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News Facts Actions - Summer 2006

In this issue:

Board Actions

NFA's Board of Directors took the following actions during the Board meeting on May 18, 2006 in New York City:

The Board approved the proposed budget for Fiscal Year 2007 (see separate story).

The Board made the following committee appointments:
Nominating Committee: F. Kemper Cagney
Hearing Committee: Richard W. Petticrew, Wendy Robinson
Finance Committee: Jeffrey Borchardt
Membership Committee: Douglas O. Kitchen
Audit Committee: Gerald F. Corcoran
Floor Broker/Floor Trader Subcommittee: Scott P. Hess, John L. McNamara

The Board approved amendments to NFA's Code of Arbitration and Member Arbitration Rules to require a Member and Associate to post a bond if it files a motion to vacate and wants to avoid suspension while the motion is pending. The amendment proposes a bond equal to 150% of the arbitration award, but staff will have the authority to accept a smaller bond in appropriate circumstances. A second amendment to the Code of Arbitration would give NFA arbitration jurisdiction over forex claims against Members and Associates covered by Compliance Rule 2-39.

The Board authorized NFA to submit a Petition for Rulemaking to the CFTC to require non-broker-dealer IBs to file their certified financial reports electronically.

The Board approved an amendment to NFA Financial Requirements Section 11 that will allow NFA to grant exemptions on affiliate transactions to the concentration charge requirement for Forex Dealer Members.

The Board approved amendments to NFA's Interpretive Notice regarding FCM and IB anti-money laundering (AML) requirements. The revised interpretive notice codifies the addition of Customer Identification Program and Suspicious Activity Reporting requirements and guidance.

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NFA budgets 2.8 percent spending increase for new fiscal year

NFA has budgeted total expenses for Fiscal Year 2007 at $36.6 million, a 2.8 percent increase over projected expenses in Fiscal Year 2006. Revenue is budgeted at $39.2 million, an increase of 16.5 percent over projected FY 2006 revenue. NFA's fiscal year runs from July 1 through June 30.

"If you separate administrative expenses from capital expenditures, you'll see that administrative expenses are up 4.2 percent and capital expenditures have decreased by 29 percent," says NFA Treasurer David Hawrysz. "The large decrease in capital expenditures is directly related to the completion of our Hot Site, a project which has significantly enhanced our disaster recovery program."

As a service organization, "people related" costs are NFA's largest expense. Therefore, the major portion of the increase in administrative expenses is targeted for wages and benefits, with health care costs continuing to constitute a significant portion of employee benefits expenses.

The primary force driving the increase in NFA revenues is the continued growth of public trading volume.

"Public trading volume on the U.S. futures exchanges over the past five years has grown an average of 30 percent," says Hawrysz. "This sustained growth has allowed NFA to reduce the assessment fee seven times over the past eight years. The current fee, two cents per side, has been effective since January 1, 2005."

Hawrysz credits the hard work of NFA's Finance Committee for guiding the development of this year's budget.

"The knowledge and expertise of each Committee member have been invaluable," says Hawrysz. "We are very fortunate to have such dedicated individuals."

NFA's Finance Committee consists of the following individuals: Jeffrey C. Borchardt, Kansas City Board of Trade; W. Robert Felker, J.P. Morgan Futures, Inc.; Paul Georgy, Allendale, Inc.; Robert E. Murray, Graham Capital Management LP; Susan M. Phillips, The George Washington University School of Business; and NFA President Dan Roth. Former committee member Douglas Kitchen of Rosenthal Collins Group also contributed to the development of this year's budget.

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News Briefs

New capital requirements effective July 31
Changes to NFA's minimum net capital requirements for FCMs, including Forex Dealer FCMs, and independent IBs become effective on July 31, 2006. At that time the new minimums will be:

  • $500,000 for FCMs that are not Forex Dealer Members;
  • $1 million for Forex Dealer Members;
  • $45,000 for independent IBs;
  • $5 million for FCMs that are counterparties to off-exchange forex options transactions with retail customers;
  • $7.5 million for FCMs with affiliates that are authorized to act as a counterparty to off-exchange forex transactions (pursuant to Section 2(c)(2)(B)(ii)(III) of the Commodity Exchange Act) with retail customers solely by virtue of their affiliation with a registered FCM.

NFA has not increased the minimum capital requirement for FCMs since 1990. During the intervening 15 years, the Consumer Price Index has risen over 50% and exchange volume has grown almost 500%. Likewise, the minimum net capital requirement for independent IBs was last raised in 1992.

"We believe that the increase is necessary to ensure that the minimum net capital requirement continues to provide adequate protection," says NFA President Dan Roth.

The increase for Forex Dealer Members was deemed appropriate because their activities create greater financial risks than the agency transactions involved in traditional exchange-traded futures and options.

"The need for adequate capital is particularly acute for firms acting as counterparties in retail off-exchange forex," says Roth.

Individuals seeking additional information on these increases should consult NFA's June 16, 2006 Member Advisory at They may also direct questions to Compliance Manager Lisa Marlow at or 312-658-6525 or Compliance Director Sharon Pendleton at or 312-658-6540.

NFA staff to speak at Forex Trading Expo
Compliance Director Sharon Pendleton will participate in a panel discussion entitled, "Making the Right Choices When Opening Your Forex Account" at the Forex Trading Expo, scheduled on September 8 and 9 in Las Vegas. Joining Sharon on the panel will be CFTC Deputy Director Lawrence Patent, Division of Clearing and Intermediary Oversight.

NFA will also sponsor an information booth in the exhibit hall, where NFA staff will distribute forex education brochures and demonstrate how to conduct online background checks of forex firms and brokers.

For more information on the expo, visit

NFA staff to present regulatory session at NIBA conference
NFA staff will present a "Q&A with NFA" session at the National Introducing Brokers Association's regional conference in New York on October 11. The conference will be held at the New York Mercantile Exchange, 1 North End Ave., New York. For additional information, visit NIBA's Web site at

Enforcement/Compliance Contact requirement now in effect
As of July 1, 2006, each firm applying for registration or currently registered is required to provide information for an Enforcement/Compliance Contact (ECC), including an e-mail address, in NFA's Online Registration System (ORS).

NFA has created a new Enforcement/Compliance Contact Information screen in the ORS firm application. Every registered firm must provide the contact person's name, street address, city, state, telephone number and e-mail address. A firm may have more than one ECC, but the required information for each must be provided.

To meet the new requirement, an authorized user of ORS should go to NFA's Web site at and log on to ORS. Once in the system, select "Update/Withdraw Registration Information." Enter the firm's NFA ID number and select "Firm's Main Office Location" from the "Business Locations" box on the screen. Page through all of the screens, updating any information as necessary, and complete the information on the new "Enforcement/Compliance Contact" screen.

NFA has created ECC screens for firms who have previously supplied NFA's Compliance Department with e-mail addresses. Although the ECC screens that NFA has created contain these e-mail address, each firm must access the screen, verify that the address is correct and complete the required contact information fields. Firms should also delete any e-mail addresses that may no longer be correct or valid.

Individuals who would like additional information regarding the new requirement should contact NFA's Information Center by phone at 800-621-3570 (if calling internationally, call 312-781-1410) or by e-mail at

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NFA restructures Compliance Department to increase efficiency

As part of its continuing efforts to improve the efficiency and effectiveness of its operations, NFA recently completed a restructuring of its Compliance Department. The new structure, which became effective on July 1, will focus on three functional areas-audits, investigations and risk management.

"For the last 15 years, NFA has used different variations of a basic team structure to operate the Compliance Department," says Regina Thoele, vice-president of Compliance. "While this arrangement has worked well for us, part of being a successful self-regulatory organization involves looking for new and better ways to do our work to ensure we can keep pace with the changes occurring in the futures industry."

Eliminating the current team structure of staff auditors, field supervisors and managers, NFA has pooled all of these staff together for the purpose of conducting audits and related regulatory work (e.g., financial analysis). The pooled staff is overseen by two directors, each of whom is assigned a certain portion of NFA membership.

"We believe this new structure will result in a less compartmentalized approach to auditing, giving us greater flexibility to allocate our audit staff where they are needed most," says Thoele.

The second area of the reorganized department is a specialized unit created to expedite the investigation process and monitor firms that may pose a greater risk to customers and the futures industry.

"By dedicating experienced members of the Compliance Department to focus solely on investigations, we can decrease the time it takes to bring a disciplinary case to the Business Conduct Committee," says Thoele

NFA has also created a risk management group who will monitor all of the information available to NFA to identify precisely those firms that need the most attention from NFA. To help this group achieve its goals, NFA is in the beginning stages of developing a new computer system that will replace the current Risk Assessment Priority Program (RAPP).

"Though it has been a useful tool for the past four years, the RAPP system has certain limitations," says Thoele. "For example, the RAPP system does not capture or reflect changes or trends occurring within firms that would help us identify potential problems."

The new system will collect all of the information NFA has concerning Member firms (e.g., annual questionnaires, financial statements, disclosure documents, investigations and audits) into one database. In addition, the risk management group will determine whether there is additional information that should be collected and input into the system so that NFA has a comprehensive profile of the firm and its operations. The risk management group will then use this information to identify, analyze, monitor and address key areas of risks created by NFA Members.

"The development of this new system will be a major initiative and will be phased in over the next few years," says Thoele. "However, we are confident that this system will greatly increase our ability to identify important regulatory issues and trends before they develop into real problems."

Reflecting the changes in the Compliance Department, NFA has updated the list of Compliance Contacts on its Web site to help Members direct their compliance questions to the appropriate staff.

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