Joint Audit Committee Regulatory Update: Documentation of Discretionary Trading Authority
The Joint Audit Committee has published guidance (Guidance) with respect to the appropriate account documentation required for futures commission merchants (FCMs) to substantiate a grant of discretionary trading authority for accounts controlled by corporate entities. The Joint Audit Committee is a representative committee of US futures exchanges and regulatory organizations, which includes the Chicago Mercantile Exchange, ICE Futures US, Nodal Exchange, the National Futures Association, and others. It establishes practices and procedures to be followed by such exchanges, in their capacity as designated self-regulatory organizations, in the conduct of regulatory examinations and financial reviews of FCMs.
The Guidance states that any grant of discretionary trading authority must be in writing and signed and dated by the account owner. It must clearly designate the person to whom discretionary trading authority has been granted.
The Guidance also states that FCMs must ensure any delegation of trading authority of corporate accounts is properly authorized by the beneficial account owner. For accounts where the authority of trading has been designated to a third party, the underlying agreement (i.e. a power of attorney, investment management agreement, etc.) delegating such authority must be executed by a properly authorized signatory of the beneficial account owner.
Further, an FCM’s due diligence policies and procedures should be designed to validate that any signatory granting trading authority is authorized to do so, which may be documented and maintained by the FCM through any means which provide the FCM a reasonable basis of the signatory’s authority. Documentary evidence may include a corporate resolution, certificate of incumbency or secretary certificate, or may be found in a limited liability operating agreement, partnership agreement, offering memorandum, of filing with a government agency or regulatory body.
FCMs may consider any delegation of trading authority for existing trading authorizations in place and effectively operating for a corporate account to be properly authorized and valid. However, new relationships or new accounts that are opened at an FCM must be validated by sufficient documentary evidence of the signatory’s authority on behalf of the corporate account owner, demonstrating a valid delegation of trading authority.
Relevance to non-FCMs
While the Guidance will apply, and need to be operationalized, by FCMs, asset managers and their customers will be indirectly impacted, because for new customers FCMs will need to ensure they conduct diligence to confirm that the asset manager is duly authorized to trade with the FCM on behalf of its customer.
It should be noted that the Guidance follows, and is in furtherance of, guidance previously published by the Joint Audit Committee prohibiting FCMs from contractually agreeing to limit recourse between accounts having the same beneficial owner (Prior Guidance). The Prior Guidance sparked debate amongst market participants and resulted in Commodity Futures Trading Commission rulemaking.
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