http://www.nfa.futures.org/member/newsLetter2.asp - Testimony
NFA President urges House Subcommittee to address forex regulatory issues in CFTC reauthorization bill
TESTIMONY OF DANIEL J. ROTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL FUTURES ASSOCIATION
BEFORE THE SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT COMMITTEE ON AGRICULTURE
U.S. HOUSE OF REPRESENTATIVES
SEPTEMBER 26, 2007
http://www.nfa.futures.org/printerFriendly.asp?tag=entireArticle
In the CFMA Congress attempted to resolve the so-called Treasury Amendment issue once and for all by clarifying that the CFTC does, in fact, have jurisdiction to protect retail customers investing in foreign currency futures. The basic thrust of the CFMA in this area was that foreign currency futures with retail customers were covered by the Commodity Exchange Act ("Act") unless the counterparty was an "otherwise regulated entity," such as a bank, a broker-dealer or an FCM. When I testified here in 2003, I told you that NFA Member FCMs held $170 million in retail customer funds trading off-exchange forex. Four years later, that number is now over $1 billion. With this dramatic growth there have been some pretty dramatic problems.
Members acting as counterparties to retail forex transactions account for less that 1% of NFA's membership. Unfortunately, they also account for over 20% of the customer complaints filed with our arbitration program, over 50% of NFA's current enforcement docket and over 50% of the emergency enforcement actions NFA has taken over the last year.
There a number of problems in the current statute that have contributed to these problems. If you look at the firms that have caused virtually all of the customer protection problems in retail forex, they share a couple of traits. First of all, they are not really FCMs at all. Congress intended to allow FCMs, along with banks, broker-dealers and insurance companies, to act as counterparties to retail forex transactions because they are all "otherwise regulated entities." The wording of the statute, though, opened the door for firms that are not really FCMs to take advantage of the FCM exemption. Firms became registered as FCMs that are FCMs in name only-they do no exchange-traded futures. They are registered as FCMs solely to qualify to do retail forex business. To make matters worse, due to a further anomaly in the statute, the Act currently does not provide the CFTC with any rulemaking authority over these firms at all. Clearly, Congress did not intend to allow firms that are FCMs in name only to act as counterparties to retail forex futures. Congress should fix this problem by limiting the FCMs that can act as counterparties to those that are primarily and substantially engaged in the activities described in Section 1(a)(20) of the Act.
The second trait that marks the problem firms in retail forex is that most, though not all, have been thinly capitalized. Congress long ago recognized that acting as a dealer involves greater risk than acting as an agent in futures trading, the way a traditional FCM does. That is why Congress in 1978 imposed a $5 million net worth requirement for firms granting dealer options and why the CFTC created a $2.5 million capital requirement for leverage transaction merchants in 1984. Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. NFA has raised the capital requirements for forex dealers several times but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business.
