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EXPLANATION OF PROPOSED AMENDMENTS

Explanation of Proposed NFA Compliance Rule 2-36

As the Commission is aware, the Commodity Futures Modernization Act ("CFMA") amends the Commodity Exchange Act to make it clear that it is unlawful to offer off-exchange foreign currency futures and options contracts to retail customers unless the offeror is an enumerated regulated financial entity, including a futures commission merchant or its affiliate. Under this amendment, NFA Member FCMs are authorized to offer off-exchange foreign currency futures and options contracts to retail customers — although NFA does not have any rules that govern these transactions.

Off-exchange, retail foreign currency business has historically been a breeding ground for fraudulent activities. Proposed Compliance Rule 2-36 prohibits NFA Members and Associates from engaging in fraudulent activities involving off-exchange foreign currency futures and options transactions. The rule is modeled after Compliance Rule 2-2, NFA's anti-fraud rule governing exchange-traded futures and options transactions. In addition, proposed Rule 2-36 contains a provision prohibiting a Member or Associate from engaging in any foreign currency futures or options transaction that is prohibited under the Commodity Exchange Act.

As originally submitted, proposed Compliance Rule 2-36 applied to off-exchange foreign currency transactions involving both retail and institutional customers. Under the CFMA, however, off-exchange foreign currency transactions involving eligible contract participants are not subject to the Commission's jurisdiction. Rule 2-36 was revised to provide that the rule applies only to off-exchange foreign currency transactions involving persons that are not eligible contract participants as defined in the CFMA.

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