trant shall immediately notify the designated self-regulatory organization and the Commission if, after giving effect to all payments of payment obligations under subordination agreements then outstanding which are then due or mature within the following 6 months without reference to any projected profit or loss of the applicant or registrant, either the aggregate indebtedness of the applicant or registrant would exceed 8% percent of its adjusted net capital, or its adjusted net capital would be less than 120 percent of the minimum dollar amount required by § 1.17 or in the case of an applicant or registrant who is operating pursuant to paragraph (g) of § 1.17, its adjusted net capital would be less than the greater of 6 percent of the funds required to be segregated pursuant to the Act and these regulations or for securities brokers or dealers, 6 percent of the aggregate debit items computed in accordance with § 240.15c3-3 of this title.

(iii) 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.

(iv) 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 applicant or registrant or the name of its nominee or custodian.

(v) Temporary subordinations. To enable an applicant or registrant to participate as an underwriter of securities or undertake other extraordinary activities and remain in compliance with the adjusted net capital requirements of this section, an applicant or registrant 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, That this tempo

rary relief shall not apply to any applicant or registrant if the adjusted net capital of the applicant or registrant is less than 10 percent of its aggregate indebtedness or in the case of an applicant or registrant operating pursuant to paragraph (g) of this section, its adjusted net capital is less than the greater of 7 percent of the funds required to be segregated pursuant to the Act and these regulations or for securities brokers or dealers, 7 percent of the aggregate debit items computed in accordance with § 240.15c3-3 of this title, or its adjusted net capital is less than 120 percent of the appropriate minimum dollar amount required by this section, or the amount of equity capital as defined in paragraph (d) of this section is less than the limits specified in paragraph (d) of this section. Such temporary subordination agreement shall be subject to all the other provisions of this section.

(vi) Filing. Two copies of any proposed subordination agreement (including nonconforming subordination agreements) shall be filed with the Commission at least 10 days prior to the proposed execution date of the agreement or at such other time as the Commission for good cause shall accept such filing. Copies of the proposed agreement shall be filed in such quantities and at such time as the designated self-regulatory organization may require with the designated selfregulatory organization, if any, of which the applicant or registrant is a member. The applicant or registrant shall also file with said parties a statement setting forth the name and address of the lender, the business relationship of the lender to the applicant or registrant and whether the applicant or registrant carried funds or securities for the lender at or about the time the proposed agreement was so filed. All agreements shall be examined at the Commission or the designated self-regulatory organization with whom such agreements are required to be filed prior to their becoming effective. No proposed agreement shall be a satisfactory subordination agreement for the purposes of this section unless and until the designated self-regulatory organization or the

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 ben rived from this paragraph (h)( (i) [Reserved]

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

(1) General definition. Cov mean transactions or positio contract for future delivery on of trade or a commodity option such transactions or positions ly represent a substitute for tions to be made or positions taken at a later time in a p marketing channel, and wher are economically appropriate reduction of risks in the condu management of a commercial prise, and where they arise from

(i) The potential change in the of assets which a person owns duces, manufactures, processe merchandises or anticipates ov producing, manufacturing, proce or merchandising.

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

(iii) The potential change in value of services which a person vides, purchases or anticipates pr ing or purchasing. Notwithsta the foregoing, no transactions or tions shall be classified as cove the purposes of this section u their purpose is to offset price ris cidental to commercial cash or operations and such positions ar tablished and liquidated in accord with sound commercial practices unless the provisions of paragrap. (2) and (3) of this section have satisfied.

(2) Enumerated cover transact The definition of covered transac and positions in paragraph (j) this section includes, but is not lin to, the following specific transac and positions:

(i) Ownership or fixed-price chase of any commodity which not exceed in quantity the sales o same commodity for future del on a board of trade or the purcha a put commodity option of the commodity for which the value for the actual commodity c tures contract which is the subje

m

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.

No futures commission merchant 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," "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