Comment Text:
i0-001
COMMENT
CL-08865
From:
Sent:
To:
Subject:
Attach:
Nancy Paschen
Monday, March 22, 2010 1:04 PM
secretary ; Penner, William
Comment Letter
2010 0322.pdf
Good afternoon,
Attached is a Comment Letter regarding Regulation of Retail Forex.
Nancy PaschenMarch 22, 20!0
Via E:-mail:
secreta
Mr, {:)avid Stawick
Seci:etar,i
Co nmodfty Ft;tures Trading Commission
[f~ree t..afayette Centre
1155 2 !st StreeL NW
Wasiqington, DC 20581
Re:: ~ulation of Retail Forex
Dear Mr. otaw~ck.
N:ationa! Futures Association (TNFAI')appreciates the opportunity to
comment on the Commission's proposed ruies regarding the regulatioi~ of off-exchange
retail foreign currency transactions (,'fore×~')~ N FA appiauds the Commission
proposing these ruies, which will both provide impo.dant protections to retail cust:omers
:and b,,:ir~g greater" ~egu]atory certainty to the retai~ fomx industry: Below NFA addresses
a few of the n'!ore important aspects of ~he Commission's proposed rulemaking i~ areas
i-elating to security deposits, trading practices~ and the mandated registration
requirements.
~he Commission proposes that retail foreigr~ :exchange dealers (."R~.t::Ds)
and certain futures commission merchants {"FCMs") acting as forex: counterpa..'ties
co~tect arid maintain security deposits eauai to ten percent of the notional valueo
-*,
each
f:orex trar:sa:ction with a retaii customer :: As you are aware NFA initially adopted
in proposing its security deposi~ ievel~ the ¢" "~ ' " "'
.
leverage limitations and that FINRA has propose:d to lim.i~ the maximum leverage:
I~m~tat~on on certa~ re:tail forex transactions offered by broke>dealers to 4 ~o 1. NFA
notes that FINRA may have a greater interest in ~ddressir}g the financia~ in:tegdty
protec~ior~ o:bject~ve solely through a security deposit ~eq~.~¢eme:n{ and. t,~e,:.efc~e, seta
higher percentage since FINRA broker~dealers engaging n reta forex are not subject
to a $20 mi~iion minimum net cap~ta~ requirement. Moreo,e~, NFA also
~-.INRA s percentage. ~evel may be higher s~nce: I:INRA has
,=a~-~ sought, to aJd.:Davtd
March
"~~
zz, 2010
own security deposit ~equirements for re:rex transactions in 2003 when 1,i~e Forex Deale~"
Member t""~rh"~""~-, ~'~: ~ minimum ~et capita~ requ~ement was $250,000. NFA ~qnancial
Requirements Section 12 mandates that NFA's ~orex Deaf~r Member~ collect 1,:~ of the
not ona! value of t~ansactions ~n ten d~flerent major currencies
2
and
~ ~; o~ ~ the notiona~
value of transactions in other currencies.
In adopting our requirements we were guided by two public poi:icy
objectives----the financial integrity of FDMs and the protection of retai~ customers who
engage in these principaf4o-principal transactions Satisfaction of these two obieciives
iled us to establish security deposit percentages that were approximately in line with the
then existing margin requirements for exchange4raded foreign currency futures at the
Chicago Mercantile Exchange ("CME"), NFA's security deposit requirements, like the
SPAN margin levets set by CME recognize that currencies can have d~ffering risk and
leveis of ,,/ota~iiity Because of these factors, NFA established the security deposit
requirement for transactions in the major currencies at a iower percentage than
transactions in more exotic currencies.
Over the years NFA has found that our security deposit req{.~irements
have se.,ved our two public polic~ objectives ',,,,ell. As to fir~ancial i~tegnty, NFA's
security deposit ~equirements help protect, ir~ part, forex coun[e~parties from absorbing
losses of defa~.~lting customers which, if significant, could affect the counterparty's
capital and put the fl~nds of other customers at risk, Althe~gh the prevention of
counterparty default is always of paramount concern, tile lack of bankruptcy protections
afforded to f~rex customer funds significantly heightens this concern.
customer p~o[ection objective separately by adopting t!~e extensive risk disclosures
requirements already in place by NFA and the new customer pe.dormance disdosL~res
proposed by the Commission
Major currencies that qualify for the ! % security deposit are the British pound,
the Swiss franc, the Can:adia~ dollar, ti~e Japanese yen~ the Euf:o, the Austlaiian
the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish
krone
2D.a'~ d Stawick
March 2~, ~s010 ....
To date~ we are not aware of a[~y situat:ions in which an FDM's ,.ap~tat has
been impaired due to its failure to collect customer debits. Of course, we aiso recognize
that f,.,rex cour~terpa~ties generally use rea~t~me systems for co~ ect~ng security deposits
so that as a posit~or~ moves against a customer the counterparty dFaws on resewes
from the cu:stomer~s accot~nt to maintain the secud~, deposit ~eve~ of 1% or ~'~.
applicable. Addit onally, as the Commission recognizes, under cL~rrent a[~to4iqu~dat~on
practices forex counter~,a~es usualty close out custome~ positions before an account's
losses exceed ks in~tia~ investment. These autoq~quidation practices, imp emented by
mos~ firms, disfing~sh the ~eta~i OTC forex f~om exchar~ge t~aded futu~res. Our
expects, nee : ndl .,at~s, howe,~'er, that not all I::DNs have implemented these close..out
practices and. therefore~ a forex counterpady's financial protection remains an:
appropriate #ubfic policy rationale for a security deposit requiremenL
As noted above. NFA.~ second pubtic pc!icy obiectwe relates to * ~--:c~
protection and sales practices. We agree with the Commission that at ce~a~n ieve[~age
ratios even minor fluctuations ~n volatile currency markets can res~.~lt ~n customers
havi~g their poskions liquidated w~th significant trading ~osses resu!t~ng--much faster
.
Commission s proposed ~:ule ~. ~ o~,
t,~s~.m,~,:~ may realize. Of co{J~se, the
~
~" ' '
~ ....
~";
relating to t!ie qua~fferly disclosure of c~4stoi~er account pedormanoe also serves as a
tool to satisfy th~s customer protection object~ve, and ensnares that "=' ;:
. .
~t~a~: customers have
a futi understanding of the attendant r~sks and ~everage ~nvo!ved ~n these transacfio~s
so that they may make ar] ~nfom~ed decis~o~, Th~s is padicutady important ~r} these
counterparty transactions where an RFED or FCM is on the opposite side of the
transaction, wh ch d~ffers from an excha~ige traded transaction ~n w!~ch an FCM acts
oniy as an ~ntermed~ary~ NFA encourages the Commission [o consider the ~mpact of
t,:,~s
d~sc~osure, ~f adopted, in formulating ~ts security deposit requirements.
Although, fo~ [he reason explained betowl NFA has not changed the
percentages in our security deposit requirements=, we have amended Fir}ancial
Requirements Section '12 in an effort to bolster this second public policy objective.
Specitically, in February 20:09, NFA etiminated a prior exem.ption for certain highly
capitalized FDMs from colleding security deposits. At that time, eight of NFA's 21
FDMs had an exemption from collec~:ing minimum security deposits. Of these eight, one
offered leverage of 700: I, four offered leverage of 400:i, two offered leverage of 200:1,
and one offered leverage o~ 50: !, One of the firms witho~.~t tt'~e exemption also off~'.~red
leverage of 50:1. Based on our experience, a proportionately greater number of theNFA
David Stawick
Ma. ch 2~:~ z, 3 ~ 0 ........
firms that offered higher leverage had also beer'., the subjects of NFA complaints, while
neither: of ttie firms that offered 50:1 !overage had ever been the subject of an NFA or
CFTC enforcement action. These statistics not only indicate that higher leverage ~atios
can lead to abuses but also: ~ndica~e that FDMs can compete wh~le offerir~g leverage of
t00:1 or less. In eliminating th~s exemption, NFA was cognizant of the ~mportance of
balancing :customer protection with both dornest~c a:nd foreign competitive: conc.erns~
:~
padicu~ady when ~egu}ations in this area. could easily ddve U.S. cus[omers overseas [o
~ess regulated trading venues,
NFA acknowledges tt~at the Commission in proposing it:s security deposit
requiremer}ts retied upon the same two public policy obiectives as NFA. Therefore, we
encourage the Comm~s.~lon to foitow two basic: guidelines in ado~)ting final requirements
in this area th:a,. ~;7~ a!so found beneficial~
First, since the foreign c{4rrency market is not static~ NFA recommer~ds
ttiat the Commission reject a one*size4its~all approach to estabtishii-,,g security deposit
req~Jirements; Based upon currency risk and volatility factors~ NFA be!ieves that
security deposit requirements should recognize differences between certain currencies.
Therefore, NFA recommends that the Commission adopt a~: approach similar to NFA's
current requirements that appties a different percentage to separate: cur:rency categories
or groupings based on currency risk and voiatility factors,
~
We also be!ieve that setti!~.g
a different percentage amount for each individual currency may be an al[emative but is
obviously more complicated to administer
NFA notes thata major U.S. bar~k offers retail forex trading with security deposit:
amounts ranging from 2% to 8% depending on the cu[rency
NFA notes that the Investment tndust@, Regulatory Orga~iza~ion of Canada
(~':IIROC") takes a similar approach in setting forex margins, Specificaliy~ the IIROC totai
margin requirement includes three componen~s.....a spot risk margin requirement, a term
risk margin requiremer'..t:, and a margin surcharge mechanism which adjusts the margin
rate for a specific currency if the volatility of the currency' exceeds a predetermined
historic volatility ti~reshold. Current margin rates are EURIUSD: 3:%: USDICAD:: 3%:
USD!GPD: 3.4%; USD!JPY: 3%~ and CAD/SGD: 10%.David Stawl,..k
March 22, 20!0 ....
Second, whoever sets the security deposit percentage levetso---:the CFTC
or an SRO--:should recognize that the Iequirements must be flexible: a!~d conti~uatly
eva!uated and adjusted, if necessary; For example, pursuant to NFA Fir~ancial
Requirements Section t2, NFA's Executive Committee has the: autlqority to adjust NFA!s
security deposit requirements under extraordinary ma;ket conditions. Even absent
e×traordina,req~irements shoutd be periodicatiy reviewed and adjusted, if necessary.
To t!~at end, NFA regularly compares our security deposit percentages to
the CME's margin requirements, and we review our requirements ~n l~ght of the
prevailing practices ~n the forex market. As NFA noted ir~ our February 2% 2009
submission le~er to: the C~:TC regardin
9
the
.amendments to Financial Requirements
Section 12's security deposit: requirements, CME margins are h~gher ~han they were at
the t~me Section 12 was adopted. Specificafly, as of December 24, 2008~ margins for
the major cunenc~es averaged 5.6% and ranged from 3.5% to 8.2%. Margk~s for ttqe
other currencies averaged 8.1% and ra[}ged from 3.2% to 12.5%. A more recent
:analysis shows that margins for ~he majo~ currencies averaged 3.4% a~d ranged f~om
2:3% ~o 5:4%. Margins for the other currencies averaged 5.7% and ranged from 3.0%
to 8.1%.~ Given the 2008 data, NFA recognized ~n early 2009 that NFA Financial
Requirements Sodden 12's secE~dty deposit percen[ages could be adjusted upward but
we resisted proposing these changes pending the Commission':s proposed secudty
deposit rutes.
NFA appreciates the Comrn{sslo, ,~s efforts in balancing ratio[is competing
interests and regulatory o.bjectives in estabiishing security deposit requirements. NFA
encourages the Commission to reco~a..nize~ tt~e differei~,t market
r sKs
":~
and volatility, posed
by d fferent currencies and adop[ " "
~
'
requl[e~t:ents ~efiective of those differences as
exchanges routinely do in establishing t:he~r margin ~evels~ Addit~onatiy, regardless of
who sets the security: depos~l: requirements and the percentage amo:unt~s) NFA urges
the ~omm~ss~on to endorse or adopt so~tie mec!~ai!ism to a~ow for periodic review and
adjustment of the requi~ements ifne~es~ary.s,
An analysis of listed currency contracts on NASDAQ OMX, formerly the
Philadelphia Board or Trade. reveals an average margin of 1:3 z~, ranging from .99 ~o to
1.~,a7°4,,~, fo~ major currencies and a margin of 6.27% for the Mexican, '~ Peso~David Stawick
March 22~ 20t0 .....
Trading Practices
The Commission's proposed Rule 5. i8(0(3)requi~es that ira fo!;ex
co~lnterparty provides a ne~,~ bid p:ice that is higher or Rower it must also provide a new
ask price that is eq:uatly higher or lower. NFA futly supports this proposed rule but urges
the Commission to ciari~ the proposal to ensure that all requote practices are objective
and evenhanded and that a counterparty that requotes customers must do so
regardless of the direction in ,,~Thich the market has moved and have in p!ace
symmetrical tolerance t:hresholds for requoting. Additionatfyi NFA recommends tt~at ~he
Commission also require: counterparties to disclose to customers how orders that reach
the platform a[a price no longer available are handled. A~ this lime, NFA also
e:~courages the Commission to carefuily consider any comments it might receive from
fore× cou:nterpa~ies regarding the pro:posed trading practices requirements to ensure
that they are appropriately crafted to meet both regulatory objectives and forex business
practices
Re~istra[ion
For many years= NFA advocated :that persons introducing forex accounts,
managing fo[ex accounts= or operating pools t[ading forex should have to register with
the Commission. Requiring forex intermediaries to register with the Commission as
introducing brok:e~s ("lBd*): commodity trading advisors ("CTAs"), or commodi[y pool
operators ("OPOsi'): as applicable: is an extremely impoitant customer protec~.::ion
[eature. NFA also believes that the following technical amendments wi!l provide greater
ciarity in the forex registration area.
The Commission!s proposed rules provide that either an RFED or an FCM
that is primadiy and substantialiy engaged in traditional futu[es actiivity may act as a
forex counterparty. The proposal requires any t B introducing retail forex accounts to an
RFED or FCM that is primarily and su['~stantiatiy engaged in traditional futures activity to
be guaranteed by that RFED or FCM. NFA believes that ti~e Commissio~
~,
intends to:
require a forex IB gua[anteed by an RFED to open and carry customer accounts
exclusiveiy with that RFED; As drafted, the proposed rules do not make this ctear. NFA
:recognize.~ that in August 2007 the Comm:ission~s Division of C!earing and intermediary
©versight issued a,'-', advisory that. among other things, indicated tt~at Rule 1,57
encompasses ~orex transacfions, but at that time the RFED counterparty category had
6Day d Stawick
March 22~ 20I 0 ......
not: been created and, therefore, the advisory only refers to guarantor FCMs, Moreover,
Commission Rule ! .57(a)(1) would appear to impose thi.~ exclusivity requirement on
as to FCM guarantors: but not RFEDsl NFA recommends that Ru!e t.57 be amended
to referenc:e both FCMs and RFEDs: or alternatively a new rule adopted to provide the
required c!arity.
NFA also believes that there are additiona! issues relatir~..} t~_) an RFED's
guarantee of forex lBs that require more ciarity. Pursuant to the proposed rules, if a firm
engages ~n retail fo~ex and conducts a minimal amount of omexchange business that is.
not enough to meet the "pdmarfi:~, and substantially engaged" criteria, it must also be
registered as an FCM to engage ~n omexchange futures. Further~ an RFED ~s
prohibited from entedng into a guarantee agreeme[~t with an 1B that conducts on--
exchange futures business because an RFED a~one cannot engage in exchange..~.raded
futures business. Therefore, as written, the proposal creates some uncertai~ty
~e.gardin9 who an RFED that is also registered as an FCM {"RFEDfFCM".t may
guarantee. For exam#le, if an IB only conducts on-exchange futures actwities, may at'.,
RFE.DIFCM guarantee the IB pursuant to its FCM registratior~? Additionatly, if an ~B is a
"dual*purpose IB" that conducts bott~ forex and on-exchange futures business may the
RFEDiFCM guarantee the IB? Finally, if an IB onty conducts on-exchange futures
business as an IB but is a~so registered as a CPO or CTA for purposes of manag!ng
forex accounts o~ operating fo~ex pools, ma'~' an RFED!FCM guarantee the IB? NFA
believes that RFEDiFCMs should be permitted to guarantee IBs under the three
circumstances described and requests that the Commission's final rules address these
registration perm utations
~
Lastly= NFA strongly encourages the Commission to provide firms with
adequate time to register or comply once its rules become final and effective. Time wit!
be necessar',/for not o[',fy new entrants but also current registrants if the Commission's
~-ules are adopted as pt-oposed. For example NFA cu~ently has over 100 independent
introducing brokers ("IB]") Members that engage in retail forex activities. Many of these
NFA recognizes that the Commission's fina! rules cou!d permit guaranteed and
nomguaranteed fBs to introduce fo~ex accounts., possibty :satisfying its cust:omer
protection objectives by [equiring non-guaranteed forex IBs to maintain a higher capitai
requirement than independent ~Bs dealing in exchange-traded products, Even in such a
case.~ these questions must be addressed with regard to guaranteed IBs.NFA"
fim~s are also engaged in exchange4raded futures activities. As noted above, the
Commission's proposed rules require any IB that introduces reta:if forex accotmts to an
RFED or FCM that ~s primarily and substantially engaged ~n ex~ha~ge..t, ad~u: futures
activity to be guaranteed by that RFED or FCM. Therefore, NFA's current lBIs may
have to sign~ficar~tly alter their business: For example; if an IBI " ~ ~,curr#nt~y introd~ices its
retai~ fo:rex accounts to an RFED o~ FCM~on~y fimq that ~s pdmad~y and substantially
e:qga:ged in exchange4raded futures activity: then the IBI must~(!)become a
gL~a:rante:ed IB of that RFED or FCM; (2) cease engag:ing ~n [eta~f~ forex activities and
remain ~ndepende ~t: or (3)find another R:F~D or FCM,only firm that w~4 gt~arantee
NFA commends the Commission and its staff for putt!rig forth p~oposed
retail fore× requirements thal. wilt provide greater protection to fore× customers and
regulatory ce~ainty to firms engaging in ~retai! forex tra~.sactions. As always, NFA
stands ready to assist the Cornmissior~ in this endeavor, if you have any questions
concerning this ~ette{, please do not hesitate to :contact: me at (312) 781d 413 or
cc: William
