2010-21729
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FR Doc 2010-21729[Federal Register: September 10, 2010 (Volume 75, Number 175)]
[Rules and Regulations]
[Page 55409-55452]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10se10-14]
[[Page 55409]]
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Part II
Commodity Futures Trading Commission
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17 CFR Parts 1, 3, 4, et al.
Regulation of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries; Final Rule
[[Page 55410]]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166
RIN 3038-AC61
Regulation of Off-Exchange Retail Foreign Exchange Transactions
and Intermediaries
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rules.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is adopting a comprehensive regulatory scheme to implement
the provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Wall Street Reform Act'') \1\ and the CFTC
Reauthorization Act of 2008 (``CRA'') \2\ with respect to off-exchange
transactions in foreign currency with members of the retail public
(i.e., ``retail forex transactions''). The new regulations and
amendments to existing regulations published today establish
requirements for, among other things, registration, disclosure,
recordkeeping, financial reporting, minimum capital, and other
operational standards.
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203 (2010).
\2\ Food, Conservation, and Energy Act of 2008, Public Law 110-
246, 122 Stat. 1651, 2189-2204 (2008).
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DATES: Effective Date: October 18, 2010.
FOR FURTHER INFORMATION CONTACT: For information regarding financial
and related reporting requirements, contact: Thomas Smith, Chief
Accountant and Deputy Director, Division of Clearing and Intermediary
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone
number: 202-418-5495; facsimile number: 202-418-5547; and electronic
mail: tsmith@cftc.gov. Jennifer Bauer, Special Counsel, Division of
Clearing and Intermediary Oversight, Division of Clearing and
Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.
Telephone number: 202-418-5472; facsimile number: 202-418-5547; and
electronic mail: jbauer@cftc.gov.
For all other information contact: William Penner, Deputy Director,
Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,
Washington, DC 20581. Telephone number: 202-418-5450; facsimile number:
202-418-5547; and electronic mail: wpenner@cftc.gov. Christopher
Cummings, Special Counsel, Division of Clearing and Intermediary
Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone
number (202) 418-5450; facsimile number: 202-418-5547; and electronic
mail: ccummings@cftc.gov. Peter Sanchez, Special Counsel, Division of
Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington,
DC 20581. Telephone number (202) 418-5450; facsimile number: 202-418-
5547; and electronic mail: psanchez@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
On January 20, 2010, the Commission published in the Federal
Register proposed new regulations and amendments to existing
regulations in response to the CRA (the ``Proposing Release'').\3\ The
Proposing Release set forth in detail the historical background of the
regulation of retail forex transactions, and the events, legislative
and otherwise, that led up to the enactment of the CRA.\4\ The
Commission explained that its proposed regulations were drawn up with
the aim of applying the same principles that have guided the regulation
of on-exchange instruments, while taking into account the real
differences between the trading of futures contracts on designated
contract markets (``DCMs'') that are cleared through Commission-
registered derivatives clearing organizations (``DCOs'') on the one
hand, and off-exchange transactions between forex firms and retail
customers on the other hand.\5\
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\3\ Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 3282 (Jan. 20, 2010).
\4\ See 75 FR 3282, 3283-3285.
\5\ See 75 FR 3282, 3285.
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The proposed rule changes were of two general sorts. The first
group included amendments to existing regulations to accommodate
regulation of retail forex transactions and the new registration
categories created under the CRA. The second group comprised a new part
5 of the Commission's regulations, encompassing, to the extent
practicable, the regulations pertaining specifically to persons
engaging in retail forex transactions. For example, many of the
operational or registration requirements in part 1 or part 3,
respectively, of the Commission's regulations referring to futures
commission merchants (``FCMs'') would, as a result of the CRA, now
apply also to retail foreign exchange dealers (``RFEDs''). Some of the
disclosure, reporting and recordkeeping requirements in part 4 had to
be modified to apply to operators of pooled investment vehicles and
advisors that engage in retail forex transactions, as called for under
the CRA. Other parts of the Commission's regulations required their own
adaptations in order to extend customer protection, privacy and
procedural requirements to retail forex transactions.
The Commission also noted in its Proposing Release that in addition
to the regulations expressly called for by the CRA, it was proposing
certain additional requirements prompted both by the essential
differences between on-exchange transactions and retail forex
transactions, and by the history of fraudulent practices in the retail
forex market.\6\ The proposed regulatory changes were discussed,
section by section.\7\
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\6\ See 75 FR 3282, 3286.
\7\ See 75 FR 3282, 3286-3293.
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Following the publication of the Proposing Release, the Wall Street
Reform Act was enacted which, in relevant part, requires that specified
Federal regulatory agencies, including the CFTC, promulgate rules
regarding retail forex transactions. Consistent with the CRA, the Wall
Street Reform Act directs that such rules prescribe appropriate
requirements with respect to disclosure, recordkeeping, capital and
margin, reporting, business conduct, and such other standards or
requirements as the Federal regulatory agencies determine to be
necessary.\8\
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\8\ See Wall Street Reform Act, Sec. 742.
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Thus, pursuant to the broad authority granted by the Wall Street
Reform Act and the CRA, the Commission is implementing requirements
for, among other things: Registration, disclosure, recordkeeping,
financial reporting, minimum capital, and other operational standards,
based on existing CFTC regulations for commodity interest transactions
and commodity interest intermediaries, and on existing National Futures
Association (``NFA'') rules with respect to retail forex transactions
offered by NFA's members. With certain exceptions, the Commission is
adopting the rule changes delineated in the Proposing Release as
proposed.
Except for certain otherwise-regulated financial intermediaries
excluded by the CRA from the Commission's jurisdiction, persons
offering to be or acting as counterparties to retail forex
transactions, but not primarily or substantially engaged in the
exchange-traded futures business, are required to register with the
CFTC as RFEDs. Registered FCMs that are ``primarily or substantially''
(as defined in the new regulations) engaged in the activities set forth
in the definition in the Commodity
[[Page 55411]]
Exchange Act (the ``Act'') of an FCM \9\ are permitted to engage in
retail forex transactions without also registering as RFEDs. Also, the
$20 million minimum net capital standard established in the CRA for
registering as an RFED or offering retail forex transactions as an FCM
is incorporated in the new regulations.
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\9\ 7 U.S.C. 1a(20) (2006).
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The new regulations also require certain entities other than RFEDs
and FCMs that intermediate retail forex transactions to register with
the Commission as introducing brokers (``IBs''), commodity trading
advisors (``CTAs''), commodity pool operators (``CPOs'') or associated
persons (``APs'') of such entities, as appropriate, and to be subject
to the Act and regulations applicable to that registrant category.
Finally, pursuant to the authority conferred by the CRA,\10\ and to
address cases where the Commission's jurisdiction has been challenged,
the Commission is adopting the proposed regulatory provisions
applicable to certain leveraged, off-exchange retail forex transactions
commonly known as ``Zelener contracts.'' \11\
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\10\ See 7 U.S.C. 2(c)(2)(C)(iv).
\11\ See 75 FR 3282, 3284-3285.
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II. The Comments on the Proposing Release
The Commission received in excess of 9,100 comments \12\ from a
range of commenters, including individuals who trade forex,
intermediaries, registered FCMs currently serving as counterparties in
retail forex transactions, trade associations or coalitions of industry
participants, one committee of a county lawyers' association, a
registered futures association, and numerous law firms representing
institutional clients. Many commenters offered specific recommendations
for clarification or modification of particular rules; other commenters
objected generally to particular proposed rules. Overall, the bulk of
the comments concerned four of the proposed rules:
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\12\ The Comment letters referred to in this release are
available through the Commission's Web site: http://www.cftc.gov/
LawRegulation/PublicComments/10-001.html.
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Proposed Regulation 5.9, which would impose a 10 to 1
leverage limitation on retail forex transactions. (``Security Deposit
Proposal'' or ``Leverage Proposal'')
Proposed Regulation 5.18(h), which would require each IB
that solicits or accepts off-exchange retail forex orders to enter into
a guarantee agreement with the FCM or RFED to which the IB introduces
the forex transactions. (``Guaranteed IB Proposal'')
Proposed Regulation 5.18(j), which would require all
retail forex counterparties to calculate, on a quarterly basis, the
percentage of non-discretionary accounts that were profitable, to
include the results of this calculation for the preceding four quarters
in required disclosures to customers, and to maintain and make
available upon request records reflecting such calculations for five
years. (``Disclosure Proposal'')
Proposed Regulation 5.7, which would establish a minimum
capital requirement for FCMs and RFEDs (``Capital Proposal'')
The comments regarding these proposed rules and the Commission's
response are discussed immediately below. The Commission's response to
comments concerning other aspects of the proposed rules follows later.
Given the volume of comments received, the Commission cannot
respond to each and every comment or objection. However, the Commission
has carefully reviewed and considered each letter and, in the sections
that follow, has endeavored to address both the primary themes running
throughout multiple letters and significant points raised by individual
commenters.
Security Deposit Proposal. In general terms, proposed Regulation
5.9 would have required FCMs and RFEDs engaging in retail forex
transactions to collect from each retail forex customer a minimum
security deposit equal to 10 percent of the notional value of each
retail forex transaction. This proposal is often referred to in the
comment letters as a 10% or 10:1 leverage requirement (i.e., for every
$10 of notional value, $1 is required as a security deposit).
The Commission received a significant number of comment letters
regarding the Security Deposit Proposal with a substantial majority of
the commenters objecting to the proposed level of 10%. Many of the
letters submitted with regard to this issue appeared to be submitted by
individual traders, were identical or nearly identical, and objected
generally to the proposal. Within the large group of comments by such
traders, whether in ``form'' letter objections or otherwise, the most
common objections were that the leverage proposal would drive business
off-shore, would lead to the loss of jobs in the U.S., was
unnecessarily restrictive and would inhibit small traders' ability to
trade profitably, or that the percentage required as a security deposit
was arbitrary, capricious and anti-competitive.
Other commenters noted that by increasing the security deposit
level, retail forex customers are exposed to greater levels of market
and credit risk. Many of these commenters believe that the
amplification that is provided by increased leverage is necessary for
clients to earn a profit from their positions. Still other commenters
urged that NFA's current levels be retained and asserted that the
Commission had already approved these levels by allowing NFA's proposed
rule regarding leverage to become effective.
Finally, one commenter encouraged the Commission to (1) recognize
the different market risks and volatility posed by different
currencies, (2) adopt requirements reflective of those differences just
as contract markets do in establishing their margin levels, and (3)
endorse or adopt some mechanism to allow for periodic review and
adjustment of the requirements if necessary.
The Commission's proposed leverage restriction was conservative and
was proposed in an effort to provide maximum customer protection. The
Commission does not, however, believe it was arbitrary or contrary to
previously approved NFA rules.\13\ Moreover, the Commission does not
believe that most retail foreign exchange customers select a
counterparty based solely on the maximum allowable leverage, otherwise
these investors would have already migrated to foreign markets, some of
which have no limitation on leverage. Nevertheless, after considering
the concerns expressed and arguments made in the comments, the
Commission has determined to adopt a revised security deposit
requirement for FCMs engaging in retail forex transactions and for
RFEDs.
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\13\ As noted above, several commenters maintained that the
proposed Regulation 5.9 was inconsistent with security deposit
levels set by NFA and approved by the Commission. In February 2009,
NFA proposed and the Commission approved amendments to Section 12 of
NFA's Financial Requirements. (See Letter from Thomas W. Sexton to
David A. Stawick, dated February 23, 2009, regarding Forex Security
Deposits--Proposed Amendments to NFA Financial Requirements Section
12 and Interpretive Notice Regarding Forex Transactions, available
on NFA's website at nfa.futures.org.) NFA's amendments left in place
requirements of a 1% security deposit for major currencies and a 4%
deposit for all other currencies, but eliminated an exemption from
these requirements for well-capitalized firms. As NFA noted in its
proposed amendments, exempted firms had offered leverage of 200:1,
400:1 and even 700:1. NFA's February 2009 amendments effectively
reduced the amount of leverage available to retail forex customers.
The Commission approved the amendments, in accordance with the
standards set in Section 17(j) of the Act.
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In developing the revised Regulation 5.9, the Commission once again
[[Page 55412]]
reviewed futures exchange margin levels, NFA's current security deposit
requirements, and comparable requirements found in other jurisdictions.
Final Regulation 5.9 permits the registered futures association
(``RFA'') of which the FCM or RFED is a member to determine specific
security deposit levels within parameters set forth by the Commission
in the regulation.\14\ The Commission has provided minimum security
deposit amounts of 2 percent of the notional value for major currency
pairs and 5 percent of the notional value for all other retail forex
transactions. The Commission will periodically review the parameters it
has set in light of market conditions and adjust them as necessary.
Similarly, each RFA (i.e., NFA) will be required to designate which
currencies are ``major currencies,'' and must review, no less
frequently than annually, major currency designations and security
deposit requirements, and must adjust the designations and requirements
as necessary in light of changes in the volatility of currencies and
other economic and market factors. It is the Commission's view that
revised Regulation 5.9 will provide a mechanism for setting security
deposit levels that is both anchored in, and adaptable to, market
conditions.
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\14\ NFA is currently the only futures association registered
with the Commission.
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Disclosure of Profitable vs. Non-Profitable Accounts. As proposed,
Regulation 5.5(e) required that the risk disclosure statement provided
to every retail forex customer include disclosure of the number of non-
discretionary accounts maintained by the FCM or RFED that were
profitable and those that were not, during the four most recent
calendar quarters. Commenters called the provision anti-competitive and
doubted that measurement of profitable accounts could be done in a way
that would permit comparison. Proposed Regulation 5.18(i) required that
each retail forex counterparty prepare and maintain on a quarterly
basis a calculation of the percentage of non-discretionary retail forex
accounts open for any period of time during the quarter that earned a
profit, and the percentage of such accounts that experienced a loss.
Some commenters asserted that the Commission did not provide
adequate guidance or a standard methodology for calculating ``winners''
and ``losers.'' Commenters stated that the proposal was ambiguous and
that the reported percentages may not be comparable across the
industry. In addition, commenters thought that there was too much
subjectivity in determining ``winners'' and ``losers'' and that,
therefore, the resulting disclosure would not be helpful for customers.
Other commenters stated that by requiring retail forex firms to
disclose the percentage of profitable accounts quarterly, the
Commission would be unfairly singling out retail forex dealers, as this
information is not required on the futures side or for broker-dealers.
As noted in the Proposing Release, there are significant
differences between trading futures contracts on an exchange and
entering into off-exchange transactions between forex firms and retail
customers.\15\ The Commission believes that as a result of the inherent
conflicts embedded in the operations of the retail over-the-counter
forex industry, such disclosure is necessary. To illustrate potential
conflicts of interests in the off-exchange retail forex industry, the
Commission in its Proposing Release pointed out that the retail forex
counterparty: (i) Is the counterparty to the customer, which sets up a
``zero-sum game'' between the customer and the retail forex dealer;
(ii) provides quotes to their customers, which may not be the best
quote at the time and may not even be a competitive quote; and (iii)
enters into a principal-to-principal transaction with the non-
discretionary retail forex accountholder. At each stage of the
transaction, the retail forex counterparty has an inherent conflict
with its non-discretionary retail forex accountholders. By contrast, in
exchange-traded futures markets, accountholders do not encounter the
same level of conflicts that retail forex customers face, and,
therefore, a requirement to disclose the percentage of non-
discretionary retail accounts that were profitable and not profitable
is appropriate in retail forex markets, while it may not be elsewhere.
As a result of the industry structure and operational conflicts, the
Commission believes that this disclosure is necessary to protect the
non-discretionary retail forex accountholder.
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\15\ See 75 FR 3282, 3285.
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So while the Commission continues to believe in the value and
effectiveness of such disclosures, it is adopting Regulation 5.5(e) and
Regulation 5.18(i) with certain amendments, in order to address
concerns regarding the implementation of the rule. As proposed, the
calculation for determining whether a retail forex account was
profitable or not during a quarter would be net of fees, commissions,
any other expenses, trading results, customer funds deposited, and
customer funds withdrawn. The regulation as adopted provides further
guidance in response to commenters' concerns. The final rule clarifies
that a retail forex account will be considered either ``profitable'' or
``not profitable,'' with ``not profitable'' including accounts that
break-even.
The Commission is also clarifying the required time periods for
which the required calculations in Regulation 5.5(e)(1) and 5.5(e)(2)
must be made and records maintained and made available. Regulation
5.5(e)(1) requires that information regarding profitable and not
profitable accounts for the four most recent quarters be included in
disclosure documents; Regulation 5.5(e)(2) requires that similar
quarterly information be maintained for five years and provided to
requesting customers or potential customers. As to the 5.5(e)(1)
information, once these regulations are effective, FCMs and RFEDs must
provide the required information for the past four quarters. FCMs and
RFEDs also must update this information going forward on a quarterly
basis and disclose the most current four quarters in disclosure
documents provided to potential customers.
Regulation 5.5(e)(2) requires an RFED or FCM to provide to a
customer or potential customer the same account information as set out
in Regulation 5.5(e)(1) for the most recent five-year period during
which the RFED or FCM maintained non-discretionary retail forex
customer accounts, but only at the request of the customer or potential
customer. The Commission intends that this requirement to keep and make
available five years worth of profitable and non-profitable account
information be prospective; following the adoption of these rules, FCMs
and RFEDs are required to keep and maintain such data going forward on
a quarterly basis until such time as they have amassed five years worth
of information, at which point they will have to keep and make
available the information for the five most recent years. Furthermore,
prior to amassing five years of performance information, an FCM or RFED
is obligated to provide, upon request by a customer or prospective
customer, the historical quarterly performance information for as many
quarters as the FCM or RFED has available.
In addition, to provide clarity regarding the type of accounts that
must be used in making the calculation of profitable and unprofitable
accounts, FCMs and RFEDS must use those retail forex accounts, as
defined in Regulation 5.1(i), that are non-discretionary accounts;
Provided, that the retail forex account is not a proprietary account,
as
[[Page 55413]]
defined in Regulation 5.18(i)(3). The Commission believes that
excluding proprietary accounts will help minimize the possibility of
skewed results stemming from differing methods of calculation. The
Commission is also requiring that the data be calculated on a calendar
year basis for all counterparties.
Guarantee Requirement for IBs Who Introduce Retail Forex Business.
The Commission proposed in Regulation 5.18(h) to require that any
person within the definition of an IB under Regulation 5.1(f)(1) (or
applicant for registration as such, or successor to the business of
such) enter into a guarantee agreement with an FCM or an RFED. The IB
would be permitted to enter such an agreement with only one FCM or
RFED. The rationale behind this requirement was to make FCMs and RFEDs
exercise care with regard to entities with which they do business by
making them jointly and severally liable for all obligations of the IB
under the Act and Commission Regulations with respect to the
solicitation of retail forex transactions. This would, in turn,
discourage them from associating with IBs without regard to the sales
practices employed by those IBs.
Commenters called the banning of independent IBs in the retail
forex business harsh and said it could lead to less customer choice and
poorer service. Others said that requiring a guarantee agreement was
anticompetitive and unnecessary, as most enforcement activity concerns
unregistered industry participants, and that guarantee agreements have
been a substitute for minimum capital for as long as the IB
registration category has existed.
After considering the comments, the Commission has determined to
permit IBs who register in order to transact retail forex business
(like IBs who register to transact futures and commodity options
business), to choose between entering into a guarantee agreement with
an FCM or RFED, and maintaining the existing IB minimum net capital
requirement. Accordingly, IBs, whether they register to do retail forex
business, futures business, or both, must comply with the provisions in
the Commission's regulations that apply to IBs; Provided, that any IB
that operates pursuant to a guarantee agreement meeting the
requirements of Regulation 1.10(j) need not meet the minimum net
capital requirements set forth in Regulations 1.10, 1.12 and 1.17.
Net Capital Requirements for FCMs and RFEDs. As proposed,
Regulation 5.7 implements the $20 million minimum net capital
requirement for FCMs engaging in retail forex transactions and for
RFEDs (as set forth in the CRA), and to the extent that the FCM's or
RFED's total retail forex obligation to its customers exceeds $10
million, the regulation requires an additional five percent of that
excess. Several comments urged the Commission to revise proposed
Regulation 5.7 to include an exemption from the additional net capital
requirement when the FCM or RFED uses ``straight-through processing.''
\16\ Referring to the costs imposed by additional capital requirements,
the commenters argued that such costs, in addition to the limits
imposed by several of the other proposed regulatory requirements, would
cause much of the retail forex business to be transferred to offshore
jurisdictions without (or with substantially reduced) regulatory
protections.\17\
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\16\ NFA's Financial Requirement Section 11 currently contains
such an exemption from an additional capital requirement for member
firms using straight-through-processing for all customer
transactions.
\17\ This argument is diminished by the recent enactment of the
Wall Street Reform Act, which clearly indicates the intent of
Congress that retail forex transactions in the United States either
be comprehensively regulated or be prohibited outright. See Wall
Street Reform Act, Sec. 742.
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The Commission considered but did not adopt NFA's straight-through
processing exemption in its proposal, specifically because the proposed
additional capital requirement was intended to provide a capital
requirement that directly relates to the size of a firm's liability to
retail forex customers. Some firms offering retail forex transactions
have liabilities to their retail customers exceeding $10 million.
Straight-through processing, although mitigating market exposure for a
firm, does not reduce in any way the total liability to retail forex
customers who are direct counterparties to the firm and therefore
exposed to the credit risk of such firm. Therefore, the Commission is
adopting the capital provisions in Section 5.7 as originally proposed.
Separately, a comment letter was received significantly after the
comment period was closed objecting to the net capital charges
applicable to retail foreign currency options set forth in proposed
Regulation 5.7(b)(2)(v)(B). The Commission has determined to adopt that
provision as proposed, and to clarify that for both FCMs and RFEDs
unlisted retail forex options are subject to the existing net capital
charges that are applicable to an FCM for any other unlisted foreign
currency option that is entered into with any eligible contract
participant (which treatment is also consistent with the treatment of
all unlisted options, including foreign currency options, for
securities broker-dealers).
Requirement To Appoint a Chief Compliance Officer. Proposed
Regulation 5.18(j) calls for each retail forex counterparty (defined to
include a retail foreign exchange dealer, an FCM or an affiliated
person of an FCM) to designate a Chief Compliance Officer. In proposing
this requirement, the Commission sought to promote customer protection
by focusing responsibility for an entity's regulatory compliance. This
requirement was criticized on the basis that potential personal
liability for a Chief Compliance Office would discourage individuals
from assuming that position, and because no comparable requirement
exists for firms engaging in on-exchange transactions.
The Commission continues to believe that, given the history of
fraudulent and improper behavior in the retail forex business,
requiring a Chief Compliance Officer is a reasonable way to ensure that
retail forex counterparties observe the highest professional standards
and take their compliance obligations seriously. Accordingly, this
requirement is retained in final Regulation 5.18.
Prohibition of Guarantees Against Customer Loss. Proposed
Regulation 5.16 would prohibit, among other things, the making of
guarantees against loss to retail foreign exchange customers by FCMs,
RFEDs and IBs. One currently registered FCM commented that firms should
be allowed to guarantee that clients will not lose more than their
account balance because technology allows for automatic liquidation of
positions if the account balance falls below margin requirements.
The Commission notes that not all retail forex counterparties have
comparable capabilities to deal with events such as extremely volatile
markets. Moreover, proposed regulation 5.16 is based on Commission
Regulation 1.56, which prohibits FCMs and IBs engaged in futures and
commodity option transactions from making similar guarantees. At the
time the Commission proposed Regulation 1.56, it specifically noted
that the use of limited-risk and guarantee-against-loss agreements had
``often been associated with patterns of allegedly unlawful conduct by
FCMs or other registrants or with the financial instability of such
persons.'' \18\ The Commission does not view these dual concerns--
rooted in consumer protection and the financial stability of firms--as
any less compelling today and
[[Page 55414]]
has determined to issue the regulation as proposed.
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\18\ See 46 Fed. Reg. 62841 (Dec. 29, 1981).
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Specific Authorization for Trades. Two commenters expressed a
concern regarding proposed Regulation 5.17, which requires RFEDs, FCMs,
IBs, and their APs to have specific authorization by the customer
before effecting a retail forex transaction. The concerns centered on
the use of automated systems that generate orders based on the trader's
specifications. According to the commenters, both IBs and forex
counterparties may run such software on their servers for traders.
Neither commenter provided a great deal of detail regarding the
mechanics of such automated trading programs, and the Commission cannot
offer its view of any particular program. However, the Commission
believes that if such programs are nothing more than automated order
entry platforms, and all relevant trading parameters are set and
controlled by the customer--including, for example, the designation of
the currency pair to be traded, the amount of currency to be bought or
sold, the price at which orders should be placed, and the amount of
money to be committed to trading--then trades generated by such
programs would originate from the customer and no additional
authorization would be required. However, Commission staff will monitor
the use of such programs. Any features that would appear to constitute
discretion, strategy or advice on the behalf of the sponsoring entity
would require a different analysis and, in addition to potentially
triggering application of Regulation 5.17, may have additional
registration implications.
Requirement To Close Out Offsetting Positions. One commenter
objected to the Commission's proposed amendment to Regulation 1.46,
which would require RFEDs and FCMs engaging in off-exchange retail
forex transactions to close out offsetting long and short positions in
a retail forex customer's account, regardless of whether a customer
instructs otherwise. Citing the prevalence of spread trades in futures
trading, the commenter maintained that there is no economic distinction
between commodity futures and forex transactions with respect to
offsetting long and short positions.
The Commission continues to believe that maintaining open long and
short positions in a retail forex customer's account removes the
opportunity for the customer to profit on the transaction, increases
the fees paid by the customer, and invites abuse. Nothing submitted by
any commenter has demonstrated otherwise. Moreover, spread trades
executed on-exchange typically involve the purchase of one futures
delivery month against the sale of another futures delivery month of
the same commodity, or the purchase of one delivery month of one
commodity against the sale of that same delivery month of a different
commodity. Because retail forex contracts are not listed by delivery
month, spread trades of this sort are not possible in retail forex
accounts, and open long and short contracts in the same currency pair
are truly offsetting. Accordingly, the Commission has determined to
adopt Regulation 1.46 as proposed.
Re-quoting. Two comments were received regarding Regulation
5.18(f), which would, among other things, prohibit retail forex
counterparties from providing a customer a new bid (or asked) price
that is higher (or lower) than a previous price without providing a new
asked (or bid) price that is higher (or lower) as well. One commenter
maintained that the proposed rule would not take into account that in
the forex market, spreads can increase dramatically, which might cause
the new bid price to be higher and the new ask price to be lower.
While a fast-moving market may affect the spread, the Commission's
proposed rule is intended to apply to those situations where a customer
is quoted one bid/asked price, and rather than fill the order, the FCM
or RFED provides a second quote. In this situation, the Commission
believes that if the forex dealer re-quotes the price, then at a
minimum, the spread should remain the same.
A second commenter suggested that the Commission clarify that all
``re-quote'' practices are required to be objective and evenhanded and
that a counterparty that re-quotes a price must do so regardless of the
direction the market moves. Further, the commenter suggested that the
Commission require counterparties to disclose to customers how orders
that reach the platform at a price no longer available are handled.
The Commission believes the intent of proposed Regulation 5.18 is
clear. It requires that, when re-quoting prices, forex counterparties
are obligated to do so in a symmetrical fashion, so that the re-quoted
prices do not represent an increase in the spread from the initially
quoted prices, regardless of the direction the market moves. As to the
objectiveness of the re-quote, the Commission believes that the
requirement that both bid and asked prices be re-quoted symmetrically
will encourage objectivity. Moreover, proposed Regulations 5.18(b)(3)
and 5.18(b)(iv) require, respectively, that forex counterparties
establish and enforce internal rules, procedures and controls to
``[f]airly and objectively establish settlement prices for retail forex
transactions'' and to maintain records reflecting ``any method or
algorithm used to determine the bid or asked price for any retail forex
transaction or the prices at which the customer orders are executed * *
*.'' The Commission believes that this should provide adequate
incentive for firms to deal fairly and objectively with their customers
with regard to re-quoting.
Finally, as to the suggested disclosure, as proposed, Regulation
5.5 would require FCMs, RFEDs and IBs engaged in retail forex
transactions to distribute to retail forex customers a written
disclosure statement containing, among other things, the following
statement:
Your ability to close your transactions or offset positions is
limited to what your dealer will offer to you, as there is no other
market for these transactions. Your dealer may offer any prices it
wishes, and it may offer prices derived from outside sources or not
in its discretion. Your dealer may establish its prices by offering
spreads from third party prices, but it is under no obligation to do
so or to continue to do so. Your dealer may offer different prices
to different customers at any point in time on its own terms. The
terms of your account agreement alone govern the obligations your
dealer has to you to offer prices and offer offset or liquidating
transactions in your account and make any payments to you. The
prices offered by your dealer may or may not reflect prices
available elsewhere at any exchange, interbank, or other market for
foreign currency.
While the proposed disclosure language does not require a statement
regarding how re-quoted prices are handled, it does inform the customer
that it is within the discretion of the forex dealer to set prices
(provided they otherwise comply with the requirements of Regulation
5.18). For this reason, and those cited above, the Commission has
determined to issue Regulation 5.18(f) as proposed.
CFTC Authority To Regulate Zelener Contracts. One commenter, a law
firm, argued that the CRA did not grant the Commission the authority to
regulate, other than for fraud, FCMs that are primarily or
substantially engaged in trading futures contracts on registered
exchanges to the extent they also offer off-exchange Zelener, or
``futures look-alike'' forex, contracts.\19\ To the extent legislative
history suggests that similarly situated RFEDs and FCMs should be
subject to the same regulations, the
[[Page 55415]]
commenter maintains that this language is restricted to requirements
relating to the financial soundness of the forex dealer and nothing
else.
---------------------------------------------------------------------------
\19\ See 7 U.S.C. 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) regarding
the scope of the Commission's authority to write rules with regard
to leveraged or margined foreign currency contracts offered to non-
ECPs.
---------------------------------------------------------------------------
The CRA contains several provisions that touch on the scope of the
Commission's jurisdiction over retail off-exchange foreign currency
contracts, whether futures or look-alike, leveraged contracts. Retail
off-exchange forex futures and options transactions are subject to
numerous provisions of the Act including sections 4(b), 4b, 4c(b), 4o,
6(c) and 6(d), 6c, 6d, 8(a), 13(a), 13(b), if they are offered or
entered into by an FCM, an RFED, or an affiliate of an FCM that is not
one of the otherwise regulated entities specified in the Act.\20\ The
same provisions apply to look-alike forex transactions.\21\ The CRA
clearly gives the Commission full rulemaking authority over the
agreements, contracts or transactions in retail forex where
``reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of [the] Act.'' \22\ On the other hand,
however, while the CRA explicitly grants the Commission rulemaking
authority over off-exchange retail futures and options transactions
where such transactions are offered or entered into by FCMs, their
affiliates or RFEDs,\23\ its rulemaking authority with regard to look-
alike transactions does not explicitly include FCMs. Thus, the
commenter concludes that language in Sections 2(c)(2)(C)(ii) and
2(c)(2)(C)(iii) limits the Commission's authority in this area where
FCMs are concerned.
---------------------------------------------------------------------------
\20\ See 7 U.S.C. 2(c)(2)(B)(iii).
\21\ See 7 U.S.C. 2(c)(2)(C)(ii)(I).
\22\ See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);
2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III).
\23\ See 7 U.S.C. 2(c)(2)(B)(v).
---------------------------------------------------------------------------
The Commission disagrees. Section 8a(5) of the Act gives the
Commission the broadest possible authority to ``make and promulgate
such rules and regulations as, in the judgment of the Commission, are
reasonably necessary to effectuate any of the provisions or to
accomplish any of the purposes of this Act[.]'' \24\ Under this
authority, the Commission has promulgated rules covering the full scope
of FCM activities generally. Furthermore, the recent Wall Street Reform
and Consumer Protection Act of 2010 specifically defines FCMs as any
``individual, association, partnership, corporation, or trust * * *
that * * * is * * * acting as a counterparty in any agreement, contract
or transaction described in Section 2(c)(2)(C)(i)'' of the Act,\25\
making it clear that the offering of ``look-alike'' transactions falls
within the scope of regulated FCM activity. Accordingly, the Commission
sees no deficiencies in its authority to fully regulate FCMs engaged in
``look-alike'' forex contracts.\26\
---------------------------------------------------------------------------
\24\ See 7 U.S.C. 12a(5) (2006).
\25\ See Wall Street Reform Act, Sec. 721(a)(13).
\26\ The Commission also disagrees with the argument that CRA
Conference Report language is inapposite. The Conference Report
states that ``[t]o the extent their risk profiles are similar, the
managers intend for FCMs and RFEDs to be regulated substantially
equivalently in terms of their off-exchange retail foreign currency
business. The managers do not intend for the Commission to provide
either FCMs or RFEDs with a more favorable regulatory environment
over the other or to create two significantly different regulatory
regimes for similar business models--to the extent the financial
risks posed by such operations are similar.'' See H.R. Rep. No. 110-
627 at 980 (Conf. Rep.) (emphasis added).
---------------------------------------------------------------------------
Definition of Retail Forex Transactions. One commenter pointed out
that the definition of ``retail forex transactions'' found in proposed
Regulation 5.1(m) refers to ``any account, agreement, contract or
transaction'' described in Section 2(c)(2)(B) or 2(c)(2)(C) of the Act
and notes that the use of the word ``account'' in this context is
confusing.
Broad language in Section 2(c)(2)(B)(i) of the Act provides the
Commission with jurisdiction over ``an agreement, contract or
transaction in foreign currency'' that is a contract of sale of a
commodity for future delivery (or an option on such a contract) or an
option (other than one traded on a securities exchange). Elsewhere in
Section 2(c), the statute states that certain of its provisions apply
to ``agreements, contracts or transactions * * * and accounts or pooled
investment vehicles * * *.'' \27\ In order to accurately reflect the
full scope of authority granted it under the Act, the Commission
included the word ``accounts'' within the definition of ``retail forex
transactions.'' The Commission does not view this as in any way
inconsistent with language in Section 2(c), as amended by the CRA, and
has determined to adopt the regulation as proposed.
---------------------------------------------------------------------------
\27\ See, for example, 7 U.S.C. 2(c)(2)(B)(iii).
---------------------------------------------------------------------------
Anticompetitiveness. In addition to similar comments specifically
referencing proposed Regulation 5.9 (security deposits) and 5.18(h)
(guaranteed IBs)--which are addressed above--the Commission received
numerous comments arguing that various other sections of the proposed
rules were ``anticompetitive'' insofar as there is no comparable
requirement relative to those engaged in futures transactions on
designated contract markets. As the Commission pointed out in its
Proposing Release, it has, whenever possible, drawn upon the principles
that have guided it in the regulation of on-exchange instruments.
However, the Commission also noted that there are essential differences
between the trading futures contracts on designated contract markets
that are cleared through designated clearing organizations, on the one
hand, and off-exchange transactions between forex firms and retail
customers, on the other.\28\
---------------------------------------------------------------------------
\28\ 75 FR 3282, 3285-86.
---------------------------------------------------------------------------
Given the principal-to-principal nature of retail forex
transactions and the inherent conflicts of interest in the relationship
between the retail customer and the dealer/counterparty, the lack of
transparency in the pricing and execution of such transactions, and the
volume of fraud the Commission has seen arising from such transactions,
the Commission has determined to promulgate some regulations that are
unique to, and tailored to, retail forex transactions. By way of
example, the Commission's proposed regulations included requirements
that forex registrants maintain records of customer complaints; that
counterparties disclose, with the Risk Disclosure Statement, the
percentage of profitable nondiscretionary forex customer accounts; and
that forex counterparties designate a chief compliance officer to be
responsible for development and implementation of customer protection
policies and procedures. To the extent the final rules published today
do not track precisely with rules applicable to on-exchange futures
trading, the Commission believes that the differences reflect
meaningful differences in the market structure of retail forex
transactions and that the rules issued today are no more restrictive or
burdensome than necessary to address these differences.
Scope of Commission's Authority and Application of Other Rules.
Several commenters lodged criticisms or made observations that go to
the scope of the Commission's authority, as provided in the Act and
CRA, or otherwise. For example, several commenters maintained that the
Commission should require segregation of customer funds by
counterparties in order to provide some protection in the event of a
counterparty insolvency. The Commission's segregation requirements with
regard to futures flow from Section 4d of the Act \29\ which, generally
speaking, requires that customer property for trading commodity
contracts be kept apart, or segregated, from the FCM's own funds.
However, as noted in the
[[Page 55416]]
Commission's proposing release,\30\ a segregated funds regime cannot be
replicated in the context of off-exchange retail forex trading. Unlike
segregation of customer funds deposited for futures trading, under the
relevant provisions of the Bankruptcy Code,\31\ such amounts held in
connection with retail forex trading would not receive any preferential
treatment to unsecured creditors in bankruptcy.
---------------------------------------------------------------------------
\29\ 7 U.S.C. 6(c) (2006).
\30\ 75 FR 3281, 3287 and 3290 (Jan. 20, 2010).
\31\ 11 U.S.C. 761, et seq.
---------------------------------------------------------------------------
Similarly, some commenters took issue with the definitions of
certain intermediaries and the capital requirements, found in the
Proposing Release. Here again, the Commission is bound by statutory
language that defines the scope of its authority.\32\ While the
Commission appreciates the concerns expressed by these commenters and
the time they have taken to express them, it can do no more than its
statutory authority permits.
---------------------------------------------------------------------------
\32\ See, for example, Section 2(c)(2)(B)(iv)(I) of the Act, 7
U.S.C. 2(c)(2)(B)(iv)(I), which provides the Commission with the
authority to register and promulgate rules regarding specifically
defined persons or entities. See also Section 2(c)(2)(B)(ii) of the
Act which explicitly provides for a $20 million minimum capital
requirement.
---------------------------------------------------------------------------
III. Related Matters
A. Regulatory Flexibility Act
FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \33\
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses.\34\ The Commission has already
established certain definitions of ``small entities'' to be used in
evaluating the impact of its rules on such small entities in accordance
with the RFA.\35\ In that statement, the Commission concluded that
neither FCMs nor registered CPOs should be considered to be small
entities for purposes of the RFA. With respect to FCMs, the
Commission's determination was based in part upon their obligation to
meet the capital requirement established by the Commission and the
purposes of protecting financial integrity.\36\
---------------------------------------------------------------------------
\33\ 5 U.S.C. 601, et seq.
\34\ By its terms, the RFA does not apply to ``individuals.''
See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons
must be individuals, (see Commission Regulation 1.3(aa) and proposed
Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does
not apply to APs and no analysis of the economic impact of this rule
proposal on such persons is required.
\35\ 47 FR 18618 (April 30, 1982).
\36\ Id. at 18619.
---------------------------------------------------------------------------
As for CPOs, the Commission determined that registered CPOs are not
small entities based upon its existing regulatory standard for
exempting certain small CPOs from the requirement to register under the
Act.\37\ (A CPO need not register with the Commission if the gross
capital contributions for all pools under its management do not exceed
$400,000 and there are not more than fifteen participants in any one of
those pools.\38\)
---------------------------------------------------------------------------
\37\ Id. at 18619-20.
\38\ 17 CFR 4.13(a)(2) (2009).
---------------------------------------------------------------------------
Thus, with respect to FCMs and registered CPOs, the Commission
believes that these final rules will not have a significant economic
impact on a substantial number of small entities.
CTAs: The Commission has previously decided to evaluate, within the
context of a particular rule proposal, whether all or some CTAs should
be considered to be small entities, and if so, to then analyze the
economic impact on them of any such rule.\39\ CTAs wishing to advise
retail forex customers may include both currently registered CTAs and
previously unregistered persons who now will be required to register.
As to the first group, there should be no significant new economic
impact. As to the second group, registration will require the
submission of application forms, fingerprinting of principals, and
payment of registration fees. To the extent that CTAs can be considered
to be small entities, the Commission does not consider either the
proposed registration fee or the proposed fingerprinting requirement
for newly registered CTAs to have significant economic impact.\40\
---------------------------------------------------------------------------
\39\ 47 FR 18618, 18620.
\40\ 48 FR 35248, 35276 (August 3, 1983)
---------------------------------------------------------------------------
IBs: In 1983, the Commission proposed that for purposes of the RFA
and future rulemakings, it would not consider introducing brokers to be
``small entities'' for essentially the same reasons that FCMs had
previously been determined not to be small entities.\41\ This was
based, in part, on the fact that IBs, like FCMs, are required to
maintain a specified level of adjusted net capital. In the Proposing
Release, retail forex IBs would not have been subject to a capital
requirement; rather, they would have had to operate pursuant to a
guarantee agreement. Under the final rules, retail forex IBs will be
treated no differently than futures IBs. Accordingly, and in keeping
with past Commission determinations, the Commission believes that the
final rules with respect to IBs will not have a significant impact on a
substantial number of small entities.
---------------------------------------------------------------------------
\41\ 48 FR 14933, 14955 (Apr. 6, 1983). See also 47 FR 18618,
18619.
---------------------------------------------------------------------------
RFEDs: RFEDs are a new category of registrant. The Commission does
not believe that there are regulatory alternatives to those being
proposed which would be consistent with the statutory mandate to
provide protection to the public against irresponsible or fraudulent
business practices. In the Proposing Release, the Commission proposed
that RFEDs not be considered to be ``small entities'' for essentially
the same reasons that FCMs have previously been determined not to be
small entities.\42\ As with FCMs, a requirement to maintain a specified
level of adjusted net capital would be imposed upon RFEDs to ensure
that they maintain sufficient capital resources to guarantee their
financial accountability and to promote responsible and reliable
business operations. Moreover, the Commission has sought to fashion its
proposed regulatory program for RFEDs in a manner which is responsive
to the function, purposes, and size of the entity being regulated
consistent with the objective of the RFA. In particular, the minimum
capital requirement required by the CRA effectuates the Congressional
purpose that RFEDs maintain sufficient reserve of capital to remain
economically viable. For the reasons stated above, the Commission will
not define RFEDs as small entities for RFA purposes.
---------------------------------------------------------------------------
\42\ Id.
---------------------------------------------------------------------------
B. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (``PRA'') \43\ an agency
may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless it displays a currently valid
control number. The Commission's final rules regarding retail forex
transactions result in information collection requirements within the
meaning of the PRA. The Commission submitted the proposing release
along with supporting documentation to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5
CFR 1320.11. The Commission requested that OMB approve, and with
respect to the collections required under the new part 5 of the
Commission's regulations, assign a new control number for, the
collections of information required by the proposing release. The
information collection burdens created by the Commission's proposed
rules, which were discussed in detail in the proposing release, are
identical to the collective information collection burdens of the final
rules.
---------------------------------------------------------------------------
\43\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------
The Commission invited the public and other Federal agencies to
comment on any aspect of the information
[[Page 55417]]
collection requirements discussed above. The Commission received no
comment on its burden estimates or on any other aspect of the
information collection requirements contained in its proposing release.
The affected collections are as follows:
Existing Collection 3038-0024 (part 1 of the Commission's
regulations);
Existing Collection 3038-0023 (part 3 of the Commission's
regulations);
Existing Collection 3038-0005 (part 4 of the Commission's
regulations);
Existing Collection 3038-0055 (part 160 of the
Commission's regulations); and
New Collection 3038-0062 (part 5 of the Commission's
regulations).
C. Cost-Benefit Analysis
Section 15(a) of the Act \44\ requires the Commission to consider
the costs and benefits of its action before issuing new regulations
under the Act. By its terms, section 15(a) does not require the
Commission to quantify the costs and benefits of a new regulation or to
determine whether the benefits of the regulation outweigh its costs.
Rather, section 15(a) simply requires the Commission to ``consider the
costs and benefits'' of its action.
---------------------------------------------------------------------------
\44\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern,
enumerated below. Accordingly, the Commission could, in its discretion,
give greater weight to any one of the five enumerated areas and could,
in its discretion, determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
As discussed in more detail above, these amendments are intended to
create a comprehensive scheme to implement the requirements of the CRA,
and to put in place requirements including registration, disclosure,
recordkeeping, financial reporting, minimum capital and other
operational standards. This is to be achieved through both amendments
to existing regulations and the creation of a new, free-standing part
to the Commission's regulations. The Commission is considering the
costs and benefits of the amendments in light of the specific
provisions of section 15(a) as follows:
1. Protection of market participants and the public. The amendments
should enhance considerably the protection of market participants and
the public because they require, for the first time, the registration
of several categories of market participants and require adherence to
operational standards that have not previously applied. The benefits
that inhere in the imposition of these requirements to a sector of the
off-exchange market that has been largely unregulated to this point,
and which is geared towards the retail public, are manifest.
2. Efficiency and competition. In its Conference Report, Congress
indicated that the Commission should avoid creating two different
regulatory regimes for similar business models with respect to FCMs or
RFEDs engaging in off-exchange retail forex transactions.\45\
Accordingly, the Commission has endeavored to ensure that these
entities be treated in comparable fashion relative to one another.
Moreover, the Commission has endeavored, wherever possible, to propose
regulations in part 5 that are analogous to regulations imposed upon
intermediaries engaged in on-exchange transactions. Accordingly, the
Commission believes that it has provided an even handed regulatory
scheme that will be familiar to industry participants.
---------------------------------------------------------------------------
\45\ As noted in the Conference Report that accompanied the CRA,
``To the extent their risk profiles are similar, the managers intend
for FCMs and RFEDs to be regulated substantially equivalently in
terms of their off-exchange retail foreign currency business.'' H.R.
Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference Report
is available via the Internet on the CFTC's Web site.
---------------------------------------------------------------------------
3. Financial integrity of futures markets and price discovery. The
amendments concern retail, off-exchange markets. These markets serve
primarily as a vehicle for members of the retail public to engage in
speculative transactions. Accordingly, the Commission does not perceive
a significant intersection between the operations of these markets and
the financial integrity or price discovery functions of the markets
generally.
4. Sound risk management practices. The amendments include
requirements regarding capital, financial reporting, risk assessment
recordkeeping, and risk assessment reporting that are comparable to
those required of entities engaged in on-exchange trading. The
Commission believes that the benefits of these risk management
requirements--which strive to ensure the financial soundness of firms--
have been borne out on the exchange-traded side and will be of
significant benefit with regard to its oversight of retail forex
counterparties.
5. Other public interest considerations. The retail, off-exchange
forex market has been largely unregulated until now. The Commission
believes that the amendments are beneficial in that they will provide
needed protections for members of the public engaging in these
transactions. The amendments will also bring much needed oversight to
the forex counterparties and intermediaries that interact with the
public.
After considering these factors, the Commission has determined to
adopt the proposed rule changes. The Commission did not receive any
comments relative to its analysis of the cost-benefit provision.
List of Subjects
17 CFR Part 1
Definitions, Minimum financial and reporting requirements.
Recordkeeping requirements, Prohibited transactions in commodity
options, Miscellaneous.
17 CFR Part 3
Definitions, Customer protection, Licensing, Registration.
17 CFR Part 4
Advertising, Brokers, Commodity futures, Commodity pool operators,
Commodity trading advisors, Consumer protection, Exemption from
registration, Reporting and recordkeeping requirements.
17 CFR Part 5
Bulk transfers, Commodity pool operators, Commodity trading
advisors, Consumer protection, Customer's money, securities and
property, Definitions, Foreign exchange, Minimum financial and
reporting requirements, Prohibited transactions in retail foreign
exchange, Recordkeeping requirements, Retail foreign exchange dealers,
Risk assessment, Special calls, Trading practices.
17 CFR Part 10
Adjudicatory proceedings, Rules of practice.
17 CFR Part 140
Authority delgations (Government agencies, Conflict of interests,
Organization and functions (Government agencies).
17 CFR Part 145
Confidential business information, Freedom of information.
17 CFR Part 147
Sunshine Act.
17 CFR Part 160
Consumer financial information, Definitions, Nonpublic personal
information, Privacy.
[[Page 55418]]
17 CFR Part 166
Arbitration, Authorization to trade, Customer protection,
Definitions, Dispute settlement, Litigation, Reparations.
0
For the reasons presented above, the Commission hereby amends Chapter I
of Title 17 of the Code of Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e,
6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c,
13a, 13a-1, 16, 16a, 19, 21, 23 and 24.
Sec. 1.1 [Removed and Reserved]
0
2. Section 1.1 is removed and reserved.
0
3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to read
as follows:
Sec. 1.3 Definitions.
* * * * *
(nn) Guarantee agreement. This term means an agreement of guaranty
in the form set forth in part B or C of Form 1-FR, executed by a
registered futures commission merchant or retail foreign exchange
dealer, as appropriate, and by an introducing broker or applicant for
registration as an introducing broker on behalf of an introducing
broker or applicant for registration as an introducing broker in
satisfaction of the alternative adjusted net capital requirement set
forth in Sec. 1.17(a)(1)(iii).
* * * * *
(yy) Commodity interest. This term means:
(1) Any contract for the purchase or sale of a commodity for future
delivery;
(2) Any contract, agreement or transaction subject to Commission
regulation under section 4c or 19 of the Act; and
(3) Any contract, agreement or transaction subject to Commission
jurisdiction under section 2(c)(2) of the Act.
0
4. Section 1.4 is revised to read as follows:
Sec. 1.4 Use of electronic signatures.
For purposes of complying with any provision in the Commodity
Exchange Act or the rules or regulations in this Chapter I that
requires a document to be signed by a customer of a futures commission
merchant or introducing broker, a retail forex customer of a retail
foreign exchange dealer or futures commission merchant, a pool
participant or a client of a commodity trading advisor, an electronic
signature executed by the customer, participant or client will be
sufficient, if the futures commission merchant, retail foreign exchange
dealer, introducing broker, commodity pool operator or commodity
trading advisor elects generally to accept electronic signatures;
Provided, however, That the electronic signature must comply with
applicable Federal laws and other Commission rules; And, Provided
further, That the futures commission merchant, retail foreign exchange
dealer, introducing broker, commodity pool operator or commodity
trading advisor must adopt and utilize reasonable safeguards regarding
the use of electronic signatures, including at a minimum safeguards
employed to prevent alteration of the electronic record with which the
electronic signature is associated, after such record has been
electronically signed.
0
5. Section 1.10 is amended by revising paragraph (j) to read as
follows:
Sec. 1.10 Financial reports of futures commission merchants and
introducing brokers.
* * * * *
(j) Requirements for guarantee agreement. (1) A guarantee agreement
filed pursuant to this section must be signed in a manner sufficient to
be a binding guarantee under local law by an appropriate person on
behalf of the futures commission merchant or retail foreign exchange
dealer and the introducing broker, and each signature must be
accompanied by evidence that the signatory is authorized to enter the
agreement on behalf of the futures commission merchant, retail foreign
exchange dealer, or introducing broker and is such an appropriate
person. For purposes of this paragraph (j), an appropriate person shall
be the proprietor, if the firm is a sole proprietorship; a general
partner, if the firm is a partnership; and either the chief executive
officer or the chief financial officer, if the firm is a corporation;
and, if the firm is a limited liability company or limited liability
partnership, either the chief executive officer, the chief financial
officer, the manager, the managing member, or those members vested with
the management authority for the limited liability company or limited
liability partnership.
(2) No futures commission merchant or retail foreign exchange
dealer may enter into a guarantee agreement if:
(i) It knows or should have known that its adjusted net capital is
less than the amount set forth in Sec. 1.12(b) of this part or Sec.
5.6(b) of this chapter, as applicable; or
(ii) There is filed against the futures commission merchant or
retail foreign exchange dealer an adjudicatory proceeding brought by or
before the Commission pursuant to the provisions of sections 6(c),
6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56 or 3.60 of
this chapter.
(3) A retail foreign exchange dealer may enter into a guarantee
agreement only with an introducing broker as defined in Sec. 5.1(f)(1)
of this chapter. A retail foreign exchange dealer may not enter into a
guarantee agreement with an introducing broker as defined in Sec.
1.3(mm) of this part.
(4) A guarantee agreement filed in connection with an application
for initial registration as an introducing broker in accordance with
the provisions of Sec. 3.10(a) of this chapter shall become effective
upon the granting of registration or, if appropriate, a temporary
license, to the introducing broker. A guarantee agreement filed other
than in connection with an application for initial registration as an
introducing broker shall become effective as of the date agreed to by
the parties.
(5)(i) If the registration of the introducing broker is suspended,
revoked, or withdrawn in accordance with the provisions of this
chapter, the guarantee agreement shall expire as of the date of such
suspension, revocation or withdrawal.
(ii) If the registration of the futures commission merchant or
retail foreign exchange dealer is suspended or revoked, the guarantee
agreement shall expire 30 days after such suspension or revocation, or
at such earlier time as may be approved by the Commission, the
introducing broker, and the introducing broker's designated self-
regulatory organization.
(6) A guarantee agreement may be terminated at any time during the
term thereof:
(i) By mutual written consent of the parties, signed by an
appropriate person on behalf of each party, with prompt written notice
thereof, signed by an appropriate person on behalf of each party, to
the Commission and to the designated self-regulatory organizations of
the futures commission merchant or retail foreign exchange dealer and
the introducing broker;
(ii) For good cause shown, by either party giving written notice of
its intention to terminate the agreement, signed by an appropriate
person, to the other party to the agreement, to the Commission, and to
the designated self-regulatory organizations of the futures
[[Page 55419]]
commission merchant or retail foreign exchange dealer and the
introducing broker; or
(iii) By either party giving written notice of its intention to
terminate the agreement, signed by an appropriate person, at least 30
days prior to the proposed termination date, to the other party to the
agreement, to the Commission, and to the designated self-regulatory
organizations of the futures commission merchant or retail foreign
exchange dealer and the introducing broker.
(7) The termination of a guarantee agreement by a futures
commission merchant, retail foreign exchange dealer or an introducing
broker, or the expiration of such an agreement, shall not relieve any
party from any liability or obligation arising from acts or omissions
which occurred during the term of the agreement.
(8) An introducing broker may not simultaneously be a party to more
than one guarantee agreement: Provided, however, That the provisions of
this paragraph (j)(8) shall not be deemed to preclude an introducing
broker from entering into a guarantee agreement with another futures
commission merchant or retail foreign exchange dealer if the
introducing broker, futures commission merchant or retail foreign
exchange dealer which is a party to the existing agreement has provided
notice of termination of the existing agreement in accordance with the
provisions of paragraph (j)(6) of this section, and the new guarantee
agreement does not become effective until the day following the date of
termination of the existing agreement: And, provided further, That the
provisions of this paragraph (j)(8) shall not be deemed to preclude an
introducing broker from entering into a guarantee agreement with
another futures commission merchant or retail foreign exchange dealer
if the futures commission merchant or retail foreign exchange dealer
which is a party to the existing agreement ceases to remain registered
and the existing agreement would therefore expire in accordance with
the provisions of paragraph (j)(6)(ii) of this section.
(9)(i)(A) An introducing broker that is a party to a guarantee
agreement that has been terminated in accordance with the provisions of
paragraph (j)(6) of this section, or that is due to expire in
accordance with the provisions of paragraph (j)(5)(ii) of this section,
must cease doing business as an introducing broker on or before the
effective date of such termination or expiration unless, on or before
10 days prior to the effective date of such termination or expiration
or such other period of time as the Commission or the designated self-
regulatory organization may allow for good cause shown, the introducing
broker files with its designated self-regulatory organization either a
new guarantee agreement effective as of the day following the date of
termination of the existing agreement, or, in the case of a guarantee
agreement that is due to expire in accordance with the provisions of
paragraph (j)(4)(ii) of this section, a new guarantee agreement
effective on or before such expiration, or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days
prior to the date on which the report is filed and a Form 1-FR-IB
certified by an independent public accountant in accordance with Sec.
1.16 as of a date not more than one year prior to the date on which the
report is filed: Provided, however, that an introducing broker as
defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee
agreement that has been terminated or that has expired must cease doing
business as an introducing broker on or before the effective date of
such termination or expiration unless, on or before 10 days prior to
the effective date of such termination or expiration or such other
period of time as the Commission or the designated self-regulatory
organization may allow for good cause shown, the introducing broker
files with its designated self-regulatory organization a new guarantee
agreement effective on or before the termination or expiration date of
the terminating or expiring guarantee agreement.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
(ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of
this section or of Sec. 1.17(a), an introducing broker that is a party
to a guarantee agreement that has been terminated in accordance with
the provisions of paragraph (j)(6)(ii) of this section shall not be
deemed to be in violation of the minimum adjusted net capital
requirement of Sec. 1.17(a)(1)(iii) or (a)(2) for 30 days following
such termination. Such an introducing broker must cease doing business
as an introducing broker on or after the effective date of such
termination, and may not resume doing business as an introducing broker
unless and until it files a new agreement or either:
(1) A Form 1-FR-IB certified by an independent public accountant in
accordance with Sec. 1.16 as of a date not more than 45 days prior to
the date on which the report is filed; or
(2) A Form 1-FR-IB as of a date not more than 17 business days
prior to the date on which the report is filed and a Form 1-FR-IB
certified by an independent public accountant in accordance with Sec.
1.16 as of a date not more than one year prior to the date on which the
report is filed: Provided, however, that an introducing broker as
defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee
agreement that has been terminated must cease doing business as an
introducing broker from and after the effective date of such
termination, and may not resume doing business as an introducing broker
as defined in Sec. 5.1(f)(1) of this chapter unless and until it files
a new guarantee agreement.
(B) Each person filing a Form 1-FR-IB in accordance with this
section must include with the financial report a statement describing
the source of his current assets and representing that his capital has
been contributed for the purpose of operating his business and will
continue to be used for such purpose.
* * * * *
0
6. Section 1.35 is amended by revising paragraphs (a), (a-1) and (b) to
read as follows:
Sec. 1.35 Records of cash commodity, futures, and option
transactions.
(a) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and members of contract markets. Each futures
commission merchant, retail foreign exchange dealer, introducing
broker, and member of a contract market shall keep full, complete, and
systematic records, together with all pertinent data and memoranda, of
all transactions relating to its business of dealing in commodity
futures, retail forex transactions, commodity options, and cash
commodities (including currencies). Each futures commission merchant,
retail foreign exchange dealer, introducing broker, and member of a
contract market shall retain the required records, data, and memoranda
in accordance with the requirements of Sec. 1.31, and produce them for
inspection and furnish true and correct information and reports as to
the contents or the meaning thereof, when and as requested by an
authorized representative of the Commission or the United States
[[Page 55420]]
Department of Justice. Included among such records shall be all orders
(filled, unfilled, or canceled), trading cards, signature cards, street
books, journals, ledgers, canceled checks, copies of confirmations,
copies of statements of purchase and sale, and all other records, data
and memoranda, which have been prepared in the course of its business
of dealing in commodity futures, retail forex transactions, commodity
options, and cash commodities. Among such records each member of a
contract market must retain and produce for inspection are all
documents on which trade information is originally recorded, whether or
not such documents must be prepared pursuant to the rules or
regulations of either the Commission or the contract market. For
purposes of this section, such documents are referred to as ``original
source documents.''
(a-1) Futures commission merchants, retail foreign exchange
dealers, introducing brokers, and members of contract markets:
Recording of customers' and option customers' orders. (1) Each futures
commission merchant, each retail foreign exchange dealer and each
introducing broker receiving a customer's, retail forex customer's or
option customer's order, as applicable, shall immediately upon receipt
thereof prepare a written record of the order including the account
identification, except as provided in paragraph (a-1)(5) of this
section, and order number, and shall record thereon, by timestamp or
other timing device, the date and time, to the nearest minute, the
order is received, and in addition, for option customers' orders, the
time, to the nearest minute, the order is transmitted for execution.
(2)(i) Each member of a contract market who on the floor of such
contract market receives a customer's or option customer's order which
is not in the form of a written record including the account
identification, order number, and the date and time, to the nearest
minute, the order was transmitted or received on the floor of such
contract market, shall immediately upon receipt thereof prepare a
written record of the order in nonerasable ink, including the account
identification, except as provided in paragraph (a-1)(5) of this
section or appendix C to this part, and order number and shall record
thereon, by timestamp or other timing device, the date and time, to the
nearest minute, the order is received.
(ii) Except as provided in paragraph (a-1)(3) of this section:
(A) Each contract market member who on the floor of such contract
market receives an order from another member present on the floor which
is not in the form of a written record shall, immediately upon receipt
of such order, prepare a written record of the order or obtain from the
member who placed the order a written record of the order, in non-
erasable ink including the account identification and order number and
shall record thereon, by time-stamp or other timing device, the date
and time, to the nearest minute, the order is received; or
(B) When a contract market member present on the floor places an
order, which is not in the form of a written record, for his own
account or an account over which he has control, with another member of
such contract market for execution:
(1) The member placing such order immediately upon placement of the
order shall record the order and time of placement to the nearest
minute on a sequentially-numbered trading card maintained in accordance
with the requirements of paragraph (d) of this section;
(2) The member receiving and executing such order immediately upon
execution of the order shall record the time of execution to the
nearest minute on a trading card or other record maintained pursuant to
the requirements of paragraph (d) of this section; and
(3) The member receiving and executing the order shall return such
trading card or other record to the member placing the order. The
member placing the order then must submit together both of the trading
cards or other records documenting such trade to contract market
personnel or the clearing member, in accordance with contract market
rules adopted pursuant to paragraph (j)(1) of this section.
(iii) Each contract market may adopt rules, which must be submitted
to the Commission pursuant to section 5a(a)(12)(A) of the Act and
Commission Regulation 1.41, that provide alternative requirements to
those contained in paragraph (a-1)(2)(ii) of this section. Such rules
shall, at a minimum, require that the contemporaneous written records:
(A) Contain the terms of the order;
(B) Include reliable timing data for the initiation and execution
of the order which would permit complete and effective reconstruction
of the order placement and execution; and
(C) Be submitted to contract market personnel or clearing members
in accordance with contract market rules adopted pursuant to paragraph
(j)(1) of this section.
(3)(i) The requirements of paragraph (a-1)(2)(ii) of this section
will not apply if a contract market maintains in effect rules which
have been submitted to the Commission pursuant to section 5a(a)(12)(A)
of the Act and Commission Regulation 1.41, which provide for an
exemption where:
(A) A contract market member places with another member of such
contract market an order that is part of a spread transaction;
(B) The member placing the order personally executes one or more
legs of the spread; and
(C) The member receiving and executing such order immediately upon
execution of the order records the time of execution to the nearest
minute on his trading card or other record maintained in accordance
with the requirements of paragraph (d) of this section.
(ii) Each contract market shall, as part of its trade practice
surveillance program, conduct surveillance for compliance with the
recordkeeping and other requirements under paragraphs (a-1) (2) and (3)
of this section, and for trading abuses related to the execution of
orders for members present on the floor of the contract market.
(4) Each member of a contract market reporting the execution from
the floor of the contract market of a customer's or option customer's
order or the order of another member of the contract market received in
accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this
section, shall record on a written record of the order, including the
account identification, except as provided in paragraph (a-1)(5) of
this section, and order number, by timestamp or other timing device,
the date and time to the nearest minute such report of execution is
made. Each member of a contract market shall submit the written records
of customer orders or orders from other contract market members to
contract market personnel or to the clearing member responsible for the
collection of orders prepared pursuant to this paragraph as required by
contract market rules adopted in accordance with paragraph (j)(1) of
this section. The execution price and other information reported on the
order tickets must be written in nonerasable ink.
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.
(i) Eligible account managers. The person placing and directing the
allocation of an order eligible for post-execution allocation must have
been granted written investment discretion
[[Page 55421]]
with regard to participating customer accounts. The following persons
shall qualify as eligible account managers:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission's rules, except for entities exempt under Sec.
4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;
(B) An investment adviser registered with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940 or
with a state pursuant to applicable state law or excluded or exempt
from registration under such Act or applicable state law or rule;
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation; or
(D) A foreign adviser that exercises discretionary trading
authority solely over the accounts of non-U.S. persons, as defined in
Sec. 4.7(a)(1)(iv) of this chapter.
(ii) Information. Eligible account managers shall make the
following information available to customers upon request:
(A) The general nature of the allocation methodology the account
manager will use;
(B) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable, any account in which the account manager has an interest.
(iii) Allocation. Orders eligible for post-execution allocation
must be allocated by an eligible account manager in accordance with the
following:
(A) Allocations must be made as soon as practicable after the
entire transaction is executed, but in any event account managers must
provide allocation information to futures commission merchants no later
than a time sufficiently before the end of the day the order is
executed to ensure that clearing records identify the ultimate customer
for each trade.
(B) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
(iv) Records. (A) Eligible account managers shall keep and must
make available upon request of any representative of the Commission,
the United States Department of Justice, or other appropriate
regulatory agency, the information specified in paragraph (a-1)(5)(ii)
of this section.
(B) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, records
sufficient to demonstrate that all allocations meet the standards of
paragraph (a-1)(5)(iii) of this section and to permit the
reconstruction of the handling of the order from the time of placement
by the account manager to the allocation to individual accounts.
(C) Futures commission merchants that execute orders or that carry
accounts eligible for post-execution allocation, and members of
contract markets that execute such orders, must maintain records that,
as applicable, identify each order subject to post-execution allocation
and the accounts to which contracts executed for such order are
allocated.
(D) In addition to any other remedies that may be available under
the Act or otherwise, if the Commission has reason to believe that an
account manager has failed to provide information requested pursuant to
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the
Commission may inform in writing any designated contract market or
derivatives transaction execution facility and that designated contract
market or derivatives transaction execution facility shall prohibit the
account manager from submitting orders for execution except for
liquidation of open positions and no futures commission merchants shall
accept orders for execution on any designated contract market or
derivatives transaction execution facility from the account manager
except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be
adversely affected or aggrieved by action taken by the Commission under
paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity
for a prompt hearing in accordance with the provisions of Sec.
21.03(g) of this chapter.
* * * * *
(b) Futures commission merchants, retail foreign exchange dealers,
introducing brokers, and clearing members of contract markets. Each
futures commission merchant, each retail foreign exchange dealer, and
each clearing member of a contract market and, for purposes of
paragraph (b)(3) of this section, each introducing broker, shall, as a
minimum requirement, prepare regularly and promptly, and keep
systematically and in permanent form, the following:
(1) A financial ledger record which will show separately for each
customer or retail forex customer or option customer all charges
against and credits to such customer's or retail forex customer's or
option customer's account, including but not limited to customer or
retail forex customer funds deposited, withdrawn, or transferred, and
charges or credits resulting from losses or gains on closed
transactions;
(2) A record of transactions which will show separately for each
account (including proprietary accounts):
(i) All commodity futures transactions executed for such account,
including the date, price, quantity, market, commodity and future;
(ii) All retail forex transactions executed for such account,
including the date, price, quantity, and currency; and
(iii) All commodity option transactions executed for such account,
including the date, whether the transaction involved a put or call,
expiration date, quantity, underlying contract for future delivery or
underlying physical, strike price, and details of the purchase price of
the option, including premium, mark-up, commission and fees; and
(3) A record or journal which will separately show for each
business day complete details of:
(i) All commodity futures transactions executed on that day,
including the date, price, quantity, market, commodity, future and the
person for whom such transaction was made;
(ii) All retail forex transactions executed on that day for such
account, including the date, price, quantity, currency and the person
for whom such transaction was made; and
(iii) All commodity option transactions executed on that day,
including the date, whether the transaction involved a put or call, the
expiration date, quantity, underlying contract for future delivery, or
underlying physical, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees and the person
for whom the transaction was made; and
(iv) In the case of an introducing broker, the record or journal
required by this paragraph (b)(3) shall also include the futures
commission merchant or
[[Page 55422]]
retail foreign exchange dealer carrying the account for which each
commodity futures, retail forex and commodity option transaction was
executed on that day. Provided, however, that where reproductions on
microfilm, microfiche or optical disk are substituted for hard copy in
accordance with the provisions of Sec. 1.31(b) of this part, the
requirements of paragraphs (b)(1) and (b)(2) of this section will be
considered met if the person required to keep such records is ready at
all times to provide, and immediately provides in the same city as that
in which such person's commodity retail forex or commodity option books
and records are maintained, at the expense of such person, reproduced
copies which show the records as specified in paragraphs (b)(1) and
(b)(2) of this section, on request of any representatives of the
Commission or the U.S. Department of Justice.
* * * * *
0
7. Section 1.36 is amended by revising paragraph (a) to read as
follows:
Sec. 1.36 Record of securities and property received from customers
and option customers.
(a) Each futures commission merchant and each retail foreign
exchange dealer shall maintain, as provided in Sec. 1.31, a record of
all securities and property received from customers, retail forex
customers or option customers in lieu of money to margin, purchase,
guarantee, or secure the commodity, retail forex or commodity option
transactions of such customers, retail forex customers or option
customers. Such record shall show separately for each customer, retail
forex customer or option customer: A description of the securities or
property received; the name and address of such customer, retail forex
customer or option customer; the dates when the securities or property
were received; the identity of the depositories or other places where
such securities or property are segregated or held; the dates of
deposits and withdrawals from such depositories; and the dates of
return of such securities or property to such customer, retail forex
customer or option customer, or other disposition thereof, together
with the facts and circumstances of such other disposition. In the
event any futures commission merchant deposits with the clearing
organization of a contract market, directly or with a bank or trust
company acting as custodian for such clearing organization, securities
and/or property which belong to a particular customer or option
customer, such futures commission merchant shall obtain written
acknowledgment from such clearing organization that it was informed
that such securities or property belong to customers or option
customers of the futures commission merchant making the deposit. Such
acknowledgment shall be retained as provided in Sec. 1.31.
* * * * *
0
8. Section 1.37 is amended by revising paragraph (a)(1) to read as
follows:
Sec. 1.37 Customer's or option customer's name, address, and
occupation recorded; record of guarantor or controller of account.
(a)(1) Each futures commission merchant, retail foreign exchange
dealer, introducing broker, and member of a contract market shall keep
a record in permanent form which shall show for each commodity futures,
retail forex or option account carried or introduced by it the true
name and address of the person for whom such account is carried or
introduced and the principal occupation or business of such person as
well as the name of any other person guaranteeing such account or
exercising any trading control with respect to such account. For each
such commodity option account, the records kept by such futures
commission merchant, introducing broker, and member of a contract
market must also show the name of the person who has solicited and is
responsible for each option customer's account or assign account
numbers in such a manner to identify that person.
* * * * *
0
9. Section 1.40 is revised to read as follows:
Sec. 1.40 Crop, market information letters, reports; copies required.
Each futures commission merchant, each retail foreign exchange
dealer, each introducing broker and each member of a contract market
shall, upon request, furnish or cause to be furnished to the Commission
a true copy of any letter, circular, telegram, or report published or
given general circulation by such futures commission merchant, retail
foreign exchange dealer, introducing broker or member which concerns
crop or market information or conditions that affect or tend to affect
the price of any commodity or exchange rate, and the true source of or
authority for the information contained therein.
0
10. Section 1.46 is amended by revising paragraphs (a) and (b) to read
as follows:
Sec. 1.46 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. (1) Except with respect to
purchases or sales which are for omnibus accounts, or where the
customer or account controller has instructed otherwise, any futures
commission merchant who, on or subject to the rules of a designated
contract market or registered derivatives transaction execution
facility:
(i) Purchases any commodity for future delivery for the account of
any customer when the account of such customer at the time of such
purchase has a short position in the same future of the same commodity
on the same market;
(ii) Sells any commodity for future delivery for the account of any
customer when the account of such customer at the time of such sale has
a long position in the same future of the same commodity on the same
market;
(iii) Purchases a put or call option for the account of any option
customer when the account of such option customer at the time of such
purchase has a short put or call option position with the same
underlying futures contract or same underlying physical, strike price,
expiration date and contract market as that purchased; or
(iv) Sells a put or call option for the account of any option
customer when the account of such option customer at the time of such
sale has a long put or call option position with the same underlying
futures contract or same underlying physical, strike price, expiration
date and contract market as that sold--shall on the same day apply such
purchase or sale against such previously held short or long futures or
option position, as the case may be, and shall, for futures
transactions, promptly furnish such customer a statement showing the
financial result of the transactions involved and, if applicable, that
the account was introduced to the futures commission merchant by an
introducing broker and the names of the futures commission merchant and
introducing broker.
(2) Any futures commission merchant or retail foreign exchange
dealer who:
(i) Engages in a retail forex transaction involving the purchase of
any currency for the account of any retail forex customer when the
account of such retail forex customer at the time of such purchase has
an open retail forex transaction for the sale of the same currency;
(ii) Engages in a retail forex transaction involving the sale of
any currency for the account of any retail forex customer when the
account of such retail forex customer at the time of such sale has an
open retail forex transaction for the purchase of the same currency;
[[Page 55423]]
(iii) Purchases a put or call option involving foreign currency for
the account of any option customer when the account of such option
customer at the time of such purchase has a short put or call option
position with the same underlying currency, strike price, and
expiration date as that purchased; or
(iv) Sells a put or call option involving foreign currency for the
account of any option customer when the account of such option customer
at the time of such sale has a long put or call option position with
the same underlying currency, strike price, and expiration date as that
sold--shall immediately apply such purchase or sale against such
previously held opposite transaction, and shall promptly furnish such
retail forex customer a statement showing the financial result of the
transactions involved and, if applicable, that the account was
introduced to the futures commission merchant or retail foreign
exchange dealer by an introducing broker and the names of the futures
commission merchant or retail foreign exchange dealer, and the
introducing broker.
(b) Close-out against oldest open position. In all instances
wherein the short or long futures, retail forex transaction or option
position in such customer's, retail forex customer's or option
customer's account immediately prior to such offsetting purchase or
sale is greater than the quantity purchased or sold, the futures
commission merchant or retail foreign exchange dealer shall apply such
offsetting purchase or sale to the oldest portion of the previously
held short or long position: Provided, That upon specific instructions
from the customer or option customer the offsetting transaction shall
be applied as specified by the customer or option customer without
regard to the date of acquisition of the previously held position; and
Provided, further, that a futures commission merchant or retail foreign
exchange dealer, if permitted by the rules of a registered futures
association, may offset, at the customer's request, retail forex
transactions of the same size, even if the customer holds other
transactions of a different size, but in each case must offset the
transaction against the oldest transaction of the same size. Such
instructions may also be accepted from any person who, by power of
attorney or otherwise, actually directs trading in the customer's,
retail forex customer's or option customer's account unless the person
directing the trading is the futures commission merchant or retail
foreign exchange dealer (including any partner thereof), or is an
officer, employee, or agent of the futures commission merchant or
retail foreign exchange dealer. With respect to every such offsetting
transaction that, in accordance with such specific instructions, is not
applied to the oldest portion of the previously held position, the
futures commission merchant or retail foreign exchange dealer shall
clearly show on the statement issued to the customer, retail forex
customer or option customer in connection with the transaction, that
because of the specific instructions given by or on behalf of the
customer, retail forex customer or option customer the transaction was
not applied in the usual manner, i.e., against the oldest portion of
the previously held position. However, no such showing need be made if
the futures commission merchant or retail foreign exchange dealer has
received such specific instructions in writing from the customer,
retail forex customer or option customer for whom such account is
carried.
* * * * *
0
11. Section 1.52 is amended by:
0
a. Revising paragraphs (a), and (c) introductory text, (c)(1), and
(c)(2);
0
b. Revising paragraphs (g)(3) and (g)(4); and
0
c. Revising paragraphs (h), (j), and (k) to read as follows:
Sec. 1.52 Self-regulatory organization adoption and surveillance of
minimum financial requirements.
(a) Each self-regulatory organization must adopt, and submit for
Commission approval, rules prescribing minimum financial and related
reporting requirements for all its members who are registered futures
commission merchants or registered retail foreign exchange dealers.
Each self-regulatory organization other than a contract market must
adopt, and submit for Commission approval, rules prescribing minimum
financial and related reporting requirements for all its members who
are registered introducing brokers. Each contract market which elects
to have a category of membership for introducing brokers must adopt,
and submit for Commission approval, rules prescribing minimum financial
and related reporting requirements for all its members who are
registered introducing brokers. Each self-regulatory organization shall
submit for Commission approval any modification or other amendments to
such rules. Such requirements must be the same as, or more stringent
than, those contained in Sec. Sec. 1.10 and 1.17, for futures
commission merchants and introducing brokers, and Sec. 5.7 of this
chapter for retail foreign exchange dealers. The definition of adjusted
net capital must be the same as that prescribed in Sec. 1.17(c) for
futures commission merchants and introducing brokers, and Sec.
5.7(b)(2) of this chapter for futures commission merchants offering or
engaging in retail forex transactions and for retail foreign exchange
dealers: Provided, however, A designated self-regulatory organization
may permit its member registrants which are registered with the
Securities and Exchange Commission as securities brokers or dealers to
file (in accordance with Sec. 1.10(h)) a copy of their Financial and
Operational Combined Uniform Single Report under the Securities
Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in lieu of
Form 1-FR: And, provided further, A designated self-regulatory
organization may permit its member introducing brokers to file a Form
1-FR-IB in lieu of a Form 1-FR-FCM.
* * * * *
(c) Any two or more self-regulatory organizations may file with the
Commission a plan for delegating to a designated self-regulatory
organization, for any registered futures commission merchant, any
registered retail foreign exchange dealer, or any registered
introducing broker which is a member of more than one such self-
regulatory organization, the responsibility of:
(1) Monitoring and auditing for compliance with the minimum
financial and related reporting requirements adopted by such self-
regulatory organizations in accordance with paragraph (a) of this
section; and
(2) Receiving the financial reports necessitated by such minimum
financial and related reporting requirements.
* * * * *
(g) * * *
(3) Reduces multiple monitoring and auditing for compliance with
the minimum financial rules of the self-regulatory organizations
submitting the plan for any futures commission merchant, retail foreign
exchange dealer, or introducing broker which is a member of more than
one self-regulatory organization;
(4) Reduces multiple reporting of the financial information
necessitated by such minimum financial and related reporting
requirements by any futures commission merchant, retail foreign
exchange dealer, or introducing broker which is a member of more than
one self-regulatory organization;
* * * * *
(h) After the Commission has approved a plan or part of one under
Sec. 1.52(g), a self-regulatory organization relieved of
responsibility must notify
[[Page 55424]]
each of its members which is subject to such a plan:
(1) Of the limited nature of its responsibility for such a member's
compliance with its minimum financial and related reporting
requirements; and
(2) Of the identity of the designated self-regulatory organization
which has been delegated responsibility for such a member.
* * * * *
(j) Whenever a registered futures commission merchant, a registered
retail foreign exchange dealer, or a registered introducing broker
holding membership in a self-regulatory organization ceases to be a
member in good standing of that self-regulatory organization, such
self-regulatory organization must, on the same day that event takes
place, give telegraphic notice of that event to the principal office of
the Commission in Washington, DC, and send a copy of that notification
to such futures commission merchant, retail foreign exchange dealer, or
such introducing broker.
(k) Nothing in this section shall preclude the Commission from
examining any futures commission merchant, retail foreign exchange
dealer, or introducing broker for compliance with the minimum financial
and related reporting requirements to which such futures commission
merchant, retail foreign exchange dealer, or introducing broker is
subject.
* * * * *
PART 3--REGISTRATION
0
12. The authority citation for part 3 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21
and 23.
0
13. Section 3.1 is amended by revising paragraph (c) to read as
follows:
Sec. 3.1 Definitions.
* * * * *
(c) Sponsor. Sponsor means the futures commission merchant, retail
foreign exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator or leverage transaction merchant which makes
the certification required by Sec. 3.12 of this part for the
registration of an associated person of such sponsor.
* * * * *
0
14. Section 3.4 is amended by revising paragraph (a) to read as
follows:
Sec. 3.4 Registration in one capacity not included in registration in
any other capacity.
(a) Except as may be otherwise provided in the Act or in any rule,
regulation, or order of the Commission, each futures commission
merchant, retail foreign exchange dealer, floor broker, floor trader,
associated person, commodity trading advisor, commodity pool operator,
introducing broker, and leverage transaction merchant must register as
such under the Act. Registration in one capacity under the Act shall
not include registration in any other capacity: Provided, however, That
a registered floor broker need not also register as a floor trader in
order to engage in activity as a floor trader.
* * * * *
0
15. Section 3.10 is amended by:
0
a. Revising the heading;
0
b. Revising paragraph (a)(1);
0
c. Revising paragraph (b); and
0
d. Revising paragraph (d) to read as follows:
Sec. 3.10 Registration of futures commission merchants, retail
foreign exchange dealers, introducing brokers, commodity trading
advisors, commodity pool operators and leverage transaction merchants.
(a) Application for registration. (1)(i) Except as provided in
paragraph (a)(3) of this section, application for registration as a
futures commission merchant, retail foreign exchange dealers,
introducing broker, commodity trading advisor, commodity pool operator
or leverage transaction merchant must be on Form 7-R, completed and
filed with the National Futures Association in accordance with the
instructions thereto.
(ii) Applicants for registration as a futures commission merchant,
retail foreign exchange dealer or introducing broker must accompany
their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in
accordance with the provisions of Sec. 1.10 of this chapter: Provided,
however, That an applicant for registration as a futures commission
merchant or introducing broker which is registered with the Securities
and Exchange Commission as a securities broker or dealer may accompany
its Form 7-R with a copy of its Financial and Operational Combined
Uniform Single Report under the Securities Exchange Act of 1934, Part
II or Part II A, in accordance with the provisions of Sec. 1.10(h) of
this chapter.
* * * * *
(b) Duration of registration. (1) A person registered as a futures
commission merchant, retail foreign exchange dealer, introducing
broker, commodity trading advisor, commodity pool operator or leverage
transaction merchant in accordance with paragraph (a) of this section
will continue to be so registered until the effective date of any
revocation or withdrawal of such registration. Such person will be
prohibited from engaging in activities requiring registration under the
Act or from representing himself to be a registrant under the Act or
the representative or agent of any registrant during the pendency of
any suspension of such registration.
(2) A person registered as an introducing broker who was a party to
a guarantee agreement with a futures commission merchant or retail
foreign exchange dealer in accordance with Sec. 1.10(j) of this
chapter will have its registration cease thirty days after the
termination of such guarantee agreement unless the procedures set forth
in Sec. 1.10(j)(8) of this chapter are followed.
* * * * *
(d) On a date to be established by the National Futures
Association, and in accordance with procedures established by the
National Futures Association, each registrant as a futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
trading advisor, commodity pool operator or leverage transaction
merchant shall, on an annual basis, review and update registration
information maintained with the National Futures Association. The
failure to complete the review and update within thirty days following
the date established by the National Futures Association shall be
deemed to be a request for withdrawal from registration, which shall be
processed in accordance with the provisions of Sec. 3.33(f).
* * * * *
0
16. Section 3.12 is amended by
0
a. Revising the heading;
0
b. Revising paragraph (a);
0
c. Revising paragraph (f)(1)(iii)(E);
0
d. Revising paragraph (f)(4);
0
e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and
0
f. Removing paragraph (j). The revisions read as follows:
Sec. 3.12 Registration of associated persons of futures commission
merchants, retail foreign exchange dealers, introducing brokers,
commodity trading advisors, commodity pool operators and leverage
transaction merchants.
(a) Registration required. It shall be unlawful for any person to
be associated with a futures commission merchant, retail foreign
exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator or leverage transaction merchant as an
associated person unless that person shall have registered under the
Act as an associated person of that sponsoring futures commission
merchant, retail foreign exchange dealer, introducing
[[Page 55425]]
broker, commodity trading advisor, commodity pool operator or leverage
transaction merchant in accordance with the procedures in paragraphs
(c), (d), (f), or (i), of this section or is exempt from such
registration pursuant to paragraph (h) of this section.
* * * * *
(f) * * *
(1) * * *
(iii) * * *
(E) Associated person's supervision of any person or persons
engaged in any of the foregoing solicitations or acceptances, with
respect to any customers common to it and any other futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
trading advisor, commodity pool operator, or leverage transaction
merchant with which the associated person is associated.
* * * * *
(4) If a person is associated with a futures commission merchant,
with a retail foreign exchange dealer, or with an introducing broker
and he directs customers seeking a managed account to use the services
of a commodity trading advisor(s) approved by the futures commission
merchant, retail foreign exchange dealer or introducing broker and all
such customers' accounts solicited or accepted by the associated person
are carried by the futures commission merchant, retail foreign exchange
dealer or introduced by the introducing broker with which the
associated person is associated, such a person shall be deemed to be
associated solely with the futures commission merchant, retail foreign
exchange dealer or introducing broker and may not also register as an
associated person of the commodity trading advisor(s).
* * * * *
(h) * * *
(1) * * *
(i) Registered under the Act as a futures commission merchant,
retail foreign exchange dealer, floor broker, or as an introducing
broker;
* * * * *
(iii) The chief operating officer, general partner or other person
in the supervisory chain-of-command, provided the futures commission
merchant, retail foreign exchange dealer, introducing broker, commodity
trading advisor, commodity pool operator, or leverage transaction
merchant engages in commodity interest related activity for customers
as no more than ten percent of its total revenue on an annual basis,
the firm is not subject to a pending proceeding brought by the
Commission or a self-regulatory organization alleging fraud or failure
to supervise, and has not been found in such a proceeding to have
committed fraud or failed to supervise, as required by the Act, the
rules promulgated thereunder or the rules of a self-regulatory
organization, the person for whom exemption is sought and the person
designated in accordance with paragraphs (h)(1)(iii)(C) or
(h)(1)(iii)(D) of this section are listed as principals of the firm,
the fitness examination conducted by the National Futures Association
with respect to these persons discloses no derogatory information that
would disqualify any of such persons as a principal or as an associated
person, and the firm files with the National Futures Association
corporate or partnership resolutions stating that:
(A) Such supervisory person is not authorized to:
(1) Solicit or accept customers', retail forex customers', or
leverage customers' orders,
(2) Solicit a client's or prospective client's discretionary
account,
(3) Solicit funds, securities or property for a participation in a
commodity pool, or
(4) Exercise any line supervisory authority over those persons so
engaged;
(B) Such supervisory person has no authority with respect to
hiring, firing or other personnel matters involving persons engaged in
activities subject to regulation under the Act;
(C) Another person (or persons) designated therein, who is
registered as an associated person(s) or who has applied for
registration as an associated person(s) and is not subject to a pending
proceeding brought by the Commission or a self-regulatory organization
alleging fraud or failure to supervise, and has not been found in such
a proceeding to have committed fraud or failed to supervise, as
required by the Act, the rules promulgated thereunder or the rules of a
self-regulatory organization, holds and exercises full and final
supervisory authority, including authority to hire and fire personnel,
over the customer commodity interest related activities of the firm;
and
(D) If the person (or persons) so designated in accordance with
paragraph (h)(1)(iii)(C) of this section ceases to have the authority
referred to therein, the firm will notify the National Futures
Association within twenty days of such occurrence by means of a
subsequent resolution which resolution must also include the name of
another associated person (or persons) who has been vested with full
supervisory authority, including authority to hire and fire personnel,
over the customer commodity interest related activities of the firm in
the event that all of those previously designated in accordance with
paragraph (h)(1)(iii)(C) of this section have been relieved of such
authority. Subsequent changes in supervisory authority shall be
reported in the same manner; or
* * * * *
0
17. Section 3.21 is amended by:
0
a. Revising paragraph (b)(3); and
0
b. Revising paragraphs (c) introductory text, (c)(1) through (3), and
(c)(4)(i) to read as follows:
Sec. 3.21 Exemption from fingerprinting requirement in certain cases.
* * * * *
(b) * * *
(3) With respect to the fingerprints of a principal. An officer, if
the futures commission merchant, retail foreign exchange dealer,
commodity trading advisor, commodity pool operator, introducing broker,
or leverage transaction merchant with which the principal will be
affiliated is a corporation, a general partner, if a partnership, or
the sole proprietor, if a sole proprietorship.
(c) Outside directors. Any futures commission merchant, retail
foreign exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator or leverage transaction merchant that has a
principal who is a director but is not also an officer or employee of
the firm may, in lieu of submitting a fingerprint card in accordance
with the provisions of Sec. Sec. 3.10(a)(2) and 3.31(a)(2), file a
``Notice Pursuant to Rule 3.21(c)'' with the National Futures
Association. Such notice shall state, if true, that such outside
director:
(1) Is not engaged in:
(i) The solicitation or acceptance of customers' orders or retail
forex customers' orders,
(ii) The solicitation of funds, securities or property for a
participation in a commodity pool,
(iii) The solicitation of a client's or prospective client's
discretionary account,
(iv) The solicitation or acceptance of leverage customers' orders
for leverage transactions;
(2) Does not regularly have access to the keeping, handling or
processing of:
(i) Commodity interest transactions;
(ii) Customer funds, retail forex customer funds, leverage customer
funds, foreign futures or foreign options secured amount, or adjusted
net capital; or
(3) Does not have direct supervisory responsibility over persons
engaged in the activities referred to in paragraphs (c)(1) and (c)(2)
of this section; and
[[Page 55426]]
(4) * * *
(i) The name of the futures commission merchant, retail foreign
exchange dealer, introducing broker, commodity trading advisor,
commodity pool operator, leverage transaction merchant, or applicant
for registration in any of these capacities of which the person is an
outside director;
* * * * *
18. Section 3.30 is amended by revising paragraph (a) to read as
follows:
Sec. 3.30 Current address for purpose of delivery of communications
from the Commission or the National Futures Association.
(a) The address of each registrant, applicant for registration and
principal, as submitted on the application for registration (Form 7-R
or Form 8-R) or as submitted on the biographical supplement (Form 8-R)
shall be deemed to be the address for delivery to the registrant,
applicant or principal for any communications from the Commission or
the National Futures Association, including any summons, complaint,
reparation claim, order, subpoena, special call, request for
information, notice, and other written documents or correspondence,
unless the registrant, applicant or principal specifies another address
for this purpose: Provided, That the Commission or the National Futures
Association may address any correspondence relating to a biographical
supplement submitted for or on behalf of a principal to the futures
commission merchant, retail foreign exchange dealer, commodity trading
advisor, commodity pool operator, introducing broker, or leverage
transaction merchant with which the principal is affiliated and may
address any correspondence relating to the registration of an
associated person to the futures commission merchant, retail foreign
exchange dealer, commodity trading advisor, commodity pool operator,
introducing broker, or leverage transaction merchant with which the
associated person or the applicant for registration is or will be
associated as an associated person.
* * * * *
0
19. Section 3.31 is amended by revising paragraphs (a)(1), (b), (c),
and (d) to read as follows:
Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.
(a)(1) Each applicant or registrant as a futures commission
merchant, retail foreign exchange dealer, commodity trading advisor,
commodity pool operator, introducing broker, or leverage transaction
merchant shall, in accordance with the instructions thereto, promptly
correct any deficiency or inaccuracy in Form 7-R or Form 8-R which no
longer renders accurate and current the information contained therein.
Each such correction shall be made on Form 3-R and shall be prepared
and filed in accordance with the instructions thereto. Provided,
however, that where a registrant is reporting a change in the form of
organization from or to a sole proprietorship, the registrant must file
a Form 7-W regarding the pre-existing organization and a Form 7-R
regarding the newly formed organization.
* * * * *
(b) Each applicant or registrant as a floor broker, floor trader or
associated person, and each principal of a futures commission merchant,
retail foreign exchange dealer, commodity trading advisor, commodity
pool operator, introducing broker, or leverage transaction merchant
must, in accordance with the instructions thereto, promptly correct any
deficiency or inaccuracy in the Form 8-R or supplemental statement
thereto which renders no longer accurate and current the information
contained in the Form 8-R or supplemental statement. Each such
correction must be made on Form 3-R and must be prepared and filed in
accordance with the instructions thereto.
(c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf
of any person for the purpose of permitting that person to be an
associated person of a futures commission merchant, retail foreign
exchange dealer, commodity trading advisor, commodity pool operator,
introducing broker, or a leverage transaction merchant, that futures
commission merchant, retail foreign exchange dealer, commodity trading
advisor, commodity pool operator, introducing broker or leverage
transaction merchant must, within thirty days after the occurrence of
either of the following, file a notice thereof with the National
Futures Association indicating:
(i) The failure of that person to become associated with the
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator, introducing broker, or
leverage transaction merchant, and the reasons therefor; or
(ii) The termination of the association of the associated person
with the futures commission merchant, retail foreign exchange dealer,
commodity trading advisor, commodity pool operator, introducing broker,
or leverage transaction merchant, and the reasons therefor.
(2) Each person registered as, or applying for registration as, a
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator, introducing broker or
leverage transaction merchant must, within thirty days after the
termination of the affiliation of a principal with the registrant or
applicant, file a notice thereof with the National Futures Association.
(3) Any notice required by paragraph (c) of this section must be
filed on Form 8-T or on a Uniform Termination Notice for Securities
Industry Registration.
(d) Each contract market or derivatives transaction execution
facility that has granted trading privileges to a person who is
registered, has received a temporary license, or has applied for
registration as a floor broker or floor trader, must notify the
National Futures Association within sixty days after such person has
ceased having trading privileges on such contract market or derivatives
transaction execution facility.
* * * * *
0
20. Section 3.33 is amended by revising paragraphs (a) introductory
text, (b) introductory text, (b)(6), and (e) to read as follows:
Sec. 3.33 Withdrawal from registration.
(a) A futures commission merchant, retail foreign exchange dealer,
introducing broker, commodity trading advisor, commodity pool operator,
leverage transaction merchant, floor broker or floor trader may request
that its registration be withdrawn in accordance with the requirements
of this section if:
* * * * *
(b) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, introducing
broker, commodity trading advisor, commodity pool operator, or leverage
transaction merchant must be made on Form 7-W, and a request for
withdrawal from registration as a floor broker or floor trader must be
made on Form 8-W, completed and filed with National Futures Association
in accordance with the instructions thereto. The request for withdrawal
must be made by a person duly authorized by the registrant and must
specify:
* * * * *
(6) If a basis for withdrawal from registration under paragraph
(a)(1) of this section is that the registrant has ceased engaging in
activities requiring
[[Page 55427]]
registration, then, with respect to each capacity for which the
registrant has ceased such activities:
(i) That all customer, retail forex customer or option customer
agreements, if any, have been terminated;
(ii) That all customer, retail forex customer or option customer
positions, if any, have been transferred on behalf of customers or
option customers or closed;
(iii) That all customer, retail forex customer or option customer
cash balances, securities, or other property, if any, have been
transferred on behalf of customers, retail forex customers or option
customers or returned, and that there are no obligations to customers,
retail forex customers or option customers outstanding;
(iv) In the case of a commodity pool operator, that all interests
in, and assets of, any commodity pool have been redeemed, distributed,
or transferred, on behalf of the participants therein, and that there
are no obligations to such participants outstanding;
(v) In the case of a leverage transaction merchant:
(A) Either that all leverage customer agreements, if any, and all
leverage contracts have been terminated, and that all leverage customer
cash balances, securities or other property, if any, have been
returned, or
(B) Alternatively, that pursuant to Commission approval, the
leverage contract obligations of the leverage transaction merchant have
been assumed by another leverage transaction merchant and all leverage
customer cash balances, securities or other property, if any, have been
transferred to such leverage transaction merchant on behalf of leverage
customers or returned, and that there are no obligations to leverage
customers outstanding;
(vi) The nature and extent of any pending customer, retail forex
customer, option customer, leverage customer, or commodity pool
participant claims against the registrant, and, to the best of the
registrant's knowledge and belief, the nature and extent of any
anticipated or threatened customer, option customer, leverage customer,
or commodity pool participant claims against the registrant; and
(vii) In the case of a futures commission merchant or a retail
foreign exchange dealer which is a party to a guarantee agreement, that
all such agreements have been or will be terminated in accordance with
the provisions of Sec. 1.10(j) of this chapter not more than thirty
days after the filing of the request for withdrawal from registration.
* * * * *
(e) A request for withdrawal from registration as a futures
commission merchant, retail foreign exchange dealer, introducing
broker, commodity trading advisor, commodity pool operator, leverage
transaction merchant on Form 7-W, and a request for withdrawal from
registration as a floor broker or floor trader on Form 8-W, must be
filed with the National Futures Association and a copy of such request
must be sent by the National Futures Association within three business
days of the receipt of such withdrawal request to the Commodity Futures
Trading Commission, Division of Clearing and Intermediary Oversight,
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In
addition, any floor broker or floor trader requesting withdrawal from
registration must file a copy of his Form 8-W with each contract market
that has granted him trading privileges. Within three business days of
any determination by the National Futures Association under Sec.
3.10(d) to treat the failure by a registrant to file an annual Form 7-R
as a request for withdrawal, the National Futures Association shall
send the Commission notice of that determination.
* * * * *
0
21. Section 3.44 is amended by revising paragraphs (a)(1) through (5)
to read as follows:
Sec. 3.44 Temporary licensing of applicants for guaranteed
introducing broker registration.
(a) * * *
(1) A properly completed guarantee agreement (Form 1-FR part B)
from a futures commission merchant or retail foreign exchange dealer
which is eligible to enter into such an agreement pursuant to Sec.
1.10(j)(2) of this chapter;
(2) A Form 7-R properly completed in accordance with the
instructions thereto;
(3) A Form 8-R for the applicant, if a sole proprietor, and each
principal (including each branch office manager) thereof, properly
completed in accordance with the instructions thereto, all of whom
would be eligible for a temporary license if they had applied as
associated persons.
(4) A certification executed by a person duly authorized by the
futures commission merchant or retail foreign exchange dealer that has
executed the guarantee agreement required by paragraph (a)(1) of this
section, stating that:
(i) The futures commission merchant or retail foreign exchange
dealer has verified the information on the Forms 8-R filed pursuant to
paragraph (a)(3) of this section which relate to education and
employment history of the applicant's principals (including each branch
office manager) thereof during the preceding three years; and
(ii) To the best of the futures commission merchant's or retail
foreign exchange dealer's knowledge, information, and belief, all of
the publicly available information supplied by the applicant and its
principals and each branch office manager of the applicant on the Form
7-R and Forms 8-R, as appropriate, is accurate and complete; and
(5) The fingerprints of the applicant, if a sole proprietor, and of
each principal (including each branch office manager) thereof on
fingerprint cards provided by the National Futures Association for that
purpose: Provided, that a principal who has a current Form 8-R on file
with the National Futures Association or the Commission is not required
to submit a fingerprint card.
* * * * *
0
22. Section 3.45 is amended by revising paragraph (b) to read as
follows:
Sec. 3.45 Restrictions upon activities.
* * * * *
(b) An applicant for registration as an introducing broker who has
received a temporary license may be guaranteed by a futures commission
merchant or retail foreign exchange dealer other than the futures
commission merchant or retail foreign exchange dealer which provided
the initial guarantee agreement described in Sec. 3.44(a)(1) of this
subpart: Provided, That, at least 10 days prior to the effective date
of the termination of the existing guarantee agreement in accordance
with the provisions of Sec. 1.10 (j)(5) of this chapter, or such other
period of time as the National Futures Association may allow for good
cause shown, the applicant files with the National Futures
Association--
(1) Written notice of such termination and
(2) A new guarantee agreement with another futures commission
merchant or retail foreign exchange dealer effective the day following
the last effective date of the existing guarantee agreement.
0
23. Section 3.50 is amended by revising paragraph (b)(2) to read as
follows:
Sec. 3.50 Service.
* * * * *
(b) * * *
(2) Any futures commission merchant or retail foreign exchange
dealer which
[[Page 55428]]
has entered into a guarantee agreement in accordance with Sec. 1.10(j)
of this chapter, if the applicant or registrant is registered as or
applying for registration as an introducing broker.
* * * * *
0
24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to read
as follows:
Sec. 3.60 Procedure to deny, condition, suspend, revoke or place
restrictions upon registration pursuant to sections 8a(2), 8a(3) and
8a(4) of the Act.
* * * * *
(b) * * *
(2)(i) * * *
(B) In the case of a sponsor which is a futures commission
merchant, a retail foreign exchange dealer or a leverage transaction
merchant, the sponsor is not subject to the reporting requirements of
Sec. 1.12(b), Sec. 5.6(b) or Sec. 31.7(b) of this chapter,
respectively; and
* * * * *
PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS
0
25. The authority citation for part 4 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and
23.
0
26. Section 4.7 is amended by:
0
a. Revising paragraph (a)(1)(v)(B); and
0
b. Revising paragraph (a)(2)(i) to read as follows:
Sec. 4.7 Exemption from certain part 4 requirements for commodity
pool operators with respect to offerings to qualified eligible persons
and for commodity trading advisors with respect to advising qualified
eligible persons.
* * * * *
(a) * * *
(1) * * *
(v) * * *
(B) Has had on deposit with a futures commission merchant, for its
own account at any time during the six-month period preceding either
the date of sale to that person of a pool participation in the exempt
pool or the date that the person opens an exempt account with the
commodity trading advisor, at least $200,000 in exchange-specified
initial margin and option premiums, together with required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) for commodity interest transactions; or
* * * * *
(2) * * *
(i)(A) A futures commission merchant registered pursuant to section
4d of the Act, or a principal thereof;
(B) A retail foreign exchange dealer registered pursuant to section
2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;
* * * * *
0
27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to read
as follows:
Sec. 4.12 Exemption from provisions of part 4.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(C) Will not enter into commodity interest transactions for which
the aggregate initial margin and premiums, and required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) exceed 10 percent of the fair market value of
the pool's assets, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into; Provided,
however, That in the case of an option that is in-the-money at the time
of purchase, the in-the-money amount as defined in Sec. 190.01(x) of
this chapter may be excluded in computing such 10 percent; and
* * * * *
0
28. Section 4.13 is amended by:
0
a. Revising paragraph (a)(3)(ii)(A): and
0
b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:
Sec. 4.13 Exemption from registration as a commodity pool operator.
* * * * *
(a) * * *
(3) * * *
(ii) * * *
(A) The aggregate initial margin, premiums, and required minimum
security deposit for retail forex transactions (as defined in Sec.
5.1(m) of this chapter) required to establish such positions,
determined at the time the most recent position was established, will
not exceed 5 percent of the liquidation value of the pool's portfolio,
after taking into account unrealized profits and unrealized losses on
any such positions it has entered into; Provided, That in the case of
an option that is in-the-money at the time of purchase, the in-the-
money amount as defined in Sec. 190.01(x) of this chapter may be
excluded in computing such 5 percent; or
(B) * * *
(1) The term ``notional value'' shall be calculated for each such
futures position by multiplying the number of contracts by the size of
the contract, in contract units (taking into account any multiplier
specified in the contract), by the current market price per unit, and
for each such option position by multiplying the number of contracts by
the size of the contract, adjusted by its delta, in contract units
(taking into account any multiplier specified in the contract), by the
strike price per unit, and for each such retail forex transaction, by
calculating the value in U.S. Dollars of such transaction, at the time
the transaction was established, excluding for this purpose the value
in U.S. Dollars of offsetting long and short transactions, if any; and
* * * * *
0
29. Section 4.14 is amended by revising paragraph (a)(7) to read as
follows:
Sec. 4.14 Exemption from registration as a commodity trading advisor.
* * * * *
(a) * * *
(7)(i) It is registered under the Act as a leverage transaction
merchant and the person's trading advice is solely in connection with
its business as a leverage transaction merchant;
(ii) It is registered under the Act as a retail foreign exchange
dealer and the person's trading advice is solely in connection with its
business as a retail foreign exchange dealer.
* * * * *
0
30. Section 4.23 is amended by:
0
a. Revising paragraph (a)(1);
0
b. Revising paragraph (a)(7); and
0
c. Revising paragraph (b)(1) and (2) to read as follows:
Sec. 4.23 Recordkeeping.
* * * * *
(a) Concerning the commodity pool: (1) An itemized daily record of
each commodity interest transaction of the pool, showing the
transaction date, quantity, commodity interest, and, as applicable,
price or premium, delivery month or expiration date, whether a put or a
call, strike price, underlying contract for future delivery or
underlying physical, the futures commission merchant and/or retail
foreign exchange dealer carrying the account and the introducing
broker, if any, whether the commodity interest was purchased, sold
(including, in the case of a retail forex transaction, offset),
exercised, expired (including, in the case of a retail forex
transaction, whether it was rolled forward), and the gain or loss
realized.
* * * * *
(7) Copies of each confirmation of a commodity interest transaction
of the pool, each purchase and sale statement and each monthly
statement for the pool received from a futures commission
[[Page 55429]]
merchant or retail foreign exchange dealer.
* * * * *
(b) Concerning the commodity pool operator: (1) An itemized daily
record of each commodity interest transaction of the commodity pool
operator and each principal thereof, showing the transaction date,
quantity, commodity interest, and, as applicable, price or premium,
delivery month or expiration date, whether a put or a call, strike
price, underlying contract for future delivery or underlying physical,
the futures commission merchant or retail foreign exchange dealer
carrying the account and the introducing broker, if any whether the
commodity interest was purchased, sold, exercised, or expired, and the
gain or loss realized.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant or retail foreign exchange dealer to:
(i) The commodity pool operator relating to a personal account of
the pool operator; and
(ii) Each principal of the pool operator relating to a personal
account of such principal.
* * * * *
0
31. Section 4.24 is amended by:
0
a. Revising paragraph (b)(1) introductory text and the first three
sentences of the Risk Disclosure Statement in paragraph (b)(1);
0
b. Adding paragraph (b)(4);
0
c. Revising paragraph (e)(6);
0
d. Revising paragraph (g);
0
e. Revising paragraphs (h)(2) and (h)(4)(iii);
0
f. Revising paragraph (i)(2)(ii);
0
g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii) and
adding new paragraph (i)(2)(xii);
0
g. Revising paragraphs (j)(1)(vi) and (j)(3); and
0
h. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and
(l)(2)(i).
The addition and revisions read as follows:
Sec. 4.24 General disclosures required.
* * * * *
(b) Risk Disclosure Statement. (1) The following Risk Disclosure
Statement must be prominently displayed immediately following any
disclosures required to appear on the cover page of the Disclosure
Document as provided by the Commission, by any applicable federal or
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions.
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION
PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD
BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET
ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR
ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *
* * * * *
(4) If the pool may engage in retail Forex transactions, the Risk
Disclosure Statement must further state:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN
OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN
THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE
FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS
USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION
CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT
COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED
OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE
TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF
CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE
POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH
THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE
AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY
KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF
PRIORITY AND OTHER GENERAL CREDITORS.
* * * * *
(e) * * *
(6) If known, the futures commission merchant and/or retail foreign
exchange dealer through which the pool will execute its trades, and, if
applicable, the introducing broker through which the pool will
introduce its trades to the futures commission merchant and/or retail
foreign exchange dealer.
* * * * *
(g) Principal risk factors. A discussion of the principal risk
factors of participation in the offered pool. This discussion must
include, without limitation, risks relating to volatility, leverage,
liquidity, counterparty creditworthiness, as applicable to the types of
trading programs to be followed, trading structures to be employed and
investment activity (including retail forex transactions) expected to
be engaged in by the offered pool.
(h) * * *
(2) A description of the trading and investment programs and
policies that will be followed by the offered pool, including the
method chosen by the pool operator concerning how futures commission
merchants and/or retail foreign exchange dealers carrying the pool's
accounts shall treat offsetting positions pursuant to Sec. 1.46 of
this chapter, if the method is other than to close out all offsetting
positions or to close out offsetting positions on other than a first-
in, first-out basis, and any material restrictions or limitations on
trading required by the pool's organizational documents or otherwise.
This description must include, if applicable, an explanation of the
systems used to select commodity trading advisors, investee pools and
types of investment activity to which pool assets will be committed;
* * * * *
(4) * * *
(iii) If assets deposited by the pool as margin or as security
deposit generate income, to whom that income will be paid.
(i) * * *
(2) * * *
(ii) Brokerage fees and commissions, including interest income paid
to futures commission merchants, and any fees incurred to maintain an
open position in retail forex transactions;
* * * * *
(xii) Any costs or fees included in the spread between bid and
asked prices for retail forex transactions; and
* * * * *
(j) * * *
(1) * * *
(vi) Any other person providing services to the pool or soliciting
participants for the pool, or acting as a counterparty to the pool's
retail forex transactions (as defined in Sec. 5.1(m) of this chapter).
* * * * *
(3) Included in the description of such conflicts must be any
arrangement
[[Page 55430]]
whereby a person may benefit, directly or indirectly, from the
maintenance of the pool's account with the futures commission merchant
and/or retail foreign exchange dealer, or from the introduction of the
pool's account to a futures commission merchant and/or retail foreign
exchange dealer by an introducing broker (such as payment for order
flow or soft dollar arrangements) or from an investment of pool assets
in investee pools or funds or other investments.
* * * * *
(l) * * *
(1) * * *
(iii) The pool's futures commission merchants and/or retail foreign
exchange dealers and its introducing brokers, if any.
(2) With respect to a futures commission merchant and/or retail
foreign exchange dealer or an introducing broker, an action will be
considered material if:
(i) The action would be required to be disclosed in the notes to
the futures commission merchant's, retail foreign exchange dealer's or
introducing broker's financial statements prepared pursuant to
generally accepted accounting principles;
* * * * *
0
32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to read as
follows:
Sec. 4.25 Performance disclosures.
* * * * *
(c) * * *
(3) * * *
(ii) If a major commodity trading advisor has not previously traded
accounts, the pool operator must prominently display the following
statement:
(name of the major commodity trading advisor), A COMMODITY TRADING
ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of
the pool's funds available for commodity interest trading allocated to
that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING
HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.
* * * * *
Subpart C--Commodity Trading Advisors
0
33. Section 4.30 is revised to read as follows:
Sec. 4.30 Prohibited activities.
No commodity trading advisor may solicit, accept or receive from an
existing or prospective client funds, securities or other property in
the trading advisor's name (or extend credit in lieu thereof) to
purchase, margin, guarantee or secure any commodity interest of the
client; Provided, however, That this section shall not apply to a
future commission merchant that is registered as such under the Act or
to a leverage transaction merchant that is registered as a commodity
trading advisor under the Act or to a retail foreign exchange dealer
that is registered as such under the Act.
0
34. Section 4.33 is amended by:
0
a. Revising paragraph (a)(6); and
0
b. Revising paragraphs (b)(1) and (2) to read as follows:
Sec. 4.33 Recordkeeping.
* * * * *
(a) * * *
(6) Copies of each confirmation of a commodity interest
transaction, each purchase and sale statement and each monthly
statement received from a futures commission merchant or a retail
foreign exchange dealer.
* * * * *
(b) * * *
(1) An itemized daily record of each commodity interest transaction
of the commodity trading advisor, showing the transaction date,
quantity, commodity interest, and, as applicable, price or premium,
delivery month or expiration date, whether a put or a call, strike
price, underlying contract for future delivery or underlying physical,
the futures commission merchant and/or retail foreign exchange dealer
carrying the account and the introducing broker, if any, whether the
commodity interest was purchased, sold (including, in the case of a
retail forex transaction, offset), exercised, expired (including, in
the case of a retail forex transaction, whether it was rolled forward),
and the gain or loss realized.
(2) Each confirmation of a commodity interest transaction, each
purchase and sale statement and each monthly statement furnished by a
futures commission merchant or retail foreign exchange dealer to:
(i) The commodity trading advisor relating to a personal account of
the trading advisor; and
(ii) Each principal of the trading advisor relating to a personal
account of such principal.
* * * * *
0
35. Section 4.34 is amended by:
0
a. Revising paragraph (b);
0
b. Revising paragraph (e)(2);
0
c. Revising paragraphs (g) and (h);
0
d. Revising paragraph (i)(2);
0
e. Revising paragraphs (j)(1) and (j)(3);
0
f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory
text, and (k)(2)(i) to read as follows:
Sec. 4.34 General disclosures required.
* * * * *
(b) Risk Disclosure Statement. (1) The following Risk Disclosure
Statement must be prominently displayed immediately following any
disclosures required to appear on the cover page of the Disclosure
Document as provided by the Commission, by any applicable federal or
state securities laws and regulations or by any applicable laws of non-
United States jurisdictions:
RISK DISCLOSURE STATEMENT
THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL.
YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS
SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING
WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU
SHOULD BE AWARE OF THE FOLLOWING:
IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF
THE PREMIUM AND OF ALL TRANSACTION COSTS.
IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A
COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU
MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY
DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO
ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR
POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A
SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN
ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED
FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A
LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.
UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR
IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN
THE MARKET MAKES A ``LIMIT MOVE.''
THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR,
SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY
LIMIT YOUR LOSSES
[[Page 55431]]
TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE
TO EXECUTE SUCH ORDERS.
A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG''
OR ``SHORT'' POSITION.
THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY
INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF
LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.
IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO
SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE
NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE
SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR
ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page
number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR
ACCOUNT BY THE COMMODITY TRADING ADVISOR.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER
SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD
THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY
INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page
number).
(2)(i) If the commodity trading advisor may trade foreign futures
or options contracts pursuant to the offered trading program, the Risk
Disclosure Statement must further state the following:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY
ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON
MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY
LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH
OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES
REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE
RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES
JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE
YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR
CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO
TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR
LOCAL AND OTHER RELEVANT JURISDICTIONS.
(ii) If the commodity trading advisor may engage in retail forex
transactions pursuant to the offered trading program, the Risk
Disclosure Statement must further state the following:
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY
ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT
CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A
COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME
PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED
FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND
YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON
TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A
COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF
THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL
CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER
GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY
CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM
ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER
GENERAL CREDITORS.
FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN
THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR
RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.
(3) If the commodity trading advisor is not also a registered
futures commission merchant or a registered retail foreign exchange
dealer, the trading advisor must make the additional following
statement in the Risk Disclosure Statement, to be included as the last
paragraph thereof:
THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING
FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY
INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM
DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE
DEALER, AS APPLICABLE.
* * * * *
(e) * * *
(2) The futures commission merchant and/or retail foreign exchange
dealer with which the commodity trading advisor will require the client
to maintain its account or, if the client is free to choose the futures
commission merchant or retail foreign exchange dealer with which it
will maintain its account, the trading advisor must make a statement to
that effect; and
* * * * *
(g) Principal risk factors. A discussion of the principal risk
factors of this trading program. This discussion must include, without
limitation, risks due to volatility, leverage, liquidity, and
counterparty creditworthiness, as applicable to the trading program and
the types of transactions and investment activity expected to be
engaged in pursuant to such program (including retail forex
transactions, if any).
(h) Trading program. A description of the trading program, which
must include the method chosen by the commodity trading advisor
concerning how futures commission merchants and/or retail foreign
exchange dealers carrying accounts it manages shall treat offsetting
positions pursuant to Sec. 1.46 of this chapter, if the method is
other than to close out all offsetting positions or to close out
offsetting positions on other than a first-in, first-out basis, and the
types of commodity interests and other interests the commodity trading
advisor intends to trade, with a description of any restrictions or
limitations on such trading established by the trading advisor or
otherwise.
(i) * * *
(2) Where any fee is determined by reference to a base amount
including, but not limited to, ``net assets,'' ``gross profits,'' ``net
profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading
advisor must explain how such base amount will be calculated. Where any
fee is based on the difference between bid and asked prices on retail
forex transactions (as defined in Sec. 5.1(m) of this chapter), the
trading advisor must explain how such fee will be calculated;
* * * * *
(j) Conflicts of interest. (1) A full description of any actual or
potential conflicts of interest regarding any aspect of the trading
program on the part of:
[[Page 55432]]
(i) The commodity trading advisor;
(ii) Any futures commission merchant and/or retail foreign exchange
dealer with which the client will be required to maintain its commodity
interest account;
(iii) Any introducing broker through which the client will be
required to introduce its account to a futures commission merchant and/
or retail foreign exchange dealer; and
(iv) Any principal of the foregoing.
* * * * *
(3) Included in the description of any such conflict must be any
arrangement whereby the trading advisor or any principal thereof may
benefit, directly or indirectly, from the maintenance of the client's
commodity interest account with a futures commission merchant and/or
retail foreign exchange dealer, or the introduction of such account
through an introducing broker (such as payment for order flow or soft
dollar arrangements).
(k) * * *
(1) * * *
(ii) Any futures commission merchant or retail foreign exchange
dealer with which the client will be required to maintain its commodity
interest account; and
(iii) Any introducing broker through which the client will be
required to introduce its account to the futures commission merchant
and/or retail foreign exchange dealer.
(2) With respect to a futures commission merchant, retail foreign
exchange dealer or introducing broker, an action will be considered
material if:
(i) The action would be required to be disclosed in the notes to
the futures commission merchant's, retail foreign exchange dealer's or
introducing broker's financial statements prepared pursuant to
generally accepted accounting principles;
* * * * *
0
36. Part 5 is added to read as follows:
PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS
Sec.
5.1 Definitions.
5.2 Prohibited transactions.
5.3 Registration of persons engaged in retail forex transactions.
5.4 Applicability of part 4 of this chapter to commodity pool
operators and commodity trading advisors.
5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign
exchange dealers. futures commission merchants and introducing
brokers regarding retail forex transactions.
5.6 Maintenance of minimum financial requirements by retail foreign
exchange dealers and futures commission merchants offering or
engaging in retail forex transactions.
5.7 Minimum financial requirements for retail foreign exchange
dealers and futures commission merchants offering or engaging in
retail forex transactions.
5.8 Aggregate retail forex assets.
5.9 Security deposits for retail forex transactions.
5.10 Risk assessment recordkeeping requirements for retail foreign
exchange dealers.
5.11 Risk assessment reporting requirements for retail foreign
exchange dealers.
5.12 Financial reports of retail foreign exchange dealers.
5.13 Reporting to customers of retail foreign exchange dealers and
futures commission merchants; monthly and confirmation statements.
5.14 Records to be kept by retail foreign exchange dealers and
futures commission merchants.
5.15 Unlawful representations.
5.16 Prohibition of guarantees against loss.
5.17 Authorization to trade.
5.18 Trading and operational standards.
5.19 Pending legal proceedings.
5.20 Special calls for account and transaction information.
5.21 Supervision.
5.22 Registered futures association membership.
5.23 Notice of bulk transfers and bulk liquidations.
5.24 Applicability of other parts of this chapter.
5.25 Applicability of the Act.
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,
21, 23.
Sec. 5.1 Definitions.
(a) Affiliated person of a futures commission merchant means a
person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;
(b) Aggregate retail forex assets means an amount of liquid assets
held in accordance with Sec. 5.8 of this part;
(c) Associated person of an affiliated person of a futures
commission merchant means any natural person associated with an
affiliated person of a futures commission merchant as a partner,
officer or employee (or any natural person occupying a similar status
or performing similar functions), in any capacity which involves:
(1) The solicitation or acceptance of retail forex customers'
orders (other than in a clerical capacity); or
(2) The supervision of any person or persons so engaged;
(d)(1) Commodity pool operator, for purposes of this part, means
any person who operates or solicits funds, securities, or property for
a pooled investment vehicle that is not an eligible contract
participant as defined in section 1a(12) of the Act, and that engages
in retail forex transactions;
(2) Associated person of a commodity pool operator, for purposes of
this part, means any natural person associated with a commodity pool
operator as defined in paragraph (d)(1) of this section as a partner,
officer, employee, consultant or agent (or any natural person occupying
a similar status or performing similar functions), in any capacity
which involves:
(i) The solicitation of funds, securities, or property for a
participation in a pooled investment vehicle; or
(ii) The supervision of any person or persons so engaged;
(e)(1) Commodity trading advisor, for purposes of this part, means
any person who exercises discretionary trading authority or obtains
written authorization to exercise discretionary trading authority over
any account for or on behalf of any person that is not an eligible
contract participant as defined in section 1a(12) of the Act, in
connection with retail forex transactions;
(2) Associated person of a commodity trading advisor, for purposes
of this part, means any natural person associated with a commodity
trading advisor as defined in paragraph (e)(1) of this section as a
partner, officer, employee, consultant or agent (or any natural person
occupying a similar status or performing similar functions), in any
capacity which involves:
(i) The solicitation of a client's or prospective client's
discretionary account; or
(ii) The supervision of any person or persons so engaged;
(f)(1) Introducing broker, for purposes of this part, means any
person who solicits or accepts orders from a customer that is not an
eligible contract participant as defined in section 1a(12) of the Act,
in connection with retail forex transactions;
(2) Associated person of an introducing broker, for purposes of
this part, means any natural person associated with an introducing
broker as defined in paragraph (g)(1) of this section as a partner,
officer, employee, or agent (or any natural person occupying a similar
status or performing similar functions), in any capacity which
involves:
(i) The solicitation or acceptance of retail forex customers'
orders (other than in a clerical capacity); or
(ii) The supervision of any person or persons so engaged;
(g) Primarily or substantially means, when used to describe the
extent of a futures commission merchant's engagement in the activities
described in section 1a(20) of the Act, that:
[[Page 55433]]
(1) Such activities account for more than fifty percent of the
futures commission merchant's gross revenues, computed in accordance
with generally accepted accounting principles, on an annual basis;
(2) The futures commission merchant receives gross revenues,
computed in accordance with generally accepted accounting principles,
from such activities in excess of $500,000 in any twelve month period;
or
(3) The futures commission merchant is a clearing member of a
registered derivatives clearing organization.
(h)(1) Retail foreign exchange dealer means any person that is, or
that offers to be, the counterparty to a retail forex transaction,
except for a person described in sub-paragraph (aa), (bb), (cc)(AA),
(dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;
(2) Associated person of a retail foreign exchange dealer means any
natural person associated with a retail foreign exchange dealer as
defined in paragraph (i)(1) of this section as a partner, officer or
employee (or any natural person occupying a similar status or
performing similar functions), in any capacity which involves:
(i) The solicitation or acceptance of retail forex customers'
orders (other than in a clerical capacity); or
(ii) The supervision of any person or persons so engaged;
(i) Retail forex account means the account of a person who is not
an eligible contract participant as defined in section 1a(12) of the
Act, established with a retail foreign exchange dealer or a futures
commission merchant, in which account retail forex transactions
(including options on contracts for the purchase or sale of foreign
currency) with such retail foreign exchange dealer or futures
commission merchant as counterparty are undertaken, or which account is
established in order to enter into such transactions.
(j) Retail forex account agreement means the contractual agreement
between a futures commission merchant or retail foreign exchange dealer
and any person who is not an eligible contract participant as defined
in section 1a(12) of the Act, which agreement contains the terms
governing the person's retail forex account with such futures
commission merchant or retail foreign exchange dealer.
(k) Retail forex customer means a person, other than an eligible
contract participant as defined in section 1a(12) of the Act, acting on
its own behalf and trading in any account, agreement, contract or
transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
(l) Retail forex obligation means the net credit balance at a
retail foreign exchange dealer or futures commission merchant that
would be obtained by combining all money, securities and property
deposited by a retail forex customer into a retail forex account or
accounts, adjusted for the realized and unrealized net profit or loss,
if any, accruing on the open trades, contracts or transactions in the
retail forex account or accounts, without including any retail forex
customers' accounts that contain negative net liquidating balances.
(m) Retail forex transaction means any account, agreement, contract
or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the
Act. A retail forex transaction does not include an account, agreement,
contract or transaction in foreign currency that is a contract of sale
of a commodity for future delivery (or an option thereon) that is
executed, traded on or otherwise subject to the rules of a contract
market designated pursuant to section 5(a) of the Act or a derivatives
transaction execution facility registered pursuant to section 5a(c) of
the Act.
Sec. 5.2 Prohibited transactions.
(a) Scope. The provisions of this section shall be applicable to
any retail forex transaction.
(b) Fraudulent conduct prohibited. It shall be unlawful for any
person, by use of the mails or by any means or instrumentality of
interstate commerce, directly or indirectly, in or in connection with
any retail forex transaction:
(1) To cheat or defraud or attempt to cheat or defraud any person;
(2) Willfully to make or cause to be made to any person any false
report or statement or cause to be entered for any person any false
record; or
(3) Willfully to deceive or attempt to deceive any person by any
means whatsoever.
(c) Acting as counterparty and exercising discretion prohibited.
(1) No person who acts as the counterparty for any retail forex
transaction may do so for an account for which the person or any
affiliate of the person is authorized (by contract, power of attorney
or otherwise) to cause transactions to be effected without the client's
specific authorization.
(2) For purposes of this paragraph (c), an ``affiliate'' of a
person means a person controlling, controlled by or under common
control with, the first person.
Sec. 5.3 Registration of persons engaged in retail forex
transactions.
(a) Subject to paragraph (b) of this section, each of the following
is subject to the registration provisions under the Act and to part 3
of this chapter:
(1)(i) Any affiliated person of a futures commission merchant, as
defined in Sec. 5.1(a) of this part, which affiliated person:
(A) Solicits or accepts orders from any person that is not an
eligible contract participant in connection with any retail forex
transaction; or
(B) Accepts money, securities, or property (or extends credit in
lieu thereof) in connection with such solicitation or acceptance of
orders in order to engage in any retail forex transaction, is required
to register as a retail foreign exchange dealer; and
(ii) Any associated person of an affiliated person of a futures
commission merchant, as defined in Sec. 5.1(c) of this part, is
required to register as an associated person of an affiliated person of
a futures commission merchant.
(2)(i) Any commodity pool operator, as defined in Sec. 5.1(d)(1)
of this part, is required to register as a commodity pool operator;
(ii) Any associated person of a commodity pool operator, as defined
in Sec. 5.1(d)(2) of this part, is required to register as an
associated person of a commodity pool operator;
(3)(i) Any commodity trading advisor, as defined in Sec. 5.1(e)(1)
of this part, is required to register as a commodity trading advisor;
(ii) Any associated person of a commodity trading advisor, as
defined in Sec. 5.1(e)(2) of this part, is required to register as an
associated person of a commodity trading advisor;
(4)(i) Any person registered as a futures commission merchant:
(A) That is not primarily or substantially engaged in the business
activities described in section 1a(20) of the Act;
(B) That solicits or accepts orders from any person that is not an
eligible contract participant in connection with any retail forex
transaction; and
(C) That accepts money, securities, or property (or extends credit
in lieu thereof) in connection with such solicitation or acceptance of
orders in order to engage in retail forex transactions, is required to
register as a retail foreign exchange dealer;
(ii) Any associated person of a futures commission merchant
described in paragraph (a)(4)(i) of this section is required to
register as an associated person of a futures commission merchant;
(5)(i) Any introducing broker, as defined in Sec. 5.1(f)(1) of
this part, is required to register as an introducing broker;
[[Page 55434]]
(ii) Any associated person of an introducing broker, as defined in
Sec. 5.1(f)(2) of this part, is required to register as an associated
person of an introducing broker;
(6)(i) Any retail foreign exchange dealer, as defined in Sec.
5.1(h)(1) of this part is required to register as a retail foreign
exchange dealer;
(ii) Any associated person of a retail foreign exchange dealer, as
defined in Sec. 5.1(h)(2) of this part, is required to register as an
associated person of a retail foreign exchange dealer;
(b) Any person described in paragraph (a) of this section that is
already registered in the required capacity specified in paragraph (a)
is not required under this section to register twice in the same
capacity; Provided, however, that a person already registered as an
associated person of one class of registrant may also be required to
register as an associated person of another class of registrant in
order to comply with this section.
Sec. 5.4 Applicability of part 4 of this chapter to commodity pool
operators and commodity trading advisors.
Part 4 of this chapter applies to any person required pursuant to
the provisions of this part 5 to register as a commodity pool operator
or as a commodity trading advisor. Failure by any such person to comply
with the requirements of part 4 will constitute a violation of this
section and the relevant section of part 4.
Sec. 5.5 Distribution of ``Risk Disclosure Statement'' by retail
foreign exchange dealers, futures commission merchants and introducing
brokers regarding retail forex transactions.
(a) Except as provided in Sec. 5.23 of this part, no retail
foreign exchange dealer, futures commission merchant, or in the case of
an introduced account no introducing broker, may open an account that
will engage in retail forex transactions for a retail forex customer,
unless the retail foreign exchange dealer, futures commission merchant
or introducing broker first:
(1)(i) In the case of a retail foreign exchange dealer or a person
required to register as an introducing broker solely by reason of this
part, furnishes the retail forex customer with a separate written
disclosure statement containing only the language set forth in
paragraph (b) of this section and the disclosure required by paragraph
(e) of this section;
(ii) In the case of a futures commission merchant or a person
required to register as an introducing broker because it engages in the
activities described in Sec. 1.3(mm) of this chapter, furnishes the
retail forex customer with a separate written disclosure statement
containing only the language set forth in paragraph (b) of this section
and the disclosure required by paragraph (e) of this section; Provided,
however, that the disclosure statement may be attached to other
documents as the initial page(s) of such documents and as the only
material on such page(s); and
(2) Receives from the retail forex customer an acknowledgment
signed and dated by the retail forex customer that he received and
understood the disclosure statement.
(b) The language set forth in the written disclosure statement
required by paragraph (a) of this section shall be as follows:
RISK DISCLOSURE STATEMENT
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED
TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A
FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR
COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED
HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH
TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT.
YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS
BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER
IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE
YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM
THE REGISTRATION STATUS OF YOUR COUNTERPARTY.
The off-exchange foreign currency trading you are entering into is
not conducted on an interbank market, nor is it conducted on a futures
exchange subject to regulation as a designated contract market by the
Commodity Futures Trading Commission. The foreign currency trades you
transact are trades with the futures commission merchant or retail
foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER
IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when
you lose money trading, your dealer is making money on such trades, in
addition to any fees, commissions, or spreads the dealer may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY
TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR
ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE
GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.
Any trading platform that you may use to enter off-exchange foreign
currency transactions is only connected to your futures commission
merchant or retail foreign exchange dealer. You are accessing that
trading platform only to transact with your dealer. You are not trading
with any other entities or customers of the dealer by accessing such
platform. The availability and operation of any such platform,
including the consequences of the unavailability of the trading
platform for any reason, is governed only by the terms of your account
agreement with the dealer.
(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.
All of your rights associated with your retail forex trading,
including the manner and denomination of any payments made to you, are
governed by the contract terms established in your account agreement
with the futures commission merchant or retail foreign exchange dealer.
Funds deposited by you with a futures commission merchant or retail
foreign exchange dealer for trading off-exchange foreign currency
transactions are not subject to the customer funds protections provided
to customers trading on a contract market that is designated by the
Commodity Futures Trading Commission. Your dealer may commingle your
funds with its own operating funds or use them for other purposes. In
the event your dealer becomes bankrupt, any funds the dealer is holding
for you in addition to any amounts owed to you resulting from trading,
whether or not any assets are maintained in separate deposit accounts
by the dealer, may be treated as an unsecured creditor's claim.
(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY
TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR
MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.
Your ability to close your transactions or offset positions is
limited to what your dealer will offer to you, as there is no other
market for these transactions. Your dealer may offer any prices it
wishes, and it may offer prices derived
[[Page 55435]]
from outside sources or not in its discretion. Your dealer may
establish its prices by offering spreads from third party prices, but
it is under no obligation to do so or to continue to do so. Your dealer
may offer different prices to different customers at any point in time
on its own terms. The terms of your account agreement alone govern the
obligations your dealer has to you to offer prices and offer offset or
liquidating transactions in your account and make any payments to you.
The prices offered by your dealer may or may not reflect prices
available elsewhere at any exchange, interbank, or other market for
foreign currency.
(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS
The futures commission merchant or retail foreign exchange dealer
may compensate introducing brokers for introducing your account in ways
which are not disclosed to you. Such paid solicitors are not required
to have, and may not have, any special expertise in trading, and may
have conflicts of interest based on the method by which they are
compensated. Solicitors working on behalf of futures commission
merchants and retail foreign exchange dealers are required to register.
You should confirm that they are, in fact registered. You should
thoroughly investigate the manner in which all such solicitors are
compensated and be very cautious in granting any person or entity
authority to trade on your behalf. You should always consider obtaining
dated written confirmation of any information you are relying on from
your dealer or a solicitor in making any trading or account decisions.
FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY
DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR
CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS
MAY INDICATE POTENTIAL SALES FRAUD.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND
OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS
WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
I hereby acknowledge that I have received and understood this risk
disclosure statement.
-----------------------------------------------------------------------
Date
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Signature of Customer
(c) The acknowledgment required by paragraph (a) of this section
must be retained by the retail foreign exchange dealer, futures
commission merchant or introducing broker in accordance with Sec. 1.31
of this chapter.
(d) This section does not relieve a retail foreign exchange dealer,
futures commission merchant or introducing broker from any other
disclosure obligation it may have under applicable law.
(e)(1) Immediately following the language set forth in paragraph
(b) of this section, the statement required by paragraph (a) of this
section shall include, for each of the most recent four calendar
quarters during which the counterparty maintained retail forex customer
accounts:
(i) The total number of non discretionary retail forex customer
accounts maintained by the retail foreign exchange dealer or futures
commission merchant;
(ii) The percentage of such accounts that were profitable during
the quarter; and
(iii) The percentage of such accounts that were not profitable
during the quarter.
(2) Identification of retail forex customer accounts for the
purpose of this disclosure and the calculation in determining whether
each such account was profitable or not profitable must be made in
accordance with Sec. 5.18(i) of this part. Such statement of
profitable trades shall include the following legend: PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each retail foreign
exchange dealer or futures commission merchant shall provide, upon
request, to any retail forex customer or prospective retail forex
customer the total number of non discretionary retail forex accounts
maintained by such foreign exchange dealer or futures commission
merchant, the percentage of such accounts that were profitable and the
percentage of such accounts that were not profitable, calculated in
accordance with Sec. 5.18(i) of this part, for each calendar quarter
during the most recent five year period during which such retail
foreign exchange dealer or futures commission merchant maintained non
discretionary retail forex customer accounts.
Sec. 5.6 Maintenance of minimum financial requirements by retail
foreign exchange dealers and futures commission merchants offering or
engaging in retail forex transactions.
(a) Each futures commission merchant offering or engaging in retail
forex transactions or who files an application for registration as a
futures commission merchant that will offer or engage in retail forex
transactions and each person registered as a retail foreign exchange
dealer or who files an application for registration as a retail foreign
exchange dealer, who knows or should have known that its adjusted net
capital at any time is less than the minimum required by Sec. 5.7 of
this part or by the capital rule of a registered futures association of
which it is a member, must:
(1) Give telephonic notice, to be confirmed in writing by facsimile
notice, that the applicant's or registrant's adjusted net capital is
less than that required by Sec. 5.7 of this part. The notice must be
given immediately after the applicant or registrant knows or should
know that its adjusted net capital is less than that required by any of
the aforesaid rules to which the applicant or registrant is subject;
and
(2) Provide together with such notice documentation in such form as
necessary to adequately reflect the applicant's or registrant's capital
condition as of any date such person's adjusted net capital is less
than the minimum required. The applicant or registrant must provide
similar documentation for other days as the Commission may request.
(b) Each applicant or registrant, who knows or should have known
that its adjusted net capital at any time is less than the greatest of:
(1) $22,000,000;
(2) 110 percent of the amount required by Sec. 5.7(a)(1)(i)(B) of
this part; or
(3) 110 percent of the amount of adjusted net capital required by a
registered futures association of which the futures commission merchant
or retail foreign exchange dealer is a member, must file written notice
to that effect within 24 hours of such event.
(c) If an applicant or registrant at any time fails to make or keep
current the books and records required by these regulations, such
applicant or registrant must, on the same day such event occurs,
provide facsimile notice of such fact, specifying the books and records
which have not been made or which are not current, and within 48 hours
after giving such notice file a written report stating what steps have
been and are being taken to correct the situation.
(d) Whenever any applicant or registrant discovers or is notified
by an independent public accountant, pursuant to Sec. 1.16(e)(2) of
this chapter, of the existence of any material inadequacy, as specified
in Sec. 1.16(d)(2) of this chapter, such applicant or registrant must
give facsimile notice of such material inadequacy within 24
[[Page 55436]]
hours, and within 48 hours after giving such notice file a written
report stating what steps have been and are being taken to correct the
material inadequacy.
(e) Whenever any self-regulatory organization learns that a member
registrant has failed to file a notice or written report as required by
Sec. 5.6 of this part, that self-regulatory organization must
immediately report this failure by telephone, confirmed in writing
immediately by facsimile notice, as provided in paragraph (h) of this
section.
(f) A retail foreign exchange dealer or a futures commission
merchant offering or engaging in retail forex transactions shall
provide written notice of a substantial reduction in capital as
compared to that last reported in a financial report filed with the
Commission pursuant to Sec. 5.12 of this part. This notice shall be
provided as follows:
(1) If any event or series of events, including any withdrawal,
advance, loan or loss cause, on a net basis, a reduction in net capital
of 20 percent or more, notice must be provided within two business days
of the event or series of events causing the reduction; and
(2) If the equity capital of the retail foreign exchange dealer or
futures commission merchant offering or engaging in retail forex
transactions or the equity capital of a subsidiary or affiliate of the
retail foreign exchange dealer or futures commission merchant offering
or engaging in retail forex transactions consolidated pursuant to Sec.
1.17(f) of this chapter would be withdrawn by action of a stockholder
or a partner or a limited liability company member or by redemption or
repurchase of shares of stock by any of the consolidated entities or
through the payment of dividends or any similar distribution, or an
unsecured advance or loan would be made to a stockholder, partner, sole
proprietor, limited liability company member, employee or affiliate,
such that the withdrawal, advance or loan would cause, on a net basis,
a reduction in excess adjusted net capital of 30 percent or more,
notice must be provided at least two business days prior to the
withdrawal, advance or loan that would cause the reduction: Provided,
however, That the provisions of paragraphs (f)(1) and (f)(2) of this
section do not apply to any retail foreign exchange transaction in the
ordinary course of business between a retail foreign exchange dealer
and any affiliate where the retail foreign exchange dealer makes
payment to or on behalf of such affiliate for such transaction and then
receives payment from such affiliate for such transaction within two
business days from the date of the transaction.
(3) Upon receipt of such notice from a futures commission merchant
offering or engaging in retail forex transactions or a retail foreign
exchange dealer, the Director of the Division of Clearing and
Intermediary Oversight or the Director's designee may require that the
futures commission merchant offering or engaging in retail forex
transactions or retail foreign exchange dealer provide or cause a
Material Affiliated Person (as that term is defined in Sec. 5.10(a)(2)
of this part) to provide, within three business days from the date of
the request or such shorter period as the Director or designee may
specify, such other information as the Director or designee determines
to be necessary based upon market conditions, reports provided by the
retail foreign exchange dealer or futures commission merchant offering
or engaging in retail forex transactions, or other available
information.
(g) Whenever a person registered as a futures commission merchant
offering or engaging in retail forex transactions or a retail foreign
exchange dealer knows or should know that the total amount of its
retail forex obligation exceeds the amount of the aggregate retail
forex assets the registrant maintains in accordance with the provisions
of Sec. 5.8 of this chapter, the registrant must report such
deficiency immediately by telephone notice, confirmed immediately in
writing by facsimile notice.
(h) Every notice and written report required to be given or filed
with the Commission by this section by an applicant must be filed with
the regional office of the Commission with jurisdiction over the state
in which the applicant's principal place of business is located, and
with the National Futures Association. Every notice and written report
required to be given or filed with the Commission by this section by a
registrant or self-regulatory organization must be filed with the
regional office of the Commission with jurisdiction over the state in
which the registrant's principal place of business is located, and with
the registrant's designated self-regulatory organization. In addition,
every notice and written report required to be given by this section
must also be filed with the Chief Accountant of the Division of
Clearing and Intermediary Oversight at the Commission's principal
office in Washington, DC.
(i) In lieu of filing paper copies with the Commission, all filings
or other notices prepared by a futures commission merchant or retail
foreign exchange dealer pursuant to this section may be submitted to
the Commission in electronic form using a form of user authentication
assigned in accordance with procedures established by or approved by
the Commission, and otherwise in accordance with instructions issued by
or approved by the Commission, if the futures commission merchant,
retail foreign exchange dealer or a designated self-regulatory
organization has provided the Commission with the means necessary to
read and to process the information contained in such report. Any such
electronic submission must clearly indicate the registrant or applicant
on whose behalf such filing is made and the use of such user
authentication in submitting such filing will constitute and become a
substitute for the manual signature of the authorized signer.
Sec. 5.7 Minimum financial requirements for retail foreign exchange
dealers and futures commission merchants offering or engaging in retail
forex transactions.
(a)(1)(i) Each futures commission merchant offering or engaging in
retail forex transactions and each retail foreign exchange dealer must
maintain adjusted net capital equal to or in excess of the greatest of:
(A) $20,000,000;
(B) $20,000,000 plus five percent of the futures commission
merchant's or retail foreign exchange dealer's total retail forex
obligation in excess of $10,000,000;
(C) any amount required under Sec. 1.17 of this chapter, as
applicable; or
(D) the amount of adjusted net capital required by a registered
futures association of which the futures commission merchant or retail
foreign exchange dealer is a member.
(ii) Section 1.17 of this chapter shall apply to retail foreign
exchange dealers as if such retail foreign exchange dealers were
futures commission merchants, or as applicable, applicants or
registrants, as stated in Sec. 1.17 for the purpose of determining the
adjusted net capital under this section. For the purpose of applying
this section, ``applicant'' or ``registrant'' shall include retail
foreign exchange dealers and futures commission merchants offering or
engaging in retail forex transactions and applicants therefore.
(2) No person applying for registration as a retail foreign
exchange dealer or a futures commission merchant that will engage in
retail forex transactions shall be so registered unless such person
affirmatively demonstrates to the satisfaction of a registered futures
association that it complies with the financial requirements of this
section.
[[Page 55437]]
(3) Each registrant must be in compliance with this section at all
times and must be able to demonstrate such compliance to the
satisfaction of the Commission or the registrant's designated self-
regulatory organization.
(4) A registrant who is not in compliance with this section, or is
unable to demonstrate such compliance as required by paragraph (a)(3)
of this section, shall, as directed by and under the supervision of the
Commission or the registrant's designated self-regulatory organization,
either liquidate or transfer all retail forex accounts (including the
novation of retail forex contracts) and refund or transfer all funds
associated with such retail forex accounts and immediately cease
offering or engaging in retail forex transactions until such time as
the firm is able to demonstrate to the Commission or the registrant's
designated self-regulatory organization such compliance: Provided,
however, That if such registrant immediately demonstrates to the
satisfaction of the Commission or the registrant's designated self-
regulatory organization the ability to achieve compliance, the
Commission or the registrant's designated self-regulatory organization
may in its discretion allow such registrant up to a maximum of 10
business days, or such additional time as determined by the Commission,
in which to achieve compliance without having to liquidate positions or
transfer accounts and cease doing business as required above. Nothing
in this paragraph (a)(4) shall be construed as preventing the
Commission or the registrant's designated self-regulatory organization
from taking action against a registrant for non-compliance with any of
the provisions of this section.
(b) For the purposes of this section:
(1) Where the applicant or registrant has an asset or liability
which is defined in Securities Exchange Act Rule 15c3-1 (Sec.
240.15c3-1 of this title) the inclusion or exclusion of all or part of
such asset or liability for the computation of adjusted net capital
shall be in accordance with Sec. 240.15c3-1 of this title, unless
specifically stated otherwise in this section or in Sec. 1.17 of this
chapter.
(2) The adjusted net capital of an applicant or registrant for the
purpose of this section shall be determined by the application of Sec.
1.17 pursuant to paragraph (a)(1)(ii) of this section, with the
following additions:
(i) All positions in retail forex accounts and other financial
positions and instruments of the applicant or registrant must be marked
to market and adjusted daily by referencing to current market prices or
rates of exchange.
(ii) Current assets must exclude any retail forex account which
liquidates to a deficit or contains a debit ledger balance only and is
not secured in accordance with Sec. 1.17(c)(3).
(iii) Current assets must exclude any unsecured receivable accrued
from any over-the-counter transaction in foreign currency, options on
foreign currency or options on contracts for the purchase or sale of
foreign currency, or arising from the deposit of collateral or
compensating balances with respect to such transactions, unless such
unsecured receivable is from a person who is an eligible contract
participant that also is:
(A) A bank or trust company regulated by a United States banking
regulator;
(B) A broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory Authority;
(C) A futures commission merchant registered with the Commission
and a member of the National Futures Association;
(D) A retail foreign exchange dealer registered with the Commission
and a member of the National Futures Association;
(E) An entity regulated as a foreign equivalent of any of the
persons listed in paragraphs (b)(2)(iii)(A) through (D) of this
section, if such person is regulated in a money center country as
defined in Sec. 1.49 of this chapter and recognized by the futures
commission merchant's or retail foreign exchange dealer's designated
self-regulatory organization as a foreign equivalent;
(F) Any other entity approved by the futures commission merchant's
or retail foreign exchange dealer's designated self-regulatory
organization.
(iv) The value attributed to any retail forex transaction that is
an option shall be the difference between the option's exercise value
or striking value and the market value of the underlying. In the case
of a call, if the market value of the underlying is less than the
exercise value or striking value of such call, it shall be given no
value; and, in the case of a put, if the market value of the underlying
is more than the exercise value or striking value of the put, it shall
be given no value.
(v)(A) In computing adjusted net capital, the capital deductions
set forth in Sec. 1.17(c)(5)(ii) of this chapter shall apply to retail
forex transactions other than options. The capital deductions which
apply are six percent for net positions in Euros, British pounds,
Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net
positions in all other foreign currencies, Provided, however, That
there shall be no capital deductions for retail forex transactions
covered (as defined in Sec. 1.17(j) of this chapter) by the applicant
or registrant by open futures contracts to the extent such futures
contracts are not otherwise designated as cover for any other net
capital purposes. For purposes of this paragraph (b)(2)(v)(A), such
retail forex transactions shall be treated as if they were inventory
and cover were therefore applicable. A retail foreign exchange dealer
or futures commission merchant may not use an affiliate (unless
approved by the firm's designated self-regulatory organization) or any
person that is considered unregulated under the rules of the firm's
designated self-regulatory organization to cover its currency positions
for purposes of this section.
(B) In computing adjusted net capital, the capital deductions set
forth in Sec. 1.17(c)(5)(vi) of this chapter shall apply to all retail
forex transactions that are options.
(C) For the purpose of applying capital deductions on open
proprietary futures positions under Sec. 1.17(c)(5)(x) of this
chapter, net or individual positions in retail forex transactions shall
not constitute cover under Sec. 1.17(j) for the purpose of applying
such charges.
(c) An applicant or registrant must prepare, and keep current,
ledgers or other similar records which show or summarize, with
appropriate references to supporting documents, each transaction
affecting the applicant's or registrant's asset, liability, income,
expense and capital accounts, and in which (except as otherwise
permitted in writing by the Commission) all the applicant's or
registrant's asset, liability and capital accounts are classified into
the account classification subdivisions specified on Form 1-FR-FCM.
Each applicant or registrant shall prepare and keep current such
records.
(d) An applicant or registrant must make and keep as a record in
accordance with Sec. 5.14 of this part formal computations of its
adjusted net capital and of its minimum financial requirements pursuant
to this section as of the close of business each month and on other
such dates called for by the Commission, the National Futures
Association, or another self-regulatory organization of which the firm
is a member. Such computations must be completed and made available for
inspection by any representative of the Commission, the National
Futures Association, a self-regulatory organization of which the firm
is a member, or the United States Department of Justice commencing the
[[Page 55438]]
first month-end after the date the application for registration is
filed.
Sec. 5.8 Aggregate retail forex assets.
(a) Each retail foreign exchange dealer and futures commission
merchant offering or engaging in retail forex transactions shall
calculate its total retail forex obligation and shall at all times hold
assets solely of the type permissible under Sec. 1.25 of this chapter
equal to or in excess of the total retail forex obligation at one or
more qualifying institutions in the United States or money center
countries as defined in Sec. 1.49 of this chapter.
(b) For assets held in the United States, a qualifying institution
is:
(1) A bank or trust company regulated by a United States banking
regulator;
(2) A broker-dealer registered with the Securities and Exchange
Commission and a member of the Financial Industry Regulatory Authority;
or
(3) A futures commission merchant registered with the Commission
and a member of the National Futures Association.
(c) For assets held in a money center country, a qualifying
institution is:
(1) A bank or trust company regulated in a money center country,
Provided that the bank or trust company has regulatory capital in
excess of $1 billion;
(2) An entity regulated in a money center country as an equivalent
of a broker-dealer or futures commission merchant as determined by the
retail foreign exchange dealer's or futures commission merchant's
designated self-regulatory organization, Provided that the entity
maintains regulatory capital in excess of $100 million; or
(3) A futures commission merchant registered with the Commission
and a member of the National Futures Association.
(d) Assets held in a money center country are not eligible to meet
the requirements of paragraph (a) of this section unless the retail
foreign exchange dealer or futures commission merchant has entered into
an agreement that is acceptable to the firm's designated self-
regulatory organization and that authorizes the qualifying institution
to provide account information to the Commission and the firm's
designated self-regulatory organization.
(e) In computing its adjusted net capital pursuant to Sec. 5.7 of
this part, a retail foreign exchange dealer or futures commission
merchant may not include aggregate retail forex assets as current
assets or otherwise record any property received from retail forex
customers as an asset without recording a corresponding liability to
the retail forex customers.
Sec. 5.9 Security deposits for retail forex transactions.
(a) Each futures commission merchant engaging, or offering to
engage, in retail forex transactions and each retail foreign exchange
dealer must collect from each retail forex customer a minimum security
deposit for each retail forex transaction equal to the applicable
percentage as set by the registered futures association of which they
are a member; Provided, that the registered futures association's
security deposit requirement cannot be less than:
(1) 2% of the notional value of the retail forex transaction for
major currency pairs and 5% of the notional value of the retail forex
transaction for all other currency pairs;
(2) For short options, 2% for major currency pairs and 5% for all
other currency pairs of the notional value of the retail forex
transaction, plus the premium received by the retail forex customer; or
(3) For long options, the full premium charged and received by the
futures commission merchant or retail foreign exchange dealer from the
retail forex customer.
(b) Security deposits must be made in the form of cash or other
financial instruments that comply with the requirements specified in
Sec. 1.25 of this chapter.
(c) A futures commission merchant or retail foreign exchange dealer
is required to collect additional security deposits from a retail forex
customer, or liquidate the retail forex customer's positions, if the
amount of the retail forex customer's security deposits maintained with
the futures commission merchant or retail foreign exchange dealer are
not sufficient to meet the requirements of this section.
(d) A major currency pair security deposit percentage is only
applicable when both sides of a retail over-the-counter foreign
exchange transaction involve major currencies.
(e) Any registered futures association whose members serve as
counterparties to retail forex transaction shall designate which
currencies are ``major currencies'', and shall review, no less
frequently than annually, major currency designations and security
deposit requirements, and shall adjust the designations and
requirements as necessary.
Sec. 5.10 Risk assessment recordkeeping requirements for retail
foreign exchange dealers.
(a) Requirement to maintain and preserve information. (1) Each
retail foreign exchange dealer registered with the Commission pursuant
to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and
preserve the following information:
(i) An organizational chart which includes the retail foreign
exchange dealer and each of its affiliated persons. Included in the
organizational chart shall be a designation of which affiliated persons
are ``Material Affiliated Persons'' as that term is used in paragraph
(a)(2) of this section, which Material Affiliated Persons file routine
financial or risk exposure reports with the Securities and Exchange
Commission, a federal banking agency, an insurance commissioner or
other similar official or agency of a state, or a foreign regulatory
authority, and which Material Affiliated Persons are dealers in
financial instruments with off-balance sheet risk and, if a Material
Affiliated Person is such a dealer, whether it is also an end-user of
such instruments;
(ii) Written policies, procedures, or systems concerning the retail
foreign exchange dealer's:
(A) Method(s) for monitoring and controlling financial and
operational risks to it resulting from the activities of any of its
affiliated persons;
(B) Financing and capital adequacy, including information regarding
sources of funding, together with a narrative discussion by management
of the liquidity of the material assets of the retail foreign exchange
dealer, the structure of debt capital, and sources of alternative
funding;
(C) Establishing and maintaining internal controls with respect to
market risk, credit risk, and other risks created by the retail foreign
exchange dealer's trading activities, including systems and policies
for supervising, monitoring, reporting and reviewing trading activities
in forex transactions, securities, futures contracts, commodity
options, forward contracts and financial instruments; policies for
hedging or managing risks created by trading activities or supervising
accounts carried for affiliates, including a description of the types
of reviews conducted to monitor positions; and policies relating to
restrictions or limitations on trading activities: Provided, however,
that if the retail foreign exchange dealer has no such written
policies, procedures or systems, it must so state in writing;
(iii) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the retail
foreign exchange dealer's organizational structure, which shall include
the retail foreign exchange dealer and its other Material Affiliated
[[Page 55439]]
Persons, prepared in accordance with generally accepted accounting
principles, which consolidated balance sheets shall be audited by an
independent certified public accountant if an annual audit is performed
in the ordinary course of business, but which otherwise may be
unaudited, and which shall include appropriate explanatory notes. The
consolidating balance sheets may be those prepared by the retail
foreign exchange dealer's highest level Material Affiliated Person as
part of its internal financial reporting process. Any additional
information required to be filed under Sec. 5.11(a)(2)(iii) of this
part shall also be maintained and preserved; and
(iv) Fiscal year-end consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the retail foreign exchange dealer's
organizational structure, which shall include the retail foreign
exchange dealer and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary
course of business, but which otherwise may be unaudited, and which
shall include appropriate explanatory notes. The consolidating
statements may be those prepared by the retail foreign exchange
dealer's highest level Material Affiliated Person as part of its
internal financial reporting process. Any additional information
required to be filed under Sec. 5.11(a)(2)(iii) shall also be
maintained and preserved.
(2) The determination of whether an affiliated person of a retail
foreign exchange dealer is a Material Affiliated Person shall involve
consideration of all aspects of the activities of, and the relationship
between, both entities, including without limitation, the following
factors:
(i) The legal relationship between the retail foreign exchange
dealer and the affiliated person;
(ii) The overall financing requirements of the retail foreign
exchange dealer and the affiliated person, and the degree, if any, to
which the retail foreign exchange dealer and the affiliated person are
financially dependent on each other;
(iii) The degree to which the retail foreign exchange dealer and
the affiliated person directly or indirectly engage in over-the-counter
transactions with each other;
(iv) The degree, if any, to which the retail foreign exchange
dealer or its customers rely on the affiliated person for operational
support or services in connection with the retail foreign exchange
dealer's business;
(v) The level of market, credit or other risk present in the
activities of the affiliated person; and
(vi) The extent to which the affiliated person has the authority or
the ability to cause a withdrawal of capital from the retail foreign
exchange dealer.
(3) For purposes of this section and Sec. 5.11 of this part, the
term Material Affiliated Person does not include a natural person.
(4) The information, reports and records required by this section
shall be maintained and preserved, and made readily available for
inspection, in accordance with the provisions of Sec. 1.31 of this
chapter.
(b) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic regulators. A retail
foreign exchange dealer shall be deemed to be in compliance with the
recordkeeping requirements of paragraphs (a)(1)(i), (iii) and (iv) of
this section with respect to a Material Affiliated Person if:
(1) The Material Affiliated Person is required to maintain and
preserve information pursuant to Sec. 240.17h-1T of this title, or
such other risk assessment regulations as the Securities and Exchange
Commission may adopt, and the retail foreign exchange dealer maintains
and makes available for inspection by the Commission in accordance with
the provisions of this section copies of the records and reports
maintained and filed on Form 17-H (or such other forms or reports as
may be required) by the Material Affiliated Person with the Securities
and Exchange Commission pursuant to Sec. Sec. 240.17h-1T and 240.17h-
2T of this title, or such other risk assessment regulations as the
Securities and Exchange Commission may adopt;
(2) In the case of a Material Affiliated Person (including a
foreign banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the retail foreign
exchange dealer or such Material Affiliated Person maintains and makes
available for inspection by the Commission in accordance with the
provisions of this section copies of all reports submitted by such
Material Associated Person to the Federal banking agency pursuant to
section 5211 of the Revised Statutes, section 9 of the Federal Reserve
Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b)
of the Home Owners' Loan Act, or section 5 of the Bank Holding Company
Act of 1956; or
(3) In the case of a Material Affiliated Person that is subject to
the supervision of an insurance commissioner or other similar official
or agency of a state, the retail foreign exchange dealer or such
Material Affiliated Person maintains and makes available for inspection
by the Commission in accordance with the provisions of this section
copies of the annual statements with schedules and exhibits prepared by
the Material Affiliated Person on forms prescribed by the National
Association of Insurance Commissioners or by a state insurance
commissioner.
(c)(1) Special provisions with respect to Material Affiliated
Persons subject to the supervision of a Foreign Regulatory Authority. A
retail foreign exchange dealer shall be deemed to be in compliance with
the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of
this section with respect to a Material Affiliated Person if such
retail foreign exchange dealer maintains and makes available, or causes
such Material Affiliated Person to make available, for inspection by
the Commission in accordance with the provisions of this section copies
of any financial or risk exposure reports filed by such Material
Affiliated Person with a foreign futures authority or other foreign
regulatory authority, provided that:
(i) The retail foreign exchange dealer agrees to use its best
efforts to obtain from the Material Affiliated Person and to cause the
Material Affiliated Person to provide, directly or through its foreign
futures authority or other foreign regulatory authority, any
supplemental information the Commission may request and there is no
statute or other bar in the foreign jurisdiction that would preclude
the retail foreign exchange dealer, the Material Affiliated Person, the
foreign futures authority or other foreign regulatory authority from
providing such information to the Commission; or
(ii) The foreign futures authority or other foreign regulatory
authority with whom the Material Affiliated Person files such reports
has entered into an information-sharing agreement with the Commission
which is in effect as of the retail foreign exchange dealer's fiscal
year-end and which will allow the Commission to obtain the type of
information required herein.
(2) The retail foreign exchange dealer shall maintain a copy of the
original report and a copy translated into the English language. For
the purposes of this section, the term ``Foreign Futures
[[Page 55440]]
Authority'' shall have the meaning set forth in section 1a(10) of the
Act.
(d) Exemptions. The Commission may exempt any retail foreign
exchange dealer from any provision of this section if it finds that the
exemption is not contrary to the public interest and the purposes of
the provisions from which the exemption is sought. The Commission may
grant the exemption subject to such terms and conditions as it may find
appropriate.
(e) Location of records. A retail foreign exchange dealer required
to maintain records concerning Material Affiliated Persons pursuant to
this section may maintain those records either at the principal office
of the Material Affiliated Person or at a records storage facility,
provided that, except as set forth in paragraph (c) of this section,
the records are located within the boundaries of the United States and
the records are kept and available for inspection in accordance with
Sec. 1.31 of this chapter. If such records are maintained at a place
other than the retail foreign exchange dealer's principal place of
business, the Material Affiliated Person or other entity maintaining
the records shall file with the Commission a written undertaking, in a
form acceptable to the Commission, signed by a duly authorized person,
to the effect that the records will be treated as if the retail foreign
exchange dealer were maintaining the records pursuant to this section
and that the entity maintaining the records will permit examination of
such records at any time, or from time to time during business hours,
by representatives or designees of the Commission and promptly furnish
the Commission representative or its designee true, correct, complete
and current hard copy of all or any part of such records. The election
to maintain records at the principal place of business of the Material
Affiliated Person or at a records storage facility pursuant to the
provisions of this paragraph shall not relieve the retail foreign
exchange dealer required to maintain and preserve such records from any
of its responsibilities under this section or Sec. 5.11 of this part.
(f) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a retail foreign
exchange dealer concerning a Material Affiliated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(g) Implementation schedule. Each retail foreign exchange dealer
who is subject to the requirements of this section shall maintain and
preserve the information required by paragraphs (a)(1)(i) and (ii) of
this section commencing 60 calendar days after registration becomes
effective and the information required by paragraphs (a)(1)(iii) and
(iv) of this section commencing 105 calendar days following the first
fiscal year-end occurring after registration becomes effective.
Sec. 5.11 Risk assessment reporting requirements for retail foreign
exchange dealers.
(a) Reporting requirements with respect to information required to
be maintained by Sec. 5.10 of this part. (1) Each retail foreign
exchange dealer registered with the Commission pursuant to Section
2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the
regional office of the Commission with which it files periodic
financial reports within 60 calendar days after the effective date of
such registration:
(i) A copy of the organizational chart maintained by the retail
foreign exchange dealer pursuant to Sec. 5.10(a)(l)(i) of this part.
Where there is a material change in information provided, an updated
organizational chart shall be filed within sixty calendar days after
the end of the fiscal quarter in which the change has occurred; and
(ii) Copies of the financial, operational, and risk management
policies, procedures and systems maintained by the retail foreign
exchange dealer pursuant to Sec. 5.10(a)(l)(ii) of this part. If the
retail foreign exchange dealer has no such written policies, procedures
or systems, it must file a statement so indicating. Where there is a
material change in information provided, such change shall be reported
within sixty calendar days after the end of the fiscal quarter in which
the change has occurred.
(2) Each retail foreign exchange dealer registered with the
Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall
file the following with the regional office with which it files
periodic financial reports within 105 calendar days after the end of
each fiscal year or, if a filing is made pursuant to a written notice
issued under paragraph (a)(2)(iii) of this section, within the time
period specified in the written notice:
(i) Fiscal year-end consolidated and consolidating balance sheets
for the highest level Material Affiliated Person within the retail
foreign exchange dealer's organizational structure, which shall include
the retail foreign exchange dealer and its other Material Affiliated
Persons, prepared in accordance with generally accepted accounting
principles, which consolidated balance sheets shall be audited by an
independent certified public accountant if an annual audit is performed
in the ordinary course of business, but which otherwise may be
unaudited, and which consolidated balance sheets shall include
appropriate explanatory notes. The consolidating balance sheets may be
those prepared by the retail foreign exchange dealer's highest level
Material Affiliated Person as part of its internal financial reporting
process;
(ii) Fiscal year-end annual consolidated and consolidating income
statements and consolidated cash flow statements for the highest level
Material Affiliated Person within the retail foreign exchange dealer's
organizational structure, which shall include the retail foreign
exchange dealer and its other Material Affiliated Persons, prepared in
accordance with generally accepted accounting principles, which
consolidated statements shall be audited by an independent certified
public accountant if an annual audit is performed in the ordinary
course of business, but which otherwise may be unaudited, and which
consolidated statements shall include appropriate explanatory notes.
The consolidating statements may be those prepared by the retail
foreign exchange dealer's highest level Material Affiliated Person as
part of its internal financial reporting process; and
(iii) Upon receiving written notice from any representative of the
Commission and within the time period specified in the written notice,
such additional information which the Commission determines is
necessary for a complete understanding of a particular affiliate's
financial impact on the retail foreign exchange dealer's organizational
structure.
(3) For the purposes of this section, the term Material Affiliated
Person shall have the meaning used in Sec. 5.10 of this part.
(4) The reports required to be filed pursuant to paragraphs (a)(1)
and (2) of this section shall be considered filed when received by the
regional office of the Commission with whom the retail foreign exchange
dealer files financial reports pursuant to Sec. 5.12 of this part.
(b) Exemptions. The Commission may exempt any retail foreign
exchange dealer from any provision of this section if it finds that the
exemption is not contrary to the public interest and the purposes of
the provisions from which the exemption is sought. The Commission may
grant the exemption subject to such terms and conditions as it may find
appropriate.
(c) Special provisions with respect to Material Affiliated Persons
subject to the supervision of certain domestic
[[Page 55441]]
regulators. (1) In the case of a Material Affiliated Person that is
required to maintain and preserve information pursuant to Sec.
240.17h-1T of this title, or such other risk assessment regulations as
the Securities and Exchange Commission may adopt, the retail foreign
exchange dealer shall be deemed to be in compliance with the reporting
requirements of paragraph (a)(2) of this section with respect to such
Material Affiliated Person if the retail foreign exchange dealer
maintains and makes available for inspection by the Commission in
accordance with the provisions of this section copies of the records
and reports maintained and filed on Form 17-H (or such other forms or
reports as may be required) by the Material Affiliated Person with the
Securities and Exchange Commission pursuant to Sec. Sec. 240.17h-1T
and 240.17h-2T of this title, or such other risk assessment regulations
as the Securities and Exchange Commission may adopt;
(2) In the case of a Material Affiliated Person (including a
foreign banking organization) that is subject to examination by, or the
reporting requirements of, a Federal banking agency, the retail foreign
exchange dealer shall be deemed to be in compliance with the reporting
requirements of paragraph (a)(2) of this section with respect to such
Material Affiliated Person if the retail foreign exchange dealer or
such Material Affiliated Person maintains in accordance with Sec. 5.10
of this part copies of all reports filed by the Material Affiliated
Person with the Federal banking agency pursuant to section 5211 of the
Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of
the Federal Deposit Insurance Act, section 10(b) of the Home Owners'
Loan Act, or section 5 of the Bank Holding Company Act of 1956.
(3) In the case of a retail foreign exchange dealer that has a
Material Affiliated Person that is subject to the supervision of an
insurance commissioner or other similar official or agency of a state,
such retail foreign exchange dealer shall be deemed to be in compliance
with the reporting requirements of paragraph (a)(2) of this section
with respect to the Material Affiliated Person if:
(i) With respect to a Material Affiliated Person organized as a
mutual insurance company or a non-public stock company, the retail
foreign exchange dealer or such Material Affiliated Person maintains in
accordance with Sec. 5.14 of this part copies of the annual statements
with schedules and exhibits prepared by the Material Affiliated Person
on forms prescribed by the National Association of Insurance
Commissioners or by a state insurance commissioner; and
(ii) With respect to a Material Affiliated Person organized as a
public stock company, the retail foreign exchange dealer or such
Material Affiliated Person maintains, in addition to the annual
statements with schedules and exhibits required to be maintained
pursuant to Sec. 1.14 of this chapter, copies of the filings made by
the Material Affiliated Person pursuant to sections 13 or 15 of the
Securities Exchange Act of 1934 and the Investment Company Act of 1940.
(4) No retail foreign exchange dealer shall be required to furnish
to the Commission any examination report of any Federal banking agency
or any supervisory recommendations or analyses contained therein with
respect to a Material Affiliated Person that is subject to the
regulation of a Federal banking agency. All information received by the
Commission pursuant to this section concerning a Material Affiliated
Person that is subject to examination by or the reporting requirements
of a Federal banking agency shall be deemed confidential for the
purposes of section 8 of the Act.
(5) The furnishing of any information or documents by a retail
foreign exchange dealer pursuant to this section shall not constitute
an admission for any purpose that a Material Affiliated Person is
otherwise subject to the Act.
(d) Special provisions with respect to Material Affiliated Persons
subject to the supervision of a Foreign Regulatory Authority. A retail
foreign exchange dealer shall be deemed to be in compliance with the
reporting requirements of paragraph (a)(2) of this section with respect
to a Material Affiliated Person if such retail foreign exchange dealer
furnishes, or causes such Material Affiliated Person to make available,
in accordance with the provisions of this section, copies of any
financial or risk exposure reports filed by such Material Affiliated
Person with a foreign futures authority or other foreign regulatory
authority, provided that:
(1) The retail foreign exchange dealer agrees to use its best
efforts to obtain from the Material Affiliated Person and to cause the
Material Affiliated Person to provide, directly or through its foreign
futures authority or other foreign regulatory authority, any
supplemental information the Commission may request and there is no
statute or other bar in the foreign jurisdiction that would preclude
the retail foreign exchange dealer, the Material Affiliated Person, the
foreign futures authority or other foreign regulatory authority from
providing such information to the Commission; or
(2) The foreign futures authority or other foreign regulatory
authority with whom the Material Affiliated Person files such reports
has entered into an information sharing agreement with the Commission
which is in effect as of the retail foreign exchange dealer's fiscal
year-end and which will allow the Commission to obtain the type of
information required herein. The retail foreign exchange dealer shall
file a copy of the original report and a copy translated into the
English language. For the purposes of this section, the term ``Foreign
Futures Authority'' shall have the meaning set forth in section 1a(10)
of the Act.
(e) Confidentiality. All information obtained by the Commission
pursuant to the provisions of this section from a retail foreign
exchange dealer concerning a Material Associated Person shall be deemed
confidential information for the purposes of section 8 of the Act.
(f) Implementation schedule. Each retail foreign exchange dealer
who is subject to the requirements of this section shall file the
information required by paragraph (a)(1) of this section within 60
calendar days after registration is granted, and the information
required by paragraph (a)(2) of this section within 105 calendar days
after registration is granted.
Sec. 5.12 Financial reports of retail foreign exchange dealers.
(a)(1) Each person who files an application for registration as a
retail foreign exchange dealer with the National Futures Association
shall submit, concurrently with the filing of such application, either:
(i) A Form 1-FR-FCM certified by an independent public accountant
as of a date not more than 45 days prior to the date on which such
report is filed; or
(ii) A Form 1-FR-FCM as of a date not more than 17 business days
prior to the date on which such report is filed and a Form 1-FR-FCM
certified by an independent public accountant as of a date not more
than one year prior to the date on which such report is filed.
(2) Each such person must include with such financial report a
statement describing the source of his current assets and representing
that his capital has been contributed for the purpose of operating his
business and will continue to be used for such purpose.
(3) The provisions of paragraph (a)(1) of this section do not apply
to any person succeeding to and continuing the
[[Page 55442]]
business of another retail foreign exchange dealer.
(b)(1) Each person registered as a retail foreign exchange dealer
must file a Form 1-FR-FCM as of the close of business each month. Each
Form 1-FR must be filed no later than 17 business days after the date
for which the report is made.
(2) In addition to the monthly financial reports required by
paragraph (b)(1) of this section, each person registered as a retail
foreign exchange dealer must file a Form 1-FR-FCM as of the close of
its fiscal year, which must be certified by an independent public
accountant and must be filed no later than 90 days after the close of
the retail foreign exchange dealer's fiscal year.
(3) A Form 1-FR-FCM required to be certified by an independent
public accountant which is filed by a retail foreign exchange dealer
must be filed in paper form and may not be filed electronically with
the Commission. A Form 1-FR-FCM required to be certified by an
independent public accountant which is filed by an applicant for
registration as a retail foreign exchange dealer with the National
Futures Association must be filed electronically in accordance with
electronic filing procedures established by the National Futures
Association, however a paper copy of any such filing with the original
manually signed certification must be maintained by the applicant for
registration as a retail foreign exchange dealer in accordance with
Sec. 1.31.
(c) Each Form 1-FR-FCM required by the provisions of paragraphs
(a)(1) and (b)(2) of this section to be certified by an independent
public accountant must be certified in accordance with Sec. 1.16 of
this chapter, and must be accompanied by the accountant's report on
material inadequacies in accordance with the provisions of Sec.
1.16(c)(5) of this chapter. In all other respects, the independent
public accountant shall act in accordance with the provisions of Sec.
1.16 (except paragraph (f)) of this chapter: Provided, however, that
the term ``Sec. 5.7'' shall be substituted for the term ``Sec.
1.17,'' and the term ``retail foreign exchange dealer'' shall be
substituted for the term ``futures commission merchant.''
(d) Upon receiving written notice from any representative of the
Commission, National Futures Association, or any self-regulatory
organization of which the firm is a member, a retail foreign exchange
dealer or applicant for such registration, must, monthly or at such
times as specified, furnish the Commission, National Futures
Association, or self-regulatory organization a Form 1-FR-FCM or such
other financial information requested in the written notice. Each such
Form 1-FR-FCM or such other information must be furnished within the
time period specified in the written notice, and in accordance with the
provisions of paragraph (i) of this section.
(e)(1) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which
is not required to be certified by an independent public accountant
must be completed in accordance with the instructions to the form and
contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) A statement of income (loss) for the period between the date
of the most recent statement of financial condition filed with the
Commission and the date for which the report is made;
(iii) A statement of changes in ownership equity for the period
between the date of the most recent statement of financial condition
filed with the Commission and the date for which the report is made;
(iv) A statement of changes in liabilities subordinated to claims
of general creditors for the period between the date of the most recent
statement of financial condition filed with the Commission and the date
for which the report is made;
(v) A statement of the computation of the minimum capital
requirements pursuant to Sec. 5.7 of this part as of the date for
which the report is made; and
(vi) In addition to the information expressly required, such
further material information as may be necessary to make the required
statements and schedules not misleading.
(2) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which is
required to be certified by an independent public accountant must be
completed in accordance with the instructions to the form and contain:
(i) A statement of financial condition as of the date for which the
report is made;
(ii) Statements of income (loss), cash flows, changes in ownership
equity, and changes in liabilities subordinated to claims of general
creditors, for the period between the date of the most recent certified
statement of financial condition filed with the Commission and the date
for which the report is made: Provided, That for an applicant filing
pursuant to paragraph (a) of this section the period must be the year
ending as of the date of the statement of financial condition;
(iii) A statement of the computation of the minimum capital
requirements pursuant to Sec. 5.7 of this part as of the date for
which the report is made;
(iv) Appropriate footnote disclosures;
(v) A reconciliation, including appropriate explanations, of the
statement of the computation of the minimum capital requirements
pursuant to Sec. 5.7 of this part, in the certified Form 1-FR-FCM with
the applicant's or registrant's corresponding uncertified most recent
Form 1-FR-FCM filing when material differences exist or, if no material
differences exist, a statement so indicating; and
(vi) In addition to the information expressly required, such
further material information as may be necessary to make the required
statements not misleading.
(3) The statements required by paragraphs (e)(2)(i) and (ii) of
this section may be presented in accordance with generally accepted
accounting principles in the certified reports filed as of the close of
the registrant's fiscal year pursuant to paragraph (b)(2) of this
section or accompanying the application for registration pursuant to
paragraph (a)(1) of this section, rather than in the format
specifically prescribed by these regulations: Provided, the statement
of financial condition is presented in a format as consistent as
possible with the Form 1-FR-FCM and a reconciliation is provided
reconciling such statement of financial condition to the statement of
the computation of the minimum capital requirements pursuant to Sec.
5.7 of this part. Such reconciliation must be certified by an
independent public accountant in accordance with Sec. 1.16 of this
chapter.
(4) Attached to each Form 1-FR-FCM filed pursuant to this section
must be an oath or affirmation that to the best knowledge and belief of
the individual making such oath or affirmation the information
contained in the Form 1-FR-FCM is true and correct. The individual
making such oath or affirmation must be: If the registrant or applicant
is a sole proprietorship, the proprietor; if a partnership, any general
partner; if a corporation, the chief executive officer or chief
financial officer; and, if a limited liability company or limited
liability partnership, the chief executive officer, the chief financial
officer, the manager, the managing member, or those members vested with
the management authority for the limited liability company or limited
liability partnership.
(f) Election of fiscal year. (1) An applicant wishing to establish
a fiscal year other than the calendar year may do so by notifying the
National Futures Association of its election of such fiscal year, in
writing, concurrently with the filing of the Form 1-FR-FCM pursuant
[[Page 55443]]
to paragraph (a)(1) of this section, but in no event may such fiscal
year end more than one year from the date of the Form 1-FR-FCM filed
pursuant to paragraph (a)(1) of this section. An applicant that does
not so notify the National Futures Association will be deemed to have
elected the calendar year as its fiscal year.
(2)(i) A registrant must continue to use its elected fiscal year,
calendar or otherwise, unless a change in such fiscal year has been
approved pursuant to this paragraph (f)(2).
(ii) A registrant may file with its designated self-regulatory
organization an application to change its fiscal year, a copy of which
the registrant must file with the Commission. The application shall be
approved or denied in writing by the registrant's designated self-
regulatory organization. The registrant must file immediately with the
Commission a copy of any notice it receives from its designated self-
regulatory organization to approve or deny the registrant's application
to change its fiscal year. A written notice of approval shall become
effective upon the filing by the registrant of a copy with the
Commission, and a written notice of denial shall be effective as of the
date of the notice.
(g) In the event a retail foreign exchange dealer or applicant for
registration as a retail foreign exchange dealer finds that it cannot
file its Form 1-FR-FCM for any period within the time specified in
paragraph (b)(1) or (2) of this section without substantial undue
hardship, it may request approval for an extension of time by filing an
application for an extension of time with, in the case of a registrant,
its designated self-regulatory organization, or, in the case of an
applicant, the National Futures Association. The registrant or
applicant also must file a copy of its application for an extension of
time with the Commission. The application shall be approved or denied
in writing by the National Futures Association or designated self-
regulatory organization, as applicable. The registrant or applicant
must file immediately with the Commission a copy of any notice it
receives approving or denying the request for extension of time. A
written notice of approval shall become effective upon the filing by
the registrant or applicant of a copy with the Commission, and a
written notice of denial shall be effective as of the date of the
notice.
(h) Public availability of reports. (1) Forms 1-FR-FCM filed
pursuant to this section will be treated as exempt from mandatory
public disclosure for purposes of the Freedom of Information Act and
the Government in the Sunshine Act and parts 145 and 147 of this
chapter, except for the information described in paragraph (i)(2) of
this section.
(2) The following information in Forms 1-FR-FCM will be publicly
available:
(i) The amount of the applicant's or registrant's adjusted net
capital; the amount of its minimum net capital requirement under Sec.
5.7 of this chapter; the amount of its adjusted net capital in excess
of its minimum net capital requirement; and the amount of the retail
forex obligation owed to its retail forex customers; and
(ii) The Statement of Financial Condition and the opinion of the
independent public accountant in the certified annual financial reports
of retail foreign exchange dealers.
(3) All information that is exempt from mandatory public disclosure
under paragraph (h)(1) of this section will, however, be available for
official use by any official or employee of the United States or any
State, by the National Futures Association or any other self-regulatory
organization of which the person filing such report is a member, and by
any other person to whom the Commission believes disclosure of such
information is in the public interest. Nothing in this paragraph (h)
will limit the authority of any self-regulatory organization to request
or receive any information relative to its members' financial
condition.
(i)(1) In the case of an applicant, all filings or other notices
provided for in this section will be considered filed when received by
the regional office of the Commission with jurisdiction over the state
in which the applicant's principal place of business is located and by
the National Futures Association. In the case of a registrant, all
filings or other notices provided for in this section will be
considered filed when received by the regional office of the Commission
with jurisdiction over the state in which the registrant's principal
place of business is located and by the registrant's designated self-
regulatory organization. Any copy that under paragraph (f)(2) or (g) of
this section is required to be filed with the Commission shall be filed
with the regional office of the Commission with jurisdiction over the
state in which the registrant's principal place of business is located.
(2) All filings or other notices filed pursuant to this section
which need not be certified in accordance with Sec. 1.16 may be
submitted to the Commission in electronic form using a a form of user
authentication assigned in accordance with procedures established by or
approved by the Commission, and otherwise in accordance with
instructions issued by or approved by the Commission, if the retail
foreign exchange dealer or a designated self-regulatory organization
has provided the Commission with the means necessary to read and to
process the information contained in such report. Any such electronic
submission must clearly indicate the registrant or applicant on whose
behalf such filing is made and the use of such user authentication in
submitting such filing will constitute and become a substitute for the
manual signature of the authorized signer. In the case of a Form 1-FR
filed via electronic transmission in accordance with procedures
established by or approved by the Commission, such transmission must be
accompanied by the user authentication assigned to the authorized
signer under such procedures, and the use of such user authentication
will constitute and become a substitute for the manual signature of the
authorized signer for the purpose of making the oath or affirmation
referred to in paragraph (e)(4) of this section.
Sec. 5.13 Reporting to customers of retail foreign exchange dealers
and futures commission merchants; monthly and confirmation statements.
(a) Monthly statements. Each retail foreign exchange dealer or
futures commission merchant must promptly furnish in writing to each
retail forex customer, as of the close of the last business day of each
month or as of any regular monthly date selected, except for accounts
in which there are neither open positions at the end of the statement
period nor any changes to the account balance since the prior statement
period, but in any event not less frequently than once every three
months, a statement which clearly shows:
(1) For each retail forex customer:
(i) The open retail forex transactions with prices at which
acquired;
(ii) The net unrealized profits or losses in all open retail forex
transactions marked to the market; and
(iii) Any money, securities or other property carried with the
retail foreign exchange dealer or futures commission merchant; and
(iv) A detailed accounting of all financial charges and credits to
such retail forex accounts during the monthly reporting period,
including money, securities or property received from or disbursed to
such customer and realized profits and losses; and
[[Page 55444]]
(2) For each retail forex customer engaging in forex options
transactions:
(i) All forex options purchased, sold, exercised, or expired during
the monthly reporting period, identified by underlying retail forex
transaction or underlying currency, strike price, transaction date, and
expiration date;
(ii) The open forex option positions carried for such customer as
of the end of the monthly reporting period, identified by underlying
retail forex transaction or underlying currency, strike price,
transaction date, and expiration date;
(iii) All open forex option positions marked to the market and the
amount each position is in the money, if any;
(iv) Any money, securities or other property carried with the
retail foreign exchange dealer or futures commission merchant; and
(v) A detailed accounting of all financial charges and credits to
such retail forex account(s) during the monthly reporting period,
including money, securities and property received from or disbursed to
such customer, premiums charged and received, and realized profits and
losses.
(b) Confirmation statement. Each retail foreign exchange dealer or
futures commission merchant must, not later than the next business day
after any retail forex or forex option transaction, furnish:
(1) To each retail forex customer, a written confirmation of each
retail forex transaction caused to be executed by it for the customer,
including offsetting transactions executed during the same business day
and the rollover of an open retail forex transaction to the next
business day.
(2) To each retail forex customer engaging in forex option
transactions, a written confirmation of each forex option transaction,
containing at least the following information:
(i) The retail forex customer's account identification number;
(ii) A separate listing of the actual amount of the premium, as
well as each mark-up thereon, if applicable, and all other commissions,
costs, fees and other charges incurred in connection with the forex
option transaction;
(iii) The strike price;
(iv) The underlying retail forex transaction or underlying
currency;
(v) The final exercise date of the forex option purchased or sold;
and
(vi) The date the forex option transaction was executed.
(3) To each retail forex customer engaging in forex option
transactions, upon the expiration or exercise of any forex option, a
written confirmation statement thereof, which statement shall include
the date of such occurrence, a description of the forex option
involved, and, in the case of exercise, the details of the retail forex
or physical currency position which resulted therefrom including, if
applicable, the final trading date of the retail forex transaction
underlying the option.
(4) Notwithstanding the provisions of paragraphs (b)(1) through (3)
of this section, a retail forex transaction or forex option transaction
that is caused to be executed for a pooled investment vehicle that
engages in retail forex transactions need be confirmed only to the
operator of such pooled investment vehicle.
(c) Controlled accounts. With respect to any account controlled by
any person other than the retail forex customer or forex option
customer for whom such account is carried, each retail foreign exchange
dealer or futures commission merchant shall promptly furnish in writing
to such other person the information required by paragraphs (a) and (b)
of this section.
(d) Recordkeeping. Each retail foreign exchange dealer or futures
commission merchant shall retain, in accordance with Sec. 1.31 of this
chapter, a copy of each monthly statement and confirmation required by
this section.
(e) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the retail foreign exchange dealer or futures commission
merchant is providing the statement was introduced by an introducing
broker and the names of the retail foreign exchange dealer or futures
commission merchant and introducing broker.
(f) Electronic transmission of statements. (1) The statements
required by this section may be furnished to a retail forex customer by
means of electronic media if the retail forex customer so consents,
Provided, however, that a retail foreign exchange dealer or futures
commission merchant must, prior to the transmission of any statement by
means of electronic media, disclose the electronic medium or source
through which statements will be delivered, the duration, whether
indefinite or not, of the period during which consent will be
effective, any charges for such service, the information that will be
delivered by such means, and that consent to electronic delivery may be
revoked at any time, and provided, further, that a retail foreign
exchange dealer or futures commission merchant must obtain the retail
forex customer's signed consent acknowledging such disclosure prior to
the transmission of any statement by means of electronic media.
(2) Any statement required to be furnished to a person other than a
retail forex customer in accordance with paragraph (f) of this section
may be furnished by electronic media.
(3) A retail foreign exchange dealer or futures commission merchant
who furnishes statements to a retail forex customer by means of
electronic media must retain a daily confirmation statement for such
retail forex customer as of the end of the trading session, reflecting
all transactions made during that session for the customer, in
accordance with Sec. 1.31 of this chapter.
(g) Combination with other statements. Any futures commission
merchant required to deliver statements to retail forex customers in
accordance with Sec. 1.33 of this chapter may combine into one monthly
statement or confirmation statement, as the case may be, the
information required by this section and the information required by
Sec. 1.33, provided that retail forex account information is
separately identified from any other trading or account activity of the
retail forex customer.
Sec. 5.14 Records to be kept by retail foreign exchange dealers and
futures commission merchants.
(a) No person shall be registered as a retail foreign exchange
dealer under the Act unless, commencing on the date his application for
such registration is filed, he prepares and keeps current ledgers or
other similar records which show or summarize, with appropriate
references to supporting documents, each transaction affecting his
asset, liability, income, expense and capital accounts, and in which
(except as otherwise permitted in writing by the Commission) all his
asset, liability and capital accounts are classified into either the
account classification subdivisions specified on Form 1-FR-FCM or
categories that are in accord with generally accepted accounting
principles as applicable. Each person so registered shall prepare and
keep current such records.
(b) Each applicant or registrant must make and keep as a record in
accordance with Sec. 1.31 of this chapter formal computations of its
adjusted net capital and of its minimum financial requirements pursuant
to Sec. 1.17 or Sec. 5.7 of this chapter, or the requirements of the
designated self-regulatory organization to which it is subject, as
applicable, as of the close of business each month. Such computations
must be completed and made available for inspection by any
representative of the National Futures Association, in the
[[Page 55445]]
case of an applicant, or of the Commission or designated self-
regulatory organization, if any, in the case of a registrant, within 17
business days after the date for which the computations are made,
commencing the first month end after the date the application for
registration is filed.
Sec. 5.15 Unlawful representations.
It shall be unlawful for any person registered pursuant to the
requirements of this part to represent or imply in any manner
whatsoever that such person has been sponsored, recommended or
approved, or that its abilities or qualifications have been reviewed or
evaluated, by the Commission, the Federal government or any agency
thereof.
Sec. 5.16 Prohibition of guarantees against loss.
(a) No retail foreign exchange dealer, futures commission merchant
or introducing broker may in any way represent that it will, with
respect to any retail foreign exchange transaction in any account
carried by a retail foreign exchange dealer or futures commission
merchant for or on behalf of any person:
(1) Guarantee such person against loss;
(2) Limit the loss of such person; or
(3) Not call for or attempt to collect security deposits, margin,
or other deposits as established for retail forex customers.
(b) No person may in any way represent that a retail foreign
exchange dealer, futures commission merchant or introducing broker will
engage in any of the acts or practices described in paragraph (a) of
this section.
(c) This section shall not be construed to prevent a retail foreign
exchange dealer, futures commission merchant or introducing broker from
assuming or sharing in the losses resulting from an error or
mishandling of an order.
(d) This section shall not affect any guarantee entered into prior
to October 18, 2010, but this section shall apply to any extension,
modification or renewal thereof entered into after such date.
Sec. 5.17 Authorization to trade.
No retail foreign exchange dealer, futures commission merchant,
introducing broker or any of their associated persons may directly or
indirectly effect a retail forex transaction for the account of any
customer unless before the transaction the customer, or person
designated by the customer to control the account specifically
authorized the retail foreign exchange dealer, futures commission
merchant, introducing broker or any of their associated persons to
effect the transaction. A transaction is ``specifically authorized'' if
the customer or person designated by the customer to control the
account specifies:
(a) The precise retail forex transaction to be effected;
(b) The exact amount of the foreign currency to be purchased or
sold; and
(c) In the case of an option, the identity of the foreign currency
or contract that underlies the option.
Sec. 5.18 Trading and operational standards.
(a) For purposes of this section:
(1) The term retail forex counterparty includes, as appropriate:
(i) A retail foreign exchange dealer as defined in Sec. 5.1 of
this part;
(ii) A futures commission merchant as defined in section 1a(20) of
the Act; and
(iii) An affiliated person of a futures commission merchant as
defined in Sec. 5.1 of this part.
(2) The term related person when used in reference to a retail
forex counterparty means any general partner, officer, director, owner
of more than ten percent of the equity interest, associated person or
employee of the retail forex counterparty, and any relative or spouse
of any of the foregoing persons, or any relative of such spouse, who
shares the same home as any of the foregoing persons.
(b) Prior to engaging in a retail forex transaction, each retail
forex counterparty shall, at a minimum, establish and enforce internal
rules, procedures and controls to:
(1) Ensure, to the extent possible, that each order received from a
retail forex customer which order is executable at or near the price
that the retail forex counterparty has quoted to the customer is
entered for execution before any order in any retail forex transaction
for any proprietary account, any other account in which a related
person of the retail forex counterparty has an interest, or any account
for which such a related person may originate orders without the prior
specific consent of the account owner (if such related person has
gained knowledge of the retail forex customer's order prior to the
transmission of an order for a proprietary account), an account in
which such a related person has an interest, or an account in which
such a related person may originate orders without the prior specific
consent of the account owner; and
(2) Prevent related persons of forex counterparties from placing
orders, directly or indirectly, with another person in a manner
designed to circumvent the provisions of paragraph (b)(1) of this
section;
(3) Fairly and objectively establish settlement prices for retail
forex transactions; and
(4) Record and maintain essential information regarding customer
orders and account activity, and to provide such information to
customers upon request. Such information shall include:
(i) Transaction records for the customer's account, including:
(A) The date and time each order is received by the retail forex
counterparty;
(B) The price at which each order is placed, or, in the case of an
option, the premium paid
(C) If the transaction was entered into by means of a trading
platform, the price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(D) The customer account identification information;
(E) The currency pair;
(F) The size of the transaction;
(G) Whether the order was a buy or sell order;
(H) The type of order, if the order was not a market order;
(I) If a trading platform is used, the date and time the order is
transmitted to the trading platform;
(J) If a trading platform is used, the date and time the order is
executed;
(K) The size and price at which the order is executed, or in the
case of an option, the amount of the premium paid for each option
purchased, or the amount credited for each option sold; and
(L) For options, whether the option is a put or call, the strike
price, and expiration date.
(ii) Account records that contain the following information:
(A) The funds in the account, net of any commissions and fees;
(B) The net profits and losses on open trades; and
(C) The funds in the account plus or minus the net profits and
losses on open trades. (In the case of open option positions, the
account balance should be adjusted for the net option value);
(iii) If a trading platform is used, daily logs showing each price
change on the platform, the time of the change to the nearest second,
and the trading volume at that time and price; and
(iv) Any method or algorithm used to determine the bid or asked
price for any retail forex transaction or the prices at which customer
orders are executed, including, but not limited to, any markups, fees,
commissions or other items which affect the profitability or risk of
loss of a retail forex customer's transaction.
(c) No retail forex counterparty shall disclose that an order of
another person
[[Page 55446]]
is being held by the retail forex counterparty, unless such disclosure
is necessary to the effective execution of such order or is made at the
request of an authorized representative of the Commission, or a futures
association registered with the Commission pursuant to section 17 of
the Act.
(d) No retail forex counterparty shall knowingly handle the account
of any related person of another retail forex counterparty unless it:
(1) Receives written authorization from a person designated by such
other retail forex counterparty with responsibility for the
surveillance over such account pursuant to paragraph (b)(2) of this
section;
(2) Prepares immediately upon receipt of an order for such account
a written record of such order, including the account identification
and order number, and records thereon to the nearest minute, by time-
stamp or other timing device, the date and time the order is received;
and
(3) Transmits on a regular basis to such other retail forex
counterparty copies of all statements for such account and of all
written records prepared upon the receipt of orders for such account
pursuant to paragraph (b)(2) of this section.
(e) No related person of a retail forex counterparty shall have an
account, directly or indirectly, with another retail forex counterparty
unless:
(1) It receives written authorization to maintain such an account
from a person designated by the retail forex counterparty of which it
is a related person with responsibility for the surveillance over such
account pursuant to paragraph (b)(2) of this section; and
(2) Copies of all statements for such account and of all written
records prepared by such other retail forex counterparty upon receipt
of orders for such account pursuant to paragraph (d)(2) of this section
are transmitted on a regular basis to the retail forex counterparty of
which it is a related person.
(f) No retail forex counterparty shall:
(1) Enter into a retail forex transaction, to be executed pursuant
to a market or limit order at a price that is not at or near the price
at which other retail forex customers, during that same time period,
have executed retail forex transactions with the retail forex
counterparty; Provided, however, that this paragraph (f)(1) shall not
prohibit such practice if done in accordance with the rules of a
registered futures association, and of which such retail foreign
exchange dealer, futures commission merchant or affiliated person of a
futures commission merchant is a member;
(2) Adjust or alter prices for a retail forex transaction after the
transaction has been confirmed to the retail forex customer; Provided,
however, that this paragraph (f)(2) shall not prohibit such practice if
in accordance with the rules of a registered futures association, and
of which such retail foreign exchange dealer, futures commission
merchant or affiliated person of a futures commission merchant is a
member;
(3)(i) Provide a retail forex customer a new bid price for a retail
forex transaction that is higher than its previous bid without
providing a new asked price that is also higher than its previous asked
price by a similar amount;
(ii) Provide a retail forex customer a new bid price for a retail
forex transaction that is lower than its previous bid without providing
a new asked price that is also lower than its previous asked price by a
similar amount; or
(4) Establish a new position for a retail forex customer (except
one that offsets an existing position for that retail forex customer)
where the retail forex counterparty holds outstanding orders of other
retail forex customers for the same currency pair at a comparable
price.
(g)(1) Each retail forex counterparty and each CPO, CTA and IB
subject to this Part 5 shall maintain a record of all communications
received by such person concerning facts giving rise to possible
violations of the Act, rules, regulations or orders thereunder, related
to their retail forex business. The record shall contain the name of
the complainant, if provided, the date of the communication, the
agreement, contract or transaction, the substance of the communication,
and the name of the person who received the communication.
(2) Each retail forex counterparty and each CPO, CTA and IB subject
to this Part 5 shall provide to the Division of Enforcement of the
Commission, electronically, a copy of the record of each communication
received pursuant to paragraph (g)(1) of this section. Such copy shall
be provided to the Division of Enforcement of the Commission no later
than 30 calendar days after the communication is received: Provided,
however, that in the case of a communication concerning facts giving
rise to possible fraud under the Act or Commission regulations, such
copy shall be provided to the Division of Enforcement of the Commission
within three business days after the communication is received.
(h) An introducing broker as defined in Sec. 5.1(f)(1) of this
part, applicant for registration as an introducing broker as defined in
Sec. 5.1(f)(1) of this part, or person succeeding to and continuing
the business of another introducing broker as defined in Sec.
5.1(f)(1) of this part must comply with all provisions applicable to an
introducing broker under this chapter; Provided, however, that an
introducing broker operating pursuant to, or an applicant for
registration as an introducing broker who has filed concurrently with
its application for registration, a guarantee agreement meeting the
requirements of Sec. 1.10(j) of this chapter is not subject to the
minimum capital and related financial reporting requirements of
Sec. Sec. 1.10, 1.12 and 1.17 of this chapter.
(i)(1) Each retail forex counterparty shall prepare and maintain on
a quarterly basis (calendar quarter) a calculation of the percentage of
nondiscretionary retail forex customer accounts open for any period of
time during the quarter that were profitable, and the percentage of
such accounts that were not profitable. In calculating whether a retail
forex account was profitable or not profitable during the quarter, the
FCM or RFED must compute the realized and unrealized gains and/or
losses on all retail forex transactions carried in the retail forex
account at any time during the quarter, and subtract all fees,
commissions, and any other charges posted to the retail forex account
during the quarter, and add any interest income and other income or
rebates credited to the retail forex account during the quarter. All
deposits and/or withdrawals of funds made by a retail forex customer
during the quarter must be excluded from the computation of whether the
retail forex account was profitable or not profitable during the
quarter. Computations that result in a zero or negative number shall be
considered a retail forex account that was not profitable. Computations
that result in a positive number shall be considered a retail forex
account that was profitable. RFEDs and FCMs shall maintain such
calculations along with data supporting such calculations for five
years in accordance with Sec. 1.31.
(2) In calculating its percentages of nondiscretionary retail forex
customer accounts that were profitable or not profitable, the retail
forex counterparty may only use those retail forex accounts, as defined
in Sec. 5.1(i) of this part, that are nondiscretionary accounts;
provided, that the retail forex account is not a proprietary account,
as defined in paragraph (i)(3) of this section.
(3) Proprietary account for this section means a retail forex
account carried on
[[Page 55447]]
the books of a retail foreign exchange dealer or a futures commission
merchant for one of the following persons, or of which ten percent or
more is owned by one of the following persons, or of which an aggregate
of ten percent or more of which is owned by more than one of the
following persons:
(i) Such retail foreign exchange dealer or futures commission
merchant itself;
(ii) If the retail foreign exchange dealer or futures commission
merchant is a partnership, a general partner in such partnership;
(iii) If the retail foreign exchange dealer or futures commission
merchant is a limited partnership, a limited or special partner in such
partnership whose duties include:
(A) The management of the partnership business or any part thereof,
(B) The handling of retail forex transactions of such partnership,
(C) The keeping of records pertaining to retail forex transactions,
or
(D) The signing or co-signing of checks or drafts on behalf of such
partnership;
(iv) If the retail foreign exchange dealer or futures commission
merchant is a corporation or association, an officer, director or owner
of ten percent or more of the capital stock, of such organization;
(v) An employee of such retail foreign exchange dealer or futures
commission merchant whose duties include:
(A) The management of the business of such retail foreign exchange
dealer or futures commission merchant or any part thereof,
(B) The handling of retail forex transactions of such retail
foreign exchange dealer or futures commission merchant,
(C) The keeping of records pertaining to retail forex transactions
of such retail foreign exchange dealer or futures commission merchant,
or
(D) The signing or co-signing of checks or drafts on behalf of such
retail foreign exchange dealer or futures commission merchant;
(vi) A spouse or minor dependent living in the same household of
any of the foregoing persons;
(vii) A business affiliate that directly or indirectly controls
such retail foreign exchange dealer or futures commission merchant; or
(viii) A business affiliate that, directly or indirectly is
controlled by or is under common control with, such retail foreign
exchange dealer or futures commission merchant.
(j) Each retail forex counterparty shall designate one or more
principals to serve as a chief compliance officer(s). The chief
compliance officer(s) shall certify to the Commission and a registered
national futures association annually that the retail forex
counterparty has in place processes to establish, maintain, review,
modify and test policies and procedures reasonably designed to achieve
compliance with the Act, rules, regulations and orders thereunder. The
certification shall include a statement that the counterparty has in
place compliance processes, and that the chief compliance officer(s)
has apprised the chief executive officer of the compliance efforts to
date and identify and address significant compliance problems and plans
to address those problems.
Sec. 5.19 Pending legal proceedings.
(a) Every retail foreign exchange dealer or futures commission
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to
the Commission copies of any dispositive or partially dispositive
decision for which a notice of appeal has been filed, the notice of
appeal and such further documents as the Commission may thereafter
request filed in any material legal proceeding to which the retail
foreign exchange dealer, futures commission merchant, CPO, CTA or IB is
a party or to which its property or assets is subject with respect to
retail forex transactions.
(b) Every retail foreign exchange dealer or futures commission
merchant and each CPO, CTA or IB subject to this Part 5 shall submit to
the Commission copies of any dispositive or partially dispositive
decision concerning which a notice of appeal has been filed, the notice
of appeal, and such further documents as the Commission may thereafter
request filed in any material legal proceeding instituted against any
person who is a principal of the retail foreign exchange dealer,
futures commission merchant CPO, CTA or IB (as the term ``principal''
is defined in Sec. 3.1(a) of this chapter) arising from conduct in
such person's capacity as a principal of the retail foreign exchange
dealer, futures commission merchant, CPO, CTA or IB and alleging
violations, with regard to retail forex transactions, of:
(1) The Act or any rule, regulation, or order thereunder; or
(2) Provisions of state law relating to a duty or obligation owed
by such a principal.
(c) All documents required by this section to be submitted to the
Commission shall be mailed via first-class or submitted by other more
expeditious means to the Commission's headquarters office in
Washington, DC, Attention: Director, Division of Enforcement. All
documents required by this section to be submitted to the Commission as
to matters pending on October 18, 2010 shall be mailed to the
Commission within 45 days of that effective date. Thereafter, all
decisions and notices of appeal required to be submitted by retail
foreign exchange dealers, futures commission merchants, CPOs, CTAs or
IBs shall be mailed within 10 days of the filing or receipt by the
retail foreign exchange dealer or futures commission merchant of the
relevant notice of appeal. For purposes of paragraph (a) and (b) of
this section, a ``material legal proceeding'' includes but is not
limited to actions involving alleged violations of the Commodity
Exchange Act or the Commission's regulations. However, a legal
proceeding is not ``material'' for the purposes of this rule if the
proceeding is not in a federal or state court or if the Commission is a
party.
Sec. 5.20 Special calls for account and transaction information.
(a) Preparation and transmission of information upon special call.
All information required upon special call shall be prepared in such
form and manner and in accordance with such instructions, and shall be
transmitted at such time and to such office of the Commission, as may
be specified in the call.
(b) Special calls for information on controlled accounts from
retail foreign exchange dealers, futures commission merchants and
introducing brokers. Upon call by the Commission, each retail foreign
exchange dealer, futures commission merchant and introducing broker
shall file with the Commission the names and addresses of all persons
who, by power of attorney or otherwise, exercise trading control over
any customer's account in retail forex transactions.
(c) Special calls for information on open transactions in accounts
carried or introduced by retail foreign exchange dealers, futures
commission merchants, and introducing brokers. Upon special call by the
Commission for information relating to retail forex transactions held
or introduced on the dates specified in the call, each retail foreign
exchange dealer, futures commission merchant, or introducing broker
shall furnish to the Commission the following information concerning
accounts of traders owning or controlling such retail forex transaction
positions, as may be specified in the call:
(1) The name, address, and telephone number of the person for whom
each account is carried;
(2) The principal business or occupation of the person for whom
each
[[Page 55448]]
account is introduced or carried, as specified in the call;
(3) The name, address and principal business or occupation of any
person who controls the trading of each account;
(4) The name and address of any person having a financial interest
of ten percent or more in each account;
(5) The number of open retail forex transaction positions
introduced or carried in each account, as specified in the call; and
(6) The total number of retail forex transactions against which
delivery has been made.
(d) Delegation of authority to the Director of the Division of
Clearing and Intermediary Oversight and the Director of the Division of
Market Oversight. The Commission hereby delegates, until the Commission
orders otherwise, to the Director of the Division of Clearing and
Intermediary Oversight and the Director of the Division of Market
Oversight, or to the respective Director's designees, the authority set
forth in this section to make special calls for information on
controlled accounts from retail foreign exchange dealers, futures
commission merchants and from introducing brokers, and to make special
calls for information on open contracts in accounts carried or
introduced by futures commission merchants, introducing brokers, and
foreign brokers. Either Director may submit to the Commission for its
consideration any matter that has been delegated pursuant to this
section. Nothing in this section shall be deemed to prohibit the
Commission, at its election, from exercising the authority delegated in
this section to the Directors.
Sec. 5.21 Supervision.
Each Commission registrant subject to this Part 5, except an
associated person who has no supervisory duties, must diligently
supervise the handling by its partners, officers, employees and agents
(or persons occupying a similar status or performing a similar
function) of all retail forex accounts carried, operated, advised or
introduced by the registrant and all other activities of its partners,
officers, employees and agents (or persons occupying a similar status
or performing a similar function) relating to its business as a
Commission registrant.
Sec. 5.22 Registered futures association membership.
(a) Each person registered as a retail foreign exchange dealer must
become and remain a member of at least one futures association that is
registered under section 17 of the Act and that provides for the
membership therein of such retail foreign exchange dealer.
(b) Each person required to register as:
(1) An introducing broker, because the person solicits or accepts
orders for retail forex transactions;
(2) A commodity pool operator because the person operates, or
solicits funds, securities, or property for, a pooled investment
vehicle that engages in retail forex transactions; or
(3) A commodity trading advisor because the person exercises
discretionary trading authority, or obtains written authorization to
exercise discretionary trading authority over, an account in connection
with retail forex transactions, must become and remain a member of at
least one futures association that is registered under section 17 of
the Act and that provides for the membership therein of such person.
Sec. 5.23 Notice of bulk transfers and bulk liquidations.
(a) Notice and disclosure to retail forex customers of a bulk
transfer. (1) A retail foreign exchange dealer, futures commission
merchant or introducing broker must obtain the written prior and
specific consent of its retail forex customer to the assignment of any
position or transfer of any account of the retail forex customer to
another retail foreign exchange dealer, futures commission merchant or
introducing broker, unless made at the retail forex customer's request.
(2) Absent a request of the retail forex customer or the consent
described in paragraph (a)(1) of this section, assignments of positions
and transfers of accounts of retail forex customers may be permitted
under rules of the retail forex dealer's, futures commission
merchant's, or introducing broker's designated self-regulatory
organization that establish notice and other requirements with respect
to the assignment of positions and transfers of accounts of retail
forex customers. If such rules permit implied consent as a result of
the failure of the retail forex customer to object after having
received notice of the proposed assignment or transfer, such rules must
provide that the notice must include a statement that the retail forex
customer is not required to accept the proposed assignment or transfer
and may direct the transferor firm to liquidate the positions of the
retail forex customer or transfer the account to a firm of the retail
forex customer's selection.
(3) For assignments and transfers made under this section, other
than at the retail forex customer's request, the transferee retail
foreign exchange dealer, futures commission merchant or introducing
broker must provide to the retail forex customer the risk disclosure
statements and forms of acknowledgment required by Part 5 of this
chapter and receive the required signed acknowledgments within sixty
days of such assignments or transfers. This requirement shall not
apply:
(i) If the transferee retail foreign exchange dealer, futures
commission merchant or introducing broker has clear written evidence
that the retail forex customer has received and acknowledged receipt of
the required disclosure statements; or
(ii) If the transfer of accounts is made from one introducing
broker to another introducing broker guaranteed by the same retail
foreign exchange dealer or futures commission merchant pursuant to a
guarantee agreement in accordance with the requirements of Sec.
1.10(j) of this chapter and such retail foreign exchange dealer or
futures commission merchant maintains the relevant acknowledgments
required by Part 5 of this chapter.
(b) Notice to the Commission. Each retail foreign exchange dealer,
futures commission merchant or introducing broker shall file with the
Commission prior notice of any transfer of accounts of any retail forex
customer that is not initiated at the request of the customer, where
the transfer involves 50 percent or more of the transferor's total
number of retail forex customer accounts.
(c) Contents of notice to the Commission. The notice required by
paragraph (b) of this section shall include:
(1) The name, principal business address and telephone number of
the transferor futures retail foreign exchange dealer, futures
commission merchant or introducing broker;
(2) The name, principal business address and telephone number of
each transferee retail foreign exchange dealer, futures commission
merchant or introducing broker;
(3) The designated self-regulatory organization for the transferor
and transferee firms;
(4) A brief statement as to the reasons for the transfer;
(5) A copy of any notices to customers regarding the transfers; and
(6) A statement of the number of accounts to be transferred.
(d) Notice of the bulk liquidation of retail forex transactions. A
retail foreign exchange dealer or futures commission merchant may not
initiate the bulk liquidation of properly margined retail forex
transactions unless such liquidation complies with the rules and
procedures of the retail forex dealer's or
[[Page 55449]]
futures commission merchant's designated self-regulatory organization
and the retail forex dealer or futures commission merchant provides the
Commission with prior written notice of the liquidation.
(e) Contents of notice of bulk liquidation. The notice required by
paragraph (d) of this section shall include:
(1) The name, principal business address and telephone number of
the initiating retail foreign exchange dealer or futures commission
merchant;
(2) A brief statement of the reasons for the liquidation;
(3) A copy of any notices to customers regarding the liquidation;
and
(4) A statement of the number of accounts to be liquidated.
(f) Filing of notices. The notice required by paragraph (b) and (d)
of this section shall be filed five business days prior to the transfer
or liquidation of the retail forex transaction with the Deputy
Director, Compliance and Registration Section, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the
National Futures Association Attn: Vice President-Compliance; and the
designated self-regulatory organization for the transferor firm.
(g) No effect on other obligations. The requirements of this
section shall not affect the obligations of a retail foreign exchange
dealer, futures commission merchant or introducing broker under the
rules of a self-regulatory organization or applicable customer account
agreement with respect to assignments of positions or transfers of
accounts or liquidation of positions.
(h) Corrective notice. If a proposed transfer is not completed in
accordance with the notice required to be filed by paragraph (b) of
this section, a corrective notice shall be filed within five business
days of the date such proposed transfer was to occur explaining why the
proposed transfer was not completed.
Sec. 5.24 Applicability of other parts of this chapter
Insofar as it is consistent with the requirements of this part, all
other provisions of this chapter that apply to a person shall apply to
such person as though such provisions were expressly set forth in this
part.
Sec. 5.25 Applicability of the Act.
Except as otherwise specified in this part and unless the context
otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k,
4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall
apply to retail forex transactions that are subject to the requirements
of this part as though such provisions were set forth herein and
included specific references to retail forex transactions and the
persons defined in Sec. 5.1 of this part.
PART 10--RULES OF PRACTICE
0
37. The authority citation for part 10 continues to read as follows:
Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7
U.S.C. 2a(12).
0
38. Section 10.1 is amended by revising paragraph (a) to read as
follows:
Sec. 10.1 Scope and applicability of rules of practice.
* * * * *
(a) Denial, suspension, revocation, conditioning, restricting or
modifying of registration as a futures commission merchant, retail
foreign exchange dealer, introducing broker, or associated person,
floor broker, floor trader, commodity pool operator, commodity trading
advisor or leverage transaction merchant pursuant to sections 6(c),
8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2),
12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of
designation as a contract market pursuant to sections 6(a) and 6(b) of
the Act, 7 U.S.C. 8;
* * * * *
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
39. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2 and 12a.
0
40. Section 140.94 is added to read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Clearing and Intermediary Oversight.
(a) The Commission hereby delegates, until such time as the
Commission orders otherwise, the following functions to the Director of
the Division of Clearing and Intermediary Oversight and to such members
of the Commission's staff acting under his direction as he may
designate from time to time:
(1) All functions reserved to the Commission in Sec. 5.7 of this
chapter;
(2) All functions reserved to the Commission in Sec. 5.10 of this
chapter;
(3) All functions reserved to the Commission in Sec. 5.11 of this
chapter;
(4) All functions reserved to the Commission in Sec. 5.12 of this
chapter, except for those relating to nonpublic treatment of reports
set forth in Sec. 5.12(i) of this chapter; and
(5) All functions reserved to the Commission in Sec. 5.14 of this
chapter.
(b) The Director of the Division of Clearing and Intermediary
Oversight may submit any matter which has been delegated to him under
paragraph (a) of this section to the Commission for its consideration.
(c) Nothing in this section may prohibit the Commission, at its
election, from exercising the authority delegated to the Director of
the Division of Clearing and Intermediary Oversight under paragraph (a)
of this section.
PART 145--COMMISSION RECORDS AND INFORMATION
0
41. The authority citation for part 145 continues to read as follows:
Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80
Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.
1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389
(5 U.S.C. 4a(j)); unless otherwise noted.
0
42. Section 145.5 is amended by revising paragraphs (d)(1)(viii) and
(h) to read as follows:
Sec. 145.5 Disclosure of nonpublic records.
* * * * *
(d) * * *
(1) * * *
(viii) The following reports and statements that are also set forth
in paragraph (h) of this section, except as specified in 17 CFR
1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to
be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are
filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR
required to be filed pursuant to 17 CFR 31.13; the accountant's report
on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);
and all reports and statements required to be filed pursuant to 17 CFR
1.17(c)(6);
* * * * *
(h) Contained in or related to examinations, operating, or
condition reports prepared by, on behalf of, or for the use of the
Commission or any other agency responsible for the regulation or
supervision of financial institutions, including, but not limited to
the following reports and statements that are also set forth in
paragraph (d)(1)(viii) of this section, except as specified in 17 CFR
1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required to
be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are
filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR
required to be filed pursuant to 17 CFR 31.13; the accountant's report
on material inadequacies filed in
[[Page 55450]]
accordance with 17 CFR 1.16(c)(5); and all reports and statements
required to be filed pursuant to 17 CFR 1.17(c)(6); and
* * * * *
PART 147--OPEN COMMISSION MEETINGS
0
43. The authority citation for part 147 continues to read as follows:
Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.
552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.
4a(j) (Supp. V, 1975)), unless otherwise noted.
0
44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H) and
(b)(8) to read as follows:
Sec. 147.3 General requirement of open meetings; grounds upon which
meetings may be closed.
* * * * *
(b) * * *
(4) * * *
(i) * * *
(H) The following reports and statements that are also set forth in
paragraph (b)(8) of this section, except as specified in 17 CFR
1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be
filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m);
FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR
1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the
accountant's report on material inadequacies filed in accordance with
17 CFR 1.16(c)(5); and all reports and statements required to be filed
pursuant to 17 CFR 1.17(c)(6);
* * * * *
(8) Disclose information contained in or related to examination,
operating, or condition reports prepared by, on behalf of, or for the
use of the Commission or any other agency responsible for the
regulation or supervision of financial institutions, including, but not
limited to the following reports and statements that are also set forth
in paragraph (b)(4)(i)(H) of this section, except as specified in 17
CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to
be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR
31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant
to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR
31.13; the accountant's report on material inadequacies filed in
accordance with 17 CFR 1.16(c)(5); and all reports and statements
required to be filed pursuant to 17 CFR 1.17(c)(6);
* * * * *
PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION
0
45. The authority citation for part 160 continues to read as follows:
Authority: 7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.
0
46. Section 160.1 is amended by revising paragraph (b) to read as
follows:
Sec. 160.1 Purpose and scope.
* * * * *
(b) Scope. This part applies only to nonpublic personal information
about individuals who obtain financial products or services primarily
for personal, family, or household purposes from the institutions
listed below. This part does not apply to information about companies
or about individuals who obtain financial products or services
primarily for business, commercial, or agricultural purposes. This part
applies to all futures commission merchants, retail foreign exchange
dealers, commodity trading advisors, commodity pool operators and
introducing brokers that are subject to the jurisdiction of the
Commission, regardless whether they are required to register with the
Commission. These entities are hereinafter referred to in this part as
``you.'' This part does not apply to foreign (non-resident) futures
commission merchants, retail foreign exchange dealers, commodity
trading advisors, commodity pool operators and introducing brokers that
are not registered with the Commission. Nothing in this part modifies,
limits or supersedes the standards governing individually identifiable
health information promulgated by the Secretary of Health and Human
Services under the authority of sections 262 and 264 of the Health
Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d--
1320d-8.
47. Section 160.3 is amended by:
0
a. Revising paragraph (a) introductory text and paragraph (a)(2);
0
b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs
(k)(2)(i)(C) through (G) and republishing them, and adding new
paragraph (k)(2)(i)(B);
0
c. Revising paragraphs (n)(1)(i) and (n)(2)(i);
0
d. Revising paragraph (o)(1)(i);
0
e. Revising paragraph (u)(2)(i)(A);
0
f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3)
through (5) and adding new paragraph (w)(2); and
0
g. Adding new paragraph (x) to read as follows:
Sec. 160.3 Definitions.
* * * * *
(a) Affiliate of a futures commission merchant, retail foreign
exchange dealer, commodity trading advisor, commodity pool operator or
introducing broker means any company that controls, is controlled by,
or is under common control with a futures commission merchant, retail
foreign exchange dealer, commodity trading advisor, commodity pool
operator or introducing broker that is subject to the jurisdiction of
the Commission. In addition, a futures commission merchant, retail
foreign exchange dealer, commodity trading advisor, commodity pool
operator or introducing broker subject to the jurisdiction of the
Commission will be deemed an affiliate of a company for purposes of
this part if:
* * * * *
(2) Rules adopted by the Federal Trade Commission or another
federal functional regulator under Title V of the GLB Act treat the
futures commission merchant, retail foreign exchange dealer, commodity
trading advisor, commodity pool operator or introducing broker as an
affiliate of that company.
* * * * *
(k) * * *
(2) * * *
(i) * * *
(B) You are a retail foreign exchange dealer with whom a consumer
has opened an account, or that effects or engages in retail forex
transactions with or for a consumer, even if you do not hold any assets
of the consumer;
(C) You are an introducing broker that solicits or accepts specific
orders for trades;
(D) You are a commodity trading advisor with whom a consumer has a
contract or subscription, either written or oral, regardless of whether
the advice is standardized, or is based on, or tailored to, the
commodity interest or cash market positions or other circumstances or
characteristics of the particular consumer;
(E) You are a commodity pool operator, and you accept or receive
from the consumer, funds, securities, or property for the purpose of
purchasing an interest in a commodity pool;
(F) You hold securities or other assets as collateral for a loan
made to the consumer, even if you did not make the loan or do not
effect any transactions on behalf of the consumer; or
(G) You regularly effect or engage in commodity interest
transactions with or for a consumer even if you do not hold any assets
of the consumer.
* * * * *
(n)(1) * * *
(i) Any futures commission merchant, retail foreign exchange
dealer,
[[Page 55451]]
commodity trading advisor, commodity pool operator or introducing
broker that is registered with the Commission as such or is otherwise
subject to the Commission's jurisdiction; and
* * * * *
(2) * * *
(i) Any person or entity, other than a futures commission merchant,
retail foreign exchange dealer, commodity trading advisor, commodity
pool operator or introducing broker that, with respect to any financial
activity, is subject to the jurisdiction of the Commission under the
Act.
* * * * *
(o)(1) * * *
(i) Any product or service that a futures commission merchant,
retail foreign exchange dealer, commodity trading advisor, commodity
pool operator, or introducing broker could offer that is subject to the
Commission's jurisdiction; and
* * * * *
(u) * * *
(2) * * *
(i) * * *
(A) Information a consumer provides to you on an application to
open a commodity interest trading account, to invest in a commodity
pool, or to obtain another financial product or service;
* * * * *
(w) * * *
(2) Any retail foreign exchange dealer;
* * * * *
(x) Retail foreign exchange dealer has the same meaning as in Sec.
5.3(i)(1) of this chapter.
0
48. Section 160.4 is amended by:
0
a. Revising paragraph (c)(2)(ii); and
0
b. Revising paragraph (e)(1)(iv) to read as follows:
Sec. 160.4 Initial privacy notice to consumers required.
* * * * *
(c) * * *
(2) * * *
(ii) Opens a retail forex account, or opens a commodity interest
account through an introducing broker or with a futures commission
merchant that clears transactions for its customers through you on a
fully-disclosed basis;
* * * * *
(e) * * *
(1) * * *
(iv) You have established a customer relationship with a customer
in a bulk transfer in accordance with Sec. 1.65, if you are a
transferee futures commission merchant, retail foreign exchange dealer
or introducing broker.
* * * * *
0
49. Section 160.30 is amended by revising the introductory text to read
as follows:
Sec. 160.30 Procedures to safeguard customer records and information.
Every futures commission merchant, retail foreign exchange dealer,
commodity trading advisor, commodity pool operator and introducing
broker subject to the jurisdiction of the Commission must adopt
policies and procedures that address administrative, technical and
physical safeguards for the protection of customer records and
information. These policies and procedures must be reasonably designed
to:
* * * * *
PART 166--CUSTOMER PROTECTION RULES
0
50. The authority citation for part 166 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,
12a and 23, as amended by the Commodity Futures Modernization Act of
2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).
0
51. Section 166.2 is revised to read as follows:
Sec. 166.2 Authorization to trade.
No futures commission merchant, retail foreign exchange dealer,
introducing broker or any of their associated persons may directly or
indirectly effect a transaction in a commodity interest for the account
of any customer unless before the transaction the customer, or person
designated by the customer to control the account:
(a) With respect to any commodity interest as defined in Sec.
1.3(yy)(1) through (3) of this chapter, specifically authorized the
futures commission merchant, retail foreign exchange dealer,
introducing broker or any of their associated persons to effect the
transaction (a transaction is ``specifically authorized'' if the
customer or person designated by the customer to control the account
specifies--
(1) The precise commodity interest to be purchased or sold; and
(2) The exact amount of the commodity interest to be purchased or
sold); or
(b) With respect to any commodity interest as defined in Sec.
1.3(yy)(1) or (2) of this chapter, authorized in writing the futures
commission merchant, introducing broker or any of their associated
persons to effect transactions in commodity interests for the account
without the customer's specific authorization; Provided, however, That
if any such futures commission merchant, introducing broker or any of
their associated persons is also authorized to effect transactions in
foreign futures or foreign options without the customer's specific
authorization, such authorization must be expressly documented.
0
52. Section 166.5 is amended by:
0
a. Removing paragraph (a)(1)(iv), redesignating paragraphs (a)(1)(i)
through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through (a)(1)(i)(C),
and adding new paragraph (a)(1)(ii);
0
b. Revising paragraphs (a)(2) and (a)(3);
0
c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as
follows:
Sec. 166.5 Dispute settlement procedures.
(a) * * * (1) * * *
(ii) Arises out of any retail forex transaction (as defined in
Sec. 5.1(m) of this chapter).
(2) The term customer as used in this section includes an option
customer (as defined in Sec. 1.3(jj) of this chapter), a retail forex
customer (as defined in Sec. 5.1(k) of this chapter) and any person
for or on behalf of whom a member of a designated contract market, or a
participant transacting on or through such designated contract market,
effects a transaction on such contract market, except another member of
or participant in such designated contract market; Provided, however, a
person who is an ``eligible contract participant'' as defined in
section 1a(12) of the Act shall not be deemed to be a customer within
the meaning of this section.
(3) The term Commission registrant as used in this section means a
person registered under the Act as a futures commission merchant,
retail foreign exchange dealer, introducing broker, floor broker,
commodity pool operator, commodity trading advisor, or associated
person.
* * * * *
(c) * * *
(5) * * *
(i) * * *
(A) The designated contract market, if applicable and if available,
upon which the transaction giving rise to the dispute was executed or
could have been executed;
* * * * *
(C) At least one other organization that will provide the customer
with the opportunity to select the location of the arbitration
proceeding from among several major cities in diverse geographic
regions and that will provide the customer with the choice of a panel
or other decision-maker composed of at least one or more persons, of
which at least a majority are not members or associated with a member
of the designated contract market, if applicable, or employee thereof,
and
[[Page 55452]]
that are not otherwise associated with the designated contract market
(mixed panel), if applicable: Provided, however, that the list of
qualified organizations provided by a Commission registrant that is a
floor broker need not include a registered futures association unless a
registered futures association has been authorized to act as a
decision-maker in such matters.
* * * * *
Issued in Washington, DC, on August 26, 2010, by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-21729 Filed 9-9-10; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: September 10, 2010
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