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September 19, 2007
Effective Date of Amendments to Interpretive Notice to Compliance Rule 2-36(e) Regarding Supervision of the Use of Electronic Trading Systems
The Interpretive Notice to Compliance Rule 2-36(e) entitled "Supervision of the Use of Electronic Trading Systems" sets supervisory standards for electronic trading systems (ETSs) operated or used by Forex Dealer Members (FDMs). At its last meeting, NFA's Board of Directors amended these provisions to require additional uniform formatting of data the Notice already requires firms to collect. In particular, the amendments require an FDM's system to generate two new types of reports: exception reports for trades meeting certain parameters and transaction reports to aid the firm and NFA auditors in calculating the new FDM assessment fee. These amendments will become effective on October 15, 2007.
The Interpretive Notice already requires the ETS to keep order information and time and price records. Using this data, the amendments require the system to generate daily exception reports showing 1) price adjustments and 2) fills outside of the price range displayed by the system when the customer's order reaches the platform (i.e., all buy orders filled at prices above the ask and all sells orders filled at prices below the bid displayed to that customer).
The amendments also require management to review these reports for suspicious or unjustifiable activity. In general, any price adjustments that are not consistent with the firm's written policy and any unusual activity that does not appear to have a reasonable explanation should raise a red flag, particularly if it is part of a pattern. The reports must be generated daily, and daily review helps ensure that problems are caught quickly. Management should document its review, and one way to do so is to have the reviewer initial and date each report.
Management must approve all price adjustments except those made according to objective criteria spelled out in the firm's procedures. Furthermore, the firm must document the reason for each price adjustment (including those that do not require management approval).
As you know, effective October 1, 2007, FDMs will be required to calculate and pay NFA an assessment fee based on the notional value of each transaction (equating to 1 cent on every $10,000). An ETS that complies with the Interpretive Notice already captures both the number of transactions and their notional value. The new amendments require FDMs to generate and maintain reports containing that information. This will help the FDM calculate the amount it owes to NFA and will make it easier for NFA to confirm that amount during an audit.
Although the amendments to the Interpretive Notice do not become effective until October 15, 2007, FDMs must have records supporting their assessment fee calculations from October 1, 2007 forward, and transactions quoted in other currencies must, of course, be converted to U.S. dollars when calculating the notional value. Therefore, firms may want to complete the programming necessary to generate these reports by October 1. However, FDMs that do not have the reports prior to October 15 will not be out of compliance as long as they have adequate support for their assessment fee calculations.
NFA's August 17, 2007 submission letter to the Commodity Futures Trading Commission includes a copy of the revised language as well as a more detailed description of the changes. You can access an electronic copy of the submission letter at National Futures Association | News Center.
Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance, at email@example.com or (312) 658-6540, or to John Brodersen, Associate Director, Compliance, at firstname.lastname@example.org or (312) 781-2226.