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News Facts Actions - Summer 2008

In this issue:

NFA President Dan Roth urges Congress to assess risks before enacting legislation to alter U.S. futures markets

Citing NFA's customer protection rules that are designed to ensure that customers have enough information to make fully informed investment decisions, NFA President Dan Roth encouraged members of the House Agriculture Committee to consider the risks inherent in the various proposals under consideration to alter the U.S. futures markets. Roth's remarks were made at House Agriculture Committee hearings held on July 9-11, 2008 to debate how to deal with rising energy prices.

"We prohibit our Members from making wildly exaggerated claims of performance and require them to provide customers with full disclosure of all of the risks," said Roth. "I think full disclosure of risks is a good idea in Congress too, but as I have followed the debate here in recent weeks about how to deal with energy prices, I've seen a lot more wild claims than I have seen disclosure of risks."

As an example, Roth cited the proposal to raise margins for energy futures contracts to as high as 50%. Roth reminded the Committee that in the futures industry margin is a performance bond designed to ensure that traders meet their financial obligations and that clearing organizations set margin levels with great care to cover the potential movement in the value of the futures contract in one day's trading.

"Used for its intended purpose, the margin setting process has been a huge success over the last 150 years in preventing defaults and insolvencies," said Roth. "Using margins to try to artificially lower the price of a futures contract is another thing altogether and could have the directly opposite result."

Roth also questioned the viability of the proposals that would either limit or completely block access to the futures markets for certain classes of investors.

"The notion that you can build a fence around this country to keep institutional, sophisticated market participants from trading the way they want to is simply detached from reality."

Roth did, however, express NFA's strong support for a proposal to provide the CFTC with the funds necessary to hire more people and upgrade its technology. NFA would also support legislation to require foreign exchanges that trade energy contracts with U.S. delivery points or that are linked to U.S. exchanges to provide the CFTC with the same type of information it gets from U.S. contract markets for surveillance purposes.

"Congress should also require the CFTC to enhance transparency in our markets by revising its monthly commitment of traders reports to ensure that trading by commercial users of the underlying commodity is listed separately from trading by index funds and hedge funds," added Roth.

With more than 20 different legislative proposals related to energy trading currently being discussed in Congress, Roth concluded his testimony with a plea for caution.

"The quick fix solutions currently being pitched to Congress carry with them substantial risks of unintended consequences that are real, that are foreseeable and that are potentially devastating," said Roth. "To enact these proposals would be to roll the dice on the American economy and would make the Congress of the United States the biggest speculator in our futures markets."

A full transcript of the testimony is available on NFA's Web site (

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NFA to launch new electronic filing system for CPO and CTA disclosure documents

NFA has petitioned the Commodity Futures Trading Commission (CFTC) to amend its Part 4 Regulations to require Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) to file their disclosure documents with NFA electronically. Concurrently, NFA is developing a new electronic filing system that will enable CPOs and CTAs to file their documents quickly and efficiently over the Internet. NFA will launch the new system once the CFTC approves the requested amendments.

"CPOs and CTAs usually file their disclosure documents with NFA by e-mail," says Mary McHenry, senior manager of NFA's Disclosure Document Review Team. "As the number of these e-mail filings continued to grow, we recognized the need for a more standardized filing process in order to enhance the efficiency and effectiveness of our review program. So, we began looking at an Internet-based filing process that would be beneficial to both our Members and NFA."

The new electronic filing system will streamline and enhance the filing process for CPOs and CTAs. Individuals will access the system using the same designated login and password they use for NFA's Online Registration System (ORS). Once they have accessed ORS, they will be guided through the filing process, which culminates in the electronic transfer of the disclosure document through a secure Web-based gateway.

"We've included a lot of prompts and questions that will help the individuals with their filings," says McHenry. "And, the information provided during the filing process will help NFA staff analyze the document more efficiently."

Another benefit of the new system is the tracking capability. Once individuals file their documents, they will be able to login to the system and track the status of their filing and receive comment letters as they are issued. Additionally, the system will serve as an electronic filing cabinet for registrants, maintaining all previous filings and related comment letters filed through the system.

In an effort to further increase the efficiency of NFA's disclosure document review process, CPOs and CTAs are now required to identify additions and deletions when filing subsequent versions of disclosure documents. This new requirement, which became effective on July 1, 2008, will help NFA identify any changes the CPO or CTA has made to the disclosure document since previously filing it.

"NFA will refuse to review and accept any subsequent filing that fails to include with it a copy of the document identifying the additions and deletions," says McHenry.

Additional information regarding the new requirements can be found in the Notice to Members issued on June 20, 2008.

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CFTC reauthorization gives agency increased authority over retail foreign currency trading

The legislation passed by Congress in May 2008 to reauthorize the Commodity Futures Trading Commission (CFTC) provides the agency with additional regulatory and enforcement authority, particularly in the area of energy products and foreign currency (forex). The legislation was included as an amendment to the Farm Bill and reauthorizes the CFTC through 2013.

"We think this is very important legislation," says NFA General Counsel Tom Sexton, "because it closes several regulatory loopholes in retail forex markets. It will certainly help us in our attempts to provide better protection for forex customers."

The legislation creates a new registration category for retail foreign exchange dealers and requires registration for those who solicit orders for forex customers, exercise discretionary forex trading authority and operate forex commodity pools.

"Requiring forex solicitors, money managers and pool operators to register with the CFTC is an effective step toward reducing the amount of fraudulent activity we have seen in the forex market," says Sexton. "Forex customers will soon be able to check the registration status and disciplinary history of these firms and individuals before opening an account."

The legislation also increases the minimum capital requirements for certain Futures Commission Merchants and Registered Foreign Exchange Dealers that act as counterparties to retail forex transactions. The increase from $5 million to $20 million will be phased in over a period of one year.

"We believe that a $20 million minimum capital requirement is necessary in relation to the risks and responsibilities involved in running a dealer market," says Sexton. "This requirement is very similar to the capital requirements for clearing member FCMs who trade on-exchange foreign currency contracts at the Chicago Mercantile Exchange."

One other forex-related element of the reauthorization legislation clarifies the CFTC's anti-fraud authority over certain retail forex transactions that had previously not been deemed futures contracts by various Court decisions.

"Closing the so-called 'Zelener loophole' will enable the CFTC to prosecute fraudulent forex activity more aggressively," says Sexton.

As a result of the reauthorization, the CFTC is currently developing registration and regulatory requirements for Registered Foreign Exchange Dealers as well as forex solicitors, money managers and pool operators.

"Because the new registration requirements will directly affect our registration systems, we are working closely with the CFTC," says Sexton. "Once the requirements are approved, we will provide additional educational materials to help new registrants through the registration process."

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NFA Board approves Fiscal Year 2009 budget

On May 15, NFA's Board of Directors approved a budget of $39.7 million for Fiscal Year 2009. The FY 09 budget reflects a 1.8% increase over projected FY 08 operating expenses. Revenue is budgeted at $38.6 million, a decrease of 10.7% over projected FY 08 revenue. NFA's fiscal year runs from July 1 through June 30.

"Every department at NFA is focused on working more efficiently and decreasing costs," says NFA's CFO David Hawrysz. "That focus and the absence of expenses related to the relocation of NFA's Chicago headquarters last year have allowed us to limit the increase in administrative expenses to less than 2.0% over projected expenses for the previous fiscal year."

Like any service related business, the majority of the spending is found in employee-related expenses.

"Rising healthcare costs continue to be a concern for us," says Hawrysz. "It's a challenge to balance providing a competitive benefits package with keeping costs under control. However, to attract and retain quality employees who will provide quality regulatory programs and services, we are committed to providing a comprehensive benefits package."

Although NFA projects public trading volume to increase in FY 09, NFA projects its revenue will decrease, due mostly to the decrease in assessment fees that NFA enacted in January 2008. That decrease marked the eighth time the fee has been lowered in the past ten years.

As in past years, Hawrysz credits the hard work of NFA's Finance Committee for guiding the development of this year's budget.

"The knowledge and expertise of each Committee member have been invaluable," says Hawrysz. "We are very fortunate to have such dedicated individuals."

During the period of time the FY 08 budget was prepared, NFA's Finance Committee consisted of the following individuals: Jeffrey C. Borchardt, Kansas City Board of Trade; (Committee Chairman) Christopher K. Hehmeyer, Penson GHCO; Thomas A. Kloet, Fimat USA; Robert E. Murray, Graham Capital Management LP; Susan M. Phillips, The George Washington University School of Business; and NFA President Dan Roth.

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NFA launches online learning program for arbitrators

On June 24, NFA launched an online learning program for its arbitrators to help them fulfill their ongoing training requirements. Individuals can access the program through the Dispute Resolution section of NFA's Web site (

The program consists of five modules covering various aspects of NFA's arbitration program. There are also four quizzes located throughout the program. Once an arbitrator completes the program, the test scores are sent electronically to NFA and stored in a database. The arbitrator can also print out a certificate of completion.

"The success of our arbitration program depends on the quality of our arbitrators," says Elizabeth Sheridan, manager of NFA's arbitration program. "That's why we require them to demonstrate proficiency in arbitration principles and procedures at least once every three years. By completing this new online program, our arbitrators can meet their training requirements."

NFA arbitrators can also meet their training requirements by attending a training seminar offered by the American Arbitration Association (AAA) or the Financial Industry National Regulatory Association (FINRA) and providing NFA with proof of attendance.

Individuals interested in serving as NFA arbitrators should contact NFA either by calling NFA's Information Center at (800) 621-3570 or e-mailing NFA at

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Board Actions

NFA's Board of Directors took the following actions at a meeting on May 15, 2008 in New York:

The Board approved amendments to the Audit Committee Charter to reflect the Committee's annual review and approval of NFA's not-for-profit tax filings and an annual meeting with NFA's external auditors.

The Board approved NFA's Fiscal Year 2009 budget (see separate story).

The Board approved amendments to NFA Financial Requirements Section 4. Section 4 provides that FCMs who violate certain CFTC financial or segregation rules also violate an NFA requirement. The amendments will make the same rules applicable to IBs.

The Board reviewed recent Member Responsibility Actions taken by NFA.

The Board conducted discussions on the Treasury Department's Blueprint for a Modernized Financial Regulatory Structure and the current status of the CFTC's reauthorization.

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News Briefs

NFA signs agreement to provide regulatory services for NYSE Liffe futures exchange
National Futures Association and NYSE Liffe LLC recently announced that they have entered into an agreement for NFA to provide regulatory services for the electronic futures exchange that NYSE Liffe will launch in the second half of 2008.

NFA will perform an extensive range of trade practice and market surveillance activities for NYSE Liffe, including processing membership applications, making use of Large Trade Position Reports and other tools to monitor position concentration, and, in consultation with NYSE Liffe's Chief Regulatory Officer, providing a variety of other regulatory services that may be necessary.

NYSE Euronext anticipates that the CFTC will designate NYSE Liffe as a contract market in the third quarter of 2008. Once designation is achieved, the CBOT precious metals complex will be transitioned from CBOT to NYSE Liffe as quickly as possible, and NFA's regulatory services will commence.

NYSE Liffe will continue to use the existing trading platform, which is powered by LIFFE CONNECT® technology, and CME will continue to provide clearing services for the precious metals complex through the end of the first quarter of 2009.

NFA staff to participate in panel discussion at Forex Trading Expo
Compliance Director Sharon Pendleton will participate in a panel discussion entitled, "The Questions You Need to Ask Your Broker Before Opening a Forex Account" at the Forex Trading Expo, scheduled on September 12 and 13 in Las Vegas. Joining Sharon on the panel will be CFTC Deputy Director, Compliance and Registration, William Penner and Tim Bourquin, co-founder of the Traders Expo and the Forex Trading Expo.

NFA will also sponsor an information booth in the exhibit hall, where NFA staff will distribute forex education brochures and demonstrate how to conduct online background checks of forex firms and brokers. They will also provide guidance for those forex solicitors, money managers and pool operators who are now required to register with the Commodity Futures Trading Commission.

For more information on the expo, visit

Amendments to Forex Transactions Interpretive Notice now in effect
Amendments to NFA's Interpretive Notice regarding Forex Transactions concerning supervision of forex promotional material became effective on July 1, 2008.

The amendments require that the supervisory employee responsible for reviewing a Forex Dealer Member's (FDM) promotional materials be under the ultimate supervision of a principal who is also an NFA Associate. 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.

The amendments make clear that an FDM must 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 these non-Members, procedures for following up on any customer complaints regarding the non-Members, and the regular review of promotional materials being used by the non-Members. Just as with an FDM's own promotional activities, the review of the non-Member's activities must be conducted by a supervisory employee that is under the ultimate supervision of a listed principal that is also an NFA Associate.

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