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EXPLANATION OF PROPOSED AMENDMENTS
The amendments to NFA Bylaw 1301 increase the assessment fee from $.14 to $.20 per roundturn futures contract and from $.07 to $.10 per option transaction¹. The Board believes that these changes are necessary for NFA to maintain sufficient working capital to effectively perform those functions mandated by Congress and those functions delegated to NFA by the Commission.
In 1994, the Board initiated the first of a series of assessment fee reductions to reduce the level of NFA's working capital to the target level of $10 million. The assessment fees for futures and options were reduced to $.20 and $.12 on January 1, 1994, to $.16 and $.08 on July 1, 1994, and to the current rate of $.14 and $.07 on January 1, 1995. Each of these reductions was, in effect, a "rebate," intended to return assessment fee revenue which had exceeded NFA's projections to those who had paid the fees. With each of these reductions, the Board was intentionally setting the fee below the level needed to fund NFA's operations. If the assessment fee had been set to cover NFA's actual funding needs, fees would have been $.18 and $.09 in 1995 and 1996 and $.20 and $.10 in 1997. The Board recognized that the reductions would be temporary and that at some point the assessment fee would have to be restored to a level sufficient to meet NFA's operating needs.
Earlier this year NFA's Finance Committee projected that NFA's working capital will be reduced to approximately $8.2 million by the end of December 1997, representing slightly over three months of operating expenses. The Board, therefore, recognized the fact that NFA could no longer offer this artificially low rate, and it concluded that an assessment fee increase to $.20 and $.10 would have to be implemented by January 1, 1998. In making its decision, the Board had to balance two competing interests: the fee must be set as low as possible but at the same time it had to be set high enough to avoid the necessity of further increases in the near future. Among the factors which were considered by the Board in this balancing process were the possibility of increasing revenue from other sources, the potential impact of additional responsibilities on NFA's funding needs and, most important of all, the projections for trading volume. Each of these factors are discussed below.
¹For the sake of consistency, the amendments to Bylaw 1301 also increase the assessment fee from $.07 to $.10
per leverage transaction even though there are no leverage transaction merchants currently registered.
Possible Sources of Additional Revenue
In 1991, the Board appointed a Special Committee for the Review of NFA's Revenue Structure to consider ways to reduce NFA's dependence on assessment fee income. The Committee carefully examined NFA's fee structure in areas such as membership dues and registration fees and proposed significant increases in each. For example, the Committee concluded that NFA registration fees should be set to recoup approximately 50percent of NFA's costs. To accomplish this, the Committee proposed increases for various types of registration filings of between 33percent and 100percent. Those fee changes increased NFA's total revenue by approximately $1 million per year.
Membership dues were also increased as a result of the Special Committee's report. Though dues for exchange member FCMs were unchanged, dues for nonexchange member FCMs, for which NFA performs audits, were increased five fold, from $1,000 to $5,000 per year. Dues for guaranteed IBs more than doubled, from $150 to $500, while dues for all other IBs, CTAs and CPOs doubled from $250 to $500. Dues changes increased NFA's total revenue by approximately $1.1 million per year.
Since these significant increases in registration fees and membership dues were introduced in 1992, the assessment fee has been decreased four separate times and is now 42percent less than the 1992 level of $.24 and $.14. The Board determined that these factors weighed against increasing revenues from these sources as a means of limiting the increase in the assessment fee.
Assumption of Additional Responsibilities
Over the years, NFA has steadily taken on more responsibilities and that trend seems likely to continue. In the past, for example, we have taken over the job of processing applications for floor brokers and floor traders, taking adverse actions with respect to floor brokers and floor traders, approving and monitoring ethics training providers, performing audits on behalf of certain exchanges, accepting and approving certain filings from foreign exempt firms and providing ancillary support for certain CFTC enforcement cases. Despite these additional responsibilities, NFA has been able to reduce its head count from an approximate average of 350 in 1988 to an average of 280 during the last fiscal year and has held the increase in total expenses to just 6.1percent over the last eight years.
On the immediate horizon, NFA expects to take on the job of performing the initial review of CPO/CTA disclosure documents in the near future and hopes to finalize an agreement with the New York Mercantile Exchange to perform additional audits by January 1. At this time it appears, however, that the assumption of these additional responsibilities will not have a material impact on our staffing levels.
As always, the key component of the assessment fee analysis involves volume projections and, as always, the Board focused not just on overall trading volume but on public trading. The trend in recent years for public trading does not present a rosy picture. The percentage of trading volume attributable to public participation has dropped from 26.6percent to 21.6percent over the last eight years. Translated into raw numbers, assessable trading volume on U.S. exchanges has dropped in each of the last four years, from approximately 121,000,000 in fiscal year 1994 to approximately 109,000,000 in fiscal year 1997. Given this trend, the Board feels the only prudent course is to project public trading volume to remain flat or decrease slightly in the next few years.
The Board determined that an assessment fee of $.20 and $.10 would provide a certain degree of stability. In fact, even if public trading volume drops by 10percent, working capital would only fall to $8.4 million by the end of fiscal year 1998 and to $6.8 million by the end of fiscal year 1999. If public trading volume holds steady, working capital would nose above the $10 million target level by the end of fiscal year 1998 and would rise slightly again in fiscal year 1999 to a level of $10.8 million.
Raising the level of any fee is never easy, but it is hard to imagine a scenario in which a fee increase is more necessary or justifiable. The Board's "rebate" campaign to reduce the level of working capital has achieved exactly the result the Board wanted and now it is inevitable that the fee be increased. The Board recognized the need to keep the assessment fee as low as possible and as stable as possible and, therefore, determined that an increase in the assessment fee to the $.20 and $.10 level is the only prudent course of action at this time.
As stated above, NFA intends to make the proposed amendments to Bylaw 1301 effective on January 1, 1998 unless, within ten days after receipt of this submission, NFA receives notification that the Commission has determined to review the amendments for approval.