UNDER SECTION 1.12 OF THE COMMISSION’S REGULATIONS Introduction

SUMMARY OF

“EARLY WARNING” NOTICE REQUIREMENTS

UNDER SECTION 1.12 OF THE COMMISSION’S REGULATIONS Introduction

Section 1.12 of the Commission’s Regulations requires FCMs to report certain events and situations both to the Commission and to the FCM's DSRO. These reports are referred to as "early warning notices". The notices required to be filed by Section 1.12 of the Regulations are summarized in the following chart:

Rule / Requirement Comment Notification Required

1.12(a) Undercapitalization If an FCM knows or should have known that it is not meeting the minimum capital requirements of the CFTC or of its DSRO, it is required to report that

immediately.

Immediate notice by telephone, followed up in writing. Within 24 hours, file a statement of financial condition, a net capital

As long as adjusted net capital does not decline below the minimum requirement, the FCM is not in violation of the net capital rule. However, the decline below the early warning level must be reported.

File written notice within 24 hours of when the FCM knows, or should have known, of the event. required to be prepared within the time frames specified by the Regulations.

Same day notice in writing by fax.

Specify records that are not current.

Within 48 hours after giving notice, file a written report on what steps have been and are being taken to correct the situation.

1.12(d) Firm discovers or is notified of a material inadequacy

• inhibit a firm from discharging its responsibilities to

customers or other creditors;

• result in material financial loss

• result in material misstatement of the firm's financial

statements; or

• result in violations of the

Within 24 hours of learning of an MI, a firm must file notice in writing by fax.

Within 48 hours of giving notice, the firm must file a written report stating what steps have been and are being taken to correct the situation.

segregation of funds and secured amount rules;

recordkeeping or reporting rules.

1.12(f)(2) FCM determines that any position it carries for another FCM must be liquidated or transferred, or the account carried for another FCM may trade for liquidation only.

This event is reportable if

liquidation or transfer is due to the other FCM's failure to meet a call for margin or to make other required deposits.

1.12(f)(3) FCM determines that an account it carries is

undermargined by an amount that exceeds the FCM's adjusted net capital.

An FCM is required to file notice whether or not a margin call has actually been issued.

Applies to any type of commodity account carried by the firm.

confirmation by fax, to its DSRO and to the Commission's Washington, D.C. office.

1.12(f)(4) Any commodity account carried is subject to a margin call in an amount that exceeds the FCM's excess adjusted net capital, and the call is not answered by COB of the day after the margin call is issued.

In addition to actual margin deposits, favorable market moves may be considered, as set out in the Joint Audit Committee's

"Margin Handbook", in determining whether a margin call has been satisfied and whether notice must be filed.

Immediate telephonic notice, along with immediate written

confirmation by fax, to its DSRO and to the Commission's Washington, D.C. office.

1.12(f)(5) Excess adjusted net capital is less than 6% of

maintenance margin required in all noncustomers' accounts.

Exclude noncustomers who are subject to financial requirements as an FCM, or BD registered with SEC.

Maintenance margin is the total amount a noncustomer is required to have on deposit in order to maintain its open position.

Immediate telephonic notice, along with immediate written

confirmation by fax, to its DSRO and to the Commission's Washington, D.C. office.

1.12(g)(1) -- 20% or more decline in net capital from that most recently reported on a financial report filed with the Commission.

Written notice within 2 business days of event or series of events causing the decline to the Commission's office nearest the FCM's place of business, to its DSRO, and to the Commission's since an FCM must always get approval from its DSRO for prepayment of subordinated debt.

1.12(g)(2) -- 30% or more decline in excess net capital from that amount most recently reported on a financial report filed with the Commission, and the decline was planned.

Notice to be filed at least 2 business days prior to the capital reduction to the Commission's office nearest the FCM's place of business, to its DSRO, and to the Commission's Washington, D.C.

office.

1.12(h) FCM has insufficient funds in segregation for customers trading on U.S. markets, or has insufficient funds set aside for customers trading on non-U.S.

markets.

Immediate telephonic notice, along with immediate written

confirmation by fax, to its DSRO and to the Commission's

Washington, D.C. office whenever the FCM knows or should have known of the deficiency in segregated or Part 30 set-aside funds.

APPENDICES

Charges – Repurchase and Reverse-Repurchase Agreements Page A-1

CHARGES FOR REPURCHASE AND REVERSE REPURCHASE AGREEMENTS

This appendix is an excerpt from the SEC rule relating to net capital treatment of reverse repurchase (asset) and repurchase (liability) agreements, and the charges to be taken against such accounts.

See 17 CFR 240. 15c3-1 (c) (2) (iv) (F). The charges specified herein are to be shown on page 7, lines 13.A and 13.B., of the Form 1-FR-FCM. While the rule refers to brokers and dealers, the charges are applicable to FCMs’ positions also.

[DEFINITIONS]

F)(1) For purposes of this paragraph:

(i) The term reverse repurchase agreement deficit shall mean the difference between the contract price for resale of the securities under a reverse repurchase agreement and the market value of those securities (if less than the contract price).

(ii) The term repurchase agreement deficit shall mean the difference between the market value of

securities subject to the repurchase agreement and the contract price for repurchase of the securities (if less than the market value of the securities).

(iii) As used in paragraph (c)(2)(iv)(F)(1) of this section, the term contract price shall include accrued interest.

(iv) Reverse repurchase agreement deficits and the repurchase agreement deficits where the counterparty is the Federal Reserve Bank of New York shall be disregarded.

[Charges For Reverse Repurchase Agreements]

(2)(i) In the case of a reverse repurchase agreement, the deduction shall be equal to the reverse repurchase agreement deficit.

(ii) In determining the required deductions under paragraph (c)(2)(iv)(F)(2)(i) of this section, the broker or dealer may reduce the reverse repurchase agreement deficit by:

(A) Any margin or other deposits held by the broker or dealer on account of the reverse repurchase agreement;

(B) Any excess market value of the securities over the contract price for resale of those securities under any other reverse repurchase agreement with the same party;

(C) The difference between the contract price for resale and the market value of securities subject to repurchase agreements with the same party (if the market value of those securities is less than the contract price); and

(D) Calls for margin, marks to the market, or other required deposits which are outstanding one business day or less.

[CHARGES FOR REPURCHASE AGREEMENTS]

(3) (i) In the case of repurchase agreements, the deduction shall be:

(A) The excess of the repurchase agreement deficit over 5 percent of the contract price for resale of United States Treasury Bills, Notes and Bonds, 10 percent of the contract price for the resale of securities issued or guaranteed as to principal or interest by an agency of the United States or mortgage related