[Federal Register Volume 59, Number 127 (Tuesday, July 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16119]
[[Page Unknown]]
[Federal Register: July 5, 1994]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 33, and 190
Risk Disclosure by Futures Commission Merchants, Introducing
Brokers, Commodity Pool Operators and Commodity Trading Advisors to
Customers; Bankruptcy Disclosure
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: The Commodity Futures Trading Commission (Commission or CFTC)
is amending its rules to permit registrants to deliver to customers a
generic risk disclosure statement which will satisfy risk disclosure
requirements applicable to domestic and foreign commodity futures and
commodity option transactions subject to regulation by the Commission.
The Commission also is permitting such statement to substitute for the
special disclosure requirement related to futures-style margining of
the options premium permitted on certain foreign exchanges. The generic
statement may be used by firms subject to CFTC jurisdiction in lieu of
the separate disclosure statements that will continue to be authorized
by Commission rules. The statement, which was developed in cooperation
with various international regulators, also is intended to satisfy the
risk disclosure requirements of certain foreign jurisdictions who have
implemented the language of this proposed risk disclosure statement in
their jurisdictions in accordance with their domestic law.
EFFECTIVE DATE: July 5, 1994.
FOR FURTHER INFORMATION CONTACT: Jane C. Kang, Esq., or Robert H.
Rosenfeld, Esq., Division of Trading and Markets, Commodity Futures
Trading Commission, 2033 K Street, NW., Washington, DC 20581; telephone
(202) 254-8955.
SUPPLEMENTARY INFORMATION:
Background
On March 30, 1993, the Commodity Futures Trading Commission
(Commission) approved for publication in the Federal Register
amendments to its rules 1.55, 30.6, 33.7, 180.3, 190.06 and 190.10.\1\
Among other things, the rule amendments consolidated the foreign
futures and foreign commodity options risk disclosure statement
required by rule 30.6 with the domestic futures risk disclosure
statement required by rule 1.55.
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\1\58 FR 17495 (April 5, 1993). On May 5, 1994, the Commission
also proposed substantial revisions to the disclosure framework
applicable to commodity pool operators (CPOs) and commodity trading
advisors (CTAs) designed to achieve greater simplicity, focus and
clarity in performance history presentation, streamlining other
required disclosures and a more concise and readable format for
disclosure documents. 59 FR 25351 (May 16, 1994). If adopted, these
changes would substitute Part 4 disclosure for rule 1.55 disclosure
in certain cases.
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In addition, rule 1.55 was amended to provide in paragraph (c) that
the Commission may approve for use in lieu of the prescribed rule 1.55
disclosure statement a risk disclosure statement approved by one or
more foreign regulatory agencies or self-regulatory organizations if
the Commission determines that such statement is reasonably calculated
to provide the disclosures specified by rule 1.55. Rule 1.55(c) was
adopted by the Commission to permit firms doing multinational business
to use the same risk disclosure statement for foreign and U.S.-based
business, thereby reducing duplicative disclosure requirements without
sacrificing important customer protections or obscuring any special
risks of trading outside the U.S.\2\
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\2\See 57 FR 46101, 46103 (October 7, 1992).
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Although initially addressed to the approval of the individual
disclosure statements of a particular jurisdiction, the Commission in
proposing the amendments to, among others, rule 1.55, stated that the
rule contemplates a mechanism for eventually substituting a uniform
disclosure format, accepted internationally, that could be used on a
general basis and supplemented as warranted for particular kinds of
transactions or special markets.\3\
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\3\57 FR 46101, 46103-46104 (October 7, 1992).
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The Commission also noted that it was considering development of a
``plain language'' option disclosure statement and requested comment
concerning the desirability of developing a simpler options disclosure
statement and other possible improvements.\4\ Generally, the commenters
who addressed this issue supported the development of a plain language
generic options risk disclosure statement and also encouraged the
Commission to consider incorporating the required options disclosure
into the revised rule 1.55 statement. However, the Commission deferred
taking such action pending the outcome of international efforts to
develop a consolidated futures and options statement.\5\
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\4\57 FR 46101, 46108 (October 7, 1992).
\5\58 FR 17495, 17502 (April 5, 1993).
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In this connection, the Commission stated that certain
international regulators were endeavoring to develop a single risk
disclosure statement that would be acceptable in multiple jurisdictions
for domestic and cross-border transactions in futures and options and
stated that:\6\
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\6\58 FR 17495, 17497 (April 5, 1993).
The Commission is monitoring developments in this area and
anticipates that if a universal statement of this nature is
developed, it will consider permitting the use of such a statement
in lieu of the new consolidated rule 1.55 risk disclosure statement
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as well as the options disclosure statement required by rule 33.7.
On January 5, 1994, the Commission approved for publication in the
Federal Register an advance notice of proposed rulemaking which
requested comment on the text of a two-page generic risk disclosure
statement then the subject of multilateral discussions among
international regulators.7 The proposed text was intended to meet
the risk disclosure requirements for both domestic and foreign
commodity futures and commodity option products subject to regulation
by the CFTC and thereby substitute for the statements required by rules
1.55, 33.7 and 190.10 as well as the special disclosures related to
futures-style margining of options permitted on certain foreign
exchanges.8
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\7\59 FR 1506, 1508 (January 11, 1994).
\8\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer Binder]
Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement relating to
the deferred payment of option premiums, superseding separate
disclosure addenda required by orders concerning the London
International Financial Futures Exchange (54 FR 37636 (September 12,
1989)), the International Petroleum Exchange (54 FR 50356 (December
6, 1989)), and the London Futures and Options Exchange (renamed as
the London Commodity Exchange) (54 FR 50348 (December 6, 1989)); and
55 FR 14238 (April 17, 1990) (Sydney Futures Exchange). The text of
the generic risk disclosure statement regarding futures-style
margining of the options premium is substantially similar to the
language of the addenda referred to above.
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Comments on Advance Notice and Related Text Modifications
The Commission received comments from the National Futures
Association (NFA), the Futures Industry Association (FIA), the Chicago
Mercantile Exchange (CME), the Business Law Section of the American Bar
Association (ABA), and Schulte Roth & Zabel (SRZ), a law firm. All
commenters generally supported the Commission's proposal for a broader
consolidated risk disclosure statement. The commenters particularly
supported substituting the generic risk disclosure statement for the
current rule 33.7 statement for domestic exchange-traded commodity
options. The commenters generally believed that consolidation of risk
disclosure statements into one concise document could increase the
clarity of generic disclosure to customers and make the disclosure
statement a more effective customer protection mechanism by focusing
customers' attention on particular risks and upon obtaining adequate
information on risks.
In response to the Commission's query whether use of the generic
statement should be made mandatory or discretionary, and whether any
distinctions should be made with respect to the type of firm that
should be permitted to use the generic statement, commenters urged the
Commission not to eliminate the current risk disclosure statement(s)
but rather to permit firms to choose which disclosure statement(s) to
provide to customers. For example, firms may not wish to redesign and
reprint disclosure statements.
The Commission, therefore, agrees that all firms (without regard to
whether the firms engage in cross-border business) should have the
flexibility to determine whether they distribute to customers the new
generic disclosure statement or the existing separate risk disclosure
statements referred to above.
Several commenters stated that the section on electronic execution
systems needed clarification. Specifically, as published in the advance
notice, paragraph 11 of the generic statement on electronic trading
referred to the possibility that losses resulting from systems failure
may be subject to limitations on liability. Commenters noted that
liability limitations are not unique to electronic trade execution
systems and may have the unintended implication that such systems are
less safe than floor-based systems. They recommended that this language
appear in the section on trading facilities (paragraph 10), which
applies to all trading systems (floor and electronic). The Commission
agrees that both floor and electronic trading venues are supported by
systems for which certain types of features are beyond the control of
the exchange and that liability limitations may apply to such features.
As a consequence it believes that the foregoing alteration of the text
is appropriate and is more satisfactory to the international regulators
who are considering adoption of the generic risk disclosure statement,
some of which only have electronic systems.9 The Commission
therefore has amended the language accordingly.
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\9\The international regulators currently prepared to permit the
use of the generic risk disclosure statement in their jurisdictions
and the products for which the statement may be used are specified
in the Addendum to the statement. The Commission intends to update
and amend the list periodically, as appropriate, in the Federal
Register. In addition, the Commission notes that notwithstanding the
adoption of the generic risk disclosure statement by a foreign
jurisdiction, other disclosure requirements may continue in effect
in such jurisdictions.
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The advance notice of proposed rulemaking on the generic risk
disclosure statement noted that an additional topic addressed in the
generic statement was the risks of off-exchange trading. In particular,
the informational working group drafting the generic statement
concluded that such a provision, if worded appropriately, would not
mislead or confuse customers in those jurisdictions which, for example,
do not permit retail customers to participate in off-exchange markets.
Although the Commission received no comments on this provision, in view
of current public discussions related to over-the-counter derivatives,
the Commission has decided to add the words ``and attendant risks'' at
the end of paragraph 12 to enhance relevant disclosure in this regard.
The Commission notes in this regard that the generic risk statement is
intended to cause a customer to ask additional questions of its broker.
Some commenters raised concerns as to the reference in paragraph 1
of the proposed disclosure statement regarding the time frame for
meeting margin calls. They believed the reference could be construed as
overriding the terms set forth in a customer account agreement between
the firm and its customer. The Commission wishes to clarify that the
language of the generic risk disclosure statement is not intended to
modify the terms and conditions of a firm's customer account agreement
concerning the timing of margin payments (provided that these are
consistent with the Commodity Exchange Act (CEA)) but to call to the
customer's attention generally that failure to post margin can have
significant consequences.
One commenter suggested that in order to alleviate the paperwork
burden on registrants, the Commission should not require inclusion in
the risk disclosure statement that is delivered to customers the
Addendum that sets forth the participating jurisdictions which have
adopted the generic statement and the products for which the statement
may be used. Although the Commission believes that the Addendum is
necessary to enable firms to ensure that use of the generic statement
for a particular product is in compliance with the applicable risk
disclosure requirements of various jurisdictions, the Addendum
ordinarily should not be necessary for customers who should receive
additional or different disclosure if the generic statement is not
accepted by a particular jurisdiction or for a particular
product.10 Otherwise, although the Commission intends to publish,
amend and update, as appropriate, the Addendum to the generic risk
disclosure statement, the Commission agrees that apart from the
limitations on its use in the U.S. to futures, options on futures and
options on commodities, the Addendum listing participating
jurisdictions need not be made part of the disclosure document itself.
Firms may, however, elect to include the Addendum as long as it appears
on a separate page after the actual risk disclosure text.
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\1\0It is, however, important in the U.S. that there be no
possible confusion as to what disclosure is required for options on
equities, which are governed by U.S. securities laws. In order to be
used in the U.S., therefore, the Addendum must reflect the products
for which use of the generic risk disclosure statement is permitted.
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In its advance notice, the Commission noted that the elimination of
a Commission mandated description of options trading and other
educational material from the mandated risk disclosure statement does
not mean that firms do not have the obligation to provide all material
disclosures consistent with the product traded and level of experience,
sophistication and financial capacity of customers in compliance with
Commission and NFA rules.11 One commenter believed that the
streamlined disclosure statement was sufficient and that if the
Commission believes that additional disclosures are necessary that it
provide specific guidance on this issue.
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\1\159 FR 1506, 1507 (January 11, 1994), citing Commission rule
1.55(f), which provides that: ``This section [requiring distribution
of a risk disclosure statement] does not relieve a futures
commission merchant or introducing broker from any other disclosure
obligation it may have under applicable law.'' See also NFA
Compliance Rule 2-30 (``know your customer'' rule).
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As discussed by the Commission when it adopted rule 1.55(d)
(currently rule 1.55(f)), the obligations of a futures commission
merchant (FCM) and introducing broker (IB) to disclose material
information to customers arise under the CEA and other applicable law.
The Commission further noted that the essential purpose of the rule was
to confirm the existing obligations of an FCM or IB under the law and
to make clear that distribution of a standard disclosure statement was
not intended to alter those obligations.12
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\1\2See 50 FR 5380 (February 8, 1985).
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Because the nature and extent of the disclosure which an FCM or IB
may be required to make to a customer necessarily must depend on the
facts and circumstances of the particular transaction and also on the
precise nature of the FCM's or IB's relationship to the customer, any
attempt by the Commission to enumerate the precise scope and form of
disclosure for all conceivable customer relationships, products and
trading strategies would be difficult to accomplish and would diminish
the impact of the generic statement which is intended to highlight the
significant risks of futures and options trading and the areas where
customers should seek additional particularized information.13
These considerations continue to apply to the current rulemaking, which
is intended to consolidate and improve the mandated disclosure process.
Accordingly, nothing in the current rulemaking should be construed as
reducing the existing obligation to make all disclosures required under
applicable law.
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\1\3The extent of these obligations is constantly being defined
on a case-by-case basis in administrative and reparations
proceedings and civil actions. Further, the language of the generic
risk disclosure statement specifically directs the customer to
elicit further information from the broker on certain issues.
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Finally, one commenter suggested that the acknowledgement
requirement should be eliminated with respect to sophisticated
investors. The CFTC has determined not to address this matter at this
time.
Procedure--Final Rule Amendments
When the Commission issued its advance notice concerning the
proposed text of a generic disclosure statement that could be adopted
by several jurisdictions regulating futures and options transactions,
the Commission contemplated that a further comment process could be
necessary. However, for the reasons noted below, the Commission
believes that a complete rulemaking record has been compiled and that
further proposal of the text of the generic risk disclosure statement
is unnecessary.
Public comments received on the advance notice were unanimous in
recommending the adoption of the generic risk disclosure statement
(subject to minor revision), including substituting the proposed
generic statement for the rule 33.7 statement for domestic exchange-
traded commodity options and the statement required by rule 190.10 for
non-cash deposits as margin.14 Second, the Commission received
comment on the generic risk disclosure proposal in connection with the
recent amendments consolidating rules 1.55 and 30.6, which contemplated
Commission approval of the substitution of a document which can be used
in multiple jurisdictions.15 Third, as provided herein, the use of
the generic risk disclosure is not mandatory, i.e., the language may be
used but is not required to be substituted for the statements now
required by rules 1.55, 33.7 and 190.10(c) and other disclosure
requirements set forth in the advance notice.
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\1\459 FR 1506, 1508 (January 11, 1994). In addition to
expressly inviting public comment on the draft text of the generic
risk disclosure statement to substitute for current disclosures
contained in rules 1.55, 33.7, 190.10 and Commission orders and
Advisories regarding disclosures related to futures-style margining
of options premium allowed by certain foreign exchanges, the
Commission also requested comment on whether the statement would be
most useful if made mandatory and whether its use should be limited
to firms doing cross-border business or more broadly.
\1\558 FR 17495, 17497 (April 5, 1993); 57 FR 46101, 46103
(October 7, 1992).
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Accordingly, the final rules amend Secs. 1.55(c), 33.7 and
190.10(c) to incorporate text which permits registrants to satisfy the
requirements of rules 1.55, 33.7 and 190.10(c) by substituting the
generic risk disclosure statement as set forth below, which will be
published in a new appendix to part 1 of the Commission's regulations.
The Commission also clarifies herein that the generic risk disclosure
statement may be used in lieu of the special disclosure addendum to
rule 33.7 in connection with transactions on certain foreign exchanges
which do not collect the full option premium.
Effect of Alternate Disclosure Statement
The Commission is hereby permitting the generic risk disclosure
statement set forth herein in appendix A to rule 1.55(c) to be used in
lieu of the statements required by rules 1.55 (which incorporates the
risk-disclosure contained in Commission rule 30.6 for foreign futures
and foreign commodity options), rule 33.7 (domestic exchange-traded
commodity options) and the special bankruptcy disclosures of Commission
rule 190.10(c) related to the acceptance of non-cash margin.
The approval of the generic risk disclosure statement is not
intended to alter disclosure requirements other than those specifically
addressed. For example, the disclosure statement would be required to
be delivered prior to the opening of the account and the
acknowledgement and manner of delivery of the disclosure statement
(i.e., as a separate written statement or in a booklet) would not be
altered. The Commission also would not change the requirement that
compliance with requirements related to providing customers with risk
disclosure statements does not relieve an FCM or IB from any other
disclosure obligation it may have under applicable law.\16\ Similarly,
the single signature acknowledgment procedure contained in rule 1.55(d)
would continue to apply\17\ as will the amendment to CFTC rule
190.10(c) eliminating the requirement that the prescribed disclosure
concerning the treatment of non-cash margin in FCM bankruptcies be
acknowledged.\18\
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\16\In addition to clarifying that firms have an obligation to
disclose all material facts, the Commission also wishes to clarify
that firms must comply with the disclosure obligations imposed by
other regulatory authorities, U.S. or foreign.
\17\The Commission wishes to reiterate that the single signature
acknowledgment format may not generally be used for the endorsements
required by rule 180.3 with respect to arbitration and other dispute
resolution agreements except with respect to Qualified Eligible
Participants (QEPs) as defined in rule 4.7(a)(1)(ii) and for certain
persons or entities specifically within the scope of rule 4.5(a).
See rule 180.3(b)(2) (as amended by 58 FR 17495 (April 5, 1993)).
Nor would the single acknowledgment affect the obligation of an FCM
or IB to obtain, by instrument separate and apart from the customer
agreement, a customer's consent that the FCM may knowingly take the
other side of a customer's order, or to transfer funds from a
customer's segregated account to an account that is not segregated.
See discussion in 58 FR 17495, 17499 (April 5, 1993).
\18\The Commission notes that the generic statement discloses
more clearly than the statement in CFTC rule 190.10(c) that cash and
non-cash margin may be subject to the same treatment in the event of
a firm bankruptcy.
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The distribution of the generic risk disclosure statement also
could substitute for the special disclosure requirements related to
futures-style margining of option premiums permitted on certain foreign
exchanges.
The generic risk disclosure statement would not, however, alter the
separate disclosure requirements concerning electronic trading systems
or trading linkages between domestic and foreign futures exchanges that
may be mandated by U.S. self-regulatory organizations.\19\
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\19\See 58 FR 17495, 17496, n.7 (April 5, 1993) citing, for
example, NFA Compliance Rule 2-28, CME rule 874 and Commodity
Exchange Inc. rule 5.14 (addressing risk disclosure requirements
applicable to foreign futures and options as a result of trading
linkages between domestic and foreign exchanges). See also CME rule
577 and Chicago Board of Trade rule 9A.20 which address the risk
disclosure requirements applicable to users of GLOBEX, and New York
Mercantile Exchange rule 6.22 which addresses the risk disclosure
requirements applicable to the users of the ACCESS electronic
trading system.
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Finally, the Commission notes that if a firm elects to use the
generic risk disclosure statement rather than the statement required by
rule 190.10(c), and uses a separate subordination agreement required by
Financial and Segregation Interpretation No. 12--``Deposit of Customer
Funds in Foreign Depositories'' for customers depositing margin in
foreign depositories,\20\ that statement must be separately
acknowledged.\21\ A separate signature also would continue to be
necessary where subordination or similar consent to contractual
modification of certain rights is required for other purposes, such as
for participation in cross-margining programs.\22\
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\20\See 53 FR 46911 (November 21, 1988). The Commission stated
that the subordination agreement discussed in Financial and
Segregation Interpretation No. 12 may be incorporated into the rule
190.10(c) bankruptcy disclosure document or separately executed. Id.
at 46913-46914.
\21\Separate acknowledgement of the rule 190.10(c)(2) disclosure
statement in this context is a substitute for execution of a
separate subordination agreement.
\22\Id., citing ``Financial and Segregation Interpretation No.
12.''
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Separate Statement
In its previous revision of rule 1.55, the Commission included an
amendment intended to clarify that the prescribed risk disclosure
statement may be provided as a physically separate document or in a
booklet containing other commodity interest account materials, as long
as the rule 1.55 risk disclosure statement appears as the cover page or
the first page, and is the only material on such page, by which it
means the page immediately following the cover page.
As the generic statement requires approximately two pages of
printed text, the statement may appear on more than one page, provided
that it is the only text that appears on those pages.
Application to Rule 30.3 and 30.10 Orders
After the effective date of these rule amendments, all firms
operating pursuant to confirmed rule 30.10 relief,\23\ and firms
complying with the terms of an outstanding order under rule 30.3 may
elect to use the generic risk disclosure statement or the risk
disclosure statements mandated by rules 1.55 and 33.7 and applicable
Commission orders, as appropriate.\24\
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\23\Firms operating pursuant to Commission rule 30.10 relief had
been permitted to comply with the risk disclosure requirements set
forth in the relevant Commission orders, i.e., they could continue
to use the text of rule 30.6 as published prior to the 1993
revisions to Commission rules 1.55 and 30.6 (which incorporated the
rule 30.6 disclosures for foreign futures into the rule 1.55
disclosures for domestic futures) (see 58 FR 17496 (April 5, 1993)).
\24\See, e.g., CFTC Advisory No. 90-1 [1987-1990 Transfer
Binder] Comm. Fut. L. Rep. (CCH) 24,597 (disclosure statement
relating to the deferred payment of option premiums for options).
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Timetable for Implementation
Under the most recent disclosure revisions, the Commission stated
that firms would be permitted to use existing disclosure statements
(i.e., either separate rule 1.55, 30.6, 33.7 and 190.10(c) documents)
up to and including July 1, 1994.\25\
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\25\See 58 FR 17495, 17497 (April 5, 1993).
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Although the Commission intends for the current rulemaking to take
effect upon the publication of this Federal Register release, the
Commission is permitting firms for a period not to exceed sixty days
after the date herein to continue to use the separate statements
contained in rules 1.55 and 30.6.
Accordingly, after the date herein, firms may use either the new
generic risk disclosure statement or the revised rule 1.55 risk
disclosure statement (which incorporates the rule 30.6 disclosure
statement) or, for a period not to exceed sixty days after the
effective date of this Federal Register release, the separate rule 1.55
and rule 30.6 risk disclosure statements to comply with relevant risk
disclosure obligations.\26\
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\26\See no action letter of the CFTC's Division of Trading and
Markets dated June 8, 1994 regarding the July 1, 1994 effective date
of the revised rule 1.55 risk disclosure statement.
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Amendment of CFR
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1980 (PRA), 44 U.S.C. 3501 et seq.,
imposes certain requirements on federal agencies (including the
Commission) in connection with their conducting or sponsoring any
collection of information as defined by the Paperwork Reduction Act.
The amendments to rules 1.55, 33.7 and 190.10 do not change the burdens
associated with those rules. The groups of rules of which they are a
part have the following burdens:
Rule 33.7--(3038-0007)
Average Burden Hours Per Response--50.32
Number of Respondents--190,197
Frequency of Response--Occasionally
Rule 190.10--(3038-0021)
Average Burden Hours--0.35
Number of Respondents--802
Frequency of Response--Occasionally
No additional burden is associated with the amendments to rules
33.7 and 190.10.
The burden associated with the group which encompasses rules 1.55,
180.3 and rule 1.65 is:
Rules 1.55, 180.3 and 1.65--(3038-0022)
Average Burden Hours Per Response--613.26
Number of Respondents--4295
Frequency of Response--Occasionally
No additional burden is associated with the amendments to rule
1.55.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA), 5 U.S.C. Sec. 601 et seq.,
requires that agencies, in proposing rules, consider the impact of
these rules on small business. In this connection, the Commission
previously has determined that FCMs and Commodity Pool Operators should
not be considered small entities for purposes of the RFA.\27\ With
respect to IBs and Commodity Trading Advisors (CTAs), the Commission
has stated that it would evaluate within the context of each proposal
whether all or some IBs and CTAs should be considered small entities,
and if so, that it would analyze the economic impact on them of any
rule.\28\ Because the proposed amendments to the Commission rules
discussed herein will not result in any significant additional burdens
to the above mentioned registrants and may in practice result in a
reduction of certain existing burdens, the Commission believes that the
proposed rule amendments will not have a significant economic impact on
such entities. Therefore, pursuant to section 3(a) of the RFA, 5 U.S.C.
Sec. 605(b), the Acting Chairman of the Commission certifies that these
proposed rule amendments will not have a significant economic impact on
a substantial number of small entities.
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\27\47 FR 18618 (April 30, 1982).
\28\Id. (CTAs) and 48 FR 35248, 35276 (August 3, 1983) (IBs).
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List of Subjects
17 CFR Part 1
Commodity futures, Domestic exchange-traded commodity option
transactions.
17 CFR Part 33
Commodity futures, Domestic exchange-traded commodity option
transactions.
17 CFR Part 190
Bankruptcy.
In consideration of the foregoing and pursuant to the authority
contained in the Commodity Exchange Act, and in particular, sections
2(a)(1), 4b, 4d, 4f and 8a of the Act, as amended, 7 U.S.C. 2, 6b, 6d,
6f and 12a, the Commission hereby amends Chapter I of Title 17 of the
Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23 and 24.
2. Section 1.55 is amended by revising paragraph (c) and by adding
a new Appendix A to read as follows:
Sec. 1.55 Distribution of ``Risk Disclosure Statement'' by futures
commission merchants and introducing brokers.
* * * * *
(c) The Commission may approve for use in lieu of the risk
disclosure document required by paragraph (b) of this section a risk
disclosure statement approved by one or more foreign regulatory
agencies or self-regulatory organizations if the Commission determines
that such risk disclosure statement is reasonably calculated to provide
the disclosure required by paragraph (b) of this section. Notice of
risk disclosure statements that may be used to satisfy Commission
disclosure requirements, what requirements such statements meet and the
jurisdictions which accept each format will be set forth in appendix A
to this section.
* * * * *
Appendix A to CFTC Rule 1.55(c)--Generic Risk Disclosure Statement
Risk Disclosure Statement for Futures and Options
This brief statement does not disclose all of the risks and other
significant aspects of trading in futures and options. In light of the
risks, you should undertake such transactions only if you understand
the nature of the contracts (and contractual relationships) into which
you are entering and the extent of your exposure to risk. Trading in
futures and options is not suitable for many members of the public. You
should carefully consider whether trading is appropriate for you in
light of your experience, objectives, financial resources and other
relevant circumstances.
Futures
1. Effect of `Leverage' or `Gearing'
Transactions in futures carry a high degree of risk. The amount of
initial margin is small relative to the value of the futures contract
so that transactions are `leveraged' or `geared'. A relatively small
market movement will have a proportionately larger impact on the funds
you have deposited or will have to deposit: this may work against you
as well as for you. You may sustain a total loss of initial margin
funds and any additional funds deposited with the firm to maintain your
position. If the market moves against your position or margin levels
are increased, you may be called upon to pay substantial additional
funds on short notice to maintain your position. If you fail to comply
with a request for additional funds within the time prescribed, your
position may be liquidated at a loss and you will be liable for any
resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g. `stop-loss' orders, where
permitted under local law, or `stop-limit' orders) which are intended
to limit losses to certain amounts may not be effective because market
conditions may make it impossible to execute such orders. Strategies
using combinations of positions, such as `spread' and `straddle'
positions may be as risky as taking simple `long' or `short' positions.
Options
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and
sellers of options should familiarize themselves with the type of
option (i.e. put or call) which they contemplate trading and the
associated risks. You should calculate the extent to which the value of
the options must increase for your position to become profitable,
taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or
allow the options to expire. The exercise of an option results either
in a cash settlement or in the purchaser acquiring or delivering the
underlying interest. If the option is on a future, the purchaser will
acquire a futures position with associated liabilities for margin (see
the section on Futures above). If the purchased options expire
worthless, you will suffer a total loss of your investment which will
consist of the option premium plus transaction costs. If you are
contemplating purchasing deep-out-of-the-money options, you should be
aware that the chance of such options becoming profitable ordinarily is
remote.
Selling (`writing' or `granting') an option generally entails
considerably greater risk than purchasing options. Although the premium
received by the seller is fixed, the seller may sustain a loss well in
excess of that amount. The seller will be liable for additional margin
to maintain the position if the market moves unfavorably. The seller
will also be exposed to the risk of the purchaser exercising the option
and the seller will be obligated to either settle the option in cash or
to acquire or deliver the underlying interest. If the option is on a
future, the seller will acquire a position in a future with associated
liabilities for margin (see the section on Futures above). If the
option is `covered' by the seller holding a corresponding position in
the underlying interest or a future or another option, the risk may be
reduced. If the option is not covered, the risk of loss can be
unlimited.
Certain exchanges in some jurisdictions permit deferred payment of
the option premium, exposing the purchaser to liability for margin
payments not exceeding the amount of the premium. The purchaser is
still subject to the risk of losing the premium and transaction costs.
When the option is exercised or expires, the purchaser is responsible
for any unpaid premium outstanding at that time.
Additional risks common to futures and options
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and
conditions of the specific futures or options which you are trading and
associated obligations (e.g. the circumstances under which you may
become obligated to make or take delivery of the underlying interest of
a futures contract and, in respect of options, expiration dates and
restrictions on the time for exercise). Under certain circumstances the
specifications of outstanding contracts (including the exercise price
of an option) may be modified by the exchange or clearing house to
reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g. illiquidity) and/or the operation of the
rules of certain markets (e.g. the suspension of trading in any
contract or contract month because of price limits or ``circuit
breakers'') may increase the risk of loss by making it difficult or
impossible to effect transactions or liquidate/offset positions. If you
have sold options, this may increase the risk of loss.
Further, normal pricing relationships between the underlying
interest and the future, and the underlying interest and the option may
not exist. This can occur when, for example, the futures contract
underlying the option is subject to price limits while the option is
not. The absence of an underlying reference price may make it difficult
to judge ``fair'' value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money
or other property you deposit for domestic and foreign transactions,
particularly in the event of a firm insolvency or bankruptcy. The
extent to which you may recover your money or property may be governed
by specific legislation or local rules. In some jurisdictions, property
which had been specifically identifiable as your own will be pro-rated
in the same manner as cash for purposes of distribution in the event of
a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of
all commission, fees and other charges for which you will be liable.
These charges will affect your net profit (if any) or increase your
loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets
formally linked to a domestic market, may expose you to additional
risk. Such markets may be subject to regulation which may offer
different or diminished investor protection. Before you trade you
should enquire about any rules relevant to your particular
transactions. Your local regulatory authority will be unable to compel
the enforcement of the rules of regulatory authorities or markets in
other jurisdictions where your transactions have been effected. You
should ask the firm with which you deal for details about the types of
redress available in both your home jurisdiction and other relevant
jurisdictions before you start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency-denominated
contracts (whether they are traded in your own or another jurisdiction)
will be affected by fluctuations in currency rates where there is a
need to convert from the currency denomination of the contract to
another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution,
matching, registration or clearing of trades. As with all facilities
and systems, they are vulnerable to temporary disruption or failure.
Your ability to recover certain losses may be subject to limits on
liability imposed by the system provider, the market, the clearing
house and/or member firms. Such limits may vary: you should ask the
firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from
trading in an open-outcry market but also from trading on other
electronic trading systems. If you undertake transactions on an
electronic trading system, you will be exposed to risks associated with
the system including the failure of hardware and software. The result
of any system failure may be that your order is either not executed
according to your instructions or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances,
firms are permitted to effect off-exchange transactions. The firm with
which you deal may be acting as your counterparty to the transaction.
It may be difficult or impossible to liquidate an existing position, to
assess the value, to determine a fair price or to assess the exposure
to risk. For these reasons, these transactions may involve increased
risks. Off-exchange transactions may be less regulated or subject to a
separate regulatory regime. Before you undertake such transactions, you
should familiarize yourself with applicable rules and attendant risks.
I hereby acknowledge that I have received and understood this risk
disclosure statement.
----------------------------------------------------------------------
Date
----------------------------------------------------------------------
Signature of Customer
* * * * *
[The following language should be printed on a page other than the
pages containing the disclosure language above and may be omitted from
the required disclosure statement]
This disclosure document meets the risk disclosure requirements in
the jurisdictions identified below ONLY for those instruments which are
specified.
United States: commodity futures and options on commodity futures
subject to the Commodity Exchange Act
[other jurisdictions: etc.]
PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION
TRANSACTIONS
3. The authority citation for this part continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6j, 6k, 6l, 6m, 6n, 6o, 7, 7a, 7b, 8, 9, 11, 12a, 12c, 13a, 13a-
1, 13b, 19 and 21, unless otherwise noted.
4. Section 33.7 is amended by revising paragraph (a)(1)(i) as
follows:
Sec. 33.7 Disclosure.
(a)(1) * * *
(i) Furnishes the option customer with a separate written
disclosure statement as set forth in this section or another statement
approved under Sec. 1.55(c) of this chapter and set forth in appendix A
to Sec. 1.55 which the Commission finds satisfies this requirement, or
includes either such statement in a booklet containing the customer
account agreement and other disclosure statements required by
Commission rules; provided, however, that if the statement contained in
Sec. 33.7 is used it must follow the statement required by Sec. 1.55;
and
* * * * *
PART 190--BANKRUPTCY RULES
5. The authority citation for part 190 continues to read as
follows:
Authority: 7 U.S.C. 1a, 2, 4a, 6c, 6d, 6g, 7, 7a, 12, 19, 23,
and 24 and 11 U.S.C. 362, 546, 548, 556 and 761-766.
6. Section 190.10 is amended by revising paragraph (c)(1) as
follows:
Sec. 190.10 General.
* * * * *
(c)(1) Disclosure statement for non-cash margin. (1) Except as
provided in Secs. 1.65, no commodity broker (other than a clearing
organization) may accept property other than cash from or for the
account of a customer to margin, guarantee, or secure a commodity
contract unless, the commodity broker first furnishes the customer with
the disclosure statement set forth in paragraph (c)(2) of this section
in boldface print in at least 10 point type which may be provided as
either a separate, written document or incorporated into the customer
agreement, or with another statement approved under Sec. 1.55(c) of
this chapter and set forth in appendix A to Sec. 1.55 which the
Commission finds satisfies this requirement.
* * * * *
Issued in Washington, DC, on June 28, 1994 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 94-16119 Filed 7-1-94; 8:45 am]
BILLING CODE 6351-01-P
