NFA expands its jurisdiction of forex regulation to reflect changes in retail market
NFA has proposed several changes to its Forex Requirements, including an amendment that will subject all NFA Members that engage in retail forex transactions, regardless of whether they are an otherwise regulated entity under the Commodity Exchange Act (CEA), to NFA's Forex Requirements. In addition, the proposed amendments require Members to comply with the same "know your customer" requirements for forex customers as are currently required for futures customers. The amendments are currently being reviewed by the Commodity Futures Trading Commission (CFTC)."The regulation of retail forex continues to evolve and these amendments are a reflection of that evolution," said NFA's General Counsel Tom Sexton. "Most importantly, regulatory exemptions that NFA established several years ago now need to be eliminated in light of recent legislative changes."
Currently, NFA Bylaw 306 excludes certain entities from the definition of Forex Dealer Member (FDM), and NFA Compliance Rule 2-39 excludes these same entities that engage in soliciting or managing retail forex accounts from certain Forex Requirements. The list of excluded entities includes, in part, NFA Members that are otherwise regulated financial institutions, financial holding companies, insurance companies, broker-dealers that are members of the Financial Industry Regulatory Authority (FINRA) and material associated persons of broker-dealers (if the broker-dealer is a member of FINRA).
"NFA adopted these exclusions about a decade ago because we were reluctant to impose additional regulatory burdens on Members who were highly regulated in other industries and who offered retail forex as a limited portion of their business," said Sexton. "With the growth of retail forex trading, however, we are now concerned that these exclusions could lead to unintended regulatory gaps."
Specifically, NFA had concerns that an otherwise regulated entity that is not subject to any meaningful regulatory scheme could become an NFA Member for the primary - or sole purpose - of cloaking itself with a mantle of respectability for its forex activities. Because these entities are NFA Members, their customers or potential customers could mistakenly believe that NFA regulates their forex activities.
"By eliminating the exclusions, we will ensure that all NFA Members conducting retail forex business are subject to our Forex Requirements," said Sexton.
Another proposed amendment will require that the "know your customer" requirements set forth in Compliance Rule 2-30 be applied to Members engaged in forex activities. "We don't see any reason why Members and Associates should have a different obligation with respect to forex customers as opposed to futures customers," said Sexton.
The proposed amendments will also require FDMs registered as Retail Foreign Exchange Dealers to maintain an office in the continental United States, Alaska, Hawaii or Puerto Rico that is responsible for preparing and maintaining CFTC and NFA required financial records and reports and be under the supervision of a listed principal and registered associated person of the FDM who resides in that office. "These are the same requirements that FCMs are subject to," said Sexton.
A copy of the complete rule submission letter is available on NFA's website.
http://www.nfa.futures.org/news/newsletter2.HTML#forex
