Q. It is an established practice in the futures industry that futures commission merchants engage in transactions through give-up arrangements, whereby a futures commission merchant, acting as an executing broker1, executes an order on an exchange for a commodity customer,2 or an option customer,3 which in accordance with applicable exchange rules is then given-up to a clearing broker. Pursuant to a give-up arrangement, which may be formalized by a written agreement,4 an executing broker will execute a trade on order of the commodity customer or option customer and then direct it to the account that the customer has established with its clearing broker. The trade thereafter is subject to acceptance by the clearing broker.5 For the purposes of the rule requiring a futures commission merchant to implement a customer identification program,6 is an account established with a futures commission merchant when it operates solely as a commodity or option customer's executing broker pursuant to a give-up arrangement?
A. No. The customer identification program rule for futures commission merchants applies when a futures commission merchant opens a new account for a customer.7 The term "account" is defined for the purposes of the rule as a formal relationship with a futures commission merchant including, but not limited to, those established to effect transactions in commodity futures or options.8 Although an executing broker in a give-up arrangement will facilitate trades for a commodity or option customer, and the give-up arrangement may be governed by a written agreement, the clearing broker, but not the executing broker, will establish a formal relationship with the commodity or option customer for the purposes of the customer identification program rule.
In a give-up arrangement, the executing broker merely enters into an agreement with a commodity or option customer to execute certain orders given up for a fee. Unlike a clearing broker, the executing broker does not: (a) accept money, securities, or other property from the commodity or option customer for the purpose of margining, guaranteeing, or securing trades until they are offset or settled; (b) enter into an agreement with the commodity or option customer that establishes the parties' respective rights and obligations with respect to the acceptance of money, securities, or other property from the commodity or option customer for the purpose of margining, guaranteeing, or securing the customer's trades;9 (c) maintain records of, and have the ability to monitor on a daily basis, all of the commodity or option customer's transactions that are cleared by the clearing broker; and (d) issue confirmations and monthly statements.10 Moreover, according to the provisions of a give-up arrangement, a trade executed by a commodity or option customer through an executing broker is not effected until it is accepted by a clearing broker.11 Thus, in a give-up arrangement, the executing broker, unlike the clearing broker, does not establish a formal relationship with the commodity or option customer.12
Although a futures commission merchant's customer identification program will not apply when it is operating solely as an executing broker in a give-up arrangement, the futures commission merchant's anti-money laundering program should contain risk-based policies, procedures, and controls for assessing the money laundering risk posed by its operations, including its execution brokerage activities; for monitoring and mitigating that risk; and for detecting and reporting suspicious activity.