US Forex Market Regulation

/US Forex Market Regulation

 RFED – Retail Foreign Exchange Dealer

CFTC

In 1974, the US Congress established the Commodity Futures Trading Commission (CFTC) – the federal regulatory agency with jurisdiction over futures trading.

The same law authorized the creation of a “registered futures association,” thus opening the possibility for the creation of self-regulatory organizations on the national level. That is how NFA was established in 1982, after it won the position while competing with another trade association called the Futures Industry Association (FIA) which was not selected.

In 2000 and 2008, Congress passed a law for certain types of companies requiring them to register with the CFTC and to become members of the NFA.

  • companies performing second party functions in transactions on Forex market (dealers)
  • fund managers on Forex markets
  • trading advisors on Forex markets
  • representative brokers on Forex markets
  • forex pool operators

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the CFTC rulemaking authority and oversight over swaps, swap dealers and major swap participants. Subsequently, the CFTC passed regulations requiring swap dealers and major swap participants to register with the CFTC and become Members of NFA.

NFA

The National Futures Association is a self-regulatory organization for the US derivatives industry including exchange-traded futures, OTC foreign exchange market (forex) and swaps.

NFA develops and implements policies and services to ensure the security and integrity of the market and investors protection.

Membership with NFA is mandatory for all companies operating on this market. Currently, NFA has about 4,100 member companies and 57,000 registered specialists.

NFA is a non-commercial, independent, self-regulatory organization which is entirely financed by membership fees.

1.Basic requirements for RFED

Type

Requirement

Details

Minimum equity capital

$20,000,000

Level of early warning – 150%. I.e the dealer must maintain a minimum level of equity capital in the amount of $ 30m. Important: Being below $ 30m does not lead to revocation of the license, but the broker must notify the NFA each time the level of private capitalization falls below this rate.
Risk capital

6% Major Currencies, 20% Exotics

Risk capital is calculated separately on the basis of open currency positions of the dealer, which is kept on the firm’s own book (not overlapped on the counterparty positions). The sum of risk capital is an integral part of the formula for calculating a dealer’s own net capital. (Example: the sum of all assets – liabilities towards clients – risk capital – expenditures = net capital)
Membership fees

$125,000

Paid annually
FX trading offering

Individuals and legal entities

 ________

STP of FX Trades

Yes

Approved counterparties only:

  • US companies and banks, as well as companies, regulated under recognized jurisdictions.
  • Foreign banks with a market capitalization of at least $ 1 billion.
  • It is also possible to approve an unregulated counterparty, however, the  NFA requires to provide accounting certified  by licensed auditors.
Futures

Yes

On-exchange traded contracts only. Additional capital requirements and segregation of funds will apply.
Options

Yes

Only stock options. Additional requirements to capitalization and obligatory segregation of funds.
FX leverage

50:1

Calculated in a form of margin in US dollars. Therefore, the minimum margin required is 2%.
Futures margins Please see marketplace specs.
CPA Audit

Every 12 months

Audit of the financial statements prepared by a certified auditor (Certified Public Accountant audit).
NFA Audit

Every 12 months

Held in the company’s office by the NFA staff.
AML Training

Every 12 months

Held by accredited compliance professionals/certified auditor.
Ethics Training

Every 36 months

Held by accredited compliance professionals/certified auditor.
FinCen    Twice a month Examination of the client base for any presence of individuals, firms requested by FinCen
4G CFTC

  Upon request

Examination of the client base for any presence of individuals, firms requested by CFTC

 

2. Key responsibilities of the member:

  • Complete an Annual Questionnaire online with NFA;
  • Complete the electronic Annual Registration Update;
  • Pay the NFA dues on the anniversary date of the firm’s registration;
  • Maintaining of up to date contact information of employee responsible for communication with regulator on USA PATRIOT Act 314(a) requests;
  • Supervise the operations of any GIBs and/or Branch Offices, including conducting an annual onsite inspection of every GIB and Branch Office;
  • Examine sales department work and conduct inner audit report;
  • Send the firm’s Privacy Policy to every current customer;
  • Contact active customers who are individuals, at least annually, to verify that the information obtained from that customer under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. To ensure that the clients have received and familiarized with the risks warnings and other essential documents;
  • To conduct the annual review of the disaster recovery plan and make adjustments. Mandatory record-keeping.
  • Review the security, capacity, credit and risk-management controls, and records provided by the electronic trading systems and certify that the requirements outlined in NFA Interpretive Notice 2-36(e) have been met. Prepare a certification, signed by a principal who is also a registered AP, and provide a hardcopy to NFA with the submission of the annual audited financial statement.
  • For Forex Dealer Members (FDMs) designate one or more principal(s) to serve as Chief Compliance Officer(s) (CCO). Each CCO, as outlined in Compliance Rule 2-36, must certify annually to NFA that the FDM has a process in place to establish, maintain, review, modify and test policies and procedures that are reasonably designed to achieve compliance with the CEA, CFTC Regulations and orders thereunder, and NFA Requirements. Each CCO must also certify that the FDM has compliance processes in place and that the CCO has apprised the FDM’s CEO (or equivalent management personnel) of the FDM’s compliance efforts to date, as well as identified any significant compliance problems and the CCO’s plan to address those problems. Each FDM must file this annual certification with NFA at the time it files it annual certified financial report.
  • Provide clients with NFA website link, which contains the information regarding the company, its directors, history of violations, etc. This information should be also sent to all new clients when opening an account.

3.Retail Foreign Exchange Dealer report requirements

Report description

Submission date

Details

Submission channel

 Forex Daily Report Daily, due by noon on the next business day Customer funds on deposit and where they are held, Customer open positions, amount due to customers, names of counterparties. Qualifying institutions holding assets used to cover the firm’s liabilities owed to its retail forex customers must report the balances in the firm’s account(s) held at the qualifying institution to NFA on a daily basis. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Forex Monthly Report Monthly, due within 17 business days of month end Operational information, specifically number of retail and ECP forex customers, as well as how many customers are active, US domiciled or foreign domiciled. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Forex Quarterly Report Quarterly, due within 17 business days of quarter end. This is based on the calendar year, not the firm’s FYE. Performance disclosures required by CFTC Regulation 5.5(e)(1)(i)-(iii). Including the total number of non-discretionary retail forex customer accounts maintained by the RFED for the prior quarter, indicating the percentage that were profitable vs. non-profitable. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Daily Trade Data Reports (“FORTRESS”) Daily, due by 11:59 p.m. the same day Each member must file a daily electronic report of trade data containing the data and be in the format prescribed by NFA. The information must be prepared as of 5:00 p.m. and filed with NFA by 11:59 p.m. the same day. See NFA Compliance Rule 2-48 for specific reports required. Forex Transaction Reporting Execution Surveillance System (FORTRESS)
Financial Reports (unaudited) Monthly, due within 17 business days of month end In accordance with the requirements described in CFTC Regulation 1.10(d)(1) WinJammer system
Certified Financial Reports(audited) Annually 1-FR-FCM due 90 days after fiscal year end;FOCUS due 60 days after fiscal year end In accordance with the requirements described in CFTC Regulation 1.10(d)(2) Mail
Subordinated loan agreementsstandard forms are available from NFA If applicable The loan, and all changes and amendments, must be approved by NFA before the effective date. If approved by DEA, please file approval letter with NFA. Mail
NFA questionnaire Annually, to coincide with annual dues NFA will send a new questionnaire for brokers every year NFA electronic system
Notice of undercapitalization If applicable Immediate notification when capital falls below the level set in NFA Financial Requirements Section 12. A 1-FR- FCM/FOCUS must follow within 24 hours as required by CFTC Regulation 5.6(a). Notification by telephone, confirmed by fax or WinJammer, fax statement or file via WinJammer
Non-current books and records If applicable Same day notification. Written report stating corrective action due within 48 hours as required by CFTC Regulation 5.6(c). Fax or WinJammer
Substantial reduction in capital If applicable Within 2 business days of the reduction in accordance with CFTC Regulation 5.6(f)(1) or (f)(2).(30% decrease in capitalization exceeding the minimum level) Mail or WinJammer
Material inadequacies noted by CPA in audited financials If applicable Notification within 24 hours. Written report stating corrective action due within 48 hours in accordance with CFTC Regulation 5.6(d). Fax or WinJammer
Request to change fiscal year end, orRequest extension of time to file financial reports If applicable File a copy of the request and NFA’s response with regional CFTC. If the firm is also registered as a B/D, must file request and DEA response with NFA and regional CFTC in accordance with CFTC Regulation 5.12(f) and (g). Mail or WinJammer
Adjusted net capital falls below the early warning requirement/eligibility to guarantee IBs requirement If applicable Notification of the NFA within 24 hours in accordance with СFTC Regulation 5.6(b). Mail or WinJammer
Forex liabilities owed to customers exceeds forex assets If applicable Immediate notification required in accordance with CFTC Regulation 5.6(g). Notification by telephone, confirmed by fax or WinJammer, fax statement or file via WinJammer
Change in security deposit amounts established by the FDM If applicable The FDM is required to immediately notify NFA if the FDM changes the security deposit amount established for a particular currency pair being offered to retail forex customers. See NFA Financial Requirement Section 12(f) for further information. WinJammer
Chief Compliance Officer Report Annually Report must be filed within 60 days after the FDM’s fiscal year end. See NFA Compliance Rule 2-36 for further information. WinJammer
Risk Exposure Reports Quarterly and whenever a material change occurs Report must be filed within five business days of providing to the FDM’s senior management. See NFA Compliance Rule 2-36 for further information. WinJammer
Risk Management Program As applicable (submitted on January 4, 2016 and thereafter upon request) Policies and procedures designed to monitor and manage the risks associated with the activities of the FDM. See NFA Compliance Rule 2-36 for further information. WinJammer
Bulk Transfers If applicable At least five business days in advance of a transfer, the RFED must provide notice under certain conditions. See CFTC Regulation 5.23 for further information.
2018-01-16T13:52:00+00:00 January 16th, 2018|