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News Facts Actions - Fall 2008

In this issue:

New provisions of Commodity Exchange Act prompt amendments to NFA forex rules

NFA has proposed several amendments to its forex rules to reflect provisions of the CFTC Reauthorization Act of 2008 enacted by Congress as part of the Farm Bill in May. The amendments cover NFA's Bylaws, registration rules, minimum net capital requirements and other compliance issues.

"For our purposes, the most significant portions of the Reauthorization Act are the ones dealing with retail forex," said NFA's Senior Vice President and General Counsel Tom Sexton. "Fortunately, we anticipated many of the elements of the reauthorization and NFA staff has been able to address the necessary rule amendments quickly and efficiently."

The legislation creates a new registration category for any firm acting only as the counterparty to retail off-exchange foreign exchange contracts. These firms will be required to register as Retail Foreign Exchange Dealers (RFEDs). An RFED or an FCM that is substantially engaged in on-exchange activities and acts as a retail forex counterparty will be designated under NFA rules as an approved Forex Dealer Member (FDM) of NFA.

The legislation also requires firms that solicit retail forex customers, manage retail forex accounts or operate pools for retail customers to register with the CFTC and be Members of NFA. FCMs, IBs, CPOs and CTAs whose activities involve retail forex will be designated Forex FCMs, Forex IBs, Forex CPOs and Forex CTAs, while APs of those firms will be designated as Forex Associated Persons.

"The separate designations are necessary for several reasons," said Sexton. "We need to track which firms and individuals are engaged in retail forex activities, and we need to distinguish between FCMs that are designated as approved FDMs and those that are not, because approved FDMs have a higher minimum net capital requirement."

The legislation imposes a $20 million capital requirement over a 360-day period on FCMs, their affiliates and RFEDs who act as counterparties to retail forex transactions. The CFTC recently approved an NFA rule amendment requiring these firms to have a minimum of $10 million in net capital on October 31, 2008, increasing to $15 million on January 17, 2009 and $20 million on May 15, 2009.

NFA is also amending its Bylaws to ensure that broker-dealer affiliates that register as RFEDs must be regulated as an FDM.

"NFA strongly believes that even though a broker-dealer is subject to regulation by the Financial Industry Regulatory Authority (FINRA), if its forex affiliate registers as an RFED, the affiliate should be subject to NFA regulation," said Sexton.

Because the Reauthorization Act will require forex solicitors and account managers to be NFA Members, NFA will eliminate its provision making FDMs responsible for the acts of non-Members and replace it with a prohibition on doing business with non-Members, similar to the prohibition in Bylaw 1101. Bylaw 1101 has long been a cornerstone of NFA's regulatory effectiveness and states that no NFA Member can do business with a non-Member.

Although as noted above, the CFTC has already approved amendments to an FDM's minimum net capital requirements, some of the other NFA rule amendments will not be submitted to the CFTC until the Commission publishes its proposed forex rules.

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NFA prepares for influx of forex registrations

The CFTC Reauthorization Act of 2008, enacted by Congress as part of the Farm Bill in May, creates a new registration category for any firm that acts as the counterparty to retail off-exchange foreign exchange contracts. In addition, the legislation requires any firm or individual whose business involves retail off-exchange foreign exchange (forex) contracts to register with the CFTC and become Members of NFA. Although the CFTC is still writing its forex regulatory and registration requirements, NFA has already begun taking the steps necessary to process the new forex applications.

"Because the new requirements create a new registration class called Retail Foreign Exchange Dealers, we have had to make several enhancements to our Online Registration System (ORS)," said NFA's Vice President of Registration Greg Prusik. "We are also making additional adjustments to identify as 'forex firms' those FCMs, IBs, CTAs and CPOs that will be dealing in retail off-exchange forex trading."

In addition to firm applications, NFA is also enhancing ORS to handle applications from APs associated with forex firms who will be dealing with retail forex customers. These APs will be identified as "forex individuals".

"We have developed a new proficiency examination specific to retail forex activity, called the Series 34 exam," said Prusik, "and have recommended to the CFTC that its forex rules require any individual applying for registration as a Forex AP to take and pass both the Series 3 exam and the Series 34."

NFA also has recommended, however, that the CFTC "grandfather" any AP who was registered as of May 22, 2008, exempting them from the requirement to take and pass the Series 34 exam. "This would be consistent with NFA's treatment of registered APs at the time the Series 3 was first implemented," said Prusik.

Since almost all registration transactions are conducted electronically, firm annual update processing, firm withdrawal processing and individual termination processing are also being enhanced to handle the new RFED class and the "forex firm" and "forex individual" statuses.

"At this point, we don't know how many forex firms and individuals will be applying for registration," said Prusik. "However, we do know that we want to have all of our systems in place and ready to begin processing registrations by the end of this calendar year."

Once the CFTC rules are finalized, NFA will provide educational materials, including a Web seminar, to help new registrants through the registration process.

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FINRA announces increase in examination fees

Citing "higher charges from test delivery vendors and increased technology charges", the Financial Industry Regulatory Authority (FINRA) has notified NFA that it will increase its fees for the administration and delivery of NFA's qualifications exams on January 2, 2009.

Effective January 2, 2009, the fee for an individual to take the Series 3 National Commodity Futures Examination will be $105, an increase of $10. The fee for the Series 30 Branch Office Managers Exam-Futures, the Series 31 Futures Managed Funds Examination and the Series 32 Limited Futures Exam-Regulation will be $70, an increase of $10.

Individuals wishing to take one or more of these exams must complete the testing application form (U10), which can either be downloaded or completed online at

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Board Actions

NFA's Board of Directors took the following actions at a meeting on August 21, 2008 in Chicago:

The Board approved the following committee appointments:
Membership Committee: Michael R. Schaefer
Finance Committee: Jeffrey C. Borchardt, Gerald F. Corcoran, Robert E. Murray and Susan M. Phillips
Audit Committee: Douglas E. Harris
Hearing Committee: George Gero and Scott Reeves

The Board approved amendments to NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements". One amendment expands the conditions by which an individual is exempt from being counted as having worked at a Disciplined Firm. The other amendment revises the language regarding the enhanced level of adjusted net capital required to be maintained by Forex Dealer Members that trigger the enhanced supervisory requirements to provide flexibility and allow for the scheduled increases to an FDM's minimum net capital requirements.

The Board approved NFA's petition for rulemaking to the CFTC to require CPOs and CTAs to electronically file disclosure documents. See related article in the Summer 2008 edition of News,Facts,Actions.

The Board approved a series of forex rule amendments prompted by recent changes to the Commodity Exchange Act. (See separate story.)

The Board approved amendments to NFA's Registration Rules and Bylaws to implement the retail forex registration requirements included in the CFTC Reauthorization Act of 2008. The Board also granted the Executive Committee the authority to make further amendments that may be necessitated as the CFTC finalizes its new forex registration rules.

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News Briefs

NFA signs Regulatory Services Agreement with ELX
NFA recently signed an agreement with the Electronic Liquidity Exchange (ELX) to perform market surveillance and other regulatory services for the new exchange. ELX was established by 12 leading financial institutions.

In its press release on July 22, ELX stated, "ELX is committed to maintaining the highest standards in market integrity. Under this agreement, the NFA will play an important role in ELX's regulatory program, providing world class market surveillance and regulatory functions for the exchange."

NFA updates Regulatory Requirements Guide
NFA has updated its publication, "NFA Regulatory Requirements for FCMs, IBs, CTAs and CPOs," to reflect recent rule amendments and interpretive notices. The publication is posted in the Member Services section of NFA's Web site and can be downloaded in a pdf format.

The updated guide includes the new recordkeeping requirements for foreign-based futures firms, additional anti-money laundering requirements and a revised IB minimum capital requirement.

NFA to participate in upcoming investor education conferences
NFA Members and futures industry professionals will have the opportunity to meet with NFA staff members at the Futures Industry Association's Annual Futures and Options Expo in Chicago on November 11-12. NFA will sponsor an information booth in the Expo exhibit hall. The Expo will be held at the Chicago Hyatt Regency Hotel.

According to the FIA, "Expo showcases products, services and information for market professionals and participants. Hundreds of risk management products, trading tools, books and exchange and technology products are presented by more than 100 companies from around the world.

Expo also offers a variety of sessions that allow participants to discuss industry trends, hear expert views on key issues, improve trading skills and learn about new products, systems and practices. More than 4,500 people from more than 30 countries will attend Expo. Attendees range from senior staff at brokerage firms and exchanges to floor traders, pension fund managers, corporate treasurers, CTAs and CPOs, and individual investors."

For additional information on the Expo, visit FIA's Web site at

NFA also is sponsoring an information booth at the Las Vegas Traders Expo on November 19-22 at the Mandalay Bay Resort and Hotel. NFA staff will distribute copies of NFA's investor education materials and answer questions from expo attendees.

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 4,000 traders. For more information visit the Expo's Web site at

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