GENERAL REGULATIONS ECORDKEEPING UNDER … · tions brought under the Commodity Ex-change Act. APPENDIX A TO PART 1 ... centrated orange juice, and all other ... (r) Net equity

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PART 1—GENERAL REGULATIONSUNDER THE COMMODITY EX-CHANGE ACT

DEFINITIONS

Sec.1.1 Words in singular and plural form.1.2 Liability of principal for act of agent.1.3 Definitions.1.4 Use of electronic signatures.

MINIMUM FINANCIAL AND RELATED REPORTINGREQUIREMENTS

1.10 Financial reports of futures commis-sion merchants and introducing brokers.

1.11 [Reserved]1.12 Maintenance of minimum financial re-

quirements by futures commission mer-chants and introducing brokers.

1.13 [Reserved]1.14 Risk assessment recordkeeping require-

ments for futures commission mer-chants.

1.15 Risk assessment reporting require-ments for futures commission mer-chants.

1.16 Qualifications and reports of account-ants.

1.17 Minimum financial requirements forfutures commission merchants and intro-ducing brokers.

1.18 Records for and relating to financial re-porting and monthly computation by fu-tures commission merchants and intro-ducing brokers.

PROHIBITED TRADING IN COMMODITY OPTIONS

1.19 Prohibited trading in certain ‘‘puts’’and ‘‘calls’’.

CUSTOMERS’ MONEY, SECURITIES, ANDPROPERTY

1.20 Customer funds to be segregated andseparately accounted for.

1.21 Care of money and equities accruing tocustomers.

1.22 Use of customer funds restricted.1.23 Interest of futures commission mer-

chant in segregated funds; additions andwithdrawals.

1.24 Segregated funds; exclusions therefrom.1.25 Investment of customer funds.1.26 Deposit of instruments purchased with

customer funds.1.27 Record of investments.1.28 Appraisal of instruments purchased

with customer funds.1.29 Increment or interest resulting from

investment of customer funds.1.30 Loans by futures commission mer-

chants; treatment of proceeds.

RECORDKEEPING

1.31 Books and records; keeping and inspec-tion.

1.32 Segregated account; daily computationand record.

1.33 Monthly and confirmation statements.1.34 Monthly record, ‘‘point balance’’.1.35 Records of cash commodity, futures,

and option transactions.1.36 Record of securities and property re-

ceived from customers and option cus-tomers.

1.37 Customer’s or option customer’s name,address, and occupation recorded; recordof guarantor or controller of account.

1.38 Execution of transactions.1.39 Simultaneous buying and selling orders

of different principals; execution of, forand between principals.

MISCELLANEOUS

1.40 Crop, market information letters, re-ports; copies required.

1.41 Contract market rules; submission ofrules to the Commission; exemption ofcertain rules.

1.41a Delegation of authority to the Direc-tors of the Division of Trading and Mar-kets and the Division of Economic Anal-ysis to process certain contract marketrules.

1.41b Delegation of authority to the Direc-tor of the Division of Trading and Mar-kets and Director of the Division of Eco-nomic Analysis.

1.41c Delegation of authority to the Direc-tor of the Division of Trading and Mar-kets to receive notice of an emergencyaction.

1.42 Delivery notice; filing of copy.1.43 Information required concerning ware-

houses.1.44 Records and reports of warehouses, de-

positories, and other similar entities;visitation of premises.

1.45 Delivery of commodities conforming toUnited States standards.

1.46 Application and closing out of offset-ting long and short positions.

1.47 Requirements for classification of pur-chases or sales of contracts for future de-livery as bona fide hedging under§ 1.3(z)(3) of the regulations.

1.48 Requirements for classification of salesor purchases for future delivery as bonafide hedging of unsold anticipated pro-duction or unfilled anticipated require-ments under § 1.3(z)(2) (i)(B) or (ii)(C) ofthe regulations.

1.50 Demonstration of continued compli-ance with the requirements for contractmarket designation.

1.51 Contract market program for enforce-ment.

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17 CFR Ch. I (4–1–01 Edition)§ 1.1

1.52 Self-regulatory organization adoptionand surveillance of minimum financialrequirements.

1.53 Enforcement of contract market by-laws, rules, regulations, and resolutions.

1.54 Contract market rules submitted toand approved or not disapproved by theSecretary of Agriculture.

1.55 Distribution of ‘‘Risk Disclosure State-ment’’ by futures commission merchantsand introducing brokers.

1.56 Prohibition of guarantees against loss.1.57 Operations and activities of intro-

ducing brokers.1.58 Gross collection of exchange-set mar-

gins.1.59 Activities of self-regulatory organiza-

tion employees, governing board mem-bers, committee members, and consult-ants.

1.60 Pending legal proceedings.1.61 [Reserved]1.62 Contract market requirement for floor

broker and floor trader registration.1.63 Service on self-regulatory organization

governing boards or committees by per-sons with disciplinary histories.

1.64 Composition of various self-regulatoryorganization governing boards and majordisciplinary committees.

1.65 Notice of bulk transfers and disclosureobligations to customers.

1.66 No-action positions with respect tofloor traders.

1.67 Notification of final disciplinary actioninvolving financial harm to a customer.

1.69 Voting by interested members of self-regulatory organization governingboards and various committees.

1.70 Notification of State enforcement ac-tions brought under the Commodity Ex-change Act.

APPENDIX A TO PART 1 [RESERVED]APPENDIX B TO PART 1—FEES FOR CONTRACT

MARKET RULE ENFORCEMENT REVIEWS

AND FINANCIAL REVIEWS

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, 24.

SOURCE: 41 FR 3194, Jan. 21, 1976, unlessotherwise noted.

DEFINITIONS

§ 1.1 Words in singular and pluralform.

Words used in the singular form inthe rules and regulations in this partshall be deemed to import the plural,and vice versa, as the case may require.

§ 1.2 Liability of principal for act ofagent.

The act, omission, or failure of anyofficial, agent, or other person actingfor any individual, association, part-nership, corporation, or trust, withinthe scope of his employment or office,shall be deemed the act, omission, orfailure of such individual, association,partnership, corporation, or trust aswell as of such official, agent, or otherperson.

§ 1.3 Definitions.The following terms, as used in the

Commodity Exchange Act, or in therules and regulations in this chapter,shall have the meanings hereby as-signed to them, unless the context oth-erwise requires:

(a) Board of Trade. This term meansany exchange or association, whetherincorporated or unincorporated, of per-sons who shall be engaged in the busi-ness of buying or selling any com-modity or receiving the same for saleon consignment.

(b) Business day. This term meansany day other than a Sunday or holi-day. In all notices required by the actor by the rules and regulations in thischapter to be given in terms of busi-ness days the rule for computing timeshall be to exclude the day on whichnotice is given and include the day onwhich shall take place the act of whichnotice is given.

(c) Clearing member. This term meansany person who is a member of, or en-joys the privilege of clearing trades inhis own name through, the clearing or-ganization of a contract market.

(d) Clearing organization. This termmeans the person or organizationwhich acts as a medium for clearingtransactions in commodities for futuredelivery or commodity option trans-actions, or for effecting settlements ofcontracts for future delivery or com-modity option transactions, for and be-tween members of any contract mar-ket.

(e) Commodity. This term means andincludes wheat, cotton, rice, corn, oats,barley, rye, flaxseed, grain sorghums,millfeeds, butter, eggs, Irish potatoes,wool, wool tops, fats and oils (includinglard, tallow, cottonseed oil, peanut oil,soybean oil, and all other fats and oils),


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Commodity Futures Trading Commission § 1.3

cottonseed meal, cottonseed, peanuts,soybeans, soybean meal, livestock,livestock products, and frozen con-centrated orange juice, and all othergoods and articles, except onions asprovided in Pub. L. 85–839, and all serv-ices, rights and interests in which con-tracts for future delivery are presentlyor in the future dealt in.

(Sec. 2(a)(1), 88 Stat. 1395; 7 U.S.C. 2(1))

(f) Commodity Exchange Act; the Act.These terms mean the Commodity Ex-change Act, as amended, 7 U.S.C. 1 etseq.

(g) [Reserved](h) Contract market. This term means

a board of trade designated by theCommission as a contract marketunder the Commodity Exchange Act orin accordance with the provisions ofpart 33 of this chapter.

(i) Contract of sale. This term includessales, purchases, agreements of sale orpurchase and agreements to sell or pur-chase.

(j) Controlled account. An accountshall be deemed to be controlled by aperson if such person by power of attor-ney or otherwise actually directs trad-ing for such account.

(k) Customer; commodity customer.These terms have the same meaningand refer to a customer trading in anycommodity named in the definition ofcommodity herein: Provided, however,An owner or holder of a proprietary ac-count as defined in paragraph (y) ofthis section shall not be deemed to bea customer within the meaning of sec-tion 4d of the Act, the regulations thatimplement sections 4d and 4f of the Actand § 1.35, and such an owner or holderof such a proprietary account shallotherwise be deemed to be a customerwithin the meaning of the Act and§§ 1.37 and 1.46 and all other sections ofthese rules, regulations and orderswhich do not implement sections 4dand 4f.

(l) Delivery month. This term meansthe month of delivery specified in acontract of sale of any commodity forfuture delivery.

(m) [Reserved](n) Floor broker. This term means any

person who, in or surrounding any pit,ring, post or other place provided by acontract market for the meeting of

persons similarly engaged, shall pur-chase or sell for any other person anycommodity for future delivery on orsubject to the rules of any contractmarket and shall include any personrequired to register as a floor brokerunder the Act by virtue of part 33 ofthis chapter.

(o) Future delivery. This term doesnot include any sale of a cash com-modity for deferred shipment or deliv-ery.

(p) Futures commission merchant. Thisterm means:

(1) Individuals, associations, partner-ships, corporations, and trusts engagedin soliciting or in accepting orders forthe purchase or sale of any commodityfor future delivery on or subject to therules of any contract market and that,in or in connection with such solicita-tion or acceptance of orders, acceptsany money, securities, or property (orextends credit in lieu thereof) to mar-gin, guarantee or secure any trades orcontracts that result or may resulttherefrom; and

(2) Shall include any person requiredto register as a futures commissionmerchant under the Act by virtue ofpart 32 or part 33 of this chapter.

(q) Member of a contract market. Thisterm means and includes individuals,associations, partnerships, corpora-tions, and trusts owning or holdingmembership in, or admitted to mem-bership representation on, a contractmarket or given members’ tradingprivileges thereon.

(r) Net equity. This term means thecredit balance which would be obtainedby combining the commodity marginbalance of any person with the netprofit or loss, if any, accruing on theopen trades or contracts or commodityoption transactions of such person.

(s) Net deficit. This term means thedebit balance which would be obtainedby combining the commodity marginbalance of any person with the netprofit or loss, if any, accruing on theopen trades or contracts or commodityoption transactions of such person.

(t) Open contracts. This term meanscontracts of purchase or sale of anycommodity made by or for any personon or subject to the rules of a board oftrade for future delivery during a speci-fied month or delivery period which


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17 CFR Ch. I (4–1–01 Edition)§ 1.3

have not been fulfilled by delivery noroffset by other contracts of sale or pur-chase in the same commodity and de-livery month.

(u) Person. This term includes indi-viduals, associations, partnerships, cor-porations, and trusts.

(v) [Reserved](w) Secretary of Agriculture. This term

means the Secretary of Agriculture orany person to whom authority hasheretofore lawfully been delegated orto whom authority may hereafter law-fully be delegated to act in his stead.

(x) Floor trader. This term means anyperson who, in our surrounding any pit,ring, post, or other place provided by acontract market for the meeting ofpersons similarly engaged, purchasesor sells solely for such person’s own ac-count, or has been authorized by a con-tract market to purchase or sell forsuch person’s own account, any com-modity for future delivery on or sub-ject to the rules of any contract mar-ket and shall include any person re-quired to register as a floor traderunder the Act by virtue of part 33 ofthis chapter or by rule or regulation ofthe Commission pertaining to the oper-ation of an electronic trading system.

(y) Proprietary account. This termmeans a commodity futures or com-modity option trading account carriedon the books and records of an indi-vidual, a partnership, corporation orother type association (1) for one of thefollowing persons, or (2) of which tenpercent or more is owned by one of thefollowing persons, or an aggregate often percent or more of which is ownedby more than one of the following per-sons:

(i) Such individual himself, or suchpartnership, corporation or associationitself;

(ii) In the case of a partnership, ageneral partner in such partnership;

(iii) In the case of a limited partner-ship, a limited or special partner insuch partnership whose duties include:

(A) The management of the partner-ship business or any part thereof,

(B) The handling of the trades or cus-tomer funds of customers or optioncustomers of such partnership,

(C) The keeping of records pertainingto the trades or customer funds of cus-

tomers or option customers of suchpartnership, or

(D) The signing or co-signing ofchecks or drafts on behalf of such part-nership;

(iv) In the case of a corporation or as-sociation, an officer, director or ownerof ten percent or more of the capitalstock, of such organization;

(v) An employee of such individual,partnership, corporation or associationwhose duties include:

(A) The management of the businessof such individual, partnership, cor-poration or association or any partthereof,

(B) The handling of the trades or cus-tomer funds of customers or optioncustomers of such individual, partner-ship, corporation or association,

(C) The keeping of records pertainingto the trades or customer funds of cus-tomers or option customers of such in-dividual, partnership, corporation orassociation, or

(D) The signing or co-signing ofchecks or drafts on behalf of such indi-vidual, partnership, corporation or as-sociation;

(vi) A spouse or minor dependent liv-ing in the same household of any of theforegoing persons;

(vii) A business affiliate that directlyor indirectly controls such individual,partnership, corporation or associa-tion.

(viii) A business affiliate that, di-rectly or indirectly is controlled by oris under common control with, such in-dividual, partnership, corporation orassociation. Provided, however, That anaccount owned by any shareholder ormember of a cooperative association ofproducers, within the meaning of sec-tions 5(5) and 6a of the Act, which asso-ciation is registered as a futures com-mission merchant and carries such ac-count on its records, shall be deemed tobe an account of a customer or optioncustomer and not a proprietary ac-count of such association, unless theshareholder or member is an officer, di-rector or manager of the association.

(z) Bona fide hedging transactions andpositions—(1) General definition. Bonafide hedging transactions and positionsshall mean transactions or positions ina contract for future delivery on anycontract market, or in a commodity


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option, where such transactions or po-sitions normally represent a substitutefor transactions to be made or posi-tions to be taken at a later time in aphysical marketing channel, and wherethey are economically appropriate tothe reduction of risks in the conductand management of a commercial en-terprise, and where they arise from:

(i) The potential change in the valueof assets which a person owns, pro-duces, manufactures, processes, or mer-chandises or anticipates owning, pro-ducing, manufacturing, processing, ormerchandising,

(ii) The potential change in the valueof liabilities which a person owns oranticipates incurring, or

(iii) The potential change in thevalue of services which a person pro-vides, purchases, or anticipates pro-viding or purchasing.Notwithstanding the foregoing, notransactions or positions shall be clas-sified as bona fide hedging unless theirpurpose is to offset price risks inci-dental to commercial cash or spot op-erations and such positions are estab-lished and liquidated in an orderlymanner in accordance with sound com-mercial practices and, for transactionsor positions on contract markets sub-ject to trading and position limits ineffect pursuant to section 4a of theAct, unless the provisions of para-graphs (z) (2) and (3) of this section and§§ 1.47 and 1.48 of the regulations havebeen satisfied.

(2) Enumerated hedging transactions.The definitions of bona fide hedgingtransactions and positions in para-graph (z)(1) of this section includes, butis not limited to, the following specifictransactions and positions:

(i) Sales of any commodity for futuredelivery on a contract market which donot exceed in quantity:

(A) Ownership or fixed-price purchaseof the same cash commodity by thesame person; and

(B) Twelve months’ unsold antici-pated production of the same com-modity by the same person providedthat no such position is maintained inany future during the five last tradingdays of that future.

(ii) Purchases of any commodity forfuture delivery on a contract marketwhich do not exceed in quantity.

(A) The fixed-price sale of the samecash commodity by the same person.

(B) The quantity equivalent of fixed-price sales of the cash products and by-products of such commodity by thesame person; and

(C) Twelve months’ unfilled antici-pated requirements of the same cashcommodity for processing, manufac-turing, or feeding by the same person,provided that such transactions andpositions in the five last trading daysof any one future do not exceed theperson’s unfilled anticipated require-ments of the same cash commodity forthat month and for the next succeedingmonth.

(iii) Offsetting sales and purchasesfor future delivery on a contract mar-ket which do not exceed in quantitythat amount of the same cash com-modity which has been bought and soldby the same person at unfixed pricesbasis different delivery months of thecontract market, provided that no suchposition is maintained in any futureduring the five last trading days ofthat future.

(iv) Sales and purchases for futuredelivery described in paragraphs(z)(2) (i), (ii), and (iii) of this sectionmay also be offset other than by thesame quantity of the same cash com-modity, provided that the fluctuationsin value of the position for future de-livery are substantially related to thefluctuations in value of the actual oranticipated cash position, and providedthat the positions in any one futureshall not be maintained during the fivelast trading days of that future.

(3) Non-enumerated cases. Upon spe-cific request made in accordance with§ 1.47 of the regulations, the Commis-sion may recognize transactions andpositions other than those enumeratedin paragraph (z)(2) of this section asbona fide hedging in such amount andunder such terms and conditions as itmay specify in accordance with theprovisions of § 1.47. Such transactionsand positions may include, but are notlimited to, purchases or sales for futuredelivery on any contract market by anagent who does not own or who has notcontracted to sell or purchase the off-setting cash commodity at a fixed


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17 CFR Ch. I (4–1–01 Edition)§ 1.3

price, provided That the person is re-sponsible for the merchandising of thecash position which is being offset.

(aa) Associated person. This termmeans any natural person who is asso-ciated in any of the following capac-ities with:

(1) A futures commission merchantas a partner, officer, or employee (orany natural person occupying a similarstatus or performing similar func-tions), in any capacity which involves(i) the solicitation or acceptance ofcustomers’ or option customers’ orders(other than in a clerical capacity) or(ii) the supervision of any person orpersons so engaged;

(2) An introducing broker as a part-ner, officer, employee, or agent (or anynatural person occupying a similar sta-tus or performing similar functions), inany capacity which involves (i) the so-licitation or acceptance of customers’or option customers’ orders (other thanin a clerical capacity) or (ii) the super-vision of any person or persons so en-gaged;

(3) A commodity pool operator as apartner, officer, employee, consultant,or agent (or any natural person occu-pying a similar status or performingsimilar functions), in any capacitywhich involves (i) the solicitation offunds, securities, or property for a par-ticipation in a commodity pool or (ii)the supervision of any person or per-sons so engaged; or

(4) A commodity trading advisor as apartner, officer, employee, consultant,or agent (or any natural person occu-pying a similar status or performingsimilar functions), in any capacitywhich involves: (i) The solicitation of aclient’s or prospective client’s discre-tionary account, or (ii) the supervisionof any person or persons so engaged;and

(5) A leverage transaction merchantas a partner, officer, employee, con-sultant, or agent (or any natural per-son occupying a similar status or per-forming similar functions), in any ca-pacity which involves: (i) The solicita-tion or acceptance of leverage cus-tomers’ orders (other than in a clericalcapacity) for leverage transactions asdefined in § 31.4(x) of this chapter, or(ii) the supervision of any person orpersons so engaged.

(bb)(1) Commodity trading advisor.This term means any person who, forcompensation or profit, engages in thebusiness of advising others, either di-rectly or through publications,writings or electronic media, as to thevalue of or the advisability of tradingin any contract of sale of a commodityfor future delivery made or to be madeon or subject to the rules of a contractmarket, any commodity option author-ized under section 4c of the Act, or anyleverage transaction authorized undersection 19 of the Act, or who, for com-pensation or profit, and as part of aregular business, issues or promulgatesanalyses or reports concerning any ofthe foregoing; but such term does notinclude (i) any bank or trust companyor any person acting as an employeethereof, (ii) any news reporter, newscolumnist, or news editor of the printor electronic media, or any lawyer, ac-countant, or teacher, (iii) any floorbroker or futures commission mer-chant, (iv) the publisher or producer ofany print or electronic data of generaland regular dissemination, includingits employees, (v) the named fiduciary,or trustee, of any defined benefit planwhich is subject to the provisions ofthe Employee Retirement Income Se-curity Act of 1974, or any fiduciarywhose sole business is to advise thatplan, (vi) any contract market, and(vii) such other persons not within theintent of this definition as the Com-mission may specify by rule, regulationor order: Provided, That the furnishingof such services by the foregoing per-sons is solely incidental to the conductof their business or profession: Providedfurther, That the Commission, by ruleor regulation, may include within thisdefinition, any person advising as tothe value of commodities or issuing re-ports or analyses concerning commod-ities, if the Commission determinesthat such rule or regulation will effec-tuate the purposes of this provision.

(cc) Commodity pool operator. Thisterm means any person engaged in abusiness which is of the nature of aninvestment trust, syndicate, or similarform of enterprise, and who, in connec-tion therewith, solicits, accepts, or re-ceives from others, funds, securities, orproperty, either directly or throughcapital contributions, the sale of stock


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or other forms of securities, or other-wise, for the purpose of trading in anycommodity for future delivery or com-modity option on or subject to therules of any contract market, but doesnot include such persons not within theintent of this definition as the Com-mission may specify by rule or regula-tion or by order.

(dd) Commission. This term means theCommodity Futures Trading Commis-sion.

(ee) Self-regulatory organization. Thisterm means a contract market (as de-fined in § 1.3(h)), or a registered futuresassociation under section 17 of the Act.

(ff) Designated self-regulatory organiza-tion. This term means:

(1) Self-regulatory organization ofwhich a futures commission merchant,an introducing broker or a leveragetransaction merchant is a member; or

(2) If a futures commission merchantor an introducing broker is a memberof more than one self-regulatory orga-nization and such futures commissionmerchant or introducing broker is thesubject of an approved plan under § 1.52of this part, then a self-regulatory or-ganization delegated the responsibilityby such a plan for monitoring and au-diting such futures commission mer-chant or introducing broker for compli-ance with the minimum financial andrelated reporting requirements of theself-regulatory organizations of whichthe futures commission merchant orintroducing broker is a member, andfor receiving the financial reports ne-cessitated by such minimum financialand related reporting requirementsfrom such futures commission mer-chant or introducing broker; or

(3) If a leverage transaction mer-chant is a member of more than oneself-regulatory organization and suchleverage transaction merchant is thesubject of an approved plan under§ 31.28 of this chapter, then a self-regu-latory organization delegated the re-sponsibility by such a plan for moni-toring and auditing such leveragetransaction merchant for compliancewith the minimum financial, cover,segregation and sales practice, and re-lated reporting requirements of theself-regulatory organizations of whichthe leverage transaction merchant is amember, and for receiving the reports

necessitated by such minimum finan-cial, cover, segregation and sales prac-tice, and related reporting require-ments from such leverage transactionmerchant.

(gg) Customer funds. This term meansall money, securities, and property re-ceived by a futures commission mer-chant or by a clearing organizationfrom, for, or on behalf of, customers oroption customers:

(1) In the case of commodity cus-tomers, to margin, guarantee, or se-cure contracts for future delivery on orsubject to the rules of a contract mar-ket and all money accruing to suchcustomers as the result of such con-tracts; and

(2) In the case of option customers, inconnection with a commodity optiontransaction on or subject to the rulesof a contract market:

(i) To be used as a premium for thepurchase of a commodity option for anoption customer;

(ii) As a premium payable to an op-tion customer;

(iii) To guarantee or secure perform-ance of a commodity option by an op-tion customer; or

(iv) Representing accruals (including,for purchasers of a commodity optionfor which the full premium has beenpaid, the market value of such com-modity option) to an option customer.

(hh) Commodity option transaction;commodity option. These terms eachmean any transaction or agreement ininterstate commerce which is or is heldout to be of the character of, or is com-monly known to the trade as, an ‘‘op-tion,’’ ‘‘privilege,’’ ‘‘indemnity,’’ ‘‘bid,’’‘‘offer,’’ ‘‘call,’’ ‘‘put.’’ ‘‘advance guar-anty,’’ or ‘‘decline guaranty,’’ andwhich is subject to regulation underthe Act and these regulations.

(ii) Premium. This term means theamount agreed upon between the pur-chaser and seller, or their agents, forthe purchase or sale of a commodityoption on or subject to the rules of acontract market.

(jj) Option customer. This term meansany person who directly or indirectly,purchases or grants (sells), or other-wise acquires or disposes of any inter-est in a commodity option for value,but does not include: (1) For purposesof §§ 1.16, 1.17, 1.20–1.30, 1.32, 1.36, 33.3


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17 CFR Ch. I (4–1–01 Edition)§ 1.3

and 33.7 of this chapter, the owner orholder of a proprietary account; and (2)option customers whose option trans-actions are conducted in accordancewith the requirements of part 32 of thischapter.

(kk) Strike price. This term means theprice, per unit, at which a person maypurchase or sell the contract of sale ofa commodity for future delivery or thephysical which is the subject of a com-modity option: Provided, That for pur-poses of § 1.17, the term ‘‘strike price’’means the total price at which a personmay purchase or sell the contract ofsale of a commodity for future deliveryor the physical which is the subject ofa commodity option (i.e., price per unittimes the number of units).

(ll) Physical. This term means anygood, article, service, right or interestupon which a commodity option maybe traded in accordance with the Actand these regulations.

(mm) Introducing broker. This termmeans:

(1) Any person who, for compensationor profit, whether direct or indirect, isengaged in soliciting or in acceptingorders (other than in a clerical capac-ity) for the purchase or sale of anycommodity for future delivery on orsubject to the rules of any contractmarket who does not accept anymoney, securities, or property (or ex-tend credit in lieu thereof) to margin,guarantee, or secure any trades or con-tracts that result or may result there-from; and

(2) Includes any person required toregister as an introducing broker byvirtue of part 33 of this chapter: Pro-vided, That the term ‘‘introducingbroker’’ shall not include:

(i) Any futures commission mer-chant, floor broker, or associated per-son, acting in its capacity as such, re-gardless of whether that futures com-mission merchant, floor broker, or as-sociated person is registered or exemptfrom registration in such capacity;

(ii) Any commodity trading advisor,which, acting in its capacity as a com-modity trading advisor, is not com-pensated on a per-trade basis or whichsolely manages discretionary accountspursuant to a power of attorney, re-gardless of whether that commodity

trading advisor is registered or exemptfrom registration in such capacity; and

(iii) Any commodity pool operatorwhich, acting in its capacity as a com-modity pool operator, solely operatescommodity pools, regardless of wheth-er that commodity pool operator isregistered or exempt from registrationin such capacity.

(nn) Guarantee agreement. This termmeans an agreement of guaranty in theform set forth in part B of Form 1–FR,executed by a registered futures com-mission merchant and by an intro-ducing broker or applicant for registra-tion as an introducing broker on behalfof an introducing broker or applicantfor registration as an introducingbroker in satisfaction of the alter-native adjusted net capital require-ment set forth in § 1.17(a)(2)(ii).

(oo) Leverage transaction merchant.Means and includes any individual, as-sociation, partnership, corporation,trust or other person that is engaged inthe business of offering to enter into,entering into or confirming the execu-tion of leverage contracts, or solicitingor accepting orders for leverage con-tracts, and who accepts leverage cus-tomer funds (or extends credit in lieuthereof) in connection therewith.

(pp) Leverage customer funds. Meansall money, securities and property re-ceived, directly or indirectly by a le-verage transaction merchant from, for,or on behalf of leverage customers tomargin, guarantee or secure leveragecontracts and all money, securities andproperty accruing to such customers asthe result of such contracts, or the cus-tomers’ leverage equity. In the case ofa long leverage transaction, profit orloss accruing to a leverage customer isthe difference between the leveragetransaction merchant’s current bidprice for the leverage contract and theask price of the leverage contract whenentered into. In the case of a short le-verage transaction, profit or loss ac-cruing to a leverage customer is thedifference between the bid price of theleverage contract when entered intoand the leverage transaction mer-chant’s current ask price for the lever-age contract.

(qq) Leverage contract. Shall have thesame meaning as that set forth in§ 31.4(w) of this chapter.


13


(rr) Foreign futures or foreign optionssecured amount. This term means allmoney, securities and property held byor held for or on behalf of a futurescommission merchant from, for, or onbehalf of foreign futures or foreign op-tions customers as defined in § 30.1 ofthis chapter:

(1) In the case of foreign futures cus-tomers, money, securities and propertyrequired by a futures commission mer-chant to margin, guarantee, or secureopen foreign futures contracts plus orminus any unrealized gain or loss onsuch contracts; and

(2) In the case of foreign options cus-tomers in connection with open foreignoptions transactions money, securitiesand property representing premiumspaid or received, plus any other fundsrequired to guarantee or secure opentransactions plus or minus any unreal-ized gain or loss on such transactions.

(ss) Foreign board of trade. This termmeans any board of trade, exchange ormarket located outside the UnitedStates, its territories or possessions,whether incorporated or unincor-porated, where foreign futures or for-eign options transactions are enteredinto.

(tt) Electronic signature means anelectronic sound, symbol, or process at-tached to or logically associated with arecord and executed or adopted by aperson with the intent to sign therecord.

[41 FR 3194, Jan. 21, 1976]

EDITORIAL NOTE: For FEDERAL REGISTER ci-tations affecting § 1.3, see the List of CFRSections Affected, which appears in theFinding Aids sections of the printed volumeand on GPO Access.

§ 1.4 Use of electronic signatures.For purposes of complying with any

provision in the Commodity ExchangeAct or the rules or regulations in thisChapter I that requires a document tobe signed by a customer of a futurescommission merchant or introducingbroker, a pool participant or a client ofa commodity trading advisor, an elec-tronic signature executed by the cus-tomer, participant or client will be suf-ficient, if the futures commission mer-chant, introducing broker, commoditypool operator or commodity tradingadvisor elects generally to accept elec-

tronic signatures; Provided, however,That the electronic signature mustcomply with applicable Federal lawsand other Commission rules; And, Pro-vided further, That the futures commis-sion merchant, introducing broker,commodity pool operator or com-modity trading advisor must adopt andutilize reasonable safeguards regardingthe use of electronic signatures, includ-ing at a minimum safeguards employedto prevent alteration of the electronicrecord with which the electronic signa-ture is associated, after such recordhas been electronically signed.

[65 FR 12469, Mar. 9, 2000]

MINIMUM FINANCIAL AND RELATEDREPORTING REQUIREMENTS

§ 1.10 Financial reports of futurescommission merchants and intro-ducing brokers.

(a) Application for registration. (1) Ex-cept as otherwise provided, a futurescommission merchant or an applicantfor registration as a futures commis-sion merchant, in order to satisfy anyrequirement in this part that it file aForm 1–FR, must file a Form 1–FR–FCM, and any reference in this part toForm 1–FR with respect to a futurescommission merchant or applicanttherefor shall be deemed to be a ref-erence to Form 1–FR–FCM. Except asotherwise provided, an introducingbroker or an applicant for registrationas an introducing broker, in order tosatisfy any requirement in this partthat it file a Form 1–FR, must file aForm 1–FR–IB, and any reference inthis part to Form 1–FR with respect toan introducing broker or applicanttherefor shall be deemed to be a ref-erence to Form 1–FR–IB.

(2)(i) Except as provided in para-graphs (a)(3) and (h) of this section,each person who files an application forregistration as a futures commissionmerchant and who is not so registeredat the time of such filing, must, con-currently with the filing of such appli-cation file either:

(A) A Form 1–FR–FCM certified byan independent public accountant inaccordance with § 1.16 as of a date notmore than 45 days prior to the date onwhich such report is filed; or


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17 CFR Ch. I (4–1–01 Edition)§ 1.10

(B) A Form 1–FR–FCM as of a datenot more than 17 business days prior tothe date on which such report is filedand a Form 1–FR–FCM certified by anindependent public accountant in ac-cordance with § 1.16 as of a date notmore than 1 year prior to the date onwhich such report is filed.Each such person must include withsuch financial report a statement de-scribing the source of his current as-sets and representing that his capitalhas been contributed for the purpose ofoperating his business and will con-tinue to be used for such purpose.

(ii) Except as provided in paragraphs(a)(3) and (h) of this section, each per-son who files an application for reg-istration as an introducing broker andwho is not so registered at the time ofsuch filing, must, concurrently withthe filing of such application file ei-ther:

(A) A Form 1–FR–IB certified by anindependent public accountant in ac-cordance with § 1.16 as of a date notmore than 45 days prior to the date onwhich such report is filed; or

(B) A Form 1–FR–IB as of a date notmore than 17 business days prior to thedate on which such report is filed anda Form 1–FR–IB certified by an inde-pendent public accountant in accord-ance with § 1.16 as of a date not morethan 1 year prior to the date on whichsuch report is filed; or

(C) A guarantee agreement.Each person filing in accordance withparagraphs (a)(2)(ii) (A) or (B) of thissection must include with such finan-cial report a statement describing thesource of his current assets and rep-resenting that his capital has been con-tributed for the purpose of operatinghis business and will continue to beused for such purpose.

(3)(i) The provisions of paragraph(a)(2) of this section do not apply toany person succeeding to and con-tinuing the business of another futurescommission merchant. Each such per-son who files an application for reg-istration as a futures commission mer-chant and who is not so registered inthat capacity at the time of such filingmust file a Form 1–FR–FCM as of thefirst month end following the date onwhich his registration is approved.Such report must be filed with the Na-

tional Futures Association, the Com-mission and the designated self-regu-latory organization, if any, not morethan 17 business days after the date forwhich the report is made.

(ii) The provisions of paragraph (a)(2)of this section do not apply to any per-son succeeding to and continuing thebusiness of another introducing broker.

(A) Each such person who succeeds toand continues the business of an intro-ducing broker which was not operatingpursuant to a guarantee agreement, orwhich was operating pursuant to aguarantee agreement and was also a se-curities broker or dealer at the time ofsuccession, who files an application forregistration as an introducing broker,and who is not so registered in that ca-pacity at the time of such filing, mustfile with the National Futures Associa-tion either a guarantee agreement withhis application for registration or aForm 1–FR–IB as of the first monthend following the date on which hisregistration is approved. Such Form 1–FR–IB must be filed not more than 17business days after the date for whichthe report is made.

(B) Each such person who succeeds toand continues the business of an intro-ducing broker which was operatingpursuant to a guarantee agreement andwhich was not also a securities brokeror dealer at the time of succession, whofiles an application for registration asan introducing broker, and who is notso registered in that capacity at thetime of such filing, must file with theNational Futures Association either aguarantee agreement or a Form 1–FR–IB with his application for registra-tion. If such person files a Form 1–FR–IB with his application for registra-tion, such person must also file a Form1–FR–IB, certified by an independentpublic accountant, as of a date no laterthan the end of the month registrationis granted. The Form 1–FR–IB certifiedby an independent public accountantmust be filed with the National Fu-tures Association not more than 45days after the date for which the reportis made.

(b) Filing of financial reports. (1)(i) Ex-cept as provided in paragraphs (b)(3)and (h) of this section, each person reg-istered as a futures commission mer-chant must file a Form 1–FR–FCM for


15


each fiscal quarter of each fiscal year,including the final fiscal quarter ofeach fiscal year, unless the futurescommission merchant elects, pursuantto paragraph (e)(2) of this section, tofile a Form 1–FR–FCM for each cal-endar quarter of each calendar year, in-cluding the final calendar quarter ofeach calendar year. Each Form 1–FR–FCM must be filed no later than 17business days after the date for whichthe report is made: Provided, however,That for each fiscal or calendar quarterending between June 30, 1997 and De-cember 31, 1997, inclusive, each Form 1–FR–FCM must be filed no later than 30calendar days after the date for whichthe report is made.

(ii) In addition to the financial re-ports required by paragraph (b)(1)(i) ofthis section, each person registered asa futures commission merchant mustfile a Form 1–FR–FCM as of the closeof its fiscal year (even if it files quar-terly reports as of each calendar quar-ter) which must be certified by an inde-pendent public accountant in accord-ance with § 1.16 no later than 90 daysafter the close of each futures commis-sion merchant’s fiscal year: Provided,however, that a registrant which is reg-istered with the Securities and Ex-change Commission as a securitiesbroker or dealer must file this reportnot later than the time permitted forfiling an annual audit report under§ 240.17a–5(d)(5) of this title.

(2)(i) Except as provided in para-graphs (b)(3) and (h) of this section, andexcept for an introducing broker oper-ating pursuant to a guarantee agree-ment which is not also a securitiesbroker or dealer, each person reg-istered as an introducing broker mustfile a Form 1–FR–IB semiannually as ofthe middle and the close of each fiscalyear unless the introducing brokerelects pursuant to paragraph (e)(2) ofthis section to file a Form 1–FR–IBsemiannually as of the middle and theclose of each calendar year. Each Form1–FR–IB must be filed no later than 17business days after the date for whichthe report is made: Provided, however,That for each reporting period endingbetween June 30, 1997 and December 31,1997, inclusive, each Form 1–FR–IBmust be filed no later than 30 calendar

days after the date for which the reportis made.

(ii) (A) In addition to the financialreports required by paragraph (b)(2)(i)of this section, each person registeredas an introducing broker must file aForm 1–FR–IB as of the close of its fis-cal year (even if it files semiannual re-ports on a calendar year basis) whichmust be certified by an independentpublic accountant in accordance with§ 1.16 no later than 90 days after theclose of each introducing broker’s fis-cal year: Provided, however, that a reg-istrant which is registered with the Se-curities and Exchange Commission as asecurities broker or dealer must filethis report not later than the time per-mitted for filing an annual audit reportunder § 240.17a–5(d)(5) of this title.

(B) If an introducing broker has filedpreviously a Form 1–FR–IB, certifiedby an independent public accountant inaccordance with the provisions of para-graphs (a)(2)(ii) or (j)(8) of this sectionand § 1.16 of this part, as of a date notmore than one year prior to the closeof such introducing broker’s fiscalyear, it need not have certified by anindependent public accountant theForm 1–FR–IB filed as of the intro-ducing broker’s first fiscal year-endfollowing the as of date of its initialcertified Form 1–FR–IB. In such a case,the introducing broker’s Form 1–FR–IBfiled as of the close of the second fiscalyear-end following the as of date of itsinitial certified Form 1–FR–IB mustcover the period of time between thosetwo dates and must be certified by anindependent public accountant in ac-cordance with § 1.16 of this part.

(iii) A Form 1–FR required to be cer-tified by an independent public ac-countant in accordance with § 1.16which is filed by a futures commissionmerchant, an introducing broker or anapplicant for registration in either cat-egory, must be filed in paper form andmay not be filed electronically.

(3) The provisions of paragraphs (b)(1)and (b)(2) of this section may be met byany person registered as a futures com-mission merchant or as an introducingbroker who is a member of a designatedself-regulatory organization and con-forms to minimum financial standardsand related reporting requirements set


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17 CFR Ch. I (4–1–01 Edition)§ 1.10

by such designated self-regulatory or-ganization in its bylaws, rules, regula-tions, or resolutions and approved afterthe effective date of these regulationsby the Commission pursuant to section4f(b) of the Act and § 1.52: Provided,however, That each such registrantshall promptly file with the Commis-sion a true and exact copy of each fi-nancial report which it files with suchdesignated self-regulatory organiza-tion.

(4) Upon receiving written noticefrom any representative of the Na-tional Futures Association, the Com-mission or any self-regulatory organi-zation of which it is a member, an ap-plicant or registrant, except an appli-cant for registration as an introducingbroker which has filed concurrentlywith its application for registration aguarantee agreement and which is notalso a securities broker or dealer,must, monthly or at such times asspecified, furnish the National FuturesAssociation, the Commission or theself-regulatory organization requestingsuch information a Form 1–FR or suchother financial information as re-quested by the National Futures Asso-ciation, the Commission or the self-regulatory organization. Each suchForm 1–FR or such other informationmust be furnished within the time pe-riod specified in the written notice, andin accordance with the provisions ofparagraph (c) of this section.

(c) Where to file reports. The reportsprovided for in this section will be con-sidered filed when received by the re-gional office of the Commission nearestthe principal place of business of theregistrant (except that a registrantunder the jurisdiction of the Commis-sion’s Western Regional Office mustfile such reports with the South-west-ern Regional Office) and by the des-ignated self-regulatory organization, ifany; and reports required to be filed bythis section by an applicant for reg-istration will be considered filed whenreceived by the National Futures Asso-ciation and by the regional office of theCommission nearest the principal placeof business of the applicant (exceptthat an applicant under the jurisdic-tion of the Commission’s Western Re-gional Office must file such reportswith the South western Regional Of-

fice): Provided, however, That any re-port filed pursuant to paragraphs (b)(1),(b)(2), or (b)(4) of this section or § 1.12(a) or (b) which need not be certified inaccordance with § 1.16 may be sub-mitted to the Commission in electronicform using a Commission-assigned Per-sonal Identification Number, and oth-erwise in accordance with instructionsissued by the Commission, if the fu-tures commission merchant, intro-ducing broker or a designated self-reg-ulatory organization has provided theCommission with the means necessaryto read and to process the informationcontained in such report: And, providedfurther, That any guarantee agreemententered into between a futures commis-sion merchant and an introducingbroker in accordance with the provi-sions of this section need be filed onlywith and will be considered filed whenreceived by the National Futures Asso-ciation.

(d) Contents of financial reports. (1)Each Form 1–FR filed pursuant to this§ 1.10 which is not required to be cer-tified by an independent public ac-countant must be completed in accord-ance with the instructions to the formand contain:

(i) A statement of financial conditionas of the date for which the report ismade;

(ii) A statement of changes in owner-ship equity for the period between thedate of the most recent statement of fi-nancial condition filed with the Com-mission and the date for which the re-port is made;

(iii) A statement of changes in liabil-ities subordinated to claims of generalcreditors for the period between thedate of the most recent statement of fi-nancial condition filed with the Com-mission and the date for which the re-port is made;

(iv) A statement of the computationof the minimum capital requirementspursuant to § 1.17 as of the date forwhich the report is made;

(v) For a futures commission mer-chant only, the statements of segrega-tion requirements and funds in seg-regation for customers trading on U.S.commodity exchanges and for cus-tomers’ dealer options accounts, andthe statement of secured amounts and


17


funds held in separate accounts for for-eign futures and foreign options cus-tomers in accordance with § 30.7 of thischapter as of the date for which the re-port is made; and

(vi) In addition to the informationexpressly required, such futher mate-rial information as may be necessaryto make the required statements andschedules not misleading.

(2) Each Form 1–FR filed pursuant tothis § 1.10 which is required to be cer-tified by an independent public ac-countant must be completed in accord-ance with the instructions to the formand contain:

(i) A statement of financial conditionas of the date for which the report ismade;

(ii) Statements of income (loss), cashflows, changes in ownership equity, andchanges in liabilities subordinated toclaims of general creditors, for the pe-riod between the date of the most re-cent certified statement of financialcondition filed with the Commissionand the date for which the report ismade: Provided, That for an applicantfiling pursuant to paragraph (a)(2) ofthis section the period must be theyear ending as of the date of the state-ment of financial condition;

(iii) A statement of the computationof the minimum capital requirementspursuant to § 1.17 as of the date forwhich the report is made;

(iv) For a futures commission mer-chant only, the statements of segrega-tion requirements and funds in seg-regation for customers trading on U.S.commodity exchanges and for cus-tomers’ dealer options accounts, andthe statement of secured amounts andfunds held in separate accounts for for-eign futures and foreign options cus-tomers in accordance with § 30.7 of thischapter as of the date for which the re-port is made;

(v) Appropriate footnote disclosures;(vi) A reconciliation, including ap-

propriate explanations, of the state-ment of the computation of the min-imum capital requirements pursuant to§ 1.17 and, for a futures commissionmerchant only, the statements of seg-regation requirements and funds insegregation for customers trading onU.S. commodity exchanges and for cus-tomers’ dealer option accounts, and the

statement of secured amounts andfunds held in separate accounts for for-eign futures and foreign options cus-tomers in accordance with § 30.7 of thischapter, in the certified Form 1–FRwith the applicant’s or registrant’s cor-responding uncertified most recentForm 1–FR filing when material dif-ferences exist or, if no material dif-ferences exist, a statement so indi-cating; and

(vii) In addition to the informationexpressly required, such further mate-rial information as may be necessaryto make the required statements notmisleading.

(3) The statements required by para-graphs (d)(2)(i) and (d)(2)(ii) of this sec-tion may be presented in accordancewith generally accepted accountingprinciples in the certified reports filedas of the close of the registrant’s fiscalyear pursuant to paragraphs (b)(1)(ii)or (b)(2)(ii) of this section or accom-panying the application for registra-tion pursuant to paragraph (a)(2) ofthis section, rather than in the formatspecifically prescribed by these regula-tions: Provided, the statement of finan-cial condition is presented in a formatas consistent as possible with the Form1–FR and a reconciliation is providedreconciling such statement of financialcondition to the statement of the com-putation of the minimum capital re-quirements pursuant to § 1.17. Such rec-onciliation must be certified by anindependent public accountant in ac-cordance with § 1.16.

(4) Attached to each Form 1–FR filedpursuant to this section must be anoath or affirmation that to the bestknowledge and belief of the individualmaking such oath or affirmation theinformation contained in the Form 1–FR is true and correct. If the applicantor registrant is a sole proprietorship,then the oath or affirmation must bemade by the proprietor; if a partner-ship, by a general partner; or if a cor-poration, by the chief executive officeror chief financial officer. In the case ofa Form 1–FR filed via electronic trans-mission in accordance with proceduresestablished by the Commission, suchtransmission must be accompanied bythe Commission-assigned Personal


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17 CFR Ch. I (4–1–01 Edition)§ 1.10

Identification Number of the author-ized signer and such Personal Identi-fication Number will constitute and be-come a substitute for the manual sig-nature of the authorized signer for thepurpose of making the oath or affirma-tion referred to in this paragraph.

(e) Election of fiscal year. (1) An appli-cant wishing to establish a fiscal yearother than the calendar year may do soby notifying the National Futures As-sociation of its election of such fiscalyear, in writing, concurrently with thefiling of the Form 1–FR pursuant toparagraph (a)(2) of this section, but inno event may such fiscal year end morethan one year from the date of theForm 1–FR filed pursuant to paragraph(a)(2) of this section. A copy of suchwritten notice must also be filed withthe regional office of the Commissionnearest the principal place of businessof the applicant (except that an appli-cant under the jurisdiction of the Com-mission’s Western Regional Officemust file such a notice with the Com-mission’s Southwestern Regional Of-fice). An applicant which does not sonotify the National Futures Associa-tion and the Commission will bedeemed to have elected the calendaryear as its fiscal year. A registrantmust continue to use its elected fiscalyear, calendar or otherwise, unless achange in such fiscal year is approvedupon written application to the prin-cipal office of the Commission in Wash-ington, DC, and written notice of suchchange is given to the designated self-regulatory organization, if any.

(2) An applicant may elect to file itsForm 1–FR for each calendar quarter inlieu of each fiscal quarter by notifyingthe National Futures Association of itselection, in writing, concurrently withthe filing of the Form 1–FR pursuantto paragraph (a)(2) of this section. Acopy of such written notice must alsobe filed with the regional office of theCommission nearest the principal placeof business of the applicant (exceptthat an applicant under the jurisdic-tion of the Commission’s Western Re-gional Office must file such a noticewith the Commission’s SouthwesternRegional Office). A registrant wishingto change such election or to makesuch election other than concurrentlywith the filing of the Form 1–FR pursu-

ant to paragraph (a)(2) of this sectionmay do so only if such change or elec-tion is approved by the Commissionupon written application to the prin-cipal office of the Commission in Wash-ington, DC, and written notice of suchchange is given to the designated self-regulatory organization, if any.

(f) Extension of time for filinguncertified reports. (1) In the event aregistrant finds that it cannot file itsreport for any period within the timespecified in paragraphs (b)(1)(i), (b)(2)(i)or (b)(4) of this section or § 1.12(b) with-out substantial undue hardship, it mayfile with the principal office of theCommission in Washington, D.C., anapplication for an extension of time toa specified date which may not be morethan 90 days after the date as of whichthe financial statements were to havebeen filed. The application must statethe reasons for the requested extensionand must contain an agreement to filethe report on or before the specifieddate. The application must be receivedby the Commission before the timespecified in paragraphs (b)(1)(i), (b)(2)(i)or (b)(4) of this section or § 1.12(b) forfiling the report. Notice of such appli-cation must be given to the designatedself-regulatory organization, if any,concurrently with the filing of such ap-plication with the Commission. Withinten calendar days after receipt of theapplication for an extension of time,the Commission shall: (i) Notify theregistrant of the grant or denial of therequested extension; or (ii) indicate tothe registrant that additional time isrequired to analyze the request, inwhich case the amount of time neededwill be specified. (See § 1.16(f) for exten-sion of the time for filing certified fi-nancial statements.)

(2) In the event an applicant findsthat it cannot file its report for any pe-riod within the time specified in para-graph (b)(4) of this section or § 1.12(b)without substantial undue hardship, itmay file with the National Futures As-sociation an application for an exten-sion of time to a specified date whichmay not be more than 90 days after thedate as of which the financial state-ments were to have been filed. The ap-plication must state the reasons forthe requested extension and must con-tain an agreement to file the report on


19


or before the specified date. The appli-cation must be received by the Na-tional Futures Association before thetime specified in paragraph (b)(4) ofthis section or § 1.12(b) for filing the re-port. Notice of such application mustbe filed with the regional office of theCommission nearest the principal placeof business of the applicant (exceptthat an applicant under the jurisdic-tion of the Commission’s Western Re-gional Office must file such a noticewith the Commission’s SouthwesternRegional Office) concurrently with thefiling of such application with the Na-tional Futures Association. Within tencalendar days after receipt of the appli-cation for an extension of time, the Na-tional Futures Association shall:

(i) Notify the applicant of the grantor denial of the requested extension; or

(ii) Indicate to the applicant that ad-ditional time is required to analyze therequest, in which case the amount oftime needed will be specified.

(g) Nonpublic treatment of reports. (1)The following portions of Forms 1–FRfiled pursuant to this section will bepublic: the statement of financial con-dition, the statement of the computa-tion of the minimum capital require-ments, the statements (to be filed by afutures commission merchant only) ofsegregation requirements and funds insegregation for customers trading onU.S. commodity exchanges and for cus-tomers’ dealer options accounts, andthe statement (to be filed by a futurescommission merchant only) of securedamounts and funds held in separate ac-counts for foreign futures and foreignoptions customers in accordance with§ 30.7 of this chapter. The other finan-cial statements (including the state-ment of income (loss)), footnote disclo-sures and schedules of Form 1–FR,trade secrets and certain other com-mercial or financial information onsuch other statements and scheduleswill be treated as nonpublic for pur-poses of the Freedom of InformationAct and the Government in the Sun-shine Act and parts 145 and 147 of thischapter.

(2) The following portions of copies ofthe Financial and Operational Com-bined Uniform Single Report under theSecurities Exchange Act of 1934, Part IIor Part IIA filed pursuant to paragraph

(h) of this section, will be public: Thestatement of financial condition, thecomputations of net capital and theminimum capital requirements, thestatements (to be filed by a futurescommission merchant only) of segrega-tion requirements and funds in seg-regation for customers trading on U.S.commodity exchanges and for cus-tomers’ dealer options accounts, andthe statement (to be filed by a futurescommission merchant only) of securedamounts and funds held in separate ac-counts for foreign futures and foreignoptions customers in accordance with§ 30.7 of this chapter. The other finan-cial statements (including the state-ment of income (loss)), footnote disclo-sures and schedules of the Financialand Operational Combined UniformSingle Report under the Securities andExchange Act of 1934, Part II or PartIIA, trade secrets and certain othercommercial or financial informationon such other statements and sched-ules will be treated as nonpublic forpurposes of the Freedom of Informa-tion Act and the Government in theSunshine Act and parts 145 and 147 ofthis chapter.

(3) [Reserved](4) All information on such other

statements, footnote disclosures andschedules will, however, be availablefor official use by any official or em-ployee of the United States or anyState, by any self-regulatory organiza-tion of which the person filing such re-port is a member, by the National Fu-tures Association in the case of an ap-plicant, and by any other person towhom the Commission believes disclo-sure of such information is in the pub-lic interest. Nothing in this paragraph(g) will limit the authority of any self-regulatory organization to request orreceive any information relative to itsmembers’ financial condition.

(5) The independent accountant’sopinion and a guarantee agreementfiled pursuant to this section will bedeemed public information.

(h) Filing option available to a futurescommission merchant or an introducingbroker which is also a securities broker ordealer. Any applicant or registrantwhich is registered with the Securitiesand Exchange Commission as a securi-ties broker or dealer may comply with


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17 CFR Ch. I (4–1–01 Edition)§ 1.10

the requirements of this section by fil-ing (in accordance with paragraphs (a),(b), (c), and (j) of this section) a copy ofits Financial and Operational Com-bined Uniform Single Report under theSecurities Exchange Act of 1934, part IIor part IIA, in lieu of Form 1–FR: Pro-vided, however, That all informationwhich is required to be furnished onand submitted with Form 1–FR is pro-vided with such Report.

(i) Filing option available to an intro-ducing broker or applicant for registrationas an introducing broker which is also acountry elevator. Any introducingbroker or applicant for registration asan introducing broker which is also acountry elevator but which is not alsoa securities broker or dealer may com-ply with the requirements of this sec-tion by filing (in accordance with para-graphs (a), (b) and (c) of this section) acopy of a financial report prepared by agrain commission firm which has beenauthorized by the Deputy Vice Presi-dent of the Commodity Credit Corpora-tion of the United States Departmentof Agriculture to provide a compilationreport of financial statements of ware-housemen for purposes of UniformGrain Storage Agreements, and whichcomplies with the standards for inde-pendence set forth in § 1.16(b)(2) withrespect to the registrant or applicant:Provided, however, That all informationwhich is required to be furnished onand submitted with Form 1–FR is pro-vided with such financial report, in-cluding a statement of the computa-tion of the minimum capital require-ments pursuant to § 1.17: And, providedfurther, That the balance sheet is pre-sented in a format as consistent as pos-sible with the Form 1–FR and a rec-onciliation is provided reconciling suchbalance sheet to the statement of thecomputation of the minimum capitalrequirements pursuant to § 1.17. At-tached to each financial report filedpursuant to this paragraph (i) must bean oath or affirmation that to the bestknowledge and belief of the individualmaking such oath or affirmation theinformation contained therein is trueand correct. If the applicant or reg-istrant is a sole proprietorship, thenthe oath or affirmation must be madeby the proprietor; if a partnership, by ageneral partner; or if a corporation, by

the chief executive officer or chief fi-nancial officer.

(j) Requirements for guarantee agree-ment. (1) A guarantee agreement filedpursuant to this section must be signedin a manner sufficient to be a bindingguarantee under local law by an appro-priate person on behalf of the futurescommission merchant and the intro-ducing broker, and each signaturemust be accompanied by evidence thatthe signatory is authorized to enter theagreement on behalf of the futurescommission merchant or introducingbroker and is such an appropriate per-son. For purposes of this paragraph (j),an appropriate person shall be the pro-prietor, if the firm is a sole proprietor-ship; a general partner, if the firm is apartnership; and either the chief execu-tive officer or the chief financial offi-cer, if the firm is a corporation.

(2) No futures commission merchantmay enter into a guarantee agreementif:

(i) It knows or should have knownthat its adjusted net capital is lessthan the amount set forth in § 1.12(b);or

(ii) There is filed against the futurescommission merchant an adjudicatoryproceeding brought by or before theCommission pursuant to the provisionsof sections 6(c), 6(d), 6c, 6d, 8a or 9 ofthe Act or §§ 3.55, 3.56 or 3.60 of thischapter.

(3) A guarantee agreement filed inconnection with an application for ini-tial registration as an introducingbroker in accordance with the provi-sions of § 3.10(a) of this chapter shallbecome effective upon the granting ofregistration or, if appropriate, a tem-porary license, to the introducingbroker. A guarantee agreement filedother than in connection with an appli-cation for initial registration as an in-troducing broker shall become effec-tive as of the date agreed to by the par-ties.

(4)(i) If the registration of the intro-ducing broker is suspended, revoked, orwithdrawn in accordance with the pro-visions of this chapter, the guaranteeagreement shall expire as of the date ofsuch suspension, revocation or with-drawal.

(ii) If the registration of the futurescommission merchant is suspended or


21


revoked, the guarantee agreementshall expire 30 days after such suspen-sion or revocation, or at such earliertime as may be approved by the Com-mission, the introducing broker, andthe introducing broker’s designatedself-regulatory organization.

(5) A guarantee agreement may beterminated at any time during theterm thereof:

(i) By mutual written consent of theparties, signed by an appropriate per-son on behalf of each party, withprompt written notice thereof, signedby an appropriate person on behalf ofeach party, to the Commission and tothe designated self-regulatory organi-zations of the futures commission mer-chant and the introducing broker;

(ii) For good cause shown, by eitherparty giving written notice of its in-tention to terminate the agreement,signed by an appropriate person, to theother party to the agreement, to theCommission, and to the designatedself-regulatory organizations of the fu-tures commission merchant and the in-troducing broker; or

(iii) By either party giving writtennotice of its intention to terminate theagreement, signed by an appropriateperson, at least 30 days prior to theproposed termination date, to theother party to the agreement, to theCommission, and to the designatedself-regulatory organizations of the fu-tures commission merchant and the in-troducing broker.

(6) The termination of a guaranteeagreement by a futures commissionmerchant or an introducing broker, orthe expiration of such an agreement,shall not relieve either party from anyliability or obligation arising from actsor omissions which occurred during theterm of the agreement.

(7) An introducing broker may not si-multaneously be a party to more thanone guarantee agreement: Provided,however, That the provisions of thisparagraph (j)(7) shall not be deemed topreclude an introducing broker fromentering into a guarantee agreementwith another futures commission mer-chant if the introducing broker or thefutures commission merchant which isa party to the existing agreement hasprovided notice of termination of theexisting agreement in accordance with

the provisions of paragraph (j)(5) ofthis section, and the new guaranteeagreement does not become effectiveuntil the day following the date of ter-mination of the existing agreement:And, provided further, That the provi-sions of this paragraph (j)(7) shall notbe deemed to preclude an introducingbroker from entering into a guaranteeagreement with another futures com-mission merchant if the futures com-mission merchant which is a party tothe existing agreement ceases to re-main registered and the existing agree-ment would therefore expire in accord-ance with the provisions of paragraph(j)(4)(ii) of this section.

(8)(i) An introducing broker which isa party to a guarantee agreementwhich has been terminated in accord-ance with the provisions of paragraph(j)(5) of this section, or which is due toexpire in accordance with the provi-sions of paragraph (j)(4)(ii) of this sec-tion, must cease doing business as anintroducing broker on or before the ef-fective date of such termination or ex-piration unless, on or before 10 daysprior to the effective date of such ter-mination or expiration or such otherperiod of time as the Commission orthe designated self-regulatory organi-zation may allow for good cause shown,the introducing broker files with itsdesignated self-regulatory organizationeither a new guarantee agreement ef-fective as of the day following the dateof termination of the existing agree-ment, or, in the case of a guaranteeagreement which is due to expire in ac-cordance with the provisions of para-graph (j)(4)(ii) of this section, a newguarantee agreement effective on orbefore such expiration, or either:

(A) A Form 1–FR–IB certified by anindependent public account in accord-ance with § 1.16 of this part as of a datenot more than 45 days prior to the dateon which the report is filed; or

(B) A Form 1–FR–IB as of a date notmore than 17 business days prior to thedate on which the report is filed and aForm 1–FR–IB certified by an inde-pendent public accountant in accord-ance with § 1.16 as of a date not morethan one year prior to the date onwhich the report is filed.


22

17 CFR Ch. I (4–1–01 Edition)§ 1.11

Each person filing a Form 1–FR–IB inaccordance with this section must in-clude with the financial report a state-ment describing the source of his cur-rent assets and representing that hiscapital has been contributed for thepurpose of operating his business andwill continue to be used for such pur-pose.

(ii) Notwithstanding the provisions ofparagraph (j)(8)(i) of this section or of§ 1.17(a) of this part, an introducingbroker which is a party to a guaranteeagreement which has been terminatedin accordance with the provisions ofparagraph (j)(5)(ii) of this section shallnot be deemed to be in violation of theminimum adjusted net capital require-ment of § 1.17(a)(1)(ii) or (a)(2) of thispart for 30 days following such termi-nation. Such an introducing brokermust cease doing business as an intro-ducing broker on or after the effectivedate of such termination, and may notresume doing business as an intro-ducing broker unless and until it files anew agreement or either:

(A) A Form 1–FR–IB certified by anindependent public account in accord-ance with § 1.16 of this part as of a datenot more than 45 days prior to the dateon which the report is filed; or

(B) A Form 1–FR–IB as of a date notmore than 17 business days prior to thedate on which the report is filed and aForm 1–FR–IB certified by an inde-pendent public accountant in accord-ance with § 1.16 as of a date not morethan one year prior to the date onwhich the report is filed.

Each person filing a Form 1–FR–IB inaccordance with this section must in-clude with the financial report a state-ment describing the source of his cur-rent assets and representing that hiscapital has been contributed for thepurpose of operating his business andwill continue to be used for such pur-pose.

(k) Filing option available to an intro-ducing broker. (1) Any introducingbroker or applicant for registration asan introducing broker which is not op-erating or intending to operate pursu-ant to a guarantee agreement maycomply with the requirements of thissection by filing (in accordance withparagraphs (a), (b) and (c) of this sec-

tion) a Form 1–FR–IB in lieu of a Form1–FR–FCM.

(2) If an introducing broker or appli-cant therefor avails itself of the filingoption available under paragraph (k)(1)of this section, the report required tobe filed in accordance with § 1.16(c)(5) ofthis part must be filed as of the date ofthe Form 1–FR–IB being filed, and suchan introducing broker or applicanttherefor must maintain its financialrecords and make its monthly formalcomputation of its adjusted net cap-ital, as required by § 1.18 of this part, ina manner consistent with Form 1–FR–IB.

(The information collection requirementscontained in § 1.10 were approved by the Of-fice of Management and Budget under con-trol number 3038–0024; in paragraphs (a) and(b) under control number 3038–0023; and inparagraph (f) under control number 3038–0003.)

[43 FR 39967, Sept. 8, 1978, as amended at 45FR 80491, Dec. 5, 1980; 46 FR 63035, Dec. 30,1981; 48 FR 35280, Aug. 3, 1983; 49 FR 39524,Oct. 9, 1984; 53 FR 4611, Feb. 17, 1988; 53 FR7179, Mar. 7, 1988; 57 FR 23143, June 2, 1992; 58FR 10953, Feb. 23, 1993; 58 FR 12988, Mar. 8,1993; 58 FR 19589, Apr. 15, 1993; 59 FR 5525,Feb. 7, 1994; 62 FR 4639, Jan. 31, 1997; 62 FR10444, Mar. 7, 1997; 62 FR 33007, June 18, 1997]

§ 1.11 [Reserved]

§ 1.12 Maintenance of minimum finan-cial requirements by futures com-mission merchants and introducingbrokers.

(a) Each person registered as a fu-tures commission merchant or whofiles an application for registration asa futures commission merchant, andeach person registered as an intro-ducing broker or who files an applica-tion for registration as an introducingbroker (except for an introducingbroker or applicant for registration asan introducing broker operating pursu-ant to, or who has filed concurrentlywith its application for registration, aguarantee agreement and who is notalso a securities broker or dealer), whoknows or should have known that itsadjusted net capital at any time is lessthan the minimum required by § 1.17 orby the capital rule of any self-regu-latory organization to which such per-son is subject, if any, must:


23


(1) Give telephonic notice, to be con-firmed in writing by telegraphic or fac-simile notice, as set forth in paragraph(i) of this section that the applicant’sor registrant’s adjusted net capital isless than required by § 1.17 or by othercapital rule, identifying the applicablecapital rule. The notice must be givenimmediately after the applicant or reg-istrant knows or should know that itsadjusted net capital is less than re-quired by any of the aforesaid rules towhich the applicant or registrant issubject; and

(2) If the person is a futures commis-sion merchant or applicant therefor,within 24 hours after giving such noticefile a statement of financial condition,a statement of the computation of theminimum capital requirements pursu-ant to § 1.17 (computed in accordancewith the applicable capital rule), thestatements of segregation require-ments and funds in segregation for cus-tomers trading on U.S. commodity ex-changes and for customers’ dealer op-tions accounts, and the statement ofsecured amounts and funds held in sep-arate accounts for foreign futures andforeign options customers in accord-ance with § 30.7 of this chapter, all as ofthe date such applicant’s or reg-istrant’s adjusted net capital is lessthan the minimum required; or

(3) If the person is an introducingbroker or applicant therefor, within 24hours after giving such notice file astatement of financial condition and astatement of the computation of theminimum capital requirements pursu-ant to § 1.17 (computed in accordancewith the applicable capital rule) all asof the date such applicant’s or reg-istrant’s adjusted net capital is lessthan the minimum required.

(b) Each person registered as a fu-tures commission merchant, or whofiles an application for registration asa futures commission merchant, whoknows or should have known that itsadjusted net capital at any time is lessthan the greatest of:

(1) 150 percent of the appropriateminimum dollar amount required by§ 1.17(a)(1)(i);

(2) Six percent of the followingamount: The customer funds requiredto be segregated pursuant to the Actand the regulations in this part and

foreign futures or foreign options se-cured amount, less the market value ofcommodity options purchased by suchcustomers on or subject to the rules ofa contract market or a foreign board oftrade for which the full premiums havebeen paid: Provided, however, That thededuction for each such customer shallbe limited to the amount of customerfunds in such customer’s account(s)and foreign futures and foreign optionssecured amounts;

(3) 150 percent of the amount of ad-justed net capital required by a reg-istered futures association of which itis a member; or

(4) For securities brokers or dealers,the amount of net capital specified inRule 17a–11(b) of the Securities and Ex-change Commission (17 CFR 240.17a–11(b)), must file written notice to thateffect as set forth in paragraph (i) ofthis section within five (5) businessdays of such event. Such applicant orregistrant must also file a Form 1–FR–FCM (or, if such applicant or registrantis registered with the Securities andExchange Commission as a securitiesbroker or dealer, it may file, in accord-ance with § 1.10(h), a copy of its Finan-cial and Operational Combined Uni-form Single Report under the Securi-ties Exchange Act of 1934, Part II, inlieu of Form 1–FR–FCM) or such otherfinancial statement designated by theNational Futures Association, in thecase of an applicant, or by the Commis-sion or the designated self-regulatoryorganization, if any, in the case of aregistrant, as of the close of businessfor the month during which such eventtakes place and as of the close of busi-ness for each month thereafter untilthree (3) successive months haveelapsed during which the applicant’s orregistrant’s adjusted net capital is atall times equal to or in excess of theminimums set forth in this paragraph(b) which are applicable to such appli-cant or registrant. Each financialstatement required by this paragraph(b) must be filed within 17 businessdays after the end of the month forwhich such report is being made: Pro-vided, however, That for each monthending between June 30, 1997 and De-cember 31, 1997, inclusive, for which afinancial statement is required by thisparagraph (b), such financial statement


24

17 CFR Ch. I (4–1–01 Edition)§ 1.12

must be filed within 30 calendar daysafter the end of the month for whichsuch report is being made.

(c) If an applicant or registrant atany time fails to make or keep currentthe books and records required bythese regulations, such applicant orregistrant must, on the same day suchevent occurs, give telegraphic or fac-simile notice of such fact, specifyingthe books and records which have notbeen made or which are not current,and within 5 business days after givingsuch notice file a written report stat-ing what steps have been and are beingtaken to correct the situation.

(d) Whenever any applicant or reg-istrant discovers or is notified by anindependent public accountant, pursu-ant to § 1.16(e)(2) of these regulations,of the existence of any material inad-equacy, as specified in § 1.16(d)(2) ofthese regulations, such applicant orregistrant must give telegraphic or fac-simile notice of such material inad-equacy within 3 business days, andwithin 5 business days after givingsuch notice file a written report stat-ing what steps have been and are beingtaken to correct the material inad-equacy.

(e) Whenever any self-regulatory or-ganization learns that a member reg-istrant has failed to file a notice orwritten report as required by § 1.12,that self-regulatory organization mustimmediately report this failure by tele-phone, confirmed in writing imme-diately by telegraphic or facsimile no-tice, as provided in paragraph (i) of thissection.

(f)(1) Whenever a clearing organiza-tion determines that any position itcarries for one of its clearing memberswhich is registered as a futures com-mission merchant or as a leveragetransaction merchant must be liq-uidated immediately, transferred im-mediately or that the trading of anyaccount of such futures commissionmerchant or such leverage transactionmerchant shall be only for the purposesof liquidation, because that clearingmember has failed to meet a call formargin or to make other required de-posits, the clearing organization mustgive telephonic, confirmed in writingby telegraphic or facsimile notice ofsuch a determination to the principal

office of the Commission at Wash-ington, DC immediately.

(2) Whenever a registered futurescommission merchant determines thatany position it carries for another reg-istered futures commission merchantor for a registered leverage transactionmerchant must be liquidated imme-diately, transferred immediately orthat the trading of any account of suchfutures commission merchant or lever-age transaction merchant shall be onlyfor purposes of liquidation, because theother futures commission merchant orthe leverage transaction merchant hasfailed to meet a call for margin or tomake other required deposits, the car-rying futures commission merchantmust give telephonic, confirmed inwriting by telegraphic or facsimile no-tice of such a determination to theprincipal office of the Commission atWashington, DC, immediately.

(3) Whenever a registered futurescommission merchant determines thatan account which it is carrying isundermargined by an amount which ex-ceeds the futures commission mer-chant’s adjusted net capital deter-mined in accordance with § 1.17, the fu-tures commission merchant must giveimmediate telephonic, confirmed inwriting by telegraphic or facsimile no-tice of such a determination to the des-ignated self-regulatory organizationand the principal office of the Commis-sion at Washington, DC. This para-graph (f)(3) shall apply to any accountcarried by the futures commission mer-chant, whether a customer, noncus-tomer, omnibus or proprietary ac-count. For purposes of this paragraph(f)(3), if any person has an interest of 10percent or more in ownership or equityin, or guarantees, more than one ac-count, or has guaranteed an account inaddition to his own account, all suchaccounts shall be combined. A des-ignated self-regulatory organizationmay grant an exemption from the pro-visions of this paragraph to a futurescommission merchant with respect toany particular account on a continuousbasis provided the designated self-regu-latory organization documents the rea-sons for granting such an exemptionand continues to monitor any such ac-count.


25


(4) A futures commission merchantshall report immediately by telephone,confirmed in writing immediately bytelegraphic or facsimile notice, when-ever any commodity interest accountit carries is subject to a margin call, orcall for other deposits required by thefutures commission merchant, that ex-ceeds the futures commission mer-chant’s excess adjusted net capital, de-termined in accordance with § 1.17, andsuch call has not been answered by theclose of business on the day followingthe issuance of the call. This applies toall accounts carried by the futurescommission merchant, whether cus-tomer, noncustomer, or omnibus, thatare subject to margining, includingcommodity futures and options. In ad-dition to actual margin deposits by anaccount owner, a futures commissionmerchant may also take account of fa-vorable market moves in determiningwhether the margin call is required tobe reported under this paragraph.

(5)(i) A futures commission merchantshall report immediately by telephone,confirmed in writing immediately bytelegraphic or facsimile notice, when-ever its excess adjusted net capital isless than six percent of the mainte-nance margin required by the futurescommission merchant on all positionsheld in accounts of a noncustomerother than a noncustomer who is sub-ject to the minimum financial require-ments of:

(A) A futures commission merchant,or

(B) The Securities and ExchangeCommission for a securities broker anddealer.

(ii) For purposes of paragraph(f)(5)(i), maintenance margin shall in-clude all deposits which the futurescommission merchant requires thenoncustomer to maintain in order tocarry its positions at the futures com-mission merchant.

(g) A futures commission merchantshall provide written notice of a sub-stantial reduction in capital as com-pared to that last reported in a finan-cial report filed with the Commissionpursuant to § 1.10. This notice shall beprovided as follows:

(1) If any event or series of events, in-cluding any withdrawal, advance, loan

or loss cause, on a net basis, a reduc-tion in net capital (or, if the futurescommission merchant is qualified touse the filing option available under§ 1.10(h), tentative net capital as de-fined in the rules of the Securities andExchange Commission) of 20 percent ormore, notice must be provided withintwo business days of the event or seriesof events causing the reduction; and

(2) If equity capital of the futurescommission merchant or a subsidiaryor affiliate of the futures commissionmerchant consolidated pursuant to§ 1.17(f) (or 17 CFR 240.15c3–1e) would bewithdrawn by action of a stockholderor a partner or by redemption or repur-chase of shares of stock by any of theconsolidated entities or through thepayment of dividends or any similardistribution, or an unsecured advanceor loan would be made to a stock-holder, partner, sole proprietor, em-ployee or affiliate, such that the with-drawal, advance or loan would cause,on a net basis, a reduction in excess ad-justed net capital (or, if the futurescommission merchant is qualified touse the filing option available under§ 1.10(h), excess net capital as defined inthe rules of the Securities and Ex-change Commission) of 30 percent ormore, notice must be provided at leasttwo business days prior to the with-drawal, advance or loan that wouldcause the reduction: Provided, however,That the provisions of paragraphs (g)(1)and (g)(2) of this section do not applyto any futures or securities transactionin the ordinary course of business be-tween a futures commission merchantand any affiliate where the futurescommission merchant makes paymentto or on behalf of such affiliate for suchtransaction and then receives paymentfrom such affiliate for such transactionwithin two business days from the dateof the transaction.

(3) Upon receipt of such notice from afutures commission merchant, the Di-rector of the Division of Trading andMarkets or the Director’s designee mayrequire that the futures commissionmerchant provide or cause a MaterialAffiliated Person (as that term is de-fined in § 1.14(a)(2)) to provide, within


26

17 CFR Ch. I (4–1–01 Edition)§ 1.13

three business days from the date of re-quest or such shorter period as the Di-vision Director or designee may speci-fy, such other information as the Divi-sion Director or designee determines tobe necessary based upon market condi-tions, reports provided by the futurescommission merchant, or other avail-able information.

(h) Whenever a person registered as afutures commission merchant knows orshould know that the total amount ofits funds on deposit in segregated ac-counts on behalf of customers, or thatthe total amount set aside on behalf ofcustomers trading on non-UnitedStates markets, is less than the totalamount of such funds required by theAct and the Commission’s rules to beon deposit in segregated or securedamount accounts on behalf of such cus-tomers, the registrant must report im-mediately by telephone, confirmed inwriting immediately by telegraphic orfacsimile notice, such deficiency to theregistrant’s designated self-regulatoryorganization and the principal office ofthe Commission in Washington, D.C.,to the attention of the Director andthe Chief Accountant of the Division ofTrading and Markets.

(i)(1) Every notice and written reportrequired to be given or filed by thissection (except for notices required byparagraph (f) of this section) by a fu-tures commission merchant, an appli-cant for registration as a futures com-mission merchant or a self-regulatoryorganization must be filed with the re-gional office of the Commission nearestthe principal place of business of theapplicant or registrant (except that anapplicant, registrant or self-regulatoryorganization under the jurisdiction ofthe Commission’s Western Regional Of-fice must file such notices and reportswith the Southwestern Regional Of-fice), with the designated self-regu-latory organization, if any, with theSecurities and Exchange Commission,if such applicant or registrant is a se-curities broker or dealer, and with theNational Futures Association, if thefirm is an applicant. In addition, everynotice required to be given by this sec-tion must also be filed with the prin-cipal office of the Commission in Wash-ington, DC. Each statement of finan-cial condition, each statement of the

computation of the minimum capitalrequirements pursuant to § 1.17 of thispart, and each schedule of segregationrequirements and funds on deposit insegregation required by this sectionmust be filed in accordance with theprovisions of § 1.10(d) of this part unlessotherwise indicated.

(2) Every notice and written reportwhich an introducing broker or appli-cant for registration as an introducingbroker is required to give or file byparagraphs (a), (c) and (d) of this sec-tion must be filed with the NationalFutures Association (on behalf of theCommission), with the designated self-regulatory organization, if any, andwith every futures commission mer-chant carrying or intending to carrycustomer accounts for the introducingbroker or applicant for registration asan introducing broker. Any notice orreport filed with the National FuturesAssociation pursuant to this paragraphshall be deemed for all purposes to befiled with, and to be the official recordof, the Commission.

(Approved by the Office of Management andBudget under control number 3038–0024)

[43 FR 39969, Sept. 8, 1978, as amended at 45FR 6539, Jan. 29, 1980; 46 FR 63035, Dec. 30,1981; 47 FR 41516, Sept. 21, 1982; 48 FR 35283,Aug. 3, 1983; 49 FR 5521, Feb. 13, 1984; 49 FR39525, Oct. 9, 1984; 52 FR 28248, July 29, 1987;52 FR 28995, Aug. 5, 1987; 53 FR 4612, Feb. 17,1988; 58 FR 10953, Feb. 23, 1993; 59 FR 66688,Dec. 28, 1994; 61 FR 19185, May 1, 1996; 62 FR4640, Jan. 31, 1997; 63 FR 32731, June 16, 1998;63 FR 45715, Aug. 27, 1998]

§ 1.13 [Reserved]

§ 1.14 Risk assessment recordkeepingrequirements for futures commis-sion merchants.

(a) Requirement to maintain and pre-serve information. (1) Each futures com-mission merchant registered with theCommission pursuant to Section 4d ofthe Act, unless exempt pursuant toparagraph (d) of this section, shall pre-pare, maintain and preserve the fol-lowing information:

(i) An organizational chart which in-cludes the futures commission mer-chant and each of its affiliated persons.Included in the organizational chartshall be a designation of which affili-ated persons are ‘‘Material Affiliated


27


Persons’’ as that term is used in para-graph (a)(2) of this section, which Ma-terial Affiliated Persons file routine fi-nancial or risk exposure reports withthe Securities and Exchange Commis-sion, a federal banking agency, an in-surance commissioner or other similarofficial or agency of a state, or a for-eign regulatory authority, and whichMaterial Affiliated Persons are dealersin financial instruments with off-bal-ance sheet risk and, if a Material Af-filiated Person is such a dealer, wheth-er it is also an end-user of such instru-ments;

(ii) Written policies, procedures, orsystems concerning the futures com-mission merchant’s:

(A) Method(s) for monitoring andcontrolling financial and operationalrisks to it resulting from the activitiesof any of its affiliated persons;

(B) Financing and capital adequacy,including information regardingsources of funding, together with a nar-rative discussion by management ofthe liquidity of the material assets ofthe futures commission merchant, thestructure of debt capital, and sourcesof alternative funding;

(C) Establishing and maintaining in-ternal controls with respect to marketrisk, credit risk, and other risks cre-ated by the futures commission mer-chant’s proprietary and noncustomerclearing activities, including systemsand policies for supervising, moni-toring, reporting and reviewing tradingactivities in securities, futures con-tracts, commodity options, forwardcontracts and financial instruments;policies for hedging or managing riskscreated by trading activities or super-vising accounts carried for noncus-tomer affiliates, including a descrip-tion of the types of reviews conductedto monitor positions; and policies re-lating to restrictions or limitations ontrading activities: Provided, however,that if the futures commission mer-chant has no such written policies, pro-cedures or systems, it must so state inwriting;

(iii) Fiscal year-end consolidated andconsolidating balance sheets for thehighest level Material Affiliated Per-son within the futures commissionmerchant’s organizational structure,which shall include the futures com-

mission merchant and its other Mate-rial Affiliated Persons, prepared in ac-cordance with generally accepted ac-counting principles, which consoli-dated balance sheets shall be auditedby an independent certified public ac-countant if an annual audit is per-formed in the ordinary course of busi-ness, but which otherwise may beunaudited, and which shall include ap-propriate explanatory notes. The con-solidating balance sheets may be thoseprepared by the futures commissionmerchant’s highest level Material Af-filiated Person as part of its internalfinancial reporting process. Any addi-tional information required to be filedunder § 1.15(a)(2)(iii) shall also be main-tained and preserved; and

(iv) Fiscal year-end consolidated andconsolidating income statements andconsolidated cash flow statements forthe highest level Material AffiliatedPerson within the futures commissionmerchant’s organizational structure,which shall include the futures com-mission merchant and its other Mate-rial Affiliated Persons, prepared in ac-cordance with generally accepted ac-counting principles, which consoli-dated statements shall be audited byan independent certified public ac-countant if an annual audit is per-formed in the ordinary course of busi-ness, but which otherwise may beunaudited, and which shall include ap-propriate explanatory notes. The con-solidating statements may be thoseprepared by the futures commissionmerchant’s highest level Material Af-filiated Person as part of its internalfinancial reporting process. Any addi-tional information required to be filedunder § 1.15(a)(2)(iii) shall also be main-tained and preserved.

(2) The determination of whether anaffiliated person of a futures commis-sion merchant is a Material AffiliatedPerson shall involve consideration ofall aspects of the activities of, and therelationship between, both entities, in-cluding without limitation, the fol-lowing factors:

(i) The legal relationship between thefutures commission merchant and theaffiliated person;

(ii) The overall financing require-ments of the futures commission mer-chant and the affiliated person, and the


28

17 CFR Ch. I (4–1–01 Edition)§ 1.14

degree, if any, to which the futurescommission merchant and the affili-ated person are financially dependenton each other;

(iii) The degree, if any, to which thefutures commission merchant or itscustomers rely on the affiliated personfor operational support or services inconnection with the futures commis-sion merchant’s business;

(iv) The level of market, credit orother risk present in the activities ofthe affiliated person; and

(v) The extent to which the affiliatedperson has the authority or the abilityto cause a withdrawal of capital fromthe futures commission merchant.

(3) For purposes of this section and§ 1.15, the term Material Affiliated Per-son does not include a natural person.

(4) The information, reports andrecords required by this section shallbe maintained and preserved, and madereadily available for inspection, in ac-cordance with the provisions of § 1.31.

(b) Special provisions with respect toMaterial Affiliated Persons subject to thesupervision of certain domestic regulators.A futures commission merchant shallbe deemed to be in compliance with therecordkeeping requirements of para-graphs (a)(1)(i), (a)(1)(iii) and (a)(1)(iv)of this section with respect to a Mate-rial Affiliated Person if:

(1) The futures commission merchantis required, or that Material AffiliatedPerson is required, to maintain andpreserve information, or such informa-tion is maintained and preserved bythe futures commission merchant onbehalf of the Material Affiliated Per-son, pursuant to § 240.17h–1T of thistitle, or such other risk assessmentregulations as the Securities and Ex-change Commission may adopt, andmaintains and makes available for in-spection by the Commission in accord-ance with the provisions of this sectioncopies of the records and reports main-tained and filed on Form 17–H (or suchother forms or reports as may be re-quired) by such futures commissionmerchant or its Material AffiliatedPerson with the Securities and Ex-change Commission pursuant to§§ 240.17h–1T and 240.17h–2T of this title,or such other risk assessment regula-tions as the Securities and ExchangeCommission may adopt;

(2) In the case of a Material Affili-ated Person (including a foreign bank-ing organization) that is subject to ex-amination by, or the reporting require-ments of, a Federal banking agency,the futures commission merchant orsuch Material Affiliated Person main-tains and makes available for inspec-tion by the Commission in accordancewith the provisions of this section cop-ies of all reports submitted by suchMaterial Associated Person to the Fed-eral banking agency pursuant to sec-tion 5211 of the Revised Statutes, sec-tion 9 of the Federal Reserve Act, sec-tion 7(a) of the Federal Deposit Insur-ance Act, section 10(b) of the HomeOwners’ Loan Act, or section 5 of theBank Holding Company Act of 1956; or

(3) In the case of a Material Affili-ated Person that is subject to the su-pervision of an insurance commissioneror other similar official or agency of astate, the futures commission mer-chant or such Material Affiliated Per-son maintains and makes available forinspection by the Commission in ac-cordance with the provisions of thissection copies of the annual statementswith schedules and exhibits preparedby the Material Affiliated Person onforms prescribed by the National Asso-ciation of Insurance Commissioners orby a state insurance commissioner.

(c) Special provisions with respect toMaterial Affiliated Persons subject to thesupervision of a Foreign Regulatory Au-thority. A futures commission mer-chant shall be deemed to be in compli-ance with the recordkeeping require-ments of paragraphs (a)(1)(iii) and(a)(1)(iv) of this section with respect toa Material Affiliated Person if such fu-tures commission merchant maintainsand makes available, or causes suchMaterial Affiliated Person to makeavailable, for inspection by the Com-mission in accordance with the provi-sions of this section copies of any fi-nancial or risk exposure reports filedby such Material Affiliated Personwith a foreign futures authority orother foreign regulatory authority,provided that: (1) the futures commis-sion merchant agrees to use its best ef-forts to obtain from the Material Af-filiated Person and to cause the Mate-rial Affiliated Person to provide, di-rectly or through its foreign futures


29


authority or other foreign regulatoryauthority, any supplemental informa-tion the Commission may request andthere is no statute or other bar in theforeign jurisdiction that would pre-clude the futures commission mer-chant, the Material Affiliated Person,the foreign futures authority or otherforeign regulatory authority from pro-viding such information to the Com-mission; or (2) the foreign futures au-thority or other foreign regulatory au-thority with whom the Material Affili-ated Person files such reports has en-tered into an information-sharingagreement with the Commission whichis in effect as of the futures commis-sion merchant’s fiscal year-end andwhich will allow the Commission to ob-tain the type of information requiredherein. The futures commission mer-chant shall maintain a copy of theoriginal report and a copy translatedinto the English language. For the pur-poses of this section, the term ‘‘For-eign Futures Authority’’ shall have themeaning set forth in section 1a(10) ofthe Act.

(d) Exemptions. (1) The provisions ofthis section shall not apply to any fu-tures commission merchant whichholds funds or property of or for fu-tures customers of less than $6,250,000and has less than $5,000,000 in adjustednet capital as of the futures commis-sion merchant’s current fiscal year-end; provided, however, that such fu-tures commission merchant is not aclearing member of an exchange.

(2) The Commission may, upon writ-ten application by a Reporting FuturesCommission Merchant, exempt fromthe provisions of this section, otherthan paragraph (a)(1)(ii) of this section,either unconditionally or on specifiedterms and conditions, any futures com-mission merchant affiliated with suchReporting Futures Commission Mer-chant. The term ‘‘Reporting FuturesCommission Merchant’’ shall mean, inthe case of a futures commission mer-chant that is affiliated with anotherregistered futures commission mer-chant, the futures commission mer-chant which maintains the greateramount of adjusted net capital as lastreported on financial reports filed withthe Commission pursuant to § 1.10 un-less another futures commission mer-

chant is acting as the ReportingBroker or Dealer under § 240.17h–2T ofthis title, or the Commission permitsanother futures commission merchantto act as the Reporting Futures Com-mission Merchant. In granting exemp-tions under this section, the Commis-sion shall consider, among other fac-tors, whether the records required bythis section concerning the MaterialAffiliated Persons of the futures com-mission merchant affiliated with theReporting Futures Commission Mer-chant will be available to the Commis-sion pursuant to this section or § 1.15. Arequest for exemption filed under thisparagraph (d)(2) shall explain the basisfor the designation of a particular fu-tures commission merchant as the Re-porting Futures Commission Merchantand will become effective on the thir-tieth day after receipt of such requestby the Commission unless the Commis-sion objects to the request by thatdate.

(3) The Commission may exempt anyfutures commission merchant from anyprovision of this section if it finds thatthe exemption is not contrary to thepublic interest and the purposes of theprovisions from which the exemption issought. The Commission may grant theexemption subject to such terms andconditions as it may find appropriate.

(e) Location of records. A futures com-mission merchant required to maintainrecords concerning Material AffiliatedPersons pursuant to this section maymaintain those records either at theprincipal office of the Material Affili-ated Person or at a records storage fa-cility, provided that, except as setforth in paragraph (c) of this section,the records are located within theboundaries of the United States andthe records are kept and available forinspection in accordance with § 1.31. Ifsuch records are maintained at a placeother than the futures commissionmerchant’s principal place of business,the Material Affiliated Person or otherentity maintaining the records shallfile with the Commission a written un-dertaking, in a form acceptable to theCommission, signed by a duly author-ized person, to the effect that therecords will be treated as if the futurescommission merchant were maintain-ing the records pursuant to this section


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17 CFR Ch. I (4–1–01 Edition)§ 1.15

and that the entity maintaining therecords will permit examination ofsuch records at any time, or from timeto time during business hours, by rep-resentatives or designees of the Com-mission and promptly furnish the Com-mission representative or its designeetrue, correct, complete and currenthard copy of all or any part of suchrecords. The election to maintainrecords at the principal place of busi-ness of the Material Affiliated Personor at a records storage facility pursu-ant to the provisions of this paragraphshall not relieve the futures commis-sion merchant required to maintainand preserve such records from any ofits responsibilities under this sectionor § 1.15.

(f) Confidentiality. All information ob-tained by the Commission pursuant tothe provisions of this section from a fu-tures commission merchant concerninga Material Affiliated Person shall bedeemed confidential information forthe purposes of section 8 of the Act.

(g) Implementation schedule. (1) Eachfutures commission merchant reg-istered as of December 31, 1994 and sub-ject to the requirements of this sectionshall maintain and preserve the infor-mation required by paragraphs (a)(1)(i)and (a)(1)(ii) of this section com-mencing April 30, 1995 and the informa-tion required by paragraphs (a)(1)(iii)and (a)(1)(iv) of this section com-mencing May 15, 1995 or, if December31, 1994 is not the futures commissionmerchant’s fiscal year-end, 135 cal-endar days following the first fiscalyear-end occurring after December 31,1994.

(2) Each futures commission mer-chant whose registration becomes ef-fective after December 31, 1994 and issubject to the requirements of this sec-tion shall maintain and preserve theinformation required by paragraphs(a)(1)(i) and (a)(1)(ii) of this sectioncommencing 60 calendar days after reg-istration become effective and the in-formation required by paragraphs(a)(1)(iii) and (a)(1)(iv) of this sectioncommencing 105 calendar days fol-lowing the first fiscal year-end occur-ring after registration becomes effec-tive.

[59 FR 66688, Dec. 28, 1994]

§ 1.15 Risk assessment reporting re-quirements for futures commissionmerchants.

(a) Reporting requirements with respectto information required to be maintainedby § 1.14. (1) Each futures commissionmerchant registered with the Commis-sion pursuant to Section 4d of the Act,unless exempt pursuant to paragraph(c) of this section, shall file the fol-lowing with the regional office withwhich it files periodic financial reportsby no later than April 30, 1995, providedthat in the case of a futures commis-sion merchant whose registration be-comes effective after December 31, 1994,such futures commission merchantshall file the following within 60 cal-endar days after the effective date ofsuch registration, or by April 30, 1995,whichever comes later:

(i) A copy of the organizational chartmaintained by the futures commissionmerchant pursuant to paragraph(a)(l)(i) of § 1.14. Where there is a mate-rial change in information provided, anupdated organizational chart shall befiled within sixty calendar days afterthe end of the fiscal quarter in whichthe change has occurred; and

(ii) Copies of the financial, oper-ational, and risk management policies,procedures and systems maintained bythe futures commission merchant pur-suant to paragraph (a)(l)(ii) of § 1.14. Ifthe futures commission merchant hasno such written policies, procedures orsystems, it must file a statement so in-dicating. Where there is a materialchange in information provided, suchchange shall be reported within sixtycalendar days after the end of the fiscalquarter in which the change has oc-curred.

(2) Each futures commission mer-chant registered with the Commissionpursuant to Section 4d of the Act, un-less exempt pursuant to paragraph (c)of this section, shall file the followingwith the regional office with which itfiles periodic financial reports within105 calendar days after the end of eachfiscal year or, if a filing is made pursu-ant to a written notice issued underparagraph (a)(2)(iii) of this section,within the time period specified in thewritten notice:

(i) Fiscal year-end consolidated andconsolidating balance sheets for the


31


highest level Material Affiliated Per-son within the futures commissionmerchant’s organizational structure,which shall include the futures com-mission merchant and its other Mate-rial Affiliated Persons, prepared in ac-cordance with generally accepted ac-counting principles, which consoli-dated balance sheets shall be auditedby an independent certified public ac-countant if an annual audit is per-formed in the ordinary course of busi-ness, but which otherwise may beunaudited, and which consolidated bal-ance sheets shall include appropriateexplanatory notes. The consolidatingbalance sheets may be those preparedby the futures commission merchant’shighest level Material Affiliated Per-son as part of its internal financial re-porting process;

(ii) Fiscal year-end annual consoli-dated and consolidating income state-ments and consolidated cash flowstatements for the highest level Mate-rial Affiliated Person within the fu-tures commission merchant’s organiza-tional structure, which shall includethe futures commission merchant andits other Material Affiliated Persons,prepared in accordance with generallyaccepted accounting principles, whichconsolidated statements shall be au-dited by an independent certified pub-lic accountant if an annual audit isperformed in the ordinary course ofbusiness, but which otherwise may beunaudited, and which consolidatedstatements shall include appropriateexplanatory notes. The consolidatingstatements may be those prepared bythe futures commission merchant’shighest level Material Affiliated Per-son as part of its internal financial re-porting process; and

(iii) Upon receiving written noticefrom any representative of the Com-mission and within the time periodspecified in the written notice, such ad-ditional information which the Com-mission determines is necessary for acomplete understanding of a particularaffiliate’s financial impact on the fu-tures commission merchant’s organiza-tional structure.

(3) For the purposes of this section,the term Material Affiliated Personshall have the meaning used in § 1.14.

(4) The reports required to be filedpursuant to paragraphs (a)(1) and (a)(2)of this section shall be considered filedwhen received by the regional office ofthe Commission with whom the futurescommission files financial reports pur-suant to § 1.10.

(b) [Reserved](c) Exemptions. (1) The provisions of

this section shall not apply to any fu-tures commission merchant whichholds funds or property of or for fu-tures customers of less than $6,250,000and has less than $5,000,000 in adjustednet capital as of the futures commis-sion merchant’s fiscal year-end; pro-vided, however, that such futures com-mission merchant is not a clearingmember of an exchange.

(2) The Commission may, upon writ-ten application by a Reporting FuturesCommission Merchant, exempt fromthe provisions of this section, otherthan paragraph (a)(1)(ii) of this section,either unconditionally or on specifiedterms and conditions, any futures com-mission merchant affiliated with suchReporting Futures Commission Mer-chant. The term ‘‘Reporting FuturesCommission Merchant’’ shall mean, inthe case of a futures commission mer-chant that is affiliated with anotherregistered futures commission mer-chant, the futures commission mer-chant which maintains the greateramount of net capital as last reportedon its financial reports filed with theCommission pursuant to § 1.10 unlessanother futures commission merchantis acting as the Reporting Broker orDealer under § 240.17h–2T of this title orthe Commission permits another fu-tures commission merchant to act asthe Reporting Futures CommissionMerchant. In granting exemptionsunder this section, the Commissionshall consider, among other factors,whether the records and other informa-tion required to be maintained pursu-ant to § 1.14 concerning the MaterialAffiliated Persons of the futures com-mission merchant affiliated with theReporting Futures Commission Mer-chant will be available to the Commis-sion pursuant to the provisions of thissection. A request for exemption filedunder this paragraph (c)(2) shall ex-plain the basis for the designation of a


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17 CFR Ch. I (4–1–01 Edition)§ 1.15

particular futures commission mer-chant as the Reporting Futures Com-mission Merchant and will become ef-fective on the thirtieth day after re-ceipt of such request by the Commis-sion unless the Commission objects tothe request by that date. The Report-ing Futures Commission Merchantmust submit the information requiredby paragraph (a)(1)(ii) of this sectionon behalf of its affiliated futures com-mission merchants.

(3) The Commission may exempt anyfutures commission merchant from anyprovision of this section if it finds thatthe exemption is not contrary to thepublic interest and the purposes of theprovisions from which the exemption issought. The Commission may grant theexemption subject to such terms andconditions as it may find appropriate.

(d) Special provisions with respect toMaterial Affiliated Persons subject to thesupervision of certain domestic regulators.(1) In the case of a futures commissionmerchant which is required to file, orhas a Material Affiliated Person whichis required to file, Form 17–H (or suchother forms or reports as may be re-quired) with the Securities and Ex-change Commission pursuant to§ 240.17h–2T of this title, or such otherrisk assessment regulations as the Se-curities and Exchange Commissionmay adopt, such futures commissionmerchant shall be deemed to be incompliance with the reporting require-ments of paragraphs (a)(1)(i) and (a)(2)of this section if the futures commis-sion merchant furnishes, in accordancewith paragraph (a)(2) of this section, acopy of the most recent Form 17–Hfiled by the futures commission mer-chant or its Material Affiliated Personwith the Securities and Exchange Com-mission, provided however, that if thefutures commission merchant has des-ignated any of its affiliated persons asMaterial Affiliated Persons for pur-poses of this section and § 1.14 whichare not designated as Material Associ-ated Persons for purposes of the Form17–H filed pursuant to §§ 240.17h–1T and240.17h–2T of this title, the futurescommission must also designate anysuch affiliated person as a Material Af-filiated Person on the organizationalchart required as Item 1 of Part I ofForm 17–H. To comply with paragraphs

(a)(1)(i) and (a)(2) of this section, suchfutures commission merchant may, atits option, file Form 17–H in its en-tirety or file such form without the in-formation required under Part II ofForm 17–H.

(2) In the case of a Material Affili-ated Person (including a foreign bank-ing organization) that is subject to ex-amination by, or the reporting require-ments of, a Federal banking agency,the futures commission merchant shallbe deemed to be in compliance with thereporting requirements of paragraph(a)(2) of this section with respect tosuch Material Affiliated Person if thefutures commission merchant or suchMaterial Affiliated Person maintainsin accordance with § 1.14 copies of allreports filed by the Material AffiliatedPerson with the Federal banking agen-cy pursuant to section 5211 of the Re-vised Statutes, section 9 of the FederalReserve Act, section 7(a) of the FederalDeposit Insurance Act, section 10(b) ofthe Home Owners’ Loan Act, or section5 of the Bank Holding Company Act of1956.

(3) In the case of a futures commis-sion merchant that has a Material Af-filiated Person that is subject to thesupervision of an insurance commis-sioner or other similar official or agen-cy of a state, such futures commissionmerchant shall be deemed to be incompliance with the reporting require-ments of paragraph (a)(2) of this sec-tion with respect to the Material Af-filiated Person if:

(i) With respect to a Material Affili-ated Person organized as a mutual in-surance company or a non-public stockcompany, the futures commission mer-chant or such Material Affiliated Per-son maintains in accordance with § 1.14copies of the annual statements withschedules and exhibits prepared by theMaterial Affiliated Person on formsprescribed by the National Associationof Insurance Commissioners or by astate insurance commissioner; and

(ii) With respect to a Material Affili-ated Person organized as a public stockcompany, the futures commission mer-chant or such Material Affiliated Per-son maintains, in addition to the an-nual statements with schedules and ex-hibits required to be maintained pursu-ant to § 1.14, copies of the filings made


33


by the Material Affiliated Person pur-suant to sections 13 or 15 of the Securi-ties Exchange Act of 1934 and the In-vestment Company Act of 1940.

(4) No futures commission merchantshall be required to furnish to the Com-mission any examination report of anyFederal banking agency or any super-visory recommendations or analysescontained therein with respect to a Ma-terial Affiliated Person that is subjectto the regulation of a Federal bankingagency. All information received bythe Commission pursuant to this sec-tion concerning a Material AffiliatedPerson that is subject to examinationby or the reporting requirements of aFederal banking agency shall bedeemed confidential for the purposes ofsection 8 of the Act.

(5) The furnishing of any informationor documents by a futures commissionmerchant pursuant to this sectionshall not constitute an admission forany purpose that a Material AffiliatedPerson is otherwise subject to the Act.

(e) Special provisions with respect toMaterial Affiliated Persons subject to thesupervision of a Foreign Regulatory Au-thority. A futures commission mer-chant shall be deemed to be in compli-ance with the reporting requirementsof paragraph (a)(2) of this section withrespect to a Material Affiliated Personif such futures commission merchantfurnishes, or causes such Material Af-filiated Person to make available, inaccordance with the provisions of thissection, copies of any financial or riskexposure reports filed by such MaterialAffiliated Person with a foreign futuresauthority or other foreign regulatoryauthority, provided that:

(1) The futures commission merchantagrees to use its best efforts to obtainfrom the Material Affiliated Personand to cause the Material AffiliatedPerson to provide, directly or throughits foreign futures authority or otherforeign regulatory authority, any sup-plemental information the Commissionmay request and there is no statute orother bar in the foreign jurisdictionthat would preclude the futures com-mission merchant, the Material Affili-ated Person, the foreign futures au-thority or other foreign regulatory au-thority from providing such informa-tion to the Commission; or

(2) The foreign futures authority orother foreign regulatory authoritywith whom the Material Affiliated Per-son files such reports has entered intoan information sharing agreement withthe Commission which is in effect as ofthe futures commission merchant’s fis-cal year-end and which will allow theCommission to obtain the type of infor-mation required herein. The futurescommission merchant shall file a copyof the original report and a copy trans-lated into the English language. Forthe purposes of this section, the term‘‘Foreign Futures Authority’’ shallhave the meaning set forth in section1a(10) of the Act.

(f) Confidentiality. All information ob-tained by the Commission pursuant tothe provisions of this section from a fu-tures commission merchant concerninga Material Associated Person shall bedeemed confidential information forthe purposes of section 8 of the Act.

(g) Implementation schedule. Each fu-tures commission merchant registeredas of December 31, 1994 and subject tothe requirements of this section shallfile the information required by para-graph (a)(1) of this section no laterthan April 30, 1995 and the informationrequired by paragraph (a)(2) of this sec-tion no later than May 15, 1995. Eachfutures commission merchant whoseregistration becomes effective afterDecember 31, 1994 and is subject to therequirements of this section shall filethe information required by paragraph(a)(1) of this section within 60 calendardays after registration is granted, orby April 30, 1995, whichever comes laterand the information required by para-graph (a)(2) of this section within 105calendar days after registration isgranted or by May 15, 1995, whichevercomes later.

[59 FR 66690, Dec. 28, 1994; 60 FR 13901, Mar.15, 1995]

§ 1.16 Qualifications and reports of ac-countants.

(a) Definitions—(1) Accountant’s report.The term ‘‘accountant’s report,’’ whenused in regard to financial statementsand schedules, means a document inwhich an independent licensed or cer-tified public accountant indicates thescope of the audit (or examination)which he has made and sets forth his


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17 CFR Ch. I (4–1–01 Edition)§ 1.16

opinion regarding the financial state-ments and schedules taken as a wholeor an assertion to the fact that anoverall opinion cannot be expressed.When an overall opinion cannot be ex-pressed, the reasons therefore must bestated.

(2) Audit or examination. The terms‘‘audit’’ and ‘‘examination,’’ when usedin regard to financial statements andschedules, mean an examination of thestatements and schedules by an ac-countant in accordance with generallyaccepted auditing standards for thepurposes of expressing an opinionthereon.

(3) Certified. The term ‘‘certified,’’when used in regard to financial state-ments and schedules, means auditedand reported upon with an opinion ex-pressed by an independent certifiedpublic accountant or independent li-censed public accountant.

(4) Customer. The term ‘‘customer’’means customer (as defined in § 1.3(k))and option customer (as defined in§ 1.3(jj) of this part and in § 32.1(c) ofthis chapter) and includes a foreign fu-tures and foreign options customer (asdefined in § 30.1(c) of this chapter).

(b) Qualifications of accountants. (1)The Commission will recognize anyperson as a certified public accountantwho is duly registered and in goodstanding as such under the laws of theplace of his residence or principal of-fice. The Commission will recognizeany person as a licensed public ac-countant who was duly licensed on orbefore December 31, 1970, and is in goodstanding as such under the laws of theplace of his residence or principal of-fice.

(2) The Commission will not recog-nize any certified public accountant orlicensed public accountant as inde-pendent who is not in fact independent.For example, an accountant will not beconsidered independent with respect toany applicant or registrant or any par-ent, subsidiary, or other affiliate ofsuch applicant or registrant (i) inwhich, during the period of his profes-sional engagement to examine the fi-nancial statements and schedules beingreported on or at the date of his report,he or his firm or a member thereof had,or was committed to acquire, any di-rect financial interest or any material

indirect financial interest, or (ii) withwhich, during the period of his profes-sional engagement to examine the fi-nancial statements and schedules beingreported on, at the date of his report orduring the period covered by the finan-cial statements, he or his firm or amember thereof was connected as apromoter, underwriter, voting trustee,director, officer, or employee, exceptthat a firm will be deemed independentwith respect to an applicant or reg-istrant and its affiliates if a formeremployee or officer of such applicantor registrant or any such affiliate isemployed by the firm and such indi-vidual has completely disassociatedhimself from the applicant or reg-istrant and its affiliates and does notparticipate in auditing financial state-ments and schedules of the applicant orregistrant or its affiliates covering anyperiod of his employment by the appli-cant or registrant or its affiliates. Anaccountant will not be considered inde-pendent if he or his firm or a memberthereof performs manual or automatedbookkeeping services or assumes re-sponsibility for maintenance of the ac-counting records, including accountingclassification decisions, of such appli-cant or registrant or any of its affili-ates. For the purposes of this § 1.16(b),the term ‘‘member’’ means all partnersin the firm and all professional em-ployees participating in the audit or lo-cated in the office of the firm partici-pating in a significant portion of theaudit.

(3) In determining whether an ac-countant may in fact not be inde-pendent with respect to a particularapplicant or registrant, the Commis-sion will give appropriate consider-ation to all relevant circumstances, in-cluding evidence bearing on all rela-tionships between the accountant andthat applicant or registrant or any af-filiate thereof, and will not confineitself to the relationship existing inconnection with the filing of reportswith the Commission.

(c) Accountant’s reports—(1) Technicalrequirements. The accountant’s report(i) must be dated, (ii) must be signedmanually, (iii) must indicate the cityand State where issued and (iv) mustidentify without detailed enumeration


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the financial statements covered bythe report.

(2) Representations as to the audit. Theaccountant’s report (i) must statewhether the audit was made in accord-ance with generally accepted auditingstandards, and (ii) must designate anyauditing procedures deemed necessaryby the accountant under the cir-cumstances of the particular casewhich have been omitted and the rea-sons for their omission. However, noth-ing in this paragraph (c)(2) shall beconstrued to imply authority for theomission of any procedure which inde-pendent accountants would ordinarilyemploy in the course of an audit madefor the purposes of expressing the opin-ion required by paragraph (c)(3) of thissection.

(3) Opinion to be expressed. The ac-countant’s report must state clearly:(i) The opinion of the accountant withrespect to the financial statements andschedules covered by the report and theaccounting principles and practices re-flected therein and (ii) the opinion ofthe accountant as to the consistency ofthe application of the accounting prin-ciples, or as to any changes in suchprinciples which have material effecton the financial statements and sched-ules.

(4) Exceptions. Any matters to whichthe accountant takes exception mustbe clearly identified, such exceptionsspecifically and clearly stated, and tothe extent practicable, the effect ofeach exception on related financialstatements and schedules given.

(5) Accountant’s report on material in-adequacies. A registrant must file con-currently with the annual audit reporta supplemental report by the account-ant describing any material inadequa-cies found to exist or found to have ex-isted since the date of the previousaudit. An applicant must file concur-rently with the audit report a supple-mental report by the accountant de-scribing any material inadequaciesfound to exist as of the date of theForm 1–FR being filed: Provided, how-ever, That if such applicant is reg-istered with the Securities and Ex-change Commission as a securitiesbroker or dealer, and it files (in accord-ance with § 1.10(h)) a copy of its Finan-cial and Operational Combined Uni-

form Single Report under the Securi-ties Exchange Act of 1934, part II orpart IIA, in lieu of Form 1–FR, the ac-countant’s supplemental report mustbe made as of the date of such report.The supplemental report must indicateany corrective action taken or pro-posed by the applicant or registrant inregard thereto. If the audit did not dis-close any material inadequacies, thesupplemental report must so state.

(d) Audit objectives. (1) The audit mustbe made in accordance with generallyaccepted auditing standards and mustinclude a review and appropriate testsof the accounting system, the internalaccounting control, and the proceduresfor safeguarding customer and firm as-sets in accordance with the provisionsof the Act and the regulations there-under, since the prior examinationdate. The audit must include all proce-dures necessary under the cir-cumstances to enable the independentlicensed or certified public accountantto express an opinion on the financialstatements and schedules. The scope ofthe audit and review of the accountingsystem, the internal controls, and pro-cedures for safeguarding customer andfirm assets must be sufficient to pro-vide reasonable assurance that any ma-terial inadequacies existing at the dateof the examination in (i) the account-ing system, (ii) the internal accountingcontrols, and (iii) the procedures forsafeguarding customer and firm assets(including, in the case of a futurescommission merchant, the segregationrequirements of section 4d(2) of the Actand these regulations and the securedamount requirements of the Act andthese regulations) will be discovered.Additionally, as specified objectivesthe audit must include reviews of thepractices and procedures followed bythe registrant in making (A) periodiccomputations of the minimum finan-cial requirements pursuant to § 1.17 and(B) in the case of a futures commissionmerchant, daily computations of thesegregation requirements of section4d(2) of the Act and these regulationsand the secured amount requirementsof the Act and these regulations.

(2) A material inadequacy in the ac-counting system, the internal account-ing controls, the procedures for safe-guarding customer and firm assets, and


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17 CFR Ch. I (4–1–01 Edition)§ 1.16

the practices and procedures referredto in paragraph (d)(1) of this sectionwhich is to be reported in accordancewith paragraph (e)(2) of this section in-cludes any conditions which contrib-uted substantially to or, if appropriatecorrective action is not taken, couldreasonably be expected to:

(i) Inhibit an applicant or registrantfrom promptly completing trans-actions or promptly discharging his re-sponsibilities to customers or othercreditors;

(ii) Result in material financial loss;(iii) Result in material misstatement

of the applicant’s or registrant’s finan-cial statements and schedules; or

(iv) Result in violations of the Com-mission’s segregation or securedamount (in the case of a futures com-mission merchant), recordkeeping orfinancial reporting requirements to theextent that could reasonably be ex-pected to result in the conditions de-scribed in paragraph (d)(2) (i), (ii), or(iii) of this section.

(e) Extent and timing of audit proce-dures. (1) The extent and timing ofaudit procedures are matters for theindependent public accountant to de-termine on the basis of his review andevaluation of existing internal controlsand other audit procedures performedin accordance with generally acceptedauditing standards and the audit objec-tives set forth in paragraph (d) of thissection. In determining the extent oftesting, consideration must be given tothe materiality of an area and to thepossible effect on the financial state-ments and schedules of a materialmisstatement in a related account.

(2) If during the course of an audit orinterim work, the independent publicaccountant determines that any mate-rial inadequacies exist in the account-ing system, in the internal accountingcontrol, in the procedures for safe-guarding customer or firm assets, or asotherwise defined in paragraph (d) ofthis section, he must call such inad-equacies to the attention of the appli-cant or registrant, which has the re-sponsibility to give notice to the Na-tional Futures Association and, if anapplicant, or the Commission and thedesignated self-regulatory organiza-tion, if any, if a registrant, in accord-ance with paragraphs (d) and (g) of

§ 1.12: Provided, however, That if the ap-plicant or registrant is an introducingbroker or applicant for registration asan introducing broker, it also has theresponsibility to give notice to the Na-tional Futures Association, the des-ignated self-regulatory organization, ifany, and every futures commissionmerchant carrying or intending tocarry customer accounts for the intro-ducing broker or applicant for registra-tion as an introducing broker. The ap-plicant or registrant must also furnishthe accountant with a copy of said no-tice within three (3) business days. Ifthe accountant fails to receive such no-tice from the applicant or registrantwithin three (3) business days, or if hedisagrees with the statements con-tained in the notice of the applicant orregistrant, the accountant must informthe National Futures Association, inthe case of an applicant, or the Com-mission and the designated self-regu-latory organization, if any, in the caseof a registrant, by reporting the mate-rial inadequacy and, in the case of anapplicant or registrant which is an in-troducing broker or applicant for reg-istration as in introducing broker, theaccountant must also inform the Na-tional Futures Association, the des-ignated self-regulatory organization, ifany, and every futures commissionmerchant carrying or intending tocarry customer accounts for the intro-ducing an introducing broker, withinthree (3) business days thereafter. Suchreport from the accountant must, ifthe applicant or registrant failed tofile a notice, describe the material in-adequacies found to exist. If the appli-cant or registrant filed a notice, theaccountant must file a report detailingthe aspects, if any, of the applicant’s orregistrant’s notice with which the ac-countant does not agree.

(f) Extension of time for filing auditedreports. (1) In the event a registrantfinds that it cannot file its certified fi-nancial statements and schedules forany year within the time specified in§ 1.10 without substantial undue hard-ship, it may file with the principal of-fice of the Commission in Washington,DC, an application for extension oftime to a specified date not more than90 days after the date as of which thecertified financial statements and


37


schedules were to have been filed. No-tice of such application must be sent tothe designated self-regulatory organi-zation, if any. The application must bemade by the registrant and must:

(i) State the reasons for the re-quested extension;

(ii) Indicate that the inability tomake a timely filing is due to cir-cumstances beyond the control of theregistrant, if such is the case, and de-scribe briefly the nature of such cir-cumstances;

(iii) Be accompanied by the latestavailable formal computation of theregistrant’s adjusted net capital andminimum financial requirements com-puted in accordance with § 1.17;

(iv) In the case of a futures commis-sion merchant, be accompanied by thelatest available computation of re-quired segregation and by a computa-tion of the amount of money, securi-ties, and property segregated on behalfof customers, and by a computation ofsecured amounts and funds held in sep-arate accounts for foreign futures andforeign options customers in accord-ance with § 30.7 of this chapter, as ofthe date of the latest available com-putation;

(v) Contain an agreement to file thereport on or before the date specifiedby the registrant in the application;

(vi) Be received by the principal of-fice of the Commission in Washington,DC and by the designated self-regu-latory organization, if any, prior to thedate on which the report is due; and

(vii) Be accompanied by a letter fromthe independent public accountant an-swering the following questions:

(A) What specifically are the reasonsfor the extension request?

(B) On the basis of that part of youraudit to date, do you have any indica-tion that may cause you to considercommenting on any material inadequa-cies in the accounting system, internalaccounting controls or procedures forsafeguarding customer or firm assets?

(C) Do you have any indication fromthe part of your audit completed todate that would lead you to believethat the firm was or is not meeting theminimum capital requirements speci-fied in § 1.17 or (in the case of a futurescommission merchant) either the seg-regation requirements of section 4d(2)

of the Act and these regulations or thesecured amount requirements of theAct and these regulations, or has anysignificant financial or recordkeepingproblems?

(2) Within ten calendar days after re-ceipt of an application for extension oftime, the Commission shall: (i) Notifythe registrant of the grant or denial ofthe requested extension; or (ii) indicateto the registrant that additional timeis required to analyze the request, inwhich case the amount of time neededwill be specified.

(3) On the written request of any des-ignated self-regulatory organization orregistrant, or on its own motion, theCommission may grant an extension oftime or an exemption from any of thecertified financial reporting require-ments of this chapter either uncondi-tionally or on specified terms and con-ditions.

(g) Replacement of accountant. (1) Inthe event (i) the independent public ac-countant who was previously engagedas the principal accountant to audit anapplicant’s or registrant’s financialstatements resigns (or indicates he de-clines to stand for re-election after thecompletion of the current audit) or isdismissed as the applicant’s or reg-istrant’s principal accountant, (ii) an-other independent accountant is en-gaged as principal accountant, or (iii)an independent accountant on whomthe principal accountant expresses reli-ance in his report regarding a sub-sidiary resigns (or formally indicateshe declines to stand for re-electionafter completion of the current audit)or is dismissed or another independentpublic accountant is engaged to auditthat subsidiary, an applicant shall filewritten notice of such occurrence withthe National Futures Association, anda registrant shall file written notice ofsuch occurrence with the Commissionat its principal office in Washington,DC, and with the designated self-regu-latory organization, if any, not morethan 15 business days after such occur-rence.

(2) Such notice must state (i) thedate of such resignation (or declinationto stand for re-election, dismissal orengagement) and (ii) whether, in con-nection with the audit of the two mostrecent fiscal years and any subsequent


38

17 CFR Ch. I (4–1–01 Edition)§ 1.16

interim period preceding such resigna-tion, dismissal or engagement, therewere any disagreements with theformer accountant on any matter ofaccounting principles or practices, fi-nancial statements disclosure, auditingscope or procedures, or compliancewith the applicable rules of the Com-mission, which, if not resolved to thesatisfaction of the former accountant,would have caused him to make ref-erence in connection with his report tothe subject matter of the disagree-ments (if so, describe such disagree-ments). The disagreements required tobe reported in this paragraph (g)(2) in-clude both those resolved to the formeraccountant’s satisfaction and those notresolved to the former accountant’ssatisfaction. Disagreements con-templated by this paragraph (g)(2) arethose which occur at the decision-mak-ing level, i.e., between personnel of theapplicant or registrant responsible forpresentation of its financial state-ments and schedules and personnel ofthe accounting firm responsible forrendering its report. The notice mustalso state whether the accountant’s re-port on the financial statements andschedules for any of the past two yearscontained an adverse opinion or a dis-claimer of opinion or was qualified asto uncertainties, audit scope, or ac-counting principles (if so, describe thenature of each such adverse opinion,disclaimer of opinion, or qualification).An applicant must also request theformer accountant to furnish the appli-cant with a letter addressed to the Na-tional Futures Association, and a reg-istrant must also request the formeraccountant to furnish the registrantwith a letter addressed to the Commis-sion, stating whether he agrees withthe statements contained in the noticeof the applicant or registrant and, ifnot, stating the respects in which hedoes not agree. Each copy of the noticeand accountant’s letter must be manu-ally signed by the sole proprietor or ageneral partner or a duly authorizedcorporate officer of the applicant orregistrant, as appropriate, and by theaccountant.

(3) If (i) within the 24 months prior tothe date of the most recent audited fi-nancial statement, a notice has beenfiled pursuant to paragraph (g)(1) ofthis section reporting a change of ac-countants, (ii) included in such filingthere is a reported disagreement onany matters of accounting principles orpractices, financial statements disclo-sure, auditing scope, or noncompliancewith the applicable rules of the Com-mission, (iii) during the fiscal year inwhich the change in accountants tookplace or during the subsequent fiscalyear, there have been any transactionsor events similar to those which in-volved a reported disagreement, and(iv) such transactions or events arematerial and were accounted for or dis-closed in a manner different from thatwhich the former accountant appar-ently would have concluded was re-quired, the existence and nature of thedisagreements and also the effect onthe financial statements must be stat-ed in a written notice to the NationalFutures Association, in the case of anapplicant, or to the Commission at itsprincipal office in Washington, DC, andthe designated self-regulatory organi-zation, if any, in the case of a reg-istrant, if the method which the formeraccountant apparently would have con-cluded was required had been followed.These disclosures need not be made ifthe method asserted by the former ac-countant ceases to be generally accept-ed because of authoritative standardsor interpretations subsequently issued.The notice required by this paragraph(g)(3) must be filed by the applicant orregistrant concurrently with the finan-cial statements and schedules to whichit pertains.

(h) Exemption for introducing broker orapplicant therefor. The provisions ofthis section do not apply to an intro-ducing broker which is operating pur-suant to a guarantee agreement, nor dosuch provisions apply to an applicantfor registration as an introducingbroker who files concurrently withsuch application a guarantee agree-ment, provided such introducing


39


broker or applicant therefor is not alsoa securities broker or dealer.

(Approved by the Office of Management andBudget under control numbers 3038–0007,3038–0024)

[43 FR 39970, Sept. 8, 1978, as amended at 46FR 54516, Nov. 3, 1981; 46 FR 63035, Dec. 30,1981; 48 FR 35284, Aug. 3, 1983; 49 FR 39526,Oct. 9, 1984; 52 FR 28995, Aug. 5, 1987; 53 FR4612, Feb. 17, 1988]

§ 1.17 Minimum financial require-ments for futures commission mer-chants and introducing brokers.

(a)(1)(i) Except as provided in para-graph (a)(2)(i) of this section, each per-son registered as a futures commissionmerchant must maintain adjusted netcapital equal to or in excess of thegreatest of:

(A) $250,000;(B) Four percent of the following

amount: The customer funds requiredto be segregated pursuant to the Actand the regulations in this part and theforeign futures or foreign options se-cured amount, less the market value ofcommodity options purchased by cus-tomers on or subject to the rules of acontract market or a foreign board oftrade for which the full premiums havebeen paid: Provided, however, That thededuction for each customer shall belimited to the amount of customerfunds in such customer’s account(s)and foreign futures and foreign optionssecured amounts;

(C) The amount of adjusted net cap-ital required by a registered futures as-sociation of which it is a member; or

(D) For securities brokers and deal-ers, the amount of net capital requiredby Rule 15c3–1(a) of the Securities andExchange Commission (17 CFR 240.15c3–1(a)).

(ii) Except as provided in paragraph(a)(2) of this section, each person reg-istered as an introducing broker mustmaintain adjusted net capital equal toor in excess of the greatest of:

(A) $30,000;(B) The amount of adjusted net cap-

ital required by a registered futures as-sociation of which it is a member; or

(C) For securities brokers and deal-ers, the amount of net capital requiredby Rule 15c3–1(a) of the Securities andExchange Commission (17 CFR 240.15c3–1(a)).

(2)(i) The requirements of paragraph(a)(1) of this section shall not be appli-cable if the registrant is a member of adesignated self-regulatory organizationand conforms to minimum financialstandards and related reporting re-quirements set by such designated self-regulatory organization in its bylaws,rules, regulations or resolutions ap-proved by the Commission pursuant tosection 4f(b) of the Act and § 1.52.

(ii) The minimum requirements ofparagraph (a)(1)(ii) of this section shallnot be applicable to an introducingbroker which elects to meet the alter-native adjusted net capital require-ment for introducing brokers by oper-ating pursuant to a guarantee agree-ment which meets the requirements setforth in § 1.10(j). Such an introducingbroker shall be deemed to meet the ad-justed net capital requirement underthis section so long as such agreementis binding and in full force and effect,and, if the introducing broker is also asecurities broker or dealer, it main-tains the amount of net capital re-quired by Rule 15c3–1(a) of the Securi-ties and Exchange Commission (17 CFR240.15c3–1(a)).

(3) No person applying for registra-tion as a futures commission merchantor as an introducing broker shall be soregistered unless such person affirma-tively demonstrates to the satisfactionof the National Futures Associationthat it complies with the financial re-quirements of this section. Each reg-istrant must be in compliance withthis section at all times and must beable to demonstrate such complianceto the satisfaction of the Commissionor the designated self-regulatory orga-nization.

(4) A futures commission merchantwho is not in compliance with this sec-tion, or is unable to demonstrate suchcompliance as required by paragraph(a)(3) of this section, must transfer allcustomer accounts and immediatelycease doing business as a futures com-mission merchant until such time asthe firm is able to demonstrate suchcompliance: Provided, however, The reg-istrant may trade for liquidation pur-poses only unless otherwise directed bythe Commission and/or the designatedself-regulatory organization: And, Pro-vided further, That if such registrant


40

17 CFR Ch. I (4–1–01 Edition)§ 1.17

immediately demonstrates to the satis-faction of the Commission or the des-ignated self-regulatory organizationthe ability to achieve compliance, theCommission or the designated self-reg-ulatory organization may in its discre-tion allow such registrant up to a max-imum of 10 business days in which toachieve compliance without having totransfer accounts and cease doing busi-ness as required above. Nothing in thisparagraph (a)(4) shall be construed aspreventing the Commission or the des-ignated self-regulatory organizationfrom taking action against a registrantfor non-compliance with any of theprovisions of this section.

(5) An introducing broker who is notin compliance with this section, or isunable to demonstrate such compli-ance as required by paragraph (a)(3) ofthis section, must immediately ceasedoing business as an introducingbroker until such time as the reg-istrant is able to demonstrate suchcompliance: Provided, however, That ifsuch registrant immediately dem-onstrates to the satisfaction of theCommission or the designated self-reg-ulatory organization the ability toachieve compliance, the Commission orthe designated self-regulatory organi-zation may in its discretion allow suchregistrant up to a maximum of 10 busi-ness days in which to achieve compli-ance without having to cease doingbusiness as required above. If the intro-ducing broker is required to ceasedoing business in accordance with thisparagraph (a)(5), the introducingbroker must immediately notify eachof its customers and the futures com-mission merchants carrying the ac-count of each customer that it hasceased doing business. Nothing in thisparagraph (a)(5) shall be construed aspreventing the Commission or the des-ignated self-regulatory organizationfrom taking action against a registrantfor non-compliance with any of theprovisions of this section.

(b) For the purposes of this section:(1) Where the applicant or registrant

has an asset or liability which is de-fined in Securities Exchange Act Rule15c3–1 (§ 240.15c3–1 of this title) the in-clusion or exclusion of all or part ofsuch asset or liability for the computa-tion of adjusted net capital shall be in

accordance with § 240.15c3–1 of thistitle, unless specifically stated other-wise in this section.

(2) Customer means customer (as de-fined in § 1.3(k)), option customer (asdefined in § 1.3(jj) of this part and in§ 32.1(c) of this chapter) and includes aforeign futures and foreign options cus-tomer (as defined in § 30.1(c) of thischapter).

(3) Proprietary account means a com-modity futures or options account car-ried on the books of the applicant orregistrant for the applicant or reg-istrant itself, or for general partners inthe applicant or registrant.

(4) Noncustomer account means a com-modity futures or option account car-ried on the books of the applicant orregistrant which is not included in thedefinition of customer (as defined inparagraph (b)(2)) or proprietary ac-count (as defined in paragraph (b)(3) ofthis section).

(5) Clearing organization means clear-ing organization (as defined in § 1.3(d))and includes a clearing organization ofany board of trade.

(6) Business day means any day otherthan a Sunday, Saturday, or holiday.

(c) Definitions: For the purposes ofthis section:

(1) Net capital means the amount bywhich current assets exceed liabilities.In determining ‘‘net capital’’:

(i) Unrealized profits shall be addedand unrealized losses shall be deductedin the accounts of the applicant or reg-istrant, including unrealized profitsand losses on fixed price commitmentsand forward contracts;

(ii) All long and all short positions incommodity options which are tradedon a contract market and listed secu-rity options shall be marked to theirmarket value and all long and all shortsecurities and commodities positionsshall be marked to their market value;

(iii) The value attributed to any com-modity option which is not traded on acontract market shall be the differencebetween the option’s strike price andthe market value for the physical orfutures contract which is the subject ofthe option. In the case of a call com-modity option which is not traded on acontract market, if the market valuefor the physical or futures contractwhich is the subject of the option is


41


less than the strike price of the option,it shall be given no value. In the caseof a put commodity option which is nottraded on a contract market, if themarket value for the physical or fu-tures contract which is the subject ofthe option is more than the strikeprice of the option, it shall be given novalue; and

(iv) The value attributed to any un-listed security option shall be the dif-ference between the option’s exercisevalue or striking value and the marketvalue of the underlying security. In thecase of an unlisted call, if the marketvalue of the underlying security is lessthan the exercise value or strikingvalue of such call, it shall be given novalue; and, in the case of an unlistedput, if the market value of the under-lying security is more than the exer-cise value or striking value of the un-listed put, it shall be given no value.

(2) The term current assets meanscash and other assets or resources com-monly identified as those which arereasonably expected to be realized incash or sold during the next 12 months.‘‘Current assets’’ shall:

(i) Exclude any unsecured commodityfutures or option account containing aledger balance and open trades, thecombination of which liquidates to adeficit or containing a debit ledger bal-ance only: Provided, however, Deficitsor debit ledger balances in unsecuredcustomers’, non-customers’, and pro-prietary accounts, which are the sub-ject of calls for margin or other re-quired deposits may be included in cur-rent assets until the close of businesson the business day following the dateon which such deficit or debit ledgerbalance originated providing that theaccount had timely satisfied, throughthe deposit of new funds, the previousday’s debit or deficits, if any, in its en-tirety.

(ii) Exclude all unsecured receiv-ables, advances and loans except for:

(A) Receivables resulting from themarketing of inventories commonly as-sociated with the business activities ofthe applicant or registrant and ad-vances on fixed price purchases com-mitments: Provided, Such receivablesor advances are outstanding no longerthan 3 calendar months from the datethat they are accrued;

(B) Interest receivable, floor broker-age receivable, commissions receivablefrom other brokers or dealers (otherthan syndicate profits), mutual fundconcessions receivable and manage-ment fees receivable from registeredinvestment companies and commoditypools: Provided, Such receivables areoutstanding no longer than thirty (30)days from the date they are due; anddividends receivable outstanding nolonger than thirty (30) days from thepayable date;

(C) Receivables from clearing organi-zations and securities clearing organi-zations;

(D) Receivables from registered fu-tures commission merchants or bro-kers, resulting from commodity fu-tures or option transactions, exceptthose specifically excluded under para-graph (c)(2)(i) of this section;

(E) Insurance claims which arisefrom a reportable segment of the appli-cant’s or registrant’s overall businessactivities, as defined in generally ac-cepted accounting principles, otherthan in the commodity futures, com-modity option, security and securityoption segments of the applicant’s orregistrant’s business activities whichare not outstanding more than 3 cal-endar months after the date they arerecorded as a receivable;

(F) All other insurance claims notsubject to paragraph (c)(2)(ii)(E) of thissection, which are not older than seven(7) business days from the date the lossgiving rise to the claim is discovered;insurance claims which are not olderthan twenty (20) business days from thedate the loss giving rise to the claim isdiscovered and which are covered by anoption of outside counsel that theclaim is valid and is covered by insur-ance policies presently in effect; insur-ance claims which are older than twen-ty (20) business days from the date theloss giving rise to the claim is discov-ered and which are covered by an opin-ion of outside counsel that the claim isvalid and is covered by insurance poli-cies presently in effect and which havebeen acknowledged in writing by theinsurance carrier as due and payable:Provided, Such claims are not out-standing longer than twenty (20) busi-ness days from the date they are so ac-knowledged by the carrier;


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17 CFR Ch. I (4–1–01 Edition)§ 1.17

(iii) Exclude all prepaid expenses anddeferred charges;

(iv) Exclude all inventories exceptfor:

(A) Readily marketable spot com-modities; or spot commodities which‘‘adequately collateralize’’ indebted-ness under paragraph (c)(7) of this sec-tion;

(B) Securities which are considered‘‘readily marketable’’ (as defined in§ 240.15c3–1(c)(11) of this title) or which‘‘adequately collateralize’’ indebted-ness under paragraph (c)(7) of this sec-tion;

(C) Work in process and finishedgoods which result from the processingof commodities at market value;

(D) Raw materials at market valuewhich will be combined with spot com-modities to produce a finished proc-essed commodity; and

(E) Inventories held for resale com-monly associated with the business ac-tivities of the applicant or registrant;

(v) Include fixed assets and assetswhich otherwise would be considerednoncurrent to the extent of any long-term debt adequately collateralized byassets acquired for use in the ordinarycourse of the trade or business of anapplicant or registrant and any otherlong-term debt adequatelycollateralized by assets of the appli-cant or registrant if the sole recourseof the creditor for nonpayment of suchliability is to such asset: Provided,Such liabilities are not excluded fromliabilities in the computation of netcapital under paragraph (c)(4)(vi) ofthis section;

(vi) Exclude all assets doubtful ofcollection or realization less any re-serves established therefor;

(vii) Include, in the case of future in-come tax benefits arising as a result ofunrealized losses, the amount of suchbenefits not exceeding the amount ofincome tax liabilities accrued on thebooks and records of the applicant orregistrant, but only to the extent suchbenefits could have been applied to re-duce accrued tax liabilities on the dateof the capital computation, had the re-lated unrealized losses been realized onthat date;

(viii) Include guaranteee depositswith clearing organizations and stock

in clearing organizations to the extentof its margin value;

(ix) In the case of an introducingbroker or an applicant for registrationas an introducing broker, include 50percent of the value of a guarantee orsecurity deposit with a futures com-mission merchant which carries or in-tends to carry accounts for the cus-tomers of the introducing broker; and

(x) Exclude exchange memberships.(3) A loan or advance or any other

form of receivable shall not be consid-ered ‘‘secured’’ for the purposes ofparagraph (c)(2) of this section unlessthe following conditions exist:

(i) The receivable is secured by read-ily marketable collateral which is oth-erwise unencumbered and which can bereadily converted into cash: Provided,however, That the receivable will beconsidered secured only to the extentof the market value of such collateralafter application of the percentage de-ductions specified in paragraph (c)(5) ofthis section; and

(ii)(A) The readily marketable collat-eral is in the possession or control ofthe applicant or registrant; or

(B) The applicant or registrant has alegally enforceable, written securityagreement, signed by the debtor, andhas a perfected security interest in thereadily marketable collateral withinthe meaning of the laws of the State inwhich the readily marketable collat-eral is located.

(4) The term liabilities means thetotal money liabilities of an applicantor registrant arising in connectionwith any transaction whatsoever, in-cluding economic obligations of an ap-plicant or registrant that are recog-nized and measured in conformity withgenerally accepted accounting prin-ciples. ‘‘Liabilities’’ also include cer-tain deferred credits that are not obli-gations but that are recognized andmeasured in conformity with generallyaccepted accounting principles. For thepurposes of computing ‘‘net capital’’,the term ‘‘liabilities’’:

(i) Excludes liabilities of an applicantor registrant which are subordi- natedto the claims of all general creditors ofthe applicant or registrant pursuant toa satisfactory subordination agree-ment, as defined in paragraph (h) ofthis section;


43


(ii) Excludes, in the case of a futurescommission merchant, the amount ofmoney, securities and property due tocommodity futures or option cus-tomers which is held in segregated ac-counts in compliance with the require-ments of the Act and these regulations:Provided, however, That such exclusionmay be taken only if such money, secu-rities and property held in segregatedaccounts have been excluded from cur-rent assets in computing net capital;

(iii) Includes, in the case of an appli-cant or registrant who is a sole propri-etor, the excess of liabilities whichhave not been incurred in the course ofbusiness as a futures commission mer-chant or as an introducing broker overassets not used in the business;

(iv) Excludes the lesser of any de-ferred income tax liability related tothe items in paragraphs (c)(4)(i) (A),(B), and (C) below, or the sum of para-graphs (c)(4)(i) (A), (B), and (C) below:

(A) The aggregate amount resultingfrom applying to the amount of the de-ductions computed in accordance withparagraph (c)(5) of this section the ap-propriate Federal and State tax rate(s)applicable to any unrealized gain onthe asset on which the deduction wascomputed;

(B) Any deferred tax liability relatedto income accrued which is directly re-lated to an asset otherwise deductedpursuant to this section;

(C) Any deferred tax liability relatedto unrealized appreciation in value ofany asset(s) which has been otherwiseexcluded from current assets in accord-ance with the provisions of this sec-tion;

(v) Excludes any current tax liabilityrelated to income accrued which is di-rectly related to an asset otherwise de-ducted pursuant to this section; and

(vi) Excludes liabilities which wouldbe classified as long term in accord-ance with generally accepted account-ing principles to the extent of the netbook value of plant, property andequipment which is used in the ordi-nary course of any trade or business ofthe applicant or registrant which is areportable segment of the applicant’sor registrant’s overall business activi-ties, as defined in generally acceptedaccounting principles, other than inthe commodity futures, commodity op-

tion, security and security option seg-ments of the applicant’s or registrant’sbusiness activities: Provided, That suchplant, property and equipment is notincluded in current assets pursuant toparagraph (c)(2)(v) of this section.

(5) The term adjusted net capitalmeans net capital less:

(i) The amount by which any ad-vances paid by the applicant or reg-istrant on cash commodity contractsand used in computing net capital ex-ceeds 95 percent of the market value ofthe commodities covered by such con-tracts;

(ii) In the case of all inventory, fixedprice commitments and forward con-tracts, except for inventory and for-ward contracts in those foreign cur-rencies which are purchased or sold forfuture delivery on or subject to therules of a contract market and coveredby an open futures contract for whichthere will be no charge, the applicablepercentage of the net position specifiedbelow:

(A) Inventory which is currently reg-istered as deliverable on a contractmarket and covered by an open futurescontract or by a commodity option ona physical.—No charge.

(B) Inventory which is covered by anopen futures contract or commodityoption.—5 percent of the market value.

(C) Inventory which is not covered.—20 percent of the market value.

(D) Fixed price commitments (openpurchases and sales) and forward con-tracts which are covered by an open fu-tures contract or commodity option.—10 percent of the market value.

(E) Fixed price commitments (openpurchases and sales) and forward con-tracts which are not covered by anopen futures contract or commodityoption.—20 percent of the marketvalue.

(iii)-(iv) [Reserved](v) In the case of securities and obli-

gations used by the applicant or reg-istrant in computing net capital, andin the case of a futures commissionmerchant with securities in segrega-tion pursuant to section 4d(2) of theAct and the regulations in this chapterwhich were not deposited by cus-tomers, the percentages specified inRule 240.15c3–1(c)(2)(vi) of the Securi-ties and Exchange Commission (17 CFR


44

17 CFR Ch. I (4–1–01 Edition)§ 1.17

240.15c3–1(c)(2)(vi)) (‘‘securities hair-cuts’’) and 100 percent of the value of‘‘nonmarketable securities’’ as speci-fied in Rule 240.15c3–1(c)(2)(vii) of theSecurities and Exchange Commission(17 CFR 240.15c3–1(c)(2)(vii));

(vi) In the case of securities optionsand/or other options for which a hair-cut has been specified for the option orfor the underlying instrument in§ 240.15c3–1 appendix A of this title, thetreatment specified in, or under,§ 240.15c3–1 appendix A, after effectingcertain adjustments to net capital forlisted and unlisted options as set forthin such appendix;

(vii) In the case of an applicant orregistrant who has open contractualcommitments, as hereinafter defined,the deductions specified in § 240.15c3–1(c)(2)(viii) of this title;

(viii) In the case of a futures commis-sion merchant, for undermargined cus-tomer commodity futures accounts andcommodity option customer accountsthe amount of funds required in eachsuch account to meet maintenancemargin requirements of the applicableboard of trade or if there are no suchmaintenance margin requirements,clearing organization margin require-ments applicable to such positions,after application of calls for margin orother required deposits which are out-standing three business days or less. Ifthere are no such maintenance marginrequirements or clearing organizationmargin requirements, then the amountof funds required to provide marginequal to the amount necessary afterapplication of calls for margin or otherrequired deposits outstanding threebusiness days or less to restore originalmargin when the original margin hasbeen depleted by 50 percent or more:Provided, To the extent a deficit is ex-cluded from current assets in accord-ance with paragraph (c)(2)(i) of thissection such amount shall not also bededucted under this paragraph(c)(5)(viii). In the event that an ownerof a customer account has deposited anasset other than cash to margin, guar-antee or secure his account, the valueattributable to such asset for purposesof this subparagraph shall be the lesserof (A) the value attributable to theasset pursuant to the margin rules ofthe applicable board of trade, or (B) the

market value of the asset after applica-tion of the percentage deductions spec-ified in this paragraph (c)(5);

(ix) In the case of a futures commis-sion merchant, for undermargined com-modity futures and commodity optionnoncustomer and omnibus accounts theamount of funds required in each suchaccount to meet maintenance marginrequirements of the applicable board oftrade or if there are no such mainte-nance margin requirements, clearingorganization margin requirements ap-plicable to such positions, after appli-cation of calls for margin or other re-quired deposits which are outstandingtwo business days or less. If there areno such maintenance margin require-ments or clearing organization marginrequirements, then the amount offunds required to provide margin equalto the amount necessary after applica-tion of calls for margin or other re-quired deposits outstanding two busi-ness days or less to restore originalmargin when the original margin hasbeen depleted by 50 percent or more:Provided, To the extent a deficit is ex-cluded from current assets in accord-ance with paragraph (c)(2)(i) of thissection such amount shall not also bededucted under this paragraph(c)(5)(ix). In the event that an owner ofa noncustomer or omnibus account hasdeposited an asset other than cash tomargin, guarantee or secure his ac-count the value attributable to suchasset for purposes of this subparagraphshall be the lesser of (A) the value at-tributable to such asset pursuant tothe margin rules of the applicableboard of trade, or (B) the market valueof such asset after application of thepercentage deductions specified in thisparagraph (c)(5);

(x) In the case of open futures con-tracts and granted (sold) commodityoptions held in proprietary accountscarried by the applicant or registrantwhich are not covered by a positionheld by the applicant or registrant orwhich are not the result of a ‘‘changertrade’’ made in accordance with therules of a contract market:

(A) For an applicant or registrantwhich is a clearing member of a clear-ing organization for the positionscleared by such member, the applicable


45


margin requirement of the applicableclearing organization;

(B) For an applicant or registrantwhich is a member of a self-regulatoryorganization 150 percent of the applica-ble maintenance margin requirementof the applicable board of trade, orclearing organization, whichever isgreater;

(C) For all other applicants or reg-istrants, 200 percent of the applicablemaintenance margin requirements ofthe applicable board of trade or clear-ing organization, whichever is greater;or

(D) For open contracts or granted(sold) commodity options for whichthere are no applicable maintenancemargin requirements, 200 percent ofthe applicable initial margin require-ment: Provided, The equity in any suchproprietary account shall reduce thededuction required by this paragraph(c)(5)(x) if such equity is not otherwiseincludable in adjusted net capital;

(xi) In the case of an applicant or reg-istrant which is a purchaser of a com-modity option not traded on a contractmarket which has value and such valueis used to increase adjusted net capital,ten percent of the market value of thephysical or futures contract which isthe subject of such option but in noevent more than the value attributedto such option;

(xii) In the case of an applicant orregistrant which is a purchaser of acommodity option which is traded on acontract market the same safety factoras if the applicant or registrant werethe grantor of such option in accord-ance with paragraph (c)(5)(x) of thissection, but in no event shall the safe-ty factor be greater than the marketvalue attributed to such option;

(xiii) Five percent of all unsecuredreceivables includable under paragraph(c)(2)(ii)(D) of this section used by theapplicant or registrant in computing‘‘net capital’’ and which are not duefrom:

(A) A registered futures commissionmerchant;

(B) A broker or dealer that is reg-istered as such with the Securities andExchange Commission; or

(C) A foreign broker that has beengranted comparability relief pursuantto §30.10 of this chapter, Provided, how-

ever, that the amount of the unsecuredreceivable not subject to the five per-cent capital charge is no greater than150 percent of the current amount re-quired to maintain futures and optionpositions in accounts with the foreignbroker, or 100 percent of such greateramount required to maintain futuresand option positions in the accounts atany time during the previous six-month period, and Provided, that, in thecase of customer funds, such account istreated in accordance with the specialrequirements of the applicable Com-mission order issued under §30.10 of thischapter.

(xiv) For securities brokers and deal-ers, all other deductions specified in§ 240.15c3–1 of this title.

(6) [Reserved](7) Liabilities are ‘‘adequately

collateralized’’ when, pursuant to a le-gally enforceable written instrument,such liabilities are secured by identi-fied assets that are otherwiseunencumbered and the market value ofwhich exceeds the amount of such li-abilities.

(8) The term contractual commitmentsshall include underwriting, whenissued, when distributed, and delayeddelivery contracts; and the writing orendorsement of security puts and callsand combinations thereof; but shall notinclude uncleared regular way pur-chases and sales of securities. A seriesof contracts of purchase or sale of thesame security, conditioned, if at all,only upon issuance, may be treated asan individual commitment.

(d) Each applicant or registrant shallhave equity capital (inclusive of satis-factory subordination agreementswhich qualify under this paragraph (d)as equity capital) of not less than 30percent of the debt-equity total, pro-vided, an applicant or registrant maybe exempted from the provisions of thisparagraph (d) for a period not to exceed90 days or for such longer period whichthe Commission may, upon applicationof the applicant or registrant, grant inthe public interest or for the protec-tion of investors. For the purposes ofthis paragraph (d):

(1) Equity capital means a satisfac-tory subordination agreement enteredinto by a partner or stockholder whichhas an initial term of at least 3 years


46

17 CFR Ch. I (4–1–01 Edition)§ 1.17

and has a remaining term of not lessthan 12 months if:

(i) It does not have any of the provi-sions for accelerated maturity providedfor by paragraphs (h)(2) (ix)(A), (x)(A),or (x)(B) of this section, or the provi-sions allowing for special prepaymentprovided for by paragraph (h)(2)(vii)(B)of this section, and is maintained ascapital subject to the provisions re-stricting the withdrawal thereof re-quired by paragraph (e) of this section;or

(ii) The partnership agreement pro-vides that capital contributed pursuantto a satisfactory subordination agree-ment as defined in paragraph (h) of thissection shall in all respects be partner-ship capital subject to the provisionsrestricting the withdrawal thereof re-quired by paragraph (e) of this section,and

(A) In the case of a corporation, thesum of its par or stated value of capitalstock, paid in capital in excess of par,retained earnings, unrealized profit andloss, and other capital accounts.

(B) In the case of a partnership, thesum of its capital accounts of partners(inclusive of such partners’ commod-ities, options and securities accountssubject to the provisions of paragraph(e) of this section), and unrealized prof-it and loss.

(C) In the case of a sole proprietor-ship, the sum of its capital accounts ofthe sole proprietorship and unrealizedprofit and loss.

(2) Debt-equity total means equitycapital as defined in paragraph (d)(1) ofthis section plus the outstanding prin-cipal amount of satisfactory subordina-tion agreements.

(e) No equity capital of the applicantor registrant or a subsidiary’s or affili-ate’s equity capital consolidated pursu-ant to paragraph (f) of this section,whether in the form of capital con-tributions by partners (includingamounts in the commodities, optionsand securities trading accounts of part-ners which are treated as equity cap-ital but excluding amounts in suchtrading accounts which are not equitycapital and excluding balances in lim-ited partners’ capital accounts in ex-cess of their stated capital contribu-tions), par or stated value of capitalstock, paid-in capital in excess of par

or stated value, retained earnings orother capital accounts, may be with-drawn by action of a stockholder orpartner or by redemption or repurchaseof shares of stock by any of the con-solidated entities or through the pay-ment of dividends or any similar dis-tribution, nor may any unsecured ad-vance or loan be made to a stock-holder, partner, sole proprietor, or em-ployee if, after giving effect theretoand to any other such withdrawals, ad-vances, or loans and any payments ofpayment obligations (as defined inparagraph (h) of this section) undersatisfactory subordination agreementsand any payments of liabilities ex-cluded pursuant to paragraph (c)(4)(vi)of this section which are scheduled tooccur within six months following suchwithdrawal, advance or loan:

(1) Either adjusted net capital of anyof the consolidated entities would beless than the greatest of:

(i) 120 percent of the appropriate min-imum dollar amount required by para-graphs (a)(1)(i)(A) or (a)(1)(ii)(A) of thissection;

(ii) For a futures commission mer-chant or applicant therefor, 6 percentof the following amount: The customerfunds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Pro-vided, however, That the deduction foreach customer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;

(iii) 120 percent of the amount of ad-justed net capital required by a reg-istered futures association of which itis a member; or

(iv) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1(e) of the Securitiesand Exchange Commission (17 CFR240.15c3–1(e)); or


47


(2) In the case of any applicant orregistrant included within such con-solidation, if equity capital of the ap-plicant or registrant (inclusive of satis-factory subordination agreementswhich qualify as equity under para-graph (d) of this section) would be lessthan 30 percent of the required debt-eq-uity total as defined in paragraph (d) ofthis section.Provided, That this paragraph (e) shallnot preclude an applicant or registrantfrom making required tax payments orpreclude the payment to partners ofreasonable compensation. The Commis-sion may, upon application of the ap-plicant or registrant, grant relief fromthis paragraph (e) if the Commissiondeems it to be in the public interest orfor the protection of nonproprietaryaccounts.

(f)(1) Every applicant or registrant,in computing its net capital pursuantto this section must, subject to theprovisions of paragraphs (f)(2) and (f)(4)of this section, consolidate in a singlecomputation, assets and liabilities ofany subsidiary or affiliate for which itguarantees, endorses, or assumes di-rectly or indirectly the obligations orliabilities. The assets and liabilities ofa subsidiary or affiliate whose liabil-ities and obligations have not beenguaranteed, endorsed, or assumed di-rectly or indirectly by the applicant orregistrant may also be so consolidatedif an opinion of counsel is obtained asprovided for in paragraph (f)(2) of thissection.

(2)(i) If the consolidation, providedfor in paragraph (f)(1) of this section, ofany such subsidiary or affiliate resultsin the increase of the applicant’s orregistrant’s adjusted net capital or de-creases the minimum adjusted net cap-ital requirement, and an opinion ofcounsel called for in paragraph (f)(2)(ii)of this section has not been obtained,such benefits shall not be recognized inthe applicant’s or registrant’s com-putation required by this section.

(ii) Except as provided for in para-graph (f)(2)(i) of this section, consolida-tion shall be permitted with respect toany subsidiaries or affiliates which aremajority owned and controlled by theapplicant or registrant, and for whichthe applicant can demonstrate to thesatisfaction of the National Futures

Association, or for which the reg-istrant can demonstrate to the satis-faction of the Commission and the des-ignated self-regulatory organization, ifany, by an opinion of counsel, that thenet asset values or the portion thereofrelated to the parent’s ownership inter-est in the subsidiary or affiliate, maybe caused by the applicant or reg-istrant or an appointed trustee to bedistributed to the applicant or reg-istrant within 30 calendar days. Suchopinion must also set forth the actionsnecessary to cause such a distributionto be made, identify the parties havingthe authority to take such actions,identify and describe the rights ofother parties or classes of parties, in-cluding but not limited to customers,general creditors, subordinated lenders,minority shareholders, employees, liti-gants, and governmental or regulatoryauthorities, who may delay or preventsuch a distribution and such other as-surances as the National Futures Asso-ciation, the Commission or the des-ignated self-regulatory organization byrule or interpretation may require.Such opinion must be current and peri-odically renewed in connection withthe applicant’s or registrant’s annualaudit pursuant to § 1.10 or upon anymaterial change in circumstances.

(3) In preparing a consolidated com-putation of adjusted net capital pursu-ant to this section, the following min-imum and non–exclusive requirementsshall be observed;

(i) Consolidated adjusted net capitalshall be reduced by the estimatedamount of any tax reasonably antici-pated to be incurred upon distributionof the assets of the subsidiary or affil-iate.

(ii) Liabilities of a consolidated sub-sidiary or affiliate which are subordi-nated to the claims of present and fu-ture creditors pursuant to a satisfac-tory subordination agreement shall bededucted from consolidated adjustednet capital unless such subordinationextends also to the claims of present orfuture creditors of the parent applicantor registrant and all consolidated sub-sidiaries.

(iii) Subordinated liabilities of a con-solidated subsidiary or affiliate whichare consolidated in accordance withparagraph (f)(3)(ii) of this section may


48

17 CFR Ch. I (4–1–01 Edition)§ 1.17

not be prepaid, repaid, or accelerated ifany of the entities included in suchconsolidation would otherwise be un-able to comply with the provisions ofparagraph (h) of this section.

(iv) Each applicant or registrant in-cluded within the consolidation shallat all times be in compliance with theadjusted net capital requirement towhich it is subject.

(4) No applicant or registrant shallguarantee, endorse, or assume directlyor indirectly any obligation or liabilityof a subsidiary or affiliate unless theobligation or liability is reflected inthe computation of adjusted net cap-ital pursuant to this section except asprovided in paragraph (f)(2)(i) of thissection.

(g) [Reserved](h) The term satisfactory subordina-

tion agreement (‘‘subordination agree-ment’’) means an agreement whichcontains the minimum and nonexclu-sive requirements set forth below.

(1) Certain definitions for purposes ofthis section:

(i) A subordination agreement maybe either a subordinated loan agree-ment or a secured demand note agree-ment.

(ii) The term subordinated loan agree-ment means the agreement or agree-ments evidencing or governing a subor-dinated borrowing of cash.

(iii) The term ‘‘collateral value’’ ofany securities pledged to secure a se-cured demand note means the marketvalue of such securities after giving ef-fect to the percentage deductions spec-ified in Rule 240.15c3–1d(a)(2)(iii) of theSecurities and Exchange Commission(17 CFR 240.15c3–1d(a)(2)(iii)).

(iv) The term payment obligationmeans the obligation of an applicant orregistrant in respect to any subordina-tion agreement:

(A) To repay cash loaned to the appli-cant or registrant pursuant to a subor-dinated loan agreement; or

(B) To return a secured demand notecontributed to the applicant or reg-istrant or to reduce the unpaid prin-cipal amount thereof and to returncash or securities pledged as collateralto secure the secured demand note; and(C) ‘‘payment’’ shall mean the perform-ance by an applicant or registrant of apayment obligation.

(v)(A) The term secured demand noteagreement means an agreement (includ-ing the related secured demand note)evidencing or governing the contribu-tion of a secured demand note to an ap-plicant or registrant and the pledge ofsecurities and/or cash with the appli-cant or registrant as collateral to se-cure payment of such secured demandnote. The secured demand note agree-ment may provide that neither thelender, his heirs, executors, adminis-trators, or assigns shall be personallyliable on such note and that in theevent of default the applicant or reg-istrant shall look for payment of suchnote solely to the collateral thenpledged to secure the same.

(B) The secured demand note shall bea promissory note executed by thelender and shall be payable on the de-mand of the applicant or registrant towhich it is contributed: Provided, how-ever, That the making of such demandmay be conditioned upon the occur-rence of any of certain events whichare acceptable to the designated self-regultory organization and the Com-mission.

(C) If such note is not paid upon pre-sentment and demand as provided fortherein, the applicant or registrantshall have the right to liquidate all orany part of the securities then pledgedas collateral to secure payment of thesame and to apply the net proceeds ofsuch liquidation, together with anycash then included in the collateral, inpayment of such note. Subject to theprior rights of the applicant or reg-istrant as pledgee, the lender, as de-fined in paragraph (h)(i)(v)(F) of thissection may retain ownership of thecollateral and have the benefit of anyincreases and bear the risks fo any de-creases in the value of the collateraland may retain the right to vote secu-rities contained within the collateraland any right to income therefrom ordistributions thereon, except the appli-cant or registrant shall have the rightto receive and hold as pledgee all divi-dends payable in securities and all par-tial and complete liquidating divi-dends.

(D) Subject to the prior rights of theapplicant or registrant as pledgee, thelender may have the right to direct thesale of any securities included in the


49


collateral, to direct the purchase of se-curities with any cash included there-in, to withdraw excess collateral or tosubstitute cash or other securities ascollateral: Provided, That the net pro-ceeds of any such sale and the cash sosubstituted and the securities so pur-chased or substituted are held by theapplicant or registrant as pledgee, andare included within the collateral tosecure payment of the secured demandnote: And provided further, That nosuch transaction shall be permitted, if,after giving effect therto, the sum ofthe amount of any cash, plus the col-lateral value of the securities, thenpledged as collateral to secure the se-cured demand note would be less thanthe unpaid principal amount of the se-cured demand note.

(E) Upon payment by the lender, asdistinguished from a reduction by thelender which is provided for in para-graph (h)(2)(vi)(C) of this section or re-duction by the applicant or registrantas provided for in paragraph (h)(2)(vii)of this section, of all or any part of theunpaid principal amount of the secureddemand note, the applicant or reg-istrant shall issue to the lender a sub-ordinated loan agreement in the amoutof such payment (or in the case of anpplicant or registrant that is a partner-ship, credit a capital account of thelender), or issue preferred or commonstock of the applicant or registrant inthe amount of such payment, or anycombination of the foregoing, as pro-vided for in the secured demand noteagreement.

(F) The term lender means the personwho lends cash to an applicant or reg-istrant pursuant to a subordinated loanagreement and the person who contrib-utes a secured demand note to an appli-cant or registrant pursuant to a se-cured demand note agreement.

(2) Minimum requirements for subor-dination agreements:

(i) Subject to paragraph (h)(1) of thissection, a subordination agreementshall mean a written agreement be-tween the applicant or registrant andthe lender, which:

(A) Has a minimum term of 1 year,except for temporary subordinationagreements provided for in paragraph(h)(3)(v) of this section, and

(B) Is a valid and binding obligationenforceable in accordance with itsterms (subject as to enforcement to ap-plicable bankruptcy, insolvency, reor-ganization, moratorium, and othersimilar laws) against the applicant orregistrant and the lender and their re-spective heirs, executors, administra-tors, successors, and assigns.

(ii) Specific amount. All subordinationagreements shall be for a specific dol-lar amount which shall not be reducedfor the duration of the agreement ex-cept by installments as specificallyprovided for therein and except as oth-erwise provided in this paragraph (h)(2)of this section.

(iii) Effective subordination. The sub-ordination agreement shall effectivelysubordinate any right of the lender toreceive any payment with respectthereto, together with accrued interestor compensation, to the prior paymentor provision for payment in full of allclaims of all present and future credi-tors of the applicant or registrant aris-ing out of any matter occurring priorto the date on which the related pay-ment obligation matures, except forclaims which are the subject of subor-dination agreements which rank on thesame priority as or junior to the claimof the lender under such subordinationagreements.

(iv) Proceeds of subordinated loanagreements. The subordinated loanagreement shall provide that the cashproceeds thereof shall be used and dealtwith by the applicant or registrant aspart of its capital and shall be subjectto the risks of the business.

(v) Certain rights of the borrower. Thesubordination agreement shall providethat the applicant or registrant shallhave the right to:

(A) Deposit any cash proceeds of asubordinated loan agreement and anycash pledged as collateral to secure asecured demand note in an account oraccounts in its own name in any bankor trust company;

(B) Pledge, repledge, hypothecate andrehypothecate, any or all of the securi-ties pledged as collateral to secure asecured demand note, without notice,separately or in common with other se-curities or property for the purpose ofsecuring any indebtedness of the appli-cant or registrant; and


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17 CFR Ch. I (4–1–01 Edition)§ 1.17

(C) Lend to itself or others any or allof the securities and cash pledged ascollateral to secure a secured demandnote.

(vi) Collateral for secured demandnotes. Only cash and securities whichare fully paid for and which may bepublicly offered or sold without reg-istration under the Securities Act of1933, and the offer, sale, and transfer ofwhich are not otherwise restricted,may be pledged as collateral to securea secured demand note. The secured de-mand note agreement shall providethat if at any time the sum of theamount of any cash, plus the collateralvalue of any securities, then pledged ascollateral to secure the secured de-mand note is less than the unpaid prin-cipal amount of the secured demandnote, the applicant or registrant mustimmediately transmit written noticeto that effect to the lender. The se-cured demand note agreement shallalso provide that if the borrower is anapplicant, such notice must also betransmitted immediately to the Na-tional Futures Association, and if theborrower is a registrant, such noticemust also be transmitted immediatelyto the designated self-regulatory orga-nization, if any, and the Commission.The secured demand note agreementshall also require that following suchtransmittal:

(A) The lender, prior to noon of thebusiness day next succeeding the trans-mittal of such notice, may pledge ascollateral additional cash or securitiessufficient, after giving effect to suchpledge, to bring the sum of the amountof any cash plus the collateral value ofany securities, then pledged as collat-eral to secure the secured demand note,up to an amount not less than the un-paid principal amount of the secureddemand note; and

(B) Unless additional cash or securi-ties are pledged by the lender as pro-vided in paragraph (h)(2)(vi)(A) above,the applicant or registrant at noon onthe business day next succeeding thetransmittal of notice to the lendermust commence sale, for the accountof the lender, of such of the securitiesthen pledged as collateral to secure thesecured demand note and apply somuch of the net proceeds thereof, to-gether with such of the cash then

pledged as collateral to secure the se-cured demand note as may be nec-essary to eliminate the unpaid prin-cipal amount of the secured demandnote: Provided, however, That the un-paid principal amount of the secureddemand note need not be reduced belowthe sum of the amount of any remain-ing cash, plus the collateral value ofthe remaining securities, then pledgedas collateral to secure the secured de-mand note. The applicant or registrantmay not purchase for its own accountany securities subject to such a sale;and

(C) The secured demand note agree-ment may also provide that, in lieu ofthe procedures specified in the provi-sions required by paragraph(h)(2)(vi)(B) of this section, the lender,with the prior written consent of theapplicant and the National Futures As-sociation, or with the prior writtenconsent of the registrant and the des-ignated self-regulatory organization or,if the registrant is not a member of adesignated self-regulatory organiza-tion, the Commission, may reduce theunpaid principal amount of the secureddemand note: Provided, That after giv-ing effect to such reduction the ad-justed net capital of the applicant orregistrant would not be less than thegreatest of:

(1) 120 percent of the appropriateminimum dollar amount required byparagraphs (a)(1)(i)(A) or (a)(1)(ii)(A) ofthis section;

(2) For a futures commission mer-chant or applicant therefor, 7 percentof the following amount: The customerfunds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;



51


(4) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(b)(6)(iii) of the Se-curities and Exchange Commission (17CFR 240.15c3–1d(b)(6)(iii)): Provided, fur-ther, That no single secured demandnote shall be permitted to be reducedby more than 15 percent of its originalprincipal amount and after such reduc-tion no excess collateral may be with-drawn.

(vii) Permissive prepayments and spe-cial prepayments. (A) An applicant orregistrant at its option, but not at theoption of the lender, may, if the subor-dination agreement so provides, makea payment of all or any portion of thepayment obligation thereunder prior tothe scheduled maturity date of suchpayment obligation (hereinafter re-ferred to as a ‘‘prepayment’’), but in noevent may any prepayment be made be-fore the expiration of one year fromthe date such subordination agreementbecame effective: Provided, however,That the foregoing restriction shall notapply to temporary subordinationagreements which comply with the pro-visions of paragraph (h)(3)(v) of thissection nor shall it apply to ‘‘specialprepayments’’ made in accordance withthe provisions of paragraph(h)(2)(vii)(B) of this section. No prepay-ment shall be made if, after giving ef-fect thereto (and to all payments ofpayment obligations under any othersubordination agreements then out-standing, the maturity or acceleratedmaturities of which are scheduled tofall due within six months after thedate such prepayment is to occur pur-suant to this provision, or on or priorto the date on which the payment obli-gation in respect to such prepayment isscheduled to mature disregarding thisprovision, whichever date is earlier)without reference to any projectedprofit or loss of the applicant or reg-istrant, the adjusted net capital of theapplicant or registrant is less than thegreatest of:


(2) For a futures commission mer-chant or applicant therefor, 7 percentof the following amount: The customer

funds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;


(4) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(b)(7) of the Securi-ties and Exchange Commission (17 CFR240.15c3–1d(b)(7)).

(B) An applicant or registrant at itsoption, but not at the option of thelender, may, if the subordinationagreement so provides, make a pay-ment at any time of all or any portionof the payment obligation thereunderprior to the scheduled maturity date ofsuch payment obligation (hereinafterreferred to as a ‘‘special prepayment’’).No special prepayment shall be madeif, after giving effect thereto (and toall payments of payment obligationsunder any other subordination agree-ments then outstanding, the maturityor accelerated maturities of which arescheduled to fall due within six monthsafter the date such special prepaymentis to occur pursuant to this provision,or on or prior to the date on which thepayment obligation in respect to suchspecial prepayment is scheduled to ma-ture disregarding this provision, which-ever date is earlier) without referenceto any projected profit or loss of theapplicant or registrant, the adjustednet capital of the applicant or reg-istrant is less than the greatest of:


(2) For a futures commission mer-chant or applicant therefor, 10 percentof the following amount: The customer


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17 CFR Ch. I (4–1–01 Edition)§ 1.17

funds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;


(4) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(c)(5)(ii) of the Se-curities and Exchange Commission (17CFR 240.15c3–1d(c)(5)(ii)): Provided, how-ever, That no special prepayment shallbe made if pre-tax losses during thelatest three-month period were greaterthan 15 percent of current excess ad-justed net capital.

(C)(1) Notwithstanding the provisionsof paragraphs (h)(2)(vii)(A) and(h)(2)(vii)(B) of this section, in the caseof an applicant, no prepayment or spe-cial prepayment shall occur withoutthe prior written approval of the Na-tional Futures Association; in the caseof a registrant, no prepayment or spe-cial prepayment shall occur withoutthe prior written approval of the des-ignated self-regulatory organization, ifany, or of the Commission if the reg-istrant is not a member of a self-regu-latory organization.

(2) A registrant may make a prepay-ment or special prepayment withoutthe prior written approval of the des-ignated self-regulatory organization:Provided, That the registrant: Is a se-curities broker or dealer registeredwith the Securities and Exchange Com-mission; files a request to make a pre-payment or special prepayment withits applicable securities designated ex-amining authority, as defined in Rule15c3–1(c)(12) of the Securities and Ex-change Commission (17 CFR 240.15c3–1(c)(12)), in the form and manner pre-scribed by the designated examiningauthority; files a copy of the prepay-

ment request or special prepayment re-quest with the designated self-regu-latory organization at the time it filessuch request with the designated exam-ining authority in the form and man-ner prescribed by the designated self-regulatory organization; and files acopy of the designated examiningauthority’s approval of the prepaymentor special prepayment with the des-ignated self-regulatory organizationimmediately upon receipt of such ap-proval. The approval of the prepaymentor special prepayment by the des-ignated examining authority will bedeemed approval by the designatedself-regulatory organization, unless thedesignated self-regulatory organizationnotifies the registrant that the des-ignated examining authority’s ap-proval shall not constitute designatedself-regulatory organization approval.

(3) The designated self-regulatory or-ganization shall immediately providethe Commission with a copy of any no-tice of approval issued where the re-quested prepayment or special prepay-ment will result in the reduction of theregistrant’s net capital by 20 percent ormore or the registrant’s excess ad-justed net capital by 30 percent ormore.

(viii) Suspended repayment. (A) Thepayment obligation of the applicant orregistrant in respect of any subordina-tion agreement shall be suspended andshall not mature if, after giving effectto payment of such payment obligation(and to all payments of payment obli-gations of the applicant or registrantunder any other subordination agree-ment(s) then outstanding which arescheduled to mature on or before suchpayment obligation), the adjusted netcapital of the applicant or registrantwould be less than the greatest of:


(2) For a futures commission mer-chant or applicant therefor, 6 percentof the following amount: The customerfunds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subject


53


to the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;


(4) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(b)(8)(i) of the Secu-rities and Exchange Commission (17CFR 240.15c3–1d(b)(8)(i)): Provided, Thatthe subordination agreement may pro-vide that if the payment obligation ofthe applicant or registrant thereunderdoes not mature and is suspended as aresult of the requirement of this para-graph (h)(2)(viii) for a period of not lessthan six months, the applicant or reg-istrant shall then commence the rapidand orderly liquidation of its business,but the right of the lender to receivepayment, together with accrued inter-est or compensation, shall remain sub-ordinate as required by the provisionsof this section.

(B) [Reserved](ix) Accelerated maturity. Obligation

to repay to remain subordinate:(A) Subject to the provisions of para-

graph (h)(2)(viii) of this section, a sub-ordination agreement may provide thatthe lender may, upon prior written no-tice to the applicant and the NationalFutures Association, or upon priorwritten notice to the registrant andthe designated self-regulatory organi-zation or, if the registrant is not amember of a designated self-regulatoryorganization, the Commission, givennot earlier than six months after theeffective date of such subordinationagreement, accelerate the date onwhich the payment obligation of theborrower, together with accrued inter-est or compensation, is scheduled tomature to a date not earlier than sixmonths after giving of such notice, butthe right of the lender to receive pay-ment, together with accrued interestor compensation, shall remain subordi-nate as required by the provisions ofthis paragraph (h)(2) of this section.

(B) Notwithstanding the provisions ofparagraph (h)(2)(viii) of this section,the payment obligation of the appli-cant or registrant with respect to asubordination agreement, togetherwith accrued interest and compensa-tion, shall mature in the event of anyreceivership, insolvency, liquidationpursuant to the Securities InvestorProtection Act of 1970 or otherwise,bankruptcy, assignment for the benefitof creditors, reorganization whether ornot pursuant to the bankruptcy laws,or any other marshalling of the assetsand liabilities of the applicant or reg-istrant, but the right of the lender toreceive payment, together with ac-crued interest or compensation, shallremain subordinate as required by theprovisions of paragraph (h)(2) of thissection.

(x) Accelerated maturity of subordina-tion agreements on event of default andevent of acceleration. Obligation torepay to remain subordinate:

(A) A subordination agreement mayprovide that the lender may, uponprior written notice to the applicantand the National Futures Association,or upon prior written notice to the reg-istrant and the designated self-regu-latory organization or, if the registrantis not a member of a designated self-regulatory organization, the Commis-sion, of the occurrence of any event ofacceleration (as hereinafter defined)given no sooner than six months afterthe effective date of such subordinationagreement, accelerate the date onwhich the payment obligation of theapplicant or registrant, together withaccrued interest or compensation, isscheduled to mature, to the last busi-ness day of a calendar month which isnot less than six months after notice ofacceleration is received by the appli-cant and by the National Futures Asso-ciation, or by the registrant and thedesignated self-regulatory organizationor, if the registrant is not a member ofa designated self-regulatory organiza-tion, the Commission. Any subordina-tion agreement containing such eventsof acceleration may also provide that,if upon such accelerated maturity datethe payment obligation of the appli-cant or registrant is suspended as re-quired by paragraph (h)(2)(viii) of thissection and liquidation of the applicant


54

17 CFR Ch. I (4–1–01 Edition)§ 1.17

or registrant has not commenced on orprior to such accelerated maturitydate, notwithstanding paragraph(h)(2)(viii) of this section, the paymentobligation of the applicant or reg-istrant with respect to such subordina-tion agreement shall mature on theday immediately following such accel-erated maturity date and in any suchevent the payment obligations of theapplicant or registrant with respect toall other subordination agreementsthen outstanding shall also mature atthe same time but the rights of the re-spective lenders to receive payment,together with accrued interest or com-pensation, shall remain subordinate asrequired by the provisions of paragraph(h)(2) of this section. Events of accel-eration which may be included in asubordination agreement complyingwith this paragraph (h)(2)(x) of thissection shall be limited to:

(1) Failure to pay interest or any in-stallment of principal on a subordina-tion agreement as scheduled;

(2) Failure to pay when due othermoney obligations of a specified mate-rial amount;

(3) Discovery that any material, spec-ified representation or warranty of theapplicant or registrant which is in-cluded in the subordination agreementand on which the subordination agree-ment was based or continued was inac-curate in a material respect at thetime made;

(4) Any specified and clearly measur-able event which is included in the sub-ordination agreement and which thelender and the applicant or registrantagree, (a) is a significant indicationthat the financial position of the appli-cant or registrant has changed materi-ally and adversely from agreed uponspecified norms; or (b) could materiallyand adversely affect the ability of theapplicant or registrant to conduct itsbusiness as conducted on the date thesubordination agreement was made; or(c) is a significant change in the seniormanagement of the applicant or reg-istrant or in the general business con-ducted by the applicant or registrantfrom that which obtained on the datethe subordination agreement becameeffective;

(5) Any continued failure to performagreed covenants included in the subor-

dination agreement relating to theconduct of the business of the appli-cant or registrant or relating to themaintenance and reporting of its finan-cial position; and

(B) Notwithstanding the provisions ofparagraph (h)(2)(viii) of this section, asubordination agreement may providethat, if liquidation of the business ofthe applicant or registrant has not al-ready commenced, the payment obliga-tion of the applicant or registrant shallmature, together with accrued interestor compensation, upon the occurrenceof an event of default (as hereinafterdefined). Such agreement may also pro-vide that, if liquidation of the businessof the applicant or registrant has notalready commenced, the rapid and or-derly liquidation of the business of theapplicant or registrant shall then com-mence upon the happening of an eventof default. Any subordination agree-ment which so provides for maturity ofthe payment obligation upon the oc-currence of an event of default shallalso provide that the date on whichsuch event of default occurs shall, ifliquidation of the applicant or reg-istrant has not already commenced, bethe date on which the payment obliga-tion of the applicant or registrant withrespect to all other subordinationagreements then outstanding shall ma-ture but the rights of the respectivelenders to receive payment, togetherwith accrued interest or compensation,shall remain subordinate as requiredby the provisions of paragraph (h)(2) ofthis section. Events of default whichmay be included in a subordinationagreement shall be limited to:

(1) The making of an application bythe Securities Investor Protection Cor-poration for a decree adjudicating thatcustomers of the applicant or reg-istrant are in need of protection underthe Securities Investor Protection Actof 1970 and the failure of the applicantor registrant to obtain the dismissal ofsuch application within 30 days;

(2) Failure to meet the minimumcapital requirements of the designatedself-regulatory organization, or of theCommission, throughout a period of 15consecutive business days, com-mencing on the day the borrower firstdetermines and notifies the designatedself-regulatory organization, if any, of


55


which he is a member and the Commis-sion, in the case of a registrant, or theNational Futures Association, in thecase of an applicant, or commencing onthe day any self-regulatory organiza-tion, the Commission or the NationalFutures Association first determinesand notifies the applicant or registrantof such fact;

(3) The Commission shall revoke theregistration of the applicant or reg-istrant;

(4) The self-regulatory organizationshall suspend (and not reinstate within10 days) or revoke the applicant or reg-istrant’s status as a member thereof;

(5) Any receivership, insolvency, liq-uidation pursuant to the Securities In-vestor Protection Act of 1970 or other-wise, bankruptcy, assignment for thebenefit of creditors, reorganizationwhether or not pursuant to bankruptcylaws, or any other marshalling of theassets and liabilities of the applicantor registrant. A subordination agree-ment which contains any of the provi-sions permitted by this subparagraph(2)(x) shall not contain the provisionotherwise permitted by paragraph(h)(2)(ix)(A) of this section.

(3) Miscellaneous provisions—(i) Pro-hibited cancellation. The subordinationagreement shall not be subject to can-cellation by either party; no paymentshall be made with respect thereto andthe agreement shall not be terminated,rescinded or modified by mutual con-sent or otherwise if the effect thereofwould be inconsistent with the require-ments of paragraph (h) of this section.

(ii) Notice of maturity or acceleratedmaturity. Every applicant or registrantshall immediately notify the NationalFutures Association, and the reg-istrant shall immediately notify thedesignated self-regulatory organiza-tion, if any, and the Commission if,after giving effect to all payments ofpayment obligations under subordina-tion agreements then outstandingwhich are then due or mature withinthe following six months without ref-erence to any projected profit or loss ofthe applicant or registrant, its ad-justed net capital would be less than:

(A) 120 percent of the minimum dol-lar amount required by paragraphs(a)(1)(i)(A) or (a)(1)(ii)(A) of this sec-tion;

(B) For a futures commission mer-chant or applicant therefor, 6 percentof the following amount: The customerfunds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;

(C) 120 percent of the amount of ad-justed net capital required by a reg-istered futures association of which itis a member; or

(D) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(c)(2) of the Securi-ties and Exchange Commission (17 CFR240.15c3–1d(c)(2)).

(iii) Certain legends. If all the provi-sions of a satisfactory subordinationagreement do not appear in a single in-strument, then the debenture or otherevidence of indebtedness shall bear onits face an appropriate legend statingthat it is issued subject to the provi-sions of a satisfactory subordinationagreement which shall be adequatelyreferred to and incorporated by ref-erence.

(iv) Legal title to securities. All securi-ties pledged as collateral to secure asecured demand note must be in bearerform, or registered in the name of theapplicant or registrant or the name ofits nominee or custodian.

(v) Temporary subordinations. To en-able an applicant or registrant to par-ticipate as an underwriter of securitiesor undertake other extraordinary ac-tivities and remain in compliance withthe adjusted net capital requirementsof this section, an applicant or reg-istrant shall be permitted, on no morethan three occasions in any 12-monthperiod, to enter into a subordinationagreement on a temporary basis whichhas a stated term of no more than 45days from the date the subordinationagreement became effective: Provided,That this temporary relief shall not


56

17 CFR Ch. I (4–1–01 Edition)§ 1.17

apply to any applicant or registrant ifthe adjusted net capital of the appli-cant or registrant is less than thegreatest of:

(A) 120 percent of the appropriateminimum dollar amount required byparagraphs (a)(1)(i)(A) or (a)(1)(ii)(A) ofthis section;

(B) For a futures commission mer-chant or applicant therefor, 7 percentof the following amount: The customerfunds required to be segregated pursu-ant to the Act and the regulations inthis part and the foreign futures or for-eign options secured amount, less themarket value of commodity optionspurchased by customers on or subjectto the rules of a contract market or aforeign board of trade for which thefull premiums have been paid: Provided,however, That the deduction for eachcustomer shall be limited to theamount of customer funds in such cus-tomer’s account(s) and foreign futuresand foreign options secured amounts;

(C) 120 percent of the amount of ad-justed net capital required by a reg-istered futures association of which itis a member;

(D) For an applicant or registrantwhich is also a securities broker ordealer, the amount of net capital speci-fied in Rule 15c3–1d(c)(5)(i) of the Secu-rities and Exchange Commission (17CFR 240.15c3–1d(c)(5)(i)); or

(E) The amount of equity capital asdefined in paragraph (d) of this sectionis less than the limits specified in para-graph (d) of this section. Such tem-porary subordination agreement shallbe subject to all the other provisions ofthis section.

(vi) Filing. An applicant shall file asigned copy of any proposed subordina-tion agreement (including noncon-forming subordination agreements)with the National Futures Associationat least ten days prior to the proposedeffective date of the agreement or atsuch other time as the National Fu-tures Association for good cause shallaccept such filing. A registrant that isnot a member of any designated self-regulatory organization shall file twosigned copies of any proposed subordi-nation agreement (including noncon-forming subordination agreements)with the regional office of the Commis-sion nearest the principal place of busi-

ness of the registrant (except that aregistrant under the jurisdiction of theCommission’s Western Regional Officeshall file such copies with the Commis-sion’s Southwestern Regional Office) atleast ten days prior to the proposed ef-fective date of the agreement or atsuch other time as the Commission forgood cause shall accept such filing. Aregistrant that is a member of a des-ignated self-regulatory organizationshall file signed copies of any proposedsubordination agreement (includingnonconforming subordination agree-ments) with the designated self-regu-latory organization in such quantitiesand at such time as the designated self-regulatory organization may requireprior to the effective date. The appli-cant or registrant shall also file withsaid parties a statement setting forththe name and address of the lender, thebusiness relationship of the lender tothe applicant or registrant and wheth-er the applicant or registrant carriedfunds or securities for the lender at orabout the time the proposed agreementwas so filed. A proposed agreementfiled by an applicant with the NationalFutures Association shall be reviewedby the National Futures Association,and no such agreement shall be a satis-factory subordination agreement forthe purposes of this section unless anduntil the National Futures Associationhas found the agreement acceptableand such agreement has become effec-tive in the form found acceptable. Aproposed agreement filed by a reg-istrant shall be reviewed by the des-ignated self-regulatory organizationwith whom such an agreement is re-quired to be filed prior to its becomingeffective or, if the registrant is not amember of any designated self-regu-latory organization, by the regional of-fice of the Commission where theagreement is required to be filed priorto its becoming effective. No proposedagreement shall be a satisfactory sub-ordination agreement for the purposesof this section unless and until the des-ignated self-regulatory organization or,if a registrant is not a member of anydesignated self-regulatory organiza-tion, the Commission, has found theagreement acceptable and such agree-ment has become effective in the formfound acceptable: Provided, however,


57


That a proposed agreement shall be asatisfactory subordination agreementfor purpose of this section if the reg-istrant: is a securities broker or dealerregistered with the Securities and Ex-change Commission; files signed copiesof the proposed subordination agree-ment with the applicable securitiesdesignated examining authority, as de-fined in Rule 15c3–1(c)(12) of the Securi-ties and Exchange Commission (17 CFR240.15c3–1(c)(12)), in the form and man-ner prescribed by the designated exam-ining authority; files signed copies ofthe proposed subordination agreementwith the designated self-regulatory or-ganization at the time it files such cop-ies with the designated examining au-thority in the form and manner pre-scribed by the designated self-regu-latory organization; and files a copy ofthe designated examining authority’sapproval of the proposed subordinationagreement with the designated self-regulatory organization immediatelyupon receipt of such approval. The des-ignated examining authority’s deter-mination that the proposed subordina-tion agreement satisfies the require-ments for a satisfactory subordinationagreement will be deemed a like find-ing by the designated self-regulatoryorganization, unless the designatedself-regulatory organization notifiesthe registrant that the designated ex-amining authority’s determinationshall not constitute a like finding bythe designated self-regulatory organi-zation.

(vii) Subordination agreements in effectprior to adoption. Any subordinationagreement which has been entered intoprior to the effective date of this sec-tion and which has been deemed to besatisfactorily subordinated pursuant tothis section previously in effect or theadjusted net capital rules of a self-reg-ulatory organization shall continue tobe deemed a satisfactory subordinationagreement until the maturity of suchagreement. Provided, That no renewalof an agreement which provides forautomatic or optional renewal by theapplicant or registrant or lender shallbe deemed to be a satisfactory subordi-nation agreement unless such renewalagreement meets the requirements ofthis section, within 6 months of the ef-fective date of this section. Provided

further, That all subordination agree-ments must meet the requirements ofthis rule within 5 years of the effectivedate of this section.

(4) A designated self-regulatory orga-nization and the Commission mayallow debt with a maturity date of 1year or more to be treated as meetingthe provisions of this paragraph (h):Provided, (i) Such exemption shall onlybe given when the registrant’s adjustednet capital is less than the minimumrequired by this section or by the cap-ital rule of the designated self-regu-latory organization to which such reg-istrant is subject;

(ii) That such debt did not exist priorto its use under this paragraph (h)(4);

(iii) Such exemption shall be for a pe-riod of 30 days or such lesser period asthe designated self-regulatory organi-zation and the Commission may deter-mine;

(iv) Such exemption shall not be al-lowed more than once in any 12 monthperiod; and

(v) At all times during such exemp-tion the registrant shall make a goodfaith effort to comply with the provi-sions of this section or the capital ruleof the designated self-regulatory orga-nization to which such registrant issubject exclusive of any benefits de-rived from this paragraph (h)(4).

(i) [Reserved](j) For the purposes of this section

cover is defined as follows:(1) General definition. Cover shall

mean transactions or positions in acontract for future delivery on a boardof trade or a commodity option wheresuch transactions or positions nor-mally represent a substitute for trans-actions to be made or positions to betaken at a later time in a physicalmarketing channel, and where they areeconomically appropriate to the reduc-tion of risks in the conduct and man-agement of a commercial enterprise,and where they arise from:

(i) The potential change in the valueof assets which a person owns, pro-duces, manufactures, processes, or mer-chandises or anticipates owning, pro-ducing, manufacturing, processing, ormerchandising.

(ii) The potential change in the valueof liabilities which a person owes or an-ticipates incurring, or


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17 CFR Ch. I (4–1–01 Edition)§ 1.18

(iii) The potential change in thevalue of services which a person pro-vides, purchases or anticipates pro-viding or purchasing. Notwithstandingthe foregoing, no transactions or posi-tions shall be classified as cover for thepurposes of this section unless theirpurpose is to offset price risks inci-dental to commercial cash or spot op-erations and such positions are estab-lished and liquidated in accordancewith sound commercial practices andunless the provisions of paragraphs (j)(2) and (3) of this section have been sat-isfied.

(2) Enumerated cover transactions. Thedefinition of covered transactions andpositions in paragraph (j)(1) of this sec-tion includes, but is not limited to, thefollowing specific transactions and po-sitions:

(i) Ownership or fixed-price purchaseof any commodity which does not ex-ceed in quantity (A) the sales of thesame commodity for future delivery ona board of trade or (B) the purchase ofa put commodity option of the samecommodity for which the market valuefor the actual commodity or futurescontract which is the subject of the op-tion is less than the strike price of theoption or (C) the ownership of a com-modity option position established bythe sale (grant) of a call commodityoption of the same commodity forwhich the market value for the actualcommodity or futures contract whichis the subject of the option is morethan the strike price of the option: Pro-vided, That for purposes of paragraph(c)(5)(x) of this section the marketvalue for the actual commodity or fu-tures contract which is the subject ofsuch option need not be more than thestrike price of that option;

(ii) Fixed-price sale of any com-modity which does not exceed in quan-tity (A) the purchase of the same com-modity for future delivery on a boardof trade or (B) the purchase of a callcommodity option of the same com-modity for which the market value forthe actual commodity or futures con-tract which is the subject of such op-tion is more than the strike price ofthe option or (C) ownership of a com-modity option position established bythe sale (grant) of a put commodity op-tion of the same commodity for which

the market value for the actual com-modity or futures comtract which isthe subject of the option is less thanthe strike price of the option: Provided,That for purposes of paragraph (c)(5)(x)of this section the market value for theactual commodity or futures contractwhich is the subject of such optionneed not be less than the strike price ofthat option; and

(iii) Ownership or fixed-price con-tracts of a commodity described inparagraphs (j)(2)(i) and (j)(2)(ii) of thissection may also be covered other thanby the same quantity of the same cashcommodity, provided that the fluctua-tions in value of the position for futuredelivery or commodity option are sub-stantially related to the fluctuationsin value of the actual cash position.

(3) Nonenumerated cases. Upon specificrequest, the Commission may recognizetransactions and positions other thanthose enumerated in paragraph (j)(2) ofthis section as cover in amounts andunder the terms and conditions as itmay specify. Any applicant or reg-istrant who wishes to avail itself of theprovisions of this paragraph (j)(3) mustapply to the Commission in writing atits principal office in Washington, DCgiving full details of the transactionincluding detailed information whichwill demonstrate that the transactionis economically appropriate to the re-duction of risk exposure attendant tothe conduct and management of a com-mercial enterprise.


[43 FR 39972, Sept. 8, 1978]

EDITORIAL NOTE: For FEDERAL REGISTER ci-tations affecting § 1.17, see the List of Sec-tions Affected, which appears in the FindingAids section of the printed volume and onGPO Access.

§ 1.18 Records for and relating to fi-nancial reporting and monthly com-putation by futures commissionmerchants and introducing brokers.

(a) No person shall be registered as afutures commission merchant or as anintroducing broker under the Act un-less, commencing on the date his appli-cation for such registration is filed, heprepares and keeps current ledgers orother similar records which show or


59


summarize, with appropriate ref-erences to supporting documents, eachtransaction affecting his asset, liabil-ity, income, expense and capital ac-counts, and in which (except as other-wise permitted in writing by the Com-mission) all his asset, liability and cap-ital accounts are classified into eitherthe account classification subdivisionsspecified on Form 1–FR–FCM or Form1–FR–IB, respectively, or, if such per-son is registered with the Securitiesand Exchange Commission as a securi-ties broker or dealer and he files (in ac-cordance with § 1.10(h)) a copy of his Fi-nancial and Operational Combined Uni-form Single Report under the Securi-ties Exchange Act of 1934, Part II orPart IIA, in lieu of Form 1–FR–FCM orForm 1–FR–IB, the account classifica-tion subdivisions specified on such Re-port, or categories that are in accordwith generally accepted accountingprinciples. Each person so registeredshall prepare and keep current suchrecords.

(b) Each applicant or registrant mustmake and keep as a record in accord-ance with § 1.31 formal computations ofits adjusted net capital and of its min-imum financial requirements pursuantto § 1.17 or the requirements of the des-ignated self-regulatory organization towhich it is subject as of the close ofbusiness each month. An applicant orregistrant which is also registered as asecurities broker or dealer with the Se-curities and Exchange Commissionmay meet the computation require-ments of this paragraph (b) by com-pleting the Statement of Financial andOperational Combined Uniform SingleReport under the Securities ExchangeAct of 1934, Part II or Part IIA. Suchcomputations must be completed andmade available for inspection by anyrepresentative of the National FuturesAssociation, in the case of an appli-cant, or of the Commission or des-ignated self-regulatory organization, ifany, in the case of a registrant, within17 business days after the date forwhich the computations are made,commencing the first month end afterthe date the application for registra-tion is filed: Provided, however, That foreach month ending between June 30,1997 and December 31, 1997, inclusive,such computations must be completed

and made available for inspection with-in 30 calendar days after the date forwhich the computations are made.

(c) The provisions of this section donot apply to an introducing brokerwhich is operating pursuant to a guar-antee agreement, nor do such provi-sions apply to an applicant for reg-istration as an introducing broker whofiles concurrently with such applica-tion a guarantee agreement, providedsuch introducing broker or applicanttherefor is not also a securities brokeror dealer.

[48 FR 35288, Aug. 3, 1983, as amended at 49FR 39530, Oct. 9, 1984; 62 FR 4641, Jan. 31,1997]

PROHIBITED TRADING IN COMMODITYOPTIONS

§ 1.19 Prohibited trading in certain‘‘puts’’ and ‘‘calls’’.

No futures commission merchant orintroducing broker may make, under-write, issue, or otherwise assume anyfinancial responsibility for the fulfill-ment of, any commodity option except:

(a) Commodity options traded on orsubject to the rules of a contract mar-ket in accordance with the require-ments of part 33 of this chapter;

(b) Commodity options traded on orsubject to the rules of a foreign boardof trade in accordance with the re-quirements of part 30 of this chapter;or

(c) For futures commission mer-chants, any option permitted under§ 32.4 of this chapter, provided however,that a capital treatment for such op-tions is referenced in § 1.17(c)(5)(vi).

[52 FR 28997, Aug. 5, 1987, as amended at 58FR 68520, Dec. 28, 1993]

CUSTOMERS’ MONEY, SECURITIES, ANDPROPERTY

§ 1.20 Customer funds to be segregatedand separately accounted for.

(a) All customer funds shall be sepa-rately accounted for and segregated asbelonging to commodity or option cus-tomers. Such customer funds when de-posited with any bank, trust company,clearing organization or another fu-tures commission merchant shall bedeposited under an account namewhich clearly identifies them as such


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17 CFR Ch. I (4–1–01 Edition)§ 1.20

and shows that they are segregated asrequired by the Act and this part. Eachregistrant shall obtain and retain in itsfiles for the period provided in § 1.31 awritten acknowledgment from suchbank, trust company, clearing organi-zation, or futures commission mer-chant, that it was informed that thecustomer funds deposited therein arethose of commodity or option cus-tomers and are being held in accord-ance with the provisions of the Act andthis part: Provided, however, that an ac-knowledgment need not be obtainedfrom a clearing organization that hasadopted and submitted to the Commis-sion rules that provide for the segrega-tion as customer funds, in accordancewith all relevant provisions of the Actand the rules and orders promulgatedthereunder, of all funds held on behalfof customers. Under no circumstancesshall any portion of customer funds beobligated to a clearing organization,any member of a contract market, a fu-tures commission merchant, or any de-pository except to purchase, margin,guarantee, secure, transfer, adjust orsettle trades, contracts or commodityoption transactions of commodity oroption customers. No person, includingany clearing organization or any depos-itory, that has received customer fundsfor deposit in a segregated account, asprovided in this section, may hold, dis-pose of, or use any such funds as be-longing to any person other than theoption or commodity customers of thefutures commission merchant whichdeposited such funds.

(b) All customer funds received by aclearing organization from a memberof the clearing organization to pur-chase, margin, guarantee, secure orsettle the trades, contracts or com-modity options of the clearing mem-ber’s commodity or option customersand all money accruing to such com-modity or option customers as the re-sult of trades, contracts or commodityoptions so carried shall be separatelyaccounted for and segregated as be-longing to such commodity or optioncustomers, and a clearing organizationshall not hold, use or dispose of suchcustomer funds except as belonging tosuch commodity or option customers.Such customer funds when deposited ina bank or trust company shall be de-

posited under an account name whichclearly shows that they are the cus-tomer funds of the commodity or op-tion customers of clearing members,segregated as required by the Act andthese regulations. The clearing organi-zation shall obtain and retain in itsfiles for the period provided by § 1.31 anacknowledgment from such bank ortrust company that it was informedthat the customer funds depositedtherein are those of commodity or op-tion customers of its clearing membersand are being held in accordance withthe provisions of the Act and these reg-ulations.

(c) Each futures commission mer-chant shall treat and deal with the cus-tomer funds of a commodity customeror of an option customer as belongingto such commodity or option customer.All customer funds shall be separatelyaccounted for, and shall not be com-mingled with the money, securities orproperty of a futures commission mer-chant or of any other person, or be usedto secure or guarantee the trades, con-tracts or commodity options, or to se-cure or extend the credit, of any personother than the one for whom the sameare held: Provided, however, That cus-tomer funds treated as belonging to thecommodity or option customers of a fu-tures commission merchant may forconvenience be commingled and depos-ited in the same account or accountswith any bank or trust company, withanother person registered as a futurescommission merchant, or with a clear-ing organization, and that such sharethereof as in the normal course of busi-ness is necessary to purchase, margin,guarantee, secure, transfer, adjust, orsettle the trades, contracts or com-modity options of such commodity oroption customers or resulting marketpositions, with the clearing organiza-tion or with any other person reg-istered as a futures commission mer-chant, may be withdrawn and appliedto such purposes, including the pay-ment of premiums to option grantors,commissions, brokerage, interest,taxes, storage and other fees andcharges, lawfully accruing in connec-tion with such trades, contracts orcommodity options: Provided, further,


61


That customer funds may be investedin instruments described in § 1.25.

(Approved by the Office of Management andBudget under control numbers 3038–0007, and3038–0024)

[46 FR 54518, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 50 FR 36051, Sept. 5,1985; 65 FR 78009, Dec. 13, 2000]

§ 1.21 Care of money and equities ac-cruing to customers.

All money received directly or indi-rectly by, and all money and equitiesaccruing to, a futures commission mer-chant from any clearing organizationor from any clearing member or fromany member of a contract market inci-dent to or resulting from any trade,contract or commodity option made byor through such futures commissionmerchant on behalf of any commodityor option customer shall be consideredas accruing to such commodity or op-tion customer within the meaning ofthe Act and these regulations. Suchmoney and equities shall be treatedand dealt with as belonging to suchcommodity or option customer in ac-cordance with the provisions of the Actand these regulations. Money and equi-ties accruing in connection with com-modity or option customers’ opentrades, contracts, or commodity op-tions need not be separately credited toindividual accounts but may be treatedand dealt with as belonging undividedto all commodity or option customershaving open trades, contracts, or com-modity option positions which if closedwould result in a credit to such com-modity or option customers.

[46 FR 54519, Nov. 3, 1981]

§ 1.22 Use of customer funds re-stricted.

No futures commission merchantshall use, or permit the use of, the cus-tomer funds of one commodity and/oroption customer to purchase, margin,or settle the trades, contracts, or com-modity options of, or to secure or ex-tend the credit of, any person otherthan such customer or option cus-tomer. Customer funds shall not beused to carry trades or positions of thesame commodity and/or option cus-tomer other than in commodities or

commodity options traded throughtthe facilities of a contract market.

[47 FR 57007, Dec. 22, 1982]

§ 1.23 Interest of futures commissionmerchant in segregated funds; addi-tions and withdrawals.

The provision in section 4d(2) of theAct and the provision in § 1.20(c), whichprohibit the commingling of customerfunds with the funds of a futures com-mission merchant, shall not be con-strued to prevent a futures commissionmerchant from having a residual finan-cial interest in the customer funds,segregated as required by the Act andthe rules in this part and set apart forthe benefit of commodity or optioncustomers; nor shall such provisions beconstrued to prevent a futures commis-sion merchant from adding to such seg-regated customer funds such amount oramounts of money, from its own fundsor unencumbered securities from itsown inventory, of the type set forth in§ 1.25, as it may deem necessary to en-sure any and all commodity or optioncustomers’ accounts from becomingundersegregated at any time. Thebooks and records of a futures commis-sion merchant shall at all times accu-rately reflect its interest in the seg-regated funds. A futures commissionmerchant may draw upon such seg-regated funds to its own order, to theextent of its actual interest therein, in-cluding the withdrawal of securitiesheld in segregated safekeeping ac-counts held by a bank, trust company,contract market clearing organizationor other futures commission merchant.Such withdrawal shall not result in thefunds of one commodity and/or optioncustomer being used to purchase, mar-gin or carry the trades, contracts orcommodity options, or extend the cred-it of any other commodity customer,option customer or other person.

[62 FR 42400, Aug. 7, 1997]

§ 1.24 Segregated funds; exclusionstherefrom.

Money held in a segregated accountby a futures commission merchantshall not include: (a) Money invested inobligations or stocks of any clearingorganization or in memberships in orobligations of any contract market; or


62

17 CFR Ch. I (4–1–01 Edition)§ 1.25

(b) money held by any clearing organi-zation which it may use for any pur-pose other than to purchase, margin,guarantee, secure, transfer, adjust, orsettle the contracts, trades, or com-modity options of the commodity oroption customers of such futures com-mission merchant.

[46 FR 54519, Nov. 3, 1981]

§ 1.25 Investment of customer funds.(a) Permitted investments. (1) Subject

to the terms and conditions set forth inthis section, a futures commission mer-chant or a clearing organization mayinvest customer funds in the followinginstruments (permitted investments):

(i) Obligations of the United Statesand obligations fully guaranteed as toprincipal and interest by the UnitedStates (U.S. government securities);

(ii) General obligations of any Stateor of any political subdivision thereof(municipal securities);

(iii) General obligations issued byany agency sponsored by the UnitedStates (government sponsored agencysecurities);

(iv) Certificates of deposit issued by abank (certificates of deposit) as definedin section 3(a)(6) of the Securities Ex-change Act of 1934, or a domesticbranch of a foreign bank that carriesdeposits insured by the Federal DepositInsurance Corporation;

(v) Commercial paper;(vi) Corporate notes;(vii) General obligations of a sov-

ereign nation; and(viii) Interests in money market mu-

tual funds.(2) In addition, a futures commission

merchant or a clearing organizationmay buy and sell the permitted invest-ments listed in paragraphs (a)(1)(i)through (viii) of this section pursuantto agreements for resale or repurchaseof the instruments, in accordance withthe provisions of paragraph (d) of thissection.

(b) General terms and conditions. A fu-tures commission merchant or a clear-ing organization is required to managethe permitted investments consistentwith the objectives of preserving prin-cipal and maintaining liquidity and ac-cording to the following specific re-quirements.

(1) Marketability. Except for interestsin money market mutual funds, invest-ments must be ‘‘readily marketable’’as defined in § 240.15c3–1 of this title.

(2) Ratings. (i) Initial requirement. In-struments that are required to be ratedby this section must be rated by anNRSRO. For an investment to qualifyas a permitted investment, ratings arerequired as follows:

(A) U.S. government securities neednot be rated;

(B) Municipal securities, governmentsponsored agency securities, certifi-cates of deposit, commercial paper, andcorporate notes, except notes that areasset-backed, must have the highestshort-term rating of an NRSRO or oneof the two highest long-term ratings ofan NRSRO;

(C) Corporate notes that are asset-backed must have the highest ratingsof an NRSRO;

(D) Sovereign debt must be rated inthe highest category by at least oneNRSRO; and

(E) Money market mutual funds thatare rated by an NRSRO must be ratedat the highest rating of the NRSRO.

(ii) Effect of downgrade. If an NRSROlowers the rating of an instrument thatwas previously a permitted investmenton the basis of that rating to below theminimum rating required under thissection, the value of the instrumentrecognized for segregation purposeswill be the lesser of:

(A) The current market value of theinstrument; or

(B) The market value of the instru-ment on the business day preceding thedowngrade, reduced by 20 percent ofthat value for each business day thathas elapsed since the downgrade.

(3) Restrictions on instrument features.(i) With the exception of money mar-ket mutual funds, no permitted invest-ment may contain an embedded deriva-tive of any kind, including but not lim-ited to a call option, put option, or col-lar, cap, or floor on interest paid.

(ii) No instrument may contain inter-est-only payment features.

(iii) No instrument may provide pay-ments linked to a commodity, cur-rency, reference instrument, index, orbenchmark except as provided in para-graph (b)(3)(iv) of this section.


63


(iv) Variable-rate securities are per-mitted, provided the interest rates paidcorrelate closely and on an unleveragedbasis to a benchmark of either the Fed-eral Funds target or effective rate, theprime rate, the three-month TreasuryBill rate, or the one-month or three-month LIBOR rate.

(v) Certificates of deposit, if nego-tiable, must be able to be liquidatedwithin one business day or, if not nego-tiable, must be redeemable at theissuing bank within one business day,with any penalty for early withdrawallimited to any accrued interest earnedaccording to its written terms.

(4) Concentration. (i) Direct invest-ments. (A) U.S. government securitiesand money market mutual funds shallnot be subject to a concentration limitor other limitation.

(B) Securities of any single issuer ofgovernment sponsored agency securi-ties held by a futures commission mer-chant or clearing organization may notexceed 25 percent of total assets held insegregation by the futures commissionmerchant or clearing organization.

(C) Securities of any single issuer ofmunicipal securities, certificates of de-posit, commercial paper, or corporatenotes held by a futures commissionmerchant or clearing organization maynot exceed 5 percent of total assetsheld in segregation by the futures com-mission merchant or clearing organiza-tion.

(D) Sovereign debt is subject to thefollowing limits: a futures commissionmerchant may invest in the sovereigndebt of a country to the extent it hasbalances in segregated accounts owedto its customers denominated in thatcountry’s currency; a clearing organi-zation may invest in the sovereign debtof a country to the extent it has bal-ances in segregated accounts owed toits clearing member futures commis-sion merchants denominated in thatcountry’s currency.

(ii) Repurchase agreements. For pur-poses of determining compliance withthe concentration limits set forth inthis section, securities sold by a fu-tures commission merchant or clearingorganization subject to agreements torepurchase shall be combined with se-curities held by the futures commis-

sion merchant or clearing organizationas direct investments.

(iii) Reverse repurchase agreements.The concentration limit applicable tosecurities of each issuer that are heldby a futures commission merchant orclearing organization subject to agree-ments to resell to a particularcounterparty shall be as follows:

(A) For a portfolio of securities heldthat are subject to resale to acounterparty that has been rated sin-gle A or higher by two or moreNRSROs, or whose obligation under anagreement is guaranteed by a parent oraffiliate company that has been ratedsingle A or higher by two or moreNRSROs:

(1) Government sponsored agencydebt, issued by the same issuer andsupplied by the counterparty, may notexceed 50 percent of the total amountof securities supplied by suchcounterparty; and

(2) Municipal securities, certificatesof deposit, commercial paper, and cor-porate notes, issued by the same issuerand supplied by the counterparty, maynot exceed 10 percent of the totalamount of securities supplied by suchcounterparty; and

(B) For a portfolio of securities heldthat are subject to resale to acounterparty that does not have a rat-ing or guarantee as specified in para-graph (b)(4)(iii)(A) of this section:

(1) Government sponsored agencydebt, issued by the same issuer andsupplied by the counterparty, may notexceed 25 percent of the total amountof securities supplied by suchcounterparty; and

(2) Municipal securities, certificatesof deposit, commercial paper, and cor-porate notes, issued by the same issuerand supplied by the counterparty, maynot exceed 5 percent of the totalamount of securities supplied by suchcounterparty.

(iv) Treatment of securities issued by af-filiates. For purposes of determiningcompliance with the concentrationlimits set forth in this section, securi-ties issued by entities that are affili-ated, as defined in paragraph (b)(6) ofthis section, shall be aggregated anddeemed the securities of a singleissuer. An interest in a permittedmoney market mutual fund is not


64

17 CFR Ch. I (4–1–01 Edition)§ 1.25

deemed to be a security issued by itssponsoring entity.

(v) Treatment of customer-owned securi-ties. For purposes of determining com-pliance with the concentration limitsset forth in this section, securitiesowned by the customers of a futurescommission merchant and posted asmargin collateral are not included intotal assets held in segregation by thefutures commission merchant, and se-curities posted by a futures commis-sion merchant with a clearing organi-zation are not included in total assetsheld in segregation by the clearing or-ganization.

(5) Time-to-maturity. Except for in-vestments in money market mutualfunds, the dollar-weighted average ofthe time-to-maturity of the portfolio,as that average is computed pursuantto § 270.2a–7 of this title, may not ex-ceed 24 months.

(6) Investments in instruments issued byaffiliates. (i) A futures commission mer-chant shall not invest customer fundsin obligations of an entity affiliatedwith the futures commission merchant,and a clearing organization shall notinvest customer funds in obligations ofan entity affiliated with the clearingorganization. An affiliate includes par-ent companies, including all entitiesthrough the ultimate holding company,subsidiaries to the lowest level, andcompanies under common ownership ofsuch parent company or affiliates.

(ii) A futures commission merchantor clearing organization may investcustomer funds in a fund affiliatedwith that futures commission mer-chant or clearing organization.

(7) Recordkeeping. A futures commis-sion merchant and a clearing organiza-tion shall prepare and maintain arecord that will show for each businessday with respect to each type of invest-ment made pursuant to this section,the following information:

(i) The type of instruments in whichcustomer funds have been invested;

(ii) The original cost of the instru-ments; and

(iii) The current market value of theinstruments.

(c) Money market mutual funds. Thefollowing provisions will apply to theinvestment of customer funds in moneymarket mutual funds (the fund).

(1) Generally, the fund must be an in-vestment company that is registeredunder the Investment Company Act of1940 with the Securities and ExchangeCommission and that holds itself outto investors as a money market fund,in accordance with § 270.2a–7 of thistitle. A fund sponsor, however, may pe-tition the Commission for an exemp-tion from this requirement. The Com-mission may grant such an exemptionprovided that the fund can dem-onstrate that it will operate in a man-ner designed to preserve principal andto maintain liquidity. The applicationfor exemption must describe how thefund’s structure, operations and finan-cial reporting are expected to differfrom the requirements contained in§ 270.2a–7 of this title and the risk-lim-iting provisions for direct investmentscontained in this section. The fundmust also specify the information thatthe fund would make available to theCommission on an ongoing basis.

(2) The fund must be sponsored by afederally-regulated financial institu-tion, a bank as defined in section3(a)(6) of the Securities Exchange Actof 1934, an investment adviser reg-istered under the Investment AdvisersAct of 1940, or a domestic branch of aforeign bank insured by the FederalDeposit Insurance Corporation, exceptfor a fund exempted in accordance withparagraph (c)(1) of this section.

(3) A futures commission merchantor clearing organization shall maintainthe confirmation relating to the pur-chase in its records in accordance with§ 1.31 and note the ownership of fundshares (by book-entry or otherwise) ina custody account of the FCM or clear-ing organization in accordance with§ 1.26(a). If the futures commission mer-chant or the clearing organizationholds its shares of the fund with thefund’s shareholder servicing agent, thesponsor of the fund and the fund itselfare required to provide the acknowl-edgment letter required by § 1.26.

(4) The net asset value of the fundmust be computed by 9 a.m. of thebusiness day following each businessday and made available to the futurescommission merchant or clearing orga-nization by that time.

(5) A fund must be able to redeem aninterest by the business day following


65


a redemption request by the futurescommission merchant or clearing orga-nization. Demonstration that this re-quirement has been met may includeeither an appropriate provision in theoffering memorandum of the fund or aseparate side agreement between thefund and a futures commission mer-chant or clearing organization.

(6) The agreement pursuant to whichthe futures commission merchant orclearing organization has acquired andis holding its interest in a fund mustcontain no provision that would pre-vent the pledging or transferring ofshares.

(d) Repurchase and reverse repurchaseagreements. A futures commission mer-chant or clearing organization maybuy and sell the permitted investmentslisted in paragraphs (a)(1)(i) through(viii) of this section pursuant to agree-ments for resale or repurchase of thesecurities (agreements to repurchase orresell), provided the agreements to re-purchase or resell conform to the fol-lowing requirements:

(1) The securities are specificallyidentified by coupon rate, par amount,market value, maturity date, andCUSIP or ISIN number.

(2) Counterparties are limited to abank as defined in section 3(a)(6) of theSecurities Exchange Act of 1934, a do-mestic branch of a foreign bank in-sured by the Federal Deposit InsuranceCorporation, a securities broker ordealer, or a government securitiesbroker or government securities dealerregistered with the Securities and Ex-change Commission or which has filednotice pursuant to section 15C(a) of theGovernment Securities Act of 1986.

(3) The transaction is executed incompliance with the concentrationlimit requirements applicable to thesecurities held in connection with theagreements to repurchase referred to inparagraphs (b)(4)(ii) and (iii) of thissection.

(4) The transaction is made pursuantto a written agreement signed by theparties to the agreement, which is con-sistent with the conditions set forth inparagraphs (d)(1) through (d)(12) of thissection and which states that the par-ties thereto intend the transaction tobe treated as a purchase and sale of se-curities.

(5) The term of the agreement is nomore than one business day, or reversalof the transaction is possible on de-mand.

(6) The securities transferred underthe agreement are held in a safe-keeping account with a bank as re-ferred to in paragraph (d)(2) of this sec-tion, a clearing organization, or theDepository Trust Company in an ac-count that complies with the require-ments of § 1.26.

(7) The futures commission merchantor the clearing organization may notuse securities received under the agree-ment in another similar transactionand may not otherwise hypothecate orpledge such securities, except securi-ties may be pledged on behalf of cus-tomers at another futures commissionmerchant or clearing organization.Substitution of securities is allowed,provided, however, that:

(i) The qualifying securities beingsubstituted and original securities arespecifically identified by date of substi-tution, market values substituted, cou-pon rates, par amounts, maturity datesand CUSIP or ISIN numbers;

(ii) Substitution is made on a ‘‘deliv-ery versus delivery’’ basis; and

(iii) The market value of the sub-stituted securities is at least equal tothat of the original securities.

(8) The transfer of securities is madeon a delivery versus payment basis inimmediately available funds. Thetransfer is not recognized as accom-plished until the funds and/or securi-ties are actually received by the custo-dian of the futures commission mer-chant’s or clearing organization’s cus-tomer funds or securities purchased onbehalf of customers. The transfer orcredit of securities covered by theagreement to the futures commissionmerchant’s or clearing organization’scustomer segregated custodial accountis made simultaneously with the dis-bursement of funds from the futurescommission merchant’s or clearing or-ganization’s customer segregated cashaccount at the custodian bank. On thesale or resale of securities, the futurescommission merchant’s or clearing or-ganization’s customer segregated cashaccount at the custodian bank must re-ceive same-day funds credited to suchsegregated account simultaneously


66

17 CFR Ch. I (4–1–01 Edition)§ 1.26

with the delivery or transfer of securi-ties from the customer segregated cus-todial account.

(9) A written confirmation to the fu-tures commission merchant or clearingorganization specifying the terms ofthe agreement and a safekeeping re-ceipt are issued immediately upon en-tering into the transaction and a con-firmation to the futures commissionmerchant or clearing organization isissued once the transaction is reversed.

(10) The transactions effecting theagreement are recorded in the recordrequired to be maintained under § 1.27of investments of customer funds, andthe securities subject to such trans-actions are specifically identified insuch record as described in paragraph(d)(1) of this section and further identi-fied in such record as being subject torepurchase and reverse repurchaseagreements.

(11) An actual transfer of securitiesby book entry is made consistent withFederal or State commercial law, asapplicable. At all times, securities re-ceived subject to an agreement are re-flected as ‘‘customer property.’’

(12) The agreement makes clear that,in the event of the bankruptcy of thefutures commission merchant or clear-ing organization, any securities pur-chased with customer funds that aresubject to an agreement may be imme-diately transferred. The agreementalso makes clear that, in the event of afutures commission merchant or clear-ing organization bankruptcy, thecounterparty has no right to compelliquidation of securities subject to anagreement or to make a priority claimfor the difference between current mar-ket value of the securities and theprice agreed upon for resale of the se-curities to the counterparty, if theformer exceeds the latter.

(e) Deposit of firm-owned securities intosegregation. A futures commission mer-chant shall not be prohibited from di-rectly depositing unencumbered securi-ties of the type specified in this sec-tion, which it owns for its own account,into a segregated safekeeping accountor from transferring any such securi-ties from a segregated account to itsown account, up to the extent of its re-sidual financial interest in customers’segregated funds; provided, however,

that such investments, transfers of se-curities, and disposition of proceedsfrom the sale or maturity of such secu-rities are recorded in the record of in-vestments required to be maintainedby § 1.27. All such securities may besegregated in safekeeping only with abank, trust company, clearing organi-zation, or other registered futures com-mission merchant. Furthermore, forpurposes of §§ 1.25, 1.26, 1.27, 1.28 and1.29, investments permitted by § 1.25that are owned by the futures commis-sion merchant and deposited into sucha segregated account shall be consid-ered customer funds until such invest-ments are withdrawn from segregation.

[65 FR 78010, Dec. 13, 2000, as amended at 65FR 82271, Dec. 28, 2000]

§ 1.26 Deposit of instruments pur-chased with customer funds.

(a) Each futures commission mer-chant who invests customer funds ininstruments described in § 1.25 shallseparately account for such instru-ments and segregate such instrumentsas belonging to such commodity or op-tion customers. Such instruments,when deposited with a bank, trust com-pany, clearing organization or anotherfutures commission merchant, shall bedeposited under an account namewhich clearly shows that they belongto commodity or option customers andare segregated as required by the Actand this part. Each futures commissionmerchant upon opening such an ac-count shall obtain and retain in itsfiles an acknowledgment from suchbank, trust company, clearing organi-zation or other futures commissionmerchant that it was informed that theinstruments belong to commodity oroption customers and are being held inaccordance with the provisions of theAct and this part. Provided, however,that an acknowledgment need not beobtained from a clearing organizationthat has adopted and submitted to theCommission rules that provide for thesegregation as customer funds, in ac-cordance with all relevant provisions ofthe Act and the rules and orders pro-mulgated thereunder, of all funds heldon behalf of customers and all instru-ments purchased with customer funds.Such acknowledgment shall be re-tained in accordance with § 1.31. Such


67


bank, trust company, clearing organi-zation or other futures commissionmerchant shall allow inspection ofsuch obligations at any reasonabletime by representatives of the Commis-sion.

(b) Each clearing organization whichinvests money belonging or accruing tocommodity or option customers of itsclearing members in instruments de-scribed in § 1.25 shall separately ac-count for such instruments and seg-regate such instruments as belongingto such commodity or option cus-tomers. Such instruments, when depos-ited with a bank or trust company,shall be deposited under an accountname which will clearly show that theybelong to commodity or option cus-tomers and are segregated as requiredby the Act and this part. Each clearingorganization upon opening such an ac-count shall obtain and retain in itsfiles a written acknowledgment fromsuch bank or trust company that it wasinformed that the instruments belongto commodity or option customers ofclearing members and are being held inaccordance with the provisions of theAct and this part. Such acknowledg-ment shall be retained in accordancewith § 1.31. Such bank or trust companyshall allow inspection of such instru-ments at any reasonable time by rep-resentatives of the Commission.

[65 FR 78012, Dec. 13, 2000]

§ 1.27 Record of investments.

(a) Each futures commission mer-chant which invests customer funds,and each clearing organization whichinvests customer funds of its clearingmembers’ customers or option cus-tomers, shall keep a record showingthe following:

(1) The date on which such invest-ments were made;

(2) The name of the person throughwhom such investments were made;

(3) The amount of money so invested;(4) A description of the instruments

in which such investments were made,including the CUSIP or ISIN numbers;

(5) The identity of the depositories orother places where such instrumentsare segregated;

(6) The date on which such invest-ments were liquidated or otherwise dis-

posed of and the amount of money re-ceived of such disposition, if any; and

(7) The name of the person to orthrough whom such investments weredisposed of.

(b) Each clearing organization whichreceives documents from its clearingmembers representing investment ofcustomer funds shall keep a recordshowing separately for each clearingmember the following:

(1) The date on which such docu-ments were received from the clearingmember;

(2) A description of such documents,including the CUSIP or ISIN numbers;and

(3) The date on which such docu-ments were returned to the clearingmember or the details of disposition byother means.

(c) Such records shall be retained inaccordance with § 1.31. No such invest-ments shall be made except in instru-ments described in § 1.25.

(Approved by the Office of Management andBudget under control numbers 3038–0007 and3038–0024)

[46 FR 54520, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 62 FR 42401, Aug. 7,1997; 65 FR 78013, Dec. 13, 2000]

§ 1.28 Appraisal of instruments pur-chased with customer funds.

Futures commission merchants whoinvest customer funds in instrumentsdescribed in § 1.25 of this part shall in-clude such instruments in segregatedaccount records and reports at valueswhich at no time exceed current mar-ket value, determined as of the close ofthe market on the date for which suchcomputation is made.

[58 FR 10953, Feb. 23, 1993, as amended at 65FR 78013, Dec. 13, 2000]

§ 1.29 Increment or interest resultingfrom investment of customer funds.

The investment of customer funds ininstruments described in § 1.25 shall notprevent the futures commission mer-chant or clearing organization so in-vesting such funds from receiving andretaining as its own any increment orinterest resulting therefrom.

[46 FR 54520, Nov. 3, 1981, as amended at 65FR 78013, Dec. 13, 2000]


68

17 CFR Ch. I (4–1–01 Edition)§ 1.30

§ 1.30 Loans by futures commissionmerchants; treatment of proceeds.

Nothing in these regulations shallprevent a futures commission mer-chant from lending its own funds tocommodity or option customers on se-curities and property pledged by suchcommodity or option customers, orfrom repledging or selling such securi-ties and property pursuant to specificwritten agreement with such com-modity or option customers. The pro-ceeds of such loans used to purchase,margin, guarantee, or secure thetrades, contracts, or commodity op-tions of commodity or option cus-tomers shall be treated and dealt withby a futures commission merchant asbelonging to such commodity or optioncustomers, in accordance with and sub-ject to the provisions of section 4d(2) ofthe Act and these regulations.

[46 FR 54520, Nov. 3, 1981]

RECORDKEEPING

§ 1.31 Books and records; keeping andinspection.

(a)(1) All books and records requiredto be kept by the Act or by these regu-lations shall be kept for a period of fiveyears from the date thereof and shallbe readily accessible during the first 2years of the 5-year period. All suchbooks and records shall be open to in-spection by any representative of theCommission or the United States De-partment of Justice.

(2) A copy of any book or record re-quired to be kept by the Act or bythese regulations shall be provided, atthe expense of the person required tokeep the book or record, to a Commis-sion representative upon the represent-ative’s request. Instead of furnishing acopy, such person may provide theoriginal book or record for reproduc-tion, which the representative maytemporarily remove from such person’spremises for this purpose. All copies ororiginals shall be provided promptly.Upon request, the Commission rep-resentative shall issue a receipt pro-vided by such person for any copy ororiginal book or record received. At therequest of the Commission representa-tive, such person shall, upon the returnthereof, issue a receipt for any copy or

original book or record returned by therepresentative.

(b) Except as provided in paragraph(d) of this section, immediate reproduc-tions on either ‘‘micrographic media’’(as defined in paragraph (b)(1)(i) of thissection) or ‘‘electronic storage media’’(as defined in paragraph (b)(1)(ii) thissection) may be kept in that form forthe required time period under the con-ditions set forth in this paragraph (b).

(1) For purposes of this section:(i) The term ‘‘micrographic media’’

means microfilm or microfiche or anysimilar medium.

(ii) The term ‘‘electronic storagemedia’’ means any digital storage me-dium or system that:

(A) Preserves the records exclusivelyin a non-rewritable, non-erasable for-mat;

(B) Verifies automatically the qual-ity and accuracy of the storage mediarecording process;

(C) Serializes the original and, if ap-plicable, duplicate units of storagemedia and creates a time-date recordfor the required period of retention forthe information placed on such elec-tronic storage media; and

(D) Permits the immediatedownloading of indexes and recordspreserved on the electronic storagemedia onto paper, microfilm, micro-fiche or other medium acceptableunder this paragraph upon the requestof representatives of the Commissionor the Department of Justice.

(2) Persons who use either micro-graphic media or electronic storagemedia to maintain records in accord-ance with this section must:

(i) Have available at all times, for ex-amination by representatives of theCommission or the Department of Jus-tice, facilities for immediate, easilyreadable projection or production ofmicrographic media or electronic stor-age media images;

(ii) Be ready at all times to provide,and immediately provide at the ex-pense of the person required to keepsuch records, any easily readable hard-copy image that representatives of theCommission or Department of Justicemay request;


69


(iii) Keep only Commission-requirerecords on the individual medium em-ployed (e.g., a disk or sheets of micro-fiche);

(iv) Store a duplicate of the record,in any medium acceptable under thisregulation, at a location separate fromthe original for the period of time re-quired for maintenance of the original;and

(v) Organize and maintain an accu-rate index of all information main-tained on both the original and dupli-cate storage media such that:

(A) The location of any particularrecord stored on the media may be im-mediately ascertained;

(B) The index is available at all timesfor immediate examination by rep-resentatives of the Commission or theDepartment of Justice;

(C) A duplicate of the index is storedat a location separate from the originalindex; and

(D) Both the original index and theduplicate index are preserved for thetime period required for the records in-cluded in the index.

(3) In addition to the foregoing condi-tions, persons using electronic storagemedia must:

(i) Be ready at all times to provide,and immediately provide at the ex-pense of the person required to keepsuch records, copies of such records onsuch approved machine-readable mediaas defined in § 15.00(1) of this chapterwhich any representative of the Com-mission or the Department of Justicemay request. Records must use a for-mat and coding structure specified inthe request.

(ii) Develop and maintain writtenoperational procedures and controls(an ‘‘audit system’’) designed to pro-vide accountability over both the ini-tial entry of required records to theelectronic storage media and the entryof each change made to any original orduplicate record maintained on theelectronic storage media such that:

(A) The results of such audit systemare available at all times for imme-diate examination by representativesof the Commission or the Departmentof Justice;

(B) The results of such audit systemare preserved for the time period re-

quired for the records maintained onthe electronic storage media; and

(C) The written operational proce-dures and controls are available at alltimes for immediate examination byrepresentatives of the Commission orthe Department of Justice.

(iii) Either(A) Maintain, keep current, and

make available at all times for imme-diate examination by representativesof the Commission or Department ofJustice all information necessary toaccess records and indexes maintainedon the electronic storage media; or

(B) Place in escrow and keep currenta copy of the physical and logical for-mat of the electronic storage media,the file format of all different informa-tion types maintained on the elec-tronic storage media and the sourcecode, documentation, and informationnecessary to access the records and in-dexes maintained on the electronicstorage media.

(4) In addition to the foregoing condi-tions, any person who uses only elec-tronic storage media to preserve someor all of its required records (‘‘Elec-tronic Recordkeeper’’) shall, prior tothe media’s use, enter into an arrange-ment with at least one third partytechnical consultant (‘‘Technical Con-sultant’’) who has the technical and fi-nancial capability to perform the un-dertakings described in this paragraph(b)(4). The arrangement shall providethat the Technical Consultant willhave access to, and the ability todownload, information from the Elec-tronic Recordkeeper’s electronic stor-age media to any medium acceptableunder this regulation.

(i) The Technical Consultant mustfile with the Commission an under-taking in a form acceptable to theCommission, signed by the TechnicalConsultant or a person duly authorizedby the Technical Consultant. An ac-ceptable undertaking must include thefollowing provision with respect to theElectronic Recordkeeper:

With respect to any books and recordsmaintained or preserved on behalf of theElectronic Recordkeeper, the undersignedhereby undertakes to furnish promptly toany representative of the United StatesCommodity Futures Trading Commission orthe United States Department of Justice


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17 CFR Ch. I (4–1–01 Edition)§ 1.32

(the ‘‘Representative’’), upon reasonable re-quest, such information as is deemed nec-essary by the Representative to download in-formation kept on the Electronic Record-keeper’s electronic storage media to any me-dium acceptable under 17 CFR 1.31. The un-dersigned also undertakes to take reasonablesteps to provide access to information con-tained on the Electronic Recordkeeper’selectronic storage media, including, as ap-propriate, arrangements for the downloadingof any record required to be maintainedunder the Commodity Exchange Act or therules, regulations, or orders of the UnitedStates Commodity Futures Trading Commis-sion, in a format acceptable to the Rep-resentative. In the event the Electronic Rec-ordkeeper fails to download a record into areadable format and after reasonable noticeto the Electronic Recordkeeper, upon beingprovided with the appropriate electronicstorage medium, the undersigned will under-take to do so, at no charge to the UnitedStates, as the Representative may request.

(ii) [Reserved](c) Persons employing an electronic

storage system shall provide a rep-resentation to the Commission prior tothe initial use of the system. The rep-resentation shall be made by the per-son required to maintain the records,the storage system vendor, or anotherthird party with appropriate expertiseand shall state that the selected elec-tronic storage system meets the re-quirements set forth in paragraph(b)(1)(ii) of this section. Persons em-ploying an electronic storage systemusing media other than optical disk orCD–ROM technology shall so state. Therepresentation shall be accompanied bythe type of oath or affirmation de-scribed in § 1.10(d)(4).

(d) Trading cards, documents onwhich trade information is originallyrecorded in writing, and written ordersrequired to be kept pursuant to§ 1.35(a), (a–1)(1), (a–1)(2) and (d) mustbe retained in hard-copy for the re-quired time period.


[41 FR 3194, Jan. 21, 1976, as amended at 46FR 22, Jan. 2, 1981; 46 FR 63035, Dec. 30, 1981;58 FR 27464, 27467, May 10, 1993; 62 FR 24031,May 2, 1997; 64 FR 28742, May 27, 1999]

§ 1.32 Segregated account; daily com-putation and record.

Each futures commission merchantmust compute as of the close of eachbusiness day:

(a) The total amount of customerfunds on deposit in segregated accountson behalf of commodity and option cus-tomers;

(b) The total amount of such cus-tomer funds required by the Act andthese regulations to be on deposit insegregated accounts on behalf of suchcommodity and option customers; and

(c) The amount of the futures com-mission merchant’s residual interest insuch customer funds.Such computation must be completedprior to noon on the next business dayand must be kept, together with allsupporting data, in accordance withthe requirements of § 1.31.



§ 1.33 Monthly and confirmation state-ments.

(a) Monthly statements. Each futurescommission merchant must promptlyfurnish in writing to each commoditycustomer and to each option customerand to each foreign futures and foreignoptions customer, as of the close of thelast business day of each month or asof any regular monthly date selected,except for accounts in which there areneither open positions at the end of thestatement period nor any changes tothe account balance since the priorstatement period, but in any event notless frequently than once every threemonths, a statement which clearlyshows:

(1) For each commodity customerand foreign futures customer—

(i) The open contracts with prices atwhich acquired;

(ii) The net unrealized profits orlosses in all open contracts marked tothe market; and

(iii) Any customer funds carried withthe futures commission merchant; and

(iv) A detailed accounting of all fi-nancial charges and credits to such


71


customer accounts during the monthlyreporting period, including all cus-tomer funds and funds on deposit withrespect to foreign futures transactionsin accordance with § 30.7 of this chapterreceived from or disbursed to such cus-tomer and realized profits and losses;and

(2) For each option customer and for-eign options customer—

(i) All commodity options and for-eign options purchased, sold, exercised,or expired during the monthly report-ing period, identified by underlying fu-tures contract or underlying physical,strike price, transaction date, and ex-piration date;

(ii) The open commodity option andforeign option positions carried forsuch customer as of the end of themonthly reporting period, identified byunderlying futures contract or under-lying physical, strike price, trans-action date, and expiration date;

(iii) All open commodity option andforeign option positions marked to themarket and the amount each positionis in the money, if any;

(iv) Any customer funds carried insuch customer’s account(s); and

(v) A detailed accounting of all fi-nancial charges and credits to suchcustomer’s account(s) during themonthly reporting period, including allcustomer funds and funds on depositwith respect to foreign options trans-actions received from or disbursed tosuch customer, premiums charged andreceived, and realized profits andlosses.

(b) Confirmation statement. Each fu-tures commission merchant must, notlater than the next business day afterany commodity futures or commodityoption transaction, including any for-eign futures or foreign options trans-actions, furnish:

(1) To each commodity customer, awritten confirmation of each com-modity futures transaction caused tobe executed by it for the customer.

(2) To each option customer, a writ-ten confirmation of each commodityoption transaction, containing at leastthe following information:

(i) The option customer’s accountidentification number;

(ii) A separate listing of the actualamount of the premium, as well as

each mark-up thereon, if applicable,and all other commissions, costs, feesand other charges incurred in connec-tion with the commodity option trans-action;

(iii) The strike price;(iv) The underlying futures contract

or underlying physical;(v) The final exercise date of the

commodity option purchased or sold;and

(vi) The date the commodity optiontransaction was executed.

(3) To each option customer, uponthe expiration or exercise of any com-modity option, a written confirmationstatement thereof, which statementshall include the date of such occur-rence, a description of the option in-volved, and, in the case of exercise, thedetails of the futures or physical posi-tion which resulted therefrom includ-ing, if applicable, the final trading dateof the contract for future delivery un-derlying the option.

(4) Notwithstanding the provisions ofparagraphs (b)(1) through (b)(3) of thissection, a commodity futures or com-modity option transaction that iscaused to be executed for a commoditypool need be confirmed only to the op-erator of the commodity pool.

(c) Exemptions. The requirements ofparagraphs (a)(1)(i), (a)(1)(ii), and (b)(1)of this section shall not apply to thefollowing:

(1) Any account carried for a personwho is a member of any contract mar-ket;

(2) Any omnibus account carried foranother futures commission merchant;and

(3) Any account containing only bonafide hedge positions, except that con-firmations must be furnished to ac-counts containing only bona fide hedgepositions.

(d) Controlled accounts. With respectto any account controlled by any per-son other than the commodity cus-tomer or option customer for whomsuch account is carried, each futurescommission merchant shall:

(1) Promptly furnish in writing tosuch other person the information re-quired by paragraphs (a) and (b) of thissection;

(2) [Reserved]


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17 CFR Ch. I (4–1–01 Edition)§ 1.34

(3) Promptly furnish in writing tosuch other person a copy of the state-ment required by § 1.46: Provided, how-ever, That the provisions of this para-graph (d) shall not apply to an accountcontrolled by the spouse, parent orchild of the customer for whom suchaccount is carried.

(e) Recordkeeping. Each futures com-mission merchant shall retain, in ac-cordance with § 1.31, a copy of eachmonthly statement and confirmationrequired by this section.

(f) Introduced accounts. Each state-ment provided pursuant to the provi-sions of this section must, if applica-ble, show that the account for whichthe futures commission merchant isproviding the statement was intro-duced by an introducing broker and thenames of the futures commission mer-chant and introducing broker.

(Approved by the Office of Management andBudget under control numbers 3038–0007 and3038–0024; the information collection require-ments in paragraph (c) were approveed undercontrol number 3038–0005)

[46 FR 54520, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 47 FR 57008, Dec. 22,1982; 48 FR 1185, Jan. 11, 1983; 48 FR 35289,Aug. 3, 1983; 52 FR 28997, Aug. 5, 1987]

§ 1.34 Monthly record, ‘‘point balance’’.(a) Each futures commission mer-

chant shall prepare, and retain in ac-cordance with the requirements of§ 1.31, a statement commonly known asa ‘‘point balance,’’ which accrues orbrings to the official closing price, orsettlement price fixed by the clearingorganization, all open contracts of cus-tomers as of the last business day ofeach month or of any regular monthlydate selected: Provided, however, That afutures commission merchant who car-ries part or all of customers’ open con-tracts with other futures commissionmerchants on an ‘‘instruct basis’’ willbe deemed to have met the require-ments of this section as to open con-tracts so carried if a monthly state-ment is prepared which shows that theprices and amounts of such contractslong and short in the customers’ ac-counts are in balance with those in thecarrying futures commission mer-chants’ accounts, and such statementsare retained in accordance with the re-quirements of § 1.31.

(b) Each futures commission mer-chant shall prepare, and retain in ac-cordance with the requirements of§ 1.31, a listing in which all open com-modity option positions carried for op-tion customers are marked to the mar-ket. Such listing shall be prepared as ofthe last business day of each month, oras of any regular monthly date se-lected, and shall be by put or by call,by underlying contract for future deliv-ery (by delivery month) or underlyingphysical (by option expiration date),and by strike price.


[46 FR 54521, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 47 FR 57008, Dec. 22,1982]

§ 1.35 Records of cash commodity, fu-tures, and option transactions.

(a) Futures commission merchants, in-troducing brokers, and members of con-tract markets. Each futures commissionmerchant, introducing broker, andmember of a contract market shallkeep full, complete, and systematicrecords, together with all pertinentdata and memoranda, of all trans-actions relating to its business of deal-ing in commodity futures, commodityoptions, and cash commodities. Eachfutures commission merchant, intro-ducing broker, and member of a con-tract market shall retain the requiredrecords, data, and memoranda in ac-cordance with the requirements of§ 1.31, and produce them for inspectionand furnish true and correct informa-tion and reports as to the contents orthe meaning thereof, when and as re-quested by an authorized representa-tive of the Commission or the UnitedStates Department of Justice. Includedamong such records shall be all orders(filled, unfilled, or canceled), tradingcards, signature cards, street books,journals, ledgers, canceled checks, cop-ies of confirmations, copies of state-ments of purchase and sale, and allother records, data and memoranda,which have been prepared in the courseof its business of dealing in commodityfutures, commodity options, and cashcommodities. Among such records eachmember of a contract market must re-tain and produce for inspection are all


73


documents on which trade informationis originally recorded, whether or notsuch documents must be prepared pur-suant to the rules or regulations of ei-ther the Commission or the contractmarket. For purposes of this section,such documents are referred to as‘‘original source documents.’’

(a–1) Futures commission merchants, in-troducing brokers, and members of con-tract markets: Recording of customers’and option customers’ orders. (1) Each fu-tures commission merchant and eachintroducing broker receiving a cus-tomer’s or option customer’s ordershall immediately upon receipt thereofprepare a written record of the orderincluding the account identification,except as provided in paragraph (a–1)(5)of this section, and order number, andshall record thereon, by timestamp orother timing device, the date and time,to the nearest minute, the order is re-ceived, and in addition, for option cus-tomers’ orders, the time, to the nearestminute, the order is transmitted forexecution.

(2)(i) Each member of a contractmarket who on the floor of such con-tract market receives a customer’s oroption customer’s order which is not inthe form of a written record includingthe account identification, order num-ber, and the date and time, to the near-est minute, the order was transmittedor received on the floor of such con-tract market, shall immediately uponreceipt thereof prepare a writtenrecord of the order in nonerasable ink,including the account identification,except as provided in paragraph (a–1)(5)of this section or appendix C to thispart, and order number and shallrecord thereon, by timestamp or othertiming device, the date and time, tothe nearest minute, the order is re-ceived.

(ii) Except as provided in paragraph(a–1)(3) of this section:

(A) Each contract market memberwho on the floor of such contract mar-ket receives an order from anothermember present on the floor which isnot in the form of a written recordshall, immediately upon receipt of suchorder, prepare a written record of theorder or obtain from the member whoplaced the order a written record of theorder, in non-erasable ink including

the account identification and ordernumber and shall record thereon, bytime-stamp or other timing device, thedate and time, to the nearest minute,the order is received; or

(B) When a contract market memberpresent on the floor places an order,which is not in the form of a writtenrecord, for his own account or an ac-count over which he has control, withanother member of such contract mar-ket for execution:

(1) The member placing such orderimmediately upon placement of theorder shall record the order and time ofplacement to the nearest minute on asequentially-numbered trading cardmaintained in accordance with the re-quirements of paragraph (d) of this sec-tion;

(2) The member receiving and exe-cuting such order immediately uponexecution of the order shall record thetime of execution to the nearestminute on a trading card or otherrecord maintained pursuant to the re-quirements of paragraph (d) of this sec-tion; and

(3) The member receiving and exe-cuting the order shall return such trad-ing card or other record to the memberplacing the order. The member placingthe order then must submit togetherboth of the trading cards or otherrecords documenting such trade to con-tract market personnel or the clearingmember, in accordance with contractmarket rules adopted pursuant to para-graph (j)(1) of this section.

(iii) Each contract market may adoptrules, which must be submitted to theCommission pursuant to section5a(a)(12)(A) of the Act and CommissionRegulation 1.41, that provide alter-native requirements to those containedin paragraph (a–1)(2)(ii) of this section.Such rules shall, at a minimum, re-quire that the contemporaneous writ-ten records:

(A) Contain the terms of the order;(B) Include reliable timing data for

the initiation and execution of theorder which would permit complete andeffective reconstruction of the orderplacement and execution; and

(C) Be submitted to contract marketpersonnel or clearing members in ac-cordance with contract market rules


74

17 CFR Ch. I (4–1–01 Edition)§ 1.35

adopted pursuant to paragraph (j)(1) ofthis section.

(3)(i) The requirements of paragraph(a–1)(2)(ii) of this section will not applyif a contract market maintains in ef-fect rules which have been submittedto the Commission pursuant to section5a(a)(12)(A) of the Act and CommissionRegulation 1.41, which provide for anexemption where:

(A) A contract market memberplaces with another member of suchcontract market an order that is partof a spread transaction;

(B) The member placing the orderpersonally executes one or more legs ofthe spread; and

(C) The member receiving and exe-cuting such order immediately uponexecution of the order records the timeof execution to the nearest minute onhis trading card or other record main-tained in accordance with the require-ments of paragraph (d) of this section.

(ii) Each contract market shall, aspart of its trade practice surveillanceprogram, conduct surveillance for com-pliance with the recordkeeping andother requirements under paragraphs(a–1) (2) and (3) of this section, and fortrading abuses related to the executionof orders for members present on thefloor of the contract market.

(4) Each member of a contract mar-ket reporting the execution from thefloor of the contract market of a cus-tomer’s or option customer’s order orthe order of another member of thecontract market received in accord-ance with paragraphs (a–1)(2)(i) or (a–1)(2)(ii)(A) of this section, shall recordon a written record of the order, in-cluding the account identification, ex-cept as provided in paragraph (a–1)(5) ofthis section, and order number, bytimestamp or other timing device, thedate and time to the nearest minutesuch report of execution is made. Eachmember of a contract market shallsubmit the written records of customerorders or orders from other contractmarket members to contract marketpersonnel or to the clearing memberresponsible for the collection of ordersprepared pursuant to this paragraph asrequired by contract market rulesadopted in accordance with paragraph(j)(1) of this section. The executionprice and other information reported

on the order tickets must be written innonerasable ink.

(5) Orders eligible for post-execution al-location. Specific customer accountidentifiers for accounts included inbunched orders need not be recorded attime of order placement or upon reportof execution if the requirements of thisparagraph are met. The bunched ordermust be placed by an eligible accountmanager on behalf of eligible customeraccounts and must be handled in ac-cordance with contract market rulesthat have been submitted to the Com-mission pursuant to Section5a(a)(12)(A) of the Act and § 1.41.

(i) Eligible account managers. The per-son placing and directing the alloca-tion of an order eligible for post-execu-tion allocation must be one of the fol-lowing who has been granted invest-ment discretion with regard to eligiblecustomer accounts:

(A) A commodity trading advisor reg-istered with the Commission pursuantto the Act;

(B) An investment adviser registeredwith the Securities and Exchange Com-mission pursuant to the InvestmentAdvisers Act of 1940;

(C) A bank, insurance company, trustcompany, or savings and loan associa-tion subject to federal or state regula-tion; or

(D) A foreign adviser who providesadvice solely to foreign persons andwho is subject to regulation by a for-eign regulator or self-regulatory orga-nization that has been granted an ex-emption pursuant to § 30.10 of thischapter or has entered into a Memo-randum of Understanding or other ar-rangement for cooperative enforcementand information sharing with the Com-mission (for the purposes of this sec-tion, referred to as a ‘‘foreign author-ity’’), provided that the certification re-quired by paragraph (a–1)(5)(iv)(C) ofthis section is made.

(ii) Eligible customers. The accountsfor which orders eligible for post-exe-cution allocation may be placed and towhich fills may be allocated must beowned by the following entities:

(A) A bank or trust company;(B) A savings and loan association or

credit union;(C) An insurance company;


75


(D) An investment company subjectto regulation under the InvestmentCompany Act of 1940 (15 U.S.C. 80a–1 etseq.) or a foreign investment companyperforming a similar role or functionsubject to foreign regulation, providedthat the investment company has totalassets exceeding $5,000,000;

(E) A commodity pool formed and op-erated by a person subject to regula-tion under the Act or a foreign entityperforming a similar role or functionsubject to foreign regulation, providedthat the commodity pool or foreign en-tity has total assets exceeding$5,000,000;

(F) A corporation, partnership, pro-prietorship, organization, trust, orother entity, provided that the entityhas either a net worth exceeding$1,000,000 or total assets exceeding$10,000,000;

(G) An employee benefit plan subjectto the Employee Retirement IncomeSecurity Act of 1974 or a foreign entityperforming a similar role or functionsubject to foreign regulation, withtotal assets exceeding $5,000,000 orwhose investment decisions are madeby a bank, trust company, insurancecompany, investment adviser subjectto regulation under the Investment Ad-visers Act of 1940 (15 U.S.C. 80b–1 etseq.) or a commodity trading advisorsubject to regulation under the Act;

(H) Any governmental entity (includ-ing the United States, any State, orany foreign government) or politicalsubdivision thereof, or any multi-national or supranational entity or anyinstrumentality, agency, or depart-ment of any of the foregoing;

(I) A broker-dealer subject to regula-tion under the Securities Exchange Actof 1934 (15 U.S.C. 78a et seq.) or a foreignperson performing a similar role orfunction subject to foreign regulation,acting on its own behalf;

(J) A futures commission merchant,floor broker, or floor trader subject toregulation under the Act or a foreignperson performing a similar role orfunction subject to foreign regulation,acting on its own behalf;

(K) An eligible account manager, asdefined in paragraph (a–1)(5)(i) of thissection; or

(L) Any natural person with total as-sets exceeding $10,000,000.

(iii) Disclosure. Before placing the ini-tial order eligible for post-execution al-location, the account manager mustdisclose the following to each of itscustomers to be subject to post-execu-tion allocation:

(A) The general nature of the alloca-tion methodology the account managerwill use;

(B) The standard by which the ac-count manager will judge the fairnessof allocations;

(C) The ability of the customer to re-view summary or composite data suffi-cient for that customer to compare itsresults with those of other relevantcustomers; and

(D) Whether accounts in which theaccount manager may have any inter-est may be included with customer ac-counts in bunched orders eligible forpost-execution allocation.

(iv) Account certification. Before plac-ing an order eligible for post-executionallocation, the account manager mustprovide the following to each futurescommission merchant clearing anypart of the order:

(A) If not previously provided, cer-tification, in writing, that the accountmanager is aware of, and will remain incompliance with, the requirements ofthis paragraph. This certification shallremain in effect until revoked by theaccount manager; and

(B) If not previously identified, theidentity of each eligible customer ac-count to which fills will be allocated.

(C) Foreign advisers must also pro-vide a written certification from a for-eign authority stating that the foreignadviser’s activities are subject to regu-lation by that foreign authority andthe foreign authority will provide,upon request of the Commission or De-partment of Justice, information thatrelates to the foreign adviser’s compli-ance with the requirements of thisparagraph.

(v) Allocation. Orders eligible forpost-execution allocation must be allo-cated in accordance with the following:

(A) Allocations must be made only tothe accounts of eligible customers.

(B) Allocations must be made as soonas practicable after the entire trans-action is executed, but no later thanthe end of the day the order is exe-cuted.


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17 CFR Ch. I (4–1–01 Edition)§ 1.35

(C) Allocations must be fair and equi-table. No account or group of accountsmay receive consistently favorable orunfavorable treatment.

(D) The allocation methodology mustbe sufficiently objective and specific sothat the appropriate allocation for agiven trade can be verified in an inde-pendent audit.

(E) The allocation methodology mustbe consistently applied.

(vi) Recordkeeping. The following rec-ordkeeping requirements apply to or-ders eligible for post-execution alloca-tion:

(A) Prior to order placement, eachaccount manager must create andtimestamp an order origination docu-ment reflecting the terms of the orderand expected allocation thereof. Anysubsequent determination to alter anyterms or allocation of the order shouldlikewise be documented.

(B) Each order must be identified bygroup identifier or other code on theoffice and/or floor order tickets at thetime of placement. The group identifieror other code on each order ticketmust relate back to the specific orderorigination document required by para-graph (a–1)(5)(vi)(A) of this section.

(C) Each transaction must be identi-fied as part of an order eligible forpost-execution allocation on contractmarket trade registers and other com-puterized trade practice surveillancerecords.

(D) Each account manager mustmake available, upon request of anyrepresentative of the Commission orthe United States Department of Jus-tice, the following records:

(1) The disclosure documents re-quired pursuant to paragraph (a–1)(5)(iii) of this section; and

(2) Records reflecting futures and op-tion transactions and other trans-actions and any other records, includ-ing the order origination document,that would identify the managementstrategy or the allocation methodologyor would relate to, or reflect upon, thefairness of the allocations.

(E) Each account manager mustmake available for review, upon re-quest of an eligible customer, summaryor composite data sufficient for thatcustomer to compare its results withthose of other relevant customers.

These summary data may be preparedso as not to disclose the identity of in-dividual account holders.

(vii) Self regulatory organization ruleenforcement and audit procedures. Aspart of its rule enforcement program,each contract market that adopts rulesthat allow the placement of orders eli-gible for post-execution allocationmust adopt audit procedures to deter-mine compliance with the record-keeping requirements identified inparagraph (a–1)(5)(vi) (B) and (C) of thissection. Each contract market, or thedesignated self-regulatory organizationof a member firm, must adopt auditprocedures to determine compliancewith the certification and allocationrequirements identified in paragraphs(a–1)(5)(iv) and (a–1)(5)(v) (A) and (B) ofthis section.

(a–2)(1) Futures commission merchants,introducing brokers, and members of con-tract markets. Upon request of the con-tract market, the Commission, or theUnited States Department of Justice,each futures commission merchant, in-troducing broker, and member of a con-tract market shall request from itscustomers and, upon receipt thereof,provide to the requesting body docu-mentation of cash transactions under-lying exchanges of futures for cashcommodities or exchanges of futures inconnection with cash commoditytransactions.

(2) Customers. Each customer of a fu-tures commission merchant, intro-ducing broker, or member of a contractmarket shall create, retain, andproduce upon request of the contractmarket, the Commission, or the UnitedStates Department of Justice docu-mentation of cash transactions under-lying exchanges of futures for cashcommodities or exchanges of futures inconnection with cash commoditytransactions.

(3) Contract markets. Every contractmarket shall adopt rules which requireits members to provide documentationof cash transactions underlying ex-changes of futures for cash commod-ities or exchanges of futures in connec-tion with cash commodity transactionsupon request of the contract market.

(4) Documentation. For the purposesof this paragraph, documentationmeans those documents customarily


77


generated in accordance with cashmarket practices which demonstratethe existence and nature of the under-lying cash transactions, including, butnot limited to, contracts, confirmationstatements, telex printouts, invoices,and warehouse receipts or other docu-ments of title.

(b) Futures commission merchants, in-troducing brokers, and clearing membersof contract markets. Each futures com-mission merchant and each clearingmember of a contract market and, forpurposes of paragraph (b)(3) of this sec-tion, each introducing broker, shall, asa minimum requirement, prepare regu-larly and promptly, and keep system-atically and in permanent form, thefollowing:

(1) A financial ledger record whichwill show separately for each customeror option customer all charges againstand credits to such customer’s or op-tion customer’s account, including butnot limited to customer funds depos-ited, withdrawn, or transferred, andcharges or credits resulting from lossesor gains on closed transactions;

(2) A record of transactions whichwill show separately for each account(including proprietary accounts):

(i) All commodity futures trans-actions executed for such account, in-cluding the date, price, quantity, mar-ket, commodity and future; and

(ii) All commodity option trans-actions executed for such account, in-cluding the date, whether the trans-action involved a put or call, expira-tion date, quantity, underlying con-tract for future delivery or underlyingphysical, strike price, and details ofthe purchase price of the option, in-cluding premium, mark-up, commis-sion and fees; and

(3) A record or journal which will sep-arately show for each business daycomplete details of:

(i) All commodity futures trans-actions executed on that day, includingthe date, price, quantity, market, com-modity, future and the person forwhom such transaction was made;

(ii) All commodity option trans-actions executed on that day, includingthe date, whether the transaction in-volved a put or call, the expirationdate, quantity, underlying contract forfuture delivery, or underlying physical,

strike price, details of the purchaseprice of the option, including premium,mark-up, commission and fees and theperson for whom the transaction wasmade; and

(iii) In the case of an introducingbroker, the record or journal requiredby this paragraph (b)(3) shall also in-clude the futures commission merchantcarrying the account for which eachcommodity futures and commodity op-tion transaction was executed on thatday. Provided, however, that where re-productions on microfilm, microficheor optical disk are substituted for hardcopy in accordance with the provisionsof § 1.31(b) of this part, the require-ments of paragraphs (b)(1) and (b)(2) ofthis section will be considered met ifthe person required to keep suchrecords is ready at all times to provide,and immediately provides in the samecity as that in which such person’scommodity or commodity option booksand records are maintained, at the ex-pense of such person, reproduced copieswhich show the records as specified inparagraphs (b)(1) and (b)(2) of this sec-tion, on request of any representativesof the Commission or the U.S. Depart-ment of Justice.

(c) Clearing members of contract mar-kets. In the daily record or journal re-quired to be kept under paragraph(b)(3) of this section, each clearingmember of a contract market shall alsoshow the floor broker or floor traderexecuting each transaction, the oppo-site floor broker or floor trader, andthe opposite clearing member withwhom it was made.

(d) Members of contract markets. (1)Each member of a contract marketwho, in the place provided by the con-tract market for the meeting of per-sons similarly engaged, executes pur-chases or sales of any commodity forfuture delivery or commodity optionon or subject to the rules of such con-tract market, shall prepare regularlyand promptly a trading card or otherrecord showing such purchases andsales. Such trading card or record shallshow the member’s name, the name ofthe clearing member, transaction date,time (as specified in rules of the con-tract market which comply with therequirements of this section), quantity,


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17 CFR Ch. I (4–1–01 Edition)§ 1.35

and, as applicable, underlying com-modity, contract for future delivery orphysical, price or premium, deliverymonth or expiration date, whether thetransaction involved a put or a call andstrike price. Such trading card or otherrecord shall also clearly identify theopposite floor broker or floor traderwith whom the transaction was exe-cuted, and the opposite clearing mem-ber (if, in accordance with the rules orpractice of the contract market, suchopposite clearing member is madeknown to the member).

(2) Each member of a contract mar-ket recording purchases and sales ontrading cards must record such pur-chases and sales in exact chronologicalorder of execution on sequential linesof the trading card without skippinglines between trades; Provided, how-ever; That if lines remain after the lastexecution recorded on a trading card,the remaining lines must be markedthrough.

(3) Each member of a contract mar-ket must identify on his trading cardsin the manner prescribed by the rulesof the contract market the purchasesand sales executed during the openingand closing periods designated by thecontract market pursuant to paragraph(j)(7) of this section.

(4) Trading cards prepared by a mem-ber of a contract market pursuant tocontract market rules must contain:

(i) Pre-printed member identificationor other unique identifying informa-tion which would permit the tradingcards of one member to be distin-guished from those of all other mem-bers;

(ii) Pre-printed sequence numbers topermit the intra-day sequencing of thecards; and

(iii) Unique and pre-printed identi-fying information which would distin-guish each of the trading cards pre-pared by the member from other suchtrading cards for no less than a one-week period.

(5) Trading cards prepared by a mem-ber of a contract market and collectedpursuant to paragraph (j)(1) of this sec-tion must be timestamped promptly tothe nearest minute upon collection byeither the contract market or the rel-evant clearing member.

(6) Each member of a contract mar-ket shall be accountable for all tradingcards prepared pursuant to contractmarket rules in exact numerical se-quence, whether or not such tradingcards are relied on as original sourcedocuments.

(7) Trading records prepared by amember of a contract market pursuantto contract market rules must:

(i) Be submitted in accordance withcontract market rules adopted pursu-ant to paragraph (j)(1) of this section;and

(ii) Be completed in non-erasable ink.A member may correct any errors bycrossing out erroneous informationwithout obliterating or otherwise mak-ing illegible any of the originally re-corded information. With regard totrading cards only, a member may cor-rect erroneous information by rewrit-ing the trading card; provided, how-ever, that the member must submit aply of the trading card, or in the ab-sence of plies the original trading card,that is subsequently rewritten in ac-cordance with contract market ruleswhich set forth the required collectionschedule for trading cards and providedfurther that the member is accountablefor any trading card that subsequentlyis rewritten pursuant to paragraph(d)(6) of this section.

(8) Each member of a contract mar-ket must use a new trading card at thebeginning of each designated 30-minuteinterval required by paragraph (j)(1) ofthis section (or such lesser interval asmay be determined appropriate by theapplicable contract market) or as maybe required pursuant hereto.

(e) Contract markets. Each contractmarket shall maintain or cause to bemaintained by its clearing organiza-tion a single record which shall showfor each futures or option trade: thetransaction date, time (as described inparagraph (g) of this section), quantity,and, as applicable, underlying com-modity, contract for future delivery orphysical, price or premium, deliverymonth or expiration date, whether thetransaction involved a put or a call,strike price, floor broker or floor trad-er buying, clearing member buying,floor broker or floor trader selling,clearing member selling, and symbols


79


indicating the buying and selling cus-tomer or option customer types. Thecustomer and option customer type in-dicators shall show, with respect toeach person executing the trade,whether such person:

(1) Was trading for his own account,or an account for which he has discre-tion;

(2) Was trading for his clearing mem-ber’s house account;

(3) Was trading for another memberpresent on the exchange floor, or an ac-count controlled by such other mem-ber; or

(4) Was trading for any other type ofcustomer or option customer. Therecord required by this paragraph (e)shall also show, by appropriate anduniform symbols, any transactionwhich is made non-competitively in ac-cordance with written rules of the con-tract market which have been sub-mitted to and approved by the Commis-sion in accordance with the provisionsof § 1.38, and trades cleared on datesother than the date of execution. Ex-cept as otherwise approved by the Com-mission for good cause shown, therecord required by this paragraph (e)shall be maintained in a format andcoding structure approved by the Com-mission (i) in hard copy or on micro-film as specified in § 1.31 and (ii) for 60days in computer-readable form oncompatible magnetic tapes or discs.

(f) Each contract market shall pro-vide for the identification of floor bro-kers, floor traders, and clearing mem-bers, in the records required to be keptunder paragraphs (c), (d), and (e) of thissection, by the use of a distinctive,nonvariable designation for each suchfloor broker, floor trader, and clearingmember.

(g) Time of trade execution. For pur-poses of paragraph (e) of this section:(1) The actual time of the execution ofeach side of a transaction must be ob-tained, or (2) if a contract market iden-tifies and records the time of a trans-action, a single actual time of execu-tion for both sides of the transactionmay be obtained. Actual times of exe-cution shall be stated in increments ofno more than one minute in length. Ifa contract market submits rules to theCommission, in accordance with theprovisions of section 5a(a)(12)(A) of the

Act and § 1.41, defining and separatelyidentifying opening and closing timeperiods, the contract market may, forpurposes of paragraph (e) of this sec-tion, use those time periods for tradesoccurring during the opening and clos-ing periods. Contract market rules ineffect prior to the effective date of thisparagraph (g) upon which a contractmarket intends to rely in complyingherewith must be submitted for thispurpose to the Commission in accord-ance with the provisions of section5a(a)(12)(A) of the Act and § 1.41.

(h) Contract market price change reg-ister. Each contract market shall estab-lish and maintain a record of allchanges in the price of futures or op-tion transactions executed on the floorof the contract market. This recordshall include the time of all changes inprice to the nearest ten seconds.

(i) Contract markets. A contract mar-ket, in order to demonstrate that it isexercising due diligence in maintainingthe continuing affirmative action pro-gram required by the Act and § 1.51,shall, at a minimum:

(1) Demonstrate effective use in itscontinuing affirmative action programof the information required to be ob-tained by paragraph (e) of this sectionto reconstruct rapidly and accuratelytransactions executed on or subject tothe rules of such contract market; and

(2) Submit to the Commission suchreports as the Commission or the Di-rector of the Division of Trading andMarkets, or such persons under the su-pervision of the Director as may bespecified from time to time, may re-quire concerning the accuracy of all in-formation recorded under paragraph (e)of this section and the use of such in-formation in the contract market’s af-firmative action program.

(j) Contract markets. Each contractmarket must maintain in effect ruleswhich require that:

(1) Trading records prepared by amember of the contract market pursu-ant to paragraphs (a–1) and (d) of thissection be submitted to contract mar-ket personnel or the clearing memberwithin 15 minutes of designated inter-vals not to exceed 30 minutes, com-mencing with the beginning of eachtrading session. The time period per-mitted for the submission of trading


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17 CFR Ch. I (4–1–01 Edition)§ 1.36

records after the close of trading ineach market shall not exceed 15 min-utes from the close. Such documentsshould nevertheless be collected asoften as is practicable by the contractmarket or relevant clearing member.Such contract market rules need not,however, require that those originalsource documents which cannot be re-lied upon by the contract market orclearing member for clearing purposesbe submitted pursuant to this para-graph. Each contract market shall sub-mit a written report to the Commis-sion no later than nine months afterthe effective date of this paragraph de-scribing with particularity the con-tract market’s system(s) in place tocomply with this paragraph and thelevel of compliance achieved to date.

(2) Trading cards collected pursuantto this paragraph must be timestampedpromptly to the nearest minute uponcollection by either the contract mar-ket or relevant clearing member.

(3) A member of the contract marketmust use a new trading card at the be-ginning of each designated 30-minuteinterval required by paragraph (j)(1) ofthis section.

(4) A member of the contract marketmust record trades in the manner pre-scribed by paragraph (d)(2) of this sec-tion.

(5) Trading cards prepared by a mem-ber of the contract market must con-tain the identifying information pre-scribed by paragraph (d)(4) of this sec-tion.

(6) A member of the contract marketmust be accountable for all tradingcards prepared pursuant to contractmarket rules in exact numerical se-quence, whether or not such tradingcards are relied on as original sourcedocuments.

(7) A member of the contract marketmust identify on his trading cardstrades executed during opening andclosing periods either by drawing a lineon the trading card to separate thosetrades from others recorded thereon orby some other method. Each contractmarket must designate as opening andclosing periods for this purpose thoseperiods upon which the opening andclosing trading ranges are based foreach of its markets.

(8) A member of the contract marketmust complete trades in non-erasableink in the manner prescribed by para-graph (d)(7)(ii) of this section.

(k) Collection of trading cards in inter-vals not to exceed 15 minutes. The Com-mission, in its discretion, may publisha schedule in the FEDERAL REGISTER noearlier than 11 months after paragraph(j)(1) of this section becomes effective,indicating when the records required tobe submitted pursuant to that para-graph must be submitted to contractmarket personnel or the clearing mem-ber within 15 minutes of designated in-tervals not to exceed 15 minutes, com-mencing with the beginning of eachtrading session.

(l) A contract market which can dem-onstrate that it currently has availablehand-held terminals or such otherautomated means for the recordationof trades which can eliminate the op-portunity for improper alteration orfabrication of trading records, may pe-tition the Commission for an exemp-tion from Regulations 1.35(a–1) (2) and(4), (d), (j) or (k), as appropriate.


[41 FR 3194, Jan. 21, 1976, as amended by 46FR 54521, Nov. 3, 1981; 46 FR 55925, Nov. 13,1981; 46 FR 63035, Dec. 30, 1981; 47 FR 57008,Dec. 22, 1982; 48 FR 35389, Aug. 3, 1983; 51 FR2691, Jan. 21, 1986; 54 FR 33881, Aug. 17, 1989;55 FR 8137, Mar. 7, 1990; 58 FR 27465, May 10,1993; 58 FR 31166, June 1, 1993; 58 FR 40348,July 28, 1993; 59 FR 5525, Feb. 7, 1994; 61 FR43001, Aug. 20, 1996; 63 FR 45709, Aug. 27, 1998;63 FR 49955, Sept. 18, 1998]

§ 1.36 Record of securities and prop-erty received from customers andoption customers.

(a) Each futures commission mer-chant shall maintain, as provided in§ 1.31, a record of all securities andproperty received from customers oroption customers in lieu of money tomargin, purchase, guarantee, or securethe commodity or commodity optiontransactions of such customers or op-tion customers. Such record shall showseparately for each customer or optioncustomer: a description of the securi-ties or property received; the name andaddress of such customer or option cus-tomer; the dates when the securities orproperty were received; the identity of


81


the depositories or other places wheresuch securities or property are seg-regated; the dates of deposits and with-drawals from such depositories; and thedates of return of such securities orproperty to such customer or optioncustomer, or other disposition thereof,together with the facts and cir-cumstances of such other disposition.In the event any futures commissionmerchant deposits with the clearing or-ganization of a contract market, di-rectly or with a bank or trust companyacting as custodian for such clearingorganization, securities and/or prop-erty which belong to a particular cus-tomer or option customer, such futurescommission merchant shall obtainwritten acknowledgment from suchclearing organization that it was in-formed that such securities or propertybelong to customers or option cus-tomers of the futures commission mer-chant making the deposit. Such ac-knowledgment shall be retained as pro-vided in § 1.31.

(b) Each clearing organization of acontract market which receives frommembers securities or property belong-ing to particular customers or optioncustomers of such members in lieu ofmoney to margin, purchase, guarantee,or secure the commodity or commodityoption transactions of such customersor option customers, or receives noticethat any such securities or propertyhave been received by a bank or trustcompany acting as custodian for suchclearing organization, shall maintain,as provided in § 1.31, a record which willshow separately for each member, thedates when such securities or propertywere received, the identity of the de-positories or other places where suchsecurities or property are segregated,the dates such securities or propertywere returned to the member, or other-wise disposed of, together with thefacts and circumstances of such otherdisposition including the authorizationtherefor.


[46 FR 54522, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 48 FR 8435, Mar. 1,1983]

§ 1.37 Customer’s or option customer’sname, address, and occupation re-corded; record of guarantor or con-troller of account.

(a) Each futures commission mer-chant, introducing broker, and memberof a contract market shall keep arecord in permanent form which shallshow for each commodity futures oroption account carried or introducedby it the true name and address of theperson for whom such account is car-ried or introduced and the principal oc-cupation or business of such person aswell as the name of any other personguaranteeing such account or exer-cising any trading control with respectto such account. For each such com-modity option account, the recordskept by such futures commission mer-chant, introducing broker, and memberof a contract market must also showthe name of the person who has solic-ited and is responsible for each optioncustomer’s account or assign accountnumbers in such a manner to identifythat person.

(b) As of the close of the market eachday, each futures commission mer-chant which carries an account for an-other futures commission merchant,foreign broker (as defined in § 15.00 ofthis chapter), member of a contractmarket, or other person, on an omni-bus basis shall maintain a daily recordfor each such omnibus account of thetotal open long contracts and the totalopen short contracts in each futureand, for commodity option trans-actions, the total open put options pur-chased, the total open put optionsgranted, the total open call optionspurchased, and the total open call op-tions granted for each commodity op-tion expiration date.

(The information collection requirementscontained in § 1.37 were approved by the Of-fice of Management and Budget under con-trol numbers 3038–0007 and 3038–0024; and inparagraph (b) under control number 3038–0009)

[46 FR 54523, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 48 FR 35289, Aug. 3,1983; 58 FR 28501, May 14, 1993]

§ 1.38 Execution of transactions.(a) Competitive execution required; ex-

ceptions. All purchases and sales of anycommodity for future delivery, and of


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17 CFR Ch. I (4–1–01 Edition)§ 1.39

any commodity option, on or subject tothe rules of a contract market shall beexecuted openly and competitively byopen outcry or posting of bids and of-fers or by other equally open and com-petitive methods, in the trading pit orring or similar place provided by thecontract market, during the regularhours prescribed by the contract mar-ket for trading in such commodity orcommodity option: Provided, however,That this requirement shall not applyto transactions which are executednon-competitively in accordance withwritten rules of the contract marketwhich have been submitted to and ap-proved by the Commission, specificallyproviding for the non-competitive exe-cution of such transactions.

(b) Noncompetitive trades; exchange offutures, etc.; requirements. Every personhandling, executing, clearing, or car-rying trades, transactions or positionswhich are not competitively executed,including transfer trades or officetrades, or trades involving the ex-change of futures for cash commoditiesor the exchange of futures in connec-tion with cash commodity trans-actions, shall identify and mark by ap-propriate symbol or designation allsuch transactions or contracts and allorders, records, and memoranda per-taining thereto.



§ 1.39 Simultaneous buying and sellingorders of different principals; exe-cution of, for and between prin-cipals.

(a) Conditions and requirements. Amember of a contract market who shallhave in hand at the same time bothbuying and selling orders of differentprincipals for the same commodity forfuture delivery in the same deliverymonth or the same option (both puts orboth calls, with the same underlyingcontract for future delivery or thesame underlying physical, expirationdate and strike price) may executesuch orders for and directly betweensuch principals at the market price, ifin conformity with written rules of

such contract market which have beenapproved by the Commission, and:

(1)(i) When trading is conducted in atrading pit or ring, such orders arefirst offered openly and competitivelyby open outcry in such trading pit orring (A) by both bidding and offering atthe same price, and neither such bidnor offer is accepted, or (B) by biddingand offering to a point where such offeris higher than such bid by not morethan the minimum permissible pricefluctuation applicable to such futurescontract or commodity option on suchcontract market, and neither such bidnor offer is accepted; or

(ii) When in nonpit trading in con-tracts of sale for future delivery, bidsand offers are posted on a board, suchmember (A) pursuant to such buyingorder posts a bid on the board and, in-cident to the execution of such sellingorder, accepts such bid and all otherbids posted at prices equal to or higherthan the bid posted by him, or (B) pur-suant to such selling order posts anoffer on the board and, incident to theexecution of such buying order, acceptssuch offer and all other offers posted atprices equal to or lower than the offerposted by him;

(2) Such member executes such or-ders in the presence of an official rep-resentative of such contract marketdesignated to observe such trans-actions and, by appropriate descriptivewords or symbol, clearly identifies allsuch transactions on his trading cardor other similar record, made at thetime of execution, and notes thereonthe exact time of execution andpromptly presents said record to suchofficial representative for verificationand initialing;

(3) Such contract market keeps arecord in permanent form of each suchtransaction showing the transactiondate, by whom executed, the exacttime of execution, quantity, and, as ap-plicable, underlying commodity, con-tract for future delivery or physical,price or premium, whether a put or acall, and strike price; and

(4) Neither the futures commissionmerchant receiving nor the memberexecuting such orders has any interesttherein, directly or indirectly, exceptas a fiduciary.


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(b) Large Order Execution Procedures.A member of a contract market mayexecute simultaneous buying and sell-ing orders of different principals di-rectly between the principals in com-pliance with large order execution pro-cedures established by written rules ofthe contract market that have been ap-proved by the Commission: Provided,That, to the extent such large orderexecution procedures do not meet theconditions and requirements of para-graph (a) of this section, the contractmarket has petitioned the Commissionfor, and the Commission has granted,an exemption from the conditions andrequirements of paragraph (a) of thissection. Any such petition must be ac-companied by proposed contract mar-ket rules to implement the large orderexecution procedures. The petitionshall include:

(1) An explanation of why the pro-posed large order execution rules donot comply with paragraph (a) of thissection; and

(2) A description of a special surveil-lance program that would be followedby the contract market in monitoringthe large order execution procedures.

The Commission may, in its discretionand upon such terms and conditions asit deems appropriate, grant such peti-tion for exemption if it finds that theexemption is not contrary to the publicinterest and the purposes of the provi-sion from which exemption is sought.The petition shall be considered con-currently with the proposed large orderexecution rules.

(c) Not deemed filling orders by offsetnor cross trades. The execution of ordersin compliance with the conditionsherein set forth will not be deemed toconstitute the filling of orders by offsetwithin the meaning of paragraph (iv) ofsection 4b(a) of the Act, nor to con-stitute cross trades within the meaningof paragraph (A) of section 4c(a) of theAct.


[41 FR 3194, Jan. 21, 1976, as amended at 46FR 63035, Dec. 30, 1981; 47 FR 57008, Dec. 22,1982; 56 FR 12344, Mar. 25, 1991; 59 FR 5525,Feb. 7, 1994]

MISCELLANEOUS

§ 1.40 Crop, market information let-ters, reports; copies required.

Each futures commission merchantand each member of a contract marketshall, upon request, furnish or cause tobe furnished to the Commission a truecopy of any letter, circular, telegram,or report published or given generalcirculation by such futures commissionmerchant or member which concernscrop or market information or condi-tions that affect or tend to affect theprice of any commodity, and the truesource of or authority for the informa-tion contained therein.


[41 FR 3194, Jan. 21, 1976, as amended at 46FR 63035, Dec. 30, 1981]

§ 1.41 Contract market rules; submis-sion of rules to the Commission; ex-emption of certain rules.

(a) Definitions. For purposes of thissection:

(1) The term rule of a contract mar-ket means any constitutional provi-sion, article of incorporation, bylaw,rule, regulation, resolution, interpreta-tion, stated policy, or instrument cor-responding thereto, in whatever formadopted, and any amendment or addi-tion thereto or repeal thereof, made orissued by a contract market, or by thegoverning board thereof or any com-mittee thereof.

(2) The words terms and conditionsmean any definition of the trading unitor the specific commodity underlying acontract for the future delivery of acommodity or commodity option con-tract, specification of settlement or de-livery standards and procedures, andestablishment of buyers’ and sellers’rights and obligations under the con-tract. Terms and conditions shall bedeemed to include provisions relatingto the following:

(i) Quality or quantity standards fora commodity and any applicable ex-emptions or discounts;

(ii) Trading hours, trading monthsand the listing of contracts;

(iii) Minimum and maximum pricelimits and the establishment of settle-ment prices;


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17 CFR Ch. I (4–1–01 Edition)§ 1.41

(iv) Position limits and position re-porting requirements;

(v) Delivery points and locationalprice differentials;

(vi) Delivery standards and proce-dures, including alternatives to deliv-ery and applicable penalties or sanc-tions for failure to perform;

(vii) Settlement of the contract; and(viii) Payment or collection of com-

modity option premiums or margins.(3) The term contract market includes

a clearing organization that clearstrades for the contract market.

(4) The term emergency means any oc-currence or circumstance listed in thisparagraph (a)(4) which, in the opinionof the governing board of the contractmarket, requires immediate action andthreatens or may threaten such thingsas the fair and orderly trading in, orthe liquidation of or delivery pursuantto, any contracts on such contractmarket. Occurrences and cir-cumstances which a governing board ofa contract market may deem emer-gencies are limited to the following:

(i) Any manipulative activity or at-tempted manipulative activity;

(ii) Any actual, attempted, or threat-ened corner, squeeze, congestion, orundue concentration of positions;

(iii) Any circumstances which maymaterially affect the performance ofcontracts traded on the contract mar-ket, including failure of the paymentsystem;

(iv) Any action taken by the UnitedStates or any foreign government orany state or local governmental body,any other contract market, board oftrade, or any other exchange or tradeassociation (foreign or domestic),which may have a direct impact ontrading on the contract market;

(v) Any circumstances which mayhave a severe, adverse effect upon thephysical functions of a contract mar-ket including, for example, fire orother casualty; bomb threats; substan-tial inclement weather; power failures;communications breakdowns; com-puter system breakdowns; screen-basedtrading system breakdowns; malfunc-tions of plumbing, heating, ventilationand air conditioning systems; andtransportation breakdowns.

(vi) The bankruptcy or insolvency ofany member or member firm of the

contract market or the imposition ofany injunction or other restraint byany government agency, court or arbi-trator upon a member of the contractmarket which may affect the ability ofthat member to perform on its con-tracts;

(vii) Any circumstance in which itappears that a member or any otherperson has failed to perform contracts,is insolvent, or is in such financial oroperational condition or is conductingbusiness in such a manner that suchperson cannot be permitted to continuein business without jeopardizing thesafety of customer funds, members ofthe contract market, or the contractmarket; and

(viii) Any other unusual, unforesee-able and adverse circumstance with re-spect to which it is not practicable forthe contract market to submit, in atimely fashion, a rule to the Commis-sion for prior review under section5a(a)(12)(A) of the Act.

(5) The term governing board of a con-tract market means the board of direc-tors, the board of governors, the boardof managers or any other similar bodyof the contract market or any com-mittee duly authorized, pursuant to arule of the contract market that hasbeen approved by the Commission orhas become effective pursuant to sec-tion 5a(a)(12)(A) of the Act to take ac-tion for and on behalf of the contractmarket with respect to an emergency.

(6) The term two-thirds vote of a gov-erning board of a contract marketmeans the affirmative vote of two ormore persons constituting not lessthan two-thirds of the members of suchgoverning board either (i) physicallypresent and voting at a meeting of suchgoverning board at which a quorum ofat least one-third of the members isphysically in attendance or (ii) votingin any manner other than at a meetingof such board at which a quorum of atleast one-third of the members is phys-ically in attendance as permitted byapplicable state corporation law.

(7) The term temporary emergency rulemeans a rule adopted by a ‘‘two-thirdsvote’’ of the governing board of a con-tract market to meet an emergency.

(8) The term affiliated firm of a personmeans any firm in which the person isa general partner, officer, director,


85


principal, employee, or owner of morethan ten percent of the equity interest.

(b) Rules that relate to terms and condi-tions. (1)(i) Except as provided hereinand in paragraph (f) of this section, allproposed contract market rules thatrelate to terms and conditions must besubmitted to the Commission for ap-proval pursuant to section 5a(a)(12)(A)of the Act prior to their proposed effec-tive dates. One copy of each such rulesubmitted under this section shall befurnished to the Commission at itsWashington, DC headquarters, and, ex-cluding submissions under paragraphs(h) through (t) of this section, one copyshall be furnished to the regional officeof the Commission having local juris-diction over the contract market. Pro-vided, however, that for submissionsunder appendix A to part 5 of the Com-mission’s Regulations with respect tocontract market designation applica-tions, three copies of such submissionsshall be furnished to the Commissionat its Washington, DC headquarters.Each submission under this paragraph(b) shall, in the following order:

(A) Label the submission as beingsubmitted pursuant to § 1.41(b);

(B) Set forth the text of the proposedrule (in the case of any change in, addi-tion to, or deletion from any currentrule of the contract market, the cur-rent rule shall be fully set forth, withbrackets used to indicate words to bedeleted and underscoring used to indi-cate words to be added);

(C) Describe the proposed effectivedate of the proposed rule and any ac-tion taken or anticipated to be takento adopt the proposed rule by the con-tract market, or by the governingboard thereof or any committee there-of, and cite the rules of the contractmarket which authorize the adoptionof the proposed rule;

(D) Explain the operation, purpose,and effect of the proposed rule, includ-ing, as applicable, a description of theanticipated benefits to market partici-pants or others, any potential anti-competitive effects on market partici-pants or others, how the rule fits intothe contract market’s scheme of self-regulation, information which dem-onstrates that the proposed rule is notinconsistent with the policies and pur-poses of the Act, and any other infor-

mation which may be beneficial to theCommission in analyzing the proposedrule. If a proposed rule affects, directlyor indirectly, the application of anyother rule of the contract market, setforth the pertinent text of any suchrule and describe the anticipated ef-fect; and

(E) Note and briefly describe any sub-stantive opposing views expressed bythe members of the contract market orothers with respect to the proposedrule which were not incorporated intothe proposed rule prior to its submis-sion to the Commission.

(ii) The Commission may remit tothe contract market, with an appro-priate explanation where practicable,and not accept for review any rule sub-mission that does not comply with theform and content requirements of para-graphs (b)(1)(i) (A) through (E) of thissection.

(2) All proposed contract marketrules that relate to terms and condi-tions submitted for review under para-graph (b)(1) shall be deemed approvedby the Commission under section5a(a)(12)(A) of the Act, forty-five daysafter receipt by the Commission, unlessnotified otherwise within that period,if:

(i) The contract market labels thesubmission as being submitted pursu-ant to Commission rule 1.41(b)—FastTrack Review;

(ii) The submission complies with therequirements of paragraphs (b)(1)(i) (A)through (E), of this section or for dor-mant contracts, the requirements of§ 5.2 of this chapter;

(iii) The contract market does notamend the proposed rule or supplementthe submission, except as requested bythe Commission, during the pendencyof the review period; and

(iv) The contract market has not in-structed the Commission in writingduring the review period to review theproposed rule under the usual proce-dures under section 5a(a)(12)(A) of theAct and paragraph (b)(1) of this sec-tion.

(3) The Commission, within forty-fivedays after receipt of a submission filedpursuant to paragraph (b)(2) of this sec-tion, may notify the contract marketmaking the submission that the reviewperiod has been extended for a period of


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thirty days where the proposed ruleraises novel or complex issues whichrequire additional time for review.This notification will briefly specifythe nature of the specific issues forwhich additional time for review is re-quired. Upon such notification, the pe-riod for fast-track review of paragraph(b)(2) of this section shall be extendedfor a period of thirty days.

(4) During the forty-five day periodfor fast-track review, or the thirty-dayextension when the period has been en-larged under paragraph (b)(3) of thissection, the Commission shall notifythe contract market that the Commis-sion is terminating fast-track reviewprocedures and will review the pro-posed rule under the usual proceduresof section 5a(a)(12)(A) of the Act andparagraph (b)(1) of this section, if it ap-pears that the proposed rule may vio-late a specific provision of the Act, reg-ulation, or form or content require-ment of this section. This terminationnotification will briefly specify the na-ture of the issues raised and the spe-cific provision of the Act, regulation,or form or content requirement of thissection that the proposed rule appearsto violate. Within ten days of receipt ofthis termination notification, the con-tract market may request that theCommission render a decision whetherto approve the proposed rule or to in-stitute a proceeding to disapprove theproposed rule under the proceduresspecified in section 5a(a)(12)(A) of theAct by notifying the Commission thatthe contract market views its submis-sion as complete and final as sub-mitted.

(c) Rules that do not relate to terms andconditions. (1)(i) Except as provided inparagraphs (d) and (f) of this section(exempt or temporary emergencyrules), each contract market shall sub-mit to the Commission pursuant tosection 5a(a)(12)(A) of the Act prior tothe proposed effective dates all pro-posed rules that do not relate to termsand conditions. One copy of the ruleshall be furnished to the Commissionat its Washington, DC headquarters,and one copy shall be transmitted bythe contract market to the regional of-fice of the Commission having local ju-risdiction over the contract market.

Each such submission under this para-graph (c) shall, in the following order:

(A) State that it is being submittedpursuant to Commission regulation1.41(c);

(B) Set forth the text of the proposedrule (in the case of any change in, addi-tion to, or deletion from any currentrule of the contact market, the currentrule shall be fully set forth, withbrackets used to indicate words to bedeleted and underscoring used to indi-cate words to be added);

(C) Describe the proposed effectivedate of the proposed rule and any ac-tion taken or anticipated to be takento adopt the proposed rule by the con-tract market, or by the governingboard thereof or any committee there-of, and cite the rules of the contractmarket which authorize the adoptionof the proposed rule;

(D) Explain the operation, purpose,and effect of the proposed rule, includ-ing, as applicable, a description of theanticipated benefits to market partici-pants or others, any potential anti-competitive effects on market partici-pants, or others, how the rule fits intothe contract market’s scheme of self-regulation, information which dem-onstrates that the proposed rule is notinconsistent with the policies and pur-poses of the Act, and any other infor-mation which may be beneficial to theCommission in analyzing the proposedrule. If a proposed rule affects, directlyor indirectly, the application of anyother rule of the contract market, setforth the pertinent text of any suchrule and describe the anticipated ef-fect;

(E) Note and briefly describe any sub-stantive opposing views expressed bygoverning board members, members ofthe contract market, or others with re-spect to the proposed rule which werenot incorporated into the proposed ruleprior to its submission to the Commis-sion. Any such description also shouldidentify the membership interest cat-egories, as that term is defined byCommission regulation 1.64(a)(4), ofpersons who were opposed to the pro-posed rule; and,

(F) Identify any sections of the Actor the Commission’s regulations thatthe Commission may need to amend orinterpret in order to approve or allow


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into effect the proposed rule. To the ex-tent that such an amendment or inter-pretation is necessary to accommodatea proposed rule, the contract marketmust provide a reasoned analysis sup-porting its submission.

(ii) The Commission may remit tothe contract market, with an appro-priate explanation where practicable,and not accept for review any rule sub-mission that does not comply with theform and content requirements of para-graphs (c)(1)(i) (A) through (F) of thissection.

(iii) The Commission may notify thecontract market within ten days afterreceipt of a submission filed pursuantto paragraph (c)(1) of this section, thatthe proposed rule raises novel or com-plex issues which require additionaltime for review or is of major economicsignificance and therefore that the re-view period has been extended as speci-fied in paragraph (c)(3) of this section.This notification will briefly specifythe nature of the issues for which addi-tional time for review is required.

(2) All proposed contract marketrules submitted for review under para-graph (c) of this section may be deemedapproved or be placed into effect, as ap-propriate, ten days after Commissionreceipt (or at such earlier time as maybe determined by the Commission) un-less:

(i) The Commission notifies the con-tract market that the submission doesnot comply with the form and contentrequirements of paragraph (c)(1)(i) ofthis section;

(ii) The Commission notifies the con-tract market that the review period forthe submission has been extended pur-suant to paragraph (c)(1)(iii) of thissection; or

(iii) The contract market agrees toanother, specified review period.

(3) Any rule for which the Commis-sion extends the review period pursu-ant to paragraph (c)(1)(iii) of this sec-tion may be deemed approved or beplaced into effect, as determined by theCommission, forty-five days after Com-mission receipt of such rule or seventy-five days after Commission receipt inthe case of rules that have been pub-lished for comment in the FEDERALREGISTER (or at such earlier time asmay be determined by the Commission)

unless the Commission notifies thecontract market that:

(i) The submission, including anysupplementary materials and in consid-eration of any comments from the pub-lic or other government agencies, doesnot comply with the form and contentrequirements of paragraph (c)(1)(i) ofthis section; or

(ii) The Commission intends to insti-tute a proceeding to disapprove therule pursuant to the procedures speci-fied in section 5a(a)(12)(A) of the Act.

(4) A notice of intention to com-mence a disapproval proceeding issuedpursuant to paragraph (c)(3) of this sec-tion will:

(i) Identify the nature of the issuesraised by the proposed rule and the spe-cific sections of the Act or the Com-mission’s regulations that the rule ap-pears to violate; and,

(ii) State that the Commission maycommence disapproval proceedings forthe proposed rule within thirty daysafter the Commission’s issuance of thenotification, unless within fifteen daysof receipt of such notice the contractmarket:

(A) Withdraws the rule, or(B) Requests the Commission to re-

view the rule pursuant to the one hun-dred and eighty day review proceduresset forth in section 5a(a)(12)(A) of theAct.

(d) Rules that are exempt from the re-quirements of section 5a(a)(12)(A) of theAct. (1) Except as otherwise provided by§§ 1.63 and 1.64, contract market rulesthat do not relate to terms and condi-tions are exempt from the require-ments of section 5a(a)(12)(A) of the Actand this section where such rules ad-dress:

(i) Standards of decorum or attire orsimilar provisions relating to admis-sion to the floor, badges, visitors, butnot the establishment of penalties forviolations of such rules;

(ii) Requirements relating to gra-tuity and similar funds, but not guar-anty, reserves, or similar funds;

(iii) Correction of typographical er-rors, renumbering, or other such non-substantive revisions of rules;

(iv) Procedures and forms for the pur-chase, sale or transfer of membership,but not including qualifications for


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membership, any right or obligation ofmembership, or dues or assessments;

(v) The organization and administra-tive procedures of a contract market’sgoverning bodies such as a Board of Di-rectors, Officers and Committees, butnot voting requirements and proce-dures or requirements or procedures re-lating to conflicts of interest;

(vi) The declaration of holidays;(vii) Facilities housing the contract

market or physical changes in thetrading floor or trading area; or

(viii) The routine, daily administra-tion, direction and control of contractmarket employees.

(2) Rules that are exempt from therequirements of section 5a(a)(12) of theAct in accordance with the provisionsof this paragraph (d) shall nonethelessbe submitted to the Commission pursu-ant to the provisions of section 5a(a)(1)of the Act. Each such submission shallbe labeled as being submitted pursuantto section 5a(a)(1) of the Act and para-graph (d) of this section. One copy ofeach such submission shall be fur-nished to the Commission at its Wash-ington, DC headquarters.

(3) Notwithstanding the provisions ofthis paragraph (d), a contract marketmay submit any such rule to the Com-mission for its approval pursuant tothe provisions of section 5a(a)(12)(A) ofthe Act and paragraph (b) of this sec-tion.

(4) The Commission may remit to thecontract market, with an appropriateexplanation where practicable, and notaccept pursuant to this paragraph anyrule which the Commission determinesto be a rule that is not exempt fromthe provisions of section 5a(a)(12)(A) ofthe Act and paragraphs (b) or (c) of thissection.

(e) Membership lists. Upon request ofthe Commission each contract marketshall promptly furnish to the Commis-sion a current list of the contract mar-ket’s membership.

(f) Temporary emergency rules. In theevent of an emergency, a contract mar-ket, by a two-thirds vote of its gov-erning board, may place into imme-diate effect a temporary emergencyrule to deal with the emergency with-out prior Commission approval, andwithout compliance with the ten-daynotice requirement pursuant to section

5a(a)(12)(A) of the Act and paragraphs(b) and (c) of this section, respectively,subject to the following provisions:

(1) A temporary emergency rule, in-cluding any modification thereof, maynot extend beyond the duration of theemergency, as determined by the con-tract market; but in no event shall atemporary emergency rule, or anymodification thereof, continue, with-out express Commission authorization,beyond 30 days after the temporaryemergency rule is first put into effect.In no event shall a temporary emer-gency rule, or any modification there-of, remain in effect for more than 90days after the temporary emergencyrule is first put into effect.

(2)(i) A contract market must makeevery effort practicable to provide no-tice to the Commission that it intendsto implement, modify or terminate atemporary emergency rule prior to im-plementing, modifying or terminatingthe rule. If it is not practicable for thecontract market to notify the Commis-sion prior to taking emergency action,the contract market shall provide theCommission with notice of the imple-mentation, modification, or termi-nation of any emergency rule at theearliest possible time. Notice must begiven to the Director of the Division ofTrading and Markets or any employeeof the Commission, as may be des-ignated by the Director for such pur-pose. The contract market must pro-vide notice to the Commission by thefastest means available and must useits best efforts to ensure that the no-tice is actually received by one of theauthorized persons above. Noticeshould include:

(A) To the extent practicable, a com-plete explanation of the contract mar-ket action intended or taken to meetthe emergency and a description of thenature of the emergency;

(B) In any instance where a contractmarket does not provide prior notice ofan emergency action, an explanation ofwhy it was not practicable for a con-tract market to provide such notice;and

(C) An explanation of why it was notpracticable for the contract market tosubmit the temporary emergency ruleto the Commission for prior reviewunder section 5a(a)(12)(A) of the Act.


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(ii) Any available documentation ofthe nature of the emergency conditionsand the intended or actual emergencyaction should be submitted at the timeof notification.

(3) On or before the fifth day afterthe day that a contract market pro-vides notice under paragraph (f)(2), ex-cept as described in paragraph (f)(4),the contract market shall supplementits notice by submitting the followinginformation to the Commission at itsWashington, DC headquarters:

(i) A written copy of the temporaryemergency rule and any modificationto or termination of the rule;

(ii) A complete written explanationof the emergency action, which expla-nation must include a complete de-scription of any matter voted on thatrelated to the emergency; a summaryof the substantive reasons in support ofand in opposition to any matter votedon that related to the emergency givenat a meeting in which the members im-plemented, modified, or terminated atemporary emergency rule; the namesof all persons who were members of thegoverning board at the time of themeeting; the names of all persons whoattended the meeting in person or whowere otherwise present by electronicmeans; the name of any person whorescued himself from the meeting, thereason for recusal, and the time thatthe recusal occurred; the approximatetime that notice of the meeting wasgiven to each governing board memberand the times that the meeting beganand ended; the name of any person whowas directed to abstain from delib-erating or voting at the meeting; anitemized list of how each governingboard member voted; and a summary ofany disclosure made by a person of hisor her positions in any subject contractmarket, including disclosure of posi-tions held in any personal account,controlled account, other account inwhich a person has an interest, andcustomer and proprietary accounts at aperson’s affiliated firm;

(iii) Any documentation, not pre-viously provided, relating to the emer-gency conditions and the emergencyaction, including documentation re-garding the reasons for the specificemergency action taken;

(iv) A description of the basis for andprocedures followed by a governingboard in making any determination asto the eligibility of an interested per-son to deliberate or to vote on mattersrelating to the emergency;

(v) Documentation of the gross posi-tions held in any personal account,controlled account, other account inwhich the governing board member hasan interest, and proprietary accountsat an affiliated firm, as well as docu-mentation of the net customer posi-tions held at an affiliated firm, by agoverning board member who attendedthe meeting for the contract monthsthat the contract market reasonablyexpects could be affected by the emer-gency action, provided that the con-tract market explains its reasons inwriting for selecting less than all con-tract months in the subject contractmarket;

(vi) A representation from each gov-erning board member who voted on anemergency action as to whether or nothe had actual knowledge of individualcustomer positions at his affiliatedfirm at the time of the vote; and

(vii) Such other information as theCommission may require.

(4)(i) Within 10 days of the receiptfrom a contract market of all of the in-formation required by paragraphs (2)and (3), or as soon as practicable there-after, the Commission will make a de-termination to permit the temporaryemergency rule to remain in effect,consistent with paragraph (1), unless itfinds that the contract market’s emer-gency action is:

(A) Arbitrary, capricious or an abuseof discretion;

(B) Lacking a reasonable basis infact; or

(C) Taken in bad faith by the con-tract market or its officials.

(ii) If the Commission determinesthat the contract market’s emergencyaction is arbitrary, capricious or anabuse of discretion; lacking a reason-able basis in fact; or taken in bad faith,then the Commission may, in its dis-cretion and upon such terms and condi-tions as it deems appropriate, suspendthe effect of the rule pending reviewunder section 5a(a)(12)(A) or otherwiseif it finds that suspension of the rule isnot contrary to the public interest and


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the purposes of section 5a(a)(12) of theAct.

(5) The Commission will submit a re-port on its determination pursuant toparagraph (4) and the basis for this de-termination to:

(i) The affected contract market;(ii) The Committee on Agriculture of

the House of Representatives; and(iii) The Committee on Agriculture,

Nutrition, and Forestry of the Senate.If the report is submitted more than 10days after the Commission receives allof the information required under para-graphs (2) and (3) from a contract mar-ket, the report will include an expla-nation of why submission within 10days from receipt of notification andexplanation was not practicable.

(6) A determination by the Commis-sion to suspend the effect of a ruleunder subparagraph (4)(ii) of this regu-lation will be subject to judicial reviewon the same basis as an emergency de-termination under section 8a(9) of theAct.

(7) A temporary emergency rule mayprovide for, or may authorize the con-tract market, or the governing boardthereof or any committee thereof, toundertake actions necessary or appro-priate to meet the emergency, includ-ing, but not limited to, such actions as:

(i) Limiting trading to liquidationonly, in whole or in part, or limitingtrading to liquidation only except fornew sales by parties who have the com-modity to delivery pursuant to suchsales;

(ii) Extending or shortening the expi-ration date for trading in contracts;

(iii) Altering delivery terms or condi-tions;

(iv) Modifying price limits;(v) Modifying circuit breakers;(vi) Ordering the liquidation of con-

tracts, the fixing of a settlement priceor the reduction in positions;

(vii) Ordering the transfer of con-tracts, and the money, securities, andproperty securing such contracts, heldon behalf of customers by a member ofthe contract market to another mem-ber, or other members, of the contractmarket willing to assume such con-tracts or obligated to do so;

(viii) Extending, limiting or changinghours of trading;

(ix) Suspending trading; and

(x) Modifying or suspending any pro-vision of the rules of the contract mar-ket, including any contract marketprohibition against dual trading.

(8) A contract market shall not main-tain in effect rules that are incon-sistent with this regulation.

(9) Nothing in this section preventsthe Commission from taking emer-gency action under section 8a(9) of theAct or from taking any enforcementaction under section 6(c), 6(d), 6b, or 6cof the Act.

(10) Governing board members whoabstain from voting on a temporaryemergency rule pursuant to § 1.69 shallnot be counted in determining whethersuch a rule was approved by the two-thirds vote required by this regulation.Such members can be counted for thepurpose of determining whether aquorum exists.

(g) Physical emergencies. In the eventthe physical functions of a contractmarket are, or are threatened to be, se-verely and adversely affected by a‘‘physical emergency,’’ such as fire orother casualty, bomb threats, substan-tial inclement weather, power failures,communications breakdowns, com-puter system breakdowns, screen-basedtrading system breakdowns or trans-portation breakdowns, a contract mar-ket official, duly authorized to takesuch action for and on behalf of thecontract market with respect to such a‘‘physical emergency’’ pursuant to arule of the contract market that hasbeen approved by the Commission orhas become effective pursuant to sec-tion 5a(a)(12) of the Act and these regu-lations, may take any action author-ized by such rule necessary or appro-priate to deal with the emergency, in-cluding, but not limited to, suspendingtrading on the contract market. Sus-pension of trading in the contract mar-ket by such a designated official shallnot continue in effect for more thanfive (5) days, except where the contractmarket has submitted in writing andthe Commission has granted, for goodcause shown, a request for an extensionof time. A request for an extension oftime must be given to the Director ofthe Division of Trading and Markets orany employee of the Commission, asmay be designated by the Director forsuch purpose. If so authorized by such


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a rule of the contract market, the des-ignated official may also order restora-tion of trading on the contract market,or removal of other restrictions im-posed by the official as permitted bythis paragraph (g), in the absence of ac-tion by the governing board of the con-tract market, upon a determination bysuch official that the ‘‘physical emer-gency’’ has sufficiently abated to per-mit the physical functions of the con-tract market to continue in an orderlymanner. A contract market must no-tify the Director of the Division ofTrading and Markets or any employeeof the Commission, as may be des-ignated by the Director for such pur-pose, of the implementation, modifica-tion or termination of a physical emer-gency action as soon as possible aftertaking the action.

(h) Stock index contracts. (1) Notwith-standing the provisions of paragraph(b) of this section, all changes in thecomposition, computation, or methodof stock selection of a stock index inwhich a contract market is designatedto trade futures contracts, or optionson such futures contracts, shall bedeemed approved by the Commission atthe time such changes are adopted by acontract market if:

(i) The index is compiled for commer-cial purposes by an independent thirdparty; and

(ii) The change is consistent with arule of the contract market which hasbeen approved by the Commission forthis purpose which specifically defines,or establishes standards governing, thecomposition of the stock index uponwhich the designated futures contractsare authorized to trade.

(2) The contract market must provideto the Commission, upon special call,information regarding the composi-tion, computation, or method of stockselection of the index, including anychange or changes, or any other issuesrelating to the index, as instructed,and within such time, and for such aperiod, specified in the call.

(i) Other index contracts. (1) Notwith-standing the provisions of paragraph(b) of this section, all changes in thecomposition, computation, or methodof selection of an index other than astock index in which a contract marketis designated to trade futures or option

contracts shall be deemed approved bythe Commission at the time suchchanges are adopted by a contract mar-ket if:

(i) The index is compiled by an inde-pendent third party whose business re-lates to the collection or disseminationof price information and which was notformed solely for the purpose of com-piling an index for use in connectionwith a futures or option contract;

(ii) The change is consistent with arule of the contract market which hasbeen approved by the Commission forthis purpose, which specifically definesor establishes standards governing thecomposition of the index upon whichdesignated futures or commodity op-tions are authorized to trade;

(iii) The contract market providesthe Commission with written notice ofthe change within five days after thechange is adopted by the contract mar-ket; and

(iv) The contract market labels thewritten notice as being submitted pur-suant to paragraph (i) of this section.

(2) The Commission will, within tendays after receipt by the Commissionof notice of a change in the composi-tion, computation, or method of selec-tion of an index, notify the contractmarket making the submission if it ap-pears that the change is not consistentwith the provisions of this paragraph.Upon such notification by the Commis-sion to the contract market, thechange will be subject to the usual pro-cedures under section 5a(a)(12)(A) ofthe Act and paragraph (b) of this sec-tion.

(j) Survey lists. (1) Notwithstandingthe provisions of paragraph (b) of thissection, all changes in lists of banks,brokers, dealers or other entities whichprovide price or cash market informa-tion to a contract market for purposesof computing cash settlement prices ora cash price series, or for defining de-liverable supply, shall be deemed ap-proved by the Commission at the timesuch changes are adopted by a contractmarket if:

(i) The change is consistent with arule of the contract market which hasbeen approved by the Commission forthis purpose and which establishesstandards or criteria for the persons orentities which qualify for the list;


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(ii) The contract market provides theCommission with written notice of thechange within three days after thechange is adopted by the contract mar-ket; and

(iii) The contract market labels thewritten notice as being submitted pur-suant to paragraph (j) of this section.

(2) The Commission will, within tendays after receipt by the Commissionof notice of a change in such a list, no-tify the contract market making thesubmission if it appears that thechange is not consistent with the pro-visions of this paragraph. Upon suchnotification by the Commission to thecontract market, the change will besubject to the usual procedures undersection 5a(a)(12)(A) of the Act and para-graph (b) of this section.

(k) Trading hours. (1) Notwith-standing the provisions of paragraph(b) of this section and except in connec-tion with an initial listing of a con-tract on an automated trading system,all changes in trading hours shall bedeemed approved by the Commission atthe close of business one business dayafter written notice of such a change isreceived by the Commission if:

(i) The change is not inconsistentwith any provision of the Act or theCommission’s regulations;

(ii) For a change that permits trad-ing anytime between 6:00 p.m. and 7:00a.m. local time in the city where thecontract market is located, the con-tract market has previously receivedCommission approval for trading be-tween such hours in at least one of itsdesignated contracts; and

(iii) The contract market labels thewritten notice as being submitted pur-suant to paragraph (k) of this section.

(2) The Commission will, within tendays after receipt by the Commissionof notice of a change in trading hours,notify the contract market making thesubmission if it appears that thechange is not consistent with someprovision of the Act or the Commis-sion’s regulations. Upon such notifica-tion by the Commission to the contractmarket, the change will be subject tothe usual procedures under section5a(a)(12)(A) of the Act and paragraph(b) of this section.

(l) Trading months. (1) Notwith-standing the provisions of paragraph

(b) of this section, all changes in trad-ing months shall be deemed approvedby the Commission ten days after writ-ten notice of such a change is receivedby the Commission if:

(i) The change is consistent with arule of the contract market governingthe listing of trading months which hasbeen approved by the Commission, andwith the Act and the Commission’s reg-ulations;

(ii) The change does not provide forthe listing of a trading month outsidethe currently established cycle of trad-ing months; and

(iii) For proposals to delist pre-viously listed futures or option con-tract months, the months to bedelisted have no open interest at thetime of delisting.

(iv) The contract market labels thewritten notice as being submitted pur-suant to paragraph (l) of this section.

(2) The Commission will, within tendays after receipt by the Commissionof notice of a change in the listing oftrading months, notify the contractmarket making the submission if it ap-pears that the change is not consistentwith the provisions of this paragraph.Upon such notification by the Commis-sion to the contract market, thechange will be subject to the usual pro-cedures under section 5a(a)(12)(A) ofthe Act and paragraph (b) of this sec-tion.

(m) Contract terms established by inde-pendent third parties. (1) Notwith-standing the provisions of paragraph(b) of this section, changes in grades orstandards of commodities on which fu-tures or options contracts are based,which are established, selected or cal-culated by independent third partiesand which are incorporated by ref-erence as terms of a contract, shall bedeemed approved by the Commissionten days after written notice of such achange is received by the Commissionif:

(i) The grade or standard is estab-lished, selected or calculated by anindependent third party for purposesother than solely for use in connectionwith a futures or options contract;

(ii) The change is consistent with arule of the contract market which hasbeen approved by the Commission for


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this purpose, and with the Act and theCommission’s regulations; and

(iii) The contract market labels thewritten notice as being submitted pur-suant to paragraph (m) of this section.

(2) The Commission will, within tendays after receipt by the Commissionof notice of such a change, notify thecontract market making the submis-sion if it appears that the change is notconsistent with the provisions of thisparagraph. Upon such notification bythe Commission to the contract mar-ket, the change will be subject to theusual procedures under section5a(a)(12)(A) of the Act and paragraph(b) of this section.

(n) Other changes. (1) Notwith-standing the provisions of paragraph(b) of this section, changes in the termsand conditions of a futures or optioncontract other than those changesspecified in paragraphs (h)–(m) of thissection shall be deemed approved bythe Commission at such time as theCommission shall specify if:

(i) The Commission notifies the con-tract market in writing, at the time ofcontract market designation, or suchother time as the Commission maydeem appropriate, that certain changesin terms and conditions may be sub-mitted pursuant to the provisions ofthis paragraph;

(ii) The change is consistent withstandards established by the Commis-sion in its notification to the contractmarket of the applicability of thisparagraph, and with the Act and theCommission’s regulations; and

(iii) The contract market labels thewritten notice as being submitted pur-suant to paragraph (n) of this section.

(2) The Commission will within tendays after receipt by the Commissionof notice of a change submitted pursu-ant to this paragraph, notify the con-tract market making the submission ifit appears that the change is not con-sistent with standards established bythe Commission. Upon such notifica-tion by the Commission to the contractmarket, the change will be subject tothe usual procedures under section5a(a)(12)(A) of the Act and paragraph(b) of this section.

(3) The Commission may at any timealter or revoke the applicability of thisparagraph to any particular contract.

(o) Option strike price listing proce-dures. (1) Notwithstanding the provi-sions of paragraph (b) of this section,all changes in the number of strikeprices listed, both initially when a con-tract for a specific expiration date isfirst listed for trading and throughoutthe life of that option contract, andchanges in the strike-price interval(s)shall be deemed approved by the Com-mission 10 days after written notice ofsuch change is received by the Com-mission if:

(i) The amended rule provides for astrike-price listing procedure that isspecified and automatic.

(ii) The amended rule does not affectany option with open interest at thetime the rule goes into effect.

(iii) The contract market labels thewritten notice as being submitted pur-suant to Commission Regulation1.41(o).

(2) The Commission will, within 10days after receipt by the Commissionof notice of a change in the strike pricelisting procedure of an option contract,notify the contract market making thesubmission if it appears that thechange is not consistent with the pro-visions of this paragraph. Upon suchnotification by the Commission to thecontract market, the change will besubject to the usual procedures undersection 5a(a)(12)(A) of the Act and para-graph (b) of this section.

(p) Option last trading day specifica-tion. (1) For purposes of this paragraph,an option on a future is an option con-tract that includes a provision for exer-cise of the option into an underlyingfutures contract. An option on a phys-ical does not contain such a provision.

(2) Notwithstanding the provisions ofparagraph (b) of this section, allchanges in the last trading day of anoption on a future or an option on aphysical shall be deemed approved bythe Commission 10 days after writtennotice of such change is received by theCommission if:

(i) For futures options not based oncash-settled futures contracts, the op-tion expires not less than one businessday before the earlier of the last trad-ing day or first notice day of the under-lying futures contract; for futures op-tions based on cash-settled futures con-tracts, the option expires no later than


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17 CFR Ch. I (4–1–01 Edition)§ 1.41

the last trading day of the underlyingfutures contract; or, for options onphysicals, the option expires not lessthan one business day before the ear-lier of the last trading day or first no-tice day of any non-cash-settled fu-tures contract in the same or a relatedcommodity, or no later than the lasttrading day of a cash-settled futurescontract in the same or a related com-modity.

(ii) The amended last trading dayrule does not apply to any option withopen interest at the time the rule goesinto effect.

(iii) The contract market labels thewritten notice as being submitted pur-suant to Commission Regulation1.41(p).

(3) The Commission will, within 10days after receipt by the Commissionof notice of a change in the last tradingday specification of an option contract,notify the contract market making thesubmission if it appears that thechange is not consistent with the pro-visions of this paragraph. Upon suchnotification by the Commission to thecontract market, the change will besubject to the usual procedures undersection 5a(a)(12) of the Act and para-graph (b) of this section.

(q) Option cabinet trade provisions. (1)For purposes of this paragraph, a cabi-net trade is defined as an option tradethat represents a transaction wherebythe per-contract value of the cabinettrade is less than the per-contractvalue associated with a trade at the ex-isting minimum premium fluctuationspecified in the contract market’s rulesfor that option contract.

(2) Notwithstanding the provisions ofparagraph (b) of this section, all initialspecifications of, and changes to, op-tion cabinet trade provisions shall bedeemed approved by the Commission 10days after written notice of suchchange is received by the Commissionif:

(i) The initial specification of a cabi-net trade rule or a change thereto pro-vides that the per-contract value (orvalues) of the cabinet trade is (are) lessthan the per-contract value associatedwith a trade at the existing minimumpremium fluctuation specified in thecontract market’s rules for that optioncontract.

(ii) The contract market labels thewritten notice as being submitted pur-suant to paragraph (q) of this section.

(3) The Commission will, within 10days after receipt by the Commissionof notice of a change in the cabinettrade provisions of an option contract,notify the contract market making thesubmission if it appears that thechange is not consistent with the pro-visions of this paragraph. Upon suchnotification by the Commission to thecontract market, the change will besubject to the usual procedures undersection 5a(a)(12) of the Act and para-graph (b) of this section.

(r) Option serial month listing proce-dures. (1) Serial options arise when ex-changes list options with different ex-piration dates based on the same un-derlying futures contract month. Ac-cordingly, and for purposes of thisparagraph, a serial option is defined asa futures option contract which isbased on the same futures deliverymonth but which expires earlier thanthe option contract expiring nearest tobut before, or on, the last trading dayof the underlying futures deliverymonth.

(2) Notwithstanding the provisions ofparagraph (b) of this section, all initialspecifications of, and changes to, theserial option listing procedures for op-tions on futures (option contracts thatinclude a provision for exercise into afutures contract) shall be deemed ap-proved by the Commission 10 days afterwritten notice of such change is re-ceived by the Commission if:

(i) The rule provides for a serial op-tion listing procedure that is specifiedand automatic.

(ii) The contract market labels thewritten notice as being submitted pur-suant to Commission Regulation1.41(r).

(3) The Commission will, within 10days after receipt by the Commissionof notice of a rule change relating tothe serial option listing procedure ofan option on a futures contract, notifythe contract market making the sub-mission if it appears that the change isnot consistent with the provisions ofthis paragraph. Upon such notificationby the Commission to the contractmarket, the change will be subject tothe usual procedures under section


95

Commodity Futures Trading Commission § 1.41a

5a(a)(12)(A) of the Act and paragraph(b) of this section.

(s) Option automatic exercise proce-dures. (1) Notwithstanding the provi-sions of paragraph (b) of this section,all rules relating to automatic exerciseprovisions for options on futures shallbe deemed approved by the Commission10 days after written notice of suchchange is received by the Commissionif:

(i) The rule provides for automaticexercise procedures that are specifiedand objective, apply to in-the-moneyoptions only, and provide an oppor-tunity for option holders to overridethe automatic exercise provision.

(ii) The contract market labels thewritten notice as being submitted pur-suant to Commission Regulation1.41(s).

(2) The Commission will, within 10days after receipt by the Commissionof notice of a change in the automaticexercise procedures of an option con-tract, notify the contract market mak-ing the submission if it appears thatthe change is not consistent with theprovisions of this paragraph. Upon suchnotification by the Commission to thecontract market, the change will besubject to the usual procedures undersection 5a(a)(12)(A) of the Act and para-graph (b) of this section.

(t) Financial standards for regular de-livery facilities. (1) Notwithstanding theprovisions of paragraph (b) of this sec-tion, all changes in the financial stand-ards or financial requirements for reg-ular delivery facilities or comparableentities shall be deemed approved bythe Commission 10 days after writtennotice of such change is received by theCommission if:

(i) The contract market includes evi-dence that the amended rule does notaffect the regularity or delivery statusof any existing facility declared reg-ular by the contract market for therelevant commodity(ies) or likely can-didates for regularity status.

(ii) The proposed requirement is spec-ified in the rules, is objective and ap-plies uniformly to all existing regularfacilities as well as to all applicationsfor regularity.

(iii) The proposed requirement is re-lated solely for the purpose of ensuring

the financial integrity of the regularfacility(ies).

(iv) The contract market labels thewritten notice as being submitted pur-suant to Commission Regulation1.41(t).

(2) The Commission will, within 10days after receipt by the Commissionof a rule change relating to the finan-cial standards or requirements for reg-ular delivery facilities, notify the con-tract market making the submission ifit appears that the change is not con-sistent with the provisions of this para-graph or if the submission raises issuesrelating to the requirements of theCommodity Exchange Act or the regu-lations promulgated thereunder. Uponsuch notification by the Commission tothe contract market, the change willbe subject to the usual proceduresunder section 5a(a)(12)(A) of the Actand paragraph (b) of this section.


[41 FR 40098, Sept. 17, 1976, as amended at 46FR 54523, Nov. 3, 1981; 46 FR 63035, Dec. 30,1981; 48 FR 4259, Jan. 28, 1983; 48 FR 49008,Oct. 24, 1983; 50 FR 30138, July 24, 1985; 50 FR31839, Aug. 7, 1985; 56 FR 42685, Aug. 29, 1991;57 FR 20637, May 14, 1992; 57 FR 27924, June23, 1992; 58 FR 26237, May 3, 1993; 58 FR 37653,July 13, 1993; 59 FR 2289, Jan. 14, 1994; 59 FR5525, Feb. 7, 1994; 62 FR 10433, 10439, Mar. 7,1997; 63 FR 33848, June 22, 1998; 64 FR 22, Jan.4, 1999]

§ 1.41a Delegation of authority to theDirectors of the Division of Tradingand Markets and the Division ofEconomic Analysis to process cer-tain contract market rules.

(a) The Commission hereby dele-gates, until the Commission ordersotherwise, the following authority tothe Director of the Division of Tradingand Markets and to the Director of theDivision of Economic Analysis, to beexercised by either of such Directors orby such other employee or employeesof the Commission under the super-vision of such Directors as may be des-ignated from time to time by the Di-rectors:

(1) Pursuant to § 1.41(b) or § 1.41(c), todetermine whether to remit to a con-tract market and not accept for reviewany rule submitted pursuant to section5a(a)(12)(A) of the Act and § 1.41(b) or


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17 CFR Ch. I (4–1–01 Edition)§ 1.41b

§ 1.41(c), where the Director determinesthat such rule submission does notcomply with the form and content re-quirements set forth in § 1.41(b);

(2) Pursuant to §§ 1.41(b) or 1.41(c) todetermine, and to notify a contractmarket, that:

(i) Pursuant to § 1.41(b), a rule sub-mitted pursuant to section 5a(a)(12)(A)of the Act and § 1.41(c) relates to termsand conditions, as defined in § 1.41(a)(2);

(ii) Pursuant to § 1.41(c), a rule sub-mitted pursuant to section 5a(a)(12)(A)of the Act and § 1.41(c) for implementa-tion without Commission approval con-stitutes a rule that requires prior Com-mission approval pursuant to a specificsection of the Act or Commission regu-lations;

(3) Pursuant to § 1.41(c) to determine,and to notify a contract market, that:

(i) Rules submitted for implementa-tion without Commission approvalunder § 1.41(c) do not require prior Com-mission approval under section5a(a)(12)(A) of the Act and § 1.41(b) or§ 1.41(c) and that such rules may be-come effective prior to the expirationof the ten day period following the re-ceipt of such rules by the Commission;

(ii) Rules submitted for Commissionapproval under § 1.41(c) do not requireprior Commission approval under sec-tion 5a(a)(12)(A) of the Act and § 1.41(b)or § 1.41(c) and may be made effectiveat the expiration of the applicable re-view period;

(iii) Rules submitted for Commissionapproval under § 1.41(c) raise novel orcomplex issues, or are of major eco-nomic significance, and that the reviewperiod has been extended pursuant to§ 1.41(c)(1)(iii); and

(4) Pursuant to § 1.41(d), to determinewhether to remit to a contract marketany rule submitted pursuant to section5a(a)(1) of the Act and § 1.41(d), wherethe Director determines that such rulesubmission is not exempt from the pro-visions of section 5a(a)(12)(A) of theAct and § 1.41(b) or § 1.41(c).

(5) Pursuant to § 1.41(h) through (t) todetermine:

(i) Whether contract market rulessubmitted pursuant to section 5a(a)(12)of the Act and the provisions of § 1.41(h)through (t) comply with the provisionsof § 1.41(h) through (t), as applicable;

(ii) To give notice that rules sub-mitted pursuant to § 1.41(k) through (t)comply with the provisions of § 1.41(k)through (t), as applicable, and there-fore shall be deemed approved prior tothe end of the period specified in theapplicable rule, commencing on theday the rule is received by the Commis-sion at its Washington, DC head-quarters;

(iii) If contract market rules sub-mitted pursuant to the provisions of§ 1.41(h) through (t) do not comply withthe applicable provisions of these regu-lations, to notify the submitting con-tract market that such rules are there-fore subject to the procedures specifiedin section 5a(a)(12) of the Act and§ 1.41(b); and

(iv) If contract market rules sub-mitted pursuant to the provisions of§ 1.41(b) comply with any of the provi-sions of § 1.41(h) through (t), to notifythe contract market that such ruleswill be treated as if submitted pursu-ant to § 1.41(h) through (t) as applica-ble.

(b) The Director of the Division ofTrading and Markets or the Director ofthe Division of Economic Analysis maysubmit to the Commission for its con-sideration any matter which has beendelegated pursuant to paragraph (a) ofthis section.

(c) Nothing in this section shall bedeemed to prohibit the Commission, atits election, from exercising the au-thority delegated to the Director of theDivision of Trading and Markets andthe Director of the Division of Eco-nomic Analysis under this section.

[48 FR 49009, Oct. 24, 1983, as amended at 50FR 30140, July 24, 1985; 57 FR 27925, June 23,1992; 59 FR 2290, Jan. 14, 1994; 59 FR 5525, 5526,Feb. 7, 1994; 62 FR 17701, Apr. 11, 1997]

§ 1.41b Delegation of authority to theDirector of the Division of Tradingand Markets and Director of the Di-vision of Economic Analysis.

(a) The Commission hereby dele-gates, until the Commission ordersotherwise, to the Director of the Divi-sion of Trading and Markets and theDirector of the Division of EconomicAnalysis, with the concurrence of theGeneral Counsel or his or her delegee,


97


to be exercised by either of such Direc-tors or by such other employee or em-ployees of the Commission under thesupervision of such Directors as may bedesignated from time to time by theDirectors, the authority to approve,pursuant to section 5a(a)(12)(A) of theAct and § 1.41(b), contract market rulesthat:

(1) Relate to, but do not materiallychange, the quantity, quality, or otherdelivery specifications, procedures, orobligations for delivery, cash settle-ment, or exercise under a contract des-ignated for trading by the Commission;daily settlement prices; clearing posi-tion limits; requirements or proceduresfor contract market governance; proce-dures for transfer trades; tradinghours; minimum price fluctuations;and maximum price limit and tradingsuspension provisions;

(2) Reflect routine modifications thatare required or anticipated by theterms of a contract market rule;

(3) [Reserved](4) Are in substance the same as a

rule of the same or another contractmarket which has been approved pre-viously by the Commission pursuant tosection 5a(a)(12)(A) of the Act; or

(5) Are consistent with a specific,stated policy or interpretation of theCommission.

(b) The Commission hereby dele-gates, until the Commission ordersotherwise:

(1) To the Director of the Division ofEconomic Analysis, with the concur-rence of the General Counsel or theGeneral Counsel’s delegatee, to be ex-ercised by such Director or by suchother employee or employees of theCommission under the supervision ofsuch Director as may be designatedfrom time to time by the Director, theauthority to approve, pursuant to sec-tion 5a(a)(12)(A) of the Act and § 1.41(b),contract market proposals, submittedpursuant to § 5.2, to list additionaltrading months or expiration for, or tootherwise recommence trading in, acontract that is dormant within themeaning of § 5.2; and

(2) To the Director of the Division ofEconomic Analysis, and to the Directorof the Division of Trading and Markets,with the concurrence of the GeneralCounsel or the General Counsel’s

delegatee, to be exercised by such Di-rector or by such other employee oremployees of the Commission underthe supervision of such Director asmay be designated from time to timeby the Director, authority to requestunder § 1.41(b)(2)(iii) that the contractmarket amend the proposed rule orsupplement the submission, to notify acontract market under § 1.41(b)(3) thatthe time for review of a proposed con-tract term submitted under that sec-tion for fast-track review has been ex-tended, and to notify the contract mar-ket under § 1.41(b)(4) that fast-trackprocedures are being terminated.

(c) The Director of the Division ofTrading and Markets or the Director ofthe Division of Economic Analysis maysubmit to the Commission for its con-sideration any matter which has beendelegated pursuant to paragraph (a) or(b) of this section.

(d) Nothing in this section shall bedeemed to prohibit the Commission, atits election, from exercising the au-thority delegated to the Director of theDivision of Trading and Markets andthe Director of the Division of Eco-nomic Analysis under this section.

[57 FR 58705, Dec. 11, 1992, as amended at 59FR 5526, Feb. 7, 1994; 62 FR 10440, Mar. 7, 1997]

§ 1.41c Delegation of authority to theDirector of the Division of Tradingand Markets to receive notice of anemergency action.

The Commission hereby delegates au-thority to receive notification and ex-planation of a temporary emergencyrule, notification of a physical emer-gency action, and a request for an ex-tension of time for suspension of trad-ing for a physical emergency, until theCommission orders otherwise, to theDirector of the Division of Trading andMarkets. This authority may be exer-cised by the Director or by another em-ployee or employees of the Commissionas may be designated from time totime by the Director.

[58 FR 26329, May 3, 1993]

§ 1.42 Delivery notice; filing of copy.(a) Upon special call from the Com-

mission or its designee, each contractmarket shall furnish or cause to be fur-nished promptly to the Commission for


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17 CFR Ch. I (4–1–01 Edition)§ 1.43

the futures or option contracts speci-fied in the call a copy of each notice ofdelivery issued by any member thereofsubject to the rules of such contractmarket, and shall also furnish or causeto be furnished promptly to the Com-mission a record of all endorsements ofthe original notice of delivery shown inthe order in which such endorsementswere made. For the purposes of thisparagraph the Commission hereby dele-gates to the Director of the Division ofEconomic Analysis, or to such otherperson designated by the Director, au-thority to issue calls for informationcontained in this section.

(b) Any contract market may providethe required delivery notice informa-tion on compatible data processingpunched cards, magnetic tapes, mag-netic discs, computer printouts, orother means: Provided, That the formatand coding structure and the nature ofthe information contained thereonhave been approved in writing by theCommission. A complete and accuratecomputer listing of any informationsupplied via data processing mediamust also be provided by an officer ofthe contract market at the time infor-mation via data processing media issupplied.

(c) For the purposes of this section,the term ‘‘delivery’’ includes the exer-cise of a commodity option on a phys-ical but does not include any futurescontract or option on a physical whichis settled in cash rather than by deliv-ery of the underlying commodity orunderlying physical.


(Secs. 4g(1), 4i, 5(b), 8a(5), Commodity Ex-change Act 7 U.S.C. 6g(1), 6i, 7(b), 12a(5)(Supp. V, 1975))

[41 FR 48112, Nov. 2, 1976, as amended at 42FR 12375, Mar. 3, 1977; 46 FR 63035, Dec. 30,1981; 47 FR 57009, Dec. 22, 1982; 52 FR 18910,May 20, 1987]

§ 1.43 Information required con-cerning warehouses.

Each contract market shall file uponrequest by the Commission a list of allwarehouses, depositories and othersimilar entities, in which or out ofwhich commodities are deliverable insatisfaction of futures contracts or op-tions on physicals made on or subject

to the rules of such contract market,which list shall show the name, loca-tion, and storage capacity of each suchwarehouse, depository or other similarentity, together with the name andbusiness address of the operator there-of. Each contract market shall requirethe operator of such warehouse, deposi-tory or, other similar entity to furnish,upon request by the Commission, aschedule of storage charges, handlingcharges, and the annual fire insurancerate applicable to such warehouse, de-pository or other similar entity.

[57 FR 20637, May 14, 1992]

§ 1.44 Records and reports of ware-houses, depositories, and othersimilar entities; visitation of prem-ises.

Each contract market shall requirethe operators of warehouses, deposi-tories and other similar entities whosereceipts are deliverable in satisfactionof commodity futures contracts or op-tions on physicals made on or subjectto the rules of such contract market:

(a) To keep records showing thestocks of each commodity traded forfuture delivery or upon which optioncontracts are traded on such contractmarket in store in such warehouses,depositories and other similar entitiesby kinds, by classes, and by grades, ifstored under conditions requiring suchdesignation or identification, and in-cluding also lots and parcels storedspecially or separately or in speciallyleased space of the warehouse, deposi-tory or other similar entity;

(b) Upon call from the Commission,to report the stocks of commodities insuch warehouses, depositories andother similar entities and to furnish in-formation concerning stocks of eachcommodity traded for future deliveryor upon which option contracts aretraded on such contract market aboutto be transferred or in the process ofbeing transferred or otherwise movedinto or out of such warehouses, deposi-tories and other similar entities, aswell as any other information con-cerning commodities stored in suchwarehouse, depositories and other simi-lar entities and which are or may beavailable for delivery on futures con-tracts or options on physicals; and


99


(c) To permit visitation of the prem-ises and inspection of the books andrecords of such warehouses, deposi-tories and other similar entities byduly authorized representatives of theCommission or the Department of Jus-tice, and to keep all books, records, pa-pers, and memoranda relating to thestorage and warehousing of commod-ities in such warehouse, depository orother similar entity for a period of 5years from the date thereof.


(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)

[41 FR 3194, Jan. 21, 1976, as amended at 46FR 63035, Dec. 30, 1981; 47 FR 57009, Dec. 22,1982]

§ 1.45 Delivery of commodities con-forming to United States standards.

Each contract market shall requirethat all contracts of sale of any com-modity for future delivery on or sub-ject to the rules of such contract mar-ket shall provide for the deliverythereunder of commodities of gradesconforming to United States standardsif such standards shall have been offi-cially promulgated and adopted by theCommission. In the event of a changein United States standards, all con-tracts made on and after the effectivedate of the adoption of the revisedstandard by the Commission shall bemade on the basis of the standards aschanged: Provided, That this shall notbe construed to prevent the closing oftrades made prior to the effective dateof such adoption by the Commission.

(Sec. 5a, 49 Stat. 1498; 7 U.S.C. 7a)

§ 1.46 Application and closing out ofoffsetting long and short positions.

(a) Application of purchases and sales.Except with respect to purchases orsales which are for omnibus accounts,any futures commission merchant who,on or subject to the rules of a contractmarket:

(1) Purchases any commodity for fu-ture delivery for the account of anycustomer when the account of suchcustomer at the time of such purchasehas a short position in the same futureof the same commodity on the samemarket;

(2) Sells any commodity for futuredelivery for the account of any cus-tomer when the account of such cus-tomer at the time of such sale has along position in the same future of thesame commodity on the same market;

(3) Purchases a put or call option forthe account of any option customerwhen the account of such option cus-tomer at the time of such purchase hasa short put or call option position withthe same underlying futures contractor same underlying physical, strikeprice, expiration date and contractmarket as that purchased; or

(4) Sells a put or call option for theaccount of any option customer whenthe account of such option customer atthe time of such sale has a long put orcall option position with the same un-derlying futures contract or same un-derlying physical, strike price, expira-tion date and contract market as thatsold shall on the same day apply suchpurchase or sale against such pre-viously held short or long futures oroption position, as the case may be,and shall, for futures transactions,promptly furnish such customer astatement showing the financial resultof the transactions involved and, if ap-plicable, that the account was intro-duced to the futures commission mer-chant by an introducing broker and thenames of the futures commission mer-chant and introducing broker.

(b) Close-out against oldest open posi-tion. In all instances wherein the shortor long futures or option position insuch customer’s or option customer’saccount immediately prior to such off-setting purchase or sale is greater thanthe quantity purchased or sold, the fu-tures commission merchant shall applysuch offsetting purchase or sale to theoldest portion of the previously heldshort or long position: Provided, Thatupon specific instructions from thecustomer or option customer the off-setting transaction shall be applied asspecified by the customer or optioncustomer without regard to the date ofacquisition of the previously held posi-tion. Such instructions may also be ac-cepted from any person who, by powerof attorney or otherwise, actually di-rects trading in the customer’s or op-tion customer’s account unless the per-son directing the trading is the futures


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17 CFR Ch. I (4–1–01 Edition)§ 1.46

commission merchant (including anypartner thereof), or is an officer, em-ployee, or agent of the futures commis-sion merchant. With respect to everysuch offsetting transaction that, in ac-cordance with such specific instruc-tions, is not applied to the oldest por-tion of the previously held position,the futures commission merchant shallclearly show on the statement issuedto the customer or option customer inconnection with the transaction, thatbecause of the specific instructionsgiven by or on behalf of the customeror option customer the transaction wasnot applied in the usual manner, i.e.,against the oldest portion of the pre-viously held position. However, no suchshowing need be made if the futurescommission merchant has receivedsuch specific instructions in writingfrom the customer or option customerfor whom such account is carried.

(c) In-and-out trades; day trades. Not-withstanding the provisions of para-graphs (a) and (b) of this section shallnot be deemed to require the applica-tion of purchases or sales closed outduring the same day (commonly knownas ‘‘in-and-out trades’’ or ‘‘day trades’’)against short or long positions carriedforward from a prior date.

(d) Exceptions. The provisions of thissection shall not apply to:

(1) Purchases or sales of commodityoptions constituting ‘‘bona fide hedg-ing transactions’’ pursuant to rules ofthe contract market which have beenadopted in accordance with the re-quirements of § 1.61(b) and approved bythe Commission pursuant to; section5a(a)(12)(A) of the Act Provided, Thatno contract market or futures commis-sion merchant shall permit such optionpositions to be offset other than byopen and competitive execution in thetrading pit or ring provided by the con-tract market, during the regular hoursprescribed by the contract market fortrading in such commodity option.

(2) Purchases or sales constituting‘‘bona fide hedging transactions’’ as de-fined in § 1.3(z); nor

(3) Sales during a delivery period forthe purpose of making delivery duringsuch delivery period if such sales areaccompanied by instructions to makedelivery thereon, together with ware-

house receipts or other documents nec-essary to effectuate such delivery.

(4) Purchases or sales made in sepa-rate accounts of a commodity pool,Provided that:

(i) The trading for such pool is di-rected by two or more unaffiliatedcommodity trading advisors actingindependently, each of which is direct-ing the trading of a separate account;

(ii) The commodity pool operatormaintains only such minimum controlover the trading for such pool as is nec-essary to fulfill its duty to supervisediligently the trading for such pool;

(iii) Each trading decision made by acommodity trading advisor for suchpool is determined independently of alltrading decisions made by any othercommodity trading advisor for suchpool;

(iv) The purchases and sales for suchpool directed by different commoditytrading advisors acting independentlyare executed by open and competitivemeans on or subject to the rules of acontract market; and

(v) No position held for or on behalfof separate pool accounts traded in ac-cordance with paragraphs (d)(4) (i), (ii),(iii) and (iv) of this section may beclosed out by transferring such an openposition from one of the separate ac-counts to another account of the pool.

(5) Purchases or sales made by a le-verage transaction merchant consti-tuting cover of its obligations to lever-age customers and made in accordancewith §§ 31.8(a) and 31.12(b) of this chap-ter.

(6) Purchases or sales made in sepa-rate accounts owned by a customer oroption customer, Provided that:

(i) Each person directing trading forone of the separate accounts is unaffili-ated with and acts independently fromeach other person directing trading fora separate account;

(ii) Each person directing trading forone of the separate accounts, unless heis the account owner himself, does sopursuant to a power of attorney signedand dated by the customer, and whichincludes, at a minimum, the name, ad-dress and telephone number of the per-son directing trading and the accountnumber over which such power isgranted;


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(iii) Each trading decision made foreach separate account is determinedindependently of all trading decisionsmade for the other separate account oraccounts;

(iv) The purchases and sales for suchaccounts are executed by open andcompetitive means on or subject to therules of a contract market;

(v) No position held for or on behalfof separate accounts traded in accord-ance with paragraphs (d)(6) (i), (ii), (iii)and (iv) of this section may be closedout by transferring such an open posi-tion from one of the separate accountsto another of such accounts; and

(vi) The customer or option customerand each person directing trading forthe customer or option customer pro-vides the futures commission merchantwith written confirmation that thetrading and the operation of the cus-tomer’s or option customer’s accountswill be in accordance with paragraphs(d)(6) (i), (ii), (iii), (iv) and (v) of thissection. The written confirmationmust be signed and dated, and receivedby the futures commission merchantbefore it can avail itself of the excep-tion provided by this paragraph.

(7) Purchases or sales made in theseparate accounts of a person grantedan exemption in accordance with § 150.3of this chapter: Provided That:

(i) The purchases and sales for suchaccounts are executed in open and com-petitive means on or subject to therules of a contract market; and

(ii) No position held for or on behalfof separate accounts traded in accord-ance with this paragraph may be closedout by transferring such an open posi-tion from one of the separate accountsto another of such accounts.

(8) Purchases or sales held in erroraccounts, including but not limited tofloor broker error accounts, and pur-chases or sales identified as errors atthe time they are assigned to an ac-count that contains other purchases orsales not identified as errors and heldin that account (‘‘error trades’’), pro-vided that:

(i) Each error trade does not offsetanother error trade held in the sameaccount;

(ii) Each error trade is offset by openand competitive means on or subject tothe rules of a contract market by not

later than the close of business on thebusiness day following the day theerror trade is discovered and assignedto an error account or identified as anerror trade, unless at the close of busi-ness on the business day following thediscovery of the error trade, the rel-evant market has reached a daily pricefluctuation limit and the trader is un-able to offset the error trade, in whichcase the error trade must be offset assoon as practicable thereafter; and

(iii) No error trade is closed out bytransferring such an open position toanother account also controlled bythat same trader.

(9) Purchases or sales held in the sep-arate accounts of a customer who hasgranted discretionary authority to afutures commission merchant, an asso-ciated person of a futures commissionmerchant, or a commodity trading ad-visor trading separate trading pro-grams which have been marketed sepa-rately, Provided That:

(i) The purchases and sales for suchaccounts are executed in open and com-petitive means on or subject to therules of a contract market; and

(ii) No position held for or on behalfof separate accounts traded in accord-ance with this paragraph (d)(9) may beclosed out by transferring such an openposition from one of the separate ac-counts to another of such accounts.

(e) With respect to the exceptionfrom the provisions of this section setforth in paragraph (d)(6) of this section,if a futures commission merchant thatcarries the separate accounts of a cus-tomer or option customer, or if an as-sociated person of such futures com-mission merchant, directs trading forone of the separate accounts:

(1) The futures commission merchantmust first furnish the customer or op-tion customer with a written state-ment disclosing that, if held open, off-setting long and short positions in theseparate accounts may result in thecharging of additional fees and com-mission and the payment of additionalmargin, although offsetting positionswill result in no additional marketgain or loss. Such written statementshall be attached to the risk disclosurestatement required to be provided to acustomer or option customer under§ 1.55 of this part.


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17 CFR Ch. I (4–1–01 Edition)§ 1.47

(2) [Reserved]


(Secs. 4g, 5, 42 Stat. 1000, 49 Stat. 1496; 7U.S.C. 6g, 7; secs. 4g, 5, 8a; 7 U.S.C. 6g, 7, 12a)

[41 FR 3194, Jan. 21, 1976, as amended at 46FR 54524, Nov. 3, 1981; 46 FR 63035, Dec. 30,1981; 47 FR 57009, Dec. 22, 1982; 48 FR 35289,Aug. 3, 1983; 49 FR 19972, May 11, 1984; 50 FR26, Jan. 2, 1985; 51 FR 17473, May 13, 1986; 53FR 614, Jan. 11, 1988; 56 FR 14314, Apr. 9, 1991;57 FR 55085, Nov. 24, 1992; 59 FR 5526, Feb. 7,1994]

§ 1.47 Requirements for classificationof purchases or sales of contractsfor future delivery as bona fidehedging under § 1.3(z)(3) of the reg-ulations.

(a) Any person who wishes to availhimself of the provisions of § 1.3(z)(3) ofthe regulations and to make purchasesor sales of any commodity for futuredelivery in any commodity in excess oftrading and position limits then in ef-fect pursuant to section 4a of the Actshall file statement with the Commis-sion in conformity with the require-ments of this section. All or a specifiedportion of the transactions and posi-tions described in these statementsshall not be considered as bona fidehedging if such person is so notified bythe Commission:

(1) Within 30 days after the Commis-sion is furnished the information re-quired under paragraph (b) of this sec-tion, or

(2) Within 10 days after the Commis-sion is furnished with the informationrequired under paragraph (c) of thissection.

The Commission may request the per-son notified to file specific additionalinformation with the Commission tosupport a determination that all, orthe specified portion, of the trans-actions and positions be considered asbona fide hedging transactions and po-sitions. In such cases, the Commissionshall consider all information so filedand, by notice to such person, shallspecify the extent to which the Com-mission has determined that the trans-actions and positions may be classifiedas bona fide hedging. In no case shalltransactions and positions described beconsidered as bona fide hedging if they

exceed the levels specified in paragraph(d) of this section.

(b) Initial statement. Initial state-ments concerning the classification oftransactions and positions as bona fidehedging pursuant to § 1.3(z)(3) shall befiled with the Commission at least 30days in advance of the date that suchtransactions or positions would be inexcess of limits then in effect pursuantto section 4a of the Act. Such state-ments shall:

(1) Describe the transactions and po-sitions for future delivery and the off-setting cash positions;

(2) Set forth in detail informationwhich will demonstrate that the pur-chases and sales are economically ap-propriate to the reduction of risk expo-sure attendant to the conduct andmanagement of a commercial enter-prise;

(3) Contain, and upon request of theCommission be supplemented by, suchother information which is necessaryto enable the Commission to make adetermination whether the particularpurchases and sales for future deliveryfall within the scope of those describedin section 1.3(z)(1) of the regulations;

(4) Include a statement concerningthe maximum size of positions for fu-ture delivery (both long and short)which will be acquired any time duringthe next fiscal year or marketing sea-son of the person filing or on whose be-half the filing is made.

(5) In addition: statements filed by anagent, concerning a futures positionwhich would offset a cash positionwhich the agent does not own or hasnot contracted to buy or sell, shall con-tain information describing all con-tractual arrangements between theagent filing and the person who ownsthe commodity or holds the cash mar-ket commitment being offset;

(6) Statements concerning futures po-sitions to be acquired against unsoldanticipated production or unfilled an-ticipated requirements for manufac-turing, processing or feeding shall alsoinclude the information required under§ 1.48 of the regulations.

(c) Supplemental reports. Whenever thepurchases or sales which a person wish-es to classify as bona fide hedging shallexceed the amount provided in the per-son’s most recent filing pursuant to


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this section or the amount previouslyspecified by the Commission pursuantto paragraph (a) of this section, suchperson shall file with the Commission astatement which updates the informa-tion provided in the person’s most re-cent filing and provides the reasons forthis change at least ten days in ad-vance of the date that person wishes toexceed those amounts.

(d) Maximum purchases and sales. Pur-chases and sales for future deliveryconsidered bona fide hedging pursuantto § 1.3(z)(3) of the regulations shall atno time exceed the lesser of:

(1) The value fluctuation equivalent(in terms of the commodity for futuredelivery) of the current cash positiondescribed in the information most re-cently filed pursuant to this section, or

(2) The maximum level of long orshort open positions provided in the in-formation most recently filed pursuantto this section or most recently speci-fied by the Commission pursuant toparagraph (a) of this section.

(e) Updated reports. Reports updatingthe information required pursuant tothis section also shall be filed with theCommission upon specific request.



§ 1.48 Requirements for classificationof sales or purchases for future de-livery as bona fide hedging ofunsold anticipated production orunfilled anticipated requirementsunder § 1.3(z)(2) (i)(B) or (ii)(C) ofthe regulations.

(a) Any person who wishes to availhimself of the provisions of § 1.3(z)(2)(i)(B) or (ii)(C) of the regulations andto make sales or purchases for futuredelivery in any commodity in excess oftrading and position limits then in ef-fect pursuant to section 4a of the Actfor the purposes of bona fide hedgingshall file statements with the Commis-sion in conformity with the require-ments of this section. All or a specifiedportion of the unsold anticipated pro-duction or unfilled anticipated require-ments described in these statementsshall not be considered as offsetting po-sitions for bona fide hedging trans-actions and positions if such person is

so notified by the Commission withinten days after the Commission is fur-nished with the information requiredunder paragraphs (b) or (c) of this sec-tion. The Commission may request theperson notified to file specific addi-tional information with the Commis-sion to support a determination thatthe statement filed accurately reflectsunsold anticipated production or un-filled anticipated requirements formanufacturing, processing or feeding.In such cases, the Commission shallconsider all additional information sofiled and, by notice to such person,shall specify its determination as towhat portion of the production or re-quirements described constitutesunsold anticipated production or un-filled anticipated requirements for thepurposes of bona fide hedging. In nocase shall such transactions and posi-tions which offset unsold anticipatedproduction or unfilled anticipated re-quirements be considered bona fidehedging if they exceed the levels speci-fied in paragraph (d) of this section ofthe regulations.

(b) Initial statement. Initial state-ments concerning the classification oftransactions and positions as bona fidehedging pursuant to § 1.3(z)(2) (i)(B) or(ii)(C) shall be filed with the Commis-sion at least ten days in advance of thedate that such transactions or posi-tions would be in excess of limits thenin effect pursuant to section 4a of theAct. Such statements shall set forth indetail for a specified operating periodnot in excess of one year the person’sunsold anticipated production or un-filled anticipated requirements forprocessing or manufacturing or feedingand explain the method of determina-tion thereof, including, but not limitedto, the following information:

(1) For unsold anticipated produc-tion:

(i) Annual production of such com-modity for the three complete fiscalyears preceding the current fiscal year;

(ii) Anticipated production of suchcommodity for a specified period not inexcess of one year;

(iii) Fixed-price forward sales of suchcommodity;

(iv) Unsold anticipated production ofsuch commodity for a specified periodnot in excess of one year.


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17 CFR Ch. I (4–1–01 Edition)§ 1.50

(2) For unfilled anticipated require-ments:

(i) Annual requirements of such com-modity for processing or manufac-turing or feeding for the three com-plete fiscal years preceding the currentfiscal year;

(ii) Anticipated requirements of suchcommodity for processing or manufac-turing or feeding for a specified oper-ating period not in excess of one year;

(iii) Inventory and fixed-price for-ward purchases of such commodity, in-cluding any quantity in process ofmanufacture and finished goods andbyproducts of manufacture or proc-essing (in terms of such commodity);

(iv) Unfilled anticipated require-ments of such commodity for proc-essing or manufacturing or feedings fora specified operating period not in ex-cess of one year.

(3) Additional information: Personshedging unsold anticipated productionor unfilled anticipated requirementswhich are not the same quantity or arenot the same commodity as the com-modity to be sold or purchased for fu-ture delivery shall furnish this infor-mation both in terms of the actualcommodity produced or used and interms of the commodity to be sold orpurchased for future delivery. In addi-tion, such persons shall explain themethod for determining the ratio ofconversion between the amount of theactual unsold anticipated productionor unfilled anticipated requirementsand the amount of commodity to besold or purchased for future delivery.Persons hedging unfilled annual feed-ing requirements for livestock andpoultry shall provide the number ofcattle, hogs, sheep, or poultry expectedto be fed during the specified period,not to exceed one year, and the deriva-tion of their annual requirementsbased upon these numbers. Persons fil-ing as an agent shall furnish this infor-mation on the basis of the fiscal or op-erating year of the person on whose be-half the filing is made.

(c) Supplemental reports. Whenever thesales or purchases which a person wish-es to consider as bona fide hedging ofunsold anticipated production or un-filled anticipated requirements shallexceed the amounts described by thefigures for requirements furnished in

the most recent filing pursuant to thissection or the amounts determined bythe Commission to constitute unsoldanticipated production or unfilled an-ticipated requirements pursuant toparagraph (a) of this section, such per-son shall file with the Commission astatement which updates the informa-tion provided in the person’s most re-cent filing and supplies the reason forthis change at least ten days in ad-vance of the date that person wishes toexceed these amounts.

(d) Maximum sales and purchases.Sales or purchases for future deliveryconsidered as bona fide hedges pursu-ant to § 1.3(z)(2) (i)(B) or (ii)(C) shall atno time exceed the lesser of:

(1) A person’s unsold anticipated pro-duction of unfilled anticipated require-ments as described by the informationmust recently filed pursuant to thissection or determined by the Commis-sion pursuant to paragraph (a) of thissection; or

(2) A person’s actual unsold antici-pated production or current unfilledanticipated requirements for thelength of time specified in the informa-tion most recently filed pursuant tothis section.

(e) Updated reports. Reports updatingthe information required pursuant tothis section shall also be filed with theCommission upon specific request.



§ 1.50 Demonstration of continuedcompliance with the requirementsfor contract market designation.

(a) With respect to each commodityor commodity option for which it hasbeen designated as a contract market,each contract market shall file withthe Commission within 60 days of aCommission request, or within suchlonger period as the Commission mayspecify in the request, a written reportcontaining such supporting data, andother information and documents asthe Commission may specify, thatdemonstrates that such contract mar-ket is complying with the conditionsand requirements of sections 5 and5a(a) of the Act and these regulations.At the discretion of the Commission,


105


the information requested may be lim-ited to certain conditions and require-ments of sections 5 and 5a(a) of the Actand these regulations.

(b) Any failure by a contract marketto continue to comply with the condi-tions and requirements for designationas a contract market as set forth insections 5 and 5a(a) of the Act or theseregulations, and any failure or refusalto file the information required by thissection shall be cause for action by theCommission under the Act or theseregulations.

(c) Upon showing of good cause by acontract market, the Commission mayextend for a reasonable time the filingdate for any report under this section.


[46 FR 54525, Nov. 3, 1981, as amended at 46FR 63035, Dec. 30, 1981; 59 FR 5526, Feb. 7,1994]

§ 1.51 Contract market program for en-forcement.

(a) Each contract market shall usedue diligence in maintaining a con-tinuing affirmative action program tosecure compliance with the provisionsof sections 5, 5a(a), 5b, 6(b), 6b, 8a(7),8a(9) and 8c of the Act, with the regula-tions implementing section 4c(c) of theAct, and with all of the contract mar-ket’s bylaws, rules, regulations andresolutions which such contract mar-ket is required by the Act or these reg-ulations to enforce. Such program shallinclude:

(1) Surveillance of market activityfor indications of possible congestionor other market situations conduciveto possible price distortion;

(2) Surveillance of trading practiceson the floor of such contract market;

(3) Examination of the books andrecords kept by contract market mem-bers relating to their business of deal-ing in commodity futures, commodityoptions, and cash commodities, insofaras such business relates to their deal-ing on such contract market;

(4) Investigation of complaints re-ceived from customers or option cus-tomers concerning the handling oftheir accounts or orders;

(5) Investigation of all other allegedor apparent violation of such bylaws,rules, regulations and resolutions;

(6) Such other surveillance, recordexamination and investigation as isnecessary to enforce such bylaws,rules, regulations and resolutions; and

(7) A procedure which results in thetaking of prompt, effective disciplinaryaction for any violation which is foundto have been committed.

(b) Each contract market shall keepfull, complete, and systematic recordswhich will clearly set forth all actiontaken as a part of, and as a result of,its program required under paragraph(a) of this section.


(Sec. 5a, 49 Stat. 1497; 7 U.S.C. 7a)

[41 FR 3194, Jan. 21, 1976, as amended at 46FR 54525, Nov. 3, 1981; 46 FR 63035, Dec. 30,1981; 59 FR 5526, Feb. 7, 1994]

§ 1.52 Self-regulatory organizationadoption and surveillance of min-imum financial requirements.

(a) Each self-regulatory organizationmust adopt, and submit for Commis-sion approval, rules prescribing min-imum financial and related reportingrequirements for all its members whoare registered futures commission mer-chants. Each self-regulatory organiza-tion other than a contract marketmust adopt, and submit for Commis-sion approval, rules prescribing min-imum financial and related reportingrequirements for all its members whoare registered introducing brokers.Each contract market which elects tohave a category of membership for in-troducing brokers must adopt, and sub-mit for Commission approval, rulesprescribing minimum financial and re-lated reporting requirements for all itsmembers who are registered intro-ducing brokers. Each self-regulatoryorganization shall submit for Commis-sion approval any modification orother amendments to such rules. Suchrequirements must be the same as, ormore stringent than, those containedin §§ 1.10 and 1.17 and the definition ofadjusted net capital must be the sameas that prescribed in § 1.17(c): Provided,however, A designated self-regulatoryorganization may permit its member


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17 CFR Ch. I (4–1–01 Edition)§ 1.52

registrants which are registered withthe Securities and Exchange Commis-sion as securities brokers or dealers tofile (in accordance with § 1.10(h)) a copyof their Financial and OperationalCombined Uniform Single Report underthe Securities Exchange Act of 1934,Part II or Part IIA, in lieu of Form 1–FR: And, provided further, A designatedself-regulatory organization may per-mit its member introducing brokers tofile a Form 1–FR–IB in lieu of a Form1–FR–FCM.

(b) Each self-regulatory organizationshall have in effect and enforce rulessubmitted to the Commission pursuantto paragraph (a) of this section and ap-proved by the Commission.

(c) Any two or more self–regulatoryorganizations may file with the Com-mission a plan for delegating to a des-ignated self-regulatory organization,for any registered futures commissionmerchant or any registered introducingbroker which is a member of more thanone such self-regulatory organization,the responsibility of:

(1) Monitoring and auditing for com-pliance with the minimum financialand related reporting requirementsadopted by such self-regulatory organi-zations in accordance with paragraph(a) of this section; and

(2) Receiving the financial reportsnecessitated by such minimum finan-cial and related reporting require-ments.Such plan may also delegate the re-sponsibility of monitoring, and exam-ining the books and records kept by,such registered futures commissionmerchant or registered introducingbroker relating to its business of deal-ing in commodity futures, commodityoptions, and cash commodities, insofaras such business relates to its dealingson contract markets, as required by§ 1.51(a)(3) and/or part 33 of this chap-ter.

(d) Any plan filed under this sectionmay contain provisions for the alloca-tion of expenses reasonably incurred bythe designated self-regulatory organi-zation among the self-regulatory orga-nizations participating in such a plan.

(e) A plan’s designated self-regu-latory organization must report tothat plan’s other self-regulatory orga-nizations any violation of such other

self-regulatory organizations’ rules andregulations for which the responsibiityto monitor, audit or examine has beendelegated to such designated self-regu-latory organization under this section.

(f) The self-regulatory organizationsmay, among themselves, establish pro-grams to provide access to any nec-essary financial or related information.

(g) After appropriate notice and op-portunity for comment, the Commis-sion may, by written notice, approvesuch a plan, or any part of the plan, ifit finds that the plan, or any part of it:

(1) Is necessary or appropriate toserve the public interest;

(2) Is for the protection and in the in-terest of customers or option cus-tomers;

(3) Reduces multiple monitoring andauditing for compliance with the min-imum financial rules of the self-regu-latory organizations submitting theplan for any futures commission mer-chant or introducing broker which is amember of more than one self-regu-latory organization;

(4) Reduces multiple reporting of thefinancial information necessitated bysuch minimum financial and relatedreporting requirements by any futurescommission merchant or introducingbroker which is a member of more thanone self-regulatory organization;

(5) Fosters cooperation and coordina-tion among the contract markets; and

(6) Does not hinder the developmentof a registered futures associationunder section 17 of the Act.

(h)(1) Upon the approval of a plan orpart of one under paragraph (g) of thissection, a self-regulatory organizationwhich is included in such a plan shallbe considered to have met its affirma-tive action responsibilities under § 1.51to the extent that such responsibilitieshave been delegated to a designatedself-regulatory organization.

(2) After the Commission has ap-proved a plan or part of one under§ 1.52(g), a self-regulatory organizationrelieved of responsibility must notifyeach of its members which is subject tosuch a plan: (i) Of the limited nature ofits responsibility for such a member’scompliance with its minimum financialand related reporting requirements;and (ii) of the identity of the des-ignated self-regulatory organization


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which has been delegated responsi-bility for such a member.

(i) The Commission may at any time,after appropriate notice and oppor-tunity for hearing, withdraw its ap-proval of any plan or part of one estab-lished under this section, if such planor part of one ceases to effectuate ade-quately the purposes of section 4(f)(b)of the Act or of this section.

(j) Whenever a registered futurescommission merchant or a registeredintroducing broker holding member-ship in a self-regulatory organizationceases to be a member in good standingof that self-regulatory organization,such self-regulatory organization must,on the same day that event takesplace, give telegraphic notice of thatevent to the principal office of theCommission in Washington, DC andsend a copy of that notification to suchfutures commission merchant or suchintroducing broker.

(k) Nothing in this section shall pre-clude the Commission from examiningany futures commission merchant orintroducing broker for compliance withthe minimum financial and related re-porting requirements to which such fu-tures commission merchant or intro-ducing broker is subject.

(l) In the event a plan is not filedand/or approved for each registered fu-tures commission merchant or for eachregistered introducing broker which isa member of more than one self-regu-latory organization, the Commissionmay design and, after notice and oppor-tunity for comment, approve a plan forthose futures commission merchants orintroducing brokers which are not thesubject of an approved plan (underparagraph (g) of this section), dele-gating to a designated self-regulatoryorganization the responsibilities de-scribed in paragraph (c) of this section.


(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19, and 21; 5U.S.C. 552, 5 U.S.C. 552b, and secs. 2(a)(11), 4b,4f, 4g, 5a, 8a, and 17 of the Commodity Ex-change Act, 7 U.S.C. 4a(j), 6b, 6f, 6g, 7a, 12a,and 21, as amended, 92 Stat 865 et seq.)

[43 FR 39981, Sept. 8, 1978, as amended at 46FR 63035, Dec. 30, 1981; 48 FR 35290, Aug. 3,1983; 53 FR 4612, Feb. 17, 1988; 59 FR 5526, Feb.7, 1994; 62 FR 4641, Jan. 31, 1997]

§ 1.53 Enforcement of contract marketbylaws, rules, regulations, and reso-lutions.

Each contract market shall enforceeach bylaw, rule, regulation, and reso-lution, made or issued by it or by thegoverning board thereof or any com-mittee thereof, which is in effect as ofJuly 18, 1975, and which relates toterms and conditions in contracts ofsale to be executed on or subject to therules of such contract market or re-lates to other trading requirements,unless such bylaw, rule, regulation, orresolution has been disapproved by theCommission pursuant to section5a(a)(12)(A) of the Act, or the amend-ment or revocation of such bylaw, rule,regulation or resolution has been ap-proved by the Commission pursuant tosection 5a(a)(12)(A) of the Act.

(Secs. 5, 5a, 6, 6b; 42 Stat. 1000, 1001, 49 Stat.1497, 1498, 82 Stat. 29, 30, 31, 88 Stat. 1392, 1400,1401, 1402; 7 U.S.C. 7, 7a, 8, 13a)

[41 FR 3194, Jan. 21, 1976, as amended at 59FR 5526, Feb. 7, 1994]

§ 1.54 Contract market rules submittedto and approved or not disapprovedby the Secretary of Agriculture.

Notwithstanding any provision ofthese rules, any bylaw, rule, regula-tion, or resolution of a contract mar-ket that was submitted to the Sec-retary of Agriculture pursuant or§ 1.38(a) or § 1.39(a) of these rules, andwas either approved by the Secretaryor not disapproved by him, as of April21, 1975, shall continue in full force andeffect unless and until disapproved, al-tered or supplemented by or with theapproval of the Commission. The adop-tion of this rule does not constitute ap-proval by the Commission of any con-tract market bylaw, rule, regulation orresolution.

(Sec. 411, Pub. L. 93–463, 88 Stat. 1414; 7 U.S.C.4a note)

[45 FR 2314, Jan. 11, 1980]

§ 1.55 Distribution of ‘‘Risk DisclosureStatement’’ by futures commissionmerchants and introducing brokers.

(a)(1) Except as provided in 1.65, nofutures commission merchant, or inthe case of an introduced account nointroducing broker, may open a com-modity futures account for a customer,


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17 CFR Ch. I (4–1–01 Edition)§ 1.55

other than for a customer specified inparagraph (f) of this section, unless thefutures commission merchant or intro-ducing broker first:

(i) Furnishes the customer with aseparate written disclosure statementcontaining only the language set forthin paragraph (b) of this section (exceptfor nonsubstantive additions such ascaptions) or as otherwise approvedunder paragraph (c) of this section;Provided, however, that the disclosurestatement may be attached to otherdocuments as the cover page or thefirst page of such documents and as theonly material on such page; and

(ii) Receives from the customer anacknowledgment signed and dated bythe customer that he received and un-derstood the disclosure statement.

(b) The language set forth in thewritten disclosure document requiredby paragraph (a) of this section shall beas follows:

RISK DISCLOSURE STATEMENT

The risk of loss in trading commodity fu-tures contracts can be substantial. Youshould, therefore, carefully consider whethersuch trading is suitable for you in light ofyour circumstances and financial resources.You should be aware of the following points:

(1) You may sustain a total loss of thefunds that you deposit with your broker toestablish or maintain a position in the com-modity futures market, and you may incurlosses beyond these amounts. If the marketmoves against your position, you may becalled upon by your broker to deposit a sub-stantial amount of additional margin funds,on short notice, in order to maintain yourposition. If you do not provide the requiredfunds within the time required by yourbroker, your position may be liquidated at aloss, and you will be liable for any resultingdeficit in your account.

(2) Under certain market conditions, youmay find it difficult or impossible to liq-uidate a position. This can occur, for exam-ple, when the market reaches a daily pricefluctuation limit (‘‘limit move’’).

(3) Placing contingent orders, such as‘‘stop-loss’’ or ‘‘stop-limit’’ orders, will notnecessarily limit your losses to the intendedamounts, since market conditions on the ex-change where the order is placed may makeit impossible to execute such orders.

(4) All futures positions involve risk, and a‘‘spread’’ position may not be less risky thanan outright ‘‘long’’ or ‘‘short’’ position.

(5) The high degree of leverage (gearing)that is often obtainable in futures tradingbecause of the small margin requirementscan work against you as well as for you. Le-

verage (gearing) can lead to large losses aswell as gains.

(6) You should consult your broker con-cerning the nature of the protections avail-able to safeguard funds or property depositedfor your account.

ALL OF THE POINTS NOTED ABOVEAPPLY TO ALL FUTURES TRADINGWHETHER FOREIGN OR DOMESTIC. INADDITION, IF YOU ARE CONTEMPLATINGTRADING FOREIGN FUTURES OR OP-TIONS CONTRACTS, YOU SHOULD BEAWARE OF THE FOLLOWING ADDITIONALRISKS:

(7) Foreign futures transactions involveexecuting and clearing trades on a foreignexchange. This is the case even if the foreignexchange is formally ‘‘linked’’ to a domesticexchange, whereby a trade executed on oneexchange liquidates or establishes a positionon the other exchange. No domestic organi-zation regulates the activities of a foreignexchange, including the execution, delivery,and clearing of transactions on such an ex-change, and no domestic regulator has thepower to compel enforcement of the rules ofthe foreign exchange or the laws of the for-eign country. Moreover, such laws or regula-tions will vary depending on the foreigncountry in which the transaction occurs. Forthese reasons, customers who trade on for-eign exchanges may not be afforded certainof the protections which apply to domestictransactions, including the right to use do-mestic alternative dispute resolution proce-dures. In particular, funds received from cus-tomers to margin foreign futures trans-actions may not be provided the same pro-tections as funds received to margin futurestransactions on domestic exchanges. Beforeyou trade, you should familiarize yourselfwith the foreign rules which will apply toyour particular transaction.

(8) Finally, you should be aware that theprice of any foreign futures or option con-tract and, therefore, the potential profit andloss resulting therefrom, may be affected byany fluctuation in the foreign exchange ratebetween the time the order is placed and theforeign futures contract is liquidated or theforeign option contract is liquidated or exer-cised.

THIS BRIEF STATEMENT CANNOT, OFCOURSE, DISCLOSE ALL THE RISKS ANDOTHER ASPECTS OF THE COMMODITYMARKETS

I hereby acknowledge that I have receivedand understood this risk disclosure state-ment.

llllllllllllllllllllllll

Date

llllllllllllllllllllllll

Signature of Customer


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(c) The Commission may approve foruse in lieu of the risk disclosure docu-ment required by paragraph (b) of thissection a risk disclosure statement ap-proved by one or more foreign regu-latory agencies or self-regulatory orga-nizations if the Commission deter-mines that such risk disclosure state-ment is reasonably calculated to pro-vide the disclosure required by para-graph (b) of this section. Notice of riskdisclosure statements that may be usedto satisfy Commission disclosure re-quirements, what requirements suchstatements meet and the jurisdictionswhich accept each format will be setforth in appendix A to this section.

(d) Any futures commission mer-chant, or in the case of an introducedaccount any introducing broker, mayopen a commodity futures account fora customer without obtaining the sepa-rate acknowledgments of disclosureand elections required by this sectionand by §§ 33.7 and 190.06 of this chapter,provided that:

(1) Prior to the opening of such ac-count, the futures commission mer-chant or introducing broker obtains anacknowledgment from the customer,which may consist of a single signatureat the end of the futures commissionmerchant’s or introducing broker’scustomer account agreement, or on aseparate page, of the disclosure state-ments and elections specified in § 1.55and §§ 33.7 and 190.06 of this chapter, aslisted directly above the signature line,provided the customer has acknowl-edged by check or other indicationnext to a description of each specifieddisclosure statement or election thatthe customer has received and under-stood such disclosure statement ormade such election;

(2) The acknowledgment referred toin subparagraph (d)(1) of this sectionmust be accompanied by and executedcontemporaneously with delivery ofthe disclosures and elective provisionsrequired by § 1.55 and §§ 33.7 and 190.06 ofthis chapter.

(e) The acknowledgment required byparagraph (a) of this section must beretained by the futures commissionmerchant or introducing broker in ac-cordance with § 1.31.

(f) A futures commission merchantor, in the case of an introduced account

an introducing broker, may open acommodity futures account for a cus-tomer without furnishing such cus-tomer the disclosure statements or ob-taining the acknowledgments requiredunder paragraph (a) of this section,§ 1.65(a)(13), and § 30.6(a), § 33.7(a), and§ 190.10(c) of this chapter, provided thatthe customer is, at the time at whichthe account is opened:

(1) A bank or trust company;(2) A savings association or credit

union;(3) An insurance company;(4) An investment company subject

to regulation under the InvestmentCompany Act of 1940 (15 U.S.C. 80a–1 etseq.) or a foreign entity performing asimilar role or function subject as suchto foreign regulations, provided thatsuch investment company has total as-sets exceeding $5,000,000;

(5) A pool operated by a commoditypool operator registered under theCommodity Exchange Act or exemptsuch registration or by a foreign personperforming a similar function to thatof a commodity pool operator and sub-ject as such to foreign regulation;

(6) A corporation, partnership, pro-prietorship, organization, trust, orother entity:

(i) which has total assets exceeding$10,000,000; or

(ii) which has a net worth of$1,000,000;

(7) An employee benefit plan subjectto the Employee Retirement IncomeSecurity Act of 1974, or a foreign per-son performing a similar role or func-tion and subject as such to foreign reg-ulation, with total assets exceeding$5,000,000 or whose investment deci-sions are made by a bank, trust com-pany, insurance company, investmentadviser subject to regulation under theInvestment Advisers Act of 1940 (15U.S.C. 80b–1 et seq.), or a commoditytrading advisor subject to regulationunder the Commodity Exchange Act;

(8) A broker-dealer subject to regula-tion under the Securities Exchange Actof 1934 (15 U.S.C. 78a et seq.) or a foreignperson performing a similar role orfunction subject as such to foreign reg-ulation, acting on its own behalf: Pro-vided, however, that if such broker-deal-er is a natural person or proprietor-ship, the broker-dealer must also meet


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17 CFR Ch. I (4–1–01 Edition)§ 1.55

the requirements of paragraphs (f)(6) or(f)(10) of this section;

(9) A futures commission merchant,floor brokers, or floor traders subjectto regulation under the Commodity Ex-change Act or a foreign person per-forming a similar role or function sub-ject as such to foreign regulation; or

(10) Any natural person with total as-sets exceeding $10,000,000.

(g) This section does not relieve a fu-tures commission merchant or intro-

ducing broker from any other disclo-sure obligation it may have under ap-plicable law.


(Secs. 4b, 4c(b), 4g(1), 4l, 4o, and 8a(5), Com-modity Exchange Act, 7 U.S.C. 6b, 6c(b),6g(1), 6l, 6o, and 12a(5)(1976), and sec. 217,Commodity Futures Trading Act of 1974, 88Stat. 1405; secs. 2(a)(1), 4b, 4c, 4d, 4f and 8a,Commodity Exchange Act, as amended (7U.S.C. 2, 6b, 6c, 6f and 12a))


111



112

17 CFR Ch. I (4–1–01 Edition)§ 1.55

* * * * *

[The following language should be printed ona page other than the pages containing the

disclosure language above and may be omit-ted from the required disclosure statement]

This disclosure document meets the riskdisclosure requirements in the jurisdictions


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identified below ONLY for those instrumentswhich are specified.

United States: Commodity futures, optionson commodity futures and options on com-modities subject to the Commodity Ex-change Act.

United Kingdom: Futures, options on fu-tures, options on commodities and optionson equities traded by members of theUnited Kingdom Securities and FuturesAuthority pursuant to the Financial Serv-ices Act, 1986.

Ireland: Financial futures and options on fi-nancial futures traded by members of fu-tures exchanges on exchanges whose ruleshave been approved by the Central Bank ofIreland under Chapter VIII of the CentralBank Act, 1989.

[43 FR 31890, July 24, 1978, as amended at 46FR 63035, Dec. 30, 1981; 48 FR 35290, Aug. 3,1983; 50 FR 5383, Feb. 5, 1985; 58 FR 17503, Apr.5, 1993; 59 FR 34380, July 5, 1994; 59 FR 38119,July 27, 1994; 60 FR 38182, July 25, 1995; 63 FR8570, Feb. 20, 1998; 63 FR 52157, Sept. 30, 1998]

§ 1.56 Prohibition of guaranteesagainst loss.

(a) For purposes of this section com-modity interest means

(1) Any contract for the purchase orsale of a commodity for future deliv-ery; and

(2) Any contract, agreement or trans-action subject to Commission regula-tion under sections 4c or 19 of the Act.

(b) No futures commission merchantor introducing broker may in any wayrepresent that it will, with respect toany commodity interest in any accountcarried by the futures commission mer-chant for or on behalf of any person:

(1) Guarantee such person againstloss;

(2) Limit the loss of such person; or(3) Not call for or attempt to collect

initial and maintenance margin as es-tablished by the rules of the applicableboard of trade.

(c) No person may in any way rep-resent that a futures commission mer-chant or introducing broker will en-gage in any of the acts or practices de-scribed in paragraph (b) of this section.

(d) This section shall not be con-strued to prevent a futures commissionmerchant or introducing broker from:

(1) Assuming or sharing in the lossesresulting from an error or mishandlingof an order; or

(2) Participating as a general partnerin a commodity pool which is a limitedpartnership.

(e) This section shall not affect anyguarantee entered into prior to Janu-ary 28, 1982, but this section shall applyto any extension, modification or re-newal thereof entered into after suchdate.

[46 FR 62844, Dec. 29, 1981, as amended at 48FR 35291, Aug. 3, 1983]

§ 1.57 Operations and activities of in-troducing brokers.

(a) Each introducing broker must:(1) Open and carry each customer’s

and option customer’s account with acarrying futures commission merchanton a fully-disclosed basis: Provided,however, That an introducing brokerwhich has entered into a guaranteeagreement with a futures commissionmerchant in accordance with the provi-sions of § 1.10(j) of this part must openand carry such customer’s and optioncustomer’s account with such guar-antor futures commission merchant ona fully-disclosed basis; and

(2) Transmit promptly for executionall customer and option customer or-ders to:

(i) A carrying futures commissionmerchant; or

(ii) a floor broker, if the introducingbroker identifies its carrying futurescommission merchant and that car-rying futures commission merchant isalso the clearing member with respectto the customer’s or option customer’sorder.

(b) An introducing broker may notcarry proprietary accounts, nor may anintroducing broker carry accounts inforeign futures.

(c) An introducing broker may notaccept any money, securities or prop-erty (or extend credit in lieu thereof)to margin, guarantee or secure anytrades or contracts of customers or op-tion customers, or any money, securi-ties or property accruing as a result ofsuch trades or contracts: Provided, how-ever, That an introducing broker maydeposit a check in a qualifying accountor forward a check drawn by a cus-tomer or option customer if:


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17 CFR Ch. I (4–1–01 Edition)§ 1.58

(1) The futures commission merchantcarrying the customer’s or option cus-tomer’s account authorizes the intro-ducing broker, in writing, to receive acheck in the name of the futures com-mission merchant, and the introducingbroker retains such written authoriza-tion in its files in accordance with§ 1.31;

(2) The check is payable to the fu-tures commission merchant carryingthe customer’s or option customer’s ac-count;

(3) The check is deposited by the in-troducing broker, on the same dayupon which it is received, in a bank ortrust company located in the UnitedStates in a qualifying account, or thecheck is mailed or otherwise trans-mitted by the introducing broker tothe futures commission merchant onthe same day upon which it is received;

(4) For purposes of this paragraph (c),a qualifying account shall be deemedto be an account:

(i) Which is maintained in an accountname which clearly identifies the fundstherein as belonging to commodity oroption customers of the futures com-mission merchant carrying the cus-tomer’s or option customer’s account;

(ii) For which the bank or trust com-pany restricts withdrawals to with-drawals by the carrying futures com-mission merchant;

(iii) For which the bank or trustcompany prohibits the introducingbroker or anyone acting upon its behalffrom withdrawing funds; and

(iv) For which the bank or trust com-pany provides the futures commissionmerchant carrying the customer’s oroption customer’s account with a writ-ten acknowledgment, which the futurescommission merchant must retain inits files in accordance with § 1.31, thatit was informed that the funds depos-ited therein are those of commodity oroption customers and are being held inaccordance with the provisions of theAct and these regulations.

[48 FR 35291, Aug. 3, 1983, as amended at 57FR 23143, June 2, 1992]

§ 1.58 Gross collection of exchange-setmargins.

(a) Each futures commission mer-chant which carries a commodity fu-tures or commodity option position for

another futures commission merchantor for a foreign broker on an omnibusbasis must collect, and each futurescommission merchant and foreignbroker for which an omnibus account isbeing carried must deposit, initial andmaintenance margin on each positionreported in accordance with § 17.04 ofthis chapter at a level no less than thatestablished for customer accounts bythe rules of the applicable contractmarket.

(b) If the futures commission mer-chant which carries a commodity fu-tures or commodity option position foranother futures commission merchantor for a foreign broker on an omnibusbasis allows a position to be marginedas a spread position or as a hedged po-sition in accordance with the rules ofthe applicable contract market, thecarrying futures commission merchantmust obtain and retain a written rep-resentation from the futures commis-sion merchant or from the foreignbroker for which the omnibus accountis being carried that each such positionis entitled to be so margined.

[61 FR 19187, May 1, 1996]

§ 1.59 Activities of self-regulatory orga-nization employees, governingboard members, committee mem-bers, and consultants.


(1) Self-regulatory organization means‘‘self-regulatory organization,’’ as de-fined in Commission regulation 1.3(ee),and includes the term ‘‘clearing organi-zation,’’ as defined in Commission reg-ulation 1.3(d).

(2) Governing board member means amember, or functional equivalentthereof, of the board of governors of aself-regulatory organization.

(3) Committee member means a mem-ber, or functional equivalent thereof, ofany committee of a self-regulatory or-ganization.

(4) Employee means any person hiredor otherwise employed on a salaried orcontract basis by a self-regulatory or-ganization, but does not include:

(i) Any governing board membercompensated by a self-regulatory orga-nization solely for governing board ac-tivities; or


115


(ii) Any committee member com-pensated by a self-regulatory organiza-tion solely for committee activities; or

(iii) Any consultant hired by a self-regulatory organization.

(5) Material information means infor-mation which, if such information werepublicly known, would be consideredimportant by a reasonable person indeciding whether to trade a particularcommodity interest on a contract mar-ket. As used in this section, ‘‘materialinformation’’ includes, but is not lim-ited to, information relating to presentor anticipated cash, futures, or optionpositions, trading strategies, the finan-cial condition of members of self-regu-latory organizations or members oflinked exchanges or their customers oroption customers, or the regulatory ac-tions or proposed regulatory actions ofa self-regulatory organization or alinked exchange.

(6) Non-public information means in-formation which has not been dissemi-nated in a manner which makes it gen-erally available to the trading public.

(7) Linked exchange means: (i) anyboard of trade, exchange or marketoutside the United States, its terri-tories or possessions, which has anagreement with a contract market inthe United States that permits posi-tions in a commodity interest whichhave been established on one of the twomarkets to be liquidated on the othermarket; (ii) any board of trade, ex-change or market outside the UnitedStates, its territories or possessions,the products of which are listed on aUnited States contract market or atrading facility thereof; (iii) any secu-rities exchange, the products of whichare held as margin in a commodity ac-count or cleared by a securities clear-ing organization pursuant to a cross-margining arrangement with a futuresclearing organization; or (iv) any clear-ing organization which clears the prod-ucts of any of the foregoing markets.

(8) Commodity interest means any com-modity futures or commodity optioncontract traded on or subject to therules of a contract market or linkedexchange, or cash commodities tradedon or subject to the rules of a board oftrade which has been designated as acontract market.

(9) Related commodity interest meansany commodity interest which is trad-ed on or subject to the rules of a con-tract market, linked exchange, orother board of trade, exchange or mar-ket, other than the self-regulatory or-ganization by which a person is em-ployed, and with respect to which:

(i) Such employing self-regulatoryorganization has recognized or estab-lished intermarket spread margins orother special margin treatment be-tween that other commodity interestand a commodity interest which istraded on or subject to the rules of theemploying self-regulatory organiza-tion; or

(ii) Such other self-regulatory orga-nization has recognized or establishedintermarket spread margins or otherspecial margin treatment with anothercommodity interest as to which theperson has access to material, non-public information.

(10) Pooled investment vehicle means atrading vehicle organized and operatedas a commodity pool within regulation4.10(d), and whose units of participa-tion have been registered under the Se-curities Act of 1933, or a trading vehi-cle for which regulation 4.5 makesavailable relief from regulation as acommodity pool operator, i.e., reg-istered investment companies, insur-ance company separate accounts, banktrust funds, and certain pension plans.

(b) Employees of self-regulatory organi-zations; Self-regulatory organizationrules. (1) Each self-regulatory organiza-tion must maintain in effect ruleswhich have been submitted to the Com-mission pursuant to Section5a(a)(12)(A) of the Act and § 1.41 (or,pursuant to section 17(j) of the Act inthe case of a registered futures associa-tion) that, at a minimum, prohibit:

(i) Employees of the self-regulatoryorganization from:

(A) Trading, directly or indirectly, inany commodity interest traded on orcleared by the employing contractmarket or clearing organization;

(B) Trading, directly or indirectly, inany related commodity interest;

(C) Trading, directly or indirectly, ina commodity interest traded on orcleared by contract markets or clear-ing organizations other than the em-ploying self-regulatory organization if


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17 CFR Ch. I (4–1–01 Edition)§ 1.60

the employee has access to material,non-public information concerningsuch commodity interest;

(D) Trading, directly or indirectly, ina commodity interest traded on orcleared by a linked exchange if the em-ployee has access to material, non-pub-lic information concerning such com-modity interest; and

(ii) Employees of the self-regulatoryorganization from disclosing to anyother person any material, non-publicinformation which such employee ob-tains as a result of his or her employ-ment at the self-regulatory organiza-tion where such employee has orshould have a reasonable expectationthat the information disclosed may as-sist another person in trading any com-modity interest; Provided, however,That such rules shall not prohibit dis-closures made in the course of an em-ployee’s duties, or disclosures made toanother self-regulatory organization,linked exchange, court of competentjurisdiction or representative of anyagency or department of the federal orstate government acting in his or herofficial capacity.

(2) Each self-regulatory organizationmay adopt rules, which must be sub-mitted to the Commission pursuant tosection 5a(a)(12)(A) of the Act and Com-mission regulation 1.41 (or, pursuant tosection 17(j) of the Act in the case of aregistered futures association), whichset forth circumstances under whichexemptions from the trading prohibi-tion contained in paragraph (b)(1)(i) ofthis section may be granted; such ex-emptions are to be administered by theself-regulatory organization on a case-by-case basis. Specifically, such cir-cumstances may include:

(i) Participation by an employee inpooled investment vehicles where theemployee has no direct or indirect con-trol with respect to transactions exe-cuted for or on behalf of such vehicles;and

(ii) Trading by an employee undercircumstances enumerated by the self-regulatory organization in rules whichthe self-regulatory organization deter-mines are not contrary to the purposesof this regulation, the Commodity Ex-change Act, the public interest, or justand equitable principles of trade.

(c) Governing board members, committeemembers, and consultants; Self-regulatoryorganization rules. Each self-regulatoryorganization must maintain in effectrules which have been submitted to theCommission pursuant to Section5a(a)(12)(A) of the Act and § 1.41 (or,pursuant to Section 17(j) of the Act inthe case of a registered futures associa-tion) which provide that no governingboard member, committee member, orconsultant shall use or disclose—forany purpose other than the perform-ance of official duties as a governingboard member, committee member, orconsultant—material, non-public infor-mation obtained as a result of the per-formance of such person’s official du-ties.

(d) Prohibited conduct. (1) No em-ployee, governing board member, com-mittee member, or consultant shall:

(i) Trade for such person’s own ac-count, or for or on behalf of any otheraccount, in any commodity interest, onthe basis of any material, non-publicinformation obtained through specialaccess related to the performance ofsuch person’s official duties as an em-ployee, governing board member, com-mittee member, or consultant; or

(ii) Disclose for any purpose incon-sistent with the performance of suchperson’s official duties as an employee,governing board member, committeemember, or consultant any material,non-public information obtainedthrough special access related to theperformance of such duties.

(2) No person shall trade for such per-son’s own account, or for or on behalfof any other account, in any com-modity interest, on the basis of anymaterial, non-public information thatsuch person knows was obtained in vio-lation of paragraph (d)(1) of this sec-tion from an employee, governingboard member, committee member, orconsultant.

[58 FR 54973, Oct. 25, 1993, as amended at 65FR 47847, Aug. 4, 2000]

§ 1.60 Pending legal proceedings.(a) Every contract market shall sub-

mit to the Commission copies of thecomplaint, any dispositive or partiallydispositive decision, any notice of ap-peal filed concerning such decisionsand such further documents as the


117


Commission may thereafter requestfiled in any material legal proceedingto which the contract market is aparty or its property or assets is sub-ject.

(b) Every futures commission mer-chant shall sumit to the Commissioncopies of any dispositive or partiallydispositive decision for which a noticeof appeal has been filed, the notice ofappeal and such further documents asthe Commission may thereafter re-quest filed in any material legal pro-ceeding to which the futures commis-sion merchant is a party or its prop-erty or assets is subjects.

(c) Every contract market shall sub-mit to the Commission copies of thecomplaint, any dispositive or partiallydispositive decision, any notice of ap-peal filed concerning such decisionsand such further documents as theCommission may thereafter requestfiled in any material legal proceedinginstituted against any officer, director,or other official of the contract marketarising from conduct in such person’scapacity as a contract market officialand alleging violations of:

(1) The act or any rule, regulation, ororder thereunder;

(2) the constitution, bylaws or rulesof the contract market; or

(3) the applicable provisions of statelaw relating to the duties of officers,directors, or other officials of businessorganizations.

(d) Every futures commission mer-chant shall submit to the Commissioncopies of any dispositive or partiallydispositive decision concerning which anotice of appeal has been filed, the no-tice of appeal, and such further docu-ments as the Commission may there-after request filed in any materiallegal proceeding instituted against anyperson who is a principal of the futurescommission merchant (as that term isdefined in § 3.1(a) of this chapter) aris-ing from conduct in such person’s ca-pacity as a principal of the futurescommission merchant and alleging vio-lations of: (1) The Act or any rule, reg-ulation, or order thereunder; or (2) pro-visions of state law relating to a dutyor obligation owed by such a principal.

(e) All documents required by thissection to be submitted to the Commis-sion shall be mailed via first-class or

submitted by other more expeditiousmeans to the Commission’s head-quarters office in Washington, DC, At-tention: Office of the General Counsel.All documents required by this sectionto be submitted to the Commission asto matters pending on the effectivedate of the section (May 25, 1984), shallbe mailed to the Commission within 45days of that effective date. Thereafter,all complaints required by this sectionto be submitted to the Commission bycontract markets shall be mailed tothe Commission within 10 days afterthe initiation of the legal proceedingsto which they relate, all decisions re-quired to be submitted by contractmarkets shall be mailed within 10 daysof their date of issuance, all notices ofappeal required to be submitted by con-tract markets shall be mailed within 10days of the filing or receipt by the con-tract market of the notice of appeal,and all decisions and notices of appealrequired to be submitted by futurescommission merchants shall be mailedwithin 10 days of the filing or receiptby the futures commission merchant ofthe relevant notice of appeal. For pur-poses of paragraph (a), (b), (c) and (d) ofthis rule, a ‘‘material legal pro-ceeding’’ includes but is not limited toactions involving alleged violations ofthe Commodity Exchange Act or theCommission’s regulations. However, alegal proceeding is not ‘‘material’’ forthe purposes of this rule if the pro-ceeding is not in a federal or statecourt or if the Commission is a party.

[49 FR 17750, Apr. 25, 1984]

§ 1.61 [Reserved]

§ 1.62 Contract market requirementfor floor broker and floor traderregistration.

(a)(1) Each contract market shalladopt, maintain in effect, and enforcerules which have become effective pur-suant to section 5a(a)(12)(A) of the Actand § 1.41 and which provide that noperson in or surrounding any pit, ring,post, or other place provided by suchcontract market for the meeting ofpersons similarly engaged may:

(i) Purchase or sell for any other per-son any commodity for future delivery,or any commodity option, on or subjectto the rules of that contract market,


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17 CFR Ch. I (4–1–01 Edition)§ 1.63

unless such person is registered or hasbeen granted a temporary license as afloor broker; or

(ii) Purchase or sell solely for suchperson’s own account, any commodityfor future delivery, or any commodityoption, on or subject to the rules ofthat contract market, unless such per-son is registered or has been granted atemporary license as a floor trader, orhas been granted a temporary licenseas a floor broker to act as a floor trad-er, in accordance with section 4f of theAct and § 3.11 or § 3.40 of this chapter,and such temporary license or registra-tion has not been terminated, revokedor withdrawn: Provided, however, Thatsuch contract market rules must pro-vide that a floor broker or floor traderwill be prohibited from engaging in ac-tivities requiring registration underthe Act or from representing himself tobe a registrant under the Act or therepresentative or agent of any reg-istrant during the pendency of any sus-pension of such person’s registration orthe suspension by a contract market ofaccess of such person to any pit, ring,post or other place provided by suchcontract market for the meeting ofpersons engaged in purchasing and sell-ing any commodity for future deliveryor commodity option on or subject tothe rules of that contract market.

(2) Each contract market shall alsoadopt, maintain in effect and enforcerules which have become effective pur-suant to section 5a(a)(12)(A) of the Actand § 1.41 which provide for requests forwithdrawal of floor broker or floortrader registration using Form 8–W inaccordance with § 3.33 of this chapter,which require training of floor brokersand floor traders in accordance with§ 3.34 of this chapter and which requirereview of registration information byfloor brokers and by floor traders everythree years in accordance with § 3.11(d)of this chapter.

(b) Each contract market must no-tify the Commission of any facts re-garding a floor broker or floor traderor an applicant for registration as afloor broker or floor trader, or a floortrader whose name appears on a listsubmitted in accordance with § 1.66 inorder to qualify for a temporary no-ac-tion position thereunder, who has beengranted trading privileges at the con-

tract market, which are set forth asstatutory disqualifications in section8a(2) of the Act (unless such facts re-sult from an enforcement action filedby the Commission or a disciplinaryaction taken by another contract mar-ket) or which are terminations of floortrading privileges for cause under§ 9.11(c) of this chapter within ten busi-ness days of the date upon which thecontract market first knows of suchfacts. Notice to the Commission shallbe sufficient if the contract marketgives notice to the Director of the Divi-sion of Trading and Markets or the Di-rector’s designee by facsimile trans-mission and/or first class mail or equiv-alent means to the Commission at itsWashington, DC office (Attn: ChiefCounsel, Division of Trading and Mar-kets, Commodity Futures TradingCommission, Three Lafayette Centre,1155 21st Street, NW., Washington, DC20581).

[58 FR 19589, Apr. 15, 1993; 59 FR 5700, Feb. 8,1994, as amended at 60 FR 49334, Sept. 25,1995]

§ 1.63 Service on self-regulatory orga-nization governing boards or com-mittees by persons with discipli-nary histories.


(1) Self-regulatory organization meansa ‘‘self-regulatory organization’’ as de-fined in Commission regulation 1.3(ee)(§ 1.3(ee)), and includes a ‘‘clearing or-ganization’’ as defined in Commissionregulation 1.3(d) (§ 1.3(d)), except as de-fined in paragraph (b)(6) of this section.

(2) Disciplinary committee means anyperson or committee of persons, or anysubcommittee thereof, that is author-ized by a self-regulatory organizationto issue disciplinary charges, to con-duct disciplinary proceedings, to settledisciplinary charges, to impose dis-ciplinary sanctions or to hear appealsthereof.

(3) Arbitration panel means any personor panel empowered by a self-regu-latory organization to arbitrate dis-putes involving such organization’smembers or their customers.

(4) Oversight panel means any panelauthorized by a self-regulatory organi-zation to review, recommend or estab-lish policies or procedures with respect


119


to the self-regulatory organization’ssurveillance, compliance, rule enforce-ment or disciplinary responsibilities.

(5) Final decision means:(i) A decision of a self-regulatory or-

ganization which cannot be further ap-pealed within the self-regulatory orga-nization, is not subject to the stay ofthe Commission or a court of com-petent jurisdiction, and has not beenreversed by the Commission or anycourt of competent jurisdiction; or,

(ii) Any decision by an administra-tive law judge, a court of competent ju-risdiction or the Commission which hasnot been stayed or reversed.

(6) Disciplinary offense means:(i) Any violation of the rules of a

self-regulatory organization exceptthose rules related to

(A) Decorum or attire,(B) Financial requirements, or(C) Reporting or recordkeeping un-

less resulting in fines aggregating morethan $5,000 within any calendar year;

(ii) Any rule violation described insubparagraphs (a)(6)(i) (A) through (C)of this regulation which involves fraud,deceit or conversion or results in a sus-pension or expulsion;

(iii) Any violation of the Act or theregulations promulgated thereunder;or,

(iv) Any failure to exercise super-visory responsibility with respect toacts described in paragraphs (a)(6) (i)through (iii) of this section when suchfailure is itself a violation of either therules of a self-regulatory organization,the Act or the regulations promulgatedthereunder.

(v) A disciplinary offense must ariseout of a proceeding or action which isbrought by a self-regulatory organiza-tion, the Commission, any federal orstate agency, or other governmentalbody.

(7) Settlement agreement means anyagreement consenting to the imposi-tion of sanctions by a self-regulatoryorganization, a court of competent ju-risdiction or the Commission.

(b) Each self-regulatory organizationmust maintain in effect rules whichhave been submitted to the Commis-sion pursuant to section 5a(a)(12)(A) ofthe Act and § 1.41 or, in the case of aregistered futures association, pursu-ant to section 17(j) of the Act, that

render a person ineligible to serve onits disciplinary committees, arbitra-tion panels, oversight panels or gov-erning board who:

(1) Was found within the prior threeyears by a final decision of a self-regu-latory organization, an administrativelaw judge, a court of competent juris-diction or the Commission to havecommitted a disciplinary offense;

(2) Entered into a settlement agree-ment within the prior three years inwhich any of the findings or, in the ab-sence of such findings, any of the actscharged included a disciplinary offense;

(3) Currently is suspended from trad-ing on any contract market, is sus-pended or expelled from membershipwith any self-regulatory organization,is serving any sentence of probation orowes any portion of a fine imposed pur-suant to either:

(i) A finding by a final decision of aself-regulatory organization, an admin-istrative law judge, a court of com-petent jurisdiction or the Commissionthat such person committed a discipli-nary offense; or,

(ii) A settlement agreement in whichany of the findings or, in the absence ofsuch findings, any of the acts chargedincluded a disciplinary offense.

(4) Currently is subject to an agree-ment with the Commission or any self-regulatory organization not to applyfor registration with the Commissionor membership in any self-regulatoryorganization;

(5) Currently is subject to or has hadimposed on him within the prior threeyears a Commission registration rev-ocation or suspension in any capacityfor any reason, or has been convictedwithin the prior three years of any ofthe felonies listed in section 8a(2)(D)(ii) through (iv) of the Act;

(6) Currently is subject to a denial,suspension or disqualification fromserving on the disciplinary committee,arbitration panel or governing board ofany self-regulatory organization asthat term is defined in section 3(a)(26)of the Securities Exchange Act of 1934.

(c) No person may serve on a discipli-nary committee, arbitration panel,oversight panel or governing board of aself-regulatory organization if such


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17 CFR Ch. I (4–1–01 Edition)§ 1.64

person is subject to any of the condi-tions listed in paragraphs (b) (1)through (6) of this section.

(d) Each self-regulatory organizationshall submit to the Commission aschedule listing all those rule viola-tions which constitute disciplinary of-fenses as defined in paragraph (a)(6) (i)of this section and to the extent nec-essary to reflect revisions shall submitan amended schedule within thirtydays of the end of each calendar year.Each self-regulatory organization mustmaintain and keep current the sched-ule required by this section, post theschedule in a public place designed toprovide notice to members and other-wise ensure its availability to the gen-eral public.

(e) Each self-regulatory organizationshall submit to the Commission withinthirty days of the end of each calendaryear a certified list of any persons whohave been removed from its discipli-nary committees, arbitration panels,oversight panels or governing boardpursuant to the requirements of thisregulation during the prior year.

(f) Whenever a self-regulatory organi-zation finds by final decision that aperson has committed a disciplinaryoffense and such finding makes suchperson ineligible to serve on that self-regulatory organization’s disciplinarycommittees, arbitration panels, over-sight panels or governing board, theself-regulatory organization shall in-form the Commission of that findingand the length of the ineligibility inany notice it is required to provide tothe Commission pursuant to either sec-tion 17(h)(1) of the Act or Commissionregulation 9.11.

[55 FR 7890, Mar. 6, 1990, as amended at 58 FR37653, July 13, 1993; 64 FR 23, Jan. 4, 1999]

§ 1.64 Composition of various self-reg-ulatory organization governingboards and major disciplinary com-mittees.


(1) Self-regulatory organization means‘‘self-regulatory organization’’ as de-fined in § 1.3(ee), not including a ‘‘clear-ing organization’’ as defined in § 1.3(d).

(2) Major disciplinary committee meansa committee of persons who are au-thorized by a self-regulatory organiza-

tion to conduct disciplinary hearings,to settle disciplinary charges, to im-pose disciplinary sanctions or to hearappeals thereof in cases involving anyviolation of the rules of the self-regu-latory organization except thosewhich:

(i) Are related to:(A) Decorum or attire,(B) Financial requirements, or(C) Reporting or recordkeeping; and,(ii) Do not involve fraud, deceit or

conversion.(3) Regular voting member of a gov-

erning board means any person who iseligible to vote routinely on mattersbeing considered by the board and ex-cludes those members who are only eli-gible to vote in the case of a tie vote bythe board.

(4) Membership interest (i) In the caseof a contract market, each of the fol-lowing will be considered a differentmembership interest:

(A) Floor brokers,(B) Floor traders,(C) Futures commission merchants,(D) Producers, consumers, processors,

distributors, and merchandisers ofcommodities traded on the particularcontract market,

(E) Participants in a variety of pitsor principal groups of commoditiestraded on the particular contract mar-ket; and,

(F) Other market users or partici-pants; except that with respect to para-graph (c)(2) of this section, a contractmarket may define membership inter-ests according to the different pits orprincipal groups of commodities tradedon the contract market.

(ii) In the case of a registered futuresassociation, each of the following willbe considered a different membershipinterest:

(A) Futures commission merchants,(B) Introducing brokers,(C) Commodity pool operators,(D) Commodity trading advisors; and,(E) Associated persons, except that

under paragraph (c)(3) of this sectionan associated person will be deemed torepresent the same membership inter-est as its sponsor.

(b) Each self-regulatory organizationmust maintain in effect standards and


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procedures with respect to its gov-erning board which have been sub-mitted to the Commission pursuant tosection 5a(a)(12)(A) of the Act and § 1.41or, when applicable to a registered fu-tures association, pursuant to section17(j) of the Act, that ensure:

(1) That twenty percent or more ofthe regular voting members of theboard are persons who:

(i) Are knowledgeable of futures trad-ing or financial regulation or are oth-erwise capable of contributing to gov-erning board deliberations; and,

(ii) (A) Are not members of the self-regulatory organization,

(B) Are not currently salaried em-ployees of the self-regulatory organiza-tion,

(C) Are not primarily performingservices for the self-regulatory organi-zation in a capacity other than as amember of the self-regulatory organi-zation’s governing board, or

(D) Are not officers, principals or em-ployees of a firm which holds a mem-bership at the self-regulatory organiza-tion either in its own name or throughan employee on behalf of the firm;

(2) In the case of a contract market,that ten percent or more of the regularvoting members of the governing boardbe comprised where applicable of per-sons representing farmers, producers,merchants or exporters of principalcommodities underlying a commodityfutures or commodity option traded onthe contract market; and

(3) That the board’s membership in-cludes a diversity of membership inter-ests. The self-regulatory organizationmust be able to demonstrate that theboard membership fairly represents thediversity of interests at such self-regu-latory organization and is otherwiseconsistent with this regulation’s com-position requirements;

(c) Each self-regulatory organizationmust maintain in effect rules with re-spect to its major disciplinary commit-tees which have been submitted to theCommission pursuant to section5a(a)(12)(A) of the Act and § 1.41 or,when applicable to a registered futuresassociation, pursuant to section 17(j) ofthe Act, that ensure:

(1) That at least one member of eachmajor disciplinary committee or hear-ing panel thereof be a person who is

not a member of the self-regulatory or-ganization whenever such committeeor panel is acting with respect to a dis-ciplinary action in which:

(i) The subject of the action is amember of the self-regulatory organi-zation’s:

(A) Governing board, or(B) Major disciplinary committee; or,(ii) Any of the charged, alleged or ad-

judicated contract market rule viola-tions involve:

(A) Manipulation or attempted ma-nipulation of the price of a commodity,a futures contract or an option on a fu-tures contract, or

(B) Conduct which directly results infinancial harm to a non-member of thecontract market;

(2) In the case of a contract market,that more than fifty percent of eachmajor disciplinary committee or hear-ing panel thereof include persons rep-resenting membership interests otherthan that of the subject of the discipli-nary proceeding being considered;

(3) In the case of a registered futuresassociation, that each major discipli-nary committee or hearing panel there-of include persons representing mem-bership interests other than that of thesubject of the disciplinary proceedingbeing considered; and,

(4) That each major disciplinary com-mittee or hearing panel thereof includesufficient different membership inter-ests so as to ensure fairness and to pre-vent special treatment or preferencefor any person in the conduct of a com-mittee’s or the panel’s responsibilities.

(d) Each self-regulatory organizationmust submit to the Commission withinthirty days after each governing boardelection a list of the governing board’smembers, the membership intereststhey represent and how the composi-tion of the governing board otherwisemeets the requirements of § 1.64(b) andthe self-regulatory organization’s im-plementing standards and procedures.

[58 FR 37654, July 13, 1993; 59 FR 5082, Feb. 3,1994]

§ 1.65 Notice of bulk transfers and dis-closure obligations to customers.

(a) Notice and Disclosure to Customers.(1) Prior to transferring a customer ac-count to another futures commissionmerchant or introducing broker other


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than at the request of the customer, afutures commission merchant or intro-ducing broker must obtain the cus-tomer’s specific consent to the trans-fer.

(2) If the customer account agree-ment contains a valid consent by thecustomer to prospective transfers ofthe account, the transferor futurescommission merchant or introducingbroker may transfer the account if thecustomer is provided with written no-tice of, and a reasonable opportunity toobject to, the transfer and the cus-tomer has not asserted an objection tothe transfer or given other instructionsas to the disposition of the account.The notice to the customer must in-clude:

(i) A clear statement of the reason(s)for the transfer, the name, address andtelephone number of the proposedtransferee firm and other informationmaterial to the transfer;

(ii) A statement that the customer isnot required to accept the proposedtransfer and may direct the transfer orfirm to liquidate the account or ransferthe account to a firm of the customer’sselection;

(iii) The name, telephone number andaddress of a contact person at thetransferor firm to whom the customermay give instructions as to the disposi-tion of the account;

(iv) Notice that a failure to respondto the letter within a specified time pe-riod, which must be a reasonable periodin the circumstances, will be deemedconsent to the transfer; and

(v) A clear statement as to the meansby which the customer may object toor otherwise respond to the notice ofproposed transfer.

(3) Where customer accounts aretransferred to a futures commissionmerchant or introducing broker, otherthan at the customer’s request, thetransferee introducing broker or fu-tures commission merchant must pro-vide each customer whose account istransferred with the risk disclosurestatements and acknowledgments re-quired by § 1.55 (domestic futures andforeign futures and options trading),and §§ 33.7 (domestic exchange-tradedcommodity options) and 190.10(c) (non-cash margin—to be furnished by fu-tures commission merchants only) of

this chapter and receive the requiredacknowledgments within sixty days ofthe transfer of accounts. This require-ment shall not apply:

(i) As to customers owning trans-ferred accounts for which the trans-feree futures commission merchant orintroducing broker has clear writtenevidence that the customer has re-ceived and acknowledged the requireddisclosure documents; or

(ii) As to customers for which thetransferee futures commission mer-chant or introducing broker has clearevidence that such customer was at thetime the account was opened by thetransferring futures commission mer-chant or introducing broker, or is atthe time the account is being trans-ferred, a customer listed in § 1.55(f); or

(iii) If the transfer of accounts ismade from one introducing broker toanother introducing broker guaranteedby the same futures commission mer-chant pursuant to a guarantee agree-ment in accordance with the require-ments of § 1.10(j) and such futures com-mission merchant maintains the rel-evant acknowledgments required by§ 1.55(a)(1)(ii) and § 33.7(a)(1)(ii) of thischapter and can establish compliancewith § 190.10(c) of this chapter.

(b) Notice to the Commission. Each fu-tures commission merchant or intro-ducing broker shall file with the Com-mission, at least five business days inadvance of the transfer, notice of anytransfer of customer accounts carriedor introduced by such futures commis-sion merchant or introducing brokerthat is not initiated at the request ofthe customer, where the transfer in-volves the lesser of:

(1) 25 percent of the total number ofcustomer accounts carried or intro-duced by such firm if that percentagerepresents at least 100 accounts; or

(2) 50 percent or more of the totalnumber of customer accounts carriedor introduced by such firm. The com-putation of the percentage and numberof accounts must be based on the totalnumber of accounts carried by thetransferor futures commission mer-chant or introduced by the introducingbroker, irrespective of whether suchaccounts are transferred to a single ormultiple transferees.


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(c) The notice required by paragraph(b) of this section shall include:

(1) The name, principal business ad-dress and telephone number of thetransferor futures commission mer-chant or introducing broker;

(2) The name, principal business ad-dress and telephone number of eachtransferee futures commission mer-chant or introducing broker;

(3) The designated self-regulatory or-ganization for the transferor and trans-feree firms;

(4) A brief statement as to the rea-sons for the transfer;

(5) A copy of the notice to customersinforming them of the proposed trans-fer and providing an opportunity to ob-ject to such transfer; and

(6) A statement of the number of ac-counts to be transferred and the esti-mated liquidating equity of the ac-counts to be transferred.

(d) The notice required by paragraph(b) of this section shall be filed withthe Chief Counsel, Division of Tradingand Markets, Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street, NW., Wash-ington, DC 20581; the National FuturesAssociation Attn: Vice President-Com-pliance; and the designated self-regu-latory organization for the transferorfirm.

(e) In the event that the notice re-quired by paragraph (b) of this sectioncannot be filed with the Commission atleast five days prior to the accounttransfer, the transferee futures com-mission merchant or introducingbroker shall file such notice as soon aspracticable and no later than the dayof the transfer. Such notice shall in-clude a brief statement explaining thecircumstances necessitating the delayin filing.

(f) The requirements of this sectionshall not affect the obligations of a fu-tures commission merchant or intro-ducing broker under the rules of a self-regulatory organization or applicablecustomer account agreement with re-spect to transfer of accounts.

(g) If a proposed transfer is not com-pleted in accordance with the noticerequired to be filed by paragraph (b) ofthis section, a corrective notice shallbe filed within five business days of thedate such proposed transfer was to

occur explaining why the proposedtransfer was not completed.

[58 FR 17504, Apr. 5, 1993, as amended at 60FR 49334, Sept. 25, 1995; 63 FR 8571, Feb. 20,1998]

§ 1.66 No-action positions with respectto floor traders.

(a) Notwithstanding any other provi-sion of law, if a contract market sub-mits to the National Futures Associa-tion by April 26, 1993 a list of floortraders who were granted trading privi-leges on that contract market on or be-fore April 26, 1993, and whose floortrading privileges remain in effect,which includes the name, date of birthand social security number of suchfloor traders, as well as facts regardingsuch floor traders which are set forthas statutory disqualifications in sec-tion 8a(2) of the Act if the contractmarket knows of such facts, and suchlist is signed by the chief operating of-ficer of the contract market, the Com-mission will not commence an enforce-ment proceeding against a floor traderon that list based solely upon the floortrader’s failure to register or receive atemporary license under section 4f ofthe Act and § 3.11 of this chapter, norwill the Commission commence an en-forcement proceeding against the con-tract market under § 1.62 for failing tobar such floor trader from operating assuch: Provided, however, That for thosefloor traders listed as to whom the con-tract market knows of facts set forthas statutory disqualifications in sec-tion 8a(2) of the Act, the no-action po-sition contained in paragraph (a) ofthis section will only apply if the con-tract market submits a supplementalstatement signed by the chief oper-ating officer of the contract marketstating that, in light of the Congres-sional mandate requiring registrationof floor traders under the Act, the con-tract market acknowledges its respon-sibility to take affirmative action toconduct appropriate surveillance ofsuch floor traders. These no-action po-sitions shall expire upon the floor’strader being granted or denied registra-tion under the Act, or on June 11, 1993,whichever comes earliest: Provided,however, That if the floor trader filesan application for registration in ac-cordance with § 3.11 of this chapter


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with the National Futures Associationby June 11, 1993, the no-action posi-tions for the floor trader and the con-tract market as to the registration ofsuch floor trader will be extended untilthe floor trader is granted or deniedregistration under the Act, unless anAdministrative Law Judge issues an in-terim order suspending the no-actionposition as to such floor trader in ac-cordance with paragraph (b) of this sec-tion or the application for registrationis withdrawn.

(b) Suspension of no-action positionunder paragraph (a) of this section pursu-ant to section 8a(2) of the Act—(1) Notice.On the basis of information obtainedby the Commission, the Commissionmay at any time serve notice upon afloor trader whose name appears on alist submitted in accordance with para-graph (a) of this section that:

(i) The Commission alleges and isprepared to prove that such floor trad-er is subject to one or more of the stat-utory disqualifications set forth in sec-tion 8a(2) of the Act;

(ii) An Administrative Law Judgeshall make a determination, basedupon written evidence, as to whetherthe floor trader is subject to such stat-utory disqualification; and

(iii) If the floor trader is found to besubject to a statutory disqualification,the no-action status of the floor traderunder paragraph (a) of this section maybe suspended and the floor trader or-dered to show cause why registrationshould not be denied.

(2) Written submission. If the floortrader wishes to challenge the accu-racy of the allegations set forth in thenotice, the floor trader may submitwritten evidence limited to the typedescribed in § 3.60(b)(1) of this chapter.Such written submission must beserved upon the Division of Enforce-ment and filed with the ProceedingsClerk within twenty days of the date ofservice of notice to the floor trader.

(3) Reply. Within ten days of receiptof any written submission filed by thefloor trader, the Division of Enforce-ment may serve upon the floor traderand file with the Proceedings Clerk areply.

(4) Determination by AdministrativeLaw Judge. A determination by the Ad-ministrative Law Judge as to whether

the floor trader is subject to a statu-tory disqualification must be basedupon the evidence of the statutory dis-qualification, notice with proof of serv-ice, the written submission, if any,filed by the floor trader in responsethereto, any written reply submittedby the Division of Enforcement andsuch other papers as the Administra-tive Law Judge may require or permit.

(5) Suspension and order to show cause.(i) If the floor trader is found to be sub-ject to a statutory disqualification, theAdministrative Law Judge, withinthirty days after receipt of the floortrader’s written submission, if any, andany reply thereto, shall issue an in-terim order suspending the no-actionstatus of the floor trader under para-graph (a) of this section and requiringthe floor trader to show cause withintwenty days of the date of the orderwhy, notwithstanding the existence ofthe statutory disqualification, the reg-istration of the floor trader should notbe denied. The no-action status of thefloor trader shall be suspended, effec-tive five days after the order to showcause is served upon the floor trader inaccordance with § 3.50(a) of this chap-ter, until a final order with respect tothe order to show cause has beenissued: Provided, That if the sole basisupon which the floor trader is subjectto statutory disqualification is the ex-istence of a temporary order, judgmentor decree of the type described in sec-tion 8a(2)(C) of the Act, the order toshow cause shall not be issued and thefloor trader shall be suspended untilsuch time as the temporary order,judgment or decree shall have expired:Provided, however, That in no eventshall the floor trader’s no-action statusbe suspended for a period to exceed sixmonths.

(ii) If the floor trader is found not tobe subject to a statutory disqualifica-tion, the Administrative Law Judgeshall issue an order to that effect andthe Proceedings Clerk shall promptlyserve a copy of such order on the floortrader, the Division of Trading andMarkets and the Division of Enforce-ment. Such order shall be effective as afinal order of the Commission fifteendays after the date it is served uponthe floor trader in accordance with theprovisions of § 3.50(a) of this chapter


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unless a timely application for reviewis filed in accordance with § 10.102 ofthis chapter. The appellate proceduresset forth in §§ 10.102, 10.103, 10.104,10.106, 10.107 and 10.109 of this chaptershall apply to any appeal broughtunder paragraph (c)(5)(ii) of this sec-tion.

(6) Further proceedings. If an order toshow cause is issued pursuant to para-graph (c)(5)(i) of this section, furtherproceedings on such order shall be con-ducted in accordance with the provi-sions of § 3.60(b) through (j) of thischapter.

[58 FR 19589, Apr. 15, 1993; 58 FR 21776, Apr.23, 1993, as amended at 60 FR 54801, Oct. 26,1995]

§ 1.67 Notification of final disciplinaryaction involving financial harm to acustomer.


(1) Final disciplinary action means anydecision by or settlement with a con-tract market in a disciplinary matterwhich cannot be further appealed atthe contract market, is not subject tothe stay of the Commission or a courtof competent jurisdiction, and has notbeen reversed by the Commission orany court of competent jurisdiction.

(2) [Reserved](b) Upon any final disciplinary action

in which a contract market finds thata member has committed a rule viola-tion that involved a transaction for acustomer, whether executed or not, andthat resulted in financial harm to thecustomer:

(1)(i) the contract market shallpromptly provide written notice of thedisciplinary action to the futures com-mission merchant that cleared thetransaction; and,

(ii) a futures commission merchantthat receives a notice, under paragraph(b)(1)(i) of this section shall promptlyprovide written notice of the discipli-nary action to the customer as dis-closed on its books and records. If thecustomer is another futures commis-sion merchant, such futures commis-sion merchant shall promptly providethe notice to the customer.

(2) A written notice required by para-graph (b)(1) of this section must in-clude the principal facts of the discipli-

nary action and a statement that thecontract market has found that themember has committed a rule viola-tion that involved a transaction for thecustomer, whether executed or not, andthat resulted in financial harm to thecustomer. For the purposes of thisparagraph, a notice which includes theinformation listed in § 9.11(b) shall bedeemed to include the principal facts ofthe disciplinary action thereof.

[58 FR 37655, July 13, 1993]

§ 1.69 Voting by interested members ofself-regulatory organization gov-erning boards and various commit-tees.


(1) Disciplinary committee means anyperson or committee of persons, or anysubcommittee thereof, that is author-ized by a self-regulatory organizationto issue disciplinary charges, to con-duct disciplinary proceedings, to settledisciplinary charges, to impose dis-ciplinary sanctions, or to hear appealsthereof in cases involving any violationof the rules of the self-regulatory orga-nization except those cases where theperson or committee is authorizedsummarily to impose minor penaltiesfor violating rules regarding decorum,attire, the timely submission of accu-rate records for clearing or verifyingeach day’s transactions or other simi-lar activities.

(2) Family relationship of a personmeans the person’s spouse, formerspouse, parent, stepparent, child, step-child, sibling, stepbrother, stepsister,grandparent, grandchild, uncle, aunt,nephew, niece or in-law.

(3) Governing board means a self-regu-latory organization’s board of direc-tors, board of governors, board of man-agers, or similar body, or any sub-committee thereof, duly authorized,pursuant to a rule of the self-regu-latory organization that has been ap-proved by the Commission or has be-come effective pursuant to either Sec-tion 5a(a)(12)(A) or 17(j) of the Act totake action or to recommend the tak-ing of action on behalf of the self-regu-latory organization.

(4) Oversight panel means any panel,or any subcommittee thereof, author-ized by a self-regulatory organization


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to recommend or establish policies orprocedures with respect to the self-reg-ulatory organization’s surveillance,compliance, rule enforcement, or dis-ciplinary responsibilities.

(5) Member’s affiliated firm is a firm inwhich the member is a ‘‘principal,’’ asdefined in § 3.1(a), or an employee.

(6) Named party in interest means aperson or entity that is identified byname as a subject of any matter beingconsidered by a governing board, dis-ciplinary committee, or oversightpanel.

(7) Self-regulatory organization meansa ‘‘self-regulatory organization’’ as de-fined in § 1.3(ee) and includes a ‘‘clear-ing organization’’ as defined in § 1.3(d),but excludes registered futures associa-tions for the purposes of paragraph(b)(2) of this section.

8) Significant action includes any ofthe following types of self-regulatoryorganization actions or rule changesthat can be implemented without theCommission’s prior approval:

(i) Any actions or rule changes whichaddress an ‘‘emergency’’ as defined in§ 1.41(a)(4)(i) through (iv) and (vi)through (viii); and,

(ii) Any changes in margin levelsthat are designed to respond to ex-traordinary market conditions such asan actual or attempted corner, squeeze,congestion or undue concentration ofpositions, or that otherwise are likelyto have a substantial effect on prices inany contract traded or cleared at suchself-regulatory organization; but doesnot include any rule not submitted forprior Commission approval becausesuch rule is unrelated to the terms andconditions of any contract traded atsuch self-regulatory organization.

(b) Self-regulatory organization rules.Each self-regulatory organization shallmaintain in effect rules that have beensubmitted to the Commission pursuantto Section 5a(a)(12)(A) of the Act and§ 1.41 or, in the case of a registered fu-tures association, pursuant to Section17(j) of the Act, to address the avoid-ance of conflicts of interest in the exe-cution of its self-regulatory functions.Such rules must provide for the fol-lowing:

(1) Relationship with named party ininterest—(i) Nature of relationship. Amember of a self-regulatory organiza-

tion’s governing board, disciplinarycommittee or oversight panel must ab-stain from such body’s deliberationsand voting on any matter involving anamed party in interest where suchmember:

(A) Is a named party in interest;(B) Is an employer, employee, or fel-

low employee of a named party in in-terest;

(C) Is associated with a named partyin interest through a ‘‘broker associa-tion’’ as defined in § 156.1;

(D) Has any other significant, ongo-ing business relationship with a namedparty in interest, not including rela-tionships limited to executing futuresor option transactions opposite of eachother or to clearing futures or optiontransactions through the same clearingmember; or,

(E) Has a family relationship with anamed party in interest.

(ii) Disclosure of relationship. Prior tothe consideration of any matter involv-ing a named party in interest, eachmember of a self-regulatory organiza-tion governing board, disciplinary com-mittee or oversight panel must discloseto the appropriate self-regulatory orga-nization staff whether he or she hasone of the relationships listed in para-graph (b)(1)(i) of this section with anamed party in interest.

(iii) Procedure for determination. Eachself-regulatory organization must es-tablish procedures for determiningwhether any member of its governingboard, disciplinary committees or over-sight committees is subject to a con-flicts restriction in any matter involv-ing a named party in interest. Takinginto consideration the exigency of thecommittee action, such determinationsshould be based upon:

(A) Information provided by themember pursuant to paragraph(b)(1)(ii) of this section; and

(B) Any other source of informationthat is held by and reasonably avail-able to the self-regulatory organiza-tion.

(2) Financial interest in a significantaction—(i) Nature of interest. A memberof a self-regulatory organization’s gov-erning board, disciplinary committeeor oversight panel must abstain fromsuch body’s deliberations and voting onany significant action if the member


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knowingly has a direct and substantialfinancial interest in the result of thevote based upon either exchange ornon-exchange positions that could rea-sonably be expected to be affected bythe action.

(ii) Disclosure of interest. Prior to theconsideration of any significant action,each member of a self-regulatory orga-nization governing board, disciplinarycommittee or oversight panel must dis-close to the appropriate self-regulatoryorganization staff the position infor-mation referred to in paragraph(b)(2)(iii) of this section that is knownto him or her. This requirement doesnot apply to members who choose toabstain from deliberations and votingon the subject significant action.

(iii) Procedure for determination. Eachself-regulatory organization must es-tablish procedures for determiningwhether any member of its governingboard, disciplinary committees or over-sight committees is subject to a con-flicts restriction under this section inany significant action. Such deter-mination must include a review of:

(A) Gross positions held at that self-regulatory organization in the mem-ber’s personal accounts or ‘‘controlledaccounts,’’ as defined in § 1.3(j);

(B) Gross positions held at that self-regulatory organization in proprietaryaccounts, as defined in § 1.17(b)(3), atthe member’s affiliated firm;

(C) Gross positions held at that self-regulatory organization in accounts inwhich the member is a principal, as de-fined in § 3.1(a);

(D) Net positions held at that self-regulatory organization in ‘‘customer’’accounts, as defined in § 1.17(b)(2), atthe member’s affiliated firm; and,

(E) Any other types of positions,whether maintained at that self-regu-latory organization or elsewhere, heldin the member’s personal accounts orthe proprietary accounts of the mem-ber’s affiliated firm that the self-regu-latory organization reasonably expectscould be affected by the significant ac-tion.

(iv) Bases for determination. Takinginto consideration the exigency of thesignificant action, such determinationsshould be based upon:

(A) The most recent large trader re-ports and clearing records available tothe self-regulatory organization;

(B) Information provided by themember with respect to positions pur-suant to paragraph (b)(2)(ii) of this sec-tion; and,

(C) Any other source of informationthat is held by and reasonably avail-able to the self-regulatory organiza-tion.

(3) Participation in deliberations. (i)Under the rules required by this sec-tion, a self-regulatory organizationgoverning board, disciplinary com-mittee or oversight panel may permit amember to participate in deliberationsprior to a vote on a significant actionfor which he or she otherwise would berequired to abstain, pursuant to para-graph (b)(2) of this section, if such par-ticipation would be consistent with thepublic interest and the member recuseshimself or herself from voting on suchaction.

(ii) In making a determination as towhether to permit a member to partici-pate in deliberations on a significantaction for which he or she otherwisewould be required to abstain, the delib-erating body shall consider the fol-lowing factors:

(A) Wwhether the member’s partici-pation in deliberations is necessary forthe deliberating body to achieve aquorum in the matter; and

(B) Whether the member has uniqueor special expertise, knowledge or ex-perience in the matter under consider-ation.

(iii) Prior to any determination pur-suant to paragraph (b)(3)(i) of this sec-tion, the deliberating body must fullyconsider the position informationwhich is the basis for the member’s di-rect and substantial financial interestin the result of a vote on a significantaction pursuant to paragraph (b)(2) ofthis section.

(4) Documentation of determination.Self-regulatory organization governingboards, disciplinary committees, andoversight panels must reflect in theirminutes or otherwise document thatthe conflicts determination proceduresrequired by this section have been fol-lowed. Such records also must include:

(i) The names of all members who at-tended the meeting in person or who


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otherwise were present by electronicmeans;

(ii) The name of any member whovoluntarily recused himself or herselfor was required to abstain from delib-erations and/or voting on a matter andthe reason for the recusal or absten-tion, if stated; and

(iii) Information on the position in-formation that was reviewed for eachmember.

[64 FR 23, Jan. 4, 1999; 64 FR 3340, Jan. 21,1999]

§ 1.70 Notification of State enforce-ment actions brought under theCommodity Exchange Act.

(a) Immediately upon instituting anyproceeding in any Federal districtcourt for violation of the Act or anyrule, regulation or order thereunderagainst any person who is subject tosuit pursuant to sections 6d(1)–(6) ofthe Act, the authorized State official ofthe State instituting the proceedingshall submit to the Commission a copyof the complaint filed in the pro-ceeding, together with a written noticewhich:

(1) Indicates the names of parties tothe proceeding;

(2) Indicates the provision of the Actor the rule, regulation or order there-under which is alleged to have beenviolated.The complaint and written notice mustbe sent by first-class U.S. mail or per-sonally delivered to the Secretary,Commodity Futures Trading Commis-sion, Three Lafayette Centre, 1155 21stStreet, NW., Washington, DC 20581.

(b) Prior to instituting any pro-ceeding in a State court for the allegedviolation of any antifraud provisions ofthe Act or any antifraud rule, regula-tion or order thereunder against anyperson registered with the Commissionwho is subject to suit pursuant to theprovisions of section 6d(8) of the Act,the authorized State official of theState intending to institute the pro-ceeding shall submit to the Commis-sion written notice which:

(1) Indicates the names of parties tothe proposed proceeding;

(2) Indicates the provision of the Actor the rule, regulation or order there-under which will be alleged to havebeen violated;

(3) Contains a brief statement of thefacts on which the proposed action willbe based.

Except as provided in paragraph (c),this written notice must be sent byfirst-class U.S. mail or personally de-livered to the Secretary, CommodityFutures Trading Commission, ThreeLafayette Centre, 1155 21st Street, NW.,Washington, DC 20581 not less than 5business days prior to instituting theproceeding in State court.

(c) Where it is impracticable to pro-vide the Commission with written no-tice within the time period specified inparagraph (b) of this section, the au-thorized state official must inform theSecretary of the Commission by tele-phone as soon as practicable to insti-tute a proceeding in state court andmust send the written notice requiredin paragraph (b)(1) through (b)(3) ofthis section by facsimile or other simi-larly expeditious means of writtencommunication to the Secretary of theCommission, prior to instituting theproceeding in state court.

(d) Immediately upon instituting anyproceeding in a State court pursuant tothe provisions of section 6d(8) of theAct for alleged violation of any anti-fraud provisions of the Act or any anti-fraud rule, regulation or order there-under, the authorized State official in-stituting the proceeding shall submitto the Commission a copy of the com-plaint filed in the proceeding. The copyof the complaint must be sent by firstclass U.S. mail or personally deliveredto the Secretary, Commodity FuturesTrading Commission, Three LafayetteCentre, 1155 21st Street, NW., Wash-ington, DC 20581.

[48 FR 49503, Oct. 26, 1983, as amended at 60FR 49334, Sept. 25, 1995]

APPENDIX A TO PART 1 [RESERVED]

APPENDIX B TO PART 1—FEES FOR CON-TRACT MARKET RULE ENFORCEMENTREVIEWS AND FINANCIAL REVIEWS

(a) Within 60 days of the effective date of afinal fee schedule for each fiscal year, eachboard of trade which has been designated asa contract market for at least one activelytrading contract shall submit a check ormoney order, made payable to the Com-modity Futures Trading Commission, to


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cover the Commission’s actual costs in con-ducting contract market rule enforcementreviews and financial reviews.

(b) The Commission determines feeschanged fees charged to exchanges basedupon a formula which considers both actualcosts and trading volume.

(c) Checks should be sent to the attentionof the Office of the Secretariat, CommodityFutures Trading Commission, Three Lafay-ette Centre, 1155 21st Street, NW., Wash-ington, DC 20581.

[50 FR 930, Jan. 8, 1985, as amended at 52 FR46072, Dec. 4, 1987; 58 FR 42645, Aug. 11, 1993;60 FR 49334, Sept. 25, 1995]

PART 2—OFFICIAL SEAL

Sec.2.1 Description.2.2 Authority to affix seal.2.3 Prohibitions against misuse of seal.

AUTHORITY: 7 U.S.C. 4a(j), unless otherwisenoted.

SOURCE: 41 FR 9552, Mar. 5, 1976, unless oth-erwise noted.

§ 2.1 Description.

Pursuant to section 2(a)(10) of theCommodity Exchange Act, as amended,7 U.S.C. 4(i), the Commodity FuturesTrading Commission has adopted an of-ficial seal (the ‘‘Seal’’), the descriptionof which is as follows:

(a) An American bald eagle in blackand white holding the scales of bal-anced interests over a black and whitewheel of commerce and a farmer’splow, also in black and white. Thesesymbols are enclosed with an inner redoctagon and a blue outer octagon rep-resenting traditional futures contracttrading pits. Around the outside of theoctagons are the words ‘‘CommodityFutures Trading Commission’’ sepa-rated by two stars from the year‘‘1975,’’ the first year of the Commis-sion’s existence.

(b) The Seal of the Commodity Fu-tures Trading Commission is illus-trated as follows:

§ 2.2 Authority to affix seal.(a) The following officials of the

Commodity Futures Trading Commis-sion are authorized to affix the Seal toappropriate documents and other mate-rials of the Commission for all pur-poses including those authorized by 28U.S.C. 1733(b) (relating to authenti-cated copies of agency documents usedas evidence): The Chairman and allCommissioners, the General Counsel,the Executive Director, the Directorsof Divisions, and the Secretariat.

(b) The officials named in paragraph(a) of this section, may redelegate, andauthorize redelegation of this author-ity, except that the Secretary may re-delegate this authority only to theDeputy Secretary.

[41 FR 9552, Mar. 5, 1976, as amended at 51 FR37177, Oct. 20, 1986]

§ 2.3 Prohibitions against misuse ofseal.

(a) Fraudulently or wrongfullyaffixing or impressing the Seal to orupon any certificate, instrument, docu-ment or paper or with knowledge of itsfraudulent character, or with wrongfulor fraudulent intent, using, buying,procuring, selling or transferring to an-other any such paper is punishableunder section 1017 of title 18, U.S. Code.


Documents

GENERAL REGULATIONS ECORDKEEPING UNDER … · tions brought under the Commodity Ex-change Act. APPENDIX A TO PART 1 ... centrated orange juice, and all other ... (r) Net equity