Customer Account Rules

Question 1

Opening Customer Accounts

Answer 1

To be able to trade commodity futures, a customer must open an account with a Futures Commission Merchant (FCM) or a Commodity Pool Operator (CPO). This can be done through an Associated Person of the FCM or CPO.

A customer may also open an account through an Associated Person of an Introducing Broker or a Commodity Trading Advisor. The Introducing Broker or Commodity Trading Advisor will then introduce the account to an FCM or CPO and will receive a commission for this service.

Question 2

Information Required

Answer 2

When opening a customer account, the Associated Person must obtain specific background information before trading begins. It is the responsibility of the NFA member who solicits the account to obtain the required information. This information includes:
P name;
P address;
P occupation;
P estimated annual income and net worth;
P approximate age; and
P previous investment and futures trading experience.
After the Associated Person obtains the background information, it must be reviewed by a branch office manager, supervisory employee, director, officer, or partner of the member firm. The supervisor must approve the opening of the account before the Associated Person can execute a trade for the customer.
The member firm may rely on the customer as the sole source for the background information.
There is no requirement that the member verify or independently check the customer’s background information.
In the event the customer refuses to provide background information other than name, address and occupation, the member firm may still open an account for the customer, as long as it makes a written record that the customer refused to reveal background information, and the account is approved.

Question 3

Transfer Agreement

Answer 3

If a customer also has a securities account with the member firm, they may enter into a transfer agreement. The transfer agreement allows the member to transfer funds from the commodities account to the securities account without contacting the customer. If a transfer agreement is not executed by the customer, such transfer may only be accomplished with the customer’s specific written consent for each individual transfer.

Question 4

Risk Disclosure Statement

Answer 4

The NFA requires that all members disclose the risks of futures trading to a customer before allowing
or executing any trade for that customer. Each member firm must furnish all customers with a standardized risk disclosure statement. The member must obtain a signed and dated acknowledgment that the customer understands the risks before opening an account for that customer. If the customer intends to trade option contracts, the firm must furnish an additional options risk disclosure statement and obtain an additional signed and dated acknowledgment.
A risk disclosure statement must be provided only the first time the customer opens an account with the NFA member. A Futures Commission Merchant’s risk disclosure statement may be used by an Introducing Broker, but the customer’s acknowledgment must be kept on file by the Introducing Broker. Each Commodity Trading Advisor and Commodity Pool Operator must print a standardized risk disclosure statement on page 1 of the disclosure document furnished to prospective customers.

Question 5

Joint Accounts

Answer 5

Joint accounts require the customers to complete a joint account form. Joint accounts may be either joint accounts with rights of survivorship, or they may be tenants in common accounts. In a joint account with rights of survivorship, if a party to the account dies, the surviving party receives the full interest in the account. With tenants in common, if a party to the account dies, the deceased person’s estate inherits his or her interest in the account. The surviving tenant receives only his or
her particular interest in the account, not the interest of the deceased tenant as well.
Example: Two individuals have a joint account in which each has a 50% interest and one of the individuals dies. In a joint account with rights of survivorship, the surviving party will own the entire account. With a tenants in common account, the surviving party will retain a 50% interest and the estate of the deceased party will own the balance.
If a member firm opens an account for an agent who is sharing in the profits of the account along with the customer, the exchange must be notified regarding the percentage of the agent’s participation. Confirmations and statements must be sent to the customer.

Question 6

Partnership Accounts

Answer 6

Partnership accounts require, beyond the documents needed to open any account, a partnership agreement authorizing one or more partners to act for the account.

Question 7

Corporate Accounts

Answer 7

Corporate accounts require a copy of the corporation’s charter and bylaws, specifying that the corporation is authorized to trade in commodity futures. A resolution of the corporation’s board of directors authorizing an individual to act for the corporation is also required.

Question 8

Trust Accounts

Answer 8

Trust accounts require a copy of the indenture specifying that the trust is eligible to trade in
commodity futures.

Question 9

Investment Company Accounts

Answer 9

Investment company accounts require the approval of the exchange before the member firm may accept them. The purpose of the approval is to insure the financial stability of the investment company and to insure that the person who is handling the trading in the account is qualified to do so. Any change in management of the investment company also requires exchange approval.

Question 10

Discretionary Accounts

Answer 10

An NFA member must obtain written consent from a customer before exercising discretion over the customer’s futures account. Written consent is generally called a power of attorney. A person is not deemed to be exercising discretion if the customer specifies the commodity, the year and delivery month of the contract, the number of contracts, and if the transaction is either a purchase or a sale.
The Futures Commission Merchant is under a continuous obligation to supervise discretionary accounts. Each trade executed pursuant to a grant of discretion must be reviewed by a principal or supervisor of the Futures Commission Merchant by the end of the day after its execution.
An Associated Person must have a minimum of two consecutive years of working experience as a registered Associated Person in order to exercise discretion over a customer account. However, this requirement does not apply to a person who is also registered as a Commodity Trading Advisor.

Question 11

Third Party Discretion

Answer 11

If discretion is to be exercised by a third party, a Futures Commission Merchant may not accept an account, and an Introducing Broker cannot introduce one, unless a copy of the customer’s written grant of discretion is obtained. The member firm must also obtain a signed acknowledgment that the customer has received a disclosure document. These requirements do not apply when the individual that owns the account and the individual exercising discretion are members of the same family.

Question 12

Margin

Answer 12

All futures contracts require a “good faith deposit” known as margin. This deposit helps reduce the
risk that one or both parties to the contract might default on their obligation. Therefore, all futures
accounts must be margin accounts.

If the price of a futures contract moves in an adverse direction causing a decrease in equity, the member firm is required to deposit additional margin. The additional margin deposit must bring the account up to the initial margin level. If the price of the futures contract moves favorably causing an increase in equity, the member firm will receive a check for the amount in excess of the
initial margin requirement from the clearinghouse.
Both the initial margin and variation margin must be deposited with the clearing house before the opening of trading on the next business day. In the event that a market is especially volatile, the clearinghouse has the right to call for variation margin during the trading session. Under these circumstances, the variation call must be answered within one hour.

Question 13

Initial Margin

Answer 13

The amount that must be deposited when buying or selling a new contract is called initial margin. It is also referred to as original margin.

Question 14

Variation Margin

Answer 14

The amount of money the clearing member firm is required to have on deposit with the clearinghouse
changes as the market price of the futures contract fluctuates. The clearinghouse will compare the margin deposit of the member firm with the current market price of the futures contract. If money is owed by the member firm, the clearinghouse will issue a call for additional margin. This call for additional margin is called a variation margin.

Question 15

Transaction Costs

Answer 15

Prior to trading, Futures Commission Merchants and Introducing Brokers must make available to
their customers information concerning the costs associated with future transactions. If fees and
charges are not calculated on a per trade or round-turn trade basis, the customer must be provided with a complete written explanation of such fees and charges. The explanation must include a reasonable example or examples of such fees and charges on a per trade or round-turn basis.
Futures Commission Merchants must provide customers with purchase and sale or confirmation
statements that include a breakdown of all fees and charges.

Question 16

Time Stamping

Answer 16

Order received by IBs and FCMs must be time-stamped upon receipt and must include the account number and order number. Options orders must also be time-stamped upon transmittal for execution. A journal or record must be kept each day that shows all commodity transactions and the name of the carrying FCM for each of the IB’s customers. If some orders are placed directly with the FCM by a customer, the IB must still keep a complete record or journal for all trades for that customer. If an IB refers a customer to an FCM but is NEVER involved in the order, then the IB is not required to keep a journal for that customer.

Question 17

Account Records

Answer 17

NFA regulations require certain records of customer accounts. Records prepared by NFA members must be kept for five years.

Question 18

Requirements for FCMs and IBs

Answer 18

A Futures Commission Merchant must promptly furnish, to each customer, a monthly statement at the close of the last business day of each month or as of any regular monthly date selected by the FCM. This applies to all accounts, except those in which there are neither open positions at the end of the statement period nor any changes to the account balance since the prior statement period.
Instead, a statement must be provided at least once every three months.
If a customer is introduced by an IB to an FCM, the daily and monthly trade confirmation statements sent to customers must show that the account was introduced by the IB and must include the names of both the FCM and the IB. These statements are required to be kept by the FCM. The IB may also keep a copy, but is not required.
If the customer is introduced to the FCM by the IB, the customer’s account form must be kept on file by both the FCM and the IB. The risk disclosure statement must be kept on file by the IB and should also be kept on file with the FCM.
An IB must give written authorization to an FCM if the FCM carries an account for affiliated persons of an IB. The FCM must give to the IB copies of statements and orders for such an account.

Question 19

Requirements for CPOs and CTAs

Answer 19

A CPO must maintain all activity statements received from an FCM. It must also maintain an itemized daily record of each commodity transaction executed for the pool.
If a CPO, CTA, or its principals has a personal account, a daily itemized record of each transaction executed for that personal account must be kept. The firm must also maintain all activity statements furnished by an FCM for that account.
Each Commodity Trading Advisor must maintain certain records at its main business office. These records should include the following:
P name and address of each client, all powers of attorney, and all other written agreements
including authorization for management fees;
P a complete list of all commodity interests for each client;
P copies of each confirmation, purchase and sale statement, and monthly statement from a
Futures Commission Merchant; and
P copies of each report, letter, circular, memorandum, publication, writing, advertisement, or other literature or advice (including texts of standardized oral presentations) and the date of first use.
It is the primary responsibility of the FCM to insure that each client of a CTA receives a monthly account statement.

Question 20

Bunched Orders

Answer 20

When an FCM receives an order from a customer, it must prepare a written record of the order (order ticket) that includes appropriate account identification. The purpose of this requirement is to prevent various forms of customer abuse, such as fraudulent allocation
of trades, and to provide an adequate audit trail that allows customer orders to be tracked through each step of the order-processing system. The rules also require CTA members to provide FCMs with the same required information. However, in the current electronic market environment, CTAs may place orders for many accounts in one order commonly referred to as bunched orders.
CTAs may place bunched orders with an FCM for different accounts and allocate those contracts
after execution. Rules require account managers to observe three requirements if allocating contracts post-execution.
1. Allocations must be fair and equitable among accounts
2. The allocation methodology must be sufficiently objective and specific to permit independent
verification of the fairness
3. Rules permit the account manager to exercise discretion over the allocation methodology,
recognizing that allocation strategies may need to vary in order to treat all customers fairly.
However, the CFTC must be able to reconstruct the allocation method sufficiently to verify
that it is not biased.
Account managers must provide allocation information to FCMs before the end of the trading day.
Account managers are required to make the following information available to customers upon request: (1) the general nature of the allocation method; and (2) summary or composite data sufficient for customers to compare their allocation and execution results with those of other relevant customers.

Question 21

Treatment of Customer Funds

Answer 21

Futures Commission Merchants and Commodity Pool Operators are the only category of registrants that may accept customer funds to trade futures contracts. A Futures Commission Merchant must segregate all customer funds from its own. Therefore, customer funds cannot be treated as the Futures Commission Merchant’s own property, and cannot be used to pay the FCM’s personal expenses.
A Commodity Pool Operator must operate its pool as a separate legal entity from that of the operator itself. Similar to a Futures Commission Merchant, a Commodity Pool Operator cannot treat customer funds as its own and must segregate them. Funds received by the CPO from customers must be made payable to the name of the pool the customer will participate in.