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August 16, 2011
Amendments to NFA's Forex Requirements Including NFA's Jurisdiction Over Members Engaging in Forex Activities
The Commodity Futures Trading Commission (CFTC) recently approved a number of amendments to NFA Requirements that govern the retail forex activities of NFA Members. These amendments to NFA Bylaws 301 and 306, NFA Compliance Rules 2-10, 2-36 and 2-39, Code of Arbitration Section 1 and Interpretive Notices 9053, 9058 and 9060 will become effective October 1, 2011.
Under NFA Bylaw 306, Members of NFA are Forex Dealer Members if they are registered with the CFTC as a retail foreign exchange dealer or futures commission merchant (FCM) and they are or offer to be the counterparty to a retail forex transaction unless the Member is also one of the entities excluded from NFA jurisdiction under Bylaw 306. NFA Compliance Rule 2-39 requires Members of NFA that introduce, solicit or manage retail forex accounts to comply with specific NFA Forex Requirement unless the Member is excluded because it is one of the specific entities identified in Bylaw 306.
NFA is amending Bylaw 306 and Compliance Rule 2-39 to eliminate these exclusions. As a result, all NFA Members that engage in retail forex transactions will be subject to the applicable NFA Forex Requirements. The only slight modification to this requirement will be for Member FCMs whose forex activities are limited to their futures customers using OTC forex to hedge currency risk related to on-exchange transactions that settle in currencies other than their home currency. Under new subsection (n) to Compliance Rule 2-36, these FCMs will be exempt from all NFA Forex requirements except the anti-fraud requirements and the responsibility to act according to just and equitable principles of trade.
NFA is also amending Bylaw 301(j), which governs the eligibility of Members to conduct forex activities. The amendment to Bylaw 301(j) requires any Member that is registered with the CFTC and conducting forex activities to be designated as a forex firm and any individual associated with the firm to be approved as a forex Associate in order to conduct forex activities for the Member. These firms will also be required to have at least one principal that is registered as an AP and approved as a forex AP. Subject to certain grandfathering provisions, this person will be required to have passed the Retail Off-Exchange Forex Examination (Series 34).
Additionally, NFA is adopting subsection (l) to NFA Compliance Rule 2-36 ("Customer Information and Risk Disclosure") and amending the Interpretive Notice 9053 entitled Forex Transactions to impose the "know-your-customer" requirements set forth in NFA Compliance Rule 2-30 to Members' forex transactions.
NFA Compliance Rule 2-10(b) is also amended to require FDMs to maintain an office in the continental United States, Alaska, Hawaii or Puerto Rico that is responsible for preparing and maintaining CFTC and NFA required financial records and reports and be under the supervision of a listed principal and registered AP of the FDM who resides in that office.
Finally, NFA is making certain technical clarifying amendments to NFA's Code of Arbitration Section 1, NFA's Interpretive Notice 9058 entitled NFA Compliance Rule 2-40: Procedures for Bulk Assignment or Liquidation of Forex Positions: Cessation of Customer Business and NFA's Interpretive Notice 9060 entitled Compliance Rule 2-36(e): Supervision of the Use of Electronic Trading Systems.
More information on these amendments can be found in NFA's March 3, 2011 Submission Letter to the CFTC. Questions concerning these changes should be directed to Lauren Brinati, Director, Compliance at firstname.lastname@example.org or Carol Wooding, Associate General Counsel, at email@example.com.