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Notice I-13-46

December 31, 2013

New Notification and Report Filing Requirements Required under CFTC Final Rule on Enhancing Customer Protections Afforded Customers and Customer Funds Held by FCMs and DCOs

In November, the Commodity Futures Trading Commission (CFTC) issued its final rule, which adopted a number of new regulations and amended existing regulations designed to enhance protections afforded customers and customer funds held by futures commission merchants (FCMs) and derivatives clearing organizations. Although the final rule is effective January 13, 2014, there are varying compliance dates applicable to the new requirements. NFA is issuing this Notice to Members to alert Members to the new notification and report filing requirements under the final regulations.

Notice Filings

Beginning January 13, 2014, FCMs must provide notification electronically through WinJammer™ to the CFTC and its Designated Self-Regulatory Organization (DSRO) for all notices required under CFTC Regulation 1.12, including the following new events under the time specified:

Immediate Notification

  • Segregated, secured, or cleared swaps collateral is not invested in accordance with CFTC Regulation 1.25.
  • The amount of funds held in segregation, secured, or cleared swaps collateral accounts is insufficient to meet the applicable residual interest targets.
  • The FCM, its parent or a material affiliate experiences a material adverse impact to its creditworthiness or ability to fund its obligations, including any change that could adversely impact the firm's liquidity resources.

Notification within 24 Hours

  • The FCM experiences a material change to its operations or risk profile, including a change in senior management, the establishment or termination of a business line, or a material adverse change in the FCM's clearing arrangements.
  • The FCM receives a notice from the Securities and Exchange Commission (SEC), a securities self-regulatory organization, or a futures self-regulatory organization, which identifies the FCM as the subject of a formal investigation.
  • The FCM receives correspondence from the SEC or a securities self-regulatory organization regarding concerns with the FCM's capital adequacy, liquidity, or internal controls.
  • The SEC or a securities self-regulatory organization issues an examination report to the FCM (the FCM must provide the CFTC with a copy of the report).

If the FCM is registered as a securities broker or dealer, notice must also be filed with the FCM's securities self-regulatory organization. Every notice or report that is required to be filed under CFTC Regulation 1.12 must include a discussion of how the reporting event originated and what steps have been, or are being taken, to address the reporting event. FCMs should become familiar with the full scope of all notification requirements identified in CFTC Regulation 1.12.

Report Filings

Certified Financial Statements

All financial statements required to be certified by an independent public accountant in accordance with CFTC Regulation 1.16 must be filed with the CFTC and DSRO electronically through WinJammer™ starting January 13, 2014.

Acknowledgement Letters

Beginning January 13, 2014, FCMs must obtain acknowledgment letters from depositories, including derivatives clearing organizations where applicable and other FCMs, holding customer funds in the form prescribed under CFTC Regulations 1.20, 1.26, 22.5, and 30.7 within three business days of opening any new accounts. FCMs and the depositories must file copies of acknowledgment letters with both the CFTC and DSRO electronically through WinJammer™. FCMs and their depositories will have until July 12, 2014 to file newly executed acknowledgment letters for any accounts existing prior to January 13, 2014. FCMs should contact their DSRO on the appropriate method for submission of acknowledgement letters from depositories.

Daily and Month-End Financial Statements

Additional line items will be added to the daily computations required under CFTC Regulations 1.32, 22.2(g) and 30.7(l) effective for the close of business January 13, 2014. These computations must be filed with the CFTC, DSRO, and NFA by noon each business day for the previous day's close of business computations. Additional line items will also be added to the CFTC Form 1-FR-FCM required under CFTC Regulation 1.10(b) effective for the January 2014 month end financial report. FCMs should become familiar with the updated computations and financial statements prior to the filing deadlines.

Segregated Investment Detail Reports

CFTC Regulations 1.32(f)-(j), 22.2(g)(5)-(9) and 30.7(l)(5)-(9) require FCMs to submit to the CFTC and DSRO a report listing the names of all banks, trust companies, FCMs, derivatives clearing organizations, foreign brokers, foreign clearing organizations, or any other depository or custodian holding customer segregated, secured, and cleared swaps funds, respectively, as of the fifteenth day of the month, or the first business day thereafter, and the last business day of each month. The report must be submitted by 11:59 p.m. the next business day electronically through WinJammer™ starting with the January 15, 2014 close of business report.

Each report must include:

  • The name and location of each depository holding customer funds;
  • The total amount of funds held by each depository;
  • The total amount of cash and permitted investments identified in CFTC Regulation 1.25 that each depository holds for the FCM;
  • The total amount of customer-owned securities held by the FCM as customer funds along with a list of the names and locations of the depositories holding customer-owned securities;
  • The total amount of customer funds that have been used to purchase securities under agreements to resell the securities (reverse repurchase transactions);
  • Identification of the depositories, if any, holding customer funds that are affiliated with the FCM.

NFA Financial Requirements Section 16 currently requires FCMs to submit nearly identical reports for customer segregated, secured, and cleared swaps funds. NFA is modifying the form currently utilized by FCMs to report this information to NFA to comply with CFTC regulations, and FCMs will meet their CFTC, NFA and DSRO filing requirement by submitting this form through WinJammer™.

Risk Management Program

New CFTC Regulation 1.11 imposes specific risk management requirements on FCMs that accept any money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result from soliciting or accepting orders for the purchase or sale of any commodity interest. In accordance with the new regulation, each FCM shall establish, maintain, and enforce a system of risk management policies and procedures (Risk Management Program) designed to monitor and manage the risks associated with the activities of the FCM as such. The Risk Management Program shall take into account market, credit, liquidity, foreign currency, legal, operational, settlement, segregation, technological, capital, and any other applicable risks together with a description of the risk tolerance limits set by the FCM and the underlying methodology in the written policies and procedures.

The Risk Management Program shall also take into account risks posed by affiliates, all lines of business of the FCM, and all other trading activity engaged in by the FCM. The Risk Management Program shall be integrated into risk management at the consolidated entity level. The Risk Management Program shall also include policies and procedures for detecting breaches of risk tolerance limits set by the FCM, and alerting supervisors within the risk management unit and senior management, as appropriate.

FCMs must file their initial Risk Management Program electronically through WinJammer™ with the CFTC and DSRO by July 12, 2014. FCMs must become familiar with the new regulation and adhere to the requirements explicitly outlined therein.

If you have questions related to the submission of filings or WinJammer™, please contact Brian Rothfuss, Senior Manager, Compliance (brothfuss@nfa.futures.org or 312-781-1439). Other questions related to the recently finalized CFTC Rule on enhancing customer protections afforded customers and customer funds held by FCMs and DCOs should be directed to Dale Spoljaric, Managing Director, Compliance (dspoljaric@nfa.futures.org or 312-781-7415).

NFA is the premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets.
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