CFTC Proposes NFA Membership Required for All Registered Intermediaries

The CFTC has proposed for comment, CFTC Rule 170.17, which would require all IBs, CTAs and CPOs become members of a registered futures association. The NFA is the only futures association registered with the CFTC. Until recently, CFTC Rule 170.15, which requires that all FCMs be members of the NFA, and NFA Bylaw 1101, which provides that no NFA Member may "carry an account, accept an order or handle a transaction" on behalf of any "non-member" of NFA, ensured that almost all CFTC registrants were also members of NFA. However, as a result of the Dodd-Frank Act, swap firm intermediaries may not have had to do business with FCMs, and therefore, would not have been required to be NFA members under CFTC Rule 170.15 and NFA Bylaw 1101. Comments on the proposed rule are due by January 17, 2014.

Futures Industry Announces Insurance Study Results on Customer Protection

The NFA, FIA, CME Group and the Institute for Financial Markets have released the results of an insurance study on the feasibility of customer asset protection insurance (CAPI) on customer losses resulting from the failure of a futures broker. The study was conducted by Compass Lexecon, a financial consulting firm and focused on four different insurance models: (1) CAPI for individual customers by primary insurance carriers, (2) CAPI for customers of particular FCMs which purchase insurance policies covering all of their customers, (3) CAPI for customers of FCMs opting to participate in insurance offered by a primary insurer and backed by reinsurance, and (4) CAPI for all customers provided pursuant to a government program similar to SIPC.

Generally, Compass Lexecon found the first two insurance based models not feasible based on costs and problems with the business model. For the third model, insurers and reinsurers provided a model plan which would cover up to a total of $300 million in customer claims per year for participating FCMs with a limit of $50 million per loss in claims covered per FCM. In the third model, total premiums for participating FCMs ranged from $3 million to $4.5 million for six FCMs and customer costs were calculated to be between six to nine percent of anticipated losses. The fourth model proposed the establishment of the Futures Investor and Customer Protection Corporation (FICPC) based on the current SIPC structure for the securities industry. This model would cover the first $250,000 of each customer 's losses with a target funding level of $2.5 billion. The funding level would be covered by payments by FCMs of 0.5 percent of each FCM's annual gross revenues. Based on current revenues, the study found that it would take 55 years for FICPC to be self-funded. Until such time that the target funding level is met, government funds would be required to act as supplemental funding to make up any difference.