NFA sends rule submission letters to CFTC

The NFA has sent four rule submission letters to the CFTC, proposing several changes and an addition to existing NFA regulations. These proposed rule changes increase forex member dues, alter the way bunched orders are allocated via a PAMM system, provide guidance on allowable slippage parameters, and adjust capital requirements for Leverage Transaction Merchants (“LTMs”). The former three proposals seek Commission approval, while the latter invokes the “ten-day” provision offered in the CEA.

Interpretation Notice for 2-36: Slippage

This new Interpretive Notice tackles slippage protocols in relation to NFA Compliance Rule 2-36. Over the past year, the NFA’s Business Conduct Committee has issued several complaints against firms violating Rule 2-36’s prohibition on manipulative practices and requirement to act with high standards of commercial honor.

Slippage occurs when a trade price changes between the time a customer places the order and the time the order arrives at the Forex Dealer Member’s (“FDM”) system. Some firms simply ask customers to reconfirm the trade at the new price. However, others use “slippage parameters” to determine whether the trade will clear. Though slippage parameters are not inherently unjust, the NFA states that some may be written to favor slippage in favor of the FDM against the customer. This Interpretive Notice makes clear that this and other practices that favors the FDM to the detriment of the Forex customer violate Rule 2-36 and will be dealt with accordingly. (read more)

Proposed Amendments to NFA Financial Requirements Section 6

This proposed amendment sets the capital requirement for Leverage Transaction Merchants at $20 million. This new requirement was prompted in part by the effective prohibition of retail off-exchange precious metals spot contracts by the Dodd-Frank Act. Since the end of retail precious metal trading in June, several FDMs inquired about the feasibility LTMs in order to continue trading these spot metal products.

CFTC Regulation 31.9 says that LTM minimal capital requirements shall be $2,500,000 + 20% market value of uncovered physical commodities subject to leverage + 2.5% of the market value of short term leverage. However, those requirements were written 20 years ago, so the NFA suggests that they be revised to correspond to Forex Dealer Member (“FDM”) capital requirements. The NFA is invoking the “ten day” provision of Section 17(j) of the Commodity Exchange Act, and will implement this amendment in ten days unless the CFTC requests further review. (read more)

Amendment to Bylaw 1301 and 1302, and Interpretive Notice “Forex Transactions”

Due to increasing auditing costs and a decrease in NFA revenue from forex transactions, the NFA has elected to increase dues for FDMs and other forex firms. It will also levy a fee on all order segments processed through the FORTRESS system. This includes Introducing Brokers (“IBs”), Commodity Trading Advisors (“CTAs”), and Commodity Pool Operators (“CPOs”) involved in forex transactions. However, to offset the increase in FDM dues, it will eliminate the current assessment on forex transactions. (read more)

Interpretive Notice for Compliance Rule 2-10: Allocation of Bunched Retail Forex Transactions

This Interpretive Notice is aimed at firms using the Percentage Allocation Management Module (“PAMM”) to allocate bunched retail forex transactions. PAMM places orders based on aggregate equity in a master account, rather than trading equity in sub-accounts. The NFA has determined that this practice violates Commission rules, and states that the quantity of lots or contracts for bunched order must be determined by the equity in each individual sub-account, rather than the overall equity of the master account. (read more)

Except for the LTM capital requirements, all proposals await comment from the CFTC.
Creative Commons License photo credit: Tim Morgan

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