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January 18, 2011
Amendments to NFA Financial Requirements for Forex Dealer Members
Amendments to NFA Financial Requirements Sections 11(b), 14(c) and (d), and the related Interpretive Notice will become effective February 1, 2011.
NFA Financial Requirements Section 11(b) and (c) prohibit a Forex Dealer Member (FDM) from including assets as current for purposes of determining adjusted net capital and from using those assets to cover currency positions if the assets are held at an affiliate or an unregulated person. An unregulated person is defined by the rule to include any entity except those specifically excluded.
The amendments to Section 11(b) remove "financial institution" from the list of excluded entities and replace it with "bank or trust company" regulated by a U.S. banking regulator as provided in CFTC Regulation 5.7. The rule is also amended to include foreign banks and trust companies regulated in a money center country and which maintain regulatory capital in excess of $1 billion. The amendments also remove insurance companies from the list of entities since, beginning July 2011, insurance companies will no longer be eligible counterparties under Section(c)(2)(B)(II) of the Commodity Exchange Act.
NFA will, however, continue to have the authority to approve the use of certain foreign equivalent entities that are appropriately regulated and capitalized. Please refer to Section (C)(3) of the related Interpretive Notice, 9053-Forex Transactions, which lists the factors NFA considers when determining whether to approve an otherwise unregulated entity for purposes of Financial Requirements Section 11(b) and (c).
NFA Financial Requirements Section 14 defines foreign institutions that are qualified for holding assets covering liabilities to retail Forex customers. The amendments eliminate foreign equivalent broker-dealers and FCMs as qualifying institutions. The amendments also eliminate reference to banks or trust companies that meet certain commercial paper or long-term debt ratings since these entities would not meet the requirements of CFTC Regulation 5.8. Banks or trust companies that are regulated in a money center country and have regulatory capital in excess of $1 billion remain a qualifying institution.
More information on NFA's amendment to NFA Financial Requirements Sections 11(b), 14(c) and (d), as well as the related Interpretive Notice can be found in NFA's December 6, 2010 Submission Letter to the CFTC. Questions concerning these changes should be directed to Sharon Pendleton, Director, Compliance (email@example.com or 312-781-1401) or Lauren Brinati, Associate Director, Compliance (firstname.lastname@example.org or 312-781-1215).