WASHINGTON (HedgeWorld.com)–The Commodity Futures Trading Commission issued final amendments to its regulations governing the bunching of customer orders, ?1.35(a-1)(5).
The existing body of rules concerning allocation procedures began to take shape in 1972, when the CFTC created ?1.35, which, among other things, required futures commission merchants to prepare a written record of every customer’s order. In that form, the rule didn’t allow for the bunching of orders at all, but it became clear over time that such bunching would enable customers to get better execution and a better price.
The issue of bunching was treated ad hoc for some time. It wasn’t until 1998 that the CFTC approved amendments to ?1.35 that authorized advisers to provide FCMs with account and allocation information subsequent to the execution of a bunched order. Those rules attached a lot of conditions to this procedure, and the new rules adopted June 11 modify those conditions in six respects: eligible customers, eligible managers, information availability, allocation, record keeping and account certification.
A memorandum prepared by Dorsey & Whitney LLP, Minneapolis, June 23, explains that the amendments also clarify the respective responsibilities of account managers on the one hand and FCMs on the other.
The Six Changes
The old rule limited the bunching of orders to sophisticated customersPrevious HedgeWorld Story. Under the new rule, the CFTC regards as eligible all customers who provide written investment discretion to their managers.
The old rule limited eligible managers to registered commodity trading advisers, registered investment advisers, banks, insurance companies, trust companies and savings & loan associations. The new rule also includes CTAs and investment advisers who are exempt from registration or who are excluded from the definition of CTA or investment adviser by operation of law or rule. It also treats as eligible foreign advisers who exercise discretionary trading authority over the accounts of non-U.S. persons.
The old rule required that managers disclose certain information as a condition of the bunching of orders, such as whether accounts in which the manager may have an interest may be included with customer accounts in bunched orders eligible for post-execution allocation. The new rule simply requires a manager to make such information available upon request.
The new rule also provides that account managers, not FCMs, are responsible for the fairness of allocations. The FCMs will continue to be responsible for the monitoring of unusual account activity–making reasonable inquiries and, where appropriate, referring such a matter to the proper regulatory authority.
Since both the information and the allocation requirements require record keeping, the new amendments provide for an enforcement mechanism should account managers fail to keep the appropriate records or comply with a request for information. The CFTC may prohibit managers delinquent in this respect from submitting orders for execution on designated contract markets and prohibit FCMs from accepting orders from such managers. The manager will have an opportunity to contest this prohibition at a hearing.
Finally, the new rule no longer requires a manager to send certification of its compliance with the rule to FCMs and no longer requires self-regulatory organizations to adopt procedures to determine compliance with the old rule’s record keeping requirements.