Audit Advisory Notice
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From Audit Department, Clearing House Division
Subject Amendments to CME Rule 972 - Notification of Reduction in Capital
Effective Date 07/31/96
Notice Number 96-07
Most commodity and security regulators have notification requirements for reductions in capital. These requirements provide prompt notification when a firm experiences a significant reduction in capital. However, the reporting requirements vary slightly among the regulators.

The Intermarket Financial Surveillance Group (IFSG), an organization composed of representatives from U.S. commodity and security regulatory organizations, proposed a standard notification requirement for reductions in capital, which was formally adopted by the CFTC and SEC. This requirement will replace the existing notifications currently used by the various regulators. As a result, firms with memberships at multiple commodity and security exchanges and clearing organizations will only be required to monitor a uniform reduction in capital notification. The CME has adopted this proposal, with other regulatory organizations expected to follow soon.

Reduction in Capital Notification

Clearing members must give notice for a reduction in net capital as reported on the Form 1-FR or tentative net capital as reported on the FOCUS Report of 20 percent or more within two business days and for a planned reduction in excess net capital of 30 percent or more two business days prior thereto.

Attached are the changes to CME Rule 972 to conform with the IFSG proposal. If you have any questions, please contact the Audit Department at (312) 930-3230.

Reduction in Capital Rule Change

Note: New text is underlined, old text is struck out.

972. REDUCTIONS IN [ADJUSTED NET] CAPITAL [IN EXCESS OF 20%]

A. A clearing member must provide written notice to the Audit Department as set forth below of any substantial reduction in [adjusted net] capital as compared to [reported on the Form 1-FR, or tentative net capital as reported on the FOCUS Report for broker/dealers, in excess of 20% from] the most recent filing of a financial [such] report.

1. If any event or series of events, including any withdrawal, advance, loan or loss cause, on a net basis, a reduction in net capital as reported on the Form 1-FR, or in tentative net capital as reported on the FOCUS Report for broker/dealers, of 20% or more, notice must be provided within two business days of the event or series of events causing the reduction; and

2. If equity capital of the clearing member or a subsidiary or a consolidated affiliate would be withdrawn by action of a stockholder or a partner or by redemption or repurchase of shares of stock by any of the consolidated entities or through the payment of dividends or any similar distribution, or an unsecured advance or loan would be made to a stockholder, partner, sole proprietor, employee or affiliate, such that the withdrawal, advance or loan would cause, on a net basis, a reduction in excess adjusted net capital of 30% or more, notice must be provided at least two business days prior to the withdrawal, advance or loan that would cause the reduction:

1. With respect to activities in the normal course of business (e.g., profit/loss, increase in charges against net capital, etc.) that cause such reduction, the Audit Department must receive written notification within forty-eight (48) hours after the clearing member becomes aware of the reduction.

2. With respect to any extraordinary transaction or series of transactions (e.g., dividend payments, loans, etc.) that will cause such reduction, the Audit Department must receive written notification at least two business days in advance of the transaction or the first in the series of transactions.]

The foregoing shall not apply in the case of a reduction in capital resulting from (1) the repayment or prepayment of subordinated liabilities for which notice has been given in accordance with Rule 970[-] or (2) any futures or securities transaction in the ordinary course of business between a clearing member and any affiliate where the clearing member makes payment to or on behalf of such affiliate for such transaction and then receives payment from such affiliate for such transaction within two business days from the date of the transaction.
B. Violation of this rule may constitute a major offense.

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