merchant agrees to use its best efforts to obtain from the Material
Affiliated Person and to cause the Material Affiliated Person to
provide, directly or through its foreign futures authority or other
foreign regulatory authority, any supplemental information the
Commission may request and there is no statute or other bar in the
foreign jurisdiction that would preclude the futures commission
merchant, the Material Affiliated Person, the foreign futures authority
or other foreign regulatory authority from providing such information
to the Commission; or (2) the foreign futures authority or other
foreign regulatory authority with whom the Material Affiliated Person
files such reports has entered into an information-sharing agreement
with the Commission which is in effect as of the futures commission
merchant's fiscal year-end and which will allow the Commission to
obtain the type of information required herein. The futures commission
merchant shall maintain a copy of the original report and a copy
translated into the English language. For the purposes of this section,
the term ``Foreign Futures Authority'' shall have the meaning set forth
in section 1a(10) of the Act.
(d) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted net capital as of the futures commission
merchant's current fiscal year-end; provided, however, that such
futures commission merchant is not a clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this
section, other than paragraph (a)(1)(ii) of this section, either
unconditionally or on specified terms and conditions, any futures
commission merchant affiliated with such Reporting Futures Commission
Merchant. The term ``Reporting Futures Commission Merchant'' shall
mean, in the case of a futures commission merchant that is affiliated
with another registered futures commission merchant, the futures
commission merchant which maintains the greater amount of adjusted net
capital as last reported on financial reports filed with the Commission
pursuant to Sec. 1.10 unless another futures commission merchant is
acting as the Reporting Broker or Dealer under Sec. 240.17h-2T of this
title, or the Commission permits another futures commission merchant to
act as the Reporting Futures Commission Merchant. In granting
exemptions under this section, the Commission shall consider, among
other factors, whether the records required by this section concerning
the Material Affiliated Persons of the futures commission merchant
affiliated with the Reporting Futures Commission Merchant will be
available to the Commission pursuant to this section or Sec. 1.15. A
request for exemption filed under this paragraph (d)(2) shall explain
the basis for the designation of a particular futures commission
merchant as the Reporting Futures Commission Merchant and will become
effective on the thirtieth day after receipt of such request by the
Commission unless the Commission objects to the request by that date.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(e) Location of records. A futures commission merchant required to
maintain records concerning Material Affiliated Persons pursuant to
this section may maintain those records either at the principal office
of the Material Affiliated Person or at a records storage facility,
provided that, except as set forth in paragraph (c) of this section,
the records are located within the boundaries of the United States and
the records are kept and available for inspection in accordance with
Sec. 1.31. If such records are maintained at a place other than the
futures commission merchant's principal place of business, the Material
Affiliated Person or other entity maintaining the records shall file
with the Commission a written undertaking, in a form acceptable to the
Commission, signed by a duly authorized person, to the effect that the
records will be treated as if the futures commission merchant were
maintaining the records pursuant to this section and that the entity
maintaining the records will permit examination of such records at any
time, or from time to time during business hours, by representatives or
designees of the Commission and promptly furnish the Commission
representative or its designee true, correct, complete and current hard
copy of all or any part of such records. The election to maintain
records at the principal place of business of the Material Affiliated
Person or at a records storage facility pursuant to the provisions of
this paragraph shall not relieve the futures commission merchant
required to maintain and preserve such records from any of its
responsibilities under this section or Sec. 1.15.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Affiliated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. (1) Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing April
30, 1995 and the information required by paragraphs (a)(1)(iii) and
(a)(1)(iv) of this section commencing May 15, 1995 or, if December 31,
1994 is not the futures commission merchant's fiscal year-end, 135
calendar days following the first fiscal year-end occurring after
December 31, 1994.
(2) Each futures commission merchant whose registration becomes
effective after December 31, 1994 and is subject to the requirements of
this section shall maintain and preserve the information required by
paragraphs (a)(1)(i) and (a)(1)(ii) of this section commencing 60
calendar days after registration become effective and the information
required by paragraphs (a)(1)(iii) and (a)(1)(iv) of this section
commencing 105 calendar days following the first fiscal year-end
occurring after registration becomes effective.
5. Section 1.15 is added to read as follows:
Sec. 1.15 Risk assessment reporting requirements for futures
commission merchants.
(a) Reporting requirements with respect to information required to
be maintained by Sec. 1.14. (1) Each futures commission merchant
registered with the Commission pursuant to Section 4d of the Act,
unless exempt pursuant to paragraph (c) of this section, shall file the
following with the regional office with which it files periodic
financial reports and with its designated self-regulatory organization
by no later than April 30, 1995, provided that in the case of a futures
commission merchant whose registration becomes effective after December
31, 1994, such futures commission merchant shall file the following
within 60 calendar days after the effective date of such registration,
or by April 30, 1995, whichever comes later:
(i) A copy of the organizational chart maintained by the futures
commission merchant pursuant to paragraph (a)(l)(i) of Sec. 1.14. Where
there is a material change in information provided, an updated
organizational chart shall be filed within sixty calendar days after
the end of the fiscal quarter in which the change has occurred; and
(ii) Copies of the financial, operational, and risk management
policies, procedures and systems maintained by the futures commission
merchant pursuant to paragraph (a)(l)(ii) of Sec. 1.14. If the futures
commission merchant has no such written policies, procedures or
systems, it must file a statement so indicating. Where there is a
material change in information provided, such change shall be reported
within sixty calendar days after the end of the fiscal quarter in which
the change has occurred.
(2) Each futures commission merchant registered with the Commission
pursuant to Section 4d of the Act, unless exempt pursuant to paragraph
(c) of this section, shall file the following with the regional office
with which it files periodic financial reports within 105 calendar days
after the end of each fiscal year or, if a filing is made pursuant to a
written notice issued under paragraph (a)(2)(iii) of this section,
within the time period specified in the written notice:
(i) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the futures
commission merchant's organizational structure, which shall include the
futures commission merchant and its other Material Affiliated Persons,
prepared in accordance with generally accepted accounting principles,
which consolidated balance sheets shall be audited by an independent
certified public accountant if an annual audit is performed in the
ordinary course of business, but which otherwise may be unaudited, and
which consolidated balance sheets shall include appropriate explanatory
notes. The consolidating balance sheets may be those prepared by the
futures commission merchant's highest level Material Affiliated Person
as part of its internal financial reporting process;
(ii) Fiscal year-end annual consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the futures commission merchant's
organizational structure, which shall include the futures commission
merchant and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary
course of business, but which otherwise may be unaudited, and which
consolidated statements shall include appropriate explanatory notes.
The consolidating statements may be those prepared by the futures
commission merchant's highest level Material Affiliated Person as part
of its internal financial reporting process; and
(iii) Upon receiving written notice from any representative of the
Commission and within the time period specified in the written notice,
such additional information which the Commission determines is
necessary for a complete understanding of a particular affiliate's
financial impact on the futures commission merchant's organizational
structure.
(3) For the purposes of this section, the term Material Affiliated
Person shall have the meaning used in Sec. 1.14.
(4) The reports required to be filed pursuant to paragraph (a)(1)
of this section shall be considered filed when received by the regional
office of the Commission with whom the futures commission merchant
files financial reports pursuant to Sec. 1.10 and by the designated
self-regulatory organization, and the reports required to be filed
pursuant to paragraph (a)(2) of this section shall be considered filed
when received by the regional office of the Commission with whom the
futures commission merchant files financial reports pursuant to
Sec. 1.10.
(b) [Reserved]
(c) Exemptions. (1) The provisions of this section shall not apply
to any futures commission merchant which holds funds or property of or
for futures customers of less than $6,250,000 and has less than
$5,000,000 in adjusted net capital as of the futures commission
merchant's fiscal year-end; provided, however, that such futures
commission merchant is not a clearing member of an exchange.
(2) The Commission may, upon written application by a Reporting
Futures Commission Merchant, exempt from the provisions of this
section, other than paragraph (a)(1)(ii) of this section, either
unconditionally or on specified terms and conditions, any futures
commission merchant affiliated with such Reporting Futures Commission
Merchant. The term ``Reporting Futures Commission Merchant'' shall
mean, in the case of a futures commission merchant that is affiliated
with another registered futures commission merchant, the futures
commission merchant which maintains the greater amount of net capital
as last reported on its financial reports filed with the Commission
pursuant to Sec. 1.10 unless another futures commission merchant is
acting as the Reporting Broker or Dealer under Sec. 240.17h-2T of this
title or the Commission permits another futures commission merchant to
act as the Reporting Futures Commission Merchant. In granting
exemptions under this section, the Commission shall consider, among
other factors, whether the records and other information required to be
maintained pursuant to Sec. 1.14 concerning the Material Affiliated
Persons of the futures commission merchant affiliated with the
Reporting Futures Commission Merchant will be available to the
Commission pursuant to the provisions of this section. A request for
exemption filed under this paragraph (c)(2) shall explain the basis for
the designation of a particular futures commission merchant as the
Reporting Futures Commission Merchant and will become effective on the
thirtieth day after receipt of such request by the Commission unless
the Commission objects to the request by that date. The Reporting
Futures Commission Merchant must submit the information required by
paragraph (a)(1)(ii) of this section on behalf of its affiliated
futures commission merchants.
(3) The Commission may exempt any futures commission merchant from
any provision of this section if it finds that the exemption is not
contrary to the public interest and the purposes of the provisions from
which the exemption is sought. The Commission may grant the exemption
subject to such terms and conditions as it may find appropriate.
(d) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. (1) In the
case of a futures commission merchant which is required to file, or has
a Material Affiliated Person which is required to file, Form 17-H (or
such other forms or reports as may be required) with the Securities and
Exchange Commission pursuant to Sec. 240.17h-2T of this title, or such
other risk assessment regulations as the Securities and Exchange
Commission may adopt, such futures commission merchant shall be deemed
to be in compliance with the reporting requirements of paragraphs
(a)(1)(i) and (a)(2) of this section if the futures commission merchant
furnishes, in accordance with paragraph (a)(2) of this section, a copy
of the most recent Form 17-H filed by the futures commission merchant
or its Material Affiliated Person with the Securities and Exchange
Commission, provided however, that if the futures commission merchant
has designated any of its affiliated persons as Material Affiliated
Persons for purposes of this section and Sec. 1.14 which are not
designated as Material Associated Persons for purposes of the Form 17-H
filed pursuant to Secs. 240.17h-1T and 240.17h-2T of this title, the
futures commission must also designate any such affiliated person as a
Material Affiliated Person on the organizational chart required as Item
1 of Part I of Form 17-H. To comply with paragraphs (a)(1)(i) and
(a)(2) of this section, such futures commission merchant may, at its
option, file Form 17-H in its entirety or file such form without the
information required under Part II of Form 17-H.
(2) In the case of a Material Affiliated Person (including a
foreign banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to such Material Affiliated Person if the futures commission merchant
or such Material Affiliated Person maintains in accordance with
Sec. 1.14 copies of all reports filed by the Material Affiliated Person
with the Federal banking agency pursuant to section 5211 of the Revised
Statutes, section 9 of the Federal Reserve Act, section 7(a) of the
Federal Deposit Insurance Act, section 10(b) of the Home Owners' Loan
Act, or section 5 of the Bank Holding Company Act of 1956.
(3) In the case of a futures commission merchant that has a
Material Affiliated Person that is subject to the supervision of an
insurance commissioner or other similar official or agency of a state,
such futures commission merchant shall be deemed to be in compliance
with the reporting requirements of paragraph (a)(2) of this section
with respect to the Material Affiliated Person if:
(i) With respect to a Material Affiliated Person organized as a
mutual insurance company or a non-public stock company, the futures
commission merchant or such Material Affiliated Person maintains in
accordance with Sec. 1.14 copies of the annual statements with
schedules and exhibits prepared by the Material Affiliated Person on
forms prescribed by the National Association of Insurance Commissioners
or by a state insurance commissioner; and
(ii) With respect to a Material Affiliated Person organized as a
public stock company, the futures commission merchant or such Material
Affiliated Person maintains, in addition to the annual statements with
schedules and exhibits required to be maintained pursuant to Sec. 1.14,
copies of the filings made by the Material Affiliated Person pursuant
to sections 13 or 15 of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940.
(4) No futures commission merchant shall be required to furnish to
the Commission any examination report of any Federal banking agency or
any supervisory recommendations or analyses contained therein with
respect to a Material Affiliated Person that is subject to the
regulation of a Federal banking agency. All information received by the
Commission pursuant to this section concerning a Material Affiliated
Person that is subject to examination by or the reporting requirements
of a Federal banking agency shall be deemed confidential for the
purposes of section 8 of the Act.
(5) The furnishing of any information or documents by a futures
commission merchant pursuant to this section shall not constitute an
admission for any purpose that a Material Affiliated Person is
otherwise subject to the Act.
(e) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A futures
commission merchant shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to a Material Affiliated Person if such futures commission merchant
furnishes, or causes such Material Affiliated Person to make available,
in accordance with the provisions of this section, copies of any
financial or risk exposure reports filed by such Material Affiliated
Person with a foreign futures authority or other foreign regulatory
authority, provided that: (1) the futures commission merchant agrees to
use its best efforts to obtain from the Material Affiliated Person and
to cause the Material Affiliated Person to provide, directly or through
its foreign futures authority or other foreign regulatory authority,
any supplemental information the Commission may request and there is no
statute or other bar in the foreign jurisdiction that would preclude
the futures commission merchant, the Material Affiliated Person, the
foreign futures authority or other foreign regulatory authority from
providing such information to the Commission; or (2) the foreign
futures authority or other foreign regulatory authority with whom the
Material Affiliated Person files such reports has entered into an
information sharing agreement with the Commission which is in effect as
of the futures commission merchant's fiscal year-end and which will
allow the Commission to obtain the type of information required herein.
The futures commission merchant shall file a copy of the original
report and a copy translated into the English language. For the
purposes of this section, the term ``Foreign Futures Authority'' shall
have the meaning set forth in section 1a(10) of the Act.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a futures commission
merchant concerning a Material Associated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. Each futures commission merchant
registered as of December 31, 1994 and subject to the requirements of
this section shall file the information required by paragraph (a)(1) of
this section no later than April 30, 1995 and the information required
by paragraph (a)(2) of this section no later than May 15, 1995. Each
futures commission merchant whose registration becomes effective after
December 31, 1994 and is subject to the requirements of this section
shall file the information required by paragraph (a)(1) of this section
within 60 calendar days after registration is granted, or by April 30,
1995, whichever comes later and the information required by paragraph
(a)(2) of this section within 105 calendar days after registration is
granted or by May 15, 1995, whichever comes later.
Issued in Washington, DC on December 21, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-31828 Filed 12-27-94; 8:45 am]
BILLING CODE 6351-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.