Implementation of the Uniform Accounting System for Commodity Futures Brokers

October 8, 1990 SEC-BED * MEMORANDUM CIRCULAR NO. 07-90 TO : Licensed Commodity Futures Brokers/Commission Merchants RE : Implementation of the Uniform Accounting System for Commodity Futures Brokers Pursuant to the desire for better supervision of the Commodity Futures Industry, standardize the financial statements reporting of Commodity Futures Brokers, and to provide market participants an easy-to-understand interpretation of certain provisions of the Revised Rules on Commodity Futures Trading, the Commission, in consultation with the Commodity Futures Brokers Association of the Philippines, Inc. HEREBY DIRECTS, all Commodity Futures Brokers/Commission Merchants to present their audited financial statements for the year ended December 31, 1990 and thereafter, in accordance with the requirements of the UNIFORM ACCOUNTING SYSTEM FOR COMMODITY FUTURES BROKERS herein annexed. prcd Any violation of this memorandum-circular, whether inadvertently or otherwise, shall subject the violator to the following schedule of penalties: Basic Penalty Daily Penalty per report to be imposed First violation P200.00 P40.00 2nd violation 300.00 80.00 3rd and subsequent violation 400.00 120.00 Daily penalty shall be imposed until a corrected statement is submitted. For information and compliance of all concerned. (SGD.) ROSARIO N. LOPEZ Chairman ATTACHMENT I. STATEMENT OF PRINCIPLES AND GUIDELINES Uniform Accounting System for Commodity Futures Brokers 1. OBJECTIVE . A uniform accounting system for commodity futures brokers seeks to achieve the following: a. To relate the provision of the Revised Rules and Regulations on Commodity Futures Trading, especially those with financial significance, into the uniform accounting system. b. To enhance wider uniform interpretation by the SEC and the CF brokers of certain provisions of said Revised Rules especially those with financial/accounting significance through the use of a uniform accounting system. c. To provide investors or customers as well as other financial statement users an easy-to-understand updated information to guide them in future plan of action. 2. CONTENTS OF THE FINANCIAL STATEMENTS . For purposes of compliance with the Rules and Regulations of the SEC, the basic contents of financial statements of a Commodity Futures Broker, shall consist of the following: a. Balance Sheet b. Statement of Income and Retained Earnings c. Statement of Changes in Financial Position d. Notes to Financial Statements, and e. Accounting References to Financial Statements Of the first three (3) basic elements above-mentioned, the balance sheet provides an effective vehicle to introduce a system of uniform accounts that could describe clearly certain aspects of operation of commodity futures brokerage that which are duly provided for in the rules. LibLex The Statement of Income and Retained Earnings showcases income and expenses of the broker under normal business operation, using the ordinary income-and-expense accounts commonly adapted by business concerns. Statement of Changes in Financial Position will eventually follow specific account titles in the balance sheet, and income statement (for changes in retained earnings only) to identify the sources and utilization of funds. Notes to Financial Statements discloses the summary of accounting policies adapted by the broker, and such other accounting data that he (broker) wants to elaborate with greater emphasis. Accounting References to Financial Statements consist of several supporting schedules, properly identified through account titles in the balance sheet, that will provide the SEC the necessary accounting details through which, certain provisions of the Revised Rules on Commodity Futures Trading, can be fully clarified or understood. But before the accounting statements are put in place, it is equally necessary that on-going futures trading activities of the broker utilizing client's money and that of its own, should be properly recorded through the use of account titles peculiar to the industry and designed particularly to suit certain provisions of the Rules on Commodity Futures Trading enforced by the Commission. It should be emphasized that the GUIDES to Journal Entries herein presented as an integral part of the Uniform Accounting System focuses primarily on customer's or client's trading transactions where funds are accounted for separately from house funds. 3. ADOPTION OF THE UNIFORM ACCOUNTING SYSTEM at the soonest possible time would help minimize problems of brokers in interpreting specific requirements of the Rules and in complying with these requirements with the least possible violation. A synchronized interpretation of the Rules through this system will eliminate previous misconception or miscommunication between examiners of this Commission and accounting staff of the broker. 4. CLEARING HOUSE TERMINOLOGIES . Brief and concise discussion on certain terminologies were added into the system to give it greater emphasis, and be meaningful to the user or users, especially the technical aspects of the discussion. II. COMMODITY FUTURES BROKERS CHART OF SPECIAL BALANCE SHEET ACCOUNTS, THEIR DEFINITIONS AND BALANCE SHEET PRESENTATION 1. CASH IN BANK This consist of commercial and savings deposits in banks and elsewhere of cash/checks, Bank Drafts, and Money Orders, that can be used as medium of exchange, acceptable for deposit at fair value by a bank, and are not restricted as to use or withdrawal. In the balance sheet, separate cash-in-bank balances may be shown for client's account, house account and company account. Another acceptable presentation would be to show house account and company account under a common cash-in-bank balance to be captioned either as Cash-in-Bank, House Account, or Cash on Hand and in Bank, company account. House account, shown separately will show changes in cash utilized for House trading activities only. Cash on Hand and in Bank, Company Account, shown separately absorbs changes in cash utilized for operating and administrative expenses or those expenses not related to commodity futures trading. The Account is shown under current assets in the balance sheet. 2. FUNDS IN MIFCH-CLIENTS . This consist of customer's or client's funds deposited by the broker in the bank account of MIFCH or clearing house, principally to back up customer's OR Client's trades confirmed by MIFE. This Account is adjusted for actual (realized) profit or loss on trades at settlement date, miscellaneous charges and fees, drawings, etc. This ACCOUNT is classified in the balance sheet under current assets. 3. FUNDS IN MIFCH-HOUSE . This consist of house or company funds deposited by the broker in the bank account of the clearing house, principally to back up trades confirmed by MIFE. This ACCOUNT is adjusted for actual (realized) profit or loss on trades at settlement date, miscellaneous charges and fees, drawings, etc. This ACCOUNT is classified in the balance sheet under current assets. 4. UNREALIZED GAIN (LOSS) ON TRADES . This ACCOUNT represents gain or loss of unliquidated trades of clients or house, computed on price differential from the date when the trades were confirmed by MIFE up to balance sheet date. In the records of the clearing house, NET UNREALIZED LOSS (that amount of loss which exceeds total gains of the same period) of the broker/member is immediately deducted from his (broker) cash balance in order to arrive at the amount of funds remaining with the said clearing house. Conversely, NET UNREALIZED PROFIT (that amount of profit which exceeds total losses of the same period ) of the broker/member is immediately added to his (broker) cash balance in order to arrive at the total of the funds available with said clearing house, and will be made available to cover or pay off the counterpart contracts already settled. This account will not be shown in the balance sheet but will be disclosed in the accompanying accounting references as an adjustment factor to house or clients funds deposited in the clearing house. (See Client's Trading Deposits) 5. ACCOUNTS RECEIVABLE CLIENT'S OVERLOSS . This account represents broker's claims against customers who have incurred actual loss or losses in trading but has not yet filled it up through additional cash deposit or margin. This account is presented as current asset in the balance sheet if due in less than one year, otherwise, it will be treated separately among non-current asset. 6. COMPENSATION FUND This represents broker's contribution into the fund maintained by the Exchange (MIFE) to guarantee fulfillment of financial obligation (default) of each member-broker in commodity futures trading. This account will be shown separately among long-term investments in the balance sheet. llcd 7. CLIENT'S TRADING DEPOSIT AND FREE MARGIN . This account summarizes clients money position maintained with the broker and those transferred by the broker to the clearing house. In arriving at or computing for NET FREE MARGIN/DEFICIT, said client's Trading Deposit balance is adjusted by an amount recognized as UNREALIZED PROFIT (Loss) per EPR and, to a certain extent, TENDER DEPOSIT before concluding it with a NET FREE MARGIN (withdrawable funds of clients) in case of surplus, or NET DEFICIT in case of Deficit. This account is classified in the balance sheet under current liabilities. NOTE: 1. There is NO NEED to change the present income expense accounts comprising the Statement of Income and Retained Earnings for commodity futures brokers after observing that the various account titles utilized therein are still very much applicable under prevailing conditions. 2. Use of Special balance sheet accounts for Commodity Futures Brokers does not preclude the use of other customary balance sheet accounts to identify broker's assets, liabilities and stockholders' equity. III. COMMODITY FUTURES BROKER BALANCE SHEET For the Six Months Period Ended June 30, 1989 IV. COMMODITY FUTURES BROKERS ACCOUNTING REFERENCES TO FINANCIAL STATEMENTS Reference 1. Schedule of CASH IN BANK CLIENTS Enumerate banks with their corresponding balances, as reconciled. cdlex Reference 2. Schedule of CASH IN BANK HOUSE Enumerate banks with their corresponding balances, as reconciled. Reference 3. Schedule of FUNDS IN MIFCH CLIENTS Funds in MIFCH Client's balance per books Pxxx ADD Realized profit not taken up in books xxx Total xxx DEDUCT Miscellaneous charges and Fees per EPR (xxx) Realized loss not taken-up in books (xxx) Drawings not taken up in books (xxx) FUNDS IN MIFCH CLIENTS Pxxx ==== Reference 4. Schedule of FUNDS IN MIFCH HOUSE Funds in MIFCH HOUSE balance per books Pxxx ADD Realized profit not taken up in books xxx Total Pxxx DEDUCT Miscellaneous charges and Fees per EPR (xxx) Realized Loss not taken up in books (xxx) Drawings not taken up in books (xxx) FUNDS IN MIFCH HOUSE Pxxx ==== Reference 5. Schedule of ACCOUNTS RECEIVABLE-CLIENTS OVERLOSS Clients Date Account Term of Incurred Number Payment Amount Reference 6. Schedule of RECEIVABLE FROM DIRECTORS, OFFICERS, STOCKHOLDERS, EMPLOYEES AND AFFILIATES Date Term of DOSEA Extended Amount Payment Reference 7. Schedule of CLIENTS TRADING DEPOSITS AND FREE MARGIN Cash in Bank Clients (Reference 1) Pxxx ADD Funds in MIFCH Clients (Reference 3) xxx Unrealized profit on trade per MIFCH xxx Total Pxxx DEDUCT Unrealized loss on trade per MIFCH (xxx) Tender Deposit (xxx) Net Free Margin (Deficit) Pxxx ==== Reference 8. Schedule of ADVANCES FROM DIRECTORS, OFFICERS STOCKHOLDERS, EMPLOYEES AND AFFILIATES (DOSEA) Date Term of DOSEA Received Amount Payment Reference 9. List of TOP 20 STOCKHOLDERS AND THEIR RESPECTIVE SHAREHOLDINGS Stockholders Stockholdings V. GUIDES TO JOURNAL ENTRIES The formation of the Broker's Balance Sheet Accounts peculiar to Commodity Futures Trading could provide Accountants with a fair assessment as to how journal entries in the broker's books of accounts can be presented utilizing the aforementioned account titles. Illustrative journal entries in broker's books detailing routine futures trading transactions are herein presented realistically to GUIDE brokers and their accountants through easy, systematic way of complying with this Uniform Accounting System. TRANSACTION NO . 1 . Customer/Client remits his initial margin deposit to broker before trading. DB CASH IN BANK CLIENTS - Pxxx CR CLIENT'S TRADING DEPOSIT - Pxxx # TRANSACTION NO . 2 . Broker complies with client's instruction to buy/sell contracts while at the same time, transfers to Clearing house the necessary margin amount from client's account. DB FUNDS IN MIFCH CLIENTS - Pxxx CR CASH IN BANK CLIENTS - Pxxx # TRANSACTION NO . 3 . Client instructed broker to settle his outstanding/open contracts in the market (MIFE), and in the process, realizes profit . DB FUNDS IN MIFCH CLIENTS - Pxxx CR CLIENT'S TRADING DEPOSIT - Pxxx # TRANSACTION (ALTERNATE) No. 3. Client settles his open contract and incurs a loss. DB CLIENT'S TRADING DEPOSIT - Pxxx CR FUNDS IN MIFCH CLIENT - Pxxx # To record loss NOTE : Additional margin deposit from client as required by broker will necessitate same journal entry as in Transaction No. 1. TRANSACTION NO . 4 . Broker collects commission from client's liquidated/settled contracts. DB CLIENT'S TRADING DEPOSIT - Pxxx CR CASH IN BANK CLIENT - Pxxx # DB CASH IN BANK HOUSE - Pxxx CR COMMISSION INCOME - Pxxx # TRANSACTION NO. 5. At the end of the month, Clearing house bills broker for miscellaneous fees and charges for servicing client's trades. DB MISCELLANEOUS CHARGES AND FEES - Pxxx CR CASH IN BANK HOUSE - Pxxx # TRANSACTION NO. 6. Considering the fact that brokers collect fix commission from client's transaction at settlement, it is only logical for broker to absorb clearing house fees billed against clients; hence, broker reimburses client of said charges. DB CASH IN BANK CLIENT - Pxxx CR CASH IN BANK HOUSE - Pxxx It is understood at this point that the foregoing journal entries and illustrated transactions are logical BASICS in Futures trading transaction for brokers so that all other facets of futures trading operation, insofar as broker's books of accounts are concerned, merely evolves around them (i.e. commission income on customer's overloss) VI. CLEARING HOUSE TERMINOLOGIES Certain terminologies of MIFCH or Clearing House were lifted from its Procedural Manual, Series 1986, Equity Position Report (EPR), and Statement of Account (SA), prcd 1. To provide clearing members and the Securities and Exchange Commission the chance to be familiar or get acquainted with these terminologies; and to relate the significance of said terminologies with data required in the Uniform Accounting System; 2. To provide clearing members the correct update of their money position in the Clearing House insofar as requirements of the latter is concerned; and 3. To provide clearing members the convenient means to reconcile their financial records versus Clearing House records. Figure No. 1 below illustrates a typical EQUITY POSITION REPORT (or EPR) issued by MIFCH. This report is prepared at the end of each trading day and is available to members at around 9:30 A.M., the following day. It contains detailed listing of outstanding commodity futures contracts or open position of a member on a "per commodity basis". Separate EPRs are prepared for Clients account and House accounts. It also contains updated balances and accountabilities of every clearing member. At the lower portion of said EPR are "TOTALS". Understanding these TOTALS and their computation, which is the object of the following presentation, could provide easy learning on how the clearing house manages the funds of members, or how such funds deposited by the broker in the clearing house are accounted for at any given day. 1. UNREALIZED PROFIT/LOSS Amount shown in the EPR represents the summary computation of all OPEN positions of the clearing member for the particular date. The same amount is taken up as "UNREALIZED GAIN (LOSS) ON TRADES" a reconciling' item in the account title "CLIENT'S TRADING DEPOSIT AND FREE MARGIN" designated as Reference No. 7 in the accompanying Accounting References to Financial Statements. Unrealized profit/loss is computed daily by MIFCH after all transactions and instructions are carried out; and arrived at, after comparing members contract price versus market price for the day. Example: Buying Selling Contract price P260,000.00 P280,000.00 Market price 300,000.00 300,000.00 Balance P40,000.00 DB P20,000.00 CR Note: Member's BUYING POSITION IS profitable when contract price is lower than market price. In the instant example, a favorable balance for BUYING is credited to the member. Clearing House's books of accounts will show the following memorandum entries. (for unrealized profit) DB Cash in bank Pxxx CR Receivable from Members Pxxx (for unrealized loss) DB Receivable from Members Pxxx CR Cash in bank Pxxx 2. NECESSARY MARGIN amount in the EPR represents the clearing member's margin requirement for all contracts with unexpired trading period or open positions. It is considered "Net position margin" after MIFCH balances out that member's open position sporting a positive balance as against same member's open position sporting a negative balance. 3. MARGIN REQUIREMENT shown in EPR represents the difference after deducting NECESSARY MARGIN from UNREALIZED PROFIT/LOSS also shown in the same EPR. 4. CASH BALANCE shown in EPR is the balance of the account at the end of the day, and is the sum of all cash receipts, realized profits, minus cash payments and realized losses. Details of transactions affecting CASH are shown in MIFCH' s monthly prepared STATEMENT OF ACCOUNT shown hereunder as FIGURE NO. 2. This STATEMENT will enable clearing members to check the entries reflected therein and reconcile with entries entered in their books of accounts on a monthly basis. Ending debit (DB) balance of P876,712.00 shown in the Statement of Account is reflected in the Equity Position Report (or EPR) as the sum of Cash balance reflected at -783,184.50 plus Miscellaneous Fees (DR) reflected at P93,527.50. 5. REALIZED PROFIT/LOSS shown in the EPR summarizes profit/gain (CR) or Loss (DB) of all positions settled/liquidated for the day, and shows only the net balance. Said amount in the EPR is already included or was already taken up in arriving at the CASH BALANCE figure shown in the same EPR. 6. MISCELLANEOUS FEES shown in the EPR is a composition of fees or charges imposed by MIFCH and MIFE, monthly on members. The amount though is accrued or computed daily against CASH balance shown in the same EPR in order to arrive at actual funds remaining with MIFCH as of report date. LexLib 7. EQUITY which is a credit (CR) balance shown in the EPR resulted from the following computation: EPR AMOUNTS Cash Balance - 783,184.50 Unrealized profit/Loss 1,349,700.00 CR Miscellaneous Fees 93,527.50 DB EQUITY P472,988.00 CR ============= In MIFCH, this means member's actual money position. Under opposite situation, a negative equity (DB) means receivable from member/s which is subject to final assessment after computing equity surplus or deficit. 8. (EQUITY) SURPLUS/DEFICIT, This amount in the EPR is computed as follows: EQUITY (shown in No. 7, preceding) P472,988.00 CR Less: NECESSARY MARGIN 176,000.00 DB SURPLUS P296,988.00 CR ============= NOTE: There are cases where EQUITY is reduced further by a TENDER FEE/DEPOSIT in arriving at SURPLUS or DEFICIT. TENDER DEPOSIT is cash deposit requirement applied to either buying or selling contracts already committed to be performed by way of physical delivery of goods. Positive EQUITY balance or SURPLUS indicates Free Margin or withdrawable funds of the member, otherwise, negative balance or DEFICIT requires margin call from MIFCH to the member who is in return, required to accommodate said call by 12:00 noon the following day. cdll FIGURE 1 MANILA INTERNATIONAL FUTURES CLEARING HOUSE, INC. EQUITY POSITION REPORT FIGURE 2 MANILA INTERNATIONAL FUTURES CLEARING HOUSE, INC. STATEMENT OF ACCOUNTS