NFA Proposes New Swap Entity Identification Requirement and Waives Series 3 Exam for APs Engaged Only in Swap Activity

August 28, 2012

National Futures Association proposes amendments to its bylaws and registration rules.

On August 22, the National Futures Association (NFA) submitted to the Commodity Futures Trading Commission (CFTC) proposed amendments to NFA Bylaw 301 and Registration Rules 401 and 402. The proposed amendments would require NFA approval for existing members that are futures commission merchants (FCMs), introducing brokers (IBs), commodity pool operators (CPOs), and commodity trading advisors (CTAs) to conduct swap activities, and, most importantly, the amendments would waive Series 3 examination requirements for associated persons (APs) who are engaged in offering and selling swaps only, not listed futures or commodity options. If the proposed amendments take effect, APs of these entities who do not engage in futures or commodity options activity will not be required to pass a proficiency examination to effect their registration as an AP.[1] Unless the CFTC objects to the proposed amendments or notifies NFA of its intention to review the amendments, these rules will become effective on September 1, 2012.

Eligibility to Conduct Swaps Activities

The proposed amendment to NFA Bylaw 301 would require any FCM, IB, CPO, or CTA whose activities involve swaps to be approved by NFA as a "Swaps Firm." Additionally, any AP of a Swaps Firm that undertakes activities involving swaps must be approved by NFA as a "Swaps AP." Every approved Swaps Firm must maintain at least one principal that is also a Swaps AP.[2] The principal will not be required to pass a Series 3 proficiency examination to become an AP if he or she supervises and conducts swaps business only and is not involved in overseeing, soliciting, or transacting in listed futures or commodity options. Application for approval as a Swaps Firm and Swaps AP must be carried out through NFA's online registration system (ORS).

Proficiency Examinations

The proposed amendment to NFA Registration Rule 401 provides that an AP who limits his or her CFTC-regulated activity to swaps will not be required to take and pass the National Commodity Futures Examination (Series 3) or any proficiency examination.[3] The waiver of examination and other proficiency requirements would also extend to APs of CPOs who solicit participation in a commodity pool that invests only in swaps and not in listed futures or commodity options and to APs of CPOs who would be exempt from registration with the CFTC by virtue of conducting a de minimis business but for the commodity pool's trading in swaps.[4] In the event that a commodity pool trades a de minimis amount of futures, but its swaps trading causes the level of commodity interest trading to exceed the de minimis threshold under CFTC's exemptions from CPO registration, the AP would also be exempt from the proficiency requirements so long as the CPO applied for a waiver from NFA under Registration Rule 402. Sponsors would be required to notify NFA promptly when their status changes and ensure that APs pass the Series 3 examination at that time.

Under the proposed amendments, APs conducting a swaps business will still be required to register with the CFTC. In order to meet this requirement, Swaps Firms must file a Form 8-R and fingerprint card with NFA for each AP.


If the proposed amendments are adopted, CFTC-registered firms and their APs will have to obtain NFA's affirmative approval prior to conducting swaps activities. This will apply even if the firms and their APs are currently registered with the CFTC and registered as an NFA member or associate. However, APs that are exclusively involved in swaps activities for such intermediaries will not be required to take and pass a proficiency examination before becoming registered with the CFTC and conducting swaps activities.


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 attorneys:

New York
F. Mindy Lo

Michael M. Philipp

[1]. NFA's submission to the CFTC may be found on NFA's website.

[2]. NFA currently has similar requirements with regard to firms and APs that conduct retail forex activities. See NFA Bylaw 301(j), available here.

[3]. In its submission to the CFTC, NFA indicated that none of the existing proficiency examinations test for knowledge that is relevant to swaps activities. NFA stated that it has not ruled out creating a swaps-specific examination, but it will not do so until it has more experience regulating members' swaps activities.

[4]. See CFTC Rule 4.5(c)(2)(iii)(A), (B); CFTC Rule 4.13(a)(3). CFTC Rule 4.5(c)(2)(iii) provides an exemption from CPO registration for a registered investment company that trade-limits the aggregate initial margin it posts for its speculative commodity interest trading to 5% of the liquidating value of its portfolio or if it limits the aggregate net notional value of its speculative commodity interests trading positions to 100% of the liquidation value of its portfolio.

CFTC Rule 4.13(a)(3) provides an exemption for commodity pools exempt from registration under the Securities Act of 1933 (Private Funds) if the funds are only offered to sophisticated investors (defined in CFTC Rule 4.7) and where either the aggregate initial margin attributable to commodity interests trading (both hedging and speculative) does not exceed 5% of the liquidation value of the commodity pool's portfolio or where the net notional amount of the commodity interests trading positions do not exceed the fund's liquidation value.

For a discussion of recent revisions to CFTC Rules 4.5 and 4.13(a)(3), please see our February 10, 2012, LawFlash, "Part I: Update on CFTC Rules 4.5 and 4.13 for Registered Investment Companies and Hedge Funds," available here.