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EXPLANATION OF PROPOSED AMENDMENTS

As you are aware, the Commission amended several of its regulations regarding minimum financial and related reporting requirements. These amendments, which are effective September 30, 2004, require NFA to make several changes to NFA Financial Requirements to conform with the amended CFTC regulations.

Specifically, the Commission amended CFTC Regulation 1.17 to delete the minimum capital computation based on segregated funds and replace it with a computation based on the maintenance margin levels of the positions or transactions carried by the FCM in customer and non-customer accounts (risk-based capital computation). The Commission's risk-based alternative computation is identical to the computation NFA added to its minimum capital calculation in October 2000. As a result, NFA Financial Requirements Section 1's current reference to the segregated funds computation needs to be deleted.

The Commission also revised the early warning computation under Regulation 1.12 to delete the computation based on the segregated amount and replace it with an early warning capital level equal to 110 percent of the risk-based capital amount. Although NFA's Financial Requirements do not have an early warning requirement, Financial Requirements Section 2 requires FCMs guaranteeing or seeking to guarantee IBs to maintain adjusted net capital at least in excess of the greater of a number of various alternative calculations that are designed to mirror the Commission's early warning requirements. We propose amending Section 2 to be consistent with the Commission's revised early warning requirements. Although this amendment will raise the eligibility amount for those firms subject to the risk-based capital minimum, NFA does not believe that it will affect any FCMs currently guaranteeing IBs.

Finally, technical amendments to Financial Requirements Sections 2(c) and 5(c) correct an error in the title to CFTC Regulation 1.17.

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make the amendments to Financial Requirements Sections 1, 2 and 5 effective on September 30, 2004, unless the Commission notifies NFA within the ten-day period that the Commission has determined to review the proposals for approval.

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