Regulations Chapter 2 Overview

Key Points

• Separate Passing Requirement: Must pass regulations separately with at least a 70% on 35 regulation questions.
• Question Format: Primarily true/false questions.

Regulatory Bodies

• CFTC (Commodity Futures Trading Commission): Federal agency regulating futures.
  • Created in 1975.
  • Prevents manipulation, oversees exchanges, and approves new futures contracts.
  • CFTC employees cannot trade futures.
• NFA (National Futures Association): SRO that regulates day-to-day futures industry.
  • Similar to FINRA in securities.

Futures Firms and Roles

• Futures Commission Merchants (FCMs), Introducing Brokers (IBs), Commodity Pool Operators (CPOs), Commodity Trading Advisors (CTAs).
• Associated Person (AP): Individuals working for these firms.
• Registered Commodity Representatives (RCRs): Another term for APs.

Regulations and Compliance

• Position and Reporting Limits:
  • Reporting levels require daily reports of positions.
  • Position limits apply primarily to speculators, not bona fide hedgers.
• NFA Audits:
  • Full scope audit every 2 years, spot audits possible.
  • Firms audit branches and guaranteed IBs annually.

NFA Rules and Compliance

• Ethics Training: Firms must have a policy for ethics training.
• Exemptions: Certain FAs, CPOs, and CTAs may have exemptions from registration.
• Member Responsibility Action: NFA can enforce immediate business cessation if necessary.
• Arbitration:
  • Faster, cost-effective dispute resolution.
  • Binding decisions.

Account Opening and Maintenance

• Customer Account Requirements:
  • Must sign commodity account agreement and risk disclosure before trading.
  • Know your customer: name, age, occupation, financials.
• Discretionary Accounts:
  • Require written power of attorney.
  • AP needs 2 years of continuous industry experience.

Recordkeeping

• Retention: Most records kept for 5 years, monthly or quarterly statements based on account activity.
• Complaints: Must be retained, not public information.
• Upon Death: Liquidate positions and cancel orders.

US Patriot Act

• Reports:
  • CTR for cash transactions > $10,000; SAR for suspicious activity > $5,000.
  • Penalties include fines and imprisonment.

Study Tips

• Focus on understanding structure and roles of CFTC, NFA, and types of firms.
• Familiarize yourself with regulatory requirements and processes like audits, reporting limits, and compliance actions.
• Practice questions on regulations to ensure mastery of the material.