Proposed Rule

Under Section 15A(k) of the Securities Exchange Act of 1934 ("Exchange Act"), NFA is a national securities association for the limited purpose of regulating the activities of NFA Members who are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act (i.e. FCMs and IBs that passport in to broker-dealer registration because they limit their securities activities to security futures products). NFA Compliance Rule 2-4 requires Members and Associates to observe high standards of commercial honor and just and equitable principles of trade. This rule imposes an obligation on all Members and Associates to put their customers' interests before their own when soliciting and executing futures transactions. To this end, in executing security futures transactions, Members and Associates have an obligation to use reasonable diligence to ensure that customer orders receive the most favorable terms under the circumstances.

When a customer's order may be executed on only one exchange, Members do not have to decide where to route the order and, consequently, satisfying their best execution obligation is simpler than when Members must consider the relative merits of routing an orders to two or more markets. In those cases where a customer's order may be executed on two or more markets trading security futures contracts that are not materially different, Members and Associates have an obligation to use reasonable diligence to ascertain the market in which the customer's security futures order will receive the most favorable terms and, in particular, the best price available under prevailing market conditions. This notice provides guidance on how to fulfill that obligation.

First, it should be clear that if a customer or customer's designee⁴ requests that a security futures order be directed to a particular market, or specifies the purchase or sale of a particular security futures product that trades on only one market, then the Member or Associate is required to follow the customer's or designee's instructions. In this particular case, a Member does not have an obligation to ascertain the best market for a customer's security futures order.

A Member or Associate must consider the relevant facts and circumstances including, at a minimum, the following factors in discharging its obligation to use reasonable diligence in ascertaining where a customer's security futures order will receive the most favorable execution available:

• The character of the market including, but not limited to, price, volatility, liquidity, depth, speed of execution, and pressure on available communications;

• The size and type of transaction, including the type of order; and

• The location, reliability and accessibility to the customer's intermediary of primary markets and quotation sources.

Members and Associates must also consider differences in the fees and costs to customers ( e.g. transaction fees, clearing costs and expenses) associated with executing transactions in each market. Unless specifically instructed by a customer or customer's designee or necessary to obtain the execution of an order, a Member shall not channel an order through a third party unless the Member can show that by doing so the total cost or proceeds of the transaction were better than if the Member decided not to channel the order through the third party. Moreover, a Member through whom a retail order is channeled and who knowingly is a party to an arrangement whereby the initiating Member firm has not fulfilled its best execution obligation will also be deemed to have violated NFA Compliance Rule 2-4. Members should be aware that channeling orders through a third party to receive reciprocation for service or business will not relieve a Member of its best execution obligation. Likewise, Members should not allow an order routing inducement, such as payment for order flow, to interfere with a Member's duty of best execution.

Failure of Member firms to maintain or adequately staff an order room or other department assigned to execute customer orders cannot be considered justification for executing away from the best available market. NFA recognizes that it may be impracticable for Members and Associates to make order routing decisions for retail orders on an order-by-order basis. Members and Associates that do not make order routing decisions for retail orders on an order-by-order basis should, at a minimum, consider the above factors and the materiality of any differences among contracts traded on different markets when establishing their retail order-routing practices and perform a regular and rigorous review of those practices to ensure that their best execution obligation is fulfilled.

This notice describes the best execution obligation of Members that are registered as brokers or dealers in security futures products under Section 15(b)(11) of the Exchange Act for transactions in security futures products only and does not impose such an obligation upon Members for transactions in other products. By necessity, this notice is general in nature since it is issued before security futures products have begun trading. NFA will provide further guidance if necessary as the markets for security futures products evolve.