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News Facts Actions - Winter 2007

In this issue:

NFA proposes amendments to Forex Dealer Member requirements

At its Board of Directors meeting in November 2006, NFA proposed several amendments to its Forex Dealer Member (FDM) requirements. The proposed amendments, all of which were approved by the Board and submitted to the CFTC for review, cover a wide range of issues, including financial requirements, supervision of the use of electronic trading systems, sales practices and bulk assignment of customer positions.

"As we continue to gain experience regulating the forex activities of our Members, we recognize that we need to adapt our regulatory requirements to address emerging issues and concerns," says Tom Sexton, NFA's General Counsel.

Financial Requirements

NFA's current rules require FDMs to maintain minimum adjusted net capital equal to the greater of $1 million ($5 million if the FCM offers forex options), 1% of the total net aggregate notional value of all open forex futures and options transactions in retail accounts, or any other amount that is required by virtue of the FDM being a Futures Commission Merchant (FCM).

The proposed amendment would replace the current capital requirement based on 1% of net notional value with a new requirement based on 5% of liabilities to retail forex customers.

"The amount of customer funds held by FDMs has increased dramatically since we first adopted the net capital requirements," says Sexton, "and our requirements no longer reflect the amount of customer funds at risk."

Since an accurate accounting of customer liabilities is essential for computing this requirement, NFA has also proposed an amendment to the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" to make clear that an FDM must maintain records of these liabilities.

The CFTC approved these amendments in late January. The new requirement and corresponding changes to the Interpretive Notice will become effective as of March 31, 2007.

Supervision of the Use of Electronic Trading Systems

Retail forex transactions occur almost exclusively on electronic trading platforms, but the reliability of those platforms and the records they generate vary widely. NFA has proposed an Interpretive Notice to Compliance Rule 2-36 that will provide guidance to FDMs on how they can fulfill their supervisory responsibilities over the security, capacity, trade integrity, credit and risk-management controls, and records provided by the firm's electronic trading systems.

For example, the section on recordkeeping addresses the specific information the trading system must record and maintain. The section on trade integrity sets a general standard requiring FDMs to adopt and enforce written procedures reasonably designed to ensure the integrity of trades placed on their trading platforms, most notably in the areas of pricing, slippage and rollovers.

"Some forex systems either already comply with these requirements or should need only minor modifications," says Sexton. "We are aware of other systems, however, that will need major upgrades."

Sales Practice Requirements

Based on recent audits and promotional material reviews, NFA has proposed amendments to the Interpretive Notice entitled "Forex Transactions with Forex Dealer Members" to clarify sales practices that NFA considers deceptive and misleading.

For example, NFA staff has begun to see testimonials in forex promotional material that are misleading because they do not represent comparable accounts, fail to state that past results are no guarantee of future success, and do not identify that the testimonial was provided in return for compensation (if that is the case).

"We have also seen forex material that cherry picks accounts or contains statements of opinion that have no reasonable basis in fact," says Sexton. "We want to make sure that these practices are explicitly defined as deceptive and misleading."

The proposed amendments to the Interpretive Notice include proscriptions against some of the more common practices that NFA has consistently held to be fraudulent. They also require that certain radio and television advertisements be submitted to NFA for review and prior approval, as is required for Members offering on-exchange futures.

Requirements Regarding the Bulk Assignment of Customer Positions and Wholesale Liquidation when Ceasing Forex Business

During the past few months, several FDMs have ceased business and assigned their customer positions to other FDMs without notifying NFA of the assignments until after the fact. Because this raises customer protection issues, NFA has proposed Compliance Rule 2-40 and its Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business."

"The proposed rule permits the bulk assignment or liquidation of customer positions or the transfer of accounts by the FDM only if the firm follows the detailed procedures outlined in the Interpretive Notice," says Sexton. "These provisions are similar to those required for on-exchange transactions."

To view each rule submission in its entirety, click on the following links:

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New Online Registration System enhancement allows users to receive automatic e-mail notification of registration-related events

NFA will soon launch a new enhancement to its Online Registration System (ORS) that allows users to receive automatic e-mail notifications when registration-related events occur in ORS. The ORS users' security managers can designate recipient(s) to receive e-mail notifications and specify which types of notifications each should receive. The system does not limit the number of individuals designated as recipients of e-mail notifications.

"We currently post registration-related actions in ORS and ORS users can view them by logging on to the system," says Greg Prusik, Vice-President of Registration and Membership. "Although we will continue this policy and encourage users to check ORS on a regular basis, we are now offering to 'push' these notices out to the Security Managers and any other individuals the firm designates to receive them."

There are currently nine different notification types. Firm recipients can receive all nine notification types. Floor brokers, floor traders and exchange recipients may receive only three (the first three types listed below). The notification types are:

  • pending applicants to be withdrawn;
  • individual with fingerprint card status set to illegible;
  • applicants/registrants withdrawn;
  • associated person with temporary license to be withdrawn;
  • associated person with temporary license withdrawn;
  • branch office with no manager;
  • dual sponsorship for associated person filed;
  • individual withdrawal notice requested; and
  • firm deemed to have requested to withdraw.

To add recipients for any of these notification types, the Security Manager should select "NFA E-mail Notification Service" under the "Security" tab in ORS. Once on the page, click the "Add Recipient" button, enter the requested information and select the notification type(s) the recipient should receive. After all required information is entered, click the "Add" button. The Security Manager is responsible for maintaining current contact information and e-mail addresses for each recipient.

"This new enhancement will allow not only Security Managers but also others at a firm to receive registration-related notices on a more timely basis," says Prusik. "We believe this new service will help our Member firms manage and monitor their registration activity more efficiently."

NFA will notify Members when this new enhancement is available.

For additional information regarding the e-mail notification service, contact NFA's Information Center at 800-621-3570 or 312-781-1410 or by e-mail at Representatives are available weekdays from 8:00 a.m. to 5:00 p.m. Central Time.

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Introducing Brokers must file certified financial statements with NFA electronically

NFA has amended its Financial Requirements Rules to require independent Introducing Brokers that are not also broker-dealers to file their Form 1-FR-IB certified financial statements electronically. Concurrently, the CFTC has amended its rules to require electronic filing and waiving the manual signature requirement. NFA's rule amendments became effective on December 22, 2006.

IBs will now file their certified financial statements through NFA's online EasyFile system. NFA launched EasyFile in 2004 to allow non-broker-dealer IBs to submit their 1-FR-IB unaudited financial statements to NFA electronically. However, they were still required to submit signed hardcopy certified statements. The amended rules have eliminated that requirement.

"Now our IBs can file their financial statements with us more efficiently," says Regina Thoele, Vice President of Compliance. "With EasyFile there is no software to download or install, and you can submit files from anywhere you have Internet access."

IBs access EasyFile by using the "Electronic Filings" link on the Compliance tab at the top of NFA's Web site home page ( IBs can then enter their 1-FR-IB information directly into NFA's database using EasyFile. If an unaudited 1-FR-IB has already been filed when the Member initially clicks the link to the certified statement, NFA's system will copy the entries from the unaudited statement to the certified one.

IBs will upload the certified financial statements (signed auditors opinion, required financial statements, supplemental schedules and footnote disclosure) as a pdf file; and enter or verify the statement balances, correcting for material changes. After the pdf documents have been uploaded and the numbers verified, the IB submits the filing to NFA. Prior to accepting the submission, the system performs a check of the numbers and alerts the IB of corrections necessary before the submission will be completed.

"Providing for the electronic filing of certified financial statements is just one example of how we continue to look for ways to help our Members meet their regulatory obligations more efficiently," says Thoele.

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CFTC amends regulations to require electronic filing of exemption notices

Effective February 15, 2007, Commodity Pool Operators (CPOs) and Commodity Trading Advisors (CTAs) that qualify for exemption from registration under the CFTC's Part 4 regulations must file their exemption notices with NFA electronically. In addition, under the amended CFTC regulations, manual signatures will no longer be required. In light of these rule changes, NFA will no longer accept hardcopies of exemption notices.

"NFA staff currently manually inputs and scans an average of 300 exemptions every month and manually follows up on exemption notices that are not prepared in accordance with CFTC requirements," says NFA General Counsel Tom Sexton. "Filing exemption notices electronically will reduce NFA staff resources devoted to this area and will eliminate data entry errors because the filer will be inputting the information into the system."

Firms that are registered with the CFTC in any capacity and non-registrants will both access NFA's electronic filing system through the use of a designated user ID and password. Registered firms will use their existing Online Registration System (ORS) accounts to file their exemption notices.

Non-registrants will complete an on-line application form (located under the "Electronic Filings" tab in the Compliance section of NFA's Web site) to obtain a login ID. NFA has developed a new form-based authentication model for non-registrant authentication. This authentication process must be completed before NFA issues a login ID to a non-registrant.

Once they access the system, both registrants and non-registrants will be able to file exemption notices simply by selecting the appropriate exemption type and providing the information required by Commission regulations. The system will automatically create a printer-friendly version of the exemption notice for the filer's records. The filer will also be able to view a historical summary of all exemption notices it has filed and update its exemption information at any time.

"The electronic filing system is very user friendly," says Sexton. "The system provides assistance to filers through a help text which outlines the specific requirements of the exemption being filed."

Individuals seeking additional information or assistance should contact NFA's Information Center toll-free at 800-621-3570 or 312-781-1410 or by e-mail at Representatives are available weekdays from 8:00 a.m. to 5:00 p.m. Central Time.

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NFA makes exemption information available on BASIC

NFA has enhanced its Background Affiliation Status Information Center (BASIC) system to provide additional information about exemptions from certain CFTC registration and reporting requirements. In particular, NFA Members and investors can now verify if a trading advisor or commodity pool operator has filed an exemption pursuant to Part 4 of the CFTC's Regulations because the person is not required to register with the CFTC, the pool's participants are sophisticated or high net worth investors, or the pool meets certain trading criteria.

"Both Members and investors now have easier access to exemption information," says Regina Thoele, Vice President of Compliance. "Members will be able to comply with NFA Bylaw 1101 by using BASIC to determine whether the firms they are currently doing business with are Members or have filed an applicable exemption. Investors will be able to determine if a specific commodity pool they are considering investing in is exempt from certain registration requirements."

Individuals may search for exemption information on BASIC by pool or firm name (i.e., the name of the trading advisor or pool operator). After entering all or part of the name into BASIC, the "Search Results" screen will display possible matches, including the name, NFA ID and status. If a firm or pool has no existing registration or exemption status, BASIC will display a message stating, "No Current Status."

"Once you identify the pool or firm you are looking for, click on the specific firm name to go to the 'Details' screen," says Thoele. "If NFA has any exemptions on file for the pool or firm, the 'Details' screen will contain an 'Exemptions' field, which will include a 'View Exemptions' link. Click on this link to see exemptions filed by the firm or for any pools that the firm operates."

If you have any questions regarding the exemption information, please contact NFA's Information Center at (800) 621-3570 or 312-781-1410 or by e-mail at Representatives are available weekdays from 8:00 a.m. to 5:00 p.m. Central Time.

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Board Actions

NFA's Board of Directors took the following actions at a meeting on November 16, 2006 in New York City:

The Board directed the Secretary to solicit from the membership the nomination of individuals to serve on the Board in the Public Representative category.

The Board appointed Maureen C. Guilfoile, Director and Senior Counsel with Merrill Lynch, to the FCM Advisory Committee. Ms. Guilfoile is also President of the Law and Compliance division of the Futures Industry Association.

The Board appointed David J. Vogel and Lawrence S. Block to the CPO/CTA Subcommittee of the Nominating Committee for terms to expire in February 2007 and February 2008, respectively. Mr. Vogel is President of Citigroup Managed Futures LLC. Mr. Block is a principal of Kenmar IA Corp. and Senior Vice President of Kenmar Group, Inc.

The Board approved an amendment to Section 2(a)(i) of NFA's Financial Requirements to raise the minimum adjusted capital requirement for FCMs that guarantee IBs to $750,000.

The Board approved amendments to NFA's Interpretive Notice regarding security futures products (SFPs) proficiency training to extend the current provisions substituting training for testing until December 31, 2009.

The Board approved amendments to NFA's Interpretive Notice regarding FCM and IB anti-money laundering (AML) requirements. The amendments codify current requirements relating to a customer identification program, suspicious activity reporting, information requests, and private banking and correspondent accounts.

The Board approved several amendments to NFA's Forex Dealer Member requirements, including:

  • Amendments to NFA Financial Requirements;
  • Supervision of the use of electronic trading systems;
  • Forex sales practice requirements; and
  • Requirements regarding the bulk assignment of customer positions and wholesale liquidation when ceasing forex business.

See separate story for a more detailed explanation of these requirements.

The Board approved a reduction in the assessment fee rate paid by exchange Members from $.01 to $.005 to correct an imbalance between the amounts paid by the smaller and larger exchange Members of NFA.

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News Briefs

NFA launches electronic investor newsletter
On January 10, NFA launched an electronic newsletter for individuals who trade futures, options on futures and off-exchange foreign exchange (forex) products. Individuals can subscribe to receive the quarterly publication free of charge on NFA's Web site (

The inaugural edition of the newsletter provides investors with information they need to better understand both the opportunities and risks inherent in trading these products and avoid becoming victims of fraudulent activity. It also contains links to other investor education resources and a list of NFA Member firms and individuals that NFA has taken enforcement actions against during the 4th quarter of 2006.

NFA provides investor education at New York Traders Expo
NFA is sponsoring an information booth at the New York Traders Expo on February 17-20 at the Marriott Marquis Hotel. NFA staff will distribute copies of NFA's investor education materials and demonstrate how to conduct a background check of a futures firm or individual using NFA's Web-based Background Affiliation Status Information Center (BASIC).

The Expo offers educational seminars and workshops as well as an exhibit hall featuring trading software providers, futures and options exchanges and other vendors. In previous years, the Expo has attracted more than 5,000 traders. For more information visit the Expo's Web site at

NFA to sponsor International Regulators Dinner
NFA will sponsor an International Regulators Dinner in Boca Raton on March 13. The dinner will be held in conjunction with a day-long meeting for international regulators that coincides with the Futures Industry Association annual conference (March 14-17). CFTC commissioners and senior staff, exchange representatives and regulators from around the world are expected to attend. For more information on the conference, visit

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