CFTC Letter 04-03

CFTC letter No. 04-03

December 23, 2003

No-Action

Office of General Counsel

Other Written Communication 

Division of Clearing and Intermediary Oversight 

Re: National Futures Association Forex Rules 

Dear : 

This is in response to your letter, dated November 13, 2003, to Jane Kang Thorpe and myself in the 

Division of Clearing and Intermediary Oversight (the “Division”) of the Commodity Futures Trading 

Commission (the “Commission”).[1] We understand that your client, “X”, objects to the National 

Futures Association’s (“NFA”) new Financial Requirements 12 (the “rule”), which was approved by the 

Commission and took effect on December 1, 2003. You have requested, on behalf of your client, that the 

Commission withdraw this rule[2] and conduct further appropriate review of this issue.[3]

The rule imposes a minimum security deposit requirement on retail forex transactions for NFA members 

that are Forex Dealer Members.[4] The requirement is two percent of the notional value for transactions 

in major currencies and four percent of the notional value for all other currencies.[5] This is consistent 

with forex transactions on the Chicago Mercantile Exchange, which have a two percent margin 

requirement for major currencies and four percent margin for all other currencies. 

The rule, and other amendments to NFA’s Bylaws and rules, were submitted to the Commission for 

approval in accordance with §17(j) of the Act. The Commission approved these rules on July 31, 2003.

[6] As with all other NFA rules approved by the Commission, or permitted to become effective without 

formal Commission approval, the Commission expects that NFA will enforce its rules. You state that 

you understand that “the CFTC and NFA anticipate reviewing the rule in six months.” The Commission 

has not stated that it will review the rule in six months and the Commission does not anticipate 

reviewing the rule unless and until NFA files an amendment thereto. 

“X” objects to the security deposit requirement because the deposit applies to Forex Dealer Members 

and not to certain otherwise-regulated entities that it believes may have a cost-advantage if the otherwiseregulated entities are not required to take security deposits from retail customers. “X” believes that this 

unfairly disadvantages them and is, therefore, anticompetitive. When NFA submitted the rule for 

approval, it stated that requiring a minimum security deposit on retail forex transaction will protect a 

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Forex Dealer Member from absorbing too many customer losses by defaulting customers, which could 

render the Forex Dealer Member insolvent and jeopardize the funds of non-defaulting customers. We 

agree with this assessment. This rationale is consistent with the customer and market protection 

mandates of both the NFA and the Commission. Moreover, the otherwise-regulated entities include 

banks, insurance companies and broker-dealers, all of whom are subject to regulation regarding their 

financial positions, albeit not necessarily from NFA. Lastly, the margin requirements apply only to retail 

customers, and the Forex Dealer Members are still be free to compete with these otherwise-regulated 

entities for non-retail clients on the basis of margin. 

Pursuant to Section 15(b) of the Commodity Exchange Act, the Commission has endeavored to take the 

least anticompetitive means of achieving the objectives of the CEA in approving the rule. The 

Commission has considered the public interest to be protected by the antitrust laws as well as the 

potential benefits of the rule. 

The Commission does not plan on withdrawing its approval of or abrogating NFA’s Financial 

Requirements 12, and the Division expects that NFA will enforce this rule, as well as the other rules and 

amendments approved by the Commission, as of December 1, 2003, the effective date. Accordingly, the 

Division does not believe that it is appropriate to recommend that the Commission grant the requested 

relief. If you have any questions concerning this correspondence, please contact me at (202) 418-5430, 

Deputy Director Lawrence B. Patent at (202) 418-5439 or Peter B. SÁnchez, an attorney on my staff, at 

(202) 418-5237. 

Very truly yours, 

James L. Carley 

Director 

[1] Jane Kang Thorpe was the Director of the Division of Clearing and Intermediary Oversight at the 

time of your request. James L. Carley became the Director on November 21, 2003. 

[2] The Commission is not authorized to withdraw an NFA rule. Section 17(k) of the Commodity 

Exchange Act (the “Act”), 7 U.S.C. § 21(k), authorizes the Commission by order to abrogate any rule of 

a registered futures association if, after appropriate notice and opportunity for hearing, it appears to the 

Commission that such abrogation is necessary or appropriate to assure fair dealing by the members of 

such association, to assure a fair representation of its members in the administration of its affairs or to 

effectuate the purposes of Section 17 of the Act. 

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[3] Prior to adopting this rule, NFA sought and received comment from its members and other interested 

parties over several months. The Commission also received an unsolicited comment letter, prior to 

approval, which raised similar objections that “X” has with regard to the rule. We are satisfied that the 

rule has been appropriately vetted. 

[4] NFA Bylaw 306(a) defines Forex Dealer Members as NFA members that “are the counterparty or 

offer to be the counterparty to [over-the-counter] foreign currency futures and options transactions 

offered to or entered into with [retail customers]” unless the member is also one of certain otherwiseregulated entities listed in Bylaw 306(b). 

[5] NFA has recently issued a no-action letter that states that NFA will not take action against a Forex 

Dealer Member if such entity collects a 1% security deposit on transactions in the British pound, Swiss 

franc, Canadian dollar, Japanese yen, Euro, Australian dollar, New Zealand dollar, Swedish krona, 

Norwegian krone, or the Danish krone, instead of the 2% deposit specified in the rule, during the period 

from December 1, 2003 to June 1, 2004. The 4% deposit requirement for other currencies remains in 

place. 

[6] Section 17(j) of the Act does not require publication in the Federal Register prior to approval. 

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