3282 Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / Proposed Rules 

1Food, Conservation, and Energy Act of 2008, 

Pub. L. 110–246, 122 Stat. 1651, 2189–2204 (2008). 

2See, 7 U.S.C. 2(c)(2)(B)(v) and 7 U.S.C. 

2(c)(2)(C)(ii)(III). 

3See, 7 U.S.C. 2(c)(2)(B)(iv)(III) and 7 U.S.C. 

2(c)(2)(C)(iii)(III). 

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: Proposed rules. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is proposing to adopt a 

comprehensive regulatory scheme 

(‘‘Proposal’’) to implement the CFTC 

Reauthorization Act of 2008 (‘‘CRA’’) 1

with respect to off-exchange 

transactions in foreign currency with 

members of the retail public (i.e., ‘‘retail 

forex transactions’’). The Commodity 

Exchange Act, as amended by the CRA, 

generally provides that the 

Commission’s jurisdiction extends to 

contracts of sale of a commodity for 

future delivery (or an option on such a 

contract) or an option (other than an 

option executed or traded on a national 

securities exchange), and to certain 

leveraged or margined contracts in 

foreign currency that are offered to or 

entered into with retail customers. The 

Commission is proposing a scheme that 

would put in place requirements for, 

among other things, registration, 

disclosure, recordkeeping, financial 

reporting, minimum capital, and other 

operational standards, based on both the 

CFTC’s existing regulations for 

commodity interest transactions and 

commodity interest intermediaries, as 

well as rules of the National Futures 

Association (‘‘NFA’’) that are already 

existing with respect to retail forex 

transactions offered by NFA’s members. 

Additionally, the Proposal would 

amend existing regulations as needed to 

clarify their application to, and 

inclusion in, the new regulatory scheme 

for retail forex. 

DATES: Comments must be received on 

or before March 22, 2010. 

ADDRESSES: You may submit comments, 

identified by RIN 3038–AC61, by any of 

the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov/search/index.jsp. 

Follow the instructions for submitting 

comments. 

• E-mail: secretary@cftc.gov. Include 

‘‘Regulation of Retail Forex’’ in the 

subject line of the message. 

• Fax: (202) 418–5521. 

• Mail: Send to David Stawick, 

Secretary, Commodity Futures Trading 

Commission, 1155 21st Street, NW., 

Washington, DC 20581. 

• Courier: Same as Mail above. 

All comments received will be posted 

without change to http://www.cftc.gov, 

including any personal information 

provided. 

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: The CRA 

provides the Commission with broad 

authority to ‘‘make, promulgate and 

enforce such rules and regulations as, in 

the judgment of the Commission, are 

reasonably necessary to effectuate any of 

the provisions of [the Commodity 

Exchange] Act’’ in connection with offexchange foreign currency futures, 

options, and options on futures, as well 

as leveraged off-exchange contracts 

offered to or entered into with retail 

customers.2 The Commission is given 

similarly broad authority to promulgate 

and enforce rules regarding registration 

of persons who solicit, exercise 

discretionary trading authority or 

operate or solicit funds in connection 

with any of these types of transactions.3

Pursuant to this authority, the 

Commission is proposing a scheme that 

would put in place requirements for, 

among other things, registration, 

disclosure, recordkeeping, financial 

reporting, minimum capital, and other 

operational standards, based on both the 

CFTC’s existing regulations for 

commodity interest transactions and 

commodity interest intermediaries, as 

well as rules of the National Futures 

Association (‘‘NFA’’) that are already 

existing with respect to retail forex 

transactions offered by NFA’s members. 

Subject to certain exceptions (e.g., for 

certain regulated financial 

intermediaries not under the 

Commission’s jurisdiction as 

established in the CRA), the Proposal 

would require persons offering to be or 

acting as counterparties to retail forex 

transactions but not primarily or 

substantially engaged in the exchange 

traded futures business, to register as 

retail foreign exchange dealers 

(‘‘RFEDs’’) with the CFTC. Registered 

futures commission merchants (‘‘FCMs’’) 

that are ‘‘primarily or substantially’’ (as 

defined in the Proposal) engaged in the 

activities set forth in the Act’s definition 

of an FCM would be permitted to engage 

in retail forex transactions without also 

registering as RFEDs. 

The Proposal would further 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. In 

addition, the Proposal would require 

any IB that introduces retail forex 

transactions to an RFED or FCM to be 

guaranteed by that RFED or FCM. 

The Proposal would also implement 

the $20 million minimum net capital 

standard established in the CRA for 

registering as an RFED or offering retail 

forex transactions as an FCM; propose 

an additional volume-based minimum 

capital threshold calculated on the 

amount an FCM or RFED owes as 

counterparty to retail forex transactions; 

and require RFEDs or FCMs engaging in 

retail forex transactions to collect 

security deposits in a minimum amount 

in order to prudentially limit the 

leverage available to their retail 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / Proposed Rules 3283 

4Public Law 93–643, 88 Stat. 1389 (1974). 

5See, Letter from Donald L.E. Ritger, Acting 

General Counsel, Department of the Treasury, to the 

Hon. Herman E. Talmadge (July 30, 1974), reprinted 

at 1974 U.S.C.C.A.N. 5843, 5887–89. 

6 Id. at 51. 

7 Dealers in GNMA Certificates as a Board of 

Trade, CFTC Staff Interpretive Letter No. 77–12, 

[1977–1980 Transfer Binder] Comm. Fut. L. Rep. 

(CCH) ¶ 20,467 (Aug. 17, 1977). 

8Board of Trade of Chicago v. SEC, 677 F. 2d 

1137, 1154 (7th Cir. 1982), vacated as moot, 459 

U.S. 1026 (1982). 

9 Id. at 1154. 

10Trading in Foreign Currencies for Future 

Delivery, 50 FR 42983 (Oct. 23, 1985). 

11 Id. at 42985. 

12 795 F. Supp. 768 (E.D. Va. 1992), aff’d, 8 F.3d 

966 (4th Cir. 1993). 

13 Id. at 978. 

14 Id. 

15See, Exemption for Certain Swap Agreements, 

58 FR 5587 (Jan. 22, 1993). 

customers on such transactions at 10 to 

1. 

I. Background 

A. The Commodity Futures Trading 

Commission Act of 1974 

Congress created the Commission in 

1974 as an independent agency with the 

mandate to regulate commodity futures 

and option markets in the United States 

by the enactment of the Commodity 

Futures Trading Commission Act of 

1974.4 While the bill was being 

considered, the Department of the 

Treasury (‘‘Treasury’’) sent a letter to the 

Senate Committee with jurisdiction over 

the bill, expressing concerns that 

Treasury had regarding the effect that 

passage would have on the off-exchange 

foreign currency (‘‘forex’’) market that 

existed at the time between large, 

institutional customers.5 The letter 

contained proposed language for the bill 

which would have maintained the 

status quo for institutional off-exchange 

forex trading, leaving jurisdiction over 

on-exchange trading in futures and 

options contracts on forex with the 

newly-created Commission. The bill 

was subsequently amended to add the 

suggested language contained in 

Treasury’s letter, which was intended to 

give the Commission jurisdiction over 

retail forex transactions and to exclude 

from the Commission’s jurisdiction the 

off-exchange, institutional ‘‘interbank’’ 

market in foreign currencies. This 

language, which has come to be known 

as the ‘‘Treasury Amendment,’’ provided 

that: 

Nothing in this Act shall be deemed to 

govern or in any way be applicable to 

transactions in foreign currency * * * unless 

such transactions involve the sale thereof for 

future delivery conducted on a board of 

trade.6

As is discussed below, over time, and 

on numerous occasions, the 

Commission and the courts have opined 

on the proper boundaries of this 

exclusion. 

The Commission first addressed the 

possible scope of the Treasury 

Amendment with regard to off-exchange 

transactions in securities issued by the 

Government National Mortgage 

Association (‘‘GNMA’’). In an 

interpretive letter issued by the 

Commission’s Office of General 

Counsel, Commission staff stated that 

the remarks by the Senate Committee 

were 

an expression that regulation by the 

Commission is unnecessary where there 

exists an informal market among institutional 

participants in transactions for future 

delivery in the specified financial 

instruments only so long as it is supervised 

by those agencies having regulatory 

responsibility over those participants. 

However, where that market is not 

supervised and where those transactions are 

conducted with participation by members of 

the general public, we do not understand the 

Committee to have intended that a regulatory 

gap should exist. In these circumstances, we 

believe the Commodity Exchange Act should 

be construed broadly to assure that the public 

interest will be protected by Commission 

regulation of those transactions.7

The scope of the exclusion, again with 

regard to off-exchange transactions in 

GNMA securities, was addressed by the 

U.S. Court of Appeals for the Seventh 

Circuit (‘‘Seventh Circuit’’) when it 

determined that the Treasury 

Amendment did not exclude options on 

government securities from the 

Commission’s authority.8 Specifically, 

the court determined that although 

trading in GNMA securities was 

excluded from the Commission’s 

jurisdiction, trading in options on such 

instruments was within the 

Commission’s authority. As the court 

stated: 

From the legislative history, it is quite clear 

that the Treasury Amendment was adopted 

by Congress only to prevent dual regulation 

by the CFTC and bank regulatory agencies of 

the banks and other sophisticated institutions 

that ordinarily trade in financial 

instruments.9

Following that discussion, in 1985, 

the Commission issued a Statutory 

Interpretation concerning the Treasury 

Amendment that specifically dealt with 

forex.10 Responding to reports that forex 

futures contracts were being offered to 

retail customers on an off-exchange 

basis, under the assumption that such 

transactions were excluded from the 

Commission’s jurisdiction, the 

Commission reaffirmed and republished 

its views, as follows: 

[T]he Commission wishes to make very 

clear that any marketing to the general public 

of futures transactions in foreign currencies 

conducted outside the facilities of a contract 

market is strictly outside the scope of the 

[Treasury] Amendment. As a result, such an 

off-exchange offer or sale of futures contracts 

involving foreign currencies is unlawful 

under section 4(a) of the Act, 7 U.S.C. 6(a) 

(1982).11

The boundaries of the Treasury 

Amendment were again tested in 

Salomon Forex v. Tauber,12 where a 

sophisticated investor sought to 

invalidate a multi-million dollar trading 

debt by claiming that the Treasury 

Amendment only excluded spot or 

forward forex transactions from the 

Commission’s jurisdiction, and that 

trading in off-exchange futures and 

options were within the Commission’s 

regulatory authority. If such transactions 

were deemed to be within the 

Commission’s authority, then the 

transactions could only occur legally on 

an approved exchange. The Court 

determined that the Treasury 

Amendment excluded off-exchange 

trading in futures and options as well as 

‘‘spot’’ and ‘‘forward’’ transactions from 

the Commission’s authority, if it 

involved ‘‘sophisticated, large-scale 

foreign currency traders.’’ 13 Although 

this holding has sometimes been 

misinterpreted to imply that offexchange forex transactions with the 

general public were outside the 

Commission’s jurisdiction, this holding 

concerned only large-scale traders and 

banks that made up the informal 

network of the foreign currency 

‘‘interbank’’ market. Indeed, the Court 

itself noted that: ‘‘[t]his case does not 

involve mass marketing to small 

investors, which would appear to 

require trading through an exchange and 

our holding in no way implies that such 

marketing is exempt from the CEA.’’ 14

B. The Futures Trading Practices Act of 

1992 

The Futures Trading Practices Act of 

1992 reorganized certain sections of the 

Commodity Exchange Act, 7 U.S.C. 1, et 

seq. (2000) (the ‘‘Act’’) and gave the 

Commission significant exemptive 

authority over the activities of a wide 

variety of persons, including FCMs, 

CTAs, and CPOs. 

It was pursuant to this exemptive 

authority that the Commission 

addressed some aspects of the over-thecounter (‘‘OTC’’) markets by adopting 

Part 35 of its regulations, which 

provides an exemption from regulation 

for certain swap agreements.15 However, 

the Commission did not use its newlyVerDate Nov<24>2008 15:03 Jan 19, 2010 Jkt 220001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 E:\FR\FM\20JAP2.SGM 20JAP2

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16See, e.g., Sections 4(c) and 4(d) of the Act, 7 

U.S.C. 6(c) and 6(d). 

17Fraud Advisory from the CFTC: Foreign 

Currency Trading (Forex) Fraud, available at: 

http://www.cftc.gov/customerprotection/ 

fraudawarenessandprevention/fraudadvisories/ 

fraudadv_forex.html. The Commission also issued 

brochures to alert customers to the possible scams 

involving forex fraud. See CFTC Brochure on Forex 

Fraud, available at: http://www.cftc.gov/enf/enfforex.htm and http://www.cftc.gov/stellent/groups/ 

public/@cpfraudawarenessandprotection/ 

documents/file/enfforexbrochure.pdf (last visited 

Oct. 15, 2009). 

18For instance, in Dunn & Delta Consultants, Inc. 

v. CFTC, 519 U.S. 465, 469 (1997), the U.S. 

Supreme Court held that foreign currency options 

were ‘‘transactions in foreign currency’’ within the 

meaning of the Treasury Amendment. 

19Consolidated Appropriations Act of 2001, 

Public Law 106–554, App. E, 114 Stat. 2763 (2000), 

available at Commodity Futures Modernization Act 

of 2000, [2000–2002 Transfer Binder] Comm. Fut. 

L. Rep. (CCH) ¶ 28,433 (Dec. 21, 2000). 

20CFTC v. Frankwell Bullion Ltd., 99 F. 3d 299 

(9th Cir. 1996). 

21See, CFTC v. Baragosh, 278 F.3d 319 (4th Cir. 

2002), which relied on the Conference Committee 

Report, not mentioned in Frankwell Bullion, to 

arrive at the opposite conclusion from the Ninth 

Circuit; See also, CFTC v. Standard Forex, No. CV– 

93–0088 (CPS). 1993 WL 809966 (E.D.N.Y. Aug. 9, 

1993). 

22See, 7 U.S.C. 2(c)(2)(B). Broadly stated, these 

entities included: (1) A financial institution; (2) a 

registered broker/dealer (‘‘B–D’’) or FCM; (3) an 

insurance company; (4) a financial holding 

company; and (5) an investment bank holding 

company. 

23Section 1(c)(12) of the Act defines the term 

‘‘eligible contract participant.’’ Entities classified as 

ECPs include financial institutions, insurance 

companies, certain commodity pools and 

individuals who meet certain asset thresholds. NonECPs, generally speaking, are retail customers. 

24For example, Section 2(d) provides that most 

sections of the Act do not apply to derivative 

transactions between ECPs; Section 2(g) provides 

that most sections of the Act do not apply to swap 

transactions between ECPs; and the Part 35 safe 

harbor for swap agreements, which pre-dates the 

CFMA, provides another basis for excluding 

jurisdiction. 

25NFA is a registered futures association, 

pursuant to Section 17(b) of the Act. It is an 

industry-wide, self-regulatory organization for the 

U.S. futures industry. 

26 Division of Trading and Markets Advisory 

Concerning Foreign Currency Trading by Retail 

Customers, available at: http://www.cftc.gov/ 

stellent/groups/public/ 

@cpfraudawarenessandprotection/documents/file/ 

forex_advisoryretailcustomers.pdf (last visited Oct. 

13, 2009). 

27 Division of Clearing and Intermediary 

Oversight Advisory Concerning Retail Off-Exchange 

Foreign Currency Trading, available at: http:// 

www.cftc.gov/stellent/groups/public/ 

@cpfraudawarenessandprotection/documents/file/ 

forex_advretailcustomers2007.pdf (last updated 

August 30, 2007). 

28CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), 

reh’g and reh’g en banc denied, CFTC v. Zelener, 

387 F.3d 624 (7th Cir. 2004). The U.S. Court of 

Appeals for the Sixth Circuit relied on Zelener 

when it issued its opinion in CFTC v. Erskine, 512 

F.3d 309 (6th Cir. 2008), determining that the 

foreign currency contracts at issue were not futures 

contracts and upholding the district court’s 

summary judgment against the Commission for lack 

of jurisdiction. 

granted exemptive authority in the 

context of retail forex.16

Rather, the Commission’s efforts were 

directed to combating forex fraud 

activities through increased 

enforcement and public awareness. In 

response to increased fraud activity in 

the forex markets, the CFTC issued a 

fraud advisory to the public on March 

30, 1998.17 Notwithstanding the 

Commission’s guidance and the 

legislative history, the ambiguity of the 

Treasury Amendment continued to 

present opportunities for defendants to 

challenge the Commission’s jurisdiction 

in the courts, which consumed much of 

the Commission staff’s time and 

resources.18 Unfortunately, these 

challenges would persist until the 

adoption of the Commodity Futures 

Modernization Act of 2000 (‘‘CFMA’’).19

Under the Treasury Amendment, 

retail forex transactions were excluded 

from the Commission’s jurisdiction 

unless they were conducted on a ‘‘board 

of trade.’’ This broad phrase caused 

further confusion when courts tried to 

interpret its meaning in order to 

delineate where the Commission’s 

jurisdiction ended. The U.S. Court of 

Appeals for the Ninth Circuit (‘‘Ninth 

Circuit’’) relied on the language in the 

Senate Committee report to interpret the 

clause and believed that a proper 

reading of the Treasury Amendment 

excluded all off-exchange forex 

transactions—even with retail 

customers—from the Commission’s 

jurisdiction and that the Commission 

only had jurisdiction over forex 

transactions traded on organized 

exchanges.20 Other courts interpreting 

the same clause came to the conclusion 

that retail off-exchange forex 

transactions were within the 

Commission’s jurisdiction and that the 

legislative history indicates that only 

large institutional trades were intended 

to be excluded from the Commission’s 

oversight.21

C. The Commodity Futures 

Modernization Act of 2000 

The CFMA amended the Act to clarify 

the jurisdiction of the Commission in 

the area of forex futures and options 

trading. For the first time, off-exchange 

retail forex transactions were expressly 

permitted, provided the counterparty 

was one of certain enumerated, 

regulated entities listed in the Act—e.g., 

a registered FCM.22 Transactions 

between certain institutional entities 

(eligible contract participants, or 

‘‘ECPs’’ 23) remained outside the 

Commission’s jurisdiction altogether, 

based on several provisions of the Act 

and the Commission’s regulations.24

Shortly after the adoption of the CFMA, 

however, the Commission and the 

National Futures Association (‘‘NFA’’) 25

noted that firms were registering as 

FCMs but not engaging in any exchangetraded activities. Rather, they were 

limiting their activities solely to retail 

forex. Additionally, the Commission 

noted that firms were registering as 

FCMs but conducting retail forex 

transactions through unregistered 

affiliates. Nothing in the Act or CFMA’s 

amendments to the Act prohibited these 

‘‘shell FCMs’’ from conducting business 

through their unregistered affiliates. 

Although the CFMA provided some 

additional clarity for off-exchange retail 

forex transactions, it did not provide the 

Commission with rulemaking authority, 

and the Commission was thus required 

to provide guidance to allow 

participants to navigate the statute. For 

instance, Advisory 06–01 made clear 

that the Commission had jurisdiction 

over retail forex and only certain 

financial institutions that are 

enumerated in the Act could act as 

counterparties for retail customers in 

that regard. Similarly, Commission staff 

issued an Advisory in 2002 which sets 

out parameters for unlicensed 

intermediaries, such as pool operators, 

account managers and introducers, in 

retail forex transactions.26 Most 

recently, in August 2007, Commission 

staff issued an Advisory that addressed 

the following areas: registration of 

associated persons (‘‘APs’’) of FCMs, 

CPOs and introducing brokers (‘‘IBs’’); 

permissible unregistered forex affiliates; 

segregated funds; guaranteed IBs; 

combined account statements for forex 

and exchange-traded futures; and forex 

trading platforms.27

Following passage of the CFMA, legal 

challenges to the Commission’s 

jurisdiction persisted and certain courts 

began to analyze the elements of a 

futures contract—the basis of the 

Commission’s jurisdiction over offexchange retail forex transactions— 

using new criteria. Some firms began 

offering to retail customers transactions 

that had the elements of futures 

contracts, but that were marketed as 

‘‘spot’’ transactions. However, unlike 

true spot transactions where delivery is 

contemplated, these transactions were 

‘‘rolled over’’ at expiration (generally 

within a few days) and carried forward 

indefinitely. These ‘‘rolling spot’’ or 

‘‘look-alike’’ contracts were the basis of 

many forex fraud cases brought by the 

Commission. However, the 

Commission’s ability to pursue fraud in 

this area was put in doubt by the 

decision of the Seventh Circuit in CFTC 

v. Zelener.28 The Zelener case 


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29See, e.g. CFTC v. Co Petro Mktg. Group, Inc. 

680 F.2d 573 (9th Cir. 1982). 

30See, e.g., CFTC v. UForex Consulting, LLC, 551 

F.Supp.2d 513 (W.D.La. 2008); CFTC v. Erskine, 512 

F. 3d 309 (6th Cir. 2008). 

31Food, Conservation, and Energy Act of 2008, 

Public Law 110–246, 122 Stat. 1651. 2189–2204 

(2008). 

32See, 7 U.S.C. 2(c)(2)(C)(iv). 

33Previously, firms serving as counterparties to 

retail forex typically registered as FCMs (if they 

were not included in any of the other permissible 

categories), even though they did not engage in 

exchange-traded futures business, and thus did not 

meet the statutory definition of an FCM. 

34See, 7 U.S.C. (2)(c)(2)(B)(i)(II)(gg). The 

Commission plans on delegating the registration 

function for RFEDs to NFA, as is the case with the 

registration of FCMs, IBs, CTAs, CPOs and APs. 

35See, 7 U.S.C. (2)(c)(2)(B)(ii). 

36See, 7 U.S.C. 2(c)(2)(C)(i)(I)(bb). 

37See, 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA); H.R. Rep. 

No. 110–627, at 979 (2008) (Conf. Rep.). 

38Although the Commission had jurisdiction 

with regard to market manipulation in prior 

versions of the Act, the CRA removed that authority 

with regard to sections 6(c) and 6(d). All other cited 

sections remain in full effect. 

39See, 7 U.S.C. (2)(c)(2)(B)(iii). In addition to the 

sections included in the CFMA for forex futures and 

options transactions, the CRA adds sections 4(b), 

4o, 13(a), and 13(b). 

40See, 7 U.S.C. (2)(c)(2)(C)(ii)(II). 

41See, 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). 

42See, 7 U.S.C. (2)(c)(2)(B)(v). 

43See, 7 U.S.C. (2)(c)(2)(C)(ii)(III). 

introduced a different framework for 

analyzing what constitutes a ‘‘spot’’ 

transaction and created confusion about 

the applicability of the CFMA to certain 

retail forex transactions. This departed 

from a line of previous non-forex cases 

that distinguished between futures and 

spot or forward contracts based on a 

multi-factor analysis of the economic 

elements in the contract.29

The court in Zelener determined that 

the contracts at issue were not offexchange futures contracts, but rather 

contracts in the commodity itself, and 

thus excluded from the Commission’s 

jurisdiction. The Seventh Circuit 

declined to rehear the case en banc and 

a split of authority among the circuits 

was created. Some courts continued to 

follow the traditional multifactor test 

while others followed the Zelener 

approach and only considered the 

language within the four corners of the 

contract.30

D. The Commodity Futures Trading 

Commission Reauthorization Act of 

2008 

The CRA 31 was intended, among 

other things, to further clarify the 

Commission’s jurisdiction in the area of 

retail forex, particularly in light of the 

proliferation of look-alike forex 

transactions such as those in the Zelener 

and Erskine cases, and to give the 

Commission additional authority to 

regulate retail forex transactions and to 

register persons involved in 

intermediating these products with 

members of the public. To remedy the 

large number of fraud cases where 

jurisdiction had been questioned, the 

CRA gave the Commission jurisdiction 

over certain leveraged retail foreign 

exchange contracts without regard to 

whether it could prove the contracts 

were off-exchange futures contracts.32

The CRA thus grants the Commission 

anti-fraud authority in leveraged retail 

forex transactions even if the 

transactions at issue are not futures or 

options. This allows the Commission to 

protect the public from fraud and 

provides a workable solution to the split 

in the decisions in the Federal appellate 

courts regarding when a so-called ‘‘spot’’ 

contract is a futures contract. 

The CRA also created a new category 

of registrant, the retail foreign exchange 

dealer, or ‘‘RFED,’’ and gave the 

Commission rulemaking authority over, 

and required registration of, 

intermediaries engaging in retail forex.33

The CRA provided that RFEDs and these 

other intermediaries must be NFA 

members and must register with the 

Commission subject to such terms as the 

Commission may prescribe.34 Among 

other requirements, the CRA established 

a $20 million minimum capital 

requirement for RFEDs and FCMs that 

offer retail forex.35

The grant of authority over look-alike 

forex contracts is very broad and is 

intended to encompass transactions that 

do not result in actual delivery, or for 

which no legitimate business purpose 

exists for the customer to enter into the 

transaction. It is not intended to 

interfere with the large, sophisticated 

interbank market or to place additional 

requirements on businesses with a need 

to engage in forex transactions in 

connection with their legitimate 

business activities. 

The CRA further provides that lookalike forex contracts are subject to the 

CFTC’s authority if they are offered on 

a leveraged or margined basis, or 

financed by the offeror, counterparty, or 

someone acting with the offeror or 

counterparty.36 The Commission’s 

authority, however, does not extend to 

securities, or to contracts that result in 

actual delivery within two days or that 

create an enforceable obligation to 

deliver between buyer and seller that 

have the ability to deliver or accept 

delivery in connection with their line of 

business.37 Thus, the CRA charges the 

Commission with regulating speculative 

forms of retail forex trading, but 

excludes from the Commission’s 

purview true spot transactions that have 

a legitimate business purpose or that 

result in actual delivery. 

The Commission is proposing these 

regulations pursuant to separate 

authority provisions of the CRA with 

respect to the participants in the forex 

market and with respect to the 

transactions themselves. 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),38 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.39 The same provisions apply to 

look-alike forex transactions.40

Notwithstanding the grant of 

authority with regard to certain sections 

of the Act specified above, the 

Commission has 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.’’ 41 The 

Commission has full rulemaking 

authority over the futures and options 

transactions where such transactions are 

offered or entered into by FCMs, their 

affiliates or RFEDs; 42 and retains 

rulemaking authority with regard to 

look-alike transactions only where such 

transactions are offered or entered into 

by RFEDs.43

E. The Commission’s Proposed Rules 

In proposing the following rules, the 

Commission has endeavored, wherever 

possible, to apply the principles that 

have guided it in the regulation of onexchange instruments. Thus, many of 

the concepts in the proposed rules will 

be familiar to industry participants and 

practitioners. There are, however, 

essential differences between the 

trading of futures contracts on 

designated contract markets (‘‘DCMs’’) 

that are cleared through Commission 

registered derivatives clearing 

organizations (‘‘DCOs’’) and off-exchange 

transactions between forex firms and 

retail customers. Many of the statutory 

and regulatory safeguards that are a 

critical feature of the trading and 

clearance of transactions in futures and 

options on futures on DCMs and DCOs, 

respectively, simply are not present in 

off-exchange retail forex transactions. 

The Commission’s proposed 

regulations are designed to deal with 

those differences, including the 

principal-to-principal nature of the 

transactions and the inherent conflicts 

of interest between the retail customer 

and the marketmaker/counterparty. In 


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44Between December 2000 and September 2009, 

the Commission has filed 114 forex-related 

enforcement actions on behalf of more than 26,000 

customers. Those efforts have thus far resulted in 

the award of approximately $476 million in 

restitution and disgorgement, and $576 million in 

civil monetary penalties. An overwhelming 

majority of these cases have involved solicitation 

fraud. 

45The Commission’s proposed regulations 

include registration requirements for all persons 

engaged in the solicitation or acceptance of orders 

for retail forex transactions involving non-ECPs, the 

exercise of discretionary trading authority in such 

transactions, or the operation or solicitation of 

funds for pooled investment vehicles in connection 

with such transactions. Accordingly, the proposed 

rules include requirements that such persons 

become registered as CTAs, CPOs or IBs, as 

appropriate. The Commission is aware that the 

statutory definitions of these entities do not 

anticipate persons engaged in off-exchange 

activities. The Commission has determined, 

however, that pursuant to its plenary power to 

regulate such off-exchange retail forex transactions 

in section 2(c) of the Act, it will entrust such 

transactions only to persons registered as CTAs, 

CPOs and IBs, inasmuch as these are categories of 

registrants with which the Commission and the 

public are already familiar. This will allow the 

Commission to regulate off-exchange retail forex 

transactions efficiently and effectively. For 

example, the proposed regulations would make use 

of the established standards for registration and 

denial of registration contained in the Act as well 

as the Commission’s previous interpretations of 

these standards. See 41 FR 44560 at 44561–62 (Oct. 

6, 1976). 

46Former part 5 (Designation of and Continuing 

Compliance by Contract Markets) was removed and 

reserved. 66 FR 42256 (Aug. 10, 2001). 

47For example, essentially replicating the text of 

part 4 (which concerns CPOs and CTAs) within the 

new part 5 in order to cover providers of forex 

trading advice and operators of pooled forex trading 

vehicles would have needlessly increased the 

volume of the Commission’s regulations, when a 

simple incorporation of the same requirements by 

reference accomplishes the same purpose. 

48See, proposed amendments to Regulations 1.4, 

1.35, 1.36, 1.37, 1.40, 1.52, 1.65, 3.1, 3.4, 3.10, 3.12, 

3.21, 3.30, 3.31, 3.33, 3.44, 3.45, 3.50, 3.60, 4.23, 

4.25, 4.30, 4.33, 10.1, 160.1, 160.3, 160.4, 160.30 

and 166.2. 

49See, proposed amendments to Regulations 1.1, 

1.3, 1.10, 1.46, 3.1, 4.7, 4.12, 4.13, 4.14, 4.24, 4.34 

and 166.5. In several instances, staff took the 

opportunity of this review and proposed 

rulemaking to propose deletion of obsolete material 

that either refers to already deleted regulatory 

provisions or has become outdated due to the 

passage of time. See proposed amendments to 

Regulations 1.52, 3.12, 3.31 and 160.18. 

50Regulation 1.3(nn). 

51Regulation 1.3(yy). 

52See, e.g., Regulation 4.6 as well as various 

provisions of Regulations 4.22 (reporting to pool 

the nine years since the passage of the 

CFMA, the Commission has observed a 

number of improper practices that have 

raised concern, among them solicitation 

fraud, a lack of transparency in the 

pricing and execution of transactions, 

unresponsiveness to customer 

complaints, and the targeting of 

unsophisticated, elderly, low net worth 

and other vulnerable individuals.44

In addition to the regulations 

explicitly mandated by the CRA— 

including new registration 

requirements 45 and enhanced financial 

requirements—the proposed regulations 

will require forex registrants to maintain 

records of customer complaints; require 

forex counterparties to guarantee the 

performance of all persons who 

introduce accounts to the counterparty; 

require counterparties to disclose, with 

the Risk Disclosure Statement, the 

percentage of profitable 

nondiscretionary forex customer 

accounts; and require forex 

counterparties to designate a chief 

compliance officer to be responsible for 

development and implementation of 

customer protection policies and 

procedures. 

As noted above, the Commission 

believes that these additional 

requirements are militated both by the 

essential differences between onexchange transactions and off-exchange 

retail forex transactions, and the history 

of fraudulent practices in this sector of 

the forex market. 

II. Section-by-Section Analysis 

A. Structure and Approach 

The CRA requires the Commission to 

register and regulate specified persons 

who intermediate off-exchange retail 

forex transactions. In order to comply 

with this mandate, the Commission 

must adopt regulations providing for the 

registration of RFEDs and other offexchange retail forex intermediaries not 

excluded from Commission jurisdiction, 

and must specify the financial, 

operational and other requirements 

applicable to persons so registered. To 

the extent practicable, the Commission 

has endeavored to assemble the new offexchange retail forex provisions in a 

single new part of the Commission’s 

regulations, proposed to be designated 

part 5.46 The goal is to provide a single 

convenient location for regulations 

applicable to off-exchange retail forex 

transactions and intermediaries. 

Unfortunately, developing a completely 

self-contained part of the Commission’s 

regulations that would contain all of the 

off-exchange retail forex regulations is 

not practicable because it has also been 

necessary to draft amendments to 

various provisions of existing 

regulations maintained in other parts of 

17 CFR Chapter 1. Among the reasons 

for these proposed additional 

amendments are the following: (1) Some 

regulatory provisions of general 

application name the specific 

registration categories they affect, and 

do not presently refer to RFEDs; (2) 

persons registered under certain existing 

registration categories (e.g., FCMs) will 

be able to engage in off-exchange retail 

forex transactions under those existing 

registrations, subject to additional 

requirements, and restating the 

requirements pertaining to those 

registration categories in part 5 would 

be unwieldy; 47 and (3) certain existing 

regulatory provisions that should apply 

to off-exchange retail forex transactions 

and to the persons engaging in them are 

worded in terms of on-exchange futures 

and commodity options transactions, 

and not in a way that would encompass 

off-exchange retail forex transactions. 

B. Proposed Amendments to Existing 

Regulations 

Many of the proposed amendments to 

regulations outside of proposed part 5 

amount to merely adding references to 

off-exchange retail forex transactions, 

off-exchange retail forex customers 

and/or RFEDs to existing regulations.48

Accordingly, those proposed 

amendments will not be separately 

discussed. Other proposed amendments, 

however, involve a substantive change 

to the existing regulation because the 

existing regulation must operate 

differently in the context of offexchange retail forex trading.49 These 

substantive changes are discussed 

below. 

1. Part 1 of the Commission’s 

Regulations—General Regulations 

a. Regulation 1.1—Fraud in or in 

connection with transactions in foreign 

currency subject to the Commodity 

Exchange Act. 

This existing provision is specific to 

off-exchange retail forex transactions. 

Consistent with the concept of a selfcontained off-exchange retail forex part 

of the regulations, existing Regulation 

1.1 is proposed to be deleted and its 

content to be incorporated into 

Regulation 5.2 of proposed part 5. 

b. Regulation 1.3—Definitions. 

The definition of ‘‘guarantee 

agreement’’ is proposed to be amended 

to take account of IBs who may be 

guaranteed by RFEDs.50 The definition 

of ‘‘commodity interest’’ is proposed to 

be amended to include off-exchange 

retail forex transactions over which the 

Commission has jurisdiction by virtue 

of the CRA.51 Including off-exchange 

retail forex transactions within the 

‘‘commodity interest’’ definition permits 

a wide range of provisions, especially 

within part 4 of the Commission’s 

regulations, to apply to such 

transactions without the need to 

separately revise each provision to 

expressly address off-exchange retail 

forex, as well as futures contracts and 

commodity options.52


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participants), 4.23 and 4.33 (recordkeeping), and 

4.24 and 4.34 (required disclosures). 

53Regulations 1.10(a)(4), 1.10(j)(3), 

1.10(j)(9)(i)(A)(2) and 1.10(j)(9)(i)(B)(2). See also, 

Proposed Regulation 5.18(h). 

54NFA’s experience supports the conclusion that 

keeping open long and short positions in a retail 

forex customer’s account removes the opportunity 

for the customer to profit on the transactions, 

increases the fees paid by the customer and invites 

abuse. 

55Regulation 1.46(a)(2). 

56Regulation 4.7(a)(1)(v)(B). 

57Regulation 4.7(a)(2)(i)(B). 

58Regulation 4.12(b)(i)(C). 

59Regulation 4.13(a)(3)(ii). 

60Regulation 4.14(a)(7)(ii). 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 website. 

61Regulations 4.24(b) and 4.34(b). 

62 11 U.S.C. 761 et seq. 

c. Regulation 1.10—Financial reports 

of futures commission merchants and 

introducing brokers. 

Proposed new provisions would 

require all IBs and all applicants for 

registration as IBs in connection with 

retail off-exchange forex transactions to 

enter into a guarantee agreement with 

an RFED or an FCM.53 To date, those 

persons who have introduced offexchange retail forex customers to 

counterparties have not been required to 

register as IBs, and fraudulent 

solicitation and sales practices have 

been commonplace. See supra note 46. 

The Commission believes that by 

requiring guarantee agreements between 

all off-exchange retail forex IBs and the 

FCM/RFED counterparties to which 

they introduce off-exchange retail forex 

customers, the counterparties will be 

forced to more carefully vet the persons 

who solicit business on their behalf and 

the practices those persons employ. 

The Commission will be preparing a 

new Part C guarantee agreement to the 

Form 1–FR–IB, modeled on the 

guarantee agreement existing in Part B 

of Form 1–FR–IB, that will provide that 

FCMs and RFEDs that guarantee 

performance by an introducing broker 

that introduces off-exchange retail forex 

transactions will be jointly and severally 

liable for all obligations of the 

introducing broker under the Act and 

Commission regulations with respect to 

the solicitation of, and transactions 

involving, all retail forex customer 

accounts of the introducing broker 

entered into on or after the effective date 

of the guarantee agreement. The 

Commission believes that the guarantee 

requirement serves the public’s interest 

in a marketplace where improper 

practices by IBs are discouraged while 

still permitting FCMs and RFEDs to 

make use of outside salespeople. An IB 

that is guaranteed by an FCM or RFED 

will not be subject to the minimum 

capital requirements set forth in 

Regulation 1.17(a)(1)(iii). 

d. Regulation 1.46—Application and 

closing out of offsetting long and short 

positions. 

Like FCMs engaging in on-exchange 

futures and option transactions under 

the existing regulation, RFEDs and 

FCMs engaging in off-exchange retail 

forex transactions would be required to 

close out offsetting long and short 

positions in an off-exchange retail forex 

customer’s account. But unlike existing 

Regulation 1.46, the requirement on 

RFEDs and FCMs engaging in offexchange retail forex transactions to 

close out offsetting positions would 

apply regardless of whether the offexchange retail forex customer has 

instructed otherwise.54 Also, unlike the 

existing provision for transactions in onexchange futures and option contracts, 

no exception is proposed for omnibus 

accounts because they are not used in 

off-exchange retail forex trading. An 

RFED or FCM could, if permitted by the 

rules of a self-regulatory organization 

(‘‘SRO’’) of which the RFED or FCM is 

a member, offset at the retail forex 

customer’s request off-exchange retail 

forex transactions of the same size, if the 

retail forex customer holds other 

transactions of a different size, but the 

RFED or FCM would be required to 

offset a transaction against the oldest 

transaction of the same size.55

2. Part 4 of the Commission’s 

Regulations—CPOs and CTAs 

a. Regulation 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. 

As proposed, in determining whether 

a person is a ‘‘qualified eligible person’’ 

(‘‘QEP’’) the NFA-specified minimum 

security deposit for off-exchange retail 

forex transactions would be included in 

the calculation of the portfolio 

requirement.56 Such amounts are 

roughly equivalent to exchangespecified initial margin and option 

premium. In addition, in order to treat 

RFEDs and FCMs comparably, RFEDs 

would be included among the persons 

that do not have to meet the portfolio 

requirement to be QEPs.57

b. Regulation 4.12—Exemption from 

provisions of part 4. 

As proposed, the NFA-specified 

minimum security deposit for offexchange retail forex transactions would 

be included among the amounts that 

cannot exceed 10 percent of the fair 

market value of a pool’s assets in order 

for the operator to claim exemption 

under Regulation 4.12(b). Again, such 

amounts are roughly equivalent to onexchange initial margin and option 

premiums.58

c. Regulation 4.13—Exemption from 

registration as a commodity pool 

operator. 

As proposed, the NFA-specified 

minimum security deposit for offexchange retail forex transactions would 

be included among the amounts that 

cannot exceed 5 percent of the 

liquidation value of the pool’s portfolio 

in order for the operator to claim 

exemption from registration under 

Regulation 4.13(a)(3). Again, such 

amounts are roughly equivalent to 

initial margin and option premiums.59

d. Regulation 4.14—Exemption from 

registration as a commodity trading 

advisor. 

As proposed, an RFED that provided 

trading advice solely in connection with 

its business as an RFED would be 

exempt from registration as a CTA. This 

is consistent with treating FCMs and 

RFEDs comparably, where 

appropriate.60

e. Regulations 4.24 and 4.34—General 

disclosures required for CPO and CTA 

Disclosure Documents. 

As proposed, the prescribed risk 

disclosure language for the front of the 

Disclosure Document would be required 

to include language warning that offexchange retail forex transactions may 

not be given the same preferential 

treatment as commodity customer 

claims under the Bankruptcy Code.61

This warning is necessary because 

definitions for such terms as 

‘‘commodity contract,’’ ‘‘customer’’ and 

‘‘customer property’’ in Subchapter IV of 

Chapter 7 of the Bankruptcy Code do 

not include or refer to off-exchange 

transactions, generally, or to offexchange retail forex transactions or 

customers engaged in such transaction, 

specifically.62

3. Part 166 of the Commission’s 

Regulations—Customer Protection Rules 

a. Section 166.5—Dispute settlement 

procedures. 

As proposed, the section of the 

Commission’s customer protection 

regulations dealing with dispute 

settlement procedures would be 

amended to expressly apply where a 

claim or grievance arises out of a retail 

forex transaction and the defined term 

customer would be amended to include 


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63Regulations 166.5(a)(1) and (a)(2). 

64See, proposed Regulation 5.1(m). 

65See, proposed Regulation 5.1(h). 

66See, proposed Regulations 5.1(d), (e) and (f). 

67See, proposed Regulations 5.1(a) and (c). 

68See, proposed Regulation 5.1(g) 

69See, proposed Regulations 5.1(b), (i), (j), (k) and 

(l). 

70See, 7 U.S.C. 2(c)(2)(B)(iv) and 2(c)(2)(C)(iii). 

71The Commission is directed to determine, 

through notice and comment rulemaking such as 

this, what ‘‘primarily or substantially’’ means in this 

context. H.R. Rep. No. 110–627, at 980 (2008) (Conf. 

Rep.); see also, Proposed Regulation 5.1(g). 

72See, H.R. Rep. No. 110–627, at 980 (2008) 

(Conf. Rep.). 

73See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc)(BB). 

74See, proposed Regulation 5.3(a)(6). 

75See, proposed Regulation 5.3(a)(4). 

76See, proposed Regulation 5.3(a)(1). 

77See, proposed Regulation 5.3(a)(5). 

a retail forex customer.63 The existing 

text could be read to exclude customer 

claims arising out of retail forex 

transactions from coverage under 

Regulation 166.5. 

C. New Part 5 

As noted earlier, the proposed new 

part 5 to the Commission’s regulations 

is intended to permit, as much as 

possible, reference to a single portion of 

the regulations for matters concerning 

off-exchange retail forex. Although it 

has been necessary to make changes to 

provisions elsewhere in the regulations, 

the Commission believes that in most 

cases, initial reference to part 5 should 

be sufficient to resolve questions (or to 

direct the reader by cross-reference to 

the appropriate provision elsewhere). 

1. Proposed Regulation 5.1—Definitions 

Proposed part 5 begins with a set of 

definitions of terms specific to offexchange retail forex and to the 

regulatory requirements that apply to 

off-exchange retail forex. ‘‘Retail forex 

transaction’’ is defined by reference to 

the description in sections 2(c)(2)(B) 

and 2(c)(2)(C) of the Act. The proposed 

definition expressly excludes futures 

and commodity option contracts traded 

on a designated contract market or 

derivatives transaction execution 

facility.64 ‘‘Retail foreign exchange 

dealer’’ is defined as anyone who offers 

to be or who is a counterparty to a retail 

forex transaction, except for those 

persons excluded from the definition by 

the CRA.65 In order to apply the IB, 

CPO, CTA and AP registration and other 

requirements to analogous retail forex 

market participants, notwithstanding 

that statutory and regulatory definitions 

of the identifying terms do not 

necessarily comprehend involvement in 

retail forex trading, the terms are 

separately defined for the purposes of 

part 5.66 ‘‘Affiliated person of a futures 

commission merchant’’ (a term not 

previously defined in the Commission’s 

regulations) and an AP of such a person 

are defined by reference to section 

2(c)(2)(B)(i)(II)(cc)(BB) of the Act.67

‘‘Primarily or substantially’’ is defined 

for use in determining whether a 

registered FCM is primarily or 

substantially engaged in FCM activities, 

such that it need not also register as an 

RFED in order to conduct retail forex 

business.68 Certain terms used in 

determining the financial and reporting 

requirements applicable to persons 

engaged in retail forex business are also 

defined in Regulation 5.1 to clarify their 

use elsewhere in part 5.69

2. Proposed Regulation 5.2—Prohibited 

Transactions: Antifraud 

As noted above, under the proposal, 

existing Regulation 1.1 prohibiting fraud 

in connection with foreign currency 

transactions would be removed and 

replaced with new Regulation 5.2, 

which, in addition to prohibiting 

fraudulent conduct in connection with 

retail forex transactions, now prohibits 

anyone from acting as the counterparty 

for a retail forex transaction in an 

account for which that person has 

discretionary trading authority. 

3. Proposed Regulation 5.3— 

Registration 

The CRA amends the Act to require 

that certain intermediaries for forex 

futures and options and for look-alike 

contracts (i.e., those at issue in Zelener) 

register in such capacity as the 

Commission shall determine and 

become members of a registered futures 

association.70 The Commission has 

determined that the appropriate 

registration categories for those 

intermediaries are as follows. Persons 

who solicit or accept orders for an 

RFED, an FCM, or an affiliate of an FCM 

should be registered as IBs. Persons who 

exercise discretionary trading authority 

over accounts should be registered as 

CTAs. Persons who operate or solicit 

funds or property for a pooled 

investment vehicle should be registered 

as CPOs. Finally, associated persons of 

the foregoing should be registered as 

APs. The proposed regulations include 

provisions to implement this part of the 

CRA. 

Prior to the passage of the CRA, many 

entities registered as FCMs solely to 

engage in retail forex transactions. The 

CRA provides that registered FCMs who 

currently trade retail forex may continue 

to do so as FCMs, or may be required 

to register as RFEDs, depending on their 

circumstances. A traditional FCM that is 

primarily or substantially engaged in 

exchange-traded futures business may 

continue to engage in retail forex as an 

FCM, and need not register as an 

RFED.71 Currently registered FCMs who 

solely trade in retail forex, or FCMs who 

are not primarily or substantially 

dealing in exchange-traded futures, will 

be required to register as RFEDs. 

Because there will be two categories of 

registrants competing for these 

customers, the stated Congressional 

intent is that an entity should not be 

advantaged or disadvantaged as a result 

of registering as an RFED instead of an 

FCM.72 The Commission has therefore 

endeavored to draft regulations that 

provide equivalent treatment of FCMs 

and RFEDs wherever possible. 

The enactment of the CFMA 

permitted registered FCMs and certain 

of their unregistered affiliates to act as 

counterparties to retail forex 

transactions, but it did not specifically 

require that intermediaries such as 

introducing brokers, account managers 

or pool operators be registered in order 

to engage in forex transactions with 

retail participants. This created 

problems when unregistered entities 

began soliciting retail customers. The 

lack of vetting by a regulatory agency or 

an SRO created a situation where 

members of the general public were 

being solicited by entities and persons 

regarding whom they were unable to 

obtain any background information. In 

some cases, persons banned from 

registering in the futures industry as a 

result of past misconduct were 

operating as unregistered intermediaries 

in retail forex transactions because of 

the lack of minimum requirements to 

operate in the forex business. Pursuant 

to the CRA, certain affiliates of FCMs 

may continue to be proper forex 

counterparties if the affiliated FCM 

makes and keeps the risk assessment 

records required in Section 4f(c)(2)(B) of 

the Act and the affiliate has at least $20 

million in adjusted net capital.73

However, under the proposed 

regulations, the affiliates will have to 

register in the appropriate capacity in 

order to serve as a counterparty. 

Proposed Regulation 5.3 imposes the 

registration requirements called for by 

the CRA upon specified categories of 

persons intermediating retail forex 

transactions. RFEDs are required to 

register as such.74 FCMs not ‘‘primarily 

or substantially’’ engaged in FCM 

business are required to register as 

RFEDs,75 and FCM-affiliated persons 

that serve as retail forex counterparties 

are also required to register as RFEDs.76

Persons introducing forex accounts are 

required to register as IBs.77 Operators 


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78See, proposed Regulations 5.3(a)(2) and 

5.3(a)(3). 

79See, 7 U.S.C. 2(c)(2)(B)(iv)(II). 

80See, 7 U.S.C. 2(c)(2)(C)(iii)(II). 

81See, proposed Regulation 5.5(e). 

82Analogous to Regulation 1.17 for FCMs trading 

only futures and commodity options. 

83The proposed requirement is analogous to 

existing Regulation 1.12 for FCMs that trade only 

on-exchange futures and commodity option 

contracts. 

of pooled investment vehicles that 

engage in retail forex transactions are 

required to register as CPOs, and 

persons providing forex trading advice 

are required to register as CTAs.78

Finally, associated persons of all of the 

foregoing are required to register as APs. 

The CRA’s registration requirements 

do not apply to certain otherwise 

regulated entities (e.g., broker-dealers), 

their associated persons, or persons who 

would be exempt from registration if 

they were engaging in such transactions 

on or subject to the rules of a contract 

market with regard to forex futures or 

options 79 or look-alike contracts.80 This 

is consistent with the original intent of 

the Treasury Amendment that entities 

engaging in forex transactions should 

not be subject to regulation by multiple 

regulators concerning the same activity. 

Proposed Regulation 5.3 excludes from 

the registration requirement the persons 

specified in the CRA. 

4. Proposed Regulation 5.4—Operative 

Requirements for CPOs and CTAs 

Proposed Regulation 5.4 applies all of 

the disclosure, recordkeeping, reporting 

and other existing requirements 

currently applicable to CPOs and CTAs 

in the context of on-exchange futures 

and commodity option contracts to 

persons defined as, and required to 

register as, CPOs and CTAs because 

those persons operate pooled 

investment vehicles that engage in retail 

forex transactions or because they 

provide retail forex trading advice. 

5. Proposed Regulation 5.5—Risk 

Disclosure by FCMs, RFEDs and IBs 

Proposed Regulation 5.5 requires 

RFEDs, FCMs and IBs to provide retail 

forex customers with a risk disclosure 

statement similar to that currently 

required by Regulation 1.55, but tailored 

to address the risks, conflicts of interest 

and unique characteristics of retail forex 

trading. For example, the required risk 

disclosure statement would also be 

required to disclose the number of nondiscretionary retail forex accounts 

maintained by an RFED or FCM, the 

percentage of such accounts that were 

profitable for each of the four most 

recent quarters, and a statement that 

past performance is not necessarily 

indicative of future results.81

Under Section 2(c) of the Act, the 

Commission’s jurisdiction with regard 

to off-exchange forex transactions 

extends to transactions involving 

entities that are not eligible contract 

participants as defined in Section 1a of 

the Act (i.e., retail customers). These 

transactions serve no broad price 

discovery function, and the Commission 

believes both that the vast majority of 

retail customers who enter these 

transactions do so solely for speculative 

purposes, and that relatively few of 

these participants trade profitably. 

Whether or not this is actually the case, 

the Commission believes that disclosure 

of the percentage of profitable accounts 

maintained by RFEDs and FCMs 

engaging in off-exchange retail forex 

will provide the retail customer with 

vital information when deciding 

whether or not to engage in such 

transactions. 

6. Proposed Regulations 5.6 and 5.7— 

Minimum Financial Requirements 

Under proposed Regulation 5.7, 

RFEDs and FCMs engaging in retail 

forex trading are required to meet the 

minimum net capital requirements 

prescribed in the CRA.82 Proposed 

Regulation 5.6 sets forth the ‘‘early 

warning’’ notification requirements 

pursuant to which RFEDs and FCMs 

engaging in retail forex trading are 

required to notify SROs and the 

Commission if an RFED or an FCM 

engaging in retail forex trading has 

experienced declines in capital, has 

discovered a material inadequacy in 

internal controls or has become 

undercapitalized.83 Because there is no 

equivalent to the futures regime of strict 

segregation of customer funds in offexchange retail foreign currency 

dealing, the notice requirement for 

RFEDs with respect to undersegregation 

is not included in the proposed 

regulation. However, a requirement has 

been proposed that an RFED or FCM 

engaging in off-exchange retail forex 

transactions give notice if it is holding 

liquid assets less than the aggregate 

retail forex obligation (as defined). The 

aggregate retail forex obligation is 

proposed to be the net obligation to all 

off-exchange retail foreign currency 

customers at all times (excluding deficit 

accounts). 

The minimum net capital regulation 

for RFEDs and FCMs offering offexchange retail forex is proposed based 

on the significantly higher minimum net 

capital level for RFEDs and FCMs 

offering retail forex established in the 

CRA. The Commission believes that the 

higher level of $20 million reflects 

Congressional intent to ensure that 

substantially undercapitalized ‘‘shell’’ 

FCM off-exchange retail forex dealers 

and their affiliates, from whom it may 

be impossible to recover funds in the 

event of customer claims, do not engage 

in off-exchange retail forex activity. The 

existing regulation for the calculation of 

FCM net capital has been proposed for 

the calculation of net capital for RFEDs 

and FCMs offering off-exchange retail 

forex, with the intent that an FCM 

offering retail forex should only have 

one calculation of its adjusted net 

capital. However, the CRA’s higher 

dollar threshold of minimum capital 

required, $20 million, will apply, as 

well as an additional early warning 

requirement of 110%, resulting in a 

notice reporting net capital level of $22 

million. The proposed early warning 

level of 110% is lower than the FCM 

early warning level of 150% due to the 

substantially higher minimum dollar 

threshold established in the CRA, which 

results in an adequate minimum early 

warning ‘‘buffer’’ of no less than $2 

million. 

An amount of minimum net capital in 

addition to the minimum $20 million is 

proposed to the extent that an FCM or 

RFED has a total retail forex obligation 

in excess of $10,000,000. After that 

threshold, as proposed the FCM or 

RFED must have net capital of no less 

than $20,000,000 plus five percent of 

the total retail forex obligation in excess 

of $10,000,000. This proposal is 

intended to address concerns that, 

although the capital level contained in 

the CRA is believed to be high at 

$20,000,000, at particularly high levels 

of retail customer obligations there 

should be commensurate increases in an 

entity’s minimum required net capital. 

The NFA has enacted a similar 

requirement applicable to all its forex 

dealer members except those that only 

provide ‘‘straight through processing.’’ 

The Commission’s proposal has no 

exceptions for FCMs engaging in offexchange retail forex or for RFEDs. 

Under the existing net capital 

regulation for FCMs contained in 

Commission Regulation 1.17, an FCM 

that becomes undercapitalized must 

immediately cease business and transfer 

its customers’ positions to another FCM, 

unless the Commission believes that it 

will be able to quickly remedy the 

situation, in which case the Commission 

may provide up to an additional 10 

business days to return to compliance 

before ceasing business. Because the 

retail forex contracts at issue are not 

exchange-traded, and therefore, 

positions are not fungible among retail 

forex FCMs and RFEDs, should an RFED 

become undercapitalized, the 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
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84 Defined in proposed Regulation 5.1(l). 

85The retail forex obligation is also a factor in one 

of the options for computation of the RFED’s or 

FCM’s net capital requirement. See, proposed 

Regulation 5.7(a)(1)(i)(B). 

Commission proposes that it either 

liquidate or transfer all off-exchange 

retail forex accounts (with a transfer 

envisioned as a full novation of the 

retail forex contracts for such accounts 

by assignment and assumption of the 

contracts by another RFED or FCM) 

under the direction and supervision of 

the Commission or the entity’s 

designated self-regulatory organization 

(‘‘DSRO’’). The same 10 business day 

period has been proposed for the 

Commission or DSRO to delay such 

liquidation or transfer if determined 

appropriate. The proposal requires the 

refund or transfer of all funds associated 

with off-exchange retail forex accounts 

contemporaneous with the liquidation 

or transfer. The possibility of an entity 

needing to refund all customers’ 

accounts and liquidate all positions in 

such circumstances makes it necessary 

to include a proposal to require such 

entity to maintain liquid assets available 

equal to the amount owed to offexchange retail forex customers. 

Although not permissible to be 

counted as a liquid asset for fulfilling 

the requirement of Regulation 5.8, under 

the proposed net capital regulation, the 

unsecured receivable resulting from an 

RFED or FCM offsetting currency 

exposure with one of several 

enumerated parties (regulated financial 

intermediaries or foreign equivalents 

approved by NFA) will be treated as a 

current asset. The Commission proposes 

this, with the counterparty limitation, to 

balance an RFED’s or FCM’s need to 

hedge its net position from offering offexchange retail forex with the concern 

that such receivables are collectible for 

net capital purposes. Without this 

proposed addition to the net capital 

calculation, RFEDs and FCMs would 

have to take a 100% capital charge for 

such unrealized gains. The Commission 

understands that NFA, under 

subparagraph (c) of its Section 11 

Financial Requirements for Forex Dealer 

Members, has been permitting existing 

forex dealer members to not take such 

a charge to the extent the counterparty 

has been considered regulated and 

approved by NFA, and is not an affiliate 

of the Forex Dealer Member. Thus, the 

Commission proposes that a DSRO be 

afforded the continuing ability to assess 

the appropriateness of counterparties for 

this purpose going forward, while 

making explicit the ability of an entity 

to cover the net exposure without the 

burden of a 100% net capital charge 

being applied. Also, the existing net 

capital charge with respect to options 

has been applied to off-exchange retail 

forex transactions that are options. This 

net capital charge, with respect to the 

existing net capital regulation for FCMs, 

is derived from the SEC’s net capital 

charges for options that are not options 

on futures. Because these retail forex 

transactions are, by nature, off-exchange 

transactions, the resulting charge under 

the SEC rule would be the charge for 

‘‘unlisted’’ options. This charge is based 

on the notional transactional size of the 

option which may result in a very 

significant capital implication for retail 

forex transactions which are options. 

However, this result is consistent with 

the existing requirements for all offexchange or unlisted foreign exchange 

options for existing FCMs and brokerdealers. 

7. Proposed Regulation 5.8—Aggregate 

Retail Forex Assets 

Proposed Regulation 5.8 requires 

RFEDs and FCMs engaging in retail 

forex transactions to compute the net 

credit balance resulting from combining 

all money, securities and property 

deposited by retail forex customers into 

their accounts, adjusted for realized and 

unrealized net profit or loss, and not 

including any accounts that contain net 

liquidating balances (the ‘‘retail forex 

obligation’’ of the RFED or FCM).84

Under proposed Regulation 5.8(a) each 

RFED or FCM engaging in retail forex 

transactions is required to hold assets of 

the type permitted under Regulation 

1.25 equal to the retail forex obligation. 

Such assets would have to be 

maintained at one or more qualifying 

institutions in the U.S., or in money 

center countries (as defined in 

Regulation 1.49) where such countries 

have agreements acceptable to NFA that 

authorize sharing account information 

with NFA. 

The requirement to hold assets equal 

to the retail forex obligation is separate 

from the adjusted net capital 

requirement. In computing their 

adjusted net capital, pursuant to 

proposed Regulation 5.8(d), RFEDs and 

FCMs could not include assets held for 

purposes of complying with proposed 

Regulation 5.8(a) as current assets, or 

otherwise recording any property 

received from retail forex customers as 

an asset without recording a 

corresponding liability to such 

customers. 

The requirement to maintain assets 

equal to or in excess of the retail forex 

obligation is intended to provide some 

degree of protection for customers in the 

absence of the protections afforded by 

the segregation of customer funds that is 

required in the context of futures and 

commodity options trading.85 The 

Commission recognizes that the retail 

forex obligation is not an equivalent 

substitute for the segregated funds 

regime, which cannot be replicated in 

the context of off-exchange retail forex 

trading. Unlike segregation of customer 

funds deposited for futures trading, 

such amounts would not be provided 

any preferential treatment to unsecured 

creditors in a bankruptcy, and would 

not be held in separately titled accounts 

under the CEA. Because of the lack of 

bankruptcy preference with respect to 

the funds of retail forex customers held 

at FCMs or RFEDs, the Commission 

does not intend to propose a separation 

of funds requirement which may be 

misconstrued as being similar to the 

protections that are afforded to 

customers engaged in exchange-traded 

futures and options. As previously 

discussed, Regulation 5.8 has been 

proposed to ensure that RFEDs and 

FCMs hold liquid assets in appropriate 

jurisdictions should they be required to 

be refunded to customers or seized to 

compensate customers. NFA first 

established under Section 14 of its 

Financial Requirements its version of 

this requirement, due to its difficulty in 

ultimately obtaining any funds for 

restitution with respect to failures of 

forex dealers and cases of fraud. The 

proposal follows the NFA’s rule in this 

regard while further requiring that the 

types of assets held to meet the 

requirement must also be of the kind 

and character permitted for the 

investments of futures customer funds 

under existing Commission Regulation 

1.25. These types of assets are limited to 

generally liquid financial instruments, 

which the Commission believes to be an 

appropriate limitation, should it become 

necessary to liquidate retail forex 

accounts, transfer funds, or seize or 

freeze funds in the event of fraud. 

8. Proposed Regulation 5.9—Security 

Deposits for Retail Forex Transactions 

Proposed Regulation 5.9(a) would 

require each RFED and each FCM that 

engages in retail forex transactions, in 

advance of any such transaction, to 

collect from the retail forex customer a 

security deposit (in cash or in financial 

instruments that meet the requirements 

of Regulation 1.25) equal to ten percent 

of the notional value of the retail forex 

transaction, ten percent of the notional 

value of short retail forex options in 

addition to the premium received, or the 

full premium received for long options, 


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86As discussed above, an FCM holding customer 

funds for trading on-exchange futures contracts is 

required to have, at all times, in its possession and 

control, segregated property sufficient to pay all 

customers with credit balances, without deduction 

for customer debit balances (which must be made 

up from the FCM’s own capital). In an FCM 

bankruptcy, customers share the segregated 

property pro rata in proportion to their claims, 

without any support from a compensation fund. 

See, generally, Part 190 of the Commission’s 

Regulations, 17 CFR Part 190 (2009). 

87NFA leverage rules are set forth in Section 12, 

‘‘Security Deposits for Forex Transactions with 

FDMs’’, of the NFA rules. On June 4, 2009, FINRA 

submitted to the U.S. Securities and Exchange 

Commission a proposed rule change to adopt 

FINRA Rule 2380 to limit the leverage ratio offered 

by broker-dealers for certain forex transactions to be 

a maximum of 1.5:1. 74 FR 32022 (July 6, 2009). 

FINRA subsequently adopted 2 amendments to this 

proposal, the second of which revised the 

maximum leverage ratio from 1.5:1 to 4:1. See SR– 

FINRA–2009–40 available on FINRA’s website at 

http://www.finra.org/Industry/Regulation/ 

RuleFilings/2009/P118864. 

88See, Regulation 1.10. 

89See, Regulation 1.10(b)(4). 

as the case may be. Pursuant to 

proposed Regulation 5.9(b), the RFED or 

FCM would be required to collect 

additional security deposit or to 

liquidate the retail forex customer’s 

position if the amount of security 

deposit collected fails to meet the 

requirements of paragraph (a). 

The extreme volatility of the foreign 

currency markets exposes retail forex 

customers to substantial risk. Forex 

dealers currently extend leverage to 

their customers at ratios of between 25:1 

to 400:1 or higher, which allows 

customers to control contracts worth 

significantly more than their cash 

investment. Given these high leverage 

ratios, even minor fluctuations in 

currency rates can exponentially 

increase a customer’s losses and gains. 

Even a small move against a customer’s 

position can result in a significant loss. 

Under current practices, customer 

positions are usually closed out once 

the losses in an account exceed the 

initial investment. However, if, for any 

reason, the positions are not closed out 

at a zero balance, the customer could be 

liable for additional losses. 

Customers also face counterparty risk, 

as there is no central counterparty for 

forex transactions. Customers may not 

know that customer funds held by a 

forex counterparty do not receive the 

bankruptcy protections applicable to 

funds held by an FCM engaged in onexchange trading on the customers 

behalf.86 Given the risks that inhere in 

the trading of off-exchange forex 

contracts by retail customers, the only 

funds that should be invested in the offexchange retail forex market are those 

that the investor can afford to lose. The 

Commission’s proposed regulation 

regarding security deposits is intended 

both to mitigate the risk to which 

customers are exposed and to provide 

some capital to cover customer funds 

held by a failing firm (albeit without the 

bankruptcy preference applicable to 

funds held in segregation for exchangetraded contracts). In determining the 

appropriate leverage or security deposit 

level to propose, the Commission 

considered current industry practices, 

as well as NFA’s current leverage 

restrictions of 100 to 1 on major 

currencies and 25 to 1 on non-major 

currencies, and the proposal by the 

Financial Industry Regulatory Authority 

(‘‘FINRA’’) to limit the maximum 

leverage on certain retail forex 

transactions offered by broker-dealers to 

4 to 1.87

9. Proposed Regulations 5.10 and 5.11— 

Risk Assessment 

Proposed Regulation 5.10 imposes 

risk assessment recordkeeping 

requirements, and Regulation 5.11 

establishes risk assessment reporting 

requirements, for RFEDs. These sections 

are patterned on the corresponding 

existing requirements for FCMs in 

existing Regulations 1.14 and 1.15, 

because the same rationale behind risk 

assessment procedures for FCMs applies 

equally to RFEDs. 

10. Proposed Regulation 5.12— 

Financial Reporting to Regulators 

Proposed Regulation 5.12 requires 

applicants for registration as RFEDs to 

submit their applications for registration 

with a Form 1–FR–FCM, the same 

financial reporting form that FCMs are 

required to file, certified by an 

independent public accountant.88

Registered RFEDs would be required to 

file Form 1–FR–FCM monthly and 

annually. In addition, RFEDs, like 

FCMs, when notified in writing by NFA 

or the Commission, would have to file 

Form 1–FR–FCM or such other financial 

information as NFA or the Commission 

may request at such other times as may 

be specified in the notice.89 The 

proposed regulation for RFED financial 

reporting is intended to require the 

substantial equivalent of independent IB 

and FCM financial reporting to the 

Commission and DSROs, with certified 

financial reports required from 

independent auditors qualified under 

existing Commission Regulation 1.16 

and similar reports on material 

inadequacies by such auditors. The 

existing reporting requirements as 

separately proposed to be amended for 

FCMs, including methods of receiving 

reports, determining fiscal year ends 

and permitting extensions of time to 

file, have been proposed for RFEDs. 

11. Proposed Regulation 5.13— 

Reporting to Customers 

RFEDs and FCMs engaging in retail 

forex transactions are required by 

proposed Regulation 5.13 to furnish 

each retail forex customer with monthly 

statements and confirmation statements 

in a manner comparable to that required 

of FCMs under Regulation 1.33. The 

Commission believes that proposed 

Regulation 5.13 has been drafted in such 

a manner as to make the required 

statements meaningful and useful to 

customers in light of the distinctive 

characteristics of retail forex 

transactions relative to exchange-traded 

futures and commodity option 

transactions. FCMs could combine their 

forex monthly and/or confirmation 

statements with statements they may 

otherwise be required by Regulation 

1.33 to furnish, so long as the futures 

and commodity options information and 

the retail forex information are each 

properly identified as such. The 

proposed section also provides that the 

required statements can be furnished 

electronically with the customer’s 

(revocable) consent, and RFEDs are 

required to keep copies of monthly and 

confirmation statements in accordance 

with the requirements of Regulation 

1.31. 

12. Proposed Regulation 5.14— 

Financial Recordkeeping 

Proposed Regulation 5.14(a) requires 

RFEDs to keep the same ledgers or 

similar records as FCMs are required to 

keep under Regulation 1.18, showing 

transactions affecting assets, liabilities, 

income, expense and capital accounts, 

classified in the manner set forth in 

Form 1–FR–FCM, or in categories 

consistent with generally accepted 

accounting principles. Proposed 

Regulation 5.14(b) requires 

recordkeeping regarding net capital 

computations, comparable to existing 

Regulation 1.18(b) for FCMs. 

13. Proposed Regulations 5.15 and 

5.16—Unlawful Representations and 

Prohibitions of Guarantees Against Loss 

As with CPOs and CTAs dealing only 

in futures and commodity options, 

RFEDs, FCMs, IBs, CPOs and CTAs 

subject to Part 5, as well as their 

principals and those who solicit for 

them, are prohibited by proposed 

Regulation 5.15 from representing that 

the Commission or the Federal 

government has sponsored, 

recommended or approved them in any 


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90Similar prohibitions already apply to CPOs and 

CTAs (section 4o(b) of the Act) and to leverage 

transaction merchants (Regulation 31.19). See also 

NFA Compliance Rule 2–22 which speaks to all 

NFA members. The Commission believes that a 

broad statement of the prohibition is appropriate 

here to ensure that customers do not misapprehend 

the implications of registration as previously 

unregistered off-exchange retail forex market 

participants come into compliance with the 

registration requirements imposed on them by the 

CRA. 

91See, Regulation 1.56 for the existing 

prohibition affecting FCMs and IBs engaged in 

futures and commodity option transactions. 

92 ‘‘Retail forex counterparty’’ is defined for 

purposes of Regulation 5.18 to include RFEDs, 

FCMs and affiliated persons of FCMs. 

93 ‘‘Related person’’ of a forex counterparty is 

defined for purposes of Regulation 5.18 as a general 

partner, officer, director, owner of more than a ten 

percent interest, associated person, employee, 

relative or spouse of the foregoing or relative of a 

spouse who shares the same home. 

way.90 RFEDs, FCMs and IBs are 

prohibited under proposed Regulation 

5.16 from guaranteeing against or 

limiting customer losses, from failing to 

collect margin or security deposits, or 

from representing that they will do any 

of those things.91 This prohibition does 

not prevent an RFED, FCM or IB from 

sharing in a loss resulting from error or 

mishandling of an order, and guarantees 

entered into prior to effectiveness of the 

prohibition will only be affected if an 

attempt is made to extend, modify or 

renew them. 

14. Proposed Regulation 5.17— 

Authorization to Trade 

Proposed Regulation 5.17 requires 

RFEDs, FCMs, IBs and their APs to have 

specific authorization by the customer 

before effecting a retail forex 

transaction. For the most part, proposed 

Regulation 5.17 follows existing 

Regulation 166.2 for on-exchange 

futures and commodity option 

transactions. The Commission believes 

that registrants acting as off-exchange 

retail forex counterparties should have 

to obtain authorization for each 

transaction like other registrants. 

15. Proposed Regulation 5.18—Trading 

Standards 

Proposed Regulation 5.18 contains 

provisions specific to retail forex 

transactions that were developed to 

prevent some of the deceptive or unfair 

practices identified by the Commission 

and NFA in recent years. Each retail 

forex counterparty 92 would be required 

to establish and enforce internal rules, 

procedures and controls: (1) To prevent 

‘‘front running,’’ where transactions in 

accounts of the retail forex counterparty 

or its related persons 93 are executed 

before a like customer order; (2) to 

establish settlement prices fairly and 

objectively; and (3) to record and 

maintain transaction records and make 

them available to customers (including 

time and price information, account 

records, trading platform price changes 

and volume, and any algorithm used to 

determine bid and ask prices). 

Paragraph (c) of the proposed 

Regulation prohibits a retail forex 

counterparty from disclosing that it 

holds another person’s order unless 

disclosure is necessary for execution. 

Paragraphs (d) and (e) ensure that 

related persons of retail forex 

counterparties do not open accounts 

with other retail forex counterparties 

without the knowledge and 

authorization of the account 

surveillance personnel of the retail forex 

counterparties with which they are 

related. Paragraph (f) prohibits retail 

forex counterparties from: (1) Entering a 

retail forex transaction to be executed at 

a price that is not at or near prices at 

which other retail forex customers have 

executed transactions with the retail 

forex counterparty during the same time 

period unless done pursuant to NFA 

rules; (2) changing prices after execution 

unless pursuant to NFA rules; (3) 

providing a customer a new bid price 

that is higher (or lower) than previously 

without providing a new asked price 

that is higher (or lower) as well; and (4) 

establishing a new position for a 

customer (except to offset an existing 

position) if the retail forex counterparty 

holds one or more outstanding orders of 

other retail forex customers for the same 

currency pair at a comparable price. 

Additionally, paragraph (g) of 

proposed Regulation 5.18 would require 

each retail forex counterparty and each 

CPO, CTA and IB subject to part 5 to 

maintain records of all communications 

they receive concerning possible 

violations of the Act or Commission 

regulations involving their retail forex 

business. The required records would 

include the complainant’s identity (if 

provided), the date of the transaction or 

contract at issue, and the name of the 

person who received the 

communication. The retail forex 

counterparty, CPO, CTA or IB would be 

required to provide copies of such 

records to the Commission. 

The Commission believes that, given 

the volume of cases it has prosecuted in 

recent years involving retail forex fraud, 

requiring the maintenance of detailed 

records of customer complaints will 

provide such intermediaries with a 

comprehensive view of the types and 

numbers of problems that exist within 

their operations, and will provide the 

Commission with ready access to 

information regarding such problems. 

Paragraph (h) of proposed Regulation 

5.18 would require each person who 

applies for registration as an IB in order 

to solicit or accept off-exchange retail 

forex orders, and each person who 

succeeds to the business of an IB that 

solicits or accepts retail forex orders to 

enter into a guarantee agreement with 

an FCM or an RFED. As discussed above 

in relation to revisions to Commission 

Regulation 1.10, the Commission 

believes that the requirement that 

RFEDs and FCMs enter a guarantee 

agreement with the IBs that solicit 

business on their behalf serves the 

public’s interest by discouraging FCMs 

and RFEDs from associating with IBs 

without regard to the sales practices 

they employ. 

Paragraph (i) of proposed Regulation 

5.18 would require retail forex 

counterparties to calculate on a 

quarterly basis the percentage of nondiscretionary accounts that were 

profitable, and to maintain records of 

those calculations together with 

supporting data for five years in 

accordance with Regulation 1.31. As 

discussed above, Proposed Regulation 

5.5 requires that RFEDs, FCMs and IBs 

provided retail forex customers with a 

risk disclosure statement that includes 

the percentage of accounts that were 

profitable for each of the four most 

recent quarters. Proposed Regulation 5.8 

buttresses this requirement by directing 

retail forex counterparties to make such 

calculations on a quarterly basis and 

maintain records reflecting the 

calculation. 

Finally, paragraph (j) would require 

each retail forex counterparty to 

designate at least one principal to serve 

as its chief compliance officer, who 

would be required to certify annually to 

the Commission and to NFA that the 

retail forex counterparty had in place 

policies and procedures reasonably 

designed to achieve compliance with 

the Act and the Commission’s 

regulations. The Commission intends 

that retail forex counterparties adhere to 

the highest professional standards and 

that they take their compliance 

responsibilities seriously. With the 

requirement of a high level compliance 

officer and annual certification, 

Commission registrants will be expected 

to meet these standards and required to 

identify the person within the entity 

responsible for meeting them. 

16. Proposed Regulation 5.19—Pending 

Legal Proceedings 

Proposed Regulation 5.19 requires 

RFEDs, FCMs CPOs, CTAs and IBs to 

disclose pending legal matters and 

specifies the manner in which such 

matters are to be reported to the 

Commission, as well as the criteria for 

determining which proceedings are 


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94See, 7 U.S.C. 2(c)(2)(B)(i)(II)(gg); 2(c)(2)(B)(iv); 

2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii). 

95See, proposed Regulation 5.23(a)(1). 

96See, proposed Regulation 5.23(a)(2). 

97 5 U.S.C. et seq. 

98By 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. 

99 47 FR 18618 (April 30, 1982). 

100 Id. at 18619. 

101 Id. at 18619–20. 

102 17 CFR 4.13(a)(2) (2009). 

103 47 FR at 18620. 

required to be disclosed. As discussed 

above, given the high incidence of fraud 

in connection with retail forex 

transactions, the Commission desires to 

monitor legal actions taken against 

registrants. Requiring reporting of such 

actions is one of the most direct ways 

of determining where problems exist 

and what registrants may have failed to 

deal fairly with customers. 

17. Proposed Regulation 5.20—Special 

Calls for Information 

Proposed Regulation 5.20 is patterned 

on existing Regulations 21.00 through 

21.03. The purpose of proposed 

Regulation 5.20 is to ensure that the 

Commission has the authority to obtain 

information regarding retail forex 

accounts and transactions when such 

information is necessary to enable the 

Commission to carry out its 

responsibilities under the Act, and to set 

forth the responsibilities and duties of 

RFEDs, FCMs, and IBs when a special 

call is issued. 

18. Proposed Regulation 5.21— 

Supervision of Retail Forex Accounts 

Proposed Regulation 5.21 imposes the 

same supervision requirements set forth 

in existing Regulation 166.3 upon 

Commission registrants subject to Part 5. 

A separate provision for retail forex is 

included in order to avoid any question 

whether the same duties apply to 

persons with supervisory 

responsibilities in the context of retail 

forex trading activity. 

19. Proposed Regulation 5.22— 

Registered Futures Association 

Membership 

In addition to registering with the 

Commission, the CRA provides that 

RFEDs and persons who provide retail 

forex trading advice, operate retail forex 

pools or solicit retail forex customers or 

accounts must also become members of 

a registered futures association.94

Accordingly, proposed Regulation 5.22 

requires registered futures association 

membership for RFEDs, and for each 

person (1) required to register as an IB 

because the person accepts orders for 

retail forex transactions; (2) required to 

register as a CPO because the person 

operates, or solicits funds, securities or 

property for, a pooled investment 

vehicle that engages in retail forex 

transactions; or (3) required to register 

as a CTA because the person exercises 

discretionary trading authority, or 

obtains written authority over, an 

account in connection with retail forex 

transactions. 

20. Proposed Regulation 5.23—Bulk 

Transfers and Bulk Liquidations 

Proposed Regulation 5.23 is patterned 

generally upon existing Regulation 1.65, 

but has been modified to take into 

account certain rules of the National 

Futures Association, that have been 

approved by the Commission, that 

govern the transfer or liquidation of the 

accounts of retail forex customers.95

Proposed Regulation 5.23 permits 

transfers that are requested by the retail 

forex customer or expressly consented 

to by the retail forex customer’s prior, 

specific consent in writing, or those 

done in accordance with rules adopted 

by the DSRO of the RFED, FCM or IB, 

as the case may be, and approved by the 

Commission that establish notice and 

other requirements for such assignments 

and transfers. The proposed regulation 

also duplicates, for the most part, the 

requirements applicable to bulk transfer 

notices to the Commission under 

Regulation 1.65. However, the draft 

regulation requires notice not only of 

bulk transfers, but also bulk 

liquidations, and effectively defines the 

term ‘‘bulk’’ to mean the transfer or 

liquidation of 50 percent or more of the 

total retail forex customer accounts 

carried by the RFED, FCM or IB.96

21. Proposed Regulation 5.24— 

Applicability of Other Parts of the 

Commission’s Regulations 

Proposed Regulation 5.24 states that, 

insofar as consistent with the 

requirements of part 5, the requirements 

of other parts of the Commission’s 

regulations that apply to a person shall 

apply to that person as though those 

provisions were expressly set forth in 

part 5. For example, Regulation 1.31 sets 

forth the Commission’s generally 

applicable recordkeeping requirements 

and speaks in terms of ‘‘persons.’’ 

Proposed Regulation 5.24 is intended to 

incorporate such provisions by 

reference to the extent that part 5 does 

not impose contradictory requirements. 

22. Proposed Regulation 5.25— 

Applicability of Act 

Proposed Section 5.25 incorporates 

various provisions of the Act which 

apply generally to registrants, specifying 

that the provisions of those sections are 

to be read to include the categories of 

forex registrants identified in proposed 

Section 5.1, and that the provisions of 

those sections are to be read to include 

off-exchange retail forex transactions 

and those that that engage in them. 

Specifically, 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) apply to 

off-exchange retail forex transactions 

just as they do to exchange-traded 

transactions. 

III. Related Matters 

A. Regulatory Flexibility Act 

FCMs and CPOs: The Regulatory 

Flexibility Act (‘‘RFA’’) 97 requires that 

agencies, in proposing rules, consider 

the impact of those rules on small 

businesses.98 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.99 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.100

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.101

(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.102) 

Thus, with respect to FCMs and 

registered CPOs, the Commission 

believes that the Proposal 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.103 CTAs 


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104 48 FR 35248 at 35276 (August 3, 1983). 

105 47 FR at 18619. 

106 Id. 107 44 U.S.C. 3501, et seq. 

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.104

IBs: In its 1982 policy statement, the 

Commission proposed that for purposes 

of the RFA and future rulemakings, the 

Commission 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.105

However, this determination was based, 

in part, on the fact that IBs, like FCMs, 

are required to maintain a specified 

level of adjusted net capital. Under the 

proposal, retail forex IBs would not be 

subject to a capital requirement; rather, 

they would have to operate pursuant to 

a guarantee agreement. Nevertheless, as 

discussed above with regard to CTAs, 

registration of previously unregistered 

entities will require the submission of 

application forms, fingerprinting of 

principals, and payment of registration 

fees. To the extent that IBs can be 

considered to be small entities, the 

Commission does not consider either 

the proposed registration fee or the 

proposed fingerprinting requirement for 

IBs subject to Part 5 to have significant 

economic impact. 

RFEDs: RFEDs are a new category of 

registrant. Accordingly, the Commission 

has not addressed the question of 

whether such persons are, in fact, small 

entities for purposes of the RFA. 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. For purposes of the RFA and 

future rulemakings, the Commission is 

hereby proposing 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.106 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 

hereby proposes not to define RFEDs as 

small entities for RFA purposes. 

B. Paperwork Reduction Act 

The Proposal contains information 

collection requirements. The Paperwork 

Reduction Act of 1995 (‘‘PRA’’) 107

imposes certain requirements of federal 

agencies (including the Commission) in 

conducting or sponsoring any collection 

of information as defined by the PRA. 

The Commission has submitted to the 

Director of the Office of Management 

and Budget (‘‘OMB’’), pursuant to the 

provisions of the PRA, an explanation 

and details of the information collection 

and recordkeeping requirements which 

would be necessary to implement the 

Proposal. 

1. Collection of Information 

If adopted, the Proposal would 

require existing and new registrants in 

the FCM, RFED, CTA, CPO and IB 

categories to submit certain filings to the 

Commission which had not been 

previously required; these collections of 

information are found primarily in the 

new part 5 of the proposed regulations. 

To the extent industry participants are 

currently registered as CTAs, CPOs, IBs 

or FCMs, and intend to engage in retail 

forex transactions, the obligations 

imposed by the proposed rules would 

not be significantly altered, but the 

existing collections will be amended to 

reflect additional, new registrants 

within these categories, and the part 5 

collection will include any additional 

information collections not captured in 

existing collections. The estimated 

numbers of respondents, annual 

responses by each, average hours per 

response and annual reporting burden 

reflected in section 2 immediately 

below represent estimates from the last 

update of the collection plus new 

respondents, responses and a new 

calculation of associated burdens. Since 

several of the proposals contained 

herein consist of proposed amendments 

to rules which have already been 

assigned OMB control numbers, the 

Commission assumes that the amended 

rules will be assigned the same OMB 

control number. Similarly, the 

Commission is proposing that the new 

registrants use amendments to existing 

forms in order to comply with 

registration and financial reporting 

requirements, those forms, as amended, 

will in all likelihood retain the same 

OMB control number which they have 

at present. Finally, as to RFEDs, a new 

category of registrant, new OMB control 

numbers will be assigned to new 

collections; to the extent existing 

regulations have been amended to 

include RFEDs, the collections 

associated with those regulations will be 

amended to reflect the new category of 

registrant. Each effected collection and 

the new part 5 collection are discussed 

separately below. 

2. Existing Collections 

a. Collection 3038–0024 (Part 1 of the 

Regulations) 

Generally speaking, collections 

occurring by operation of part 1 

regulations affect FCMs and IBs. Those 

entities that will be required to register 

as RFEDs are currently registered as 

FCMs, so existing Collection 3038–0024 

has been amended, where appropriate, 

to reflect fewer FCM respondents. The 

collection has also been amended, 

where appropriate, to reflect additional 

IB registrants, who were not previously 

required to register to conduct offexchange retail forex business and now 

will be. 

Estimated number of respondents: 

2,160. 

Annual responses by each 

respondent: 38,894. 

Estimated average hours per response: 

1.9. 

Annual reporting burden: 21,229. 

b. Collection 3038–0023 (Part 3 of the 

Regulations) 

Part 3 of the Commission’s regulations 

concern registration requirements. 

Existing Collection 3038–0023 has been 

amended to reflect the obligations 

associated with the registration of new 

entrants, such as CTAs, CPOs, IBs, and 

APs, that had not previously been 

required to register in order to conduct 

off-exchange retail forex transactions. 

Since the registration requirements are 

in all respects the same as for current 

registrants, the collection has been 

amended only insofar as it concerns the 

increased estimated number of 

respondents and the corresponding 

estimated annual burden. 


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108 Due to a mathematical error in the previous 

Collection 3038–0005, the current estimated 

numbers reflect a large increase in the burden to 

respondents. The estimated increase in the annual 

responses to by each respondent is increased by 721 

as a result of this rulemaking. The estimated annual 

increase in the hours of reporting burden is 

increased by 4,833 as a result of this rulemaking. 109 7 U.S.C. 19(a). 

Estimated number of respondents: 

71,857. 

Annual responses by each 

respondent: 73,694. 

Estimated average hours per response: 

0.09. 

Annual reporting burden: 6,632. 

c. Collection 3038–0005 (Part 4 of the 

Commission’s Regulations) 

Part 4 of the Commission’s regulations 

concerns the operations of CTAs and 

CPOs, and the circumstances under 

which they may be exempted from 

registration. As discussed above, the 

estimated average time spent per 

response has not been altered. However, 

adjustments have been made to the 

collection to account for additional 

CPOs and CTAs: filing for exemptions 

from the Part 4 rules, developing and 

distributing required disclosure 

documents; complying with required 

reporting requirements. 

Estimated number of respondents: 

9,486. 

Annual responses by each 

respondent: 37,930. 

Estimated average hours per response: 

17. 

Annual reporting burden: 183,700.108

d. Collection 3038–0055 (Part 160 of the 

Regulations) 

Part 160 requires financial institutions 

to provide notice to customers regarding 

privacy policies and practices. As 

discussed above, the estimated average 

time spent per response has not been 

amended; rather, the collection has been 

amended to reflect new registrants that 

will have to comply with the part 160 

requirements. 

Estimated number of respondents: 

4,066. 

Annual responses by each 

respondent: 96. 

Estimated average hours per response: 

0.24. 

Annual reporting burden: 6,186. 

3. New Collection 3038—NEW 

(Proposed Part 5 of the Regulations) 

Part 5 of the proposed regulations 

requires various information collections 

by various registrants. The Commission 

is seeking a new and separate control 

number for collections occurring 

pursuant to part 5. Among the sections 

requiring information collections in the 

new part 5 is Regulation 5.5, which 

would require the development and 

distribution of risk disclosure 

documents by RFEDs, FCMs and IBs 

transacting off-exchange retail forex. 

Regulation 5.6 would require reporting 

by RFEDs that fail to meet minimum 

financial requirements or are otherwise 

required to provide early warning 

notices. Regulation 5.11 would require 

annual risk assessment reporting by 

RFEDs, and Regulation 5.12 would 

require financial reports of RFEDs 

applying for registration. Regulation 

5.13 concerns reporting to customers by 

RFEDS and FCMs. Regulation 5.18 

generally concerns trading and 

operational standards for retail forex 

counterparties and intermediaries. 

Among the sections within Regulation 

5.18 requiring collections of information 

are 5.18(g), which requires all 

counterparties and intermediaries to 

forward to the Commission records of 

communications received concerning 

facts giving rise to possible violations of 

the Act or Regulations, and 5.18(j), 

which requires forex counterparties to 

provide the Commission with an annual 

compliance certification. Regulation 

5.19 would require all forex 

counterparties and intermediaries to 

provide the Commission with notice of 

legal proceedings to which they are 

parties. Finally, Regulation 5.23 

concerns the notices that must be given 

in the event of bulk transfers or 

liquidations. 

OMB Control Number 3038—NEW. 

Estimated number of respondents: 

1,156. 

Annual responses by each 

respondent: 4,493. 

Estimated average hours per response: 

1.8. 

Annual reporting burden: 4,202. 

Copies of the information collection 

submission to OMB are available from 

the CFT Clearance Officer, 1155 21st 

Street, NW., Washington, DC 20581, 

(202) 418–5160. The Commission 

considers comments by the public on 

this proposed collection of information 

in— 

Evaluating whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have a 

practical use; 

Evaluating the accuracy of the 

Commission’s estimate of the burden of 

the proposed collection of information, 

including the validity of the 

methodology and assumptions used; 

Enhancing the quality, utility and 

clarity of the information to be 

collected; and 

Minimizing the burden of the 

collection of information on those who 

are to respond, including through the 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology, 

e.g., permitting electronic submissions 

of responses. 

Organizations and individuals 

desiring to submit comments on the 

information collection should contact 

the Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 20503, 

ATTN: Desk Officer of the Commodity 

Futures Trading Commission. OMB is 

required to make a decision concerning 

the collection of information contained 

in the Proposal between 30 and 60 days 

after publication of his document in the 

Federal Register. Therefore, a comment 

to OMB is best assured of having its full 

effect if OMB receives it within 30 days 

of publication. This does not affect the 

deadline for the public comment to the 

Commission on the proposed rules. 

C. Cost-Benefit Analysis 

Section 15(a) of the Act 109 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. 

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, the 

Proposal would create a comprehensive 

scheme to implement the requirements 

of the CRA. It would put in place 

requirements including registration, 

disclosure, recordkeeping, financial 

reporting, minimum capital and other 

operational standards. This would 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 


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110As 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. 

and benefits of the Proposal in light of 

the specific provisions of section 15(a) 

as follows: 

1. Protection of market participants 

and the public. The Proposal should 

enhance considerably the protection of 

market participants and the public 

because it requires, for the first time, the 

registration of several categories of 

market participants and requires 

adherence to operational standards that 

had not previously applied. The benefits 

that inhere in the imposition of these 

requirements to a sector of the offexchange 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 offexchange retail forex transactions.110

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 the 

proposed part 5 that are analogous to 

regulations imposed upon 

intermediaries engaged in on-exchange 

transactions. Accordingly, the 

Commission believes that it has 

provided an evenhanded regulatory 

scheme that will be familiar to industry 

participants. 

3. Financial integrity of futures 

markets and price discovery. The 

Proposal’s regulations 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 Proposal includes 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 Proposal is beneficial 

in that will provide needed protections 

for members of the public engaging in 

these transactions. The Proposal 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 issue the 

Proposal. The Commission invites 

public comment on its application of 

the cost-benefit provision. Commenters 

also are invited to submit any data that 

they may have quantifying the costs and 

benefits of the Proposal with their 

comment letters. 

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. 

17 CFR Part 166 

Arbitration, Authorization to trade, 

Customer protection, Definitions, 

Dispute settlement; Litigation; 

Reparations. 

For the reasons presented above, the 

Commission hereby proposes to amend 

Chapter I of Title 17 of the Code of 

Federal Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

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. 

§ 1.1 [Removed and Reserved] 

2. Section 1.1 is removed and 

reserved. 

3. Section 1.3 is amended by revising 

paragraphs (nn) and (yy) to read as 

follows: 

§ 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 § 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. 

4. Section 1.4 is revised to read as 

follows: 


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§ 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. 

5. Section 1.10 is amended by revising 

paragraph (j) to read as follows: 

§ 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 § 1.12(b) of this 

part or § 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 §§ 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 § 5.1(f)(1). A retail foreign 

exchange dealer may not enter into a 

guarantee agreement with an 

introducing broker as defined in 

§ 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 § 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 selfregulatory 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 selfregulatory organizations of the futures 

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 selfregulatory 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 


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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 selfregulatory 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 § 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 § 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 § 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 

§ 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 § 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 § 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 § 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 § 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 § 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. 

* * * * * 

6. Section 1.35 is amended by revising 

paragraphs (a), (a-1) and (b) to read as 

follows: 

§ 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 

§ 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 

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, 


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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 postexecution allocation must have been 

granted written investment discretion 

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 § 4.14(a)(3) or 

§ 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 § 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. 


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(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 postexecution 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 

§ 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 

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 § 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. 

* * * * * 

7. Section 1.36 is amended by revising 

paragraph (a) to read as follows: 

§ 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 § 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 


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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 § 1.31. 

* * * * * 

8. Section 1.37 is amended by revising 

paragraph (a)(1) to read as follows: 

§ 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. 

* * * * * 

9. Section 1.40 is revised to read as 

follows: 

§ 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. 

10. Section 1.46 is amended by 

revising paragraphs (a) and (b) to read 

as follows: 

§ 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; 

(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 


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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. 

* * * * * 

11. Section 1.52 is amended by: 

a. Revising paragraphs (a) and (c); 

b. Revising paragraphs (g)(3) and 

(g)(4); and 

c. Revising paragraphs (h), (j), and (k) 

to read as follows: 

§ 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 §§ 1.10 and 1.17, for futures 

commission merchants and introducing 

brokers, and § 5.7 for retail foreign 

exchange dealers. The definition of 

adjusted net capital must be the same as 

that prescribed in § 1.17(c) for futures 

commission merchants and introducing 

brokers, and § 5.7(b)(2) for futures 

commission merchants offering or 

engaging in retail forex transactions and 

for retail foreign exchange dealers: 

Provided, however, A designated selfregulatory 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 

§ 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 selfregulatory 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 selfregulatory 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 

§ 1.52(g), a self-regulatory organization 

relieved of responsibility must notify 

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 selfregulatory 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 

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. 

13. Section 3.1 is amended by revising 

paragraph (c) to read as follows: 

§ 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 § 3.12 of this 

part for the registration of an associated 

person of such sponsor. 

* * * * * 

14. Section 3.4 is amended by revising 

paragraph (a) to read as follows: 


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§ 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. 

* * * * * 

15. Section 3.10 is amended by: 

a. Revising the heading; 

b. Revising paragraph (a)(1); 

c. Revising paragraph (b); and 

d. Revising paragraph (d) to read as 

follows: 

§ 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 § 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 

§ 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 

§ 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 § 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 § 3.33(f). 

* * * * * 

16. Section 3.12 is amended by 

a. Revising the heading; 

b. Revising paragraph (a); 

c. Revising paragraph (f)(1)(iii)(E); 

d. Revising paragraph (f)(4); 

e. Revising paragraph (h)(1)(i) and 

paragraph (h)(1)(iii); and 

f. Removing paragraph (j) 

The revisions read as follows: 

§ 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 

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 


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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 selfregulatory 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 

* * * * * 

17. Section 3.21 is amended by: 

a. Revising paragraph (b)(3); and 

b. Revising paragraph (c)(1) through 

(3) and (c)(4)(i) to read as follows: 

§ 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 

§§ 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 

(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: 

§ 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. 

* * * * * 

19. Section 3.31 is amended by 

revising paragraphs (a)(1), (b), (c), and 

(d) to read as follows: 

§ 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 


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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. 

(Approved by the Office of Management 

and Budget under control number 3038– 

0023) 

20. Section 3.33 is amended by 

revising paragraphs (a) introductory 

text, (b) introductory text, (b)(6), and (e) 

to read as follows: 

§ 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 

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 


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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 § 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 

§ 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. 

* * * * * 

21. Section 3.44 is amended by 

revising paragraphs (a)(1) through (5) to 

read as follows: 

§ 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 § 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. 

* * * * * 

22. Section 3.45 is amended by 

revising paragraph (b) to read as follows: 

§ 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 § 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 § 1.10 

(j)(4)(ii) or (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. 

23. Section 3.50 is amended by 

revising paragraph (b)(2) to read as 

follows: 

§ 3.50 Service. 

* * * * * 

(b) * * * 

(2) Any futures commission merchant 

or retail foreign exchange dealer which 

has entered into a guarantee agreement 

in accordance with § 1.10(j) of this 

chapter, if the applicant or registrant is 

registered as or applying for registration 

as an introducing broker. 

* * * * * 

24. Section 3.60 is amended by 

revising paragraph (b)(2)(i)(B) to read as 

follows: 

§ 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 

§ 1.12(b), § 5.6(b) or § 31.7(b) of this 

chapter, respectively; and 

* * * * * 

PART 4—COMMODITY POOL 

OPERATORS AND COMMODITY 

TRADING ADVISORS 

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. 

26. Section 4.7 is amended by: 

a. Revising paragraph (a)(1)(v)(B); and 

b. Revising paragraph (a)(2)(i) to read 

as follows: 

§ 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 sixmonth 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 exchangespecified initial margin and option 

premiums, together with NFA-specified 

minimum security deposit for retail 

forex transactions (as defined in section 

5.1(m) of this chapter) for commodity 

interest transactions; or 

* * * * * 


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(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; 

* * * * * 

27. Section 4.12 is amended by 

revising paragraph (b)(1)(i)(C) to read as 

follows: 

§ 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 NFA-specified minimum security 

deposit for retail forex transactions (as 

defined in § 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 inthe-money at the time of purchase, the 

in-the-money amount as defined in 

§ 190.01(x) may be excluded in 

computing such 10 percent; and 

* * * * * 

28. Section 4.13 is amended by: 

a. Revising paragraph (a)(3)(ii)(A): and 

b. Revising paragraph (a)(3)(ii)(B)(1) to 

read as follows: 

§ 4.13 Exemption from registration as a 

commodity pool operator. 

* * * * * 

(a) * * * 

(3) * * * 

(ii) * * * 

(A) The aggregate initial margin, 

premiums, and NFA-specified 

minimum security deposit for retail 

forex transactions (as defined in section 

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 § 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 

* * * * * 

29. Section 4.14 is amended by 

revising paragraph (a)(7) to read as 

follows: 

§ 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. 

* * * * * 

30. Section 4.23 is amended by: 

a. Revising paragraph (a)(1); 

b. Revising paragraph (a)(7); and 

c. Revising paragraph (b)(1) and (2) to 

read as follows: 

§ 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 

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. 

* * * * * 

31. Section 4.24 is amended by: 

a. Revising paragraph (b)(1) 

introductory text and the first three 

sentences of the Risk Disclosure 

Statement in paragraph (b)(1); 

b. Adding paragraph (b)(4); 

c. Revising paragraph (e)(6); 

d. Revising paragraph (g); 

e. Revising paragraphs (h)(2) and 

(h)(4)(iii); 

f. Revising paragraph (i)(2)(ii); 

g. Redesignating paragraph (i)(2)(xii) 

as paragraph (i)(2)(xiii) and adding new 

paragraph (i)(2)(xii); 

h. Revising paragraphs (j)(1)(vi) and 

(j)(3); and 

i. Revising paragraphs (l)(1)(iii), (l)(2) 

introductory text and (l)(2)(i). 

The addition and revisions to read as 

follows: 

§ 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. 


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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 § 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 section 

5.1(m) of this chapter). 

* * * * * 

(3) Included in the description of such 

conflicts must be any arrangement 

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; 

* * * * * 

32. Section 4.25 is amended by 

revising paragraph (c)(3)(ii) to read as 

follows: 

§ 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 

33. Section 4.30 is revised to read as 

follows: 

§ 4.30 Prohibited activities. 

No commodity trading advisor may 

solicit, accept or receive from an 

existing or prospective client funds, 


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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. 

34. Section 4.33 is amended by: 

a. Revising paragraph (a)(6); and 

b. Revising paragraphs (b)(1) and (2) 

to read as follows: 

§ 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) Concerning the commodity trading 

advisor: 

(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. 

* * * * * 

35. Section 4.34 is amended by: 

a. Revising paragraph (b); 

b. Revising paragraph (e)(2); 

c. Revising paragraphs (g) and (h); 

d. Revising paragraph (i)(2); 

e. Revising paragraphs (j)(1) and (j)(3); 

f. Revising paragraphs (k)(1)(ii), 

(k)(1)(iii), (k)(2) introductory text, and 

(k)(2)(i) to read as follows: 

§ 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 

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 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
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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 OFFEXCHANGE 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 § 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 § 5.1 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: 

(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; 

* * * * * 

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 


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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. 

§ 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 section 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: 

(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. 


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(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. 

§ 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. 

§ 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 

section 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 

§ 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 § 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 

§ 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 § 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 § 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 § 5.1(f)(1) of this part, is 

required to register as an introducing 

broker; 

(ii) Any associated person of an 

introducing broker, as defined in 

§ 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 § 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 

§ 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. 

§ 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. 

§ 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 § 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 § 1.3(mm) of this 

chapter, furnishes the retail forex 


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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 

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. 

lllllllllllllllllll

Date 

lllllllllllllllllll

Signature of Customer 


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(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 

§ 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 

quarters during which the counterparty 

maintained retail forex accounts: 

(i) The total number of non 

discretionary retail forex accounts 

maintained by the retail foreign 

exchange dealer or futures commission 

merchant; 

(ii) The percentage of such accounts 

that were profitable; and 

(iii) the percentage of such accounts 

that were not profitable. 

(2) Identification of retail forex 

accounts for purposes of this disclosure 

and calculation of each such account’s 

profit or loss must be made in 

accordance with § 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 retail foreign 

exchange dealer or futures commission 

merchant, the percentage of such 

accounts that were profitable, and the 

percentage of such accounts that were 

unprofitable, calculated in accordance 

with § 5.18(i) of this part, for each 

quarter during the most recent five year 

period during which such retail foreign 

exchange dealer or futures commission 

merchant maintained non discretionary 

retail forex accounts. 

§ 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 § 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 § 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 § 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 § 1.16(e)(2) of this chapter, 

of the existence of any material 

inadequacy, as specified in § 1.16(d)(2) 

of this chapter, such applicant or 

registrant must give facsimile notice of 

such material inadequacy within 24 

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 § 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 § 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 

§ 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
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(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 § 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 § 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 selfregulatory 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. 

§ 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 § 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 § 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. 

(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 selfregulatory 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 selfregulatory organization the ability to 

achieve compliance, the Commission or 

the registrant’s designated selfregulatory 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 (§ 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 § 240.15c3– 

1 of this title, unless specifically stated 

otherwise in this section or in § 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 § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
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(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 § 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 § 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 § 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 

§ 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 

§ 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 § 1.17(c)(5)(x) of 

this chapter, net or individual positions 

in retail forex transactions shall not 

constitute cover under § 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 § 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 

first month-end after the date the 

application for registration is filed. 

§ 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 § 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 § 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 selfregulatory 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 § 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. 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / Proposed Rules 3317 

§ 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 in the form 

of cash or other financial instruments 

that comply with the requirements 

specified in § 1.25 of this chapter for 

each retail forex transaction equal to: 

(1) Ten percent of the notional value 

of the retail forex transaction; 

(2) For short options, ten percent of 

the notional value of the retail forex 

transaction, plus the premium received 

by the futures commission merchant or 

retail foreign exchange dealer; or 

(3) For long options, the full premium 

charged and received by the futures 

commission merchant or retail foreign 

exchange dealer. 

(b) 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 in paragraph (a) of this 

section. 

§ 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 enduser 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 

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 § 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 

§ 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 

§ 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 § 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) 


wwoods2 on DSK1DXX6B1PROD with PROPOSALS-PART 2
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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 § 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 

§§ 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 

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 § 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 § 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. 

§ 5.11 Risk assessment reporting 

requirements for retail foreign exchange 

dealers. 

(a) Reporting requirements with 

respect to information required to be 

maintained by section 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 

§ 5.10(a)(l)(i) of this part. Where there is 

a material change in information 

provided, an updated organizational 


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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 

§ 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 § 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 § 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 

regulators. (1) In the case of a Material 

Affiliated Person that is required to 

maintain and preserve information 

pursuant to section 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 §§ 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 § 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 § 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 § 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 


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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. 

§ 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 

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 § 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 § 1.16 of 

this chapter, and must be accompanied 

by the accountant’s report on material 

inadequacies in accordance with the 

provisions of § 1.16(c)(5) of this chapter. 

In all other respects, the independent 

public accountant shall act in 

accordance with the provisions of § 1.16 

(except paragraph (f)) of this chapter: 

Provided, however, that the term ‘‘§ 5.7’’ 

shall be substituted for the term ‘‘§ 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 § 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 


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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 § 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 § 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 § 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 § 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 § 5.7 of this 

part. Such reconciliation must be 

certified by an independent public 

accountant in accordance with § 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 

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 selfregulatory organization. The registrant 

must file immediately with the 

Commission a copy of any notice it 

receives from its designated selfregulatory 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 selfregulatory 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 § 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 selfVerDate Nov<24>2008 15:03 Jan 19, 2010 Jkt 220001 PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 E:\FR\FM\20JAP2.SGM 20JAP2

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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 selfregulatory organization. Any copy that 

under paragraph (f)(2) or (g) 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 § 1.16 

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 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. 

§ 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 

(2) For each retail forex customer 

engaging in forex option 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 


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with § 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. 

(g) 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 (g) 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 § 1.31 of this chapter. 

(h) Combination with other 

statements. Any futures commission 

merchant required to deliver statements 

to retail forex customers in accordance 

with § 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 

§ 1.33, provided that retail forex account 

information is separately identified from 

any other trading or account activity of 

the retail forex customer. 

§ 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 § 1.31 of this chapter 

formal computations of its adjusted net 

capital and of its minimum financial 

requirements pursuant to § 1.17 or § 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 

case of an applicant, or of the 

Commission or designated selfregulatory 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. 

§ 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. 

§ 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 [effective 

date of final rule], but this section shall 

apply to any extension, modification or 

renewal thereof entered into after such 

date. 

§ 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. 

§ 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 § 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 

§ 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 


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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 

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 


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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 § 5.11(a)(1) of this part, or an 

applicant for registration as an 

introducing broker as defined in 

§ 5.1(f)(1) of this part, or any person 

succeeding to and continuing the 

business of another introducing broker 

as defined in § 5.1(f)(1) of this part, must 

enter into a guarantee agreement with a 

retail foreign exchange dealer or futures 

commission merchant. 

(i) Each retail forex counterparty shall 

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. The calculation of 

profit or loss for each retail forex 

account must be net of fees, 

commissions, any other expenses, 

trading losses, customer funds 

deposited, and customer funds 

withdrawn. Retail forex counterparties 

shall maintain such calculations along 

with all data supporting such 

calculations for five years in accordance 

with § 1.31. 

(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. 

§ 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 

§ 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 firstclass 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 

[effective date of final rule] 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. 

§ 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: 


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(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 

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. 

§ 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. 

§ 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. 

§ 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 § 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. 


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(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 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. 

§ 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. 

§ 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 § 5.1 of this part. 

PART 10—RULES OF PRACTICE 

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). 

38. Section 10.1 is amended by 

revising paragraph (a) to read as follows: 

§ 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 PROCEEDINGS OF 

THE COMMISSION 

39. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2 and 12a. 

40. Section 140.94 is amended by 

adding to read as follows: 

§ 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 § 5.7 of this chapter; 

(2) All functions reserved to the 

Commission in § 5.10 of this chapter; 

(3) All functions reserved to the 

Commission in § 5.11 of this chapter; 

(4) All functions reserved to the 

Commission in § 5.12 of this chapter, 

except for those relating to nonpublic 

treatment of reports set forth in § 5.12(i) 

of this chapter; and 

(5) All functions reserved to the 

Commission in § 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 

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. 

42. Section 145.5 is amended by 

revising paragraphs (d)(1)(viii) and (h) 

to read as follows: 

§ 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 


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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 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 

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. 

44. Section 147.3 is amended by 

revising paragraphs (b)(4)(i)(H) and 

(b)(8) to read as follows: 

§ 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 

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. 

46. Section 160.1 is amended by 

revising paragraph (b) to read as follows: 

§ 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: 

a. Revising paragraph (a) introductory 

text and paragraph (a)(2); 

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); 

c. Revising paragraphs (n)(1)(i) and 

(n)(2)(i); 

d. Revising paragraph (o)(1)(i); 

e. Revising paragraph (u)(2)(i)(A); 

f. Redesignating paragraphs (w)(2) 

through (4) as paragraphs (w)(3) through 

(5) and adding new paragraph (w)(2); 

and 

g. Adding new paragraph (x) to read 

as follows: 

§ 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 


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(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, 

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 § 5.3(i)(1) of this 

chapter. 

48. Section 160.4 is amended by: 

a. Revising paragraph (c)(2)(ii); and 

b. Revising paragraph (e)(1)(iv) to read 

as follows: 

§ 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 § 1.65, if 

you are a transferee futures commission 

merchant, retail foreign exchange dealer 

or introducing broker. 

* * * * * 

49. Section 160.30 is amended by 

revising the introductory text to read as 

follows: 

§ 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 

50. The authority citation for part 166 

remains 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). 

51. Section 166.2 is revised as 

follows: 

§ 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 § 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 § 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. 

52. Section 166.5 is amended by: 

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); 

b. Revising paragraphs (a)(2) and 

(a)(3); 

c. Revising paragraphs (c)(5)(i)(A) and 

(c)(5)(i)(C) to read as follows: 

§ 166.5 Dispute settlement procedures. 

(a) * * * 

(ii) Arises out of any retail forex 

transaction (as defined in § 5.1(m) of 

this chapter). 

(2) The term customer as used in this 

section includes an option customer (as 

defined in § 1.3(jj) of this chapter), a 

retail forex customer (as defined in 

§ 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 


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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 

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 January 7, 

2010, by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. 2010–456 Filed 1–19–10; 8:45 am] 

BILLING CODE P 


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