Beginning with the monthly FOCUS Report that's due on 11/21 - for the October 2010 reporting period - each firm that's a futures commission merchant (FCM) and clears OTC derivatives for customers through CME - either as a CME clearing member itself or as a carrying, non-clearing firm through a CME clearing member - must file with FINRA a new statement pertaining to customer cleared OTC derivatives.

This requirement arises from recent amendments by CME to its financial reporting rules and forms and amendments to NFA's financial requirements rules.  The new statement - Statement of Sequestration Requirements and Funds in Cleared OTC Derivatives Sequestered Accounts (Sequestration Statement) - is a supplemental schedule to FOCUS Report Parts II and II CSE, and firms must file it with FINRA as part of their monthly FOCUS Reports.  The Sequestration Statement is set forth in Attachment A to the Regulatory Notice - see link below.

    Amendments to CFTC's Regulation Part 1901.    Effective  5/6/10, the CFTC's amended rules that, among other things, create a new customer account class for “cleared OTC derivatives” applicable only to the bankruptcy of a commodity broker that is an FCM.  As stated in the CFTC adopting release for these new regulations, “… a position in an OTC derivative (and relevant collateral) that a customer clears through an FCM with a DCO (derivatives clearing organization), which position (and collateral) is not subject to a Section 4d [of the Commodity Exchange Act] Order, would be considered part of the cleared OTC derivative account class, as soon as, but only after, a DCO rule… that requires such positions (and relevant collateral) to be held in a separate account for cleared OTC derivatives becomes effective…”

Following the CFTC’s adoption of the new Regulation Part 190 requirements, CME, as a DCO, adopted new rules requiring that customer “cleared OTC derivatives” be held in a separate account, titled “Customer Cleared OTC Derivatives Sequestered Account,” subject to specified requirements, including the preparation of a Sequestration Statement.  NFA also adopted rule amendments that would require its carrying, non-clearing FCM members that clear OTC derivatives for customers through a CME clearing member to comply with CME’s new rules as well.

To comply, BD/FCMs will need to develop the necessary accounting and operational systems, procedures and controls to ensure that they're able to adhere to the new requirements.  Among other things, FCMs should open new bank and safekeeping accounts for cleared OTC customer assets. 

The new CME sequestration requirements became effective on October 4, 2010.  Pursuant to FINRA Rule 4521(a), FINRA member firms that are FCMs and that clear OTC derivative products through a DCO or any other facility that has OTC derivatives sequestration requirements, in complying with such facility’s requirements, must file with FINRA the Sequestration Statement, or such similar form as the facility may require, as a supplement to the electronic FOCUS Report filing (FOCUS Report Parts II and II CSE).  FINRA member firms that are FCMs and subject to CME’s requirements must file the Sequestration Statement in eFOCUS and WinJammer, commencing with the monthly FOCUS Report that's due 11/23.  

For further details, click onto:   [ FINRA RegNote 10-46, October ]