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News Facts Actions - Fall 2007

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NFA announces effective date for increased minimum net capital requirements for Forex Dealer Members

Beginning on December 21, 2007, NFA Forex Dealer Members (FDMs) will be required to maintain a minimum net capital requirement of $5 million. The increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). The amendments to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions" were approved by the Commodity Futures Trading Commission (CFTC) in late September.

In addition to the increased capital requirements, the amendments eliminate the concentration charge and replace it with restrictions on the types of firms with which an FCM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17.

"We have taken these steps because a Forex Dealer Member's activities create greater financial risks than the type of transactions involved in traditional exchange-traded futures and options," says NFA General Counsel Tom Sexton. "The increased capital requirement will result in greater customer protection."

FDM capital requirements have been a great cause of concern recently. During the past ten years, NFA has issued 11 emergency enforcement actions against FDMs for failing to demonstrate compliance with NFA financial requirements. In addition, since March 2007, nine different FDMs have fallen under the early warning requirement of $1.5 million.

"Customers trading off-exchange forex do not receive a priority under the Bankruptcy Code in the event of a firm's insolvency," says Sexton, "so it's crucial that FDMs have adequate capital."

NFA is closely monitoring its FDMs to ensure that those firms that wish to continue operating past December 21 will take the necessary steps to meet their new financial requirements.

Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance (spendleton@nfa.futures.org or 312-658-6540) or Valerie Kretschmer, Field Supervisor, Compliance (vkretschmer@nfa.futures.org or 312-658-6588).

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NFA President urges House Subcommittee to address forex regulatory issues in CFTC reauthorization bill

NFA President Dan Roth presented testimony focusing on customer protections issues related to retail off-exchange foreign currency (forex) trading at a hearing held on September 26 by the House Agriculture Committee's Subcommittee on General Farm Commodities and Risk Management to continue the CFTC reauthorization process.

Roth began his testimony by citing the dramatic growth the retail forex market has experienced over the past four years and the resulting customer protection problems that have evolved.

"Members acting as counterparties to retail forex transactions account for less than 1% of NFA's membership," said Roth. "Unfortunately, they also account for over 20% of the customer complaints filed with our arbitration program, over 50% of NFA's current enforcement docket and over 50% of the emergency enforcement actions NFA has taken over the last year."

Roth recommended several actions Congress could take when reauthorizing the CFTC to address forex-related regulatory issues.

  • Congress should limit the Futures Commission Merchants (FCMs) that can act as counterparties to retail forex transactions to those that are primarily and substantially engaged in the activities described in Section 1(a)(20) of the Commodity Exchange Act. Currently, firms are registering as FCMs solely to qualify to conduct retail forex business and the CFTC has no rule-making authority over these firms.
  • Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. "NFA has raised the capital requirements for forex dealers several times, but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business," said Roth.
  • Congress should require that not only the counterparties but also the persons actually selling forex products to retail customers be registered and subject to the CFTC's jurisdiction. These requirements should also extend to those persons "that manage accounts or pooled investment vehicles on behalf of retail customers."
  • To address issues created by the Zelener case, Congress should create "a statutory presumption that leveraged or margined transactions offered to retail customers are futures contracts if the retail customer does not have a commercial use for the commodity or the ability to make or take delivery."

The full text of Roth's testimony can be found in the News Center section of NFA's Web site.

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NFA celebrates 25th anniversary

In October 2007, National Futures Association is celebrating its 25th anniversary as the industrywide self-regulatory organization for the U.S. futures industry.

To understand the evolution of NFA over the past quarter century, it's important to understand the nature of the futures markets in the years leading up to NFA's birth. With the introduction of futures contracts based on financial instruments in 1972, the futures markets began to experience dramatic growth. With this growth, however, came the realization that the regulatory scope of the industry needed to be broadened.

Hundreds of futures professionals, most notably Commodity Pool Operators and Commodity Trading Advisors were operating without formal, continuous supervision, and more Futures Commission Merchants were operating without exchange supervision. Introducing Brokers were not recognized as a separate registration category. Instead, they were considered agents of Futures Commission Merchants. Clearly, the time had arrived for a unified national association which could bring within its fold all the diverse interests and multitude of market users.

In 1974, Congress passed the Commodity Futures Trading Commission Act, establishing the CFTC as the governmental regulatory agency and authorizing the creation of "registered futures associations." A committee of futures industry representatives, led by Leo Melamed, who was then the president of the Chicago Mercantile Exchange, began the task of developing what would eventually become NFA.

The committee convinced Congress to amend the Futures Trading Act in 1978 to sanction NFA's proposed mandatory membership provision. NFA's application for registration was submitted to the CFTC on March 16, 1981 and was approved on September 22 of that year.

"NFA faced many challenges in the fall of 1982," says Robert K. Wilmouth, NFA's President and CEO from 1982 through 2002. "We had to demonstrate to Congress that we could fulfill our promise to be a strong self-regulator. We had to demonstrate to the futures industry that we could avoid regulatory overlap and establish a single, coherent set of high standards of conduct. And we had to demonstrate to the investing public that we could maintain the integrity of the futures markets by developing stringent sales practice rules."

To meet those challenges, NFA developed programs and services in four congressionally mandated areas.

  • NFA established rigorous fitness standards for all NFA Members, including adopting a bylaw requiring all NFA registrants to pass the National Commodity Futures Examination (Series 3).
  • NFA adopted stringent rules covering a wide variety of areas such as advertising, telephone solicitations, additional risk disclosure, discretionary trading, disclosure of fees and minimum capital requirements. Concurrently, NFA began auditing its Member firms for rule compliance and taking strong disciplinary action against rule violators.
  • NFA committed resources to provide investors with the tools they need to make informed financial decisions. NFA also developed several publications and other resources to help its Members understand and fulfill their regulatory requirements.
  • NFA began an arbitration program in 1983 to provide a convenient, inexpensive and prompt method for investors and Members to resolve futures-related disputes.

During 25 years of operations, NFA has developed additional policies and procedures to meet the challenges of a rapidly changing industry. It has also incorporated technology to streamline work processes and increase efficiency.

Since NFA opened its doors in 1982, trading on the U.S. futures markets has exploded. Futures trading has become global in scope and primarily electronic. In 1983, slightly more than 140 million contracts were traded. In 2006, the total number of contracts traded exceeded 2.5 billion. During the same time period, customer complaints - as measured by the number of CFTC reparations and NFA arbitration cases filed - decreased dramatically.

"NFA begins its second quarter century with the same commitment and professionalism that has served the industry well for the past 25 years," says NFA President Dan Roth. "We will continue to strive to be a unique and exemplary self-regulatory organization."

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NFA is on the move

After spending its first 25 years in the same location, National Futures Association is moving its Chicago headquarters to a new location in December. Effective December 17, NFA will be located at 300 South Riverside Plaza, Suite 1800, Chicago, IL 60606. All mail sent to NFA after December 14 should be sent to the new address.

Many of NFA's telephone numbers, including those for NFA's Information Center (800-621-3570) and main reception desk (312-781-1300), will remain the same. However, the numbers listed below, used to fax specific documents (e.g., anti-money laundering documents, disclosure documents, promotional material), will change on December 1, 2007.

Current Fax Number New Fax Number
Effective 12/1/07
Anti-Money Laundering (312) 781-1516 (312) 559-3419
Arbitration Documentation (312) 658-4111 (312) 559-3360
Business Systems Group -- ORS (312) 781-1519 (312) 559-3537
Exchange Application (TPMS) (312) 658-1484 (312) 559-3402
Art/Promotional Materials (312) 658-1466 (312) 559-3359
Disclosure Documents (312) 658-1461 (312) 559-3456
FOREX (312) 658-4193 (312) 559-3363
TPMS (312) 658-4169 (312) 559-3458


In addition, NFA's fingerprint service and registration computer kiosks will be closed beginning at 11:00 a.m. on Thursday, December 13, 2007. The registration computer kiosk will re-open on Tuesday, December 18, and the fingerprint service will re-open on Wednesday, December 19.

In order to use NFA's registration computer kiosk and fingerprint service at NFA's new location, visitors must be pre-registered in the building's visitor registry. Visitors should contact NFA's Information Center (either by phone at 312-781-1410 or send an email to information@nfa.futures.org) to register their name and date of visit so that they can receive access to NFA's offices on the 18th floor. NFA recommends that visitors pre-register at least a day prior to their visit. The hours of operation for the registration computer kiosk and fingerprint service will be from 8:30 a.m. to 4:00 p.m.

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Board Actions

NFA's Board of Directors took the following actions during the Board meeting on August 16, 2007 in Chicago:

The Board approved the following committee appointments:
Finance Committee - Mark G. Bagan, Thomas A. Kloet, Robert E. Murray and Susan M. Phillips
CPO/CTA Advisory Committee - Raymond J. Brinskelle, Dunn Capital Management, Inc.
Hearing Committee - Bernard W. Dan, John R. Kinsella and Joseph J. O'Neill

The Board approved amendments to the Code of Arbitration and Member Arbitration Rules that will raise the level at which an oral hearing can be requested to $15,000.
Note: The CFTC subsequently approved the amendments, which became effective on October 15, 2007.

The Board approved an amendment to NFA Financial Requirements for Forex Dealer Members that will raise the minimum capital requirement to $5 million.
Note: The CFTC subsequently approved the amendment and the new requirements are effective as of December 21, 2007. See separate story for additional details.

The Board approved amendments to NFA's Interpretive Notice setting supervisory standards for any electronic trading system operated or used by Forex Dealer Members (FDMs). The amendments will require an FDM's system to generate two types of reports: exception reports for trades meeting certain parameters and transaction reports to aid the firm and NFA auditors in calculating the FDM assessment fee. The amendments became effective on October 15, 2007.

The Board approved the adoption of NFA Financial Requirement Section 15 and corresponding amendments to the Interpretive Notice entitled "Forex Transactions." The new financial requirements contain three major provisions:

  • The rule would require FDMs to provide NFA with an internal control report prepared and certified by an independent public accountant qualified to certify financial statements for public companies (i.e., a firm registered and in good standing with the Public Company Accounting Oversight Board). The Member would be required to provide this report before commencing its retail forex business.
  • The rule would authorize NFA staff in circumstances when it believes that a Forex Dealer Member's financial records are inadequate to require an FDM's annual financial statements to be certified by an independent public accountant qualified to certify financial statements for public companies.
  • The rule would require each FDM to have an AP/principal who is responsible for supervising the firm's financial functions.

The amended Interpretive Notice would clarify that part of an FDM's supervisory responsibility includes hiring and retaining qualified accounting staff and the firm's independent auditor.
Note: The CFTC subsequently approved these amendments, which are effective immediately.

The Board approved amendments to NFA Compliance Rule 2-39 to prohibit most Members from using unregulated solicitors when acting as fully disclosed forex intermediaries.
Note: The CFTC subsequently approved these amendments. Firms that are currently accepting orders or servicing accounts introduced by unregulated entities have until October 31, 2007 to unwind their arrangements with these unregulated entities.

The Board approved amendments to the Interpretive Notice entitled "Forex Transactions" to require that a Forex Dealer Member's (FDM) disclosure language makes clear to customers that the FDM is acting as a principal in these transactions and may profit from the market moving against the customer. The amendments also provide NFA staff with the authority to approve appropriate alternative language based upon an FDM's business model. Additionally, the amendments require the disclosure to be prominently displayed in uppercase letters in at least 10 point size type and to be separate acknowledged by the customer.

The Board approved amendments to NFA's Articles of Incorporation regarding contract market representation on NFA's Board.

The Board approved the adoption of an Interpretive Notice entitled "Compliance Rule 2-4: Misuse of Trade Secrets and Proprietary Information." The Notice, which became effective on September 5, 2007, states that Compliance Rule 2-4 prohibits Members and Associates from knowingly obtaining or seeking to obtain another Member's or Associate's confidential information or trade secrets without that person's permission and from knowingly or recklessly misusing confidential information or trade secrets in their possession when these activities may harm customers. The Notice gives three examples of behavior that violates the rule: 1) misusing customer information; 2) disclosing customer orders; and 3) obtaining or attempting to obtain confidential information disclosing a Commodity Trading Advisor's historical trading positions.
Note: The CFTC subsequently approved the Notice, which became effective on September 5, 2007.

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News Briefs

NFA distributes $1 million in restitution payments to defrauded investors
As a result of a judgment in a CFTC case, NFA recently distributed a little over $1 million in restitution payments to 62 investors. Because NFA does not charge any administrative fees for its restitution program, individuals received 92 cents on the dollar for their losses.

The court order is a result of a complaint the CFTC filed on March 11, 2005, against Ben Ouyand and Victco Financial Services, Inc.

In the last 10 years, NFA has distributed more than $14.9 million to over 7,000 investors.

NFA launches new futures trading online learning program
NFA has developed an online learning program for individuals who want to learn about the opportunities and risks inherent in exchange-traded futures. Individuals can access the program through the Investor Learning Center section of NFA's Web site (www.nfa.futures.org).

The program is based on NFA's publication "Opportunity and Risk: An Educational Guide to Trading Futures and Options on Futures." The interactive, self-directed program consists of four modules explaining how futures contracts are traded, who regulates the U.S. futures markets, the various ways individuals can participate in futures trading and steps individuals should take before opening a futures trading account. The program also contains a series of quizzes to help reinforce basic concepts and a complete glossary of terms related to futures trading.

NFA to participate in two upcoming investor education conferences
NFA Communications and Education Director Larry Dyekman will give a presentation to investors at a conference sponsored by the American Association of Individual Investors (AAII). The conference is being held November 8-10 at the Hilton Walt Disney Resort in Orlando, Florida. Dyekman's presentation will focus on the language of the futures markets, the unique features of futures trading, the risk involved in futures trading and steps investors can take to avoid becoming a victim of fraudulent operations.

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

For more information on the AAII conference, visit www.aaii.com/programs/conference/.

In addition, NFA will sponsor an information booth at the Traders Expo being held at the Mandalay Bay Convention Center in Las Vegas on November 14-18.

For more information on the expo, visit http://www.tradersexpo.com/.

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