[Federal Register Volume 78, Number 217 (Friday, November 8, 2013)]
[Proposed Rules]
[Pages 67078-67084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-26790]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 170

RIN 3038-AE09


Membership in a Registered Futures Association

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') 
proposes to amend its regulations to require that all persons 
registered with the Commission as introducing brokers (``IBs''), 
commodity pool operators (``CPOs''), and commodity trading advisors 
(``CTAs'') must become and remain members of at least one registered 
futures association (``RFA'').

DATES: Comments must be received on or before January 17, 2014.

[[Page 67079]]


ADDRESSES: You may submit comments, identified by RIN number 3038-AE09, 
by any of the following methods:
     The agency's Web site, at http://comments.cftc.gov. Follow 
the instructions for submitting comments through the Web site.
     Mail: Melissa D. Jurgens, Secretary of the Commission, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.
     Hand Delivery/Courier: Same as mail above.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.

Please submit your comments using only one method.

    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments will be posted as received to 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that you believe is exempt from disclosure under the 
Freedom of Information Act, a petition for confidential treatment of 
the exempt information may be submitted according to the procedures 
established in Sec.  145.9 of the Commission's regulations.\1\
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    \1\ 17 CFR 145.9. Commission regulations referred to herein can 
be found on the Commission's Web site, www.cftc.gov.
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    The Commission reserves the right, but shall have no obligation, to 
review, pre-screen, filter, redact, refuse or remove any or all of your 
submission from http://www.cftc.gov that it may deem to be 
inappropriate for publication, such as obscene language. All 
submissions that have been redacted or removed that contain comments on 
the merits of the rulemaking will be retained in the public comment 
file and will be considered as required under the Administrative 
Procedure Act and other applicable laws, and may be accessible under 
the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT: Andrew Chapin, Associate Director, 
Division of Swap Dealer and Intermediary Oversight, 202-418-5465, 
[email protected]; Jason Shafer, Attorney Advisor, Division of Swap 
Dealer and Intermediary Oversight, (202) 418-5097, [email protected]; or 
Hannah Ropp, Economist, 202-418-5228, [email protected], Office of the 
Chief Economist, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    Part 170 of the Commission's regulations pertains to RFAs. RFAs 
serve a vital self-regulatory role by functioning as frontline 
regulators of their members subject to Commission oversight. 
Regulations 170.15 and 170.16 require each registered futures 
commission merchant (``FCM''), and each registered swap dealer (``SD'') 
and major swap participant (``MSP''), respectively, to become a member 
of an RFA, subject to an exception for certain notice registered 
brokers or dealers.\2\ However, there is no such mandatory membership 
requirement for other registrants. In the absence of a mandatory 
membership requirement, those registrants not already members of an RFA 
are nevertheless subject to the rules and regulations of the 
Commission,\3\ and, absent this proposal, the Commission would assume 
the role performed by the RFA for this class of registrants. Currently, 
the National Futures Association (``NFA'') is the sole RFA under 
Section 17(a) of the Commodity Exchange Act (``CEA''),\4\ and it is 
also a self-regulatory organization (``SRO'').\5\
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    \2\ 17 CFR 170.15 and 170.16. See also Registration of Swap 
Dealers and Major Swap Participants, 77 FR 2613 (Jan. 19, 2012).
    \3\ See 7 U.S.C. 21(e), which specifies that any person 
registered under the CEA, who is not a member of an RFA, shall be 
subject to such other rules and regulations as the Commission may 
find necessary to protect the public interest and promote just and 
equitable principles of trade.
    \4\ 7 U.S.C. 21(a).
    \5\ SROs include designated contract markets (``DCMs'' or 
``exchanges''), swap execution facilities (``SEFs''), registered 
futures associations, and derivatives clearing organizations 
(``DCOs''). Among other things, SROs maintain and update a 
standardized audit program and coordinate audit and financial 
statement surveillance activities over firms that are members of 
more than one SRO.
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II. Proposed Regulation

    Section 8a(5) of the CEA authorizes the Commission to promulgate 
such regulations as, in the judgment of the Commission, are reasonably 
necessary to effectuate any of the provisions, or to accomplish any of 
the purposes, of the CEA.\6\ Section 17(m) of the CEA permits the 
Commission to require membership in an RFA if the Commission determines 
that mandatory membership is necessary or appropriate to achieve the 
purposes and objectives of the CEA.\7\ Pursuant to its statutory 
authority, the Commission hereby proposes to amend Part 170 by adding 
Sec.  170.17 to require each person registered as an IB, CPO, or CTA to 
become and remain a member of an RFA based on its preliminary belief 
that such membership is necessary or appropriate to ensure 
comprehensive and effective market oversight which is applied 
consistently to all registered intermediaries.
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    \6\ 7 U.S.C. 12a(5).
    \7\ 7 U.S.C. 21(m).
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    The Commission previously promulgated Sec.  170.15 to require, 
subject to an exception for certain notice registered securities 
brokers or dealers, that all persons registered with the Commission as 
FCMs must become and remain members of at least one RFA.\8\ NFA Bylaw 
1101 states that no member of NFA may ``carry an account, accept an 
order or handle a transaction'' in commodity futures contracts for, or 
on behalf of, any non-member of NFA that is required to be registered 
with the Commission as, inter alia, an IB, CPO, or CTA.\9\ Accordingly, 
any IB, CPO or CTA required to be registered that desires to conduct 
business directly with an FCM must become a member of NFA, and 
derivatively, must ensure that it conducts business only with those 
IBs, CPOs or CTAs that also are NFA members. Therefore, given the NFA's 
status as the sole RFA under Section 17(a) of the CEA, at the time it 
was proposed, the Commission noted that Sec.  170.15 would operate in 
conjunction with NFA Bylaw 1101 to assure essentially complete NFA 
membership from the universe of commodity professionals: FCMs, CPOs, 
CTAs and IBs.\10\
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    \8\ Membership in Registered Futures Association, 72 FR 2614 
(Jan. 22, 2007).
    \9\ NFA Bylaw 1101 is available at: http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=BYLAW%201101&Section=3.
    \10\ Membership in a Registered Futures Association, 71 FR 64171 
at n.7 (proposed Nov. 1, 2006). The Commission notes that proposed 
Sec.  170.17, like Sec.  170.15 and Sec.  170.16, does not directly 
require associated persons (``APs'') to join a RFA. This is because 
APs must be sponsored by one of the aforementioned entities.
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    In proposing new Regulation 170.17, the Commission recognizes that 
due to recent changes to the CEA, Sec.  170.15 and NFA Bylaw 1101 will 
no longer assure NFA membership for all IBs, CPOs or CTAs. In 
particular, the Dodd-Frank Wall Street Reform and Consumer Protection 
Act (``Dodd-Frank Act'') amended the CEA to establish a comprehensive 
new regulatory framework for swaps.\11\ The new regulatory framework 
provides that, among other things, entities that engage in regulated 
activity with respect to swaps will be required to register with the 
Commission as IBs, CPOs, or CTAs, as appropriate. However, due to the 
unique nature of swap transactions, it may be possible for these 
Commission registrants to serve clients without interacting with a firm 
that ``carries an account,'' e.g., an FCM or an SD who

[[Page 67080]]

accepts customer funds. For example, a CTA may advise a ``special 
entity'' on swaps in the capacity of an ``independent advisor,'' 
pursuant to section 4s(h)(5) of the CEA,\12\ or a CPO may operate a 
pool that trades only swaps that are not cleared through a DCO. As a 
result, these registrants would not be captured by the intersection of 
Sec. Sec.  170.15 or 170.16, and NFA Bylaw 1101, and would not be 
required to become members of NFA.
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    \11\ Public Law 111-203, 124 Stat. 1376 (2010).
    \12\ See, e.g., Business Conduct Standards for Swap Dealers and 
Major Swap Participants with Counterparties, Final Rule, 77 FR 9734, 
9825 (Feb. 17, 2012).
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    Proposed Sec.  170.17 would eliminate existing gaps in the 
regulatory oversight programs established by the Commission and NFA. 
The proposed rule would advance the Commission's effort to create an 
oversight regime that levels the playing field by ensuring consistent 
treatment of all its registered intermediaries, including FCMs, SDs, 
MSPs, IBs, CPOs, and CTAs.
    In sum, consistent with Sections 8a(5) and 17m of the CEA, the 
Commission preliminarily believes that the proposed rule is necessary 
or appropriate to facilitate comprehensive and effective market 
oversight by NFA in its capacity as an SRO. By mandating membership in 
an RFA by each person registered as an IB, CPO, or CTA, the proposed 
rule would enable NFA to ensure compliance with Section 17 of the CEA, 
and rules and regulations thereunder. As the only RFA, NFA serves as 
the frontline regulator of its members, subject to Commission 
oversight. Without mandatory membership in NFA or another RFA, 
effective implementation of the programs required by Section 17 of the 
CEA and NFA's self-regulatory programs could be impeded.

III. Request for Comment

    To ensure that the proposed rule would, if adopted, achieve its 
stated purpose, the Commission requests comment generally on all 
aspects of the proposed rule. Specifically, the Commission requests 
comment on the following:
    (1) Regulation 4.14(a)(9) was adopted on March 10, 2000.\13\ 
Regulation 4.14(a)(9) provides that a person is not required to 
register as a CTA if it does not: (i) Direct any client accounts; or 
(ii) provide commodity trading advice based on, or tailored to, the 
commodity interest or cash market positions or other circumstances or 
characteristics of particular clients. This exemption from CTA 
registration generally pertains to persons only providing advice to the 
general public, such as in a newsletter, and not to specific clients. 
When adopted, Regulation 4.14(a)(9) did not require CTAs to de-register 
who were, at the time, registered with the Commission, but who could 
avail themselves of 4.14(a)(9). Therefore, many CTAs are currently 
registered with the Commission even though they qualify for an 
exemption from Commission registration pursuant to 4.14(a)(9). Should 
entities who are currently registered with the Commission but otherwise 
qualify for a Rule 4.14(a)(9) exemption be required to become members 
of NFA? If not, why?
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    \13\ Exemption from Registration as a Commodity Trading Advisor, 
65 FR 12938 (March 10, 2000).
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    (2) The Commission has not identified an impact on the risk 
management decisions of market participants as a result of the proposed 
regulation, but seeks comment as to any potential impact. Will proposed 
Sec.  170.17 impact, positively or negatively, the risk management 
procedures or actions of intermediaries?

The Commission further requests comment on the specific questions 
included throughout this release.

IV. Administrative Compliance

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \14\ imposes certain 
requirements on Federal agencies, including the Commission, in 
connection with their conducting or sponsoring any collection of 
information, as defined by the PRA. This proposed rulemaking would 
result in an amendment to existing collection of information OMB 
Control Number 3038-0023.\15\ The Commission is therefore submitting 
this proposal to the Office of Management and Budget (``OMB'') for 
review. If adopted, responses to this collection of information would 
be mandatory. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
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    \14\ 44 U.S.C. 3501 et seq.
    \15\ See OMB Control No. 3038-0023, http://www.reginfo.gov/public/do/PRAOMBHistory?ombControlNumber=3038-0023.
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    Registration with the Commission requires each applicant for 
registration to, among other things, file a Form 7-R providing basic 
background and contact information.\16\ The proposed regulation would 
not require affected IBs, CPOs, and CTAs to register with the 
Commission, but only to become a member of the NFA.
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    \16\ The Commission has designated NFA to receive Form 7-R 
submissions on its behalf. The Commission notes that application for 
NFA membership is incorporated in Form 7-R.
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    As of April 11, 2013, NFA has indicated that 53 CPOs, CTAs, and IBs 
have applied for or have been approved for Commission registration 
solely because of their activity in the swaps market.\17\ Furthermore, 
NFA indicated to the Commission that, as of April 11, 2013, there are 
756 non-FCM registrants that are currently registered with the 
Commission, but are not NFA members.\18\ Therefore, based on current 
information provided by NFA, the Commission estimates that there may be 
a total of 809 respondents affected by this proposed rule, and 
accordingly, the Commission preliminarily believes that OMB Collection 
3038-0023 needs to be adjusted to account for an increase in the number 
of respondents. The proposed regulation would otherwise not impact the 
burden estimates currently provided for Collection 3038-0023.
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    \17\ Data provided by NFA was used in estimating this figure. 
Specifically, the data shows that, on April 11, 2013, there were 5 
IBs, 1 IB/CTA, 30 CPOs, 8 CTAs, and 9 CPO/CTAs who indicated that 
they transact exclusively in swaps.
    \18\ Data provided by NFA was used in estimating this figure. 
Specifically, the 756 figure is calculated by adding the following 
(as of April 11, 2013, the total number of registered firms without 
NFA membership): 20 IBs, 1 IB/CPO, 2 IB/CTAs, 59 CPOs, 628 CTAs, and 
46 CPO/CTAs.
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    The Commission seeks comment about the total number of respondents 
that it estimates may be impacted by the proposed rule, i.e., the 
Commission's preliminary estimate of 809 potential respondents. In 
particular, the Commission seeks comment as to the number of persons 
who have registered or plan to register as CTAs, CPOs, and IBs in order 
to serve the swap market exclusively and would be required to register 
with the Commission as a result of their activity in uncleared swaps 
(i.e., would not otherwise be captured by the aforementioned interplay 
of CFTC Sec. Sec.  170.15 and 170.16 and NFA Bylaw 1101).
Information Collection Comments
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the reporting burdens discussed above. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
in order to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including the information will have practical utility; 
(2) evaluate the accuracy of the Commission's estimate of the burden of 
the proposed collection of information; (3) determine whether there are 
ways to enhance the

[[Page 67081]]

quality, utility, and clarity of the information to be collected; and 
(4) minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Comments may be submitted directly to the Office of Information and 
Regulatory Affairs, by fax at (202) 395-6566 or by email at 
[email protected]. Please provide the Commission with a copy 
of submitted comments so that all comments can be summarized and 
addressed in the final rule preamble. Refer to the ADDRESSES section of 
this notice of proposed rulemaking for comment submission instructions 
to the Commission. A copy of the supporting statements for the 
collections of information discussed above may be obtained by visiting 
RegInfo.gov. OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this document in the Federal Register. Therefore, a comment is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act \19\ requires that agencies consider 
whether the rules they propose will have a significant economic impact 
on a substantial number of small entities and, if so, provide a 
regulatory flexibility analysis respecting the impact.
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    \19\ 5 U.S.C. 601 et seq.
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1. CPOs
    The Commission has previously determined that CPOs are not small 
entities for purposes of the Regulatory Flexibility Act.\20\ 
Accordingly, the Chairman, on behalf of the Commission, hereby 
certifies pursuant to 5 U.S.C. 605(b) that the proposed rules will not 
have a significant economic impact on a substantial number of small 
entities with respect to these entities.
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    \20\ Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
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2. IBs and CTAs
    The Commission has previously determined to evaluate within the 
context of a particular rule proposal whether all or some IBs or CTAs 
should be considered to be small entities and, if so, to analyze the 
economic impact on them of any such rule.\21\
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    \21\ See, with respect to commodity trading advisors, 47 FR at 
18620, and see, with respect to IBs, Introducing Brokers and 
Associated Persons of Introducing Brokers, Commodity Trading 
Advisors and Commodity Pool Operators; Registration and Other 
Regulatory Requirements, 48 FR 35276 (Aug. 3, 1983).
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    Since there could be some small entities that register as IBs or 
CTAs, the Commission is considering whether this rulemaking would have 
a significant economic impact on these registrants. The proposed rules 
would require all CTAs and IBs who register with the Commission to 
become members of an RFA. As previously noted, this would require CTAs 
and IBs to ``check a box'' on Form 7-R and ensure they are prepared for 
an NFA audit.\22\ However, as discussed below, the Commission 
preliminarily believes that any costs associated with preparing for an 
audit by the NFA should not be substantially different from, or 
significantly exceed, the costs associated with preparing for an audit 
by the Commission, which every registered entity would already be 
responsible to do.\23\ To the extent that this proposed rule only 
pertains to CFTC registrants, the Commission preliminarily believes 
that any audit-related costs incident to NFA membership would be 
minimal, and should not have a significant economic impact on IBs, 
CPOs, or CTAs that are small entities. Consequently, the Commission 
finds that there is no significant economic impact on IBs or CTAs 
resulting from this rulemaking.
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    \22\ See infra note 28. As stated in the booklet titled ``NFA 
Regulatory Requirements: For FCMs, IBs, CPOs, and CTAs,'' NFA audits 
have two major objectives: (1) To determine whether the firm is 
maintaining records in accordance with NFA rules and applicable CFTC 
regulations; and (2) To ensure that the firm is being operated in a 
professional manner and that customers are protected against 
unscrupulous activities and fraudulent or high-pressure sales 
practices.
    \23\ The Commission believes that many of the recordkeeping 
obligations associated with preparing with a NFA audit are already 
required for Commission registrants. For example, Sections 4.23 and 
4.33 of the Commission's Regulations are recordkeeping requirements 
associated with registered CPOs and CTAs, respectively. Moreover, 
given the average periodicity for NFA audits, the magnitude of 
annual audit-related costs is limited.
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    Accordingly, for the reasons stated above, the Commission 
preliminarily believes that the proposal will not have a significant 
economic impact on a substantial number of small entities. Therefore, 
the Chairman, on behalf of the Commission, hereby certifies, pursuant 
to 5 U.S.C. 605(b), that the proposed regulations being published today 
by this Federal Register release will not have a significant economic 
impact on a substantial number of small entities.

C. Considerations of Costs and Benefits

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing an order. Section 15(a) further specifies that 
the costs and benefits shall be evaluated in light of the following 
five broad areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations.
1. Background
    As discussed above, prior to the Dodd-Frank Act, the intersection 
of Sec.  170.15 and NFA Bylaw 1101 effectively required most CFTC-
registered intermediaries to be members of NFA. Because NFA Bylaw 1101 
provides that NFA members transacting futures business on behalf of 
customers cannot transact with non-members, and Sec.  170.15 requires 
all FCMs to be NFA members, any IB, CPO, or CTA that engages with an 
FCM is required to maintain NFA membership in order to transact in 
futures.
    In assessing the costs and benefits of the proposed rule, the 
Commission, in consultation with the NFA, has identified the following 
typical scenarios in which, under the current Commission regulations 
and NFA rules, a firm is registered with the Commission, but is not an 
NFA member:
     A firm that is no longer in business, but subject to 
Commission action, is prohibited from withdrawing its registration with 
the Commission until after the Commission action is resolved, but, 
since the firm no longer actively participates in the futures markets, 
it has withdrawn its NFA membership (in other words, a firm has a 
``withdrawal hold'');
     A firm that is not ready to commence business as a CTA 
and/or CPO first becomes registered in order to complete the more 
complex process of being properly vetted for registration, and then 
adds membership later when it is preparing to commence trading and to 
submit a disclosure document to NFA for review;
     When an NFA member firm no longer has at least one 
principal who is registered as an AP of the firm, NFA rules provide 
that the firm's membership can be withdrawn if the situation is not 
corrected. If the firm does not re-attain NFA membership by adding a 
new principal who is an AP of the firm, typically the firm's 
registration is subsequently withdrawn as well;
     CTAs that do not manage accounts consistent with the 
parameters of

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Sec.  4.14(a)(9) register with the Commission, but are not required to 
become members of NFA and thus do not become members of NFA.
    Moreover, the Dodd-Frank Act amended the CEA to establish a 
comprehensive new regulatory framework for swaps markets. Accordingly, 
an intermediary that was previously not required to register with the 
Commission because its activities were limited to swaps may now be 
required to register with the Commission. However, unlike futures 
transactions, because some swaps can be entered into bilaterally and 
not be cleared through a central counterparty (in other words, will not 
necessarily require the use of an FCM, SD, or MSP), the intersection of 
Sec. Sec.  170.15 and 170.16 and NFA Bylaw 1101 may not require an IB, 
CPO, or CTA who transacts only in uncleared swaps to become a member of 
an RFA.\24\
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    \24\ Under the current Regulations and NFA bylaws, an IB, CPO, 
and CTA who transacts only in uncleared swaps with another IB, CPO, 
or CTA who similarly limits its transactions to uncleared swaps, 
will not be required to become a member of NFA so long as both 
parties are (1) not members of NFA and (2) continue to transact only 
in uncleared swaps with similarly-situated entities.
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    Proposed Sec.  170.17 would eliminate these gaps in the regulatory 
oversight programs established by the Commission and NFA. In 
conjunction with Sec.  170.15, which requires all FCMs to become 
members of an RFA, and Sec.  170.16, which requires all SDs and MSPs to 
become members of an RFA, the Commission is intending to create an 
oversight regime that levels the playing field by ensuring consistent 
treatment of all its registered intermediaries. The Commission 
preliminarily believes that the proposed regulation is necessary to 
ensure comprehensive regulation and equal oversight of all 
intermediaries.
2. Costs
    There would be certain costs associated with the proposed 
regulation. First, affected CFTC registrants would be required to 
become NFA members. The Commission understands that the process for a 
current CFTC registrant to become an NFA member amounts to checking a 
box on the CFTC registration form and updating some contact 
information; thus, the Commission preliminarily believes the cost of 
filing for membership to be less than one half-hour of labor.\25\
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    \25\ See Form 7-R, http://www.nfa.futures.org/nfa-registration/templates-and-forms/form7-r.HTML. Applications forms for NFA 
membership and Associate membership are incorporated in Forms 7-R 
and 8-R. See NFA Membership and Dues, http://www.nfa.futures.org/nfa-registration/NFA-membership-and-dues.HTML.
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    Affected entities would also be subject to certain membership fees. 
The Commission understands that NFA imposes initial membership dues and 
annual membership dues for IBs, CPOs, and CTAs. Currently, the initial 
membership dues to become an NFA member are $750 for the first year, 
and the annual dues to maintain membership are $750 per year 
thereafter.\26\
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    \26\ See NFA Membership and Dues, http://www.nfa.futures.org/nfa-registration/NFA-membership-and-dues.HTML.
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    The Commission preliminarily believes that the rule may impose 
certain compliance costs on affected entities. However, such costs 
should not be substantially different from or significantly exceed the 
costs associated with current Commission regulations. NFA members are 
subject to periodic audits by NFA. The Commission understands that NFA 
audits CPOs, CTAs and IBs every three to four years, but the frequency 
may vary depending on NFA's risk analysis.\27\ The Commission also 
understands that while the direct cost of the audit is covered by the 
annual membership dues, members may incur indirect costs associated 
with an on-site audit, e.g., preparing for the audit and providing 
staff to assist NFA staff during the audit. The Commission has 
authority to ensure all IBs, CTAs, and CPOs, registered with the 
Commission are in compliance with Commission regulations applicable to 
IBs, CTAs and CPOs as Commission registrants and to conduct on-site 
examinations of the operations and activities of IBs, CTAs, and CPOs as 
Commission registrants. Given the existing costs associated with 
ongoing compliance and examinations under the Commission regulations 
currently in effect, the Commission preliminarily believes that the 
costs associated with preparing for an audit by the NFA should not be 
substantially different from or significantly exceed the costs 
associated with preparing for an audit by the Commission, which every 
registered entity is already responsible to do (e.g., have properly 
prepared and maintained books and records available for examination at 
all times).\28\ All affected entities should expect to incur costs 
necessary to work with NFA to facilitate regulatory audits.\29\ 
Therefore, the Commission preliminarily believes that IBs, CPOs, and 
CTAs covered by the proposed rule may incur few, if any, additional 
audit-related costs by virtue of their NFA membership.
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    \27\ The Commission notes that the NFA states that it seeks to 
audit all new registrants within the first year of NFA membership, 
and periodically thereafter. See http://www.nfa.futures.org/nfa-faqs/compliance-faqs/audits/index.HTML.
    \28\ Entities that will become Commission registrants for the 
first time should expect to incur the costs of ensuring they are 
adequately prepared for an on-site examination by the Commission. 
Such costs, however, are not attributable to the present rule 
proposal.
    \29\ NFA provides a booklet titled ``NFA Regulatory 
Requirements: For FCMs, IBs, CPOs, and CTAs,'' the NFA Manual, CFTC 
Regulations, and the ``Self-Examination Checklist,'' which all NFA 
must complete on a yearly basis. All are available on NFA's Web site 
at www.nfa.futures.org.
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    Likewise, with respect to general, ongoing compliance costs, the 
Commission preliminarily believes that NFA membership would impose few 
additional costs on subject IBs, CPOs, and CTAs, because as Commission 
registrants, these participants would already be subject to the 
majority of regulations that NFA is responsible to enforce. 
Specifically, in its capacity as an SRO, NFA would act, in respect of 
entities subject to the proposed rule, as the frontline regulator for 
the programs required by Section 17 of the CEA and the regulations 
thereunder. Section 17 and those regulations, however, are applicable 
to subject entities, independent of whether they are NFA members. 
Accordingly, in the main, entities would not incur any additional 
general, ongoing compliance costs as a result of NFA membership. 
However, in certain limited situations, there may be costs associated 
with being an NFA member in excess of those costs incurred for being 
registered with the Commission. For example, the Commission's capital 
rules require that registered IBs maintain adjusted net capital equal 
to or in excess of the greatest of $45,000 [or] the amount of adjusted 
net capital required by a registered futures association of which it is 
a member.\30\ However, section 5 of the NFA Manual sets forth the 
following capital requirements for member IBs:
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    \30\ See 17 CFR 1.17(a)(1)(iii).

    (a) Each Member IB, except an IB operating pursuant to a 
guarantee agreement which meets the requirements set forth in CFTC 
Regulation 1.10(j), must maintain Adjusted Net Capital (as defined 
in CFTC Regulation 1.17) equal to or in excess of the greatest of:
    (i) $45,000;
    (ii) For Member IBs with less than $1,000,000 in Adjusted Net 
Capital, $6,000 per office operated by the IB (including the main 
office);
    (iii) For Member IBs with less than $1,000,000 in Adjusted Net 
Capital, $3,000 for each AP sponsored by the IB.\31\
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    \31\ NFA's manual is available at http://www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=SECTION%205&Section=7.

    Therefore, while the Commission preliminarily believes, as noted 
above, that comprehensive and effective market oversight conducted by 
NFA would

[[Page 67083]]

enhance market oversight and promote effective implementation of the 
CEA, the Commission recognizes that in certain limited situations, the 
requirements to be an NFA member may be more stringent, and potentially 
most costly to comply with, than the requirements associated with being 
registered with the Commission. The Commission requests comment on 
whether there are any additional situations similar to the example 
described above where the costs associated with NFA membership diverge 
from the costs of Commission registration.
    The Commission contacted NFA to determine the number of IBs, CPOs, 
and CTAs that would be directly impacted by this rule (i.e., currently 
registered with the Commission, but not currently members of NFA). NFA 
indicated to the Commission that, as of April 11, 2013, there were 756 
non-FCM firms that are registered with the Commission, but are not NFA 
members.\32\ Large percentages of the identified IBs, IB/CPOs, IBs/
CTAs, and CPOs --90%, 100%, 100% and 66%, respectively--are firms that 
are subject to a withdrawal hold. A smaller percentage of CPOs/CTAs 
(46%) and CTAs (4%) also fit within this category. This category of 
entities--i.e., those intermediaries that are subject to a withdrawal 
hold--should not be affected by the proposed regulations because they 
are, in the majority of cases, no longer in business, and, in any case, 
are not actively trading.
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    \32\ See supra note 18.
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    Relying on the information provided by NFA, the Commission 
estimates that a combined 652 entities are CFTC registrants because of 
the activities that qualify them as a CPO, CTA or IB, but are not NFA 
members, equating to an initial cost to the industry of approximately 
$489,000.\33\ In addition, the Commission anticipates a small cost to 
each firm to update the firm's registration statement and other 
paperwork necessary to become an NFA member. The Commission estimates 
annual ongoing cost to the industry of the same amount ($489,000) \34\ 
plus the indirect costs of the periodic audits, which the Commission 
cannot estimate at this time due to the entity-specific nature of the 
indirect costs incurred.
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    \33\ See supra note 18. Specifically, the 652 figure is 
calculated by adding the following (as of April 11, 2013): 2 IBs, 20 
CPOs, 605 CTAs, and 25 CPO/CTAs. To arrive at the monetary estimate, 
the 652 figure was multiplied by the $750.00 per-entity initial 
cost. The Commission notes, however, that some entities currently 
registered with the Commission may withdraw their registration 
because they are inactive in derivatives markets or for some other 
reason. As a result, the total number of affected entities may be 
reduced, and corresponding total costs associated with the proposed 
rule may be lower.
    \34\ Id.
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    The Commission also asked NFA for estimates regarding the number of 
future IBs, CPOs, and CTAs who will be required to register for the 
first-time with the Commission because of their swaps activity. NFA 
indicated that 53 firms that have applied for or have been approved for 
Commission registration have indicated they participate exclusively in 
the swaps markets.\35\ However, the Commission estimates that this 
number may increase after certain regulations affecting the 
registration status of swaps entities come into effect.\36\ Moreover, 
as described above, this regulation would directly affect the subset of 
these new entities required to register for the first time because they 
are active exclusively in the uncleared swaps market and engage with 
similarly-situated entities. The Commission preliminarily believes that 
many entities have yet to apply for registration under the Commission's 
new swaps market regime, and as such the Commission is not yet able to 
accurately determine the exact number of new registrants that will be 
affected by the proposed regulation.
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    \35\ See supra note 17. NFA indicated that on April 11, 2013, it 
had approved 52 firms that deal exclusively in swaps for 
registration as an IB, CPO, or CTA and that the IB, CPO, or CTA 
registration of 1 additional firm that deals exclusively in swaps is 
currently pending.
    \36\ For example, the Commission's final definition of the term 
``U.S. Person'' as it relates to cross-border swap transactions 
could dramatically affect the number of market participants required 
to register with the Commission.
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    The Commission requests comment on all aspects of its preliminary 
consideration of costs. Has the Commission accurately identified the 
costs of this proposed regulation? Are there other costs to the 
Commission, market participants, and/or the American public that may 
result from the adoption of the proposed regulation that the Commission 
should consider? The Commission seeks specific comment on the 
following:
     How many IBs, CPOs, and CTAs will be affected by the 
proposed regulation?
     How many entities are active only in the uncleared swaps 
markets and plan to register with the Commission--and so would need to 
become members of NFA as a result of the proposed regulation?
     What are the costs of an NFA audit? Please identify and, 
where possible, quantify such costs. Do the types of costs or amount of 
costs vary depending on whether the audit is online or onsite? Do 
market participants bear different costs with respect to NFA's periodic 
audits versus daily audits?
     Would the proposed rule result in ongoing compliance costs 
beyond those an entity would face as a result of being registered with 
the Commission? Are there any costs of NFA membership beyond those an 
entity would face as a result of being registered with the Commission?
     Are there other costs of NFA membership that the 
Commission should consider?
3. Benefits
    The proposed regulation would enable the Commission to carry out 
its obligations pursuant to Section 17 of the CEA to delegate certain 
oversight responsibility for intermediaries, including IBs, CPOs, and 
CTAs, to an RFA. As described above, the NFA cannot enforce its rules 
over registrants who do not become NFA members, and existing 
regulations would not require all IBs, CPOs, and CTAs to become NFA 
members. Thus, the Commission proposed new Sec.  170.17 to require IBs, 
CPOs, and CTAs to become NFA members analogously to how Sec.  170.15 
presently requires FCMs to become NFA members and how Sec.  170.16 
requires the same of SDs and MSPs. In so doing, the Commission 
preliminarily believes it would ensure a level regulatory playing field 
for all registered intermediaries. The proposed rule would enable the 
NFA to apply its experience as a SRO to oversee all registered IBs, 
CPOs, and CTAs.
    In addition, the Commission preliminarily believes that by 
requiring membership in an RFA, the proposed rule would result in a 
more efficient deployment of agency resources which would otherwise 
have to be used to oversee these registrants who would, without this 
rule, not be overseen by NFA.
    Moreover, by requiring all registered IBs, CPOs and CTAs to become 
NFA members, the public would benefit from NFA's developed set of rules 
and oversight capabilities to ensure the integrity of the swaps market 
and its participants. This increase in market integrity may lead to a 
corresponding increase in market participation as the public and market 
participants grow more confident in the safety of these markets. The 
Commission preliminarily believes that the proposed regulation would 
ensure that NFA has the authority necessary to fulfill its delegated 
responsibilities to provide regulatory oversight and promote market 
integrity.
    The Commission requests comment on all aspects of its preliminary

[[Page 67084]]

consideration of benefits. Has the Commission accurately identified the 
benefits of this proposed regulation? Are there other benefits to the 
Commission, market participants, and/or the public that may result from 
the adoption of the proposed regulation that the Commission should 
consider?
4. Section 15(a)
    Section 15(a) of the CEA requires the Commission to consider the 
effects of its actions in light of the following five factors:
a. Protection of Market Participants and the Public
    The proposed regulation would protect the public by ensuring that 
all registered intermediaries are subject to the same level of 
comprehensive NFA oversight. Because the entities affected by the 
proposed regulation act as intermediaries for clients, it is imperative 
that these entities be subject to proper oversight in order to protect 
customers from wrongdoing.
    The Commission seeks comment as to how market participants and the 
public may be protected by the proposed regulation.
b. Efficiency, Competitiveness, and Financial Integrity of Markets
    The proposed regulation would act to create a more level playing 
field for intermediaries, ensuring that all such registered entities 
are subject to the same level of oversight and regulatory 
responsibility. In so doing, the Commission preliminarily believes the 
integrity of markets would be enhanced.
    The Commission seeks comment as to how the proposed regulation may 
promote the efficiency, competitiveness, and financial integrity of 
markets.
c. Price Discovery
    The Commission has not identified an impact on price discovery as a 
result of the proposed regulation, but seeks comment as to any 
potential impact. Will proposed Sec.  170.17 impact, positively or 
negatively, the price discovery process?
d. Sound Risk Management
    The Commission has not identified an impact on the risk management 
decisions of market participants as a result of the proposed 
regulation, but seeks comment as to any potential impact. Will proposed 
Sec.  170.17 impact, positively or negatively, the risk management 
procedures or actions of intermediaries?
e. Other Public Interest Considerations
    The Commission preliminarily believes that proposed Sec.  170.17 
may promote public confidence in the integrity of derivatives markets 
by ensuring consistent and adequate regulation and oversight of all 
intermediaries. Will proposed Sec.  170.17 impact, positively or 
negatively, any heretofore unidentified matter of interest to the 
public?

List of Subjects in 17 CFR Part 170

    Authority delegations (Government agencies), Commodity futures, 
Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 170 as follows:

PART 170--REGISTERED FUTURES ASSOCIATIONS

0
1. The authority citation for part 170 is revised to read as follows:

    Authority: 7 U.S.C. 6p, 12a, and 21.

Subpart C--Membership in a Registered Futures Association

0
2. In subpart C, add Sec.  170.17 to read as follows:


Sec.  170.17  Introducing Brokers, Commodity Pool Operators, and 
Commodity Trading Advisors.

    Each person registered as an introducing broker, commodity pool 
operator, or commodity trading advisor must become and remain a member 
of at least one futures association that is registered under Section 17 
of the Act and that provides for the membership therein of such 
introducing broker, commodity pool operator, or commodity trading 
advisor, as the case may be, unless no such futures association is so 
registered.

    Issued in Washington, DC, on November 5, 2013, by the 
Commission.
Melissa D. Jurgens,
Secretary of the Commission.

Appendix to Membership in a Registered Futures Association--Commission 
Voting Summary

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix--Commission Voting Summary

    On this matter, Chairman Gensler and Commissioners Chilton, 
O'Malia, and Wetjen voted in the affirmative; no Commissioner voted 
in the negative.

[FR Doc. 2013-26790 Filed 11-7-13; 8:45 am]
BILLING CODE 6351-01-P