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Notice I-00-16

September 06, 2000

Effective Date of Amendments to NFA Financial Requirements

NFA has received notice that the Commodity Futures Trading Commission (CFTC) has approved an amendment to Section 1 of NFA’s Financial Requirements. The amendment adds a risk-based alternative capital requirement that FCMs that carry accounts must meet.

In 1998, the CFTC eliminated a four percent capital charge for short options. As an unintended consequence, an FCM can carry a large number of short option positions that create a substantial amount of risk but have no affect on the firm’s minimum capital requirement. NFA’s Board of Directors determined to address the problem by adopting an alternative risk-based capital requirement similar to the requirement that has been in effect at the Chicago Board of Trade and the Chicago Mercantile Exchange since 1998.

Under Section 1, as amended, FCMs are required to maintain adjusted net capital equal to the greatest of:

    1. $250,000;

    2. Four percent of segregated funds;

    3. $6,000 for each proprietary branch office and each office (main or branch) of its guaranteed IBs;

    4. $3,000 for each AP of the FCM and its guaranteed IBs;

    5. the SEC capital requirement (for securities brokers and dealers); or

    6. Eight percent of customer margin requirements and four percent of non-customer margin requirements, excluding margin requirements for accounts owned by the FCM (or, for a partnership, by a limited partner involved in the management, trading or recordkeeping for the business or a general partner). This requirement only applies to the FCM carrying the account.

A copy of Section 1, as amended, is attached.

The risk-based capital requirement will become effective on October 31, 2000. The October 31 effective date should give FCMs time to infuse any additional capital necessary to meet the new requirement. An FCM’s capital computation for October 31, 2000 must show that it met the new requirement as of that date.

Earlier this year, the CFTC adopted two changes to CFTC Regulation 1.17 that are also incorporated into NFA’s Financial Requirements by reference. First, the capital charge that must be applied to equity securities pledged as collateral for secured demand notes was increased from 15 percent to 30 percent. Also, one of the alternative calculations to be made in determining the restriction on the withdrawal of equity capital from an FCM was reduced from seven percent to six percent of the customer segregated and secured amount. These changes are already in effect.

The CFTC has also adopted an amendment to CFTC Regulation 1.17 that will become effective on September 25, 2000. The amendment allows an FCM’s or independent IB’s futures industry designated self-regulatory organization (DSRO) to rely on the firm’s securities industry designated examining authority (DEA) to review and approve subordinated loan agreements and requests to prepay subordinated loans or reduce the outstanding principal balance of secured demand notes. The FCM or IBI must, however, file signed copies of the subordinated loan agreement or request with both its DSRO and DEA before the proposed effective date and must file copies of the DEA’s approval with the DSRO immediately after receiving the approval.

Questions concerning any of the requirements described above should be directed to:

Anthony Gialanella
Director, Compliance
National Futures Association
200 West Madison Street
Chicago, Illinois 60606-3447
email: TGialanella@nfa.futures.org


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) 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);

    (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)); or

    (vi) Eight (8) percent of domestic and foreign domiciled customer and four (4) percent of non-customer (excluding proprietary) risk maintenance margin/performance bond requirements for all domestic and foreign futures and options on futures contracts.

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.

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