Proposed Rule
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(additions are underscored and deletions are
FINANCIAL REQUIREMENTS
SECTION 1. FUTURES COMMISSION MERCHANT FINANCIAL REQUIREMENTS
(a) Each Member that is registered or required to be registered with the Commodity Futures Trading Commission (hereinafter "CFTC") as a Futures Commission Merchant (hereinafter "Member FCM") must maintain "Adjusted Net Capital" (as defined in CFTC Regulation 1.17) equal to or in excess of the greatest of:
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(i) $250,000;
(ii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $6,000 for each remote location operated (i.e., proprietary branch offices, main office of each guaranteed IB and branch offices of each guaranteed IB);
(iii) For Member FCMs with less than $2,000,000 in Adjusted Net Capital, $3,000 for each AP sponsored (including APs sponsored by guaranteed IBs);
(iv) For securities brokers and dealers, the amount of net capital specified in Rule 15c3-1(a) of the Regulations of the Securities and Exchange Commission (17 CFR 240.15c3-1(a)); or
(v) Eight (8) percent of domestic and foreign domiciled customer and four (4) percent of non-customer (excluding proprietary) risk maintenance margin/performance bond requirements for all domestic and foreign futures and options on futures contracts excluding the risk margin associated with naked long options positions;
(vi) For Member FCMs with an affiliate described in section 2(c)(2)(B)(ii)(III) of the Act that engages in off-exchange forex transactions with retail customers (as those terms are defined in Compliance Rule 2-36(h) and (i)) and that is authorized to engage in those transactions solely by virtue of its affiliation with a registered FCM, $7,500,000.
(d) No Member FCM may use retail forex customer equity as capital or may record retail forex customer equity as an asset without recording a corresponding liability. For purposes of this requirement:
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(i) Retail forex customer means any person who is not an eligible contract participant, as defined in Section 1a(12) of the Act, and who enters into retail forex transactions with the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) (except transactions executed on a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade); and
(ii) Retail forex customer equity means money, securities, and property received by the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) to margin, guarantee, or secure off-exchange forex transactions between a retail forex customer and the FCM or any of its affiliates described in section 2(c)(2)(B)(ii)(III) or accruing to a retail forex customer as a result of such transactions.
INTERPRETIVE NOTICES
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FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS INTERPRETIVE NOTICE
The Commodity Futures Modernization Act of 2000 (CFMA), which was signed into law on December 21, 2000, amended the Commodity Exchange Act (CEA) to provide that only certain regulated entities may offer off-exchange foreign currency futures and options contracts (forex) to retail customers.1 Under the CFMA, registered futures commission merchants (FCMs) and their affiliates described in section 2(c)(2)(B)(ii)(III) of the CEA are among the entities that may offer forex contracts to retail customers.2 As described below, NFA Bylaw 306 creates a Forex Dealer Member category for certain NFA Members who act as counterparties to forex transactions with retail customers.3 This category allows NFA to exercise appropriate regulatory jurisdiction over the retail forex activities of these Members without imposing unnecessary, and potentially duplicative, regulatory burdens on Members that are otherwise subject to regulatory oversight for their activities.
Given the differences between off-exchange forex transactions and traditional exchange-traded futures and options, the Board of Directors does not believe that it is appropriate to apply the full array of NFA's futures rules to off-exchange forex transactions. Therefore, rather than simply incorporating off-exchange forex transactions into the definition of "futures," NFA adopted NFA Compliance Rule 2-36 to govern these transactions.
8. Affiliates - Forex Dealer Members must supervise and are subject to discipline for the activities of affiliates that are authorized to engage in forex transactions solely by virtue of their affiliation with a Forex Dealer Member.
The CEA authorizes affiliates of FCMs to act as counterparties to forex transactions with retail customers if the affiliate directly or indirectly controls, is controlled by, or is under common control with the FCM and the FCM makes and keeps records regarding the financial activities of the affiliate for purposes of the Commission's risk assessment requirements.12 If a Forex Dealer Member has one or more affiliates that act as counterparty to retail forex customers solely on the basis of that affiliation, the Forex Dealer Member must supervise the affiliate's retail forex activities and is subject to discipline for that affiliate's activities.13 The Forex Dealer Member must also make these affiliates' books and records available to NFA upon request.
12 See Sections 2(c)(2)(B)(ii)(III) and 4f(c)(2)(B) of the CEA and CFTC Regulations 1.14 and 1.15.