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News Facts Actions - Summer 2012

In this issue:

Swaps regulatory responsibilities reshape NFA's budget

Costs associated with a substantial expansion of regulatory duties have resulted in a 27 percent increase in National Futures Association's operating budget for Fiscal Year 2013, which began July 1. NFA projects operating expenses in FY 2013 will be $60.8 million. NFA's Board of Directors approved the proposed budget at its meeting on May 17 in New York.

"We will need significantly more resources in order for us to process registration of swap dealers (SD) and major swap participants (MSP) and monitor these new classes of NFA Members for compliance with NFA rules and CFTC regulations," said NFA President Dan Roth.

About 80 percent-or $10.3 million-of the $12.8 million increase in operating expenses is directly related to the anticipated regulation of SDs and MSPs, as well as providing regulatory services to swap execution facilities (SEF). NFA currently is in the first year of a two- to three-year ramp up with its swaps regulatory program.

"Preparing this budget was particularly challenging this year because much of the increased spending is contingent on the CFTC's actions-namely, implementing final rules and definitions pertaining to the OTC markets," said David Hawrysz, NFA's treasurer and chief financial officer.

Under the CFTC's proposed regulations, SEFs will have certain self-regulatory responsibilities, including trade practice and market surveillance. The CFTC has allowed for SEFs to outsource their compliance requirements to other registered entities, such as NFA.

"To date, NFA has entered into pre-launch services agreements (PSA) with 12 SEFs and one designated contract market that plans to only trade swaps," said Ed Dasso, vice president of market regulation. "In order to service all of our clients effectively, NFA already has begun investing in additional staff and systems development."

With these increased regulatory responsibilities comes the need for additional staffing. NFA anticipates its staffing level will increase by about 60 employees in FY 2013. To accommodate the new staff, NFA is expanding its office in Chicago and relocating its New York offices to a larger space.

NFA will continue to operate on the premise that each regulatory program (futures, swaps, forex, market regulation) should be financially self-sufficient, and that each program generate enough revenue to recover the costs associated with operating their respective programs.

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CFTC approves new NFA financial requirement to strengthen protection of customer segregated funds at FCMs

The CFTC recently approved NFA Financial Requirements Section 16 and the related interpretive notice entitled "FCM Financial Practices and Excess Segregated Funds/Secured Amount Disbursements". NFA Financial Requirements Section 16 and the notice impose new requirements on futures commission merchants (FCM) with respect to customer segregated funds and secured amount funds accounts, and require reporting of specific information regarding financial and operational information on a monthly or semi-monthly basis. The requirements will become effective September 1.

NFA Financial Requirements Section 16

NFA Financial Requirements Section 16 contains four subsections. Subsection 16(a) requires FCMs to maintain written policies and procedures regarding the maintenance of FCM's residual interest in customer segregated and customer secured amount funds. These policies and procedures must identify a target amount (either a percentage or dollar amount) that the FCM will seek to maintain as its residual interest. This target residual amount, and any changes to the amount or material changes to the written policies and procedures, must be approved in writing by the FCM's governing body, CEO or CFO.

The second subsection, 16(b), prohibits an FCM from withdrawing, transferring or otherwise disbursing funds from any customer segregated funds account exceeding 25 percent of the FCM's residual interest in those accounts unless the FCM's CEO, CFO or a principal with knowledge of the firm's financial information pre-approves the disbursement in writing. Subsection (b) also requires any FCM making such a disbursement to file written notice through the WinJammer online filing system of the disbursement and other specified information. The subsection also imposes requirements for disbursements from any customer segregated funds account made subsequent to a disbursement that exceeds the 25 percent threshold and prior to the next day's required segregated funds calculation.

Subsection 16(c) imposes the same approval and notice requirements in subsection 16(b) to disbursements from foreign futures and foreign options customer secured amount funds accounts that are identified under CFTC Regulation 30.7.

Finally, subsection 16(d) requires all FCMs to report certain financial and operational information to NFA on a monthly and other specified information on a semi-monthly basis through WinJammer. The first required monthly report, which deals primarily with net capital information, is due for the month ended September 30 on or before October 23. The semi-monthly reporting requirement, which requires information on the funds held in segregated accounts/secured amount accounts and the percentage of segregated/secured amount funds held in cash and each of the investments permitted under CFTC Regulation 1.25., was implemented in mid-July.

Subsection (d) also requires FCMs to file through WinJammer each business day by noon, a schedule of daily segregated funds and secured amount funds computations as of the close of the preceding business day.

Interpretive Notice

The Interpretive Notice further describes certain regulatory requirements that FCMs must adopt to implement the specific requirements of Section 16:

  • When calculating the FCM's secured amount requirement, the FCM must use the method that calculate net liquidating equity plus the market value of any securities held in customers' accounts.
  • When determining the target amount of the firm's residual interest, the FCM's governing body, CEO or CFO must perform a due diligence inquiry and consider various specified factors relating to the nature of the firm's business, and create a written record containing a description of the analysis of the factors used by the FCM to determine its targeted residual amount.
  • If an FCM falls below the target residual interest amount due to a disbursement that is not for the benefit of customers, the FCM must either deposit funds into the segregated/secured amount funds accounts necessary to restore the respective account balance to the target amount or, if appropriate, revise the target amount in accordance with the requirements under subsection (a) for doing so by the close of business on the next business day.
  • If an FCM makes a disbursement from customer segregated or secured amount funds that is not for the benefit of customers, the FCM's internal procedures must require the FCM to consider the most current required segregated funds or secured amount calculation, as well as the impact of any known unsecured debits, deficits and previous disbursements that could cause material adjustments to its most-current segregated and secured funds calculations.
  • If an FCM fails to complete the required segregated funds calculation or the secured amount funds calculation, it is prohibited from making any disbursements (not for the benefit of customers) from the accounts for which the calculation was not completed until the required calculation is completed and submitted to NFA.

The interpretive notice also emphasizes that NFA and other designated SROs will closely monitor the information submitted pursuant to Financial Requirements Section 16 to ensure that an FCM maintains sufficient funds to remain in continual compliance with the customer segregated funds and secured amount requirements.

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NFA stresses need for rule harmonization under dual CFTC/SEC regulatory regime for CPOs

On February 9, the CFTC amended CFTC Regulation 4.5 to re-impose pre-2003 trading and marketing restrictions on SEC-registered investment companies (RIC) that claim an exclusion from commodity pool operator (CPO) registration. Recognizing the necessity of harmonizing its Part 4 compliance obligations with the SEC's requirements applicable to RICs, the CFTC concurrently issued a proposed rulemaking to harmonize the compliance obligations that will apply to dually registered investment advisors (IA) of RICs that will also be required to register as CPOs.

NFA submitted a comment letter on April 24 to the CFTC containing suggestions on how to ease the regulatory burden for potential CPO Members that will have to comply with both CFTC and SEC obligations. The letter followed similar comment letters from NFA to the CFTC submitted in 2010 and 2011 on the same issue.

"We support the CFTC's changes to Regulation 4.5 and its desire to address the potential conflicts between the CFTC's regulatory regime and that imposed by the SEC," said NFA General Counsel Tom Sexton.

To assist NFA with drafting the comment letter, NFA met with a committee it had assembled in 2011 to discuss the issues related to the then-proposed changes to Regulation 4.5. The committee, which is comprised of industry participants that operate commodity pools, RICs trading commodity interests and private counsel who specialize in the CFTC's Part 4 Regulations and/or the Investment Company Act of 1940, identified several harmonization issues relating to recordkeeping, reporting and disclosure issues. NFA also sought input from its CPO/CTA Advisory Committee prior to finalizing its comments.

"This committee was extremely helpful in identifying the issues that that may be problematic for dually registered firms," Sexton said.

NFA's comment letter discussed several harmonization areas including reporting of past performance information on related pools; the timing of periodic accounts statements and a request that the Commission continue to work with the SEC on the placement and inclusion of certain information in a dually registered entity's prospectus/disclosure document.

NFA's letter also expressed full support for the CFTC's proposed changes to Part 4, noting that the changes embody what NFA outlined in its 2011 comment letter.

"The amendments to Regulation 4.5 could impact the number of SEC-registered firms required to register with the CFTC as CPOs and become NFA Members," Sexton said. "We want to ensure that the regulatory requirements for these dually registered entities are not unduly burdensome, while at the same time providing appropriate customer protections."

The full text of the comment letter can be found on NFA's website.

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Industry to electronically confirm customer segregated funds

In an effort to shore up confidence in customer segregated funds, a special committee composed of representatives from the futures industry's self-regulatory organizations (SRO) has proposed additional requirements to SRO rules and regulatory practices. The new requirements are designed to strengthen safeguards for customer segregated and secured funds held at futures commission merchants (FCM).

The SRO committee, which was formed in January and includes representatives from NFA, CME Group, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange, unanimously agreed on July 17 to begin the process of confirming the balances of customer segregated bank accounts for all FCMs using a web-based, electronic confirmation process.

Additionally, SROs will develop rules to require all FCMs to provide their designated SRO with direct online access to confirm segregated and secured funds balances at the banks holding the FCM's customer segregated and secured funds. However, bank depositories that fail to provide electronic online access will not be considered an acceptable depository for holding customer segregated and secured funds.

Under this rule, SROs will be able to check any customer segregated bank account balance for any FCM at any time without first checking with the firm or bank. NFA will then be able to compare those balances to the firm's daily segregation report. Additionally, NFA intends to expand this approach-once it's implemented-to receive daily updates from all depositories for customer segregated accounts, including clearing FCMs.

"The committee recognizes that we need to make better use of technology to monitor firms for compliance with segregation and secured requirements and strengthen the industry's customer protection regime," said NFA President Dan Roth.

Previous recommendations from the SRO committee were included in NFA Financial Requirements Section 16 and an accompanying Interpretive Notice, which were approved by NFA's Board of Directors in May and the CFTC on July 13. Under NFA Financial Requirements Section 16, FCMs will be required to report specific information regarding customer segregated funds and secured amount funds accounts on a monthly or semi-monthly basis via the WinJammer online filing system.

NFA Financial Requirements Section 16 goes into effect September 1.

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Facts about the CFTC Whistleblower Program

This story was written by the CFTC for NFA Members

In January, the Commodity Futures Trading Commission (CFTC) announced the opening of its Whistleblower Office. Created under the Dodd-Frank Act, the CFTC's whistleblower program allows for the payment of monetary awards to eligible whistleblowers, and provides anti-retaliation protections for whistleblowers who share information with or assist the CFTC.

The following are some basic facts about the program:

  • The CFTC will pay awards to eligible whistleblowers who voluntarily provide the Commission with original information about violations of the Commodity Exchange Act that lead the Commission to bring an enforcement action that results in more than $1 million in monetary sanctions.
  • The CFTC can also pay whistleblower awards based on monetary sanctions collected by other authorities (including self-regulatory organizations) in actions that are related to a CFTC enforcement action, and are based on information provided by a CFTC whistleblower.
  • The total amount of a whistleblower award will be between 10 and 30 percent of the monetary sanctions collected in either the CFTC action or the related action.
  • A whistleblower can be any person who provides the CFTC with original information about a violation of the Commodity Exchange Act. Such information can be based on either the person's independent knowledge or independent analysis. Under the CFTC's Whistleblower Rules, however, certain specified persons are ineligible to receive whistleblower awards.
  • In order to become a whistleblower, an individual must file a Form TCR with the CFTC.
  • A whistleblower may file anonymously.

You can learn more about the CFTC's whistleblower program by visiting the program's webpage on where you will find forms, program rules, frequently asked questions, filing instructions, and notices of actions for which whistleblowers can file award claims. If you have any questions, you may contact the CFTC's Whistleblower Office by sending an email to

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Board Actions

The following actions were taken by NFA's Board of Directors at its meeting on May 17.

The Board of Directors approved NFA's proposed Fiscal Year 2013 budget. (See separate story)

The Board approved technical amendments to Financial Requirements Section 13. The amendments specify each financial and operational report required to be filed by Forex Dealer Members, and clarify that any report that is filed after its due date must be accompanied by a fee of $200 for each business day that it is late.

The Board approved a technical amendment to NFA Bylaw 1301(e) regarding assessment fees for Forex Dealer Members (FDM). On February 1, NFA began imposing an assessment fee on all order segments submitted by FDMs via NFA's Forex Transaction Reporting Execution Surveillance System (FORTRESS) in order to recover the costs NFA incurs with respect to monitoring FDM trade practices. NFA Bylaw 1301(e)(ii) currently provides that "any unfilled open orders that are carried over by the system are considered a new order segment the next day." The amendment removes this language from the bylaw, removing unfilled open orders when calculating a FDM's assessment fee.

The Board appointed Jeffrey Borchardt and Ernest Jaffarian to NFA's Finance Committee. The Board appointed Aleks Kins to the CPO/CTA Advisory Committee and Craig Caudle to the Hearing Committee. Additionally, the Board appointed W. Robert Felker to the Membership Committee.

The Board approved proposed new NFA Financial Requirements Section 16 and its related interpretive notice. (See separate story)

The Board approved the adoption of a new interpretive notice to NFA Bylaw 1301(b) entitled "NFA Bylaw 1301(b): NFA's Assessment Fee-Diminutive Notional Value Contracts and Security Futures Products." (See separate story)

The Board approved proposed amendments to NFA Compliance Rule 2-46: Reporting Requirements for CPOs and CTAs. (See separate story)

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News Briefs

NFA proposes amendments to Compliance Rule 2-46 regarding CPO and CTA quarterly reporting requirements

In March 2010, NFA adopted Compliance Rule 2-46 to require commodity pool operators (CPO) to report certain information to NFA on a quarterly basis. In light of the CFTC's February 2012 adoption of CFTC Regulation 4.27, which imposes similar periodic reporting requirements on CPOs and new reporting requirements on CTAs as required under the Dodd-Frank Act, NFA has proposed amendments to NFA Compliance Rule 2-46 to ensure that NFA's reporting requirements are consistent with the CFTC's, and to avoid duplicative filing of the same information. The changes modify the timing and content requirements for CPOs and impose a filing requirement on CTAs that is consistent with the CFTC's new requirement.

The amendments to Compliance Rule 2-46 do not impose any additional NFA reporting requirements on CPOs. The changes primarily modify the deadlines to coincide with the CFTC's deadlines under Regulation 4.27.

The filing requirements with modified time-frames based on CFTC Regulation 4.27's requirements will be:

  • Small CPOs will be required to file NFA Form PQR (which will consist of CFTC Form CPO-PQR's Schedule A and a schedule of investments) with NFA on a quarterly basis within 60 days of the quarters ending March, June and September. Small CPOs will also be required to file a year-end report (consisting of Schedule A and a schedule of investments) within 90 days of the calendar year end
  • Mid-size CPOs will be required to file NFA Form PQR (which will consist of CFTC Form CPO-PQR's Schedule A and a schedule of investments) with NFA on a quarterly basis within 60 days of the quarters ending in March, June and September. Mid-size CPOs will also be required to file CFTC Form CPO-PQR's Schedules A and B on an annual basis, which will be due within 90 days of the calendar year end
  • Large CPOs will satisfy their NFA PQR filing requirements by filing the required CFTC Form PQR schedules on a quarterly basis within 60 days of the quarter end
  • CPOs that file Form PF with the SEC in lieu of CFTC Form CPO-PQR will be required to file NFA Form PQR (CFTC Form CPO-PQR Schedule A and a schedule of investments), with NFA on a quarterly basis within 60 days of the quarter end, except for the December 31st quarter, which will be due within 90 days of quarter end

CTAs will be required to file NFA Form PR on a quarterly basis, within 45 days of the quarter end, and a year-end report within 45 days of the calendar year end. NFA Form PR will consist of CFTC Form CTA-PR, plus additional information relating to relationships (i.e., carrying broker, introducing broker, etc.); assets under management for each trading program; and monthly performance during the quarter for each trading program.

All filings for CPOs and CTAs will be made through NFA's Easy-File System. The amendments have been sent to the CFTC for approval.

Visit NFA's website for the full rule submission letter.

NFA reduces assessment fee rate for diminutive notional value contracts and security futures products

On July 20, NFA adopted an Interpretative Notice, "NFA Assessment Fee - Diminutive Notional Value Contracts and Security Futures Products." The notice implements a reduced assessment fee rate for contracts designated by NFA's Executive Committee as diminutive notional value contracts (DNVC) and security futures products (SFP), and provides that NYMEX's micro crude oil contract has been designated a DNVC.

Under the notice, contract markets and exempt commercial markets may request that NFA's Executive Committee designate certain contacts as DNVCs. If granted DNVC status, NFA's assessment fee under NFA Bylaw 1301(b) for these contracts will be reduced from $0.04 per round turn to $0.00008 per round-turn, with a minimum fee of $0.01 per round-turn in the event a customer trades less than 100 contracts. If any computation results in a fraction of a cent, the fee will be rounded to the nearest penny. The reduced assessment fee rate also will apply to SFPs.

The notice and reduced assessment fee rate will go into effect September 1.

More information on the notice can be found in NFA's June 1 submission letter to the CFTC.

NFA launches education initiative to aid commodity pool operators and commodity trading advisors

NFA announced an education initiative in July to assist commodity pool operators and commodity trading advisors that will be affected by the CFTC's recent rule amendments. On February 24, the CFTC issued final rules amending CFTC Part 4 Regulations to rescind the exemption from registration available to CPOs offering certain qualifying pools under CFTC Regulation 4.13(a)(4), which could result in a large number of entities being required to register with the CFTC and to become NFA Members.

NFA's initiative is intended to ensure that these entities understand the registration process as well as their new, ongoing regulatory obligations, and will include published guidance, webinars, workshops and tutorial videos. In September and October, NFA will conduct workshops in Chicago, New York, San Francisco and London to assist CPO/CTA registrants. The workshops, presented by NFA staff and other futures professionals, will focus on the registration process, disclosure document preparation, performance reporting, financial reporting requirements, sales practices and the NFA audit process. Click here for more details.

Additionally, NFA will host a 90-minute webinar for previously exempt CPOs on August 15 at 3:00 p.m. EST. NFA staff will explain who has to register, provide a walkthrough of the registration process, as well as give a brief overview of a CPO's regulatory requirements. Participants will be able to submit questions throughout the program. There is no fee to participate in the webinar, but registration is required.

To register for the webinar, click here.

For additional information about the education initiatives, contact NFA's Information Center at (800) 621-3570.

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