NFA Provides Guidance to Forex Dealer Members on Risk Management Program

The NFA provided guidance to forex dealer members ("FDM's") on how best to establish, maintain and enforce a risk management program designed to monitor and manage risks associated with forex activities. The guidance relates to amendments to NFA Compliance Rule 2-36 ("Requirements for Forex Transactions") which was approved by the NFA Board of Directors in May 2015, and became effective on January 4, 2016.

Specifically, the NFA reminded FDMs of the following risk management program requirements:

• Written Risk Management Program: Each FDM must adopt written policies and procedures that describe its risk management program, and those policies and procedures must be approved in writing by its firm's governing body.
• Risk Management Unit: The risk management unit must report directly to the firm's senior management and remain independent from those employees who are involved in the pricing, trading, sales, marketing, advertising and solicitation activities of the FDM.
• Elements of the Risk Management Program: The risk management program must include procedures to manage market, credit, liquidity, foreign currency, legal, counterparty, technological and capital risks, as well as liabilities to retail forex customers.
• Risk Tolerance Limits: The risk management program also must set risk tolerance limits for each of the elements described above and discuss the underlying methodology used in setting those limits.
• Stress Testing: The FDM must conduct stress tests of all positions in the proprietary account and in each counterparty account at least on a semi-monthly basis. The tests must be conducted under extreme but plausible conditions.
• Affiliate Risk: The risk management program also must consider all risks posed by the FDM's affiliates, including the risks posed by affiliates when the FDM functions as the primary risk manager and/or liquidity provider for affiliates, the FDM's other business lines and any other trading activity engaged in by the FDM.
• Periodic Risk Reports: Each FDM's risk management unit must provide quarterly written risk exposure reports to senior management and its governing body.
• Supervision: The FDM must have a supervisory system in place to ensure that the risk management program is followed diligently by all appropriate personnel.
• Review and Testing: The FDM must ensure that the risk management program is reviewed and tested annually at least, or upon any material change in the FDM's business that is likely to alter the FDM's risk profile.
• Recordkeeping: An FDM must maintain copies of all written policies and procedures, changes thereto and approvals required in the NFA's Interpretive Notice pursuant to NFA Compliance Rule 2-10 ("Recordkeeping") for the period required under CFTC Rule 1.31 ("Books and Records; Keeping and Inspection").