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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

NFA Bylaw 1301(a) currently requires contract market Members to pay to NFA an assessment calculated on the basis of $.01 for each round-turn transaction in a commodity futures contract executed on the contract market. Bylaw 1301(a) places caps, however, on the amount paid to NFA. Specifically, in any NFA fiscal year, a contract market Member that had transaction volume of more than 20% of U.S. exchange volume during that fiscal year shall not pay more than $150,000 to NFA and contract market Members with less than 20% of U.S. exchange volume shall not pay more than $100,000 to NFA.

From a historical perspective, NFA's original Bylaws required all contract market Members to pay NFA $.02 per round turn futures contract with an annual cap of $300,000. In 1984, the Board reduced the amount of this assessment to the current $.01 level with a cap of $150,000 for contract market Members with two Directors on NFA's Board and a cap of $100,000 for those exchange Members with one Director. The Board's 1984 reduction in the assessment to $.01 was in response to a large increase in public trading volume, and its reduction in the cap level was designed to recognize that exchanges of different sizes should not pay the same amount to NFA. In 2001, in conjunction with the Board's restructuring, the Board amended the Bylaws to impose the current caps of $150,000 for exchange Members with more than 20% of U.S. exchange volume and $100,000 for exchange Members with less than 20% of U.S. exchange volume.

Due to the dramatic increase in U.S. exchange trading volume in recent years, the smaller exchange Members are paying a disproportionate amount of dues relative to the larger exchanges. NFA has adjusted downward the assessment fee remitted by FCMs over the last few years, but has not made corresponding adjustments to the assessment paid by the exchanges.

Adjusting the per contract fee from $.01 to $.005 will not materially impact overall exchange fee revenues to NFA since the larger exchanges will still hit the fee cap. Therefore, two exchange Members would currently be affected by this proposed fee reduction. From a historical perspective, this adjustment would drop these exchanges to the amount they paid to NFA in the year 2000 - prior to the recent surge in U.S. exchange volume.

Clearly, due to the increase in exchange volume, these two exchange Members pay more today to NFA than a few years ago. NFA believes that this increased amount has created an imbalance between the amounts paid by the smaller and larger exchanges. Therefore, to restore this balance, the Board voted to reduce the rate paid by exchange Members from $.01 to $.005.

As mentioned earlier, NFA is invoking the "ten-day" provision of Section 17(j) of the Commodity Exchange Act. NFA intends to make the proposed amendments to Bylaw 1301(a) reducing the rate paid by Exchange Members effective ten days after receipt of this submission by the Commission, unless the Commission notifies NFA that the Commission has determined to review the proposal for approval.

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