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News Facts Actions - Fall 2012

In this issue:

Compliance Consultative Committee undergoes changes

Citing the need for a more risk-based focus, NFA's Board of Directors recently approved changes to the Compliance Consultative Committee (CCC). Renaming the committee the Compliance and Risk Committee (CRC), the Board adopted a formal charter for the CRC, placing a greater emphasis on issues that may pose compliance and financial risks to NFA's Member firms.

"We're refocusing the committee," says NFA Board Chairman Chris Hehmeyer. "Rather than primarily focusing on compliance, we're going to try to place an added emphasis on firm and market risk."

When NFA's Board of Directors (Board) originally created the CCC in May 2006, its role was as advisor to the Board and staff in regard to compliance-related matters. At that time, the Board stated that its functions included providing feedback in the development of NFA rule proposals related to customer protection issues, reviewing NFA examination trends and sanctioning guidelines, providing feedback on Business Conduct Committee (BCC) cases and overseeing the systems developed and utilized by NFA's compliance staff.

By developing a charter and placing a greater emphasis on risk, Hehmeyer thinks the refocused committee will be more proactive and provide more risk analysis.

The committee will meet at least quarterly, and may schedule additional meetings as necessary. It will continue to report about its activities at each quarterly Board meeting.

In terms of makeup, the CRC's membership will be composed of at least five, but not more than 10 members (independent of NFA staff), all of whom will be appointed by the Board and have general knowledge of the compliance and financial obligations of NFA Member firms. CRC members may be directors or non-directors of NFA Members or non-Members.

Additionally, CRC members cannot also be members of NFA's Appeals Committee, the BCC or Hearing Committee due to the sensitive nature of some of the committee's discussions, and the possibility that the subject of investigative matters may subsequently be named in a Member Responsibility Action.

Like the CCC, the reconstituted CRC has many of the same functions, chief among them the principal responsibility to advise staff, the Executive Committee and the Board on compliance- and risk-related matters, including:

  • Discussing regulatory and market issues that may pose compliance and financial risks to NFA's Member firms;
  • Discussing regulatory and market issues arising from trends and issues identified in NFA's examinations;
  • Discussing selected investigations;
  • Discussing trends and issues associated with BCC cases that have been initiated and/or closed;
  • Discussing CFTC rule enforcement reviews relating to NFA's compliance activities;
  • Discussing NFA's sanctioning guidelines;
  • Discussing NFA's proposed rulemakings and petitions for rulemaking to the CFTC regarding compliance-related issues;
  • Performing an oversight role relating to the systems developed and utilized by NFA's compliance staff; and
  • Reviewing the charter annually and proposing any necessary changes to the Board.

The key to the new CRC's success, Hehmeyer believes, will be tapping its members' vast experience and expertise.

"Firms face a variety of risks these days," he says. "What we're attempting to do is get the members engaged, and share with staff where the risks are in order to be proactive and try to prevent problems before they happen. There are a number of other regulatory organizations that have wrestled with this issue and talked about it, and NFA is going to do it."

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Promoting greater transparency of FCM financial data

As referenced in last quarter's newsletter, NFA has been working to shore up confidence in customer segregated funds. As part of its efforts, NFA Financial Requirements Section 16 and its related Interpretive Notice, which became effective September 1, address FCM practices related to segregated and secured amount funds. Among other things, it requires FCMs to report certain financial information to NFA on a monthly or semi-monthly basis.

NFA's Special Committee on the Protection of Customer Segregated Funds recommended that certain FCM financial information reported pursuant to Section 16 be made publicly available on NFA's website to assist customers in their due diligence review of an FCM. NFA then developed an easy-to-read display that will be resident on an FCM's Background Affiliation Status Information Center (BASIC) system page designed to provide retail investors with useful financial information about the firm.

The financial information included on an FCM's BASIC page will include three reports:

  • FCM Capital Report: This report will show the most recent month's information on adjusted net capital, required net capital and excess net capital;
  • FCM Customer Segregated Funds Report: This report will show total funds held in segregated accounts, total funds required to be held in segregated accounts, excess segregated funds, the percentage of segregated funds that are held in cash and each of the investments permitted under CFTC Regulation 1.25 and whether the FCM held any funds at a depository that is an affiliate of the FCM during the previous month; and
  • FCM Customer Secured Amount Funds Report: Identical to the FCM Customer Segregated Funds Report, this report will show the same information in regard to an FCM's secured funds.

Viewers will have access to the previous 12 months' data for all three report types as NFA collects this information.

FCMs' first publicly available monthly report will be for the month ended September 30, and must be filed on or before October 23. This financial data will be available to the public the first week of November. In subsequent periods, NFA will update the FCM Capital Report on a monthly basis. The Customer Segregated Funds Report and Customer Secured Amount Funds Report will be updated on a semi-monthly basis.

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NFA expands Board to integrate swap dealers and major swap participants

A number of new faces will soon be seen at NFA Board meetings. At its August 16th meeting, NFA's Board of Directors unanimously voted to ratify the proposal to amend NFA's Articles of Incorporation to increase the size and modify the structure of the Board to integrate swap dealer (SD) and major swap participant (MSP) Members.

In May 2011, NFA's Board appointed a Special Committee on NFA Governance, comprised of representatives from NFA's current Board and potential swap participants, to review NFA's current governance structure in advance of the Commodity Futures Trading Commission (CFTC) passing final rules requiring SDs and MSPs to become Members of NFA.

The Special Committee explored alternatives for structurally realigning NFA's Board, Executive Committee and other committees to include SDs and MSPs, and made formal recommendations on these governance issues to NFA's Swap Dealer Advisory Committee (SDAC), the Executive Committee and the Board.

Once the CFTC issued the final entity definitional rules relating to swap participants in May 2012, both the SDAC and the Executive Committee reviewed and recommended Board approval of the Special Committee's formal recommendations to integrate swap participants into NFA's governance structure and Membership.

Pursuant to Article XVII, upon the Board's ratification of the amended Articles, the proposed changes were submitted to a ballot vote of Members and were adopted after the affirmative vote of a majority of those Members.

The recently ratified changes to the Articles of Incorporation include:

  • Increasing the Board's size to 39 directors; additional representatives include seven swap participants and four public directors;
  • Within the swap participant category, three seats are allocated to "large financial institution" SDs, three seats to other SDs and one seat to an MSP if one is willing to serve;
  • An RFED seat is substituted for an FCM seat on the Board, thereby reducing the total number of FCM seats to seven. Additionally, three seats are allocated to top-10 FCMs, three seats to non-top-10 FCMs and one at-large seat;
  • Adopt special category voting rules so Board actions would require a majority vote by swap participant directors and public directors as one voting category, a majority vote by the futures directors and the public directors as another voting category and then a majority vote by the Board as a whole;
  • Prohibit the Member affiliates of a single corporate group entity from having more than one Board representative;
  • Phase-in the increase in public directors over a four-year Board election cycle by electing an additional public director each year so that public directors comprise 35 percent of the Board's overall composition at the conclusion of this four-year period; and
  • Slightly enlarge the Executive Committee to 13 members, with public directors continuing to comprise 35 percent of the Committee's composition.

Pending approval of the amended Articles by the CFTC, NFA expects swap participant directors to be elected in 2013.

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Educational initiatives take center stage at NFA

NFA staff have taken to cyberspace and racked up frequent flier miles in recent months in an effort to spread the word to current and future Members about the significant changes afoot for commodity pool operators (CPO), commodity trading advisors (CTA), introducing brokers (IB) swap dealers (SD) and major swap participants (MSP), among others.

Throughout the months of September and October, NFA hosted a series of workshops in London, New York, Chicago and San Francisco for entities that are operating or advising commodity pools that had previously been exempt from registration as CPOs or CTAs. The workshops focused on the registration process, disclosure document preparation, performance reporting, financial reporting requirements, sales practices and NFA audit process. The demand for information was so great in New York that a second workshop was added after the first sold out in 36 hours.

"The regulatory landscape is changing dramatically and many previously unregulated entities are now facing CFTC registration and NFA membership," said NFA's Director of Communications and Education Larry Dyekman. "Providing the information these entities will need to meet their new regulatory responsibilities is of primary importance to NFA."

Member interest in a number of recent NFA webinars has been equally high. On August 15, NFA held a 90-minute webinar for those previously exempt CPOs/CTAs. NFA staff explained who has to register, provided a walkthrough of the registration process and provided an overview of the regulatory requirements. More than 1,000 people attended the webinar. The record number of attendees submitted more than 400 questions, which NFA answered both during the presentation and via email.

On September 20th, NFA hosted another webinar for firms that are not currently registered with the CFTC but are acting as futures commission merchants (FCM), IBs, CPOs or CTAs with respect to swaps subject to the jurisdiction of the CFTC. During the webinar, NFA staff explained the registration process, discussed the regulatory requirements and answered attendees' questions.

NFA held another webinar on August 23rd to help SDs and MSPs understand their registration process. During this 90-minute webinar, NFA staff provided an in-depth discussion of the registration process, including firm and individual registration filing requirements; provisional registration of SDs and MSPs; Section 4s requirements; and the due diligence obligation for swap entities concerning associated persons of SDs and MSPs.

All of these webinars are archived and available on NFA's website.

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CFTC provides temporary registration relief for swap intermediaries

On October 11, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) issued a staff no action letter to provide temporary registration relief to certain persons-including introducing brokers (IB), commodity pool operators (CPO), commodity trading advisors (CTA) and their associated persons (AP), and APs of a futures commission merchant (FCM)-where the requirement to be registered arises solely due to the person's involvement with swaps.

The DSIO stated that on or before Dec. 31, 2012, the person must complete and file with NFA a registration application, including Forms 7-R and 8-R (as appropriate), as well as a fingerprint card for each of its principals and APs.

Firms acting as CPOs will be required to register based upon their swap activities unless the firm properly claims an exclusion or exemption from registration via NFA's Electronic Exemption System, or the CFTC issues interpretive guidance providing that certain collective investment vehicles are not considered commodity pools.

In addition, any person associated with a firm newly registering or currently registered as a FCM, IB, CPO or CTA that engages in activities involving swaps subject to the jurisdiction of the CFTC must register as an AP. There will be no proficiency requirements for APs whose activities are limited solely to swaps at this time.

As of Jan. 1, 2013, newly and currently registered FCMs, IBs, CPOs and CTAs whose activities include swaps subject to the jurisdiction of the CFTC will have to be approved as an NFA Member swaps designated firm. In addition, any person associated with a Member that is currently registered with the CFTC as an FCM, IB, CPO or CTA and engages in activities involving swaps subject to the jurisdiction of the CFTC must be approved as a swap designated AP by NFA in order to engage in swaps activities on behalf of such Member. No Member may be approved as a swap firm unless at least one of its principals is registered as an AP, and is approved as a swap AP.

All registration applications are filed over the Internet via NFA's Online Registration System (ORS).

For information on accessing ORS and filing applications, watch NFA's "Registration Video Tutorials":

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Board Actions

The following actions were taken by NFA's Board of Directors at its meeting on August 16.

The Board appointed Carl W. Gilmore to the Compliance Consultative Committee. (This committee was recently renamed to the Compliance and Risk Committee. See separate story.)

The Board approved technical amendments to NFA's Interpretive Notice, "NFA Compliance Rule 2-9: FCM and IB Anti-Money Laundering Program" regarding an FCM's Customer Identification Program obligations with respect to omnibus accounts.

The Board approved technical amendments to NFA Financial Requirements Section 4 and Compliance Rule 2-10 to add references to CFTC Regulations and, thereby, deem a violation of one of those Regulations by an NFA Member a violation of the NFA requirement. Section 4 was amended to add CFTC Regulation 1.49 and Rule 2-10 was amended to add CFTC Regulations 1.68 and 1.71.

The Board approved the Executive Committee's authorization for staff to temporarily suspend Section II.C.2(c) of NFA's Investment Policy related to funding NFA's long-term investments, and the Board's minimum operating reserve requirement of 10 months of operating expenses.

The Board ratified the Executive Committee's decision to temporarily suspend Section II.C.2(c) of NFA's Investment Policy related to rebalancing NFA's long-term investments, and the Board's minimum operating reserve requirement of 10 months of operating expenses.

The Board approved amendments to NFA Financial Requirements Section 4 requiring FCMs to provide online, view-only access to FCM customer segregated/secured amount bank account information to its DSRO. The amendments also provided that in order for a bank or trust company to be an acceptable depository for customer segregated/secured amount funds, the bank or trust company must allow the FCM to provide its DSRO with this information. (See story in last quarter's newsletter)

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News Briefs

NFA to present workshop at FIA Expo 2012

The Futures Industry Association's (FIA) Expo 2012 is rapidly approaching. The convention, which showcases products, services and information for market professionals and participants, will be held at the Hilton Chicago, located in Chicago, Ill., on October 31 and November 1.

The annual convention offers a variety of sessions that allow attendees-ranging from business, operations and technology professionals and traders-to discuss industry trends, hear expert views on key issues, improve trading skills and learn about new products, systems and practices.

NFA is scheduled to conduct a workshop, beginning at 9:00 a.m. on Thursday, November 1, that is intended to provide an in-depth review of various NFA registration and customer protection initiatives. Panelists will cover details of swap dealer registration, and the resulting Section 4s implementing requirements, swaps intermediary registration, as well as how swap participants will be integrated into NFA's governance and funding structures.

NFA staff members also will appear on panels at the following sessions:

Additionally, NFA staff members will be on hand in the exhibit hall at booth 216. Expo attendees are welcome to stop by to ask questions and pick up information materials.

To register for FIA Expo 2012, visit

NFA reaches its pearl anniversary

October 1 isn't just the 274th day of the Gregorian calendar year, the day in 331 BC when Alexander the Great defeated Darius III of Persia at Gaugamela leading to the fall of the Persian empire or even the day the first episode of "The Tonight Show Starring Johnny Carson" aired in 1962. It also is the date NFA formally opened its doors back in 1982 and began its regulation of the futures industry.

In honor of NFA's 30th anniversary, here is a list of interesting tidbits related to the work NFA has accomplished during its existence:

  • NFA's website currently contains more than 5,900 pages, including 2,526 content/application pages and 3,398 News Center articles;
  • Initially instituted as the Disciplinary Information Access Line (DIAL) telephone system in 1991, NFA refined, rebranded and relocated the system in 1998, calling it the Background Affiliation Status Information Center (BASIC). Since then, BASIC been enhanced numerous times to display a firm's exemption status to help Members comply with Bylaw 1101 (2006), display inactive firms by raising a "red flag" to potential customers who might be solicited by an inactive firm (2010) and provide a public display of FCM financial information (2012);
  • Users have run more than 5 million searches on BASIC since 2007;
  • In 1982, it took weeks and sometimes months to process an application. Now temporary licenses can be granted instantaneously;
  • From 1982 to present, NFA has distributed more than $27 million in restitution to more than 9,500 individuals;
  • Dating back to the mid-1980s, NFA staff have delivered training to audiences on five continents and well over 15 countries, including Brazil, Korea, India, Singapore, Ethiopia and China; and
  • NFA now delivers services to five (soon to be six) designated contract markets and has pre-launch service agreements with 13 swap execution facilities.

NFA to attend Traders Expo in Las Vegas

The International Traders Expo will be held at Caesar's Palace in Las Vegas, Nevada, on November 14 to 17. The Traders Expo offers traders an opportunity to meet face-to-face with, learn from and ask specific questions of a long list of trading experts.

NFA is scheduled to participate in the presentation, "Red Flags: Questions to Ask Your Futures or Forex Broker Before Opening an Account." The panel discussion, which is slated for 8:00 a.m. to 9:00 a.m. on November 16, is expected to discuss the questions retail traders should be asking of a forex or futures broker prior to depositing funds, and the types of answers they should hear. Panelists also will provide information on where investors can go to help them conduct their due diligence.

NFA also will be set up in the exhibit hall at booth 812. Attendees are welcome to stop by to talk with members of the compliance staff, ask questions and pick up information materials. For complimentary registration to The Traders Expo Las Vegas, call (800) 970-4355 and mention priority code 028945, or visit the Expo's website.

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