Application and Registration Requirements for CFE Trading Privileges

Transcription

1 CFE Regulatory Circular RG11-06 Date: March 18, 2011 To: From: Re: CBOE Trading Permit Holders CFE Trading Privilege Holders CFE Trading Privilege Holder Applicants Registration Services Department Application and Registration Requirements for CFE Trading Privileges CBOE Futures Exchange, LLC (CFE) previously made filings with the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to authorize CFE to list security futures contracts for trading on CFE. The first security futures contract that CFE intends to list for trading is the CBOE Gold ETF Volatility Index (GVZ) security futures contract which is anticipated to commence trading on March 25, CFE may also subsequently list other security futures contracts. CFE previously issued CFE Regulatory Circular RG03-01 in order to summarize the registration requirements for CBOE members (now CBOE trading permit holders), CFE trading privilege holders, and CFE trading privilege holder applicants desiring to trade futures contracts on CFE. This circular updates and supersedes CFE Regulatory Circular RG03-01 in light of the fact that CFE now intends to list one or more security futures contracts for trading on CFE. References to futures products in this circular refer to both futures products that are not security futures as well as security futures unless otherwise indicated. CBOE trading permit holders may obtain access privileges to trade futures products on CFE, provided they apply for trading privileges on CFE with the Registration Services Department, and if required to do so, register with the CFTC and/or SEC in any required capacity. Firms and persons that are not CBOE trading permit holders may also apply for trading privileges on CFE by submitting application materials to the Registration Services Department and completing any required registration with the CFTC and/or SEC. CFE trading privilege holders may obtain security futures market maker status on CFE by submitting a CFE Security Futures Market Maker & Dealer Registration Form to the Registration Services Department. Please refer to CFE Regulatory Circular RG11-04 for detail regarding that process. CFE Application Requirements CBOE trading permit holders that desire to obtain trading privileges on CFE need to submit a short form application to the Registration Services Department. If an individual CBOE trading permit holder is affiliated with a CBOE TPH organization, only the TPH organization needs to submit an application. If an individual CBOE trading permit holder is a sole proprietor,

2 the individual needs to complete the application. In addition to completing a short form application, all CFE trading privilege holders are required to be covered by a CFE guarantee form from a CFE clearing member. Persons and firms other than CBOE trading permit holders may also apply for trading privileges on CFE and need to complete a CFE application and be covered by a CFE guarantee form from a CFE clearing member. CFE application materials are available at permits.aspx or from the Registration Services Department. CFTC Registration Requirements Corresponding to CBOE Trading Permit Holder and Related Capacities Certain CBOE trading permit holders may be required to register with the CFTC in order to trade futures products on CFE. Set forth below is a summary description of the CFTC registration requirements that correspond to various CBOE trading permit holder and associated person capacities. Individual Market-Makers An individual CBOE market-maker who wishes to trade futures products on CFE on a proprietary basis on behalf of a CBOE market-maker firm does not need to register with the CFTC, provided that the individual is a salaried employee of the firm or is in an employee-like relationship with the firm. A sole proprietor CBOE market-maker who wishes to trade futures products on CFE on a proprietary basis does not need to register with the CFTC. Individual DPM Designees An individual CBOE DPM designee who wishes to trade futures products on CFE on a proprietary basis on behalf of a CBOE DPM firm does not need to register with the CFTC, provided that the individual is a salaried employee of the firm or is in an employee-like relationship with the firm. Individual Proprietary Trading Permit Holders An individual CBOE proprietary trading permit holder who wishes to trade futures products on CFE on a proprietary basis on behalf of a CBOE proprietary trading permit holder firm does not need to register with the CFTC, provided that the individual is a salaried employee of the firm or is in an employee-like relationship with the firm. A sole proprietor CBOE proprietary trading permit holder who wishes to trade futures products on CFE on a proprietary basis does not need to register with the CFTC. Individual Upstairs Traders of Market-Maker and DPM Firms An individual upstairs trader of a CBOE market-maker or DPM firm who wishes to trade futures products on CFE on a proprietary basis on behalf of that firm does not need to register with the CFTC, provided that the individual is a salaried employee of the firm or is in an employee-like relationship with the firm. Individual Traders of Proprietary Trading Permit Holder Firms An individual trader of a CBOE proprietary trading permit holder firm who wishes to trade futures products on CFE on a proprietary basis on behalf of that firm does not need to register with the CFTC, provided that the individual is a salaried employee of the firm or is in an employee-like relationship with the firm. 2

3 Individual Floor Brokers Futures Products Other Than Security Futures: An individual CBOE floor broker who wishes to execute orders from others in non-security futures products on CFE on behalf of a CBOE retail brokerage firm (defined below), a CBOE executing brokerage firm (defined below), or as a sole proprietor is required to register with the CFTC as a Floor Broker. Security Futures: An individual CBOE floor broker who wishes to execute orders from others in security futures on CFE on behalf of a CBOE retail brokerage firm or a CBOE executing brokerage firm, and that limits that person's futures activity to the solicitation of orders, acceptance of orders, execution of orders, and the placing of orders on behalf of others to security futures, is exempt from registration with the CFTC. Market-Maker Firms and DPM Firms CBOE market-maker firms and CBOE DPM firms that wish to trade futures products on CFE on a proprietary basis are not required to register with the CFTC as a Floor Broker, Futures Commission Merchant, or Introducing Broker. CBOE previously obtained Commodity Pool Operator (CPO) and Commodity Trading Advisor (CTA) registration relief from the CFTC in connection with the security futures trading activities of CBOE market-maker and DPM firms. The requirements for obtaining this registration relief are described in CBOE Regulatory Circular RG For activities in futures products other than security futures, CBOE market-maker and DPM firms should consult with their legal advisors to determine whether CPO and/or CTA registration is required. Proprietary Trading Permit Holder Firms CBOE proprietary trading permit holder firms that wish to trade futures products on CFE on a proprietary basis are not required to register with the CFTC as a Floor Broker, Futures Commission Merchant, or Introducing Broker and should consult with their legal advisors to determine whether CPO and/or CTA registration is required. Market-Maker Clearing Firms CBOE market-maker clearing firms that wish to clear the accounts of unaffiliated market-makers that trade futures products on CFE are required to register with the CFTC as a Futures Commission Merchant. Retail Brokerage Firms Futures Products Other Than Security Futures: CBOE retail brokerage firms are required to register with the CFTC as a Futures Commission Merchant. Security Futures: In lieu of fully registering as a Futures Commission Merchant, a CBOE retail brokerage firm may file a notice registration to be a Futures Commission Merchant with the CFTC if the firm (i) limits its solicitation, acceptance, or execution of futures orders, or placing of futures orders on behalf of others, to security futures; (ii) has an effective broker-dealer registration with the SEC that is not suspended; and (iii) is a FINRA member. A retail brokerage firm in this context is a firm that (i) solicits or accepts orders for futures products on CFE and (ii) accepts customer money, securities, or property or extends credit to customers. Executing Brokerage Firms Futures Products Other Than Security Futures: CBOE brokerage firms that wish to 3

4 execute agency orders for non-security futures products on CFE and that do not carry customer accounts, do not accept customer money, securities, or property (or extend credit to customers), and that give up the name of the clearing firm that carries an account when executing agency orders are required to register with the CFTC as an Introducing Broker. Security Futures: CBOE brokerage firms that limit their futures activity to solicitation of orders, acceptance of orders, execution of orders, and the placing of orders on behalf of others in futures to security futures are exempt from registration with the CFTC. An executing brokerage firm in this context is a firm that executes agency orders for broker-dealer accounts, for customer or proprietary accounts of brokerage firms, for marketmaker accounts, or for the accounts of institutional and other customers that generally trade large size orders and that does not carry customer accounts, does not accept customer money, securities, or property, and gives up the name of the clearing firm that carries an account when executing agency orders. Other Persons and Firms Other persons and firms that do not fit within the foregoing CBOE trading permit holder and related capacities or are not CBOE trading permit holders will need to assess whether registration with the CFTC is required based upon their own circumstances and desired activities on CFE. Associated Persons Associated Persons (as defined in the Commodity Exchange Act) of CFE trading privilege holders that are registered with the CFTC are also required to be registered with CFTC. Generally, an Associated Person is an individual who solicits orders, customers, or customer funds (or who supervises persons engaged in these activities) on behalf of a Futures Commission Merchant, Introducing Broker, CPO, or CTA. An individual registered as a Floor Broker is not required to register as an Associated Person. Requirements relating to acting as an Associated Person with respect to security futures are noted in the upcoming CFE Regulatory Circular RG11-05 and further information regarding registration requirements for Associated Persons may be found on the National Futures Association (NFA) web site at SEC Broker Dealer Registration Requirements for CFE Trading Privilege Holders CFE trading privilege holders that are registered with the CFTC as a Futures Commission Merchant or as an Introducing Broker and wish to effect transactions on CFE solely in security futures may notice register as a broker-dealer with the SEC. CFE trading privilege holders that desire to hold a customer security futures position in a securities account must fully register with the SEC as a broker-dealer. 4

5 NFA Registration Process NFA performs the CFTC's registration function as the CFTC's delegate. The NFA generally only accepts registration applications through its web-based registration and membership filing and processing system, which is called the Online Registration System (ORS). The NFA has an ORS tutorial on its website at to help registrants through the electronic application process. The first step in the registration process is to electronically submit an enrollment form (located at which requires the designation of a security manager to act as the administrator that governs ORS access. (The process of governing access to ORS is more applicable to Futures Commission Merchants, Introducing Brokers, Commodity Pool Operators, Commodity Trading Advisors, and Floor Brokers than to the other registration categories). Second, the NFA will notify the applicant by letter when it approves the enrollment request and will provide the applicant with a username that will permit the applicant to access the ORS system with the temporary password that was generated when the enrollment form was submitted in order to submit to the NFA the required registration information (see below for the registration requirements for each category). Next, for those applying for registration as a Floor Broker, or an Introducing Broker guaranteed by a Futures Commission Merchant, the NFA may grant to the applicant a temporary license to conduct business in the applicable registration capacity after the submission of the required registration information 1 while the NFA conducts a fitness inquiry of the applicant. Futures Commission Merchants and non-guaranteed Introducing Brokers are not eligible to receive a temporary license and must wait until the fitness inquiry review is complete. The fitness inquiry review period generally lasts one to two weeks. The final step in the process is the granting of full registration by the NFA, provided that the NFA has determined that no disqualification from registration exists after it has conducted a fitness inquiry of the applicant. Granting NFA membership for Futures Commission Merchant and Introducing Broker applicants may take up to ten weeks depending on promptness and quality of the compliance-related documentation that the applicant provides (see Futures Commission Merchant and Introducing Broker Registration Filing Requirements below). Additionally, NFA membership will not be granted until at least one individual principal is also registered as an Associated Person. NFA Floor Broker Registration Filing Requirements (see Completed online Form 8-R. Completed fingerprint card and non-refundable NFA registration fee (unless 1 For Floor Broker applicants, a temporary license will be granted after the applicant electronically files Form 8-R in ORS, submits fingerprint cards, pays the required fee, and obtains trading privileges on CFE. For guaranteed Introducing Broker applicants, the NFA may grant a temporary license after all the filings have been made for the Introducing Broker and all of its individual principals and the NFA determines that the Introducing Broker and all of its individual principals meet the eligibility requirements for obtaining a temporary license. The Futures Commission Merchant that guarantees the Introducing Broker must also electronically file its certification before the temporary license can be issued. 5

6 currently registered with the CFTC in any capacity or listed as a principal of a current CFTC registrant). Proof from CFE that the individual has been granted trading privileges. (Proof may be provided after the application has been filed, and is submitted by CFE and not the applicant.) NFA Futures Commission Merchant Registration Filing Requirements (see Completed online Form 7-R. Completed online Form 8-R and fingerprint card for each individual principal. Completed Form 1-FR-FCM or FOCUS Report (certified audit). Statement describing the source of the current assets of the Futures Commission Merchant (FCM) applicant, combined with a representation that the applicant's capital has been contributed for the purpose of operating the business of an FCM and will continue to be used for that purpose. Non-refundable NFA registration fees. An applicant registering as an FCM must also apply to become a member of the NFA. The application forms for NFA membership are incorporated in Form 7-R. o Compliance-related documentation. (see o Completed online Form 8-R for at least one Associated Person who is also a principal and proof of satisfaction of applicable proficiency requirements. o Membership dues. NFA Introducing Broker Registration Filing Requirements (see Completed online Form 7-R. Completed online Form 8-R and fingerprint card for each individual principal. Completed FOCUS Report (certified audit), Form 1-FR-IB (Part A), or Guarantee Agreement from a Futures Commission Merchant (Form 1-FR-IB, Part B) If the applicant is applying as an independent Introducing Broker (non-guaranteed), the applicant must also provide a statement describing the source of its current assets, combined with a representation that its capital has been contributed for the purpose of operating the business of an Introducing Broker and will continue to be used for that purpose. Non-refundable NFA registration fees. An applicant registering as an Introducing Broker must also apply to become a member of the NFA. The application forms for NFA membership are incorporated in Form 7-R. o Compliance-related documentation. (see o Completed online Form 8-R for at least one Associated Person who is also a principal and proof of satisfaction of applicable proficiency requirements. o Membership dues. NFA Commodity Pool Operator Registration Filing Requirements (see 6

7 Completed online Form 7-R. Completed online Form 8-R and fingerprint card for each individual principal. Non-refundable NFA registration fees. An applicant registering as a Commodity Pool Operator must also apply to become a member of the NFA. The application forms for NFA membership are incorporated in Form 7-R. o o Completed online Form 8-R for at least one Associated Person who is also a principal and proof of satisfaction of applicable proficiency requirements. Membership dues. NFA Commodity Trading Advisor Registration Filing Requirements (see Completed online Form 7-R. Completed online Form 8-R and fingerprint card for each individual principal. Non-refundable NFA registration fees. An applicant registering as a Commodity Trading Advisor must also apply to become a member of the NFA if it intends to manage customer accounts. The application forms for NFA membership are incorporated in Form 7-R. o Completed online Form 8-R for at least one Associated Person who is also a principal and proof of satisfaction of applicable proficiency requirements. o Membership dues. With respect to fingerprint cards, please note that the NFA is unable to accept electronic prints except for electronic fingerprints taken at NFA's offices. Therefore, Floor Brokers and individuals deemed to be Associated Persons and principals of Futures Commission Merchants, Introducing Brokers, Commodity Pool Operators, and Commodity Trading Advisors must either submit fingerprint cards in hardcopy form to the NFA or be fingerprinted at NFA's offices. CFE applicants may get fingerprints taken and obtain a hardcopy fingerprint card from the CBOE Badges and Jacket office, which the applicants can then submit to the NFA. Continuing Obligations that Apply to All CFTC Registrants The CFTC and NFA require NFA registrants to comply with certain ethics training guidelines, though flexibility is permitted in the format, frequency, and providers of ethics training. In essence, each NFA registrant may tailor its own training program to better suit its own operations. Compliance with these guidelines provides a "safe harbor" with respect to acceptable ethics practices. The guidelines can be accessed at The NFA issued an interpretive release that provides further guidance regarding ethics requirements, which can be accessed at Further information regarding ethics training can be found on the NFA website at NFA members also must pay annual dues and fees and complete an Annual Registration Update and Annual Questionnaires as well as other annual requirements. Please refer to Annual Regulatory Reminder (see for 7

8 additional information. * * * * * This circular is not intended to provide a complete description of the CFTC, NFA, and SEC registration requirements applicable to the trading of futures products on CFE. The applicability of these requirements is dependent upon the applicable facts and circumstances, and CBOE trading permit holders, CFE trading privilege holders, and others may wish to consult with their legal advisors regarding whether and how these requirements may apply to them. Any questions regarding CFE application requirements may be directed to Stan Leimer in the Registration Services Department at (312) Any questions concerning CFTC registration may be directed to NFA's Information Center at (312) or toll-free at (800)