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[Federal Register: April 22, 2002 (Volume 67, Number 77)]
[Notices]
[Page 19557-19558]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22ap02-29]

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COMMODITY FUTURES TRADING COMMISSION


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice and request for comment.

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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.
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    \1\ 7 U.S.C. 1 et seq. (2000).
    \2\ 15 U.S.C. 78a et seq. (2000).

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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 [email protected].
Reference should be made to ``NFA Interpretive Notice Regarding Best
Execution Obligation of Notice-Registered Broker-Dealers.''

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 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

[[Page 19558]]

effective 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
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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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    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.

    Issued in Washington, DC on April 16, 2002, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 02-9717 Filed 4-19-02; 8:45 am]
BILLING CODE 6951-01-M
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