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Notice I-03-14

October 02, 2003

New Forex Rules Will Become Effective on December 1, 2003

The Commodity Futures Trading Commission (CFTC) has approved amendments to NFA Bylaws, Compliance Rules, Financial Requirements, and Code of Arbitration and a new Interpretive Notice regarding off-exchange foreign currency futures and options transactions with retail customers. These requirements will become effective on December 1, 2003.

Current NFA Bylaw 306 establishes a Forex Dealer membership category for certain NFA Members who act as counterparties to off-exchange foreign currency futures and options transactions with retail customers, and current NFA Compliance Rule 2-36 prohibits these Members from engaging in fraud. The new requirements will protect retail customers against unethical business practices and loss of funds due to insolvency or related problems.

Amendment to Bylaw 306
The definition of Forex Dealer Member has been amended 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: i) observe high standards of commercial honor and just and equitable principles of trade in connection with their retail forex business; ii) supervise their employees and agents; and iii) 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 an 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 has been amended to impose 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
The Code of Arbitration has been amended to require Forex Dealer Members, other Members who do business with them, and their Associates and employees to submit to arbitration at the request of a retail forex customer.

Sections 11 and 12 to NFA Financial Requirements
NFA's Financial Requirements have been amended to impose an alternative minimum net capital requirement on Forex Dealer Members based on the notional value of open positions with retail customers. The Financial Requirements have also been amended to require Forex Dealer Members to 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. Lastly, the third section addresses financial issues such as dues, capital requirements, and security deposits.

The Rules and Interpretive Notice can be found at http://www.nfa.futures.org/compliance/forexRuleAmendments.asp and http://www.nfa.futures.org/compliance/forexInterpNotice.asp. (If either of these links are inactive, copy and paste them into the address bar of your Web browser.) NFA is developing a regulatory guide to help Forex Dealer Members understand and comply with these requirements, and we expect to have it available by December 1, 2003.

Questions concerning the forex requirements should be directed to:

Sharon Pendleton
Associate Director, Compliance
National Futures Association
200 West Madison Street
Chicago, Illinois 60606-3447
email: spendleton@nfa.futures.org

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