Tag Archives: FCM

CFTC Adopts New Segregated Funds Rules Post PFG

In the wake of the failure of MF Global in 2011, regulators and self-regulatory organizations scrambled to assess the damage and to implement regulations to oversee how futures commission merchants (“FCMs”) manage and report segregated funds. Just as some of these rules were being implemented, the Peregrine Financial Group scandal hit, and the renewed calls for reform have likely triggered another wave of regulations.

Recent Activity on Segregated Funds

It has been a busy couple of months for rules affecting segregated funds:

July 9: The NFA brought an emergency action against Peregrine Financial Group, Inc. (“Peregrine Financial”) and Peregrine Asset Management, Inc. for, among other things, failing to demonstrate that they could meet capital and segregated funds requirements. The NFA was Peregrine Financial’s designated self-regulatory organization.

July 10: The NFA notified CPO Members holding assets at Peregrine Financial to notify the NFA of their exposure to Peregrine Financial.

July 13: The CFTC adopted the new segregated funds rules for FCMs proposed by the NFA in late May.

July 16: The NFA, following harsh criticism, announced an external review of its general audit practices and procedures, as well as its execution of those procedures with respect to the NFA’s review of Peregrine Financial’s segregated funds.

Late July: The NFA and other regulatory and self-regulatory organizations publicly discussed proposals for new rules affecting segregated funds.

New Regulations Effective September 1, 2012

The CFTC announced on Friday, July 13 that it had adopted the segregated funds rules proposed by the NFA. These rules will become effective on September 1, 2012. Below is a summary; greater details can be found on the NFA’s website here.

Policies and Procedures. All FCMs must have written policies and procedures regarding the maintenance of the firm’s residual interest in its customer segregated funds. These policies and procedures must target an amount (either by percentage or dollars) that the FCM seeks to maintain as its residual interest in those accounts and ensure that the FCM remains in compliance with the applicable segregation requirements.

Pre-Approval and NFA Notice. No FCM may withdraw, transfer or otherwise disburse funds from any customer segregated funds account exceeding 25% of the FCM’s residual interest in customer segregated funds unless (a) the firm’s CEO, CFO or other defined principal pre-approves the transaction in writing, and (b) a notice is filed immediately with the NFA.

Monthly or Semi-Monthly Reporting. All FCMs must provide NFA with certain financial and operational information on a monthly or semi-monthly basis. NFA will subsequently make some of the information publicly available on its website in the future.

Note: all of these new requirements

also apply to foreign futures and options customer secured amount funds accounts.

Proposed Rules and Procedures

Various regulators and self-regulatory organizations have put forth the following rules and procedures for discussion and possible adoption in the future:

Web-Based Balance Confirmation. A committee of self-regulatory organizations have agreed to put into place a web-based process that FCMs can use to confirm their segregated account balances. [Note: this committee includes the CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange.]

Direct e-Monitoring of Accounts. The CFTC, the NFA, and a number of self-regulatory organizations have expressed support for requiring FCMs to provide regulators with direct read-only access to the FCMs’ segregated accounts, to facilitate monitoring of account balances.

Clearinghouses. CME Group expressed potential support for having segregated funds held at clearinghouses or other depositories, with the interest being returned to the FCMs.


FCMs should be aware of the new CFTC rules that will go into effect on September 1, 2012. FCMs should also prepare for the imposition of some or all of the rules proposed by various self-regulatory organizations.


Special Reminder: CPOs Must Notify NFA of Exposure to Peregrine Financial

As mentioned above, the NFA is requiring CPO Members that hold assets at Peregrine Financial to report their exposure. Specifically, the NFA requires the following information within 48 hours of receiving the NFA notice:

• The name of each pool account held at Peregrine Financial and its NFA Pool ID number;

• The current dollar amount of pool assets held at Peregrine Financial for each pool account and the corresponding date;

• The most recent net asset value for each pool with funds at Peregrine Financial and the date of the valuation;

• Any withdrawal restrictions that the firm has implemented or plans to implement with respect to each pool.

In addition, please note that following the failure of MF Global, the NFA required CPOs to disclose the extent of their exposure in the CPO’s disclosure documents. The NFA may require a similar disclosure related to Peregrine Financial.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm with a focus on managed futures law and regulations which affect CTAs, CPOs, IBs and FCMs. Bart can be reached directly at 415-868-5345.


NFA Self-Examination Checklist 2010 | FCMs, IBs, CPOs and CTAs

Easy Step by Step Guide for NFA Member Firms

NFA Member Firms are all required to complete a yearly self-examination checklist to ensure that the Member Firm is complying with all the NFA Rules (as well as the CFTC Regulations and other applicable laws).  The NFA has provided some resources on their website.  We believe that the resources are good, but they are not easy to use for NFA Member Firms.  Accordingly, Mallon P.C. has reworked the forms into a more easy-to-use format.  Below is a description on how you should proceed with this process along with the various checklists that each Member Firm should print off and complete.

All of the checklists below are based on, and contain the same information, as the NFA checklists which can be found here.

Overview of Process

The whole process should take anywhere from 1 to 3 hours (or more) depending on the exact structure of the NFA Member Firm.  Firm authorized personnel should complete the following steps:

  1. Print off the General Checklist
  2. Print off the Registration Specific Checklist
  3. Print off the Attestation Sheet
  4. Go through the checklists step by step and write notes and initial the appropriate areas.  If a certain area is not applicable, write N/A.
  5. Sign the Attestation Sheet
  6. File the Checklists according to the Firm’s internal compliance procedures

If there are compliance issues which arise during the course of the self-examination process, please record the issue and how the issue has been or will be addressed.  Do not try to cover up the issue – the NFA is more interested in the fact that a firm identifies and appropriately deals with compliance issues than a firm that has a perfect self-exam checklist (through a cover-up).  Do not be afraid to take ample notes in the appropiate places on the checklist – this will show the NFA examiners that the Firm is committed to thinking about the relevant compliance issues.

* Note: there are other yearly compliance procedures that a firm will need to complete in addition to the self-examination checklist.  For more information, please see the Mallon P.C. NFA Compliance Guide or contact your compliance consultant.  Please note that the compliance guide may not cover all compliance requirements.


Each Member Firm will need to complete at least two checklists – (1) a general NFA Member Firm checklist and (2) a specific registration category checklist (i.e. FCM, IB, CPO, CPA).

General Checklist

Registration Specific Checklist


Each Member Firm will need to complete an attestation sheet which acknowledges that the Firm has completed the annual self-examination checklists.


Each of the checklists makes reference to certain appendices.  Below we have created links to those appendices.


Each of the checklists include acronyms.  We have listed them below for your convenience.

  • AML – Anti-Money Laundering
  • AP – Associated Person
  • BASIC – Background Affiliation Status Information Center
  • BSA – Bank Secrecy Act
  • CIP – Customer Identification Program
  • CRD – Central Registration Depository
  • DSRO – Designated Self-Regulatory Organization
  • FATF – Financial Action Task Force
  • FIFO – First-in, First-out
  • FinCEN – Financial Crimes Enforcement Network
  • NAV – Net Asset Value
  • NCCT – Non-Cooperative Countries and Territories
  • OFAC – Office of Foreign Assets Control
  • SAR – Suspicious Activity Report
  • SDN – Specially Designated Nationals
  • SPAN – Standard Portfolio Analysis

Rules & Regulations

Some of the checklists have references to certain CFTC Regulations and NFA Rules.  We have listed them below for your convenience.

  • CFTC Part 4 Regulations
  • CFTC Regulation 160
  • CFTC Interpretation #10
  • NFA Compliance Rule 2-7
  • NFA Compliance Rule 2-29
  • NFA Compliance Rule 2-30
  • NFA Bylaw 1301
  • Securities Exchange Act of 1933 – Sections 9(a), 9(b), 10(b)


Some of the checklists have references to forms and these are included below.

  • CFTC Form 40
  • CFTC Form 8-T
  • Form U5


Other related NFA compliance articles include:

Bart Mallon, Esq. of Cole-Frieman & Mallon LLP runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345