The CFTC has amended its Rule 1.35 to require futures commission merchants (FCMs), certain introducing brokers (IBs), retail foreign exchange dealers and certain other registrants to record all oral communications that lead to the execution of a transaction in a commodity interest. The new rule became effective on February 19, 2013, and compliance with the new oral communications recordkeeping requirement must be implemented by December 21, 2013. At the Chicago NIBA Conference on September 18, 2013, the Legal Update Panel will be discussing a number of new rules and what they mean for industry participants. Among other topics, the discussion…...
Five Ideas of CTA Due Diligence
Over the years I’ve found people perform varying degrees of due diligence of a Commodity Trading Advisor (CTA). Some may only crunch the returns of the manager. Others will only ask the CTA to fill out a due diligence questionnaire and some will do a full due diligence process on the manager including research and operational due diligence. The first two points listed are good places to start, but is not the ending point as your goal is to get as close to a full due diligence process as possible. Regarding the research/strategy component of due diligence, below are five…...
Still Stupid After All These Years
To be perfectly honest, I’m not sure any professional Fund of Fund managers anywhere would admit using any of the techniques below, much less advocating their use. That said, in my experience, these techniques are both popular and bone-stupid. Hiring People with Charisma Charisma doesn’t count. It’s not evidence. Hiring People without doing all of your Homework Many FOF managers do only part of their job and fight any suggestion that there is anything else in the world that might be of some importance. Naturally, this problem is not limited to FOF managers. Consider, as an example, that in 2008…...
Understanding an IB’s AML Program Requirements
Since April 24, 2002, NFA Compliance Rule 2-9(c) has required all NFA Member FCMs and IBs to have an anti-money laundering (AML) compliance program in place. At a minimum, the AML program must establish and implement policies, procedures, and internal controls reasonably designed to assure compliance with the applicable provisions of the Bank Secrecy Act, designate an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program, provide for independent testing for compliance to be conducted by Member personnel or by a qualified outside party, and provide ongoing training for appropriate personnel. NFA…...
Common Mistakes, Introducing Brokers and AML Procedures
Most introducing brokers (“IBs”) view their Anti-Money Laundering (“AML”) obligations quite minimally but this can be a monumental mistake. Generally IBs believe their AML responsibilities are limited to ensuring a compliance manual is on file and that annual AML training has been completed by necessary employees. This belief is typically the result of customer accounts being held and funded through a Futures Commission Merchant (“FCM”). Since client accounts are processed at an FCM, IBs take direction from the clearing firm regarding their Customer Identification Program (“CIP”). While this may make sense in some instances introducing brokers tend to rely on…...
Overview of AML Policies and Procedures for Introducing Brokers
Federal law and NFA rules require Introducing Brokers to maintain an Anti-Money Laundering program implemented by written policies, procedures and controls. NFA provides a number of materials to help IBs ensure their AML programs are compliant, including the Self-Examination Checklist, Exhibit A thereto, and other materials on NFA’s website. The AML program has several components as described below. IBs must designate one or more individuals to oversee the AML program and on an annual basis must have an independent audit of their AML program and train employees on AML procedures. 1. Customer Identification Program (“CIP”) The CIP must allow the…...
What Constitutes a Swap?
In a sense, introducing brokers act as gatekeepers to the futures and derivatives markets. Following the passage of the Dodd-Frank Act, certain OTC products which were formerly not regulated are now subject to the CFTC’s jurisdiction. Firms that deal with these products may need to be registered and the products traded may need to be cleared at an exchange. A customer may contact an introducing broker with a particular trade that it wants to make, but will probably not be concerned whether the trade is legally classified as a future, swap or forward. However, it will make a difference to…...
CFTC Issues Interpretive Letter on Regulation 1.73
Recently, the Commodity Futures Trading Commission (“CFTC”) issued an interpretive letter regarding new CFTC Regulation 1.73 and its applicability to introducing brokers (“IBs”) that enter into give up arrangements with their customers’ clearing futures commission merchants (“FCMs”). In its letter, the CFTC confirmed that the term “executing firm” in Regulation 1.73 refers to both IBs and FCMs that execute orders for customers, requiring IBs who execute give-up orders on behalf of their clients to adopt risk management procedures. Background on CFTC Regulation 1.73 By way of background, adopted in 2012 as part of the Dodd-Frank Wall Street Reform Act, Regulation…...
NFA’s Board approves expanded Fiscal Year 2014 budget
A number of factors are having a significant impact on NFA’s operating budget for Fiscal Year 2014. The substantial expansion of NFA’s regulatory duties has resulted in an 18 percent increase in NFA’s budget for Fiscal Year 2014, which begins July 1, 2013. NFA’s Board of Directors met on May 16 and approved a budget of $74 million for the coming fiscal year. One reason for the significant rise in spending is due to the registration and monitoring of new swap dealer (SD) and major swap participant (MSP) Members. NFA is currently hiring and training additional staff to manage these…...
Reporting Requirements for Memorial Day
This is a reminder that Monday, May 27, 2013 is Memorial Day. This holiday will impact your regulatory filings as follows: Daily segregated, 30.7 secured, sequestered and daily forex statements prepared as of May 24, 2013 are required to be submitted by noon on Tuesday, May 28, 2013; Daily segregated statements are not required to be prepared as of May 27, 2013; Daily 30.7 secured, sequestered and forex statements are required to be prepared as of May 27, 2013 and are required to be submitted by 12:00 noon on Tuesday, May 28, 2013. If an FCM is required to file…...