On February 28, 2023, the National Futures Association (NFA), the self-regulatory organization for U.S. derivatives market participants, submitted to the Commodity Futures Trading Commission (CFTC) for approval a new Compliance Rule 2-51: Requirements for Members and Associates Engaged in Activities Involving Digital Asset Commodities.

Compliance Rule 2-51 would impose compliance obligations in respect of activities by NFA Members (e.g. registered commodity pool operators, commodity trading advisors, futures commission merchants, introducing brokers, and swap dealers) in “digital asset commodities” that mirror the NFA compliance obligations already applicable to Member activities in derivatives such as futures and swaps. As currently drafted, Compliance Rule 2-51 would define the term “digital asset commodities” to encompass only Bitcoin and Ether, being the only two digital assets on which futures and options have been certified for trading by CFTC regulated designated contract markets. However, the NFA noted in its explanation of the proposed rule that the NFA could amend the rule to cover additional digital assets in the future.

Once effective, Compliance Rule 2-51 would:

• Impose a number of anti-fraud and other market conduct prohibitions with respect to Members’ activities in digital asset commodities;
• Extend Members’ existing obligations to observe high standards of commercial honor and just and equitable principles of trade to the conduct of Member’s business involving any digital asset commodity;
• Require Members to comply with NFA Interpretive Notice 9073, which addresses disclosure requirements for registered commodity pool operators, commodity trading advisors, futures commission merchants, and introducing brokers; and
• Require Members to diligently supervise their employees and agents in the conduct of digital asset commodity activities on the Member’s behalf.

The NFA noted in its explanation of the proposed rule that over 100 NFA Members have reported that they engage in business activities relating to digital assets, including both spot and derivative transactions. The NFA Board concluded that Compliance Rule 2-51 is necessary to address the NFA’s current lack of jurisdiction to discipline members and protect the public with respect to Members’ conduct of such activities in digital asset commodities.

In submitting Compliance Rule 2-51, the NFA invoked Section 17(j) of the Commodity Exchange Act, which permits the NFA to make a compliance rule effective as early as ten days after submission to the CFTC, absent notification by the CFTC that it intends to review the proposal. Whether such a notification has been issued remains to be seen, and we would expect the NFA will issue a notice to its Members in the near future establishing the formal effective date for Compliance Rule 2-51. In the meantime, Members should keep in mind existing NFA expectations with respect to digital asset activities, including the disclosure requirements set out in NFA Interpretive Notice 9073 referenced above and the annual questionnaire reporting requirements noted in Member Notice I-21-18.

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