(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to cancellation by either party, and that the loan shall not be repaid and the agreement shall not be terminated, rescinded, or modified by mutual consent or otherwise if the effect thereof would be to make the agreement inconsistent with the conditions of this section or to reduce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:

(i) 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,

(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.

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

§ 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.

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

§ 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. [33 F.R. 14456, Sept. 26, 1968]

§ 1.30 Loans by futures commission merchants; treatment of proceeds. Nothing contained in the rules and regulations in this chapter, shall be construed to prevent a futures commission merchant from lending his own funds to commodity customers on securities and property pledged by such customers, or from re-pledging or selling such securities and property pursuant to specific

written agreement with such customers: Provided, however, That the proceeds of such loans used to margin, guarantee, or secure the trades or contracts of such customers in any commodity for future delivery shall be treated and dealt with by such futures commission merchant as belonging to such customers, in accordance with and subject to the provisions of section 4d (2) of the Commodity Exchange Act.

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

§ 1.31

RECORD KEEPING

Books and records; keeping and inspection.

All books and records required to be kept by the act or by the rules and regulations in this chapter, shall be kept for a period of five years from the date thereof and shall be readily accessible during the first two years of such period. During the last two years of such period, the person required to keep such books and records may at his option substitute photographic reproductions thereof on film, together with facilities for the projection of such film in a manner which will permit it to be readily inspected or examined. All such books, records, and photographic reproductions shall be open to inspection by any representative of the United States Department of Agriculture or the United States Department of Justice.

(Secs. 4, 5, 42 Stat. 999, as amended, 1000, as amended, secs. 4g, 41, 5a, 49 Stat. 1496, 1497; 7 U.S.C. 6, 7, 6g, 61, 7a) [15 F.R. 4443, July 13, 1950]

§ 1.31a Compliance with §§ 1.32-1.36.

With respect to a futures commission merchant who transmits all customers' commodity futures orders, together with all money, securities, and property received to margin, guarantee, or clear the trades or contracts of such customers, to another futures commission merchant for execution or clearance, and the latter renders confimations and statements of purchase and sale, and transmits remittances, direct to such customers, the requirements of §§ 1.32-1.36, inclusive, shall be deemed to be complied with if the books and records described in the aforesaid sections are prepared and kept, in the form and manner therein set forth, by either the futures commission merchant transmitting such order or by the futures commission merchant to whom such orders are transmitted.