Member Newsletter

NFA and the Commodity Futures Trading Commission (CFTC) held a joint press briefing in Washington on August 26 to announce the CFTC's approval of NFA's new forex rules. The rules, which will become effective on December 1, provide additional investor protection against fraud in the retail off-exchange foreign currency markets.

At the briefing, CFTC Chairman James Newsome applauded NFA's rule-making efforts.

"We feel strongly that these rules represent a significant step in our joint effort to protect investors from fraudulent practices in the area of off-exchange retail forex markets," said Newsome.

The Commodity Futures Modernization Act of 2000 (CFMA) makes clear the CFTC's authority and jurisdiction to investigate and take action to close down entities selling illegal off-exchange foreign currency futures and option contracts to retail customers. Since the CFMA became effective in December 2000, the CFTC has filed 41 cases against forex entities, involving approximately $177 million taken from at least 3,500 victims.

Since the passage of the CFMA, however, a problem remains with unregulated individuals soliciting retail customers for forex transactions, particularly where a futures commission merchant (FCM) is a counterparty to the trade.

"For example, an FCM Member that's a forex dealer could profit from sales practices of unregistered entities that violate NFA rules," said Roth. "The FCM forex dealer could benefit from a fraud committed by an unregistered solicitor, and that's just not right. And we're not going to let that happen."

The new rules impose several regulatory requirements on forex dealer Members, including taking the responsibility for the activities of unregulated solicitors. The following is a summary of the new requirements.

Amendment to Bylaw 306
NFA has amended the definition of Forex Dealer Member to apply to those Members that are not covered by another regulatory scheme. The definition does not apply to Members that are broker-dealers and members of NASD or to most affiliates of those firms.

Compliance Rule 2-36
As amended, Compliance Rule 2-36 requires Forex Dealer Members and their Associates to: 1) observe high standards of commercial honor and just and equitable principles of trade in connection with their retail forex business; 2) supervise their employees and agents; and 3) supervise unregulated affiliates that engage in forex transactions with retail customers.

The amendment also extends many of the rule's requirements to other Members and Associates who solicit retail customers for or manage retail customer accounts with Forex Dealer Members. Another important change authorizes NFA to bring enforcement actions against Forex Dealer Members for the activities of unregulated third-party solicitors and account managers who solicit or introduce retail customers to the Forex Dealer Member or manage accounts for those customers.

Amendment to Bylaw 1301
Bylaw 1301 imposes annual dues on Forex Dealer Members based on their gross annual revenue from their retail off-exchange forex business. To ensure that NFA collects the correct dues, any Forex Dealer Member for whom NFA is not the designated self-regulatory organization (DSRO) must file its annual certified financial statement with NFA (in hard copy or through Winjammer) at the same time it files the statement with its DSRO.

Code of Arbitration
Forex Dealer Members, other Members who do business with them, and their Associates and employees are required to submit to arbitration at the request of a retail forex customer.

NFA Financial Requirements
NFA has imposed an alternative minimum net capital requirement on Forex Dealer Members based on the notional value of open positions with retail customers. Forex Dealer Members must also collect a minimum security deposit for retail forex transactions.

Interpretive Notice
NFA adopted an Interpretive Notice to provide additional guidance to Forex Dealer Members. The Interpretive Notice contains three sections. The first section describes who qualifies as a Forex Dealer Member and explains that firms become Forex Dealer Members automatically when they meet the qualifications. The second section provides additional guidance on the requirements of Compliance Rule 2-36 and addresses disclosure, reporting, supervision, recordkeeping, communications with the public and promotional material, know your customer requirements, responsibility for unregulated third-party solicitors and account managers, and responsibility for affiliates. The third section addresses financial issues such as dues, capital requirements and security deposits.

NFA Members can find the rules and interpretive notice on NFA's Web site (www.nfa.futures.org).

NFA has begun an extensive education effort to help forex dealer Members understand their new regulatory responsibilities. Since a majority of NFA's forex dealer FCMs are located in the New York metropolitan area, NFA held a training session in its New York office on October 30. NFA has also developed a regulatory guide specifically addressing forex issues. The guide is available in the Compliance section of NFA's Web site.