Series 3 - National Commodities Futures

AAA

Regulations - Futures Account Opening Requirements

Futures Account Opening Requirements
One of the most important regulations a Series 3 candidate needs to know is NFA Rule 2-30, "Customer Information and Risk Disclosure," or the "Know Your Customer rule."

The following information, at a minimum, must be obtained from each customer:

  • Name, address and occupation;
  • current estimated annual income and net worth;
  • age; and
  • an indication of the customer's previous investment and futures trading experience.

In addition, NFA members who are not also FINRA members must obtain the following information from each customer who is an individual (as opposed to a firm), if the customer trades security futures products:

  • whether the customer's account is for speculative or hedging purposes;
  • the customer's employment status;
  • the customer's estimated liquid net worth;
  • the customer's marital status and number of dependents; and
  • any other information used in making recommendations to the customer.

SEE: The National Futures Association As Watchdog

LOOK OUT!
Questions on regulation are likely to encompass financial as well as agricultural futures.

An NFA member must disclose information related to the risks of futures trading before a customer first opens a futures trading account. The risk disclosure to be provided to the customer must include the CFTC's required "Risk Disclosure Statement" and "Disclosure Document."

Another important regulation is NFA Rule 2-8 governing "discretionary accounts," arrangements by which the account holders give written power of attorney to a CTA to buy and sell, without prior approval of the holder. Discretion over a customer's commodity futures account cannot be exercised unless the customer or account controller has provided written authorization to the NFA member or AP. No member or associate may exercise discretion with regard to foreign futures or foreign options transactions unless the customer has further specified in writing that these transactions are permitted. The trader, though, has discretion as to the timing and pricing of each transaction, and does not need written authorization to exercise that discretion.

Rule 2-9, which governs account supervision and review, states that each NFA 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." In terms of supervision, the NFA is most concerned with the conduct of telemarketers and with compliance with anti-money laundering laws.

There are also regulations concerning an AP's minimum experience for exercising discretion over a customer's account. Holding a Series 3 license is not enough; the AP must have been continuously registered for a minimum of two years and have worked in the industry for that period of time. This requirement doesn't apply to anyone registered as a CTA. Further, The NFA has the discretion to waive this requirement if the Associate has equivalent experience.

Position Reporting Requirements
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