CFTC Market Participants Division Issues Guidance on FCM Registration
The CFTC's Market Participants Division ("MPD") issued guidance to "assist entities considering registering as, or acquiring, [Futures Commission Merchants] ("FCMs")."
The MPD stated that "there have been several recent instances of entities acquiring existing FCMs via corporate transactions, including business acquisitions and asset sales" and many of these entities "have no previous registration status with the Commission and have limited to no previous experience being a financial institution subject to oversight by a federal financial regulator."
The MPD issued a set of FAQs. Briefly, here are the questions and responses to the posed questions:
1. What activities require an entity to register as an FCM?
The MPD explained that any entity that solicits or accepts orders for futures, options on futures, swaps, or retail forex, and accepts money or other assets from customers to support those orders, must register as an FCM with the CFTC. All FCMs must also become members of the National Futures Association ("NFA").
2. What is the registration process for an FCM?
The MPD explained that entities must submit a CFTC Form 7-R through the NFA, along with Form 8-R and fingerprint cards for each natural person principal and associated person. The NFA reviews the application and conducts background checks to identify any statutory disqualifications.
3. What proficiency examinations are required for FCM personnel?
The MPD explained that Associated persons must pass the Series 3 exam. If they engage in swaps activities, they must also complete NFA's Swaps Proficiency Requirements.
4. What books and records must an FCM maintain?
The MPD explained that FCMs must keep complete transaction records, communications (written and oral), and financial records under CFTC Regulation 1.35. These records must be retained for at least five years and be available for regulatory inspection.
5. What compliance procedures must an FCM implement?
The MPD explained that FCMs must adopt written policies addressing: (i) anti-money laundering (AML); (ii) business continuity; (iii) cybersecurity; (iv) promotional materials; (v) supervision; (vi) customer complaints; (vii) margin procedures; and (viii) ethics training. They must also appoint a Chief Compliance Officer and maintain a U.S. office (or an approved non-U.S. equivalent) responsible for books and records.
6. What are the minimum capital requirements for an FCM?
The MPD explained that an FCM must maintain the greater of: (i) $1 million; (ii) 8% of total risk margin; (iii) NFA minimums; (iv) SEC net capital (if also a broker-dealer). FCMs that engage in retail forex or are also swap dealers must meet higher capital thresholds, up to $100 million depending on activity.
7. What financial forms must an FCM file?
The MPD explained that applicants must submit audited or unaudited financial reports (Form 1-FR-FCM or FOCUS Report) with Form 7-R. Registered FCMs must file: (i) monthly unaudited financial reports; (ii) annual audited financial reports; (iii) daily segregation statements; and (vi) notices of certain events (e.g., undercapitalization).
8. What risk management requirements must an FCM meet?
The MPD explained that each FCM must implement a written risk management program covering: (i) segregation of customer funds; (ii) automated risk controls; and (iii) capital and liquidity planning. The program must be overseen by an independent risk unit and reviewed annually. Quarterly risk exposure reports must be filed with senior management and the CFTC.
9. What are the responsibilities of an FCM’s governing body?
The MPD explained that the governing body must approve the FCM’s risk management program and residual interest levels. It must also pre-approve any withdrawal of more than 25% of proprietary funds from customer accounts and receive regular risk reports.
10. What are the duties of the Chief Compliance Officer?
The MPD explained that the CCO must oversee the FCM’s compliance with CFTC rules, resolve conflicts of interest, and remediate compliance issues. The CCO must file a signed annual report with the CFTC detailing compliance procedures, effectiveness, issues, and resource allocations.
11. What are an FCM’s AML obligations?
The MPD explained that FCMs must comply with the Bank Secrecy Act and FinCEN regulations. Requirements include: (i) a written AML program; (ii) customer identification procedures; (iii) ongoing training and independent audits; (iv) suspicious activity reporting; and (v) procedures for responding to Section 314(a) information-sharing requests.
12. How are customers protected in an FCM bankruptcy?
The MPD explained that FCM bankruptcies are governed by the U.S. Bankruptcy Code and CFTC Part 190. Customer funds must be segregated and are prioritized over general creditors. There is no SIPC-like insurance, and customers share losses pro rata if there are shortfalls.