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Notice I-15-21

September 01, 2015

Effective date of new Forex Dealer Member Requirements

The Commodity Futures Trading Commission (CFTC) recently approved NFA's amendments to NFA Financial Requirements Section 11, NFA Financial Requirements Section 12, and NFA Compliance Rule 2-36 and a related interpretive notice entitled NFA Compliance Rule 2-36: Risk Management Program for Forex Dealer Members. These amendments and the new interpretive notice, which are described below, are effective January 4, 2016.

NFA Financial Requirements Section 11

Each forex dealer member (FDM) must continue to maintain a minimum of $20 million in capital and additional capital equal to 5 percent of all liabilities owed to customers (as defined in NFA Compliance Rule 2-36(o)) that exceed $10 million. The amendments to Financial Requirements Section 11 impact the additional capital that an FDM must maintain. In addition to the base amount and 5 percent of all liabilities owed to customers that exceed $10 million, the amendments now also requires an FDM to maintain additional capital for transactions with eligible contract participants (ECPs), including higher amounts for those that are acting as dealers, as follows:

  • 5 percent of all liabilities the FDM owes to ECPs that are not an affiliate of the FDM and that are not acting as a dealer (This charge does not apply until the combined liabilities the FDM owes to customers and these ECP counterparties exceed $10 million.);

  • 10 percent of all liabilities the FDM owes to ECP counterparties that are an affiliate of the FDM not acting as a dealer;

  • 10 percent of all liabilities ECP counterparties that are an affiliate of the FDM and acting as a dealer owe to their customers (including ECPs) including liabilities related to retail commodity transactions; and

  • 10 percent of all liabilities the FDM owes to ECP counterparties acting as a dealer that are not an affiliate of the FDM, including liabilities related to retail commodity transactions.

  • Any FDM that is also registered as a futures commission merchant (FCM) continues to be subject to the FCM capital requirement pursuant to NFA Financial Requirements Section 1 and must meet the higher of the two amounts.

FDMs must be in compliance with these new capital requirements on January 4, 2016.

NFA Financial Requirements Section 12

The amendments to Financial Requirements Section 12 require each FDM to collect a security deposit for each forex transaction with an ECP in the same amount the FDM is required to collect for its forex transactions with customers. Each FDM must begin collecting and maintaining these amounts for transactions occurring on or after January 4, 2016, including rollovers of existing positions.

The amendments to Section 12 also prohibit an FDM from acting as a counterparty to an ECP acting as a dealer, unless that ECP dealer collects and maintains from its customers and ECP counterparties security deposit amounts for forex transactions that are at least equal to the amount required by Section 12. This amendment is effective for transactions occurring on or after January 4, 2016, including rollovers of existing positions.

Finally, under the amendments to Section 12, each FDM is now required to immediately notify NFA's Compliance department via an electronic filing if the FDM begins requiring a higher security deposit than the amount required by NFA.

NFA Compliance Rule 2-36 and related Interpretive Notice

The most significant amendment to Compliance Rule 2-36 requires each FDM to adopt a risk management program that is designed to monitor and manage the risks associated with its forex activities. The required components of the program are outlined in the new interpretive notice entitled NFA Compliance Rule 2-36: Risk Management Program for Forex Dealer Members. This requirement applies to all FDMs, including FCMs that engage in retail forex transactions.

Each FDM must have the risk management program in place and file it with NFA by January 4, 2016. The first quarterly risk exposure report will be due for the quarter ending March 31, 2016. An FDM will be required to prepare an interim report any time it detects a material change in the firm's risk exposure on or after January 4, 2016. The first review and testing of the program must be completed by January 4, 2017, unless the firm is required to complete an earlier review due to a material change in the FDM's business that is reasonably likely to alter the FDM's risk profile.

The amendments to Compliance Rule 2-36 also require each FDM to designate one individual principal to serve as the firm's CCO (as opposed to the current requirement that permits multiple CCOs). Each FDM must have this CCO in place by January 4, 2016. An FDM will also now be required to prepare a CCO annual report that meets the requirements of CFTC Regulation 3.3. The first report will be due for the FDM's first fiscal year end occurring after January 4, 2016.

Finally, the amendments to Compliance Rule 2-36 require each FDM to make certain information readily available on its website and update the information as necessary. This information must be available on each FDM's website by January 4, 2016.

More information on these requirements is available in the May 28, 2015 submission letter to the CFTC. If you have questions regarding these changes, please contact Sarah A. Walsh, Associate Director, Compliance (312-781-1202 or sawalsh@nfa.futures.org) or Rachel Sturgeon, Senior Manager, Compliance (312-781-1472 or rsturgeon@nfa.futures.org).

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