Chapter 7 Regulations Flashcards
Who is the ultimate regulator of futures trading in the United States?
Commodity Futures Trading Commission (CFTC).
Who has the authority to discipline futures industry professionals who violate and engage in activities that are not in the public interest?
CFTC and NFA
Commodity Exchange Act of 1936
Expanded government regulatory powers, making additional commodities subject to federal oversight.
2 things the Commodity Exchange Act of 1936 did
- Established criteria for licensing exchanges and designating contract markets.
- Mandated registration of firms and representatives , set rules for protecting customer funds, discouraged market manipulation, and limited excessive speculation.
When was the CFTC created?
in 1974 by the CFTC act of 1974
What does the commission of the CFTC consist of?
5 members appointed by the president to 5 year terms, subject to congressional appoval.
can a commissioner of CFTC trade futures or options?
No, it is a felony
Who regulates all Domestic Futures and Options?
CFTC
What is meant by the CFTC having a sunset provision?
Unless Congress reauthorizes the CFTCs existence periodically, the Commission would cease to exist.
What was the act passed by Congress in 2008 called and what did it do?
CFTC Reauthorization Act..
- Gave it additional duties to implement and enforce provisions under the Dodd-Frank Act.
Dodd-Frank Act
Calls for the registration and regulation of entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange transactions. Retail forex must register with CFTC as Foreign exchange dealers (RFEDS)
RFED
Registered Foreign Exchange Dealer must be registered with the CFTC under the Dodd Frank Act
Do FCMs have to register with CFTC as RFEDs
No, FCMs that are now primarily or substantially engaged in the activities of an FCM are permitted to engage in retail forex transactions without also registering as RFEDs.
APs registration
All associated persons who solicit retail off-exchange forex business must pass both the series 3 and series 34.
Who regulates Stock index futures or stock index futures options?
CFTC- Because they are futures.
What does the CFTC require regarding ethical behavior in relationships involving customers? 4
- FCMS to supervise their associated persons
- Orders for FCMS, Associated Persons, and IBs not to be executed ahead of and at disadvantage to customer orders (front running)
- Confidentiality regarding customer orders to parties not involved with executing such orders (prohibits misusing inside information)
- Prohibitions against FCMs, IBs, and APs intentionally trading the other side of specific customer orders without prior permission from the customer.
Who is responsible for the actions of exchange members relative to exchange matters?
Licensed futures exchanges.
Who does the NFA regulate?
all persons conducting futures business with the public.
The CFTC maintains exclusive rule over futures trading in the United States. The Commission seeks to prevent: 5
- Fraud
- Manipulation of futures prices
- Attempts to corner the market (buying or selling futures contracts in such volume as to gain control over price)
- Excessive speculating
- Disseminating false information
How does the CFTC protect customers assets
FCMs must segregate customer assets from the firms assets, and firms cannot use customer funds to finance their own trades or business operations.
The CFTC considers various factors in response to exchange proposals for contract market designation, including: 5
- Economic need for the futures contract
- Sufficient cash sales of the commodity to reflect fair market value
- The means to effectively prevent manipulation and maintain open markets
- Recordkeeping and filing ability, including prices, bids, offers, volume, open interest, and more, although certain data may be compiled by the clearing house.
- Access to official inspection facilities: the exchange need not provide inspection services directly, as long as inspection facilities are proximate to delivery locations and capable of determining delivery grade and other matters.
Who clears trades
Trades typically clear through an associated clearing house.
Who must register with CFTC?
All persons conduction futures business with public customers must register with the CFTC through membership in the NFA.
What is required in the NFA form 8-R for APs to register
Employment history for 10 years and 5 years of residential history
Who ultimately oversees any exchange created rule
CFTCs
Can the CFTC imposed a desired change to rules on an exchange?
yes
How does the CFTC monitor activities of futures traders?
They require daily position reporting when their futures position in a commodity exceeds a specified threshold.
What is a reporting limit?
the maximum net number of contracts that one trader or customer can hold on the same side of a given commodity without having to file daily reports.
Reporting limit features (6)
- Compares all customer long and short positions in a particular commodity
- Must file daily reports disclosing all holdings in the commodity and/or futures option until positions are less than the reporting limit.
- Position limit reports are required for both hedgers and speculators.
- Significant number of day trades or spread positions also may trigger the reporting requirement.
- FCMs must also file daily reports regarding customers with positions exceeding reporting levels.
- Exchanges must file weekly reports relative to accounts exceeding reporting levels.
What are special Accounts?
Accounts exceeding reporting limits
Speculative position limits
CFTC sets position limits to discourage manipulation and excessive speculation.
Bona Fide Hedge
a futures position substituting for a position at a later time in the physical commodity. To qualify, the futures position must be apporpriate to reduce risk. Bonafide hedge includes anticipatory hedging.
When must bonafide hedgers notify the CFTC of intent to exceed position limits.
At least thirty days before the establishment of the large position.
When did commissions become negotiable for all traders?
March 1978
What actions can the CFTC take under the Reparations Program? 3
- suspending or revoking registration
- impose civil penalties for each violation
- deny trading privileges on all exchanges
Decisions by the ALJ (admistrative law judge) can be appealed to:
the Commission and then through the U.S. Court of Appeals.
Matter requiring criminal proceedings may be referred to and what violations
the U.S. District Courth with Felony Violations punishable by a fine up to $1 million, 10 years imprisonment, or both.
What is the statute of limitations for complaints?
complaints must be filed within 2 years of the date the violation occurred or within 2 years of the date the offended party should have known about the violation.
What does the CFTC reparation provide?
an inexpensive, fair, and impartial forum to handle customer complaints and resolve disputes between futures customers and commodity futures trading professionals.
What happened in 1976
The CFTC designated the NFA as the SRO for supervising the activities of persons conducting futures business with public customers.
What is the NFAs primary responsibility
To enforce CFTC regulations
NFA membership is mandatory for: 5
- FCMs
- IBs
- CPOs
- CTAs
- APs of the above
Who can’t a member conduct business with?
suspended members or registered commodities representatives (RCRs) unless otherwise authorized by an appropriate NFA committee.
How are NFA operating costs supported?
by membership dues and small assessments on both parties to each transaction in futures or futures options.
What is dual registration
an AP of a member may become associated with another member as long as the NFA is notified
How many days after a written notice by the NFAs business conduct committee to member respondent, must a copy be submitted to the CFTC
30 days after it becomes final
Are CFTC rules automatically rules of the SROs (including NFA)
yes
What are 8 fraudulent practices prohibited by the NFA?
- Cheat, defraud, or deceive any customer.
- Bucket (i.e., hold but not execute) orders;
- Make false reports to customers
- Disseminate false or misleading information that affects futures prices
- Engage in manipulative acts or practices
- Effect trades for prohibited persons
- Misuse customer assets or engage in excessive transactions (I.E., churning)
- willfully submit false information to the NFA
When can a member or associate share directly or indirectly in customer profits or losses
only if written consent has been obtained from the customer.
4 NFA membership restrictions
- Members may only share customer profits/losses only if written consent has been obtained from the customer.
- No member or associate may conduct business with a suspended member or associate.
- Members may not imply that they have been approved, recommended, or endorsed by the NFA
- An NFA member cannot terminate his membership if he is under investigation or faces disciplinary charges by the NFA.
Who does the NFA submit an investigation of a members findings too?
the appropriate Business Conduct Committee.
In what condition must a firm notify the NFA within 10 business days
if any RCR (or the member itself) has been found by a self-regulatory organization such as FINRA to have violated securities laws or regulations or was subject to a written customer complaint involving theft o forgery.
What is a discretionary account
a member or an associate (rather than the customer) determines one or more specific terms of a transaction.
A member or an associate is not exercising discretion when the customer specifies the: 4
- Commodity
- Delivery month and year
- Number of contracts
- Whether to buy or sell
What must a customer do for a member to be able to accept an account on a discretionary basis? 3
- Request a discretionary account in writing
- Grant power of attorney (trading authorization) in favor of the person to enter the orders
- The AP handling the account must have two years of experience as a registered commodities representative, unless the AP is also registered as a commodity trading advisor.
What are CTAs exempt from?
the two year registration requirement for managing discretionary accounts.
How must a firm supervise discretionary accounts 5
- Orders must be identified as discretionary
- Must be approved by a supervisor within a reasonable time after each order is filled.
- Supervisory personnel must regularly review discretionary trading activity.
- The firm must document the proper method for conducting reviews in their manual.
- Members must keep written records of discretionary account reviews.
When is an account under third party control?
when the person entering the orders is neither the customer nor the member (firm) nor one of its APs.
Third party cannot exercise discretion unless: 2
- The member has written proof and evidence of the customers trading authorization
- The member has acknowledgement from the the customer that appropriate disclosure documents were received.
What is the exception to the third party rule?
if the third party is the customer’s immediate family. Immediate family members include spouses, parents, children, grandparents, grandchildren, brothers, sisters, aunts, uncles, nephews, nieces, and in-laws.
Immediately after receiving a customers written notice to transfer account, the carrying member must: 2
- Provide the receiving member with information confirming open positions and assets in the customers account within two business days
- transfer positions and assets to the receiving member within 3 business days following the confirmation.
Account Transfers
The transferring FCM has 2 business days to confirm positions and three more business days to transfer the customers assets, the entire transfer process takes five business days (from receipt of the customers written transfer request).
NFA Rule 2-29 (Public communication) Promotional material must include: 6
- Promotional material must balance the possibility of profit with a statement regarding possible loss.
- References to track records must state that past performance does not indicate future results.
- Recommendations must be presented as opinions rather than facts.
- NFA members must be able to demonstrate a reasonable basis for their claims and may not mislead the public with unfounded statements of opinions.
- Any promotional material that uses statistical information can do so only if the information can be proven to the NFA.
- If the material uses rate of return information, the figures must be calculated by the method required by the CFTC.
What does promotional material include?
material presented to the public concerning a futures account.
What does NFA rule 2-29 consider as Promotional material: 8
- Sales literature or other educational literature distributed to the public (whether prepared by the NFA member, AP, or another party.
- Seminar presentations and meetings and any advertising or promotional activity to encourage attendance at a seminar or meeting
- Advertising, including newspapers, magazines, radio, television, direct mail, and online computer delivery of promotional materials.
- Telephone solicitations, either cold calls or follow-ups to responses to sales leads
- Newsletters, reports, or circulars
- Prepared sales scripts, regardless of whether they are used as the basis of actual sales calls or merely for training purposes.
- Material transmitted on the internet (including email, websites, and chatroom conversations)
- Performance charts and graphs.
