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Regulatory Notice 10-46

Supplemental FOCUS Filing Requirement Applicable to Certain Joint Broker-Dealers/Futures Commission Merchants

Published Date:
Effective Date: FOCUS Report Due on November 23, 2010, Covering the October 2010 Reporting Period

FOCUS Reporting

Regulatory Notice
Notice Type

Referenced Rules & Notices

SEA Rule 17a-5
FINRA Rule 4521
Suggested Routing

Regulatory Reporting
Senior Management
Key Topics

FOCUS Reporting

Executive Summary

Beginning with the monthly FOCUS Report that is due on November 23, 2010 (covering the October 2010 reporting period), each member firm that is a futures commission merchant (FCM) and clears OTC derivatives for customers through Chicago Mercantile Exchange Inc. (CME)—either as a CME clearing member itself or as a carrying, non-clearing firm through a CME clearing member—must file with FINRA a new statement pertaining to customer cleared OTC derivatives. This requirement arises from recent amendments by CME to its financial reporting rules and forms and by National Futures Association (NFA) to its financial requirements rules.

The new statement—the Statement of Sequestration Requirements and Funds in Cleared OTC Derivatives Sequestered Accounts (Sequestration Statement)—is a supplemental schedule to FOCUS Report Parts II and II CSE and firms must file it with FINRA as part of their monthly FOCUS Reports.

The Sequestration Statement is set forth in Attachment A.

Questions concerning this Notice should be directed to:

•  Yui Chan, Managing Director, Risk Oversight & Operational Regulation (ROOR), at (646) 315-8426; or
•  Kathryn Mahoney, Director, ROOR, at (646) 315-8428.

Background and Discussion

Effective May 6, 2010, the Commodity Futures Trading Commission (CFTC) adopted new amendments to the CFTC's Regulation Part 1901 that, among other things, create a new customer account class for "cleared OTC derivatives" (as defined in new CFTC Regulation 190.01(oo)), applicable only to the bankruptcy of a commodity broker that is an FCM.2 As stated in the CFTC adopting release for these new regulations, "... a position in an OTC derivative (and relevant collateral) that a customer clears through an FCM with a DCO [derivatives clearing organization], which position (and collateral) is not subject to a Section 4d [of the Commodity Exchange Act] Order, would be considered part of the cleared OTC derivative account class, as soon as, but only after, a DCO rule... that requires such positions (and relevant collateral) to be held in a separate account for cleared OTC derivatives becomes effective..."3

Following the CFTC's adoption of the new Regulation Part 190 requirements, CME, as a DCO, adopted new rules requiring that customer "cleared OTC derivatives" be held in a separate account, titled "Customer Cleared OTC Derivatives Sequestered Account," subject to specified requirements, including the preparation of a Sequestration Statement.4 NFA also adopted rule amendments that would require its carrying, non-clearing FCM members that clear OTC derivatives for customers through a CME clearing member to comply with CME's new rules as well.5

In June, CME advised FCMs to develop the necessary accounting and operational systems, procedures and controls to ensure that they are able to adhere to the new requirements when the rules become effective.6 Among other things, CME stated that FCMs should open new bank and safekeeping accounts for cleared OTC customer assets. The new CME sequestration requirements became effective on October 4, 2010.7

Pursuant to FINRA Rule 4521(a), FINRA member firms that are FCMs and that clear OTC derivative products through a DCO or any other facility that has OTC derivatives sequestration requirements, in complying with such facility's requirements, must file with FINRA the Sequestration Statement, or such similar form as the facility may require, as a supplement to the electronic FOCUS Report filing (FOCUS Report Parts II and II CSE). FINRA member firms that are FCMs and subject to CME's requirements must file the Sequestration Statement in eFOCUS and WinJammer, commencing with the monthly FOCUS Report that is due November 23, 2010 (covering the October 2010 reporting period).

1See 17 CFR Chapter 1 Part 190 (Bankruptcy).

2See 75 FR 17297 (April 6, 2010).

3See supra note 2 at 17301.

4 CME's new cleared OTC derivatives sequestration rules are set forth in CME Group Audit Information Bulletin #10-07 (issued July 16, 2010). For further information regarding the CME's implementation of the new rules, see also CME Group Audit Information Bulletin #10-09 (issued August 17, 2010) and CME Group Advisory Notice #10-256 (Updates #1 and #2) (issued June 17, 2010).

5See Letter from Thomas W. Sexton, Senior Vice President and General Counsel, NFA, to David A. Stawick, Office of the Secretariat, CFTC, dated August 30, 2010. The new NFA rule—NFA Financial Requirements Section 4(b)—states that any NFA member FCM "that receives money, securities and/or other property from, for or on behalf of a customer to margin, guarantee or secure the customer's positions in cleared OTC derivatives... must comply with CFTC requirements and the requirements established by the applicable contract market and/or derivatives clearing organization for such activity."

6See CME Group Advisory Notice #10-256 (Update #1).

7See CME Group Audit Information Bulletin #10-09.