Feb 28, 2022 Over the last year National Futures Association (“NFA”) has been making adjustments to annual questionnaire response items. Similarly, NFA has been amending its pre-examination audit request lists while conducting routine regulatory reviews. These two things are not uncommon for NFA, but they are important to pay attention to. As one of the largest providers of private Commodity Futures Trading Commission (“CFTC”) compliance and business consulting in the United States, Turnkey’s team has observed on many occasions patterns to how NFA approaches regulation. It is our view based on these recent adjustments that NFA intends to heavily target retail and crypto currency brokers in the near future. The following article supports this rationale and should provide insight into our line of thinking. Differing Regulatory Perspectives Many market participants are not aware of how the commodity interest markets (commodity futures & options, retail foreign and digital currency exchange, swaps, etc.) are regulated. These markets are generally policed by the CFTC at the Federal level. They then are also regulated by self-regulatory organizations (“SROs”) which include NFA and the various commodity exchanges. The various commodity exchanges have always tried to increase volume for the benefit of their members. However, once they set their sights on going public, exchanges have worked even harder to increase trading volumes. These efforts have materialized in a variety of ways including but not necessarily limited to developing consumer education materials, increasing exchange advertising and marketing budgets, developing strategic partnerships, and introducing more consumer-friendly product. When it comes to consumer-friendly products, these include mini-contracts, micro-contracts, and different asset classes such as index futures or digital currency offerings. In contrast to this, although also a membership organization, NFA has always had a mandate to serve its members while also protecting the investing public. In an odd twist of fate NFA has also utilized various awareness tools to educate the public about trading in commodity interest products. It seems however, that NFA and the exchanges may be at odds with one another when it comes to certain derivatives product innovations. New Annual Questionnaire Requests CFTC registered firms who are also NFA members are asked annually to provide general information to NFA about their operations. This is done within the Online Registration System (“ORS”) in the form of the so called “Annual Questionnaire”. In late December of 2021, NFA developed the “Virtual Currency and Micro Contract Supplement” which firms are now having to respond to. If you have not yet seen the supplement it includes the following themed requests: Micro Contracts Number of accounts trading micros Minimum account funding level for micro customers Commission rate for micros relative to other standard products Volume related questions tied to micro activity Micro products being traded most frequently by customers Proprietary trading related to micro contracts Virtual Currency Trading and Contracts Proprietary spot/physical virtual currency activity Customer spot/physical virtual currency activity Current firm registration status for spot/physical brokerage & trading activities Solicitation efforts for digital currency and crypto products Volume of digital currency and crypto transactions Investments in digital currency or crypto assets Potential Impact As of the date of this article CFTC registered, NFA member firms are allowed to offer both micro and digital currency futures contracts to customers. Also, as of the date of this article, spot and physical crypto currency is not yet fully regulated by the CFTC. There are however clear signs that NFA believes micro and digital currency products are being offered inappropriately to consumers by certain of its members. It is Turnkey’s view that NFA also believes digital currency will soon be regulated and eventually fall under its jurisdiction. To demonstrate this look no further than the help text for the new questionnaire where NFA states: “Due to recent increased interest and activity in virtual currency and micro contract products, NFA has updated the Annual Questionnaire (AQ) to address Members’ spot/physical virtual currency, virtual currency derivatives and micro contract transactions. This template supplement includes all the possible and available questions within the AQ related to virtual currency and micro contracts.” After years of offering derivatives consulting advice Turnkey staff members have observed how regulators adapt to many industry changes. Generally, these adaptations stem from the same playbook when coming from NFA. At first NFA remains on the sidelines and watches how an asset class or product type develops and is accepted. After this they then begin to document consumer complaints and look for industry trends. If an industry product innovation or behavior becomes significant enough, NFA then typically begins asking member firms specifically about their activities in the new area. Finally, after collecting enough data, NFA begins to put out new interpretive notices or to suggest new rules to protect the retail public from potential industry abuse. Coming Changes Based upon our years of experience Turnkey staff believe NFA will soon issue new regulatory guidance about how they would like their members to engage the retail public in both micro and crypto currency transactions. It is our belief that this guidance will call for some type of additional risk disclosure, conflict of interest, suitability, or fair commission presentation. Turnkey’s view is that NFA is likely receiving a large influx of consumer complaints related to micro futures and surely crypto currency trading. Firms currently or considering operating in this marketspace should be advised that change is likely coming. Today would be a great time to take inventory of brokerage and trading practices in these areas before it’s too late. About Turnkey Regulated brokerage and trading firms have their work cut out for them in keeping up with the latest compliance obligations. Turnkey Trading Partners is an award winning firm that provides customized support to the brokerage and trading industry. We can assist Commodity Trading Advisors (“CTA”), Commodity Pool Operators (“CPO”), Introducing Brokers (“IB”), and Futures Commission Merchant’s (“FCM’s”) working within the alternative investments space. Our team is well versed in both operational and regulatory matters relating to commodity futures, equities, bonds, options, swaps, forex, digital currency, cash and physical trading, as well as several other specialized financial markets transaction types.