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Notice I-07-15

March 07, 2007

Effective Date of New Compliance Rule 2-40 Regarding the Bulk Assignment or Liquidation of Forex Positions

NFA has received notice that the Commodity Futures Trading Commission has approved new NFA Compliance Rule 2-40: Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business and the related Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business." The rule and Interpretive Notice became effective on February 16, 2007.

Compliance Rule 2-40 and the Interpretive Notice govern the bulk assignment and liquidation of forex positions with a Forex Dealer Member. The rule permits the bulk assignment or liquidation of customer positions or the transfer of accounts using the procedures in the Interpretive Notice.

The Interpretive Notice provides that a Forex Dealer Member may assign customer open positions and transfer account balances to an assignee that is a counterparty enumerated in Section 2(c)(2)(B)(ii) of the Commodity Exchange Act (an "Authorized Entity") and is financially able to honor its commitments to customers as a result of the assignment. The following requirements must be met.

  • The Forex Dealer Member must obtain a customer's written consent or provide the customer with notice of an assignment or transfer before it occurs.
  • The Forex Dealer Member must submit a notice to NFA's Compliance Department and send it to customers in a manner intended to ensure receipt by the customer within a reasonable period prior to the assignment date. Generally, the notice must be sent at least seven calendar days before the assignment.
  • The notice must inform customers that they are not required to accept the proposed assignment and may direct the assignor Forex Dealer Member to liquidate their positions.
  • The notice must include the name and contact information of an individual at the assignor Forex Dealer Member to contact with questions or with instructions to liquidate positions and the name and contact information of the assignee firm, as well as the name of an individual at that firm.
  • The notice must instruct customers that their failure to respond to the notice by a specified date will result in a default action (generally either assignment to the assignee or, if assignment is not permitted under the customer agreement, liquidation of the open positions and return of the remaining funds).
  • The notice must also include any other material information. For example, if customer positions are being assigned to a firm that is not an NFA Member, the notice must disclose that the assignee firm is not an NFA Member, is not subject to NFA oversight, and is not required to comply with NFA rules.
The Interpretive Notice also addresses the wholesale liquidation of customer positions. Unless the Forex Dealer Member has the express consent of the customer to liquidate the customer's positions, it must provide the customer with a notice that has been reviewed by NFA's Compliance Department. The timing and content requirements of this notice are similar to the ones noted above relating to assignments.

As part of either an assignment or liquidation of customer positions, Forex Dealer Members are also required to provide NFA with pertinent information and documents. Depending on the circumstances, Forex Dealer Members must provide, among other things, a list of the affected accounts and the value of each as of the date NFA receives notice of the assignment or liquidation, a representative copy of the customer agreements governing the affected accounts, and a subsequent list of the value of each affected account as of the date of the assignment or liquidation.

Questions concerning these changes should be directed to Michael A. Piracci, Senior Attorney (mpiracci@nfa.futures.org or 312-781-1419) or Sharon Pendleton, Director Compliance (spendleton@nfa.futures.org or 312-658-6540).

Compliance Rule 2-40 and the related Interpreted Notice follow.

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COMPLIANCE RULES

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PART 2 - RULES GOVERNING THE BUSINESS CONDUCT OF MEMBERS REGISTERED WITH THE COMMISSION

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RULE 2-40: BULK ASSIGNMENT OR LIQUIDATION OF FOREX POSITIONS; CESSATION OF CUSTOMER BUSINESS

(a) Bulk Assignment, Transfer, or Liquidation. A Forex Dealer Member may not enter into a bulk assignment, transfer, or liquidation of customer forex positions or accounts unless the assignment, liquidation, or transfer complies with procedures established by NFA.

(b) Obligation of Assignees. If customer forex positions or accounts are assigned or transferred to a Forex Dealer Member, the Member may not accept orders initiating new positions until it has either:

    (1) obtained personal and financial information from the customer and provided the disclosures required under Compliance Rule 2-36; or

    (2) if the assignor was a Forex Dealer Member, obtained the necessary personal and financial information pertaining to the customer from the assignor and obtained reliable written evidence (which may include electronic records) that the assignor provided the required disclosures.

(c) Ceasing Business. A Forex Dealer Member must notify NFA by e-mail or facsimile seven calendar days prior to ceasing its retail forex business.

(d) Definitions. For purposes of this rule, the term "forex" has the same meaning as in Bylaw 1507(b) and the term "customer" has the same meaning as in Compliance Rule 2-36(i).

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INTERPRETIVE NOTICES

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NFA COMPLIANCE RULE 2-40: PROCEDURES FOR THE BULK ASSIGNMENT OR LIQUIDATION OF FOREX POSITIONS; CESSATION OF CUSTOMER BUSINESS

A Forex Dealer Member ("FDM") must follow these procedures when seeking to employ a bulk assignment or liquidation of its customer's positions or a bulk transfer of customer accounts. NFA may waive or modify any of these procedures or impose additional requirements if doing so is in the FDM's customers' best interest or if the circumstances otherwise require.

BULK ASSIGNMENTS AND TRANSFERS

Permitted Assignees

An FDM must notify NFA's Compliance Department ("Compliance") prior to any bulk assignment of customer positions or bulk transfer of customer accounts. An FDM may only assign open positions to an entity that is an authorized counterparty enumerated in Section 2(c)(2)(B)(ii) of the Act. Prior to the assignment or transfer, the FDM must conduct a reasonable investigation and determine that the assignee intends and is financially able to honor its commitments to the FDM's customers as a result of the assignment or transfer. The FDM must document this investigation and provide this information to NFA.

Written Consent or Prior Notice

An FDM may assign customer positions and transfer customer accounts to an authorized counterparty with the express written consent of its customers. Alternatively, an FDM may assign open positions and transfer accounts by providing its customers with prior notice. The FDM must send NFA's Compliance Department a copy of this notice before the notice is sent to customers.

    Notice to Customers

    The notice should be sent to the customer's independent e-mail address (not a dedicated address provided by the Forex Dealer Member) and by postal mail (at least first class delivery). Generally, the FDM must provide this notice at least seven calendar days before the assignment or transfer. In rare and unusual circumstances, NFA's Compliance Department might determine that a shorter notice period is appropriate. Additionally, there might be circumstances in which the Compliance Department determines that a longer notice period is required.

    The notice should include any information that is material based upon the specific circumstances of the assignment or transfer. At a minimum, the notice must include:

      1. The reason for the assignment/transfer;

      2. A clear and concise statement that as of a particular date (the assignment/transfer date, which should not be less than seven calendar days after the date of the notice) the FDM will no longer be the counterparty to the customer's positions and will not service the customer's account;

      3. The name, NFA ID (if applicable), postal and e-mail addresses, and telephone number of the proposed assignee/transferee as well as the name of an individual at the assignee/transferee the customer can contact about the proposed assignment/transfer;

      4. A statement that the customer is not required to accept the proposed assignment/transfer but may direct the assignor/ transferor FDM to liquidate the customer's positions;

      5. The name, postal and e-mail address, and telephone number of an individual at the assignor/transferor FDM the customer can contact with questions or to liquidate positions; and

      6. A statement that failure to respond to the notice within a specified period of time, not less than seven days from the date of the notice, will result in a default action, which must be either (A) assigning the customer's positions and transferring account balances to the assignee (if authorized by contract) or (B) liquidating the customer's positions and returning the remaining funds, whichever is the case.

    Where the customer positions and accounts are being assigned/transferred to a firm that is not an NFA Member, the notice must include the following disclosure:

      YOUR POSITIONS AND ACCOUNT WILL BE ASSIGNED TO A FIRM THAT IS NOT A MEMBER OF NATIONAL FUTURES ASSOCIATION (NFA), IS NOT REGULATED BY NFA, AND IS NOT REQUIRED TO COMPLY WITH NFA's RULES.

    Where the customer positions and accounts are being assigned/transferred to a firm that is an NFA Member but is not an FDM, the notice must include the following disclosure:

      YOUR POSITIONS AND ACCOUNT WILL BE ASSIGNED TO A FIRM WHOSE OFF-EXCHANGE FOREX ACTIVITIES ARE NOT REGULATED BY NATIONAL FUTURES ASSOCIATION.

BULK LIQUIDATIONS

An FDM must notify NFA's Compliance Department prior to any bulk liquidation of customer positions. An FDM may liquidate customer positions with the express written consent of its customers. Alternatively, an FDM may liquidate customer positions by providing its customers with prior notice of the liquidation. The FDM must send NFA's Compliance Department a copy of this notice before the notice is sent to customers.

    Notice to Customers

    The notice should be sent to the customer's independent e-mail address (not a dedicated address provided by the Forex Dealer Member) and by postal mail (at least first class delivery). Generally, the FDM must provide this notice at least seven calendar days before the liquidation. In rare and unusual circumstances, NFA's Compliance Department might determine that a shorter notice period is appropriate. Additionally, there might be circumstances in which the Compliance Department determines that a longer notice period is required.

    The notice should include any information that is material based upon the specific circumstances of the liquidation. At a minimum, the notice must include:

      1. The reason for the liquidation;

      2. A clear and concise statement that as of a particular date (the liquidation date, which should not be less than seven calendar days after the date of the notice) the FDM will liquidate all open positions in the customer's account and close the account; and

      3. The name, postal and e-mail address, and telephone number of an individual at the FDM the customer can contact with questions regarding the liquidation.

RECORDS

For a bulk assignment, liquidation, or transfer, the FDM should provide NFA's Compliance Department with all pertinent records pertaining to the transaction. At a minimum, the FDM should provide the following records.

At the time that the FDM first contacts NFA's Compliance Department, the FDM must provide:

    1. representative copies of the customer agreements;
    2. a list of the affected accounts, including:
      a. customer names;
      b. account numbers; and
      c. account values as of the end of the previous day;

    3. if an assignment or transfer, documentation regarding the assignor FDM's investigation of the assignee's status as an authorized counterparty and its financial ability to honor its commitments to the customers.

Immediately after the bulk assignment, liquidation, or transfer, the FDM must provide a list of the affected accounts and the value of each account as of the date of the transaction

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