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Notice

Request of the National Futures Association for Approval of Interpretive Notice to NFA Compliance Rule 2-4: Best Execution Obligation of NFA Members Notice-Registered as Broker-Dealers Under Section 15(b)(11) of the Securities Exchange Act of 1934 Concerning Security Futures Transactions

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Information about this document as published in the Federal Register.

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AGENCY:

Commodity Futures Trading Commission.

ACTION:

Notice and request for comment.

SUMMARY:

The National Futures Association (“NFA”) has submitted to the Commodity Futures Trading Commission (the “Commission” or “CFTC”), pursuant to Section 17(j) of the Commodity Exchange Act (the “Act”),[1] a proposed Interpretive Notice (the “Interpretive Notice”) to its Compliance Rule 2-4 regarding the best execution obligation of NFA members who are notice-registered with the Securities and Exchange Commission (“SEC”) as broker-dealers under Section 15(b)(11) of the Securities Exchange Act of 1934 (the “'34 Act”) [2] with respect to security futures transactions. The Interpretive Notice would state the obligation and provide guidance as to the factors to be considered when processing customer orders and when establishing order routing practices, but it would permit flexibility in the manner in which a member fulfills its best execution obligation. The Commission has determined to provide an opportunity for public comment prior to its consideration of the Interpretative Notice.

DATES:

Comments must be received by May 22, 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 secretary@cftc.gov. Reference should be made to “NFA Interpretive Notice Regarding Best Execution Obligation of Notice-Registered Broker-Dealers.”

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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: lpatent@cftc.gov, or ccummings@cftc.gov.

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SUPPLEMENTARY INFORMATION:

I. Introduction

By letter dated March 19, 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 2-4 regarding the best execution obligation of NFA members who are notice-registered with the SEC as broker-dealers under Section 15(b)(11) of the '34 Act with respect to security futures transactions.[3] NFA's submission asks that the Interpretive Notice be declared Start Printed Page 19558effective upon approval by the Commission. The Interpretive Notice was prompted by an August 21, 2001 order issued by the SEC requiring NFA to adopt a best execution rule comparable to NASD Rule 2320 before retail exchange trading of security futures can begin. NFA established a working group composed of certain of its own staff and representatives of futures exchanges, futures commission merchants, end users, a securities options exchange and an alternative trading system to address this issue. The working group determined that the best approach would be an interpretation of NFA Compliance Rule 2-4. NFA Compliance Rule 2-4 states: “Members and Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their commodity futures business.”

II. Description of the Interpretive Release

NFA staff drafted the proposed Interpretive Notice to state the obligation to seek best execution while allowing flexibility in meeting the obligation. If a customer's order can be executed on only one exchange, members do not have to decide where to route the order, and fulfilling the best execution obligation would be simplified. Where a customer's order may be executed on any of two or more markets for trading security futures contracts that are not materially different, members must use reasonable diligence to ascertain where the customer's order will receive the most favorable terms and, in particular, the best price available under prevailing market conditions.

Where a customer has requested that an order be directed to a particular market, the member must honor that request. In the absence of customer instructions, the interpretive notice recites some of the relevant facts and circumstances that must be considered, including: market attributes (price, volatility, liquidity, depth, speed of execution, and pressure on available communications, among others); the size and type of transaction and order; and the location, reliability and availability to the customer's intermediary of primary markets and quotation sources.

Fees and costs related to each market must be considered. Absent the customer's instruction to do so, an order must not be channeled through a third party unless the member can show that the total cost or proceeds of the transaction will be improved by doing so. Members may not allow inducements such as payment for order flow to interfere with fulfilling the best execution obligation.

Where it is impracticable to make order routing decisions for customers on an order-by-order basis, a member should, at a minimum, consider the factors listed in the interpretation and the materiality of any differences among contracts traded on different markets when establishing retail order-routing practices, which practices should be regularly and rigorously reviewed.

The Commission seeks comments on the proposed Interpretive Notice to NFA Compliance Rule 2-4 regarding the best execution obligation of NFA members who are notice-registered as broker-dealers for purposes of trading security futures. 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.

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Issued in Washington, DC on April 16, 2002, by the Commission.

Jean A. Webb,

Secretary of the Commission.

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Footnotes

1.  7 U.S.C. 1 et seq. (2000).

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2.  15 U.S.C. 78a et seq. (2000).

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3.  NFA members that are dually registered as full futures commission merchants and full securities broker-dealers would be subject to NASD's Rule 2320 concerning best execution.

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[FR Doc. 02-9717 Filed 4-19-02; 8:45 am]

BILLING CODE 6951-01-M