Proposed Rule

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Proposed Amendments
(Additions are underscored and deletions are stricken)

FINANCIAL REQUIREMENTS

SECTION 1. MINIMUM FINANCIAL REQUIREMENT.

Each NFA Member that is registered or required to be registered with the Commodity Futures Trading Commission (hereinafter "CFTC") as a Futures Commission Merchant (hereinafter "Member FCM") must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17 Schedule A hereto) equal to or in excess of the greatest of:

    (i) $250,000;

    (ii) Four (4) percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade for which full premiums have been paid: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts;

    (iii) $6,000 for each remote location operated (i.e., proprietary branch offices, main office of each guaranteed IB and branch offices of each guaranteed IB);

    (iv) $3,000 for each AP sponsored (including APs sponsored by guaranteed IBs); or

    (v) (for securities brokers and dealers) the amount of net capital specified in Rule 15c3-1(a) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).

A Member FCM, for which NFA is the designated self-regulatory organization (hereinafter DSRO), that is required to file any document with or give any notice to its DSRO under CFTC Regulations 1.10 [Financial reports of futures commission merchants and introducing brokers], 1.12 [Maintenance of minimum financial requirements by futures commission merchants and introducing brokers], 1.16 [Qualifications and reports of accountants], or 1.17 [Minimum financial requirements by futures commission merchants and introducing brokers] shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

A Member FCM that knows or should have known that its Adjusted Net Capital is less than this required amount must give telegraphic notice to its Designated Self-Regulatory Organization (hereinafter "DSRO") within 24 hours. Additionally, within 24 hours after giving telegraphic notice, the Member FCM must file with its DSRO a statement of financial condition, a statement of the computation of the minimum capital requirements, the statements of segregation requirements and funds in segregation for customers trading on U.S. exchanges and for customers' dealer options accounts, and the statement of secured amounts and funds held in separate accounts for foreign futures and foreign options customers, all as of the date such Member FCM's Adjusted Net Capital is less than the mini-mum required.

SECTION 2. DESIGNATED SELF-REGULATORY ORGANIZATION.

In the case of a Member FCM or Introducing Broker (hereinafter "Member IB") that is a member of one or more contract markets, the Member's DSRO shall be the organization that has been delegated primary financial responsibility for the Member pursuant to the Delegation Plan of NFA and the contract markets. In the case of a Member FCM that is not a member of a contract market, the Member's DSRO shall be NFA.

SECTION 3. DEBT/EQUITY RATIO REQUIREMENT.

(a) Requirement. Except as provided in (b) below, each Member FCM shall have "Equity Capital" (as defined in Schedule B hereto), inclusive of "Satisfactory Subordination Agreements" (as defined in Schedule C hereto) that qualify as Equity Capital, of not less than 30 percent of the following amount: The Member's Equity Capital plus the outstanding principal amount of Satisfactory Subordination Agreements.

(b) Exemption. A Member FCM may be exempted from Section 3(a) for a period not to exceed 90 days, or for such longer period as the FCM's DSRO may permit as within the best interests of the DSRO.

SECTION 4. COMPLIANCE WITH FINANCIAL REQUIREMENTS.

Each Member FCM and Member IB must be in compliance with these financial requirements at all times and must be able to demonstrate such compliance to the satisfaction of its DSRO.

SECTION 5. FAILURE TO COMPLY WITH FINANCIAL REQUIREMENTS.

A Member FCM that is not in compliance with these financial requirements or is unable to demonstrate compliance with these requirements as required by Section 4 above may trade for liquidation purposes only unless otherwise directed by its DSRO. Otherwise, the Member FCM may be directed by the DSRO to transfer customer accounts or cease doing business as an FCM until it is able to demonstrate compliance. If, however, the Member FCM immediately demonstrates to the satisfaction of the DSRO the ability to achieve compliance, the DSRO may allow the Member FCM a maximum of 10 business days in which to achieve compliance without having to transfer accounts, cease doing business, or trade for liquidation purposes only.

SECTION 2. 6. EARLY WARNING CAPITAL REQUIREMENTS , BOOKS AND RECORDS, ELIGIBILITY TO GUARANTEE IBS.

(a) A Member FCM must file the a written notice required by CFTC Regulation 1.12 with its DSRO, within 5 business days, when the FCM knows that or should have known that its Adjusted Net Capital is less than the greatest of:

    (i) $375,000;

    (ii) 6 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade for which full premiums have been paid: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts;

    (iii) $9,000 for each remote location operated (i.e., proprietary branch offices, main office of each guaranteed IB and branch offices of each guaranteed IB);

    (iv) $4,500 for each AP sponsored (including APs sponsored by guaranteed IBs); or

    (v) (for securities brokers or dealers) the amount of capital specified in Rule 17(a)-11(b) of the Regulations of the Securities and Exchange Commission (17 CFR 240.17a-11(b)).

(b) A Member FCM whose Adjusted Net Capital is less than the amount set forth in paragraph (a) of this Section must file with its DSRO a Form 1-FR (or, if such Member is registered with the Securities and Exchange Commission as a securities broker or dealer, it may file a copy of its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, in lieu of Form 1-FR), containing the statements required by Section D2-b of these requirements, as of the close of business for the month during which such event takes place and as of the close of business for each month thereafter until three successive months have elapsed during which the Member's Adjusted Net Capital is at all times equal to or in excess of the amounts set forth in paragraph (a). Each financial statement required by this paragraph must be filed within 30 calendar days after the end of the month for which such report is being made.

(c) Whenever a Member FCM is required to give notice to the CFTC pursuant to CFTC Regulation 1.12, the FCM also is required to give such notice to its DSRO.

(b) (d) A Member FCM which is subject to the financial reporting requirements of CFTC Regulation 1.12 paragraph (b) of this Section may not enter into a guarantee agreement with an IB.

(c) (e) A Member FCM which is a party to a guarantee agreement with an IB and whose Adjusted Net Capital is less than the amount set forth in paragraph (a) of this Section, must also provide NFA and any IBs which it guarantees with a copy of the notice required by paragraph (a) (b). If the FCM cannot demonstrate to NFA and its DSRO, within 30 days after filing the required notice, that its Adjusted Net Capital is greater than the amount required by paragraph (a), the FCM must immediately notify, in writing, any IB which it guarantees that the guarantee agreement will terminate 30 days following the notice. A copy of the notice must also be filed with the CFTC, NFA, and the DSRO of the FCM. If the FCM demonstrates to its DSRO and NFA prior to the effective date of the termination of the guarantee agreement that its Adjusted Net Capital is greater than the amount required by paragraph (a), then it may notify any IB which it guarantees, the CFTC, NFA, and its DSRO, that the guarantee agreement will not terminate.

SECTION 3 7. RELIEF REQUESTS.

A Member FCM, for which NFA is DSRO, or IB that may, as provided in Schedule E hereto, file with its DSRO a request for relief from certain provisions of a request for relief from certain provisions of these Requirements, the Schedules hereto, and CFTC Regulations 1.10, 1.12, 1.16 and 1.17 with its DSRO may file such request with NFA. NFA may grant the relief request without receiving the prior concurrence of the CFTC unless such concurrence is required by CFTC Regulations. Any such grant of relief shall be valid and shall remain in full force and effect unless or until reversed by the CFTC or withdrawn by NFA.

SECTION 4 8. FINANCIAL REQUIREMENTS AND TREATMENT OF CUSTOMER PROPERTY.

Any Member FCM who violates any of CFTC Regulations 1.10, 1.12, 1.16, 1.17 or 1.20 through 1.30 shall be deemed to have violated an NFA requirement.

SECTION 5 9. INTRODUCING BROKER FINANCIAL REQUIREMENTS.

Each Member IB, except an IB operating pursuant to a guarantee agreement which meets the requirements set forth in CFTC Regulation 1.10(j), must maintain Adjusted Net Capital (as defined in CFTC Regulation 1.17 Schedule A hereto) equal to or in excess of the greatest of:

    (i) $30,000;

    (ii) $6,000 per office operated by the IB (including the main office);

    (iii) $3,000 for each AP sponsored by the IB; or

    (iv) (for securities brokers and dealers) the amount of net capital required by Rule 15c3-1(a) of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)).

A Member IB that is required to file any document with or give any notice to the CFTC under CFTC Regulations 1.10 [Financial reports of futures commission merchants and introducing brokers], 1.12 [Maintenance of minimum financial requirements by futures commission merchants and introducing brokers], 1.16 [Qualifications and reports of accountants], or 1.17 [Minimum financial requirements by futures commission merchants and introducing brokers] shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

SECTION 10. INTRODUCING BROKER REPORTING REQUIREMENTS.

(a) A Member IB which knows or should have known that its adjusted net capital is less than the amount required by Section 9 or by the capital rule of any self-regulatory organization to which it is subject, must give telegraphic notice to NFA within 24 hours.

(b) A Member IB which fails to make or keep current the books and records required to be kept under CFTC Regulations 1.18, 1.35 and 1.37 must, on the same day this event occurs, give telegraphic notice to NFA.

(c) A Member IB must file with NFA the financial reports required under CFTC Regulation 1.10(b)(1) and (2).

(d) A Member IB which is also a securities broker or dealer may in lieu of a form 1-FR file a copy of its Financial and Operational Combined Uniform Single Report under the Securities Exchange Act of 1934, Part II or Part IIA, in accordance with CFTC Regulation 1.10(h). A Member IB which is also a country elevator may file a copy of a financial report prepared by a grain commission firm in accordance with CFTC Regulation 1.10(i).

(e) A Member IB which violates either CFTC Regulation 1.10 or 1.12 shall be deemed to have violated an NFA requirement.

[Note: CFTC Regulation 1.10(b)(1) generally requires IBs to file financial reports on a semi-annual basis. In accordance with CFTC Regulation 1.10(b)(3), Section 10 requires that each Member IB for which NFA is DSRO which files financial reports must file such reports with NFA with a copy to the CFTC.]

[See Interpretive Notice at 9028.]

SECTION 6 11. LEVERAGE TRANSACTION MERCHANT REPORTING REQUIREMENTS.

Each Leverage Transaction Merchant (hereinafter "Member LTM") required to file any document with or give notice to the CFTC under CFTC Regulations 31.7 [Maintenance of minimum financial, cover and segregation requirements by leverage transaction merchants], 31.13 [Financial reports of leverage transaction merchants], 31.16 [Monthly reporting requirements], and 31.26 [Quarterly reporting requirements] shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

SCHEDULE A
FINANCIAL REQUIREMENTS COMPUTATION

SECTION A1. DEFINITIONS.

A1-a. Designated Self-Regulatory Organization (DSRO): has the meaning assigned to it in Section 2.

A1-b. Business Day: means any day other than a Sunday, Saturday or holiday.

A1-c. Commodity Options: means any transaction or agreement as defined in CFTC Regulation 32.1(a).

A1-d.

    (i) Cover: means transactions or positions in a contract for future delivery on a board of trade, or in a commodity option, where such transactions or positions normally represent a substitute for transactions to be made, or positions to be taken at a later time in a physical marketing channel, and where they are economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, and where they arise from:

      (A) The potential change in the value of assets which a person owns, produces, manufactures, processes, or merchandises or anticipates owning, producing, manufacturing, processing, or merchandising;

      (B) The potential change in the value of liabilities which a person owes or anticipates incurring; or

      (C) The potential change in the value of services which a person provides, purchases or anticipates providing or purchasing.

    But no transactions or positions shall be classified as cover for the purposes of these requirements unless their purpose is to offset price risks incidental to commercial cash or spot operations, and such positions are established and liquidated in accordance with sound commercial practices, and unless the provisions of the paragraphs (ii) or (iii) below have been satisfied.

    (ii) Enumerated cover transactions: cover transactions and positions include, but are not limited to, the following specific transactions and positions:

      (A) Ownership or fixed-price purchases of any commodity which does not exceed in quantity: (1) the sales of the same commodity for future delivery on a board of trade; (2) the purchase of a put commodity option of the same commodity for which the market value for the actual commodity or futures contract which is the subject of the option is less than the striking price of the option; or (3) the ownership of a commodity option position established by the sale (grant) of a call commodity option of the same commodity for which the market value for the actual commodity or futures contract which is the subject of the option is more than the strike price of the option: Provided however, that for the purposes of Section A6-h of this section the market value for the actual commodity or futures contract which is the subject of such option need not be more than the strike price of that option;

      (B) Fixed-price sale of any commodity which does not exceed in quantity: (1) the purchase of the same commodity for future delivery on a board of trade; (2) the purchase of a call commodity option of the same commodity for which the market value for the actual commodity for futures contract which is the subject of such option is more than the striking price of the option; or (3) the ownership of a commodity option position established by the sale (grant) of a put commodity option of the same commodity for which the market value for the actual commodity or futures contract which is the subject of the option is less than the strike price of the option: Provided however, that for purposes of Section A6-h of this section the market value for the actual commodity or futures contract which is the subject of such option need not be less than the strike price of that option; and

      (C) Ownership or fixed-price contracts of a commodity described in the preceding two paragraphs may also be covered other than by the same quantity of the same cash commodity, provided that the fluctuations in value of the position for future delivery or commodity options are substantially related to the fluctuations in value of the actual cash position.

    (iii) Nonenumerated cases: cover transactions and positions also include transactions or positions which have been recognized by the CFTC as "cover" pursuant to CFTC Regulation 1.17(j)(3). (In such cases, a copy of the CFTC's letter recognizing such transactions or positions should be filed with the DSRO.)

A1-e. Customer: means a person trading in any commodity future, except the holder of a "proprietary account" as defined in CFTC Regulation 1.3(y); in addition, it means an "option customer" as defined in CFTC Regulation 1.3(jj) and includes a foreign futures and foreign options customer.

A1-f. Non-Customer Account: means a commodity futures or option account carried on the books of a Member FCM which account is neither a Customer Account (See A1-e, above) nor a Proprietary Account (See A1-g, below).

A1-g. Proprietary Account: means a commodity futures or option account carried on the books of a Member FCM for the Member FCM itself, or for general partners of the Member FCM.

A1-h. Striking Price: means the price at which an option customer may purchase or sell the commodity or the contract of sale of a commodity for future delivery which is the subject of a commodity option transaction.

A1-i. Value: means, with regard to:

    (i) Commodity futures positions: The value of all long and short commodity positions marked to their market value.

    (ii) Listed security options: The value of all long and short positions in listed security options marked to their market value.

    (iii) Securities: The value of all long and short securities marked to their market value.

    (iv) Commodity options traded on a commodity options exchange: Long and short commodity options shall be marked on their market value.

    (v) Commodity options not traded on a commodity options exchange: The value shall be the difference between the option's strike price and the market value for the actual commodity or futures contract which is the subject of the option.

      a. Call commodity option: If the market value for the actual commodity or futures contract is less than the strike price, it shall be given a zero value.

      b. Put commodity option: If the market value for the actual commodity or futures contract is more than the strike price of the option, it shall be given zero value.

    (vi) Unlisted security options: The difference between the option's exercise value or striking value and the market value of the underlying security.

    (vii) Unlisted calls: Zero, if the market value of the underlying security is less than the exercise value or striking value of such call.

    (viii) Unlisted puts: Zero, if the market value of the underlying security is more than the exercise value or striking value of the unlisted put.

A1-j. Foreign Futures or Foreign Options Secured Amount: has the same meaning as in CFTC Regulation 1.3(rr).

SECTION A2. RULES OF CONSTRUCTION
FOR PURPOSES OF THESE REQUIREMENTS.

A2-a. Aging of Margin Calls-Computation of: In computing the number of days a margin call is outstanding, DAY ONE would equal the first business day after the day on which the margin call was issued (which must be the business day subsequent to the day the position becomes undermargined).

A2-b. [Reserved]

A2-c. Contractual Commitments: include underwriting, when issued, when distributed, and delayed delivery contracts; and the writing or endorsement of security puts and calls and combinations thereof. It does not include uncleared regular way purchases and sales of securities. A series of contracts of purchase or sale of the same security, conditioned, if at all, only upon issuance, may be treated as an individual commitment.

A2-d. Liabilities-Adequate Collateralization: Liabilities are "adequately collateralized" when, pursuant to a legally enforceable written instrument, such liabilities are secured by identifiable assets that are otherwise unencumbered, and the market value of the assets exceeds the amount of such liabilities.

A2-e. Secured Receivables: A loan or advance or any other form of receivable is not "secured" unless the following conditions exist:

The receivable is secured by readily marketable collateral which is otherwise unencumbered, and which can be readily converted into cash, provided that the value of the collateral must be haircut as prescribed in A6, below, before determining whether the receivable is properly secured; and

    (i) The readily marketable collateral is in the possession or control of the Member FCM; or

    (ii) The Member FCM has a legally enforceable, written secured agreement, signed by the debtor, and has a perfected security interest in the readily marketable collateral within the meaning of the laws of the State in which the readily marketable collateral is located.

A2-f. SEC Definitions: For securities broker-dealers, any asset or liability defined in SEC Regulations (See SEC Regulation 15c3-1) and which is not specifically defined in these Requirements, shall be treated in accordance with the SEC Regulations. Broker-dealers should treat aggregate indebtedness in accordance with SEC Regulation 15c3-1(c)(1) as it applies to the securities segment of their business.

A2-g. Unrealized Profits: shall be added and "Unrealized Losses" shall be deducted in the accounts of the Member FCM, including unrealized profits and losses on fixed price commitments and forward contracts.

COMPUTATIONAL FORMULA-SPECIAL DEFINITIONS
AND RULES OF CONSTRUCTION

SECTION A3. NET CAPITAL: means the amount by which Current Assets (See A4, below) exceed Liabilities (See A5, below).

SECTION A4. CURRENT ASSETS: means cash and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold during the next 12 months. In computing Current Assets:

A4-a. Debit and Deficit Accounts. Exclude any unsecured commodity futures or option account containing a ledger balance and open trades, the combination of which liquidates to a deficit, or containing a debit ledger balance only. Deficits or debit ledger balances in unsecured Customers, Non-Customers and Proprietary Accounts which are the subject of calls for margin or other required deposits may be included in Current Assets until the close of business the day following the date on which such deficit or debit ledger balance originated: Provided, however, that the account had timely satisfied, through the deposit of new funds, the previous day's debit or deficit, if any, in its entirety.

A4-b. Unsecured Receivables, etc. Exclude all unsecured receivables, advances and loans (See A2-e) except for:

    (i) Receivables resulting from the marketing of inventories commonly associated with the business activities of the Member FCM and advances on fixed price purchase commitments, but only if they are outstanding no longer than three calendar months from the date that they are accrued;

    (ii) Interest receivable, floor brokerage receivable, commissions receivable from other brokers or dealers (other than syndicate profits), mutual fund concessions receivable and management fees receivable from registered investment companies and commodity pools, but only if they are outstanding no longer than 30 days from the date they are due, and dividends receivable that are outstanding no longer than 30 days from the payable date;

    (iii) Receivables from clearing organizations;

    (iv) Receivables from FCMs or brokers, resulting from commodity futures or option transactions, except those specifically excluded under A4-a, above;

    (v) Insurance claims which arise from a reportable segment of the Member FCM's overall business activities as defined in generally accepted accounting principles, other than in the commodity futures, commodity option, security and security option segments of the FCM's business activities, which are not outstanding more than three calendar months after the date they are recorded as a receivable; and

    (vi) All other insurance claims not subject to (v) above which are not older than seven business days from the date the loss giving rise to the claim is discovered; insurance claims which are not older than 20 business days from the date the loss giving rise to the claim is discovered and which are covered by an opinion of outside counsel that the claim is valid and is covered by insurance policies presently in effect; and insurance claims which are older than 20 business days from the date the loss giving rise to the claim is discovered and which are covered by an opinion of outside counsel that the claim is valid and covered by insurance policies presently in effect and which have been acknowledged in writing by the insurance carrier as due and payable, unless such claims are outstanding longer than 20 business days from the date they are so acknowledged by the carrier.

A4-c. Prepaid Expenses and Deferred Charges. Exclude all prepaid expenses and deferred charges.

A4-d. Inventories. Exclude all inventories except for:

    (i) Readily marketable spot commodities; or spot commodities which "adequately collateralize" (See A2-d, above) indebtedness;

    (ii) Securities which are considered "readily marketable" as defined in SEC Rule 15c3-1(c)(11) or which "adequately collateralize" (See A2-d, above) indebtedness;

    (iii) Work in process and finished goods which result from the processing of commodities at market value;

    (iv) Raw materials at market value which will be combined with spot commodities to produce a finished processed commodity; and

    (v) Inventories held for resale commonly associated with the business activities of the Member FCM.

A4-e. Doubtful Assets. Exclude all assets doubtful of collection or realization less any related reserves.

A4-f. Exchange Memberships. Exclude exchange memberships.

A4-g. Fixed Assets. Include fixed assets and assets which otherwise would be considered noncurrent to the extent of any long-term debt adequately collateralized by assets acquired for use in the ordinary course of the Member FCM's ordinary trade or business, and any other long-term debt adequately collateralized by assets of the Member FCM if the sole recourse of the creditor is such assets, but only if such liabilities are not excluded from liabilities in the computation of Net Capital under A5-d, below.

A4-h. Future Tax Benefits. Include, in the case of future income tax benefits arising as a result of unrealized losses, the amount of income tax liabilities accrued on the books and records of the Member FCM, but only to the extent such benefits could have been applied to reduce accrued tax liabilities on the date of the capital computation, had the related unrealized losses been realized on that date.

A4-i. Guarantee Deposits and Clearing House Stock. Include guarantee deposits with clearing organizations and stock in clearing organizations to the extent of its margin value.

SECTION A5. LIABILITIES: means the total money liabilities of a Member FCM arising in connection with any transaction whatsoever, including economic obligations of the Member FCM that are recognized and measured in conformity with generally accepted accounting principles. Liabilities also include any deferred credits that are not obligations but that are recognized and measured in conformity with generally accepted accounting principles. In computing liabilities:

A5-a. Satisfactorily Subordinated Liabilities. Exclude liabilities which are subordinated to the claims of all general creditors of the Member FCM pursuant to subordination agreements which meet the standards set forth in Schedule C.

A5-b. Segregated Funds. Exclude the amount of money, securities and property due to commodity futures or option customers which is held in segregated accounts in compliance with Section 4d of the Commodity Exchange Act and CFTC Regulations, including CFTC Regulation 32.6, but only if such money, securities and property held in segregated accounts has been excluded from Current Assets in computing Net Capital.

A5-c. Deferred Income Tax Liability. Exclude the lesser of any deferred income tax liability related to the items in (i), (ii) and (iii) below, or the sum of (i), (ii) and (iii) below:

    (i) The aggregate amount resulting from applying to the amount of the deductions computed in accordance with Section A6, the appropriate Federal and State tax rate(s) applicable to any unrealized gain on the asset on which the deduction was computed;

    (ii) Any deferred tax liability related to income accrued which is directly related to an asset otherwise deducted pursuant to these financial rules;

    (iii) Any deferred tax liability related to unrealized appreciation in value of any asset which has been otherwise excluded from Current Assets in accordance with these requirements.

A5-d. Long-Term Liabilities. Exclude liabilities which would be classified as long term in accordance with generally accepted accounting principles to the extent of the net book value of plant, property and equipment which is used in the ordinary course of any trade for business of the Member FCM which is a reportable segment of the Member FCM's overall business activities, as defined in generally accepted accounting principles, other than in the commodity futures, commodity option, security and security option segments of the Member FCM's business activities, but only if such plant, property and equipment is not included in Current Assets pursuant to A4-g, above.

A5-e. Certain Liabilities of Sole Proprietors. Include, in the case of a Member FCM who is a sole proprietor, the excess of liabilities which have not been incurred in the course of business as an FCM over assets not used in the business.

A5-f. Certain Current Tax Liabilities. Exclude current tax liabilities resulting from accrued income which is directly related to an asset which is treated as non-current pursuant to Section A4 of these regulations.

SECTION A6. ADJUSTED NET CAPITAL: means Net Capital less:

A6-a. Advances. The amount by which any advances paid by the Member FCM on cash commodity contracts and used in computing Net Capital exceeds 95 percent of the market value of the commodities covered by such contracts.

A6-b. Inventory, Open Commitments and Forward Contracts. In the case of all inventory, open commitments and forward contracts (except for inventory of an forward contracts in those foreign currencies which are purchased or sold for future delivery on or subject to the rules of a contract market and Covered by an open futures contract, for which there will be no charge), the applicable percentage charge is specified below:

    (i) Inventory net of net open commitments, currently registered as deliverable on a contract market and Covered by an open futures contract-no charge.

    (ii) Inventory net of net open commitments, Covered by an open futures contract or commodity option-five percent of the market value.

    (iii) Inventory net of net open commitments, not Covered-20 percent of the market value.

    (iv) Open commitments (net open purchases and sales) and forward contracts which are Covered by an open futures contract or commodity option-10 percent of the market value.

    (v) Open commitments (net 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.

A6-c. Securities. In the case of securities and obligations used by the Member FCM in computing Net Capital, and in the case of securities in segregation pursuant to Section 4d(2) of the Commodity Exchange Act which are not deposited by customers, the percentage specified in SEC Regulation 15c3-1(c)(2)(vi) (securities haircuts) and 100 percent of the value of "nonmarketable securities" as specified in SEC Regulation 15c3-1(c)(2)(vii), or where appropriate for securities brokers or dealers, the percentages specified in SEC Regulation 15c3-1(f).

A6-d. Securities Options. In the case of securities options used by the Member FCM in computing Net Capital, the deductions specified in SEC Regulation 15c3-1, Appendix A, after effecting the adjustments to Net Capital for listed and unlisted options as set forth in that Appendix.

A6-e. Open Contractual Commitments. In the case of a Member FCM who has Open Contractual Commitments (See A2-c, above) the deductions specified in SEC Rule 15c3-1(c)(2)(viii).

A6-f. Undermargined Customer Futures and Options Accounts. For under-margined Customer (See A1-e, above) commodity futures accounts and Customer commodity options accounts, the amount of funds required in each such account to meet maintenance margin requirements of the applicable board of trade or commodity options exchange, or if there are not such maintenance margin requirements, the clearing organization margin requirements applicable to such positions, after application of calls for margin, or other required deposits which are outstanding three business days or less. If there are no such maintenance margin requirements or clearing organization margin requirements on such accounts, then the amount of funds required to provide margin equal to the amount necessary after application of calls for margin, or other required deposits outstanding three days or less to restore original margin when the original margin has been depleted by 50 percent or more. To the extent a deficit is excluded from Current Assets in accordance with A4 above, however, such amount shall not also be deducted.

When other than cash is deposited to margin or secure an account, the value of the asset shall be the lesser of:

    (i) The value attributed to such asset under the margin rules of the pertinent board of trade; or

    (ii) The value of the asset after taking the percentage charges specified in this Section A6.

A6-g. Undermargined Non-Customer and Omnibus Futures and Options Accounts. For undermargined Non-Customer (See A1-f, above) and omnibus commodity futures and commodity options accounts, the amount of funds required in each such account to meet maintenance margin requirements of the applicable board of trade or commodity options exchange, or, if there are no such maintenance margin requirements, the clearing organization margin requirements applicable to such positions, after application of calls for margin, or other required deposits which are outstanding two business days or less. If there are no such maintenance margin requirements, or clearing organization margin requirements, then the amount of funds required to provide margin equal to the amount necessary after application of calls for margin, or other required deposits outstanding for two days or less to restore original margin when the initial margin has been depleted by 50 percent or more. To the extent a deficit is excluded from Current Assets in accordance with A4-a above, however, such amount shall not also be deducted.

When other than cash is deposited to margin or secure an account, the value of the asset shall be the lesser of:

    (i) The value attributed to such asset under the margin rules of the pertinent board of trade; or

    (ii) The value of the asset after taking the percentage charges specified in this Section A6.

A6-h. Open Futures Positions and Grantor Commodity Options in Proprietary Accounts. In the case of open futures contracts and grantor commodity options held in Proprietary Accounts (See A1-g, above) carried by the Member FCM which are not Covered by a position held by the Member FCM or which are not the result of a changed trade made in accordance with the rules of a contract market:

    (i) For a Member FCM which is a clearing member of a contract market, for the positions on such contract market cleared by such member, the amount of the applicable margin requirement of the applicable clearing organization;

    (ii) For all other Member FCMs, an amount equal to 150 percent of the applicable maintenance margin requirement of the applicable board of trade, commodity options exchange, or clearing organization, whichever is greater;

    (iii) For open contracts or granted (sold) commodity options for which there are no applicable maintenance margin requirements, 200 percent of the applicable initial margin requirements.

The equity in such proprietary account shall reduce the deduction required by this Section if such equity is not otherwise includable in Adjusted Net Capital.

A6-i. Commodity Options. For customer commodity options, four percent of the market value of commodity options granted (sold) by options customers on or subject to the rules of a contract market or a foreign board of trade.

A6-j. Purchaser of Commodity Options Not Traded on a Contract Market. In the case of a commodity option which is carried long by the Member FCM as a taker of a commodity option not traded on a contract market which has value and such value is used to increase Adjusted Net Capital, 10 percent of the market value of the commodity which is the subject of such option, but in no event more than the value attributed to such option.

A6-k. Purchaser of Commodity Options Traded on a Contract Market. In the case of a Member FCM which is a purchaser or taker of a commodity option which is traded on a contract market, the same safety factor as if the member were a grantor of such option (See A6-h, above). In no event shall the safety factor be greater than the market value attributed to such option.

A6-l. Unsecured Receivables. Five (5) percent of all unsecured receivables (See A2-e, above) includable under A4-b(iv) above used by the Member FCM in computing Net Capital and which are not receivable from another FCM or a broker or dealer registered with the SEC.

A6-m. Broker-Dealer Charges. For securities brokers or dealers, all other deductions specified in SEC Rule 15c3-1.

SECTION A7. CONSOLIDATIONS.

A7-a. Every Member FCM, in computing its Net Capital pursuant to this section must (subject to the provisions of A7-b and A7-d, below) consolidate, in a single computation, assets and liabilities of any subsidiary or affiliate for which it guarantees, endorses or assumes directly or indirectly the obligations or liabilities. The assets and liabilities of a subsidiary or affiliate whose liabilities and obligations have not been guaranteed, endorsed or assumed directly or indirectly by the Member FCM may also be so consolidated if an opinion of counsel is obtained as provided for in A7-b below.

A7-b.

    (i) If the consolidation, provided for in A7-a above, of any such subsidiary or affiliate results in the:

      (A) increase of the Member FCM's Adjusted Net Capital; or

      (B) decrease of the minimum Adjusted Net Capital requirement called for by Section 1, and an opinion of counsel called for in Section A7-b(ii) below has not been obtained,

      such benefits shall not be recognized in the Member FCM's capital computation under these requirements.

    (ii) Except as provided in A7-b(i) above, consolidation shall be permitted with respect to any subsidiaries or affiliates which are majority owned and controlled by the Member FCM and for which the Member FCM can demonstrate to the satisfaction of its DSRO by an opinion of counsel that the Net Asset values, or the portion thereof related to the parent's ownership interest in the subsidiary or affiliate, may be caused by the Member FCM or an appointed trustee to be distributed to the Member FCM within 30 calendar days. Such opinion must also set forth the actions necessary to cause such a distribution to be made and identify the parties or classes of parties (including but not limited to customers, general creditors, subordinated lenders, minority shareholders, employees, litigants and governmental or regulatory authorities) who may delay or prevent such a distribution and such other assurances as the DSRO by rule or interpretation may require. Such opinion must be current and periodically renewed in connection with the Member FCM's annual audit or upon any material change in circumstances.

A7-c. In preparing a consolidated computation of Adjusted Net Capital, the following minimum and nonexclusive requirements shall be observed:

    (i) Consolidated Adjusted Net Capital shall be reduced by the estimated amount of any tax reasonably anticipated to be incurred upon distribution of the assets of the subsidiary or affiliate.

    (ii) Liabilities of a consolidated subsidiary or affiliate which are subordinated to the claims of present and future creditors pursuant to a satisfactory subordination agreement shall be deducted from consolidated Adjusted Net Capital unless such subordination extends also to the claims of present or future creditors of the parent Member FCM and all consolidated subsidiaries.

    (iii) Subordinated liabilities of a consolidated subsidiary or affiliate which are consolidated in accordance with A7-c(ii) above may not be prepaid, repaid or accelerated if any of the entities included in such consolidation would otherwise be unable to comply with the provisions of Schedule C.

    (iv) Each Member FCM included within the consolidation shall at all times be in compliance with the Adjusted Net Capital requirement to which it is subject.

A7-d. No Member FCM shall guarantee, endorse or assume directly or indirectly any obligation or liability of a subsidiary or affiliate unless the obligation or liability is reflected in the computation of Adjusted Net Capital except as provided in A7-b(ii) above.

SECTION 7 A8. PERFORMANCE MARGIN.

A8-a. Every Member FCM that is not a member of a contract market or a foreign board of trade must collect performance margin (initial and maintenance) for all customer accounts at a level no less than that established for customer accounts by the rules of the applicable contract market or a foreign board of trade.

SCHEDULE B
EQUITY CAPITAL

SECTION B1. EQUITY CAPITAL. This term includes:

B1-a. A satisfactory subordination agreement entered into by a partner or stockholder which has an initial term of at least three years and has a remaining term of not less than 12 months if:

    (i) It does not have any of the provisions for accelerated maturity provided for by Schedule C, C1-b(ix)(A), C1-b(x)(A) or C1-b(x)(B), or the provisions for Revolving Subordination-Special Prepayment provided for by Schedule C, C2-f; or

    (ii) The partnership agreement provides that capital contributed pursuant to a satisfactory subordination agreement as defined in Schedule C shall in all respects be partnership capital subject to the provisions restricting the withdrawal thereof required by B2 below; and

B1-b.

    (i) In the case of a corporation, the sum of its par or stated value of capital stock, paid in capital in excess of par, retained earnings, unrealized profit and loss, and other capital accounts;

    (ii) In the case of partnership, the sum of its capital accounts of partners (inclusive of such partners' commodity futures and options and securities accounts and other properties designated in the partnership agreement as capital subject to the provisions of B2 below), and unrealized profit and loss; or

    (iii) In the case of a sole proprietorship, the sum of its capital accounts of the sole proprietorship and unrealized profit and loss.

SECTION B2. EQUITY WITHDRAWAL.

B2-a. The following are prohibited:

    (i) The withdrawal of equity capital (See B1, above) from a Member FCM (or subsidiary or affiliate where equity capital is consolidated under Schedule A, Section A8); or

    (ii) The making of an unsecured loan (including an advance) to a stockholder, partner, sole proprietor, or employee-if, after giving effect to such withdrawal or loan, and capital reductions which are scheduled to occur within six months, Adjusted Net Capital of any of the consolidated entities would be less than the greatest of:

      (A) 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements;

      (B) Seven (7) percent of the funds required to be segregated and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or

      (C) For securities brokers or dealers, the amount of net capital specified in Rule 15c3-1(e) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1(e));

      or, in the case of a Member FCM which is included within such consolidation, if its equity capital would be less than 30 percent of the required debt-equity total as defined in Section 3.

B2.b. This provision does not preclude making required tax payments or paying partners reasonable compensation.

B2-c. A DSRO may, upon application of a Member FCM, grant relief from this Section B2 if the DSRO deems it to be in the best interests of the DSRO.

SCHEDULE C
SUBORDINATED LOAN AGREEMENTS

SECTION C1. SUBORDINATED LOAN AGREEMENTS. The term satisfactory subordination agreement ("subordination agreement") means an agreement which contains the minimum and non-exclusive requirements set forth below:

C1-a. Definitions.

    (i) A subordination agreement may be either a subordinated loan agreement or a secured demand note agreement.

    (ii) The term "subordinated loan agreement" means the agreement or agreements evidencing or governing a subordinated borrowing of cash.

    (iii) The term "collateral value" of any securities pledged to secure a secured demand note means the market value of such securities after giving effect to the percentage deductions specified in Schedule A, Section A6.

    (iv) The term "payment obligation" means the obligation of a Member FCM in respect to any subordination agreement: (A) to repay cash loaned to the Member FCM pursuant to a subordinated loan agreement; or (B) to return a secured demand note contributed to the Member FCM or to reduce the unpaid principal amount thereof and to return cash or securities pledged as collateral to secure the secured demand note, and "payment" shall mean the performance by a Member FCM of a payment obligation.

    (v)

      (A) The term "secured demand note agreement" means an agreement (including the related secured demand note) evidencing or governing the contribution of a secured demand note to a Member FCM and the pledge of securities and/or cash with the Member FCM as collateral to secure payment of such secured demand note. The secured demand note agreement may provide that neither the lender, his heirs, executors, administrators, or assigns shall be personally liable on such note and that in the event of default the Member FCM shall look for payment of such note solely to the collateral then pledged to secure the same.

      (B) The secured demand note shall be a promissory note executed by the lender and shall be payable on the demand of the Member FCM to which it is contributed: Provided, however, that the making of such demand may be conditioned upon the occurrence of any of certain events which are acceptable to the DSRO.

      (C) If such note is not paid upon presentment and demand as provided for therein, the Member FCM shall have the right to liquidate all or any part of the securities then pledged as collateral to secure payment of the same and to apply the net proceeds of such liquidation, together with any cash then included in the collateral in payment of such note. Subject to the prior rights of the Member FCM as pledgee, the lender, as defined in C1-a(v)(F) below, may retain ownership of the collateral and have the benefit of any increases and bear the risks of any decreases in the value of the collateral and may retain the right to vote securities contained within the collateral and any right to income therefrom or distributions thereon, except the Member FCM shall have the right to receive and hold as pledgee all dividends payable in securities and all partial and complete liquidating dividends.

      (D) Subject to the prior rights of the Member FCM as pledgee, the lender may have the right to direct the sale of any securities included in the collateral, to direct the purchase of securities with any cash included therein, to withdraw excess collateral or to substitute cash or other securities as collateral: Provided however, that the net proceeds of any such sale and the cash so substituted and the securities so purchased or substituted are held by the Member FCM as pledgee, and are included within the collateral to secure payment of the secured demand note; and Provided further, that no such transaction shall be permitted, if after giving effect thereto, the sum of the amount of any cash, plus the collateral value of the securities then pledged as collateral to secure the secured demand note, would be less than the unpaid principal amount of the secured demand note.

      (E) Upon payment by the lender, as distinguished from a reduction by the lender which is provided for in C1-b(vi)C below or reduction by the Member FCM as provided for in C1-b(vii) below of all or any part of the unpaid principal amount of the secured demand note, the Member FCM shall issue to the lender a subordinated loan agreement in the amount of such payment (or in the case of a Member FCM that is a partnership, credit a capital account of the lender), or issue preferred or common stock of the Member FCM in the amount of such payment, or any combination of the foregoing, as provided for in the secured demand note agreement.

      (F) The term "lender" means the person who lends cash to a Member FCM pursuant to a subordination loan agreement and the person who contributes a secured demand note to a Member FCM pursuant to a secured demand note agreement.

C1-b. Minimum Requirements for Subordination Agreements.

    (i) General. Subject to C1-a above, a subordination agreement shall mean a written agreement between the Member FCM and the lender, which:

      (A) Has a minimum term of one year, except for temporary subordination agreements provided for in C2-e below; and

      (B) Is a valid and binding obligation enforceable in accordance with its terms (subject as to enforcement to applicable bankruptcy, insolvency, reorganization, moratorium, and other similar laws) against the Member FCM and the lender and their respective heirs, executors, administrators, successors, and assigns.

    (ii) Specific amount. All subordination agreements shall be for a specific dollar amount which shall not be reduced for the duration of the agreement except by installments as specifically provided for therein and except as otherwise provided in this Section C1-b.

    (iii) Effective subordination. The subordination agreement shall effectively subordinate any right of the lender to receive any payment with respect thereto, together with accrued interest or compensation, to the prior payment or provision for payment in full of all claims of all present and future creditors of the Member FCM arising out of any matter occurring prior to the date on which the related payment obligation matures, except for claims which are the subject of subordination agreements which rank on the same priority as or are junior to the claim of the lender under such subordination agreements.

    (iv) Proceeds of subordinated loan agreements. The subordinated loan agreement shall provide that the cash proceeds thereof shall be used and dealt with by the Member FCM as part of its capital and shall be subject to the risks of the business.

    (v) Certain rights of the borrower. The subordination agreement shall provide that the Member FCM shall have the right to:

      (A) Deposit any cash proceeds of a subordinated loan agreement and any cash pledged as collateral to secure a secured demand note in an account or accounts in its own name in any bank or trust company;

      (B) Pledge, repledge, hypothecate and rehypothecate any or all of the securities pledged as collateral to secure a secured demand note, without notice, separately or in common with other securities or property for the purpose of securing any indebtedness of the Member FCM; and

      (C) Lend to itself or others any or all of the securities and cash pledged as collateral to secure a secured demand note.

    (vi) Collateral for secured demand notes. Only cash and securities which are fully paid for and which may be publicly offered or sold without registration under the Securities Act of 1933, and the offer, sale, and transfer of which are not otherwise restricted, may be pledged as collateral to secure a secured demand note. The secured demand note agreement shall provide that if at any time the sum of the amount of any cash, plus the collateral value of any securities then pledged as collateral to secure the secured demand note, is less than the unpaid principal amount of the secured demand note, the Member FCM must immediately transmit written notice to that effect to the lender and its DSRO. The secured demand note agreement shall also require that following such transmittal:

      (A) The lender, prior to noon of the business day next succeeding the transmittal of such notice, may pledge as collateral additional cash or securities sufficient, after giving effect to such pledge, to bring the sum of the amount of any cash, plus the collateral value of any securities then pledged as collateral to secure the secured demand note, up to an amount not less than the unpaid principal amount of the secured demand note; and

      (B) Unless additional cash or securities are pledged by the lender as provided in (A) above, the Member FCM at noon on the business day next succeeding the transmittal of notice to the lender must commence the sale, for the account of the lender, of such of the securities then pledged as collateral to secure the secured demand note and apply so much of the net proceeds thereof, together with such of the cash then pledged as collateral to secure the secured demand note, as may be necessary to eliminate the unpaid principal amount of the secured demand note: Provided, however, that the unpaid principal amount of the secured demand note need not be reduced below the sum of the amount of any remaining cash, plus the collateral value of the remaining securities then pledged as collateral to secure the secured demand note. The Member FCM may not purchase for its own account any securities subject to such a sale; and

      (C) The secured demand note agreement may also provide that, in lieu of the procedures specified in the provisions required by (B) above, the lender with the prior written consent of the Member FCM and the DSRO may reduce the unpaid principal amount of the secured demand note: Provided, however, that after giving effect to such reduction the Adjusted Net Capital of the Member FCM would not be less than the greater of seven percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or for securities brokers or dealers, the amount of net capital specified in Rule 15c3-1d(b)(6)(iii) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(6)(iii)); and Provided further, that no single secured demand note shall be permitted to be reduced by more than 15 percent of its original principal amount and after such reduction no excess collateral may be withdrawn. The DSRO shall not consent to a reduction of the principal amount of a secured demand note, if after giving effect to such reduction, Adjusted Net Capital would be less than 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements.

    (vii) Permissive prepayments and special prepayments. A Member FCM at its option, but not at the option of the lender, may, if the subordination agreement so provides, make a payment of all or any portion of the payment obligation thereunder prior to the scheduled maturity date of such payment obligation (hereinafter referred to as "prepayment"), but in no event may any prepayment be made before the expiration of one year from the date such subordination agreement became effective: Provided, however, that the foregoing restriction shall not apply to temporary subordination agreements which comply with the provisions of C2-e below, nor shall it apply to revolving agreements covered under Section C2-f. No prepayments shall be made, if after giving effect thereto (and to all payments of payment obligations under any other subordinated agreements then outstanding, the maturities or accelerated maturities of which are scheduled to fall due within six months after the date such prepayment is to occur pursuant to this provision, or on or prior to the date on which the payment obligation in respect to such prepayment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the Member FCM, either the Adjusted Net Capital of the Member FCM is less than the greatest of seven percent of the funds required to be segregated under the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(b)(7) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(7)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements. Notwithstanding the above, no prepayment shall occur without the prior written approval of the Member FCM's DSRO.

    (viii) Suspended repayment.

      (A) The payment obligation of the Member FCM with respect to any subordination agreement shall be suspended and shall not mature, if after giving effect to payment of such payment obligation (and to all payments of payment obligations of the Member FCM under any other subordination agreement(s) then outstanding which are scheduled to mature on or before such payment obligation), the Adjusted Net Capital of the Member FCM would be less than the greatest of six percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(b)(8)(i) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(b)(8)(i)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; and Provided further, that the subordinated agreement may provide that if the payment obligation of the Member FCM thereunder does not mature and is suspended as a result of the requirement of this paragraph for a period of not less than six months, the Member FCM shall then commence the rapid and orderly liquidation of its business but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of this Section.

      (B) Whenever a subordinated agreement provides that a Member FCM shall commence a rapid and orderly liquidation as permitted in C1-b(ix)(A) below, the date on which the liquidation commences shall become the maturity date for each subordination agreement of the Member FCM then outstanding, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by the provisions of this Section.

    (ix) Accelerated maturity. The obligation to repay to remain subordinate is as follows:

      (A) Subject to C1-b(viii) above, a subordination agreement may provide that the lender may, upon prior written notice to the Member FCM and its DSRO, given not earlier than six months after the effective date of such subordination agreement, accelerate the date on which the payment obligation of the borrower, together with accrued interest or compensation, is scheduled to mature, to a date not earlier than six months after giving of such notice, but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b.

      (B) Notwithstanding this Section C1-b, the payment obligation of the Member FCM with respect to a subordination agreement, together with accrued interest and compensation shall mature in the event of any receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to the bankruptcy laws, or any other marshalling of the assets and liabilities of the Member FCM, but the right of the lender to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b.

    (x) Accelerated maturity of subordination agreement on event of default and acceleration. The obligation to repay to remain subordinate is as follows:

      (A) A subordination agreement may provide that the lender may, upon prior written notice to the Member FCM and its DSRO, of the occurrence of any event of acceleration (as hereinafter defined) given no sooner than six months after the effective date of such subordination agreement, accelerate the date on which the payment obligation of the Member FCM, together with accrued interest, or compensation, is scheduled to mature, to the last business day of a calendar month which is not less than six months after notice of acceleration is received by the Member FCM and its DSRO. Any subordination agreement containing such events of acceleration may also provide that, if upon such accelerated maturity date the payment obligation of the Member FCM is suspended as required by C1-b(viii) above and liquidation of the Member FCM has not commenced on or prior to such accelerated maturity date, notwithstanding C1-b(viii) above, the payment obligation of the Member FCM with respect to such subordination agreement shall mature on the date immediately following such accelerated maturity date and in any such event the payment obligations of the Member FCM with respect to all other subordination agreements then outstanding shall also mature at the same time, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b. Events of acceleration which may be included in a subordination agreement and comply with this Section C1-b(x) shall be limited to:

        (1) Failure to pay interest or any installment or principal on a subordination agreement as scheduled;

        (2) Failure to pay when due other money obligations of a specified material amount;

        (3) Discovery that any material specified representation of warranty of the Member FCM which is included in the subordination agreement and on which the subordination agreement was based or continued was inaccurate in a material respect at the time made;

        (4) Any specified and clearly measurable event which is included in the subordination agreement and which the lender and the Member FCM agree:(a) is a significant indication that the financial position of the Member FCM has changed materially and adversely from agreed upon specified norms; (b) could materially and adversely affect the ability of the Member FCM to conduct its business as conducted on the date the subordination agreement was made; or (c) is a significant change in the senior management of the Member FCM or in the general business conducted by the Member FCM from that which was obtained on the date the subordination agreement became effective; and

        (5) Any continued failure to perform agreed covenants included in the subordination agreement relating to the conduct of the business of the Member FCM or relating to the maintenance and reporting of its financial position.

      (B) Notwithstanding C1-b(viii) above, a subordination agreement may provide that, if liquidation of the business of the Member FCM has not already commenced, the payment obligation of the Member FCM shall mature, together with accrued interest or compensation, upon the occurrence of an event of default (as hereinafter defined). Such agreement may also provide that, if liquidation of the business of the Member FCM has not already commenced, the rapid and orderly liquidation of the business of the Member FCM shall then commence upon an event of default. Any subordination agreement which so provides for maturity of the payment obligation upon the occurrence of an event of default shall also provide that the date on which such event of default occurs shall, if liquidation of the Member FCM has not already commenced, be the date on which the payment obligation of the Member FCM with respect to all other subordination agreements then outstanding shall mature, but the rights of the respective lenders to receive payment, together with accrued interest or compensation, shall remain subordinate as required by this Section C1-b. Events of default which may be included in a subordination agreement shall be limited to:

        (1) The making of an application by the Securities Investor Protection Corporation for a decree adjudicating that customers of the Member FCM are in need of protection under the Securities Investor Protection Act of 1970 and the failure of the Member FCM to obtain the dismissal of such application within 30 days;

        (2) Failure to meet the minimum capital requirements of the Member FCM's DSRO throughout a period of 15 consecutive business days (commencing on the day the borrower first determines and notifies the DSRO or if the DSRO first determines and so notifies the Member FCM of such non-compliance, on the day of such notice);

        (3) The CFTC shall revoke the registration of the Member FCM as an FCM;

        (4) The DSRO shall suspend (and not reinstate within 10 days) or revoke the Member FCM's status as a member firm; and

        (5) Any receivership, insolvency, liquidation pursuant to the Securities Investor Protection Act of 1970 or otherwise, bankruptcy, assignment for the benefit of creditors, reorganization whether or not pursuant to bankruptcy laws, or any other marshalling of the assets and liabilities of the Member FCM.

      A subordination agreement which contains any of the provisions permitted by this Section C1-b(x) shall not contain the provision otherwise permitted by Section C1-b(ix)(A) above.

SECTION C2. MISCELLANEOUS PROVISIONS.

C2-a. Prohibited Cancellations. The subordination agreement shall not be subject to cancellation by either party; and no payment shall be made with respect thereto and the agreement shall not be terminated, rescinded or modified by mutual consent or otherwise if the effect thereof would be inconsistent with the requirements of C1 above.

C2-b. Notice of Maturity or Accelerated Maturity. Every Member FCM shall immediately notify its DSRO if, after giving effect to all payments of payment obligations under subordination agreements then outstanding which are then due or mature within the following six months without reference to any projection of profit or loss of the Member FCM, its Adjusted Net Capital would be less than 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; or its Adjusted Net Capital would be less than the greatest of six percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(2) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(2)).

C2-c. Certain Legends. If all the provisions of a satisfactory subordination agreement do not appear in a single instrument, then the debenture or other evidence of indebtedness shall bear on its face an appropriate legend stating that it is issued subject to the provisions of a satisfactory subordination agreement which shall be adequately referred to and incorporated by reference.

C2-d. Legal Title to Securities. All securities pledged as collateral to secure a secured demand note must be in bearer form, or registered in the name of the Member FCM or the name of its nominee or custodian.

C2-e. Temporary Subordinations. To enable a Member FCM to participate as an underwriter of securities or undertake other extraordinary activities and remain in compliance with the financial requirements, a Member FCM shall be permitted, on no more than three occasions in any 12-month period, to enter into a subordination agreement on a temporary basis which has a stated term of no more than 45 days from the date the subordination agreement became effective: Provided, however, that this temporary relief shall not apply to any Member FCM if the Adjusted Net Capital of the Member FCM is less than the greatest of seven percent of the funds required to be segregated under the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade; and Provided further, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(5)(1) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(1)); or 120 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements, or if the amount of equity capital defined in Schedule B is less than the limits specified in Section 3. Such temporary subordination agreement shall be subject to all of the other provisions of Schedule C.

C2-f. Revolving Subordination-Special Payments. A Member FCM shall be allowed to enter into a revolving subordination agreement which, at the option of the Member FCM but not at the option of the lender, if the agreement so provides, allows a prepayment at anytime prior to the scheduled maturity date, subject to the prior written approval of the Member FCM's DSRO. However, no such prepayment shall be made if:

    (i) After giving effect thereto (and to all payments of payment obligations under any other subordinated agreements then outstanding, the maturities or accelerated maturities of which are scheduled to fall due within six months after the date such special payment is to occur pursuant to this provision, or on or prior to the date on which the payment obligation in respect to such special payment is scheduled to mature disregarding this provision, whichever date is earlier) without reference to any projected profit or loss of the applicant or registrant, the Adjusted Net Capital of the applicant or registrant is less than the greatest of 10 percent of the funds required to be segregated pursuant to the Commodity Exchange Act and CFTC Regulations and the foreign futures or foreign options secured amount, less the market value of commodity options purchased by customers on or subject to the rules of a contract market or a foreign board of trade: Provided, however, the deduction for each customer shall be limited to the amount of customer funds in such customer's account and foreign futures and foreign options secured amounts; or, for securities brokers or dealers, the amount of Net Capital specified in Rule 15c3-1d(c)(5)(ii) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1d(c)(5)(ii)); or 200 percent of the greatest amount required by Section 1, paragraph (i), (iii) or (iv) of these Requirements; or

    (ii) Pre-tax losses during the latest three-month period were greater than 15 percent of current excess Adjusted Net Capital.

C2-g. Filing. A signed copy of any proposed subordination agreement (including nonconforming subordination agreements) must be filed with the DSRO at least 10 days prior to the proposed effective date of the agreement, or at such other time as the DSRO for good cause shall find acceptable. The Member FCM shall also file with the DSRO a statement setting forth the name and address of the lender, the business relationship of the lender to the Member FCM, and whether the Member FCM carried funds or securities for the lender at or about the time the proposed agreement was so filed. All agreements shall be examined by the DSRO prior to their becoming effective. No proposed agreement shall be a satisfactory subordination agreement for the purpose of these capital requirements unless and until the DSRO finds the agreement acceptable and such agreement has become effective in the form found acceptable.

C2-h. Subordination Agreements in Effect Prior to December 20, 1978. Any subordination agreement which has been entered into prior to December 20, 1978, and which has been deemed to be a satisfactory subordinated agreement pursuant to the CFTC requirements then in effect or the rules of a contract market shall continue to be deemed a satisfactory subordination agreement until the maturity of such agreement: Provided, however, that no renewal of an agreement that provides for automatic or optional renewal by the Member shall be deemed a satisfactory subordination agreement unless it meets the requirements of this Schedule C.; and, Provided further, that all subordination agreements must meet the requirements of this Schedule C by December 20, 1983.

SECTION C3. EXCEPTIONS. The Member FCM's DSRO may allow debt with a maturity date of one year or more to be treated as meeting the requirements of this Schedule C: Provided, however,

C3-a. That such exemption shall only be given when the Member FCM's Adjusted Net Capital is less than the minimum required by Section 1;

C3-b. That such debt did not exist prior to its use under this Section C3;

C3-c. That such exemption shall be for a period of 30 days or such lesser period as the DSRO may determine;

C3-d. That such exemption shall not be allowed more than once in any 12 month period; and

C3-e. That at all times during such exemption the Member FCM shall make a good faith effort to comply with these minimum capital requirements exclusive of any benefits derived from this Section C3.

SCHEDULE D
FINANCIAL REPORTS

SECTION D1. CERTIFIED REPORT. Each Member FCM must annually file with its DSRO (See Section 2) a certified financial report, on Form 1-FR or other format acceptable to the FCM's DSRO, that speaks as of the close of the Member FCM's fiscal year and is prepared by an independent certified public accountant in accordance with CFTC Regulation 1.16. (The term "other format acceptable" is used so that certified FOCUS reports or certified financial statements, prepared in accordance with generally accepted accounting principles and accompanied by a reconciliation to the Form 1-FR, may be used to fulfill a Member FCM's filing requirements.)

D1-a. Due Date. Certified reports must be filed no later than 90 days after the close of the Member FCM's fiscal year, except in those cases where a Member FCM has applied to the DSRO and has received an approval for an extension or has received a notice from the DSRO that additional time is required to analyze the request, pursuant to D4-d below, in which case this provision does not apply.

D1-b. Required Statements. The Certified Report must contain the following statements:

    (i) Statement of Financial Condition;

    (ii) Statements of Cash Flows and Changes in Ownership Equity for the period between the date of the most recent certified statement of financial condition and the date for which the report is made;

    (iii) Statement of Computation of the Minimum Capital Requirements;

    (iv) Schedule of Segregated Funds Required for Commodity Futures and Options and Schedule of Segregated Funds on Deposit;

    (v) Schedule of Funds Required to be on Deposit and Funds Actually on Deposit in Separate Accounts;

    (vi) Statement of Income (Loss);

    (vii) Statement of Changes in Liabilities Subordinated to Claims of General Creditors for the period between the date of the most recent certified statement of financial condition and the date for which the report is made; and

    (viii) Attestation Letter.

SECTION D2. INTERIM REPORTS. Each Member FCM for which NFA is the DSRO shall file with NFA an interim financial report on Form 1-FR or other format acceptable on a quarterly basis. (The term "other format acceptable" is used so that FOCUS Reports may be used to fulfill a Member FCM's filing requirements.) For Member FCMs which use the FOCUS Report to fulfill their filing requirements, the interim report requirement is satisfied by the quarterly FOCUS Part II or IIA which under SEC requirements is filed based on the calendar quarter.

D2-a. Due Date. Interim reports must be filed no later than 17 business days after the date for which the report is made, except in those cases where a Member FCM has applied to its DSRO and has received an approval for an extension, or has received a notice from the DSRO that additional time is required to analyze the request, pursuant to D4-d(i) below, in which case this provision does not apply.

D2-b. Required Statements. The interim Financial Report must contain the following statements:

    (i) Statement of Financial Condition;

    (ii) Statement of Changes in Ownership Equity for the period between the date of the most recent statement of financial condition and the date for which the report is made;

    (iii) Statement of Computation of Minimum Capital Requirements;

    (iv) Schedule of Segregated Funds Required for Commodity Futures and Options and Schedule of Segregated Funds on Deposit;

    (v) Schedule of Funds Required to be on Deposit and Funds Actually on Deposit in Separate Accounts;

    (vi) Statement of Changes in Liabilities Subordinated to Claims of General Creditors for the period between the date of the most recent Statement of Financial Condition and the date for which the report is made; and

    (vii) Attestation Letter.

SECTION D3. OTHER REPORTS.

SECTION 8 D3-a. ADDITIONAL INFORMATION REQUESTS.

If requested by NFA its DSRO, a Member FCM or IB must promptly submit such additional reports and supplemental financial information which NFA the DSRO deems necessary.

D3-b. Position and Cash Information. Unless expressly exempted by its DSRO, each Member FCM must submit to the DSRO a report containing all open futures and commodity options positions carried by the Member FCM for Customer, Non-Customer and Proprietary Accounts. Additionally, for Proprietary Accounts and Non-Customer Accounts of parents and affiliates, the Member FCM must furnish upon special request a report containing all of the cash commodity positions of the parent or affiliate. These reports must be submitted on the DSRO's Supplementary Schedules or in another comparable format acceptable to the DSRO.

D3-c. Reports Submitted to Exchanges and Other Regulatory Agencies. Each Member FCM which also is a member of any securities or commodity exchange or other self-regulatory organization, or which is subject to financial reporting requirements of any federal agency, must promptly submit to its DSRO, unless specifically exempted, copies of any and all financial reports and statements (e.g., FOCUS Reports) submitted pursuant to the requirements of those exchanges, organizations or agencies.

SECTION 9 D3-d. Notification of Reportable Positions.

Each Member FCM for which NFA is the DSRO and which is required to file any document with or give notice to the CFTC under CFTC Regulation 15.03 shall also file one copy of such document with or give such notice to NFA at its Chicago office no later than the date such document or notice is due to be filed with or given to the CFTC.

SECTION D4. MISCELLANEOUS PROVISIONS.

D4-a. Certification and Attestation Requirements.

    (i) For a Member FCM which is a registered partnership, financial reports must be signed by two general partners.

    (ii) For a Member FCM which is a corporation, financial reports must be signed by at least two of the bona fide, active executive officers of the corporation.

    (iii) For a Member FCM which is a sole proprietorship, financial reports must be signed by the proprietor.

    (iv) The signature of a partner of such partnership or an officer of such corporation may be waived by the DSRO, at its discretion. In the event of such waiver, an FCM will be required, in the case of a partnership, to have one general partner sign the financial reports. In the case of a corporation, the FCM will be required to have the chief executive officer or the chief financial officer sign the financial reports.

    (v) Financial reports audited by an independent public accountant must be attested to by the independent public accountant.

D4-b. Retention of Audit Report. A copy of each audit report signed by the Member FCM's independent public accountant must be retained as part of the books and records of the Member FCM.

D4-c. Election of Fiscal Year. A Member FCM must continue to use its current fiscal year, calendar or otherwise, unless a change in such fiscal year is approved upon written application to the DSRO.

D4-d. Extension of Time for Filing.

(i) Interim Financial Statements. In the event a Member FCM finds that it cannot file its report for any period within the time specified in D2-a above without substantial undue hardship, it may file with the DSRO an application for an extension of time to a specified date which may not be more than 90 days after the date as of which the financial statements were to have been filed. The application must state the reasons for the requested extension and must contain an agreement to file the report on or before the specified date. The application must be received by the DSRO before the time specified in D2-a above for filing the report. Within a reasonable time, not to exceed 10 calendar days after receipt of the application for an extension of time, the DSRO shall either notify the Member FCM of the grant or denial of the requested extension, or indicate to the Member FCM that additional time is required to analyze the request, in which case the amount of time needed will be specified.

(ii) Certified Financial Statements. For an extension of time to file a certified financial statement (See D1-a above), the Member FCM must apply to the DSRO. In no event will an extension of time exceed 90 days after the date the statement was originally due. The application must:

    (A) State the reason for the request;

    (B) Indicate that the inability to make a timely filing is due to circumstances beyond the control of the Member FCM, if such is the case, and describe briefly the nature of such circumstances;

    (C) Be accompanied by the latest available formal computation of Adjusted Net Capital under Section 1;

    (D) Include the most recent statement of segregation for commodity futures and/or commodity options where applicable;

    (E) Contain an agreement to file the report on or before the requested extension date;

    (F) Be received by the DSRO prior to the date the statement was originally due; and

    (G) Include a letter from the independent public accountant explaining:

      (1) The reason for the request;

      (2) The nature of any material inadequacies disclosed thus far in the audit work; and

      (3) The nature of any significant adverse financial or reporting findings which would cause a deficiency under Section 1.

    Within a reasonable time, not to exceed 10 calendar days after receipt of the application for an extension of time, the DSRO shall either notify the Member FCM of the grant or denial of the requested extension, or indicate to the Member FCM that additional time is required to analyze the request, in which case the amount of time needed will be specified.

[See Interpretive Notice at 9028.]

SCHEDULE E
PROCEDURES FOR RELIEF REQUESTS

SECTION E1. DEFINITION."Relief request" means a request:

E1-a. Debt-Equity Ratio. Under Section 3 and CFTC Regulation 1.17(d) for exemption from the minimum debt-equity ratio;

E1-b. Withdrawal of Capital. Under Schedule B, Section B2-c and CFTC Regulation 1.17(e) to withdraw equity capital;

E1-c. Consolidation. Under Schedule A, Section A7-b(ii) and CFTC Regulation 1.17(f)(2)(ii) for approval of consolidation;

E1-d. Secured Demand Notes. Under Schedule C, Section C1-a(v)(B) and CFTC Regulation 1.17(h)(1)(v)(B) for approval of terms in a secured demand note relating to the conditions for the making of a demand;

E1-e. Subordinated Borrowings; Prepayment. Under Schedule C, Section C1-b(vii) and CFTC Regulation 1.17(h)(2)(vii) to prepay subordinated borrowings;

E1-f. Emergency Subordination. Under Schedule C, Section C3 and CFTC Regulation 1.17(h)(4) for approval of an emergency subordination;

E1-g. Fiscal-Year Election. Under Schedule D, Section D4-c and either CFTC Regulation 1.10(e) or 4.22(g) for approval of a change in a fiscal-year election;

E1-h. Filing Extension. Under Schedule D, Section D4-d and CFTC Regulations 1.10(f) and 1.16(f) or 4.22(f) for a filing extension; or

E1-i. Uncovered Commodities. Under Schedule A, Section A2-e, for a no-action position regarding the 20 percent charge on "uncovered" commodities deposited as collateral. A no-action position may be taken regarding commodities which are covered, but do not appear as hedged on the books of the Member FCM.

SECTION E2. FILING. A Member FCM or IB that has filed any relief request with its DSRO or any Member CPO that has filed such a request with NFA need not file such request with the CFTC. For the purposes of this Schedule E the term "DSRO" as used in regard to Member CPOs shall mean NFA. The DSRO will promptly advise the CFTC of the request and use its best efforts to provide the CFTC with all pertinent information available to the DSRO.

SECTION E3. GRANT OF RELIEF REQUEST; EFFECT OF. Except where the relief requested is the withdrawal of equity capital or the prepayment of subordinated borrowings (See E2-b and E2-e, above), the DSRO may, in its discretion, grant the relief request without receiving the prior concurrence of the CFTC. Any such grant of relief shall be valid and shall remain in full force and effect unless or until reversed by the CFTC or withdrawn by the DSRO on its own initiative. The Member FCM, IB or CPO shall be deemed in compliance with the applicable provision (See E1, above) of these Financial and Related Reporting Requirements and related CFTC Regulations during the effective period of any such grant. No violation of these Requirements or related CFTC Regulations by the Member FCM, IB or CPO shall occur for having acted in accordance with the decision of the DSRO during its period of effectiveness. The DSRO will promptly advise the Member FCM, IB or CPO of any reversal by the CFTC or withdrawal by the DSRO.

SECTION E4. CFTC Concurrence. The DSRO will not approve any withdrawal of equity capital or prepayment of subordinated borrowings (See E1-b and E1-e, above) without first having received the concurrence of the CFTC. The DSRO will promptly advise the Member FCM, IB or CPO of the determination.

SECTION E5. INQUIRIES. All inquiries concerning the status of relief requests should be directed to the appropriate official of the Member FCM's, IB's or CPO's DSRO (the appropriate NFA official is the Director of Compliance). Every effort will be made to assure the prompt review and disposition of all relief requests.

SECTION E6. FURNISHING ADDITIONAL INFORMATION. In reviewing any relief request, additional information may be required from the Member FCM, IB or CPO. This information should be furnished as promptly as possible, unless the Member FCM, IB or CPO decides to withdraw the request. Failure to furnish the required information in a timely manner may be deemed to be a withdrawal of the relief request.

SECTION E7. COMPLIANCE WITH SCHEDULE; EFFECT OF. Compliance with the procedures set forth in this Schedule is expressly deemed by the CFTC to be satisfactory compliance by a Member FCM, IB or CPO with the provisions of the CFTC Regulations referenced in E1, above.

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