7.4 FCM and IB Operations, Order Records, and Reporting
Key Takeaways
- An FCM may accept customer funds and carry accounts; an IB introduces orders but may not accept customer money, securities, or property to margin futures or options.
- Guaranteed IBs operate through one guarantor FCM, while independent IBs meet their own financial and reporting requirements and may establish relationships with multiple FCMs.
- Order records must preserve required times, terms, account identity, and allocation information; post-execution changes require a bona fide error basis and supervisory controls.
- FCM and IB supervision covers margin collection, cost disclosure, complaints, promotional material, financial filings, position reporting, and prompt correction of record or capital deficiencies.
7.4 FCM and IB Operations, Order Records, and Reporting
Registration categories determine who may hold customer property and who bears particular financial and operational duties. The most frequently tested distinction is that a Futures Commission Merchant can carry accounts and accept customer funds, while an Introducing Broker can solicit or accept orders but cannot accept the money, securities, or property used to margin or secure those orders.
FCM Responsibilities
An FCM's operating system connects customers to exchanges and clearing organizations. Its duties include:
- Opening and approving accounts, delivering required disclosures, and maintaining customer agreements.
- Accepting customer orders and, unlike an IB, accepting margin funds and other permitted collateral.
- Transmitting or executing orders and maintaining a daily record of positions, cash, margin, and settlements.
- Collecting margin and taking protective action when an account fails to meet the firm's requirements.
- Segregating domestic futures customer property and separately accounting for secured amounts associated with foreign futures, as applicable.
- Providing confirmations and periodic statements and responding to customer complaints.
- Maintaining minimum adjusted net capital, filing required financial reports, and notifying regulators of specified capital, segregation, recordkeeping, or operational events.
An FCM can set house margin above an exchange minimum. It cannot promise that initial margin is the maximum possible loss. If losses create a deficit, the customer remains liable under the account agreement, and the FCM may liquidate positions consistent with its contractual and regulatory authority.
Guaranteed and Independent IBs
An IB introduces customer business to an FCM and does not carry the customer's funds. The two financial structures are:
Guaranteed IB
A guaranteed IB has a written guarantee agreement with one FCM. The guarantor accepts joint financial responsibility for the IB's obligations covered by the agreement. The IB is exempt from the independent net-capital requirement while the guarantee is effective, but the arrangement increases the guarantor's supervisory responsibility. A guaranteed IB cannot divide guaranteed business among several guarantor FCMs.
Independent IB
An independent IB is not operating under an FCM guarantee. It must meet the applicable minimum adjusted net-capital requirement, maintain its own financial records, and make required filings. It may introduce accounts to more than one FCM. Independence does not allow it to accept customer margin funds.
A customer may deliver a check or transfer intended for the carrying FCM through operational channels, but the IB may not treat the money as its own deposit, place it in the IB's account, or use it. Exam questions focus on custody and control, not on who physically hands an envelope to a courier.
Order Tickets and Time Records
A reliable audit trail shows what the customer authorized and how the firm handled it. Required records commonly identify:
- Customer or account identifier.
- Commodity, contract month, option strike and type when applicable.
- Buy or sell, quantity, and order type or price instruction.
- Time the order was received, time it was transmitted for execution, and execution information as required by the firm's role and the trading method.
- Whether an order was discretionary and the person exercising authority.
- Allocation information for bunched orders and the method established before results were known.
Times matter because they help detect trading ahead, unauthorized changes, and unfair allocation. An AP may not wait to see whether a trade is profitable and then assign it to a favored account. Bunched orders require a fair, objective allocation method established before or at order entry, followed consistently or changed only for a documented legitimate reason.
Errors and Account Adjustments
A firm can correct a genuine clerical or execution error, but it may not use an error account to transfer profits to favored customers or losses to the firm or disfavored customers. A correction file should identify the original order, the error, when and how it was found, the correcting transaction, financial effect, and supervisory approval.
Changing an account name, price, quantity, or buy/sell direction after execution is a regulatory warning sign. The firm should determine whether the original instructions and timestamps support the correction. Repeated errors by the same person or branch require heightened review.
Costs, Complaints, and Margin Communication
Before trading, the customer should receive clear information about commissions, fees, and how charges affect break-even results. An AP cannot describe a round-turn charge as immaterial while omitting recurring platform, advisory, give-up, or other costs that make the statement misleading. Promotional claims about low costs remain subject to NFA Rule 2-29.
A written customer complaint belongs in a supervised complaint file and must reach responsible personnel. The firm should preserve the complaint, account and order records, correspondence, investigation, response, and corrective action. An AP may not settle a complaint personally, conceal it from the firm, or ask a customer to rewrite it to avoid review. A complaint can also reveal unauthorized trading, churning, disclosure failures, or weak branch supervision.
Margin calls and liquidations must be communicated accurately. Calling a performance bond a down payment or promising that a stop order limits the loss to a fixed amount is misleading. The FCM's agreement can authorize liquidation without prior notice, but supervisors still review whether personnel followed firm procedures and treated accounts consistently.
Financial and Position Reporting
FCMs and independent IBs make financial filings applicable to their registration status. An FCM monitors adjusted net capital, segregation, secured amounts, residual interest, and early-warning thresholds. Falling below a minimum is different from crossing an early-warning level: the latter can trigger notice while the firm remains above minimum capital.
Large-trader and special-call systems give the CFTC and exchanges information about reportable positions, account ownership and control, and whether positions are speculative or bona fide hedges. A trader cannot avoid aggregation or reporting by splitting controlled positions among related accounts or FCMs. The customer supplies required ownership and control information, and the carrying firm must maintain and report it accurately.
The unifying principle is supervised traceability: customer authority, order terms, execution, allocation, cash movement, position, and regulatory report should agree. When they do not, the firm must investigate and document the correction rather than silently rewriting the record.
Which activity may an FCM perform that an IB may not perform in its IB capacity?
A guaranteed IB wants to route half its guaranteed business through a second unrelated guarantor FCM. Which statement is correct?
After a bunched order is profitable, an AP allocates the winning fills to favored accounts even though no allocation method was established before execution. What is the primary defect?