| The Audit Department frequently receives questions regarding required notifications for clearing member firms. As a reference tool, we summarized the Audit Department�s notification requirements for significant changes in financial position, operational changes, and changes in ownership. CFTC notification requirements applicable to the items listed are also noted. However, please be advised that this reference document does not include all notifications that may be required for your firm by the CFTC, other SROs, or other CME Departments. If you have any questions, please contact the Audit Department at (312) 930-3230. Also note that the CME Rule Book is available on the internet (www.CME.com). FINANCIAL NOTIFICATIONS: 1. A clearing member must provide written notice to the Audit Department whenever the clearing member: (a) fails to maintain minimum capital requirements; (b) fails to maintain early warning capital requirements; (c) fails to maintain current books and records; or (d) determines the existence of a material inadequacy as specified in CFTC Regulation 1.16(d)(2). Refer to CME Rule 970.A.3 and CFTC Regulations 1.12 (a), (b), (c), and (d). 2. If sufficient funds are not maintained in segregation or set aside in separate accounts and a clearing member firm�s DSRO is the CME, written notice must be provided to the Audit Department within 24 hours of when the occurrence is noted. Refer to CME Rule 971.C. 3. A reduction in net capital (1-FR) or tentative net capital (FOCUS) of 20% or more must be reported within 2 business days of the event occurring and any planned reduction in excess net capital of 30% or more must be reported at least 2 business days in advance to the Audit Department. Refer to CME Rule 972 and CFTC Regulation 1.12(g). 4. A performance bond call in any account (customer, non-customer, or omnibus) which exceeds adjusted net capital or a performance bond call exceeding excess net capital which remains unanswered by the close of business the day following the issuance of the call must be reported to the clearing member firm�s DSRO and the CFTC. Refer to CFTC Regulation 1.12(f)(3) and 1.12(f)(4). 5. Notification is required when excess adjusted net capital is less than 6% of the non-customer maintenance margin requirement, unless the non-customer is subject to the CFTC�s or the SEC�s minimum financial requirements. This notification is only required by the CFTC. Refer to CFTC Regulation 1.12(f)(5). Note that the CME clearing member capital requirement includes a factor for 6% of noncustomer risk margin requirements. Refer to Financial Notification #1 above for applicable CME notification requirement. 6. A clearing member firm�s DSRO must be notified of and approve new subordinated debt agreements as well as prepayments and amendments to existing agreements. The Audit Department should also be notified in a timely manner regarding additional borrowings (drawdowns) on subordinated loans. Refer to CME Rule 970.A.5. and CFTC Regulation 1.17(h). SIGNIFICANT BUSINESS TRANSACTIONS OR CHANGES IN OPERATION: 1. A clearing member firm of the CME must notify the Audit Department prior to any significant business transaction or significant change in operations including: - the merger, combination, or consolidation between a clearing member firm and another person or entity;
- the assumption or guarantee by a clearing member firm of all or substantially all of the liabilities of another in connection with a direct or indirect acquisition of all or substantially all of that person�s or entity�s assets;
- the sale of a significant part of a clearing member firm�s business and/or assets to another person or entity;
- a change in the direct or indirect beneficial ownership of 20% or more of a clearing member firm;
- any change in a clearing member firm�s system provider used to process trades; and,
- an increase in the number of members qualified by a clearing member firm as determined by the Clearing House Committee. Currently, a change will require notification if it results in the clearing member qualifying for clearing the lesser of 10% or more of the total exchange qualified members or an addition, in any six month period, of 100 qualified members.
In addition, a clearing member firm that qualifies members must provide fifteen days notice to the Exchange of any proposal to terminate such business or any material part of such business. This notification is only required by the CME. Refer to CME Rule 901.H. 2. Notification is required to a clearing member firm�s DSRO, the NFA, and the CFTC when a change in public accountants occurs. Refer to CFTC Regulation 1.16(g)(1). 3. Notification is required for bulk transfers made other than at the customer�s request. This notice is to be made five business days prior to the transfer, or if impracticable, as soon as possible but not later than the day of the transfer. Refer to CFTC Regulation 1.65. OWNERSHIP CHANGES: 1. All clearing member firms of the CME must submit and maintain with the Audit Department a current list of every person or entity who is directly, or indirectly through intermediaries, the beneficial owner of 5% or more of any class of equity security of the clearing member firm. Notification is required as soon as any changes in ownership structure occurs. Such changes should be accompanied by updated parent guarantee agreements as necessary in accordance with CME Rule 901.L. This notification is only required by the CME. RISK ASSESSMENT: 1. Annual consolidated and consolidating financial report filings are due 105 days after fiscal year end, or April 15, for December 31 fiscal year ends. FCMs are allowed to submit consolidating statements used for internal report processing as long as the information meets the CFTC�s needs. 2. Updated organizational charts and risk management procedures are due within 60 days after the end of the quarter in which a change has occurred. Organizational charts and risk management procedures do not have to be filed if no changes occurred. All risk assessment information should be filed directly with the CFTC only. Refer to CFTC Regulations 1.14 and 1.15. If you have any questions, please contact the Audit Department at (312) 930-3230. | 