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EXPLANATION OF PROPOSED INTERPRETIVE NOTICE

Since NFA's December 7, 1995 submission of the proposed adoption of an Interpretive Notice Relating to the Allocation of Block Orders for Multiple Accounts, NFA staff has had several meetings with Commission staff to discuss the Interpretive Notice. These discussions primarily focused on the section of the Interpretive Notice that allows certain CTAs to transmit allocation instructions to clearing FCMs electronically, contemporaneously with the placement of the order. Commission staff subsequently proposed a number of technical amendments which NFA incorporated into the proposed Interpretive Notice. They include the following:

  • a more complete explanation as to why it is impractical for a limited number of larger and more sophisticated CTAs to prefile standing allocation instructions;

  • an explanation of the average price and quantity procedure for allocating split and partial fills; and

  • a more complete explanation as to why the procedures relating to the contemporaneous filing of instructions via electronic transmission are meant for relatively few CTAs.

In addition to the aforementioned technical amendments, Commission staff also requested clarification relating to an FCM's duty to its customers in the event that a CTA prefiles allocation instructions with the FCM and the CTA itself provides the FCM with specific information on how the prefiled instructions apply to a particular order. In response to the Commission's request, NFA added language to the proposed Interpretive Notice to clarify that an FCM has certain basic duties to its customers, including the duty to supervise its own activities in a way designed to ensure that it treats its customers fairly. The proposed Interpretive Notice specifically states that the FCM would violate this duty if it has actual or constructive notice that allocations for its customers may be fraudulent and fails to take appropriate action. The FCM with such notice must make a reasonable inquiry into the matter and, if appropriate, refer the matter to the proper regulatory authorities (e.g., the CFTC or NFA or its DSRO). Obviously, whether an FCM has such notice depends upon the information that the FCM has or should have, which, in turn, is based upon the FCM's role in the executing and clearing process.

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