Registered futures commission merchants, introducing brokers, commodity pool operators, and commodity trading advisors should implement procedures to comply with the new requirements.
With the recent launch of virtual currency futures contracts, futures regulators are increasingly focusing on transactions in virtual currency and derivatives on virtual currencies. A recent example is an investor advisory issued by the National Futures Association (NFA) on December 1 alerting the public to risks involved in trading in such instruments, and the recent issuance of notices to NFA member commodity pool operators (CPOs) and commodity trading advisors (CTAs) that execute a transaction involving any virtual currency or virtual currency derivative (such as futures, options, or swaps) on behalf of a commodity pool or managed account, NFA member introducing brokers (IBs) that solicit or accept orders for a virtual currency derivative, and NFA member futures commission merchants (FCMs) for which NFA is the designated self-regulatory organization (DSRO) that offer customers or non-customers (such as proprietary accounts) the ability to trade any virtual currency futures product.
NFA began imposing new reporting requirements on December 6 when it issued a notification to FCM member firms for which NFA is the DSRO (Covered FCMs) to immediately notify NFA should a Covered FCM determine to offer its customers or non-customers the ability to trade any virtual currency futures product. NFA subsequently issued notices to IBs, CPOs, and CTAs on December 14. In the IB notification, NFA alerted IB member firms to new initial and ongoing reporting requirements applicable to IBs that solicit or accept orders for a virtual currency derivative. On the same date, NFA issued a notification to CPO/CTA member firms requiring CPOs and CTAs to immediately notify NFA the first time that the CPO or CTA executes a transaction involving any virtual currency or virtual currency derivative on behalf of a pool or managed account and thereafter report, on a quarterly basis, information regarding such trading activity. The IB and CPO/CTA initial notice and quarterly report to NFA must be provided through the firm-level section of its annual questionnaire, which now includes the new questions set forth below.
Initial Notification to NFA
A Covered FCM must immediately notify NFA if the FCM determines to offer its customers or non-customers the ability to trade any virtual currency futures product. NFA explains that Covered FCMs “should email this notification to their NFA examination manager.”
An IB, CPO, or CTA making an initial notification to NFA about its activities in virtual currency markets must answer the following questions by updating its annual questionnaire:
Daily Reporting for FCMs
Beginning December 12, Covered FCMs must report certain information, based on the prior business day, related to virtual currency futures contracts on their daily segregated report filed through Winjammer, including
NFA instructs a Covered FCM that does not offer virtual currency products or whose customers and non-customers have not engaged in virtual currency futures trading to report zero.
Ongoing IB, CPO, and CTA Quarterly Notification in the Annual Questionnaire
Beginning with the first quarter of 2018, NFA will require IBs, CPOs, and CTAs to provide a quarterly report within 15 days after the end of each quarter. The report must be made through a firm’s annual questionnaire, updated to reflect information on virtual currency transactions. An IB that solicits or accepts orders for virtual currency derivatives will be required to report the number of accounts it introduced that executed one or more trades in a virtual currency derivative during each calendar quarter. A CPO or CTA that has executed transactions involving a virtual currency or a related derivative contract must report the number of its: (1) pools or managed accounts that executed one or more transactions involving a virtual currency; and (2) pools or managed accounts that executed one or more transactions involving a virtual currency derivative during such calendar quarter.
The only explanation in the NFA notification to members for these new requirements was a reference to the recent listing of exchange-traded virtual currency derivatives and the volatility of the underlying market for virtual currencies. The reporting requirements differ amongst registrants, with Covered FCMs being subject to reporting only with respect to virtual currency futures. IBs are subject to reporting about soliciting or accepting orders in virtual currency derivatives (futures, options, and swaps), while CPOs and CTAs are subject to the most comprehensive reporting, with NFA mandating that CPOs and CTAs report about their activities in virtual currency and virtual currency derivatives (futures, options, and swaps). NFA did not explain the rationale for the inconsistent product scope of the reporting requirements or what it will do with the information that it is collecting. However, it is possible that NFA may elect to examine member firms that report transactions in virtual currencies and virtual currency derivatives with a focus on their sales practices or risk disclosures relating to these instruments. Covered FCMs, IBs, CPOs, and CTAs should be aware of and implement procedures to comply with the NFA’s new virtual currency notification and reporting requirements.
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:
Ethan W. Johnson
Timothy W. Levin
 NFA Notice I-17-27: Additional reporting requirements regarding virtual currency futures products for FCMs for which NFA is the DSRO (Dec. 6, 2017); NFA Notice I-17-28: Additional reporting requirements for CPOs and CTAs that trade virtual currency products (Dec. 14, 2017); and NFA Notice I-17-29: Additional reporting requirements for IBs that solicit or accept orders in virtual currency products (Dec. 14, 2017).
 The notices became publicly available on NFA’s website on December 19, 2017.