National Futures Association has proposed amendments to NFA Compliance Rule 2-36 and Financial Requirements Sections 11 and 12 and adoption of the Interpretative Notice entitled NFA Compliance Rule 2-36: Risk Management Program for Forex Dealer Members (FDMs).
Under the proposals, FDMs would be subject to risk management program requirements similar to futures commission merchants (FCMs) and swap dealers; FDMs would be subject to increased capital requirements; FDMs would be required to collect security deposits from eligible contract participants (ECPs) and prohibited from acting as counterparty to an ECP acting as a dealer unless that dealer collects and maintains from its customer and ECP counterparties similar security deposits; FDMs would be required to make public disclosures similar in nature to those required of FCMs; and FDMs would be subject to a chief compliance officer annual report requirement similar to that which is required under Commodity Futures Trading Commission Regulation 3.3.
As amended, NFA Compliance Rule 2-36 and the corresponding Interpretive Notice would require all FDMs, including FCMs that engage in retail forex transactions, to adopt a risk management program designed to monitor and manage the risks associated with their forex activities. Each FDM would also be required to make publicly available information similar to the public disclosures required of FCMs under CFTC Regulation 1.55. An FDM would be required to publish that information on its website and update that information at least annually. FDMs would also be required to disclose any material risks associated with the FDM acting as counterparty to ECPs, including any risks created by the FDM’s affiliates acting as dealers.
The amendments to Financial Requirements Section 11 would impose a capital charge of 10 percent of FDM liabilities owed to (1) affiliated ECP counterparties that are not acting as dealer, and (2) non-affiliated ECP counterparties that are acting as dealer (excluding certain banks and trust companies). Revised Section 11 would also include a 10 percent capital charge on liabilities that affiliated ECP counterparties that are acting as dealer owe to the FDM’s customers, including ECP customers. Finally, revised Section 11 would require an FDM to include liabilities to non-affiliated ECP counterparties that are not acting as dealers when calculating the already-required 5 percent capital charge on liabilities that exceed $10 million owed to customers.
Financial Requirements Section 12 would be amended to require FDMs to collect and maintain security deposit amounts from ECP counterparties in the same manner as an FDM already is required to collect and maintain from customers that are not ECPs, and would be prohibited from acting as a counterparty to a dealer that does not collect and maintain the same security deposits from its customers and ECP counterparties that would be required of such FDM.
The NFA rule submission letter is available here.