Commission has found the agreement acceptable and such agreement has become effective in the form found acceptable.

(vii) Subordination agreements in effect prior to adoption. Any subordination agreement which has been entered into prior to the effective date of this section and which has been deemed to be satisfactorily subordinated pursuant to this section previously in effect or the adjusted net capital rules of a self-regulatory organization shall continue to be deemed a satisfactory subordination agreement until the maturity of such agreement. Provided, That no renewal of an agreement which provides for automatic or optional renewal by the applicant or registrant or lender shall be deemed to be a satisfactory subordination agreement unless such renewal agreement meets the requirements of this section, within 6 months of the effective date of this section. Provided further, That all subordination agreements must meet the requirements of this rule within 5 years of the effective date of this section.

(4) A designated self-regulatory organization and the Commission may allow debt with a maturity date of 1 year or more to be treated as meeting the provisions of this paragraph (h): Provided, (i) Such exemption shall only be given when the registrant's adjusted net capital is less than the minimum required by this § 1.17 or by the capital rule of the designated self-regulatory organization to which such registrant is subject;

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

(iii) Such exemption shall be for a period of 30 days or such lesser period as the designated self-regulatory organization and the Commission may determine;

(iv) Such exemption shall not be allowed more than once in any 12 month period; and

(v) At all times during such exemption the registrant shall make a good faith effort to comply with the provisions of this § 1.17 or the capital rule of the designated self-regulatory organization to which such registrant is

subject exclusive of any benefits derived from this paragraph (h)(4). (i) [Reserved]

(j) For the purposes of this section "cover" is defined as follows:

(1) General definition. Cover shall mean transactions or positions in a contract for future delivery on a board of trade or 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:

(i) 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.

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

(iii) The potential change in the value of services which a person provides, purchases or anticipates providing or purchasing. Notwithstanding the foregoing, no transactions or positions shall be classified as cover for the purposes of this section 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 paragraphs (j) (2) and (3) of this section have been satisfied.

(2) Enumerated cover transactions. The definition of covered transactions and positions in paragraph (j)(1) of this section includes, but is not limited to, the following specific transactions and positions:

(i) Ownership or fixed-price purchase of any commodity which does not exceed in quantity the sales of the same commodity for future delivery on a board of trade or 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.

(ii) Fixed-price sale of any commodity which does not exceed in quantity the purchase of the same commodity for future delivery on a board of trade or the purchase 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 such option is more than the striking price of the option; and

(iii) Ownership or fixed price contracts of a commodity described in paragraphs (j)(2)(i) and (j)(2)(ii) of this section 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 option are substantially related to the fluctuations in value of the actual cash position.

(3) Nonenumerated cases. Upon specific request, the Commission may recognize transactions and positions other than those enumerated in paragraph (j)(2) of this section as cover in amounts and under the terms and conditions as it may specify. Any applicant or registrant who wishes to avail itself of the provisions of this paragraph (j)(3) must apply to the Commission in writing at its principal office in Washington, D.C. giving full details of the transaction including detailed information which will demonstrate that the transaction is economically appropriate to the reduction of risk exposure attendant to the conduct and management of a commercial enterprise.

(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19 and 21) [43 FR 39972, Sept. 8, 1978]

§ 1.18 Records for and relating to financial reporting and monthly computation.

(a) No person shall be registered as a futures commission merchant under the Act unless, commencing on the date his application for such registration is filed, he prepares and keeps current, ledgers or other similar records which show or summarize with appropriate references to supporting documents, each transaction affecting

his asset, liability, income, expense and capital accounts, and in which (except as otherwise permitted in writing by the Commission) all his asset, liability and capital accounts are classified into either the account classification subdivision specified on Form 1-FR or categories that are in accord with generally accepted accounting principles. Each person so registered shall prepare and keep current such records.

(b) Each applicant or registrant must make and keep as a record in accordance with § 1.31, formal computations of its adjusted net capital and of its minimum financial requirements pursuant to § 1.17 or the requirements of the designated self-regulatory organization to which it is subject as of the close of business each month. Such computations must be completed and made available for inspection by any representative of the Commission or designated self-regulatory organization, if any, within 30 days after the date for which the computations are made, commencing the first monthend after the date the application for registration is filed or the first monthend after the effective date of this section.

(7 U.S.C. 6c, 6d, 6f, 6g, 7a, 12a, 19 and 21) [41 FR 3194, Jan. 21, 1976, as amended at 43 FR 39981, Sept. 8, 1978]

PROHIBITED TRADING IN COMMODITY OPTIONS

§ 1.19 Prohibited trading in "puts" and "calls" in commodities.

merchant

No futures commission shall make, underwrite, issue, or otherwise assume any financial responsibility for the fulfillment of, any transaction which is of the character of, or is commonly known to the trade as, an "option," "privilege," "indemnity," "bid," "offer," "put," "call," "advance guaranty," or "decline guaranty" in any commodity.

(Secs. 4c(a), 4f, 5, 49 Stat. 1494, 1495, 82 Stat. 28, 88 Stat. 1392, 1412; 7 U.S.C. 6c(a), 6f, 7)

CUSTOMERS' MONEY, SECURITIES, AND

PROPERTY

§1.20 Customers' money, securities, and property to be segregated and separately accounted for.

(a) All money, securities, and property received by a futures commission merchant to margin, guarantee, or secure the trades or contracts of commodity customers and all money accruing to such customers as the result of such trades or contracts shall be separately accounted for and be segregated as belonging to such customers. Such money, securities, and property, when deposited with any bank, trust company, clearing organization of a contract market, or another futures commission merchant, shall be deposited under an account name which will clearly show that they are customers' money, securities, and property, segregated as required by the Act. Each registrant shall obtain and retain in his files for the period provided in § 1.31, an acknowledgment from such bank, trust company, clearing organization of a contract market, or futures commission merchant, that it was informed that the money, securities, and property therein are those of commodity customers and are being held in accord with the provisions of the Act. Under no circumstances shall any portion of commodity customers' money, securities, or property be obligated to the clearing organization of a contract market, or to any member of a contract market, a futures commission merchant, or any depository except to margin, guarantee, secure, transfer, adjust, or settle trades and contracts made on behalf of such commodity customers. Nor shall any such money, securities, or property be held, disposed of, or used as belonging to the depositing futures commission merchant or any person other than the customers of such futures commission merchant.

(b) All money, securities, and property received by a clearing organization of a contract market from a member of the clearing organization to margin, guarantee or secure the trades or contracts of his customers and all money accruing to such customers as the

result of trades and contracts so carried shall be separately accounted for and segregated as belonging to such customers, and such clearing organization shall not hold, use or dispose of such money, securities, and property except as belonging to such customers. Such money, securities, and property when deposited in a bank or trust company shall be deposited under an account name which will clearly show that they are the money, securities, and property of the customers of members, segregated as required by the Act. The clearing organization shall obtain and retain in its files for the period provided by § 1.31, an acknowledgement from such bank or trust company that it was informed that the money, securities, and property deposited therein are those of customers of its members and are being held in accord with the provisions of the Act.

§ 1.21 Care of money and equities accruing to customer.

All money received directly or indirectly by, and all money and equities accruing to, a futures commission merchant from any clearing organization of any contract market, or from any member thereof or from any member of a contract market, incident to or resulting from any trade or contract in commodity futures made by or through such futures commission merchant in behalf of any customer shall be considered as accruing to such customer within the meaning of section 4d(2) of the Act. Such money and equities shall be treated and dealt with as belonging to such customer in accordance with the provisions of the Act. Money and equities accruing in connection with customers' open trades or contracts need not be separately credited to individual customers' accounts but may be treated and dealt with as belonging undivided to all customers having open trades or contracts which if closed would result in a credit to such customers.

(Sec. 4d, 49 Stat. 1494; 7 U.S.C. 6d)

§1.22 Use of money, securities, or property of customer restricted.

No futures commission merchant shall use, or permit the use of, the money, securities, or property of one customer to margin or settle the trades or contracts, or to secure or extend the credit, of any person other than such customer. The net equity of one customer shall not be used to carry the trades or contracts or to offset the net deficit of any other customer or person or to carry the trades or offset the net deficit of the same customer in goods or property not included in the term "commodity" as defined in § 1.3(e).

(Sec. 4d, 49 Stat. 1494; 7 U.S.C. 6d)

§ 1.23 Interest of futures commission merchant in segregated funds, additions and withdrawals.

The prohibition in section 4d(2) of the Act against commingling customers' funds with the funds of a futures commission merchant shall not be construed to prevent such futures commission merchant from having a residual financial interest in the funds segregated and set apart for the benefit of commodity customers, nor shall such prohibition be construed to prevent a futures commission merchant from adding to customers' segregated funds from his own funds such amount or amounts of money as he may deem necessary to insure any and all customers' accounts from becoming undermargined at any time: Provided, however, That the books and records of such futures commission merchant shall at all times accurately reflect his interest in customers' segregated funds. Such futures commission merchant may draw upon such segregated funds to his own order to the extent of his actual interest therein: Provided, That such withdrawal shall not result in the money, securities, property, or equity of one customer being used to margin or carry the trades or contracts, or extend the credit, of any other customer or person.

(Sec. 4d, 49 Stat. 1494; 7 U.S.C. 6d)

§ 1.24 Segregated funds; exclusions therefrom.

Money held in segregated account by a futures commission merchant shall not include: (a) Money invested in obligations or stocks of any clearing organization, or in memberships in or obligations of any contract market; or (b) money held by any clearing organization of any contract market which may be used by such clearing organization for any purpose other than to margin, guarantee, secure, transfer, adjust, or settle the contracts or trades of the commodity customers of such futures commission merchant. (Sec. 4d, 49 Stat. 1494; 7 U.S.C. 6d)

§ 1.25 Investment of customers' funds.

No futures commission merchant and no clearing organization of a contract market shall invest funds belonging to commodity customers except in obligations of the United States, in general obligations of any State or of any political subdivision thereof, or in obligations fully guaranteed as to principal and interest by the United States. Such investments shall be made through an account or accounts used for the deposit of customers' funds and proceeds from any sale of such obligations shall be redeposited in such account or accounts.

§ 1.26 Deposit of obligations purchased with customers' funds.

(a) Each futures commission merchant who invests money belonging or accruing to commodity customers in obligations described in § 1.25, shall separately account for such obligations and segregate such obligations as belonging to such customers. Such obligations when deposited with a bank, trust company, clearing organization of a contract market, or another futures commission merchant, shall be deposited under an account name which will clearly show that they belong to commodity customers and are segregated as required by the Act. Each futures commission merchant upon opening such an account, shall obtain and retain in his files an acknowledgment from such bank, trust company, clearing organization of a

contract market, or other futures commission merchant that it was informed that the obligations belong to commodity customers and are being held in accord with the provisions of the Act. Such acknowledgment shall be retained for the period of time specified in 1.31. Such bank, trust company, clearing organization of a contract market, or other futures commission merchant shall allow inspection of such obligations at any reasonable time by representatives of the Commission.

(b) Each clearing organization of a contract market which invests money belonging or accruing to customers of its members in obligations described in § 1.25, shall separately account for such obligations and segregate such obligations as belonging to such customers. Such obligations when deposited with a bank or trust company, shall be deposited under an account name which will clearly show that they belong to commodity customers and are segregated as required by the Act. Each clearing organization upon opening such an account shall obtain and retain in its files an acknowledgment from such bank or trust company that it was informed that the obligations belong to commodity customers of members of the clearing organization and are being held in accord with the provisions of the Act. Such acknowledgment shall be retained for the period of time specified in § 1.31. Such bank or trust company shall allow inspection of such obligations at any reasonable time by representatives of the Commission.

§ 1.27 Record of investments.

(a) Each futures commission merchant who invests money belonging or accruing to customers, and each clearing organization of a contract market which invests money belonging or accruing to customers of its members, shall keep a record showing the following:

(1) The date on which such investments were made,

(2) The name of the person through whom such investments were made,

(3) The amount of money so invested,

(4) A description of the obligations in which such investments were made, (5) The identity of the depositories or other places where such obligations are segregated,

(6) The date on which such investments were liquidated or otherwise disposed of and the amount of money received on such disposition, if any, and

(7) The name of the person to or through whom such investments were disposed of.

(b) Each clearing organization of a contract market which receives documents from its members representing investment of customers' funds shall keep a record showing separately for each member the following:

(1) The date on which such documents were received from the member, (2) A description of such documents, and

(3) The date on which such documents were returned to the member or the details of disposition by other

means.

(c) Such records shall be retained in accord with § 1.31. No such investments shall be made except in obligations described in § 1.25.

§ 1.28 Appraisal of obligations purchased with customers' funds.

Futures commission merchants who invest customers' money in obligations described in § 1.25, shall include such obligations in segregated account at values which at no time shall be greater than current market value, determined as of the close of the market on the last preceding market day.

§1.29 Increment or interest resulting from investment of customers' funds. The investment of customers' funds in obligations described in § 1.25, shall not operate to prevent the futures commission merchant or clearing organization so investing such funds from receiving and retaining as its own any increment or interest resulting therefrom.

§ 1.30 Loans by futures commission merchants; treatment of proceeds.

Nothing contained in these rules and regulations shall be construed to pre