Episode 21: NFA Rulebook – Interpretive Notice 9073

On episode 21 we discuss the National Futures Association (“NFA”) board’s recent released rules via the Interpretive Notice 9073 – Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities. We also do a deep dive into the NFA Rulebook.



CCO Buzz: Welcome back! On episode 21 of the CCO Buzz we have a Compliance Consultant.  He will be discussing how the National Futures Association (“NFA”) board recently released rules via the Interpretive Notice 9073 – Disclosure Requirements for NFA Members Engaging in Virtual Currency Activities, but more specifically we’ll be doing a deep dive into the NFA Rulebook.

Compliance Consultant: On May 17, 2018 the NFA Board of Directors approved new disclosure requirements for NFA Members engaging in virtual currency activities. These requirements go into effect on October 31st, 2018. The requirements the NFA outlined in their release impact Futures Commission Merchants (“FCMs”), Introducing Broker (“IBs”), Commodity Pool Operator (“CPOs”), and Commodity Trade Advisor (“CTAs”).

However, I want to specifically speak about disclosure requirements related to CPOs and CTAs engaged in virtual currency transactions in pools and managed accounts.

The NFA did not intended to prescribe specific language in their release; however, they have made it clear that CPOs and CTAs engaged in virtual currency transactions in pools and managed accounts must make certain disclosures that speak to the unique risks inherent in virtual currencies. These disclosures should address some of the following:

  • Unique Features of Virtual Currencies
  • Price Volatility
  • Valuation and Liquidity
  • Cybersecurity
  • Opaque Spot Market
  • Virtual Currency Exchanges, Intermediaries and Custodians
  • Regulatory Landscape
  • Technology
  • Transaction Fees

CCO Buzz: Wow, that’s quite a bit. Do you mind breaking that down for us?

Compliance Consultant:

Unique Features of Virtual Currencies. Virtual currencies are not legal tender in the United States. The price of many virtual currencies is based on the agreement of the parties of the transaction and the risks associated with the unique features of virtual currencies should be explained.

Price Volatility. Virtual currency is based on the perceived value of the virtual currency and could be subject to change due to sentiment, which can make the products highly volatile. Virtual currencies has experienced daily price volatility, according to the NFA, of more than 20%. Risks associated with the extreme price volatility and the possibility of rapid substantial price movements, which could result in significant losses, should be explained.

Valuation and Liquidity. Virtual currencies have to be traded through privately negotiated transactions and through numerous virtual currency exchanges and intermediaries. Due to the lack of a centralized pricing, this can pose a challenge. The NFA generally expects policies and procedures for valuing virtual currency products implemented by CPOs and CTAs takes into account their access to liquidity and the volatility of the market. Valuation and liquidity risks and the procedures used for valuing virtual currencies and the related risks should be explained.

Cybersecurity is also an important risk to take into consideration. A cybersecurity event could result into a substantial, immediate and irreversible loss for a market participant. Even a minor cybersecurity event in virtual currency could have downward price pressure on the product and cybersecurity risk should be explained.

Opaque Spot Market. Virtual currency balances are generally maintained as an address on the blockchain. Virtual currency transactions are typically publicly available on the blockchain through the distributed ledger. The public address does not identify the controller, owner or holder of the private key. Unlike bank and brokerage accounts, virtual currency exchanges and custodians hold virtual currencies, but they do not always identify the owner. The opaque underlying or spot market can pose asset verification challenge for market participants, regulators and auditors and gives rise to an increased risk of manipulation and fraud, including the potential for Ponzi schemes, bucket shops and pump and dump schemes. The risks associated with the opaque nature of the underlying or spot virtual currency market should be explained.

CCO Buzz: Wow, that’s a lot to take in for right now. How about we pause and wait for next week’s episode to hear more about the Virtual Currency Requirements for Pools and Managed Account Programs, as well as the Derivative Disclosure Requirements for Pools and Managed Account Programs.

CCO Buzz: Well that’s it for this week’s episode. If you’d like additional information, please check out our website at www.corecls.com. You can also follow us on Facebook, LinkedIn or Twitter @CoreCLS. Thank you and we hope you tune into next week’s episode of the CCO Buzz.


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