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October 03, 2012
Effective Dates of Amendments to NFA Bylaw 301 and Registration Rules 401 and 402 Regarding Swap Registration Requirements for FCMs, IBs, CPOs, CTAs and APs
NFA recently amended NFA Bylaw 301 to require NFA Member FCMs, IBs, CPOs and CTAs and their APs that engage in swaps activity that is subject to CFTC jurisdiction to be approved by NFA as a swaps firm or swaps AP. The details of this new requirement, which becomes effective January 1, 2013, are described below. NFA also amended Registration Rules 401 and 402 to provide relief, as described below, from the proficiency requirements for swaps APs of these Members. The amendments to Registration Rules 401 and 402 are effective immediately.
Under Dodd-Frank, and its implementing regulations, entities that act as an FCM, IB, CPO or CTA (and their APs) with respect to swaps that are subject to CFTC jurisdiction will be required to be registered in the appropriate capacity. For purposes of NFA's regulatory obligations, NFA believes it is important to be able to identify entities and individuals that are engaging in swaps activities. Since a firm's or individual's registration alone does not provide NFA with information to determine whether the registered entity is engaging in swaps activity, NFA has amended Bylaw 301 to require Members that are registered as a FCM, IB, CPO or CTA and engaging in swaps activity subject to the CFTC jurisdiction to be approved as a swaps firm by NFA. In addition, the APs of these Members who are engaging in swaps activity subject to the CFTC's jurisdiction must be approved as a swaps AP by NFA.
NFA understands that certain FCMs will also be registered with the CFTC as swap dealers. NFA further recognizes that the CFTC's internal business conduct rules (Commission Rule 1.71), effectively require the separation of duties between those individuals who are acting on behalf of the firm in its capacity of a swap dealer, i.e., wherein the firm is acting as principal to its counterparty, and those individuals who are acting on behalf of the firm in its capacity as an FCM, i.e., wherein the firm is acting as agent for its customer.
Under the Commodity Exchange Act, an AP of a swap dealer is not required to be registered as such and, consequently, is not required to be an associate member of NFA. NFA wishes to make clear that the requirement that an FCM identify those APs who "engage in activities involving swaps subject to the jurisdiction" of the Commission is limited to those APs acting on behalf of the firm in its capacity as an FCM. Individuals deemed to be APs of the firm acting in its capacity as a swap dealer are not required to be registered with the Commission or identified to NFA as swaps APs.
NFA Bylaw 301 has also been amended to provide that in order to be approved as a swaps firm, and maintain that status, the Member must have at least one principal that is registered as an AP and designated as a swaps AP. If the firm only has one such principal and that principal withdraws, the firm must have another principal register as an AP and be designated as a swaps AP or NFA will deem the firm to have requested to have its swaps designation withdrawn.
The process for obtaining swaps designation is virtually identical for existing Members and APs and new registrants. The firm must first log into NFA's Online Registration System (ORS) and click on the "Apply for Registration" tab. From here, the firm will select "process application", which will bring it to the "Registration Categories" page of Form 7-R. If the firm is registering, it will select its registration category and then answer the following question: Will the firm's commodity interest activities include swaps transactions subject to the jurisdiction of the Commodity Futures Trading Commission? If the firm answers "yes" it will be designated as a swaps firm and will be directed to answer the following question: Will the firm limit its commodity interest activities exclusively to swaps transactions subject to the jurisdiction of the Commodity Futures Trading Commission? Existing Members will follow the same process except that there will be no need to select a registration category and the firm will go directly to the swaps questions. The firm will then have to complete the similar questions regarding its APs' activities on Form 8-R for each of its APs that will be engaging in swap activities: Will your activities involve the solicitation of customers for swaps transactions subject to the jurisdiction of the Commodity Futures Trading Commission or the supervision of persons involved in such solicitation of activities? If the answer is "yes" to this question, the AP will be designated a swaps AP and the firm will be directed to answer the following question with respect to the AP: Will you limit your solicitation activities exclusively to the solicitation or the supervision of persons involved in the solicitation of customers for swaps transactions subject to the jurisdiction of the Commodity Futures Trading Commission? Newly registering firms will complete these questions for all APs regardless of whether the AP will be involved in swaps, whereas existing firms will only answer the questions on the Form 8-Rs of APs that will be engaging in swaps activities.
Finally, NFA has amended Bylaw 301 to provide that a Member may request that its approval or pending application for designation as a swaps firm be withdrawn by filing a request through NFA's ORS. The request will be effective on the 30th day after the Member files the request or earlier if notified by NFA.
These amendments to Bylaw 301 are effective January 1, 2013, however, Members may request swap designation for itself and its APs effective immediately.
NFA has also amended Registration Rule 401 to effectively exempt from the proficiency requirements APs whose activities that are subject to CFTC jurisdiction are limited to swaps. APs of FCMs, IBs, CPOs and CTAs whose activities are solely limited to swaps, and for whom "yes" answers were provided on the AP's Form 8-R regarding swaps activity, will be automatically exempt. The sponsor of APs of CPOs that would be exempt from registration under 4.13(a)(3) or excluded from the definition of commodity pool operator under 4.5(c)(2)(iii)(A) or (B) but for their swaps activities (i.e., the firm would meet the de minimis requirements if swaps were not included), however, must send a signed request to NFA seeking a waiver for its APs from the Series 3 under 401(e)(2)(ii) on the basis that but for the trading of swaps it would be eligible for an exclusion under CFTC Regulation 4.5(c)(2)(iii)(A) or (B) or the exemption under 4.13(a)(3). This signed request may be sent to Suzanne Cech at firstname.lastname@example.org. When completing the Proficiency Requirements - Series 3 page of the 8-R, the firm would select the option on behalf of the AP: You intend to satisfy an Alternative Proficiency Requirement. Once this is selected, three alternatives are offered and the firm should select the alternative that indicates: Check here if your sponsor is a CPO that trades swaps subject to the jurisdiction of the CFTC in a commodity pool that but for the trading of such swaps would be eligible for the exclusion under CFTC Regulation 4.5(c)(2)(iii)A) or (B) or the exemption under CFTC Regulation 4.13(a)(3) and the sponsor has been or is seeking a waiver from the Series 3 for its APs pursuant to Registration Rule 401(e)(2)(ii). The exemption in either case also applies to APs whose activities are limited to supervising other APs who are exempt.
Finally, NFA has amended Registration Rule 402 to clarify that a sponsor that obtains a waiver on behalf of its APs on any basis approved by the Board under Rule 402 must notify NFA if it becomes ineligible for the waiver.
The amendments to Registration Rules 401 and 402 are effective immediately.
If you have any questions on these requirements, please contact NFA's Information Center at 312-781-1410 or 800-621-3570, or by email to email@example.com.