Interpretative Interpretation Notice:
By letter of 20 July 2018, the National Futures Association ("NFA") presented a proposed Interpretation Notice entitled "19459007] Disclosure Requirements to the Commodity Futures Trading Commission (" CFTC ") for NFA Members engaged in virtual currency activities (the "Interpretative Communication"). The Interpretative Notice would apply new disclosure obligations for NFA members engaged in activities involving virtual currency products, including specific disclosure obligations for any commodity pool operator ("CPO") or commodity trading adviser ( "CTA") in relation to a pool, or not exempt, or a managed account. Unless the CFTC notifies the NFA that it has decided to revise the proposed interpretative notice for approval, the NFA should make the actual interpretative notice starting from the second half of September.
The Interpretation section The notification applicable to CPO and CTA members requires that they provide pool participants and customers with managed accounts information about (i) their activities in the virtual currencies of the spot market, (ii) their derivatives assets on virtual currencies and (iii) the lack of regulation of the NFA : Spot virtual currency Transactions in a pool or managed account program : Interpretative warning identifies a number of areas that CPOs and CTAs must address (if applicable) in their disclosure documents, offering documents and promotional materials when making underlying virtual currency transactions or commercials in a pool or in an account program managed ( ie ., Unique characteristics of virtual currencies, price volatility, valuation and liquidity, computer security, opaque spot market, virtual currency exchanges, interm ediaries and custodians, regulatory fees, technology and transaction fees). Although NFA does not intend to prescribe a standardized dissemination language for this purpose, it is desirable that CPO and CTA personalize their documents to address unique risks related to their particular activities, including any other applicable risks not mentioned.
The proposed interpretative communication would also require any CPO or CTA member to manage a pool, an exempt pool or a trading program that exchanges virtual spot market currencies to include a standardized disclosure that takes into account the limits of supervision of the NFA and inform investors that, given some features of these products ( eg ., Lack of centralized price sources and market opacity), there is currently no acceptable or reliable practice that NFA can use to verify ownership and control of the underlying virtual currencies / spot.
- Virtual currency transactions in a pool or managed account : Although NFA does not intend to prescribe a standardized dissemination language for this purpose, the CPO and CTA members engage in derivative transactions on virtual currencies in a pool, Exempt or managed pool the account program must address the unique characteristics of virtual currency derivatives in disclosure documents, offering documents and promotional material. The NFA cites as an example price volatility, potential increases in the initial margin for long positions, potential restrictions on the futures commission market ("FCM") on client trading activities and the potential impact of designated contract market.
- Any other assets in the Underlying or Spot Virtual Currency : Since a CPO or CTA member may also conduct virtual spot currency transactions with customers or counterparties other than a pool, an exempt pool or a managed account program, the Interpretive Communication would also require the same standardized disclosure required by a MMF or broker member to specify that NFA has no regulatory oversight of underlying products or transactions or of virtual currency or currencies, custodians or virtual markets. CPO and CTA members must provide this information to customers and counterparties and display it in any promotional material for any virtual currency activity on the spot market (other than an investment in a pool, exempt pool or managed program) committed by a CPO or Member of the CTA.
In particular, Interpretive Communication states that failure to follow the guidelines described therein may be considered to be inconsistent with the obligations of a member under the NFA Compliance Rule 2-4 for observe high standards of commercial honor and fair and just trade principles, as well as violations of the NFA 2-29 compliance rule regarding communication with the public and promotional material. Consequently, given that the Interpretative Communication will become effective shortly, to the extent that the CPOs or CTA members of the NFA undertake, or intend to engage in virtual currency activities, they should review the disclosure documents, offer documents, advice and promotional material to ensure that they comply with these new guidelines.