As the Commission is aware, in August 1998, the CFTC approved certain amendments to Regulation 1.35(a-1) to allow eligible account managers to place orders for a combined group of eligible customers on a contract market without specific customer account identification at the time of either order placement or report of execution. These amendments permit orders entered on behalf of these eligible customers to be allocated after execution of the order, in accordance with exchange rules, but no later than the end of the day on which the order is executed. NFA Compliance Rule 2-10 adopts by reference CFTC Regulation 1.35, including these recent amendments.
In the preamble to the Federal Register release containing these approved amendments, the CFTC imposes a supervisory obligation upon carrying FCMs to ensure that only eligible accounts have received post-execution allocations. The proposed Interpretive Notice, as discussed recently with CFTC staff, addresses this obligation. The Interpretive Notice stipulates that an FCM carrying accounts that receive post-execution allocations must have compliance procedures in place reasonably designed to ensure that only eligible accounts have received such allocations. The Interpretive Notice recommends that a carrying FCM should test on a regular basis a sample of its accounts receiving post-execution allocations to ensure that only eligible accounts are included. The Interpretive Notice states that in performing these regular checks, there are two important factors -- frequency and scope -- and that both of these factors will be influenced by how often an exchange or executing FCM is able to make information readily available to perform the check and the form of such information. The Interpretive Notice advises that if an FCM carries only eligible accounts for a particular trading manager, then the fact that such accounts received "end of day" allocations imposes no additional supervisory responsibilities upon the FCM.
Finally, the Interpretive Notice provides that any FCM that receives notice that post-execution allocations have been made to accounts that have not been previously identified as eligible must make a reasonable inquiry into the matter and, if appropriate, refer the matter to the proper regulatory authority, such as the CFTC, NFA or the FCM's DSRO.