Proposed Rule
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(additions are underscored and deletions are
FINANCIAL REQUIREMENTS
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(a) Each Forex Dealer Member must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:
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(i)
(ii) 5% of all liabilities owed to customers (as customer is defined in Compliance Rule 2-36(i); or
(iii) Any other amount required by Section 1 of these Financial Requirements.
For purposes of this section and section (c), a person counterparty is unregulated unless it is:
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(i) a financial institution regulated by a U.S. banking regulator;
(ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NASD Inc.;
(iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA;
(iv) an insurance company regulated by any U.S. state;
(v) an entity regulated as a foreign equivalent of any of the above if regulated in a money center country as defined in CFTC Regulation 1.49; or
(vi) any other entity approved by NFA.
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(i) The sum of the amounts by which the Member's net open position with a single affiliate exceeds 10% of the Forex Dealer Member's total long or short position in a particular currency; or
(ii) The amount by which the Member's net open position with all affiliates combined exceeds 10% of the Forex Dealer Member's total long or short position in a particular currency.
(d) For purposes of this rule:
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(1) "Forex" has the same meaning as in Bylaw 1507(b);
- Whether the person
counterpartyis regulated in another jurisdiction and, if so, the type and extent of regulation; - The person's
counterparty'scapital; and - The person's
counterparty'scredit rating. - The parent company's and affiliated person's capital;
- Whether the parent company and the affiliated person are regulated entities;
- Whether the parent company will guarantee the obligations of the affiliated person (unless the parent company and the affiliated person are the same entity);
- The parent company's credit rating;
- Whether the affiliated person has strong risk-management policies to limit its value-at-risk; and
- For purposes of Section 11(c), whether the affiliated person limits the amount of offsetting transactions it enters into with unregulated counterparties.
- Calculate the total long value for each currency pair by adding up the Member's long positions with all counterparties (including ECPs, affiliates, and principals), multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;
- Multiply the total long value by 10%;
- Calculate the total short value for each currency pair by adding up the Member's short positions with all counterparties, multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;
- Multiply the total short value by 10%;
- For each unregulated counterparty that is counterparty to more than 10% of the Forex Dealer Member's total long position or total short position in that currency, subtract 10% of the total long value from the Member's net long position with the unregulated counterparty or subtract 10% of the total short value from the Member's net short position with the unregulated counterparty; and
- Multiply the result by the haircut for uncovered positions in that currency; and
- For each unaffiliated, unregulated counterparty subject to the concentration charge that maintains an account at the Forex Dealer Member (i.e., a customer), the Member may subtract the net liquidating value of the counterparty's forex and the excess funds in regulated commodity accounts. In determining these amounts, include only those assets allowable as capital under CFTC Rule 1.17 and apply the haircuts required by that rule (except those for open positions).
- Account holders are those counterparties for whom it carries accounts and includes both retail customers and eligible contract participants.
- Trading partners are counterparties with whom the Member trades but who do not have accounts with the Member. For purposes of the calculations under Section 11(c), this category does not include affiliates (approved or unapproved) or regulated counterparties.
- Affiliates are entities that control, are controlled by, or are under common control with the Forex Dealer Member. For purposes of Section 11(c) only, this category does not include affiliates who have been approved by NFA under Section 11(b).
- Regulated entities are those counterparties that meet the definition in Section 11(b) and include entities-including affiliates-approved by NFA under that Section.
- Calculate 10% of the total long and short values for each currency pair using the same steps as for unaffiliated unregulated counterparties under Section 11(b);
- For each affiliate that is counterparty to more than 10% of the Forex Dealer Member's total long position or total short position in that currency, subtract 10% of the total long value from the Member's net long position with the affiliate or subtract 10% of the total short value from the Member's net short position with the affiliate;
- Multiply that amount by the haircut for uncovered positions in that currency to calculate the charge for each affiliate;
- Add the charges for each affiliate to calculate the total charge based on the Forex Dealer Member's positions with single affiliates;
- Compute the Forex Dealer Member's net position with all affiliates combined and subtract 10% of the total long value from the Member's combined long position or subtract 10% of the total short value from the Member's combined short position;
- Multiply the result by the haircut for uncovered positions in that currency to calculate the charge based on the Forex Dealer Member's positions with all affiliates combined; and
- Take the larger charge.
(2) "Forex Dealer Member" has the same meaning as in Bylaw 306; and
(3) As used in sections (b) and (c), "currency" refers to open foreign currency positions with counterparties regardless of whether those counterparties are eligible contract participants as defined in Section 1a(12) of the Act.
INTERPRETIVE NOTICES
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FOREX TRANSACTIONS
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2. Financial Requirements Section 11(b)
Section 11(b) prohibits a Forex Dealer Member from including assets held by an affiliate (unless approved) or an unregulated person in the firm's current assets for purposes of determining its adjusted net capital under CFTC Rule 1.17. This means an FDM may not count any part of those assets for capital purposes.17 imposes a concentration charge on a Forex Dealer Member that has a material position with a single unregulated counterparty (including a customer) that is not an affiliate.
An unregulated person counterparty is any person entity that is not:
- (i) a financial institution regulated by a U.S. banking regulator;
(ii) a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of NASD Inc.;
(iii) a futures commission merchant registered with the U.S. Commodity Futures Trading Commission and a Member of NFA;
(iv) an insurance company regulated by any U.S. state;
(v) an entity regulated as a foreign equivalent of any of the above if regulated in a money center country as defined in CFTC Regulation 1.49; or
(vi) any other entity approved by NFA.
A Forex Dealer Member may not engage in Section 11(b) or (c) transactions with a regulated affiliate without NFA's approval. The Member may, however, ask NFA to authorize it to cover its positions with specified affiliates (including unregulated affiliates). An affiliate is any entity that controls, is controlled by, or is under common control with the Forex Dealer Member. The standards for approving affiliated persons are significantly higher than those for unaffiliated persons. For example, NFA will also consider:
The concentration charge applies whenever an unaffiliated, unregulated counterparty's net position with a Forex Dealer Member in a particular currency exceeds 10% of the Member's total long or short position in that currency. The part of the position that exceeds the 10% threshold is treated as uncovered and is subject to the CFTC's 6% or 20% haircut, depending on the currency. Any uncovered amount above the 10% threshold is subject to only one charge, and any uncovered amount below the 10% threshold is subject to the regular CFTC haircut.
To calculate the concentration charge with unaffiliated, unregulated counterparties, follow these steps:
For example, assume a Forex Dealer Member incurs a concentration charge with regard to two unregulated Counterparties, Counterparty A and Counterparty B. Counterparty B is a customer and the net liquidating value in its forex account and the excess funds in its segregated account under CFTC Rule 1.20 total $32,075. Further, the Forex Dealer Member has an agreement with Counterparty B to permit it to transfer funds from the segregated account to reduce the debit balance incurred in the forex account. For the following positions with unregulated Counterparties A and B in British Pounds, Euros, and Mexican Pesos, the calculation would look like this:
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3. Financial Requirements Section 11(c)
Section 11(c) prohibits Forex Dealer Members from using affiliates (unless approved) and unregulated persons to cover their foreign currency positions for purposes of CFTC Rule 1.17(c)(5).
The rule does not prohibit Forex Dealer Members from entering into positions with unregulated or unapproved counterparties. They may not, however, count positions with those counterparties when calculating their covered positions for purposes of CFTC Rule 1.17(c)(5).
For purposes of Section 11(c), Forex Dealer Members have four different types of counterparties. In particular:
Type of Counterparty | Account Holders | Trading Partners | Affiliates | Regulated Entities |
Account Holders | Yes | No | No | Yes |
Trading Partners | No | Yes | No | Yes |
Affiliates | No | No | Yes | Yes |
Regulated Entities | Yes | Yes | Yes | Yes |
A Forex Dealer Member is required to take a charge on the larger of its unnetted long or short position but not on both.
Example
Assume a Forex Dealer Member has the following Euro positions:
Type | Long | Short | Net Long | Net Short |
Account Holders | 11,154,912 | 6,011,794 | 5,143,118 | |
Trading Partners | 4,987,345 | 7,299,886 | 2,312,541 | |
Affiliates | 3,790,754 | 2,640,553 | 1,150,201 | |
Regulated Entities | 1,280,555 | 4,125,018 | 2,844,463 |
In determining the uncovered amount for purposes of the 6% haircut, the Forex Dealer Member can offset its net long position with account holders against the net short position with regulated entities but cannot offset its position with its trading partners or its position with unapproved affiliates against any category except regulated entities.
The math works this way (using only absolute numbers):
Net long position with account holders | 5,143,118 |
Minus net short position with regulated entities | -2,844,463 |
2,298,655 | |
Uncovered long position with account holders | 2,298,655 |
Plus net long position with affiliates | +1,150,201 |
Total uncovered long position | 3,448,856 |
Net short position with trading partners | 2,312,541 |
Larger of net long or short position | 3,448,856 |
Haircut on Euros (3,448,856 X .06) | $206,931 |
The concentration charge also applies to a Forex Dealer Member's positions with its affiliates if its net position with any single affiliate exceeds 10% of the Forex Dealer Member's total net long or short position in a particular currency or if its combined position with all affiliates exceeds 10% of the Forex Dealer Member's total long or short position in a particular currency. An affiliate is any entity that controls, is controlled by, or is under common control with the Forex Dealer Member.
To calculate the concentration charge for positions with affiliates, follow these steps:
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The calculation for the affiliate concentration charge on Euros would look like this:
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4. Financial Requirements Section 12
This requirement does not apply to any Forex Dealer Member that consistently maintains adjusted net capital equal to or in excess of two times the greater amount required by Section 11(a)(i) or (ii) of the Financial Requirements. A Forex Dealer Member claiming the exemption must file advance written notice with NFA. If a firm that claims the exemption falls below double its capital requirement under Section 11(a)(i) and (ii), it must immediately notify NFA. If the firm does not come back into compliance within 48 hours, it must collect the required security deposits on all customer positions and may not claim the exemption for six months. A firm that claims the exemption but falls below the required capital amount three times within 90 days may not claim the exemption for six months.1718
17 Where the CFTC's requirements for holding current assets are more stringent, those requirements apply.
1718 For this purpose, underages within the same U.S. calendar day are one occurrence.