Aug 28, 2018 | News

New Disclosure Required for Introducing Brokers and FCMs

Due to the significant growth of the virtual currency market, the NFA has proposed an interpretive notice to the CFTC invoking the “ten-day” provision and will make it effective 10 days after receipt of submission.  The notice was put forth because of concerns that customers do not fully understand the nature, volatility, and substantial risk involved with trading virtual currencies.

Therefore, NFA is implementing new disclosure requirements for NFA Members engaging in virtual currency products.  For IBs and FCMs, an Investor Advisory: — Futures on Virtual Currencies Including Bitcoin an the CFTC Customer Advisory:  Understand the Risk of Virtual Currency Trading, to any customer that engages in a virtual currency derivative transaction with or through the FCM or IB Member.  For introduced accounts, the advisories may be provided by either the FCM or IB Member.  If the FCM or IB member has customer that traded virtual currency derivatives before this Interpretive Notice, the FCM or IB Member musst provide the advisories to the customer within 30 calendar days of the date of the Interpretive Notice.

Moreover, FCMs or IBs seeking to solicit or engage in transactions involving underlying or spot virtual currencies with customers or counterparties must disclose that these transactions and activities are not regulated in any way.  NFA Compliance Rule 2-22 prohibits a Member from stating that it has been sponsored, recommended, or approved by NFA.  If FCMs and IBS are engaging in spot virtual currencies, the following disclosure must be made:

(NFA Member) is a member of NFA and is subject to NFA’s Regulatory oversight and examinations.  However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.

Note:  Merely having this disclosure language on the FCM or IB Member’s website is not considered sufficient.  It must be provided to retail customers in writing or electronically in a prominent manner designed to ensure a customer is aware of them.  the disclosure language must be prominently displayed in any promotional materials related to underlying or spot virtual currencies and must be provided to any customer or counterparty at or before the time thy engage in any underlying or spot virtual currency activities.

Moreover, disclosures are required of CTAs and CPOs trading virtual currencies or virtual currency derivatives.   In this case, CTAs and CPOs must customerize their disclosure documents, offering documents, and promotional material to address the unique risks related to their specific activities. The following disclosures must be made:

Unique Features of Virtual Currencies.  Virtual currencies are not legal tender in the United States and many question whether they have intrinsic value. The price of many virtual currencies is based on the agreement of the parties to a transaction. The risks associated with the unique features of virtual currencies should be explained.

Price Volatility. The price of a virtual currency is based on the perceived value of the virtual currency and subject to changes in sentiment, which make these products highly volatile. Certain virtual currencies have experienced daily price volatility of more than 20%. The risks associated with the extreme price volatility of virtual currencies and the possibility of rapid and substantial price movements, which could result in significant losses, should be explained.

Other areas of disclosure that need to be addressed include Valuation and Liquidity, Cybersecurity, Opaque Spot Market, Virtual Currency Exchanges, Intermediaries, and Custodians, Regulatory Landscape, Technology, and Transaction Fees.

For details regarding these additional disclosures, visit the Interpretive Notice here.

Please contact our firm if you need assistance updating your disclosure documents.  Reach out to Mike at 630-351-8942 or email