CFTC Form 1-FR-IB Instructions - National Futures Association

qualify for exclusion from liabilities, a satisfactory
subordination agreement. A subordinated loan agreement involves
a lender providing an IB with cash, or with a secured demand
note collateralized by the lender's pledge of securities or
cash.
Generally, interest on subordinated debt must be included in
liabilities in determining adjusted net capital. Accrued
interest on subordinated debt can be excluded from liabilities
only if the following conditions are met:
1. the interest rate can be directly ascertained from the
subordination agreement or related note. If the rate is
tied to an external factor such as the prime rate or
federal funds rate, this condition is not met;
2. by the terms of the agreement, the accrued interest can
not be paid to the lender for a year after it is due to be
paid. Example: The IB prepares a 12/31/87 1-FR. Accrued
interest of $5,000 is due and payable on that date. The
agreement prohibits the IB from paying the interest before
12/31/88;
3. all accrued interest due on a subordinated loan must be
treated the same way. The entire amount accrued on a loan
must be either included or excluded from liabilities,
except that interest accrued in the last year of a
subordination agreement's term may not be excluded; and
4. the subordinated loan agreement had an original
maturity of at least one year.
Cash as Collateral for Secured Demand Note
An IB which receives cash as collateral for a secured demand
note may use such cash in its ongoing operations. Where the IB
receives cash as collateral, it must record the cash received
and a corresponding liability. The liability should be reported
on page 3, line 16.F. (other payables) and described in the
separate itemization required for this line.
Line 19.B. - Not subject to a satisfactory subordination
agreement
Report on this line liabilities which are effectively
subordinated to the claims of creditors, but which are not
subject to an agreement that satisfies the requirements of
regulation 1.17(h) for a satisfactory subordination agreement.
Line 20. - Total liabilities
Show here the total of liabilities reflected on lines 14 through
19. The total should be carried forward to page 4, line 2 of the net
capital computation.