Commodity Futures Trading Commission Request of the National Futures Association for Approval of Interpretive Notice to NFA Compliance Rule 2-9: Supervision of the Use of Automated Order Routing Systems

[Federal Register: March 27, 2002 (Volume 67, Number 59)]
[Notices]
[Page 14701-14702]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27mr02-32]

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COMMODITY FUTURES TRADING COMMISSION


Request of the National Futures Association for Approval of
Interpretive Notice to NFA Compliance Rule 2-9: Supervision of the Use
of Automated Order Routing Systems

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') has determined, pursuant to section 17(j) of the Commodity
Exchange Act (the ``Act''), to review the National Futures
Association's (``NFA's'') proposed Interpretive Notice of (the
``Interpretive Notice'') to its Compliance Rule 2-9 regarding
supervision of the use of automated order routing systems (``AORSs'')
that route orders through futures commission merchants (``FCMs''). The
Interpretive Notice would require that NFA members adopt and enforce
written procedures in the areas of security, capacity, and credit and
risk management controls in connection with AORSs, but it provides
flexibility for members to design procedures tailored to their own
circumstances. Because NFA's policy is to set standards rather than to
require specific technology, other procedures than those described in
the Interpretive Notice may comply with the general standards for
supervisory responsibilities imposed by NFA Compliance Rule 2-9. The
proposed Interpretive Notice would become effective upon approval by
the Commission. Therefore, the Commission has determined to provide an
opportunity for public comment prior to its consideration of the
Interpretive Notice.

DATES: Comments must be received by April 26, 2002.

ADDRESSES: Comments on the proposed rules may be sent to Jean A. Webb,
Secretary of the Commission, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5521, or by electronic mail to [email protected].
Reference should be made too ``NFA Interpretive Notice Regarding
Supervision of Automated Order Routing Systems.''

FOR FURTHER INFORMATION CONTACT: Lawrence B. Patent, Associate Chief
Counsel, or Christopher W. Cummings, Special Counsel, Division of
Trading and Markets, Commodity Futures Trading Commission, 1155 21st
Street, NW., Washington, DC 20581, telephone number: (202) 418-5450,
facsimile number: (202) 418-5536, electronic mail: [email protected], or
[email protected].

SUPPLEMENTARY INFORMATION:

I. Introduction

    By letter dated March 1, 2002, NFA submitted to the Commission for
its approval, pursuant to section 17(j) of the Act, NFA's proposed
Interpretive Notice to its Compliance Rule 2-9 regarding supervision of
the use of AORSs that route orders through FCMs. NFA's submission
indicates that the Interpretive Notice would become effective upon
approval by the Commission. NFA Compliance Rule 2-9 requires, in
relevant part, that ``(e)ach Member shall diligently supervise its
employees and agents in the conduct of their commodity futures
activities for or on behalf of the Member. Each Associate who has
supervisory duties shall diligently exercise such duties in the conduct
of that Associate's commodity futures activities on behalf of the
Member.'' NFA believes that supervisory standards do not change with
the medium used, but that the manner in which those standards are
applied may be affected by technology. In order to fulfill their
supervisory obligations, NFA members using AORSs must adopt and enforce
written procedures to examine the security,

[[Page 14702]]

capacity and credit and risk management controls provided by the firm's
AORSs.
    NFA notes that the proposed Interpretive Notice applies to AORSs
that are within an NFA member's control (including those provided by an
application service provider or an independent software vendor). While
a member would not be responsible for an AORS chosen by the customer
and not under the member's control, the member would be required to
adopt procedures that could reasonably be expected to address the
trading, clearing and other risks arising from its customer
relationship.

II. Description of the Interpretive Release

    The proposed Interpretive Notice would require that NFA members
adopt and enforce written procedures in three general areas: (1)
Security procedures to protect the reliability and confidentiality of
customer orders and account information; (2) capacity procedures to
maintain adequate personnel and facilities for timely and efficient
delivery of orders and reporting of executions, as well as for timely
handling of customer complaints; and (3) credit and risk management
controls to prevent customers from entering trades that could create
undue financial risks for the NFA member or its other customers.
    Without specifying the manner in which they are to be implemented,
the proposed Interpretive Notice describes a set of essential functions
under each general heading and gives non-exclusive examples to
illustrate. The essential functions that are listed under security
procedures include: (1) Authentication of the user; (2) encryption or
equivalent protections; (3) firewalls or equivalent protections; (4)
means for customers to give notice that a person is no longer
authorized; (5) periodic testing; and (6) administrative oversight and
supervision. The essential functions that are listed under capacity
procedures include: (1) Regular evaluation of the system's capacity
(with increases as needed); (2) monitoring of system capacity and
performance; (3) follow-up on customer access complaints; (4) disaster
recovery and redundancies; (5) prompt notice to customers of
operational difficulties; and (6) advance disclosure of factors that
could stress the system. The essential functions that are listed under
credit and risk management controls are: (1) Pre-execution controls (to
be imposed when appropriate); (2) post-execution controls and trade
monitoring; (3) extra precautions for direct-access systems; and (4)
review of AORS controls in conjunction with the member's regular credit
and risk control procedures.
    NFA has also revised the required annual self-examination to
include the WebTrust^SM/TM Self-Assessment Questionnaire,
which was developed by the American Institute of Certified Public
Accountants and the Canadian Institute of Chartered Accountants.
WebTrust^SM/TM states that it is ``for use by electronic
commerce service providers to document their business practices/
transaction integrity disclosures, policies, procedures and
monitoring.''
    As noted earlier, the proposed Interpretive Release would become
effective upon approval by the Commission. Accordingly, the Commission
seeks comments on the proposed Interpretive Notice to NFA Compliance
Rule 2-9 regarding supervision of the use of AORs.
    Copies of the proposed Interpretive Notice will be available for
inspection at the Office of the Secretariat, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC 20581. Copies also may be obtained through the Office of the
Secretariat at the above address by telephoning (202) 418-5100.

    Issued in Washington, DC on March 21, 2002, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-7345 Filed 3-26-02; 8:45 am]
BILLING CODE 6351-01-M