9 September 2008 - 14:14Important news from NFA

For those of you who don’t know the firms classified as Forex Dealer Members or FDMs always act as counterparty to you in your trades. Read the following taken from the NFA website discussing this. Check with the NFA to see if the firm you are using is classified as an FDM. A firm where your trades never reach the market and your always betting against the house so to speak. If so think twice about investing with a firm which is classified as an FDM by the NFA.

(Revised November 9, 2004; June 13, 2005; September 15, 2005; November 30, 2005; April 30, 2006; July 31, 2006; October 1, 2006; February 13, 2007; March 7, 2007; March 9, 2007; March 31, 2007; May 7, 2007; June 5, 2007; July 1, 2007; September 21, 2007; October 1, 2007; October 25, 2007; December 17, 2007; December 21, 2007; June 1, 2008; and July 1, 2008.)

INTERPRETIVE NOTICE

The Commodity Exchange Act (CEA or Act) gives the Commodity Futures Trading Commission (CFTC or Commission) limited jurisdiction over off-exchange foreign currency transactions offered to or entered into with retail customers. As a result of those provisions, certain firms primarily engaged in the retail forex business have registered with the CFTC and become Members of NFA. NFA has adopted several requirements to govern the conduct of these firms and their associated persons.

As described below, NFA Bylaw 306 creates a Forex Dealer Member category for certain NFA Members who act as counterparties to forex transactions with retail customers. This category allows NFA to exercise appropriate regulatory jurisdiction over the retail forex activities of these Members without imposing unnecessary, and potentially duplicative, regulatory burdens on Members that are otherwise subject to regulatory oversight for their activities.

NFA Bylaw 1507(b) defines forex as foreign currency futures and options and any other agreement, contract, or transaction in foreign currency that is offered or entered into on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis that are:

• offered to or entered into with persons that are not eligible contract participants as defined in Section 1a(12) of the Act (retail customers); and
• not executed on or subject to the rules of a contract market, a derivatives transaction execution facility, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade.¹

Bylaw 1507(b) also excludes the following from the forex definition if the transaction is not a futures or options contract:

• securities (other than security futures products);
• any contract of sale that results in actual delivery within two days; and
• any contract of sale that creates an enforceable obligation to deliver between a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business.

Given the differences between off-exchange transactions and traditional exchange-traded futures and options, the Board of Directors does not believe that it is appropriate to apply the full array of NFA’s futures rules to forex transactions. Therefore, rather than simply incorporating forex transactions into the definition of “futures,” NFA adopted NFA Compliance Rule 2-36 to govern these transactions.