Risk Assessment for Holding Company Systems

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

Risk Assessment for Holding Company Systems

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

``Commission'') is proposing for comment rules to implement the risk

assessment provisions of the Futures Trading Practices Act of 1992. The

proposed rules would enhance the Commission's financial surveillance

program by providing the Commission with access to information

concerning the activities of affiliates of registered futures

commission merchants (``FCMs'') whose activities are reasonably likely

to have a material impact on the financial or operational condition of

the FCM. As proposed, these rules would require registered FCMs to

maintain certain records concerning the financial activities of such

material affiliates, to file certain information with the Commission on

an annual and quarterly basis and to provide additional information to

the Commission upon the occurrence of specified events.

DATES: Comments must be received on or before May 2, 1994.

ADDRESSES: Comments on the proposed rules should be sent to Jean A.

Webb, Secretary of the Commission, Commodity Futures Trading

Commission, 2033 K Street, NW., Washington, DC 20581. Reference should

be made to ``Proposed Risk Assessment Rules.''

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, NW., Washington, DC 20581.

Telephone (202) 254-8955.

SUPPLEMENTARY INFORMATION:

I. Background

Following the failures of certain FCMs operating as part of a group

of affiliated companies, the Commission requested and received new

statutory authority, codified in the Futures Trading Practices Act of

1992 (``FTPA''),\1\ to obtain information concerning affiliate

activities that could pose material risks to the FCM. The Commission is

proposing rules to implement this new authority. The proposed rules, in

accordance with the statutory authority granted the Commission,

establish three basic types of risk assessment requirements: (1)

Recordkeeping; (2) reporting to the Commission of certain information

on a routine basis; and (3) reporting to the Commission upon the

occurrence of certain events that warrant further review.

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\1\Pub. L. No. 102-546, 106 Stat. 3590 (1992). The FTPA was

enacted on October 28, 1992.

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First, the proposed rules require that FCMs maintain certain

records. These records concern FCM risk management policies, procedures

and systems and the activities of their affiliates that could result in

material risks to the FCM's financial condition or operations. They

include information concerning on-balance sheet and off-balance

financial activities of the FCM's material affiliates, and consolidated

financial information for the group of companies of which the FCM is a

part.

Second, the proposed rules would require reporting by the FCM to

the Commission, generally on an annual basis unless significant changes

in the reported information occur, of the risk management and affiliate

activity information required to be maintained by the FCM. Aggregate

information concerning the noncustomer accounts carried by the

reporting FCM would be required on a routine quarterly basis. These

routine reporting requirements are designed to facilitate

identification of FCMs whose financial condition or operations may be

affected by their relationships with affiliate firms, to provide

Commission staff background information on the group and its activities

to enable it to better evaluate non-routine reports and permit more

efficient and informed responses by the Commission in emergency

situations, to permit identification of significant changes in the

scope, types and risk of those activities, to permit the Commission to

better understand how the group is funded, and to provide the

Commission with information concerning the types of affiliate

activities that are likely to pose risks to the FCM.

Third, the proposed rules would require that FCMs give notice to

the Commission of certain events such as a decline in the FCM's capital

or losses at a material affiliate exceeding specified thresholds. These

``trigger'' events have been constructed with a view towards providing

the Commission with notice of circumstances likely to warrant further

scrutiny. 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. The use of specified events triggering

notice to the Commission is also intended to reduce the need for

routine reports to the Commission without compromising the overall

objectives of the risk assessment program.

The rules contain certain required exemptions for banks and

insurance companies and defer to certain Securities Exchange Act

requirements in the case of broker-dealer FCMs.

Comment is requested concerning all aspects of the proposed rules

and specifically concerning the appropriate balance of routine

reporting requirements, event-specific notice requirements, and use of

statutory special call authority.

A. Current Financial Regulatory Framework

Section 229 of the FTPA, entitled ``Risk Assessment for Holding

Company Systems,'' added new section 4f(c)\2\ to the Commodity Exchange

Act (``CEA'' or ``Act''). Section 4f(c) provides the Commission with

authority to obtain information concerning activities of an FCM's

affiliates that could pose material risks to the FCM. The Commission's

new risk assessment authority augments long-standing provisions of the

CEA and Commission regulations designed to safeguard funds held by FCMs

on behalf of futures customers and to assure that FCMs maintain a

minimum level of capital to support their obligations to customers and

the marketplace on an ongoing basis.

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\2\7 U.S.C. 6f(c) (Supp. IV 1992).

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Section 4d(2) of the CEA and Commission regulations require that

one hundred percent of customer funds and property, that is, all funds

and property deposited to ``margin, guarantee or secure'' futures or

commodity option positions, and all accruals thereon, be maintained for

the exclusive benefit of the depositing customer and segregated from

the funds of the FCM.\3\ The segregation requirement bars the use by an

FCM of one customer's funds for any purpose other than to margin or

secure that customer's trades and facilitates customer recovery on a

first priority basis in the event of the bankruptcy of the FCM. Under

Section 4d(2) and Commission rules, an FCM must always maintain

sufficient funds in segregation to satisfy the claims of all customers

holding accounts with positive net equities. An FCM therefore is

required to add its own funds to the segregated customer funds account

to cover any debit or deficit account balance of any customer by the

close of business on the day the deficit occurs. As a consequence, if

the segregation requirements are satisfied, an FCM's financial failure

generally should not result in a loss of customer funds, and one

customer's withdrawal of funds or failure to satisfy margin demands

should not affect the funds of any other customer.\4\

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\3\7 U.S.C. 6d(2) (1988).

\4\See, generally, Commission Rules 1.20-1.30 and Part 190.

Commission rules referred to herein are found at 17 CFR Ch. I

(1993).

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The CEA and Commission rules requiring that FCMs maintain

regulatory capital at or above specified minimum levels buttress the

security of customer funds and the overall financial integrity of the

futures markets. Minimum capital requirements for FCMs are designed to

assure that futures firms are financially sound and have liquid assets

sufficient to sustain normal market reverses without losses to

customers. The CFTC's financial regulations also establish an ``early

warning'' system to identify firms whose capital levels or other

conditions warrant intensified surveillance. This system requires

notice to the Commission when an FCM's capital falls below 150 percent

of its required minimum capital and when certain other conditions exist

that constitute or could lead to capital impairment or other financial

deficiencies.\5\

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\5\Commission rules require, for example, that an FCM provide

notice to the Commission if the FCM fails to keep current books and

records, is notified by an independent public accountant of a

material inadequacy under Rule 1.16(d)(2), becomes subject to

trading restrictions for failure to meet a margin call or determines

that it is carrying an account that is undermargined by an amount

exceeding its adjusted net capital. See Commission Rule 1.12.

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Other safeguards for customer funds established by the CEA and CFTC

regulations include protections against the use of customer funds by

depositories, such as banks or clearing organizations, to offset

obligations of the FCM to the depository, limitations on investments of

customer funds to U.S. government or municipal securities, and the

requirement that an FCM's independent public accountant review and

report upon the adequacy of the firm's internal controls and procedures

for safeguarding customer assets.

The statutory and regulatory framework administered by the

Commission requires that each futures exchange, as a self-regulatory

organization (``SRO''), adopt and enforce minimum financial

requirements and reporting rules for its member FCMs that are at least

as stringent as those established by Commission regulations. As SROs,

the futures exchanges and the National Futures Association (``NFA''),

an industry-wide self-regulatory organization responsible for firms

that are not members of an exchange, have the primary direct

responsibility to ensure the financial integrity of their member

firms.6 The Commission is responsible for oversight of the SROs'

financial surveillance and rule enforcement programs.

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\6\Responsibility for routine periodic audits of firms that are

members of more than one SRO is allocated among the SROs under a

Joint Audit Plan in which all of the exchanges and NFA participate.

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The Commission's routine financial oversight activities include

evaluation and monitoring of SRO financial surveillance and audit

activities, direct audits of FCMs and introducing brokers (``IBs'') as

a quality control check of SRO audit work, and targeted reviews of FCMs

that have ``early warning'' conditions or have otherwise been

identified as high risk firms. The Commission's financial oversight

program makes use of various types of information to target firms for

heightened surveillance and to better understand firm operations,

including among other sources of relevant information, data identifying

the holders of large market positions generated on a daily basis by the

Commission's large-trader reporting system, notices of adjusted net

capital being below early warning levels, and financial data, including

pay and collect data, generated by the SROs' surveillance systems.

B. Purposes of Risk Assessment Authority

The risk assessment provisions of the FTPA are designed to

facilitate financial oversight of FCMs which are part of holding

company groups whose activities may affect the FCM's overall financial

condition, or where the structure of the group of companies places

control of funding outside the FCM. As such, the risk assessment

provisions are intended to enhance the effectiveness of existing

safeguards of customer funds by providing the Commission with increased

access to material information concerning the operations of affiliates

of the FCM whose activities may expose the FCM to financial or

operational risks. This new statutory authority recognizes that, as

illustrated by the experience of the CFTC and other regulators with

several recent failures of regulated brokerage firms, the operations of

regulated FCMs may be materially affected by, and only understood in

conjunction with, the activities of affiliated entities, many of which

may be unregulated. Concomitantly, the effectiveness of ongoing

financial oversight programs may depend upon access to information

concerning risks to the FCM created by affiliate activity, and the

efficacy of regulatory responses to financial problems at the regulated

entity may be enhanced by access to information concerning relevant

affiliate activity.

For example, Commission staff and futures industry self-regulators

worked closely with securities and banking regulators to facilitate the

rapid wind-down of Drexel Burnham Lambert, Inc. (``DBL''), a registered

FCM and securities broker-dealer, and to minimize adverse effects of

the wind-down on customers and the markets. Approximately 1700 futures

accounts were transferred from DBL to other futures firms during a two-

week period in February 1990.7 The immediate cause of DBL's

failure was the inability of its parent firm, The Drexel Burnham

Lambert Group, Inc. (``DBL Group''), to meet certain debt payments,

some of which consisted of commercial paper, following a reduction of

DBL's credit rating. DBL Group filed a bankruptcy petition on February

13, 1990. Previously, approximately $220 million of DBL's excess

capital had been transferred to DBL Group in the form of short-term

loans.8

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\7\No regulated futures customers suffered losses due to DBL's

insolvency.

\8\The New York Stock Exchange subsequently ordered DBL to

maintain excess capital of $300 million.

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In addition to monitoring and facilitating the transfer of DBL's

futures accounts to other firms, Commission staff monitored the

liquidation of futures positions of Drexel Burnham Lambert Trading

Corporation (``Drexel Trading''), a noncustomer affiliate whose account

was carried by DBL. Drexel Trading's futures account at DBL was

apparently used to hedge its commodity trading activities in

unregulated cash and forward markets. The wind-down of Drexel Trading's

business thus entailed the liquidation of futures positions that were

related to unregulated cash positions. In the course of the Drexel

events, the availability of information concerning the developing

problems at DBL Group and better understanding of the unregulated

activities of Drexel Trading and other Drexel Group entities that

carried futures positions in noncustomer accounts at DBL to manage the

risks of related cash operations and swaps positions would have

facilitated the Commission's financial oversight of DBL and the

development and tailoring of regulatory responses to those events.

Commission staff also monitored the wind-down of Stotler and

Company (``Stotler''), a registered FCM and government securities

broker-dealer. On July 25, 1990, Stotler Group, Inc. (``Stotler

Group''), Stotler's parent firm, formally announced that it had

defaulted on $750,000 of commercial paper obligations and that Stotler

would be winding down its futures brokerage business. As those events

unfolded, it became apparent that Stotler's FCM was dependent upon

financing from Stotler Group, which in turn was dependent upon the

issuance of commercial paper for its own financing. Stotler had already

commenced informally winding down its futures brokerage business on

July 12, 1990, following notification by the Commission that it did not

meet minimum capital requirements, due to adjustments to Stotler's

reported capital to correct, among other things, the failure to reflect

in Stotler's capital computations liabilities purportedly transferred

to Stotler Group. In a period of approximately eight weeks, Stotler,

with the assistance and monitoring of the CFTC and self-regulatory

authorities, transferred more than 65,000 futures customer accounts and

customer segregated funds totaling over $309 million.9 Access to

information concerning Stotler Group's commercial paper operations, on

which Stotler drew for financing, would have assisted the Commission in

its oversight of Stotler and aided in the identification of the

developing difficulties of the Stotler entities.

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\9\Less than one percent of customer segregated funds had not

been returned to customers prior to the filing by Stotler and

Stotler Group of petitions in bankruptcy on August 24, 1990. The

remaining one percent was subsequently returned.

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The well-publicized problems of the Metallgesellschaft AG group of

companies provide the most recent example of the potential utility of

information on entities affiliated with an FCM. MG Futures, Inc. (``MG

Futures''), a registered FCM and a wholly-owned subsidiary of

Metallgesellschaft AG, carried large, purported hedge positions in the

energy futures markets for the MG group of companies. Large losses

sustained by the MG Group of companies in late 1993 apparently caused

severe cash flow problems for MG Futures, the regulated intermediary.

The losses, which occurred at an affiliated entity, were not reflected

in the financial reports filed by MG Futures with the Commission and

materially affected MG Futures' funding arrangements.

The interrelationships between FCMs and their affiliates may

include a wide range of financial relationships that render the FCM

dependent upon certain affiliates' financial condition or expose the

FCM's capital to withdrawal or other impairment to support an affiliate

experiencing funding difficulties. These types of financial

relationships include, for example, guarantee arrangements between the

FCM and its parent or other affiliate, arrangements to shift capital

from the FCM to an affiliate, financing or investment relationships

between the FCM and an affiliate, maintenance by the FCM of a futures

account for an affiliate, and business referral arrangements or other

forms of contractual arrangements that create financial

interdependencies between the FCM and an affiliate. Further, even in

the absence of direct exposure of the FCM's resources to an affiliate's

activities pursuant to contract or common ownership, the existence of

management or ownership linkages between the FCM and an affiliate may

have the result that financial or operational difficulties of a closely

linked affiliate adversely affect the FCM's credit or customer

relationships, and thus its liquidity.

The potential risks to FCM operations created by affiliate

activities may be exacerbated, and the importance of ready access to

information concerning affiliate activities heightened, by the nature

of the affiliate activities. Because FCM activities are subject to

minimum capital requirements designed to measure, and provide resources

adequate to protect against, the risks of various types of

transactions, a holding company group may elect to conduct activities

giving rise to capital charges in unregulated affiliates rather than

the regulated entity. As a result, activities conducted on an

unregulated basis but that nonetheless may create significant market,

credit or other risk exposures, may be concentrated in affiliated

entities that are not subject to federal or state oversight.10

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\1\0As the SEC noted in proposing its risk assessment rules for

broker-dealers, ``the activities carried out by the affiliates of a

broker-dealer are, in the aggregate, generally more highly leveraged

and riskier than permitted by the net capital rule.'' 56 FR 44014,

44015 (September 6, 1991).

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C. Statutory Risk Assessment Provisions

The risk assessment provisions added to the CEA by the FTPA provide

a mechanism for the Commission to obtain information concerning FCM

affiliate activities that should facilitate both a better understanding

of the ongoing risk exposures of the FCM and an improved ability to

determine appropriate intervention in the event of financial

difficulties at the FCM or in other circumstances of heightened risk.

New Section 4f(c) of the Act authorizes the Commission to require each

registered FCM to obtain ``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.''11 The statute 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.''12 The

Commission is authorized to require, by rule or regulation, summary

reports of such information to be filed no more frequently than

quarterly. Section 4f(c) also authorizes the Commission to require the

filing by FCMs of 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.13

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\1\17 U.S.C. 6f(c)(2)(A) (Supp. IV 1992).

\1\27 U.S.C. 6f(c)(2)(B) (Supp. IV 1992).

\1\37 U.S.C. 6f(c)(3)(A) (Supp. IV 1992).

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Section 4f(c) also provides that the Commission may exempt ``any

person or class of persons'' from recordkeeping or reporting

requirements established pursuant to that provision. In granting such

exemptions, the Commission is directed to consider, ``among other

factors,'' whether information of the type required is available from

the Securities and Exchange Commission (``SEC''), a state insurance

commission or similar state agency, a supervisory agency as defined in

section 1101(7) of the Right to Financial Privacy Act of 197814 or

a similar foreign regulator; the primary business of any affiliated

person; the nature and extent of domestic or foreign regulation of the

affiliated person's activities; the nature and extent of the FCM's

futures and options activities; and, with respect to the FCM and its

affiliated persons, on a consolidated basis, the amount and proportion

of assets devoted to, and revenues derived from, activities in the U.S.

futures markets.15 The legislative history reflects that the

Commission ``may determine not to require information concerning

holding companies or other affiliates of FCMs that are primarily

engaged in nonfinancial activities such as merchandising, construction

(other than equity investment or financing), travel services, real

estate brokerage, consumer lending, publishing or nonfutures-related

information processing.''16

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\1\4The term ``supervisory agency'' is defined in section

1101(7) of the Right to Financial Privacy Act of 1978, 12 U.S.C.

3401(7), to include the following agencies which have the statutory

authority to examine the financial condition, business operations,

or records or transactions of a financial institution, holding

company, or subsidiary thereof: (1) The Federal Deposit Insurance

Corporation; (2) the Director, Office of Thrift Supervision; (3) the

National Credit Union Administration; (4) the Board of Governors of

the Federal Reserve System; (5) the Comptroller of the Currency; (6)

the Securities and Exchange Commission; (7) the Secretary of the

Treasury; and (8) any state banking or securities department or

agency.

\1\57 U.S.C. 6f(c)(9) (Supp. IV 1992).

\1\6S. Rep. No. 22, 102d Cong., 2d Sess. 50 (1992).

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Section 4f(c) provides that generally an FCM will be considered to

have complied with a recordkeeping or reporting requirement adopted by

the Commission concerning an affiliated person subject to examination

by, or reporting requirements of, a federal banking agency if the FCM

uses for that purpose copies of reports filed by the affiliated person

with the relevant federal banking agency pursuant to specified

statutory provisions. However, the Commission is authorized to require

the FCM to obtain, maintain or report supplemental information if the

Commission makes a finding that such information is necessary to inform

the Commission concerning potential risks to the FCM and first requests

the federal banking agency to expand its requirements to include the

information.\17\

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\17\Section 4f(c)(5) also provides that prior to making a

request for supplemental information pursuant to section 4f(c)(3)

with respect to an affiliated person that is subject to examination

by or reporting requirements of a federal banking agency, the

Commission shall notify the agency of the information requested and

consult with the agency to determine whether the information

required is available from the agency and for other purposes,

``unless the Commission determines that any delay resulting from the

consultation would be inconsistent with ensuring the financial and

operational condition of the futures commission merchant or the

stability or integrity of the futures markets.'' 7 U.S.C. 6f(c)(5)

(Supp. IV 1992).

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The risk assessment provisions of the FTPA require the Commission

to treat any risk assessment information required to be provided to it

pursuant to that authority as subject to the confidentiality provisions

of section 8 of the Act. The Commission therefore is generally

prevented from disclosing such information to third parties.\18\

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\18\Section 8 of the Act provides generally that the Commission

may not publish data and information that would separately disclose

the business transactions or market positions of any person and the

trade secrets or names of customers unless such information has been

previously disclosed in connection with a congressional proceeding

or an administrative or judicial proceeding brought under the Act. 7

U.S.C. 12 (1988 & Supp. IV 1992).

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D. SEC Final Temporary Risk Assessment Regulations

The Commission's statutory risk assessment authority is

substantially similar to that granted to the SEC under Section 4 of the

Market Reform Act of 1990.\19\ Pursuant to this risk assessment

authority, the SEC has adopted ``final temporary'' rules\20\ 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.\21\ The SEC's risk assessment structure includes

recordkeeping and reporting rules applicable generally to all broker-

dealers that maintain capital equal to or greater than twenty million

dollars or that carry customer accounts and maintain capital of

$250,000. Under the SEC's risk assessment rules, broker-dealers are

required to maintain an organizational chart identifying material

associated persons, to depict the broker-dealer's risk management

policies and procedures, to provide certain financial data on the

affiliated system, including consolidated and consolidating financial

statements, to provide aggregate securities and commodities positions,

including financial instruments with off-balance sheet risk and

concentrations of credit risk (as defined in Statement of Financial

Accounting Standards No. 105 (``SFAS 105'')) on a disaggregated basis

for each material associated person, and other financial and

securities-related information. Under the SEC's risk assessment

program, the information required to be maintained by broker-dealers

under the recordkeeping rule generally is required to be filed within

60 days after the end of each quarter on SEC Form 17-H.\22\

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\19\Pub. L. No. 101-432, 104 Stat. 963 (1990).

\20\The SEC adopted ``final temporary'' rules as an interim step

in the adoption of final regulations to enable the agency to gain

experience with the information obtained pursuant to its risk

assessment rules and to evaluate the operation of the risk

assessment program based upon review of this information. The SEC's

Division of Market Regulation will prepare a study evaluating the

effectiveness of the rules which will be published 90 days after the

rules have been in full effect for two years. After evaluating

public comment on this report, the SEC will determine what

modifications to the rule, if any, are necessary. See 57 FR 32159,

32161 (July 21, 1992).

\21\57 FR 32159 (July 21, 1992).

\22\The SEC's rules require broker-dealers to file an

organizational chart as part of its first risk assessment filing and

with each year-end filing. Quarterly updates are required only if a

material change has occurred. The risk management policies must be

filed only with the first risk assessment filing, unless a material

change has occurred, in which case a quarterly update is required.

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The SEC's rules include provisions designed to diminish the

necessity for broker-dealers to create additional sets of records where

records substantially similar to those required by the risk assessment

rules are created for the use of other federal or state regulators. For

example, under the SEC's rules, a broker-dealer will be deemed in

compliance with the recordkeeping and reporting requirements concerning

a material associated person subject to the CFTC's supervision if it

maintains and files copies of Forms 1-FR-FCM or 1-FR-IB filed by the

FCM or the IB, respectively, with the CFTC.23 In adopting its risk

assessment rules, the SEC stated that these special provisions for CFTC

registrants were appropriate ``because entities regulated by the CFTC

are subject to recordkeeping, reporting, and supervisory requirements

similar to those imposed by the Commission on broker-dealers.''24

The SEC's risk assessment rules also include special provisions for

reporting broker-dealers with respect to other types of regulated

affiliates, including banks, insurance companies, and entities subject

to the supervision of foreign financial regulatory authorities.

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\2\3The CFTC and SEC, in cooperation with securities and futures

industry self-regulatory organizations, have developed a draft of a

new, combined Form 1-FR/FOCUS report, which will further harmonize

and facilitate electronic financial reporting for broker-dealers and

FCMs and will capture certain information on a regulated firm's

derivative product positions. The draft form is expected to be

published for public comment within the next several months.

\2\457 FR at 32163.

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E. Coordination With Other Regulators

The legislative history of the FTPA indicates that Congress

intended that the Commission take into account the existing reporting

systems of other relevant financial regulators in exercising the risk

assessment authority conferred upon it.25 The Commission has

consulted extensively with other financial regulators to develop, to

the extent possible, a coordinated approach to information-gathering

concerning regulated affiliates of FCMs. Commission staff have met with

securities and banking regulators on multiple occasions and have

reviewed various reports and filings required under the securities and

banking regulatory frameworks. In particular, Commission staff have

explored the extent to which other federal financial regulators may

share relevant risk assessment information concerning entities subject

to their supervision with the CFTC on a confidential basis in order

that requirements for reporting to the CFTC with respect to such

entities might be minimized. The Commission believes that, subject to

appropriate confidentiality safeguards such as are afforded by section

8 of the CEA, information-sharing among federal financial regulators

responsible for oversight of various entities operating within the same

holding company group should be fostered to facilitate financial

oversight of the group and its regulated component entities and to

minimize reporting requirements under the various individual regulatory

structures. For example, Commission staff have explored the extent to

which various types of event-specific information could be provided

directly to the CFTC by the relevant regulatory authority. The staff

also has discussed establishing lead regulator type responsibilities to

the extent practicable.

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\2\5S. Rep. No. 22, 102d Cong., 2d Sess. at 50.

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Further, the Commission has given extensive consideration to the

risk assessment rules adopted by the SEC pursuant to the risk

assessment authority granted it in the Market Reform Act of 1990. To

the extent possible, the Commission has designed its risk assessment

provisions with a view towards permitting FCMs which are broker-dealers

(or which are part of holding company groups that include a broker-

dealer) required to report pursuant to the SEC's risk assessment rules

to use reports prepared pursuant to the SEC's requirements to fulfill

the Commission's requirements. Generally, the Commission's proposed

rules would require filing of a subset of the information called for by

the SEC on a routine basis but call for certain additional information

specific to the operations of FCMs acting as clearing firms for

affiliated entities. The proposed rules are designed to permit the use

of the SEC risk assessment form, Form 17-H, given appropriate

supplementation, on an elective basis in lieu of new CFTC Form 1.15A.

To the extent that the Commission's approach alters that of the SEC, it

is intended to give early warning of events that would cause the CFTC

to request further information or to seek assistance from other

regulators and to take account of the more limited resources available

to the Commission to assess the information provided.

II. The Proposed Rules

Proposed Rule 1.14 would require FCMs to maintain and preserve

certain records and information concerning, among other things, the

organizational structure of which the FCM is 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 requires 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 upon the occurrence of

certain specified events, such as large decreases in the reported

adjusted net capital of FCMs or the equity of their parent companies.

Maintenance of the records required under proposed Rule 1.14 and

reporting of the data required pursuant to proposed Rule 1.15 are

intended to impose a discipline on the FCM relative to its own risk

management activities as well as to permit the Commission to make

informed assessments relevant to market events and to the analysis of

possible regulatory responses to such events. For example, risk

assessment information may permit more effective and moderate

management of financial market disruptions than would occur in the

absence of pertinent information.

The risk assessment provisions being proposed by the Commission

would 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 that

are clearing members of a contract market. As proposed, however, the

rules make special provisions for FCMs that are dually registered with

the SEC as broker-dealers, or that are part of a holding company group

that includes a broker-dealer, filing reports pursuant to the SEC's

risk assessment rules. Further, in general, the proposed rules would

allow 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 authority 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.

A. Definition of Material Affiliated Person

The FTPA requires that, in general, FCMs maintain certain records

regarding ``their affiliated persons whose business activities are

reasonably likely to have a material impact on the financial or

operational condition of the FCM.''26 For the purpose of

determining which affiliated persons are covered under this standard,

the proposed rules would define the term ``material affiliated person''

(``MAP'') by reference to several illustrative factors relevant to the

activities of the FCM and its affiliate and the relationship between

the entities. The factors specified are intended to provide guidance

and not to be exhaustive. FCMs should consider all of the facts and

circumstances pertinent to the identification of their affiliated

entities whose business activities are reasonably likely to have a

material impact on the financial or operational condition of the FCM.

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\2\6Specifically, Section 4f(c)(2)(A) of the Act states that

each FCM ``shall obtain such information and make and keep such

records as the Commission, by rule or regulation prescribes

concerning the registered (FCM'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 natural persons.'' 7 U.S.C 6f(c)(2)(A) (Supp. IV 1992).

The term ``affiliated person'' is defined for purposes of section

4f(c)(1)(i) of the Act to mean ``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.'' Natural

persons are generally excluded from risk assessment requirements. 7

U.S.C. 6f(c) (2)(A) and (3)(A) (Supp. IV 1992).

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The material affiliated person definition used in the Commission's

proposed rules is similar to that used in SEC Rule 17h-1T.27

However, for purposes of these rules, the Commission has used the term

``affiliated person'' rather than ``associated person'' to avoid

confusion with the associated person registration category described in

section 4k of the Act28 and Commission Rule 3.12. Like the SEC

under its risk assessment regulations, the Commission proposes to leave

the determination as to which entities affiliated with an FCM are MAPs

with the reporting FCM, in the first instance, based on the FCM's

examination of all relevant facts and circumstances.

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\2\717 CFR 240.17h-1T (1993).

\2\87 U.S.C. 6k (1988 & Supp. IV 1992).

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A first relevant factor in determining the materiality of an

affiliated person is 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. In a two-tier holding

company structure, for example, the first tier may include the direct

holding company parent of the FCM and several related financial service

entities. The entities at this first tier are very likely to be

material to the FCM in light of their close proximity and consequent

potential for direct financial impact upon the FCM and its funding. In

some cases, entities other than the FCM's parent and the parent's

affiliates may be required to be deemed MAPs. For example, intermediate

holding companies and the ultimate parent corporation may be deemed

MAPs if, for example, a bankruptcy of the ultimate parent could

significantly affect the FCM's ability to obtain needed credit. If,

however, after evaluating all of the relevant facts and circumstances,

it appears that an affiliated person in the upper tiers of a holding

company structure could have only a remote impact on the financial or

operational condition of the FCM, the affiliate would not be required

to be designated as a MAP. Moreover, if the ultimate parent in a multi-

tiered holding company structure primarily is engaged in activities

which are not related to the futures or financial markets, such as

manufacturing or retailing, the parent would not generally be required

to be designated a MAP. However, an ultimate parent company which is

engaged in non-financial activities may clear its futures account

through the FCM in order to manage the risk of cash commodity positions

and this relationship could expose the FCM to potential risks relative

to cash or over-the-counter trading that would render the parent

company a MAP.

A second factor relevant to the identification of MAPs is the

degree of financial dependence of the FCM on its affiliate and the

nature of the FCM's financing requirements. For example, if the FCM's

obligations are guaranteed by a parent or other affiliate, the FCM has

a degree of financial dependence upon the guarantor entity such that,

absent unusual circumstances, that entity would be a MAP. Similarly, if

the FCM relies for financing upon a parent company whose capacity to

provide such financing depends upon the issuance of commercial paper or

other sources of unsecured credit, the FCM would be materially affected

by an acceleration or call by the holders of these obligations,

especially if the FCM did not have sufficient liquid assets or

alternative financing available to replace the financing provided by

its parent company.

A third materiality factor is the degree to which an FCM or its

customers rely upon an affiliated person for operational services or

support. If an FCM relies upon an affiliated person for significant

operational facilities or support, the operations or financial

difficulties of the affiliated person could materially impact the FCM's

operations.

Another relevant factor in the materiality determination is the

level of market, credit and other risk present in an affiliated

entity's activities. A high volume of over-the-counter derivative

transactions conducted through an unregulated affiliated entity may

give rise to market, credit, operational or other risks that require

sophisticated risk management strategies and internal control

procedures to protect against potential losses that could jeopardize

the resources of the affiliate and potentially impact related entities.

Position taking by an affiliate may also expose the affiliate to risks

that create the potential for spillover effects upon the FCM.

Generally, affiliated entities that assume greater risk exposures may

incur an increased likelihood of liquidity declines or other financial

difficulties that increase the potential for adverse effects upon the

FCM.

Finally, the extent to which an affiliated person has the authority

or ability to negatively impact the FCM's capital is a factor in

determining the materiality of the affiliated entity. The activities of

a parent company or other affiliate that has the ability to remove

capital from the FCM, such as for the purpose of repayment of loans or

debt, generally are material to the FCM (e.g., a parent company of an

FCM may have the ability to withdraw capital from a subsidiary FCM if

the parent is unable to meet interest or principal payments on

debt).29

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\2\9Of course, the parent could only lawfully withdraw capital

to the extent that the FCM would remain in compliance with the

Commission's net capital requirements.

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B. Information Required To Be Maintained and Filed on a Routine Basis

The proposed rules generally require two forms of risk assessment

activity by FCMs: Recordkeeping and reporting. FCMs subject to the

rules would generally be required to maintain specified types of

information and to file reports of that information on a routine basis,

in most cases annually, absent a material change in reported data. The

categories of information called for are discussed below, with specific

reference to the relevant recordkeeping and reporting requirements of

the proposed rules.

1. Organizational Chart

Proposed Rule 1.14(a)(1)(i) would require an FCM to maintain an

organizational chart depicting the holding company structure of which

the FCM is a part. The chart should provide an overview of the entire

organization and identify those affiliated persons that are MAPs of the

FCM, as determined by the registrant in accordance with the standards

set forth in the proposed rule and discussed above. The chart should

also 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. In addition, the chart should indicate

whether a MAP is a dealer or end user (or both) of financial

instruments with off-balance sheet risk. End-users employ financial

instruments to facilitate the management of financial risks that arise

in the course of their business. Dealers are distinguished from end-

users by their readiness to make two-way markets in financial

instruments, thereby providing end-users (and other dealers) with the

financial instrument positions they seek. As proposed, Rule

1.15(a)(1)(i) would require the FCM to file its organizational chart

within 90 calendar days after the effective date of the rule or within

60 calendar days of registration if that occurs after the rule's

effective date. Where there is a material change in the information

provided, an updated organizational chart is required to be filed

within five calendar days after the end of the fiscal quarter in which

the change occurred. If no material change occurs, no updates are

required.30

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\3\0A statement that updates required under Rule 1.15 in the

event of a change in previously reported information are not

required because no change sufficient to trigger the update

requirement has occurred may be requested on the new combined 1-FR/

FOCUS report.

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2. Risk Management Policies

Paragraph (a)(1)(ii) of proposed Rule 1.14 would require an FCM to

maintain records relating to the FCM's procedures for monitoring and

controlling financial and operational risks to it resulting from the

activities of its affiliates. Like the SEC's risk assessment rules, the

Commission's proposed rule would require that FCMs maintain and

preserve 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 and

concerning their financing and capital adequacy, including information

regarding sources of funding and a narrative discussion by management

of the liquidity of the material assets, the structure of debt capital

and sources of alternative funding. Also like the SEC rule, the

Commission's proposed rule would require the FCM to maintain written

policies concerning trading positions and risks, such as records

regarding reporting responsibilities for trading activities,

limitations on trading activities and a description of the types of

reviews conducted to monitor existing positions. However, the CFTC's

proposed requirement relating to records of policies, procedures and

systems with respect to trading activity, while incorporating the

matters covered by the SEC's rules, includes 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 would include, for example, as specified in

proposed 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 reviewing hedging and

risk management strategies of noncustomer affiliates.

Subject to the CEA and Commission regulations, in particular any

requirements encompassed by existing Rule 166.3, the proposed rule does

not itself require an FCM to create specific risk management policies

and procedures.31 It is sufficient for purposes of the risk

assessment requirements 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. However, the Commission believes that

from the perspective of prudent risk management, FCMs subject to these

rules should review their existing internal controls and risk

management systems and procedures with a view towards assuring that

those systems are sufficient in light of the potential risks created by

their own and their affiliates' activities. The types of risk

management policies and internal controls referred to in the proposed

rule, while by no means exclusive of those necessary to prudent risk

management,32 are indicative of the types of risk management

systems that may be warranted to address risks engendered by affiliate

activities.

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\3\1See 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).

\3\2Simulation analyses or major market move scenarios to

measure the impact upon positions carried and upon regulatory

capital of extreme price movements would be one tool for management

of the risk of positions carried by the FCM, one which has been

favorably mentioned by audit staff in oversight reviews of exchange

financial surveillance programs. Separation of functions, periodic

reconciliations of key accounts, daily marking-to-market of

positions, and on-going assessments of the effectiveness of hedge

positions, are examples of other internal controls generally

important to an FCM's business, some of which are explicitly

required under the CEA and Commission rules.

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Paragraph (a)(1)(ii) of Rule 1.15 requires an FCM to file the

information referred to above with the Commission within 90 calendar

days from the effective date of the rule or 60 days following the FCM's

registration if that occurs after the rule's effective date. Where

there is a material change in the information provided, such a change

is required to be reported to the Commission within five calendar days

after the end of the fiscal quarter in which the change occurred. If

there is no material change, no update is required.33

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\3\3In this regard, the Commission's proposed rule departs from

the SEC's reporting structure which requires similar information to

be filed on an annual basis.

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3. Financial Statements

The following financial statements would be required on a

consolidated basis for the FCM and its ultimate parent company and

would be required to be filed within 105 calendar days after the end of

each fiscal year: (1) Balance sheet; (2) statement of income; (3)

statement of cash flows; and (4) explanatory notes to the financial

statements. Additionally, a consolidating balance sheet and statement

of income must be filed annually for the FCM and its ultimate parent

company. The consolidated and consolidating financial statements would

be required to be prepared in accordance with United States generally

accepted accounting principles, consistently applied (``U.S. GAAP''),

except as indicated below. If an annual audit and certification is

performed as an ordinary and customary part of the entity's business,

the consolidated statements should be certified by an independent

certified public accountant. The consolidating financial statements

must show separately the FCM, its ultimate parent company and each MAP.

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 should be included. The note

should provide a narrative description of the items that are treated

differently by U.S. GAAP. The consolidated financial statements also

should be accompanied by the footnotes required by GAAP and any other

information necessary for an understanding of the information being

presented (e.g., the summary of significant accounting policies).

The Commission requests 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.

The financial statements required to be maintained and filed

pursuant to the proposed rules are the same as those required under the

SEC's risk assessment program. The proposed rules, however, require the

consolidated financial statements to be certified if an audit is

ordinarily performed. The Commission does not believe that this should

create any additional burdens for FCMs also subject to the SEC's

regulations, because the proposed rules would not impose the added

expense of an annual audit if an annual audit is not customarily

performed. Moreover, the Commission is requesting financial statements

to be filed on an annual basis rather than quarterly as required under

SEC rules. However, the Commission requests 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.

4. Aggregate Securities and Commodity Positions

Paragraph (a)(1)(v) of proposed Rule 1.14 would require FCMs to

maintain records of the fair market value as of the end of each fiscal

quarter of each MAP's inventory of long and short securities and

physical commodity positions as specified in new Form 1.15A, including

a separate listing for each MAP of any aggregate unhedged exposure,

other than U.S. government or agency securities, denominated in dollars

and measured by interest rate, duration, instrument or other measure as

specified by the reporting entity, which exceeds a Materiality

Threshold. For purposes of the proposed rules, the term ``materiality

threshold'' is defined as the greatest of: (i) $20 million; (ii) 10

percent of the FCM's adjusted net capital on the most recent financial

reports filed by the FCM with the Commission pursuant to Rule 1.10;

(iii) 10 percent of the MAP's tangible net worth; or (iv) for an FCM

that is required, or that has a MAP that is required, to file pursuant

to SEC Rule 17h-2T, the Materiality Threshold specified in SEC Rule

17h-1T.

The Commission requests comment as to whether the Materiality

Threshold should be applied on a product-by-product basis with respect

to each MAP or on an aggregate basis for all transactions of a MAP with

a single counterparty. If product-by-product differentiation is more

appropriate for credit risk assessment purposes, what product

breakdowns are desirable?

The information required under this provision of the proposed rules

is intended to encompass only the types of items which appear on the

balance sheet of the FCM. Accordingly, records of physical (spot)

commodities would be maintained under this paragraph and reported under

the ``aggregate securities and commodities'' heading of Form 1.15A,

while off-balance sheet items such as futures and forwards are covered

in paragraph (a)(1)(vi) of proposed Rule 1.14 which concerns

``financial instruments,'' as discussed below.

The on-balance sheet items provide more particularity by instrument

than required financial reports and some information relative to

funding. Nonetheless, the Commission requests comment concerning the

scope of the requirement for on-balance sheet information, in

particular as to whether the specified on-balance sheet items should

generally be required or only required where the item is part of a

financing transaction.

Rule 1.15 requires the information discussed above to be filed on

Form 1.15A on an annual basis within 105 days after the end of each

fiscal year. Quarterly updates would be required only if a change of 20

percent or greater in a line item has occurred since the FCM's last

filing with the Commission. Rather than require routine quarterly

reporting of on-balance sheet aggregate securities and commodities

information, the Commission is proposing to require quarterly updates

only when a significant change in previously reported information has

occurred. When filing any quarterly update referred to herein, only the

particular line item in which the 20 percent or greater change occurred

need be updated, not the entire form. However, an FCM may elect to file

this information for each fiscal quarter.

The Commission requests comment as to whether the requirement for

quarterly updates would more appropriately be framed in terms of

whether a ``material change,'' rather than a 20 percent change, in such

data has occurred or whether a routine quarterly filing requirement

would be preferable.

The type of information required under the foregoing provisions is

the same as that required under the SEC's interim final regulations.

However, the information would be provided on new CFTC Form 1.15A in

the aggregate for the FCM's MAPs rather than separately for each MAP as

is required under the SEC's rules, unless such a presentation would

materially understate the risk relative to stockholders' equity of any

MAP, in which case the information must be provided separately for such

MAP. The Commission, however, is including a proposed Part C to Form

1.15A to elicit comment as to whether such a schedule is preferable for

identifying MAPs that require additional review and could be used for

reporting cases where aggregate data for all MAPs might disguise a

particular MAP's risk. For example, Part C would require information on

a MAP's trading book, and if a MAP maintains separate trading books for

different types of instruments, these must be discussed separately.

The Commission requests comment as to whether Part C should be used

in lieu of providing the information on Parts A and B for such MAP

separately. The Commission requests comment concerning Form 1.15A

generally as well as concerning Part C thereof, and the Commission

further requests comment as to whether reporting on Form 1.15A should

generally be required separately for each MAP rather than on an

aggregate basis for all MAPs.

The Commission's proposed rules also incorporate a lower

Materiality Threshold than is provided in the SEC's risk assessment

rules, which use the greater of $100 million or 10 percent of the

broker-dealer's tentative net capital or tangible net worth.34 The

Commission believes that a $20 million threshold is a more realistic

materiality figure for FCMs as opposed to generally larger broker-

dealers but requests comment on this point. To reduce reporting burdens

for FCMs that also file under the SEC's rules or are part of a holding

company group that includes a reporting broker-dealer, the Commission's

proposed threshold incorporates the SEC's higher materiality threshold

for such firms.

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\3\4Further, Form 1.15A, unlike SEC Form 17-H, does not call for

information concerning purchased options or risk arbitrage.

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5. Financial Instruments

Proposed Rule 1.14(a)(1)(vi) requires FCMs to maintain records of

the amount at the end of each fiscal quarter, on an aggregate basis for

the FCM and its MAPs, of the notional or contractual amounts, and in

the case of options, the value of the underlying instruments, of

exchange-traded futures and commodity option contracts, forward

contracts, over-the-counter commodity options, and financial

instruments with off-balance sheet risk and financial instruments with

concentrations of credit risk, as those terms are defined in SFAS 105,

broken down by contract type and maturity as specified in proposed Form

1.15A. The record must identify each instrument where credit risk with

respect to a counterparty exceeds the Materiality Threshold. SFAS 105

is applicable to all companies that prepare financial statements in

accordance with GAAP and requires disclosure of information about

financial instruments35 with off-balance sheet risk and financial

instruments with a concentration of credit risk. As noted above, in

contrast to paragraph (a)(1)(v) of Rule 1.14 which concerns ``on-

balance sheet'' aggregate securities and commodity positions, the

information regarding ``financial instruments'' is intended to

encompass off-balance sheet activities.

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\3\5The term ``financial instrument'' is defined in SFAS 105 as

cash, evidence of an ownership interest in an entity or a contract

that both:

a. Imposes on one entity a contractual obligation (1) to deliver

cash or another financial instrument to a second entity or (2) to

exchange financial instruments on potentially unfavorable terms with

the second entity; and

b. Conveys to that second entity a contractual right (1) to

receive cash or another financial instrument from the first entity

or (2) to exchange other financial instruments on potentially

favorable terms with the first entity.

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``Off-balance sheet risk'' is defined in SFAS 105 as the risk of

accounting loss.36 SFAS 105 defines ``credit risk'' as the

possibility that a loss may occur from the failure of another party to

perform under the terms of the contract. The proposed rules would

require an FCM to separately list each instrument where the credit risk

with respect to an individual counterparty exceeds the Materiality

Threshold at quarter end.

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\3\6''Accounting loss'' is further defined as the loss that may

have to be recognized due to credit and market risk as the result of

the obligations from a financial instrument.

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The reporting of futures, forwards and swaps on proposed Form 1.15A

differs slightly from that under SEC Form 17-H. While SEC Form 17-H

breaks out only interest rate and foreign exchange swaps, proposed Form

1.15A also includes separate entries for energy and precious metal

swaps. The same category breakdown would also apply for reporting

futures and forwards on proposed Form 1.15A. This is in contrast to SEC

Form 17-H, which breaks down the reporting of futures and forward

contracts by three categories of underlying instrument: (1) U.S.

Treasury and mortgage-backed securities; (2) other securities; and (3)

all others. In addition, Form 1.15A would require separate listing of

all swaps and forwards by three different maturities: less than one

year; one to five years; and more than five years.

These changes are intended to take account of differences between

banking and securities reporting of off-balance sheet exposures and

ongoing discussions on data relative to macro-prudential, as opposed to

micro-prudential, risk. The Commission requests comment as to whether

additional maturity breakdowns under one year or over five years would

be appropriate, particularly in the case of interest rate instruments.

Rule 1.15 requires the above information to be filed on Form 1.15A

on an annual basis within 105 days after the end of each fiscal year.

Quarterly updates would be required within 60 calendar days after the

end of any fiscal quarter in which a change of 20 percent or greater in

any line item has occurred since the FCM's last filing with the

Commission. An FCM may elect to file this information routinely for

each fiscal quarter.

The Commission requests comment as to whether a materiality

standard, as compared to a quantitative threshold, should be used to

determine whether quarterly updates are required or whether a routine

quarterly filing requirement would be preferable to an update

requirement triggered by a change in any line item. Comment is also

requested as to whether any efficiencies in reporting would be achieved

if large trader account numbers were substituted for domestic exchange

traded futures positions.

6. Extensions of Credit

Paragraph (a)(1)(vii) of proposed Rule 1.14 would require an FCM to

maintain records of the aggregate amount as of quarter end of all

material unsecured extensions of credit by each MAP, including a

description of any extensions of credit to a single borrower which

exceed the Materiality Threshold. Annual filing of this information

would be required on Form 1.15A pursuant to proposed Rule 1.15. If a

change of 20 percent or greater occurs in the information last filed

with the Commission, a quarterly update must be filed within 60

calendar days after the end of the fiscal quarter in which such a

change occurred. An FCM may, at its option, file this information

routinely for each fiscal quarter.

The information required under this paragraph is essentially the

same as that required under the SEC's risk assessment rules. However,

the Commission's proposal does not break out bridge loans as a separate

listing under this heading. Rather, a bridge loan, if material, would

be treated the same as and be grouped together with any other material

unsecured extensions of credit for recordkeeping and reporting purposes

under the Commission's proposal.

7. Commercial Paper and Other Financing Information

Paragraph (a)(1)(viii) of Rule 1.14 would require FCMs to keep

records of the aggregate amount at fiscal quarter end of commercial

paper, secured and unsecured borrowing, bank loans, lines of credit and

the principal installments of long-term or medium-term debt scheduled

to mature within one year. Under proposed Rule 1.15 this information

would be required to be filed on Form 1.15A annually unless a change of

20 percent or greater occurs in any of the information last filed with

the Commission pursuant to either paragraph (a)(2)(iii) or (a)(4) of

Rule 1.15, in which case a quarterly update would be required to be

filed within 60 calendar days after the end of the fiscal quarter in

which such a change occurred. An FCM may, at its option, file this

information routinely for each fiscal quarter. The information

discussed above is of the same nature as that called for under the

SEC's risk assessment regulations, except that the proposed rule

generally calls for such information to be reported in the aggregate

for the FCM's MAPs rather than for each MAP as required under SEC

rules.

8. Real Estate Information

Proposed Rule 1.14(a)(1)(ix) requires FCMs to maintain information

concerning the annual gross income derived from real estate activities,

including mortgage loans and investments, for each MAP that derived

more than 20 percent of its gross income (loss) from such activities

during the fiscal year. This information would be required to be

reported annually on Form 1.15A. The information required under the

SEC's risk assessment rules regarding a MAP's real estate activities is

considerably more detailed than that which would be required under the

Commission's proposed rules. The SEC's rules require that a broker-

dealer maintain and file information regarding any real estate

activities of a MAP, without regard to the percentage of gross income

derived from such activities, and call for a variety of types of

information concerning each MAP's real estate operations.37 The

proposed rules would require reporting of the annual gross income

derived from real estate activities for any MAP that derived more than

20 percent of its gross income (loss) from such activities during the

fiscal year. Although the Commission may ask for supplemental

information concerning a MAP's real estate activities if necessary in

the circumstances, the Commission believes that, in the first instance,

the information requested under the proposed rules should be sufficient

to highlight the real estate activities of those MAPs which may require

additional review. The Commission requests comment, however, as to

whether more detailed information, such as is called for by the SEC's

rules, should be required.

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\3\7For example, the SEC's rules require that a broker-dealer

maintain and file information concerning a material associated

person's real estate mortgage or loan investment type, a geographic

distribution of such activities by year, the value of loans that are

noncurrent, are in the process of foreclosure or have been

restructured, the allowance for losses on loans and investments and

information concerning risk concentration in the material associated

person's investment and loan portfolio. See 17 CFR 240.17h-

1T(a)(1)(x).

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9. Information Regarding Noncustomer Accounts

Paragraph (a)(1)(x) of Rule 1.14 would require an FCM to maintain

on a quarterly basis the gross notional value, long and short, of open

positions in noncustomer accounts, as that term is defined in Rule

1.17(b)(4),38 the percentage of this value compared to the FCM's

adjusted net capital, the percentage of the notional value of

noncustomer accounts carried by the futures commission merchant that

are bona fide hedging positions in accordance with Rule 1.3(z), and the

percentage of the aggregate notional value of noncustomer accounts

carried for the purpose of managing the risk of cash market commitments

that mature more than 12 months from quarter end and more than 60

months from quarter end, compared to the aggregate notional value of

open positions in all noncustomer accounts carried by the FCM. Large

positions carried in noncustomer accounts of an FCM may represent a

significant exposure of the FCM to risks created by its affiliate's

trading activities relative to cash flow or financing shortages. The

nature of the affiliate's activities, i.e., whether the positions are

for hedging purposes or for speculation and, if for hedging or risk

management purposes, the maturities of the cash positions being offset,

may bear significantly upon the risks assumed by the FCM carrying an

affiliate's account.

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\3\8Rule 1.17(b)(4) defines a ``noncustomer account'' as a

commodity futures or option account carried on the books of an FCM

``which is not included in the definition of customer or * * *

proprietary account (as defined in Sec. 1.17(b)(3)).'' ``Proprietary

account'' is defined in Rule 1.17(b)(3) to mean a commodity futures

or option account carried on the books of the FCM for the FCM

itself, or for general partners in the FCM. Essentially, the

definition of noncustomer account includes proprietary accounts as

defined in Rule 1.3(y) other than the account of the FCM itself or

its general partners. Noncustomer accounts would thus include, among

others, accounts of affiliates of the FCM that are under common

control with the FCM, that control the FCM, or are controlled by the

FCM.

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The Commission believes that the size and nature of noncustomer

accounts carried by the FCM are likely to be important components of

risk assessment information, particularly in circumstances in which

futures positions carried for affiliates are either not offset by, or

are imperfectly correlated with, cash positions at the affiliate.

Accordingly, information concerning such positions is necessary for a

complete risk assessment evaluation of an FCM. The noncustomer account

information that would be required under the proposed rules would, for

the most part, be maintained by the FCM as part of its required

recordkeeping under current rules39 and could be used to trigger

more extensive financial oversight by the CFTC. To the extent that

additional information is required to be maintained and reported

concerning the maturities of cash commitments which a MAP is hedging or

the risks of which the MAP is managing by means of futures transactions

carried by the FCM, the information requested is material to the FCM's

own risk management program and should be readily accessible to the

FCM.

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\3\9See, generally, Rule 1.35; see also Rules 1.33, 1.37 and

1.46.

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Rule 1.15(a)(1)(iii) would initially require filing of the

information discussed above within 90 calendar days of the rule's

effective date or 60 calendar days from the date of the FCM's

registration if later. Thereafter, Rule 1.15(a)(3) would require this

information to be filed within 60 calendar days after the end of each

fiscal quarter. and 1.46.

C. Information Required Upon the Occurrence of Certain Events

The proposed rules would require the majority of the required risk

assessment information to be filed on an annual basis, with updates to

be provided at the end of a quarter only if a change of 20 percent or

greater has occurred in the information provided to the Commission

since the FCM's last risk assessment filing. Only information

concerning noncustomer accounts, which is either wholly or largely

within the scope of the FCM's routine recordkeeping systems, would be

required routinely on a quarterly basis. This approach differs from

that adopted by the SEC, which generally requires routine quarterly

reporting. In lieu of requiring routine quarterly filing of substantial

information concerning each affiliate's activities, the Commission's

proposed rules identify certain extraordinary events which trigger a

required notice to the Commission. Upon receipt of notice of such an

event, the Commission may then determine whether supplemental

information should be requested of the FCM, in light of the

circumstances of the FCM and its affiliated entities, the nature of the

event triggering the notice requirement and other available information

concerning the FCM.

The proposed rule would require notification to the Commission upon

the occurrence of any of eight ``triggering'' events which may indicate

a basis for further inquiry or closer scrutiny of the FCM. In

specifying ``triggering'' events requiring notice to the Commission,

together with quarterly updates of significant changes in financial

information, the Commission has endeavored to construct a reporting

system that minimizes routine filings and operates instead to identify

potentially significant events from a financial monitoring perspective

that should be readily evident to the FCM, are objectively or

quantitatively defined, evidence circumstances likely to warrant

further review, and should occur infrequently. 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)40 within three

business days of the occurrence of any event specified in paragraph

(b)(2) of proposed Rule 1.15 except to the extent that shorter periods

are specified in paragraphs (b)(2)(i) and (b)(2)(viii) with respect to

particular triggering events. After reviewing the notice filed by an

FCM, additional information may be requested from the firm or a

relevant regulatory agency, as determined to be necessary in the

circumstances. The Commission requests comment, however, 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.

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\4\0The Director of the Division of Trading and Markets is

generally delegated the authority to act on behalf of the Commission

with respect to the proposed risk assessment regulations.

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Comment is also requested, in view of the recordkeeping

requirements of proposed Rule 1.14, as to whether any efficiencies

would be achieved by limiting the reporting of certain information

required on Form 1.15A to a response for a request for information in

the event of a triggering event. In this connection, commenters should

specifically address what routine information would be sufficient to

provide such understanding of group activities and exposures as may be

necessary to provide background about the liquidity management of the

group and to assist in evaluating potential risks and the significance

of a triggering event to the regulated FCM. Commenters should also

address the practicability of developing particularized information on

a sufficiently timely basis, if such information were only provided

upon a triggering event, to assist the Commission's management of

emergency situations. For example, when market surveillance special

calls are made, generally a response is required within 24 hours.

Under the proposed rule, the following events would require notice

to the Commission.

1. Reduction in FCM's Adjusted Net Capital or Parent's Stockholders'

Equity

The Commission believes that a sudden major reduction in the

adjusted net capital of an FCM or the consolidated stockholders' equity

of the FCM's parent may be an indication of impending financial

difficulties and should be brought to the Commission's attention.

Accordingly, the Commission's proposed rules require that an FCM notify

the Commission of any such reduction. Paragraph (b)(2)(i) of Rule 1.15

requires 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. The FCM must

provide notice within two business days of any such reduction 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, such as a dividend payment or

making of a loan. This notification requirement is essentially the same

as that provided in Rule 921 of the Chicago Mercantile Exchange

(``CME''), which requires that an FCM notify the CME within 48 hours

after activities in the normal course of business or at least two

business days prior to any extraordinary transaction or series of

transactions that cause greater than a twenty percent reduction in the

FCM's last reported adjusted net capital.41 SEC regulations also

require notice in the event of withdrawals, advances or loans by a

broker-dealer or its consolidated subsidiaries or affiliates that

exceed certain thresholds.42

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\4\1The Commodity Exchange, Inc. (``COMEX''), New York

Mercantile Exchange (``NYMEX'') and Chicago Board of Trade (``CBT'')

have adopted similar rules. See COMEX Rule 7.08(a); NYMEX Rule

2.14(D); and CBT Rule 285.03.

\4\217 CFR 240.15c3-1(e)(1) (1993). In general, the SEC rule

provides that a broker-dealer or consolidated subsidiary or

affiliate must notify the SEC: (1) Two business days prior to any

withdrawals, advances or loans which on a net basis exceed in the

aggregate in any 30 calendar day period 30 percent of the broker-

dealer's excess net capital; or (2) two business days after

withdrawals, advances or loans which on a net basis exceed in the

aggregate in any 30 calendar day period 20 percent of the broker-

dealer's excess net capital. The rule, however, is limited to the

following types of transactions that cause an equity reduction: (1)

Withdrawals by action of a stockholder or partner; (2) redemption or

repurchase of stock by a consolidated entity; (3) payment of

dividends or any similar distribution; or (4) an unsecured advance

or loan made to a stockholder, partner, sole proprietor, employee or

affiliate. Pursuant to SEC Rule 15c3-1(e)(3)(i), the SEC also may

restrict for up to twenty business days any withdrawal of equity

capital by a broker-dealer or unsecured loan or advance to a

stockholder, partner, sole proprietor, employee or affiliate if: (1)

Such advance or loan when aggregated with all other withdrawals,

advances or loans on a net basis during a 30 calendar day period

exceeds 30 percent of the broker-dealer's excess net capital; or (2)

the SEC concludes that the withdrawal, advance or loan may be

detrimental to the broker-dealer's financial integrity, may unduly

jeopardize the broker-dealer's ability to repay customer claims or

other liabilities which may cause a significant impact on the

markets or expose the broker-dealer's customers or creditors to

loss. 17 CFR 240.15c3-1(e)(3)(i) (1993). See also 17 CFR 240.15c3-

1(e)(2) (1993) (placing various other limitations on withdrawals of

broker-dealer's equity capital).

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Similarly, paragraph (b)(2)(v) of the rule requires an FCM to

notify the Commission of any reduction of 20 percent or more of its

parent's consolidated stockholders' equity from the date of the

parent's last quarterly consolidated financial statements. Such notice

must be provided within three calendar days of any such reduction.

2. Outflow of FCM's Assets

Paragraph (b)(2)(ii) of Rule 1.15 requires 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 rule explicitly excludes, however,

securities transactions between FCMs and their MAPs which occur in the

ordinary course of business where payment is made within two business

days, and aggregate withdrawals equalling $500,000 or less (computed on

a net basis) within a 30 calendar-day period. This provision would

enable the Commission to receive current information on matters that

materially impact the financial resources of a futures commission

merchant and to update the Commission's records regarding the amount of

an entity's adjusted net capital and other financial resources

maintained by a firm, which otherwise could become materially

inaccurate. This notice requirement is similar to a requirement in the

SEC's net capital rule which requires broker-dealers to notify the SEC

of certain withdrawals of equity capital.43 The Commission's rule

is, however, both more lenient and broader than the SEC rule. The

Commission's proposal allows three business days for an FCM to notify

the Commission of any transaction which falls within the proposed rule,

as opposed to the advance notice or two business day notification

requirements established by the SEC. However, the Commission requires

notice of ``any outflow of assets'' that meets the criteria set forth

in the proposed rule and therefore potentially could require notice of

certain transactions that would not affect an entity's regulatory

capital and therefore would not fall within the SEC's notice

provisions.

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\4\3See supra note 42.

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3. Losses

Paragraph (b)(2)(iii) of proposed Rule 1.15 would require an FCM to

notify the Commission if aggregate cumulative losses occurring in all

noncustomer accounts (as defined in Rule 1.17(b)(4)) carried by the FCM

exceed: (1) In any 30 day period, the greater of 10 percent of the last

reported consolidated stockholders' equity of the FCM's parent or $50

million; or (2) in any 12-month period, the greater of 20 percent of

the last reported consolidated stockholders' equity of the FCM's parent

or $100 million.

This provision is designed to assure that the FCM alerts the

Commission to material losses in the futures markets to the extent such

losses are incurred by the consolidated group in noncustomer accounts

carried by the FCM. Since reporting under this provision is triggered

by losses in the futures markets and does not depend upon a computation

of corporate net income pursuant to generally accepted accounting

principles, it is a simple and relatively sensitive reporting device.

Although the Commission recognizes that losses on futures transactions

may be offset by corresponding gains on related cash positions, this

notice provision is intended to permit the Commission to make early

inquiries regarding financial strategies or positions that may be

causing material cash flow demands on the resources of the consolidated

group of which the FCM is a part.

Paragraph (b)(2)(iv) of Rule 1.15 is intended to alert the

Commission to large losses occurring at a MAP which may affect the

consolidated group's financial stability. This provision requires an

FCM to notify the Commission of any net loss at a MAP during any

quarter which exceeds 30 percent of the MAP's last reported net worth

or 20 percent of the FCM's adjusted net capital.

4. Changes in Credit or Capital Rating

Paragraph (b)(2)(vi) of Rule 1.15 requires an FCM to notify the

Commission of any reduction in a MAP's credit rating by Standard &

Poor's Corporation, Moody's Investor Services, Inc. or any other

nationally recognized rating service. As over-the-counter transactions

may be conducted through unregulated entities that are heavily

dependent upon high credit ratings for the conduct of their business, a

change in credit rating may be very material to such entities'

operations. Consequently, reporting under this provision will alert the

Commission to events which could adversely impact the FCM or its

consolidated group.

Paragraph (b)(2)(vii) requires an FCM to notify the Commission if a

MAP files a notice with a banking regulator stating that an adjustment

to its capital category may have occurred. A reduction in capital

category may have been due to financial or other events of which the

Commission has not yet become aware. Under banking regulations, an

entity subject to the supervision of the Board of Governors of the

Federal Reserve System, the Office of Thrift Supervision, the Federal

Deposit Insurance Corporation or the Office of the Comptroller of the

Currency must provide written notice to its supervisory agency or

agencies that an adjustment to the entity's capital category may have

occurred, no later than 15 calendar days following the date that any

material event has occurred that would cause the entity to be placed in

a lower capital category.44

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\4\4See 12 CFR 208.32(c)(1993); 12 CFR 565.3(c)(1993); 12 CFR

325.102(c)(1993); and 12 CFR 6.3(c)(1993).

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5. Guarantee Agreements

Paragraph (b)(2)(viii) of Proposed Rule 1.15 would require an FCM

to notify the Commission three business days prior to the effective

date of any agreement whereby the FCM agrees to guarantee the

obligation of any affiliated entity. The Commission wishes to emphasize

that this provision applies to agreements between the FCM and any

affiliate and is not limited to guarantee agreements entered into with

a MAP.45 Notice under this provision would inform the Commission

as to new financial obligations undertaken by an FCM that may have a

material impact upon the firm's regulatory capital and may not yet have

been reflected in financial reports filed with the Commission. Upon

receipt of a notice under this provision, depending upon the nature and

extent of the guarantee, the Commission may request a current pro forma

computation of an FCM's adjusted net capital position, which would

indicate the potential impact on adjusted net capital of any newly

undertaken guarantees.

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\4\5However, the establishment of such a guarantee arrangement

may result in the affiliate becoming a MAP.

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D. Exemptions and Special Provisions

Under Section 4f(c), the Commission may exempt, ``under such terms

and conditions and for such periods as the Commission shall provide,''

any person or class of persons from rules issued pursuant to that

provision. Section 4f(c) of the Act directs the Commission to consider

the following general factors in determining whether to grant such

exemptions: (1) Whether the information requested is available from

another supervisory agency; (2) the primary business of an affiliated

person; (3) the nature and extent of domestic or foreign regulation of

the affiliated person's activities; (4) the nature and extent of the

FCM's commodity futures and options activities; and (5) the amount of

assets and revenues derived from and involved in United States futures

markets.

Based upon these factors and the purposes of the risk assessment

rules, the Commission has determined to provide an exemption for FCMs

who, based on the amount of customer funds held and adjusted net

capital maintained, appear to engage in only small amounts of futures

and options activities. Further, the proposed rules 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 proposed 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

Preliminarily, the Commission has determined to focus its risk

assessment program upon those FCMs which appear to be significantly

engaged in futures and options trading or which, by virtue of their

status as clearing members46 of exchanges may have a significant

impact upon the financial integrity of the exchange marketplace. In

this regard, the Commission is proposing to exempt from the risk

assessment requirements all FCMs, other than clearing member firms,

that hold customer funds of less than $6,250,00047 and maintain

adjusted net capital of less than $5,000,000, calculated as of the

FCM's fiscal year-end.48 Of course, the Commission may re-evaluate

these customer funds and adjusted net capital levels at a later date

should experience indicate that they are either too high or too low

given the objective of the risk assessment rules to provide the

Commission with data designed to reduce risks to the futures markets

and users of regulated intermediaries transacting in these markets

arising from the financial deterioration of an FCM or related company.

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\4\6Rule 1.3(c) defines ``clearing member'' as any person who is

a member of, or enjoys the privilege of clearing trades in his own

name through, the clearing organization of a contract market.

\4\7In determining the dollar amount of customer funds held by

an FCM at fiscal year-end, funds required to be segregated pursuant

to section 4d(2) of the Act and set aside pursuant to part 30 of the

Commission's rules are required to be included. The Commission

requests comment as to whether the calculation of customer funds for

this purpose should be the same as that for Rule 1.17 capital

computation purpose, i.e., whether long option values should be

deducted.

\4\8The Commission estimates that approximately 200 FCMs would

be covered under the proposed rules. A substantial percentage of

these FCMs either are dually registered as broker-dealers reporting

under the SEC's risk assessment rules or are affiliated with a

reporting broker-dealer, bank or insurance company.

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Currently, the Commission 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 $50,000.49 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. Therefore, the Commission believes that

it is appropriate to use as the minimum level for the application of

those rules that level of customer funds carried by an FCM where an

increase in such amount of funds will effectively cause an increase in

the minimum adjusted net capital requirement. Based upon the NFA

minimum dollar amount and the Commission's basic four percent

calculation, that level is $6,250,000.

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\4\9See Commission Rule 1.17(a)(1)(i).

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The Commission further believes that, even if an FCM is not

carrying any customer funds, it may be engaged in proprietary trading

or trading for noncustomer accounts to an extent that could create the

potential for risks to other market participants or systemic risks. The

Commission is therefore proposing $5 million of adjusted net capital as

an additional minimum level for application of these rules, even if a

firm is not carrying the minimum level of customer funds of $6,250,000.

In determining this amount, the Commission examined data concerning the

financial condition of registered FCMs and comparable SEC rules.50

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\5\0The comparable SEC figure is $20 million. 17 CFR 240.17h-

1T(d)(1)(iv) and 240.17h-2T(b)(1)(iv). However, given the relative

size of securities and futures market activity, the degree of

leverage in futures transactions, and the fact that the Commission

is proposing a materiality threshold of $20 million, as compared to

the SEC's $100 million, a $5 million adjusted net capital ceiling

for exemption from these rules appears to be an appropriate level.

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The Commission requests comment as to the appropriateness of the

adjusted net capital and customer funds exemption levels established by

the proposed rules.

2. Special Provisions for Certain Regulated Entities

a. Broker-Dealers. The legislative history of section 4f(c) of the

FTPA indicates that Congress intended that, in promulgating its risk

assessment rules, the Commission would ``avoid imposing unnecessary

paperwork burdens upon securities brokers or dealers regulated by the

SEC.''\51\ As noted above, the SEC has adopted interim risk assessment

rules which require recordkeeping and quarterly reporting of

comprehensive information concerning material affiliates of broker-

dealers. The proposed rules derive in significant measure from the

SEC's risk assessment rules and are intended to facilitate reporting by

FCMs that are either also registered as broker-dealers and are required

to report to the SEC pursuant to the SEC's rules or are part of a

holding company group that includes a broker-dealer reporting pursuant

to the SEC's rules. The rules also contemplate coordination with other

regulators and the use of triggering events to diminish routine

paperwork. In light of the SEC's risk assessment requirements, the

Commission's proposed rules permit FCMs that are dually registered as

securities broker-dealers or that have affiliates that are registered

as 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 dually

registered as a broker-dealer or that has an affiliate that is

registered as a broker-dealer would be deemed to be in compliance with

all of the routine reporting requirements of proposed Rule 1.15, except

the filing of risk management policies pursuant to paragraph (a)(1)(ii)

of Rule 1.15\52\ and the reporting of information regarding the FCM's

noncustomer accounts under paragraphs (a)(1)(iii) and (a)(3) 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. Only an

individual filing for the excluded MAP need be filed. Similarly, the

FCM would be deemed to be in compliance with all of the recordkeeping

requirements of proposed Rule 1.14, except for the requirements that

the FCM maintain records concerning the FCM's risk management policies

under paragraph (a)(1)(ii) and noncustomer accounts under paragraph

(a)(1)(x), if the FCM maintains, in accordance with the proposed rule,

copies of the records and reports maintained and filed on SEC Form 17-

H. The FCM would, however, be required to maintain supplemental

information for any entities required to be treated as MAPs under the

CFTC's rules that are not treated as MAPs for purposes of the SEC's

rules.

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\51\S. Rep. No. 22, 102d Cong., 2d Sess. at 50.

\52\The relief provided does not extend to filing of risk

management policies because although the SEC rules require filing of

many of the same types of written policies and procedures as the

CFTC's rules, the CFTC rule requires additional information relating

to FCM risk management policies with respect to noncustomer trading

activities.

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Because SEC Form 17-H is, with respect to certain reporting

requirements, more inclusive than the Commission's proposed reporting

requirements, Rule 1.15(d)(1) provides an FCM with the option of either

filing Form 17-H in its entirety, or filing the form with certain

modifications to omit information that would not be required under the

proposed rules. Specifically, the FCM may make the following changes to

its Form 17-H filing: (1) The FCM need not include information on

arbitrage and purchased options required under Items 10 and 11,

respectively, of Part I of Form 17-H; (2) the FCM may substitute the

real estate information required to be maintained under Rule

1.14(a)(ix) and reported under Section V of Form 1.15A for the detailed

information required under Section V of Form 17-H; and (3) the FCM may

file the information required under Part II of Form 17-H on an

aggregate basis for its MAPs rather than for each MAP as otherwise

required, provided that if this would materially understate risk in

relation to equity in any MAP, the information must be provided

separately for such MAP. The FCM may use either the Commission or the

SEC form for the latter purpose. As noted above, however, an FCM who

qualifies under the special provisions applicable to SEC filers would

remain responsible for maintaining and furnishing the Commission with

information concerning the FCM's risk management policies under

paragraph (a)(1)(ii) of proposed Rules 1.14 and 1.15 and noncustomer

accounts under paragraphs (a)(1)(x) of proposed Rule 1.14 and

(a)(1)(iii) and (a)(3) of proposed Rule 1.15. Moreover, the FCM would

remain responsible for notifying the Commission of the occurrence of

the events specified in Rule 1.15(b)(2) and providing supplemental

information, if requested. If, however, such a ``triggering'' event

occurs, the Division Director will attempt, in the first instance, to

obtain any necessary supplemental information from the FCM's or its

MAP's filings with the SEC.\53\

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\53\A letter from the FCM or a relevant MAP acknowledging the

Commission's right of access to relevant SEC risk assessment filings

may be requested in these circumstances.

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The Commission believes that compliance with the notice provisions

of proposed Rule 1.15(b) is essential to enable the Commission to act

expeditiously in emergency situations and to detect incipient problems.

The Commission does not believe that such compliance should impose an

undue burden on entities dually registered as FCMs and securities

broker-dealers, as the events that require notification under proposed

Rule 1.15(b) should occur infrequently.

b. Banks. Section 4f(c)(4)(B) of the Act provides generally that a

registered FCM shall be considered to have complied with recordkeeping

or reporting requirements adopted by the Commission ``concerning an

affiliated person that is subject to examination by, or reporting

requirements of, a Federal banking agency if the [FCM] utilizes for the

recordkeeping or reporting requirement copies of reports filed by the

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. The

legislative history of the FTPA indicates, however, that an FCM may not

be required under any circumstances to obtain or furnish the Commission

with copies of examination reports.\54\

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\54\H.R. Rep. No. 978, 102d Cong., 2d Sess. 75 (1992).

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With respect to an FCM with a MAP that is subject to supervision by

a federal banking agency, the proposed rule provides that an FCM will

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 bank regulators.\55\ Paragraph (b)(2) of proposed

Rule 1.14 provides similar treatment with respect to recordkeeping

requirements. 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 proposed rules.

Additionally, as part of its risk assessment program with respect to

MAPs that are subject to the supervision of a federal banking agency,

the Commission intends to obtain and review, on an as-needed basis, the

Bank Holding Company Performance Report prepared by the Board of

Governors of the Federal Reserve and/or the Uniform Bank Performance

Report, prepared by the Federal Deposit Insurance Corporation, to gain

further information regarding the financial activities of such MAPs.

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\55\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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c. Insurance Companies. Section 4f(c) of the Act requires that, in

granting exemptions from the reporting and recordkeeping requirements,

the Commission should consider, among other factors, whether

information of the type required is available from a state insurance

commission or similar state agency. The proposed rules would provide

relief comparable to that provided with respect to MAPs subject to

supervision by Federal banking agencies for MAPs subject to regulation

by an insurance commissioner or other similar state official or agency.

Under the proposed rule, an FCM with a MAP that is an insurance company

would satisfy the routine reporting requirements of proposed Rule

1.15(a)(2) with respect to such a MAP if, in the case of a mutual

insurance company or non-public stock company, the FCM maintains in

accordance with proposed Rule 1.14 copies of the annual reports filed

by the parent insurance company on forms prescribed by the National

Association of Insurance Commissioners. With respect to a MAP organized

as a public stock company, the FCM would be required, in addition to

maintaining state insurance reports, to maintain in accordance with

proposed Rule 1.14 copies of the filings the insurance company makes

under Sections 13 or 15 of the Securities Exchange Act of 1934 and

filings made under the Investment Company Act of 1940.

d. Firms subject to foreign regulatory supervision. With respect to

foreign firms that are regulated in a foreign jurisdiction, the

proposed rules would permit 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, or other foreign regulatory authority with which the

Commission has an information-sharing agreement in effect. The proposed

rules require that the FCM file with the Commission a copy of the

original report as well as one copy translated into English. In the

absence of such an information-sharing agreement, the FCM would be

required to comply with the proposed rules with respect to foreign MAPs

subject to foreign regulation to the same extent as unregulated

entities.

III. Implementation Schedule

The Commission is proposing to phase in implementation of the risk

assessment rules in order to provide FCMs with the opportunity to make

any internal adjustments in their financial recordkeeping and reporting

operations which may be necessary prior to beginning compliance with

the risk assessment rules. The proposed rules would require that FCMs

maintain and file with the Commission the organizational chart, risk

management policy information and noncustomer account information

required by paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(x) of proposed

Rule 1.14 and paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of

proposed Rule 1.15 within 90 calendar days from the effective date of

the proposed rules. The first annual filings for fiscal years ending

December 31, 1994 or thereafter would be due, in accordance with the

proposed rules, within 105 calendar days of fiscal year-end.

IV. Other Matters

The Commission has proposed these rules recognizing the types and

formats of information provided to other reporting agencies and based

upon the types of information it uses to consider regulatory

intervention in financial disruptions. Nonetheless, the Commission

requests comment on whether alternative approaches could achieve the

Commission's and Congress' objectives and could be reasonably

integrated with the approaches of other financial regulators. In that

current events have caused the Commission to need enhanced authority to

obtain information concerning affiliate activity, the Commission will

only consider responses to this request for alternatives that are

sufficiently specific to reasonably convince it that the alternative

would address the Commission's objectives.

V. 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.\56\ FCMs have been determined not to be small entities under the

RFA. Additionally, smaller FCMs generally will not be affected by the

proposed rules because the rules exempt from their requirements certain

smaller entities. The Commission believes that the proposals, if

adopted, would not have a significant economic impact on smaller

entities.

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\56\47 FR 18618-18621 (April 30, 1982).

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Accordingly, pursuant to Rule 3(a) of the RFA, 5 U.S.C. 605(b), the

Chairman, on behalf of the Commission, certifies that these proposed

rules will not have a significant economic impact on a substantial

number of small entities. The Commission nonetheless invites comment

from any registered FCM who believes that these rules would have a

significant impact on its operations.

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 proposed rules and its

associated information collection requirements to the Office of

Management and Budget. The burden associated with this entire

collection, including these proposed rules, is as follows:

Average Burden Hours Per Response: 18.55

Number of Respondents: 1,990

Frequency of Response: Annually and on occasion

The burden associated with this specific proposed rule, is as

follows:

Average Burden Hours Per Response: 3.05

Number of Respondents: 620

Frequency of Response: Annually and on occasion

Persons wishing to comment on the estimated paperwork burden

associated with this proposed rule should contact Gary Waxman, 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

The Office of the Executive Director expects to include review of

this proposal in any plan to enhance and refine systems to accept

electronic filings. Should it appear that the filing of data

electronically would expedite the purposes of collecting the

information or provide a significant cost benefit to reporting entities

and the Commission, 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 hereby proposes to amend part 1 of chapter I of title 17 of

the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

1. The authority citation for Part 1 continues to read as follows:

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

6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,

12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

2. Section 1.14 is proposed to be 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, end users

or both;

(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

reviewing hedging and risk management strategies of 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 futures commission merchant and its ultimate parent company,

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 sheet shall show separately the futures commission merchant,

its ultimate parent company and each Material Affiliated Person;

(iv) Fiscal year end consolidated and consolidating income

statements and consolidated cash flow statements for the futures

commission merchant and its ultimate parent company, 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 shall show separately the futures commission merchant, its

ultimate parent company and each Material Affiliated Person;

(v) The fair market value as of the end of each fiscal quarter of

each Material Affiliated Person's inventory of long and short

securities and physical commodity positions as specified in Form 1.15A,

including a separate listing for each Material Affiliated Person of any

aggregate unhedged exposure, other than U.S. government or agency

securities, denominated in dollars measured by interest rate, duration,

instrument or other measure as specified by the reporting entity, that

exceeds the Materiality Threshold, as defined in this section, at any

fiscal quarter end;

(vi) The notional or contractual amounts, and in the case of

options, the value of the underlying instruments, as of the end of each

fiscal quarter, of exchange-traded futures and commodity option

contracts, forward contracts, over-the-counter commodity options, and

financial instruments with off-balance sheet risk or concentrations of

credit risk (as those terms are used in Statement of Financial

Accounting Standards No. 105), broken down by contract type and

maturity, as specified in Form 1.15A. The record must identify each

instrument or contract where the credit risk (as that term is used in

Statement of Financial Accounting Standards No. 105) with respect to a

counterparty exceeds the Materiality Threshold at the fiscal quarter

end;

(vii) The aggregate amount as of the end of each fiscal quarter of

all material unsecured extensions of credit (not including intra-group

receivables) with an initial or remaining maturity of less than one

year by each Material Affiliated Person, together with the allowance

for losses for such transactions;

(viii) The aggregate amount as of the end of each fiscal quarter of

commercial paper, secured and other unsecured borrowing, bank loans,

lines of credit, or any other borrowings, and the principal

installments of long-term or medium-term debt, scheduled to mature

within twelve months from the most recent fiscal quarter for each

Material Affiliated Person;

(ix) The percentage, as of fiscal year end, of annual gross income

or loss derived from real estate activities, including mortgage loans

and investments in real estate, with respect to each Material

Affiliated Person which derived greater than 20 percent of its gross

income or loss for the fiscal year from such activities; and

(x) The gross notional value, long and short, of open positions in

noncustomer accounts, as defined in Sec. 1.17(b)(4), carried by the

futures commission merchant as of the end of each fiscal quarter, the

percentage of such aggregate notional value compared to the futures

commission merchant's adjusted net capital, the percentage of the

aggregate notional value of open positions in noncustomer accounts

carried by the futures commission merchant that constitute bona fide

hedging positions in accordance with Sec. 1.3(z), and the percentage of

the aggregate notional value of noncustomer accounts carried for the

purpose of managing the risk of cash market commitments that mature

more than 12 months and 60 months, respectively, from fiscal quarter

end compared to the aggregate notional value of open positions in all

noncustomer accounts carried by the futures commission merchant.

(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) 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.

(4) For the purposes of this section and Sec. 1.15, the term

Materiality Threshold shall mean the greatest of:

(i) $20 million;

(ii) 10 percent of the futures commission merchant's adjusted net

capital as reported on its most recent financial reports filed pursuant

to Sec. 1.10;

(iii) 10 percent of the Material Affiliated Person's tangible net

worth; or

(iv) In the case of a futures commission merchant that is required,

or that has a Material Affiliated Person that is required, to maintain

and preserve information pursuant to Rule 240.17h-1T of this title, the

Materiality Threshold specified in Sec. 240.17h-1T or such other risk-

assessment regulations as the Securities and Exchange Commission may

adopt.

(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) and (a)(1)(iii)

through (ix) of this section if:

(1) The futures commission merchant is required, or has a Material

Affiliated Person that is required, to maintain and preserve

information pursuant to Rule 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, provided, however, that if the futures

commission merchant has any Material Affiliated Persons for purposes of

this section and Sec. 1.15 that are not designated as Material

Associated Persons for purposes of Secs. 240.17h-1T and 240.17h-2T of

this title, the futures commission merchant must also maintain the

information required pursuant to paragraphs (a)(1)(v) through (ix) of

this section for any such Material Affiliated Person;

(2) In the case of a Material Affiliated Person that is subject to

examination by, or the reporting requirements of, a Federal banking

agency, the futures commission merchant 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 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; 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 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)(iii) through (a)(ix) of

this section with respect to a Material Affiliated Person if such

futures commission merchant maintains and makes 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

relevant foreign authority. The futures commission merchant shall

maintain a copy of the original report and a copy translated into the

English language.

(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, has less than $5,000,000

in adjusted net capital as of the futures commission merchant's current

fiscal year end, and 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, 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. 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.

(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 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 any or 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. Each futures commission merchant

subject to the requirements of this section shall maintain and preserve

the information required by this section commencing 90 days from the

effective date of this section.

3. Section 1.15 is proposed to be 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 within 90 calendar days after the effective date of

this section, provided that in the case of a futures commission

merchant whose registration becomes effective after the effective date

of this section, such futures commission merchant shall file the

following within 60 calendar days after the effective date of such

registration:

(i) A copy of the organizational chart maintained by the futures

commission merchant pursuant to paragraph (a)(1)(i) of Sec. 1.14. Where

there is a material change in information provided, an updated

organizational chart shall be filed within five calendar days after the

end of the fiscal quarter in which the change has occurred;

(ii) Copies of the financial, operational, and risk management

policies, procedures and systems maintained by the futures commission

merchant pursuant to paragraph (a)(1)(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 five calendar days after the end of the fiscal quarter in which

the change has occurred; and

(iii) The aggregate notional value of open positions in noncustomer

accounts, as defined in Sec. 1.17(b)(4), held by the futures commission

merchant as of the end of the most recent fiscal year, the percentage

of such aggregate notional value compared with the futures commission

merchant's adjusted net capital as of its fiscal year end, the

percentage of the aggregate notional value of open positions in

noncustomer accounts carried by the futures commission merchant that

constitute bona fide hedging positions in accordance with Sec. 1.3(z),

and the percentage of the aggregate notional value of open positions in

noncustomer accounts held for the purpose of managing the risks of cash

market commitments that mature more than 12 months and 60 months,

respectively, from the most recent fiscal quarter end, as compared to

the aggregate notional value of open positions in all noncustomer

accounts held by the futures commission merchant.

(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:

(i) Fiscal year end consolidated and consolidating balance sheets

for the futures commission merchant and its ultimate parent company,

prepared in accordance with generally accepted accounting principles,

which consolidated balance sheet 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 sheet shall show separately the

futures commission merchant, its ultimate parent company and each

Material Affiliated Person.

(ii) Fiscal year end annual consolidated and consolidating income

statements and consolidated cash flow statements for the futures

commission merchant and its ultimate parent company, 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 shall show separately the futures

commission merchant, its ultimate parent company and each Material

Affiliated Person.

(iii) Form 1.15A. The information required to be reported on Form

1.15A may be provided on an aggregate basis for the futures commission

merchant's Material Affiliated Persons, provided that if this would

materially understate the risk relative to stockholders' equity of any

Material Affiliated Person, the required information must be provided

separately for such Material Affiliated Person.

(3) 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 with the regional office with which it

files periodic financial reports within 60 calendar days after the end

of each fiscal quarter the aggregate notional value of open positions

in noncustomer accounts, as defined in Sec. 1.17(b)(4), held by the

futures commission merchant as of the end of each fiscal year, the

percentage of such aggregate notional value compared with the futures

commission merchant's adjusted net capital as of fiscal year end, the

percentage of the aggregate notional value of open positions in

noncustomer accounts carried by the futures commission merchant that

constitute bona fide hedging positions in accordance with Sec. 1.3(z),

and the percentage of the aggregate notional value of open positions in

noncustomer accounts held for the purpose of managing the risk of cash

market commitments that mature more than 12 months and 60 months,

respectively, from fiscal quarter end compared to the aggregate

notional value of open positions in all noncustomer accounts held by

the futures commission merchant.

(4) A futures commission merchant shall provide the Commission with

updated information within 60 calendar days after the end of each

fiscal quarter for any line item in which a change of 20% or greater

has occurred since the futures commission merchant's last filing with

the Commission with respect to any information required to be reported

pursuant to paragraph (a)(2)(iii) of this section, except information

relating to a Material Affiliated Person's real estate activities;

provided, however, that a futures commission merchant may, at its

option, file the information required by paragraph (a)(2)(iii) of this

section on a routine quarterly basis.

(5) For the purposes of this section, the term Material Affiliated

Person shall have the meaning used in Sec. 1.14.

(b) Notice and additional reporting requirements upon the

occurrence of certain events. (1) A futures commission merchant shall

notify the Director of the Division of Trading and Markets or the

Director's designee of the occurrence of any event specified in

paragraph (b)(2) of this section. Such notice must be provided within

three business days of such occurrence unless a different reporting

period is specified in paragraph (b)(2) of this section. 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 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.

(2) The following events shall require a futures commission

merchant to notify the Director of the Division of Trading and Markets

or the Director's designee in accordance with paragraph (b)(1) of this

section.

(i) 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 shall be reported as follows.

(A) With respect to activities in the normal course of business

(e.g., operating losses, proprietary trading losses, increased charges

against net capital) that cause such reduction, written notification

must be received within two business days of such reduction; and

(B) 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.

(ii) Any outflow of assets from the futures commission merchant,

including but not limited to any loans, advances, asset transfers,

redemption or repurchase of a consolidated entity's stock,

recapitalization of stock or payment of dividends, which withdrawal,

advance or loan on a net basis exceeds in the aggregate in any 30

calendar day period 20 percent or more of the futures commission

merchant's excess adjusted net capital, provided, however, that this

paragraph shall not apply to:

(A) Securities transactions in the ordinary course of business

between a futures commission merchant and a Material Affiliated Person

where the futures commission merchant makes payment to or on behalf of

such Material Affiliated Person for the securities transaction within

two business days of the transaction; or

(B) Withdrawals, advances or loans which in the aggregate in any

thirty calendar day period, on a net basis, equal $500,000 or less.

(iii) Aggregate, cumulative losses occurring in all non-customer

accounts carried by the futures commission merchant, as defined in

Sec. 1.17(b)(4), which exceed the greater of: (A) In any 30-day period,

10 percent of the last reported consolidated stockholders' equity of

the parent company of the futures commission merchant or $50 million;

and (B) in any 12-month period, 20 percent of the last reported

consolidated stockholders' equity of the parent company of the futures

commission merchant or $100 million;

(iv) Negative net income at a Material Associated Person during any

quarter which is the greater of:

(A) 30 percent of the Material Associated Person's last-reported

net worth; or

(B) 20 percent of the futures commission merchant's adjusted net

capital;

(v) A reduction of 20 percent or more of the consolidated

stockholders' equity of the futures commission merchant's parent from

the date of the parent's last quarterly consolidated financial

statements;

(vi) Any reduction in the credit rating of a Material Affiliated

Person as reported by Standard & Poor's Corporation, Moody's Investor

Services, Inc. or any other nationally recognized rating organization;

(vii) Filing of a notice by a Material Associated Person with the

Board of Governors of the Federal Reserve, the Federal Deposit

Insurance Corporation, the Office of Thrift Supervision, or the Office

of the Comptroller of the Currency pursuant to 12 CFR 208.32(c), 12 CFR

325.102(c), 12 CFR 565.3(c) or 12 CFR 6.3(c), with respect to possible

adjustment of a Material Affiliated Person's capital category; or

(viii) Agreement by the futures commission merchant to guarantee

any obligation of any affiliated entity, such notice to be filed within

three business days before such guarantee is to become effective.

(3) The reports required to be filed pursuant to paragraphs (a)(1),

(a)(2), (a)(3) and (a)(4) 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. Any notice required to be filed pursuant to paragraph (b)(1)

of this section shall be considered filed when received at the

Commission's principal office in Washington, DC.

(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, has less than $5,000,000

in adjusted net capital as of the futures commission merchant's fiscal

year end, and 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, either unconditionally or on specified terms and conditions,

any futures commission merchants affiliated with the 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. 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.

(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 Secs. 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

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 file any information required pursuant to

paragraph (a)(2)(iii) of this section with respect to any such Material

Affiliated Person and 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 with the

following amendments:

(i) The information concerning arbitrage and purchased options

required to be reported on Items 10 and 11, respectively, of Part I of

Form 17-H need not be included;

(ii) The information concerning real estate activities required to

be maintained under Rule 1.14(a)(1)(ix) and reported on Section V of

Form 1.15A may be included in lieu of the information required under

Section V of Part II of Form 17-H; and

(iii) The information required to be reported on Part II of Form

17-H may be provided on an aggregate basis for the futures commission

merchant's Material Affiliated Persons, provided that if this would

materially understate the risk relative to stockholders' equity of any

Material Affiliated Person, the required information must be provided

separately for such Material Affiliated Person.

(2) In the case of a Material Affiliated Person 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 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 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, 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 with which the Commission has entered into an

information sharing agreement which remains in effect as of the futures

commission merchant's fiscal year end. 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

subject to the requirements of this section shall file the information

required by paragraph (a)(1) of this section within 90 calendar days

from the effective date of this section. Commencing December 31, 1994,

the provisions of this section shall apply in their entirety.

Risk Assessment Report for Futures Commission Merchants CFTC Form

1.15A--Instructions

1. This form contains three parts. Part A is the cover page and

includes a summary of the FCM's Material Affiliated Persons that are

included in this report as well as the FCM's attestation. Part B

contains information concerning the FCM's MAPs' on-balance sheet

financial instruments (Section I); financial instruments with off-

balance sheet risk (Section II); extensions of credit (Section III);

sources of funding for operations (Section IV); and real estate

activities (Section V). Part C contains information for individual MAPs

whose positions with a single counterparty exceed the Materiality

Threshold as defined in paragraph 9 of these instructions.

2. The information requested in Part B is to be completed in the

aggregate for all MAPs. However, if this would materially understate

the risk exposure relative to stockholders' equity of any MAP, an

additional Part B must be prepared showing the required information for

just that MAP. In addition, Part C must also be prepared for such

separately reported MAP, if applicable.

3. This Form contains line items for reporting numerical and other

data required by paragraphs (a)(1)(v) through (ix) of Rule 1.14. The

information to be provided on this Form is in addition to the reporting

requirements of paragraphs (a)(1) (organizational chart, risk

management policies, and initial filing of aggregate notional value of

open positions in noncustomer accounts), (a)(2)(i) and (ii) (annual

consolidated and consolidating balance sheets, income statements and

cash flow statements), and (a)(3) (quarterly noncustomer account data)

of Rule 1.15.

4. The report is to be prepared as of the last day of the FCM's

fiscal year or fiscal quarter if a quarterly update is required under

Rule 1.15. This Form is to be filed within 105 calendar days after the

end of each fiscal year. An update as to the particular line item only

must be filed within 60 calendar days after the end of each fiscal

quarter for which any line item change of 20 percent or more has

occurred since the FCM's last filing with the Commission.

5. If an FCM is affiliated with one or more other registered FCMs,

each FCM is required to file a separate Form 1.15A. The Commission may

exempt from the filing requirements all FCMs affiliated with an FCM

that has been designated a ``Reporting Futures Commission Merchant'' as

defined in Rules 1.14 and 1.15, i.e., the FCM which maintains the

greater amount of adjusted net capital as last reported to the

Commission. An FCM seeking designation as a Reporting Futures

Commission Merchant must apply to the Commission for such designation

pursuant to Rule 1.15. Pending such designation, each FCM affiliated

with the FCM requesting such designation is required to file a separate

Form 1.15A.

6. Whenever a replacement cost is required to be reported, the

methodology for determining such amount must be stated.

7. Although specific maturities only for swaps and forwards need be

identified, an FCM should also indicate if the maturities of any other

instruments reported herein represent unusual risk.

8. All amounts should be reported in thousands of U.S. dollars.

9. The term ``Materiality Threshold'' shall mean the greatest of:

(i) $20 million; (ii) 10 percent of the FCM's adjusted net capital as

reported on its most recent financial report; (iii) 10 percent of the

Material Affiliated Person's tangible net worth; or (iv) in the case of

an FCM that is required, or that has a Material Affiliated Person that

is required, to maintain and preserve information pursuant to SEC Rule

240.17h-1T, the Materiality Threshold specified in that rule or such

other risk assessment rules as the SEC may adopt.

10. The term ``Designated Country'' shall mean Canada, France,

Germany, Japan, Switzerland, and the United Kingdom. The term

``Designated Currency'' shall mean Canadian dollar, French franc,

Deutschemark, Japanese yen, Swiss franc, British pound, and European

currency unit.

BILLING CODE 6351-01-P

TP01MR94.005

TP01MR94.006

TP01MR94.007

TP01MR94.008

TP01MR94.009

TP01MR94.010

TP01MR94.011

TP01MR94.012

TP01MR94.013

BILLING CODE 635-01-C

Issued in Washington, DC, on February 23, 1994, by the

Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 94-4570 Filed 2-28-94; 8:45 am]

BILLING CODE 6351-01-P