CFTC Registration Update: NFA Proposes Rules for Registrants Engaged in Swaps Activities

August 27, 2012


Dodd-Frank added swaps to the jurisdiction of the U.S. Commodity Futures Trading Commission (the “CFTC”). Extensive rulemaking has been proposed and finalized regarding swap dealers and major swap participants, but the CFTC and the U.S. National Futures Association (the “NFA”) have been less focused on how the addition of swaps affects other registrant categories.

On August 22, 2012, the NFA submitted to the CFTC proposed amendments to NFA Bylaws and Registration Rules to facilitate the NFA’s new responsibility for supervising its member firms and their associated persons (“APs”) engaged in swaps activities. The proposed amendments will become effective by the beginning of September, unless the CFTC determines to take additional time to review them.

In a nutshell, the proposal:

  • Establishes a relatively light touch process for CFTC-registered introducing brokers (“IBs”), commodity pool operators (“CPOs”), commodity trading advisers (“CTAs”), and futures commission merchants (“FCMs”) to be approved as swap firms if they engage in swap activities.
  • Requires registration of swap APs for registered swap firms, and requires each swap firm to have a principal that is a swap AP.
  • Confirms that no proficiency exam will be required for APs who engage exclusively in swaps activities.

The proposal (when effective) will not itself require registration of entities that, exclusively because of their swap activities, may be IBs, CPOs, CTAs, or FCMs.

Approvals for Swaps Activities

The NFA has proposed to amend Bylaw 301 to require a member firm whose activities involve swaps to be approved as a “swaps firm.” In addition, any AP of a swaps firm must be approved as a “swaps AP” in order to engage in swaps activities on behalf of the swaps firm. Under these amendments, an IB, CPO, CTA, or FCM may not be approved as a swaps firm unless at least one of its principals is registered as an AP and approved by the NFA as a swaps AP. Requests for approval as a swaps firm or swaps AP must be filed electronically through the NFA’s Online Registration System.

Exemption from Proficiency Exam Requirement

NFA Registration Rule 401(a) provides that a person applying for registration as an AP of a registered firm must satisfy the NFA’s proficiency requirement by passing the National Commodity Futures Examination, commonly known as the Series 3 exam. An applicant need not pass the Series 3 exam if he or she can rely on an exception to this requirement found elsewhere in the Rule or can obtain a waiver under NFA Registration Rule 402.

The NFA has proposed to amend the Rule to provide new exceptions from this proficiency requirement. New paragraph (e) of the Rule would provide that a person registering as an AP will satisfy the proficiency requirement if his or her sole activities, subject to CFTC regulation, are and will continue to be limited to:

  1. the solicitation or acceptance on behalf of the firm of orders for swaps subject to the jurisdiction of the CFTC;
  2. solicitation on behalf of the firm of funds, securities, or property for participation in a commodity pool that:
    1. exclusively trades swaps subject to the jurisdiction of the CFTC; or
    2. trades swaps subject to the jurisdiction of the CFTC in a commodity pool and the firm has been granted or is seeking a waiver from the Series 3 exam for its APs because, but for its swaps trading, it would be eligible for the exclusion under CFTC Rule 4.5 (the CPO exclusion for registered investment companies) or CFTC Rule 4.13(a)(3) (the CPO exemption for sponsors of certain private funds);1
  3. the solicitation on behalf of the firm of clients to open discretionary accounts that exclusively trade swaps subject to the jurisdiction of the CFTC to be managed by registered CTAs; or
  4. the supervision on behalf of the firm of persons whose activities are so limited.

According to its August 22 rule filing with the CFTC, the NFA has adopted these proposed exceptions because it has not developed a new proficiency exam specific to swaps. The NFA has indicated that it may do so in the future, but not until it has more experience related to regulating its member firms’ swaps activities.

If an AP wished to rely on Rule 401(e)(2)(ii), its firm would need to seek a waiver on his or her behalf pursuant to Rule 402. The waiver process typically involves submitting a written request for relief for the NFA’s consideration. Firms should expect to provide information demonstrating the necessary calculations of initial margin or notional value under CFTC Rule 4.13(a)(3) or 4.5, including how they have classified certain instruments for purposes of those calculations (e.g., whether as a swap or as some other type of commodity interest).

The NFA has also proposed amending Rule 402 to require a member firm to notify the NFA if it becomes unable to rely on a previously-granted waiver. This may present practical challenges for firms that have obtained waivers for their APs as described in Rule 401(e)(2)(ii) and later determine that their trading in commodity interests other than swaps exceeds the limits imposed by Rule 4.13(a)(3) or Rule 4.5. For instance, an AP that could no longer rely on a waiver would face the possibility of having to take and pass the Series 3 exam in relatively short order.

Rule 401(e)(4) would similarly eliminate the Series 3 exam requirement for any person who is an AP because he or she supervises individuals who must register as APs because of their swaps-related activities. We believe that the requirement to seek a waiver under Rule 402 would apply to such a “supervisory AP” of a CPO in the circumstances described above – i.e., under Rule 401(e)(2)(ii).


Please feel free to reach out to your regular contacts at the Firm if you have any questions about the matters addressed in this alert. In addition, you are welcome to contact any of the above members of the Firm’s CFTC Working Group.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:


1 Further background on these CFTC Rules and the types of instruments that would be included in the calculations thereunder may be found in our CPO/CTA Registration and Compliance Outline.

This article was originally published by Bingham McCutchen LLP.