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July 05, 2006
Via Federal Express
Lawrence B. Patent, Esq.
Division of Clearing and Intermediary Oversight
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, DC 20581
Re: National Futures Association: Proposed Amendments to NFA's Interpretive Notice Regarding Forex Transactions with Forex Dealer Members*
Dear Mr. Patent:
By letter dated February 27, 2006, National Futures Association ("NFA") submitted to the Commodity Futures Trading Commission ("CFTC" or "Commission") proposed amendments to NFA's Interpretive Notice regarding Forex Transactions with Forex Dealer Members. The proposed amendments would require Forex Dealer Members to disclose to retail forex customers that their funds may not receive a priority under the Bankruptcy Code.
Please substitute the following language for the submission letter's explanation for the proposed change.1 The language to be replaced starts with the last line on page 3 of the submission letter and continues through the middle of page 5.
Disclosure Regarding Bankruptcy Protections
The Refco, Inc. bankruptcy proceedings, which included its affiliate Refco FX, highlight concerns about bankruptcy protection for retail forex customers. The Refco bankruptcy prompted customers of Forex Dealer Members to call NFA regarding the safety of their funds if their dealers become insolvent. Based on those calls, it is obvious that some customers believe their funds are protected under the bankruptcy laws.
As you know, Subchapter IV of the U.S. Bankruptcy Code provides special protections for customers trading on an exchange, including a priority in bankruptcy and the right to have their positions transferred or liquidated. The Code applies these protections to funds owed to customers in connection with exchange-traded futures and options, leverage contracts regulated under Section 19 of the Commodity Exchange Act, and dealer options regulated under Section 4c(b) of the Act. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added "any other agreement or transaction that is similar," but it is not clear that this language would cover off-exchange retail forex transactions. Therefore, forex customers may be general creditors, with no priority in bankruptcy and no right to transfer or liquidate their positions.
As noted above, retail forex customers do not appear to appreciate this distinction. NFA is also aware of several instances where solicitors or employees of Forex Dealer Members have actually told customers their funds were protected in bankruptcy. Although those representations violate NFA's forex requirements in their current form, NFA believes it is important for Forex Dealer Members to make an affirmative disclosure that bankruptcy protections may not apply. Therefore, NFA is amending the Interpretive Notice regarding Forex Transactions with Forex Dealer Members to require an affirmative disclosure.
NFA understands that some attorneys have taken the position, in connection with the Refco bankruptcy, that forex customers receive the same protections as customers trading on an exchange. This question may have to be resolved by the courts at some point. The disclaimer adopted by the Board states that forex transactions "may not" carry the same bankruptcy protections, not that they do not. NFA will revise the disclosure if the courts resolve the question.
If you have any questions, please contact me at 312-781-1413 or by e-mail at email@example.com.
Very truly yours,
Thomas W. Sexton
Vice President and General Counsel
* The proposed amendments to NFA's Interpretive Notice Regarding Forex Transactions with Forex Dealer Members becomes effective on October 1, 2006.
1 The language of the proposed amendment is unchanged, as is the proposed language and the explanation for a proposed new Section 13 to NFA's Financial Requirements, which was included in the same submission letter.