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News Facts Actions - Fall 2010

In this issue:

NFA experiences influx of applications as result of CFTC's final forex rules

On August 30, the Commodity Futures Trading Commission (CFTC) issued its final rules regarding retail off-exchange foreign currency (forex) trading in the United States. As the October 18 effective date for the rules approached, NFA stepped up its efforts to ensure that newly registered IBs, CPOs and CTAs could continue conducting retail forex business after October 18.

The final forex rules put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operation standards. With certain exceptions, persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex are required to register with the CFTC, either as introducing brokers, commodity trading advisors, commodity pool operators or as associated persons of such entities.

NFA began accepting registration applications from forex firms and individuals on September 2nd. Through October 10, the Association had received registration applications from 263 forex firms and 1,161 forex associated persons. Of those, NFA had approved 131 forex firms and 842 associated persons.

"Some of the applications have come from firms and individuals who had previously registered but must now be approved to offer retail forex trading to their customers," said Greg Prusik, vice-president of Registration. "Those types of applications move through the process fairly quickly. However, previously unregistered forex firms and individuals require a more comprehensive review before approving their registration."

Independent IB applications are among those that require a more detailed review, because these firms must meet net capital requirements. CPOs and CTAs have the additional responsibility of providing an NFA-approved disclosure document to all potential customers.

"Fortunately, many forex CPOs and CTAs have been voluntarily registering during the past few years, so we haven't been inundated with new disclosure documents," said Mary McHenry, senior manager of Promotional Material and Disclosure Document Review. "Since September 2, NFA has received approximately 60 disclosure documents from forex CPO and CTA applicants."

Although NFA has placed a high priority on processing as many forex-related applications as possible prior to the effective date of the CFTC's rules, some forex firms may not be able to conduct business on October 18 if the firm's application has not been approved.

"Some firms may have waited too long to submit their applications or their applications were deficient in some way," said Prusik. "That means that they may have to delay opening their doors for business until their applications have been approved. And if they had been conducting business as unregistered entities prior to October 18, they may have to suspend trading until their applications have been approved."

Navigating through the registration process is just the beginning of a forex firm's regulatory journey. Beginning on October 18, previously unregistered forex IBs, CPOs and CTAs will be subject to a host of rules and regulations covering every aspect of their business, including promotional material, sales practice, supervision, recordkeeping, ethics training, privacy policy and disaster recovery procedures.

"This marks the beginning of a new era of forex regulation, one that will result in more effective customer protection," said Prusik.

NFA has developed several educational resources for new forex applicants, including updated regulatory guides and registration video tutorials. All of the resources are available on NFA's website

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NFA prepares to receive daily trading reports from Forex Dealer Members

National Futures Association's Board of Directors recently approved new NFA Compliance Rule 2-48 which will require all Forex Dealer Members (FDMs) to file a daily electronic report of trade data with NFA. The data will be filed electronically using NFA's newly developed Forex Transaction Review System.

"Since each FDM operates its own market for its customers and is the counterparty to each transaction, there is both the ability and the incentive to manipulate prices and/or control when orders are executed," said Regina Thoele, senior vice-president of Compliance at NFA. "Our Business Conduct Committee has already issued a Complaint against one of our FDMs for programming its trading platform to favor the firm instead of the customer when price slippage occurs. We believe that a comprehensive study of the trading activities of all of our FDMs is necessary to protect retail investors."

The new system has been designed to gather and process data from each of NFA's FDMs on a daily basis. The information submitted by the FDMs will include:

  • All order transaction records;
  • A list of executed trades;
  • A list of all customers on the first day of reporting, with any changes being reported daily;
  • A list of all money managers on the first day of reporting, with any changes being reported daily;
  • A list identifying all customers being managed by a particular money manager on the first day of reporting, with any changes being reported daily;
  • A list of all price adjustments made by the FDM; and
  • A list of any unusual events, such as a system outage or "fast market".

"We have worked closely with our Forex Dealer Members throughout the development of the system," said Tim McHenry, director of Risk Management and one of the project's leaders. "We hope to begin a pilot program with some of them within the next few weeks."

The system will analyze all of the data and create exception reports that identify potential price manipulations and problematic patterns of trading activity.

"We have developed this system to provide NFA staff with a method of regularly monitoring trade information and identifying unusual or suspicious trends," said Regina Thoele, senior vice-president of Compliance at NFA. "Ultimately, this will bring greater transparency and greater customer protection to the retail off-exchange forex markets."

Pending CFTC approval of NFA Compliance Rule 2-48, NFA has tentatively set February 4, 2011 as the effective date of the new rule and the first day that FDMs will be required to submit their daily reports.

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NFA begins publishing library of free video tutorials

NFA has begun developing a library of tutorial videos to help CFTC registrants and NFA Members meet their regulatory requirements. The first series of tutorials was published on NFA's website ( on September 24 and within the first two weeks were viewed more than 300 times.

"Firms and individuals applying for CFTC registration and NFA membership often contact our Information Center and spend a lot of time on the telephone walking through various aspects of the registration process," said Larry Dyekman, director of Communications and Education. "By providing tutorial videos explaining the process, we hope to help these firms and individuals navigate the application process more efficiently and decrease the amount of time they may have to spend on the telephone."

The four registration-related tutorials cover proficiency requirements, the enrollment process, how to file an individual registration application and how to file a firm registration application.

In addition to the registration-related videos, NFA has produced a two-part series of videos describing how Commodity Pool Operators should file their Quarterly Pool Statements using NFA's EasyFile system.

"These videos are cost-effective for NFA to produce and are a reflection of NFA's continued commitment to Member education," said Dyekman. "We are encouraged by the initial response to the videos, and Members can look forward to an expanding library of tutorial videos on a variety of compliance-related topics in the near future."

NFA Members who would like to suggest topics for NFA videos should send their suggestions to 

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Board Actions

The following actions were taken by NFA's Board of Directors at their meeting on August 19, 2010.

The Board approved the following committee appointments:

Finance Committee: Gerald F. Corcoran, David S. Goone, Aleks A. Kins and Michael H. Moskow

The Board approved an amendment to NFA's Interpretive Notice entitled "NFA Compliance Rule 2-30(b): Risk Disclosure Statement for Securities Futures Contracts" to ensure that the SFP risk disclosure statement accurately reflects the dividend feature of a new product to be offered on OneChicago, LLC. The amendment was subsequently reviewed by the CFTC and became effective on October 7, 2010.

The Board approved several revisions to NFA Compliance Rule 2-9's Interpretive Notice entitled "Enhanced Supervisory Requirements." The proposed revisions include:

  • limited relief for some Members that would currently qualify for the requirements based on a principal's previous affiliation with another Member that was subject to the requirements;
  • changes to the enhanced capital requirements in light of a recent increase in the FCM minimum capital requirement;
  • changes to deal with CPOs and CTAs in a manner more consistent with the nature of their business;
  • requiring specific items to be included in a firm's written supervisory procedures;
  • requiring quarterly rather than monthly reports on a firm's compliance with the requirements; and
  • clarifying language regarding-charging abnormally high commissions and fees; the effect that receiving a waiver has on future situations involving the requirements; and the 2007 list of firms qualifying as Disciplined Firms since they have resolved sales practice actions within the past five years.

The Board approved an amendment to NFA's Code of Arbitration that will prohibit all parties to an arbitration filed by a customer that is not an eligible contract participant as defined in Section 1a(12) of the Commodity Exchange Act from instituting any suit, legal action or proceeding outside of the arbitration proceeding against any other party that concerns or would resolve any of the matters raised in the arbitration. The amendment was subsequently reviewed by the CFTC and became effective on October 7, 2010.

The Board approved the adoption of NFA Compliance Rule 2-48: FDM Trade Reporting System. The new rule will require each Forex Dealer Member to file a daily electronic report of trade data with NFA using the electronic filing method required by NFA. (See separate story.)

The Board approved amendments to NFA Bylaw 1301: Assessment of Trades on Foreign Exchanges. The proposed amendments exempt a person having privileges of membership on any NFA Member contract market that meets the volume threshold (as contained in Article VII, Section 2(a) of NFA's Articles of Incorporation) from paying the assessment fee on proprietary trades on foreign contract markets. The amendments were subsequently reviewed by the CFTC and will become effective on November 1, 2010.

The Board approved amendments to NFA Financial Requirements Section 4 regarding cleared OTC derivatives. The amendments would require NFA Member FCMs that engage in OTC derivatives trading to comply with CFTC requirements and the requirements established by the applicable contract market or derivatives clearing organization for such activity. NFA would require non-clearing FCMs to submit the daily Sequestration Statement to NFA under Financial Requirements Section 8. The amendments were subsequently reviewed by the CFTC and became effective on October 4, 2010.

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News Briefs

NFA staff to participate in several industry events this fall
NFA staff members have been invited to speak at several futures industry and investor education events being held during the next few weeks. 

The Futures Industry Association (FIA) is holding its annual Futures and Options Expo at the Hilton Chicago on November 2 - 4. NFA will also sponsor a booth in the Expo's Exhibit Hall, which showcases products, services and information for market professionals and participants. Click here for more information on the Expo.

On November 2, the National Association of Introducing Brokers (NIBA) will host its annual fall conference at the Embassy Suites Downtown Lakefront, 511 N. Columbus Drive, Chicago. NFA Compliance staff member Rachel Brandenburg will appear as a panelist at the 1:30 p.m. session entitled "Rules, Regulations and Your Revenue". Click here for more information on the conference.

Additionally, the CFTC hosted its annual International Symposium at the Federal Reserve in Chicago from October 18 - 22. NFA traditionally sponsors a reception for the attendees.

The Regulatory Compliance Association's 2010 Asset Management Thought Leadership Symposium will be held on November 3 at the Marriott Marquis Hotel in New York City. NFA Officers Dan Roth, Dan Driscoll, Tom Sexton and Regina Thoele are scheduled to participate in several of the symposium's sessions, including "Regulatory Reporting and Examinations Escalate in the Era of Pro-Regulation" and "Dodd-Frank: The Impact and Implications of a New Regulatory Paradigm". More information on the symposium can be found here.

NFA Senior Vice President of Strategic Planning and Communications Karen Wuertz will participate as a panelist at a number of sessions at IOSCO's Self-Regulatory Organization Consultative Committee's Training Seminar, being held in Rio de Janeiro on November 30 through December 2. The training program will cover the IOSCO Principles relating to issuers, collective investment schemes and enforcement.

NFA announces effective dates for several rule amendments
NFA has recently announced the following dates on which rule amendments will become effective:

NFA to participate in upcoming investor education conference
NFA will sponsor an information booth at the Traders Expo being held at the Caesar's Palace Conference Center in Las Vegas on November 17-20. 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 futures commission merchants, retail foreign exchange dealers, 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 website.

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