First Phase of NFA Financial Requirements Regarding Use of Technology to Monitor FDM Forex Customer Liability Requirements (NFA Notice I-14-25)
Commentary by Bob Zwirb
The National Futures Association ("NFA") issued a notice concerning the recently amended NFA Rules, Financial Requirements Section 14 regarding the daily confirmation of funds covering liabilities to retail forex customers. Forex dealer members ("FDMs") now will be required to instruct any forex funds depository holding such funds to report the balances in the relevant accounts on a daily basis to the NFA or a third party designated by the NFA. The amendment also provides that the forex funds depository must comply with this request in order to be an acceptable depository for retail forex assets.
Although Financial Requirements Section 14 applies to all depositories that are holding assets used to cover retail forex customer liabilities, the NFA stated that it is implementing the process in phases. The first phase, which requires bank depositories to report end-of-day cash balances, is effective for the close of business on October 15, 2014, with reporting beginning on October 16, 2014.
In addition, while the first phase is limited to banks, the NFA stated that it intends to expand the requirements over the next several months to require all fund depositories – including prime brokers – to report all balances for accounts holding assets being used to cover an FDM's liability to its retail forex customers. The NFA stated that it will provide FDMs with sufficient advance notice before phasing in other depositories and reporting requirements, and will work with the FDM and depository communities in implementing the requirements.
See: NFA Notice to Members I-14-25.
Related news: NFA Proposes to Amend Financial Requirements Rule Regarding Covering Liabilities to Retail Forex Customers (September 3, 2014).
Commentary
The Notice refers to new rules that the NFA adopted in September for Forex Dealer Members ("FDMs") in a rather rushed manner with the invocation of the "ten-day" rule review procedure. The new rules mirror those (in NFA Rules, Financial Requirements, Section 4) that already apply to FCMs that hold customer-segregated funds, secured amount funds and cleared swaps customer collateral. Under those rules, FCMs must instruct depositories that hold customer-segregated funds to report the balances in all customer-segregated fund accounts on a daily basis to the NFA or a third party designated by the NFA. Moreover, a depository must report these balances in order to be considered an acceptable depository to hold customer-segregated funds. The NFA receives daily customer-segregated fund balances from banks, clearing FCMs and DCOs.
The new rules to which this Notice applies would extend this requirement to FDMs via NFA Financial Requirements Section 14. In the letter that it submitted early last month to the CFTC describing the new requirements, the NFA noted that "[a]lthough FDMs are not subject to the Commodity Exchange Act's segregation requirements for funds deposited by retail forex customers, both the Commission's regulations [CFTC Rule 5.8] and NFA Financial Requirements Section 14 require FDMs to calculate daily the amount owed to customers for forex transactions and to hold assets equal to or in excess of that amount at one or more qualifying institutions in the United States or money center countries." The new rule also requires FDMs to verify daily that they have sufficient funds to meet their liability to forex customers.
This is not an insubstantial requirement. Although it is being phased in according to type of depository, with application to banks starting in two weeks, a regulatory change this significant should have been initiated with more lead time than that which is afforded by the NFA's invocation of a ten-day trigger.