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Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

NFA Financial Requirements Section 12 generally requires Forex Dealer Members ("FDMs") to collect security deposits from customers equal to 1% for the major currencies and 4% for all others. Section 12 is silent on what collateral is acceptable, however, and NFA recently received two inquiries regarding this issue. Therefore, we believe it would help FDMs if NFA spells out what collateral they can accept.

The amendments to Section 12 provide that, in addition to cash, FDMs may accept collateral that would be eligible investments for segregated funds under CFTC Regulation 1.25. The collateral would be subject to the haircuts in CFTC Regulation 1.17 (for purposes of collateral value) and would have to be in the FDM's possession and control.

In determining what collateral would be acceptable, NFA considered the margin rules at the U.S. futures exchanges and those instruments that are acceptable capital (with appropriate haircuts) under CFTC rules. While Regulation 1.25 is not a perfect match for either, it appears to be a good compromise between the two.

NFA asked FDMs for comments on this proposal and received four responses. Two comments supported the proposal and one recommended that only cash and Treasury Securities be allowed. The fourth suggested expanding the proposal to include letters of credit meeting certain conditions. While letters of credit can be written in a way to ensure collectability, NFA is concerned that their use could encourage retail customers to speculate with borrowed money. Therefore, NFA does not believe it would be appropriate for letters of credit to be permitted as collateral in these retail markets.

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