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September 19, 2001
Ms. Jean A. Webb
Re: Rules Relating to Intermediaries of Commodity Interest Transactions; 66 Fed. Reg. 45221 (Aug. 28, 2001)
Dear Ms. Webb:
In the August 28, 2001 Federal Register, the Commodity Futures Trading Commission re-published a number of proposals primarily designed to provide intermediaries with greater flexibility in complying with Commission rules. NFA commends the Commission for its efforts in this area and is pleased to comment on these proposals.
As we stated in our August 7, 2000 comment letter to the Commission's original proposals, NFA strongly supports the Commission's initiatives to reinvent the regulatory structure in the futures industry. The Commission's proposals recognize the need for change to keep up with the technological and business developments that are invigorating the futures industry. The proposals also recognize that regulatory needs change with the type of product being traded and the nature of the investor. NFA continues to believe, however, that many of the Commission's proposals do not go far enough because they amend existing regulations rather than relying on core principles supplemented by interpretive guidance — an approach endorsed by the Commodity Futures Modernization Act of 2000 (CFMA) and supported by NFA.
Obviously, every regulation cannot be replaced with a core principle. Capital and segregation requirements, for example, must be spelled out in detail to ensure the integrity of customer funds. In many other areas, however, customers and the markets can be adequately protected without this specificity and, in those areas, core principles can and should be used to provide intermediaries with more flexibility. NFA encourages the Commission to revisit all of its rules — including any rules amended by the Commission as a result of this proposal — as part of the intermediary study mandated by the CFMA.
Having expressed our strong support for the overall proposal, NFA would like to take this opportunity to comment on some of the specifics in the proposal.
NFA also supports the Commission's proposal to delete Rule 3.32 and replace it with a new paragraph (a)(2) to Rule 3.31. This proposal will make the process of adding new principals much simpler while continuing to provide the information necessary to ensure that the new principals meet the fitness requirements imposed by the Commodity Exchange Act.
NFA applauds the Commission for rethinking its position on obtaining certified financial statements from FCMs filing an initial registration application. As we stated in our August 7, 2000 comment letter, this requirement provides important protections for customer funds without imposing an undue burden on the FCM. We also continue to support the Commission's proposal to provide IBs with an alternative way to demonstrate their compliance with the financial requirements.
As the Commission notes, the CFMA allows broker-dealers, depository institutions, and institutions of the Farm Credit System to act as intermediaries on derivatives transactions execution facilities (DTFs) for qualified eligible participants without registering as FCMs or IBs. As the Commission also notes, this provision generally renders its earlier passporting proposal moot. NFA continues to believe, however, that the registration process should be streamlined for dual securities and futures registrants by eliminating duplicate background checks even when the person services retail customers. NFA encourages the Commission to address this issue as part of the intermediary study mandated by the CFMA.
Fitness and Supervision
Risk Disclosure and Account Statements
NFA looks forward to developing appropriate disclosure for retail customers trading on DTFs. If the Commission decides that it is appropriate to issue a Statement of Acceptable Practices for disclosure to institutional customers, NFA believes that the Commission should delegate that responsiblity to NFA. We will, of course, work closely with the Commission and the industry in this process.
In this same vein, we do not agree that the Commission should codify the provisions of its Advisory relating to electronic transmission of account statements. We fully support the content of that Advisory, but codifying it reduces — rather than enhances — flexibility. We recommend that the Advisory be treated as acceptable practices guidance rather then be codified in a rule.
The Commission's proposal also gives customers and account controllers the flexibility to offset positions in their accounts using something other than the first in, first out (FIFO) method. NFA supports giving customers/account controllers this discretion provided that a customer uses a consistent approach in offsetting positions. This discretion should not be misused to permit customers to change offsetting instructions on every position, which could raise issues relating to improving delivery positions, tax avoidance, and money laundering.
As NFA stated in its August 7, 2000 letter, NFA does not support the Commission's proposal to require CPOs and CTAs to disclose their method of offset in the disclosure document if they have instructed the FCM to offset positions using something other than the FIFO method. This disclosure is only material to a participant or client if a CPO/CTA calculates its compensation based on realized gains. If this is the case, then the CPO/CTA is already required to disclose how positions are closed out and what effect that has on fees. Therefore, amending Commission regulations to require this disclosure is unnecessary in some situations and redundant in others.
In closing, NFA is pleased with the Commission's proposal and believes it is an excellent first step in eliminating the one-size-fits-all approach to regulating the derivatives markets. NFA encourages the Commission to further evaulate these rules in connection with the intermediary study mandated by the CFMA and to provide additional flexibility in response to that study. NFA stands ready and willing to assist the Commission with the study and to develop acceptable practices guidance for the industry.
Very truly yours,
Thomas W. Sexton