CFTC mandates that dealers and swap participants join National Futures Association.

The worlds of exchange-traded futures and OTC swaps are becoming inexorably intertwined through the adoption of regulatory reforms requiring swaps to be centrally cleared and executed.

The Commodity Futures Trading Commission has issued a final rule which mandates that swap dealers and major swap participants become members of a registered futures association.

The Dodd-Frank Act added to the Commodity Exchange Act a new Section 4s, which requires registered swap dealers and major swap participants to meet specific requirements with regard to, among other things, capital and margin, reporting and recordkeeping, daily trading records, business conduct standards, documentation standards, trading duties, designation of a chief compliance officer, and, with respect to uncleared swaps, segregation of customer funds.

Section 4s further directs the CFTC to adopt regulations to implement the Section 4s requirements, and the Commission is doing so through rulemakings separate and apart from this rulemaking.

The CFTC is delegating to the National Futures Association the authority to perform the full range of registration functions for swap dealers and major swap participants.

CFTC commissioner Scott O’Malia said the rule will require market participants to track multiple rules to determine which 4s requirements they do or do not need to demonstrate compliance with in order to qualify for NFA registration.

“Only the government could think it wise to pass over a simple and clear-cut bright line rule and instead adopt a cumbersome and complex set of timing rules,” O’Malia said. “This piecemeal approach makes it even more important that the Commission issue a schedule outlining the order of rules to be considered and an implementation timeline for all of the rules.”

The National Futures Association, the self-regulatory organization of the futures industry, has been holding discussion with the CFTC on the estimated cost impact to swap dealers and major swap participants of the CFTC’s delegation to NFA of the registration function for SDs and MSPs under the Dodd-Frank Act, and the estimated cost impact associated with NFA’s ongoing monitoring of SDs and MSPs.

The cost estimates are based on the assumption that there will be approximately 125 SD and MSP member firms within NFA.

The NFA has revised upward its estimates of the fees it will need to charge such firms.

While the principal processing fee remains unchanged, NFA has significantly altered the SD and MSP registration application fee due to NFA’s expected review of SD and MSP submissions, the NFA said.

As to the estimated registration application fee, NFA plans to modify this fee from $500 to $15,000. In order to review the SDs and MSPs written submissions, NFA will include direct and indirect costs associated with employing staff to conduct the review, and the $15,000 registration fee is designed to defray a proportion of this expense.

Membership dues for SDs and MSPs could range between $125,000- and $1 million per member firm based on the size and complexity of the firm’s swaps business.

For example, there may be three tiered of membership dues: $1 million for larger SDs and MSPs associated with financial institutions, $250,000 for firms not in either Tiers One or Three, and $125,000 for SDs or MSPs whose swaps activity solely consists of transactions on a contract market or SEF.