Registration requirements

Question 1

CFTC functions

Answer 1

P prevent the manipulation of futures and options prices;
P establish and enforce customer protection rules and minimum financial and ethical standards for commodity firms and professionals;
P prohibit the spread of false and misleading market information;
P approve new futures and options contracts;
P regulate exchanges and floor members; and
P provide for settlement of customer claims.

Question 2

Regulation by exchanges

Answer 2

P the creation of futures contracts with terms that are fair and reasonable to all parties;
P rules governing trading by floor traders and floor brokers; procedures for clearing and margining trades;
P rules ensuring fair treatment of all market participants, including customers and members; and
P arbitration of disputes between members, or between members and customers.

Question 3

National Futures Association

Answer 3

P audit its members to insure they meet minimum financial requirements;
P enforce ethical standards and customer protection rules;
P provide for arbitration of disputes between member firms and customers;
P conduct registration screening of commodity personnel; and
P establish training standards and proficiency testing of commodity personnel.

Question 4

NFA Registration Requirements

Answer 4

All types of persons subject to CFTC regulation, other than floor brokers and floor traders, are required
to register with the NFA by filing an application and paying the appropriate fee. An annual update,
accompanied by an annual fee, is also required.

Question 5

Registration Categories

Answer 5

There are several categories of persons subject to the registration requirements. These categories are generally based on a description of the person’s business activities.

Question 6

Futures Commission Merchant (FCM)

Answer 6

All Futures Commission Merchants are required to register with the NFA. A Futures Commission Merchant is an individual or business entity (such as a partnership, corporation or trust) that solicits or accepts orders for futures or options contracts traded on an exchange and accepts money (or securities or property) from a customer to margin, guarantee, or secure the option or futures transaction.
An FCM must maintain adjusted net capital equal to, or in excess of, $1,000,000.

Question 7

Clearing vs. Non-clearing

Answer 7

Futures Commission Merchants may be either clearing or non-clearing firms, which means that they may or may not need an outside clearing firm to process their exchange executed trades. In order to become a clearing member Futures Commission Merchant, the FCM must satisfy the applicable exchange’s capital requirements and must agree to abide by exchange
rules. The exchange will conduct audits of its clearing member Futures Commission Merchants periodically.

Question 8

Omnibus Account

Answer 8

Futures Commission Merchants that are not clearing members of an exchange must open an “omnibus account” with a clearing member Futures Commission Merchant in order to have their customers’ trades cleared. The omnibus account contains trades belonging to all of the customers, and is carried by the clearing member Futures Commission Merchant on a “nondisclosed basis”. On a nondisclosed basis means in the name of the non-clearing member FCM,
not in the names of its customers. In turn, the non-clearing member Futures Commission Merchant
will issue individual confirmations, purchase and sale statements, and monthly statements to each of the customers.

Question 9

Introducing Broker (IB)

Answer 9

An introducing broker is an individual or business entity that solicits or accepts orders for futures or options contracts traded on an exchange, but does not accept money, securities or property, or extend credit to its customers. Introducing brokers may not accept customer funds in their name or in the name of the firm. IBs may accept customer funds in the name of the FCM if they have written authorization from the FCM, and the IB must keep this written authorization on file. Certain other procedures must also be followed.

Question 10

Qualified Bank Account

Answer 10

Checks received by an IB must be deposited on the day received, in a qualified bank account. A qualified bank account is an account in the name of the FCM and titled “Customer Segregated Funds.” Also, it must be a one-way account for the FCM. The introducing broker will place orders with one or more Futures Commission Merchants, who maintain the account.

Question 11

Net Capital

Answer 11

An IB must maintain adjusted net capital equal to, or in excess of, $45,000. If an IB chooses not to maintain its own net capital, it may satisfy the minimum financial requirement by entering into a guarantee agreement with a registered FCM. This agreement does not have an expiration date, continues until termination, and may be entered into with only one FCM. The guaranteed IB may introduce accounts to more than one FCM, although the guaranteeing FCM may require an exclusive agreement.

Question 12

Net Capital - An introducing broker is exempt from registration with the NFA if:

Answer 12

P it is registered and acting in the capacity of an Associated Person, Floor Broker, or Futures
Commission Merchant;
P it is registered as a Commodity Pool Operator and only operates pools; or
P it is registered as a Commodity Trading Advisor and only manages accounts under powers of attorney or does not receive per trade compensation.

Question 13

Commodity Trading Advisor

Answer 13

A Commodity Trading Advisor is an individual or business entity that, for compensation or profit, advises others on the trading of futures or options contracts. The definition of a Commodity Trading Advisor may include a person or firm who, for compensation or profit, regularly issues reports analyzing commodities.
CTAs may not accept customer funds in their name or the name of the firm. In addition, Commodity Trading Advisors may not accept customer funds to margin or place futures or options trades.

Question 14

Commodity Trading Advisor exemptions

Answer 14

Certain entities are exempt from registering as Commodity Trading Advisors, as their services are
solely incidental to the rest of their business activities. Examples include banks, accountants, newspaper reporters and publishers, and employees of business or financial periodicals. An exemption is
also available to a CTA if:
P the person is registered as a Commodity Pool Operator, or is exempt from registration as a CPO, and its advice is for the sole use of the pools for which it registered or exempt;
P it is registered as an Introducing Broker and its trading advice is solely in connection with its business as an IB; or
P it has provided advice to 15 persons or less during the preceding 12 months and has not held itself out to the public as a Commodity Trading Advisor.

Question 15

Commodity Pool Operator (CPO)

Answer 15

A Commodity Pool Operator is an individual or business entity which pools the funds of several
customers into one trading account. A CPO may accept customer funds for the purpose of trading
futures or options contracts. The funds received by a CPO from a customer must be in the name of
the pool in which the customer will participate.
Exempt from the registration requirements are pools that have less than $400,000 in contributions
and 15 participants (excluding the pool operator, trading advisors, and their immediate families).
Also exempt are pool operators who receive no compensation other than administrative expenses,
do not advertise, and operate only one pool at a time.

Question 16

Floor Broker

Answer 16

A Floor Broker is an individual who executes futures or options orders on the floor of an exchange.
Floor Brokers are exempt from NFA membership and are exempt from registration as an Associated Person.

Question 17

Associated Person (AP)

Answer 17

An Associated Person, also referred to as a registered commodity representative, is a natural person
(not a corporation or partnership) who is associated with a FCM or an IB as a partner, officer, or
employee and solicits customer orders, or supervises any person so engaged. An Associated Person
can be associated with only one FCM.
Also categorized as APs are partners, officers, or employees of a Commodity Pool Operator who
solicit funds or supervise persons who do so and partners, officers, or employees of Commodity
Trading Advisors engaged in the solicitation of a discretionary account or the supervision of persons
who do so.

Question 18

Associated Person (AP) exemption

Answer 18

An AP is exempt from registration if the person:
P is already registered as a Futures Commission Merchant, Floor Broker, or Introducing Broker;
P is registered as a Commodity Pool Operator and is to be associated with one; or
P is engaged in only the solicitation of commodity pools and is properly registered with the National Association of Securities Dealers.

Question 19

NFA Membership Requirements

Answer 19

Membership in the NFA is mandatory for all Futures Commission Merchants, Introducing Brokers,
Commodity Pool Operators, and Commodity Trading Advisors who decide on trades or place orders for customers. Any person who acts as an Associated Person of a member firm must become an NFA associate member.

Question 20

Membership Exemptions

Answer 20

A person that is exempt from the registration requirements is also exempt from NFA membership
requirements. Floor Brokers and Floor Traders are exempt from NFA membership, but are subject to the regulation of the exchange on which they have trading privileges. Commodity Trading Advisors are exempt from membership in the NFA if they do not direct or place trades for customers.
Exchanges are subject to direct CFTC oversight and are fully regulated without NFA membership.

Question 21

Dealings with Nonmembers

Answer 21

The NFA prohibits its members from doing futures related business with a suspended member.
Additionally, NFA members may not do business with a nonexempt FCM, IB, CPO, or CTA that is currently a nonmember. This enables the NFA to enforce its requirements for membership.