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News Facts Actions - Winter 2008

In this issue:

NFA urges Treasury Department to recommend CFTC's principles-based regulatory approach to other financial institutions

Citing the success of principles-based regulation in the U.S. futures markets, NFA President Dan Roth urged the U.S. Treasury Department to suggest a similar regulatory structure be applied to other financial markets.

Roth's remarks were included in a letter NFA submitted to the Treasury Department in response to a request for comments in connection with the Department's "broad review of the regulatory structure associated with financial institutions."

"In recent years, the futures industry's regulatory approach has yielded significant benefits for both the industry and customers," wrote Roth. "In fact, futures exchange-traded volume has grown explosively in recent years...This growth and competitiveness can be credited, in large part, to the efforts of the Commodity Futures Trading Commission (CFTC), which embraced a principles-based regulatory approach in 2000 with the adoption of the Commodity Futures Modernization Act (CFMA)."

In addition to presenting a brief historical overview of the regulation of both futures and securities markets in the U.S., NFA's comment letter outlines the historical and cultural differences between the Securities and Exchange Commission (SEC) and the CFTC.

"Both agencies have, and recognize, the same three fundamental regulatory purposes: customer protection, market integrity and financial system stability," wrote Roth. "Nonetheless, these two industries have different primary market participants with significantly different uses for the instruments offered. These differences are embedded in the culture of each agency's regulatory philosophy."

Although the idea of combining the SEC and the CFTC into one regulatory agency is not a new one, Roth warns that "combining regulators may produce economies of scale, but it is just as likely to produce bureaucracies of scale where some products get lost in the shuffle."

The Treasury Department received more than 350 comment letters in response to their request and plans to release its recommendations for regulatory reform in early 2008.

The complete text of NFA's comment letter can be found in the News Center section of NFA's Web site.

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Advisory Committees serve as important link between NFA and its Members

NFA's organizational structure gives Members many opportunities to participate in the self-regulatory process. Recently, all three of NFA's Advisory Committees (FCM, IB and CPO/CTA) met to discuss upcoming NFA rule proposals and other topics relevant to their specific category of membership.

NFA Associate General Counsel Kathryn Camp serves as NFA's liaison to the Advisory Committees. Camp works with the committee chairmen to schedule meeting dates and has primary responsibility for developing meeting agendas.

"The Advisory Committees serve an important function at NFA," says Camp. "They speak for the membership in advising the Executive Committee and the Board on regulatory issues impacting their registration categories."

Some issues are discussed by all three committees, while others are specific to the committee's registration category. For example, all three committees recently discussed a constituent proposal regarding forex arbitration jurisdiction and NFA's proposed response to the Treasury Department's Review of the Regulatory Structure Associated with Financial Institutions (see separate article). However, the CPO/CTA Advisory Committee also discussed proposed requirements regarding forex pool operators and trading advisors, while the FCM Advisory Committee discussed Forex Dealer Member price adjustments.

"The Advisory Committees make significant contributions to the rule-making process," says Camp. "For example, when the Executive Committee was concerned that customers did not understand the bankruptcy implications of sweeping excess funds into a non-regulated account, it asked the FCM Advisory Committee to work with NFA staff to develop a proposal. In the process, the FCM Advisory Committee ensured that the resulting interpretive notice gives FCMs the flexibility to tailor their disclosures to their individual sweeps programs."

Because the Advisory Committees represent NFA membership at large, members of the committees encourage and appreciate input from individual Members.

"If you have an industry issue or would like to provide feedback on a specific NFA rule, contact a member of your Advisory Committee," says Camp. "I know they would welcome your input."

Advisory Committee members are appointed by NFA's Board of Directors for two-year terms. Individuals interested in serving on an Advisory Committee should contact Kathryn Camp or NFA General Counsel Tom Sexton by mail.

NFA Members currently serving on NFA Advisory Committees are as follows:

FCM Advisory Committee

David M. Battan, Vice President and General Counsel
Interactive Brokers, LLC
Bruce A. Beatus
Clarence Delbridge, III, Executive Vice President
FC Stone, LLC
Maureen C. Downs, President
Rosenthal Collins Group LLC
Maureen C. Guilfoile, Director & Senior Counsel
Merrill Lynch Pierce Fenner & Smith, Inc.
Robert F. Klein
Citigroup Global Markets, Inc.
Dennis A. Klejna, Senior Vice President
MF Global, Inc.
Donald R. Levin, Senior Vice President/Senior Counsel
Prudential Financial
Bonnie Litt, Managing Director and Associate General Counsel
Goldman Sachs & Co.
Russell R. Wasendorf Sr., President
Peregrine Financial Group, Inc.

CPO/CTA Advisory Committee

Robert J. Amedeo, President
Altegris Portfolio Management
Raymond J. Brinskelle, Trading Specialist
Dunn Capital Management, Inc.
Douglas L. Bry, President
Northfield Trading LP
Jeffrey F. Chandor, Senior Vice President
Merrill Lynch Investment Partners, Inc.
Ernest L. Jaffarian, Managing Member
Efficient Capital Management
Mark H. Mitchell
Barbara A. Pfendler, Vice President
Calyon Financial, Inc.
Kenneth E. Steben, President
Steben & Company, Inc.
Gerald G. Trevino, Chief Operating Officer/Chief Risk Officer and Principal
AAA Capital Management Advisors, Ltd.

IB Advisory Committee

John W. Crane, President
Traders Network, Inc.
John L. Ramirez, Sole Proprietor
Stephen D. Reece, President
Sciota Trading Ltd.
Richard C. Schlabs, Account Executive
Schlabs & Hysinger Commodity Services
Michael T. Sherzan, President
Broker Dealer Financial Services Corp.
Scott W. Stewart, President
Stewart-Peterson Group, Inc.

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NFA launches new electronic audit software system

The first component of a three-year initiative to improve NFA's compliance activities was unveiled in January 2008 with the launch of a new electronic audit software system. The new system utilizes advanced technology to enhance overall audit productivity and improve the audit experience for NFA Member firms.

In April 2006, NFA began a process of reorganizing the Compliance Department to improve the efficiency and effectiveness of its operations. As part of this reorganization, NFA created a specialized Risk Management Group primarily responsible for identifying high risk Member firms as early as possible and ensuring that these firms receive priority treatment from NFA's audit and investigative staff.

At the same time, NFA's Executive Committee, with the concurrence of the Board of Directors, authorized NFA to develop three significant regulatory initiatives related to its compliance activities: a risk management system, an electronic auditing system and a relationship tracking system.

"The electronic audit system is the first of the three systems to be widely deployed to staff," says Timothy McHenry, director of Risk Management, "and is the culmination of 15 months of work by many dedicated NFA employees."

Early in the design phase of the project, NFA identified four key objectives the new system had to satisfy:

  • Store all audit data in a centralized database so it is available to other key compliance systems. Aside from the benefits of more efficient system integration, centralized data storage also provides for more effective statistical analysis of audit results and trends.
  • Develop more effective collaboration for staff both in the field and back in the office via remote connectivity. This improves workflow in the field while also allowing for the more timely review of audit work by senior staff back in the office.
  • Provide for a flexible, interactive system interface that will guide staff through the appropriate audit steps and help ensure consistency across experience levels.
  • Use an improved risk management system and an enhanced database to help focus audit scopes on areas that present the highest risk.

"We reviewed a number of possible technology solutions that would allow us to satisfy these four objectives," says McHenry. "It soon became apparent that one of the biggest challenges for us would be to find a way for our auditors in the field to effectively collaborate with staff back in the office during an audit."

NFA's extensive testing of various communication technologies revealed that dependable connections do not always exist in every location, and in some cases, security was a concern as well. In response to these tests, NFA decided to create a system that had both connected and stand alone functionality, with a maximum amount of system security.

"We also began working on a complete overhaul of the audit modules themselves," says McHenry. "We identified new opportunities to further enhance the audit process and make it more efficient for the auditors to complete their testing. For example, we found a way to eliminate duplicative documentation and enable a more streamlined entry of audit information."

On March 26, 2007, NFA successfully tested its first prototype of the new system and began adding more functionality to the system.

"Throughout the testing phase, we received valuable feedback from our auditors that allowed us to develop a number of enhancements before we even launched the system," says McHenry

These enhancements include:

  • A fully integrated imaging system which will enable auditors to scan source documents in the field and save them to their audit files;
  • A workflow management feature which will enable onsite collaboration by managing access to various audit components among the staff in the field; and
  • The development of a series of new interface controls that will make the input of audit information more efficient.

"Now that we have begun using the system, we encourage NFA Members to provide our auditors with feedback regarding their audit experiences so that we can continue to develop enhancements that will increase audit efficiency," says McHenry.

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Board Actions

NFA's Board of Directors took the following actions at a meeting on November 15, 2007 in Washington, DC:

The Board approved an amendment to the requirement that Forex Dealer Members (FCMs) disclose to retail customers the inherent conflict in acting as a counterparty in forex transactions. The amendment revised the disclosure language to refer to the FCM as acting as a "counterparty" rather than a "principal" in forex transactions. Additionally, the reference that the FCM is not acting as an agent will be deleted.

The Board approved technical amendments to several of NFA's rules and interpretive notices to reflect the NASD's name change to the Financial Industry Regulatory Authority (FINRA). The amendments were subsequently approved by the CFTC.

The Board approved amendments to several NFA rules and interpretive notices to reflect NFA's new address. These amendments were subsequently approved by the CFTC and became effective on December 10, 2007.

The Board approved an amendment to NFA Compliance Rule 3-7 to provide that an individual who was appointed to a hearing panel during his or her term on the Hearing Committee can continue serving on that panel when the term has expired. This amendment was subsequently approved by the CFTC and became effective on December 10, 2007.

The Board approved an amendment to the interpretive notice entitled "Forex Transactions" to require that the supervisory employee responsible for reviewing promotional material for a Forex Dealer Member (FDM) be under the ultimate supervision of a principal that is also an NFA Associate. As a result of this amendment, an individual principal of the FCM may be held responsible for the use of fraudulent or misleading promotional materials.

The Board approved amendments to NFA's interpretive notice entitled "NFA Compliance Rule 2-9: FCM and IB Anti-Money Laundering Program" to incorporate additional requirements and guidance recently provided by the Financial Crimes Enforcement Network (FinCEN). These include:

  • Adopting a final rule under Section 312 of the USA Patriot Act to require FCMs and IBs to apply enhanced due diligence measures to correspondent accounts maintained for certain foreign banks. This rule will become effective in two parts. Beginning on February 5, 2008, the rule will apply to accounts established from that date forward. On May 5, 2008, the rule will apply to all existing accounts established prior to February 5, 2008.
  • Issuing guidance clarifying that in a give-up arrangement, the clearing FCM and not the executing FCM, is required to apply its Customer Identification Program to the customer.
  • Issuing guidance clarifying that upon request, FCMs and IBs are required to provide appropriate law enforcement and regulatory agencies with any supporting documentation related to a Suspicious Activity Report filed with FinCEN.

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News Briefs

January 1, 2008 marks effective date of several new NFA rules
NFA's new assessment fee rate of $.01 per side (futures and options on futures) became effective on January 1, 2008, reflecting the sustained strong growth in public trading volume. The decrease marks the seventh NFA assessment fee reduction over the past nine years. For additional information on assessment fees, visit the Assessment Fee FAQ section of NFA's Web site.

Also effective on January 1 were amendments to NFA Registration Rules 203 and 214 regarding the deadline for filing termination notices. The filing period for late termination notices has been extended from 20 to 30 days before a $100 fine is imposed. The new filing period and late fee rules now reflect those in the securities industry

NFA provides investor education at New York Traders Expo
NFA is sponsoring an information booth at the New York Traders Expo on February 16-19 at the Marriott Marquis Hotel. 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. In previous years, the Expo has attracted more than 6,000 traders. For more information visit the Expo's Web site at

NFA to sponsor International Regulators Dinner
NFA will sponsor an International Regulators Dinner in Boca Raton on March 11. The dinner will be held in conjunction with a day-long meeting for international regulators that coincides with the Futures Industry Association annual conference (March 12-15). CFTC commissioners and senior staff, exchange representatives and regulators from around the world are expected to attend. For more information on the conference, visit

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