As your industry advocate, the NIBA provides many services which help your business stay in compliance with NFA regulations. “Ask the NFA,” is the way you can ask questions about those regulations and compliance requirements without having to call NFA directly. Just email us at nfacomments@theniba.com and we will get the answers for you. Please keep in mind the purpose of this contact is to keep the lines of communication between the NFA and NIBA members.
This month’s questions were selected from those submitted by NIBA members. The answers were supplied by NFA staff.
What are the guidelines for commission to equity ratios and do those change if a customer is trading with a CTA?
NFA reviews commission to equity ratios during examinations. NFA does not have an established ratio that may or may not be acceptable. Rather, NFA views several factors in evaluating whether a ratio raises red flags and may be unacceptable, including the nature of the customer, trading methodology, service provided, performance, trading frequency, and whether the account is discretionary or non-discretionary, among others. The same factors are considered if a customer is trading with a CTA.
NFA's Interpretive Notice entitled Supervision of Branch Offices and Guaranteed IBs also states that commission to equity ratios should be calculated for discretionary accounts to detect possible excessive trading. This Interpretive Notice describes the minimum standards for a supervisory program for branch offices and guaranteed IBs.
My firm is required to tape under the new rules. Our system from time to time malfunctions at no fault of our own. Is this a problem or if we address and document right away are we ok? Do you guys recommend any systems that you know of that function without any glitches?
In 2013, the CFTC amended CFTC Regulation 1.35 to require certain IBs*, among other Members, to keep a record of (and therefore tape record) all oral communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, mobile device, or other digital or electronic media for a period of one year. The CFTC's rulemaking made clear that any conversation must be recorded if it meets the content described in Regulation 1.35(a), regardless of whether it occurred on a firm provided or personal phone. While NFA does not make third-party system recommendations, NFA does recommend firms do their due diligence with all third-party vendors.
If an IB subject to these requirements experiences a system malfunction, contact NFA (information@nfa.futures.org or 312-781-1410 or 800-621-3570). Any situation of a system malfunction leading to a failure to comply with NFA and CFTC recordkeeping requirements will be evaluated on a case-by-case basis.
*CFTC Regulation 1.35 provides two limited exceptions to the requirement
