August 01, 2006
Forex Dealer Member Requirements for Weekly Forex Reports and Bankruptcy Disclosure
NFA has received notice that the Commodity Futures Trading Commission has approved a new NFA Financial Requirements Section 13 and an amendment to the Interpretive Notice regarding Forex Transactions with Forex Dealer Members. Section 13 became effective on July 25, 2006, and the amendment to the Interpretive Notice will be effective on October 1, 2006. These requirements are discussed below.
Forex Weekly Reports
A new Section 13 to NFA's Financial Requirements codifies the existing requirement that Forex Dealer Members file weekly reports with NFA showing liabilities to customers (and other financial information) as of the end of the week. The report must be filed electronically by noon on the next business day, and Section 13 imposes an automatic $200 fee for each day it is late. This fee mirrors the fee imposed on FCMs and IBs that file late financial statements.
The new Section 13 follows.
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SECTION 13. FOREX DEALER MEMBER WEEKLY REPORTS
(a) Each Forex Dealer Member must file weekly electronic reports showing liabilities to customers and other financial information required by NFA. The report must be prepared as of the last business day of the week and must be filed by noon on the following business day in the format and using the electronic filing method provided by NFA.
(1) No Forex Dealer Member may access NFA's electronic financial reports database until NFA has assigned it a unique identifying code and password. Each Forex Dealer Member is responsible for maintaining the security and confidentiality of its identifying code and password and that of each person it authorizes to file weekly electronic reports on its behalf.
(2) Submitting the report certifies that the person filing it is duly authorized to bind the Forex Dealer Member and that, to the best of that person's knowledge, all information in the report is true, correct, and complete.
(b) Each weekly report that is filed after it is due shall be accompanied by a fee of $200 for each business day it is late. Payment and acceptance of the fee does not preclude NFA from filing a disciplinary action for failure to comply with the deadlines imposed by this rule.
Disclosure Regarding Bankruptcy Protections
Subchapter IV of the U.S. Bankruptcy Code provides special protections for customers trading on an exchange, including a priority in bankruptcy and the right to have their positions transferred or liquidated. The Code applies these protections to funds owed to customers in connection with exchange-traded futures and options, leverage contracts regulated under Section 19 of the Commodity Exchange Act, and dealer options regulated under Section 4c(b) of the Act. It is not clear that these protections apply to off-exchange retail forex transactions, however. Therefore, forex customers may be general creditors, with no priority in bankruptcy and no right to transfer or liquidate their positions.
NFA believes it is important for Forex Dealer Members to make an affirmative disclosure that bankruptcy protections may not apply to off-exchange forex transactions. Therefore, NFA amended the Interpretive Notice regarding Forex Transactions with Forex Dealer Members to require an affirmative disclosure.
The disclosure requirement will become effective on October 1, 2006. The relevant part of the Interpretive Notice, including the prescribed language for the disclosure, follows.
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FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS
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B. COMPLIANCE RULE 2-36
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1. Disclosure - Members must provide retail forex customers with understandable and timely disclosure on essential features of forex trading.
At or before the time a retail customer first engages in a forex transaction, a Forex Dealer Member and its Associates should provide the customer sufficient information concerning the characteristics and particular risks of entering into forex transactions. This information must include the following statement prominently displayed:
The transactions you are entering into with [Member] are not traded on an exchange. Therefore, under the U.S. Bankruptcy Code, your funds may not receive the same protections as funds used to margin or guarantee exchange-traded futures and options contracts, which receive a priority in bankruptcy. Since that same priority has not been given to funds used for off-exchange forex trading, if [Member] becomes insolvent and you have a claim for amounts deposited or profits earned on transactions with [Member], your claim may not receive a priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of other general creditors, from any monies still available after priority claims are paid. Even customer funds that [Member] keeps separate from its own operating funds may not be safe from the claims of other general and priority creditors.
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Questions concerning these requirements should be directed to Sharon Pendleton, Associate Director, Compliance, (firstname.lastname@example.org or
312-658-6540); Lauren Brinati, Field Supervisor, Compliance (email@example.com or 312-658-6585); or Ick-Soo Park, Team Manager, New York Compliance (firstname.lastname@example.org or 212-513-6019).