Alternative Market Risk and Credit Risk Capital Charges for Futures Commission Merchants and Specified Foreign Currency Forward and Inventory Capital Charges, 5587-5596 [06-982]

Download as PDF Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations dms.dot.gov. The docket number is FAA– 2005–22157; Directorate Identifier 2005–CE– 44–AD. Issued in Kansas City, Missouri, on January 20, 2006. John Colomy, Acting Manager, Small Airplane Directorate, Aircraft Certification Service. [FR Doc. 06–735 Filed 2–1–06; 8:45 am] BILLING CODE 4910–13–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 1, 145 and 147 RIN 3038–AC05 Alternative Market Risk and Credit Risk Capital Charges for Futures Commission Merchants and Specified Foreign Currency Forward and Inventory Capital Charges Commodity Futures Trading Commission. ACTION: Final rule. wwhite on PROD1PC61 with RULES AGENCY: SUMMARY: The Commodity Futures Trading Commission (‘‘Commission’’ or ‘‘CFTC’’) is amending Commission regulations that impose minimum financial and related reporting requirements upon each person registered as a futures commission merchant (‘‘FCM’’). The amended regulations address the capital computations of FCMs that are registered with the Securities and Exchange Commission (‘‘SEC’’) as securities brokers or dealers (‘‘FCM/ BDs’’), and, who, pursuant to SEC’s regulations governing consolidated supervised entities (‘‘CSEs’’), have received SEC approval to use internal mathematical models to determine the deductions from their capital for market risk and credit risk associated with their proprietary trading assets. Subject to the reporting and other requirements specified in the amended regulations, these FCM/BDs may elect to compute their adjusted net capital using their SEC-approved alternative market risk and credit risk capital deductions in lieu of CFTC requirements. The Commission is also adopting other rule amendments that address confidential treatment for the reports and statements that would be required to be filed under the amended regulations, and also address the confidential treatment of certain other information that all FCMs must file with both the Commission and the SEC. Finally, the Commission is also adopting amendments that will affect the minimum financial requirements of FCMs and introducing brokers (‘‘IBs’’) VerDate Aug 31 2005 12:15 Feb 08, 2006 Jkt 208001 by reducing the capital deductions for their uncovered inventory or forward contracts in specified foreign currencies. This reduction is consistent with guidance currently provided by the Commission to FCMs and IBs. DATES: Effective February 2, 2006. FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and Chief Accountant, at (202) 418–5430, or Thelma Diaz, Special Counsel, at (202) 418–5137, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Electronic mail: (tsmith@cftc.gov) or (tdiaz@cftc.gov). SUPPLEMENTARY INFORMATION: I. Background On October 11, 2005, the Commission published a release in the Federal Register to provide public notice of, and request comment on, proposed amendments to its capital rules.1 The Commission encourages interested persons to read the detailed analysis of the proposing amendments in the October 11 release, and has included citations to pertinent pages of the release as part of the discussion in this final rulemaking release.2 In response to the proposals issued by the Commission, four commenters sent letters that were generally supportive of the proposed regulations.3 The commenters included the National Futures Association (‘‘NFA’’), a registered futures association; Goldman, Sachs and Co., an FCM/BD; and two industry trade groups, the Futures Industry Association (‘‘FIA’’) and the Securities Industry Association (‘‘SIA’’).4 The comments received from each of these organizations are addressed elsewhere in this release, in connection with the specific Commission regulations discussed in these letters. 1 The RIN Number for the release published in the Federal Register on October 11, 2005 was identified as 3038–AC19. See 70 FR 58985 (October 11, 2005). The correct RIN Number, 3038–AC05, has been used in this release. 2 The October 11 Release may be accessed electronically on the Commission’s Web site, at https://www.cftc.gov/. 3 The original deadline for the receipt for comments was extended from November 10th to November 30, 2005. See 70 FR 70749 (November 23, 2005). 4 The comment letters are available for inspection and copying at the Commission’s Washington office in its public reading room, Room 4072, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. The telephone number for the public reading room is (202) 418–5025. The comment letters also are available on the Commission’s public Web site, at https:// www.cftc.gov/foia/comment05/foi05--006_1.htm. PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 5587 II. Amendments Allowing Alternative Capital Computation for Proprietary Trading Assets of Qualifying FCM/BDs That Are Part of CSEs A. Request to Commission for Amendment to Rule 1.17 As noted in the October 11 release, Commission Rule 1.17(a) requires each FCM to maintain a minimum amount of ‘‘adjusted net capital’’, which is defined as the FCM’s net capital less the deductions, or ‘‘haircuts’’, that are specified in Rule 1.17(c)(5) and (8).5 For purposes of the required haircuts on the FCM’s proprietary positions in securities, Rule 1.17(c)(5) incorporates by reference percentage deductions that are set forth in SEC regulations 17 CFR 240.15c3–1(c)(2)(vi) and (vii). Also, Commission Rule 1.17(c)(2)(ii), in a manner similar to the SEC’s requirements for BDs under 17 CFR 240.15c3–1(c)(2)(iv), requires unsecured receivables arising from an FCM’s transactions in over-the-counter (‘‘OTC’’) derivatives to be excluded from the FCM’s current assets for purposes of determining the firm’s regulatory capital. The deductions required for other proprietary assets of the FCM are set forth in other parts of Commission Rule 1.17(c). The October 11 release also noted that the Commission and SEC have, to the extent practical, harmonized their respective capital rules in order to avoid creating inconsistent regulatory obligations for firms that are duallyregistered FCMs and securities brokers or dealers (‘‘BDs’’). This harmonization of capital rules extends to the computation of net capital and adjusted net capital, and to the qualifications that subordinated debt must meet in order to qualify as regulatory capital. Furthermore, if an FCM is also registered as a BD, it may file an SEC Form X–17a–5, ‘‘Financial and Operational Combined Uniform Single Report’’ (‘‘FOCUS Report’’) to satisfy its requirement to file with the Commission a Form 1–FR–FCM financial report. In particular, Commission Rule 1.10(h) treats Part II and Part IIA of the FOCUS report as acceptable substitutes for the Form 1–FR–FCM, provided that the FOCUS report includes all information required to be furnished on and submitted with Form 1–FR–FCM. Also, for those portions of the Form 1–FR– FCM that the Commission has designated as either publicly available or as exempt from mandatory public 5 The rules of the Commission cited in this release may be found at 17 CFR Ch. I (2005). SEC rules cited in this release may be found at 17 CFR Ch. II (2005). E:\FR\FM\02FER1.LOC 02FER1 5588 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations wwhite on PROD1PC61 with RULES disclosure for purposes of the Freedom of Information Act and the Government in the Sunshine Act, the Commission extends the same treatment to those portions of the FOCUS Report that are equivalent to the Form 1–FR–FCM. The uniform capital computations, and related single-form filing requirements, harmonize the regulatory requirements imposed upon dual registrants while providing the Commission and SEC with the necessary financial information to assess whether firms maintain a minimum level of regulatory capital while engaging in futures and securities businesses. On June 21, 2004, the SEC adopted final rule amendments to its capital rules to provide an alternative net capital computation for broker-dealers that voluntarily elect to be supervised on a consolidated basis (the ‘‘Alternative Capital Computation’’).6 As amended, SEC Rule 15c3–1(a)(7), (17 CFR 240.15c3–1(a)(7)), provides that the SEC may approve a BD’s application, if submitted in accordance with the provisions of a new Appendix E (17 CFR 240.15c3–1e), to use the Alternative Capital Computation when calculating its net capital.7 To the extent approved by the SEC, the BD using the Alternative Capital Computation would compute a total deduction for market risk for positions in the proprietary accounts of the BD, in accordance with the specific standards set forth in Appendix E.8 The BD would calculate its regulatory capital using this deduction in lieu of the haircuts that SEC Rules 15c3–1(c)(2)(vi) and (c)(2)(vii) require for the BD’s positions in securities. The SEC may also approve alternative market risk deductions for the BD’s proprietary positions in forward contracts and commodity futures contracts. Also, Appendix E provides that where the alternative market risk deduction has been used to compute the deduction on the underlying instrument for OTC derivatives of the BD, the BD would compute a deduction for credit risk, using the standards set forth in Appendix E, and it would use this deduction in lieu of the capital charges that SEC Rule 15c3–1(c)(2)(iv) requires 6 The SEC’s new rule was published at 69 FR 34428 (June 21, 2004). The effective date of the rule was August 20, 2004. 7 A detailed description of the application process was included in the October 11 release. See 70 FR at 58989. 8 The requirements for the computation of the deduction for market risk were summarized in the October 11 Release. See 70 FR at 58987–58988. VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 for the BD’s credit exposures arising from OTC transactions in derivatives.9 As the SEC noted when first proposing rules for the Alternate Capital Computation, the required market risk and credit risk deductions are expected to be substantially smaller in amount than the standardized deductions.10 As the SEC rule amendments were being discussed and proposed, Commission staff identified that continued harmonization of the capital rules of the two agencies would require amendment of Rule 1.17, and communicated this to various market participants potentially affected by the difference between the SEC’s proposed rules and CFTC Rule 1.17. After the SEC adopted rule amendments allowing BDs to apply for approval to use the Alternative Capital Computation, several FCM/BDs, along with representatives of the SIA and the FIA, contacted staff of the Commission’s Division of Clearing and Intermediary Oversight (the ‘‘Division’’) to express their support for Commission rulemaking that would allow duallyregistered FCM/BDs to use their SECapproved alternative market risk and credit risk deductions when computing their adjusted net capital under Rule 1.17.11 In addition, two duallyregistered FCM/BDs that had received SEC approval for the Alternative Capital Computation requested no-action positions from Division staff, without which the Alternative Capital Computation could not be used for purposes of their capital computation and reporting requirements to the Commission. The Division granted such relief on an interim basis, to be superseded by such final rules as the Commission might eventually adopt in connection with the Alternative Capital Computation.12 B. Amendments to Rule 1.17 for FCMs Electing To Use SEC-Approved Capital Deductions. After consideration of the amendments as proposed in the October 11 release, and in view of the comments that the Commission received in 9 The requirements for the computation of the deduction for credit risk were summarized in the October 11 Release. See 70 FR at 58988–58989. 10 The SEC’s proposed rules for the Alternative Capital Computation were published in the Federal Register in 2003. 68 FR 62872 (November 6, 2003). 11 The Securities Industry Association and the Futures Industry Association are industry trade groups whose members include broker-dealers, futures commission merchants, and representatives of other segments of the securities and futures industries. 12 Two additional FCMs have received SEC approval to use the Alternative Capital Computation, and have received similar no-action positions from the Division pending the rulemaking process. PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 response to the proposed amendments, which generally supported their adoption, the Commission is amending Rule 1.17 to provide that an FCM/BD may elect, if the firm satisfies all of the requirements of a new paragraph (c)(6), to compute its adjusted net capital using alternative capital deductions that the SEC has approved by written order under 17 CFR 240.15c3–1(a)(7). The amended regulation permits an FCM, to the extent that the SEC has approved alternative capital deductions for the FCM/BD’s unsecured receivables from OTC transactions in derivatives, or for its proprietary positions in securities, forward contracts, or futures contracts, to use these same alternative capital deductions when computing its adjusted net capital under the Commission’s regulations. These alternative deductions would be used in lieu of the amounts that otherwise would be required by the following regulations: Rule 1.17(c)(2)(ii) for unsecured receivables from OTC derivatives transactions; Rule 1.17(c)(5)(ii) for proprietary positions in forward contracts; Rule 1.17(c)(5)(v) for proprietary positions in securities; and Rule 1.17(c)(5)(x) for proprietary positions in futures contracts. The amendments do not alter or affect the haircuts that Rule 1.17(c)(5)(v) and Rule 1.32(b) require for securities that are held in segregation under section 4d of the Commodity Exchange Act, because the alternative deductions apply solely to an FCM/BD’s proprietary positions.13 The terms of the amended Rule 1.17(c)(6) has been adopted as originally proposed by the Commission in the October 11 release. The effective date for the amended regulations is the date of the publication of this release in the Federal Register, at which time all FCMs that determine to elect to use the Alternative Capital Computation must comply with the requirements of the amended regulations. If a firm has already elected to use the Alternative Capital Computation under earlier noaction positions issued by the Division 13 FCM/BDs using the Alternative Capital Computation would continue to be required, under Rule 1.17(c)(5)(v), to deduct the securities haircuts specified in SEC Rules 15c3–1(c)(2)(vi) and (vii) from the value of securities that are held in segregated accounts under Section 4d and the Commission’s implementing regulations and which were not deposited by customers. Such FCM/BDs would also continue to be required, when computing the amount of funds required to be in segregated accounts, to use the standard SEC securities haircut expressly referenced in Rule 1.32(b), i.e., SEC Rule 15c3–1(c)(2)(vi). Rule 1.32 applies this haircut for purposes of the permissible offset of any net deficit in a customer’s account against the current market value of readily marketable securities, less the SEC standard haircut, that are held for the same customer’s account. E:\FR\FM\02FER1.SGM 02FER1 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations of Clearing and Intermediary Oversight, it may not continue to use the Alternative Capital Computation unless it maintains compliance with the reporting and other continuing obligations required by the amended regulations, as the earlier no-action positions are withdrawn as of the effective date of the amended regulations. In formulating the amendments to its rules, the Commission has taken into consideration that the Alternative Capital Computation, unlike the current standardized charges, is determined by an ongoing oversight process that results in individualized capital charges that require considerable firm-specific information.14 Pursuant to Commission Rule 1.17(a)(3), FCMs must be able to demonstrate to the satisfaction of the Commission their continuous compliance with their minimum financial requirements under the Commodity Exchange Act and implementing regulations of the Commission. The Commission also took into consideration that SEC Rule 15c3– 1(a)(7) requires the BD to maintain at all times ‘‘tentative net capital’’ 15 of not less than $1 billion and net capital of not less than $500 million, and to provide same day notice if the BD’s tentative net capital is less than $5 billion, or some other ‘‘early warning’’ amount specified by the SEC.16 The Alternative Capital Computation is also limited to those firms who: (i) Have in place an internal risk management system that complies with 17 CFR 240.15c3–4 (previously applicable only to OTC derivatives dealers registered with the SEC), which addresses not only their market risk and credit risk, but also liquidity, legal and operational risks at the firm; and (ii) whose ultimate holding company and affiliates have consented to SEC consolidated supervision, i.e., they elect CSE status.17 14 See 70 FR 58989–90. BD’s ‘‘tentative net capital’’ consists of its net capital before the approved deductions for market risk and credit risk under the SEC’s amended rule, and also increased by the balance sheet value (including counterparty net exposure) resulting from transactions in derivative instruments that would otherwise be deducted by virtue of paragraph (c)(2)(iv) of Rule 15c3–1. 16 Upon written application by a BD, the SEC may lower the threshold for the early warning requirement, either unconditionally or subject to specified terms and conditions. The SEC will consider various factors to determine whether the early warning requirement should be modified. 69 FR at 34461. 17 In adopting the Alternative Capital Computation, the SEC has also responded to concerns expressed by several U.S. BDs that are required, pursuant to a directive issued by the European Union (‘‘EU’’) at the end of 2002 (the ‘‘Financial Groups Directive’’), to demonstrate holding company supervision that is equivalent to wwhite on PROD1PC61 with RULES 15 The VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 For purposes of such consolidated supervision, the BD’s ultimate holding company and affiliated entities must consent to direct examination by the SEC, unless the holding company is subject to supervision by the Federal Reserve or foreign banking regulators because it is a U.S. holding company or foreign bank that has elected financial holding company status under the Bank Holding Company Act of 1956.18 The SEC has added a new Appendix G to Rule 15c3–1 (17 CFR 240.15c3–1g), which establishes the minimum reporting, recordkeeping, and notification requirements for all holding companies of BDs that apply for, or have received approval for the use of, the Alternative Capital Computation.19 1. Notice of Election or of Changes to Election Amended paragraph (c)(6)(ii) of Rule 1.17 specifies that an FCM’s election to use the Alternative Capital Computation shall not be effective unless and until it has filed with the Commission a notice, addressed to the Director of the Division of Clearing and Intermediary Oversight, that is to include: (i) A copy of the SEC order approving its alternative market risk and credit risk capital charges; and (ii) a statement that identifies the amount of tentative net capital below which the FCM is required to provide notice to the SEC, and that also includes portions of the information made available to the SEC for purposes of its request for approval to use the Alternative Capital Computation, as follows: (1) A list of the categories of positions that the firm holds in its proprietary accounts, and, for each such category, a description of the methods that the firm will use to calculate its deductions for market risk and credit risk, and, if calculated separately, its deductions for specific risk; (2) A description of the VaR models to be used for its market risk and credit risk deductions, and an overview of the integration of the models into the EU consolidated supervision. See ‘‘Directive 2002/ 87/EC of the European Parliament and of the Council of 16 December 2002.’’ Absent a demonstration of comparable group-wide supervision, the EU may restrict or otherwise place conditions upon the operations of the Europeanbased affiliates of these BDs. The consolidated supervision requirements in the SEC’s amended rules provide a regulatory structure that is intended to satisfy the requirements of the Financial Groups Directive. 18 The CSE rule specifically exempts FCM affiliates of BDs, and other functionally regulated BD affiliates, from the SEC’s direct examination. 19 To minimize duplicative regulation, Appendix G imposes fewer requirements on holding companies that have elected financial holding company status. PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 5589 internal risk management control system of the firm; (3) A description of how the firm will calculate current exposure and maximum potential exposure for its deductions for credit risk; (4) A description of how the firm will determine internal credit ratings of counterparties and internal credit risk weights of counterparties, if applicable; and (5) A description of the estimated effect of the alternative market risk and credit risk deductions on the amounts reported by the firm as net capital and adjusted net capital. Amended Rule 1.17(c)(6)(ii) also requires the FCM to supplement its statement, upon the request of the Commission made at any time, with any other explanatory information for the firm’s computation of its alternative market risk and credit risk deductions as the Commission may require at its discretion. The requests for explanatory information under amended Rule 1.17(c)(6)(ii) may be made by the Director of the Division of Clearing and Intermediary Oversight, to whom, as set forth in Commission Rule 140.91(a)(6), the Commission has delegated authority for the functions reserved for the Commission under Rule 1.17. Amended Rule 1.17(c)(6)(ii) further provides that the FCM must file, as a supplemental notice with the Director of the Division of Clearing and Intermediary Oversight, a notice advising that the SEC has imposed additional or revised conditions after the date of the SEC order filed with the FCM’s original notice to the Director of the Division of Clearing and Intermediary Oversight. The FCM must also file as a supplemental notice a copy of any approval by the SEC of amendments that the firm has requested for its application to use the Alternative Capital Computation. An FCM is also permitted under the amended rule to voluntarily change its election, by filing with the Director of the Division of Clearing and Intermediary Oversight a written notice that specifies a future date as of which its market risk and credit risk capital charges will no longer be determined by the Alternative Capital Computation, but will instead be computed as otherwise required under the Commission’s rules. 2. Conditions Under Which FCM May No Longer Elect Alternative Capital Charges Amended paragraph (c)(6)(iii) of Rule 1.17 specifies that an FCM may no longer elect to use its SEC-approved alternative market risk and credit risk E:\FR\FM\02FER1.SGM 02FER1 5590 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations wwhite on PROD1PC61 with RULES deductions, and must instead compute the charges otherwise required under Rules 1.17(c)(5) or 1.17(c)(2), upon the occurrence of any of the following: (i) The SEC revokes its approval of the firm’s market risk and credit risk deductions; (ii) the firm fails to come into compliance with its filing requirements under the proposed rule, after having received from the Director of the Division of Clearing and Intermediary Oversight written notification that the firm is not in compliance with its filing requirements, and must cease using the Alternative Capital Computation if it has not come into compliance by a date specified in the notice; or (iii) the Commission by written order finds that permitting the firm to continue to use such alternative market risk and credit risk deductions is no longer appropriate for the protection of customers of the FCM or the financial integrity of the futures or options markets. In addition, since the amended rule permits only dual registrants to use the Alternative Capital Computation, an FCM’s election to use the Alternative Capital Computation automatically terminates immediately, without further action by the Commission, if the firm ceases to be dually-registered as a BD. 3. Additional Filing Requirements In addition to the notice and supplemental notices described above, amended paragraph (c)(6)(iv) also provides that any firm that elects to use the Alternative Capital Computation must file with the Commission copies of all additional monthly, quarterly, and annual reporting items that BDs who are approved to use the Alternative Capital Computation must file with SEC, as discussed above. The FCM must also file with the Commission a copy of the notice that it is required to file with the SEC whenever its tentative net capital falls below the amount required by the SEC, or of the notice filed with the SEC or the firm’s designated examining authority in regard to planned withdrawals of excess net capital. Specifically, the amended rule requires that the following be filed with the Commission, at the same time that originals are filed with the SEC: (i) All information that the firm files on a monthly basis with its designated examining authority or the SEC in satisfaction of SEC Rule 17a–5(a)(5)(i), whether by way of schedules to the firm’s FOCUS reports or by other filings; (ii) the quarterly reports required by SEC Rule 17a–5(a)(5)(ii); (iii) the supplemental annual filings as required by SEC Rule 17a–5(k), which consist of a report on management controls that is prepared by a registered public VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 accounting firm and is filed by the firm concurrently with its annual audit report, and also a related statement, filed prior to the commencement of the accountant’s review but no later than December 10 of each year, that includes a description of the procedures agreed to by the firm and the accountant and a notice describing changes to the agreed-upon procedures, if any, or stating that there are no changes; and (iv) any notification to the SEC or the firm’s designated examining authority of planned withdrawals of excess net capital, and any notification that the firm is required to file with the SEC when its tentative net capital is below an amount specified by the SEC. 4. Conforming Amendments To permit Filing of Part II CSE FOCUS Report Those BDs that use the Alternative Capital Computation also file a revised Part II to the FOCUS report, designated ‘‘Part II CSE’’. This revised FOCUS report includes financial information that BDs previously reported in Part II of the FOCUS Report, and also includes new schedules that provide much of the additional information that BDs who use the Alternative Capital Computation must report on a monthly basis. In order to facilitate the firm’s reporting requirements and reduce administrative burden, the Commission has amended Rule 1.10(h) to specify that a dual registrant may file, in lieu of its Form 1– FR–FCM report, a copy of the FOCUS Report, Part II CSE that the firm files with the SEC.20 All of the commenters supported the Commission’s proposed amendments to Regulations 1.10(h) and 1.17(c)(6), which would have the effect of harmonizing capital calculations under the CFTC’s and SEC’s regulations. Two commenters, FIA and the SIA, recommended that the Commission should further take into consideration whether reporting and filing requirements under the Commission’s ‘‘risk assessment’’ regulations, Rules 20 Several other Commission rules include references to Parts II and Part IIA of the FOCUS report, in order to facilitate the filing of the FOCUS report in lieu of the Form 1–FR–FCM. The Commission has also amended these rules to add a reference to Part II CSE. In particular, conforming amendments have been made to the following rules: Rule 1.10(d)(4)(ii), which sets forth the requirements for ‘‘authorized signers’’ of the FOCUS report; Rule 1.10(f)(1), which sets forth the procedures required to obtain extensions of time for filing the FOCUS report; Rule 1.16(c)(5), which requires the accountant’s supplemental report on material inadequacies to be filed as of the same date as the Form 1–FR or FOCUS report; Rules 1.18(a) and (b)(2), which permit FOCUS filings to satisfy certain recordkeeping requirements of the FCM; and Rule 1.52(a), which permits the designated selfregulatory organization of a dual registrant to accept a FOCUS report in lieu of a Form 1–FR–FCM. PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 1.14 and 1.15, might be revised to allow five FCMs to substitute alternative means of compliance, either through making available for inspection certain holding company information provided to the SEC under its CSE regulations, or through information-sharing arrangements between the SEC and CFTC. Both FIA and SIA offered to meet with Commission staff to discuss these or other alternatives for the five firms, in light of the consolidated supervision of their holding companies by the SEC. While not opposed to such discussions, the commenters have raised issues that exceed the scope of the proposed regulations, and may be addressed separately from the amended rules in this release. III. Treatment of Information Received From FCMs Electing the Alternative Capital Computation, and of Other Information Filed by FCMs and IBs The release published October 11 also announced proposed amendments to Commission regulations in parts 145 and 147, which respectively implement the provisions of FOIA and the Sunshine Act. Specifically, the Commission proposed to amend Rules 145 and 147 to include all Forms 1–FR and FOCUS reports (except for certain information as discussed below), plus all reports and statements required to be filed pursuant to Rule 1.17(c)(6), as representative examples of information that would be exempt from mandatory public disclosure under exemptions that are available under both FOIA and the Sunshine Act (Exemptions 4 and 8 under FOIA, and the same exemptions under the Sunshine Act).21 The proposed amendments to Commission Rule 1.10(g), however, specified that the Commission would continue to make available upon public request the following information: (i) For each FCM or IB, the amount of its adjusted net capital, its minimum capital requirement under Rule 1.17, and its adjusted net capital in excess of its minimum capital requirement; (ii) The statement of financial condition in the certified annual financial report, and footnote disclosures thereof;22 and (iii) The statements related to the segregation of customer funds under section 4d of the Commodity Exchange 21 A summary of FOIA and the Sunshine Act, including exemptions 4 and 8, and their application to the Form 1–FR and FOCUS reports, was included in the October 11 release. See 70 FR 58991—58992. 22 A BD’s certified annual statement of financial condition is also publicly available under SEC Rule 17a–5(e)(3). E:\FR\FM\02FER1.SGM 02FER1 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations Act and to customer funds that are held as secured amounts under Rule 30.7.23 FIA strongly endorsed the Commission’s proposal to amend Rules 1.10(g), 145.5(d) and (h), and 147.3(b) to provide that certain financial information filed with the Commission is exempt from disclosure pursuant to FOIA Exemption 8. The Commission received no comments opposing adoption of these proposed amendments. After considering the proposed amendments and the responses by commenters, the Commission has decided to amend Rules 1.10(g), 145.5(d) and (h), and 147.3(b) as proposed. wwhite on PROD1PC61 with RULES IV. Amendments To Reduce Capital Charges for Foreign Currency Forwards and Inventory in Specified Currencies The Commission has also amended Commission Rule 1.17(c)(5)(ii), pursuant to which an FCM or IB, in computing its adjusted net capital, must deduct from its net capital specified percentages of the market value of its inventory, fixed price commitments and forward contracts. In general, the required deduction from market value for a forward contract that is not ‘‘covered’’, as defined in Rule 1.17(j), is twenty percent. The Commission has amended the rule by adding a provision that would specify a capital charge of six percent for uncovered inventory and forward contracts in euros, British pounds, Canadian dollars, Japanese yen, or Swiss francs. Uncovered forward contracts and cash deposits in any other non-U.S. currency would remain subject to the capital charge of twenty percent currently set forth in the rule. As noted by the Commission when it proposed amending Rule 1.17 to reduce the charge for specified currencies to 6 percent, the lower charge is consistent with the reduced currency risk of these foreign currencies, given their stability relative to the U.S. dollar. As discussed in the October 11 release, the reduced charge is also consistent with similar capital charges that BDs are required to deduct from their net capital under SEC regulations.24 Furthermore, the amendment provides greater clarity and 23 Rule 1.10(g) currently provides, and will continue to provide, that all information on Forms 1–FR and FOCUS reports that is nonpublic will, however, be available for official use by any official or employee of the United States or any State, by any self-regulatory organization of which the person filing such report is a member, by the National Futures Association in the case of an applicant, and by any other person to whom the Commission believes disclosure of such information is in the public interest. Rule 1.10(g) also specifies the rule does not limit the authority of any self-regulatory organization to request or receive any information relative to its members’ financial condition. 24 See 70 FR 58993. VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 transparency to the Commission’s capital rule, as currently the lower capital charge for the specified major non-U.S. currencies is set forth only in the Commission’s Form 1–FR Instructions Manual.25 FIA and the NFA generally supported this amendment, and no commenters expressed any objections to the amendment. In its comment letter, NFA advocated that the Commission undertake additional revision of Commission Regulation 1.17, to address the Commission’s required deductions from capital in relation to the activities of retail foreign exchange (FOREX) dealers that are registered as FCMs. As noted in the NFA’s letter, Division staff is already in the process of reviewing several of the issues listed in the letter, as part of separate guidance and/or future rulemaking related to FOREX. V. Related Matters A. Administrative Procedure Act The Administrative Procedure Act (‘‘APA’’) provides that the required publication of a substantive rule shall be made not less than 30 days before its effective date, unless the agency is permitted to implement an earlier effective date under one of the exceptions recognized by the APA.26 The exceptions set forth in the APA are as follows: (1) A substantive rule which grants or recognizes an exemption or relieves a restriction; (2) interpretative rules and statements of policy; or (3) as otherwise provided by the agency for good cause found and published with the rule.27 The amendments being made to Rule 1.17 ‘‘grant or recognize an exemption or relieve a restriction’’ that harmonizes unnecessarily conflicting capital deductions that would otherwise be required for FCMs that have received SEC approval to use the Alternative Capital Computation. The Commission is also adopting other amendments that permit FCMs to file their Part II CSE FOCUS reports in lieu of their required Form 1–FR, which also contributes to the exemption or relief made available by amended Rule 1.17(c)(6).28 Accordingly, the Commission has determined to make these amendments 25 An electronic copy of the ‘‘Instructions for Form 1–FR–FCM’’ is available to the public on the Commission’s Web site, at https://www.cftc.gov/ files/tm/ tminstructionsmanualfinalseptember2004.pdf. 26 5 U.S.C. 553(b) and (d). 27 5 U.S.C. 553 (d). 28 As noted earlier, the amendments related to filing the Part II CSE version of the FOCUS report affect Rules 1.10, 1.18, and 1.52. PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 5591 effective immediately upon publication in the Federal Register. Furthermore, the Commission has previously found ‘‘good cause’’ for making FOIA and Sunshine Act amendments effective immediately with the adoption of new financial filing requirements for FCMs, in particular where the new filings are required prior to the expiration of 30 days from the publication in the rule.29 In this case, the no-action relief granted to firms prior to the adoption of the amendments of Rule 1.17(c)(6) will be superceded immediately upon the effective date of the amended rules in the attached release, and the firms will be required to comply with the reporting requirements mandated by the amended rules. In addition, other firms may receive SEC approval to use alternative capital charges prior to the expiration of 30 days from the publication of this rule, and would therefore seek to file with the Commission such notices and statements as are required by the amended rule. Accordingly, the Commission has determined to make the amendments to Rules 145 and 147 adopted in this final rulemaking effective immediately upon publication in the Federal Register. B. Regulatory Flexibility Act The Regulatory Flexibility Act (‘‘RFA’’), 5 U.S.C. 601 et. seq., requires that agencies, when amending their rules, consider the impact of those amendments on small businesses. The Commission invited the public to comment on the Chairman’s certification that these rules would not have a significant economic impact on a substantial number of small entities.30 The Commission received no comments on the certification. C. Paperwork Reduction Act This rulemaking includes information collection requirements. As required by the Paperwork Reduction Act of 1995 (‘‘PRA’’),31 the Commission submitted a copy of the proposed rule amendments to the Office of Management and Budget (‘‘OMB’’) for its review. No comments were received in response to the Commission’s invitation in the proposed rules to comment on any potential paperwork burden associated with regulation.32 29 The Commission’s prior determination that there was ‘‘good cause’’ for making amendments to parts 145 and 147 effective immediately appears in 44 FR 13435 (March 27, 1979) (Adoption of Changes to Form 1–FR and Freedom of Information and Sunshine Act Rules). 30 70 FR at 58994. 31 44 U.S.C. 3507(d). 32 70 FR at 58994. E:\FR\FM\02FER1.SGM 02FER1 5592 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations wwhite on PROD1PC61 with RULES D. Cost-Benefit Analysis Section 15(a) of the Act, as amended by section 119 of the CFMA, requires the Commission to consider the costs and benefits of its action before issuing a new regulation under the Act. By its terms, section 15(a) as amended does not require the Commission to quantify the costs and benefits of a new regulation or to determine whether the benefits of the regulation outweigh its costs. Rather, section 15(a) simply requires the Commission to ‘‘consider the costs and benefits’’ of its action. Section 15(a) of the Act further specifies that costs and benefits shall be evaluated in light of five broad areas of market and public concern: Protection of market participants and the public; efficiency, competitiveness, and financial integrity of futures markets; price discovery; sound risk management practices; and other public interest considerations. Accordingly, the Commission could in its discretion give greater weight to any one of the five enumerated areas and could in its discretion determine that, notwithstanding its costs, a particular rule was necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the Act. The amended Rule 1.17(c)(6) allows FCM/BDs that meet the requirements of the rule to compute their adjusted net capital using the same alternative capital deductions that have been approved by the SEC. The amended Rule 1.17(c)(5)(ii) reduces a capital charge to which FCMs and IBs are subject under the Commission’s current regulations. The Commission is considering the costs and benefits of these amended rules in light of the specific provisions of section 15(a) of the Act, as follows: 1. Protection of market participants and the public. The amendments to Rule 1.17(c)(6) provides the benefit of increasing the accuracy of the reflection of risks in the net capital charges for FCM/BDs approved for using the alternative net capital charges based on internal risk measurement tools, while bettering the Commission’s ability to perform appropriate financial and risk oversight. Furthermore, the Commission considers that no FCM/BD will elect to use the Alternative Capital Computation unless the costs of compliance would be outweighed by the benefits to such FCM/BD from using the alternative net capital charges. 2. Efficiency and competition. The Commission anticipates that the amendments to Rule 1.17(c)(6) will VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 benefit efficiency by eliminating a difference in the computation of net capital charges between the SEC and the CFTC for dually-registered FCM/BDs that have been approved by the SEC to use such charges. The amendments to Rule 1.17(c)(5)(ii) reduce the capital charges applicable to FCMs and IBs, which may therefore result in the more efficient utilization of their capital. 3. Financial integrity of futures markets and price discovery. The notification and reporting requirements in amended Rule 1.17(c)(6) contribute to the benefit of ensuring that eligible FCMs can meet their financial obligations to customers and other market participants. Customers and other market participants would also benefit from the provisions in amended Rule 1.10(g), which continues to make publicly available certain information in Form 1–R and FOCUS reports related to capital requirements and requirements for customer funds to be held in segregated or separate accounts. The proposed amendments should have no effect, from the standpoint of imposing costs or creating benefits, on the price discovery function of such markets. 4. Sound risk management practices. The alternative capital computation permitted under amended Rule 1.17(c)(6) is limited to FCMs who have in place an internal risk management system that expressly addresses market risk, credit risk, liquidity risk, legal risk and operational risks at the firm. The amended rule also requires that the Commission receive copies of written reviews, which are to be prepared annually by registered public accountants, of the firm’s internal risk management control system. The amended rule may therefore contribute to the sound risk management practices of futures intermediaries. 5. Other public interest considerations. The Commission also believes that the amendments to Rule 1.17(c)(6) are beneficial in that they minimize what would otherwise be a conflict between Commission and SEC rules, which conflict would otherwise make the SEC’s opportunity for qualifying BDs to use alternative net capital charges unavailable to dually registered FCM/BDs, despite the commonality of interest and purpose for the CFTC and SEC minimum net capital rules. The amendments to Rule 1.17(c)(5)(ii), which incorporates agency guidance not presently included in the Commission’s regulations, enhances the transparency of the Commission’s rulemaking for FCMs and IBs. The Commission invited, but did not receive, public comment on its application of the cost-benefit provision. PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 After considering these factors, the Commission has determined to issue this final rule. List of Subjects 17 CFR Part 1 Brokers, Commodity futures, Reporting and recordkeeping requirements. 17 CFR Part 145 Freedom of information. 17 CFR Part 147 Sunshine Act. ■ Accordingly, 17 CFR Chapter I is amended as follows: PART 1—GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT 1. The authority citation for part 1 continues to read as follows: ■ Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity Futures Modernization Act of 2000, Appendix E of Pub. L. 106–554, 114 Stat. 2763 (2000). 2. Section 1.10 is amended by revising paragraphs (d)(4)(ii), (f)(1) introductory text, (g)(1), (g)(2), (g)(4), and (h) to read as follows: ■ § 1.10 Financial reports of futures commission merchants and introducing brokers. * * * * * (d) * * * (4) * * * (ii) If the registrant or applicant is registered with the Securities and Exchange Commission as a securities broker or dealer, the representative authorized under § 240.17a–5 of this title to file for the securities broker or dealer its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE. In the case of a Form 1–FR filed via electronic transmission in accordance with procedures established by the Commission, such transmission must be accompanied by the Commissionassigned Personal Identification Number of the authorized signer and such Personal Identification Number will constitute and become a substitute for the manual signature of the authorized signer for the purpose of making the oath or affirmation referred to in this paragraph. * * * * * (f) Extension of time for filing uncertified reports. (1) In the event a registrant finds that it cannot file its E:\FR\FM\02FER1.SGM 02FER1 wwhite on PROD1PC61 with RULES Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations Form 1–FR, or, in accordance with paragraph (h) of this section, its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS report), for any period within the time specified in paragraphs (b)(1)(i) or (b)(2)(i) of this section without substantial undue hardship, it may request approval for an extension of time, as follows: * * * * * (g) Public availability of reports. (1) Forms 1–FR filed pursuant to this section, and FOCUS reports filed in lieu of Forms 1–FR pursuant to paragraph (h) of this section, will be treated as exempt from mandatory public disclosure for purposes of the Freedom of Information Act and the Government in the Sunshine Act and parts 145 and 147 of this chapter, except for the information described in paragraph (g)(2) of this section. (2) The following information in Forms 1–FR, and the same or equivalent information in FOCUS reports filed in lieu of Forms 1–FR, will be publicly available: (i) The amount of the applicant’s or registrant’s adjusted net capital; the amount of its minimum net capital requirement under § 1.17 of this chapter; and the amount of its adjusted net capital in excess of its minimum net capital requirement; and (ii) The following statements and footnote disclosures thereof: the Statement of Financial Condition in the certified annual financial reports of futures commission merchants and introducing brokers; the Statements (to be filed by a futures commission merchant only) of Segregation Requirements and Funds in Segregation for customers trading on U.S. commodity exchanges and for customers’ dealer options accounts, and the Statement (to be filed by a futures commission merchant only) of Secured Amounts and Funds held in Separate Accounts for foreign futures and foreign options customers in accordance with § 30.7 of this chapter. * * * * * (4) All information that is exempt from mandatory public disclosure under paragraph (g)(1) of this section will, however, be available for official use by any official or employee of the United States or any State, by any selfregulatory organization of which the person filing such report is a member, by the National Futures Association in the case of an applicant, and by any other person to whom the Commission believes disclosure of such information is in the public interest. Nothing in this VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 paragraph (g) will limit the authority of any self-regulatory organization to request or receive any information relative to its members’ financial condition. * * * * * (h) Filing option available to a futures commission merchant or an introducing broker that is also a securities broker or dealer. Any applicant or registrant which is registered with the Securities and Exchange Commission as a securities broker or dealer may comply with the requirements of this section by filing (in accordance with paragraphs (a), (b), (c), and (j) of this section) a copy of its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS report), in lieu of Form 1–FR: Provided, however, That all information which is required to be furnished on and submitted with Form 1–FR is provided with such FOCUS report. * * * * * ■ 3. Section 1.16 is amended by revising paragraph (c)(5) to read as follows: § 1.16 Qualifications and reports of accountants. * * * * * (c) * * * (5) Accountant’s report on material inadequacies. A registrant must file concurrently with the annual audit report a supplemental report by the accountant describing any material inadequacies found to exist or found to have existed since the date of the previous audit. An applicant must file concurrently with the audit report a supplemental report by the accountant describing any material inadequacies found to exist as of the date of the Form 1–FR being filed: Provided, however, That if such applicant is registered with the Securities and Exchange Commission as a securities broker or dealer, and it files (in accordance with § 1.10(h)) a copy of its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in lieu of Form 1–FR, the accountant’s supplemental report must be made as of the date of such report. The supplemental report must indicate any corrective action taken or proposed by the applicant or registrant in regard thereto. If the audit did not disclose any material inadequacies, the supplemental report must so state. * * * * * ■ 4. Section 1.17 is amended by revising paragraphs (c)(5)(ii) and adding (c)(6) to read as follows: PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 5593 § 1.17 Minimum financial requirements for futures commission merchants and introducing brokers. * * * * * (c) * * * (5) * * * (ii) In the case of all inventory, fixed price commitments and forward contracts, the applicable percentage of the net position specified below: (A) Inventory which is currently registered as deliverable on a contract market and covered by an open futures contract or by a commodity option on a physical.—No charge. (B) Inventory which is covered by an open futures contract or commodity option.—5 percent of the market value. (C) Inventory which is not covered.— 20 percent of the market value. (D) Inventory and forward contracts in those foreign currencies that are purchased or sold for future delivery on or subject to the rules of a contract market, and which are covered by an open futures contract.—No charge (E) Inventory and forward contracts in euros, British pounds, Canadian dollars, Japanese yen, or Swiss francs, and which are not covered by an open futures contract or commodity option.— 6 percent of the market value. (F) Fixed price commitments (open purchases and sales) and forward contracts which are covered by an open futures contract or commodity option.— 10 percent of the market value. (G) Fixed price commitments (open purchases and sales) and forward contracts which are not covered by an open futures contract or commodity option.—20 percent of the market value. * * * * * (6) Election of alternative capital deductions that have received approval of Securities and Exchange Commission pursuant to § 240.15c3–1(a)(7) of this title. (i) Any futures commission merchant that is also registered with the Securities and Exchange Commission as a securities broker or dealer, and who also satisfies the other requirements of this paragraph (c)(6), may elect to compute its adjusted net capital using the alternative capital deductions that, under § 240.15c3–1(a)(7) of this title, the Securities and Exchange Commission has approved by written order. To the extent that a futures commission merchant is permitted by the Securities and Exchange Commission to use alternative capital deductions for its unsecured receivables from over-thecounter transactions in derivatives, or for its proprietary positions in securities, forward contracts, or futures contracts, the futures commission merchant may use these same E:\FR\FM\02FER1.SGM 02FER1 wwhite on PROD1PC61 with RULES 5594 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations alternative capital deductions when computing its adjusted net capital, in lieu of the deductions that would otherwise be required by paragraph (c)(2)(ii) of this section for its unsecured receivables from over-the-counter derivatives transactions; by paragraph (c)(5)(ii) of this section for its proprietary positions in forward contracts; by paragraph (c)(5)(v) of this section for its proprietary positions in securities; and by paragraph (c)(5)(x) of this section for its proprietary positions in futures contracts. (ii) Notifications of election or of changes to election. (A) No election to use the alternative market risk and credit risk deductions referenced in paragraph (c)(6)(i) of this section shall be effective unless and until the futures commission merchant has filed with the Commission, addressed to the Director of the Division of Clearing and Intermediary Oversight, a notice that is to include a copy of the approval order of the Securities and Exchange Commission referenced in paragraph (c)(6)(i) of this section, and to include also a statement that identifies the amount of tentative net capital below which the futures commission merchant is required to provide notice to the Securities and Exchange Commission, and which also provides the following information: a list of the categories of positions that the futures commission merchant holds in its proprietary accounts, and, for each such category, a description of the methods that the futures commission merchant will use to calculate its deductions for market risk and credit risk, and also, if calculated separately, deductions for specific risk; a description of the value at risk (VaR) models to be used for its market risk and credit risk deductions, and an overview of the integration of the models into the internal risk management control system of the futures commission merchant; a description of how the futures commission merchant will calculate current exposure and maximum potential exposure for its deductions for credit risk; a description of how the futures commission merchant will determine internal credit ratings of counterparties and internal credit risk weights of counterparties, if applicable; and a description of the estimated effect of the alternative market risk and credit risk deductions on the amounts reported by the futures commission merchant as net capital and adjusted net capital. (B) A futures commission merchant must also, upon the request of the Commission at any time, supplement the statement described in paragraph (c)(6)(ii)(A) of this section, by providing VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 any other explanatory information regarding the computation of its alternative market risk and credit risk deductions as the Commission may require at its discretion. (C) A futures commission merchant must also file the following supplemental notices with the Director of the Division and Clearing and Intermediary Oversight: (1) A notice advising that the Securities and Exchange Commission has imposed additional or revised conditions for the approval evidenced by the order referenced in paragraph (c)(6)(i) of this section, and which describes the new or revised conditions in full, and (2) A notice which attaches a copy of any approval by the Securities and Exchange Commission of amendments that a futures commission merchant has requested for its application, filed under 17 CFR 240.15c3–1e, to use alternative market risk and credit risk deductions approved by the Securities and Exchange Commission. (D) A futures commission merchant may voluntarily change its election to use the alternative market risk and credit risk deductions referenced in paragraph (c)(6)(i) of this section, by filing with the Director of the Division of Clearing and Intermediary Oversight a written notice specifying a future date as of which it will no longer use the alternative market risk and credit risk deductions, and will instead compute such deductions in accordance with the requirements otherwise applicable under paragraph (c)(2)(ii) of this section for unsecured receivables from over-thecounter derivatives transactions; by paragraph (c)(5)(ii) of this section for proprietary positions in forward contracts; by paragraph (c)(5)(v) of this section for proprietary positions in securities; and by paragraph (c)(5)(x) of this section for proprietary positions in futures contracts. (iii) Conditions under which election terminated. A futures commission merchant may no longer elect to use the alternative market risk and credit risk deductions referenced in paragraph (c)(6)(i) of this section, and shall instead compute the deductions otherwise required under paragraph (c)(2)(ii) of this section for unsecured receivables from over-the-counter derivatives transactions; by paragraph (c)(5)(ii) of this section for proprietary positions in forward contracts; by paragraph (c)(5)(v) of this section for proprietary positions in securities; and by paragraph (c)(5)(x) of this section for proprietary positions in futures contracts, upon the occurrence of any of the following: PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 (A) The Securities and Exchange Commission revokes its approval of the market risk and credit risk deductions for such futures commission merchant; (B) A futures commission merchant fails to come into compliance with its filing requirements under this paragraph (c)(6), after having received from the Director of the Division of Clearing and Intermediary Oversight written notification that the firm is not in compliance with its filing requirements, and must cease using alternative capital deductions permitted under this paragraph (c)(6) if it has not come into compliance by a date specified in the notice; or (C) The Commission by written order finds that permitting the futures commission merchant to continue to use such alternative market risk and credit risk deductions is no longer necessary or appropriate for the protection of customers of the futures commission merchant or of the integrity of the futures or options markets. (iv) Additional filing requirements. Any futures commission merchant that elects to use the alternative market risk and credit risk deductions referenced in paragraph (c)(6)(i) of this section must file with the Commission, in addition to the filings required by paragraph (c)(6)(ii) of this section, copies of any and all of the following documents, at such time as the originals are filed with the Securities and Exchange Commission: (A) Information that the futures commission merchant files on a monthly basis with its designated examining authority or the Securities and Exchange Commission, whether by way of schedules to its FOCUS reports or by other filings, in satisfaction of 17 CFR 240.17a–5(a)(5)(i); (B) The quarterly reports required by 17 CFR 240.17a–5(a)(5)(ii); (C) The supplemental annual filings as required by 17 CFR 240.17a–5(k); (D) Any notification to the Securities and Exchange Commission or the futures commission merchant’s designated examining authority of planned withdrawals of excess net capital; and (E) Any notification that the futures commission merchant is required to file with the Securities and Exchange Commission when its tentative net capital is below an amount specified by the Securities and Exchange Commission. * * * * * ■ 5. Section 1.18 is amended by revising paragraphs (a) and (b)(2) to read as follows: E:\FR\FM\02FER1.SGM 02FER1 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations § 1.18 Records for and relating to financial reporting and monthly computation by futures commission merchants and introducing brokers. (a) No person shall be registered as a futures commission merchant or as an introducing broker under the Act unless, commencing on the date his application for such registration is filed, he prepares and keeps current ledgers or other similar records which show or summarize, with appropriate references to supporting documents, each transaction affecting his asset, liability, income, expense and capital accounts, and in which (except as otherwise permitted in writing by the Commission) all his asset, liability and capital accounts are classified into either the account classification subdivisions specified on Form 1–FR– FCM or Form 1–FR–IB, respectively, or, if such person is registered with the Securities and Exchange Commission as a securities broker or dealer and he files (in accordance with § 1.10(h)) a copy of his Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS report) in lieu of Form 1–FR–FCM or Form 1–FR–IB, the account classification subdivisions specified on such FOCUS report, or categories that are in accord with generally accepted accounting principles. Each person so registered shall prepare and keep current such records. (b) * * * (2) An applicant or registrant that has filed a monthly Form 1–FR or Statement of Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE (FOCUS report) in accordance with the requirements of § 1.10(b) will be deemed to have satisfied the requirements of paragraph (b)(1) of this section for such month. * * * * * ■ 6. Section 1.52 is amended by revising paragraph (a) to read as follows: wwhite on PROD1PC61 with RULES § 1.52 Self-regulatory organization adoption and surveillance of minimum financial requirements. (a) Each self-regulatory organization must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered futures commission merchants. Each self-regulatory organization other than a contract market must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered introducing VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 brokers. Each contract market which elects to have a category of membership for introducing brokers must adopt, and submit for Commission approval, rules prescribing minimum financial and related reporting requirements for all its members who are registered introducing brokers. Each self-regulatory organization shall submit for Commission approval any modification or other amendments to such rules. Such requirements must be the same as, or more stringent than, those contained in §§ 1.10 and 1.17 and the definition of adjusted net capital must be the same as that prescribed in § 1.17(c): Provided, however, A designated self-regulatory organization may permit its member registrants which are registered with the Securities and Exchange Commission as securities brokers or dealers to file (in accordance with § 1.10(h)) a copy of their Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in lieu of Form 1–FR: And, provided further, A designated self-regulatory organization may permit its member introducing brokers to file a Form 1–FR–IB in lieu of a Form 1–FR–FCM. * * * * * PART 145—COMMISSION RECORDS AND INFORMATION 7. The authority citation for part 145 continues to read as follows: ■ Authority: Pub. L. 99–570, 100 Stat. 3207; Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23, 81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561– 1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93– 463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless otherwise noted. 8. Section 145.5 is amended by revising paragraphs (d)(1) and (h) to read as follows: ■ § 145.5 Disclosure of nonpublic records. * * * * * (d) Trade secrets and commercial or financial information obtained from a person and privileged or confidential, including, but not limited to: (1)(i) Reports of stocks of grain, such as Forms 38, 38C, 38M and 38T required to be filed pursuant to 17 CFR 1.44; (ii) Statements of reporting traders on Form 40 required to be filed pursuant to 17 CFR 18.04; (iii) Statements concerning special calls on positions required to be filed pursuant to 17 CFR part 21; (iv) Statements concerning identification of special accounts on Form 102 required to be filed pursuant to 17 CFR 17.01; PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 5595 (v) Reports required to be filed pursuant to parts 15 through 21 of this chapter; (vi) Reports concerning option positions of large traders required to be filed pursuant to part 16 of this chapter; (vii) Form 188; and (viii) The following reports and statements that are also set forth in paragraph (h) of this section, except as specified in 17 CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1–FR required to be filed pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1– FR pursuant to 17 CFR 1.10(h); Forms 2–FR required to be filed pursuant to 17 CFR 31.13; the accountant’s report on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); and all reports and statements required to be filed pursuant to 17 CFR 1.17(c)(6); * * * * * (h) Contained in or related to examinations, operating, or condition reports prepared by, on behalf of, or for the use of the Commission or any other agency responsible for the regulation or supervision of financial institutions, including, but not limited to the following reports and statements that are also set forth in paragraph (d)(1)(viii) of this section, except as specified in 17 CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1–FR required to be filed pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1–FR pursuant to 17 CFR 1.10(h); Forms 2–FR required to be filed pursuant to 17 CFR 31.13; the accountant’s report on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); and all reports and statements required to be filed pursuant to 17 CFR 1.17(c)(6); and * * * * * PART 147—OPEN COMMISSION MEETINGS 9. The authority citation for part 147 continues to read as follows: ■ Authority: Sec. 3(a), Pub. L. 94–409, 90 Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) (Supp. V, 1975)), unless otherwise noted. 10. Section 147.3 is amended by revising paragraphs (b)(4)(i) and (b)(8) to read as follows: ■ § 147.3 General requirement of open meetings; grounds upon which meetings may be closed. * * * * * (b) * * * (4)(i) Disclose trade secrets and commercial or financial information obtained from a person and privileged or confidential including, but not limited to: E:\FR\FM\02FER1.SGM 02FER1 5596 Federal Register / Vol. 71, No. 22 / Thursday, February 2, 2006 / Rules and Regulations wwhite on PROD1PC61 with RULES (A) Reports of stocks of grain, such as Forms 38, 38C, 38M and 38T, required to be filed pursuant to 17 CFR 1.44; (B) Statements of reporting traders on Form 40 required to be filed pursuant to 17 CFR 18.04; (C) Statements concerning special calls on positions required to be filed pursuant to 17 CFR part 21; (D) Statements concerning identification of special accounts on Form 102 required to be filed pursuant to 17 CFR 17.01; (E) Reports required to be filed pursuant to parts 15 through 21 of this chapter; (F) Reports concerning option positions of large traders required to be filed pursuant to part 16 of this chapter; (G) Form 188; and (H) The following reports and statements that are also set forth in paragraph (b)(8) of this section, except as specified in 17 CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1–FR required to be filed pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1–FR pursuant to 17 CFR 1.10(h); Forms 2–FR required to be filed pursuant to 17 CFR 31.13; the accountant’s report on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); and all reports and statements required to be filed pursuant to 17 CFR 1.17(c)(6); * * * * * (8) Disclose information contained in or related to examination, operating, or condition reports prepared by, on behalf of, or for the use of the Commission or any other agency responsible for the regulation or supervision of financial institutions, including, but not limited to the following reports and statements that are also set forth in paragraph (b)(4)(i)(H) of this section, except as specified in 17 CFR 1.10(g)(2) or 17 CFR 31.13(m): Forms 1–FR required to be filed pursuant to 17 CFR 1.10; FOCUS reports that are filed in lieu of Forms 1– FR pursuant to 17 CFR 1.10(h); Forms 2–FR required to be filed pursuant to 17 CFR 31.13; the accountant’s report on material inadequacies filed in accordance with 17 CFR 1.16(c)(5); and all reports and statements required to be filed pursuant to 17 CFR 1.17(c)(6); * * * * * Issued in Washington, DC, on January 30, 2006, by the Commission. Jean A. Webb, Secretary of the Commission. [FR Doc. 06–982 Filed 2–1–06; 8:45 am] BILLING CODE 6351–01–P VerDate Aug<31>2005 15:24 Feb 01, 2006 Jkt 208001 SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 232 [Release Nos. 33–8656; 34–53186; 35– 28081; 39–2441; IC–27219] RIN 3235–AG96 Adoption of Updated EDGAR Filer Manual Securities and Exchange Commission. ACTION: Final rule. AGENCY: SUMMARY: The Securities and Exchange Commission (the Commission) is adopting revisions to the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) Filer Manual to reflect updates to the EDGAR system. The revisions are being made primarily to support the amended rules and forms adopted by the Commission requiring that certain open-end management investment companies and insurance company separate accounts identify in their EDGAR submissions information relating to their investment company type, series and classes (or contracts, in the case of separate accounts), and ticker symbols. Revisions are also being made to support the final rule requiring that Form 25–NSE be filed electronically. In addition, revisions are being made to revoke submission types based on the Public Utility Holding Company Act of 1935 which was repealed in the enactment of the Energy Policy Act of 2005. Finally, revisions are being made to complete the removal of the submission types rescinded on December 1, 2005 as a result of the adoption of securities offering reform initiatives. The revisions to the Filer Manual reflect changes within Volumes I and II, entitled EDGAR Filer Manual, Volume I: ‘‘General Information,’’ Version 2 (February 2006) and EDGAR Filer Manual, Volume II: ‘‘EDGAR Filing,’’ Version 3 (February 2006) respectively. The updated manual will be incorporated by reference into the Code of Federal Regulations. EFFECTIVE DATE: February 6, 2006. The incorporation by reference of the EDGAR Filer Manual is approved by the Director of the Federal Register as of February 6, 2006. FOR FURTHER INFORMATION CONTACT: In the Office of Information Technology, Rick Heroux, at (202) 551–8800; for questions concerning the rescinding of Public Utility Holding Company Act of 1935 submission types, in the Division of Investment Management, Catherine A. Fisher, Assistant Director, Office of PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 Public Utility Regulation at (202) 551– 6944; for questions concerning Securities Offering Reform, in the Division of Corporation Finance, Herbert Scholl, Office Chief, EDGAR and Information Analysis at (202) 551– 3615; for questions concerning the Form 25–NSE filings, in the Division of Market Regulation, Sharon Lawson, Senior Special Counsel, at (202) 551– 5605; for questions concerning the inclusion of series and class (contract) data in filings for open-end management investment companies and insurance company separate accounts, in the Division of Investment Management, Ruth Armfield Sanders, Senior Special Counsel, at (202) 551–6989; and, in the Office of Filings and Information Services, Shirley Slocum, at (202) 551– 8900. SUPPLEMENTARY INFORMATION: Today we are adopting an updated EDGAR Filer Manual (Filer Manual). The Filer Manual describes the technical formatting requirements for the preparation and submission of electronic filings through the EDGAR system.1 It also describes the requirements for filing using EDGARLink 2 and the Online Forms/ XML Web site. The Filer Manual contains all the technical specifications for filers to submit filings using the EDGAR system. Filers must comply with the applicable provisions of the Filer Manual in order to assure the timely acceptance and processing of filings made in electronic format.3 Filers should consult the Filer Manual in conjunction with our rules governing mandated electronic filing when preparing documents for electronic submission.4 1 We originally adopted the Filer Manual on April 1, 1993, with an effective date of April 26, 1993. Release No. 33–6986 (April 1, 1993) [58 FR 18638]. We implemented the most recent update to the Filer Manual on November 7, 2005. See Release No. 33– 8633 (November 1, 2005) [70 FR 67350]. 2 This is the filer assistance software we provide filers filing on the EDGAR system. 3 See Rule 301 of Regulation S–T (17 CFR 232.301). 4 See Release Nos. 33–6977 (February 23, 1993) [58 FR 14628], IC–19284 (February 23, 1993) [58 FR 14848], 35–25746 (February 23, 1993) [58 FR 14999], and 33–6980 (February 23, 1993) [58 FR 15009] in which we comprehensively discuss the rules we adopted to govern mandated electronic filing. See also Release No. 33–7122 (December 19, 1994) [59 FR 67752], in which we made the EDGAR rules final and applicable to all domestic registrants; Release No. 33–7427 (July 1, 1997) [62 FR 36450], in which we adopted minor amendments to the EDGAR rules; Release No. 33– 7472 (October 24, 1997) [62 FR 58647], in which we announced that, as of January 1, 1998, we would not accept in paper filings that we require filers to submit electronically; Release No. 34–40934 (January 12, 1999) [64 FR 2843], in which we made mandatory the electronic filing of Form 13F; Release No. 33–7684 (May 17, 1999) [64 FR 27888], E:\FR\FM\02FER1.SGM 02FER1

Agencies

Commodity Futures Trading Commission

[Federal Register Volume 71, Number 22 (Thursday, February 2, 2006)]
[Rules and Regulations]
[Pages 5587-5596]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-982]


=======================================================================
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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 145 and 147

RIN 3038-AC05


Alternative Market Risk and Credit Risk Capital Charges for 
Futures Commission Merchants and Specified Foreign Currency Forward and 
Inventory Capital Charges

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rule.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is amending Commission regulations that impose minimum 
financial and related reporting requirements upon each person 
registered as a futures commission merchant (``FCM''). The amended 
regulations address the capital computations of FCMs that are 
registered with the Securities and Exchange Commission (``SEC'') as 
securities brokers or dealers (``FCM/BDs''), and, who, pursuant to 
SEC's regulations governing consolidated supervised entities 
(``CSEs''), have received SEC approval to use internal mathematical 
models to determine the deductions from their capital for market risk 
and credit risk associated with their proprietary trading assets. 
Subject to the reporting and other requirements specified in the 
amended regulations, these FCM/BDs may elect to compute their adjusted 
net capital using their SEC-approved alternative market risk and credit 
risk capital deductions in lieu of CFTC requirements. The Commission is 
also adopting other rule amendments that address confidential treatment 
for the reports and statements that would be required to be filed under 
the amended regulations, and also address the confidential treatment of 
certain other information that all FCMs must file with both the 
Commission and the SEC.
    Finally, the Commission is also adopting amendments that will 
affect the minimum financial requirements of FCMs and introducing 
brokers (``IBs'') by reducing the capital deductions for their 
uncovered inventory or forward contracts in specified foreign 
currencies. This reduction is consistent with guidance currently 
provided by the Commission to FCMs and IBs.

DATES: Effective February 2, 2006.

FOR FURTHER INFORMATION CONTACT: Thomas J. Smith, Deputy Director and 
Chief Accountant, at (202) 418-5430, or Thelma Diaz, Special Counsel, 
at (202) 418-5137, Division of Clearing and Intermediary Oversight, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Electronic mail: (tsmith@cftc.gov) 
or (tdiaz@cftc.gov).

SUPPLEMENTARY INFORMATION:

I. Background

    On October 11, 2005, the Commission published a release in the 
Federal Register to provide public notice of, and request comment on, 
proposed amendments to its capital rules.\1\ The Commission encourages 
interested persons to read the detailed analysis of the proposing 
amendments in the October 11 release, and has included citations to 
pertinent pages of the release as part of the discussion in this final 
rulemaking release.\2\ In response to the proposals issued by the 
Commission, four commenters sent letters that were generally supportive 
of the proposed regulations.\3\ The commenters included the National 
Futures Association (``NFA''), a registered futures association; 
Goldman, Sachs and Co., an FCM/BD; and two industry trade groups, the 
Futures Industry Association (``FIA'') and the Securities Industry 
Association (``SIA'').\4\ The comments received from each of these 
organizations are addressed elsewhere in this release, in connection 
with the specific Commission regulations discussed in these letters.
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    \1\ The RIN Number for the release published in the Federal 
Register on October 11, 2005 was identified as 3038-AC19. See 70 FR 
58985 (October 11, 2005). The correct RIN Number, 3038-AC05, has 
been used in this release.
    \2\ The October 11 Release may be accessed electronically on the 
Commission's Web site, at https://www.cftc.gov/.
    \3\ The original deadline for the receipt for comments was 
extended from November 10th to November 30, 2005. See 70 FR 70749 
(November 23, 2005).
    \4\ The comment letters are available for inspection and copying 
at the Commission's Washington office in its public reading room, 
Room 4072, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581. The telephone number for the public reading 
room is (202) 418-5025. The comment letters also are available on 
the Commission's public Web site, at https://www.cftc.gov/foia/
comment05/foi05-- --006--1.htm.
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II. Amendments Allowing Alternative Capital Computation for Proprietary 
Trading Assets of Qualifying FCM/BDs That Are Part of CSEs

A. Request to Commission for Amendment to Rule 1.17

    As noted in the October 11 release, Commission Rule 1.17(a) 
requires each FCM to maintain a minimum amount of ``adjusted net 
capital'', which is defined as the FCM's net capital less the 
deductions, or ``haircuts'', that are specified in Rule 1.17(c)(5) and 
(8).\5\ For purposes of the required haircuts on the FCM's proprietary 
positions in securities, Rule 1.17(c)(5) incorporates by reference 
percentage deductions that are set forth in SEC regulations 17 CFR 
240.15c3-1(c)(2)(vi) and (vii). Also, Commission Rule 1.17(c)(2)(ii), 
in a manner similar to the SEC's requirements for BDs under 17 CFR 
240.15c3-1(c)(2)(iv), requires unsecured receivables arising from an 
FCM's transactions in over-the-counter (``OTC'') derivatives to be 
excluded from the FCM's current assets for purposes of determining the 
firm's regulatory capital. The deductions required for other 
proprietary assets of the FCM are set forth in other parts of 
Commission Rule 1.17(c).
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    \5\ The rules of the Commission cited in this release may be 
found at 17 CFR Ch. I (2005). SEC rules cited in this release may be 
found at 17 CFR Ch. II (2005).
---------------------------------------------------------------------------

    The October 11 release also noted that the Commission and SEC have, 
to the extent practical, harmonized their respective capital rules in 
order to avoid creating inconsistent regulatory obligations for firms 
that are dually-registered FCMs and securities brokers or dealers 
(``BDs''). This harmonization of capital rules extends to the 
computation of net capital and adjusted net capital, and to the 
qualifications that subordinated debt must meet in order to qualify as 
regulatory capital. Furthermore, if an FCM is also registered as a BD, 
it may file an SEC Form X-17a-5, ``Financial and Operational Combined 
Uniform Single Report'' (``FOCUS Report'') to satisfy its requirement 
to file with the Commission a Form 1-FR-FCM financial report. In 
particular, Commission Rule 1.10(h) treats Part II and Part IIA of the 
FOCUS report as acceptable substitutes for the Form 1-FR-FCM, provided 
that the FOCUS report includes all information required to be furnished 
on and submitted with Form 1-FR-FCM. Also, for those portions of the 
Form 1-FR-FCM that the Commission has designated as either publicly 
available or as exempt from mandatory public

[[Page 5588]]

disclosure for purposes of the Freedom of Information Act and the 
Government in the Sunshine Act, the Commission extends the same 
treatment to those portions of the FOCUS Report that are equivalent to 
the Form 1-FR-FCM. The uniform capital computations, and related 
single-form filing requirements, harmonize the regulatory requirements 
imposed upon dual registrants while providing the Commission and SEC 
with the necessary financial information to assess whether firms 
maintain a minimum level of regulatory capital while engaging in 
futures and securities businesses.
    On June 21, 2004, the SEC adopted final rule amendments to its 
capital rules to provide an alternative net capital computation for 
broker-dealers that voluntarily elect to be supervised on a 
consolidated basis (the ``Alternative Capital Computation'').\6\ As 
amended, SEC Rule 15c3-1(a)(7), (17 CFR 240.15c3-1(a)(7)), provides 
that the SEC may approve a BD's application, if submitted in accordance 
with the provisions of a new Appendix E (17 CFR 240.15c3-1e), to use 
the Alternative Capital Computation when calculating its net 
capital.\7\ To the extent approved by the SEC, the BD using the 
Alternative Capital Computation would compute a total deduction for 
market risk for positions in the proprietary accounts of the BD, in 
accordance with the specific standards set forth in Appendix E.\8\ The 
BD would calculate its regulatory capital using this deduction in lieu 
of the haircuts that SEC Rules 15c3-1(c)(2)(vi) and (c)(2)(vii) require 
for the BD's positions in securities. The SEC may also approve 
alternative market risk deductions for the BD's proprietary positions 
in forward contracts and commodity futures contracts. Also, Appendix E 
provides that where the alternative market risk deduction has been used 
to compute the deduction on the underlying instrument for OTC 
derivatives of the BD, the BD would compute a deduction for credit 
risk, using the standards set forth in Appendix E, and it would use 
this deduction in lieu of the capital charges that SEC Rule 15c3-
1(c)(2)(iv) requires for the BD's credit exposures arising from OTC 
transactions in derivatives.\9\
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    \6\ The SEC's new rule was published at 69 FR 34428 (June 21, 
2004). The effective date of the rule was August 20, 2004.
    \7\ A detailed description of the application process was 
included in the October 11 release. See 70 FR at 58989.
    \8\ The requirements for the computation of the deduction for 
market risk were summarized in the October 11 Release. See 70 FR at 
58987-58988.
    \9\ The requirements for the computation of the deduction for 
credit risk were summarized in the October 11 Release. See 70 FR at 
58988-58989.
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    As the SEC noted when first proposing rules for the Alternate 
Capital Computation, the required market risk and credit risk 
deductions are expected to be substantially smaller in amount than the 
standardized deductions.\10\ As the SEC rule amendments were being 
discussed and proposed, Commission staff identified that continued 
harmonization of the capital rules of the two agencies would require 
amendment of Rule 1.17, and communicated this to various market 
participants potentially affected by the difference between the SEC's 
proposed rules and CFTC Rule 1.17. After the SEC adopted rule 
amendments allowing BDs to apply for approval to use the Alternative 
Capital Computation, several FCM/BDs, along with representatives of the 
SIA and the FIA, contacted staff of the Commission's Division of 
Clearing and Intermediary Oversight (the ``Division'') to express their 
support for Commission rulemaking that would allow dually-registered 
FCM/BDs to use their SEC-approved alternative market risk and credit 
risk deductions when computing their adjusted net capital under Rule 
1.17.\11\ In addition, two dually-registered FCM/BDs that had received 
SEC approval for the Alternative Capital Computation requested no-
action positions from Division staff, without which the Alternative 
Capital Computation could not be used for purposes of their capital 
computation and reporting requirements to the Commission. The Division 
granted such relief on an interim basis, to be superseded by such final 
rules as the Commission might eventually adopt in connection with the 
Alternative Capital Computation.\12\
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    \10\ The SEC's proposed rules for the Alternative Capital 
Computation were published in the Federal Register in 2003. 68 FR 
62872 (November 6, 2003).
    \11\ The Securities Industry Association and the Futures 
Industry Association are industry trade groups whose members include 
broker-dealers, futures commission merchants, and representatives of 
other segments of the securities and futures industries.
    \12\ Two additional FCMs have received SEC approval to use the 
Alternative Capital Computation, and have received similar no-action 
positions from the Division pending the rulemaking process.
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B. Amendments to Rule 1.17 for FCMs Electing To Use SEC-Approved 
Capital Deductions.

    After consideration of the amendments as proposed in the October 11 
release, and in view of the comments that the Commission received in 
response to the proposed amendments, which generally supported their 
adoption, the Commission is amending Rule 1.17 to provide that an FCM/
BD may elect, if the firm satisfies all of the requirements of a new 
paragraph (c)(6), to compute its adjusted net capital using alternative 
capital deductions that the SEC has approved by written order under 17 
CFR 240.15c3-1(a)(7). The amended regulation permits an FCM, to the 
extent that the SEC has approved alternative capital deductions for the 
FCM/BD's unsecured receivables from OTC transactions in derivatives, or 
for its proprietary positions in securities, forward contracts, or 
futures contracts, to use these same alternative capital deductions 
when computing its adjusted net capital under the Commission's 
regulations. These alternative deductions would be used in lieu of the 
amounts that otherwise would be required by the following regulations: 
Rule 1.17(c)(2)(ii) for unsecured receivables from OTC derivatives 
transactions; Rule 1.17(c)(5)(ii) for proprietary positions in forward 
contracts; Rule 1.17(c)(5)(v) for proprietary positions in securities; 
and Rule 1.17(c)(5)(x) for proprietary positions in futures contracts. 
The amendments do not alter or affect the haircuts that Rule 
1.17(c)(5)(v) and Rule 1.32(b) require for securities that are held in 
segregation under section 4d of the Commodity Exchange Act, because the 
alternative deductions apply solely to an FCM/BD's proprietary 
positions.\13\
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    \13\ FCM/BDs using the Alternative Capital Computation would 
continue to be required, under Rule 1.17(c)(5)(v), to deduct the 
securities haircuts specified in SEC Rules 15c3-1(c)(2)(vi) and 
(vii) from the value of securities that are held in segregated 
accounts under Section 4d and the Commission's implementing 
regulations and which were not deposited by customers. Such FCM/BDs 
would also continue to be required, when computing the amount of 
funds required to be in segregated accounts, to use the standard SEC 
securities haircut expressly referenced in Rule 1.32(b), i.e., SEC 
Rule 15c3-1(c)(2)(vi). Rule 1.32 applies this haircut for purposes 
of the permissible offset of any net deficit in a customer's account 
against the current market value of readily marketable securities, 
less the SEC standard haircut, that are held for the same customer's 
account.
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    The terms of the amended Rule 1.17(c)(6) has been adopted as 
originally proposed by the Commission in the October 11 release. The 
effective date for the amended regulations is the date of the 
publication of this release in the Federal Register, at which time all 
FCMs that determine to elect to use the Alternative Capital Computation 
must comply with the requirements of the amended regulations. If a firm 
has already elected to use the Alternative Capital Computation under 
earlier no-action positions issued by the Division

[[Page 5589]]

of Clearing and Intermediary Oversight, it may not continue to use the 
Alternative Capital Computation unless it maintains compliance with the 
reporting and other continuing obligations required by the amended 
regulations, as the earlier no-action positions are withdrawn as of the 
effective date of the amended regulations.
    In formulating the amendments to its rules, the Commission has 
taken into consideration that the Alternative Capital Computation, 
unlike the current standardized charges, is determined by an ongoing 
oversight process that results in individualized capital charges that 
require considerable firm-specific information.\14\ Pursuant to 
Commission Rule 1.17(a)(3), FCMs must be able to demonstrate to the 
satisfaction of the Commission their continuous compliance with their 
minimum financial requirements under the Commodity Exchange Act and 
implementing regulations of the Commission. The Commission also took 
into consideration that SEC Rule 15c3-1(a)(7) requires the BD to 
maintain at all times ``tentative net capital'' \15\ of not less than 
$1 billion and net capital of not less than $500 million, and to 
provide same day notice if the BD's tentative net capital is less than 
$5 billion, or some other ``early warning'' amount specified by the 
SEC.\16\ The Alternative Capital Computation is also limited to those 
firms who: (i) Have in place an internal risk management system that 
complies with 17 CFR 240.15c3-4 (previously applicable only to OTC 
derivatives dealers registered with the SEC), which addresses not only 
their market risk and credit risk, but also liquidity, legal and 
operational risks at the firm; and (ii) whose ultimate holding company 
and affiliates have consented to SEC consolidated supervision, i.e., 
they elect CSE status.\17\ For purposes of such consolidated 
supervision, the BD's ultimate holding company and affiliated entities 
must consent to direct examination by the SEC, unless the holding 
company is subject to supervision by the Federal Reserve or foreign 
banking regulators because it is a U.S. holding company or foreign bank 
that has elected financial holding company status under the Bank 
Holding Company Act of 1956.\18\ The SEC has added a new Appendix G to 
Rule 15c3-1 (17 CFR 240.15c3-1g), which establishes the minimum 
reporting, recordkeeping, and notification requirements for all holding 
companies of BDs that apply for, or have received approval for the use 
of, the Alternative Capital Computation.\19\
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    \14\ See 70 FR 58989-90.
    \15\ The BD's ``tentative net capital'' consists of its net 
capital before the approved deductions for market risk and credit 
risk under the SEC's amended rule, and also increased by the balance 
sheet value (including counterparty net exposure) resulting from 
transactions in derivative instruments that would otherwise be 
deducted by virtue of paragraph (c)(2)(iv) of Rule 15c3-1.
    \16\ Upon written application by a BD, the SEC may lower the 
threshold for the early warning requirement, either unconditionally 
or subject to specified terms and conditions. The SEC will consider 
various factors to determine whether the early warning requirement 
should be modified. 69 FR at 34461.
    \17\ In adopting the Alternative Capital Computation, the SEC 
has also responded to concerns expressed by several U.S. BDs that 
are required, pursuant to a directive issued by the European Union 
(``EU'') at the end of 2002 (the ``Financial Groups Directive''), to 
demonstrate holding company supervision that is equivalent to EU 
consolidated supervision. See ``Directive 2002/87/EC of the European 
Parliament and of the Council of 16 December 2002.'' Absent a 
demonstration of comparable group-wide supervision, the EU may 
restrict or otherwise place conditions upon the operations of the 
European-based affiliates of these BDs. The consolidated supervision 
requirements in the SEC's amended rules provide a regulatory 
structure that is intended to satisfy the requirements of the 
Financial Groups Directive.
    \18\ The CSE rule specifically exempts FCM affiliates of BDs, 
and other functionally regulated BD affiliates, from the SEC's 
direct examination.
    \19\ To minimize duplicative regulation, Appendix G imposes 
fewer requirements on holding companies that have elected financial 
holding company status.
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1. Notice of Election or of Changes to Election
    Amended paragraph (c)(6)(ii) of Rule 1.17 specifies that an FCM's 
election to use the Alternative Capital Computation shall not be 
effective unless and until it has filed with the Commission a notice, 
addressed to the Director of the Division of Clearing and Intermediary 
Oversight, that is to include: (i) A copy of the SEC order approving 
its alternative market risk and credit risk capital charges; and (ii) a 
statement that identifies the amount of tentative net capital below 
which the FCM is required to provide notice to the SEC, and that also 
includes portions of the information made available to the SEC for 
purposes of its request for approval to use the Alternative Capital 
Computation, as follows:
    (1) A list of the categories of positions that the firm holds in 
its proprietary accounts, and, for each such category, a description of 
the methods that the firm will use to calculate its deductions for 
market risk and credit risk, and, if calculated separately, its 
deductions for specific risk;
    (2) A description of the VaR models to be used for its market risk 
and credit risk deductions, and an overview of the integration of the 
models into the internal risk management control system of the firm;
    (3) A description of how the firm will calculate current exposure 
and maximum potential exposure for its deductions for credit risk;
    (4) A description of how the firm will determine internal credit 
ratings of counterparties and internal credit risk weights of 
counterparties, if applicable; and
    (5) A description of the estimated effect of the alternative market 
risk and credit risk deductions on the amounts reported by the firm as 
net capital and adjusted net capital.
    Amended Rule 1.17(c)(6)(ii) also requires the FCM to supplement its 
statement, upon the request of the Commission made at any time, with 
any other explanatory information for the firm's computation of its 
alternative market risk and credit risk deductions as the Commission 
may require at its discretion. The requests for explanatory information 
under amended Rule 1.17(c)(6)(ii) may be made by the Director of the 
Division of Clearing and Intermediary Oversight, to whom, as set forth 
in Commission Rule 140.91(a)(6), the Commission has delegated authority 
for the functions reserved for the Commission under Rule 1.17.
    Amended Rule 1.17(c)(6)(ii) further provides that the FCM must 
file, as a supplemental notice with the Director of the Division of 
Clearing and Intermediary Oversight, a notice advising that the SEC has 
imposed additional or revised conditions after the date of the SEC 
order filed with the FCM's original notice to the Director of the 
Division of Clearing and Intermediary Oversight. The FCM must also file 
as a supplemental notice a copy of any approval by the SEC of 
amendments that the firm has requested for its application to use the 
Alternative Capital Computation.
    An FCM is also permitted under the amended rule to voluntarily 
change its election, by filing with the Director of the Division of 
Clearing and Intermediary Oversight a written notice that specifies a 
future date as of which its market risk and credit risk capital charges 
will no longer be determined by the Alternative Capital Computation, 
but will instead be computed as otherwise required under the 
Commission's rules.
2. Conditions Under Which FCM May No Longer Elect Alternative Capital 
Charges
    Amended paragraph (c)(6)(iii) of Rule 1.17 specifies that an FCM 
may no longer elect to use its SEC-approved alternative market risk and 
credit risk

[[Page 5590]]

deductions, and must instead compute the charges otherwise required 
under Rules 1.17(c)(5) or 1.17(c)(2), upon the occurrence of any of the 
following: (i) The SEC revokes its approval of the firm's market risk 
and credit risk deductions; (ii) the firm fails to come into compliance 
with its filing requirements under the proposed rule, after having 
received from the Director of the Division of Clearing and Intermediary 
Oversight written notification that the firm is not in compliance with 
its filing requirements, and must cease using the Alternative Capital 
Computation if it has not come into compliance by a date specified in 
the notice; or (iii) the Commission by written order finds that 
permitting the firm to continue to use such alternative market risk and 
credit risk deductions is no longer appropriate for the protection of 
customers of the FCM or the financial integrity of the futures or 
options markets. In addition, since the amended rule permits only dual 
registrants to use the Alternative Capital Computation, an FCM's 
election to use the Alternative Capital Computation automatically 
terminates immediately, without further action by the Commission, if 
the firm ceases to be dually-registered as a BD.
3. Additional Filing Requirements
    In addition to the notice and supplemental notices described above, 
amended paragraph (c)(6)(iv) also provides that any firm that elects to 
use the Alternative Capital Computation must file with the Commission 
copies of all additional monthly, quarterly, and annual reporting items 
that BDs who are approved to use the Alternative Capital Computation 
must file with SEC, as discussed above. The FCM must also file with the 
Commission a copy of the notice that it is required to file with the 
SEC whenever its tentative net capital falls below the amount required 
by the SEC, or of the notice filed with the SEC or the firm's 
designated examining authority in regard to planned withdrawals of 
excess net capital.
    Specifically, the amended rule requires that the following be filed 
with the Commission, at the same time that originals are filed with the 
SEC: (i) All information that the firm files on a monthly basis with 
its designated examining authority or the SEC in satisfaction of SEC 
Rule 17a-5(a)(5)(i), whether by way of schedules to the firm's FOCUS 
reports or by other filings; (ii) the quarterly reports required by SEC 
Rule 17a-5(a)(5)(ii); (iii) the supplemental annual filings as required 
by SEC Rule 17a-5(k), which consist of a report on management controls 
that is prepared by a registered public accounting firm and is filed by 
the firm concurrently with its annual audit report, and also a related 
statement, filed prior to the commencement of the accountant's review 
but no later than December 10 of each year, that includes a description 
of the procedures agreed to by the firm and the accountant and a notice 
describing changes to the agreed-upon procedures, if any, or stating 
that there are no changes; and (iv) any notification to the SEC or the 
firm's designated examining authority of planned withdrawals of excess 
net capital, and any notification that the firm is required to file 
with the SEC when its tentative net capital is below an amount 
specified by the SEC.
4. Conforming Amendments To permit Filing of Part II CSE FOCUS Report
    Those BDs that use the Alternative Capital Computation also file a 
revised Part II to the FOCUS report, designated ``Part II CSE''. This 
revised FOCUS report includes financial information that BDs previously 
reported in Part II of the FOCUS Report, and also includes new 
schedules that provide much of the additional information that BDs who 
use the Alternative Capital Computation must report on a monthly basis. 
In order to facilitate the firm's reporting requirements and reduce 
administrative burden, the Commission has amended Rule 1.10(h) to 
specify that a dual registrant may file, in lieu of its Form 1-FR-FCM 
report, a copy of the FOCUS Report, Part II CSE that the firm files 
with the SEC.\20\
---------------------------------------------------------------------------

    \20\ Several other Commission rules include references to Parts 
II and Part IIA of the FOCUS report, in order to facilitate the 
filing of the FOCUS report in lieu of the Form 1-FR-FCM. The 
Commission has also amended these rules to add a reference to Part 
II CSE. In particular, conforming amendments have been made to the 
following rules: Rule 1.10(d)(4)(ii), which sets forth the 
requirements for ``authorized signers'' of the FOCUS report; Rule 
1.10(f)(1), which sets forth the procedures required to obtain 
extensions of time for filing the FOCUS report; Rule 1.16(c)(5), 
which requires the accountant's supplemental report on material 
inadequacies to be filed as of the same date as the Form 1-FR or 
FOCUS report; Rules 1.18(a) and (b)(2), which permit FOCUS filings 
to satisfy certain recordkeeping requirements of the FCM; and Rule 
1.52(a), which permits the designated self-regulatory organization 
of a dual registrant to accept a FOCUS report in lieu of a Form 1-
FR-FCM.
---------------------------------------------------------------------------

    All of the commenters supported the Commission's proposed 
amendments to Regulations 1.10(h) and 1.17(c)(6), which would have the 
effect of harmonizing capital calculations under the CFTC's and SEC's 
regulations. Two commenters, FIA and the SIA, recommended that the 
Commission should further take into consideration whether reporting and 
filing requirements under the Commission's ``risk assessment'' 
regulations, Rules 1.14 and 1.15, might be revised to allow five FCMs 
to substitute alternative means of compliance, either through making 
available for inspection certain holding company information provided 
to the SEC under its CSE regulations, or through information-sharing 
arrangements between the SEC and CFTC. Both FIA and SIA offered to meet 
with Commission staff to discuss these or other alternatives for the 
five firms, in light of the consolidated supervision of their holding 
companies by the SEC. While not opposed to such discussions, the 
commenters have raised issues that exceed the scope of the proposed 
regulations, and may be addressed separately from the amended rules in 
this release.

III. Treatment of Information Received From FCMs Electing the 
Alternative Capital Computation, and of Other Information Filed by FCMs 
and IBs

    The release published October 11 also announced proposed amendments 
to Commission regulations in parts 145 and 147, which respectively 
implement the provisions of FOIA and the Sunshine Act. Specifically, 
the Commission proposed to amend Rules 145 and 147 to include all Forms 
1-FR and FOCUS reports (except for certain information as discussed 
below), plus all reports and statements required to be filed pursuant 
to Rule 1.17(c)(6), as representative examples of information that 
would be exempt from mandatory public disclosure under exemptions that 
are available under both FOIA and the Sunshine Act (Exemptions 4 and 8 
under FOIA, and the same exemptions under the Sunshine Act).\21\ The 
proposed amendments to Commission Rule 1.10(g), however, specified that 
the Commission would continue to make available upon public request the 
following information:
---------------------------------------------------------------------------

    \21\ A summary of FOIA and the Sunshine Act, including 
exemptions 4 and 8, and their application to the Form 1-FR and FOCUS 
reports, was included in the October 11 release. See 70 FR 58991--
58992.
---------------------------------------------------------------------------

    (i) For each FCM or IB, the amount of its adjusted net capital, its 
minimum capital requirement under Rule 1.17, and its adjusted net 
capital in excess of its minimum capital requirement;
    (ii) The statement of financial condition in the certified annual 
financial report, and footnote disclosures thereof;\22\ and
---------------------------------------------------------------------------

    \22\ A BD's certified annual statement of financial condition is 
also publicly available under SEC Rule 17a-5(e)(3).
---------------------------------------------------------------------------

    (iii) The statements related to the segregation of customer funds 
under section 4d of the Commodity Exchange

[[Page 5591]]

Act and to customer funds that are held as secured amounts under Rule 
30.7.\23\
---------------------------------------------------------------------------

    \23\ Rule 1.10(g) currently provides, and will continue to 
provide, that all information on Forms 1-FR and FOCUS reports that 
is nonpublic will, however, be available for official use by any 
official or employee of the United States or any State, by any self-
regulatory organization of which the person filing such report is a 
member, by the National Futures Association in the case of an 
applicant, and by any other person to whom the Commission believes 
disclosure of such information is in the public interest. Rule 
1.10(g) also specifies the rule does not limit the authority of any 
self-regulatory organization to request or receive any information 
relative to its members' financial condition.
---------------------------------------------------------------------------

    FIA strongly endorsed the Commission's proposal to amend Rules 
1.10(g), 145.5(d) and (h), and 147.3(b) to provide that certain 
financial information filed with the Commission is exempt from 
disclosure pursuant to FOIA Exemption 8. The Commission received no 
comments opposing adoption of these proposed amendments. After 
considering the proposed amendments and the responses by commenters, 
the Commission has decided to amend Rules 1.10(g), 145.5(d) and (h), 
and 147.3(b) as proposed.

IV. Amendments To Reduce Capital Charges for Foreign Currency Forwards 
and Inventory in Specified Currencies

    The Commission has also amended Commission Rule 1.17(c)(5)(ii), 
pursuant to which an FCM or IB, in computing its adjusted net capital, 
must deduct from its net capital specified percentages of the market 
value of its inventory, fixed price commitments and forward contracts. 
In general, the required deduction from market value for a forward 
contract that is not ``covered'', as defined in Rule 1.17(j), is twenty 
percent. The Commission has amended the rule by adding a provision that 
would specify a capital charge of six percent for uncovered inventory 
and forward contracts in euros, British pounds, Canadian dollars, 
Japanese yen, or Swiss francs. Uncovered forward contracts and cash 
deposits in any other non-U.S. currency would remain subject to the 
capital charge of twenty percent currently set forth in the rule. As 
noted by the Commission when it proposed amending Rule 1.17 to reduce 
the charge for specified currencies to 6 percent, the lower charge is 
consistent with the reduced currency risk of these foreign currencies, 
given their stability relative to the U.S. dollar. As discussed in the 
October 11 release, the reduced charge is also consistent with similar 
capital charges that BDs are required to deduct from their net capital 
under SEC regulations.\24\ Furthermore, the amendment provides greater 
clarity and transparency to the Commission's capital rule, as currently 
the lower capital charge for the specified major non-U.S. currencies is 
set forth only in the Commission's Form 1-FR Instructions Manual.\25\
---------------------------------------------------------------------------

    \24\ See 70 FR 58993.
    \25\ An electronic copy of the ``Instructions for Form 1-FR-
FCM'' is available to the public on the Commission's Web site, at 
https://www.cftc.gov/files/tm/
tminstructionsmanualfinalseptember2004.pdf.
---------------------------------------------------------------------------

    FIA and the NFA generally supported this amendment, and no 
commenters expressed any objections to the amendment. In its comment 
letter, NFA advocated that the Commission undertake additional revision 
of Commission Regulation 1.17, to address the Commission's required 
deductions from capital in relation to the activities of retail foreign 
exchange (FOREX) dealers that are registered as FCMs. As noted in the 
NFA's letter, Division staff is already in the process of reviewing 
several of the issues listed in the letter, as part of separate 
guidance and/or future rulemaking related to FOREX.

V. Related Matters

A. Administrative Procedure Act

    The Administrative Procedure Act (``APA'') provides that the 
required publication of a substantive rule shall be made not less than 
30 days before its effective date, unless the agency is permitted to 
implement an earlier effective date under one of the exceptions 
recognized by the APA.\26\ The exceptions set forth in the APA are as 
follows: (1) A substantive rule which grants or recognizes an exemption 
or relieves a restriction; (2) interpretative rules and statements of 
policy; or (3) as otherwise provided by the agency for good cause found 
and published with the rule.\27\
---------------------------------------------------------------------------

    \26\ 5 U.S.C. 553(b) and (d).
    \27\ 5 U.S.C. 553 (d).
---------------------------------------------------------------------------

    The amendments being made to Rule 1.17 ``grant or recognize an 
exemption or relieve a restriction'' that harmonizes unnecessarily 
conflicting capital deductions that would otherwise be required for 
FCMs that have received SEC approval to use the Alternative Capital 
Computation. The Commission is also adopting other amendments that 
permit FCMs to file their Part II CSE FOCUS reports in lieu of their 
required Form 1-FR, which also contributes to the exemption or relief 
made available by amended Rule 1.17(c)(6).\28\ Accordingly, the 
Commission has determined to make these amendments effective 
immediately upon publication in the Federal Register.
---------------------------------------------------------------------------

    \28\ As noted earlier, the amendments related to filing the Part 
II CSE version of the FOCUS report affect Rules 1.10, 1.18, and 
1.52.
---------------------------------------------------------------------------

    Furthermore, the Commission has previously found ``good cause'' for 
making FOIA and Sunshine Act amendments effective immediately with the 
adoption of new financial filing requirements for FCMs, in particular 
where the new filings are required prior to the expiration of 30 days 
from the publication in the rule.\29\ In this case, the no-action 
relief granted to firms prior to the adoption of the amendments of Rule 
1.17(c)(6) will be superceded immediately upon the effective date of 
the amended rules in the attached release, and the firms will be 
required to comply with the reporting requirements mandated by the 
amended rules. In addition, other firms may receive SEC approval to use 
alternative capital charges prior to the expiration of 30 days from the 
publication of this rule, and would therefore seek to file with the 
Commission such notices and statements as are required by the amended 
rule. Accordingly, the Commission has determined to make the amendments 
to Rules 145 and 147 adopted in this final rulemaking effective 
immediately upon publication in the Federal Register.
---------------------------------------------------------------------------

    \29\ The Commission's prior determination that there was ``good 
cause'' for making amendments to parts 145 and 147 effective 
immediately appears in 44 FR 13435 (March 27, 1979) (Adoption of 
Changes to Form 1-FR and Freedom of Information and Sunshine Act 
Rules).
---------------------------------------------------------------------------

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et. seq., 
requires that agencies, when amending their rules, consider the impact 
of those amendments on small businesses. The Commission invited the 
public to comment on the Chairman's certification that these rules 
would not have a significant economic impact on a substantial number of 
small entities.\30\ The Commission received no comments on the 
certification.
---------------------------------------------------------------------------

    \30\ 70 FR at 58994.
---------------------------------------------------------------------------

C. Paperwork Reduction Act

    This rulemaking includes information collection requirements. As 
required by the Paperwork Reduction Act of 1995 (``PRA''),\31\ the 
Commission submitted a copy of the proposed rule amendments to the 
Office of Management and Budget (``OMB'') for its review. No comments 
were received in response to the Commission's invitation in the 
proposed rules to comment on any potential paperwork burden associated 
with regulation.\32\
---------------------------------------------------------------------------

    \31\ 44 U.S.C. 3507(d).
    \32\ 70 FR at 58994.

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

[[Page 5592]]

D. Cost-Benefit Analysis

    Section 15(a) of the Act, as amended by section 119 of the CFMA, 
requires the Commission to consider the costs and benefits of its 
action before issuing a new regulation under the Act. By its terms, 
section 15(a) as amended does not require the Commission to quantify 
the costs and benefits of a new regulation or to determine whether the 
benefits of the regulation outweigh its costs. Rather, section 15(a) 
simply requires the Commission to ``consider the costs and benefits'' 
of its action.
    Section 15(a) of the Act further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular rule was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the Act.
    The amended Rule 1.17(c)(6) allows FCM/BDs that meet the 
requirements of the rule to compute their adjusted net capital using 
the same alternative capital deductions that have been approved by the 
SEC. The amended Rule 1.17(c)(5)(ii) reduces a capital charge to which 
FCMs and IBs are subject under the Commission's current regulations. 
The Commission is considering the costs and benefits of these amended 
rules in light of the specific provisions of section 15(a) of the Act, 
as follows:
    1. Protection of market participants and the public. The amendments 
to Rule 1.17(c)(6) provides the benefit of increasing the accuracy of 
the reflection of risks in the net capital charges for FCM/BDs approved 
for using the alternative net capital charges based on internal risk 
measurement tools, while bettering the Commission's ability to perform 
appropriate financial and risk oversight. Furthermore, the Commission 
considers that no FCM/BD will elect to use the Alternative Capital 
Computation unless the costs of compliance would be outweighed by the 
benefits to such FCM/BD from using the alternative net capital charges.
    2. Efficiency and competition. The Commission anticipates that the 
amendments to Rule 1.17(c)(6) will benefit efficiency by eliminating a 
difference in the computation of net capital charges between the SEC 
and the CFTC for dually-registered FCM/BDs that have been approved by 
the SEC to use such charges. The amendments to Rule 1.17(c)(5)(ii) 
reduce the capital charges applicable to FCMs and IBs, which may 
therefore result in the more efficient utilization of their capital.
    3. Financial integrity of futures markets and price discovery. The 
notification and reporting requirements in amended Rule 1.17(c)(6) 
contribute to the benefit of ensuring that eligible FCMs can meet their 
financial obligations to customers and other market participants. 
Customers and other market participants would also benefit from the 
provisions in amended Rule 1.10(g), which continues to make publicly 
available certain information in Form 1-R and FOCUS reports related to 
capital requirements and requirements for customer funds to be held in 
segregated or separate accounts. The proposed amendments should have no 
effect, from the standpoint of imposing costs or creating benefits, on 
the price discovery function of such markets.
    4. Sound risk management practices. The alternative capital 
computation permitted under amended Rule 1.17(c)(6) is limited to FCMs 
who have in place an internal risk management system that expressly 
addresses market risk, credit risk, liquidity risk, legal risk and 
operational risks at the firm. The amended rule also requires that the 
Commission receive copies of written reviews, which are to be prepared 
annually by registered public accountants, of the firm's internal risk 
management control system. The amended rule may therefore contribute to 
the sound risk management practices of futures intermediaries.
    5. Other public interest considerations. The Commission also 
believes that the amendments to Rule 1.17(c)(6) are beneficial in that 
they minimize what would otherwise be a conflict between Commission and 
SEC rules, which conflict would otherwise make the SEC's opportunity 
for qualifying BDs to use alternative net capital charges unavailable 
to dually registered FCM/BDs, despite the commonality of interest and 
purpose for the CFTC and SEC minimum net capital rules. The amendments 
to Rule 1.17(c)(5)(ii), which incorporates agency guidance not 
presently included in the Commission's regulations, enhances the 
transparency of the Commission's rulemaking for FCMs and IBs.
    The Commission invited, but did not receive, public comment on its 
application of the cost-benefit provision. After considering these 
factors, the Commission has determined to issue this final rule.

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 145

    Freedom of information.

17 CFR Part 147

    Sunshine Act.

0
Accordingly, 17 CFR Chapter I is amended as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0
1. The authority citation for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h, 
6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 
13a-1, 16, 16a, 19, 21, 23, and 24, as amended by the Commodity 
Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554, 
114 Stat. 2763 (2000).


0
2. Section 1.10 is amended by revising paragraphs (d)(4)(ii), (f)(1) 
introductory text, (g)(1), (g)(2), (g)(4), and (h) to read as follows:


Sec.  1.10  Financial reports of futures commission merchants and 
introducing brokers.

* * * * *
    (d) * * *
    (4) * * *
    (ii) If the registrant or applicant is registered with the 
Securities and Exchange Commission as a securities broker or dealer, 
the representative authorized under Sec.  240.17a-5 of this title to 
file for the securities broker or dealer its Financial and Operational 
Combined Uniform Single Report under the Securities Exchange Act of 
1934, Part II, Part IIA, or Part II CSE. In the case of a Form 1-FR 
filed via electronic transmission in accordance with procedures 
established by the Commission, such transmission must be accompanied by 
the Commission-assigned Personal Identification Number of the 
authorized signer and such Personal Identification Number will 
constitute and become a substitute for the manual signature of the 
authorized signer for the purpose of making the oath or affirmation 
referred to in this paragraph.
* * * * *
    (f) Extension of time for filing uncertified reports. (1) In the 
event a registrant finds that it cannot file its

[[Page 5593]]

Form 1-FR, or, in accordance with paragraph (h) of this section, its 
Financial and Operational Combined Uniform Single Report under the 
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE 
(FOCUS report), for any period within the time specified in paragraphs 
(b)(1)(i) or (b)(2)(i) of this section without substantial undue 
hardship, it may request approval for an extension of time, as follows:
* * * * *
    (g) Public availability of reports. (1) Forms 1-FR filed pursuant 
to this section, and FOCUS reports filed in lieu of Forms 1-FR pursuant 
to paragraph (h) of this section, will be treated as exempt from 
mandatory public disclosure for purposes of the Freedom of Information 
Act and the Government in the Sunshine Act and parts 145 and 147 of 
this chapter, except for the information described in paragraph (g)(2) 
of this section.
    (2) The following information in Forms 1-FR, and the same or 
equivalent information in FOCUS reports filed in lieu of Forms 1-FR, 
will be publicly available:
    (i) The amount of the applicant's or registrant's adjusted net 
capital; the amount of its minimum net capital requirement under Sec.  
1.17 of this chapter; and the amount of its adjusted net capital in 
excess of its minimum net capital requirement; and
    (ii) The following statements and footnote disclosures thereof: the 
Statement of Financial Condition in the certified annual financial 
reports of futures commission merchants and introducing brokers; the 
Statements (to be filed by a futures commission merchant only) of 
Segregation Requirements and Funds in Segregation for customers trading 
on U.S. commodity exchanges and for customers' dealer options accounts, 
and the Statement (to be filed by a futures commission merchant only) 
of Secured Amounts and Funds held in Separate Accounts for foreign 
futures and foreign options customers in accordance with Sec.  30.7 of 
this chapter.
* * * * *
    (4) All information that is exempt from mandatory public disclosure 
under paragraph (g)(1) of this section will, however, be available for 
official use by any official or employee of the United States or any 
State, by any self-regulatory organization of which the person filing 
such report is a member, by the National Futures Association in the 
case of an applicant, and by any other person to whom the Commission 
believes disclosure of such information is in the public interest. 
Nothing in this paragraph (g) will limit the authority of any self-
regulatory organization to request or receive any information relative 
to its members' financial condition.
* * * * *
    (h) Filing option available to a futures commission merchant or an 
introducing broker that is also a securities broker or dealer. Any 
applicant or registrant which is registered with the Securities and 
Exchange Commission as a securities broker or dealer may comply with 
the requirements of this section by filing (in accordance with 
paragraphs (a), (b), (c), and (j) of this section) a copy of its 
Financial and Operational Combined Uniform Single Report under the 
Securities Exchange Act of 1934, Part II, Part IIA, or Part II CSE 
(FOCUS report), in lieu of Form 1-FR: Provided, however, That all 
information which is required to be furnished on and submitted with 
Form 1-FR is provided with such FOCUS report.
* * * * *

0
3. Section 1.16 is amended by revising paragraph (c)(5) to read as 
follows:


Sec.  1.16  Qualifications and reports of accountants.

* * * * *
    (c) * * *
    (5) Accountant's report on material inadequacies. A registrant must 
file concurrently with the annual audit report a supplemental report by 
the accountant describing any material inadequacies found to exist or 
found to have existed since the date of the previous audit. An 
applicant must file concurrently with the audit report a supplemental 
report by the accountant describing any material inadequacies found to 
exist as of the date of the Form 1-FR being filed: Provided, however, 
That if such applicant is registered with the Securities and Exchange 
Commission as a securities broker or dealer, and it files (in 
accordance with Sec.  1.10(h)) a copy of its Financial and Operational 
Combined Uniform Single Report under the Securities Exchange Act of 
1934, Part II, Part IIA, or Part II CSE, in lieu of Form 1-FR, the 
accountant's supplemental report must be made as of the date of such 
report. The supplemental report must indicate any corrective action 
taken or proposed by the applicant or registrant in regard thereto. If 
the audit did not disclose any material inadequacies, the supplemental 
report must so state.
* * * * *

0
4. Section 1.17 is amended by revising paragraphs (c)(5)(ii) and adding 
(c)(6) to read as follows:


Sec.  1.17  Minimum financial requirements for futures commission 
merchants and introducing brokers.

* * * * *
    (c) * * *
    (5) * * *
    (ii) In the case of all inventory, fixed price commitments and 
forward contracts, the applicable percentage of the net position 
specified below:
    (A) Inventory which is currently registered as deliverable on a 
contract market and covered by an open futures contract or by a 
commodity option on a physical.--No charge.
    (B) Inventory which is covered by an open futures contract or 
commodity option.--5 percent of the market value.
    (C) Inventory which is not covered.--20 percent of the market 
value.
    (D) Inventory and forward contracts in those foreign currencies 
that are purchased or sold for future delivery on or subject to the 
rules of a contract market, and which are covered by an open futures 
contract.--No charge
    (E) Inventory and forward contracts in euros, British pounds, 
Canadian dollars, Japanese yen, or Swiss francs, and which are not 
covered by an open futures contract or commodity option.--6 percent of 
the market value.
    (F) Fixed price commitments (open purchases and sales) and forward 
contracts which are covered by an open futures contract or commodity 
option.--10 percent of the market value.
    (G) Fixed price commitments (open purchases and sales) and forward 
contracts which are not covered by an open futures contract or 
commodity option.--20 percent of the market value.
* * * * *
    (6) Election of alternative capital deductions that have received 
approval of Securities and Exchange Commission pursuant to Sec.  
240.15c3-1(a)(7) of this title.
    (i) Any futures commission merchant that is also registered with 
the Securities and Exchange Commission as a securities broker or 
dealer, and who also satisfies the other requirements of this paragraph 
(c)(6), may elect to compute its adjusted net capital using the 
alternative capital deductions that, under Sec.  240.15c3-1(a)(7) of 
this title, the Securities and Exchange Commission has approved by 
written order. To the extent that a futures commission merchant is 
permitted by the Securities and Exchange Commission to use alternative 
capital deductions for its unsecured receivables from over-the-counter 
transactions in derivatives, or for its proprietary positions in 
securities, forward contracts, or futures contracts, the futures 
commission merchant may use these same

[[Page 5594]]

alternative capital deductions when computing its adjusted net capital, 
in lieu of the deductions that would otherwise be required by paragraph 
(c)(2)(ii) of this section for its unsecured receivables from over-the-
counter derivatives transactions; by paragraph (c)(5)(ii) of this 
section for its proprietary positions in forward contracts; by 
paragraph (c)(5)(v) of this section for its proprietary positions in 
securities; and by paragraph (c)(5)(x) of this section for its 
proprietary positions in futures contracts.
    (ii) Notifications of election or of changes to election. (A) No 
election to use the alternative market risk and credit risk deductions 
referenced in paragraph (c)(6)(i) of this section shall be effective 
unless and until the futures commission merchant has filed with the 
Commission, addressed to the Director of the Division of Clearing and 
Intermediary Oversight, a notice that is to include a copy of the 
approval order of the Securities and Exchange Commission referenced in 
paragraph (c)(6)(i) of this section, and to include also a statement 
that identifies the amount of tentative net capital below which the 
futures commission merchant is required to provide notice to the 
Securities and Exchange Commission, and which also provides the 
following information: a list of the categories of positions that the 
futures commission merchant holds in its proprietary accounts, and, for 
each such category, a description of the methods that the futures 
commission merchant will use to calculate its deductions for market 
risk and credit risk, and also, if calculated separately, deductions 
for specific risk; a description of the value at risk (VaR) models to 
be used for its market risk and credit risk deductions, and an overview 
of the integration of the models into the internal risk management 
control system of the futures commission merchant; a description of how 
the futures commission merchant will calculate current exposure and 
maximum potential exposure for its deductions for credit risk; a 
description of how the futures commission merchant will determine 
internal credit ratings of counterparties and internal credit risk 
weights of counterparties, if applicable; and a description of the 
estimated effect of the alternative market risk and credit risk 
deductions on the amounts reported by the futures commission merchant 
as net capital and adjusted net capital.
    (B) A futures commission merchant must also, upon the request of 
the Commission at any time, supplement the statement described in 
paragraph (c)(6)(ii)(A) of this section, by providing any other 
explanatory information regarding the computation of its alternative 
market risk and credit risk deductions as the Commission may require at 
its discretion.
    (C) A futures commission merchant must also file the following 
supplemental notices with the Director of the Division and Clearing and 
Intermediary Oversight:
    (1) A notice advising that the Securities and Exchange Commission 
has imposed additional or revised conditions for the approval evidenced 
by the order referenced in paragraph (c)(6)(i) of this section, and 
which describes the new or revised conditions in full, and
    (2) A notice which attaches a copy of any approval by the 
Securities and Exchange Commission of amendments that a futures 
commission merchant has requested for its application, filed under 17 
CFR 240.15c3-1e, to use alternative market risk and credit risk 
deductions approved by the Securities and Exchange Commission.
    (D) A futures commission merchant may voluntarily change its 
election to use the alternative market risk and credit risk deductions 
referenced in paragraph (c)(6)(i) of this section, by filing with the 
Director of the Division of Clearing and Intermediary Oversight a 
written notice specifying a future date as of which it will no longer 
use the alternative market risk and credit risk deductions, and will 
instead compute such deductions in accordance with the requirements 
otherwise applicable under paragraph (c)(2)(ii) of this section for 
unsecured receivables from over-the-counter derivatives transactions; 
by paragraph (c)(5)(ii) of this section for proprietary positions in 
forward contracts; by paragraph (c)(5)(v) of this section for 
proprietary positions in securities; and by paragraph (c)(5)(x) of this 
section for proprietary positions in futures contracts.
    (iii) Conditions under which election terminated. A futures 
commission merchant may no longer elect to use the alternative market 
risk and credit risk deductions referenced in paragraph (c)(6)(i) of 
this section, and shall instead compute the deductions otherwise 
required under paragraph (c)(2)(ii) of this section for unsecured 
receivables from over-the-counter derivatives transactions; by 
paragraph (c)(5)(ii) of this section for proprietary positions in 
forward contracts; by paragraph (c)(5)(v) of this section for 
proprietary positions in securities; and by paragraph (c)(5)(x) of this 
section for proprietary positions in futures contracts, upon the 
occurrence of any of the following:
    (A) The Securities and Exchange Commission revokes its approval of 
the market risk and credit risk deductions for such futures commission 
merchant;
    (B) A futures commission merchant fails to come into compliance 
with its filing requirements under this paragraph (c)(6), after having 
received from the Director of the Division of Clearing and Intermediary 
Oversight written notification that the firm is not in compliance with 
its filing requirements, and must cease using alternative capital 
deductions permitted under this paragraph (c)(6) if it has not come 
into compliance by a date specified in the notice; or
    (C) The Commission by written order finds that permitting the 
futures commission merchant to continue to use such alternative market 
risk and credit risk deductions is no longer necessary or appropriate 
for the protection of customers of the futures commission merchant or 
of the integrity of the futures or options markets.
    (iv) Additional filing requirements. Any futures commission 
merchant that elects to use the alternative market risk and credit risk 
deductions referenced in paragraph (c)(6)(i) of this section must file 
with the Commission, in addition to the filings required by paragraph 
(c)(6)(ii) of this section, copies of any and all of the following 
documents, at such time as the originals are filed with the Securities 
and Exchange Commission:
    (A) Information that the futures commission merchant files on a 
monthly basis with its designated examining authority or the Securities 
and Exchange Commission, whether by way of schedules to its FOCUS 
reports or by other filings, in satisfaction of 17 CFR 240.17a-
5(a)(5)(i);
    (B) The quarterly reports required by 17 CFR 240.17a-5(a)(5)(ii);
    (C) The supplemental annual filings as required by 17 CFR 240.17a-
5(k);
    (D) Any notification to the Securities and Exchange Commission or 
the futures commission merchant's designated examining authority of 
planned withdrawals of excess net capital; and
    (E) Any notification that the futures commission merchant is 
required to file with the Securities and Exchange Commission when its 
tentative net capital is below an amount specified by the Securities 
and Exchange Commission.
* * * * *

0
5. Section 1.18 is amended by revising paragraphs (a) and (b)(2) to 
read as follows:

[[Page 5595]]

Sec.  1.18  Records for and relating to financial reporting and monthly 
computation by futures commission merchants and introducing brokers.

    (a) No person shall be registered as a futures commission merchant 
or as an introducing broker under the Act unless, commencing on the 
date his application for such registration is filed, he prepares and 
keeps current ledgers or other similar records which show or summarize, 
with appropriate references to supporting documents, each transaction 
affecting his asset, liability, income, expense and capital accounts, 
and in which (except as otherwise permitted in writing by the 
Commission) all his asset, liability and capital accounts are 
classified into either the account classification subdivisions 
specified on Form 1-FR-FCM or Form 1-FR-IB, respectively, or, if such 
person is registered with the Securities and Exchange Commission as a 
securities broker or dealer and he files (in accordance with Sec.  
1.10(h)) a copy of his Financial and Operational Combined Uniform 
Single Report under the Securities Exchange Act of 1934, Part II, Part 
IIA, or Part II CSE (FOCUS report) in lieu of Form 1-FR-FCM or Form 1-
FR-IB, the account classification subdivisions specified on such FOCUS 
report, or categories that are in accord with generally accepted 
accounting principles. Each person so registered shall prepare and keep 
current such records.
    (b) * * *
    (2) An applicant or registrant that has filed a monthly Form

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