Authored By: Greg Baracy

This summer National Futures Association (“NFA”) issued Notice to Members I-19-15 announcing the Commodity Futures Trading Commission’s (“CFTC”) approval of an annual dues increase for certain NFA Members.  More specifically, new charges of $1,750 will be levied from IBs, CPOs and CTAs that are approved as swap firms pursuant to NFA Bylaw 301(I).  NFA invoices membership dues for the upcoming year approximately 45 days before the firm’s membership renewal date.  This means that this dues surcharge will be invoiced to swap-approved or swap-pending Member firms for membership dues payable on or after January 1, 2020 during the month of November.  Now is the time to consider whether or not this fee increase will impact your firm.

Complicated History For Swaps

The CFTC and NFA were granted jurisdiction over certain swaps trading activities via the Wall Street Reform Act (“Dodd Frank”) in 2010.  At the time this legislation was passed, it was not clear to the industry how regulators might draft or apply newly crafted swap trading rules and obligations.  In fact, there was a period of time when the term “swap” had not been fully defined. Similarly, from the passage of Dodd Frank until around 2016, NFA also struggled to determine which firms it would consider to be “swap” members.

Registrants who have been NFA members for a number of years may recall that initially NFA considered block futures transactions to be “swaps”. When NFA held this position, Turnkey witnessed on many occasions NFA staff instructing execution only, voice or instant message, block futures brokerage firms to select the “swap firm” membership designation in ORS.  Fortunately, as of today, NFA’s advice has changed.  Turnkey was able to verify with NFA legal that the regulator now views, and has made clear, that block futures are futures not swaps.  This brief example illustrates however that the industry’s compliance history in this area has been a bit murky.

Final Swap Firm Definitions

Section 1a (49) of the Commodity Exchange Act (CEA) defines what both a Swap Dealer (“SD”) and a Swap Broker (“Swap IB”) are. Turnkey has summarized these definitions into “plain English” due to the brevity of this article:

A Swap Dealer is a person (which includes entities) that: holds itself out as a dealer in swaps; makes a market in swaps; regularly enters into swaps with counterparties as an ordinary course of business for its own account; or engages in any activity causing the entity to be commonly known in the trade as a dealer or market maker in swaps. Firms that meet the above criteria are required to register once the gross notional amount of their swap dealing activity exceeds the de minimis threshold, currently $8 billion, over a twelve-month period.

A Swap IB is a person (which includes entities) whose current operations are limited to advising end-user and related Eligible Contract Participants (“ECP”) in regards to OTC bi-lateral swaps. A Swap IB acts in the capacity of bi-lateral swap broker by introducing two counterparties to a transaction for a fee.  The swaps brokered by these firms are typically not traded speculatively but are used by end users to hedge production or consumption risks of some type. Swap IBs do not act as a counterparty or principal to any bi-lateral swaps they may negotiate for customers.

Review Firm Activity by November 15, 2019

NFA’s membership fee increase is scheduled to go into effect January 1, 2020. Invoices for this surcharge will be scheduled to go out around November 15, 2019.  Now is the time for NFA member firms to revisit whether or not their brokerage activities fall under NFA’s new swap firm considerations.  Registrants that conduct any swaps business should remain NFA swap firm members. Those registrants that only conduct futures trading, including block futures, should consider whether or not dropping their designation as a swap firm might make sense.

To ensure proper processing, NFA has encouraged member firms improperly listed as “swaps” firms to file form 7-W by December 1, 2019.  However, any firm that withdraws its swap approval prior to the firm’s 2020 renewal date will not be required to pay the dues surcharge.

To further discuss your firm’s activities and whether or not they would be considered swaps with regard to NFA’s new fee structure or if you need assistance changing your firm’s “swap firm” status, please contact Turnkey today via (312) 324-0040 or by clicking here.

About the Author

Greg Baracy has over 15 years of experience in the financial services industry. His expertise spans across many verticals such as investment banking, financial advisory, quantitative and qualitative analysis. His area of focus at Turnkey is in new business origination, customer on-boarding and relationship management. Greg also regularly conducts reviews of customer outside office locations for Turnkey clients. Before joining Turnkey, he managed the Mid-Atlantic, Midwest and Northeast portfolio of municipal issuers for one of the big three Wall Street Bond Rating Agencies. During his tenure, he grew the agencies portfolio to its largest size since its inception. He holds a degree in Economics and Applied Policies from Michigan State University.