CFTC Approves NFA Rules Affecting Forex Dealers


CFTC Approves NFA Rules Affecting Forex Dealers

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On August 27, 2015, the CFTC approved National Futures Association (NFA) rules that will impose the following requirements on Forex Dealer Members (FDMs):

  1. Increase capital requirements for FDMs,
  2. Require FDMs to establish a risk management program, and
  3. Require each FDM to make certain information regarding its business publicly available on its website, including discussion of services it offers, administrative, civil, or enforcement proceedings against it, material risks associated with the FDM acting as a counterparty, and particular financial information about the FDM.

The proposed capital requirements will impose an additional capital charge on FDMs equal to 10% of any liabilities the FDM owes to (i) counterparties affiliated with the FDM that are eligible contract participants (ECPs) and are not acting as a dealer and (ii) ECP counterparties not affiliated with the FDM that are acting as a dealer (excluding certain banks and trust companies).  In addition, the proposal will impose a capital charge equal to 10% of any liabilities owed by affiliated ECP counterparties acting as dealer to the FDM’s customers. 

The CFTC also approved NFA’s interpretive notice that provides guidance on the risk management program required under the new rule. The notice explains that each FDM must establish a risk management unit and that the program must include policies and procedures to monitor, manage, and set tolerance limits for the following types of risk:

  1. Market risk
  2. Credit risk
  3. Liquidity risk
  4. Foreign currency risk
  5. Legal risk
  6. Operational risk
  7. Counterparty risk
  8. Risk associated with liability to retail forex customers
  9. Technological risk
  10. Capital risk
  11. “Any other applicable risks”

Additionally, the FDMs will be required to do semi-monthly stress tests and to provide quarterly risk exposure reports to senior management and the firm’s governing body.

The new rules generally will become effective on January 1, 2016.  The NFA expects to distribute a notice to members shortly that will clarify when various aspects of these new requirements must be in place.