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In the past six months, at least three Forex Dealer Members ("FDMs") have ceased business and assigned their customer positions to other FDMs. Additionally, in at least one instance, a non-FDM assigned its customer positions to an FDM. NFA has become increasingly concerned with these assignments because NFA was not notified of the assignments until after the fact. Further, NFA is concerned that customers may not be assured of the same protections that apply to other bulk transfer situations. Therefore, they may not be fully aware of the consequences of the assignment and their ability to avoid having their positions liquidated instead of assigned to another forex dealer.
In the current regulatory framework relating to forex, it is not clear what notification is required when an FDM transfers customer accounts by assigning its counterparty obligations with customers to another FDM or a non-FDM. CFTC Rule 1.65 requires that certain notice and disclosures be provided to on-exchange customers prior to transferring their accounts. Since an FDM acts as a counterparty to off-exchange forex transactions rather than an agent, CFTC Rule 1.65, if applicable, is not completely suitable for forex accounts.
New Compliance Rule 2-40 and its Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business" govern the bulk assignment and liquidation of retail customers' open forex positions with an FDM. Since the circumstances of each assignment may vary, any rule proposal in this area should provide NFA with flexibility to tailor the requirements, if necessary, to the facts of a specific situation. The rule permits the bulk assignment or liquidation of customer positions or the transfer of accounts pursuant to the procedures in the Interpretive Notice, which contains detailed procedures but allows NFA to waive, modify, or impose additional requirements if doing so is in the best interest of the FDM's customers or if the circumstances otherwise require.
The Interpretive Notice provides that an FDM may assign customer open positions and transfer account balances to an assignee that is a counterparty enumerated in Section 2(c)(2)(B)(ii) of the Act (an "Authorized Entity")1 and is financially able to honor its commitments to customers as a result of the assignment. The proposed Interpretive Notice also contains the following requirements.
As part of either an assignment or liquidation of customer positions, FDMs are also required to provide NFA with pertinent information and documents. Depending on the circumstances, FDMs must provide, among other things, a list of the affected accounts and the value of each as of the date NFA receives notice of the assignment or liquidation, a representative copy of the customer agreements governing the affected accounts, and a subsequent list of the value of each affected account as of the date of the assignment or liquidation.
Compliance Rule 2-40 also provides that where an FDM obtains customer positions or credit balances as assignee, the FDM may not accept orders initiating new positions until it has obtained information from the customer and provided the disclosures required under NFA Compliance Rule 2-36. If the assignor is also an FDM, however, the assignee may instead obtain the necessary information pertaining to the customer from the assignor and, instead of having to provide the required disclosures, may obtain clear and reliable written evidence that the assignor previously provided them. Where appropriate, such written evidence could include electronic records.
NFA respectfully requests that the Commission review and approve the adoption of Compliance Rule 2-40 - Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business and the Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business."
1 For example, a registered FCM, registered broker-dealer, or financial institution.