CFTC Regulation 1.73 affects IBs and FCMs that execute orders for customers. Thus IBs who execute give-up orders and bunched orders must adopt risk management procedures. This new regulation has been in existence since June 2013. 1.73 came about from Dodd-Frank and requires clearing FCMs and executing firms to establish risk based limits for customer and prop accounts based on position size, order size, margin requirements, etc.
It also requires the clearing FCM that is not serving as the executing firm to enter into an agreement that requires the clearing FCM to establish risk based limits for the customer and the executing firm to screen orders for compliance with those limits.
Two important implications for IBS
1 the IB is required to screen customer orders to ensure they are in compliance with based limits of the clearing firm. This requires IBs to not only be aware of the risk standards adopted by the clients clearing FCM but to implement policies and procedures for review of orders.
2 IBs that are given market access by clearing FCMs are solely responsible for all customer order screening, with no responsibility falling on the clearing FCM.
How to meet the requirement
The easiest way for an IB to meet these requirements is to use the FIA published free template agreement and to update the IB’s written operational procedures to incorporate such changes.
About the Author
Michael Coglianese has been providing compliance, auditing, and accounting services for the futures industry for over 25 years. Mike can be reached directly at 630-642-5841 or via email mike@cogcpa.com. Visit www.cogcpa.com for a more complete picture of services offered.