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May 29, 2012
National Futures Association proposes new financial requirements for FCM treatment of customer segregated funds
May 29, Chicago - National Futures Association (NFA), the self-regulatory organization for the U.S. futures industry, has proposed new financial requirements that will strengthen regulations regarding the treatment and monitoring of customer segregated funds held by futures commission merchants (FCMs). The proposed new requirements were approved by NFA's Board of Directors on May 17.
NFA has submitted the proposed financial requirements and accompanying interpretive notice to the CFTC for approval.
NFA Financial Requirements Section 16, and an Interpretive Notice entitled "NFA Financial Requirements Section 16: FCM Financial Practices and Excess Segregated Funds/Secured Amount Disbursements" implement the recommendations made by the SRO Committee and NFA's Special Committee on the Protection of Customer Funds, which were formed in early 2012 in light of the MF Global bankruptcy. The SRO Committee is comprised of senior representatives from NFA, CME Group, the InterContinental Exchange, Minneapolis Grain Exchange and the Kansas City Board of Trade. The Special Committee is comprised of NFA's ten public directors.
"In the process of developing these new requirements, we received comments and suggestions from a variety of industry sources," said NFA President Dan Roth, "including the Futures Industry Association, the CFTC and NFA's Board of Directors, as well as our FCM, CPO/CTA and IB Advisory Committees.
The major provisions of the new requirements are as follows:
All FCMs must have written policies and procedures regarding the maintenance of the firm's residual interest in its customer segregated funds. These policies and procedures must target an amount (either by percentage or dollars) that the FCM seeks to maintain as its residual interest in those accounts and ensure that the FCM remains in compliance with the applicable segregation requirements.
No FCM may withdraw, transfer or otherwise disburse funds from any customer segregated funds account exceeding 25% of the FCM's residual interest in customer segregated funds unless the firm's CEO, CFO or other defined principal pre-approves the transaction in writing. In addition, the FCM must immediately file a written notice with NFA that must include the following: notification of the disbursement, description of the reason(s) for the disbursement, the amounts and recipients of the disbursement, confirmation that a qualified individual pre-approved in writing the disbursement and the current estimate of the remaining total residual interest in the customer segregated funds accounts along with a representation that the FCM remains in compliance with the segregation requirements.
All FCMs must provide NFA with certain financial and operational information on a monthly or semi-monthly basis. NFA will subsequently make some of the information publicly available on its website in the future.
All of these new requirements also apply to foreign futures and options customer secured amount funds accounts.
"These new requirements will help begin the process of restoring public confidence in the financial integrity of customer segregated funds," said Roth. "Making this information available to the public will give investors a better picture of the financial standing of the FCM with which they are conducting business."
The complete text of the Rule Submission Letter is available on NFA's website.
NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.