• Enhanced Customer Protections - Disbursement Rule Amendments

      • To
      • Chief Executive Officer, Chief Compliance Officer, and Chief Financial Officer
      • From
      • Audit Department, Clearing House Division
      • #
      • 12-10
      • Notice Date
      • 28 September 2012
      • Effective Date
      • 01 October 2012
    • In a continuing effort to enhance the regulation of customer funds at the firm level and to harmonize industry rules and requirements, we are proposing to amend our rules covering disbursements from segregated, secured 30.7 and sequestered[1] accounts.  
       
      Disbursement Approvals
       
      Effective September 1, 2012, the Chief Executive Officer (“CEO”) or Chief Financial Officer (“CFO”) of our FCM clearing members are required to pre-approve in writing any disbursement from customer segregated, secured 30.7 or sequestered funds that exceeds 25% of the excess of such origin[2] and is not for the benefit of a customer. 
       
      Similar to NFA’s Financial Requirements Section 16[3], we have amended our rules to allow authorize representatives of the CEO or CFO to pre-approve such disbursements greater than 25% of excess segregated, secured, or sequestered funds. The authorized representative must possess knowledge of the FCM clearing member’s financial requirements and position. Further under the amended rules the CEO and CFO remain responsible for the pre-approvals by their authorized representatives.
       
      Amended Rule 971.D. is attached with additions underlined and deletions struck out and will become effective October 1, 2012. Based on inquires we have received and to provide further guidance on the application of the rule we have expanded the Questions & Answers originally published in Audit Information Bulletin #12-09 issued on July 19, 2012. An updated and complete set of Questions & Answers may be found on the following pages.
       
      If you have any questions, please call the Audit Department at (312) 930-3230.
      Questions & Answers on Disbursements under Rule 971.D.
       
      1.    What type of disbursements would be included and subject to the 25% level reporting requirements?
       
      Disbursements from segregated, secured 30.7 and sequestered accounts that are not made for the benefit of customers are included in the 25% reporting level. For example, if a firm transfers excess segregated funds to a house account such disbursement would be included. Likewise a transfer of excess segregated funds to secured 30.7 would be included in the 25% level.
       
      2.    Would a replacement of one type of asset with another asset (two separate transactions) in the respective customer segregated, secured 30.7 or sequestered origin be subject to the 25% level reporting requirements?
       
      Yes, the transfer out of an asset even if replaced simultaneously or approximately simultaneously with a deposit of another asset would be included in the 25% reporting level. As the transfer out and transfer in are two separate transactions, the transfer out must be considered a disbursement with regards to the 25% reporting level. For clarity, the transfer out and transfer in cannot be netted for comparison to the 25% level reporting requirement.
       
      For example, a firm replaces a security with cash whereby the firm transfers a security from a customer segregated account to a house account and then transfers cash from a house account to a customer segregated account in the same amount such that there is no effect on excess segregated funds.   The transfer of the security from a customer segregated account (the full value of the security transferred out) would be considered a disbursement and subject to the 25% reporting level.
       
      As a further example, based on a firm’s foreign currency needs, a firm transfers Euros from a customer segregated account to a house account and then transfers the equivalent U.S. dollars from a house account to a customer segregated account. As the currency movements are two separate transactions, the transfer of Euros out of a customer segregated account must be considered a disbursement with regards to the 25% reporting level. 
       
      3.    If an asset was first deposited into a customer segregated, secured 30.7 or sequestered account and a subsequent related transfer out of the respective origin is made, would it be subject to the 25% level reporting requirement?
       
      Yes, any transfer out would be subject to the 25% reporting level requirement as the transfer in and transfer out are two separate and independent transactions and are not dependent upon each other. For clarity, the transfer in and transfer out cannot be netted for comparison to the 25% level reporting requirement.
       
      4.    What types of disbursements would not be included and would not be subject to the 25% level reporting requirements?
       
      Transfers for the benefit of customers would not be included in the 25% level. Several examples include, but are not limited to:
       
      A customer requests a withdrawal of segregated funds to their bank account. In such case both the segregated liability to the customer and segregated funds decrease and there is no effect on excess segregated funds.
       
      A customer requests that the FCM purchase a security on their behalf with cash held in their segregated account. In such case the segregated liability to the customer and the segregated asset held convert from cash to securities and there is no effect on excess segregated funds.
       
      A customer requests a transfer of segregated funds to their secured 30.7 account provided the funds are actually transferred from a segregated depository to a secured 30.7 depository. In such case both the segregated liability to the customer and segregated assets decrease and the secured 30.7 liability to the customer and secured 30.7 assets increase – thus there is no effect on excess segregated or excess secured 30.7 funds. If funds are not transferred between the segregated and secured 30.7 depositories, that is only a bookkeeping entry is made to reflect the liability to the customer (transfer from a customer segregated liability to a customer secured 30.7 liability), then in essence a transfer of firm excess secured 30.7 funds has been made to a segregated account and should be included in the 25% level for secured 30.7 disbursements. In such case, excess segregated funds have increased and excess secured 30.7 funds have decreased by the amount of the transfer. Note if the transfer of funds is part of a “net transfer” between origins, the funds will be considered transferred and not included in the 25% level.
       
      5.    Would a replacement of one type of asset with another asset done on a Delivery vs. Payment (“DVP”) basis in the respective customer segregated, secured 30.7 or sequestered origin be subject to the 25% level reporting requirements?
       
      No, transfers of assets between accounts done on a DVP basis occur as one transaction on a simultaneous basis. As such it would not be considered a disbursement of funds.
       
      6.    Would the execution of a repurchase agreement “repo” or reverse repurchase agreement “reverse repo” be considered a disbursement and subject to the 25% level reporting requirements?
       
      No, in the case of a repo/reverse-repo it is one transaction done on DVP basis and would not be considered a disbursement of funds subject to the 25% level reporting requirement.
       
      7.    Are all transactions that affect excess segregated, secured 30.7 or sequestered accounts part of the 25% reporting requirements?
       
      No, only segregated, secured 30.7 and sequestered disbursements not made for the benefit of customers are included in the 25% reporting level. For example, an increase in customer segregated debits will decrease excess funds but are the result of market losses and not the result of a disbursement.


       
      8.    In determining the 25% level of excess, are segregated, secured 30.7, and sequestered origins combined?
       
      No, the 25% disbursement level is calculated and monitored separately for segregated, secured 30.7 and sequestered accounts.
       
      9.    In determining the 25% level of excess segregated funds, is the excess level calculated and monitored on a currency by currency basis?
       
      No, in determining the 25% level of excess segregated funds, the combined excess of all segregated currency computations should be utilized. Further all currencies are combined within the respective origin to determine the 25% level for secured 30.7 and sequestered disbursements as well.
       
      10. In determining the 25% excess level, are excess cross margin funds combined with excess segregated funds?
       
      No, as excess segregated funds in the cross-margin origin or non-cross-margin origin may not offset a segregation deficiency in the other origin. Therefore the 25% level for excess segregated funds (non-cross-margin) must be determined and reviewed independently from the 25% level for excess cross margin funds.
       
      11. In determining the 25% level reporting requirement, what date of excess segregated, secured 30.7 and sequestered computations do I utilize?
       
      To determine if a disbursement exceeds the 25% level reporting requirement, the most recent calculation of excess funds must be utilized. In addition, when aggregating disbursements to determine if the 25% threshold level has been exceeded, all such disbursements not for the benefit of a customer should be aggregated since the last calculation of excess funds.
       
      For example, your daily segregated statement for July 23rd is completed at 11:30 a.m. on July 24th. All disbursements not related to customers after 11:30 a.m. on July 24th should be reviewed based on the excess funds as of the July 23rd computations until the July 24th computations are completed on July 25th. Thus a disbursement made in the afternoon on July 24th should look at the excess funds as of July 23rd. Further disbursements made in the morning of July 25th (until the daily segregated statement for July 24th is completed) should be compared to the excess funds as of July 23rd and further should be aggregated with all disbursements made since the July 23rd computation was completed on July 24th at 11:30 a.m.
       
      If a pre-approved disbursement is not made before the next calculation of excess funds is completed, then the disbursement should be re-approved based on the most current computation.
       
      If a daily segregated, secured 30.7 and sequestered calculation is not completed by 12:00 noon of the following business day, then no disbursements not for the benefit of a customer should be made until the respective segregated, secured 30.7 and sequestered calculations are completed.
       
      12. If a disbursement exceeds the 25% level and is reported, does it impact the reporting of future disbursements?
       
      Yes, once a disbursement or aggregate of disbursements exceeds the 25% level, then all future disbursements not made for the benefit of a customer from that particular origin must be reported until the next segregation, secured 30.7 or sequestered computation, as applicable, is completed.
       
      Thus if a disbursement from a segregated account exceeds the 25% level and is pre-approved and reported then all future disbursements not for the benefit of a customer from segregation must be pre-approved and reported until the next segregation calculation is completed. 
       
      13. Who can approve the disbursements which exceed the 25% level and what should the approval entail?
       
      All disbursements not for the benefit of a customer that exceed the 25% level must be pre-approved in writing by the CEO, CFO or their authorized representative with knowledge of the firm’s financial requirements and position.[4] The approval of any such disbursements should only be given if after the disbursement the firm will continue to maintain excess segregated, secured 30.7 or sequestered funds, as applicable, based on the best estimates of current segregated, secured 30.7 and sequestered amounts.
       
      Furthermore the CEO and CFO remain responsible for the pre-approvals by their authorized representatives. 
       
      14.  What must be included in the notification of the disbursement exceeding the 25% level?
       
      The notification of the disbursement exceeding the 25% level should include confirmation of the written pre-approval of the CEO, CFO or their authorized representative with knowledge of the firm’s financial requirements and position,4 the date(s) of the disbursements, the amount(s) and recipient(s) of the disbursements, a description of the reason(s) for the disbursements and confirmation that the firm continues to maintain excess funds in the origin for which the disbursement was pre-approved.[5]
      15. Who can file the notification of approval of the disbursement exceeding the 25% level?
       
      The immediate notification required under Rule 971.D. for disbursements exceeding the 25% level should be submitted through WinJammer by the firm’s CEO, CFO or their designated representative as approved by CME using their assigned User Identification (“User ID”). Note that while the notification may be submitted by a designated representative of the CEO and/or CFO, the pre-approval of the disbursement must be made by the CEO, CFO or their authorized representative with knowledge of the firm’s financial requirements and position.4
       

      [1] Note that as of November 5, 2012, all references in Rule 971 to “sequestered” accounts will (in accordance with new Part 22 of the CFTC’s regulations) be revised to “Cleared Swaps Customer Accounts”.
       
      [2] For clarity the terms “excess segregated, excess secured 30.7 and excess sequestered or excess of such origin” refer to the FCM’s residual interest in the respective origin; that is firm money held in segregation, secured 30.7 and sequestration as applicable.
       
      [3] In addition to Rule 971.D., FCM clearing members must comply with all requirements under NFA’s Financial Requirements Section 16 with regards to disbursements from segregated, secured 30.7 and sequestered accounts as applicable.
       
      [4] For clarity, under NFA Financial Requirements Section 16, the pre-approval in writing of such disbursements must be made by the CEO, CFO or other designated individual(s) who holds a position with knowledge of the firm’s financial requirements and financial position and is listed as a principal on the firm’s NFA Form 7-R (for purposes of Section 16 only, a “Financial Principal”).
       
      [5] For clarity, under NFA Financial Requirements Section 16, the notification of the disbursement exceeding the 25% level should also include the current estimate of excess segregated, secured 30.7 and sequestered, as applicable, after the disbursement. Further the notification should include a representation that to the best of the person’s knowledge and reasonable belief the FCM remains in compliance with segregation, secured 30.7 and sequestered requirements, as applicable, after the disbursement. 

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