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]

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From the Federal Register Online via GPO Access [wais.access.gpo.gov]


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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 [email protected] 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 http://www.regulations.gov 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: [email protected]


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

at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.[fxsp0]access.gpo.[fxsp0]gov/nara/cfr/waisidx--06/17cfrv1--06.html.

\2\ 7 U.S.C. 12a(5). The Act can be accessed at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.access.


\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


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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: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.[fxsp0]nfa.[fxsp0]futures.org/nfaManual/financialRequirements.asp.


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

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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]


Updated November 01, 2006

Last Updated: June 26, 2007