Proposed Rule

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EXPLANATION OF PROPOSED AMENDMENTS

Since November 2001, when the Board last approved the fee reduction, public trading volume has grown at an unprecedented rate, which has continued to increase NFA's reserves. Therefore, NFA's Board approved another reduction in the assessment fee to an all time low of $.10 per round-turn futures contract and $.05 per options transaction. The Board would intend to have the new fees become effective on April 1, 2002.

NFA's Special Committee on NFA Funding has reviewed the application of the assessment fee to security futures products. Given the probable notional value of these contracts, the Special Committee does not believe that the proposed full assessment fee amount of $.10 per round-turn should be assessed upon these security futures contracts. For reasons discussed below, the Special Committee opined that the current mini-contract fee of $.04 per round-turn is the appropriate fee.

The Special Committee recommended that NFA's assessment fee should only be imposed upon those security futures contracts that are carried in the futures accounts of NFA Member firms. In other words, customers carrying security futures contracts in securities accounts of dual NFA and NASD Member firms should be exempt from NFA's assessment fee. The Special Committee felt that this exemption is warranted because NFA's rules only govern the activity in futures accounts and, therefore, the exemption is consistent with one of the Special Committee's guiding principles, that NFA's funding mechanism reflect how NFA expends its resources. Of course, the Special Committee expects that the NASD will impose either a direct or indirect fee upon customers trading these products in securities accounts at dual NFA and NASD Member firms.

In order to evaluate whether $.04 per round-turn is the appropriate fee for these contracts, the Special Committee requested that staff discuss the fee level with both Nasdaq Liffe LLC ("Nqlx") and OneChicago. In preparing for these discussions, staff prepared a chart comparing the proposed futures regulatory fees to those for a comparable transaction in the underlying security. The chart's computations take into account the recently enacted reduction in the SEC Section 31 fee and the reduction in the CFMA fee applicable to security futures products. This chart generally shows that for stocks valued above $25.00 the proposed futures fees are less than the fees associated with a transaction in the underlying security. Nqlx agreed that $.04 per round-turn appears to be an acceptable level for NFA's assessment fee for security futures products. OneChicago also agreed that this level appeared acceptable. However, OneChicago noted that the fee may be slightly high for 20% of the individual stock futures the exchange desires to list because the underlying security for those contracts are currently valued in the teens.

Based upon this comparison, the Special Committee felt that a $.04 per round-turn assessment fee level for these contracts should not stifle the development of these contracts. Therefore, the Special Committee recommended, and the Board approved, an assessment fee amount of $.04 per round-turn for security futures carried in futures accounts at NFA Member firms.