Final Rulemaking Permitting Futures-Style Margining of Commodity Options

Federal RegisterJun 16, 1998

Ask Donna

What actually matters in this document.

Text

COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1 and 33

Final Rulemaking Permitting Futures-Style Margining of Commodity

Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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

SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

repealing Commission Regulation 33.4(a)(2) and amending Commission

Regulation 33.7(b). The Commission also is implementing technical

amendments to its regulations imposing financial and segregation

requirements on futures commission merchants (``FCMs'') and introducing

brokers (``IBs'').

Regulation 33.4(a)(2) requires the purchaser of a commodity option

to pay the full option premium at the initiation of the transaction.

Regulation 33.7 requires an FCM, or an IB in the case of an introduced

account, to provide each option customer with a written option

disclosure statement prior to the opening of the account.

The repeal of Regulation 33.4(a)(2) will permit commodity options

to be margined using a ``futures-style'' margining system. Futures-

style margining requires both the purchaser (``long'') and the seller

(``short'') of a commodity option to post risk-based, original margin

upon entering into an option position. During the life of the option,

the option value is marked to market daily, and gains and losses are

posted to the accounts of the long and short position holders. The

repeal does not impose an obligation on exchanges to adopt futures-

style margining for commodity options. Exchanges may continue to use

their current option margining systems. Any exchange wishing to

implement futures-style margining must submit proposed rules for

Commission review pursuant to Section 5a(a)(12)(A) of the Commodity

Exchange Act (``Act'') and Commission Regulation 1.41.

Regulation 33.7(b) sets forth the terms of the disclosure statement

and

[[Page 32727]]

currently reflects the prohibition against the margining of long option

positions. The Commission is amending the disclosure statement to

reflect the permissibility of futures-style margining for options.

EFFECTIVE DATE: July 16, 1998.

FOR FURTHER INFORMATION CONTACT: Thomas Smith, Attorney, Division of

Trading and Markets, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581.

Telephone: (202) 418-5495; or electronic mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Background

On December 19, 1997, the Commission published for public comment

in the Federal Register a proposal to repeal Commission Regulation

33.4(a)(2) and proposed amendments to the option disclosure statements

in Regulation 33.7(b) and Appendix A to Regulation 1.55(c).\1\ The

original comment period was scheduled to end on February 2, 1998, but

was extended by the Commission until March 4, 1998.\2\

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

\1\ 62 FR 66569 (December 19, 1997).

\2\ 63 FR 6112 (February 6, 1998).

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

Regulation 33.4(a)(2) is one of several regulations that were

implemented as part of a pilot program for the exchange trading of

options on non-agricultural futures instituted by the Commission on

November 3, 1981.\3\ Regulation 33.4(a)(2) requires the purchaser of an

option to pay the full premium at the initiation of the transaction.

Overall, the Commission's experience with the pilot program was

positive, and the trading of options on non-agricultural futures was

made permanent on August 1, 1986.\4\

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

\3\ 46 FR 54500 (November 3, 1981).

\4\ 51 FR 17464 (May 13, 1986); 51 FR 27529 (August 1, 1986).

Subsequently, the Commission approved the exchange trading of

options on agricultural futures and options on non-agricultural

physicals effective February 9, 1987. 52 FR 777 (January 9, 1987).

On April 8, 1998, the Commission approved a three-year pilot program

for the off-exchange trading of certain agricultural trade options

and also approved exchange trading of options on agricultural

physicals. 63 FR 18821 (April 16, 1998).

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

Regulation 33.4(a)(2) requires commodity options to be subject to a

``stock-style'' margining system that obligates the option buyer to pay

the full purchase premium when the transaction is initiated.\5\ The

long is not required to make any additional payments during the life of

the option. The option premium is credited to the account of the option

seller, who must keep it posted with his or her FCM. The short also

must deposit risk margin with his or her FCM to cover potential adverse

market moves in the option position. If the option increases in value,

the short must deposit additional funds into the account. These funds,

however, are not transferred to the long, who must exercise or offset

the option in order to realize any increase in its value. By contrast,

if the option value decreases, the short may withdraw any excess funds

from its account.

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

\5\ Regulations 33.4 in pertinent part states:

Sec. 33.4 Designation as a contract market for the trading of

commodity options.

The Commission may designate any board of trade...as a contract

market for the trading of options on contracts of sale for future

delivery... when the applicant complies with and carries out the

requirements of the Act (as provided in Sec. 33.2), these

regulations, and the following conditions and requirements with

respect to the commodity option for which the designation is sought:

(a) Such board of trade * * *

(2) Provides that the clearing organization must receive from

each of its clearing members, that each clearing member must receive

from each other person for whom it clears commodity option

transactions, and that each futures commission merchant must receive

from each of its option customers, the full amount of each option

premium at the time the option is purchased.

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

Futures-style margining of commodity options will require that both

the long and the short position holders post risk-based, original

margin upon entering into their option positions. The option value will

be marked to market daily during the life of the option. Any increase

in value will result in a credit to the long option holder's account

and a corresponding debit against the short option seller's account.

Conversely, any decrease in value will result in a credit to the

short's account and a corresponding debit to the long's account.

Thus, under futures-style margining, the cash flows associated with

option contracts will be symmetric, as is the case for cash flows for

futures. Futures-style margining, however, will not alter the

fundamental nature of each party's overall obligation. A long's

potential for loss will remain limited to the full option premium and

transaction costs. As is the case now, a short's potential for loss

will not be so limited.

In the Notice of Proposed Rulemaking, the Commission identified

several potential benefits and potential costs that may result from the

adoption of futures-style margining. The potential benefits included

the enhancement of the financial integrity and market liquidity that

may result from the more efficient cash flows associated with futures-

style margining. The potential costs included an increase in the use of

leverage in the futures markets, an increase in customer confusion,

including an increase in the opportunity for unscrupulous individuals

to mislead unsophisticated option customers, and transition costs to

the industry in adopting futures-style margining.\6\

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

\6\ See, 62 FR 66571-66572

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

II. Comments Received

The Commission received 27 comment letters on the proposal.

Supporting comments were submitted by six futures exchanges, four trade

associations, one clearing organization, one FCM and one law firm.\7\

Eight commercial firms, two securities options exchanges, one FCM and

one investment management firm submitted opposing comments.\8\ Two FCMs

submitted comments that, while not opposing the proposal, raised

concerns about the implementation and operation of futures-style

margining.\9\

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

\7\ Supporting comments were submitted by: Chicago Board of

Trade; Chicago Mercantile Exchange; New York Mercantile Exchange;

Coffee, Sugar & Cocoa Exchange, Inc.; New York Cotton Exchange;

Minneapolis Grain Exchange; National Grain Trade Council; Commodity

Floor Brokers & Traders Association; National Grain and Feed

Association; Futures Industry Association; Board of Trade Clearing

Corporation; ABN Amro Chicago Corporation; and Philip McBride

Johnson of Skadden, Arps, Slate, Meagher & Flom, and a former

Chairman of the Commission.

\8\ The opposing comments were submitted by: Andre & CIE S.A.

Lausanne; Transcatalana De Comercio, S.A.; Garnac Grain Co., Inc.;

Refinadora De Oleos Brasil LTDA.; SAROC S.P.A.; Compagnie

Commerciale Andre; La Plata Cereal; Andre & CIE (Singapore) PTE

LTD.; The Options Clearing Corporation; The Chicago Board Options

Exchange; The Clifton Group; and FIMAT Futures USA, Inc.

\9\ The two comments were submitted by Lind Waldock & Company

and DKB Financial Futures Corp.

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

The material issues raised by the comment letters are set forth

below. In most instances, the issues raised were previously identified

by the Commission in the Notice of Proposed Rulemaking.

One commenter stated that many of the cash flow benefits identified

in the Notice of Proposed Rulemaking could be achieved by expanding the

availability of cross-margining between futures markets and securities

markets. Another commenter stated that the Standard Portfolio Analysis

of Risk (``SPAN'') margining system provides market participants with

many of the cash flow benefits that are identified with futures-style

margining.\10\

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

\10\ The SPAN margining system was developed by the Chicago

Mercantile Exchange and is currently used by all domestic futures

exchanges and clearing organizations, except the Philadelphia Board

of Trade.

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

The Commission recognizes that cross-margining and the SPAN

margining system provide cash flow benefits to market participants. The

Commission believes, however, that futures-style margining could

provide additional cash flow benefits not

[[Page 32728]]

available through cross-margining or SPAN. For example, cross-margining

is restricted to specified products with offsetting risk

characteristics that are traded on different exchanges that have cross-

margining arrangements. In contrast, futures-style margining could be

available for any futures exchange-traded options, and the cash flow

benefits would not be dependent on preexisting arrangements between

exchanges. Similarly, under SPAN, the long is still obligated to pay

the full option premium at the inception of the transaction regardless

of the portfolio's risk calculation. Thus, a trader who hedged a short

futures position with a long option would be required to pay the full

option premium at the initiation of the transaction under the stock-

style margining system, even though SPAN would calculate the margin on

the two positions on a portfolio basis.

Two commenters expressed a concern that futures-style margining

will result in an increase in the use of leverage in the futures

market. As the Commission stated in the Notice of Proposed Rulemaking,

futures-style margining will result in an increase in the amount of

leverage in the futures market. The purchaser of an option will be able

to acquire an option position upon payment of less than the full option

premium at the initiation of the transaction. The option position will

then be marked to market on a daily basis, with gains or losses posted

to the respective accounts of the long and short position holders. The

substitution of a margining system for the full, up-front payment of

the option also will introduce a risk of default by the long that does

not exist under the stock-style margining system.

The Commission believes, however, that the leverage associated with

long options will not substantially increase the risk to the financial

integrity of the markets. First, as the Commission noted in the Notice

of Proposed Rulemaking, long option positions entail less total risk

than short options or long or short futures positions. Under futures-

style margining, the maximum loss that a long may incur on an option

position will continue to be limited to the full option premium at the

initiation of the transaction. In contrast, holders of short options or

long or short futures positions will continue to be subject to much

greater risk from adverse market moves.

Second, with respect to the added risk of default, FCMs that

currently hold customer accounts that include short options and long

and short futures positions assess the creditworthiness of each

customer as part of their normal business practices. Requiring such

firms to assess the creditworthiness of potential option purchasers

should not require any significant adjustments in such firms' operating

procedures in this regard.

Third, the Commission is not requiring that exchanges adopt

futures-style margining for options. The exchanges may continue to use

their current margining systems and require option purchasers to pay

the option premium at the initiation of the transaction. The Commission

expects that exchanges will not propose adopting futures-style

margining until they have developed appropriate systems and/or

procedures to monitor the margining of long option positions and have

considered the views and market needs of their members and other market

participants.

Finally, an FCM may require that option purchasers pay the full

option premium at the initiation of the transaction even if the

exchange permits futures-style margining. Therefore, FCMs that do not

have the systems or procedures to monitor the margining of long option

positions may elect to retain the stock-style margining system even

though an exchange might permit futures-style margining.

Several commenters expressed a concern that futures-style margining

would benefit option buyers at the expense of option sellers. The

primary concern of these commenters is that the Commission did not

demonstrate that expected increases in option premiums would

sufficiently compensate option sellers for their loss of interest

income.

In the Notice of Proposed Rulemaking, the Commission noted that a

futures-style margining system may alter option pricing. Sellers of

options may charge a higher premium to compensate for the loss of

interest income. Conversely, option buyers may be willing to pay a

higher premium because they will not have to pay the full premium up-

front. The Commission believes, however, that market forces should

ensure that pricing changes will not benefit longs at the expense of

shorts. In this regard, commenters did not submit any support for the

assertion that futures-style margining would benefit option buyers at

the expense of option sellers.

One commenter stated that permitting futures-style margining, which

does not require the up-front payment of option premiums, may result in

additional low-capital customers entering the option markets. The

commenter argued that such customers may not be very knowledgeable

about futures markets and may be susceptible to unscrupulous

individuals seeking to take advantage of them.

By amending the option disclosure statement in Regulation 33.7 to

reflect the permissibility of futures-style margining, the Commission

is attempting to ensure that potential option customers receive

adequate notice concerning the risks of trading in commodity options.

In addition, the distribution of the disclosure statement does not

relieve an FCM or IB from any other disclosure obligations that it may

have under applicable law.

One commenter stated that futures-style margining will require some

FCMs to increase staff and upgrade systems capabilities in order to

perform continuous intraday monitoring of long option positions. The

commenter further stated that the increased costs may be passed on to

option customers, thereby making trading more expensive. The commenter

also claimed that exchanges should not be permitted to offer futures-

style margining until they are able to provide continuous, updated

information regarding the volatility levels of their options to their

member firms.

The Commission recognizes that certain FCMs may be required to

expend additional capital to monitor properly long option positions

with the implementation of a futures-style margining system. However,

many firms already have such systems in place. As noted above, short

option positions are currently margined and marked to market on a daily

basis. Firms that carry short option positions on their books must have

monitoring and margining systems in place in order to track properly

the short option positions. In addition, futures-style margining has

been in place at the London International Financial Futures and Options

Exchange for over ten years.

In addition, the Commission anticipates that the exchanges will

take into consideration the views of their members and other market

participants prior to proposing any changes to their option margining

systems. Moreover, any proposal to adopt a futures-style margining

system must be submitted to the Commission for review pursuant to

Section 5a(a)(12)(A) of the Act and Commission Regulation 1.41. As part

of the review process, the Commission may determine that publication of

the proposal in the Federal Register is necessary in order to obtain

the views and comments of interested persons.

One commenter stated that the Commission's proposal lacked

specificity with respect to the implementation and operation of a

futures-style margining system. The

[[Page 32729]]

commenter argued that a lack of specificity may result in the adoption

of different margining systems or standards for each exchange or

different systems within one exchange. In contrast, two other

commenters stated that exchanges should have discretion to determine

which option contracts should be subject to a stock-style or futures-

style margining system as part of the contract design process. In

addition, one of these two commenters stated that an exchange should be

afforded the flexibility of designing margining systems that result in

a hybrid of the stock-style and futures-style system. For example, an

exchange should have the discretion to design an option contract that

would require the option buyer to pay the full premium at the time of

purchase (stock-style) while also allowing that customer to withdraw

any subsequent option value gains from the account (futures-style).

By repealing Commission Regulation 33.4(a)(2), the Commission does

not intend to require that an exchange use a uniform margining system

for all of its listed option markets or that the exchanges adopt

futures-style margining in a concerted manner. While the Commission

recognizes that a uniform margining system across all futures markets

might increase efficiency and reduce potential confusion among market

participants, the Commission believes that it is not its role to

mandate such a result. Each exchange should have the discretion to

design margining systems that it believes are appropriate for its

option markets. Accordingly, the Commission will review each proposal

to implement a futures-style margining system on an individual basis.

III. Amendments to the Option Disclosure Statement

A. Amendments to the Option Disclosure Statement in Regulation 33.7(b)

Commission Regulation 33.7 was issued as part of the initial option

pilot program in November 1981 and requires an FCM, or an IB in the

case of an introduced account, to provide each option customer with a

detailed disclosure statement prior to the opening of an account. The

customer is required to sign an acknowledgment indicating that he or

she read and understood the document before any transaction is effected

for that customer's account.

The disclosure statement, which is set forth in Regulation 33.7(b),

contains a detailed description of option trading and the risks

associated with option positions. The statement was drafted to reflect

the prohibition against the margining of long option positions.

In the Notice of Proposed Rulemaking, the Commission proposed

several amendments to the disclosure statement to reflect the

permissibility of futures-style margining. The Commission has

determined to adopt the amendments with one modification.

The Commission's proposed amendments included adding the following

language to the option disclosure statement:

BOTH THE PURCHASER AND THE GRANTOR SHOULD KNOW WHETHER THE

PARTICULAR OPTION IN WHICH THEY CONTEMPLATE TRADING IS SUBJECT TO A

``STOCK-STYLE'' OR ``FUTURES-STYLE'' SYSTEM OF MARGINING. UNDER A

STOCK-STYLE MARGINING SYSTEM, A PURCHASER IS REQUIRED TO PAY THE

FULL PURCHASE PRICE OF THE OPTION AT THE INITIATION OF THE

TRANSACTION. THE PURCHASER HAS NO FURTHER OBLIGATION ON THE OPTION

POSITION. UNDER A FUTURES-STYLE MARGINING SYSTEM, THE PURCHASER

DEPOSITS INITIAL MARGIN AND MAY BE REQUIRED TO DEPOSIT ADDITIONAL

MARGIN IF THE MARKET MOVES AGAINST THE OPTION POSITION. THE

PURCHASER'S TOTAL MARGIN OBLIGATION, HOWEVER, WILL NOT EXCEED THE

ORIGINAL OPTION PREMIUM. IF THE PURCHASER OR GRANTOR DOES NOT

UNDERSTAND HOW OPTIONS ARE MARGINED UNDER A STOCK-STYLE OR FUTURES-

STYLE MARGINING SYSTEM, HE OR SHE SHOULD REQUEST AN EXPLANATION FROM

THE FUTURES COMMISSION MERCHANT (``FCM'') OR INTRODUCING BROKER

(``IB''). (Emphasis added.)

One commenter stated that the statement--THE PURCHASER'S TOTAL

MARGIN OBLIGATION, HOWEVER, WILL NOT EXCEED THE ORIGINAL OPTION

PREMIUM--while strictly true, could be open to honest

misinterpretation. The commenter stated that under certain

circumstances a long option position holder may incur margin payment

obligations that exceed the initial option premium. For example, an FCM

may require risk margin that exceeds the option premium. In addition, a

bought option may first increase substantially in value immediately

after purchase and then lose nearly all of its value on the next day.

If the option owner had withdrawn the initial value increase from the

account, he or she would be required to make a large daily variation

margin payment to the FCM to settle the subsequent value loss. In such

situations, the variation margin payments on the second day may exceed

the initial option premium. Accordingly, the commenter proposed that

the sentence be modified to state:

THE PURCHASER'S TOTAL SETTLEMENT VARIATION MARGIN OBLIGATION

OVER THE LIFE OF THE OPTION, HOWEVER, WILL NOT EXCEED THE ORIGINAL

OPTION PREMIUM, ALTHOUGH SOME INDIVIDUAL PAYMENT OBLIGATIONS AND/OR

RISK MARGIN REQUIREMENTS MAY AT TIMES EXCEED THE ORIGINAL OPTION

PREMIUM.

The Commission concurs with the commenter and is amending the risk

disclosure statement to include the above sentence in lieu of the

proposed sentence.

B. Proposed Amendments to Appendix A of Regulation 1.55(c)

Appendix A of Commission Regulation 1.55(c) contains a generic risk

disclosure statement applicable to the Commission's disclosure

requirements for domestic and foreign commodity futures and commodity

option transactions.\11\ The disclosure statement includes a discussion

of the risks associated with the futures-style margining of options,

which has been permitted on certain foreign exchanges, including the

London International Financial Futures and Option Exchange.

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

\11\ The disclosure statement was developed by the Commission in

cooperation with various international regulators and self-

regulatory organizations who also have adopted the statement for use

in their jurisdictions. The disclosure statement permits firms doing

multinational business to use the same risk disclosure statement for

foreign and U.S.-based business. The Commission adopted the

disclosure statement on July 5, 1994. 59 FR 34376 (July 5, 1994).

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

In the Notice of Proposed Rulemaking, the Commission proposed minor

amendments to the risk disclosure statement to reflect explicitly the

permissibility of futures-style margining for options traded on U.S.

markets. Upon reconsideration, the Commission has determined that the

disclosures in the risk disclosure statement, as currently drafted, are

appropriate. Accordingly, the Commission is not amending Appendix A to

Commission Regulation 1.55(c).

IV. Technical Amendments

In the Notice of Proposed Rulemaking, the Commission requested

comment on any amendments that would need to be made to the

Commission's regulations governing net capital requirements for FCMs

and IBs to reflect the permissibility of futures-style margining. No

comments were received on this point.

Several of the Commission's regulations impose financial

requirements on FCMs and IBs. In various sections of those regulations,

reference is made to the manner in which an FCM's net capital

requirement

[[Page 32730]]

is to be calculated. The calculation excludes the value of long options

positions because such options, under current methodologies, are fully

paid for and pose no financial risk to the FCM. The Commission, as

suggested in the Notice of Proposed Rulemaking, is making technical

amendments to these regulations in order to reflect the permissibility

of a futures-style margining system for commodity options and to make

clear that only the value of fully paid for long options may be

excluded from the capital requirement formula. Specifically, the

Commission is amending the definition of customer funds in Regulation

1.3(gg) and certain reporting requirements and financial requirements

set forth in Regulations 1.12(b)(2), 1.17(a)(1)(i)(B), 1.17(e)(1)(ii),

1.17(h)(2)(vi)(C)(2), 1.17(h)(2)(vii)(A)(2), 1.17(h)(2)(vii)(B)(2),

1.17(h)(2)(viii)(A)(2), 1.17(h)(3)(ii)(B), and 1.17(h)(3)(v)(B).\12\

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

\12\ The Commission's Division of Trading and Markets previously

has issued guidance on the proper accounting and segregation

treatment of exchange-traded options subject to a stock-style

margining system. See, Financial and Segregation Interpretation No.

8--Proper Accounting, Segregation and Net Capital Treatment of

Exchange Traded Option Transactions, Comm. Fut. L. Rep. (CCH) para.

7118 (Division of Trading and Markets, August 12, 1982). The

Commission may determine that it would be appropriate to revise this

Interpretation if exchanges seek to implement futures-style

margining.

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

V. Conclusion

The Commission is repealing Regulation 33.4(a)(2), amending the

option disclosure statement in Regulation 33.7(b) and implementing

technical amendments to several financial regulations in order to

permit the futures-style margining of commodity options. The repeal of

Regulation 33.4(a)(2) is consistent with the Commission's ongoing

commitment to implement regulatory reforms that reduce unnecessary

burdens on the futures industry while also preserving important

customer protections and market safeguards. In this regard, it has been

seventeen years since the Commission authorized the first option pilot

program. During that time, option trading volume has grown from less

than 2 million transactions a year to over 100 million transactions a

year. During this period of remarkable growth, the Commission,

exchanges, FCMs and market participants have gained extensive

experience on the operations of the option markets. In light of this

experience and upon consideration of all the comments, the Commission

believes that with adequate disclosure to public customers it is no

longer necessary for the Commission to require option purchasers to pay

the full option premium at the initiation of the transaction.

VI. Related Matters

A. Regulatory Flexibility Act

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

seq., requires that agencies, in promulgating rules, consider the

impact of those rules on small businesses. The rules discussed herein

will affect contract markets, clearing organizations, FCMs and IBs. The

Commission 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. Contract markets and FCMs

have been determined not to be small entities under the RFA. 47 FR

18616 (April 30, 1982). Furthermore, the then Chairman of the

Commission previously has certified on behalf of the Commission that

comparable rules affecting clearing organizations do not have a

significant economic impact on a substantial number of small entities.

51 FR 44866, 44868 (December 12, 1986).

With respect to IBs, the Commission has stated that it is

appropriate to evaluate within the context of a particular rule

proposal whether some or all IBs should be considered to be small

entities and, if so, to analyze that economic impact on such entities

at that time. The proposed rule amendments would not require any IB to

alter its current method of doing business as FCMS have the

responsibility of administering customer funds. Further, these rule

amendments, as proposed, should impose no additional burden or

requirements on IBs and, thus, if adopted would not have a significant

economic impact on a substantial number of IBs.

Therefore, the Chairperson, on behalf of the Commission, hereby

certifies pursuant to 5 U.S.C. Sec. 605(b) that the action taken herein

would not have a significant economic impact on a substantial number of

small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 \13\ imposes certain

requirements on federal agencies (including the Commission) in

connection with their conducting or sponsoring any collection of

information as defined by the Paperwork Reduction Act.

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

\13\ Pub. L. 104-13 (May 13, 1995).

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

While Rules 1.3, 1.12, and 1.17 do not effect the burden, the group

of rules (3038-0024) of which Rules 1.3, 1.12, and 1.17 are a part have

the following burden.

Average burden hours per response: 128.

Number of respondents: 3,148.

Frequency of responses: on occasion.

While Rule 33.7 does not effect the burden, the group of rules

(3038-0007) of which Rule 33.7 is a part has the following burden.

Average burden hours per response: 50.57.

Number of respondents: 190,422.

Frequency of responses: on occasion.

Copies of the information collection submission to the Office of

Management and Budget are available from the CFTC Clearance Officer,

1155 21st Street, N.W., Washington, D.C. 20581, (202) 418-5160.

List of Subjects

17 CFR Part 1

Commodity Futures, Reporting and recordkeeping requirements.

17 CFR Part 33

Commodity Futures, Domestic exchange-traded commodity option

transactions, Consumer protection, Fraud.

In consideration of the foregoing, and pursuant to the authority

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

2(a)(1), 4b, 4c, and 8a thereof, 7 U.S.C. 2a, 6b, 6c, and 12a, the

Commission hereby amends Chapter I of Title 17 of the Code of Federal

Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

1. The authority citation for Part 1 continues to read as follows:

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

6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,

12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24.

2. Section 1.3 is amended to revise paragraph (gg)(2)(iv) to read

as follows:

Sec. 1.3 Definitions

* * * * *

(gg) * * *

(2) * * *

(iv) Representing accruals (including, for purchasers of a

commodity option for which the full premium has been paid, the market

value of such commodity option) to an option customer.

* * * * *

3. Section 1.12 is amended by revising paragraph (b)(2) to read as

follows:

[[Page 32731]]

Sec. 1.12 Maintenance of minimum financial requirements by futures

commission merchants and introducing brokers.

* * * * *

(b) * * *

(2) 6 percent of the following amount: The customer funds required

to be segregated pursuant to the Act and the regulations in this part

and foreign futures or foreign options secured amount, less the market

value of commodity options purchased by such customers on or subject to

the rules of a contract market or a foreign board of trade for which

the full premiums have been paid: Provided, however, That the deduction

for each such customer shall be limited to the amount of customer funds

in such customer's account(s) and foreign futures and foreign options

secured amounts;

* * * * *

4. Section 1.17 is amended by revising paragraphs (a)(1)(i)(B),

(e)(1)(ii), (h)(2)(vi)(C)(2), (h)(2)(vii)(A)(2), (h)(2)(vii)(B)(2),

(h)(2)(viii)(A)(2), (h)(3)(ii)(B) and (h)(3)(v)(B) to read as follows:

Sec. 1.17 Minimum financial requirements for futures commission

merchants and introducing brokers.

* * * * *

(a)(1)(i) * * *

(B) Four percent of the following amount: The customer funds

required to be segregated pursuant to the Act and the regulations in

this part and the foreign futures or foreign options secured amount,

less the market value of commodity options purchased by customers on or

subject to the rules of a contract market or a foreign board of trade

for which the full premiums have been paid: Provided, however, That the

deduction for each customer shall be limited to the amount of customer

funds in such customer's account(s) and foreign futures and foreign

options secured amounts;

* * * * *

(e) * * *

(1) * * *

(ii) For a futures commission merchant or applicant therefor, 7

percent of the following amount: The customer funds required to be

segregated pursuant to the Act and the regulations in this part and the

foreign futures or foreign options secured amount, less the market

value of commodity options purchased by customers on or subject to the

rules of a contract market or a foreign board of trade for which the

full premiums have been paid: Provided, however, That the deduction for

each customer shall be limited to the amount of customer funds in such

customer's account(s) and foreign futures and foreign options secured

amounts;

* * * * *

(h) * * *

(2) * * *

(vi) * * *

(2) For a futures commission merchant or applicant therefor, 7