Independent IB Financial Requirements

Independent IB Financial
Requirements
Who is NFA?
• Self-regulatory organization for the U.S. derivatives
industry, including on-exchange traded futures, retail offexchange foreign currency (forex) and OTC derivatives
(swaps).
• Formally designated as a “registered futures association”
by the CFTC.
• NFA has developed and enforced rules, provided programs
and offered services that safeguard market integrity, protect
investors and help our Members meet their regulatory
responsibilities and has done so for more than 30 years.
• Independent regulatory organization with no ties to any
specific marketplace.
• Not-for-profit; not a trade or lobbying association.
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Categories of NFA Membership
• With certain exceptions, all persons and organizations that
intend to do business as futures professionals must register
under the Commodity Exchange Act as:
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Futures Commission Merchant (FCM)
Retail Foreign Exchange Dealer (RFED)
Commodity Pool Operator (CPO)
Commodity Trading Advisor (CTA)
Introducing Broker (IB)
Swap Dealers (SD)
Major Swap Participants (MSP)
3
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Entity Registration
Futures
Commission
Merchant (FCM)
Introducing Broker
(IB)
•CFTC Registration
• CFTC Registration
• NFA approval as
Swap Firm
• CFTC Provisional
Registration
• Form 7-R
• Form 7-R
• Form 7-R
• Form 7-R
• Solicits/accepts
futures orders and
accepts money or
other assets from
customers to
support such
orders
• Solicits/accepts
futures orders, but
does not accept
money or other
assets from
customers
• Engages in
activities involving
swaps (may also
be registered as
FCM, IB, CPO or
CTA)
• Dealer/market
maker (>$8 Billion
notional annually)
or “substantial
position” not held
for hedging
• Certified financials
• Register at least
one AP Principal
• Certified financials
(Independent only)
• Register at least
one AP Principal
Swap Firm
• No additional
requirements
• Register at least
one AP Principal to
be approved by
NFA as Swap AP
Swap Dealer (SD) /
Major Swap
Participant (MSP)
• 4s Submissions
(financials?)
• List at least one
individual Principal
• Limited purpose
designation now
possible
NFA Membership by Registration
Category (As of April 23, 2014)
Total NFA Members: 4,171
Futures Commission
Merchants
Introducing Brokers
Commodity Trading
Advisors
1321
79
1398
2
90
7
8
Commodity Pool
Operators
Exchanges
Retail Foreign
Exchange Dealers
1266
Swap Dealers
Major Swap
Participants
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Registration and Beyond…
FCM / IB
• Required annual filings /
updates
• Financial requirements
• Annual FCM audit
• NFA Self-Examination
Questionnaire
• CFTC , Exchange and
DCO requirements
SD / MSP
• 4s document submission
• 4s review process
• Ongoing CEA
compliance requirements
• Periodic audit of
compliance with 4s
requirements
Swap Firm
Exempt Foreign
Firm
• Additional designation for
intermediary engaged in
swaps transactions as
agent
• Non-US resident firm
with US customers for
non-US trading and
clearing activity
• Subject to ongoing
requirements of
companion registration
category
• Although foreign
regulator remains the
primary regulator, subject
to applicable ongoing
CFTC requirements
under Rule 30.10
• CFTC, SEF, DCM and
DCO requirements
Limited Purpose
SD/MSP
Foreign SD / MSP
• Designation for entities
with SD/MSP activity that
is limited to specific
categories of swaps
• Similar to SD/MSP, but
eligible for “substitute
compliance” for certain
requirements
• Requires application to
CFTC
• Distinguishes entity vs
transaction level
requirements
• Conditions specified in
CFTC Order
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
NFA’s Core Functions
• Registration and Membership
– Screen firms and individuals to ensure knowledge and fitness
standards are met
• Compliance/Enforcement
– Conduct examinations, analyze financial information, investigate
complaints, and take disciplinary action when appropriate
• Dispute Resolution
– Offer arbitration and mediation alternatives to customers and
Members
• Education
– Help investors better understand trading opportunities and risks
and assist membership in understanding and meeting regulatory
responsibilities
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Enforcement Coordination:
NFA and CFTC
– Take action against
members and associates
– Violations of NFA
Requirements
– Remedies through NFA
Committees
– Can not go to court
– Must refer illegal activity
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
– Can prosecute registrants
and non-registrants
– Violations of Commodity
Exchange Act
– Can seek injunctive action
Types of NFA Disciplinary
Actions
• NFA has the authority to take disciplinary actions against
any firm or individual who violates its rules.
• These actions range from Warning Letters for minor rule
infractions to formal Complaints in cases where rule
violations warrant prosecution.
• Complaints
– Issued by NFA’s Business Conduct Committee.
• Member or Associate Responsibility Action
– Summary action issued by NFA’s President and Executive
Committee to protect the markets, customers or other Members or
Associate from eminent harm.
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Proceedings and Sanctions
• Proceedings after the Issuance of a Complaint:
– Settlement
– Hearing
• Sanctions Available under NFA Rule 3-14:
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Expulsion or suspension
Bar or suspension from association with NFA member
Censure or reprimand
Monetary fine
Cease and desist order
Other penalty or remedial action
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
NFA Examination Program
• Annual examinations of FCMs and FDMs holding customer
funds.
• Risk-based examination of remaining Members
-
Exams are targeted and scheduled for identifiable, measured
risk-based reasons.
Based on data collected from Members and on information
learned about Members
- Registration records
- Questionnaires
- Financial statements
- Customer complaints
- Other disciplinary actions
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
NFA Examinations - Swaps
• NFA has 104 Provisionally Registered SDs and 2
Provisionally Registered Major Swap Participants. (as of Sep
3)
• NFA commenced field exams of Swap Dealers in July 2014.
• Annual examinations of SDs and MSPs.
• Exams are planned to be conducted in specific rulemaking
areas.
• The current cycle of swaps exams will focus on compliance
with the CCO rules, including the firm's CCO Annual Report.
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Current Issues and Challenges
• Dodd-Frank impact on registration requirements
– Includes swaps in definition of commodity interest
• Cleared swaps vs. futures
• Uncleared bilateral
• Security based swaps
– Results in an influx of numerous new members
• Swap Dealers, Introducing Brokers, Commodity Pool
Operators
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Current Issues and Challenges
• Swap Dealers
– Cross-border Implementation
– Capital, Margin and Segregation rules
– Position Limits
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION
Current Issues and Challenges
• Introducing Brokers
– Tape Recording / Recordkeeping
• CFTC Regulation 1.35
– Anti Money Laundering / Know Your Customer
• NFA Compliance Rule 2-9(c)
– Commissions Receivable
• CFTC No Action 13-82
CONFIDENTIAL TREATMENT REQUESTED BY NFA – NOT FOR DISTRIBUTION