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Explanation of Proposed AmendmentsA) Explanation of Amendments to Sections 1, 2 and 5 of NFA Financial Requirements and the Interpretive Notice Regarding The Electronic Filing of Financial Reports
Since 1997, FCM and IB Members have been able to file their financial reports electronically with NFA via NFA's iNFAst system on a voluntary basis. This filing method provides many benefits for both Members and NFA. Electronic filing is much more accurate and efficient than paper filing. The software catches clerical errors and informs the filer of unusual items (e.g., that the firm is under-capitalized or under-segregated) while the statement is being prepared and before it is sent. When the statement is received by NFA, it is immediately avail-able for analysis rather than waiting until staff enters it into the Compliance Department's computerized financial analysis system.
Although NFA's experience to-date has indicated that electronic filings are received more timely, have fewer errors, and result in less staff time to process and analyze, the majority of financial reports filed with NFA are still filed on paper.
NFA has been working with the Chicago Board of Trade and the Chicago Mercantile Exchange to develop software (Winjammer IV) to be used by all industry participants. This software uses PINs, which should alleviate the CFTC's concerns about accepting electronic filings using NFA's system. Therefore, FCMs for which NFA is the DSRO and IBIs will be able to file electronically with both NFA and the CFTC. The software will allow each Member to determine where it wants the financial report filed and to send an encrypted copy to each selected location simultaneously. The Winjammer IV software will be provided to each Member via compact disc, with upgrades accessible at the Joint Audit Committee's web site.
The Board believes that this filing method can be used by all NFA Mem-bers, including the smallest independent IBs. A Member needs only a personal computer to run the software and Internet access to send the resulting data to NFA. NFA surveys have indicated that virtually all affected Members have a PC and Internet access. Additionally, if needed, access to the Internet can be obtained at local libraries and at outlets such as Mail-Boxes Etc., Kinko's copy shops, and other similar facilities.
Given the significant benefits and minimal costs of filing electronically, the Board amended Sections 1 and 5 of the Financial Requirements to require all FCM and independent IBs for which NFA is the DSRO to electronically file their uncertified financial reports (FOCUS II and IIA, 1FR-FCM, and 1FR-IB). This requirement would eliminate all paper filings other than financial reports that must be certified by a certified public accountant.
The Board made amendments to the Interpretive Notice regarding The Electronic Filing of Financial Statements to clarify that all FCMs and IBs for which NFA is the DSRO must file their financial reports electronically using NFA approved software. The Interpretive Notice was also amended to explain the usage of a Personal Identification Number when filing reports.
Since many FCMs and IBs are not used to filing electronically, their initial filing will be a learning experience. NFA staff will work with these filers to famil-iarize them with the system and will accept the first filing on paper, if necessary.
Monthly Filing Requirement for FCMs
The Chicago Board of Trade, Chicago Mercantile Exchange and the New York Mercantile Exchange all require the firms for which they are the DSRO to file monthly statements. In contrast, approximately 50% of the FCMs for which NFA is the DSRO currently file quarterly rather than monthly. The Board amended Sections 1 and 5 of the Financial Requirements to provide that all FCMs for which it is the DSRO are required to submit monthly financial state-ments within 17 business days of the date of the statement. This would provide NFA with more timely financial information and be consistent with the rules of the other DSROs.
The Board felt that requiring all FCMs to file their financial reports monthly should not be unduly burdensome, as all FCMs must already complete a capital computation on a monthly basis, and most, if not all, prepare monthly financial statements even if they do not file them with NFA.
Changes to the Capital Requirement
The Board made a minor change to Sections 1 and 2 of the Financial Requirements by amending the risk-based capital computation to eliminate cal-culating risk on naked long options positions. This change simplifies capital computation and also conforms to recent Chicago Board of Trade and Chicago Mercantile Exchange changes to their risk-based capital computation.
The Board amended Sections 1, 2 and 5 of the Financial Requirements by eliminating the charge for remote locations and APs for well-capitalized FCMs and IBs. In NFA's experience, FCMs with Adjusted Net Capital of $2,000,000 or greater and IBs with Adjusted Net Capital of $1,000,000 or greater are not impacted by this alternative capital requirement. Therefore, the Board felt that eliminating this calculation will simplify their capital computations without having an effect on their capital requirements. The calculation does affect smaller firms, however, and retaining it for those firms ensures that they have adequate capital in relation to the size of their operations.
The Board amended Sections 1 and 5 of the Financial Requirements to require FCMs and IBs for which NFA is the DSRO to file with NFA copies of any financial reports and statements that it files with another futures or securities SRO. This requirement ensures that NFA has the same information as other SROs. Furthermore, since the Member already has to file the information with another SRO, filing it with NFA will not impose an undue burden on the Member.
The Board would intend to make the amendments to the Financial Requirements and the Interpretive Notice effective on December 31, 2001.
B) Explanation of Amendments to NFA Bylaw 1301(b)
At its meeting in May 2001, the Board approved a $.04 reduction in the assessment fee to its current level of $.14 per round-turn futures contract and $.07 per options transaction. The fee reduction became effective on July 1, 2001. By reducing the assessment fee, the Board intended to reduce NFA's working capital which has been running above budget.
Since May when the Board approved the fee reduction, public trading volume has grown at an unprecedented rate, which has continued to increase NFA's reserves. Therefore, NFA's Finance Committee met in late September to discuss NFA's unanticipated current reserve level and recommended in light of this reserve level that NFA's assessment fee be further reduced by $.02. The Board agreed with the Finance Committee and therefore approved a reduction in the assessment fee to an all time low of $.12 per round-turn futures contract and $.06 per options transaction.
The Board would intend to have the new fees become effective on January 1, 2002.