[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2006]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR31.8]

[Page 355-357]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 31_LEVERAGE TRANSACTIONS--Table of Contents
 
Sec.  31.8  Cover of leverage contracts.

    (a)(1) Each leverage transaction merchant must at all times maintain 
cover of at least 90 percent of the amount of physical commodities 
subject to open long leverage contracts entered into with leverage 
customers, and must at all times also maintain cover of at least 90 
percent of the amount of physical commodities subject to open short 
leverage contracts entered into with leverage customers. At least 25 
percent of the amount of physical commodities subject to open long 
leverage contracts must be covered by the types of permissible cover set 
forth in paragraphs (a)(2) (i) and (ii) of this section.
    (2) Permissible cover for a long leverage contract is limited to:
    (i) Warehouse receipts for the leverage commodity subject to the 
leverage contract held in commercial banks located in the United States 
or in approved contract market depositories: Provided, That the balance 
of the principal and accrued interest on any loan against such warehouse 
receipts does not exceed 70 percent of the current market value of the 
commodity represented by each receipt.
    (ii) Warehouse receipts for gold bullion in the case of leverage 
contracts on bulk gold coins, bulk gold coins in the case of leverage 
contracts on gold bullion, silver bullion in the case of leverage 
contracts on bulk silver coins, bulk silver coins in the case of 
leverage contracts on silver bullion, one type of bulk gold coins for 
leverage contracts involving another type of bulk gold coins on an 
ounce-for-ounce basis if each type of bulk gold coins used as cover is 
the subject of a leverage contract offered by the leverage transaction 
merchant pursuant to registration under Sec.  31.6 of this part, and one 
type of bulk silver coins for leverage contracts involving another type 
of bulk silver coins on an ounce-for-ounce basis if each type of bulk 
silver coins used as cover is the subject of a leverage contract offered 
by the leverage transaction merchant pursuant to registration under 
Sec.  31.6 of this part, which are held in commercial banks located in 
the United States or in approved contract market depositories: Provided, 
That the balance of the principal and accrued interest on any loans 
against such warehouse receipts does not exceed 70 percent of the 
current market value of the commodity for which it represents cover.
    (iii) Purchase, in physical form, of the leverage commodity subject 
to the leverage contract, or of the same alternative commodities 
provided for in paragraph (a)(2)(ii) of this section, with settlement 
within two business days shall be considered permissible cover from the 
time the purchase order is confirmed, even though the leverage 
transaction merchant does not have possession or control of a warehouse 
receipt until settlement: Provided, however, That such purchases are not 
made from an affiliated firm, and such purchases at no time constitute 
more than 10 percent of the amount of physical commodities subject to 
open long leverage contracts entered into with leverage customers: And, 
provided further, That the leverage transaction merchant maintains, in 
accordance with Sec.  31.14 of this part, detailed records of these 
transactions which will be subject to inspection, copying and audit by 
the Commission and a designated self-regulatory organization.
    (iv) A long spot futures contract on the leverage commodity subject 
to the

[[Page 356]]

leverage contract, or of the same alternative commodities provided for 
in paragraph (a)(2)(ii) of this section, if the leverage transaction 
merchant has stopped a delivery notice which is non-transferable with 
respect to that futures contract and has otherwise complied with any 
procedures, including payment, necessary for taking delivery, even 
though the leverage transaction merchant does not have possession or 
control of a warehouse receipt for two business days: Provided, however, 
That the amount of physical commodities subject to such long spot 
futures contracts at no time constitutes more than 10 percent of the 
amount of physical commodities subject to open long leverage contracts 
entered into with leverage customers: And, provided further, That the 
leverage transaction merchant maintains, in accordance with Sec.  31.14 
of this part, detailed records of its deliveries on futures contracts, 
which will be subject to inspection, copying and audit by the Commission 
and a designated self-regulatory organization.
    (v)(A) Purchases for future delivery on or subject to the rules of 
the contract market of the same generic commodity subject to the 
leverage contract, or of the same alternative commodities provided for 
in paragraph (a)(2)(ii) of this section; or
    (B) Purchases of call commodity options for the same generic 
commodity subject to the leverage contract, or of the same alternative 
commodities provided for in paragraph (a)(2)(ii) of this section, on or 
subject to the rules of a contract market in accordance with the 
provisions of part 33 of this chapter: Provided, That the market value 
of the actual commodity or futures contract which is the subject of such 
option is more than the value of the underlying commodity based on the 
strike price of the option.
    (3) Permissible cover for a short leverage contract is limited to:
    (i) Sales for future delivery on or subject to the rules of a 
contract market of the same generic commodity subject to the leverage 
contract, or of the same alternative commodities provided for in 
paragraph (a)(2)(ii) of this section; or
    (ii) Purchases of put commodity options for the same generic 
commodity subject to the leverage contract, or of the same alternative 
commodities provided for in paragraph (a)(2)(ii) of this section, on or 
subject to the rules of a contract market in accordance with the 
provisions of part 33 of this chapter: Provided, That the market value 
of the actual commodity or futures contract which is the subject of such 
option is less than the value of the underlying commodity based on the 
strike price of the option.
    (b) Such leverage transaction merchant must be in compliance with 
paragraph (a) of this section at all times and must be able to 
demonstrate such compliance to the satisfaction of the Commission and/or 
the designated self-regulatory organization. A leverage transaction 
merchant who is not in compliance with paragraph (a) of this section or 
in unable to demonstrate such compliance must immediately cease engaging 
in the business of offering to enter into, entering into, or confirming 
the execution of, any leverage contract until such time as the leverage 
transaction merchant is able to demonstrate such compliance. Nothing in 
this paragraph (b) shall be construed as preventing the Commission or 
the designated self-regulatory organization from taking action against a 
leverage transaction merchant for non-compliance with any of the 
provisions of this section.
    (c) The amount of cover which is actually maintained by a leverage 
transaction merchant, and the amount of cover which must be maintained 
by a leverage transaction merchant in order to comply with the 
requirements of this section, shall be computed as of the close of each 
business day by the leverage transaction merchant. A written record of 
this computation shall be made and kept, together with all supporting 
data, in accordance with the provisions of Sec.  1.31 of this chapter. 
This daily computation shall be made by noon on the next business day 
and shall be computed in a format identical to the Schedule of Coverage 
Requirements and Coverage Provided contained in Form 2-FR. In computing 
the amount of cover actually maintained, the leverage transaction 
merchant

[[Page 357]]

shall include only those warehouse receipts which are unencumbered or 
against which the balance of the principal and accrued interest on cash 
loans for which such receipts serve as collateral does not exceed 70 
percent of the current market value of the commodities underlying such 
receipts.
    (d) A leverage transaction merchant who uses as collateral for cash 
loans warehouse receipts held as cover for leverage contracts shall 
maintain a separate record for such loans which contains the following 
information:
    (1) The date on which the loan was made;
    (2) The name of the commercial bank or futures commission merchant 
making such loan;
    (3) The purpose for which the loan was made;
    (4) The amount of the loan;
    (5) The interest rate on the loan;
    (6) The loan's maturity date;
    (7) The date of any partial or complete liquidation of the loan; and
    (8) A description of the warehouse receipt collateralizing such loan 
including the receipt number, the issuer's name, and the total quantity 
of the commodity covered by the warehouse receipt. Such loans shall be 
evidenced in a written agreement executed by the leverage transaction 
merchant and the lender. The leverage transaction merchant shall retain 
such agreement and any related notes in accordance with the requirements 
of Sec.  31.14 of this part.
    (e) The requirements of paragraphs (a) through (d) of this section 
shall not be applicable if the leverage transaction merchant is a member 
of a designated self-regulatory organization and conforms to minimum 
cover standards and related reporting requirements set by such 
designated self-regulatory organization in its bylaws, rules, 
regulations or resolutions approved by the Commission pursuant to 
section 19 of the Act and Sec.  31.28 of this part.

(Secs. 8a(5) and 19 of the Commodity Exchange Act, as amended, 7 U.S.C. 
12a(5) and 23 (1982))

[49 FR 5531, Feb. 13, 1984, as amended at 50 FR 28, Jan. 2, 1985; 54 FR 
41079, Oct. 5, 1989]