• Enhanced Customer Protections – Rule Amendments

      • To
      • Chief Executive Officers, Chief Compliance Officers, Chief Financial Officers
      • From
      • Audit Department, Clearing House Division
      • Advisory #
      • 12-08
      • Notice Date
      • 27 June 2012
      • Effective Date
      • 27 June 2012
    • As announced in Audit Information Bulletin #12-04 issued on April 2, 2012, CME has worked with several industry groups to develop and implement enhancements to further safeguard customer funds. FCM clearing members began filing daily segregated, secured 30.7 and sequestered statements with CME effective May 1, 2012. In addition, CME’s Audit Department has already implemented limited reviews of customer segregated, secured 30.7 and sequestered statements on a surprise basis outside of the regular risk based examinations. 
       
      To formally adopt these enhanced customer protections, CME has filed with the CFTC several rule amendments as detailed below:
       
      Maintenance of Excess Segregated, Secured 30.7 and Sequestered Funds
       
      FCM clearing members are required to maintain excess segregated, secured 30.7 and sequestered funds at all times including on an intra-day basis. As such we amended Rule 971.A.1. to confirm that, in accordance with CFTC regulations, excess funds must be maintained at all times.
       
      Daily Segregated, Secured 30.7 and Sequestered Statements
       
      All FCM clearing members were required as of May 1, 2012 to file daily segregated, secured 30.7 and sequestered statements, as applicable, through WinJammer™ by 12:00 noon on the following business day. These daily statements must be electronically submitted and signed off by the firm’s Chief Executive Officer, Chief Financial Officer or their designated representative as approved by CME and as authorized on the “User Identification Request Form”. The daily reporting requirements are delineated in Rules 971.B. and 971.F.
       
      Semi-monthly Investment Reports
       
      FCM clearing members will be required to file semi-monthly reports of investments reflecting how customer segregated, secured 30.7 and sequestered funds are invested and where those funds are held. That is, separately for segregated, secured and sequestered balances, the report must identify the amount of cash held and the dollar amount held in each type of CFTC Regulation 1.25 permitted investment as well as the identity of and dollar amount held at each depository utilized. The reports of investments will be filed electronically through WinJammer as of the 15th of the month and last day of the month. The report is identified as SIDR (“Segregated Investment Detail Report”) within the WinJammer system.
      The new semi-monthly investment reports filing requirements will be effective July 2, 2012 and are found in Rule 971.C. Thus, the first required report of investments will be as of the close of business July 16, 2012 due to be filed through WinJammer by the close of business on July 17, 2012.
       
      Disbursement Approvals
       
      All disbursements made by FCM clearing members of customer segregated, secured 30.7 or sequestered funds that are not made for the benefit of customers of the respective customer origin and that exceed 25% of the excess segregated, secured 30.7 or sequestered funds as applicable must be pre-approved in writing by the FCM’s Chief Executive Officer or Chief Financial Officer. In determining if the 25% level has been exceeded, all such disbursements not made for the benefit of customers by customer origin should be aggregated and compared to the most current daily segregated, secured 30.7 and sequestered calculations as applicable. Further, CME must be immediately notified upon pre-approval of such disbursements through WinJammer notification filings including a description of the nature of the disbursement(s) and confirmation of pre-approval. 
       
      The new disbursement reporting requirements will be in Rule 971.D. as detailed in the rule amendments filed with the CFTC and included on the following pages. We will coordinate with the National Futures Association (“NFA”) on an effective date for Rule 971.D.
       
       
      In addition several housekeeping changes were adopted to harmonize “secured”, “separate”, and “set-aside” as “secured 30.7” in the rules and to better organize the rule requirements.
       
      In the attached formal rule changes, additions are underlined and deletions struck out. 
       
      The amendments to Rules 971.A., 971.B., 971.E., 971.F. and 971.G. were effective June 14, 2012. The amendments to Rule 971.C. will be effective July 2, 2012 so that the first reporting requirement for investment reports will be as of July 16, 2012. Finally we are coordinating the adoption of Rule 971.D. with the NFA and will publish further details of the rule requirements and an effective date once it has been determined.
       
      If you have any questions, please call the Audit Department at (312) 930-3230.
       
       


       
      CME, CBOT and NYMEX Rulebooks
       
      Chapter 9. CLEARING MEMBERS
       
      Rule 971. SEGREGATION, SECURED AND SEQUESTERED REQUIREMENTS
       
      A. All clearing members must comply with the requirements set forth in CFTC Regulations 1.20 through 1.30, 1.32, and 30.7, and CME Rules 8F100 through 8F136. This includes, but is not limited to, the following:
       
      1. Maintaining sufficient funds at all times in segregation or set aside in separate or, secured 30.7 and sequestered accounts;
       
      2. Computing, recording and reporting completely and accurately the balances in the:
       
      a. Statement of Segregation Requirements and Funds in Segregation;
      b. Statement of Secured Amounts and Funds Held in Separate Accounts; and
      c. Statement of Sequestration Requirements and Funds Held in Sequestered Accounts.
       
      3. Obtaining satisfactory segregation, separate secured 30.7 and sequestered account acknowledgement letters and identifying segregated, separate secured 30.7 and sequestered accounts as such; and
       
      4. Preparing complete and materially accurate daily segregation, secured 30.7 and sequestered amount computations in a timely manner.
       
      B. Exchange staff may prescribe additional segregation, secured and sequestered amount requirements. All FCM clearing members must submit a daily segregated, secured 30.7 and sequestered amount statement, as applicable, through Exchange-approved electronic transmissions by 12:00 noon on the following business day.
       
      C. All clearing members must provide written notice to the Audit Department of a failure to maintain sufficient funds in segregation or set-aside in separate or sequestered accounts. The Audit Department must receive immediate written notification when a clearing member knows or should have known of such failure. All FCM clearing members must submit a report of investments in a manner as prescribed through Exchange-approved electronic transmissions as of the 15th of the month (or the following business day if the 15th is a holiday or weekend) and last business day of the month by the close of business on the following business day. The report of investments shall be prepared and shall identify separately for segregated, secured 30.7 and sequestered funds held: 
       
      1.         The dollar amount of funds held in cash and each permitted investment identified in CFTC Regulation 1.25(a); and
       
      2.         The identity of each depository holding funds and the dollar amount held at each depository.
       
      D. All disbursements not made for the benefit of a customer from a segregated, secured 30.7 or sequestered account which exceed 25% of the FCM clearing members excess segregated, secured 30.7 or sequestered of the respective origin must be pre-approved in writing by the clearing member’s Chief Executive Officer or Chief Financial Officer.
       
      1.         In determining if a disbursement exceeds the 25% level, such disbursement must be:
       
      a.         Compared to the most recent calculation of excess segregated, secured 30.7 and sequestered amounts; and
      b.         A single disbursement must be reviewed individually and in the aggregated with all other disbursements not made for the benefit of a customer of the respective segregated, secured 30.7 or sequestered origin since the last calculation of excess funds. 
      2.         Upon approval of a single disbursement or the disbursement which in the aggregated exceeds the 25% level as defined in Rule 971.D.1., the FCM clearing member must provide immediate notification to the Audit Department through Exchange-approved electronic transmissions. Such notification shall include:
       
      a.         Confirmation that the FCM clearing member’s Chief Executive Officer or Chief Financial Officer pre-approved in writing the disbursement(s);
      b.         The amount(s) and recipient(s) of such disbursement(s); and
      c.         A description of the reasons for the single or multiple transaction(s) that resulted in the disbursement(s).
       
      E. All clearing members must provide written notice to the Audit Department of a failure to maintain sufficient funds in segregation, secured 30.7 or sequestered accounts. The Audit Department must receive immediate written notification when a clearing member knows or should have known of such failure.
       
      F. Each statement and report filing required under this Rule must be submitted by the Chief Executive Officer, Chief Financial Officer or their authorized representative as approved by CME using their assigned User Identification (“User ID”). The User ID will constitute and become a substitute for the manual signature of the authorized signer to the electronically submitted daily segregated, secured 30.7 and sequestered amount statements. The User ID is a representation by the authorized signer that, to the best of his or her knowledge, all information contained in the statement being transmitted under the User ID is true, correct and complete. The unauthorized use of a User ID for electronic attestation by an unauthorized party is expressly prohibited.  
       
      G. Exchange staff may prescribe additional segregation, secured 30.7 and sequestered amount requirements.

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