Home > News Center > Proposed Rule

Proposed Rule

2014 | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | 2001 | 2000 | 1999 | 1998 | 1997 | 1996

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

FINANCIAL REQUIREMENTS

* * *

SECTION 11. FOREX DEALER MEMBER FINANCIAL REQUIREMENTS

* * *

(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. The amount of the concentration charge may be reduced by the net liquidating value of the counterparty's off-exchange foreign currency account held by the Forex Dealer Member, except that the Forex Dealer Member may use only those assets allowable as capital under CFTC Rule 1.17 and must apply the haircuts required by that rule (except those for open positions). With the same restrictions, the concentration charge may also be reduced by the amount of the net liquidating value of the counterparty's regulated commodity accounts held by the Forex Dealer Member in compliance with CFTC Rule 1.20 or 30.7 that is in excess of any margin requirement, if the Forex Dealer Member has the right under an agreement with the counterparty to transfer funds from these accounts to reduce the debit balance incurred in the counterparty's off-exchange foreign currency account.

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.

* * *

INTERPRETIVE NOTICE

* * *

FOREX TRANSACTIONS

* * *

C. OTHER REQUIREMENTS

* * *

2. 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 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 by adding up the Member's long positions with all counterparties (including ECPs, affiliates, and principals), multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;

  • Multiply the total long value by 10%;

  • Calculate the total short value for each currency pair by adding up the Member's short positions with all counterparties, multiplying by the contract size, and converting to U.S. dollars using the relevant exchange rate;

  • 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. ; and

  • For each unaffiliated, unregulated counterparty subject to the concentration charge that maintains an account at the Forex Dealer Member, the Member may subtract the net liquidating value of the counterparty's off-exchange foreign currency account and the excess funds in regulated commodity accounts. In determining these amounts, include only those assets allowable as capital under CFTC Rule 1.17 and apply the haircuts required by that rule (except those for open positions).

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

For example, assume a Forex Dealer Member incurs a concentration charge with regard to two unregulated Counterparties, Counterparty A and Counterparty B. Counterparty B is a customer and the net liquidating value in its off-exchange foreign currency account and the excess funds in its segregated account under CFTC Rule 1.20 total $32,075. Further, the Forex Dealer Member has an agreement with Counterparty B to permit it to transfer funds from the segregated account to reduce the debit balance incurred in the off-exchange foreign currency account. For the following positions with unregulated Counterparties A and B in British Pounds, Euros, and Mexican Pesos, 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
British Pound $2,500,000 $250,000 $3,000,000 $300,000
Euro $4,125,000 $412,500 $3,250,000 $325,000
Mexican Peso $ 250,000 $ 25,000 $ 250,000 $ 25,000

Currency Value of Net Long Positions with Counterparty A Value of Net Short Positions with Counterparty A Value in Excess of 10%
British Pound $425,000 $125,000
Euro $500,000 $ 87,500
Mexican Peso $ 20,000 $ 0

Concentration Charge for Counterparty A
Concentration Charge for British Pounds ($125,000 x 6%) $ 7,500
Concentration Charge for Euros ($87,500 x 6%) $ 5,250
Concentration Charge for Mexican Pesos ($0 x 20%) $ 0
Total Concentration Charge $12,750

Currency Value of Net Long Positions with Counterparty B Value of Net Short Positions with Counterparty B Value in Excess of 10%
British Pound $500,000 $250,000
Euro $300,000 $ 0
Mexican Peso $100,000 $ 75,000

Concentration Charge for Counterparty B
Concentration Charge for British Pounds ($250,000 x 6%) $15,000
Concentration Charge for Euros ($0 x 6%) $ 0
Concentration Charge for Mexican Pesos ($75,000 x 20%) $15,000
Total $30,000
Less Net Liquidating Value of Counterparty B's Accounts $32,075
Total Concentration Charge $0

Concentration Charge for Counterparty A $12,750
Concentration Charge for Counterparty B $ 0
Total Concentration Charge Incurred $12,750

NFA is the premier independent provider of efficient and innovative regulatory programs that safeguard the integrity of the derivatives markets.
Site Index | Contact NFA | News Center | FAQs | Career Opportunities | Industry Links | Home
© National Futures Association All Rights Reserved. | Disclaimer and Privacy Policy