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October 31, 2011
Effective Date of Amendments to NFA's Forex Requirements Regarding Supervision and Use of Electronic Trading Systems and Bulk Assignment and Liquidation of Forex Positions; Cessation of Customer Business
NFA recently made several amendments to NFA's Requirements that govern the retail forex activities of NFA Members. These amendments to NFA's Interpretive Notice entitled Compliance Rule 2-36(e): Supervision and Use of Electronic Trading Systems and NFA Compliance Rule 2-40 and the related Interpretive Notice entitled NFA Compliance Rule 2-40: Procedures for the Assignment and Liquidation of Forex Positions; Cessation of Customer Business will become effective on November 15, 2011.
Interpretive Notice Regarding Supervision of the Use of Electronic Trading Systems
NFA's Interpretive Notice entitled Compliance Rule 2-36(e): Supervision of the Use of Electronic Trading Systems provides Forex Dealer Members (FDMs) with guidance on their obligations for supervising their use of electronic trading systems. NFA recently updated this Interpretive Notice to:
- Remind Members of their obligation to ensure that any promotional material (including any that discusses demo accounts) they distribute or endorse regarding an electronic trading system must accurately and completely discuss the platform's function and operation;
- Require Members to have Credit and Risk Management Controls with respect to their own proprietary trading and to have System Controls that are designed to identify any trading anomalies or patterns that indicate a system malfunction;
- Clarify that the periodic review of the system must be done at least annually and provide guidance on the scope of the review; and
- Include the requirement that FDMs file the daily trading reports required by Compliance Rule 2-48.
NFA Compliance Rule 2-40 and Related Interpretive Notice Regarding Procedures for Assignment and Liquidation of Forex Positions and Cessation of Customer Business
NFA Compliance Rule 2-40 and its related Interpretive Notice entitled NFA Compliance Rule 2-40: Procedures for the Assignment or Liquidation of Forex Positions; Cessation of Customer Business describes the procedures an FDM must follow when it enters into a bulk assignment, transfer, or liquidation of forex positions for a retail forex customer. NFA amended the rule to clarify that forex IBs are also subject to the requirements and to provide that IBs and FDMs engaging in these transactions must comply with CFTC Regulation 5.23, as well as certain additional requirements imposed by NFA and outlined in the Interpretive Notice, including:
- The transferee/assignee FDM or IB must obtain (from either the customer or the transferring FDM or IB) the customer's personal and financial information required under Compliance Rule 2-36 before the FDM or IB accepts an order to initiate a new position.
- The assignee/transferee FDM or IB must provide each retail forex customer with the disclosures required under CFTC Regulation 5.5(e)(1)(i)-(iii) regarding the percentage of profitable and unprofitable accounts maintained by the assignee/transferee FDM during the prior calendar quarter. The only exception to this requirement occurs in cases where the transferee IB introduces the customers to the same FDM as the transferor IB since that customer would have already received the FDM's performance information from the transferor IB.
- The assignee/transferee FDM or IB must provide CFTC Regulation 5.5(e)(1)(i)-(iii)'s disclosures even when the customer requests the transfer.
More information on these amendments can be found in NFA's September 15, 2011 and September 22, 2011 Submission Letters to the CFTC. Questions concerning these changes should be directed to Lauren Brinati, Director, Compliance at firstname.lastname@example.org or Sharon Pendleton, Director, Compliance at email@example.com.