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June 19, 2013
Implementation of Phase 2 - NFA Financial Requirements Section 4 - Segregated Account Balance Reporting by FCMs and DCOs
NFA Financial Requirements Section 4 requires FCMs that hold customer segregated funds under CFTC Regulation 1.20, customer secured amount funds under CFTC Regulation 30.7 or cleared swaps customer collateral under CFTC Regulation 22.2 (collectively "customer segregated funds") to instruct the depositories holding these funds to report the balances in these accounts on a daily basis. Under Financial Requirements Section 4, a depository must comply with this request in order to be considered an acceptable depository for customer segregated funds. CME Group, Inc. (CME) has adopted similar requirements for its FCM clearing members.
As previously communicated to FCMs in Notice I-13-05 dated January 30, 2013, NFA and CME are implementing Financial Requirements Section 4 in phases. Phase 1, which became effective February 15, 2013, requires all banks and trust companies holding customer segregated cash and securities balances to report the end of day balances in those accounts to AlphaMetrix360, LLC, which NFA and CME selected to act as the aggregator of this information.
NFA and CME are currently implementing Phase 2, which requires derivative clearing organizations (DCO) and clearing FCMs acting as a segregated funds depository for customer funds of another FCM (non-clearing FCM)1 to report the end of day balances in all customer omnibus accounts held by DCOs and clearing FCMs directly to the DSRO of the non-clearing FCM for which the DCO or clearing FCM is holding the customer segregated funds. This Notice addresses clearing FCM and non-clearing FCM obligations to ensure that clearing FCMs report end of day balance information. In the next few weeks, CME will issue a bulletin with information regarding the technology requirements for DCOs to report those balances.
Phase 2 will require both clearing FCMs (including Foreign Brokers) that carry customer omnibus accounts on behalf of other FCMs, as well as non-clearing FCMs for which the clearing FCM carries the customer omnibus account, to take a number of actions to ensure that end of day balances in customer segregated fund accounts are being reported to the appropriate DSRO. These steps are outlined below.
Instructions for Non-Clearing FCMs that have customer omnibus accounts at Clearing FCMs
Phase 2 requires non-clearing FCMs to instruct all clearing FCMs carrying its customer omnibus account(s) to report end-of-day balances in those accounts to the non-clearing FCM's DSRO. In order to facilitate the reporting process, the non-clearing FCM must complete a standard authorization letter which authorizes the clearing FCM to send the required data to the firm's DSRO. Non-clearing FCMs must contact their DSRO for a copy of the standard authorization letter. The authorizations for all customer omnibus accounts must be completed and sent to the respective clearing FCMs no later than July 19, 2013. In addition, a copy of the authorization letter must be submitted by the non-clearing FCM to its respective DSRO. Finally, the non-clearing FCM must ensure that the clearing FCMs holding its customer omnibus account(s) begin reporting the required data to the appropriate DSRO by September 6, 2013.
Instructions for Clearing FCMs which carry customer omnibus accounts on behalf of Non-Clearing FCMs
Phase 2 requires clearing FCMs to report end of day balances in customer omnibus account(s) to the DSRO of the non-clearing FCM for which the account(s) is carried. Complete details of the filing process are included in the attached specification entitled "Daily Segregation Confirmation System - Carrying Brokers." Each clearing FCM should read this specification in order to understand the reporting obligations. The following key points, however, provide an overview of the process:
Clearing FCMs must begin daily reporting for customer omnibus accounts no later than September 6, 2013.
Non-clearing FCMs have been provided with a standard authorization letter to authorize and instruct their clearing FCMs to submit account balance data for the non-clearing FCM's customer omnibus account(s) to the applicable DSRO. Non-clearing FCMs are required to complete these letters and submit them to their clearing FCMs by July 19, 2013.
Clearing FCMs must report the required customer omnibus account balances covered by this phase in two separate files:
1. Account Balances File: This file must include the following end of day balance totals for each individual omnibus account:
- Total Cash
- Total Open Trade Equity
- Total Long Option Value
- Total Short Option Value
Total Net Liquidating Equity
2. Securities Balances File: This file must include key data such as par value and CUSIP of each individual security held in each omnibus account. Note that total securities value in an omnibus account does not satisfy the filing requirement for this file. The attached specification outlines the format and structure of the required data in detail.
Clearing FCMs must send all end of day files via secure FTP to a server maintained by the DSRO of the non-clearing FCM for which the account(s) are carried (i.e., to NFA for customer omnibus accounts carried for an FCM for which NFA is DSRO and to CME for customer omnibus accounts carried for an FCM for which CME is DSRO). No files should be sent to both NFA and CME.
Each clearing FCM must establish an SFTP connection with the DSRO(s) of the FCMs for which it carries customer omnibus accounts. Therefore, clearing FCMs that carry customer omnibus account(s) for both FCMs for which NFA is DSRO and FCMs for which CME is DSRO, must establish an SFTP connection with both NFA and CME. In order to establish an SFTP connection, the clearing FCM must submit the applicable security request forms to NFA and/or CME as applicable, which may be obtained from the Technical contacts listed at the end of this Notice.
In order to support firms in complying with Phase 2, NFA and CME have setup a dedicated email box for technical questions on the filing process. The email address for this box is: DailyConfirmRequests@nfa.futures.org.
In addition, NFA and CME will hold semi-monthly one-hour teleconference calls to address general and/or technical questions. The first teleconference is scheduled to take place on Wednesday, June 26 at 3:00 p.m. (CDT), and will continue every other Wednesday at 3:00 p.m. (CDT) until August 28. If you would like to participate in these calls, please send a request to DailyConfirmRequests@nfa.futures.org with your name, your firm's name and whether you are a clearing FCM, a non-clearing FCM, or both and we will provide you with the teleconference number and participant code.
Phase 2 will become effective on September 6, 2013. As a result, in order for clearing FCMs carrying customer omnibus accounts for non-clearing FCMs to be considered an acceptable depository, non-clearing FCMs must ensure that those clearing FCMs holding customer segregated cash and/or securities on its behalf report the end of day balances in those accounts to NFA or CME, as applicable, beginning with the September 6, 2013 balances. Any FCM with concerns regarding this requirement should contact its respective DSRO to address the matter.
Questions on this notice should be directed to:
- FCMs for which CME is DSRO, contact the CME's Financial and Regulatory Surveillance Department at 312-930-3230.
- FCMs for which NFA is DSRO, contact Tracey Hunt at 312-781-1284 (email@example.com).
Technical questions should be directed to:
- FCMs for which NFA is DSRO, contact David Rosenberg at 312-781-1375 (firstname.lastname@example.org) or Tim McHenry at 312-781-1425 (email@example.com).
- FCMs for which CME is DSRO, contact firstname.lastname@example.org (312-930-3230).
1 The term non-clearing FCM refers to that FCM for purposes of the customer omnibus account held at the clearing FCM. This Notice only applies to non-clearing FCMs that have customer omnibus accounts at another FCM and does not apply to FCMs with fully disclosed accounts at another FCM.