The NFA has finalized several proposed amendments to rules governing forex dealer members (“FDM”). These amendments were first proposed September in rule submission letters to the CFTC. One set of changes will come into effect next month, while the second will not be in place until January.

The first set of amendments concerns electronic trading systems and assignee/transferee rules. Notice for Compliance Rule 2-36(e): Supervision of the Use of Electronic Trading Systems has been amended to require forex firms to “accurately and completely” discuss their trading platforms in promotional materials, monitor their proprietary trading activities, and notify all customers affected by any electronic trading disruption, no matter how brief.

The amendments to NFA Compliance Rule 2-40 on assignee/transferee rules add reporting obligations for forex account assignees and transferees. FDMs and IBs that accept assigned or transferred accounts pursuant to bulk transfer rules must obtain personal and financial information from retail clients, provide retail clients with disclosures, and obtain signatures within 60 days of the transfer. Amendments to these rules and notices go into effect on November 15, 2011.

The second set of amendments affects NFA Financial Requirements Section 13 and its related interpretive notice. These amendments require forex dealer members to file daily, monthly, and quarterly reports.

The daily reports must include:

• details of the FDM’s capital position;
• an assessment of its ability to meet obligations to retail forex customers;
• the net aggregate value for all open futures and options forex positions.

The monthly reports must now include:

• operational information;
• the number of retail and ECP forex customers;
• number of active customers, both US and foreign domiciled.

The quarterly reports must include:

• up-to-date performance disclosures;
• total number of non-discretionary retail forex customer accounts, including the percentage of  profitable and not profitable accounts.

The amendments will become effective on January 2, 2012, and the first report is due on January 17.

Read more about these NFA forex amendments.

photo credit: joeltelling

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

The NFA issued a notice today reminding member Commodity Pool Operators, or CPOs, that they are still responsible for paying NFA assessment fees. In the course of routine examinations, NFA staff found that exchange-member CPOs were failing to properly remit these fees. Though initially only for non-exchange members, in August 2004, the NFA board adopted an amendment extending that fee to NFA member CPOs.

The NFA adopted this amendment in recognition of the “significant amount of resources” expended to regulate exchange-member CPOs as the NFA decided it was unfair to place the entirety of the financial burden on non-exchange member CPOs.

Read more about this NFA member notice.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

The Commodity and Futures Trading Commission (CFTC) recently approved certain amendments to Interpretive Notice 9031 (“Standard List of Documents to be Exchanged Under Section 8 of NFA’s Code of Arbitration”). This section involves a party’s obligations to automatically exchange specified documents in connection with an NFA arbitration proceeding. These amendments will be effective for claims filed after April 15, 2011.

Section 8(a) of NFA’s Code of Arbitration requires that, as part of the discovery process, all parties in an NFA arbitration proceeding automatically exchange certain routine documents relevant for the cause of action alleged in a particular case. These documents are set forth in the Interpretive Notice. Though many of the documents identified in the Notice are relevant regardless of whether the dispute involves commodity futures or forex transactions, NFA’s Board recently identified a few additional documents that may be routinely relevant in a dispute that involves forex transactions.

Read more about changes to the Interpretive Notice.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

Pursuant to Section 17(j) of the Commodity Exchange Act, as amended, NFA hereby submits to the CFTC proposed amendments to Financial Requirements Sections 11(b) and (c) regarding Forex Dealer Member financial requirements and the Interpretive Notice regarding Forex Transactions. NFA’s Board of Directors approved this proposal on February 18, 2010.

Financial Requirements Section 11(b) and (c) prohibit Forex Dealer Members (FDMs) from including assets held at unregulated persons as current assets for purposes of determining adjusted net capital and from using such unregulated persons to cover currency positions. The rule defines a person as unregulated unless it is one of the persons enumerated in the rule. The enumerated persons include, among others, futures commission merchants registered with the CFTC and brokerdealers registered with the SEC, as well as certain entities regulated as a foreign equivalent.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

Pursuant to Section 17(j) of the Commodity Exchange Act, as amended, the NFA hereby submitted to the CFTC proposed amendments to Financial Requirements Section 1 regarding minimum net capital requirements for futures commission merchants and introducing brokers. NFA’s Board of Directors approved this proposal on February 18, 2010.

• Increase the minimum dollar capital requirement from $500,000 to $1,000,000;

• Increase the risk-based capital requirement for non-customer accounts from 4% to 8% of the total risk margin requirement for positions carried in non-customer accounts; and

• Include cleared over-the counter derivative positions in an FCM’s risk based capital calculation for customer and non-customer accounts.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

NFA has received notice from the Commodity Futures Trading Commission (“CFTC”) that NFA may make effective certain proposed amendments regarding the use of internet and on-line social networking groups when communicating with the public. The Interpretive Notice entitled “Use of On-Line Social Networking Groups to Communicate with the Public” makes clear that on-line communications are subject to the same standards as other types of communications with the public and provides guidance to Members to meet their responsibilities in this area. The Interpretive Notice became effective on December 24, 2009.

A related amendment to Compliance Rule 2-29(h) requires that any audio or video distributed through media accessible by the public (e.g., through the internet) that makes any specific trading recommendation or refers to the extent of profit previously obtained or achievable in the future must be submitted to NFA for review and approval at least 10 days prior to first use. In this way the amendment subjects certain on-line advertising to the same requirements as similar television and radio advertising. To allow Members sufficient time to submit these types of advertisements to NFA for approval, the amendment becomes effective as of February 1, 2010. Accordingly, any audio or video advertisements that a Member posts on-line after January 31, 2010, must have been previously reviewed and approved by NFA.

NFA’s December 8, 2009, submission letter to the CFTC contains a more detailed explanation of the changes. You can access an electronic copy of the submission letter at: http://www.nfa.futures.org/news/PDF/CFTC/CR2-29_IntNotc_re_OnLine_Social_Networking_120209.pdf.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

On-line Social Networking Groups – Proposed Amendments to NFA’s Compliance Rule 2-29(h) and Adoption of Interpretive Notice

On-line social networking groups have changed the way people make trading decisions. A number of NFA Members sponsor blogs, chat rooms, and forums (also called message or bulletin boards), and some use sites like Facebook or Twitter for business purposes. Associates may also sponsor or participate in these groups. Unfortunately, these on-line communities provide opportunities for posters to spread unsubstantiated rumors and intentional misrepresentations. The form of communication does not change the obligations of Members and Associates who host or participate in these groups, and electronic communications must comply with Compliance Rules 2-9, 2-29, 2-36, and 2-39.

NFA’s interpretive notice entitled NFA Compliance Rule 2-9: Supervisory Procedures for E-Mail and the Use of Web Site,” (NFA Manual, ¶ 9037) provides guidance on how NFA’s promotional material and supervision rules relate to email and web sites but does not specifically address other types of electronic communications. This notice discusses a Member or Associate’s responsibilities in connection with on-line social networking facilities such as blogs, chat rooms, forums, Facebook, and Twitter.

Obviously, any electronic content that can be viewed by the general public, or even by a more closed community that includes current and potential customers, can be promotional material. For example, blogs dealing with commodity futures or options are promotional material when written by an NFA Member or Associate, and forex blogs are promotional material when written by a Member or Associate subject to the forex rules.

Therefore, content generated by the Member or Associate is subject to the requirements of NFA Compliance Rules 2-29, 2-36, or 2-39. The same is true for futures, options, or forex content written by a Member or Associate and posted on a third party’s site.

The issue becomes more complicated for user-generated comments responding to a Member or Associate’s blog and for Members and Associates who host chat rooms or forums. What is their responsibility for posts from customers or others over whom the Member or Associate has no direct control? When inadequately monitored, social networking sites may contain misleading information, lure customers into trades that they would not normally make, or be used in an attempt to manipulate prices.

If a Member or Associate hosts a blog, a chat room, or a forum where futures or forex are discussed, the Member or Associate is required to supervise the use of that community. This requires, at a minimum, that the Member or Associate regularly monitor the content of the sites it hosts, take down any misleading or otherwise fraudulent posts, and ban users for egregious or repeat violations. Not only are these actions required by NFA’s supervision rules, they are both common sense and common practice. Similar requirements apply to Facebook and other sites that allow others to post to the Member or Associate’s “wall” or other assessable area.

Audio pod-casts and videos on the Internet—whether on the Member or Associate’s Web site or on an independent site such as You-Tube—are similar to radio and television advertisements. If they make specific trading recommendations or refer to profits that have been obtained in the past or can be

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NFA Bylaw 1301(e) requires Forex Dealer Members to pay annual dues that are
graduated according to the firm’s gross annual revenue from customers (e.g.,
commissions, mark-ups, mark-downs) for its forex activities. Profits and losses
from proprietary trades are not to be included. To calculate dues:
• Start with the FCM dues imposed by NFA Bylaw 1301(b)(ii);
• Add $44,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is $500,000 or less;
• Add $69,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is more than $500,000, but not more than $2,000,000;
• Add $94,375 if the Forex Dealer Member’s gross annual revenue from
forex transactions is more than $2,000,000, but not more than $5,000,000;
or
• Add $119,375 if the Forex Dealer Member’s gross annual revenue from
these activities is more than $5,000,000.

These dues apply when the Forex Dealer Member offers to be a counterparty to
a forex transaction or accepts a forex trade (whichever is earlier), and NFA will
send the Member an invoice for the minimum dues ($50,000 or $45,875) minus
any amount already paid for that membership year. Thereafter, the dues will be
assessed on the firm’s membership renewal date and will be based on the Forex
Dealer Member’s latest certified financial statement.

(proposed amendment)
The only exception to the dues set forth above is a situation in which NFA does
not serve as the DSRO for a Forex Dealer Member and the DSRO has agreed to
examine the Forex Dealer Member’s forex activities. In this case, the surcharge
paid by the Forex Dealer Member, regardless of gross annual revenue, is
$12,000. Accordingly, for such a Forex Dealer Member the dues to be assessed
at the time it offers to be a counterparty to a forex transaction or accepts a forex
trade (whichever is earlier), and on its membership renewal date thereafter, will
be $13,500.

CFTC LAW | Forex, Futures and Derivatives Regulatory News - Forex, Futures, and Commodities News and Analysis. Press release, rule summaries, and enforcement actions from the CFTC, NFA, SEC, FSA, and other agencies from around the world.

Financial Requirements Section 15 currently requires firms to provide NFA with an internal control report prior to acting as an FDM. This report must be prepared by an independent public accountant registered with the Public Company Accounting Oversight Board and must include representations by the accountant that the FDM’s internal financial controls have no material weaknesses. NFA adopted this rule after taking a number of Member Responsibility Actions against FDMs with inadequate internal financial controls.
Additionally, reputable public accounting firms have informed NFA that AICPA auditing standards require accountants to test live transactions before making representations about the adequacy of internal controls, and they cannot do this testing for firms that have not yet begun business. Therefore, the amendments to Section 15 eliminate the specific requirement for an internal control report prior to acting as an FDM and replace it with a more general requirement that the Member must demonstrate that it has adequate internal financial controls. This requirement will continue to put the burden on the Member but will provide more flexibility. Section 15 will continue to authorize NFA to require any FDM to provide an internal control report if NFA believes that the Member’s controls are inadequate:

-If NFA believes that a Member’s internal controls are inadequate at any time, NFA’s Compliance Director may require it to provide to NFA an internal control report that is prepared and certified by an independent public accountant who is registered under Section 102 of the Sarbanes-Oxley Act. -

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The amendments modify the monetary thresholds for determining whether a case is processed as a summary proceeding or an oral hearing and the number of arbitrators NFA appoints to a case. The rule changes will apply to all cases filed on or after October 1. The NFA has increased the standard threshold for three arbitrator pannals to over $100,000. Claim amounts that are less than or equal to $50,000 will now generally be processed as summary proceedings.

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