Category: NFA Regulations

CME Chairman Voices Concerns About Brokerage Collateral Ruling

Terrence Duffy, Chairmen of the CME Group, counseled Senators against a pending CFTC ruling regarding collateral set aside by brokerages. Duffy’s presentation before the Senate Committee on Agriculture, Nutrition and Forestry in a hearing to evaluate the CFTC was yesterday, July 17th 2013.

In his testimony, Terrence Duffy took aim at a certain pending CFTC ruling requiring all Futures Commission Merchants (FCMs) to put all residual interest on their funds in a separate account. This money would be used to refund customers if a critical situation, such as MFE Global’s dissolution, were to occur again.

But Duffy doesn’t believe that this would do well to protect customers from losing money; instead, he warned the Senate that this could cause brokerages to be pushed out of the market, decreasing both liquidity and competition within the market. Furthermore, he appealed to the Committee by arguing that these changes would disproportionately impact smaller FCMs with stronger ties to agriculture.

Finally, Duffy reasoned that the proposed ruling would disrupt the ‘current regulatory structure’ of having institutions such as the NFA and CME do risk-audits of FCMs.

According to Bloomberg, the CFTC has not yet determined whether or not the regulation will be passed, and spokesman Steve Adamske did not comment on Duffy’s commentary

NFA Registers Cargill as Swap Dealer

The National Futures Assocation (NFA) announced yesterday that Cargill Inc is the first major non-financial entity to be registered as a swap dealer. Cargill operates in a range of commodity markets and is based out of Minneapolis.

NFA, CFTC and Swap Dealer Registration

The NFA is the futures industry’s self-regulator. Swap dealers must be members of the NFA, a process that involves an audit. According to CFTC rules, any firm that deals in more than $8 billion in swaps must be registered as a swap dealer.

The new rule mandating registration for crossing the threshold was instated earlier this year. According to Reuters:

Cargill said it had applied to be a swap dealer because services its Cargill Risk Management unit provided had brought it within the definitions of the law.

NFA and CFTC do allow some space for firms that employ swaps for hedging commodities or liabilities; these firms are exempt from rules mandating swap dealer registration.

Another effect of registration: now Cargill must clear its swaps transactions through clearing houses that were instated to curb risk of defaulting.

As it stands, most registered swaps dealers are enormous financial entities – JPMorgan, Bank of America, and Deutsche Bank, for example. Cargill is the first of its kind: a non-financial entity that has crossed the $8 billion dollar swaps threshold.

Read more.


NFA Responds to Peregrine Financial Group Audits

The National Futures Association (NFA) announced its intention to implement 21 changes and recommendations to how it manages futures industry firms. The news comes after the Berkeley Research Group (BRG), as part of its independent analysis of NFA’s audits of the Peregrine Financial Group, uncovered countless auditing oversights in the wake of the $200 million financial fraud by futures broker Peregrine Financial Group Inc.

Cedar Falls, Iowa-based Peregrine, fell into bankruptcy in July after the fraud was discovered at the same time as the firm’s CEO and founder, Russell Wasendorf Sr. attempted suicide.

A special committee of the NFA board met on Jan. 29, and recommended that the organization modify its auditor training and hiring practices; update its auditing policies and procedures; and better incorporate information from its own disciplinary reviews and auditing by the Commodity Futures Trading Commission.

The board will also appoint a special committee to supervise the implementation of these recommendations. These changes, according to the BRG, are “designed to improve the operations of NFA audits” based on the results of its analysis.

The BRG also recommended that the NFA organize more testing of internal controls, and take better steps to recognize potential risk factors in futures commission merchant (FCM) operations. An NFA press release from President Dan Roth stated, “Our primary goal is to thoroughly review the BRG report and develop a plan to implement its recommendations.”  Mr. Roth concluded in the press release, “We will present our plan to the board in the near future. We are confident that the actions already taken by NFA and other regulators, along with the recommendations proposed by BRG, will help us to create a stronger regulatory environment and a better industry.”

The Peregrine fraud was uncovered last year as the association was began new changes to their electronic process for reviewing bank confirmation statements regarding customer funds held by futures brokers such as Peregrine. Unlike the Madoff Ponzi scheme, no complaints or attempts at whistleblowing  were made, regarding Waseendorf’s fraud.

CFTC Rule Update: New CTA Reporting Rule Deadline Announced by NFA

The U.S. Commodity Futures Trading Commission’s (CFTC) final rule 4.27, requiring that all commodity trading advisors (CTA) report a range of substantive information to the NFA, is set to to get into affect on February 15, 2013.

From the NFA Statement Regarding CFTC Rule:

In February 2012, the CFTC issued final rules adopting CFTC Regulation 4.27 which, among other things, requires that all CTAs file a Form PR annual report with NFA within 45 days of the calendar year end. The Form PR requires each CTA to report on an annual basis general information about the CTA, its trading programs, the pool assets directed by the CTA and the identity of the CPOs that operate those pools. NFA has provided the Form PR template.

The first annual Form PR report will be due by February 14, 2013 for the year ended December 31, 2012 and must be filed electronically using NFA’s EasyFile System, which can be accessed at In order to access the EasyFile System, the CTA’s security manager must set up the necessary security settings. Instructions on how to do that can be found on our website.

NFA Rule

Additionally, the NFA announced that a similar, quarterly filing must be made within 45 days of the close of each quarter. The first filing will be due on March 31, 2013.

From the Statement:

CTA Members should also be aware that NFA has proposed changes to NFA Compliance Rule 2-46 to require a similar CTA PR filing to be made quarterly within 45 days of the calendar quarter end and expects that the first filing under this amendment will be due for the quarter ending March 31, 2013. NFA will provide notice to Members once approval of the amendments has been received.

Read more.

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.

Read the statement here.

CTA receives NFA BCC complaint

The NFA’s Business Conduct Committee has issued a complaint against Commodity Trading Advisor (“CTA”) Golden Forex. According to the NFA, Golden Forex submitted misleading information to the Association about its listed Associated Person (“AP”), Kathie Bui.

Golden Forex is a California based CTA, and a member of the NFA since May 2009. The company is owned by Linh Ngoc Nguyen, and Nguyen is listed as the firm’s principal, but not its AP. The only person ever listed as the firm’s AP is Kathie Bui. The complaint alleges that in June 2009, Bui left Golden Forex, and requested that Nguyen remove her listing as the AP in NFA records. Nguyen, as the only person with access to the company’s NFA Online Registration System account, was responsible for doing so. After repeated requests, Nguyen indicated to Bui that her name had been removed from the CTA’s AP list.

However, the NFA claims that in June 2011 Bui learned that she was in fact listed listed as Golden Forex’s AP. She again contacted Nguyen, who told her the firm would have to withdraw from the NFA if she was removed, and offered to pay her if she would remain registered. Bui refused, and contacted the NFA. The NFA then conducted an audit, which confirmed Bui’s story.

Golden Forex withdrew its NFA membership in September 2011. Nguyen has the opportunity to submit an answer to the complaint. If the committee finds against Nguyen, the defendant may be censured, fined, or permanently barred from NFA membership. So far, no other allegations have been made against the CTA.

Read more about this NFA BCC complaint.
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NFA hits North Carolina CTAs with enforcement action

The NFA announced today that is has taken emergency enforcement action against D2W Capital Management LLC (D2W), Prestige Capital Advisors LLC (Prestige), as well as their principal, Toby Hunter. The North Carolina-based CTAs and Hunter allegedly mislead customers, used similarly false and  misleading information to solicit new customers, and did not provide customers with NFA disclosure documents.

During a routine NFA exam of the CTAs, Hunter was unwilling or unable to provide current books and records to prove that the Prestige Fund had the three accounts, nor to account for large withdrawals from the Fund’s brokerage account.  The NFA notice notes that “even worse than the fund’s significant loss of assets, however, is the fact the NFA believes Prestige is lying to fund participants regarding the value of their investments, and that participants have no indication the fund is nearly exhausted.” Allegedly, D2W’s accounts are similarly haphazard.

The Member Responsibility Action(“MRA”) and Associate Responsibility Action (“ARA”) prevents the defendants from soliciting or accepting funds from customers, investors, managed accounts, pools, or other vehicles, or placing any trades. They are also prohibited from disbursing or transferring any funds without NFA approval. The actions will remain in place until the CTAs and Hunter can prove they are in compliance with NFA regulations.

Read more about this NFA emergency enforcement action.
Creative Commons License photo credit: Arenamontanus

NFA to CPOs: Don’t forget assessment fees

The NFA issued a notice today reminding member Commodity Pool Operators, or CPOs, that they are still responsible for paying NFA assessment fees. In the course of routine examinations, NFA staff found that exchange-member CPOs were failing to properly remit these fees. Though initially only for non-exchange members, in August 2004, the NFA board adopted an amendment extending that fee to NFA member CPOs.

The NFA adopted this amendment in recognition of the “significant amount of resources” expended to regulate exchange-member CPOs as the NFA decided it was unfair to place the entirety of the financial burden on non-exchange member CPOs.

Read more about this NFA member notice.

NFA orders California Introducing Broker barred from registration permanently

The NFA announced today that is has issued a Business Conduct Committee, or BCC, action permanently barring Roslex Corporation, an introducing broker, or IB, from ever registering with the Association again. Additionally, one of the firm’s principles, Gabriel A. Robles, is barred from membership for four years, and must pay a hefty fine if he ever elects to rejoin. The California-based IB allegedly engaged in abusive trading practices. Roslex and Robles elected to settle out of court. They have neither confirmed nor denied the charges.

On May 11, the NFA filed a compliant against Introducing Broker Roslex, Robles, and three others (Julio C. Aquino, Erick E. Ware, and Philp A. Day). The brief claimed that the Introducing Broker, its princpals (Robles and Aquino), and its APs (Ware and Day) were using exploitative trading methods. Specifically, on the designated accounts that they had power of attorney (POA) over, the four would make excessive numbers of trades in order to maximize their commissions. Often, these trades were not only unnecessary but unwise, causing some account-holders to lose their entire initial investment. The brief also contends that record-keeping standards were inadequate, and that it failed to maintain sufficient capital in 2010. Even so, Robles withdrew capital from the IB to pay his personal credit card. For all of this this, the defendants were accused of failing to “uphold just and equitable principles of trade” and “observe high standards of commercial honor.”

As an Introducing Broker, Roslex is liable for the actions of its employees, especially its association persons. Roslex and Robles (the owner as well as a principle) have already address the complaint by settling. However, Aquino, Ware, and Day have yet to make a statement or give any other indication of how they intent to respond to the NFA’s brief.

Read more about this NFA enforcement action against this IB.
Creative Commons License photo credit: timsnell

CFTC finalizes new CPO exemptions, delegates to NFA

The CFTC published a final rule on compliance relief from certain recordkeeping and reporting requirements for specific types of commodity pool operators (CPOs). Similar exemptions were previously made on a case-by-case basis by the CFTC. The new rule exempts CPOs that are listed and traded on national securities exchanges (i.e. Commodity Exchange Traded Funds or ETFs) from Disclosure Document delivery and acknowledgement, and Account Statement delivery. They are also not required to keep books and records at their main business address. Furthermore, independent directors or trustees of Commodity ETFs are exempt from registration as long as they are only serving as a part of the audit committee required for actively-managed public companies under Sarbanes-Oxley (and therefore under SEC regulation). The CFTC has also issued a notice authorizing the NFA to process these exemptions. To obtain relief, Commodity ETFs must file specific notices with the NFA.

To read the proposed rule, click here. To read the authorization, click here.