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]
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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.
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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\
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\1\ 17 CFR 145.9. Commission regulations referred to herein can
be found on the Commission's Web site, www.cftc.gov.
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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,
[email protected]; Jason Shafer, Attorney Advisor, Division of Swap
Dealer and Intermediary Oversight, (202) 418-5097, [email protected]; or
Hannah Ropp, Economist, 202-418-5228, [email protected], 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\
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\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.
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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.
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\6\ 7 U.S.C. 12a(5).
\7\ 7 U.S.C. 21(m).
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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\
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\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.
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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.
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\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).
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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?
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\13\ Exemption from Registration as a Commodity Trading Advisor,
65 FR 12938 (March 10, 2000).
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(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.
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\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.
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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.
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\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.
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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.
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\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.
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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
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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
[email protected]. 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.
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\19\ 5 U.S.C. 601 et seq.
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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.
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\20\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18619 (Apr. 30, 1982).
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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\
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\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).
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\26\ See NFA Membership and Dues, http://www.nfa.futures.org/nfa-registration/NFA-membership-and-dues.HTML.
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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.
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\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.
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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:
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\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\
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\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.
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\32\ See supra note 18.
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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.
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\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.
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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.
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\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.
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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