Proposed Rule

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PROPOSED AMENDMENTS
(additions are underscored and deletions are stricken through)

FINANCIAL REQUIREMENTS

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SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS

Each Forex Dealer Member must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:

    (i) $250,000;

    (ii) 1% of the total net aggregate notional value of all open foreign currency futures and options plus 1% of the total net aggregate options value (calculated by multiplying the notional value of the underlying currency by the larger of the option's delta or .25) for transactions in customer and non-customer but not proprietary accounts that are between the Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and that are not executed on a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade; or

    (iii) any other amount required by Section 1 of these Financial Requirements.

    * * *

    INTERPRETIVE NOTICE

    * * *

    FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS
    INTERPRETIVE NOTICE

    * * *

    2. Financial Requirements Section 11

    Forex Dealer Members must maintain adjusted net capital equal to or higher than the greatest amount required by Section 11 of NFA's Financial Requirements. For Forex Dealer Members, one of those amounts is 1% of the total net aggregate notional value of all open foreign currency futures and options plus 1% of the total net aggregate options value for transactions that are between the Forex Dealer Member and any person that is not an eligible contract participant, including foreign persons. To calculate the capital requirement, follow these steps:

    • Calculate the aggregate long notional value for each currency pair by adding up the long positions, multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;
    • Calculate the aggregate short notional value for each currency pair by adding up the short positions, multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;
    • Subtract the smaller value from the larger value to determine the net value for the currency pair;
    • Add the net values of the pairs (whether long or short) to arrive at the total notional value; and
    • Multiply that number by .01.

    For example:

    Currency Pair Long Value Short Value Net Value
    EUR/USD $29,518,561 $12,489,666 $17,028,895
    CND/JPY 25,422,685 15,387,016 10,044,669
    CND/BRL 18,123,654 18,876,273 752,619
    USD/MXN 5,431,980 6,769,211 1,337,231
    BRL/MXN 2,111,789 4,097,815 1,986,026
    Total Notional Value $31,149,440
    Capital Requirement ($31,149,440 X .01) $311,494

    If the firm carries forex options positions for retail customers and non-customers, follow these additional steps for each currency pair:

    • Net identical options (long and short calls with the same strike price and expiration date and long and short puts with the same strike price and expiration date);
    • Multiply the remaining long calls by their deltas or by .25, whichever is larger, and by their contract size;
    • Multiply the remaining long puts by their deltas or by .25, whichever is larger, and by their contract size;
    • Multiply the remaining short calls by their deltas or by .25, whichever is larger, and by their contract size;
    • Multiply the remaining short puts by their deltas or by .25, whichever is larger, and by their contract size;
    • Add the results;
    • Multiply the sum by the spot exchange rate (converting to U.S. dollars in the process) to get the net aggregate options value for that currency pair;

    Then calculate the capital requirement as follows:

    • Add the results from each currency pair to get the total net aggregate options value;
    • Multiply the total net aggregate options value by .01 to determine the options capital requirement; and
    • Add the options capital requirement to the futures capital requirement to determine the firm's capital requirement.

    For example:

    Assume the Forex Dealer Member's customers have the following EUR/USD options:

    Type Long Options Short Options Delta Delta for Capital Purposes Contract Size
    Call 1499 321 .5 .5 10,000
    Call 2181 780 .5 .5 5,000
    Call 1167 912 .15 .25 10,000
    Call 1674 1688 .15 .25 5,000
    Put 91 32 .4 .4 10,000
    Put 281 70 .4 .4 5,000
    Put 364 115 .1 .25 10,000
    Put 845 198 .1 .25 5,000

    Calculate the values for long calls, long puts, short calls, and short puts:

    (Long calls) 1499 X .5 X 10,000 = 7,495,000
    2181 X .5 X 5,000 = 5,452,500
    1167 X .25 X 10,000 = 2,917,500
    1674 X .25 X 5,000 = 2,092,500
    17,957,500
     
    (Long puts) 91 X .4 X 10,000 = 364,000
    281 X .4 X 5,000 = 562,000
    364 X .25 X 10,000 = 910,000
    845 X .25 X 5,000 = 1,056,250
    2,892,250
     
    (Short calls) 321 X .5 X 10,000 = 1,605,000
    780 X .5 X 5,000 = 1,950,000
    912 X .25 X 10,000 = 2,280,000
    1688 X .25 X 5,000 = 2,110,000
    7,945,000
    (Short puts) 32 X .4 X 10,000 = 128,000
    70 X .4 X 5,000 = 140,000
    115 X .25 X 10,000 = 287,500
    198 X .25 X 5,000 = 247,500
    803,000

    Calculate the net aggregate options value:

    Long calls 17,957,500
    Long puts 2,892,250
    Short calls 7,945,000
    Short puts 803,000
    29,597,750
    Spot exchange rate X     1.2016
    $35,564,656

    Calculate the options capital requirement:

    EUR/USD $35,564,656
    USD/JPY 12,791,554
    USD/MXN 11,905,332
    (Etc.)
    Total Net Aggregate Options Value $93,411,016
    Options Capital Requirement ($93,411,016 X .01) $934,110

    Calculate the firm's capital requirement:

    Options Capital Requirment $934,110
    Plus Futures Capital Requirement 311,494
    Total Capital Requirement $1,245,604

    A Forex Dealer Member that carries forex options positions for retail customers and non-customers must submit the methodology it uses to calculate the deltas to NFA prior to use and must maintain records showing the actual deltas used in the firm's daily capital computations.

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