|Past Member Newsletters|
In this issue:
NFA and the Regulatory Compliance Association (RCA) will present the Annual Asset Management Thought Leadership Summit on Monday, April 20, at the Sheraton Hotel & Towers, 811 7th Avenue, New York City. This year's summit will focus on "Litigation, Risk Management and Regulatory Reform - An Industry in Transition."
"We believe this conference will provide a great opportunity for individuals to speak and network with senior regulatory authorities," said NFA's Executive Vice President and COO Dan Driscoll.
Panelists at the summit represent senior management from the largest fund complexes, attorneys, CPAs and senior regulatory authorities. A partial list includes: Walter Zebrowski, JD, CPA, CIO, COO, Hedgemony Partners; Dan Driscoll; Joan McKown, Chief Counsel, Division of Enforcement, SEC; Martin Schwartz, CCO, Millennium Partners; and Peter Greene, Lowenstein Sandler.
"The summit will provide invaluable practical guidance to develop comprehensive investment and due diligence processes as well as timely business strategies to successfully navigate an industry in transition," said RCA Chairman Walter Zebrowski.
The registration fee for the one-day conference is $145 for NFA and RCA members or $295 for non-members.
For more information visit: http://rcaonline.org/conferences.phtml or call 800-306-6133.
NFA recently proposed amendments to forex-related Compliance Rules, Financial Requirements and Interpretive Notices to address several areas of concern, including the use of hypothetical performance data and discretionary trading authority. The proposed amendments were approved by NFA's Executive Committee and Board of Directors and were sent to the CFTC for review and approval in December.
The proposed amendments include the following:
The complete text of the rule submission can be found on NFA's Website (www.nfa.futures.org).
NFA has proposed the adoption of a new Compliance Rule 2-43 that would limit the conditions under which a Forex Dealer Member (FDM) can adjust prices after execution and would prohibit an FDM from offering its customers the ability to take long and short positions in the same currency pair in the same account. NFA submitted the rule to the Commodity Futures Trading Commission (CFTC) on December 9, 2008.
"NFA staff has spent a great deal of time studying the trading practices of our FDMs," said Regina Thoele, senior vice-president of Compliance, "and this new rule addresses some of the issues that we found to be not in the best interest of forex customers."
FDMs occasionally change prices charged to retail customers after the customer's trade has been executed and confirmed. Although these firms have the contractual right to change prices unilaterally, NFA's analysis of price change data submitted by its FDMs indicates that the majority of price adjustments are made only when it favors the FDM.
FDMs cited several reasons for their price adjustments. They claimed that the liquidity provider banks or trading systems from which they receive price feeds sometimes experience internet issues, software glitches, systems failures or market conditions that can cause their price feeds to freeze or be otherwise impacted.
However, the vast majority of price changes reported to NFA related to non-liquidity provider issues, such as technical errors in the FDM's own trading platform or the customer's front end system and connection issues arising from the FDM's use of two or more different trading platforms.
"NFA believes that the only condition under which an FDM should be allowed to adjust customer orders once they have been executed is when the FDM operates a 'straight-through processing' model and the FDM's liquidity provider changes the price of an executed order with the FDM," said Thoele. "In that case the FDM must notify the customer within 15 minutes of the customer order being executed that it intends to cancel or adjust the order."
To ensure that FDMs do not selectively choose to adjust only those trades where the adjustment benefits the FDM, the proposed new rule requires FDMs to either cancel or adjust all customer orders affected. In addition, a principal of the FDM who is also an associated person must review and approve all cancellations or adjustments of customer orders.
"The review must be in writing, include documentation from the liquidity provider and sent to NFA," said Thoele. "Equally important, if an FDM chooses to cancel or adjust executed customer orders based upon liquidity provider price changes, it must provide customers with a written notice explaining the process before the customer begins trading."
Another element of the new rule addresses the strategy that FDMs currently refer to as "hedging", where customers take long and short positions in the same currency pair in the same account.
"Because this strategy essentially eliminates any opportunity to profit on the transaction and increases the customer's financial costs in several ways, we are concerned that FDMs are promoting a strategy that customers do not thoroughly understand," said Thoele.
Therefore, the new proposed rule requires FDMs to offset positions on a first-in, first-out basis but allows customers to direct the FDM to offset same-size transactions.
The full text of this rule submission is available on NFA's Website (www.nfa.futures.org).
Citing a lack of uniformity and clarity among Forex Dealer Members' (FDM) customer account statements, NFA has proposed the adoption of a new Compliance Rule 2-44 to ensure that forex customers receive accurate and comprehensive account statements. The new rule is currently under review by the Commodity Futures Trading Commission (CFTC).
Currently, NFA's Forex Transactions Interpretive Notice takes more of a principles-based approach to forex confirmations and monthly statements.
"The interpretive notice provides FDMs with general guidance on what confirmation and monthly statements should contain rather than listing specific information that should be included," said NFA Senior Vice President and General Counsel Tom Sexton. "Unfortunately, during the course of our audits of FDMs, we have found confirmations and monthly statements lack uniformity and are hard to follow."
Proposed Compliance Rule 2-44 is modeled after CFTC Regulation 1.33, which governs on-exchange transactions. However, there are several significant differences.
First, in addition to the transactions that require a confirmation under Regulation 1.33, proposed Compliance Rule 2-44 requires confirmations for rollovers and any adjustments to an account, including those that debit or credit the account rather than changing the price.
Second, Regulation 1.33 does not require monthly statements to show futures transactions closed during the month. NFA Compliance Rule 2-44 will require that forex customer monthly statements show all transactions as well as all open positions.
Third, although Regulation 1.33 requires monthly statements to show how much an open option is in-the-money, if it is, Compliance Rule 2-44 will not require forex customers statements to show the amount an option is in or out-of-the-money.
Regarding the issue of account value, NFA's proposed new Compliance Rule will require FDMs to provide daily statements that show the account equity as of the previous day and to prominently display the account equity on daily statements, confirmations and monthly statements. The rule defines account equity as the sum of all realized profits and losses, all unrealized profits and losses, and any other cash and collateral in the account.
The rule also provides that FDMs can provide their customers with electronic access to confirmations and monthly statements if the customer agrees to that delivery method.
"We would like to thank the FDMs who provided us with comments on the proposed rule as it was being developed," said Sexton. "We incorporated some of their suggestions into the final version of the rule, and we believe that this version reflects their concerns while bringing greater value to the customer."
Responding to requests from FDMs to clarify how some of the rule's provisions would apply to particular practices, NFA will revise its forex regulatory guide when the rule is approved to include examples of acceptable statements and delivery methods.
The full text of the rule submission is available on NFA's Website (www.nfa.futures.org).
NFA's Executive Committee and Board of Directors recently approved proposed amendments to the Interpretive Notice to Compliance Rule 2-36(e) regarding Supervision of the Use of Electronic Trading Systems (ETS Notice). The proposed amendments were sent to the CFTC in December for review and approval.
"We are proposing these amendments due to recurring deficiencies by our Forex Dealer Members (FDMs) in the supervision of their electronic trading systems (ETS)," said NFA Senior Vice President and General Counsel Tom Sexton.
To address these issues, the amended ETS Notice requires each FDM to notify NFA of the trading platform(s) it uses and of the owner of the platform. The amended Notice also requires outside parties to audit the trading platform within 12 months after it begins operating and biannually thereafter.
In addition, the FDM will be required to notify NFA as soon as reasonably possible, but no more than 24 hours, after it experiences operational difficulties with its trading platform. The FDM must also provide to its customers an advance disclosure of the factors that might affect the system's performance and an alternate means of contacting the FDM during system outages or slow-downs.
Additional requirements listed in the proposed amendments are:
The full text of the rule submission is available on NFA's Website (www.nfa.futures.org).
The following actions were taken by NFA's Board of Directors at their meeting on November 20, 2008.
The Board approved technical amendments to NFA Compliance Rules 2-41 and 2-42, imposing requirements on forex Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) similar to those for CPOs and CTAs trading on-exchange products.
The Board approved amendments to forex-related Compliance Rules, Financial Requirements and Interpretive Notices to address several areas of concern, including the use of hypothetical performance data and discretionary trading authority. (See related story.)
The Board approved new Compliance Rule 2-43 that would limit the conditions under a Forex Dealer Member (FDM) can adjust prices after execution and would prohibit an FDM from offering its customers the ability to take long and short positions in the same currency pair in the same account. (See related story.)
The Board approved new Compliance Rule 2-44 to ensure that forex customers receive accurate and comprehensive account statements. (See related story.)
The Board approved amendments to the Interpretive Notice to Compliance Rule 2-36(e) regarding Supervision of the Use of Electronic Trading Systems. (See related story.)
NFA provides investor education at New York Traders Expo
NFA is sponsoring an information booth at the New York Traders Expo on February 21-23 at the Marriott Marquis Hotel. NFA staff will distribute copies of NFA's investor education materials and demonstrate how to conduct a background check of a futures firm or individual using NFA's Web-based Background Affiliation Status Information Center (BASIC).
The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. In previous years, the Expo has attracted more than 6,000 traders. For more information visit the Expo's Web site at www.TradersExpo.com.
NFA to sponsor International Regulators Dinner
NFA will sponsor an International Regulators Dinner in Boca Raton on March 10. The dinner will be held in conjunction with a day-long meeting for international regulators that coincides with the Futures Industry Association annual conference (March 11-14). CFTC commissioners and senior staff, exchange representatives and regulators from around the world are expected to attend. For more information on the conference, visit http://www.futuresindustry.org/boca-2009.asp.
Recent Webinar on NFA's new disclosure document filing system now available for viewing on demand
On January 22, NFA held a Webinar to familiarize CPOs and CTAs with NFA's new electronic filing system for disclosure documents. Individuals who were unable to attend the Webinar may now view the entire program on demand at NFA's Website (www.nfa.futures.org). The Webinar can be found in the Member Services section of the Website (click on Past Workshops and Meetings). There is no fee to watch the Webinar.