NFA Escalates Market Monitoring of Futures Commission Merchants (FCMs)
The National Futures Association’s (NFA) board of directors today announced two new rules that aim at customer protection. The rules were approved at a November 15 meeting.
NFA and Market Monitoring
The first announced rule will “enable NFA to make better use of technology in order to better monitor futures commission merchant (FCM) segregation compliance.” This announcement comes on the heels of a similar move by the CFTC, which will require audio recordings as part of a new approach to market monitoring. The NFA announcement also comes just days after the Australian Securities Investment Commission’s (ASIC) recent deal that would bring HFT technology to market monitoring.
The new technology used by NFA is being referred to a “daily segregation confirmation system.” The issued statement explains:
Earlier this year, as part of NFA’s ongoing effort to further safeguard customer funds, NFA’s Board approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated and secured amount funds-including banks, clearing FCMs, broker-dealers and money market accounts-to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCM’s designated self-regulatory organization (DSRO). The DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to identify any material discrepancies.
In November, NFA’s Board approved amendments to Financial Requirements Section 4 in order to implement this new daily confirmation system. The new amendments will require an FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances to a third party designated by NFA. The amended rule also states that in order for a depository to be deemed acceptable, it must report the FCM’s customer segregated and secured amount balances and cleared swaps customer collateral balances to a third party designated by NFA.
The daily confirmation system is still being worked out, however, with the first phase, beginning Dec. 31, applying only to banks. Other categories will following in the new year.
About The Author
Elan Mendel
Elan Mendel is an associate with Shipkevich PLLC, and has done registration, compliance, and enforcement defense work for commodities, futures and forex firms registered with the CFTC and NFA as FCMs, RFEDs, and others. Elan also specializes in domestic and cross-border insolvency issues.