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NFA revises interpretive notices related to allocation of bunched orders

NFA recently amended two interpretive notices related to the post-execution allocation of bunched orders for multiple accounts. The amendments, reflecting changes the CFTC made this past summer to Regulation 1.35(a-1)(5), became effective on September 15.

"The allocation of bunched orders is an issue the industry has debated for several years," says Dan Driscoll, executive vice president and chief compliance officer. "In 2001, NFA and the Futures Industry Institute (now called the Institute for Financial Markets) co-authored a Best Practices Study, which listed recommendations for the allocation of bunched orders. We're very pleased that the CFTC's amended rules incorporate many of the recommendations from the Study."

CFTC Regulation 1.35(a-1)(5) allows certain managers to bunch customer orders for execution and to allocate them to individual accounts after execution but prior to the end of the day. NFA Compliance Rule 2-10 adopts CFTC Regulation 1.35 by reference.

The amendments to CFTC Regulation 1.35(a-1)(5) make several significant changes. Most significantly, the amendments provide that certain account managers may use bunched orders for all futures customers, which affords retail customers the advantages previously only enjoyed by sophisticated customers. These advantages include better execution and pricing of their orders. Additionally, the amendments expand the category of eligible account managers. For example, in addition to registered CTAs and investment advisers who are currently eligible, account managers that are exempt or excluded from CFTC and SEC registration are now also eligible.

In addition to the changes regarding customer and account manager eligibility, the amendments simplify the requirements for using bunched orders. For example, the amendments now require that account managers make certain information available to customers upon request, rather than mandating the disclosure of such information before bunching orders. The amendments also eliminate the requirement that account managers file a certification with an FCM before bunching. Lastly, the amendments more clearly define the responsibilities of FCMs and account managers regarding the allocation of bunched orders.

"For the past several years, NFA has had two interpretive notices related to bunched orders," says Driscoll. "Because certain portions of these notices were inconsistent with the CFTC's revisions, we formed a subcommittee comprised of FCM, exchange and CTA representatives to review the proposed changes to both notices.

NFA has revised the 1997 interpretive notice, which is now entitled "NFA Compliance Rule 2-10: The Allocation of Bunched Orders for Multiple Accounts." The changes reorganize the original notice, make it consistent with the CFTC's amendments to Regulation 1.35 and continue to provide important guidance relating to the use of bunched orders. For example, the amendments to the interpretive notice continue to:

  • Require CTAs to use an allocation methodology designed to provide non-preferential treatment for all accounts (the specific allocation instructions may change daily based on certain factors, but the allocation methodology should not);
  • Provide guidance on the type of allocation methodologies designed to provide non-preferential treatment;
  • Require CTAs to analyze each trading program at least quarterly to ensure that the allocation method has been fair and equitable (i.e., customers in the same trading program achieve similar results over time) and to document this analysis; and
  • Remind FCMs that they have certain basic duties to their customers in connection with these orders.

"The subcommittee provided very helpful comments that we incorporated into the final version of the interpretive notice," says Driscoll. "We are grateful for the time these individuals voluntarily committed to this project."

In addition to the amendments to the interpretive notice mentioned above, NFA rescinded the 1999 interpretive notice entitled "NFA Compliance Rule 2-10: Orders Eligible for Post-Execution Allocation."

A copy of the revised interpretive notice can be accessed through NFA's Web site at www.nfa.futures.org.

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