The CFTC has adopted a final rule, CFTC Rule 170.17, which will require almost all IBs, CTAs and CPOs to become NFA Members. CFTC Rule 170.17 requires each person or entity registered as an IB, CTA or CPO to also be a member of a “registered futures association,” subject to a narrow exception for registered CTAs that meet the requirements of the exemption from registration set forth in CFTC Rule 4.14(a)(9). The NFA is the only registered futures association; thus, most CFTC registrants who are not NFA members will be required to become members of NFA or withdraw their registrations.
Prior to the adoption of CFTC Rule 170.17, existing CFTC rules only required FCMs, CFTC-registered swap dealers and major swap participants to be members of a registered futures association. Specifically, CFTC Rule 170.15, in the case of FCMs, and CFTC Rule 170.16, in the case of Swap Dealers and Major Swap Participants, required them to be members of a registered futures association. Prior to the adoption of CFTC Rule 170.17, no CFTC Rule explicitly required IBs, CTAs and CPOs to be NFA members. Practically speaking though, NFA Bylaw 1101 has ensured that most IBs, CTAs and CPOs in the futures industry were NFA members. NFA Bylaw 1101 provides that no member “may carry an account, accept an order or handle a transaction in commodity futures contracts for or on behalf of any non-member… that is required to be registered with the Commission as an FCM, IB, CPO, CTA. . . .” If a registered IB, CTA or CPO wanted to do futures business with an FCM, it also needed to be an NFA member pursuant to NFA Bylaw 1101.
However, NFA Bylaw 1101 only applies to those entities engaged in the futures business and does not apply to swap firm intermediaries. CFTC Rule 170.17 closes this gap and now registered IBs, CTAs and CPOs that may only be registered because of their swap business, will also need to be NFA members.
The only exception to CFTC Rule 170.17 is for registered CTAs that can rely upon the exemption provided in CFTC Rule 4.14(a)(9), which exempts from registration those CTAs that do not direct client accounts and do not provide personalized advice. Currently, there are approximately 700 registered IBs, CTAs and CPOs that are not NFA members and presumably will be affected by the new rule. CFTC Rule 170.17 will become effective on November 13, 2015 and persons subject to the new rule will have until December 31, 2015 to become NFA members.
To the extent that you have any questions regarding the matters discussed in this article, please feel free to contact the authors.
Matthew Kluchenek is a Partner at Baker & McKenzie LLP and leads the firm’s Derivatives & Futures practice group. He can be reached at matt.kluchenek@bakermckenzie.com and (312) 861-8803.
Michael Sefton is a Senior Associate at Baker & McKenzie LLP and can be reached at michael.sefton@bakermckenzie.com and (312) 861-2884.
