As one of the industry’s largest service providers, Turnkey was recently notified by NFA staff that significant accounting changes are likely coming. These changes may greatly impact the operations of certain NFA member firms that have a net capital obligation.  NFA advised that Introducing Brokers (“IB”) and Futures Commission Merchants (“FCM”) will likely be required by the CFTC to amend how certain commission receivables are classified when reporting their net capital position. This change will require FCMs and IBs to reclassify commissions on form 1-FR and to change the way these commissions are aged as a receivable.

NFA suggested that the CFTC will require commission receivable balances not paid by a regulated FCM to be classified as non-current. This change in classification will be required regardless of how long these commissions may have aged.   The expectation is that, commissions paid by an FCM should still be listed on line 2A of the 1-FR. Commissions for OTC transactions should now be exclusively listed on line 5 as “Other Income” and itemized.  Currently the CFTC allows registered firms to carry commission receivables as current for up to thirty (30) days from the date the commissions were invoiced. This will no longer be true for any commissions reported on line 5 as “Other Income”. Line 5 “Other Income” commissions will be non-allowable regardless of how long they may have been outstanding.

Based on feedback from NFA during recent exams Turnkey is convinced this change is coming. Turnkey has also seen NFA staff requiring member firms to amend 1-FR submissions over this issue.  While neither the CFTC nor NFA have put out an official position on this topic, it is our view that registrant, member firms should start to assume all commission receivable amounts not paid by FCMs will be required to be classified as non-current, and thus non-allowable on net capital filings in the future.

This accounting change will primarily impact brokerage operations that transact in bi-laterally negotiated products. Typically, this will include swaps, block futures, OTC and physical commodity transactions, as well as most, if not all unregulated environmental commodity brokerage products. Firms with a primary business model that includes bi-laterally negotiated transactions, chat brokerage, or voice brokerage, give up or general trade execution services, would be wise to re-evaluate their net capital position. Keeping a larger cash reserve balance on hand may be prudent in light of this new significant change to 1-FR accounting practices.