by James Welsh on September 4, 2012
The National Futures Association has submitted proposed amendments altering the NFA’s anti-money laundering requirements affecting introducing brokers and futures commission merchants.
The proposal was submitted by Thomas W. Sexton, senior vice president and general counsel of the NFA, to David Stawick, of the Office of the Secretariat at the U.S. Commodity Futures Trading Commission in Washington, D.C.
As an industry watchdog, the Chicago-based NFA keeps an eye on brokerages handing commodity, futures, and foreign exchange trades. In turn, it reports to the CFTC, a federal regulatory agency.
The new proposal affects the NFA’s Compliance Rule 2-9, the “FCM and IB Anti-Money Laundering Program,” which spells out requirements for brokers and FCMs to make certain that customers who trade through their operations are legitimate, and that money stays clean.
The rule change was suggested by the Securities and Exchange Commission, and clarifies instances in which brokers are required to apply formal Customer Identification programs to the parties in transactions.
Each commission merchant and introducing broker must adopt a written Customer Identification Program that covers individuals or entities opening new accounts as of Oct. 1, 2003. However, they are not required to apply the program to to existing customers who open additional accounts, if the broker or merchant has a “reasonable belief” that it knows the true identity of the customer.
The proposed change lays out the following guidelines for determining whether to apply CIP requirements:
For an omnibus account established by an intermediary, the commission merchant generally does not have to “look through” an intermediary to the underlying beneficiaries. In addition, if an intermediary opens an account in the name of a “collective investment vehicle” such as a commodity pool, the merchant or introducing broker is not required to apply its customer identification program to underlying participants in the pool.
In a “give up arrangement,” the clearing futures commission merchant, not a commission merchant acting solely as an executing broker, is required to apply its customer identification program to the customer.
A give up is often used to consolidate numerous small orders, or to disperse large orders. The arrangement occurs when a contract is executed by one broker for the client of another broker, which the client orders to be turned over to the second broker. The broker accepting the order from the client then collects a wire toll from the carrying broker.
The NFA proposal was submitted to the CFTC on Aug. 27 under provisions of the Commodity Exchange Act, after being approved by NFA’s board of directors on Aug. 18. It was to become effective in 10 days after being received by the CFTC, unless the commission decided closer review was needed.
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James Welsh is a financial writer specializing in compliance and securities fraud issues. He also writes the daily “Top 10/Street Patrol” column at www.thestreetsweeper.org, and had held staff editing and writing positions at daily newspapers including The Orange County Register in Southern California and The Times-Picayune of New Orleans.
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