On August 22nd, the National Futures Association proposed amendments to NFA Bylaw 301 and Registration Rules 401 and 402 regarding swaps activity eligibility and proficiency requirements. The effect of these amendments will be to conform the particular rules in question to the requirements that apply to other types of derivatives trading activity (futures, retail forex), except as noted below.
The "Q&A" that follows is intended to provide our readers with an overview of the proposal, which will be of interest to any 1) FCM, IB, CPO or CTA that engages in swaps activities; or 2) the adviser to any mutual fund or hedge fund that may be required to register as a "commodity pool operator," due to the changes to CFTC Rules 4.5 and 4.13 adopted earlier this year.
Who will be affected by the proposals?
The proposals will affect any NFA member that:
- is registered with the CFTC as a futures commission merchant, introducing broker, commodity pool operator, or commodity trading advisor (FCM, IB, CPO or CTA, respectively); and
- engages in activities that involve swaps subject to the jurisdiction of the CFTC.
We refer to these FCMs, IBs, CPOs and CTAs as "Affected Members" for the remainder of this Q&A.
What will be required of Affected Members, if the amendments are enacted as proposed?
Every Affected Member and the associated person of these firms will need to be approved as a "Swap Firm" or a "Swap AP", respectively. Swap Firms will be permitted to engage in futures or retail forex activities. Furthermore, every Affected Member will be required to have at least one individual who is a listed principal, and is registered as an AP and designated as a Swap AP.
How will an Affected Member seek approval to be designated as a Swap Firm?
An Affected Member will seek approval to be designated as a Swap Firm by submitting an electronic filing through the NFA's Online Registration System.
What proficiency requirements will apply to Swap APs?
The NFA has not developed a new proficiency examination specific to swaps. In its explanation of the proposed amendments, the NFA expressed its view that, "none of the existing proficiency examinations test for either the product or regulatory knowledge that is relevant to swaps activities." Therefore, the proposed amendments will not require an AP who limits his/her activity to swaps to take and pass a proficiency exam in order to become a designated Swap AP.
As part of the amendments, the NFA has proposed an exemption from the proficiency requirements for an AP of a CPO that is required to be registered solely due to the firm's swaps activities. In other words, an AP will not need to be designated as a "Swaps AP" if its CPO had to register solely as a result of its swaps activities (e.g., its futures trading was within the de minimis levels under CFTC Rule 4.13 or 4.5). In order to qualify for this exemption, the CPO will need to seek a waiver on behalf of its APs.
When will these proposed changes become effective?
The proposed amendments will become effective ten days after the CFTC received the submission (approximately September 1st), unless the CFTC notifies the NFA that the CFTC has determined to review the proposals for approval. As of August 28th, the CFTC has not issued such a determination. The notice posted http://www.nfa.futures.org/ indicated that it was sent to the CFTC "via Federal Express" on August 22nd.