NFA is facing a number of issues relating to the current exemptions from paying NFA's assessment fee. One of those issues involves the application of NFA's assessment fee to commodity pools operated by NFA CPO Members that are also exchange members with "privileges of membership." Currently, under Bylaw 1301, a person with "privileges of membership" is exempt from paying NFA's assessment fee for trades occurring on the exchange where the person is a member.
Exchanges have created new membership opportunities for passive investment vehicles, including commodity pools operated by CPO Members of NFA. The CBOT has approved rules expanding eligibility for member firm registration and transaction fee treatment that allow pools, hedge funds, mutual funds, pension funds, and investment companies, or similarly structured entities owned by passive investors, to receive significant cost savings on their transactions at the exchange. In order to participate in the program, a firm must buy four full memberships and two associate memberships during an eighteen-month period. The firm may then assign the privilege of fee discounts to five passive investment vehicles. As a result, passive investment vehicles that are commodity pools operated by NFA Member CPOs can qualify for the exemption from NFA assessment fees for contracts traded on the CBOT. The CME also offers a similar type of membership that is focused on attracting non-clearing entities, including passive investment vehicles. Again, commodity pools operated by NFA CPO Members using these memberships can qualify for the assessment fee exemption for trades occurring on the CME.
Although only a limited number of CPO Members are participating in these memberships at the CBOT and CME, there may still be a measurable impact on assessment fee revenue. The costs associated with these memberships are significant and, therefore, the participating CPOs are generally large CPOs with significant trading volume. Moreover, the universe of participating CPOs may expand if the exchanges modify the membership requirements to make it more attractive and accessible to smaller pools. As a result, NFA may lose significant assessment fee revenue generated by these pools while retaining our audit and regulatory responsibilities for the commodity pool operator.
The Board recognizes that NFA expends a significant amount of resources in regulating CPO Members and their pools. Exchange membership does not reduce the amount of resources that NFA expends since NFA remains responsible for examining CPO Members after they become exchange members. As a result, the Board believes that it would create an unfair situation if pools for certain NFA Members were exempt from NFA's assessment fee because they have "privileges of membership" at an exchange. The Board approved the amendments to NFA Bylaw 1301, which would exclude from the "privileges of membership" exemption trades executed by a commodity pool operated by an NFA Member CPO. Since NFA has regulatory responsibilities for CPO Members regardless of the status of the pools they operate, both exempt and non-exempt pools operated by those CPOs would pay the assessment fee.
NFA respectfully requests that the Commission review and approve the proposed amendment to NFA Bylaw 1301.