the sum of the safety factors hereinafter prescribed in this section with respect to both proprietary accounts and customers' accounts plus 5 percent of the applicant's aggregate indebtedness; and each person registered as futures commission merchant shall at times continue to meet such financial requirements.

(b) The requirements of paragraph (a) of this section shall not be applicable if the applicant for registration or registrant is a member of a contract market and conforms to minimum financial standards and related reporting requirements set by such contract market in its bylaws, rules, regulations or resolutions and approved by the Secretary of Agriculture as adequate to effectuate the purposes of paragraph (2) of section 4f of the Act.

(c) The minimum financial requirements prescribed in the regulations in this part shall not be applicable to any applicant for registration as futures commission merchant to operate only in accordance with the provisions of § 1.31a, or to any registrant who in accordance with his application for registration is authorized to operate only in accordance with that section and who in fact at all times so operates.

(d) Definitions: For the purposes of this section:

(1) The term "working capital" means the amount by which current assets exceed current liabilities.

(2) The term "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 the normal course of operation of the principal business of the applicant or registrant, and which are available for and intended for payment of current liabilities. The term "current assets" excludes, among other things:

(i) Customers' regulated and nonregulated commodity futures accounts that liquidate to an unsecured deficit or contain unsecured debit balances and which accounts have been in such a condition for more than 30 consecutive days;

(ii) Crop loans (loans made to farmers for the purpose of financing their crops or farm operations) which are not (a) due and collectable within 9 months after the respective dates of making of such loans, and (b) evidenced by legally enforceable written instruments in the possession of the registrant or applicant;

(iii) All other unsecured receivables that are not due and collectable within 6 months from the respective dates of their inception;

(iv) Exchange membership, clearing house stocks and guaranty funds;

(v) Unsecured advances and loans to any business affiliate that directly or indirectly controls, is controlled by, or is under common control with, the applicant or registrant;

(vi) Unrealized commissions on open futures contracts;

(vii) Cash and claims to cash which are restricted as to withdrawal, such as customers' segregated funds;

(viii) Land, buildings, furniture and fixtures, improvements to real property and other fixed assets;

(ix) Prepaid expenses and deferred charges;

(x) Unsecured loans and advances to partners, officers and employees of the applicant or registrant;

(xi) Unsecured debit balances and unsecured deficits in accounts owned by the applicant or registrant or in accounts of partners, officers and employees of the applicant or registrant; and

(xii) Securities without a ready market.

(3) The term "current liabilities" means obligations that are or will become due and payable in the next 12 months, or the liquidation of which is reasonably expected to require the use of existing resources classifiable as current assets or the creation of other current liabilities. For the purpose of computing "working capital" within the meaning of this section, the following amounts may be excluded from current liabilities:

(i) The amount of money, securities and property due to commodity customers of the applicant or registrant which is held in segregated account in compliance with the requirements of section 4d (2) of the Act and the regulations thereunder: Provided, however, That such exclusion may be taken only if the applicant or registrant has also excluded such money, securities, and property held in segregated account from current assets in computing his working capital; and

(ii) The amount of indebtedness subordinated to the claims of all general creditors of the applicant or registrant pursuant to a satifactory subordination agreement, as hereinafter defined.

(4) The term "satisfactory subordination agreement" means a written agreement duly executed by the registrant or applicant and the lender, which agreement is binding and enforceable in accordance with its terms upon the lender, his creditors, heirs, executors, administrators, and assigns, and which agreement satisfies all of the following conditions:

(i) It effectively subordinates any right of the lender to demand or receive payment or return of the cash or securities loaned, to the claims of all present and future creditors of the registrant or applicant;

(ii) The cash or securities are loaned for a term of not less than 1 year;

(iii) It provides that the agreement shall not be subject to cancellation by either party, and that the loan shall not be repaid and the agreement shall not be terminated, rescinded, or modified by mutual consent or otherwise if the effect thereof would be to make the agreement inconsistent with the conditions of this section or to reduce the adjusted working capital of the applicant or registrant below the amount required by this section;

(iv) It provides that no default in the payment of interest or in the performance of any covenant or condition by the registrant or applicant shall have the effect of accelerating the maturity of the indebtedness;

(v) It provides that any notes or other written instruments evidencing the indebtedness shall bear on their face an appropriate legend stating that such notes or instruments are issued subject to the provisions of a subordination agreement which shall be adequately referred to and incorporated by reference;

(vi) It provides that any securities or other property loaned to the registrant or applicant pursuant to its provisions may be used and dealt with by the registrant or applicant as part of his capital and shall be subject to the risks of the business; and

(vii) Two copies of such agreement, and of any notes or written instruments evidencing the indebtedness, are filed, within 10 days after such agreement is entered into, with the regional office of the Commodity Exchange Authority for the region in which the registrant or applicant maintains his principal place of business, together with a statement of the full name and address of the lender,

and the business relationship of the lender to the registrant or applicant.

(5) The term "adjusted working capital" means working capital less:

(1) Five percent of all unsecured receivables used by the applicant or registrant in computing his working capital;

(ii) The amount by which any advances paid by the applicant or registrant on cash commodity contracts and used in computing his working capital, exceeds 90 percent of the market value of the commodities covered by such contracts;

(iii) In the case of cash commodity inventories that are hedged by bona fide hedging positions in the futures market as defined in section 4a (3) of the Act, the amount by which the value of such inventories used by the applicant or registrant in computing his working capital, exceeds 95 percent of the market value of such inventories;

(iv) In the case of cash commodity inventories that are not hedged as specified above, the amount by which the value of such inventories used by the applicant or registrant in computing his working capital, exceeds 80 percent of the market value of such inventories: Provided, however, That with respect to those units of inventory that are committed to fixed price sales, there shall be no deduction from the value of such units of inventory used by the applicant or registrant in computing his working capital if the value so used does not exceed the committed sales price;

(v) The amount by which the value of securities and obligations used by the applicant or registrant in computing his working capital exceeds:

(a) In the case of preferred stocks, 80 percent of the market value thereof; (b) In the case of common stocks, 70 percent of the market value thereof;

(c) In the case of commercial bonds, 90 percent of the market value thereof; and

(d) In the case of obligations of, or guaranteed by, the United States, and of general obligations of any State, or of any political subdivision thereof, 100 percent of the market value thereof.

(6) The term "aggregate indebtedness" means that portion of the total liabilities of an applicant or registrant which is not adequately collateralized, but excluding:

(i) Advances received by the applicant or registrant against bills of lading issued in connection with the shipment of

commodities sold by the applicant or registrant;

(ii) Equities in partners' and officers' commodity futures accounts;

(iii) Equities in customers' commodity futures accounts segregated in accordance with the Act and regulations; and

(iv) The amount of indebtedness subordinated to the claims of all general creditors of the applicant or registrant pursuant to a satisfactory subordination agreement, as defined in this section.

(7) Liabilities shall be deemed to be "adequately collateralized" when, pursuant to a legally enforceable written instrument, such liabilities are secured by identified assets that are otherwise unencumbered and the market value of which exceeds the amount of such liabilities by 10 percent or more.

(e) In the case of open futures contracts held in customers' accounts carried by the applicant or registrant, the safety factor shall be one-half of 1 percent of the market value of the greater of either the total long or total short futures contracts in each commodity (regulated, nonregulated and foreign) in all such accounts: Provided, however, (1) That such safety factor shall not apply to any spread or straddle held for the same account in the same commodity, on the same market, in the same crop year, and (2) that in the case of any intermarket or intercrop year spread or straddle, or any intermarket and intercrop year spread or straddle, held for the same account in the same commodity, the safety factor shall be one-fourth of 1 percent of the market value of that side of each such spread or straddle having the greater market value.

(f) In the case of open futures contracts held in proprietary accounts carried by the applicant or registrant, the safety factor shall be 10 percent of the market value of the greater of either the total long or total short futures contracts in each commodity (regulated, nonregulated and foreign) in all such accounts: Provided, however, (1) That such safety factor shall not apply to any spread or straddle held for the same account in the same commodity, on the same market, in the same crop year, or to any contract representing a bona fide hedging transaction as defined in section 4a (3) of the Act or to any contract resulting from a "changer trade" made in accordance with the rules of a contract market which have been submitted to

and not disapproved by the Secretary of Agriculture, and (2) that in the case of any intermarket or intercrop year spread or straddle, or any intermarket and intercrop year spread or straddle, held for the same account in the same commodity the safety factor shall be 5 percent of the market value of that side of each such spread or straddle having the greater market value. The term "proprietary account" within the meaning of this section shall include any account directly or indirectly owned or controlled by the applicant or registrant or any employee thereof, or by any partner or officer of the applicant or registrant, if a partnership, or by any officer, director or owner of 10 percent or more of the capital stock of the applicant or registrant, if a corporation, or by any person who alone or in concert with any other person or persons controls the applicant or registrant.

NOTE: The reporting and recordkeeping requirements herein have been approved by the Bureau of the Budget in accord with the Federal Reports Act of 1942 (44 U.S.C. Ch. 12).

[34 F.R. 599, Jan. 16, 1969]

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 Commodity Exchange Act. Each registrant shall obtain and retain in his files for the period provided in § 1.31, an acknowledgement 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 deposited therein are those of commodity customers and are being held in accord with the provisions of the

Commodity Exchange 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 Commodity Exchange Act. The clearing organization shall obtain and retain in its files for the period provided by § 1.31, an acknowledgment 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 Commodity Exchange Act.

[33 F.R. 14455, Sept. 26, 1968]

within the meaning of section 4d(2) of the Commodity Exchange 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 § 1.2(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 Commodity Exchange Act (49 Stat. 1494; 7 U.S.C. 6d) 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: Pro

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.

[33 F.R. 14455, Sept. 26, 1968]

§ 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 Commodity Exchange 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 Commodity Exchange 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 Commodity Exchange Authority.

(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 Commodity Exchange 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 Commodity Exchange 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 Commodity Exchange Authority.

[33 F.R. 14455, Sept. 26, 1968]

§ 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,