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  • Commodity Futures Trading Commission 17 CFR Part 170 Membership in a Registered Futures Association[Federal Register: November 1, 2006 (Volume 71, Number 211)]

    [Proposed Rules]

    [Page 64171-64173]

    From the Federal Register Online via GPO Access []


    [[Page 64171]]




    17 CFR Part 170

    RIN 3038-AC29

    Membership in a Registered Futures Association

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Proposed rule.


    SUMMARY: The Commodity Futures Trading Commission ("Commission" or

    "CFTC") is proposing to amend its regulations in order to require,

    subject to the existing exception for certain notice registered

    securities brokers or dealers ("BDs"), that all persons registered

    with the Commission as futures commission merchants ("FCMs") must

    become and remain members of at least one registered futures

    association ("RFA"). This action ("Proposed Amendment") is

    consistent with the regulatory philosophy underlying the Commodity

    Futures Modernization Act of 2000 ("CFMA").

    DATES: Comments must be received on or before December 1, 2006.

    ADDRESSES: Comments on the Proposed Amendment should be sent to Eileen

    Donovan, Acting Secretary, Commodity Futures Trading Commission, Three

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

    may be sent by facsimile transmission to (202) 418-5521, or by e-mail

    to Reference should be made to "Proposed

    Regulation Regarding Membership in a Registered Futures Association."

    Comments also may be submitted by connecting to the Federal eRulemaking

    Portal at and following the comment

    submission instructions.

    FOR FURTHER INFORMATION CONTACT: Helene D. Schroeder, Special Counsel,

    Compliance and Registration Section, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

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

    telephone number: (202) 418-5450; facsimile number: (202) 418-5528; and

    electronic mail:


    I. Background

    A. Commission Regulation 170.15

    Commission Regulation 170.15 \1\ ("Regulation") provides in

    general that all persons who are required to register as FCMs must

    become and remain members of at least one RFA. The Regulation was

    adopted in 1983 pursuant to the Commission's general rulemaking

    authority in Section 8a(5) of the Commodity Exchange Act ("Act" or

    "CEA"),\2\ as well as the authority in Sections 17(m), (p) and (q) of

    the Act,\3\ which govern the registration of futures associations.

    Currently, the National Futures Association ("NFA") is the sole RFA

    under Section 17(a) of the Act, and it is also a self-regulatory

    organization ("SRO").


    \1\ 17 CFR 170.15. The Commission's regulations can be accessed


    \2\ 7 U.S.C. 12a(5). The Act can be accessed at


    \3\ 7 U.S.C. 21(m), (p) and (q).


    Section 8a(5) of the Act 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 Act. Section 17(m) of the Act permits the CFTC to

    require membership in an RFA if the CFTC determines that mandatory

    membership is "necessary or appropriate" to the purposes and

    objectives of the Act. Section 17(p) of the Act requires each RFA to

    have a comprehensive program to audit the financial and sales practices

    of its members and their associated persons. Section 17(q) of the Act

    requires each RFA to establish such programs "as soon as practicable

    but not later than September 30, 1985."

    When it proposed Regulation 170.15, the Commission received 50

    comment letters, from a wide range of futures professionals and

    industry representatives. In adopting the Regulation, the Commission

    addressed concerns raised by two commenters \4\ and determined, in

    accordance with Section 8a(5) of the Act, that adoption of the

    Regulation was reasonably necessary to effectuate the purposes of the

    Act and, in particular, to provide a means for assuring that the

    purposes of Sections 17(m), (p) and (q) of the Act would be

    achieved.\5\ Specifically, the Commission found that comprehensive and

    effective self-regulation, and the avoidance of duplicative regulation,

    which are the underlying goals of Sections 17(m), (p) and (q) of the

    Act, would be enhanced by adoption of a Regulation mandating membership

    in an RFA by each person required to be registered as an FCM.


    \4\ Only two commenters opposed adoption of the Regulation, the

    Antitrust Division of the United States Department of Justice

    ("Antitrust Division"), and an individual engaged in the business

    of financial consulting, whose views were somewhat similar to those

    of the Antitrust Division. The Antitrust Division set forth three

    basic objections to the Regulation: (1) that the proposed regulation

    was of questionable constitutionality; (2) that the Commission

    lacked authority under the Act to adopt the proposed regulation; and

    (3) that the Commission was compelled to employ other less

    anticompetitive regulatory alternatives pursuant to Section 15 of

    the Act, because, in the view of the Antitrust Division, the

    proposed regulation would have serious anticompetitive consequences.

    \5\ See 48 FR 26304 (Jun. 7, 1983), which contains a detailed

    discussion of the Commission's response to the commenters' concerns.


    The Commission further noted that, in the absence of a mandatory

    membership requirement, the Commission would be required under relevant

    provisions of the Act to maintain costly and extensive direct

    regulation over those Commission registrants that would not be subject

    to any self-regulatory jurisdiction.\6\ In particular, the Commission

    would have had to continue to conduct financial, compliance and sales

    practice examinations of those FCMs, commodity pool operators

    ("CPOs"), commodity trading advisors ("CTAs") and introducing

    brokers ("IBs") that did not join NFA.\7\ Further, the Commission

    found that the need to maintain these extensive programs for the

    comparatively small number of persons likely to remain subject solely

    to the Commission's direct regulation would be inefficient and

    duplicative of the self-regulatory functions for which NFA would be



    \6\ See, e.g., 7 U.S.C. 21(e), which specifies that any person

    registered under the Act, 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."

    \7\ In this regard, the Commission found that the Regulation,

    which would operate in conjunction with NFA's Bylaw 1101, would

    assure essentially complete NFA membership from the universe of

    commodity professionals: FCMs, CPOs, CTAs and IBs. This is because

    Bylaw 1101 prohibits members from carrying an account, accepting an

    order or handling a transaction in commodity futures contracts for

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

    with the CFTC as an FCM, IB, CPO or CTA.

    \8\ It should be noted that, since the adoption of the

    Regulation, the Commission has been reauthorized four times,

    specifically, in 1986, 1992, 1995 and 2000. The Act also was amended

    by the Telemarketing and Consumer Fraud and Abuse Prevention Act,

    Pub. L. No. 103-297, 108 Stat. 1545 (1994). At no time during

    reauthorization of the Commission or in connection with amending the

    CEA was the viability of the Regulation challenged or questioned.


    In proposing the Regulation, the Commission requested comment on

    whether the Regulation should be expanded to apply to all registered

    FCMs, regardless of whether such persons are required to be


    [[Page 64172]]

    Ultimately, the Commission found that expansion was not necessary to

    ensure the effectiveness of NFA's self-regulatory program. The

    Commission noted, however, that it might consider expanding the

    Regulation in the future in light of new circumstances or experiences

    with the Regulation.\10\ As discussed below, in light of the new

    oversight philosophy advanced by the CFMA, the Commission believes that

    the Regulation now should be expanded.


    \9\ 47 FR 53031, 53031-32 (Nov. 24, 1982). Pursuant to Sections

    1a(20) and 4d(a)(1) of the Act, a person must register with the

    Commission as an FCM if it solicits or accepts orders from customers

    for the purchase or sale of commodity futures contracts on or

    subject to the rules of a contract market or derivatives transaction

    execution facility and accepts customer funds related thereto. Some

    persons register with the Commission as FCMs even though they are

    not required to be registered. For example, a person may not

    currently handle exchange-traded customer business but may

    nonetheless register as an FCM or maintain its registration as an

    FCM if it anticipates handling exchange-traded futures business at a

    later date. Additionally, a person may be or become fully registered

    as a BD and wish to act as counterparty to off-exchange foreign

    currency futures or option transactions with retail customers. See 7

    U.S.C. 2(c)(2)(B). The person may fully register as an FCM, although

    it engages in no other futures or options business and is not

    required to register as an FCM or become a member of NFA to act as a

    counterparty in these types of off-exchange foreign currency


    \10\ 48 FR 26304, 26310.


    B. The Commodity Futures Modernization Act of 2000

    In December 2000, the CFMA was enacted into law. The CFMA

    extensively revised the Act and the regulatory landscape by adding a

    more flexible regulatory structure based on core principles for

    registered entities (designated contract markets, derivatives

    transaction execution facilities and derivatives clearing


    Another relevant change made by the CFMA relates to the supervisory

    function of the Commission. Specifically, the CFMA transformed the role

    of the CFTC from a front-line regulator, with responsibility for direct

    supervision of the commodity futures markets and their participants and

    professionals, to an oversight agency.\11\ In light of this new

    oversight role and the policies and purposes of the Act, including the

    goals of effective self-regulation and the avoidance of duplicative

    regulation, the Commission is of the view that all registered FCMs,

    regardless of whether any such FCM is required to be registered as

    such, must become and remain members of an RFA.


    \11\ See 7 U.S.C. 5(b).


    II. Proposed Amendment

    Paragraph (a) of the Regulation currently provides that, except as

    specified in paragraph (b) of the Regulation, each person required to

    register as an FCM must become and remain a member of at least one RFA.

    As proposed to be revised, the Regulation would require that each

    person registered as an FCM--regardless of whether any such person is

    required to be so registered--would need to become and remain a member

    of at least one RFA. This would ensure that all FCMs come under direct

    supervision of at least one SRO.

    Paragraph (b) of the Regulation currently provides an exception for

    persons registered as FCMs pursuant to the notice registration

    provisions set forth in Regulation 3.10(a)(3). The Commission is not

    proposing to amend paragraph (b) of the Regulation, which was added

    following enactment of the CFMA. The CFMA established a joint

    regulatory framework for persons trading security futures products that

    included a notice registration procedure for FCMs and BDs that are

    fully registered, respectively, with the CFTC or the Securities and

    Exchange Commission. In this regard, the CFMA amended the CEA to

    specify that any BD that is notice registered with the Commission as an

    FCM is not required to become a member of an RFA.\12\ Paragraph (b) was

    added in recognition of this joint regulatory framework and the need to

    avoid duplicative regulation and, further, to make clear that BDs who

    notice register as FCMs (in contrast to persons fully registered as

    FCMs) are not subject to the mandatory provisions and thus need not

    become members of an RFA.\13\


    \12\ See 7 U.S.C. 6f(a)(4)(C)(i).

    \13\ See 66 FR 43080 (Aug. 17, 2001).


    As members of NFA, persons registered as FCMs will be subject to

    the minimum financial requirements of NFA. NFA recently raised its

    minimum dollar amount of adjusted net capital for member FCMs to

    $500,000. FCM members acting as counterparties of retail off-exchange

    foreign currency futures or option transactions are subject to even

    higher requirements (at least $1 million, $5 million if engaged in

    option transactions and $7.5 million if seeking to qualify certain

    affiliates as counterparties).\14\


    \14\ See NFA Financial Requirements Sections 1(a) and 11(a),

    which can be accessed at:[fxsp0]nfa.[fxsp0]


    The Commission also notes that RFAs, like the other SROs, function

    as frontline regulators of their members subject to Commission

    oversight. Adverse registration or disciplinary actions of an RFA are

    subject to Commission review in accordance with Sections 17(h) and (i)

    of the Act and Part 171 of the regulations promulgated thereunder. RFA

    rules must be submitted to the Commission in accordance with Section

    17(j) of the Act, and Sections 17(b)(8) and (9) outline the procedures

    an RFA must follow in proceeding against members and applicants for



    \15\ Members of an RFA should not be concerned that they will

    have no right of appeal from an adverse action or that mandatory

    membership in an RFA will somehow deprive them of their due process

    rights under the Fifth Amendment to the United States Constitution.

    This issue was raised by the Antitrust Division in connection with

    the adoption of the Regulation, and the Commission addressed this

    concern when it announced adoption of the Regulation. See 48 FR

    26304, 26307-08.


    III. Related Matters

    A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \16\ requires that agencies, in

    proposing regulations, consider the impact of those regulations on

    small businesses. The Proposed Amendment would affect persons that are

    registered as FCMs, even if they are not required to be so registered.

    The Commission has previously established certain definitions of

    "small entities" to be used by the Commission in evaluating the

    impact of its regulations on such entities in accordance with the

    Regulatory Flexibility Act.\17\ The Commission previously determined

    that registered FCMs are not small entities for the purpose of the

    Regulatory Flexibility Act.\18\


    \16\ 5 U.S.C. 601 et seq.

    \17\ 47 FR 18618 (Apr. 30, 1982).

    \18\ 47 FR 18618, 18619.


    B. Cost-Benefit Analysis

    Section 15(a) of the Act \19\ requires the Commission to consider

    the costs and benefits of its action before issuing a new regulation

    under the Act. By its terms, Section 15(a) does not require the

    Commission to quantify the costs and benefits of a new regulation or to

    determine whether the benefits of the proposed regulation outweigh its

    costs. Rather, Section 15(a) simply requires the Commission to

    "consider the costs and benefits" of its action.


    \19\ 7 U.S.C. 19(a).


    Section 15(a) further specifies that costs and benefits shall be

    evaluated in light of 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. The Commission, in its discretion, can

    [[Page 64173]]

    choose to give greater weight to any one of the five enumerated areas

    and determine that, notwithstanding its costs, a particular regulation

    is necessary or appropriate to protect the public interest or to

    effectuate any of the provisions or to accomplish any of the purposes

    of the Act.

    The Proposed Amendment will result in efficiency enhancements for

    the Commission and should have no effect on the following three

    enumerated areas: (1) Efficiency, competitiveness or the financial

    integrity of futures markets; (2) price discovery; and (3) sound risk

    management practices. Specifically, the Proposed Amendment, if adopted,

    will require all fully-registered FCMs, even those that are not

    required to be registered as FCMs, to become members of an RFA. This

    will make such FCMs subject to the self-regulatory jurisdiction and

    oversight programs of NFA.

    After considering these factors, the Commission has determined to

    propose the amendment to Regulation 170.15 discussed above. The

    Commission invites public comment on its application of the cost-

    benefit provision. Commenters also are invited to submit any data that

    they may have quantifying the costs and benefits of the Proposed

    Amendment with their comment letters.

    List of Subjects in 17 CFR Part 170

    Authority delegations (Government agencies), commodity futures,

    reporting and recordkeeping requirements.

    For the reasons discussed in the preamble, the Commission proposes

    to amend 17 CFR part 170 as follows:


    1. The authority citation for part 170 continues to read as


    Authority: 7 U.S.C. 6p, 12a and 21, as amended by the Commodity

    Futures Modernization Act of 2000, Appendix E of Pub. L. 106-554,

    114 Stat. 2763 (2000).

    Subpart C--Membership in a Registered Futures Association

    2. Section 170.15 is amended by revising paragraph (a) to read as


    Sec. 170.15 Futures commission merchants.

    (a) Except as provided in paragraph (b) of this section, each

    person registered as a futures commission merchant 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 futures commission merchant, unless no such futures

    association is so registered.

    * * * * *

    Issued in Washington, DC, on October 25, 2006, by the


    Catherine D. Daniels,

    Assistant Secretary of the Commission.

    [FR Doc. E6-18270 Filed 10-31-06; 8:45 am]

    BILLING CODE 6351-01-P

    Updated November 01, 2006

    Last Updated: June 26, 2007