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News Facts Actions - Spring 2008

In this issue:



An Interview with NFA Chairman W. Robert Felker

On February 21, NFA's Board of Directors elected W. Robert Felker to serve as its new chairman. Mr. Felker is the chairman of JPMorgan Futures, Inc. and has previously served as president for First Chicago Futures, Banc One Capital Markets and Chase Investments Services. He is a member of the Clearinghouse Committee of the CME Group and a director of the University of Illinois Foundation.

Mr. Felker is only the sixth person to serve as chairman since NFA began operations in 1982 (following Leo Melamed, John Conheeney, Hal Hansen, Charles Nastro and Michael Schaefer). News,Facts,Actions recently met with Chairman Felker to discuss his views on NFA, its futures plans and his goals for the Association.

NFA: As you begin your tenure as NFA Chairman, what do you consider to be NFA's strengths?

Felker: NFA has always been a leader in professional and firm registration. It was among the first to automate these processes and continues to be very user friendly. The arbitration process administered by NFA has also been a model of efficiency and fairness. The education function developed by NFA for users of the derivatives market has also made some great strides.

What specific goals would you like NFA to achieve under your leadership?

I think the tone set by preceding chairs and management is appropriate and no big change in how the Association is governed is required. I do believe that the industry will continue to change and NFA will need to adapt to those changes. The compliance functions (audits, investigations, risk management, trade practice and market surveillance) will probably be the areas most likely to see differences in their daily activity. This will probably be more as a result of the introduction of new products, new participants or differences in the way that business is done rather than changes the Board of Directors might make.

We do need to be efficient in the way in which we operate. I believe NFA produces good regulation at a reasonable cost to the industry. We need to be vigilant and make sure that continues.

We also need to be inclusive as we develop the agenda for the Association. We need to seek advice from those we regulate, federal officials with whom we share responsibility and our employees as we deliberate about our future.

What specific issues will NFA need to address if it wants to continue to be successful?

For the derivatives business to continue its phenomenal growth, we must continue to maintain the public's trust. Each of the operating divisions of NFA plays a role in that worthy goal. We must create an environment where individual and institutional participants are treated fairly. If some Member firms or registered professionals do not treat people fairly, they should be identified. As appropriate, their behavior must change or their privileges to be in our industry should be revoked.

With all of the changes occurring in the financial services industry (new products, exchange consolidation, etc.), what role do you see NFA playing as we move forward?

I believe trading markets serve two major purposes: capital formation and risk management. NFA has historically concentrated on the risk management sector of trading. The concentration in risk management seems appropriate going forward. It is likely that the consolidations we have seen-in brokerage firms, commercial banking, investment banking, money management and exchanges-will continue, at least in the near term. However, it is also likely that we will see new participants enter the market, different ways to manage risk being introduced, and new venues for the transfer of risk being developed. I think as long as institutional or individual members of the public are offered these risk management alternatives, NFA will have an active role.

Where would you like to see NFA five years from now?

It's hard to imagine what the risk management business will look like in five years or what the regulatory regime will be. I would wager that our CTAs and CPOs have more money under management and that will require NFA to continue to sharpen its understanding of those businesses. They may be trading instruments that don't exist today. I believe that information available to market participants will increase and that will provide additional trading opportunities.

NFA will need to understand how that information is made available to and is used by the public. Volatility in financial and physical markets is apt to be high periodically, and NFA must be able to move quickly if that volatility causes distress to a Member firm.

Finally, we are bound to see new, sophisticated, complex risk management tools. NFA staff must be able to understand these instruments-in markets it regulates and in markets it does not regulate-and how the public may be using them.

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NFA proposes disclosure document requirements for forex pool operators and trading advisors

NFA's Board of Directors recently approved the adoption of NFA Compliance Rules 2-41 and 2-42 that would require any trading program or pool that includes forex trading to provide disclosures similar to those currently required under CFTC Part 4 regulations. The Rules are currently at the CFTC for review.

"During the past two years, we have seen a significant increase in the number of CTA Members that deal exclusively in forex," said NFA Attorney Michael A. Piracci. "Unfortunately, under the current forex regulatory structure, CFTC and NFA rules regarding disclosure documents do not apply to these firms."

Due to the lack of content requirements, many forex disclosure documents do not include information that would be required in a document related to on-exchange trading. For example, some forex disclosure documents sent to NFA have not included background information about the CTA and its principals, potential conflicts of interest, past performance results and relevant prior disciplinary actions.

"We are also seeing traditional CTAs offer forex trading programs alongside on-exchange programs," said Piracci. "This presents the added problem of reviewing a disclosure document for which certain parts are subject to the requirements under Part 4 of the CFTC regulations while others are only subject to NFA Compliance Rule 2-39's anti-fraud standard."

The proposed new rules will require Members that manage forex accounts on behalf of customers or offer pools that trade forex to provide prospective clients and pool participants with a disclosure document and to file it with NFA prior to use. Additionally, any trading program or pool that includes forex trading would have to provide disclosures similar to those currently required under CFTC Part 4 regulations. Finally, similar to traditional CPOs, a Member operating a pool trading forex would be required to provide periodic (monthly or quarterly) account statements and an annual report to the pool participants.

"By imposing similar requirements on forex CPOs and CTAs as on traditional CPOs and CTAs, we believe forex customers will have access to information they need before making any investment decisions," said Piracci.

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NFA responds to request from Forex Dealer Members to clarify acceptable collateral for forex security deposits

NFA's Board of Directors has approved an amendment to NFA Financial Requirements Section 12 to clarify the types of collateral that Forex Dealer Members (FDMs) can accept for forex security deposits. This amendment has been submitted to the CFTC for its review and approval.

"Although Section 12 requires FDMs to collect security deposits from customers equal to 1% for the major currencies and 4% for all others, it does not specify what types of collateral are acceptable," said NFA General Counsel Tom Sexton. "In response to inquiries from some of our FDMs, we decided it would be beneficial for NFA to clarify what constitutes 'acceptable collateral'."

The proposed amendments to Section 12 provide that, in addition to cash, FDMs may accept collateral that would be eligible investments for segregated funds under CFTC Regulation 1.25. The collateral would be subject to the haircuts in CFTC Regulation 1.17 and would have to be in the FDM's possession and control.

"Some of our FDMs have asked whether they can accept bank letters of credit," said Sexton. "While letters of credit can be written in a way to ensure collectability, NFA is concerned that their use could encourage retail customers to speculate with borrowed money. Therefore, NFA does not believe it would be appropriate for letters of credit to be permitted as collateral in these retail markets."

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Board Actions

NFA's Board of Directors took the following actions at a meeting on February 21, 2008 in Chicago:

The Board elected W. Robert Felker to a one-year term as chairman and Christopher K. Hehmeyer to a one-year term as vice chairman. Mr. Felker is the chairman of JPMorgan Futures, Inc. Mr. Hehmeyer is chief executive officer at Penson GHCO.

The Board elected the following individuals to serve two-year terms as public directors: Douglas E. Harris, managing director of Promontory Financial Group LLC; Todd E. Petzel, chief investment officer for Offit Capital Advisors LLC; and Susan M. Phillips, dean of the School of Business at George Washington University.

The Board elected the following individuals to serve one-year terms on NFA's Executive Committee: Mark G. Bagan, Minneapolis Grain Exchange; Bruce Cleland, Campbell and Company Inc.; George E. Crapple, The Millburn Corporation; Paul Georgy, Allendale, Inc.; Christopher Hehmeyer; Todd E. Petzel; John F. Sandner, CME Group; and Michael R. Schaefer, Citigroup Global Markets, Inc. Mr. Felker and NFA President Dan Roth also serve on the Executive Committee.

The Board approved the following committee appointments (for terms to expire in January 2010):

  • Appeals Committee: Jeffrey C. Borchardt, George E. Crapple, Thomas W. Ewing, William F. McCoy, Robert E. Murray
  • Membership Committee: Craig L. Caudle, Scott A. Cordes, James A. Gary, Mark J. Hawley, Lou Illes, Silas Keehn, Douglas O. Kitchen, Thomas A. Kloet, David M. Kozak, Charles P. Nastro, Frederick G. Uhlmann

The Board approved the following committee appointments (for terms to expire in January 2011):

  • Business Conduct Committee: J. Michael Gorham, James P. O'Hara
  • FCM Advisory Committee: Clarence Delbridge III, Robert F. Klein, Timothy J. Lankford, Susan M. Schultz
  • CPO/CTA Advisory Committee: Bruce A. Beatus, Ernest L. Jaffarian, David A. Kauppi
  • IB Advisory Committee: John W. Crane
  • Educational/Testing Advisory Committee: Carla J. Eyre
  • Telemarketing Procedures Waiver Committee: Calogero B. Carcione, Terrence B. Clarke, Frank A. Gelber
  • Hearing Committee: Armando T. Belly, Lawrence C. Block, Stephen T. Bobo, Charles S. Collier, Martin F. Doyle, Richard A. Driver, Bryan T. Durkin, Joseph S. Geisel, Sr., Pamela Klein-Kurland, Dennis A. Klejna, Roberta A. Kruchoski, Gena Kusiak, Kent Lawrence, Doris Lindbergh, William T. Maitland, Christopher Malo, Barry J. Mandel, Gloria J. Matthews (Harris), Charles R. Mills, Paul O'Kelly, Joseph W. Ott, William H. Pauly, Anne S. Polaski, Susan M. Schultz, Michael G. Tannenbaum, Cynthia L. Zeltwanger.


The Board approved a technical amendment to the Interpretive Notice to NFA Compliance Rule 2-9: FCM and IB Anti-Money Laundering Programs to correct an error in one of the Notice's footnotes.

The Board approved an amendment to NFA's Code of Arbitration to impose a $525 fee upon the party requesting an oral hearing in a case originally filed as a summary proceeding.

The Board approved NFA Compliance Rules 2-41 and 2-42 that would require Members that manage forex accounts on behalf of customers or offer pools that trade forex to provide prospective clients and pool participants with a disclosure document and to file it with NFA prior to use. Additionally, any trading program or pool that includes forex trading would have to provide disclosures similar to those currently required under CFTC Part 4 regulations. Finally, similar to traditional CPOs, a Member operating a pool trading forex would be required to provide periodic (monthly or quarterly) account statements and an annual report to the pool participants. (See separate story.)

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News Briefs

Amendments to Interpretive Notice regarding supervision of forex promotional materials become effective July 1, 2008
Effective July 1, 2008, the supervisory employee responsible for reviewing a Forex Dealer Member's promotional materials must be under the ultimate supervision of a principal who is also an NFA Associate. The new requirement is one of the amendments to the Interpretive Notice entitled "Forex Transactions". As a result of this amendment, an individual principal of the FDM may be held responsible for the use of fraudulent or misleading promotional materials.

Additionally, the amendments require an FDM to adopt and enforce written supervisory procedures for reviewing the activities of non-Members with which they do business. Among other things, these procedures must include the regular review of trading being conducted in the accounts solicited, introduced or managed by the non-Members; procedures for following up on any customer complaints regarding the non-Members; and the regular review of promotional materials used by the non-Members.

Questions concerning the amendments should be directed to Sharon Pendleton, Director, Compliance (spendleton@nfa.future.org or 312-781-1401) or Lauren Brinati, Manager, Compliance (lbrinati@nfa.futures.org or 312-781-1215).

NFA announces workshops on promotional material and small firm compliance issues
NFA will hold two half-day workshops for NFA Members and futures compliance professionals on Monday, May 19, 2008 in Chicago. The workshops will be held at the UBS Conference Center, located at One North Wacker Drive. The morning workshop will cover all aspects of promotional material rules and regulations, while the afternoon workshop will address small firm regulatory issues and compliance practices. Participants may choose to attend either of the workshops or both.

The fee for attending each workshop is $100 per person for NFA Members and $150 per person for non-NFA Members. If attending both workshops, the total fee is $150 for Members and $250 for non-Members. Be sure to indicate on your registration form which workshop(s) you plan to attend.

Registration fees include all meeting materials and refreshment breaks. However, lunch will not be provided.

Online registration is for credit card transactions only. To register using this method, complete the online registration form.

You can also register by downloading the registration form from NFA's Web site and mailing it with a check or money order to: National Futures Association, Member Workshop, Box 98383, Chicago, IL 60693-0001. Please make checks payable, in U.S. funds, to National Futures Association. Payment must be made at the time of registration.

For more information, visit the Upcoming Events section of NFA's Web site.

CFTC Commissioner Bart Chilton will be featured guest at NFA Member meeting in Boston
CFTC Commissioner Bart Chilton will join NFA officers and senior compliance staff members for an informal discussion of current events that are impacting NFA, its Members and the futures industry at NFA's "Issues and Answers" Member meeting to be held on Tuesday, April 29, 2:00 to 4:00 p.m. at the Sheraton Boston Hotel, 39 Dalton Street.

There is no charge to attend an Issues and Answers meeting; however, space is limited. When you register online, you can also indicate specific topics you would like NFA to address at the meeting.

Attendees can take advantage of a $15.00 discounted parking rate at the Prudential Center Garage. The Sheraton does not offer discounted parking rates during the day.

Don't miss this opportunity to meet with Commissioner Chilton and NFA staff members, ask questions and discuss regulatory issues of importance to you.

Click here to register online for the Boston meeting.

NFA staff scheduled to participate in FIA's Annual Law and Compliance Division Workshop
NFA senior staff members will participate on several panel discussions at the FIA's Annual Law and Compliance Division Workshop, May 7-9, in Baltimore. The workshop is designed "to address issues affecting the legal and regulatory framework of the derivatives industry."

On Wednesday, May 7, NFA's General Counsel Tom Sexton will serve as a panelist at the "Soup to Nuts: General Compliance for Intermediaries" session. Regina Thoele, NFA's Vice-President of Compliance, will be a panelist at "The Nuts and Bolts of Order Handling" session on May 8, and Executive Vice President Dan Driscoll will be one of the panelists at the "Retail FOREX and Other Retail Transactions" session on May 9.

For additional information on the workshop, visit FIA's Web site at http://www.futuresindustry.org/lc-2008.asp.

NFA to provide investor education at Los Angeles Traders Expo
NFA is sponsoring an information booth at the Los Angeles Traders Expo on June 18-21 at the Ontario Convention Center. NFA staff will distribute copies of NFA's investor education materials and demonstrate how to conduct a background check of a futures firm or individual using NFA's Web-based Background Affiliation Status Information Center (BASIC).

The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. For more information visit the Expo's Web site at http://www.tradersexpo.com/.

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