Cleared OTC Sequestration Requirements

As previously communicated, the CFTC recently amended its Part 190 Bankruptcy Rules to create a new account class in the event of an FCM’s bankruptcy.  The new “cleared OTC derivatives” account class became effective on May 6, 2010 but the CFTC has not yet proposed substantive requirements for the treatment of these customer positions.  Until such time as the CFTC proposes and adopts rules for this new account class, it will allow derivatives clearing organizations, such as CME, to adopt their own rules for this new account class.

CME has been working with clearing member firms and bookkeeping/service bureaus in preparing for implementation of this new account class.  As CME Clearing House Advisory Notice 10-256 previously indicated, we anticipate making our rules effective and transferring all customer cleared OTC derivative positions and all related performance bond collateral currently held in CME Clearing’s Secured Part 30.7 origin to the new cleared OTC derivatives origin on September 13, 2010.

CME Clearing is committed to ensuring that all clearing members are adequately informed of these changes and have adequate time to develop the necessary accounting and operational systems, procedures and controls to ensure a smooth implementation of this new account class when effective. 

Towards that end, below are CME rules which have been approved by CME’s Clearing House Risk Committee for the cleared OTC derivatives account class and which will be effective upon CME’s implementation of the cleared OTC derivatives origin.  In order to clearly distinguish it from Segregated or Secured Part 30.7 customer protection rules, this new account class has been titled “Sequestered”.  As these rules constitute a significant rule change, CME is seeking comment on these rules.  Please review these rules and contact the Audit Department with any comments you may have prior to July 30, 2010. 

For the full text of this advisory...