June 21, 2021

Volume XI, Number 172


June 18, 2021

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Bridging the Week: April 24 to 28 and May 1, 2017 (Registration Forms; Social Networking; Recordkeeping; Exchanges Expenses)

It was a light week for news impacting financial service industry participants, but there were still a few items of interest. Among other things, the core basic registration form required for all individual registrants with the Commodity Futures Trading Commission will be getting a minor nip and tuck after many years. Additionally, India approved and proposed many significant changes regarding its oversight of commodity derivatives participants and products. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • Registration Form for Individuals Revised by CFTC (includes Legal Weeds);

  • India Approves and Proposes Substantial Changes to Its Oversight of Commodity Derivatives Participants and Products;

  • FINRA Issues Guidance on Use of Social Networking Websites and Business Communications; and more.

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  • Registration Form for Individuals Revised by CFTC: The Commodity Futures Trading Commission approved revisions to its Form 8R – the basic application form used by individuals to register with it as an associated person of a registrant, floor broker or floor trader, or to be identified as a principal of a registrant. Among the changes to the form is the addition of a new category of individuals that could be associated with a floor trader – a s0-called “floor trader order enterer.” This new category accounts for persons who, for a floor trader’s proprietary account, execute swaps trades on a swap execution facility (click here for background in CFTC Rule 3.11(a)(1)). The revised Form 8R also accommodates recent changes to fingerprint requirements for non-US natural persons and certain outside directors of registered firms (click here to access CFTC Rule 3.21(e) and CFTC Rule 3.21(c)), as well as solicits additional disciplinary history information. The changes to Form 8R were requested by the National Futures Association and will be effective as soon as the NFA makes the new form available on its website. (Individuals have filed Form 8R electronically with the NFA since 2002.)

Legal Weeds: Registered floor traders that trade swaps for their own account solely on a swap execution facility do not have to register as a swap dealer regardless of the notional value of the swaps they have executed. (Click here to access CFTC Rule 1.3(ggg)(6)(iv) and here for CFTC Division of Swap Dealer and Intermediary Oversight No-Action Letter 13-80.) In its initially proposed Regulation Automated Trading, the CFTC recommended the mandatory registration of persons as floor traders if they engaged in algorithmic trading for their own accounts through direct electronic access on designated contract markets and they were not registered with the CFTC in any one of certain enumerated capacities (i.e., an FCM, floor broker, swap dealer, major swap participant, commodity pool operator, commodity trading advisor or introducing broker). Under a supplemental proposal made in November 2016, the CFTC recommended that the floor trader registration requirement only apply to an otherwise relevant non-registered person if the person traded 20,000 or more contracts in aggregate on a DEA basis across all DCMs on an average daily basis during the prior six-month counting period (i.e., January 1 through June 30 or July 1 through December 31). (Click here for further details regarding Regulation AT and the CFTC’s supplemental proposal.)

  • India Approves and Proposes Substantial Changes to Its Oversight of Commodity Derivatives Participants and Products: The Securities and Exchange Board of India announced it will issue unified licenses to brokers and clearing members to transact in both commodity derivative and equity markets. This follows the merger of the Forwards Markets Commission, which regulates commodity markets in India, and SEBI in September 2015. Previously, separate legal entities were required for the different businesses. Additionally, SEBI proposed to permit hedge funds to invest in commodity derivatives. Comments on its proposal regarding hedge funds will be accepted through May 20. SEBI also announced that, after a public consultation, it would soon permit exchanges to offer commodity derivative options.

  • FINRA Issues Guidance on Use of Social Networking Websites and Business Communications: The Financial Industry Regulatory Authority published guidance, including frequently asked questions, regarding the use of social networking websites by member firms and their registered representatives. Among other things, FINRA reminded members that they must be able to retain all records of interactions between their registered representatives and investors related to the firm’s business that occur on text messaging applications and chat services. FINRA’s FAQs also addressed a member firm’s responsibilities when it provides links to independent third-party content, including when such third party itself provides links to other third-party content. In its guidance, FINRA indicated that a registered representative that “likes” an unsolicited favorable comment about him or her on social media adopts such testimonial; the testimonial then becomes subject to FINRA’s communication rules, including its prohibition on the use of incomplete or misleading statements. (Click here to access FINRA Rule 2210 Interpretive Guidance FAQs and here to access FINRA Rule 2210. Click here for more detailed background on FINRA's guidance. )

  • CFTC’s DSIO Authorizes CTAs to Use Third-Party Record keepers: The Division of Swap Dealer and Intermediary Oversight issued relief exempting commodity trading advisers from having to maintain certain records regarding clients and subscribers at their main business office, as they otherwise would be required by CFTC rules (click here to access CFTC Rule 4.33 and here for CFTC Rule 4.7(c)(2)). Under the exemptive relief, CTAs may maintain required records with third-party record-keepers  although they remain responsible for the failure of such third parties to maintain books and records as otherwise required by CFTC rules. To take advantage of the relief, a CTA must file a notice of claim with DSIO. DSIO previously granted similar relief to commodity pool operators (click here to access DSIO No Action Letter 14-114).

  • CFTC’s Division of Market Oversight Issues Guidance to Exchanges on Calculating Projected Operating Costs: The Commodity Futures Trading Commission’s Division of Market Oversight provided guidance to designated contract markets and swap execution facilities on what expenses they might exclude in calculating their requirement to maintain financial resources adequate to cover operating expenses for a one-year period on a rolling basis. Among the expenses DMO said might be excluded are: sales, marketing, business development, product development and recruitment expenses; compensation, taxes and benefit costs for employees whose functions are not necessary to meet regulatory requirements; costs for acquiring and defending patents and trademarks and other intellectual property; and variable commissions a voice-based SEF may pay to its employee-brokers.

  • HK Regulators Consider Carve-Out of Delta One Warrants From the Definition of OTC Product: The Hong Kong Monetary Authority and the HK Securities and Futures Commission solicited comment on a proposal to exclude delta one warrants from its definition of over-the-counter product and thus exclude it from mandatory reporting obligations. (Delta one warrants are call warrants with a zero or near-zero strike price that trade like the underlying asset until the exercise date. They enable investors to have synthetic exposure to assets in closed markets or markets where access is difficult.) SFC stated its belief that delta one warrants should be excluded from the OTC definition because they are not leveraged and don’t have the same types of risk as OTC products. Comments will be accepted through May 26.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VII, Number 121



About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...