Proposed Rule

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NFA's experience with the forex requirements indicates that disclosing mark-ups and mark-downs, as required in the current rules, is of limited value to customers and can even be misleading. We believe that the bid-ask spread provides more complete information about customer costs. Therefore, NFA proposes amending the interpretive notice to require Forex Dealer Members to disclose the bid-ask spread rather than the mark-up or mark-down. Of course, commissions and similar charges would also be disclosed.

The forex rules were modeled after securities industry requirements for over-the-counter (OTC) securities. Consequently, the forex rules currently require Forex Dealer Members to provide customers with written confirmations that include mark-ups and mark-downs, commissions, costs, fees, and other charges. As used in the securities industry and NFA requirements, a mark-up or mark-down is the difference between the price the Forex Dealer Member gives its customer and the price at which the Forex Dealer Member can buy (if the customer bought) or sell (if the customer sold) the same currency pair for its own account. In other words, if the Forex Dealer Member can hedge its risk with a bank at a 4 pip spread and it offers its customers a 6 pip spread with the same mid-point, then the Member has widened the spread by 1 pip on each side. This means that the Forex Dealer Member marked up the price by 1 pip for customers who bought the currency pair and marked down the price by 1 pip for customers who sold the currency pair.

The current approach, however, gives customers an incomplete picture of their costs. In the above example, the customer pays more than the 1 pip mark-up that the current rules require the Forex Dealer Member to disclose. The customer really pays 3 pips to buy and 3 pips to sell (i.e., one-half of the bid-ask spread). In addition, the same bank may give one Forex Dealer Member a better spread than it gives another Forex Dealer Member because the first firm is more credit-worthy or trades a larger volume. If both Forex Dealer Members offer the same bid-ask spread to their customers, however, the firm that receives the better spread from the bank has to disclose a larger mark-up than the firm that receives the poorer spread. For example:

FD Member Bid-ask Spread from Bank Bid-ask Spread to Customers Mark-up/Mark-down
A 2 pips 6 pips 2 pips
B 4 pips 6 pips 1 pip

Since Member B discloses a smaller mark-up, a customer might assume he will get a better deal with the less credit-worthy firm even though the customer will actually receive the same price at both firms.

To provide more accurate information, NFA's proposed amendments require Forex Dealer Members to disclose both the bid and the offer to retail customers and eliminating the requirement that they disclose mark-ups and mark-downs. Although the securities regulators require dealers to disclose mark-ups and mark-downs, we believe that there is a significant difference between how retail customers participate in the OTC forex markets and how customers participated in the OTC securities markets when the securities mark-up rules were adopted. In the traditional securities markets, customers would call up a dealer and ask for a price to buy or to sell but would not necessarily receive both quotes. Most of our Forex Dealer Members use electronic trading platforms that show both the bid and the offer, so the customer sees the bid-ask spread when entering an order. For these firms, the proposed change would merely codify their current practice. Voice brokers would also be subject to the requirement, so they would have to provide both quotes when the customer calls to place an order.

In a related matter, we have seen websites advertising commission free transactions. These advertisements are misleading when they imply that the firm does not make any money on the transaction. Therefore, the proposed amendments prohibit Members subject to the forex rules from advertising that they do not charge commissions unless they prominently disclose how they are compensated in near proximity to the statement about commissions. NFA also proposes requiring Members to disclose how they are compensated when a retail customer opens an account.


Several forex firms that meet the criteria for the enhanced supervisory requirements have argued that those requirements do not apply to them because they are not engaged in futures activities as that term is defined in NFA rules. NFA Compliance Rule 2-9(b), which establishes the Board's authority to adopt criteria and procedures for enhanced supervision, does not mention futures, however, and it is broad enough to include off-exchange forex activities. Similarly, the interpretive notice does not limit its reach to exchange-traded futures. Nonetheless, NFA proposes amending the interpretive notice to make it clear that the enhanced supervision requirements apply to the retail forex activities of Members subject to NFA Compliance Rule 2-36.

NFA respectfully requests that the Commission review and approve the proposed amendments to the Interpretive Notice regarding Forex Transactions with Forex Dealer Members and the Interpretive Notice to Compliance Rule 2-9 regarding Enhanced Supervisory Procedures.

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