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

(a) 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) $1,000,000;

    (ii) 1% of the total net aggregate notional value of all open foreign currency futures 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 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 or subject to the rules of 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; 5% of all liabilities owed to customers (as customer is defined in Compliance Rule 2-36(i)); or

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

For purposes of this section, the term non-customer does not include the Forex Dealer Member; any principal of the Forex Dealer Member; any affiliate that controls, is controlled by, or is under common control with the Forex Dealer Member; or any entity that is created or used by the Forex Dealer Member or any of its principals or affiliates for the purpose of lowering the Forex Dealer Member's capital requirements. Transactions carried for these persons may not be netted with customer and non-customer accounts when calculating the requirement under (a)(ii) of this rule.

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INTERPRETIVE NOTICES

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FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS

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B. COMPLIANCE RULE 2-36

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4. Recordkeeping - Members must keep books and records relating to their forex operations for a period of five years from the date thereof and shall keep them readily accessible during the first 2 years of the 5-year period. All such books and records shall be open to inspection by NFA.

Members should adopt and enforce reasonable procedures to create current and accurate books and records and to keep them from being altered or destroyed. Such records must include, among other things, financial records substantiating a Members assets and liabilities, including liabilities owed to customers and receivables from other persons. The Member should be able to promptly produce its records in a format that NFA can read.

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C. OTHER REQUIREMENTS

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2. Financial Requirements Section 11(a)

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 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 or a principal or affiliate of the Forex Dealer Member, and it includes transactions with foreign persons. To calculate this 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 15,378,016 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.

32. Financial Requirements Section 11(b)

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To calculate the concentration charge with unaffiliated, unregulated counterparties, follow these steps:

  • Calculate the total long value for each currency pair using the same formula used to calculate the aggregate long notional value under Section 11(a) but apply the formula to by adding up the Member's long positions with all counterparties (including ECPs, affiliates, and principals), rather than to customer and non-customer positions multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;

  • Multiply the total long value by 10%;

  • Calculate the total short value for each currency pair using the same formula used to calculate the aggregate short notional value under Section 11(a) but apply the formula to by adding up the Member's short positions with all counterparties, rather than to customer and non-customer positions multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;

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43. Financial Requirements Section 11(c)

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54. Financial Requirements Section 12

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