NFA Issues Proposal On Further Account & Client Information To Be Submitted By FX Firms

The NFA has released a proposal aimed at stepping up the amount of reporting that FCMs, FX companies and IBs

On Thursday last week, the National Futures Association (NFA) released a notification of proposed amendment to the reporting requirements which Futures Commission Merchants (FCMs), Forex Dealer Members (FDMs) and Introducing Brokers (IBs) are required to submit.


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The United States’ regulatory bodies are well-known for their highly organized methods of overseeing the corporate behavior of the financial markets participants who provide FX services to American clients, however this proposed reporting requirement represents the NFA’s wish to ensure all surveillance carried out, both manual and automatic, is as detailed as possible.

Risk Management System Requires Concise Trade Information

FX firms registered as FDMs, as well as IBs and FCMs will, according to the NFA’s proposal, be subject to the responsibility of submitting newly required information which covers a broad range of areas including FCM and FDM operations, risk management practices, customer account data, product concentration, and business relationships, and will be collected through the daily segregation report or the daily forex report, with each report populating the appropriate questions on a daily, monthly or quarterly basis.

Some examples of the new information which the NFA intends to request from its members include information on margin deficiencies, customer and house funds held outside of the U.S., customers that make up more than 5% of segregation requirement, any single segments that customers trade in and the percentage of customer base in each segment, and any current litigation against the firm or its principals.

Calculated Surveillance

The NFA intends to invoke the new ten-day provision of Section 17 of the Commodities Exchange Act (CEA), and will make these proposals effective ten days after receipt of the submission by the Commodity Futures Exchange Commission (CFTC) unless the CFTC determines that it has reason to review the proposals for approval.

The ten-day reveiew procedure is a directive used by the CFTC which gives it ten working days in order to determine whether a rule should be submitted for prior approval.

Currently, the NFA uses an automated risk management system which analyses the information which the NFA collects about its members, and quantifies the information to a risk score for the firm in order to determine and prioritize the NFA’s surveillance measures according to the specific risk score achieved by each market participant.

The risk management system is used primarily to prioritize NFA’s examinations of fully disclosed FCMs, IBs, commodity pool operators and CTAs.

The system also generates nightly alerts for all categories of membership, including FCMs that hold customer funds and FDMs, which staff reviews the next day to determine whether further follow-up is necessary.

The risk management system also supplements NFA’s day-to-day risk surveillance of each FCM that holds customer funds and each FDM, which has a Compliance Manager assigned to it who is responsible for reviewing specific information relating to that FCM or FDM on a daily basis. The manager is also responsible for reviewing the FCM’s/FDM’s monthly financial information and identifying any concerning information or trends.

NFA staff, in consultation with NFA’s Compliance and Risk Committee (CRC), has identified additional FCM and FDM financial and operational data that NFA should collect from FCMs that hold customer funds, and for which NFA is the DSRO and FDMs in order to enhance the RMS and provide managers with additional material information for their ongoing manual monitoring.

This information, as well as key information that NFA currently collects, will be presented to managers in a comprehensive FCM or FDM “profile report” displaying all key operational, financial, risk management, personnel, information about a particular FCM and FDM.

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Once implemented, managers will be able to generate an updated profile report at any time for monitoring purposes and examination staff will be able to generate the profile report to assist the team in preparing for an examination involving the FCM or FDM.

Resource-Hungry Reporting

In order to implement the new reporting requirements, NFA has amended NFA Financial Requirements Section 8 to specifically require FCMs for which NFA is the DSRO and FDMs to file the financial, operational, risk management and other information required by NFA in the form and manner prescribed by NFA.

The NFA has stated that it will notify the affected members of the specific additional information reporting requirements through a Notice to Members, which will inform firms of the new requirements and provide them with a list of additional information that will be requested, and whether the information must be reported on a daily, monthly or quarterly basis.

It has been recognized by the NFA that affected firms will need to devote more resources to complete their regulatory filings because of the newly required information.

Therefore, NFA simplified the process and, as noted above, plans to collect the additional information through the existing daily segregated funds report or daily forex report.

The NFA stated that it believes that the profile document will significantly enhance NFA’s risk management tools by providing managers and other examination staff with a complete summary of all information NFA has determined is important to understanding the risk profile and operations of FCMs and FDMs.

Amendment To Settlement Procedure

In addition to the proposed reporting procedure amendments, the NFA set in place a change to the settlement process with regard to securities, and the risk disclosure procedure which is used in conjunction with the new procedure for settlement.

The NFA recently received contact from OneChicago, LLC which is an electronic exchange, partially owned by Interactive Brokers and CME Group, in order to request that the NFA considers amendment of the risk disclosure statement because it plans to offer a new product that has a different settlement process.

Therefore, the amendment makes a minor change to the settlement section of the risk disclosure statement to reflect the new settlement process.

In addition, FINRA intends to make the same modifications to its risk disclosure statement to cover its members.




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