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November 09, 2005
Via E-Mail (firstname.lastname@example.org)
Ms. Jean A. Webb
Re: Proposed Amendment to Rule 1.17
Dear Ms. Webb:
NFA supports the Commission's proposal to provide an Alternative Capital Computation to certain broker-dealer FCMs. This change would conform the Commission's rules to SEC rules.
NFA also supports the change to Rule 1.17(c)(5). That change would codify the already well-established and commonly understood 6% capital charge for certain uncovered foreign currencies. However, we urge the Commission to adopt more comprehensive changes in this area.
As you know, the Commodity Futures Modernization Act of 2000 (CFMA) amended the Commodity Exchange Act to explicitly prohibit off-exchange foreign currency futures and options transactions (forex) with retail customers unless the counterparty is a regulated entity listed in the CFMA. FCMs are among the entities authorized to offer forex contracts to retail customers. As a result, a number of entities have registered as FCMs for the sole purpose of entering into these transactions. Rule 1.17 predates the CFMA by several decades and was not written with these forex dealer FCMs in mind.
As the designated self-regulatory organization (DSRO) for most of the retail forex dealers that have registered as FCMs, NFA has a vital interest in assuring that these firms are financially viable and are able to meet their obligations to their retail customers. One of the best ways to accomplish this is to encourage these firms to cover their obligations to their counterparties (whether retail or non-retail). Unfortunately, the current provisions of Rule 1.17 do not address dealer transactions, and it is unclear how certain parts of that rule apply to these firms. NFA staff has had frequent conversations with the Commission's Division of Clearing and Intermediary Oversight and has attempted to apply the rule to encourage cover and otherwise reflect the risks involved in a dealer business. Nonetheless, a number of issues are either still outstanding or should be codified in the rule. In particular, NFA believes that Rule 1.17 should address the following matters.
For the reasons discussed above, NFA urges the Commission to adopt more comprehensive changes to Rule 1.17 to address dealer foreign currency transactions. If you have any questions concerning this letter, please contact me at 312-781-1413 or email@example.com.