Font Size: AAA // Print // Bookmark

2013-26790

  • [Federal Register Volume 78, Number 217 (Friday, November 8, 2013)]

    [Proposed Rules]

    [Pages 67078-67084]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2013-26790]

    =======================================================================

    -----------------------------------------------------------------------

    COMMODITY FUTURES TRADING COMMISSION

    17 CFR Part 170

    RIN 3038-AE09

    Membership in a Registered Futures Association

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed rulemaking.

    -----------------------------------------------------------------------

    SUMMARY: The Commodity Futures Trading Commission (``Commission'')

    proposes to amend its regulations to require that all persons

    registered with the Commission as introducing brokers (``IBs''),

    commodity pool operators (``CPOs''), and commodity trading advisors

    (``CTAs'') must become and remain members of at least one registered

    futures association (``RFA'').

    DATES: Comments must be received on or before January 17, 2014.

    [[Page 67079]]

    ADDRESSES: You may submit comments, identified by RIN number 3038-AE09,

    by any of the following methods:

    The agency's Web site, at http://comments.cftc.gov. Follow

    the instructions for submitting comments through the Web site.

    Mail: Melissa D. Jurgens, Secretary of the Commission,

    Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st

    Street NW., Washington, DC 20581.

    Hand Delivery/Courier: Same as mail above.

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied

    by an English translation. Comments will be posted as received to

    http://www.cftc.gov. You should submit only information that you wish

    to make available publicly. If you wish the Commission to consider

    information that you believe is exempt from disclosure under the

    Freedom of Information Act, a petition for confidential treatment of

    the exempt information may be submitted according to the procedures

    established in Sec. 145.9 of the Commission's regulations.\1\

    ---------------------------------------------------------------------------

    \1\ 17 CFR 145.9. Commission regulations referred to herein can

    be found on the Commission's Web site, www.cftc.gov.

    ---------------------------------------------------------------------------

    The Commission reserves the right, but shall have no obligation, to

    review, pre-screen, filter, redact, refuse or remove any or all of your

    submission from http://www.cftc.gov that it may deem to be

    inappropriate for publication, such as obscene language. All

    submissions that have been redacted or removed that contain comments on

    the merits of the rulemaking will be retained in the public comment

    file and will be considered as required under the Administrative

    Procedure Act and other applicable laws, and may be accessible under

    the Freedom of Information Act.

    FOR FURTHER INFORMATION CONTACT: Andrew Chapin, Associate Director,

    Division of Swap Dealer and Intermediary Oversight, 202-418-5465,

    achapin@cftc.gov; Jason Shafer, Attorney Advisor, Division of Swap

    Dealer and Intermediary Oversight, (202) 418-5097, jshafer@cftc.gov; or

    Hannah Ropp, Economist, 202-418-5228, hropp@cftc.gov, Office of the

    Chief Economist, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Background

    Part 170 of the Commission's regulations pertains to RFAs. RFAs

    serve a vital self-regulatory role by functioning as frontline

    regulators of their members subject to Commission oversight.

    Regulations 170.15 and 170.16 require each registered futures

    commission merchant (``FCM''), and each registered swap dealer (``SD'')

    and major swap participant (``MSP''), respectively, to become a member

    of an RFA, subject to an exception for certain notice registered

    brokers or dealers.\2\ However, there is no such mandatory membership

    requirement for other registrants. In the absence of a mandatory

    membership requirement, those registrants not already members of an RFA

    are nevertheless subject to the rules and regulations of the

    Commission,\3\ and, absent this proposal, the Commission would assume

    the role performed by the RFA for this class of registrants. Currently,

    the National Futures Association (``NFA'') is the sole RFA under

    Section 17(a) of the Commodity Exchange Act (``CEA''),\4\ and it is

    also a self-regulatory organization (``SRO'').\5\

    ---------------------------------------------------------------------------

    \2\ 17 CFR 170.15 and 170.16. See also Registration of Swap

    Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).

    \3\ See 7 U.S.C. 21(e), which specifies that any person

    registered under the CEA, who is not a member of an RFA, shall be

    subject to such other rules and regulations as the Commission may

    find necessary to protect the public interest and promote just and

    equitable principles of trade.

    \4\ 7 U.S.C. 21(a).

    \5\ SROs include designated contract markets (``DCMs'' or

    ``exchanges''), swap execution facilities (``SEFs''), registered

    futures associations, and derivatives clearing organizations

    (``DCOs''). Among other things, SROs maintain and update a

    standardized audit program and coordinate audit and financial

    statement surveillance activities over firms that are members of

    more than one SRO.

    ---------------------------------------------------------------------------

    II. Proposed Regulation

    Section 8a(5) of the CEA authorizes the Commission to promulgate

    such regulations as, in the judgment of the Commission, are reasonably

    necessary to effectuate any of the provisions, or to accomplish any of

    the purposes, of the CEA.\6\ Section 17(m) of the CEA permits the

    Commission to require membership in an RFA if the Commission determines

    that mandatory membership is necessary or appropriate to achieve the

    purposes and objectives of the CEA.\7\ Pursuant to its statutory

    authority, the Commission hereby proposes to amend Part 170 by adding

    Sec. 170.17 to require each person registered as an IB, CPO, or CTA to

    become and remain a member of an RFA based on its preliminary belief

    that such membership is necessary or appropriate to ensure

    comprehensive and effective market oversight which is applied

    consistently to all registered intermediaries.

    ---------------------------------------------------------------------------

    \6\ 7 U.S.C. 12a(5).

    \7\ 7 U.S.C. 21(m).

    ---------------------------------------------------------------------------

    The Commission previously promulgated Sec. 170.15 to require,

    subject to an exception for certain notice registered securities

    brokers or dealers, that all persons registered with the Commission as

    FCMs must become and remain members of at least one RFA.\8\ NFA Bylaw

    1101 states that no member of NFA may ``carry an account, accept an

    order or handle a transaction'' in commodity futures contracts for, or

    on behalf of, any non-member of NFA that is required to be registered

    with the Commission as, inter alia, an IB, CPO, or CTA.\9\ Accordingly,

    any IB, CPO or CTA required to be registered that desires to conduct

    business directly with an FCM must become a member of NFA, and

    derivatively, must ensure that it conducts business only with those

    IBs, CPOs or CTAs that also are NFA members. Therefore, given the NFA's

    status as the sole RFA under Section 17(a) of the CEA, at the time it

    was proposed, the Commission noted that Sec. 170.15 would operate in

    conjunction with NFA Bylaw 1101 to assure essentially complete NFA

    membership from the universe of commodity professionals: FCMs, CPOs,

    CTAs and IBs.\10\

    ---------------------------------------------------------------------------

    \8\ Membership in Registered Futures Association, 72 FR 2614

    (Jan. 22, 2007).

    \9\ NFA Bylaw 1101 is available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=BYLAW%201101&Section=3.

    \10\ Membership in a Registered Futures Association, 71 FR 64171

    at n.7 (proposed Nov. 1, 2006). The Commission notes that proposed

    Sec. 170.17, like Sec. 170.15 and Sec. 170.16, does not directly

    require associated persons (``APs'') to join a RFA. This is because

    APs must be sponsored by one of the aforementioned entities.

    ---------------------------------------------------------------------------

    In proposing new Regulation 170.17, the Commission recognizes that

    due to recent changes to the CEA, Sec. 170.15 and NFA Bylaw 1101 will

    no longer assure NFA membership for all IBs, CPOs or CTAs. In

    particular, the Dodd-Frank Wall Street Reform and Consumer Protection

    Act (``Dodd-Frank Act'') amended the CEA to establish a comprehensive

    new regulatory framework for swaps.\11\ The new regulatory framework

    provides that, among other things, entities that engage in regulated

    activity with respect to swaps will be required to register with the

    Commission as IBs, CPOs, or CTAs, as appropriate. However, due to the

    unique nature of swap transactions, it may be possible for these

    Commission registrants to serve clients without interacting with a firm

    that ``carries an account,'' e.g., an FCM or an SD who

    [[Page 67080]]

    accepts customer funds. For example, a CTA may advise a ``special

    entity'' on swaps in the capacity of an ``independent advisor,''

    pursuant to section 4s(h)(5) of the CEA,\12\ or a CPO may operate a

    pool that trades only swaps that are not cleared through a DCO. As a

    result, these registrants would not be captured by the intersection of

    Sec. Sec. 170.15 or 170.16, and NFA Bylaw 1101, and would not be

    required to become members of NFA.

    ---------------------------------------------------------------------------

    \11\ Public Law 111-203, 124 Stat. 1376 (2010).

    \12\ See, e.g., Business Conduct Standards for Swap Dealers and

    Major Swap Participants with Counterparties, Final Rule, 77 FR 9734,

    9825 (Feb. 17, 2012).

    ---------------------------------------------------------------------------

    Proposed Sec. 170.17 would eliminate existing gaps in the

    regulatory oversight programs established by the Commission and NFA.

    The proposed rule would advance the Commission's effort to create an

    oversight regime that levels the playing field by ensuring consistent

    treatment of all its registered intermediaries, including FCMs, SDs,

    MSPs, IBs, CPOs, and CTAs.

    In sum, consistent with Sections 8a(5) and 17m of the CEA, the

    Commission preliminarily believes that the proposed rule is necessary

    or appropriate to facilitate comprehensive and effective market

    oversight by NFA in its capacity as an SRO. By mandating membership in

    an RFA by each person registered as an IB, CPO, or CTA, the proposed

    rule would enable NFA to ensure compliance with Section 17 of the CEA,

    and rules and regulations thereunder. As the only RFA, NFA serves as

    the frontline regulator of its members, subject to Commission

    oversight. Without mandatory membership in NFA or another RFA,

    effective implementation of the programs required by Section 17 of the

    CEA and NFA's self-regulatory programs could be impeded.

    III. Request for Comment

    To ensure that the proposed rule would, if adopted, achieve its

    stated purpose, the Commission requests comment generally on all

    aspects of the proposed rule. Specifically, the Commission requests

    comment on the following:

    (1) Regulation 4.14(a)(9) was adopted on March 10, 2000.\13\

    Regulation 4.14(a)(9) provides that a person is not required to

    register as a CTA if it does not: (i) Direct any client accounts; or

    (ii) provide commodity trading advice based on, or tailored to, the

    commodity interest or cash market positions or other circumstances or

    characteristics of particular clients. This exemption from CTA

    registration generally pertains to persons only providing advice to the

    general public, such as in a newsletter, and not to specific clients.

    When adopted, Regulation 4.14(a)(9) did not require CTAs to de-register

    who were, at the time, registered with the Commission, but who could

    avail themselves of 4.14(a)(9). Therefore, many CTAs are currently

    registered with the Commission even though they qualify for an

    exemption from Commission registration pursuant to 4.14(a)(9). Should

    entities who are currently registered with the Commission but otherwise

    qualify for a Rule 4.14(a)(9) exemption be required to become members

    of NFA? If not, why?

    ---------------------------------------------------------------------------

    \13\ Exemption from Registration as a Commodity Trading Advisor,

    65 FR 12938 (March 10, 2000).

    ---------------------------------------------------------------------------

    (2) The Commission has not identified an impact on the risk

    management decisions of market participants as a result of the proposed

    regulation, but seeks comment as to any potential impact. Will proposed

    Sec. 170.17 impact, positively or negatively, the risk management

    procedures or actions of intermediaries?

    The Commission further requests comment on the specific questions

    included throughout this release.

    IV. Administrative Compliance

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \14\ imposes certain

    requirements on Federal agencies, including the Commission, in

    connection with their conducting or sponsoring any collection of

    information, as defined by the PRA. This proposed rulemaking would

    result in an amendment to existing collection of information OMB

    Control Number 3038-0023.\15\ The Commission is therefore submitting

    this proposal to the Office of Management and Budget (``OMB'') for

    review. If adopted, responses to this collection of information would

    be mandatory. An agency may not conduct or sponsor, and a person is not

    required to respond to, a collection of information unless it displays

    a currently valid control number.

    ---------------------------------------------------------------------------

    \14\ 44 U.S.C. 3501 et seq.

    \15\ See OMB Control No. 3038-0023, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0023.

    ---------------------------------------------------------------------------

    Registration with the Commission requires each applicant for

    registration to, among other things, file a Form 7-R providing basic

    background and contact information.\16\ The proposed regulation would

    not require affected IBs, CPOs, and CTAs to register with the

    Commission, but only to become a member of the NFA.

    ---------------------------------------------------------------------------

    \16\ The Commission has designated NFA to receive Form 7-R

    submissions on its behalf. The Commission notes that application for

    NFA membership is incorporated in Form 7-R.

    ---------------------------------------------------------------------------

    As of April 11, 2013, NFA has indicated that 53 CPOs, CTAs, and IBs

    have applied for or have been approved for Commission registration

    solely because of their activity in the swaps market.\17\ Furthermore,

    NFA indicated to the Commission that, as of April 11, 2013, there are

    756 non-FCM registrants that are currently registered with the

    Commission, but are not NFA members.\18\ Therefore, based on current

    information provided by NFA, the Commission estimates that there may be

    a total of 809 respondents affected by this proposed rule, and

    accordingly, the Commission preliminarily believes that OMB Collection

    3038-0023 needs to be adjusted to account for an increase in the number

    of respondents. The proposed regulation would otherwise not impact the

    burden estimates currently provided for Collection 3038-0023.

    ---------------------------------------------------------------------------

    \17\ Data provided by NFA was used in estimating this figure.

    Specifically, the data shows that, on April 11, 2013, there were 5

    IBs, 1 IB/CTA, 30 CPOs, 8 CTAs, and 9 CPO/CTAs who indicated that

    they transact exclusively in swaps.

    \18\ Data provided by NFA was used in estimating this figure.

    Specifically, the 756 figure is calculated by adding the following

    (as of April 11, 2013, the total number of registered firms without

    NFA membership): 20 IBs, 1 IB/CPO, 2 IB/CTAs, 59 CPOs, 628 CTAs, and

    46 CPO/CTAs.

    ---------------------------------------------------------------------------

    The Commission seeks comment about the total number of respondents

    that it estimates may be impacted by the proposed rule, i.e., the

    Commission's preliminary estimate of 809 potential respondents. In

    particular, the Commission seeks comment as to the number of persons

    who have registered or plan to register as CTAs, CPOs, and IBs in order

    to serve the swap market exclusively and would be required to register

    with the Commission as a result of their activity in uncleared swaps

    (i.e., would not otherwise be captured by the aforementioned interplay

    of CFTC Sec. Sec. 170.15 and 170.16 and NFA Bylaw 1101).

    Information Collection Comments

    The Commission invites the public and other Federal agencies to

    comment on any aspect of the reporting burdens discussed above.

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments

    in order to: (1) Evaluate whether the proposed collection of

    information is necessary for the proper performance of the functions of

    the Commission, including the information will have practical utility;

    (2) evaluate the accuracy of the Commission's estimate of the burden of

    the proposed collection of information; (3) determine whether there are

    ways to enhance the

    [[Page 67081]]

    quality, utility, and clarity of the information to be collected; and

    (4) minimize the burden of the collection of information on those who

    are to respond, including through the use of automated collection

    techniques or other forms of information technology.

    Comments may be submitted directly to the Office of Information and

    Regulatory Affairs, by fax at (202) 395-6566 or by email at

    OIRAsubmissions@omb.eop.gov. Please provide the Commission with a copy

    of submitted comments so that all comments can be summarized and

    addressed in the final rule preamble. Refer to the ADDRESSES section of

    this notice of proposed rulemaking for comment submission instructions

    to the Commission. A copy of the supporting statements for the

    collections of information discussed above may be obtained by visiting

    RegInfo.gov. OMB is required to make a decision concerning the

    collection of information between 30 and 60 days after publication of

    this document in the Federal Register. Therefore, a comment is best

    assured of having its full effect if OMB receives it within 30 days of

    publication.

    B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \19\ requires that agencies consider

    whether the rules they propose will have a significant economic impact

    on a substantial number of small entities and, if so, provide a

    regulatory flexibility analysis respecting the impact.

    ---------------------------------------------------------------------------

    \19\ 5 U.S.C. 601 et seq.

    ---------------------------------------------------------------------------

    1. CPOs

    The Commission has previously determined that CPOs are not small

    entities for purposes of the Regulatory Flexibility Act.\20\

    Accordingly, the Chairman, on behalf of the Commission, hereby

    certifies pursuant to 5 U.S.C. 605(b) that the proposed rules will not

    have a significant economic impact on a substantial number of small

    entities with respect to these entities.

    ---------------------------------------------------------------------------

    \20\ Policy Statement and Establishment of Definitions of

    ``Small Entities'' for Purposes of the Regulatory Flexibility Act,

    47 FR 18618, 18619 (Apr. 30, 1982).

    ---------------------------------------------------------------------------

    2. IBs and CTAs

    The Commission has previously determined to evaluate within the

    context of a particular rule proposal whether all or some IBs or CTAs

    should be considered to be small entities and, if so, to analyze the

    economic impact on them of any such rule.\21\

    ---------------------------------------------------------------------------

    \21\ See, with respect to commodity trading advisors, 47 FR at

    18620, and see, with respect to IBs, Introducing Brokers and

    Associated Persons of Introducing Brokers, Commodity Trading

    Advisors and Commodity Pool Operators; Registration and Other

    Regulatory Requirements, 48 FR 35276 (Aug. 3, 1983).

    ---------------------------------------------------------------------------

    Since there could be some small entities that register as IBs or

    CTAs, the Commission is considering whether this rulemaking would have

    a significant economic impact on these registrants. The proposed rules

    would require all CTAs and IBs who register with the Commission to

    become members of an RFA. As previously noted, this would require CTAs

    and IBs to ``check a box'' on Form 7-R and ensure they are prepared for

    an NFA audit.\22\ However, as discussed below, the Commission

    preliminarily believes that any costs associated with preparing for an

    audit by the NFA should not be substantially different from, or

    significantly exceed, the costs associated with preparing for an audit

    by the Commission, which every registered entity would already be

    responsible to do.\23\ To the extent that this proposed rule only

    pertains to CFTC registrants, the Commission preliminarily believes

    that any audit-related costs incident to NFA membership would be

    minimal, and should not have a significant economic impact on IBs,

    CPOs, or CTAs that are small entities. Consequently, the Commission

    finds that there is no significant economic impact on IBs or CTAs

    resulting from this rulemaking.

    ---------------------------------------------------------------------------

    \22\ See infra note 28. As stated in the booklet titled ``NFA

    Regulatory Requirements: For FCMs, IBs, CPOs, and CTAs,'' NFA audits

    have two major objectives: (1) To determine whether the firm is

    maintaining records in accordance with NFA rules and applicable CFTC

    regulations; and (2) To ensure that the firm is being operated in a

    professional manner and that customers are protected against

    unscrupulous activities and fraudulent or high-pressure sales

    practices.

    \23\ The Commission believes that many of the recordkeeping

    obligations associated with preparing with a NFA audit are already

    required for Commission registrants. For example, Sections 4.23 and

    4.33 of the Commission's Regulations are recordkeeping requirements

    associated with registered CPOs and CTAs, respectively. Moreover,

    given the average periodicity for NFA audits, the magnitude of

    annual audit-related costs is limited.

    ---------------------------------------------------------------------------

    Accordingly, for the reasons stated above, the Commission

    preliminarily believes that the proposal will not have a significant

    economic impact on a substantial number of small entities. Therefore,

    the Chairman, on behalf of the Commission, hereby certifies, pursuant

    to 5 U.S.C. 605(b), that the proposed regulations being published today

    by this Federal Register release will not have a significant economic

    impact on a substantial number of small entities.

    C. Considerations of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the

    costs and benefits of its actions before promulgating a regulation

    under the CEA or issuing an order. Section 15(a) further specifies that

    the costs and benefits shall be evaluated in light of the following

    five broad areas of market and public concern: (1) Protection of market

    participants and the public; (2) efficiency, competitiveness, and

    financial integrity of futures markets; (3) price discovery; (4) sound

    risk management practices; and (5) other public interest

    considerations.

    1. Background

    As discussed above, prior to the Dodd-Frank Act, the intersection

    of Sec. 170.15 and NFA Bylaw 1101 effectively required most CFTC-

    registered intermediaries to be members of NFA. Because NFA Bylaw 1101

    provides that NFA members transacting futures business on behalf of

    customers cannot transact with non-members, and Sec. 170.15 requires

    all FCMs to be NFA members, any IB, CPO, or CTA that engages with an

    FCM is required to maintain NFA membership in order to transact in

    futures.

    In assessing the costs and benefits of the proposed rule, the

    Commission, in consultation with the NFA, has identified the following

    typical scenarios in which, under the current Commission regulations

    and NFA rules, a firm is registered with the Commission, but is not an

    NFA member:

    A firm that is no longer in business, but subject to

    Commission action, is prohibited from withdrawing its registration with

    the Commission until after the Commission action is resolved, but,

    since the firm no longer actively participates in the futures markets,

    it has withdrawn its NFA membership (in other words, a firm has a

    ``withdrawal hold'');

    A firm that is not ready to commence business as a CTA

    and/or CPO first becomes registered in order to complete the more

    complex process of being properly vetted for registration, and then

    adds membership later when it is preparing to commence trading and to

    submit a disclosure document to NFA for review;

    When an NFA member firm no longer has at least one

    principal who is registered as an AP of the firm, NFA rules provide

    that the firm's membership can be withdrawn if the situation is not

    corrected. If the firm does not re-attain NFA membership by adding a

    new principal who is an AP of the firm, typically the firm's

    registration is subsequently withdrawn as well;

    CTAs that do not manage accounts consistent with the

    parameters of

    [[Page 67082]]

    Sec. 4.14(a)(9) register with the Commission, but are not required to

    become members of NFA and thus do not become members of NFA.

    Moreover, the Dodd-Frank Act amended the CEA to establish a

    comprehensive new regulatory framework for swaps markets. Accordingly,

    an intermediary that was previously not required to register with the

    Commission because its activities were limited to swaps may now be

    required to register with the Commission. However, unlike futures

    transactions, because some swaps can be entered into bilaterally and

    not be cleared through a central counterparty (in other words, will not

    necessarily require the use of an FCM, SD, or MSP), the intersection of

    Sec. Sec. 170.15 and 170.16 and NFA Bylaw 1101 may not require an IB,

    CPO, or CTA who transacts only in uncleared swaps to become a member of

    an RFA.\24\

    ---------------------------------------------------------------------------

    \24\ Under the current Regulations and NFA bylaws, an IB, CPO,

    and CTA who transacts only in uncleared swaps with another IB, CPO,

    or CTA who similarly limits its transactions to uncleared swaps,

    will not be required to become a member of NFA so long as both

    parties are (1) not members of NFA and (2) continue to transact only

    in uncleared swaps with similarly-situated entities.

    ---------------------------------------------------------------------------

    Proposed Sec. 170.17 would eliminate these gaps in the regulatory

    oversight programs established by the Commission and NFA. In

    conjunction with Sec. 170.15, which requires all FCMs to become

    members of an RFA, and Sec. 170.16, which requires all SDs and MSPs to

    become members of an RFA, the Commission is intending to create an

    oversight regime that levels the playing field by ensuring consistent

    treatment of all its registered intermediaries. The Commission

    preliminarily believes that the proposed regulation is necessary to

    ensure comprehensive regulation and equal oversight of all

    intermediaries.

    2. Costs

    There would be certain costs associated with the proposed

    regulation. First, affected CFTC registrants would be required to

    become NFA members. The Commission understands that the process for a

    current CFTC registrant to become an NFA member amounts to checking a

    box on the CFTC registration form and updating some contact

    information; thus, the Commission preliminarily believes the cost of

    filing for membership to be less than one half-hour of labor.\25\

    ---------------------------------------------------------------------------

    \25\ See Form 7-R, http://www.nfa.futures.org/nfa-registration/templates-and-forms/form7-r.HTML. Applications forms for NFA

    membership and Associate membership are incorporated in Forms 7-R

    and 8-R. See NFA Membership and Dues, http://www.nfa.futures.org/nfa-registration/NFA-membership-and-dues.HTML.

    ---------------------------------------------------------------------------

    Affected entities would also be subject to certain membership fees.

    The Commission understands that NFA imposes initial membership dues and

    annual membership dues for IBs, CPOs, and CTAs. Currently, the initial

    membership dues to become an NFA member are $750 for the first year,

    and the annual dues to maintain membership are $750 per year

    thereafter.\26\

    ---------------------------------------------------------------------------

    \26\ See NFA Membership and Dues, http://www.nfa.futures.org/nfa-registration/NFA-membership-and-dues.HTML.

    ---------------------------------------------------------------------------

    The Commission preliminarily believes that the rule may impose

    certain compliance costs on affected entities. However, such costs

    should not be substantially different from or significantly exceed the

    costs associated with current Commission regulations. NFA members are

    subject to periodic audits by NFA. The Commission understands that NFA

    audits CPOs, CTAs and IBs every three to four years, but the frequency

    may vary depending on NFA's risk analysis.\27\ The Commission also

    understands that while the direct cost of the audit is covered by the

    annual membership dues, members may incur indirect costs associated

    with an on-site audit, e.g., preparing for the audit and providing

    staff to assist NFA staff during the audit. The Commission has

    authority to ensure all IBs, CTAs, and CPOs, registered with the

    Commission are in compliance with Commission regulations applicable to

    IBs, CTAs and CPOs as Commission registrants and to conduct on-site

    examinations of the operations and activities of IBs, CTAs, and CPOs as

    Commission registrants. Given the existing costs associated with

    ongoing compliance and examinations under the Commission regulations

    currently in effect, the Commission preliminarily believes that the

    costs associated with preparing for an audit by the NFA should not be

    substantially different from or significantly exceed the costs

    associated with preparing for an audit by the Commission, which every

    registered entity is already responsible to do (e.g., have properly

    prepared and maintained books and records available for examination at

    all times).\28\ All affected entities should expect to incur costs

    necessary to work with NFA to facilitate regulatory audits.\29\

    Therefore, the Commission preliminarily believes that IBs, CPOs, and

    CTAs covered by the proposed rule may incur few, if any, additional

    audit-related costs by virtue of their NFA membership.

    ---------------------------------------------------------------------------

    \27\ The Commission notes that the NFA states that it seeks to

    audit all new registrants within the first year of NFA membership,

    and periodically thereafter. See http://www.nfa.futures.org/nfa-faqs/compliance-faqs/audits/index.HTML.

    \28\ Entities that will become Commission registrants for the

    first time should expect to incur the costs of ensuring they are

    adequately prepared for an on-site examination by the Commission.

    Such costs, however, are not attributable to the present rule

    proposal.

    \29\ NFA provides a booklet titled ``NFA Regulatory

    Requirements: For FCMs, IBs, CPOs, and CTAs,'' the NFA Manual, CFTC

    Regulations, and the ``Self-Examination Checklist,'' which all NFA

    must complete on a yearly basis. All are available on NFA's Web site

    at www.nfa.futures.org.

    ---------------------------------------------------------------------------

    Likewise, with respect to general, ongoing compliance costs, the

    Commission preliminarily believes that NFA membership would impose few

    additional costs on subject IBs, CPOs, and CTAs, because as Commission

    registrants, these participants would already be subject to the

    majority of regulations that NFA is responsible to enforce.

    Specifically, in its capacity as an SRO, NFA would act, in respect of

    entities subject to the proposed rule, as the frontline regulator for

    the programs required by Section 17 of the CEA and the regulations

    thereunder. Section 17 and those regulations, however, are applicable

    to subject entities, independent of whether they are NFA members.

    Accordingly, in the main, entities would not incur any additional

    general, ongoing compliance costs as a result of NFA membership.

    However, in certain limited situations, there may be costs associated

    with being an NFA member in excess of those costs incurred for being

    registered with the Commission. For example, the Commission's capital

    rules require that registered IBs maintain adjusted net capital equal

    to or in excess of the greatest of $45,000 [or] the amount of adjusted

    net capital required by a registered futures association of which it is

    a member.\30\ However, section 5 of the NFA Manual sets forth the

    following capital requirements for member IBs:

    ---------------------------------------------------------------------------

    \30\ See 17 CFR 1.17(a)(1)(iii).

    (a) Each Member IB, except an IB operating pursuant to a

    guarantee agreement which meets the requirements set forth in CFTC

    Regulation 1.10(j), must maintain Adjusted Net Capital (as defined

    in CFTC Regulation 1.17) equal to or in excess of the greatest of:

    (i) $45,000;

    (ii) For Member IBs with less than $1,000,000 in Adjusted Net

    Capital, $6,000 per office operated by the IB (including the main

    office);

    (iii) For Member IBs with less than $1,000,000 in Adjusted Net

    Capital, $3,000 for each AP sponsored by the IB.\31\

    ---------------------------------------------------------------------------

    \31\ NFA's manual is available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=SECTION%205&Section=7.

    Therefore, while the Commission preliminarily believes, as noted

    above, that comprehensive and effective market oversight conducted by

    NFA would

    [[Page 67083]]

    enhance market oversight and promote effective implementation of the

    CEA, the Commission recognizes that in certain limited situations, the

    requirements to be an NFA member may be more stringent, and potentially

    most costly to comply with, than the requirements associated with being

    registered with the Commission. The Commission requests comment on

    whether there are any additional situations similar to the example

    described above where the costs associated with NFA membership diverge

    from the costs of Commission registration.

    The Commission contacted NFA to determine the number of IBs, CPOs,

    and CTAs that would be directly impacted by this rule (i.e., currently

    registered with the Commission, but not currently members of NFA). NFA

    indicated to the Commission that, as of April 11, 2013, there were 756

    non-FCM firms that are registered with the Commission, but are not NFA

    members.\32\ Large percentages of the identified IBs, IB/CPOs, IBs/

    CTAs, and CPOs --90%, 100%, 100% and 66%, respectively--are firms that

    are subject to a withdrawal hold. A smaller percentage of CPOs/CTAs

    (46%) and CTAs (4%) also fit within this category. This category of

    entities--i.e., those intermediaries that are subject to a withdrawal

    hold--should not be affected by the proposed regulations because they

    are, in the majority of cases, no longer in business, and, in any case,

    are not actively trading.

    ---------------------------------------------------------------------------

    \32\ See supra note 18.

    ---------------------------------------------------------------------------

    Relying on the information provided by NFA, the Commission

    estimates that a combined 652 entities are CFTC registrants because of

    the activities that qualify them as a CPO, CTA or IB, but are not NFA

    members, equating to an initial cost to the industry of approximately

    $489,000.\33\ In addition, the Commission anticipates a small cost to

    each firm to update the firm's registration statement and other

    paperwork necessary to become an NFA member. The Commission estimates

    annual ongoing cost to the industry of the same amount ($489,000) \34\

    plus the indirect costs of the periodic audits, which the Commission

    cannot estimate at this time due to the entity-specific nature of the

    indirect costs incurred.

    ---------------------------------------------------------------------------

    \33\ See supra note 18. Specifically, the 652 figure is

    calculated by adding the following (as of April 11, 2013): 2 IBs, 20

    CPOs, 605 CTAs, and 25 CPO/CTAs. To arrive at the monetary estimate,

    the 652 figure was multiplied by the $750.00 per-entity initial

    cost. The Commission notes, however, that some entities currently

    registered with the Commission may withdraw their registration

    because they are inactive in derivatives markets or for some other

    reason. As a result, the total number of affected entities may be

    reduced, and corresponding total costs associated with the proposed

    rule may be lower.

    \34\ Id.

    ---------------------------------------------------------------------------

    The Commission also asked NFA for estimates regarding the number of

    future IBs, CPOs, and CTAs who will be required to register for the

    first-time with the Commission because of their swaps activity. NFA

    indicated that 53 firms that have applied for or have been approved for

    Commission registration have indicated they participate exclusively in

    the swaps markets.\35\ However, the Commission estimates that this

    number may increase after certain regulations affecting the

    registration status of swaps entities come into effect.\36\ Moreover,

    as described above, this regulation would directly affect the subset of

    these new entities required to register for the first time because they

    are active exclusively in the uncleared swaps market and engage with

    similarly-situated entities. The Commission preliminarily believes that

    many entities have yet to apply for registration under the Commission's

    new swaps market regime, and as such the Commission is not yet able to

    accurately determine the exact number of new registrants that will be

    affected by the proposed regulation.

    ---------------------------------------------------------------------------

    \35\ See supra note 17. NFA indicated that on April 11, 2013, it

    had approved 52 firms that deal exclusively in swaps for

    registration as an IB, CPO, or CTA and that the IB, CPO, or CTA

    registration of 1 additional firm that deals exclusively in swaps is

    currently pending.

    \36\ For example, the Commission's final definition of the term

    ``U.S. Person'' as it relates to cross-border swap transactions

    could dramatically affect the number of market participants required

    to register with the Commission.

    ---------------------------------------------------------------------------

    The Commission requests comment on all aspects of its preliminary

    consideration of costs. Has the Commission accurately identified the

    costs of this proposed regulation? Are there other costs to the

    Commission, market participants, and/or the American public that may

    result from the adoption of the proposed regulation that the Commission

    should consider? The Commission seeks specific comment on the

    following:

    How many IBs, CPOs, and CTAs will be affected by the

    proposed regulation?

    How many entities are active only in the uncleared swaps

    markets and plan to register with the Commission--and so would need to

    become members of NFA as a result of the proposed regulation?

    What are the costs of an NFA audit? Please identify and,

    where possible, quantify such costs. Do the types of costs or amount of

    costs vary depending on whether the audit is online or onsite? Do

    market participants bear different costs with respect to NFA's periodic

    audits versus daily audits?

    Would the proposed rule result in ongoing compliance costs

    beyond those an entity would face as a result of being registered with

    the Commission? Are there any costs of NFA membership beyond those an

    entity would face as a result of being registered with the Commission?

    Are there other costs of NFA membership that the

    Commission should consider?

    3. Benefits

    The proposed regulation would enable the Commission to carry out

    its obligations pursuant to Section 17 of the CEA to delegate certain

    oversight responsibility for intermediaries, including IBs, CPOs, and

    CTAs, to an RFA. As described above, the NFA cannot enforce its rules

    over registrants who do not become NFA members, and existing

    regulations would not require all IBs, CPOs, and CTAs to become NFA

    members. Thus, the Commission proposed new Sec. 170.17 to require IBs,

    CPOs, and CTAs to become NFA members analogously to how Sec. 170.15

    presently requires FCMs to become NFA members and how Sec. 170.16

    requires the same of SDs and MSPs. In so doing, the Commission

    preliminarily believes it would ensure a level regulatory playing field

    for all registered intermediaries. The proposed rule would enable the

    NFA to apply its experience as a SRO to oversee all registered IBs,

    CPOs, and CTAs.

    In addition, the Commission preliminarily believes that by

    requiring membership in an RFA, the proposed rule would result in a

    more efficient deployment of agency resources which would otherwise

    have to be used to oversee these registrants who would, without this

    rule, not be overseen by NFA.

    Moreover, by requiring all registered IBs, CPOs and CTAs to become

    NFA members, the public would benefit from NFA's developed set of rules

    and oversight capabilities to ensure the integrity of the swaps market

    and its participants. This increase in market integrity may lead to a

    corresponding increase in market participation as the public and market

    participants grow more confident in the safety of these markets. The

    Commission preliminarily believes that the proposed regulation would

    ensure that NFA has the authority necessary to fulfill its delegated

    responsibilities to provide regulatory oversight and promote market

    integrity.

    The Commission requests comment on all aspects of its preliminary

    [[Page 67084]]

    consideration of benefits. Has the Commission accurately identified the

    benefits of this proposed regulation? Are there other benefits to the

    Commission, market participants, and/or the public that may result from

    the adoption of the proposed regulation that the Commission should

    consider?

    4. Section 15(a)

    Section 15(a) of the CEA requires the Commission to consider the

    effects of its actions in light of the following five factors:

    a. Protection of Market Participants and the Public

    The proposed regulation would protect the public by ensuring that

    all registered intermediaries are subject to the same level of

    comprehensive NFA oversight. Because the entities affected by the

    proposed regulation act as intermediaries for clients, it is imperative

    that these entities be subject to proper oversight in order to protect

    customers from wrongdoing.

    The Commission seeks comment as to how market participants and the

    public may be protected by the proposed regulation.

    b. Efficiency, Competitiveness, and Financial Integrity of Markets

    The proposed regulation would act to create a more level playing

    field for intermediaries, ensuring that all such registered entities

    are subject to the same level of oversight and regulatory

    responsibility. In so doing, the Commission preliminarily believes the

    integrity of markets would be enhanced.

    The Commission seeks comment as to how the proposed regulation may

    promote the efficiency, competitiveness, and financial integrity of

    markets.

    c. Price Discovery

    The Commission has not identified an impact on price discovery as a

    result of the proposed regulation, but seeks comment as to any

    potential impact. Will proposed Sec. 170.17 impact, positively or

    negatively, the price discovery process?

    d. Sound Risk Management

    The Commission has not identified an impact on the risk management

    decisions of market participants as a result of the proposed

    regulation, but seeks comment as to any potential impact. Will proposed

    Sec. 170.17 impact, positively or negatively, the risk management

    procedures or actions of intermediaries?

    e. Other Public Interest Considerations

    The Commission preliminarily believes that proposed Sec. 170.17

    may promote public confidence in the integrity of derivatives markets

    by ensuring consistent and adequate regulation and oversight of all

    intermediaries. Will proposed Sec. 170.17 impact, positively or

    negatively, any heretofore unidentified matter of interest to the

    public?

    List of Subjects in 17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures,

    Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures

    Trading Commission proposes to amend 17 CFR part 170 as follows:

    PART 170--REGISTERED FUTURES ASSOCIATIONS

    0

    1. The authority citation for part 170 is revised to read as follows:

    Authority: 7 U.S.C. 6p, 12a, and 21.

    Subpart C--Membership in a Registered Futures Association

    0

    2. In subpart C, add Sec. 170.17 to read as follows:

    Sec. 170.17 Introducing Brokers, Commodity Pool Operators, and

    Commodity Trading Advisors.

    Each person registered as an introducing broker, commodity pool

    operator, or commodity trading advisor must become and remain a member

    of at least one futures association that is registered under Section 17

    of the Act and that provides for the membership therein of such

    introducing broker, commodity pool operator, or commodity trading

    advisor, as the case may be, unless no such futures association is so

    registered.

    Issued in Washington, DC, on November 5, 2013, by the

    Commission.

    Melissa D. Jurgens,

    Secretary of the Commission.

    Appendix to Membership in a Registered Futures Association--Commission

    Voting Summary

    Note: The following appendix will not appear in the Code of

    Federal Regulations.

    Appendix--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton,

    O'Malia, and Wetjen voted in the affirmative; no Commissioner voted

    in the negative.

    [FR Doc. 2013-26790 Filed 11-7-13; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 8, 2013



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions