NFA Enters Second Phase Implementation of FDM Forex Customer Liability Reporting Requirements (NFA Notice I-15-20)
Commentary by Bob Zwirb
The NFA began implementing Phase 2 of the Section 14 Financial Requirements of the NFA Manual. Phase 2 requires all other depositories to report the end-of-day balances in all accounts that are holding assets used to cover the liability of Forex Dealer Members ("FDMs") to their retail forex customers. The NFA emphasized that it has been working closely with FDMs and their respective depositories that hold such assets to ensure that those depositories have established connectivity with NFA, directly or through the SWIFT network.
The NFA stated that Phase 2 will become effective by the close of business on August 31, 2015, beginning with the reporting of end-of-day balances on September 1, 2015.
See: NFA Notice I-15-20 of Phase Two of NFA Financial Requirements Implementation.
Related news: First Phase of NFA Financial Requirements Regarding Use of Technology to Monitor FDM Forex Customer Liability Requirements (NFA Notice I-14-25) (with Zwirb Comment) (September 30, 2014); NFA Proposes to Amend Financial Requirements Rule Regarding Covering Liabilities to Retail Forex Customers (September 3, 2014).
Commentary
Under CFTC and NFA rules, FCMs and Retail Forex Dealers ("RFDs") are obligated to compute, and to report to regulators on a daily basis, information that relates to the customer funds they hold (or that third-party depositories hold) on behalf of their customers. In the case of FCMs, the daily reports confirm the balances of all customer segregated funds, while RFDs' reports (which are not subject to the CEA's segregation requirements for funds deposited by retail forex customers) confirm the amount owed to their customers. The reporting requirements for FCMs are intended to protect customers from, inter alia, the kind of misuse of segregated funds that was demonstrated in the MF Global-Peregrine implosions. The requirements for RFDs are used to verify that they have sufficient funds to meet their liability to forex customers daily.
Although these requirements serve customer protection purposes, they also serve the regulators by allowing them to monitor an intermediary's use of customer assets more closely, which has become more important in times of market volatility and intermediary insolvency. In the case of retail forex, the reporting parties are usually the depositories holding customer assets to cover retail forex customer liabilities, yet the RFD is on the hook if the outside depository fails to fulfill this duty. As the NFA notice emphasizes, it is the FDMs that "must ensure" the timely submission of the reports; that all depositories that hold funds to cover amounts owed to customers for forex transactions must report the end-of-day balances in those accounts to CME or NFA directly.