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Proposed Rule

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Explanation of Proposed Amendments

As the Commission is aware, the Commodity Futures Modernization Act ("CFMA") amends the Commodity Exchange Act to make it clear that it is unlawful to offer off-exchange foreign currency futures and options contracts ("FOREX") to retail customers unless the offeror is an enumerated regulated financial entity, including a futures commission mer-chant or its affiliate. Under this amendment, NFA Member FCMs are authorized to offer FOREX transactions to retail customers.

NFA's primary objective is to prohibit fraudulent acts by entities that register as FCMs for the purpose of qualifying under the CFMA to engage in FOREX transactions with retail customers. Proposed NFA Bylaw 306 creates a separate NFA membership category for FOREX dealers. The new Bylaw provides that any NFA Member that is the counterparty to foreign currency futures and options transactions that are offered to or entered into with persons that are not eligible contract participants would also be subject to regulation (e.g. anti-fraud) as a FOREX Dealer Member if 35% or more of its gross revenue from financial market transactions (acting as counterparty or agent) is generated from those foreign currency futures and options activities. This category will allow NFA to exercise appropriate regulatory authority over firms that primarily engage in FOREX business without imposing additional regulation on Members that are otherwise highly regulated and offer FOREX as a limited portion of their business.

Off-exchange, retail foreign currency business has historically been a breeding ground for fraudulent activities. Proposed Compliance Rule 2-36 prohibits FOREX Dealer Members from engaging in fraudulent activities involving FOREX transactions. The rule is modeled after Compliance Rule 2-2, NFA's anti-fraud rule governing exchange-traded futures and options transactions. In addition, proposed Rule 2-36 contains a provision prohibiting these Members from engaging in any foreign currency futures or options transaction that is prohibited under the Commodity Exchange Act.

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