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PROPOSED AMENDMENTS
(additions are underscored and deletions are stricken through)

COMPLIANCE RULES

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Rule 2-36. REQUIREMENTS FOR FOREIGN CURRENCY FUTURES OR OPTIONS TRANSACTIONS

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(g) Activities of Other Members and Associates

Unless the Member meets the criteria in Bylaw 306(b), Members and their Associates who solicit foreign currency futures and options transactions on behalf of, introduce customers to, or manage accounts for customers that enter into foreign currency futures and options transactions with a Forex Dealer Member shall comply with subsections (a), (b), (c), and (e) of this rule.

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(g) BASIC Disclosure

When a customer first opens an account and at least once a year thereafter, each Forex Dealer Member shall provide each customer with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.

(h) Scope

This rule governs foreign currency futures and options transactions that:

    (i) are between a Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and

    (ii) are not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade.

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RULE 2-39. SOLICITING, INTRODUCING, OR MANAGING OFF-EXCHANGE RETAIL FOREX TRANSACTIONS OR ACCOUNTS

(a) Unless the Member meets the criteria in Bylaw 306(b), Members and their Associates who solicit customers, introduce customers to a counterparty, or manage accounts on behalf of customers in connection with off-exchange foreign currency futures or options transactions shall comply with subsections (a), (b), (c), and (e) of Compliance Rule 2-36.

(b) Definitions

For purposes of this rule:

    (i) the term "off-exchange" means transactions that are not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade; and

    (ii) the term "customer" means a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and includes persons who participate in pooled accounts.

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FINANCIAL REQUIREMENTS

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SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS

(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:

    (i) $250,000;

    (ii) 1% of the total net aggregate notional value of all open foreign currency futures and options transactions in customer and non-customer (but not proprietary) accounts that are between the Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and that are not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade; or

    (iii) any other amount required by Section 1 of these Financial Requirements.

For purposes of this section, the term non-customer does not include the Forex Dealer Member; any principal of the Forex Dealer Member; any affiliate that controls, is controlled by, or is under common control with the Forex Dealer Member; or any entity that is created or used by the Forex Dealer Member or any of its principals or affiliates for the purpose of lowering the Forex Dealer Member's capital requirements. Transactions carried for these persons may not be netted with customer and non-customer accounts when calculating the requirement under (a)(ii) of this rule.

(b) Each Forex Dealer Member must take a concentration charge on transactions with an unaffiliated, unregulated counterparty if the Forex Dealer Member's net open position with the unregulated counterparty exceeds 10% of the Forex Dealer Member's total long or short position in a particular currency. The amount exceeding 10% will be subject to the CFTC's haircut for uncovered positions regardless of the Forex Dealer Member's overall position.

For purposes of this section, a counterparty is unregulated unless it is:

    (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.

(c) Each Forex Dealer Member must also take a concentration charge on transactions with affiliates equal to the greater of the following:

    (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.

This amount will be subject to the CFTC's haircut for uncovered positions regardless of the Forex Dealer Member's overall position.

SECTION 12. SECURITY DEPOSITS FOR FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS.

(a) Except as provided in (b) below, each Forex Dealer Member shall collect and maintain the following minimum security deposit for each foreign currency futures and options transaction between the Forex Dealer Member and a person that is not an eligible contract participant as defined in Section 1a(12) of the Act and that are not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade:

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FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS INTERPRETIVE NOTICE

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Bylaw 306 and Compliance Rule 2-36 define forex transactions as off-exchange foreign currency futures and options transactions that are offered to or entered into with persons that are not eligible contract participants as defined in Section 1a(12) of the CEA and are limited to those transactions where an NFA Forex Dealer Member is the counterparty or the person offering to be the counterparty. For these purposes, "forex" does not include transactions executed on or subject to the rules of a contract market, a designated transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade, which continue to be covered by other regulatory schemes.

Consistent with the provisions of Section 2(c) of the CEA, Bylaw 306 and Compliance Rule 2-36 apply only to transactions with retail customers. In developing its forex requirements, NFA's primary concern was to ensure that they provide adequate protection for retail customers without imposing undue burdens on NFA Members. NFA also believes that its requirements should, where consistent with customer protection, promote innovation and competition. In order to provide Members with as much flexibility as possible, NFA has chosen to deal with a number of issues by providing guidance under NFA Compliance Rule 2-36 instead of by adopting additional rules.

NFA Compliance Rule 2-36 sets out the general standards that apply to Forex Dealer Members and their Associates in connection with forex transactions with retail customers. Subsection (b) prohibits Forex Dealer Members and their Associates from engaging in fraudulent activities, subsection (c) requires Forex Dealer Members and their Associates to observe high standards of commercial honor and just and equitable principles of trade in connection with their forex business, and subsection (e) requires Forex Dealer Members and their Associates with supervisory duties to supervise their employees and agents. Other subsections address a Forex Dealer Member's responsibility for its unregulated affiliates and third-party solicitors, and make Forex Dealer Members subject to discipline for the conduct of certain non-Members with which they do business, and extend certain of the rule's requirements to other Members and Associates who do business with Forex Dealer Members.

This notice has three sections. The first section explains who qualifies as a Forex Dealer Member under NFA Bylaw 306, the second section provides additional guidance about the requirements in Compliance Rule 2-36, and the third section covers other miscellaneous requirements.

A. BYLAW 306

In general, Forex Dealer Members are NFA Members who act as counterparties to retail, off-exchange forex futures and options transactions. This is a self-executing requirement, which means that any Member who qualifies is automatically a Forex Dealer Member. There is no application form and no approval requirement.

Members who do not act as counterparties are not Forex Dealer Members, even if they introduce or manage retail forex accounts. Under NFA Compliance Rule 2-396(g), however, most Members who introduce retail forex accounts to Forex Dealer Members or manage retail forex accounts for customers of Forex Dealer Members are required to comply with subsections (a), (b), (c), and (e) of that ruleNFA Compliance Rule 2-36.

Bylaw 306(b) excludes Members that are otherwise subject to regulatory oversight for their retail forex activities, which means that these Members are not Forex Dealer Members and do not have to comply with Compliance Rule 2-36.4 The exclusions mostly follow Section 2(c)(2)(B)(ii) of the CEA, although the exclusions for broker-dealers and their affiliates are conditioned on NASD membership. In particular, the following entities are not Forex Dealer Members:

  • financial institutions (e.g., banks and savings associations);
  • certain insurance companies and their regulated subsidiaries or affiliates;
  • financial holding companies;
  • investment bank holding companies;
  • registered broker-dealers that are members of NASD;5 and
  • Material Associated Persons of registered broker-dealers that are members of NASD.6

B. COMPLIANCE RULE 2-36

As noted above, this section provides additional guidance on what Compliance Rule 2-36 requires. Certain sections specifically refer to Forex Dealer Members. Except for Members that meet the criteria in Bylaw 306(b), all other provisions of this notice also apply to Members and their Associates who solicit retail forex transactions on behalf of a Forex Dealer Member, introduce retail customers to a Forex Dealer Member, or manage accounts for retail customers that enter into forex transactions with a Forex Dealer Member. This notice does not apply to transactions with counterparties listed in Bylaw 306(b) or to transactions between Forex Dealer Members and eligible contract participants.7

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9. BASIC Disclosure - Members must provide retail forex customers with information on NFA's BASIC system.

NFA Compliance Rule 2-36(g) requires Forex Dealer Members to provide customers with written information regarding NFA's Background Affiliation Status Information Center (BASIC), including the web site address.15 This information must be provided when the customer first opens an account and at least once a year thereafter.

Forex Dealer Members may provide the information electronically but must do it in a way that ensures each customer is aware of it. For example, merely having the information on the Member's web site is not adequate, but sending customers an e-mail including a link to that information and explaining what the link is would be sufficient in most circumstances.


7 Except as provided in NFA Compliance Rule 2-39, this notice also does not apply to transactions with counterparties listed in NFA Bylaw 306(b). Where Compliance Rule 2-39 applies, references to transactions with Forex Dealer Members include transactions with counterparties listed in NFA Bylaw 306(b).

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15 Forex Dealer Members can comply with this requirement by providing customers with a copy of NFA's brochure entitled "Background Affiliation Status Information Center (BASIC): An Information Resource for the Investing Public," which is available in print and on NFA's website at www.nfa.futures.org.

C. OTHER REQUIREMENTS

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2. Financial Requirements Section 11(a)

Forex Dealer Members must maintain adjusted net capital equal to or higher than the greatest amount required by Section 11 of NFA's Financial Requirements. For Forex Dealer Members, one of those amounts is 1% of the total net aggregate notional value of all open foreign currency futures and options transactions that are between the Forex Dealer Member and any person that is not an eligible contract participant or a principal or affiliate of the Forex Dealer Member, and it includeinges transactions with foreign persons.

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3. Financial Requirements Section 11(b)

Section 11(b) imposes a concentration charge on a Forex Dealer Member that has a material position with a single unregulated counterparty (other than an affiliate). An unregulated counterparty is any 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.

Any Forex Dealer Member may ask NFA to approve a counterparty for purposes of making transactions with that counterparty exempt from the concentration charge. In determining whether to approve the counterparty, NFA will consider a number of factors, including:

  • Whether the counterparty is regulated in another jurisdiction and, if so, the type and extent of regulation;
  • The counterparty's capital; and
  • The counterparty's credit rating.

NFA's approval of a particular counterparty exempts all Forex Dealer Members from the concentration charge for transactions with that counterparty. NFA may also approve categories of counterparties (e.g., banks regulated in a particular jurisdiction or with a particular credit rating).

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:

  • Calculate the total long value for each currency pair using the same formula used to calculate the aggregate long notional value under Section 11(a) but apply the formula to the Member's long positions with all counterparties (including ECPs, affiliates, and principals) rather than to customer and non-customer positions;
  • Multiply the total long value by 10%;
  • Calculate the total short value for each currency pair using the same formula used to calculate the aggregate short notional value under Section 11(a) but apply the formula to the Member's short positions with all counterparties rather than to customer and non-customer positions;
  • 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.

For example, assume a Forex Dealer Member is fully hedged. If it hedges its exposure in British Pounds, Euros, and Mexican Pesos with unregulated Counterparty A, the calculation would look like this:

Currency Total Long Value of Member's Open Positions 10% of Long Value Total Short Value of Member's Open Positions 10% of Short Value Value of Net Long Positions with Counterparty A Value of Net Short Positions With Counterparty A Value in Excess of 10%
British Pound $1,257,052 $125,705 $1,257,052 $125,705 $429,606 $303,901
Euro $2,433,256 $243,326 $2,433,256 $243,326 $211,123 $0
Mexican Peso $283,412 $28,341 $283,412 $28,341 $229,404 $201,063

Concentration Charge for British Pounds ($303,901 x 6%) $18,234
Concentration Charge for Euros 0
Concentration Charge for Mexican Pesos ($201,063 x 20%) 40,213
Total Concentration Charge for Positions with Counterparty A = $58,447

4. Financial Requirements Section 11(c)

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:

  • 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' positions with all affiliates combined; and
  • Take the larger charge.

For example, assume the Forex Dealer Member from the previous example has British Pound and Euro positions with three affiliates. The calculation for the affiliate concentration charge on British Pounds would look like this:

Affiliate 10% of Long Value 10% of Short Value Value of Net Long Positions with Affiliate Value of Net Short Positions with Affiliate Value in Excess of 10% Charge (Excess Value X 6% Haircut)
A $125,705 $125,705 $192,554 $ 66,849 $4,011
B $125,705 $125,705 $285,109 $159,404 $9,564
C $125,705 $125,705 $ 99,573 $0 $0

Charge for Affiliate A $ 4,011
Charge for Affiliate B 9,564
Charge for Affiliate C 0
Sum of Charges for Single Affiliates $13,575

Long position, Affiliate B $285,109
Short position, Affiliate A + Affiliate C $292,127
Net position, all affiliates combined ($292,127 - $285,109) $ 7,018
Amount over 10% ($7,018 - $125,705) $0
Charge for Combined Positions ($0 X .06) $0

Affiliate Concentration Charge on British Pounds $13,575

The calculation for the affiliate concentration charge on Euros would look like this:

Affiliate 10% of Long Value 10% of Short Value Value of Net Long Positions with Affiliate Value of Net Short Positions with Affiliate Value in Excess of 10% Charge (Excess Value X 6% Haircut)
A $243,326 $243,326 $304,711 $61,385 $3,683
B $243,326 $243,326 $240,112 $0 $0
C $243,326 $243,326 $228,775 $0 $0

Charge for Affiliate A $3,683
Charge for Affiliate B 0
Charge for Affiliate C 0
Sum of Charges for Single Affiliates $3,683

Long position, Affiliate A + Affiliate B + Affiliate C $773,598
Short position $0
Net position, all affiliates combined ($773,598 - $0) $773,598
Amount over 10% ($773,598 - $243,326) $530,272
Charge for Combined Positions ($530,272 X .06) $ 31,816

Affiliate Concentration Charge on Euros $31,816

5. Financial Requirements Section 12

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