(a) Except as provided in section (b), Members of NFA are Forex Dealer Members if they are the counterparty or offer to be the counterparty to
foreign currency futures and options forex transactions (as defined in Bylaw 1507(b)) offered to or entered into with persons that are not eligible contract participants 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.
RULE 1-1. DEFINITIONS.
No Forex Dealer Member or Associate of a Forex Dealer Member engaging in any
foreign currency futures or options forex transaction shall:
Forex Dealer Members and their Associates shall observe high standards of commercial honor and just and equitable principles of trade in the conduct of their
foreign currency futures and options forex business.
A Forex Dealer Member that is the counterparty, or offers to be the counterparty, to
foreign currency futures and options forex transactions for customers shall be subject to discipline for the activities of any person that solicits or introduces a customer to the Member or that manages such customer's accounts, unless such person is a Member or Associate of NFA, meets the criteria in Bylaw 306(b), or would be exempt from Commission registration if it were acting in the same capacity in connection with exchange-traded futures contracts.
Each Forex Dealer Member shall diligently supervise its employees and agents in the conduct of their
foreign currency futures and options forex activities for or on behalf of the Forex Dealer Member. Each Associate of a Forex Dealer Member who has supervisory duties shall diligently exercise such duties in the conduct of that Associate's foreign currency futures and options forex activities for or on behalf of the Forex Dealer Member.
Each Forex Dealer Member that has an affiliate that is authorized to engage in forex transactions solely by virtue of its affiliation with the Forex Dealer Member shall supervise its affiliate's
foreign currency futures and options forex activities for compliance with the same requirements that apply to the Forex Dealer Member, including section (a) of this rule. The Forex Dealer Member shall make the affiliate's books and records available to NFA staff upon request and shall be subject to discipline for acts and omissions of the affiliate that violate the standards imposed by NFA requirements.
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.
For purposes of this rule, the term "customer" means a counterparty that is not an eligible contract participant as defined in Section 1a(12) of the Act.
SECTION 1. DEFINITIONS.
(1) futures and options contracts traded on a Commission-licensed exchange;
(2) options contracts granted by a person that has registered with the Commission under Section 4c(d) of the Act as a grantor of such option contracts or has notified the Commission under the Commission's Rules that it is qualified to grant such option contracts;
(3) foreign futures and foreign options transactions made or to be made on or subject to the rules of a foreign board of trade for or on behalf of foreign futures and foreign options customers as those terms are defined in the Commission's rules;
(4) leverage transactions as that term is defined in the Commission's Rules;
(5) security futures products, as that term is defined in Section 1a(32) of the Act; and
(6) for purposes of jurisdiction under this Code,
foreign currency futures and options forex transactions that 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 , unless they are executed on a national securities exchange registered pursuant to Section 6(a) of the Exchange Act. Forex Dealer Members, their employees, and Members and Associates who solicit transactions on behalf of, introduce customers to, or manage accounts for customers that enter into transactions with a Forex Dealer Member are all subject to mandatory arbitration in connection with those transactions.
(n)(p) "Introducing Broker" or "IB" - means an introducing broker as that term is used in the Commodity Exchange Act, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.
(o)(q) "Leverage Transaction Merchant" or "LTM" - means a leverage transaction merchant as that term is used in Commission Rules, and that is required to be registered as such under the Commodity Exchange Act and Commission Rules.
(p)(r) "Member" - means a Member of NFA or a person that was a Member at the time the acts or transactions that are the subject of the dispute occurred.
(q)(s) "NFA" - means National Futures Association.
(r)(t) "Panel" - means the arbitration panel appointed pursuant to Section 4(a) of this Code.
(s)(u) "Person" - includes individuals, corporations, partnerships, trusts, associations and other entities.
(t)(v) "Pleading" - means an Arbitration Claim, counter-claim, cross-claim, third-party claim, Answer or Reply filed under this Code.
(u)(w) "President" - means the President of NFA.
(v)(x) "Respondent" - means a person against whom a claim is asserted under this Code.
(w)(y) "Secretary" - means the Secretary of NFA.
(x)(z) "Third-party Claim" - means a claim filed by a Respondent against a person not a party to the action.
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SECTION 1. FUTURES COMMISSION MERCHANT FINANCIAL REQUIREMENTS.
(a) Each Member that is registered or required to be registered with the Commodity Futures Trading Commission (hereinafter "CFTC") as a Futures Commission Merchant (hereinafter "Member FCM") 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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(vi) For Member FCMs with an affiliate described in section 2(c)(2)(B)(ii)(III) of the Act that engages in
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off-exchange forex transactions with retail customers (as those terms are defined in Compliance Rule 2-36(h)(ii) and Compliance Rule 2-36(i) (as defined in Bylaw 1507(b)) and that is authorized to engage in those transactions solely by virtue of its affiliation with a registered FCM, $7,500,000; or
(vii) For Member FCMs that are counterparties to
off-exchange forex options transactions with retail customers (as those terms are defined in Compliance Rule 2-36(h)(ii) and Compliance Rule 2-36(i)) (as forex is defined in Bylaw 1507(b)), $5,000,000.
(d) No Member FCM may use
retail forex customer equity as capital or may record retail forex customer equity as an asset without recording a corresponding liability. For purposes of this requirement:
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Retail fForex customer means any person who is not an eligible contract participant, as defined in Section 1a(12) of the Act, and who enters into retail forex transactions (as defined in Bylaw 1507(b)) with the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) (except transactions executed on 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
Retail fForex customer equity means money, securities, and property received by the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) to margin, guarantee, or secure off-exchange forex transactions between a retail forex customer and the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) or accruing to a retail forex customer as a result of such transactions.
SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS.
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(d) For purposes of this rule:
(1) "Forex" has the same meaning as in Bylaw 1507(b);
SECTION 12. SECURITY DEPOSITS FOR FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS.
(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.
(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 forex 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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(b) A Forex Dealer Member that consistently maintains adjusted net capital of at least twice the greater of the amount required by Section 11(a)(i) or (ii) of these Financial Requirements is exempt from (a) above.
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(d) For purposes of this rule:
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WITH FOREX DEALER MEMBERS
The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, amended the Commodity Exchange Act (CEA) to provide that only certain regulated entities may offer off-exchange foreign currency futures and options contracts (forex) to retail customers.1 Under the CFMA, registered futures commission merchants (FCMs) and their affiliates described in section 2(c)(2)(B)(ii)(III) of the CEA are among the entities that may offer forex contracts to retail customers.2
The Commodity Exchange Act (CEA or Act) gives the Commodity Futures Trading Commission (CFTC or Commission) limited jurisdiction over off-exchange foreign currency transactions offered to or entered into with retail customers. As a result of those provisions, certain firms primarily engaged in the retail forex business have registered with the CFTC and become Members of NFA. NFA has adopted several requirements to govern the conduct of these firms and their associated persons.
As described below, NFA Bylaw 306 creates a Forex Dealer Member category for certain NFA Members who act as counterparties to forex transactions with retail customers.
3 This category allows NFA to exercise appropriate regulatory jurisdiction over the retail forex activities of these Members without imposing unnecessary, and potentially duplicative, regulatory burdens on Members that are otherwise subject to regulatory oversight for their activities.
NFA Bylaw 1507(b) defines forex as foreign currency futures and options and any other agreement, contract, or transaction in foreign currency that is offered or entered into on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis that are:
Bylaw 1507(b) also excludes the following from the forex definition if the transaction is not a futures or options contract:
- offered to or entered into with persons that are not eligible contract participants as defined in Section 1a(12) of the Act (retail customers); and
- 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.
- securities (other than security futures products);
- any contract of sale that results in actual delivery within two days; and
- any contract of sale that creates an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business.
Given the differences between off-exchange
forex transactions and traditional exchange-traded futures and options, the Board of Directors does not believe that it is appropriate to apply the full array of NFA's futures rules to off-exchange forex transactions. Therefore, rather than simply incorporating off-exchange forex transactions into the definition of "futures," NFA adopted NFA Compliance Rule 2-36 to govern these transactions.
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 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.
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 2-39, however, most Members who introduce or manage retail forex accounts are required to comply with subsections (a), (b), (c), and (e) of NFA 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. 52 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;
- Material Associated Persons of registered broker-dealers that are members of NASD.
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 forex accounts for retail customers that enter into forex transactions with a Forex Dealer Member. This notice does not apply to transactions between Forex Dealer Members and eligible contract participants.8
1. Disclosure - Members must provide
retail forex customers with understandable and timely disclosure on essential features of forex trading.
At or before the time a
retail customer first engages in a forex transaction, a Forex Dealer Member and its Associates should provide the customer sufficient information concerning the characteristics and particular risks of entering into forex transactions.
At or before the time a
retail customer engages in a forex transaction, a Member and its Associates should disclose how the Member will be compensated for the services it will provide to the customer.
Forex Dealer Members should provide both the bid and the offer when the customer enters an order.
Members should update any material information that has changed prior to entering into new transactions with current
retail customers if failing to update the information would make it misleading.
2. Reporting - Forex Dealer Members must provide
retail forex customers with timely and accurate notice of the status of their accounts.
Forex Dealer Members should provide written confirmations within one business day after any activity in the
retail customer's account, including offsetting transactions, rollovers, and deliveries. The confirmation should include the details of the transaction as well as all commissions, costs, fees and other charges incurred by the customer in connection with the transaction, including commissions and similar charges collected on behalf of third-parties who introduce business to or manage accounts carried by the Forex Dealer Member.
Forex Dealer Members should provide regular monthly summaries of all forex transactions and other account activity to
retail customers for all accounts that have open positions at the end of the month or changes in the account balance since the prior statement. Forex Dealer Members should provide summaries at least quarterly for all other open accounts.
With the customer's consent, confirmations and monthly summaries may be transmitted by electronic means.
3. Supervision - Members and their Associates having supervisory responsibilities must diligently supervise the Member's forex business, including the activities of the Member's Associates and agents. Members must establish, maintain, and enforce written supervisory procedures.
NFA has provided Members with guidance on minimum standards of supervision through interpretive notices issued under NFA Compliance Rule 2-9.
95 In these interpretive notices NFA recognized that, given the differences in the size of and complexity of the operations of NFA Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm. This principle also applies to the supervision of a Member's forex business.
Although Members have the flexibility to design procedures that are tailored to their own situation, an adequate program for supervision would include procedures for performing day-to-day monitoring. These procedures would include:
- screening employees who will solicit transactions from or provide advice to
retail customers or manage retail customer accounts to see if they are subject to any of the statutory disqualifications in Section 8a of the CEA and, if so, to determine the extent of supervision they will require;
- monitoring communications with the public, including sales solicitations and web sites, and approving promotional material;
- reviewing the information obtained from and the information provided to
retail customers solicited by the firm and its employees to ensure that the necessary account information has been obtained and the appropriate information provided; and
- handling and resolving
retail customer complaints.
For Forex Dealer Members, these procedures would also include:
- screening prospective Associates to ensure that they are registered with the Commodity Futures Trading Commission as associated persons;
- screening persons who introduce
retail customer business or manage retail customer accounts to see if the firm or any of its principals is subject to a statutory disqualification under Section 8a of the CEA and, if so, determining if the Forex Dealer Member should perform additional due diligence on that person; 117
- reviewing disclosures given to
retail customers to ensure they are understandable, timely, and provide sufficient information;
- reviewing and analyzing the forex activity in
retail customer accounts, including discretionary customer accounts; and
retail customer funds, including accepting security deposits.
An adequate supervisory program should also include periodic on-site visits to branch offices, guaranteed introducing brokers, and otherwise unregulated affiliates that conduct
retail forex business on behalf of the Member. The Member needs to determine the frequency and nature of these visits. The number of visits will depend on the amount of business generated, the number of retail customer complaints received, the training and experience of the office personnel, and the frequency and nature of problems that arise from the office.
Finally, a Member's supervisory responsibilities include the obligation to ensure that its employees are properly trained to perform their duties. The formality of a training program will depend on the size of the firm and the nature of its business. Procedures should be in place to ensure that supervisory personnel know and understand the firm's supervisory procedures and that employees receive adequate training to abide by NFA requirements and to properly handle
retail customer accounts.
4. Recordkeeping - Members must keep books and records relating to their forex operations for a period of five years from the date thereof and shall keep them readily accessible during the first 2 years of the 5-year period. All such books and records shall be open to inspection by NFA.
Members should adopt and enforce reasonable procedures to create current and accurate books and records and to keep them from being altered or destroyed. The Member should be able to promptly produce its records in a format that NFA can read and reproduce.
5. Communications with the Public and Promotional Material - No Member or Associate shall make any communication with potential or current
retail customers that operates as a fraud or deceit; uses a high-pressure approach; or implies that forex transactions are appropriate for all persons. Promotional material used by the Member or Associate shall not deceive the public; contain any material misstatement of fact; mention the possibility of profit unless accompanied by an equally prominent statement of the risk of loss; or include any reference to actual past trading profits without mentioning that past results are not necessarily indicative of future results.
No Member or Associate may represent that forex funds deposited with a Forex Dealer Member are given special protection under the bankruptcy laws.
No Member or Associate may represent that its services are commission free without prominently disclosing how it is compensated in near proximity to that representation.
Members and Associates may not solicit customers based on the leverage available unless they balance any discussion regarding the advantages of leverage with an equally prominent contemporaneous disclosure that increasing leverage increases risk.
Every Member should adopt and enforce written procedures to supervise communications with potential and current
retail customers and promotional material. A supervisory employee should review and approve all promotional material. 128
All promotional material should be maintained by each Member and be available for examination for the periods specified in the recordkeeping section of this notice, measured from the date of last use.
6. Know Your Customer - Members and Associates have a duty to acquaint themselves sufficiently with the personal and financial circumstances of each
retail forex customer to determine what further facts, explanations and disclosures are needed in order for the customer to make an informed decision on whether to enter into forex transactions.
Every Member should determine what information it will obtain from a prospective
retail forex customer. At a minimum, the Member soliciting the retail customer to engage in forex transactions with a Forex Dealer Member should obtain the customer's name, address, principal occupation or business, current estimated annual income and net worth, approximate age, and an indication of the customer's previous investment and trading experience. Members and their Associates need to ensure that each retail customer they solicit has received adequate information concerning the risks of forex transactions so that the customer can make an informed decision as to whether forex transactions are appropriate for the customer. These obligations fall on the Forex Dealer Member when a non-Member solicits the customer.
7. Doing Business with Non-Members - Forex Dealer Members are subject to discipline for the activities of most non-Members who solicit or introduce
retail forex customers to the Forex Dealer Member or manage accounts for those customers.
If a customer is solicited or introduced by a non-Member of NFA, or if the customer's account is managed by a non-Member, the Forex Dealer Member is subject to discipline for the non-Member's conduct if that conduct would violate NFA requirements when engaged in by an NFA Member. In other words, a Forex Dealer Member is subject to an NFA disciplinary action for the non-Member's activities when soliciting, introducing, or managing accounts for the Forex Dealer Member's
retail customers even if the non-Member was not the Forex Dealer Member's agent.
The rule allows NFA to bring a disciplinary action even if the Forex Dealer Member acts diligently and has no knowledge of the third-party's conduct. As a practical matter, however, NFA will not take disciplinary action unless the Forex Dealer Member knew or should have known of the third-party's conduct or failed to exercise due diligence when establishing and maintaining the relationship with the third party.
The Forex Dealer Member is not subject to discipline for the actions of non-Members who are described in NFA Bylaw 306(b). It is also not subject to discipline for the actions of non-Members who would be exempt from Commission registration if they were acting in the same capacity in connection with exchange-traded futures contracts, such as foreign persons that solicit, introduce, or manage accounts for foreign customers only.
139 The Forex Dealer Member does, of course, have certain basic duties to its customers, including a duty to supervise its own activities in a way designed to ensure that it treats its customers fairly. Specifically, the Forex Dealer Member would violate this duty if it has actual or constructive notice that one of these entities engaged in fraudulent conduct and fails to take appropriate action.
8. Affiliates - Forex Dealer Members must supervise and are subject to discipline for the activities of affiliates that are authorized to engage in forex transactions solely by virtue of their affiliation with a Forex Dealer Member.
The CEA authorizes affiliates of FCMs to act as counterparties to forex transactions
with retail customers if the affiliate directly or indirectly controls, is controlled by, or is under common control with the FCM and the FCM makes and keeps records regarding the financial activities of the affiliate for purposes of the Commission's risk assessment requirements. 1410 If a Forex Dealer Member has one or more affiliates that act as counterparty to retail forex customers solely on the basis of that affiliation, the Forex Dealer Member must supervise the affiliate's retail forex activities and is subject to discipline for that affiliate's activities. 1511 The Forex Dealer Member must also make these affiliates' books and records available to NFA upon request. Additionally, the Forex Dealer Member must assure that its affiliates do not act as counterparties to forex transactions unless they are authorized to do so under the Act.
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.
1612 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.
C. OTHER REQUIREMENTS
This section of the notice provides guidance on dues, capital requirements, and security deposits. These requirements apply only to Forex Dealer Members.
1. Bylaw 1301
Forex Dealer Members are not required to pay assessment fees on
retail off-exchange forex transactions. Instead, NFA Bylaw 1301(e) imposes annual dues that are graduated according to the firm's gross annual revenue from customers (e.g., commissions, mark-ups, mark-downs) for these activities. Profits and losses from proprietary trades are not to be included. To calculate dues:
The following table shows the dues to be assessed for Forex Dealer Members:
- Start with the FCM dues imposed by NFA Bylaw 1301(b)(ii);
- Add $14,375 if the Forex Dealer Member's gross annual revenue from
acting as counterparty to retail forex transactions is $500,000 or less;
- Add $24,375 if the Forex Dealer Member's gross annual revenue from
acting as counterparty to retailforex transactions is more than $500,000, but not more than $2,000,000;
- Add $44,375 if the Forex Dealer Member's gross annual revenue from
acting as counterparty to retail forex transactions is more than $2,000,000, but not more than $5,000,000; or
- Add $94,375 if the Forex Dealer Member's gross annual revenue from these activities is more than $5,000,000.
Amount of annual Gross Revenue From
|Off-Exchange Retail Forex Transactions |
Dues if NFA is the DSRO
Dues if NFA is not the DSRO
|$500,000 or less
| More than $500,000, but not more than $2 million
|More than $2 million, but not more than $5 million
| More than $5 million
The dues will be assessed on the firm's membership renewal date and will be based on the Forex Dealer Member's latest certified financial statement.
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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 (including a customer) that is not
other than an affiliate ). An unregulated counterparty is any entity that is not:
(i) a financial institution regulated by a U.S. banking regulator;
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:
(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.
- 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 just 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 just 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:
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%
| Concentration Charge for British Pounds ($303,901 x 6%)
|Concentration Charge for Euros
|Concentration Charge for Mexican Pesos ($201,063 x 20%)
| Total Concentration Charge for Positions with Counterparty A =
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5. Financial Requirements Section 12
Forex Dealer Members must collect security deposits from
retail forex customers equal to 1% of the notional value of transactions in specified foreign currencies and 4% of the notional value of all other transactions. Where the two currencies are in different categories, the Forex Dealer Member must collect the higher amount. If the transaction pairs a foreign currency with the U.S. dollar, the security deposit is based on the foreign currency. If the transaction pairs a currency that qualifies for a 1% deposit with a currency that does not, the Forex Dealer Member must collect a 4% security deposit for the entire transaction. For example:
For short options, the Forex Dealer Member must collect this amount plus the premium the customer received. For long options, the Forex Dealer Member must simply collect the entire premium from the customer.
This requirement does not apply to any Forex Dealer Member that maintains adjusted net capital equal to or in excess of two times the greater of the 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.
1 For purposes of this notice, the term "retail customer" refers to any counterparty - domestic or foreign - that is not an eligible contract participant as defined in Section 1a(12) of the CEA.
2 Other NFA Members may offer these contracts if they are also registered in one of the other categories listed in Section 2(c)(2)(B)(ii) of the CEA.
3 The Board of Directors has determined that the retail, off-exchange forex transactions entered into by these firms should be subject to NFA's regulatory jurisdiction and are a proper subject of NFA regulation and oversight under Article XVIII(k) of NFA's Articles of Incorporation.
41 The Board of Directors has declared that these transactions are a proper subject of NFA regulation and oversight under Article XVIII, paragraph (k).
52 Compliance Rule 2-36(d) and (g) 2-39 excludes these same entities when they introduce customers to or manage forex accounts for customers of Forex Dealer Members.
63 Bylaw 306(b)(ii) excludes broker-dealers that are members of any fully-registered national securities association and FCMs that are members of another registered futures association. At this time, however, NASD is the only fully-registered national securities association and NFA is the only registered futures association.
74 These are affiliates of broker-dealers for which the broker-dealer makes and keeps records under the Securities and Exchange Commission's risk assessment requirements. See Section 17(h) of the Securities Exchange Act of 1934 and SEC Rule 17h-1T.
8 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).
95 See, for example, Compliance Rule 2-9: Supervision of Branch Offices and Guaranteed IBs, NFA Manual paragraph 9019; Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Sites, NFA Manual paragraph 9037; Compliance Rule 2-9: Supervision of the Use of Automated Order-Routing Systems, NFA Manual paragraph 9046. These interpretive notices do not apply to off-exchange retail forex activities, but they may provide helpful guidance to Members in connection with those activities.
106 The Commodity Futures Trading Commission has stated that all employees of an FCM who solicit or accept orders for forex transactions from retail customers must be registered with the Commission as an associated person of the FCM. See Division of Trading and Markets Advisory Concerning Foreign Currency Trading by Retail Customers (March 2002).
117 The screening process should include 1) checking BASIC and any other readily available sources and 2) asking the third-party to represent that neither it nor any of its principals is subject to a statutory disqualification or to identify and explain any statutory disqualifications.
128 Under traditional legal principles, Members can also be liable for promotional material promoting forex trading systems developed by third-parties. For example, a Member has direct responsibility for misleading promotional material if the Member prepares or distributes it; has agency responsibility if the system developer is an agent of the Member under established principles of agency law; and has supervisory responsibility if the Member fails to supervise its own employees when linking to a third-party trading system developer's web site, recommending a third-party's trading system, or entering into a referral agreement with a third-party system developer. See Interpretive Notice titled "NFA Bylaw 1101, Compliance Rules 2-9 and 2-29: Guidelines Relating to the Registration of Third-Party Trading System Developers and the Responsibility of NFA Members for Promotional Material That Promotes Third-Party Trading System Developers and Their Trading Systems," NFA Manual, paragraph 9005.
139 For this purpose, foreign persons and foreign customers are 1) natural persons who are not residents of the United States or 2) legal entities (other than passive investment vehicles) that are organized under the laws of a country other than the United States, do not have their principal place of business in the United States, and do not conduct their retail forex activities from a location in the United States. Those terms do not include a passive investment vehicle that is more than 10% owed by United States persons or that solicits United States persons who are not eligible contract participants as defined in Section 1a(12) of the Act. "United States" includes U.S. territories and possessions.
1410 See Sections 2(c)(2)(B)(ii)(III) and 4f(c)(2)(B) of the CEA and CFTC Regulations 1.14 and 1.15.
1511 Obviously, the Forex Dealer Member must also ensure that no entity with common ownership engages in the retail forex business unless it is authorized to do so.
1612 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.
1713 For this purpose, underages within the same U.S. calendar day are one occurrence.