Maintenance of Minimum Financial Requirements by Futures Commission Merchants and Introducing Brokers

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1

Maintenance of Minimum Financial Requirements by Futures

Commission Merchants and Introducing Brokers

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: Rule 1.12 of the Commodity Futures Trading Commission

(Commission or CFTC) \1\ sets forth the early warning reporting

requirements for futures commission merchants (FCMs) and introducing

brokers (IBs). These requirements are designed to afford the CFTC and

industry self-regulatory organizations (SROs) sufficient advance notice

of a firm's financial or operational problems to take any protective or

remedial action that may be needed to assure the safety of customer

funds and the integrity of the marketplace.

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\1\ Commission rules are found at 17 CFR Ch. I (1998).

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The Commission is adopting as proposed an amendment to Rule 1.12,

applicable to FCMs only, to require immediate notification by an FCM to

the CFTC and its designated self-regulatory organization (DSRO) if an

FCM knows or should know that it is in an undersegregated or

undersecured condition, i.e., that the FCM has insufficient funds in

accounts segregated for the benefit of customers trading on U.S.

contract markets or has insufficient funds set aside for customers

trading on non-U.S. markets to meet the FCM's obligations to its

customers. The term ``funds'' in this context includes accrued amounts

due to or from the FCM's clearing organizations and/or carrying brokers

in connection with customer-related activities, typically the daily or

intraday variation settlement.

The Commission is also adopting amendments to Rule 1.12, as

proposed, to require immediate notification of certain events

pertaining to undercapitalization or failure to satisfy margin calls,

where notice has been required within 24 hours. In addition, the

Commission has determined to codify a previous staff interpretation

that permits notices required by Rule 1.12 to be filed by facsimile in

lieu of telegraphic means and to require immediate telephonic notice as

well.

EFFECTIVE DATE: September 28, 1998.

FOR FURTHER INFORMATION CONTACT:

Paul H. Bjarnason, Jr., Deputy Director and Chief Accountant, or

Lawrence B. Patent, Associate Chief Counsel, Division of Trading and

Markets, Commodity Futures Trading Commission, 1155 21st Street, N.W.,

Washington, D.C. 20581. Telephone (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Introduction

On January 6, 1998, the Commission proposed amendments to the early

warning requirements set forth in Rule 1.12.\2\ These proposals

included: (1) a new requirement for an FCM to notify the CFTC and its

DSRO immediately (by telephone call to be followed immediately by

telegraphic or facsimile notice) when it knows or should know that it

is in an undersegregated or undersecured condition; (2) requiring

immediate telephonic notice, rather

[[Page 45712]]

than notice within 24 hours, when an FCM or IB is undercapitalized or

when an account must be liquidated, transferred or allowed to trade for

liquidation only; and (3) codifying a previous staff interpretation

that permits written notices to be filed by facsimile in lieu of

telegraphic means.\3\

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\2\ 63 FR 2188 (Jan. 14, 1998).

\3\ The CFTC's Division of Trading and Markets has stated that

any notice required to be transmitted to the CFTC under Rule 1.12 by

telegraphic notice may be transmitted by facsimile machine. See

CFTC's Advisory No. 90-2, [1987-1990] Transfer Binder] Comm. Fut. L.

Rep. (CCH) para. 24,599 (Feb. 6, 1990). The CFTC proposes to codify

this Advisory throughout Rule 1.12 to make clear that any written

notice can be provided either through telegraphic means or via

facsimile transmission.

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The 60-day comment period expired on March 16, 1998. The Commission

received eight comment letters. Three FCMs, GNI Incorporated (GNI),

FIMAT USA Inc. (FIMAT) and Lind-Waldock & Company (LWC), each submitted

a comment letter. One comment letter was submitted on behalf of six

exchanges (Chicago Board of Trade, Chicago Mercantile Exchange (CME),

Kansas City Board of Trade, Minneapolis Grain Exchange, New York Cotton

Exchange and New York Mercantile Exchange, collectively referred to as

the Exchanges). Another exchange, the Coffee, Sugar & Cocoa Exchange

(CSCE), submitted its own comment letter. The other commenters were the

Association of the Bar of the City of New York's Committee on Futures

Regulation (NYC Bar), National Futures Association (NFA) and the

Futures Industry Association (FIA).\4\ The commenters expressed concern

about the ``should know'' portion of the reporting standard in the

proposed undersegregation notice rule. Some of the commenters suggested

alternatives to the proposals. These comments and alternatives are

discussed more fully below.

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\4\ In addition, the comment file contains a memorandum from

Commissioner Holum's office concerning a meeting on February 10,

1998, with staff of Cargill Investor Services, Inc. and Cargill

Grain Division (collectively, Cargill) during which the rule

proposals, among other things, were discussed.

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The Commission has considered carefully the comments received.

Based upon these comments, discussions between Commission staff and

industry representatives and the Commission's reconsideration of this

subject, the Commission has determined to adopt a new Rule 1.12(h) as

proposed so that an FCM will be required to notify immediately the CFTC

and its DSRO of an undersegregated or undersecured condition if it

knows or should know the condition exists. The Commission has also

provided in the preamble of this release, in response to suggestions

from FIA and NFA, an example of the circumstances that would trigger a

requirement to report under the new standard. The other rule amendments

have been adopted essentially as proposed.

II. Rule Amendments

A. Undersegregation Notice

1. Proposal

FCMs occasionally have become undersegregated as a result of market

movements which cause deficits in the accounts they carry on behalf of

their customers. Generally, the undersegregated condition is discovered

as a result of the segregation calculation, which under Commission

rules is required to be completed by noon on the business day following

the day of the market movements. Most FCMs are able to avoid any

undersegregated condition which might have occurred on the same

business day for which the segregation calculation is made, using

proprietary funds or through collection of deficits by wire transfer

arrangements made with customers. However, this is not always the case.

During the market downturn on October 27, 1997, the Commission was made

aware that a few FCMs experienced undersegregation to a degree that

they were unable to make up the shortfall from their own internal

proprietary funds. Infusions of external capital were required in those

cases to correct the undersegregated conditions. The Commission is also

aware that, in at least one case, an FCM was aware that it was

undersegregated as of the close of business on October 27, due to

losses in the accounts of a single customer. Further, this FCM was

aware on October 27 that it was likely this customer would default in

its obligations to the FCM and that, as a result, the FCM would be

undersegregated. Further, the FCM also knew that it did not have

sufficient proprietary funds within the firm to correct the

undersegregated condition. As explained further below, the Commission

was notified on or about the close of business October 28--at least one

day after the FCM was well aware of the situation.

An evaluation of the Commission's early warning notification rules

indicated that these rules, which require notice to the Commission

upon, among other events, an FCM falling below the adjusted net capital

early warning level, which is 150 percent of the minimum required, may

not result in notice to the commission until as much as a day or a day

and a half after the occurrence of a major market event that causes an

undersegregated condition. In particular, on October 27, 1997, some

firms knew that they had a major problem by noon of that day, but did

not provide notice of these problems to the Commission until on or

about the close of business on October 28.

The Commission, therefore, proposed a new Rule 1.12(h) \5\ that

would require an FCM to notify the Commission and its DSRO immediately

after it knows or should know that funds segregated for customers

trading on U.S. markets or set aside for customers trading on non-U.S.

markets are less than the amount required to be segregated or set aside

by the Commodity Exchange Act (Act) or Commission rules.\6\ In this

context, the term ``funds'' includes funds on deposit and funds due to

or from the FCM's clearing organizations or carrying brokers. The

Commission's proposal would require an immediate telephone call by an

FCM, to be followed immediately by telegraphic or facsimile notice. The

notification to the Commission would be directed to the Division of

Trading and Markets, to the attention of the Director and the Chief

Accountant, and notice to the DSRO was to be directed to the person or

unit provided for under the DSRO's rules. For example, the notice

required by CME Rule 971 must be sent to CME's Audit Department.\7\

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\5\The Commission proposed to redesignate current paragraph (h)

of Rule 1.12 as paragraph (i) and to include the new rule in a new

paragraph (h).

\6\ Background on the segregation and set aside requirements is

set forth at 63 FR 2188, 2189.

\7\ The CME has a rule requiring that a FCM for which it acts as

the DSRO provide written notice to CME within 24 hours after the FCM

becomes aware of its failure to maintain sufficient funds in

segregation or set aside in separate accounts. Rules of the Chicago

Mercantile Exchange, Rule 971 Segregation and Secured Requirements

(1997).

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2. Comments on Proposed Reporting Standard

Most of the commenters objected to the ``should know'' standard in

proposed new Rule 1.12(h). GNI, Cargill and LWC criticized this

language as being too vague and granting the Commission too much

discretion. NYC Bar and CSCE claimed that a ``should know'' standard

would lead to overreporting by firms fearful of an enforcement action.

Overreporting could create or exacerbate, rather than prevent or

ameliorate, a market crisis, causing rumors to spread of problems at

reporting firms, according to the NYC Bar and GNI. FIA expressed

concern that this could cause the Commission to take precipitous

action, such as ordering the transfer of accounts.

NYC Bar also stated that ``the `should know' standard has not been

the subject of litigation or addressed by any staff interpretations.''

The Commission notes that the ``should know'' standard has

[[Page 45713]]

been part of the standard for reporting undercapitalization in Rule

1.12(a) since it was adopted 20 years ago.\8\ The Commission was

intending to conform the reporting requirements for undersegregation

and undercapitalization, a concept that FIMAT deemed sensible in its

comment letter (although, as discussed below, FIMAT objected to the

timing element). The Commission further notes that Rule 1.12(a) has

been the subject of litigation.\9\

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\8\ 43 FR 39956, 39969 (Sept. 8, 1978).

\9\ See, e.g., In the Matter of First Commercial Financial

Group, Inc., et al., CFTC Docket No. 95-10, [Current Transfer

Binder] Comm. Fut. L. Rep. (CCH) para. 27,180 (Initial Decision Oct.

27, 1997); In the Matter of Eagan & Company, Inc., et al. CFTC

Docket No. 92-20, [1990-1992 Transfer Binder] Comm. Fut. L. Rep.

(CCH) para. 25,350 (Initial Decision July 31, 1992).

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Some commenters suggested alternatives. FIA stated that it could

support reporting of undersegregation subject to three conditions,

which should be set forth in the rule itself or in the preamble of the

Federal Register notice announcing adoption of the rule: (1) there is a

significant undermargined account; (2) the customer makes clear that it

is unable or unwilling to meet the margin call; and (3) the FCM is

aware that it will be unable to transfer enough funds from its own

accounts into segregation in a timely manner to cover the shortfall.

NFA stated that, in extraordinary markets, an FCM may know earlier than

the formal computation deadline of noon the following business day that

it is undersegregated and suggested that the Commission clarify that

this is the exception rather than the norm.

In an effort to respond to the commenters, the Commission's staff

explored the use of language other than ``knows or should know'' for

the undersegregation notice requirement on an informal basis with

representatives of entities that submitted comment letters. Following

these discussions and Commission reconsideration of the issue, the

Commission has determined to adopt as the standard for reporting an

undersegregated or undersecured condition that an FCM ``knows or should

know'' either condition exists, as the Commission proposed. Of course,

this standard would be met if the daily calculations of segregation and

secured amount requirements pursuant to Rules 1.32 and 30.7(f) reveal

deficiencies. However, the requirement to report under new Rule 1.12(h)

could also arise even before the required daily calculations of

segregation and secured amount must be made. The Commission notes, in

response to FIA's and NFA's suggestion referred to above, the one

example of when the Commission would conclude that an FCM knows or

should know that the new reporting requirement is triggered is the

following circumstance: (1) there is a significant undermargined

account; (2) the customer makes clear that it is unable or unwilling to

meet the margin call; and (3) the FCM is aware that it will be unable

to transfer enough funds from its own accounts into segregation or

separate set-aside accounts to cover the shortfall.

That part of the standard requiring an FCM to report when it

``should know'' of a problem may be defined as the point at which a

party, in the exercise of reasonable diligence, should become aware of

an event. This is an objective standard that has been applied by courts

on numerous occasions.\10\ As noted above, the standard ``knows or

should know'' has been used in Commission Rule 1.12(a) for almost 20

years, and this language is used in other federal regulations.\11\

Because of the severe financial consequences that could arise from an

FCM's failure to comply with segregation and secured amount

requirements, and to achieve consistency between the treatment of

undercapitalization and undersegregation conditions, the Commission

believes that it is appropriate to adopt the ``knows or should know''

standard for new Rule 1.12(h).

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\10\ See, e.g., Anixter v. Home-State Production Company, 947 F.

2d 897, 899 & n.5 (10th Cir. 1991); Maloley v. R.J. O'Brien &

Associates, Inc., 819 F.2d 1435, 1442-1444 (8th Cir. 1987).

\11\ See, e.g., 17 CFR 240.14e-3 (1998); 29 CFR 1604.11 (1997).

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By this rule change, the Commission requires reporting of serious

problems, such as occurred on October 27, 1997, as soon as they become

apparent to the FCM. In addition, the Commission wishes to make clear

that an FCM cannot avoid the reporting requirement by failing to

perform or by delaying the required segregation and secured amount

calculations pursuant to Rules 1.32 and 30.7(f). Failure to make the

required calculations, which are rule violations in and of themselves,

cannot be used as an excuse for failing to report as required by new

Rule 1.12(h).

3. Comments on When to Report

The Commission proposed that an FCM be required to report an

undersegregated or undersecured condition immediately by telephone,

which is to be confirmed in writing immediately by telegraphic or

facsimile notice. The Exchanges and FIMAT stated that, during major

market moves, the first priority of an FCM should be to monitor

accounts, to collect required deposits and to ensure that settlement

variation requirements can be met. In their view, it is less important

to perform immediately a ministerial calculation to determine whether a

precise violation of segregation requirements has occurred than to

address immediately all severe problems. These commenters, as well as

GNI, NYC Bar and FIA, also noted that, given the nature of today's

financial markets, with round-the-clock, round-the-globe trading and

increased give-up business, it takes time for an FCM to gather and to

review the necessary information concerning an FCM's segregation and

secured amount requirements; moment-to-moment calculations are not

possible. Two commenters (GNI and FIMAT) questioned whether Commission

staff would be available at all times to receive calls if immediate

telephonic notice is required.

Certain commenters also suggested alternatives on this aspect of

the proposals. FIMAT noted that, pursuant to CME Rule 971(C), it is

already required to report undersegregation to the CME within 24 hours.

FIMAT stated that it would not object to a similar time frame in a

Commission rule; earlier reporting could be encouraged, but mandating

immediate reporting is too severe in FIMAT's view. NYC Bar suggested

that the Commission amend Rule 1.32 to require earlier completion of

the daily segregation record (now required by noon on the following

business day) and immediate reporting of undersegregation as of the

earlier time.

The Commission considered the time for reporting in connection with

the rule proposal and determined that immediate reporting would be the

appropriate standard. The Commission recognizes, however, that time may

be needed for consultation by FCM staff with senior management, and it

did not intend to foreclose that activity. The Commission also did not

intend to require FCMs to make additional segregation calculations on a

routine basis, but only to do so if a problem arises that could trigger

the reporting requirement under new Rule 1.12(h). It is the

Commission's intent that the ``knows or should know'' standard be

implemented by FCMs using existing sources of information and

computations. Nor does the Commission wish to accelerate the

requirement for completion of the daily segregation record, as

suggested by the NYC Bar, since the Commission would have to propose

such a rule change and allow

[[Page 45714]]

further comment thereon and the Commission does not believe at this

time that such a rule change is needed. The Commission is requiring

that, when an FCM knows or should know that it is undersegregated or

undersecured, it must report that immediately. As to the availability

of Commission staff for immediate telephonic notification under new

Rule 1.12(h), the Commission does not believe that this will be a

problem given modern telecommunications facilities.

After reviewing other provisions of the early warning requirements,

the Commission proposed that notices of events that had been required

within 24 hours (namely, when an FCM or IB is undercapitalized or when

an account must be liquidated, transferred or allowed to trade for

liquidation only) be made immediately. Such notifications would be

required by telephone immediately, to be confirmed in writing by

telegraph or facsimile. See Rule 1.12(a)(1), (f)(1), and (f)(2).

Certain other provisions of Rule 1.12 already require immediate

notifications. See paragraphs (e), (f)(3), (f)(4) and (f)(5) of Rule

1.12. The Commission also proposed that these notifications be made by

telephone as well as by telegraph or facsimile. The Commission received

no comment on these proposals and is adopting them as proposed.\12\

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\12\ The Commission is also adopting as proposed a correction to

the cross-reference in Sec. 1.12(g)(2) concerning consolidation that

now refers to ``Sec. 1.10(f)'' to read ``1.17(f)''.

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4. Comments on Where to Report

The Commission proposed new Rule 1.12(h) to require an FCM to

report an undersegregated or undersecured condition both to its DSRO

and to the Commission, which is consistent with the other provisions of

Rule 1.12. The Exchanges, FIA, GNI and LWC commented that all early

warning notices, including those unaffected by the recent proposals,

should be filed only with a firm's DSRO, which would in turn be

responsible for informing the CFTC and other SROs. This would eliminate

the requirement for a firm to report directly to the Commission. Taking

a different viewpoint, CSCE complained that DSROs fail to share early

warning notice information in a timely manner with other exchanges and

clearing organizations where the FCM that filed an early warning notice

is carrying large positions.

The Commission did not consider this to be an issue in drafting the

proposals, and the proposal as to where to report an undersegregated or

undersecured condition was consistent with the other provisions of Rule

1.12. Since time is of the essence in situations addressed by Rule

1.12, and in light of the Commission's review of all of the comments on

this point, the Commission has determined to adopt as proposed the

requirement for direct notice by firms to the Commission under new Rule

1.12(h). The Commission also wishes to note, however, that it

encourages FCMs to communicate with their DSROs on an ongoing basis and

believes that DSROs can perform an important role in determining when

it is appropriate for early warning notices to be filed. In any event,

at the point when an FCM knows or should know that it is in an

undersegregated or undersecured condition, it must report that

condition immediately to its DSRO and the Commission.

The Exchanges requested that paragraphs (f)(3)-(f)(5) of Rule 1.12

be deleted as ineffectual. These provisions require immediate reporting

whenever (1) an FCM issues a margin call in excess of its adjusted net

capital,\13\ (2) a margin call is not met by the close of business on

the day following its issuance, or (3) an FCM's excess adjusted net

capital is less than six percent of maintenance margin required on

positions carried for noncustomers other than another FCM or a

securities broker-dealer.

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\13\ FIMAT commented that the existence of Rule 1.12(f)(3),

which requires immediate reporting when an FCM issues a margin call

in excess of its adjusted net capital, is a reason not to require

immediate reporting of undersegregation.

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The Commission's only proposals with respect to paragraphs (f)(3)-

(f)(5) of Rule 1.12, which were adopted in conjunction with and were

derived from the proposals for the Commission's risk assessment rules,

Rules 1.14 and 1.15, concerned telephonic and facsimile notice as

described above. The Commission believes that these provisions should

be retained, but that, if the Commission pursues further rulemaking

concerning risk assessment, it may be appropriate at that time to

reconsider Rule 1.12(f)(3)-(f)(5).

III. Related Matters

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-611 (1994),

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

those rules on small businesses. The rule amendments discussed herein

would affect primarily FCMs. The amendment of one provision,

Sec. 1.12(f)(1), would affect clearing organizations, and the amendment

of another provision, Sec. 1.12(a)(1), would affect IBs. The Commission

has previously determined that, based upon the fiduciary nature of FCM/

customer relationships, as well as the requirement that FCMs meet

minimum financial requirements, FCMs should be excluded from the

definition of small entity.\14\ Contract markets and their clearing

organizations have also been excluded from the definition of small

entity.\15\

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\14\ 47 FR 18618-18621 (April 30, 1992).

\15\ Id.

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The amendment to Sec. 1.12(a)(1) concerning notice of

undercapitalization affects the minority of IBs that rely upon their

own capital to meet adjusted net capital rules, ``independent'' IBs, as

well as FCMs. The Commission has determined to require that this notice

be provided immediately rather than within 24 hours as previously

required. The notification requirement will remain essentially the

same, but the time within which to report has been shortened. The

Commission believes that this rule amendment is necessary for the

Commission and DSROs to be able to carry out their oversight and

monitoring functions concerning the financial condition of futures

industry intermediaries and to protect the customers of those firms and

the markets. Therefore, any slight increase in the burden on an

independent IB caused by the amendment to Rule 1.12(a)(1) is necessary

for the Commission to fulfill its regulatory obligations.\16\

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\16\ The Commission evaluates within the context of a particular

rule proposal whether all or some IBs should be considered small

entities and, if so, analyzes the impact on IBs of the proposal. 48

FR 35248, 35276 (Aug. 3, 1983).

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

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

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

small entities.

B. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA''), 44 U.S.C. 3501 et

seq. (Supp. I 1995), 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. The

Commission anticipates that fewer than ten FCMs per year will file

reports under the new rule, and thus the new rule will not constitute a

collection of information under the PRA.\17\ The group of rules (3038-

0024) of which this is a part has the following burden:

\17\ 44 U.S.C. 3502(3) (Supp. I 1995).

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Average Burden Hours Per Response: 128

[[Page 45715]]

Number of Respondents: 1366

Frequency of Response: On ocassion

Copies of the OMB approved information collection package

associated with this rule may be obtained from Desk Officer, CFTC,

Office of Management and Budget, Room 10202, NEOB, Washington, D.C.

20503, (202) 395-7340.

List of Subjects in 17 CFR Part 1

Commodity futures, Minimum financial and related reporting

requirements.

In consideration of the foregoing, and pursuant to the authority

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

4f, 4g and 8a(5) thereof, 7 U.S.C. 6f, 6g and 12a(5), the Commission

hereby amends 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 1.12 is amended by revising paragraph (a)(1), by

revising the first sentence of paragraph (b)(4), by adding the phrase

``or facsimile'' after the word ``telegraphic'' in paragraphs (c) and

(d), by revising paragraph (e), by adding the phrase ``telephonic,

confirmed in writing by'' before the word ``telegraphic,'' by adding

the phrase ``or facsimile,'' after the word ``telegraphic'' and by

revising the phrase at the end which reads ``within 24 hours'' to read

``immediately'' in paragraphs (f)(1) and (f)(2), by adding the phrase

``telephonic, confirmed in writing by'' before the word ``telegraphic''

and by adding the phrase ``or facsimile,'' after the word

``telegraphic'' in paragraph (f)(3), by adding the phrase ``by

telephone, confirmed in writing immediately by telegraphic or facsimile

notice,'' after the word ``immediately'' in paragraphs (f)(4) and

(f)(5), by revising the phrase in paragraph (g)(2) which reads

``Sec. 1.10(f)'' to read ``Sec. 1.17(f)'', by redesignating paragraphs

(h)(1) and (h)(2) as paragraphs (i)(1) and (i)(2), respectively, by

revising the last sentence of paragraph (i)(2), and by adding a new

paragraph (h). The additions and revisions follow:

Sec. 1.12 Maintenance of minimum financial requirements by futures

commission merchants and introducing brokers.

(a) * * *

(1) Give telephonic notice, to be confirmed in writing by

telegraphic or facsimile notice, as set forth in paragraph (i) of this

section that the applicant's or registrant's adjusted net capital is

less than required by Sec. 1.17 or by other capital rule, identifying

the applicable capital rule. The notice must be given immediately after

the applicant or registrant knows or should know that its adjusted net

capital is less than required by any of the aforesaid rules to which

the applicant or registrant is subject; and

* * * * *

(b) * * *

(4) For securities brokers or dealers, the amount of net capital

specified in Rule 17a-11(b) of the Securities and Exchange Commission

(17 CFR 240.17a-11(b)), must file written notice to that effect as set

forth in paragraph (i) of this section within five (5) business days of

such event. * * *

* * * * *

(e) Whenever any self-regulatory organization learns that a member

registrant has failed to file a notice or written report as required by

Sec. 1.12, that self-regulatory organization must immediately report

this failure by telephone, confirmed in writing immediately by

telegraphic or facsimile notice, as provided in paragraph (i) of this

section.

* * * * *

(h) Whenever a person registered as a futures commission merchant

knows or should know that the total amount of its funds on deposit in

segregated accounts on behalf of customers, or that the total amount

set aside on behalf of customers trading on non-United States markets,

is less than the total amount of such funds required by the Act and the

Commission's rules to be on deposit in segregated or secured amount

accounts on behalf of such customers, the registrant must report

immediately by telephone, confirmed in writing immediately by

telegraphic or facsimile notice, such deficiency to the registrant's

designated self-regulatory organization and the principal office of the

Commission in Washington, D.C., to the attention of the Director and

the Chief Accountant of the Division of Trading and Markets.

(i) * * *

(2) * * * Any notice or report filed with the National Futures

Association pursuant to this paragraph shall be deemed for all purposes

to be filed with, and to be the official record of, the Commission.

Issued in Washington, D.C. on August 24, 1998 by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 98-23021 Filed 8-26-98; 8:45 am]

BILLING CODE 6351-01-M