12.—(1) Subject to this regulation, every futures broker, other than a futures broker to which regulation 11A(1)(d) or (e) applies, shall not allow its adjusted net capital to fall for 4 consecutive weeks below the higher of $2 million or the sum of —(a) | 2% of every amount of funds that a customer of the futures broker deposits with the futures broker that is in excess of the maintenance margins of that customer; and | (b) | 4% of the maintenance margins of customers and non-customers relating to all futures contracts and leveraged foreign exchange trading transactions. |
(1A) Every futures broker to which regulation 11A(1)(d) or (e) applies shall not allow its adjusted net capital to fall for 4 consecutive weeks below $300,000. |
(2) If the adjusted net capital of a futures broker falls below the amount specified in paragraph (1) or (1A), the futures broker shall immediately notify the Authority and, in the case of a futures broker which is a member of an Exchange, notify the Authority and the Exchange, that the futures broker does not comply with the financial requirements under paragraph (1) or (1A). |
(3) Subject to this regulation, every futures broker that is a member of an Exchange, other than a futures broker to which regulation 11A(1)(d) or (e) applies, shall notify the Exchange immediately if its adjusted net capital falls below the higher of $3 million or the sum of —(a) | 2% of every amount of funds that a customer of the futures broker deposits with the futures broker that is in excess of the maintenance margins of that customer; and | (b) | 6% of the maintenance margins of customers and non-customers relating to all futures contracts and leveraged foreign exchange trading transactions. |
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(3A) Where the Authority becomes aware of or is notified by a futures broker that —(a) | the futures broker does not comply with the financial requirements under paragraph (1) or (1A); or | (b) | the futures broker is unable to demonstrate compliance with the financial requirements under paragraph (1) or (1A),the Authority may direct the futures broker to immediately do any one or more of the following: |
(i) | transfer all or any part of a customer’s futures trading and leveraged foreign exchange trading positions, margins and accounts to one or more futures brokers; | (ii) | cease carrying on business as a futures broker until such time as it is able to demonstrate to the Authority that it complies with the financial requirements under paragraph (1) or (1A), except that the futures broker may continue trading for the purposes of liquidation only or unless otherwise directed by the Authority; or | (iii) | operate its business in such manner and on such conditions as the Authority may determine. |
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(3B) If a futures broker other than a futures broker to which regulation 11A(1)(d) or (e) applies does not comply with the financial requirements in paragraph (3), or is unable to demonstrate compliance with such financial requirements, it shall immediately notify the Authority of that fact and if such a state of affairs continues for 5 consecutive business days or more, the Authority may issue directions requiring the futures broker to do any one or more of the following:(a) | forthwith submit the statements prescribed in paragraph (5) to the Authority on a weekly basis, or at such regular intervals as may be determined by the Authority, until the adjusted net capital of the futures broker exceeds the amount required under paragraph (3) for 8 consecutive weeks, and thereafter the futures broker may submit the prescribed statements monthly; | (b) | immediately cease any further increase in positions for any account carried by the futures broker; or | (c) | transfer all or any part of a customer’s futures trading and leveraged foreign exchange trading positions, margins and accounts to one or more futures brokers if the futures broker is unable to demonstrate compliance with the minimum financial requirements in paragraph (3) within one week from the date the futures broker failed to comply, or is unable to demonstrate compliance, with the financial requirements in paragraph (3). |
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(3C) A futures broker shall comply with any direction issued by the Authority under paragraphs (3A) and (3B). |
(3D) If a futures broker has failed to comply with the financial requirements in paragraph (1), but immediately demonstrates to the satisfaction of the Authority that it is able to achieve compliance with such financial requirements, the Authority may, in its discretion, allow the futures broker up to a maximum of 5 business days within which to achieve compliance before the Authority issues any direction under paragraph (3A). |
(3E) The statements required to be submitted in paragraph (3B)(a) shall be signed by a director of the futures broker and shall be lodged with the Authority not later than one business day after the end of the weekly or other interval determined by the Authority under that paragraph. |
(4) The Authority may, after assessing the financial condition of a futures broker, direct the futures broker to meet such additional financial or other requirements as the Authority may determine. |
(4A) Subject to such conditions as the Authority may impose, or from time to time vary or revoke, a futures broker may meet up to 50% of the adjusted net capital requirements under paragraph (1) or (3) or both, or under paragraph (1A) in the case of a futures broker to which regulation 11A(1)(e) applies, by providing SIMEX with one or more qualifying letters of credit for the appropriate amount that the futures broker wishes to meet in that manner. |
(4B) Where the aggregate amount payable under the qualifying letter or letters of credit exceeds 50% of the respective adjusted net capital requirements of the futures broker under paragraph (1) or (3), or under paragraph (1A) in the case of a futures broker to which regulation 11A(1)(e) applies, that amount may not be used to meet more than 50% of the respective adjusted net capital requirements of that futures broker. |
(5) A futures broker shall cause statements in the prescribed form in respect of each month to be prepared in relation to its business as a futures broker. |
(6) The assets and liabilities of the business shall be brought into account in the statements at such amounts to be classified and described therein in such manner that the statements give a true and fair view of the state of affairs. |
(7) Each statement prepared pursuant to paragraph (5) shall be signed by a director and shall be lodged with the Authority not later than 14 calendar days after the end of each month. |
(8) For the purposes of these Regulations —(a) | “net capital” means the amount by which current assets exceed liabilities, and in determining “net capital” —(i) | unrealised profits shall be added and unrealised losses shall be deducted in the accounts of the futures broker including unrealised profits and losses on fixed price commitments and forward contracts; and | (ii) | all long and all short futures trading and leveraged foreign exchange trading positions shall be marked to their market value; |
| (b) | “current assets” means cash and other assets which are reasonably expected to be realised in cash or sold during the next 12 months but shall —(i) | exclude any unsecured futures trading account and leveraged foreign exchange trading account containing a debit balance which has remained unpaid for more than one business day; | (ii) | exclude all unsecured advances, loans, and other receivables; except for dividends, interest and commissions due within 30 days and receivables from merchandising incurred in the normal course of business due within 90 days; | (iii) | exclude all assets doubtful of collection or realisation except for any reserves established therefor; | (iv) | exclude exchange memberships; | (v) | include receivables from clearing houses and from futures brokers arising out of trading in futures contracts and shares and securities which are listed on a stock market, and have not been suspended; | (vi) | include receivables from futures brokers arising out of leveraged foreign exchange trading and from other parties; and | (vii) | include or exclude such other items as the Authority may from time to time prescribe; |
| (c) | a loan or advance or any other form of receivable shall not be considered “secured” unless the following conditions exist:(i) | the receivable is secured by collateral which is otherwise unencumbered and which can be readily converted into cash: |
Provided that such receivable will be considered only to the extent of the market value of such collateral after application of such percentage deductions as prescribed in sub-paragraph (f); and |
(ii) | (A) | the collateral is in the possession or control of the futures broker; or | (B) | the futures broker has a legally enforceable written security agreement executed by the debtor in its favour under which the futures broker shall have the power to readily sell or otherwise convert the collateral into cash; |
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| (d) | for the purposes of computing “net capital”, the term “liabilities” —(i) | excludes liabilities of a futures broker which are subordinated to the claims of all general creditors of the futures broker pursuant to a satisfactory subordination agreement, as defined in sub-paragraph (e); | (ii) | excludes the amount of money, securities and property due to customers which are held in segregated accounts in accordance with section 37 of the Act: |
Provided that such exclusion may be made only if the money, securities and property held in segregated accounts have been excluded from current assets in computing net capital; and |
(iii) | excludes liabilities which would be classified as long-term liabilities in accordance with generally accepted accounting principles to the extent of the net book value of plant, property and equipment which are used in the ordinary course of the futures broker’s business, provided that the plant, property and equipment are not included in current assets; |
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| (e) | for the purpose of sub-paragraph (d)(i), a “satisfactory subordination agreement” means an agreement between the futures broker and its lender (referred to in these Regulations as the subordinated creditor) which agreement shall be in such form and shall contain such terms as the Authority may from time to time require but shall at a minimum contain the following terms:(i) | the subordinated creditor will not claim or receive from the futures broker by set-off or in any other manner, any subordinated debt until all senior debt has been paid or except with the prior written approval of the Authority, or in the case of a futures broker which is a member of an Exchange, with the prior written approval of the Exchange; | (ii) | the subordination agreement shall ensure that claims of the subordinated creditor are fully subordinated to the claims of all unsubordinated creditors; | (iii) | the subordination agreement shall have not less than 2 years to maturity at the time of adjusted net capital computation; | (iv) | the subordinated debt shall not be redeemed before the maturity of the subordination agreement without the prior written approval of the Authority, or in the case of a futures broker which is a member of an Exchange, without the prior written approval of the Authority and the Exchange, and for this purpose, interest payments on the subordinated debt shall not be construed as early redemption of the subordinated debt; | (v) | the subordination agreement shall not be subject to cross-default or negative pledges or contain any clause which would enable the subordinated creditor to demand early or accelerated repayment of the subordinated debt; | (vi) | the subordination agreement shall have the option for the futures broker to defer interest payment on the subordinated debt; | (vii) | the subordinated debt shall automatically be converted into capital as a provision for losses arising from bad and doubtful debts if an appropriate reconstruction of the capital of the futures broker, which is acceptable to the Authority, has not been under taken; | (viii) | in the event of any payment or distribution of assets of the futures broker, in cash, in kind or in securities (referred to in these Regulations as a distribution), upon any dissolution, winding-up, liquidation or reorganisation of the futures broker —(A) | the senior creditor shall first be entitled to receive payment in full of the senior debt before the subordinated creditor receives any payment in respect of the subordinated debt; | (B) | any distribution to which the subordinated creditor would be entitled but for the provisions of the agreement shall be paid or delivered by the liquidator, Official Assignee in bankruptcy or any other person making the distribution directly to the senior creditors rateably according to their senior debt until they have been paid in full (taking into account other distributions to the senior creditors); and |
| (ix) | if, notwithstanding sub-paragraphs (i) to (viii), any distribution is received by the subordinated creditor in respect of the subordinated debt, the distribution shall be paid over to the senior creditors for application rateably against their senior debt until the senior debt has been paid in full (taking into account other distributions to the senior creditors) and until such payment in full shall be held in trust for the senior creditors; |
| (f) | “adjusted net capital” means net capital less the following:(i) | the amount by which any advances paid by the futures broker on cash commodity contracts and used in computing net capital exceeds 95% of the market value of the commodities covered by such contracts; | (ii) | in the case of all inventories which are hedged by hedging positions in any market, the amount by which the value of the inventories used in computing the net capital exceeds 95% of the market value of such inventories; | (iii) | in the case of all inventories which are not hedged by any hedging positions in any market, the amount by which the value of the inventories in computing the net capital exceeds 80% of the market value of such inventories; | (iv) | in the case of any Government security used by the futures broker in computing the net capital, the amount by which the value of such security exceeds 100% of the market value of such security; | (v) | in the case of shares and other securities used by the futures broker in computing the net capital, the amount by which the value of the shares or securities exceeds 90% of the market value of such shares or securities; | (vi) | for under-margined futures trading or leveraged foreign exchange trading accounts, the amount of money required for each account to meet the relevant maintenance margin requirements, if that amount shall have been outstanding after the trade date for more than 3 business days; and if there are no such relevant maintenance margin requirements then, when the original margin has been depleted by 50% or more, the amount of money required to restore the original margin if that amount shall have been outstanding after the trade date for more than 3 business days: |
Provided that to the extent a deficit is excluded from current assets in accordance with this sub-paragraph, such amount shall not also be deducted; and if a customer shall have deposited any asset other than cash into his account, the value attributable to the asset for purposes of this sub-paragraph shall be the value attributable to the asset pursuant to the relevant margin rules of an Exchange, futures market or foreign exchange market; |
(vii) | the maintenance margin requirement on open futures contracts or open leveraged foreign exchange transactions held in the proprietary accounts of the futures broker which are not hedged; and | (viii) | the total amount of money for which the futures broker is contingently liable under any security, guarantee or indemnity granted, other than a security, guarantee or indemnity granted by the futures broker for the purpose of securing, guaranteeing or indemnifying any obligation of the futures broker to —(A) | an Exchange or a clearing house; or | (B) | another futures broker as margin for, or to guarantee or secure, futures contracts; |
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| (g) | “customer” has the same meaning as in section 37(9) of the Act; | (h) | “maintenance margin” means the amount of margin required to be deposited with —(i) | an Exchange or a clearing house; or | (ii) | another futures broker or person, |
as a margin for, or to guarantee or secure, futures contracts or leveraged foreign exchange transactions, as the case may be; |
| (i) | “non-customer” means any person, other than a customer, for whom a futures broker carries an account for trading in futures contracts or leveraged foreign exchange transactions; | (j) | “qualifying letter of credit” means an irrevocable letter of credit made in favour of SIMEX issued by a bank approved by, and in a form acceptable to, SIMEX, which is to be used solely for the purpose of meeting part of the adjusted net capital requirements of the futures broker under this regulation. |
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