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December 27, 2012
Member Obligations Under NFA Bylaw 1101 with Respect to Certain IBs Afforded Temporary Registration No-Action Relief
NFA Bylaw 1101 prohibits an NFA Member from carrying an account, accepting an order or handling a transaction in commodity futures contracts for or on behalf of any non-Member of NFA that is required to be registered with the Commodity Futures Trading Commission (CFTC) as an FCM, IB, CPO, CTA or LTM. Bylaw 1101 by its terms imposes strict liability on any Member conducting customer business with a non-Member that is required to be registered.
Effective October 11, 2012, the Commodity Futures Trading Commission (CFTC) afforded certain IBs temporary registration no-action relief. Specifically, the CFTC's Division of Swap Dealer and Intermediary Oversight (DSIO) stated, in part, that it would not recommend that the Commission commence an enforcement action against a person for failing to register as an IB where the person's requirement to be registered arises from the person being involved with certain Intercontinental Exchange, Inc. (ICE) and/or New York Mercantile Exchange (NYMEX) contracts.* In the case of ICE, the applicable contracts are those relating to the transition of cleared ICE OTC energy swap products to energy and options contracts traded on ICE Futures US and ICE Futures Europe and, in the case NYMEX, the applicable contracts are those relating to the transition of certain energy transactions submitted for clearing through CME ClearPort via exchange of futures for risk transactions to energy transactions executed off the centralized market but subject to NYMEX's rules and submitted for clearing as futures and options transactions (ICE/NYMEX Contracts).
To be afforded DSIO's temporary registration no-action relief, a person registering as an IB must on or before December 31, 2012 complete and file with NFA a registration application, including as appropriate Forms 7-R and 8-R, as well as a fingerprint card for each of its principals and associated persons. Additionally, the person must comply with the other conditions specified in DSIO's no-action relief letter. DSIO's registration no-action position terminates on the date that NFA provides notice in accordance with CFTC Regulation 3.2(c) that the person is registered as an IB or five days after service by NFA upon the person pursuant to NFA Registration Rule 504 that the person may be disqualified from registration under Sections 8a(2) or 8a(3) of the Commodity Exchange Act (CEA).
DSIO's no-action relief specifically states that DSIO intends to provide assurance that as long as a person files an application for registration on or before December 31, 2012, and complies with the other conditions, then engaging in activities requiring registration before the person has been registered will not, in and of itself, result in DSIO recommending that the Commission commence an enforcement action against the person. Moreover, DSIO recognized that the no-action relief will enable NFA to perform the registration function in an orderly manner. See CFTC No-Action Letter 12-15.
DSIO's no-action relief clearly contemplates that certain persons registering as IBs where the requirement to be registered arises from the person's involvement with ICE/NYMEX Contracts may continue to engage in these activities after December 31, 2012 even if they are not registered provided they meet the conditions set forth in DSIO's no-action letter. NFA's BASIC system will display these IBs' registration and NFA membership statuses as pending until the person is registered as an IB and approved as an NFA Member.
As a result, a Member carrying an account, accepting an order or handling a transaction in commodity futures contracts from these pending IB Members will be considered in compliance with Bylaw 1101 even if the IB is not an approved NFA IB Member provided the Member by January 31, 2013 obtains a written representation from the pending IB Member that it meets the conditions set forth in DSIO's October 11, 2012 letter affording temporary registration no-action relief. A Member's relief from Bylaw 1101 with respect to a pending IB Member meeting the no-action letter's conditions will terminate on the date that the IB becomes an approved NFA Member or five days after service by NFA upon the pending IB Member pursuant to NFA Registration Rule 504 that it may be disqualified from registration under CEA Section 8a(2) or 8a(3).
Any Member that acts in accordance with the guidance provided in this Notice will not be charged with violating NFA Bylaw 1101. Members should be aware, however, that this Notice's guidance does not in any way relieve their regulatory obligations pursuant to the Commodity Exchange Act and the CFTC's Regulations.
* DSIO's October 11, 2012 no-action letter also stated that DSIO would not recommend that the Commission commence an enforcement action against a person for failing to register as an IB where the person's requirement to be registered arises solely from the person's swaps activities. The relief contained in this notice is not necessary for these swap-only IBs since NFA Bylaw 1101 does not currently apply to swaps transactions.