Updated: NFA Interpretive Notice Requires Enhanced Virtual Currency Disclosures for CPOs, CTAs, FCMs, and IBs | Practical Law

Updated: NFA Interpretive Notice Requires Enhanced Virtual Currency Disclosures for CPOs, CTAs, FCMs, and IBs | Practical Law

The National Futures Association (NFA) adopted an interpretive notice establishing enhanced disclosure requirements for commodity pool operators (CPOs), commodity trading advisers (CTAs), futures commission merchants (FCMs), and introducing brokers (IBs) that engage in virtual currency activities.

Updated: NFA Interpretive Notice Requires Enhanced Virtual Currency Disclosures for CPOs, CTAs, FCMs, and IBs

by Practical Law Finance
Published on 23 Aug 2018 • USA (National/Federal)
The National Futures Association (NFA) adopted an interpretive notice establishing enhanced disclosure requirements for commodity pool operators (CPOs), commodity trading advisers (CTAs), futures commission merchants (FCMs), and introducing brokers (IBs) that engage in virtual currency activities.
On August 9, 2018, the National Futures Association (NFA), a self-regulatory organization (SRO) for the US derivatives market, published a notice to members regarding the adoption of an interpretive notice (the interpretive notice) establishing enhanced disclosure requirements for NFA members engaging in virtual currency activities. The enhanced disclosure requirements are intended to advise investors of the "unique and potentially significant risks" of trading in virtual currencies, or cryptocurrencies such as bitcoin, and virtual currency derivatives. The disclosure requirements are divided into two separate sections, addressing:
Both sections of disclosures emphasize:
  • The "substantial risk of loss," according to the NFA, that may arise from trading in virtual currencies and virtual currency derivatives.
  • The NFA's limited regulatory authority over spot market virtual currencies.
The NFA submitted the proposed interpretive notice to the CFTC on July 20, 2018. The NFA notes in its submission to the CFTC that the enhanced disclosure requirements were prompted by the recent listing of bitcoin futures by designated contract markets (DCMs) as well as the NFA's concern that investors do not fully understand the risk of trading in virtual currencies (see Legal Update, CFTC Announces Bitcoin Derivatives Self-Certification Process and New Bitcoin Contracts on Three Futures Exchanges).
For FCMs and IBs, the interpretive notice provides that, beginning on October 31, 2018:
For CPOs and CTAs, the interpretive notice provides that beginning on October 31, 2018:
  • A CPO or CTA must provide investors with "robust" and customized disclosures related to their activities in spot-market virtual currencies and virtual currency derivatives. These disclosures must address the following areas, if applicable, as well as other areas that may be applicable to the CPO's or CTA's activities:
    • the unique features of virtual currencies;
    • the price volatility of virtual currencies;
    • the valuation and liquidity of virtual currencies;
    • cybersecurity;
    • the opaque virtual currency spot market;
    • virtual currency exchanges, intermediaries, and custodians;
    • the regulatory landscape surrounding virtual currencies;
    • the technology underlying virtual currencies; and
    • transaction fees involved in virtual currencies.
  • Any CPO or CTA that operates a commodity pool, exempt pool, or managed account program that trades spot market virtual currencies must include a standardized disclosure addressing the limits of the NFA's oversight.
  • Any CPO or CTA that engages in spot virtual currency transactions other than through a commodity pool, exempt pool, or managed account program must include the same disclosure as FCMs or IBs (see above) regarding the NFA's has limited regulatory authority over underlying spot or virtual currency exchanges, custodians, or markets.
The NFA clarifies that CPOs and CTAs are expected to review their current disclosure and offering documents and update any documents that are materially incomplete in light of the new disclosure requirements under the interpretive notice. Materially incomplete documents are required to be updated and filed with the NFA by November 21, 2018. In addition, CPOs and CTAs must provide existing investors with the updated disclosure documents by November 21, 2018.
The interpretive notice will become effective on October 31, 2018.