COMMODITY FUTURES TRADING COMMISSION RULE 1.55(K): FCM-SPECIFIC DISCLOSURE DOCUMENT

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1 COMMODITY FUTURES TRADING COMMISSION RULE 1.55(K): FCM-SPECIFIC DISCLOSURE DOCUMENT The Commodity Futures Trading Commission (Commission) requires each futures commission merchant (FCM), including RBC Capital Markets, LLC ( RBCCM or the Firm ), to provide the following information to a customer prior to the time the customer first enters into an account agreement with the FCM or deposits money or securities (funds) with the FCM. 1 Except as otherwise noted below, the information contained herein is as of July 13, RBCCM will update this information annually, and as necessary, to account for any material change to its business operations, financial condition or other factors that RBCCM believes may be material to a customer s decision to do business with the Firm. Nonetheless, RBCCM s business activities and financial data are not static and will change in non-material ways frequently throughout any 12-month period. Information that may be material with respect to RBCCM for purposes of the Commission s disclosure requirements may not be material to RBC USA Holdco Corporation for purposes of applicable securities laws. RBCCM is a wholly-owned subsidiary of RBC USA Holdco Corporation (the Parent ), a Delaware corporation. RBC USA Holdco Corporation is a wholly-owned subsidiary of Royal Bank of Canada, ( RBC ), the ultimate consolidated parent. The consolidated statement of financial condition includes wholly-owned subsidiaries, and is available at RBCCM s Designated Self Regulatory Organization is the CME Group, RBCCM s financial information reports can also be found by conducting a search for RBCCM in National Futures Association s ( NFA ) BASIC system ( and then clicking on View Financial Information on the RBCCM s BASIC Details page. Pursuant to Rule Sections(s) 1.55(k)(1) and (k)(2), the following is relevant information about RBCCM, including, name, title, business address, business background, areas of responsibility and the nature of the duties of each principal as defined in 3.1(a) (Individuals listed as Principals with the National Futures Association ( NFA ). Firm and its Principals RBC Capital Markets, LLC Three World Financial Center 200 Vesey Street, 5 th fl. New York, NY Phone: Fax number: Roseann.Viscardi@rbccm.com 1 The objective of the disclosures is to provide prospective and existing customers of RBCCM with material information in determining whether to engage in a relationship with the Firm.

2 The following individuals are located at 200 Vesey Street, New York, NY, 10281: Fleming, Blair, Managing Director ( MD ), Chief Executive Officer & Chairman of the Board Lively, Clinton, Non-Employee Board Member The following individuals are located at 30 Hudson Street, Jersey City, NJ Chiulli, Eugene, MD & Controller Decicco, Steven, MD & Chief Financial Officer Demonte, Matthew, MD & Chief Operations Officer Plotkin, Howard, MD & Chief Compliance Officer Thurlow, John J., MD & Chief Operating Officer The following individuals are located at 60 S 6 th Street, Minneapolis, MN, 55402: Fleming, Joseph, SR. VP, Chief Compliance Officer, Wealth Management Sagissor, Thomas, SR. VP, Regional Director & Board Member Taft, John, President & Board Member Tobin, Cathleen, SR. MD, Head, Correspondent & Advisor Services & Board Member The following individuals are located at 200 Bay Street South Tower, Toronto, ON, M5J 2J5, Canada: Maxwell, V. Troy, Non Employee Board Member Mcgregor, Alex Douglas, Non-Employee Board Member The following individual is located at th Ave, Suite 3600, Seattle, WA, 98101: Rasmusson, Karen, Manager, Risk The following individual is located at 300 W. 6 th St, Suite 1520, Austin, TX, 78701: Traweek, Darryl, Regional Director The following direct owner is located at Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE, 19808: RBC USA Holdco Corporation, Direct Owner Firm s Business Rule Section 1.55(k)(3) requires disclosure by an FCM of significant types of activities and product lines that the FCM engages in and the approximate percentage of assets and capital that are contributed to each type of business activity or product line. Further, the regulation is intended to provide the public with information concerning the major business activities engaged in by RBCCM as a registered FCM, so that a customer may be informed with regard to applicable benefits and risks when conducting transactions in commodity interests. This includes material business activities by RBCCM as the FCM. As a registered U.S. Broker-Dealer ( BD ), FCM and Swap Firm, RBCCM is a full-service clearing and execution provider for a broad range of securities and financial instruments. This includes, but is not limited to, equity securities, listed options, fixed income securities, repurchase and reverse repurchase agreements, securities futures and options on futures 2

3 instruments. See below for a list of RBCCM s exchange and clearing organization memberships. As a registered Swap Firm in conformity with the NFA Bylaw 301, RBCCM s business model also includes the facilitation of swap activities on behalf of its ultimate consolidated entity parent (Royal Bank of Canada or RBC ). RBC is a registered Swap Dealer subject to the jurisdiction of the CFTC in accordance with Section 732 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank Act ). The following information is as of April 30, 2015: Activity/Product Line Percentage of Assets Percentage of Capital FCM Market Activities 2.78% 0.52% Broker-Dealer(Non-FCM)* Activities: Client execution and clearing 97.22% 99.48% 7.68% 41.79% Market making 89.31% 54.30% Investment banking 0.23% 3.39% * Broker-Dealer activity includes non-fcm business activities, which includes, but is not limited to, the trade execution, market making, and investment banking activities associated with securities and other non-futures related financial instruments, including that for listed and over-the-counter equity, options and fixed income products. Client execution and clearing includes the firm s Wealth Management and Correspondent Services businesses. FCM Customer Business Rule Section 1.55(k)(4) requires the FCM to disclose its business on behalf of customers, including types of accounts, markets traded, international businesses, and clearinghouses and carrying brokers used, and its policies and procedures concerning the chose of bank depositories, custodians, and other counterparties. Such activities are limited to the activities of the FCM acting in its capacity as an FCM. RBCCM s business on behalf of its customer base in the futures markets, includes: Types of customers: Institutional (Corporations, Commodity Pools, Hedge Funds, Asset Managers, Pension Funds, Banks, Trust, Insurance Companies); Commercial (Agricultural, Energy) and Affiliates; Markets traded: Equity Index, Interest Rates, FX, Agricultural, Energy and Metals International businesses: Canada, Europe, Asia, Australia 3

4 Exchange Memberships Exchange Memberships CBOE Futures Exchange Nodal Exchange LLC Chicago Board of Trade NYSE Liffe US, LLC Chicago Mercantile Exchange, Inc. One Chicago LLC Commodity Exchange Inc. NYSE Liffe Europe ICE Futures US, Inc. ICE Futures Canada Nasdaq OMX Futures Exchange, Inc. New York Mercantile Exchange, Inc. ICE Futures Europe EUREX Clearinghouses used: member, non-member Clearing Organization Chicago Mercantile Exchange ICE Clear US Inc. ICE Clear Europe LCH.Clearnet Limited Options Clearing Corporation RBCCM is the Member Yes Yes Yes Yes Yes Carrying brokers used: affiliates, non-affiliates Carrying Brokers US/Non-US ADM Investor Services, Inc. Barclays Bank PLC Macquarie Bank Limited RBC Dominion Securities, Inc. Royal Bank of Canada RBC Europe Limited Affiliated with RBCCM Yes/No No No No Yes Yes Yes 4

5 Permitted Depositories and Counterparties The following is information related to RBCCM s policies and procedures concerning the choice of bank depositories, custodians and counterparties for permitted transactions under CFTC Regulation For this purpose, counterparties are limited to CFTC Regulation 1.25 counterparties. The funds you deposit with RBCCM may be invested by RBCCM in certain types of financial instruments that have been approved by the Commission for the purpose of such investments. Permitted investments are listed in Commission Regulation Section 1.25 and include: U.S. government securities; municipal securities; money market mutual funds; and certain corporate notes and bonds. RBCCM currently invests customer funds in U.S. Government Securities and Money Market Funds offered by the CME Group Collateral Management Program. RBCCM maintains customer segregated and customer secured Regulation 30.7 and customer swap segregated bank accounts with The Bank of New York Mellon Corporation, BMO Harris Bank and JP Morgan Chase and Co. RBCCM may retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that RBCCM may invest customer funds in. This information may be obtained from the NFA at: An FCM s segregation of customer funds forms the foundation of the futures industry's customer protection regime. Funds that customers deposit with RBCCM, or that are otherwise required to be held for the benefit of customers, to margin futures and options on futures contracts traded on futures markets located in the United States, must be held in a customer segregated funds account pursuant to Section 4d(a)(2) of the Commodity Exchange Act and CFTC Regulation Funds that customers deposit with RBCCM, or that are otherwise required to be held for the benefit of customers, to margin futures and options on futures contracts traded on foreign boards of trade, must be held in a foreign futures and foreign options secured amount account in accordance with CFTC Regulation Funds that customers deposit with an FCM, or that are otherwise required to be held for the benefit of customers, to margin, guarantee or secure a cleared swap, must be segregated and held in accordance with CFTC Regulations CFTC Regulation 1.22 prohibits an FCM from using one customer's funds to meet the obligations of another customer. Similarly, CFTC Regulation 22.2(d) prohibits an FCM from using one cleared swaps customer s collateral to meet the obligations of any other person. Therefore, if a customer fails to have sufficient funds on deposit with an FCM to meet the customer's obligation, the FCM must use its own funds (excess funds) to make up any deficiency in a customer's account. CFTC Regulation 1.11(e)(3)(i)(D), CFTC Regulation 1.23(c) and NFA Financial Requirements Section 16 requires RBCCM to maintain written policies and procedures regarding the maintenance of its excess customer segregated, secured 30.7 funds and customer segregated swaps to ensure RBCCM remains in compliance with segregation, secured 30.7 requirements and cleared swap segregation. 5

6 In establishing targeted excess segregated, secured 30.7 and cleared swap amounts, RBCCM performs due diligence inquiries relating to the nature of its business, along with the factors outlined below: the firm's type of customers and their general creditworthiness; trading activity; type of markets and products traded by the firm's customers and the firm itself; general volatility and liquidity of those markets and products; Cleared Swaps is a new asset class for the FCM and ranges were based on the current client base; the firm's own liquidity and capital needs; historical trends in customer segregated/secured requirements and customer debit/deficits Based upon these considerations, RBCCM primarily engages institutional clients consisting of asset managers, pensions, corporations, utilities, hedge funds and CTAs having strong creditworthiness. RBCCM makes a concerted effort to only accept clients with excellent creditworthiness. Trading activity varies due to the diverse needs or our client base but, in general, our daily swings tend to be constrained by that same diversity of positions. The majority of client positions are in very liquid markets. RBCCM has established a target dollar range for such purposes. The targeted range for customer segregated and secured 30.7 is as follows: Customer Funds Required $500 million o Target Minimum - $20 million excess Customer Funds Required > $500 million $1 billion o Target Minimum - $40 million excess Customer Funds Required > $1 billion $1.5 billion o Target Minimum - $80 million excess Customer Funds Required > $1.5 billion $2.0 billion o Target Minimum - $120 million excess Customer Funds Required > $2.0 billion $2.5 billion o Target Minimum - $160 million excess Customer Funds Required > $2.5 billion $3.0 billion o Target Minimum - $200 million excess The targeted range for Cleared Swaps is as follows: Customer Funds Required $500 million o Target Minimum - $40 million excess Customer Funds Required > $500 million $1 billion o Target Minimum - $80 million excess Customer Funds Required > $1 billion $1.5 billion o Target Minimum - $120 million excess 6

7 Customer Funds Required > $1.5 billion $2.0 billion o Target Minimum - $160 million excess Customer Funds Required > $2.0 billion Target Minimum - $200 million excess These target percentage ranges are sufficient to meet customer obligations while concurrently complying with segregated/secured 30.7/cleared segregated swap requirements. However, it is important to note that falling below these targeted ranges will not necessarily result in a violation of segregated/secured 30.7/cleared segregated swap amounts. If a withdrawal of excess funds causes the Firm to fall below the targeted amount, RBCCM will comply with the following: By the close of business the following day, RBCCM must restore the excess funds to the target amount; Or if RBCCM chooses not to restore the targeted amount, a revised target amount must be documented and approved by the CFO. Although RBCCM does not anticipate material changes to its written policies and targeted range amounts, in the event such changes are necessary, appropriate internal approvals, recordkeeping and updates to Firm disclosures documentation will be performed accordingly. Disbursements of Customer Segregated/Secured 30.7 Funds/Customer Segregated Swaps Disbursement(s) of RBCCM s customer segregated/secured 30.7/customer segregated swaps funds (Single or Multiple transactions), that are not for the benefit of customers, in an amount equal to or greater than 25% of excess funds (based on most recent segregated/secured 30.7/customer segregated swaps calculation) will comply with the following: RBCCM s CFO must pre-approve disbursement in writing prior to any movement of monies; RBCCM must provide the CFTC, CME and National Futures Association (NFA) a signed and dated written notice that provides the following: o RBCCM has made or intends to disburse greater than 25% of excess funds; o Description of why, the amount and who is receiving the disbursement; o Confirmation that the CFO pre-approved the disbursement in writing; o Current estimate of RBCCM s remaining excess funds; o Representation that RBCCM remains compliant with segregation/secured requirements after the disbursement. Upon a disbursement greater than 25% of excess funds, no additional disbursement(s) may be made on the same business day without obtaining pre-approval and providing written notice to the regulatory authorities. 7

8 Material Risks Rule Section 1.55(k)(5) requires an FCM, including RBCCM to discuss the material risks, accompanied by an explanation of how such risks may be material to its customers, in entrusting funds to the FCM, including, without limitation, the nature of investments made by RBCCM. These risks include: (i) the nature of investments made by the FCM (including credit quality, weighted average maturity and weighted average coupon); (ii) an FCM s creditworthiness, leverage, capital, liquidity, principal liabilities, balance sheet leverage and other lines of business; (iii) risks to FCM created by its affiliates and their activities, including investment of customer funds in an affiliated entity; and (iv) any significant liabilities, contingent or otherwise, and material commitments. Nature of Investments RBCCM holds a variety of instruments to support the wholesale broker dealer and wealth management businesses, the majority of which is US Treasury securities, followed by other highly rated government and/or government sponsored entity ( GSE ) securities, and other investment grade securities, such as corporate bonds and municipal securities. Additionally, RBCCM also holds non-investment grade corporate bonds, mortgage backed securities, convertible bonds and certain equities and equity options. Although the weighted average maturity and coupon for such holdings will vary, the Firm maintains robust risk management practices which address the inherent risks with longer maturity or duration securities, including, interest rate sensitivity risk. (See Risk section below). RBCCM also performs repurchase agreements and reverse repurchase agreements transacted through RBCCM, most of which are on an overnight basis. The business activities performed and inventories held within RBCCM may lead to the exposure to a variety of risks. Our ability to manage these risks is a key competency within RBCCM, and is supported by a strong risk culture and an effective risk management approach. These risks include credit, market, liquidity, regulatory compliance and operational risk. Risks created by affiliates are limited to RBCCM s ultimate consolidated entity parent, RBC. Other affiliates of RBC do not create material risks to RBCCM unless they have a material impact or exposure to the parent. Credit, Leverage Net Capital & Liquidity As of June 30, 2015, RBCCM was independently rated by Standard and Poor s, with a Long Term Foreign and Local Issuer Credit rating of AA- and Short Term Foreign and Local Issuer 8

9 Credit Rating of A-1+. As of June 30, 2015, Moody s Investor Service rated RBCCM with an Issuer and Long Term Rating of A2, and Short Term Rating of P-1. As of April 30, 2015, RBCCM s excess net capital was $ million. The Firm s net capital calculation includes consideration of both customer and non-customer risk maintenance margin requirements. Pursuant to the Firm s leverage calculation, which takes into account necessary adjustments pursuant to NFA instructions for the purpose of performing the calculation, as of April 30, 2015, RBCCM s leverage ratio was This calculation is performed by dividing RBCCM s total adjusted assets (numerator) by regulatory capital (denominator). Regulatory capital is the sum of RBCCM s total ownership equity and subordinated debt. As of April 30th 2015, RBCCM has complied with its internal liquidity thresholds mandated by RBCCM governance policies and procedures. RBCCM manages its liquidity and funding risk through standard business methodologies, utilizing net cash flow measurements and limits (i.e., tactical liquidity risk). Calculation of net cash flow positions include scheduled, known and forecasted cash flows of all assets, liabilities and material off-balance sheet activities maturing within the periods of measurement that include Day 1, week 1, weeks 2-4, weeks 5-9 and beyond 9 weeks. In general, cash flows are reported in periods corresponding to the contracted maturity dates of underlying transactions unless a date other than legal maturity reflects a more appropriate cash flow treatment for certain balance sheet items, such as securities. A liquidity haircut is applied to the balance and categorized by time classifications accordingly. The calculated net cash flow can be no less than the limits outlined in the Firm policy for the respective time periods. Risks Associated with the FCM Market Risk Market risks incurred by RBCCM are mainly through fixed income trading activity in the wholesale broker dealer business and to a lesser extent, through the wealth management business. Inventories of securities held in RBCCM are most sensitive to movements in interest rates and credit spreads as opposed to other risk factors. These risk factors, among others, are measured and monitored independently by the risk management department. Daily reporting is performed by the Risk Management Department that includes the review of measures such as value-at-risk, stress value-at-risk, stress scenarios and sensitivities. A series of market risk limits have been implemented to constrain the levels of risks incurred by the broker dealer and to create escalation points to the RBCCM s Chief Risk Officer ( CRO ) and the RBCCM s senior management and Board of Directors as necessary. Market risk is not considered a significant risk to the futures clearing business as this business line operates on an agency basis and does not hold inventories of securities or derivatives that would incur market risk. Generally, risks to affiliates would be exclusive to RBCCM s ultimate parent entity, RBC. Such affiliate risks to RBC would pose risk to RBCCM only to the extent that risk resulted in a material impact to RBC. 9

10 Credit Risk Credit risks incurred by RBCCM include counterparty credit, issuer, clearinghouse, settlement and margin risk. Credit risks applicable to the broker dealer occur from activities such as securities lending, the holding of securities inventories, settlement of transactions and the extension of margin to clients through the wealth management and futures clearing businesses. Credit risks are quantified and managed independently by the risk management department with daily governance through reporting. Escalation of issues is to the RBCCM s CRO and the RBCCM s senior management and Board of Directors as necessary. Operational Risk Operational risk policies and programs have been implemented across the organization and are applicable to all business activities that occur in RBCCM. Risk control assessments, operational event reporting and key risk indicators are established processes that are used to mitigate operational risk. Liquidity & Funding Risk Liquidity and funding risk is a material risk which is managed by RBCCM. Liquidity Risk is defined as the risk that an institution is unable to generate or obtain sufficient cash or its equivalents on a cost effective basis to meet commitments as they become due. The nature of capital markets and some wealth management services inherently exposes RBCCM to liquidity risk. The type and level of liquidity risk depends on many factors, including but not limited to, the source of the liquidity risk, the nature and duration of the circumstances giving rise to the risk and RBCCM s capacity to counterbalance or respond to changes in liquidity demands. The most common sources of liquidity risk arise from mismatches in the timing and value of on-balance sheet and off-balance sheet cash inflows and outflows. In general, on-balance sheet mismatches generate liquidity risk when the effective maturity of assets exceeds the effective maturity of liabilities. While liquidity mismatches inherently expose RBCCM to liquidity risk, it is typically lowprobability/high-severity external or internal stress events that create the potential to amplify existing liquidity mismatches and create adverse liquidity outcomes. For example, internal losses from first order risks (e.g. credit, market, operational) can negatively impact the perceived credit quality of a financial institution by putting pressure on its capital base, which in turn, may constrain its access to sources of funding and exacerbate its liquidity risk. As primarily a second order or consequential risk, liquidity risk must therefore be managed in an integrated manner with credit, market, operational and other relevant risks. External events such as general market disruptions, country-specific credit or payment system issues may also heighten liquidity risk. The above situations may be material to RBCCM customers if RBCCM was not able to source funds/collateral to meet margin requirements, facilitate settlements and/or meet a liability obligation that has come due prior to the ability to monetize an asset. Delayed customer payments could result if not properly planned for in advance and proper contingencies put in 10

11 place. Given the range of circumstances and factors that can influence liquidity risk, RBCCM utilizes a range of liquidity risk measures that vary by time horizon and stress levels. In consideration of these two variables (time horizon and stress level), RBCCM primarily employs two types of liquidity risk assessments, tactical and contingency (stress) liquidity risk. Tactical liquidity risk represents the risk of a negative net cash flow position whereby cash outflows would exceed cash inflows over a short term horizon. Contingency liquidity risk is the risk that future circumstances will require a significantly larger amount of cash or collateral than expected. Contingency liquidity risk typically arises at the tail end of the distribution of liquidity conditions that is both remote and potentially severe and therefore metrics with increasing levels of stressed assumptions are used to measure this risk. Regulatory Environment RBCCM continues to monitor ongoing regulatory obligations promulgated by various US and global regulatory agencies in mitigating risk. These regulations include prohibitions on proprietary trading and certain investments in hedge and other investment funds (i.e. U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) - Section 619 the Volcker Rule ) and the US Federal Reserve proposal for Enhanced Supervision of Foreign Banking Organizations. Material Liabilities & Commitments The following is a summary of material liabilities and commitments on behalf of RBCCM, as of April 30, Leases The Firm leases office space, furniture, and communications and information technology equipment under various non-cancelable operating and capital leases. Most office space lease agreements include rate increases, which are recognized on a straight-line basis over the life of the lease, and cover payments of real estate taxes, insurance, and other occupancy expenses. At April 30, 2015, the aggregate future minimum rental payments were as follows (in thousands): Gross Sublease Net Year Commitment Income Commitment 2015 $ 94,810 $ (1,527) $ 93, ,572 (1,154) 86, ,880 (1,192) 79, ,396 (610) 66, ,912-57,912 Thereafter 191, ,230 Total $ 579,800 $ (4,483) $ 575,317 Exchange and Clearing Memberships The Firm maintains memberships with various domestic exchanges and clearinghouses. Exchange memberships owned by the Company are carried at cost as an intangible asset in other assets on the consolidated statement of financial 11

12 condition and assessed periodically for potential impairment in accordance with ASC 940, Financial Services Brokers and Dealers. Under the standard membership agreements, members are generally required to guarantee the performance of other members. Under the agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral. The Firm s obligation under such guarantees could exceed the collateral amounts posted. The Firm s maximum potential liability under these arrangements cannot be quantified. However, the potential for the Firm to be required to make payments under these arrangements is remote. Accordingly, no contingent liability was recorded for these arrangements at April 30, Litigation The Firm has been named, as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with its activities as a broker-dealer. Certain of the actual or threatened legal actions include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. The Firm is also involved, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding the Firm s business, including, among other matters, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The Firm contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Firm cannot predict the loss or range of loss, if any, related to such matters; how or if such matters will be resolved; when they will ultimately be resolved; or what the eventual settlement, fine, penalty or other relief, if any, might be. Subject to the foregoing, the Firm believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated statement of financial condition of the Firm. Legal accruals have been established in accordance with the requirements for accounting for contingencies. Once established, accruals are adjusted when there is more information available or when an event occurs requiring a change. There is a reasonable possibility that an additional loss may be incurred beyond the amount of legal accruals depending on the ultimate outcome of legal actions for which the Company is involved. On October 10, 2014, the Delaware Court of Chancery in a class action brought by former shareholders of Rural/Metro Corporation held the Company liable for aiding and abetting a breach of fiduciary duty by three Rural/Metro directors. The plaintiffs attorneys fees application has been decided by the Court with no further liability to the Company. A final judgment was entered on February 19, 2015 in the amount of US$93 million. The Company has appealed the Court s determination of liability and quantum of damages, and the plaintiffs have cross-appealed the Court s ruling on the attorneys fees application. 12

13 Material Complaints or Actions Rule Section 1.55(k)(7) requires RBCCM to disclose any material administrative, civil, enforcement or criminal complaints or actions filed against the FCM where such complaints or actions have not concluded, and any enforcement complaints or actions filed against FCM during the last three years. Based upon a review of relevant open and/or closed actions, RBCCM as the registered FCM, has no current reportable material complaints or actions. Customer Funds Segregation Rule Section 1.55(k)(8) requires a basic overview of customer fund segregation, FCM management and investments, FCMs and joint FCM/broker dealers. RBCCM maintains three different types of accounts for customers, depending on the products a customer trades: (i) a Customer Segregated Account for customers that trade futures and options on futures listed on US futures exchanges; (ii) a Secured 30.7 Account for customers that trade futures and options on futures listed on foreign boards of trade; and (iii) a Cleared Swaps Customer Account for customers trading swaps that are cleared on a derivatives clearing organization (DCO) registered with the Commission. The requirement to maintain these separate accounts reflects the different risks posed by the different products. Cash, securities and other collateral (collectively, Customer Funds ) required to be held in one type of account, (e.g., the Customer Segregated Account, may not be commingled with funds required to be held in another type of account, such as the Secured 30.7 Account, except as the Commission may permit by order). Customer Segregated Account. Funds that customers deposit with RBCCM, or that are otherwise required to be held for the benefit of customers, to margin futures and options on futures contracts traded on futures exchanges located in the US, (i.e., designated contract markets) are held in a Customer Segregated Account in accordance with section 4d(a)(2) of the Commodity Exchange Act (Act) and Commission Rule Customer Segregated Funds held in the Customer Segregated Account may not be used to meet the obligations of RBCCM or any other person, including another customer. All Customer Segregated Funds may be commingled in a single account, (i.e., a customer omnibus account) and held with: (i) a bank or trust company located in the US; (ii) a bank or trust company located outside of the US that has in excess of $1 billion of regulatory capital; (iii) an FCM; or (iv) a DCO. Such commingled account is properly titled to make clear that the funds belong to, and are being held for the benefit of, RBCCM s customers. RBCCM will hold sufficient US dollars in the US to meet all US dollar obligations and sufficient funds in each other currency to meet obligations in such currency. Unless a customer provides instructions to the contrary, RBCCM may hold Customer Segregated Funds only: (i) in the US; (ii) in a money center country; or (iii) in the country of origin of the currency. 13

14 Secured 30.7 Account. Funds that customers deposit with RBCCM, or that are otherwise required to be held for the benefit of customers, to margin futures and options on futures contracts traded on foreign boards of trade, (i.e., Secured 30.7 Customer Funds), and sometimes referred to as the foreign futures and foreign options secured amount, are held in a Secured 30.7 Account in accordance with Commission Rule Funds required to be held in the Secured 30.7 Account for or on behalf of customers may be commingled in a Secured 30.7 customer omnibus account and held with: (i) a bank or trust company located in the US; (ii) a bank or trust company located outside the US that has in excess of $1 billion in regulatory capital; (iii) an FCM; (iv) a DCO; (v) the clearing organization of any foreign board of trade; (vi) a foreign broker; or (vii) such clearing organization s or foreign broker s designated depositories. Such commingled account must be properly titled to make clear that the funds belong to, and are being held for the benefit of, the RBCCM s customers. Customers trading on foreign markets assume additional risks. Laws or regulations will vary depending on the foreign jurisdiction in which the transaction occurs, and funds held in a Secured 30.7 Account outside of the US may not receive the same level of protection as customer segregated funds. If the foreign broker carrying Secured 30.7 customer positions fails, the broker will be liquidated in accordance with the laws of the jurisdiction in which it is organized, which laws may differ significantly from the US Bankruptcy Code. Return of Secured 30.7 customer funds to the US will be delayed and likely will be subject to the costs of administration of the failed foreign broker in accordance with the law of the applicable jurisdiction, as well as possible other intervening foreign brokers, if multiple foreign brokers were used to process the US customers transactions on foreign markets. If the foreign broker does not fail but the Secured 30.7 Customers US FCM fails, the foreign broker may want to assure that appropriate authorization has been obtained before returning the funds to the FCM s trustee, which may delay their return. If both the foreign broker and the US FCM were to fail, disputes between the trustee for the US FCM and the administrator for the foreign broker may result in significant delays and additional administrative expenses. Use of other intervening foreign brokers by the US FCM to process the trades of Secured 30.7 customers on foreign markets may cause additional delays and administrative expenses. To reduce the potential risk to Secured 30.7 customer funds held outside of the US, Commission Rule 30.7 generally provides that an FCM may not deposit or hold Secured 30.7 customer funds in permitted accounts outside of the US except as necessary to meet margin requirements, including prefunding margin requirements, established by rule, regulation, or order of the relevant foreign boards of trade or foreign clearing organizations, or to meet margin calls issued by foreign brokers carrying the Secured 30.7 customers positions. The rule further provides, however, that, in order to avoid the daily transfer of funds from accounts in the US, an FCM may maintain in accounts located outside of the US an additional amount of up to 20 percent of the total amount of funds necessary to meet margin and prefunding margin requirements to avoid daily transfers of funds. 14

15 Cleared Swaps Customer Account. Funds deposited with RBCCM, or otherwise required to be held for the benefit of customers, to margin swaps cleared through a registered DCO, (i.e., Cleared Swaps Customer Collateral), are held in a Cleared Swaps Customer Account in accordance with the provisions of section 4d(f) of the Act and Part 22 of the Commission s rules. Funds required to be held in a Cleared Swaps Customer Account may be commingled in an omnibus account and held with: (i) at a bank or trust company located in the US; (ii) a bank or trust company located outside of the US that has in excess of $1 billion of regulatory capital; (iii) a DCO; or (iv) another FCM. Such commingled account is properly titled to make clear that the funds belong to, and are being held for the benefit of, RBCCM s Cleared Swaps Customers. No SIPC Protection. Although RBCCM is a registered broker-dealer, it is important to understand that the funds you deposit with RBCCM for trading futures and options on futures contracts on either US or foreign markets or cleared swaps are not protected by the Securities Investor Protection Corporation. Further, Commission rules require RBCCM to hold funds deposited to margin futures and options on futures contracts traded on US designated contract markets in Customer Segregated Accounts. Similarly, RBCCM must hold funds deposited to margin cleared swaps and futures and options on futures contracts traded on foreign boards of trade in a Cleared Swaps Customer Account or a Secured 30.7 Account, respectively. In computing its Customer Funds requirements under relevant Commission rules, RBCCM may only consider those Customer Funds actually held in the applicable Customer Accounts and may not apply free funds in an account under identical ownership but of a different classification or account type (e.g., securities, Customer Segregated, Secured 30.7) to an account s margin deficiency. In order to be used for margin purposes, the funds must actually transfer to the identically-owned undermargined account. For additional information on the protection of customer funds, please see the Futures Industry Association s Protection of Customer Funds Frequently Asked Questions located at Filing a Complaint Rule Section 1.55(k)(9) requires RBCCM to describe how a customer may obtain information regarding filing a complaint about RBCCM with the Commission or with RBCCM s DSRO. A customer that wishes to file a complaint about RBCCM or one of its employees with the Commission can contact the Division of Enforcement either electronically at or by calling the Division of Enforcement tollfree at 866-FON-CFTC (866) A customer that may file a complaint about the RBCCM or one of its employees with the National Futures Association electronically at or by calling NFA directly at (800)

16 A customer that wishes to file a complaint about RBCCM or one of its employees with the CME Group, RBCCM s DSRO, electronically at or by calling the CME Group s Division of Market Regulation at (312) Relevant Financial Data Rule Section 1.55(k)(10) requires RBCCM to include the following financial information as of the most recent month-end that such information is available with respect to this Disclosure Document. This financial information includes the following as of 5/31/2015, unless stated otherwise: (i) RBCCM s total equity, regulatory capital, and net worth, all computed in accordance with U.S. Generally Accepted Accounting Principles and Rule 1.17, as applicable; (ii) the dollar value of RBCCM s proprietary margin requirements as a percentage of the aggregate margin requirement for futures customers, cleared swaps customers, and 30.7 customers; (iii) the number of futures customers, cleared swaps customers, and 30.7 customers that comprise 50 percent of RBCCM s total funds held for futures customers, cleared swaps customers, and 30.7 customers, respectively; (iv) the aggregate notional value, by asset class, of all non-hedged, principal over-the counter transactions into which RBCCM has entered; (v) the amount, generic source and purpose of any unsecured lines of credit (or similar short-term funding) the RBCCM has obtained but not yet drawn upon. (vi) the aggregate amount of financing the FCM provides for customer transactions involving illiquid financial products for which it is difficult to obtain timely and accurate prices; (vii) the percentage of futures customers, cleared swaps customers, and 30.7 customer receivable balances that RBCCM was required to write-off as uncollectable during the past 12-month period, as compared to the current balance of funds held for futures customers, cleared swaps customers, and 30.7 customers. Financial Data RBCCM s Ownership Equity is $4,591,545,046, Regulatory Capital (Ownership Equity plus Subordinated Debt) is $5,991,545,046 and Net Worth (Net Capital) is $1,221,753,887, all which were computed in accordance with U.S. Generally Accepted Accounting Principles and Rule 1.17, as applicable; 16

17 RBCCM s proprietary margin requirement was 16% of the aggregate margin requirement for all customers; Nine (9) Futures customers comprised 50 percent of RBCCM s funds held in Segregation accounts, six (6) Foreign Futures/Options customers comprised 50 percent of RBCCM s funds held in 30.7 Secured accounts and one (1) cleared swap customer comprised 50 percent of RBCCM s funds held in CFTC Part 22 Cleared Swaps Segregated accounts; RBCCM was not required to write-off any customer balances as uncollectable during the past 12-month period. RBCCM does not currently provide financing to customers within its FCM, and therefore would not be subject to risk regarding customer financing involving illiquid financial products. Lines of Credit & Funding RBCCM has approximately $1.2 billion in short-term (overnight) credit facilities with nonaffiliated banks. These facilities are used to manage short-term liquidity needs. As of April 30, 2015, there was no balance outstanding under these facilities. Interest is paid monthly and is based on a floating rate equal to the federal fund rate plus a variable spread. RBCCM has an $850 million short-term (overnight) credit facility with Royal Bank of Canada ( RBC ), its ultimate consolidated parent. This facility is used to manage short-term liquidity needs. As of April 30, 2015, there was no outstanding balance under this facility. Interest is accrued daily and is based on a floating rate equal to the federal fund rate plus 0.30%. RBCCM extended the $3.0 billion revolving credit agreement with RBC on August 24, 2014, now maturing on August 19, This facility is used to manage short-term liquidity needs. At April 30, 2015, the amount available was $3.0 billion and there were no borrowings under this facility. Interest is paid monthly and is based on a floating rate equal to 30-day LIBOR, as of each reset date, plus 0.70%. Loans under this facility are unsecured. RBCCM has entered into a secured loan agreement with Bedford Row Funding Corp. ( Bedford Row ), an affiliate, on December 4, 2012, not to exceed $10.0 billion at any given time. This facility, which expires on December 4, 2018, is used to provide an alternative source of funding and to complement the current funding programs, which includes short-term repurchase agreement financing. As of April 30, 2015, $6.7 billion was outstanding. The fair value of securities pledged as collateral on this loan was $6.7 billion. Interest is paid monthly and is based on LIBOR (0.32%-0.59% at April 30, 2015). RBCCM has entered into an uncommitted money market facility agreement with RBC Investor Services Bank S.A., an affiliate, not to exceed Euro million. This facility is used to manage short-term liquidity needs. As of April 30, 2015, the Company had $104.4 million of borrowing under this facility. Interest is based on 3 months EURIBOR and GBP LIBOR 17

18 (0.12% and 0.69% respectively, at April 30, 2015). Customers should be aware that the NFA publishes on its website certain financial information with respect to each FCM. The FCM Capital Report provides each FCM s most recent monthend adjusted net capital, required net capital, and excess net capital. (Information for a twelvemonth period is available.) In addition, the NFA publishes twice-monthly a Customer Segregated Funds report, which shows for each FCM: (i) total funds held in Customer Segregated Accounts; (ii) total funds required to be held in Customer Segregated Accounts; and (iii) excess segregated funds, (i.e., the FCM s Residual Interest). This report also shows the percentage of Customer Segregated Funds that are held in cash and each of the permitted investments under Commission Rule Finally, the report indicates whether an FCM held any Customer Segregated Funds during that month at a depository that is an affiliate. The report shows the most recent semi-monthly information, but the public will also have the ability to see information for the most recent twelve-month period. A 30.7 Customer Funds report and a Customer Cleared Swaps Collateral report provides the same information with respect to the 30.7 Account and the Cleared Swaps Customer Account. The above financial information reports can be found by conducting a search for a specific FCM in NFA s BASIC system ( and then clicking on View Financial Information on the FCM s BASIC Details page. Current Risk Practices, Controls and Procedures Rule Section 1.55(k)(11) requires a summary of RBCCM s current risk practices, controls and procedures. RBCCM is both a registered futures commission merchant (FCM) with the NFA and the Commodities Futures Trading Commission (CFTC), and is a registered broker dealer with the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) in the United States. Pursuant to these registrations, RBCCM is subject to ongoing rigorous regulatory obligations, including, but not limited to, maintaining satisfactory risk controls, policies and procedures. Further, RBCCM is subject to periodic review by these aforementioned regulatory bodies, and performs its own internal controls testing reviews. This is further supported by independent reviews performed by the Firm s internal Audit function and external third-party Auditors more broadly. Governance Functions and Risk Controls RBCCM maintains a robust risk and controls governance framework supported by policies and procedures pertaining to the oversight of the Firm both within the U.S. and globally. Relevant RBCCM control areas include, but are not limited to, Market Risk, Credit Risk, Liquidity Risk, Operational Risk, Compliance and Audit. Each functional risk and/or control area maintains policies, procedures and governance tools (e.g., surveillance reports, risk limit thresholds and metrics, front-office systemic controls) for purposes of maintaining the Firm s overall governance and risk management structure. 18

19 These risk and control functions also maintain dedicated staffing specifically for the sales and trading activity within the FCM platform. Among other duties, the FCM Risk function measures overnight and intraday risks of all client positions using methods consistent with the Firm s Risk Management policies and procedures. These measures are also compared to Exchange margin requirements for validating appropriate margin. Additional monitoring includes a review of profit/loss, concentration risks and liquidity risks. These and other reviews of client positions enhance the existing controls that already exist with RBCCM. Polices & Procedures RBCCM maintains a wide array of policies and procedures utilized by both front-office and functional support areas of the FCM. Many of these policies and procedures are required as part of the obligations associated with being a registered FCM. However, the Firm also maintains and follows Firm specific policies and procedures which are adhered to at a global organization level. Relevant polices and procedures maintained by the Firm associated with the RBCCM as an FCM include, but are not limited to: Futures Compliance Manual Financial Control Procedures Customer Service/Treasury Procedures Operations Procedures Manual Registration Manual Risk Management Manual Anti-Money Laundering Procedures Enterprise Privacy Risk Management Policy This Disclosure Document was first used on August 24,