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In the past six months, at least three Forex Dealer Members ("FDMs") have ceased business and assigned their customer positions to other FDMs. Additionally, in at least one instance, a non-FDM assigned its customer positions to an FDM. NFA has become increasingly concerned with these assignments because NFA was not notified of the assignments until after the fact. Further, NFA is concerned that customers may not be assured of the same protections that apply to other bulk transfer situations. Therefore, they may not be fully aware of the consequences of the assignment and their ability to avoid having their positions liquidated instead of assigned to another forex dealer.
In the current regulatory framework relating to forex, it is not clear what notification is required when an FDM transfers customer accounts by assigning its counterparty obligations with customers to another FDM or a non-FDM. CFTC Rule 1.65 requires that certain notice and disclosures be provided to on-exchange customers prior to transferring their accounts. Since an FDM acts as a counterparty to off-exchange forex transactions rather than an agent, CFTC Rule 1.65, if applicable, is not completely suitable for forex accounts.
New Compliance Rule 2-40 and its Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business" govern the bulk assignment and liquidation of retail customers' open forex positions with an FDM. Since the circumstances of each assignment may vary, any rule proposal in this area should provide NFA with flexibility to tailor the requirements, if necessary, to the facts of a specific situation. The rule permits the bulk assignment or liquidation of customer positions or the transfer of accounts pursuant to the procedures in the Interpretive Notice, which contains detailed procedures but allows NFA to waive, modify, or impose additional requirements if doing so is in the best interest of the FDM's customers or if the circumstances otherwise require.
The Interpretive Notice provides that an FDM may assign customer open positions and transfer account balances to an assignee that is a counterparty enumerated in Section 2(c)(2)(B)(ii) of the Act (an "Authorized Entity")1 and is financially able to honor its commitments to customers as a result of the assignment. The proposed Interpretive Notice also contains the following requirements.
- The FDM must obtain a customer's written consent or provide the customer with notice of an assignment or transfer before it occurs.
- The FDM must submit a notice to NFA's Compliance Department and send it to customers in a manner intended to ensure receipt by the customer within a reasonable period prior to the assignment date. It is anticipated, however, that the notice will be sent at least seven calendar days before the assignment so that NFA has sufficient time to monitor the closing of the FDM's business.
- The contents of the notice may vary depending upon the specific circumstances of the assignment, but the notice must provide the customer with sufficient information to allow them to make informed decisions regarding their open positions.
- The notice must inform customers that they are not required to accept the proposed assignment and may direct the assignor FDM to liquidate their positions.
- The notice must include the name and contact information of an individual at the assignor FDM to contact with questions or with instructions to liquidate positions and the name and contact information of the assignee firm, as well as the name of an individual at that firm.
- The notice must instruct customers that their failure to respond to the notice by a specified date will result in a default action (generally either assignment to the assignee or, if assignment is not permitted under the customer agreement, liquidation of the open positions and return of the remaining funds).
- The notice must also include any other material information. For example, if customer positions are being assigned to a firm that is not an NFA Member, the notice must disclose that the assignee firm is not an NFA Member, is not subject to NFA oversight, and is not required to comply with NFA rules.
As part of either an assignment or liquidation of customer positions, FDMs are also required to provide NFA with pertinent information and documents. Depending on the circumstances, FDMs must provide, among other things, a list of the affected accounts and the value of each as of the date NFA receives notice of the assignment or liquidation, a representative copy of the customer agreements governing the affected accounts, and a subsequent list of the value of each affected account as of the date of the assignment or liquidation.
Compliance Rule 2-40 also provides that where an FDM obtains customer positions or credit balances as assignee, the FDM may not accept orders initiating new positions until it has obtained information from the customer and provided the disclosures required under NFA Compliance Rule 2-36. If the assignor is also an FDM, however, the assignee may instead obtain the necessary information pertaining to the customer from the assignor and, instead of having to provide the required disclosures, may obtain clear and reliable written evidence that the assignor previously provided them. Where appropriate, such written evidence could include electronic records.
NFA respectfully requests that the Commission review and approve the adoption of Compliance Rule 2-40 - Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business and the Interpretive Notice entitled "Procedures for the Bulk Assignment or Liquidation of Forex Positions; Cessation of Customer Business."
1 For example, a registered FCM, registered broker-dealer, or financial institution.