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December 19, 2012

NFA enhances monitoring of FCMs, amends forex capital requirements

At its November 15 meeting, National Futures Association's (NFA) Board of Directors approved two measures that will further enhance customer protection safeguards. The first measure will enable NFA to make better use of technology in order to better monitor futures commission merchant (FCM) segregation compliance. Secondly, NFA's Board approved rule amendments to increase the capital requirement for FCMs acting as counterparties in off-exchange foreign currency (forex) transactions with eligible contract participants (ECP).

FCM daily confirmation system

Earlier this year, as part of NFA's ongoing effort to further safeguard customer funds, NFA's Board approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated and secured amount funds-including banks, clearing FCMs, broker-dealers and money market accounts-to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCM's designated self-regulatory organization (DSRO). The DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to identify any material discrepancies.

In November, NFA's Board approved amendments to Financial Requirements Section 4 in order to implement this new daily confirmation system. The new amendments will require an FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances to a third party designated by NFA. The amended rule also states that in order for a depository to be deemed acceptable, it must report the FCM's customer segregated and secured amount balances and cleared swaps customer collateral balances to a third party designated by NFA.

The daily conformation system is still under implementation, but the first phase, beginning with banks, is expected to be implemented by December 31. Other categories of depositories will be added in 2013.

Increase in capital requirements for FCMs acting as counterparties in forex transactions with ECPs

Over the past year, NFA has observed that several NFA Member FCMs are almost exclusively acting as counterparties to forex transactions with ECPs. Specifically, three FCM Members have ceased to act as forex dealer members (FDM) but continue to act as counterparties to forex transactions with ECPs. Because these firms do not act as a counterparty to retail forex transactions, their minimum adjusted net capital requirement is only $1 million pursuant to NFA Financial Requirements Section 1.

Given the counterparty nature of these FCMs' forex activities, NFA is concerned that these firms are currently subject to inadequate capital requirements. Specifically, NFA believes there is no sense from a financial safeguard perspective that an FDM that acts as counterparty to a retail forex transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type transaction with an ECP must only maintain a minimum $1 million in capital.

Therefore, NFA's Board approved an amendment to Section 1 that includes a provision requiring an FCM that acts as counterparty to a forex transaction with an ECP to maintain adjusted net capital of at least $20 million. This amendment was submitted to the Commodity Futures Trading Commission for approval on November 20.

NFA is the premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets.
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