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: – – – – – – – 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: – – – – – – 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