CFTC Approves NFA's Proposed Rules for Retail Forex Customers | Practical Law

CFTC Approves NFA's Proposed Rules for Retail Forex Customers | Practical Law

The CFTC approved certain rule amendments and a new interpretive notice recently submitted by the National Futures Association designed to increase protection for retail forex customers.

CFTC Approves NFA's Proposed Rules for Retail Forex Customers

Practical Law Legal Update 1-618-4686 (Approx. 3 pages)

CFTC Approves NFA's Proposed Rules for Retail Forex Customers

by Practical Law Finance
Published on 01 Sep 2015 • USA (National/Federal)
The CFTC approved certain rule amendments and a new interpretive notice recently submitted by the National Futures Association designed to increase protection for retail forex customers.
On August 27, 2015, the CFTC approved certain rule amendments and a new interpretive notice recently submitted by the National Futures Association (NFA) designed to increase protection for retail foreign exchange (forex) customers. The proposed amendments were submitted to the CFTC in May 2015 as part of the review and approval process for amendments to the Commodity Exchange Act (CEA).
Specifically, the rule amendments and interpretative notice seek to increase protections for retail customers of the NFA's Forex Dealer Members (FDM) by:
  • Requiring each FDM to maintain a written risk management program, which must contain, at a minimum, policies designed to manage:
    • market risk, including market exposure, price volatility and leverage;
    • credit risk, which should account for overall credit exposure to comply with forex counterparty credit limits and regular valuation of collateral;
    • liquidity risk, including a daily measurement of liquidity needs and procedures for liquidating non-cash collateral;
    • foreign currency risk, including a daily measurement of the amount of capital exposed to foreign currency fluctuations against the applicable limits and safeguards;
    • legal risk, ensuring that appropriate due diligence is taken on transactions and netting arrangements, and any potential litigation;
    • operational risk to ensure procedural safeguards against erroneous trades and deficiencies in operating or information systems;
    • counterparty risk, including any settlement or pricing risks associated with offsetting the FDM's positions with counterparties;
    • specific liabilities to retail forex customers, which includes: (i) a separation of advising, approving cash receipts and recordkeeping roles, (ii) various methods for accurately determining retail liability, (iii) methods for operating depositories to cover specific liability requirements, and (iv) the use of timely recordkeeping activities;
    • technological risk, by establishing processes for identifying risks in trading platforms and security systems;
    • capital risk, by ensuring that the FDM has sufficient capital to be in compliance with the CEA and these new NFA regulations; and
    • any other applicable risks.
  • Requiring each FDM to establish a risk management unit to enforce its risk management program and provide reports to the FDM's senior management.
  • Requiring each FDM to make certain information readily available on its website to allow counterparties to easily access risk.
  • Modifying FDM capital requirements to include:
    • liability to nonaffiliated eligible contract participant (ECP) counterparties that are not acting as dealers when calculating the current additional 5% capital charge on liabilities exceeding $10 million owed customers; and
    • a capital charge of 10% on any liabilities the FDM owes to: (i) ECP counterparies that are affiliates of the FDM but not acting as a dealer, (ii) ECP counterparties that are not affiliates of the FDM but are acting as dealers, and (iii) ECP counterparties that are affiliates of the FDM and are acting as dealers.
  • Requiring the FDM to collect the same security deposits from ECP counterparties as was previously required for retail costumers that are not ECPs.