Commodity Futures Trading Commission: Wednesday, January 20, 2010

Wednesday,
January 20, 2010
Part II
Commodity Futures
Trading Commission
17 CFR Parts 1, 3, 4, et al.
Regulation of Off-Exchange Retail Foreign
Exchange Transactions and
Intermediaries; Proposed Rule
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3282 Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / Proposed Rules
COMMODITY FUTURES TRADING • Fax: (202) 418–5521. of persons who solicit, exercise
COMMISSION • Mail: Send to David Stawick, discretionary trading authority or
Secretary, Commodity Futures Trading operate or solicit funds in connection
17 CFR Parts 1, 3, 4, 5, 10, 140, 145, Commission, 1155 21st Street, NW., with any of these types of transactions.3
147, 160, and 166 Washington, DC 20581. Pursuant to this authority, the
RIN 3038–AC61 • Courier: Same as Mail above. Commission is proposing a scheme that
All comments received will be posted would put in place requirements for,
Regulation of Off-Exchange Retail without change to http://www.cftc.gov, among other things, registration,
Foreign Exchange Transactions and including any personal information disclosure, recordkeeping, financial
Intermediaries provided. reporting, minimum capital, and other
operational standards, based on both the
AGENCY: Commodity Futures Trading FOR FURTHER INFORMATION CONTACT: For
CFTC’s existing regulations for
Commission. information regarding financial and
commodity interest transactions and
ACTION: Proposed rules.
related reporting requirements, contact:
commodity interest intermediaries, as
Thomas Smith, Chief Accountant and
well as rules of the National Futures
SUMMARY: The Commodity Futures Deputy Director, Division of Clearing
Association (‘‘NFA’’) that are already
Trading Commission (‘‘Commission’’ or and Intermediary Oversight, 1155 21st
existing with respect to retail forex
‘‘CFTC’’) is proposing to adopt a Street, NW., Washington, DC 20581.
transactions offered by NFA’s members.
comprehensive regulatory scheme Telephone number: 202–418–5495; Subject to certain exceptions (e.g., for
(‘‘Proposal’’) to implement the CFTC facsimile number: 202–418–5547; and certain regulated financial
Reauthorization Act of 2008 (‘‘CRA’’) 1 electronic mail: tsmith@cftc.gov. intermediaries not under the
with respect to off-exchange Jennifer Bauer, Special Counsel, Commission’s jurisdiction as
transactions in foreign currency with Division of Clearing and Intermediary established in the CRA), the Proposal
members of the retail public (i.e., ‘‘retail Oversight, Division of Clearing and would require persons offering to be or
forex transactions’’). The Commodity Intermediary Oversight, 1155 21st acting as counterparties to retail forex
Exchange Act, as amended by the CRA, Street, NW., Washington, DC 20581. transactions but not primarily or
generally provides that the Telephone number: 202–418–5472; substantially engaged in the exchange
Commission’s jurisdiction extends to facsimile number: 202–418–5547; and traded futures business, to register as
contracts of sale of a commodity for electronic mail: jbauer@cftc.gov. retail foreign exchange dealers
future delivery (or an option on such a For all other information contact: (‘‘RFEDs’’) with the CFTC. Registered
contract) or an option (other than an William Penner, Deputy Director, futures commission merchants (‘‘FCMs’’)
option executed or traded on a national Division of Clearing and Intermediary that are ‘‘primarily or substantially’’ (as
securities exchange), and to certain Oversight, 1155 21st Street, NW., defined in the Proposal) engaged in the
leveraged or margined contracts in Washington, DC 20581. Telephone activities set forth in the Act’s definition
foreign currency that are offered to or number: 202–418–5450; facsimile of an FCM would be permitted to engage
entered into with retail customers. The number: 202–418–5547; and electronic in retail forex transactions without also
Commission is proposing a scheme that mail: wpenner@cftc.gov. Christopher registering as RFEDs.
would put in place requirements for, Cummings, Special Counsel, Division of The Proposal would further require
among other things, registration, Clearing and Intermediary Oversight, certain entities other than RFEDs and
disclosure, recordkeeping, financial 1155 21st Street, NW., Washington, DC FCMs that intermediate retail forex
reporting, minimum capital, and other 20581. Telephone number (202) 418– transactions to register with the
operational standards, based on both the 5450; facsimile number: 202–418– Commission as introducing brokers
CFTC’s existing regulations for 5547; and electronic mail: (‘‘IBs’’), commodity trading advisors
commodity interest transactions and ccummings@cftc.gov. (‘‘CTAs’’), commodity pool operators
commodity interest intermediaries, as Peter Sanchez, Special Counsel, (‘‘CPOs’’), or associated persons (‘‘APs’’)
well as rules of the National Futures Division of Clearing and Intermediary of such entities, as appropriate, and to
Association (‘‘NFA’’) that are already Oversight, 1155 21st Street, NW., be subject to the Act and regulations
existing with respect to retail forex Washington, DC 20581. Telephone applicable to that registrant category. In
transactions offered by NFA’s members. number (202) 418–5450; facsimile addition, the Proposal would require
Additionally, the Proposal would number: 202–418–5547; and electronic any IB that introduces retail forex
amend existing regulations as needed to mail: psanchez@cftc.gov. transactions to an RFED or FCM to be
clarify their application to, and SUPPLEMENTARY INFORMATION: The CRA guaranteed by that RFED or FCM.
inclusion in, the new regulatory scheme provides the Commission with broad The Proposal would also implement
for retail forex. authority to ‘‘make, promulgate and the $20 million minimum net capital
DATES: Comments must be received on enforce such rules and regulations as, in standard established in the CRA for
or before March 22, 2010. the judgment of the Commission, are registering as an RFED or offering retail
ADDRESSES: You may submit comments, reasonably necessary to effectuate any of forex transactions as an FCM; propose
identified by RIN 3038–AC61, by any of the provisions of [the Commodity an additional volume-based minimum
the following methods: Exchange] Act’’ in connection with off- capital threshold calculated on the
• Federal eRulemaking Portal: http:// exchange foreign currency futures, amount an FCM or RFED owes as
www.regulations.gov/search/index.jsp. options, and options on futures, as well counterparty to retail forex transactions;
Follow the instructions for submitting as leveraged off-exchange contracts and require RFEDs or FCMs engaging in
comments. offered to or entered into with retail retail forex transactions to collect
• E-mail: secretary@cftc.gov. Include customers.2 The Commission is given security deposits in a minimum amount
‘‘Regulation of Retail Forex’’ in the similarly broad authority to promulgate in order to prudentially limit the
subject line of the message. and enforce rules regarding registration leverage available to their retail
1 Food, Conservation, and Energy Act of 2008, 2 See, 7 U.S.C. 2(c)(2)(B)(v) and 7 U.S.C. 3 See, 7 U.S.C. 2(c)(2)(B)(iv)(III) and 7 U.S.C.
Pub. L. 110–246, 122 Stat. 1651, 2189–2204 (2008). 2(c)(2)(C)(ii)(III). 2(c)(2)(C)(iii)(III).
Federal Register / Vol. 75, No. 12 / Wednesday, January 20, 2010 / Proposed Rules 3283
customers on such transactions at 10 to an expression that regulation by the under section 4(a) of the Act, 7 U.S.C. 6(a)
1. Commission is unnecessary where there (1982).11
exists an informal market among institutional
I. Background participants in transactions for future The boundaries of the Treasury
delivery in the specified financial Amendment were again tested in
A. The Commodity Futures Trading instruments only so long as it is supervised
Commission Act of 1974 Salomon Forex v. Tauber,12 where a
by those agencies having regulatory
responsibility over those participants.
sophisticated investor sought to
Congress created the Commission in invalidate a multi-million dollar trading
1974 as an independent agency with the However, where that market is not
supervised and where those transactions are debt by claiming that the Treasury
mandate to regulate commodity futures
conducted with participation by members of Amendment only excluded spot or
and option markets in the United States the general public, we do not understand the forward forex transactions from the
by the enactment of the Commodity Committee to have intended that a regulatory Commission’s jurisdiction, and that
Futures Trading Commission Act of gap should exist. In these circumstances, we
1974.4 While the bill was being trading in off-exchange futures and
believe the Commodity Exchange Act should
considered, the Department of the be construed broadly to assure that the public options were within the Commission’s
Treasury (‘‘Treasury’’) sent a letter to the interest will be protected by Commission regulatory authority. If such transactions
Senate Committee with jurisdiction over regulation of those transactions.7 were deemed to be within the
the bill, expressing concerns that The scope of the exclusion, again with Commission’s authority, then the
Treasury had regarding the effect that regard to off-exchange transactions in transactions could only occur legally on
passage would have on the off-exchange GNMA securities, was addressed by the an approved exchange. The Court
foreign currency (‘‘forex’’) market that U.S. Court of Appeals for the Seventh determined that the Treasury
existed at the time between large, Circuit (‘‘Seventh Circuit’’) when it Amendment excluded off-exchange
institutional customers.5 The letter determined that the Treasury trading in futures and options as well as
contained proposed language for the bill Amendment did not exclude options on ‘‘spot’’ and ‘‘forward’’ transactions from
which would have maintained the government securities from the the Commission’s authority, if it
status quo for institutional off-exchange Commission’s authority.8 Specifically, involved ‘‘sophisticated, large-scale
forex trading, leaving jurisdiction over the court determined that although foreign currency traders.’’ 13 Although
on-exchange trading in futures and trading in GNMA securities was this holding has sometimes been
options contracts on forex with the excluded from the Commission’s misinterpreted to imply that off-
newly-created Commission. The bill jurisdiction, trading in options on such exchange forex transactions with the
was subsequently amended to add the instruments was within the general public were outside the
suggested language contained in Commission’s authority. As the court Commission’s jurisdiction, this holding
Treasury’s letter, which was intended to stated: concerned only large-scale traders and
give the Commission jurisdiction over banks that made up the informal
From the legislative history, it is quite clear
retail forex transactions and to exclude that the Treasury Amendment was adopted
network of the foreign currency
from the Commission’s jurisdiction the by Congress only to prevent dual regulation ‘‘interbank’’ market. Indeed, the Court
off-exchange, institutional ‘‘interbank’’ by the CFTC and bank regulatory agencies of itself noted that: ‘‘[t]his case does not
market in foreign currencies. This the banks and other sophisticated institutions involve mass marketing to small
language, which has come to be known that ordinarily trade in financial investors, which would appear to
as the ‘‘Treasury Amendment,’’ provided instruments.9 require trading through an exchange and
that: Following that discussion, in 1985, our holding in no way implies that such
Nothing in this Act shall be deemed to the Commission issued a Statutory marketing is exempt from the CEA.’’ 14
govern or in any way be applicable to Interpretation concerning the Treasury
B. The Futures Trading Practices Act of
transactions in foreign currency * * * unless Amendment that specifically dealt with
such transactions involve the sale thereof for 1992
forex.10 Responding to reports that forex
future delivery conducted on a board of futures contracts were being offered to
trade.6 The Futures Trading Practices Act of
retail customers on an off-exchange 1992 reorganized certain sections of the
As is discussed below, over time, and basis, under the assumption that such Commodity Exchange Act, 7 U.S.C. 1, et
on numerous occasions, the transactions were excluded from the seq. (2000) (the ‘‘Act’’) and gave the
Commission and the courts have opined Commission’s jurisdiction, the Commission significant exemptive
on the proper boundaries of this Commission reaffirmed and republished authority over the activities of a wide
exclusion. its views, as follows: variety of persons, including FCMs,
The Commission first addressed the
[T]he Commission wishes to make very CTAs, and CPOs.
possible scope of the Treasury clear that any marketing to the general public
Amendment with regard to off-exchange It was pursuant to this exemptive
of futures transactions in foreign currencies
transactions in securities issued by the conducted outside the facilities of a contract authority that the Commission
Government National Mortgage market is strictly outside the scope of the addressed some aspects of the over-the-
Association (‘‘GNMA’’). In an [Treasury] Amendment. As a result, such an counter (‘‘OTC’’) markets by adopting
interpretive letter issued by the off-exchange offer or sale of futures contracts Part 35 of its regulations, which
Commission’s Office of General involving foreign currencies is unlawful provides an exemption from regulation
Counsel, Commission staff stated that for certain swap agreements.15 However,
7 Dealers in GNMA Certificates as a Board of
the remarks by the Senate Committee the Commission did not use its newly-
Trade, CFTC Staff Interpretive Letter No. 77–12,
were [1977–1980 Transfer Binder] Comm. Fut. L. Rep.
11 Id. at 42985.
(CCH) ¶ 20,467 (Aug. 17, 1977).
4 Public 12 795 F. Supp. 768 (E.D. Va. 1992), aff’d, 8 F.3d
Law 93–643, 88 Stat. 1389 (1974). 8 Board of Trade of Chicago v. SEC, 677 F. 2d
5 See, Letter from Donald L.E. Ritger, Acting 1137, 1154 (7th Cir. 1982), vacated as moot, 459 966 (4th Cir. 1993).
General Counsel, Department of the Treasury, to the U.S. 1026 (1982). 13 Id. at 978.
Hon. Herman E. Talmadge (July 30, 1974), reprinted 9 Id. at 1154. 14 Id.
at 1974 U.S.C.C.A.N. 5843, 5887–89. 10 Trading in Foreign Currencies for Future 15 See, Exemption for Certain Swap Agreements,
6 Id. at 51. Delivery, 50 FR 42983 (Oct. 23, 1985). 58 FR 5587 (Jan. 22, 1993).
granted exemptive authority in the legislative history indicates that only to provide guidance to allow
context of retail forex.16 large institutional trades were intended participants to navigate the statute. For
Rather, the Commission’s efforts were to be excluded from the Commission’s instance, Advisory 06–01 made clear
directed to combating forex fraud oversight.21 that the Commission had jurisdiction
activities through increased over retail forex and only certain
enforcement and public awareness. In C. The Commodity Futures financial institutions that are
response to increased fraud activity in Modernization Act of 2000 enumerated in the Act could act as
the forex markets, the CFTC issued a The CFMA amended the Act to clarify counterparties for retail customers in
fraud advisory to the public on March the jurisdiction of the Commission in that regard. Similarly, Commission staff
30, 1998.17 Notwithstanding the the area of forex futures and options issued an Advisory in 2002 which sets
Commission’s guidance and the trading. For the first time, off-exchange out parameters for unlicensed
legislative history, the ambiguity of the retail forex transactions were expressly intermediaries, such as pool operators,
Treasury Amendment continued to permitted, provided the counterparty account managers and introducers, in
present opportunities for defendants to was one of certain enumerated, retail forex transactions.26 Most
challenge the Commission’s jurisdiction regulated entities listed in the Act—e.g., recently, in August 2007, Commission
in the courts, which consumed much of a registered FCM.22 Transactions staff issued an Advisory that addressed
the Commission staff’s time and between certain institutional entities the following areas: registration of
resources.18 Unfortunately, these (eligible contract participants, or associated persons (‘‘APs’’) of FCMs,
challenges would persist until the ‘‘ECPs’’ 23) remained outside the CPOs and introducing brokers (‘‘IBs’’);
adoption of the Commodity Futures Commission’s jurisdiction altogether, permissible unregistered forex affiliates;
Modernization Act of 2000 (‘‘CFMA’’).19 based on several provisions of the Act segregated funds; guaranteed IBs;
Under the Treasury Amendment, and the Commission’s regulations.24 combined account statements for forex
retail forex transactions were excluded Shortly after the adoption of the CFMA, and exchange-traded futures; and forex
from the Commission’s jurisdiction however, the Commission and the trading platforms.27
unless they were conducted on a ‘‘board National Futures Association (‘‘NFA’’) 25 Following passage of the CFMA, legal
of trade.’’ This broad phrase caused noted that firms were registering as challenges to the Commission’s
further confusion when courts tried to FCMs but not engaging in any exchange- jurisdiction persisted and certain courts
interpret its meaning in order to traded activities. Rather, they were began to analyze the elements of a
delineate where the Commission’s limiting their activities solely to retail futures contract—the basis of the
jurisdiction ended. The U.S. Court of forex. Additionally, the Commission Commission’s jurisdiction over off-
Appeals for the Ninth Circuit (‘‘Ninth noted that firms were registering as exchange retail forex transactions—
Circuit’’) relied on the language in the FCMs but conducting retail forex using new criteria. Some firms began
Senate Committee report to interpret the transactions through unregistered offering to retail customers transactions
clause and believed that a proper affiliates. Nothing in the Act or CFMA’s that had the elements of futures
reading of the Treasury Amendment amendments to the Act prohibited these contracts, but that were marketed as
excluded all off-exchange forex ‘‘shell FCMs’’ from conducting business ‘‘spot’’ transactions. However, unlike
transactions—even with retail through their unregistered affiliates. true spot transactions where delivery is
customers—from the Commission’s Although the CFMA provided some contemplated, these transactions were
jurisdiction and that the Commission additional clarity for off-exchange retail ‘‘rolled over’’ at expiration (generally
only had jurisdiction over forex forex transactions, it did not provide the within a few days) and carried forward
transactions traded on organized Commission with rulemaking authority, indefinitely. These ‘‘rolling spot’’ or
exchanges.20 Other courts interpreting and the Commission was thus required ‘‘look-alike’’ contracts were the basis of
the same clause came to the conclusion many forex fraud cases brought by the
that retail off-exchange forex 21 See, CFTC v. Baragosh, 278 F.3d 319 (4th Cir. Commission. However, the
transactions were within the 2002), which relied on the Conference Committee Commission’s ability to pursue fraud in
Report, not mentioned in Frankwell Bullion, to this area was put in doubt by the
Commission’s jurisdiction and that the arrive at the opposite conclusion from the Ninth
Circuit; See also, CFTC v. Standard Forex, No. CV– decision of the Seventh Circuit in CFTC
16 See, e.g., Sections 4(c) and 4(d) of the Act, 7 93–0088 (CPS). 1993 WL 809966 (E.D.N.Y. Aug. 9, v. Zelener.28 The Zelener case
U.S.C. 6(c) and 6(d). 1993).
17 Fraud Advisory from the CFTC: Foreign 22 See, 7 U.S.C. 2(c)(2)(B). Broadly stated, these 26 Division of Trading and Markets Advisory
Currency Trading (Forex) Fraud, available at: entities included: (1) A financial institution; (2) a Concerning Foreign Currency Trading by Retail
http://www.cftc.gov/customerprotection/ registered broker/dealer (‘‘B–D’’) or FCM; (3) an Customers, available at: http://www.cftc.gov/
fraudawarenessandprevention/fraudadvisories/ insurance company; (4) a financial holding stellent/groups/public/
fraudadv_forex.html. The Commission also issued company; and (5) an investment bank holding @cpfraudawarenessandprotection/documents/file/
brochures to alert customers to the possible scams company. forex_advisoryretailcustomers.pdf (last visited Oct.
involving forex fraud. See CFTC Brochure on Forex 23 Section 1(c)(12) of the Act defines the term 13, 2009).
Fraud, available at: http://www.cftc.gov/enf/enf- ‘‘eligible contract participant.’’ Entities classified as 27 Division of Clearing and Intermediary
forex.htm and http://www.cftc.gov/stellent/groups/ ECPs include financial institutions, insurance Oversight Advisory Concerning Retail Off-Exchange
public/@cpfraudawarenessandprotection/ companies, certain commodity pools and Foreign Currency Trading, available at: http://
documents/file/enfforexbrochure.pdf (last visited individuals who meet certain asset thresholds. Non- www.cftc.gov/stellent/groups/public/
Oct. 15, 2009). ECPs, generally speaking, are retail customers.
@cpfraudawarenessandprotection/documents/file/
18 For instance, in Dunn & Delta Consultants, Inc. 24 For example, Section 2(d) provides that most forex_advretailcustomers2007.pdf (last updated
v. CFTC, 519 U.S. 465, 469 (1997), the U.S. sections of the Act do not apply to derivative August 30, 2007).
Supreme Court held that foreign currency options transactions between ECPs; Section 2(g) provides 28 CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004),
were ‘‘transactions in foreign currency’’ within the that most sections of the Act do not apply to swap reh’g and reh’g en banc denied, CFTC v. Zelener,
meaning of the Treasury Amendment. transactions between ECPs; and the Part 35 safe 387 F.3d 624 (7th Cir. 2004). The U.S. Court of
19 Consolidated Appropriations Act of 2001, harbor for swap agreements, which pre-dates the Appeals for the Sixth Circuit relied on Zelener
Public Law 106–554, App. E, 114 Stat. 2763 (2000), CFMA, provides another basis for excluding when it issued its opinion in CFTC v. Erskine, 512
available at Commodity Futures Modernization Act jurisdiction. F.3d 309 (6th Cir. 2008), determining that the
of 2000, [2000–2002 Transfer Binder] Comm. Fut. 25 NFA is a registered futures association, foreign currency contracts at issue were not futures
L. Rep. (CCH) ¶ 28,433 (Dec. 21, 2000). pursuant to Section 17(b) of the Act. It is an contracts and upholding the district court’s
20 CFTC v. Frankwell Bullion Ltd., 99 F. 3d 299 industry-wide, self-regulatory organization for the summary judgment against the Commission for lack
(9th Cir. 1996). U.S. futures industry. of jurisdiction.
introduced a different framework for Commission rulemaking authority over, 4c(b), 4o, 6(c) and 6(d),38 6c, 6d, 8(a),
analyzing what constitutes a ‘‘spot’’ and required registration of, 13(a), 13(b), if they are offered or
transaction and created confusion about intermediaries engaging in retail forex.33 entered into by an FCM, an RFED, or an
the applicability of the CFMA to certain The CRA provided that RFEDs and these affiliate of an FCM that is not one of the
retail forex transactions. This departed other intermediaries must be NFA otherwise regulated entities specified in
from a line of previous non-forex cases members and must register with the the Act.39 The same provisions apply to
that distinguished between futures and Commission subject to such terms as the look-alike forex transactions.40
spot or forward contracts based on a Commission may prescribe.34 Among Notwithstanding the grant of
multi-factor analysis of the economic other requirements, the CRA established authority with regard to certain sections
elements in the contract.29 a $20 million minimum capital of the Act specified above, the
The court in Zelener determined that requirement for RFEDs and FCMs that Commission has full rulemaking
the contracts at issue were not off- offer retail forex.35 authority over the agreements, contracts
exchange futures contracts, but rather The grant of authority over look-alike or transactions in retail forex where
contracts in the commodity itself, and forex contracts is very broad and is ‘‘reasonably necessary to effectuate any
thus excluded from the Commission’s intended to encompass transactions that of the provisions or to accomplish any
jurisdiction. The Seventh Circuit do not result in actual delivery, or for of the purposes of [the] Act.’’ 41 The
declined to rehear the case en banc and which no legitimate business purpose Commission has full rulemaking
a split of authority among the circuits exists for the customer to enter into the authority over the futures and options
was created. Some courts continued to transaction. It is not intended to transactions where such transactions are
follow the traditional multifactor test interfere with the large, sophisticated offered or entered into by FCMs, their
while others followed the Zelener interbank market or to place additional affiliates or RFEDs; 42 and retains
approach and only considered the requirements on businesses with a need rulemaking authority with regard to
language within the four corners of the to engage in forex transactions in look-alike transactions only where such
contract.30 connection with their legitimate transactions are offered or entered into
business activities. by RFEDs.43
D. The Commodity Futures Trading
Commission Reauthorization Act of The CRA further provides that look- E. The Commission’s Proposed Rules
2008 alike forex contracts are subject to the In proposing the following rules, the
The CRA 31 was intended, among CFTC’s authority if they are offered on Commission has endeavored, wherever
other things, to further clarify the a leveraged or margined basis, or possible, to apply the principles that
Commission’s jurisdiction in the area of financed by the offeror, counterparty, or have guided it in the regulation of on-
retail forex, particularly in light of the someone acting with the offeror or exchange instruments. Thus, many of
proliferation of look-alike forex counterparty.36 The Commission’s the concepts in the proposed rules will
transactions such as those in the Zelener authority, however, does not extend to be familiar to industry participants and
and Erskine cases, and to give the securities, or to contracts that result in practitioners. There are, however,
Commission additional authority to actual delivery within two days or that essential differences between the
regulate retail forex transactions and to create an enforceable obligation to trading of futures contracts on
register persons involved in deliver between buyer and seller that designated contract markets (‘‘DCMs’’)
intermediating these products with have the ability to deliver or accept that are cleared through Commission
members of the public. To remedy the delivery in connection with their line of registered derivatives clearing
large number of fraud cases where business.37 Thus, the CRA charges the organizations (‘‘DCOs’’) and off-exchange
jurisdiction had been questioned, the Commission with regulating speculative transactions between forex firms and
CRA gave the Commission jurisdiction forms of retail forex trading, but retail customers. Many of the statutory
over certain leveraged retail foreign excludes from the Commission’s and regulatory safeguards that are a
exchange contracts without regard to purview true spot transactions that have critical feature of the trading and
whether it could prove the contracts a legitimate business purpose or that clearance of transactions in futures and
were off-exchange futures contracts.32 result in actual delivery. options on futures on DCMs and DCOs,
The CRA thus grants the Commission The Commission is proposing these respectively, simply are not present in
anti-fraud authority in leveraged retail regulations pursuant to separate off-exchange retail forex transactions.
forex transactions even if the authority provisions of the CRA with The Commission’s proposed
transactions at issue are not futures or respect to the participants in the forex regulations are designed to deal with
options. This allows the Commission to market and with respect to the those differences, including the
protect the public from fraud and transactions themselves. Off-exchange principal-to-principal nature of the
provides a workable solution to the split forex futures and options transactions transactions and the inherent conflicts
in the decisions in the Federal appellate are subject to numerous provisions of of interest between the retail customer
courts regarding when a so-called ‘‘spot’’ the Act including sections 4(b), 4b, and the marketmaker/counterparty. In
contract is a futures contract.
33 Previously, firms serving as counterparties to 38 Although the Commission had jurisdiction
The CRA also created a new category
retail forex typically registered as FCMs (if they with regard to market manipulation in prior
of registrant, the retail foreign exchange
were not included in any of the other permissible versions of the Act, the CRA removed that authority
dealer, or ‘‘RFED,’’ and gave the categories), even though they did not engage in with regard to sections 6(c) and 6(d). All other cited
exchange-traded futures business, and thus did not sections remain in full effect.
29 See, e.g. CFTC v. Co Petro Mktg. Group, Inc. meet the statutory definition of an FCM. 39 See, 7 U.S.C. (2)(c)(2)(B)(iii). In addition to the
680 F.2d 573 (9th Cir. 1982). 34 See, 7 U.S.C. (2)(c)(2)(B)(i)(II)(gg). The sections included in the CFMA for forex futures and
30 See, e.g., CFTC v. UForex Consulting, LLC, 551 Commission plans on delegating the registration options transactions, the CRA adds sections 4(b),
F.Supp.2d 513 (W.D.La. 2008); CFTC v. Erskine, 512 function for RFEDs to NFA, as is the case with the 4o, 13(a), and 13(b).
F. 3d 309 (6th Cir. 2008). registration of FCMs, IBs, CTAs, CPOs and APs. 40 See, 7 U.S.C. (2)(c)(2)(C)(ii)(II).
31 Food, Conservation, and Energy Act of 2008, 35 See, 7 U.S.C. (2)(c)(2)(B)(ii). 41 See, 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);
Public Law 110–246, 122 Stat. 1651. 2189–2204 36 See, 7 U.S.C. 2(c)(2)(C)(i)(I)(bb). (2)(c)(2)(C)(ii)(III); (2)(c)(2)(C)(iii)(III).
(2008). 37 See, 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(AA); H.R. Rep. 42 See, 7 U.S.C. (2)(c)(2)(B)(v).
32 See, 7 U.S.C. 2(c)(2)(C)(iv). No. 110–627, at 979 (2008) (Conf. Rep.). 43 See, 7 U.S.C. (2)(c)(2)(C)(ii)(III).
the nine years since the passage of the of fraudulent practices in this sector of B. Proposed Amendments to Existing
CFMA, the Commission has observed a the forex market. Regulations
number of improper practices that have Many of the proposed amendments to
raised concern, among them solicitation II. Section-by-Section Analysis
regulations outside of proposed part 5
fraud, a lack of transparency in the A. Structure and Approach amount to merely adding references to
pricing and execution of transactions, off-exchange retail forex transactions,
unresponsiveness to customer The CRA requires the Commission to off-exchange retail forex customers
complaints, and the targeting of register and regulate specified persons and/or RFEDs to existing regulations.48
unsophisticated, elderly, low net worth who intermediate off-exchange retail Accordingly, those proposed
and other vulnerable individuals.44 forex transactions. In order to comply amendments will not be separately
In addition to the regulations with this mandate, the Commission discussed. Other proposed amendments,
explicitly mandated by the CRA— must adopt regulations providing for the however, involve a substantive change
including new registration registration of RFEDs and other off- to the existing regulation because the
requirements 45 and enhanced financial exchange retail forex intermediaries not existing regulation must operate
requirements—the proposed regulations excluded from Commission jurisdiction, differently in the context of off-
will require forex registrants to maintain and must specify the financial, exchange retail forex trading.49 These
records of customer complaints; require operational and other requirements substantive changes are discussed
forex counterparties to guarantee the applicable to persons so registered. To below.
performance of all persons who the extent practicable, the Commission
has endeavored to assemble the new off- 1. Part 1 of the Commission’s
introduce accounts to the counterparty; Regulations—General Regulations
require counterparties to disclose, with exchange retail forex provisions in a
the Risk Disclosure Statement, the single new part of the Commission’s a. Regulation 1.1—Fraud in or in
percentage of profitable regulations, proposed to be designated connection with transactions in foreign
nondiscretionary forex customer part 5.46 The goal is to provide a single currency subject to the Commodity
accounts; and require forex convenient location for regulations Exchange Act.
counterparties to designate a chief applicable to off-exchange retail forex This existing provision is specific to
compliance officer to be responsible for transactions and intermediaries. off-exchange retail forex transactions.
development and implementation of Unfortunately, developing a completely Consistent with the concept of a self-
customer protection policies and self-contained part of the Commission’s contained off-exchange retail forex part
procedures. regulations that would contain all of the of the regulations, existing Regulation
off-exchange retail forex regulations is 1.1 is proposed to be deleted and its
As noted above, the Commission content to be incorporated into
believes that these additional not practicable because it has also been
necessary to draft amendments to Regulation 5.2 of proposed part 5.
requirements are militated both by the b. Regulation 1.3—Definitions.
essential differences between on- various provisions of existing
regulations maintained in other parts of The definition of ‘‘guarantee
exchange transactions and off-exchange agreement’’ is proposed to be amended
retail forex transactions, and the history 17 CFR Chapter 1. Among the reasons
for these proposed additional to take account of IBs who may be
amendments are the following: (1) Some guaranteed by RFEDs.50 The definition
44 Between December 2000 and September 2009,
regulatory provisions of general of ‘‘commodity interest’’ is proposed to
the Commission has filed 114 forex-related be amended to include off-exchange
enforcement actions on behalf of more than 26,000 application name the specific
customers. Those efforts have thus far resulted in registration categories they affect, and retail forex transactions over which the
the award of approximately $476 million in Commission has jurisdiction by virtue
do not presently refer to RFEDs; (2)
restitution and disgorgement, and $576 million in of the CRA.51 Including off-exchange
civil monetary penalties. An overwhelming persons registered under certain existing
retail forex transactions within the
majority of these cases have involved solicitation registration categories (e.g., FCMs) will
‘‘commodity interest’’ definition permits
fraud. be able to engage in off-exchange retail
45 The Commission’s proposed regulations a wide range of provisions, especially
forex transactions under those existing
include registration requirements for all persons within part 4 of the Commission’s
registrations, subject to additional
engaged in the solicitation or acceptance of orders regulations, to apply to such
for retail forex transactions involving non-ECPs, the requirements, and restating the
transactions without the need to
exercise of discretionary trading authority in such requirements pertaining to those
transactions, or the operation or solicitation of separately revise each provision to
registration categories in part 5 would
funds for pooled investment vehicles in connection expressly address off-exchange retail
with such transactions. Accordingly, the proposed
be unwieldy; 47 and (3) certain existing forex, as well as futures contracts and
rules include requirements that such persons regulatory provisions that should apply commodity options.52
become registered as CTAs, CPOs or IBs, as to off-exchange retail forex transactions
appropriate. The Commission is aware that the and to the persons engaging in them are 48 See, proposed amendments to Regulations 1.4,
statutory definitions of these entities do not
anticipate persons engaged in off-exchange
worded in terms of on-exchange futures 1.35, 1.36, 1.37, 1.40, 1.52, 1.65, 3.1, 3.4, 3.10, 3.12,
activities. The Commission has determined, and commodity options transactions, 3.21, 3.30, 3.31, 3.33, 3.44, 3.45, 3.50, 3.60, 4.23,
however, that pursuant to its plenary power to and not in a way that would encompass 4.25, 4.30, 4.33, 10.1, 160.1, 160.3, 160.4, 160.30
regulate such off-exchange retail forex transactions and 166.2.
off-exchange retail forex transactions. 49 See, proposed amendments to Regulations 1.1,
in section 2(c) of the Act, it will entrust such

transactions only to persons registered as CTAs, 1.3, 1.10, 1.46, 3.1, 4.7, 4.12, 4.13, 4.14, 4.24, 4.34
CPOs and IBs, inasmuch as these are categories of 46 Former part 5 (Designation of and Continuing and 166.5. In several instances, staff took the
registrants with which the Commission and the Compliance by Contract Markets) was removed and opportunity of this review and proposed
public are already familiar. This will allow the reserved. 66 FR 42256 (Aug. 10, 2001). rulemaking to propose deletion of obsolete material
Commission to regulate off-exchange retail forex 47 For example, essentially replicating the text of that either refers to already deleted regulatory
transactions efficiently and effectively. For part 4 (which concerns CPOs and CTAs) within the provisions or has become outdated due to the
example, the proposed regulations would make use new part 5 in order to cover providers of forex passage of time. See proposed amendments to
of the established standards for registration and trading advice and operators of pooled forex trading Regulations 1.52, 3.12, 3.31 and 160.18.
50 Regulation 1.3(nn).
denial of registration contained in the Act as well vehicles would have needlessly increased the
51 Regulation 1.3(yy).
as the Commission’s previous interpretations of volume of the Commission’s regulations, when a
these standards. See 41 FR 44560 at 44561–62 (Oct. simple incorporation of the same requirements by 52 See, e.g., Regulation 4.6 as well as various
6, 1976). reference accomplishes the same purpose. provisions of Regulations 4.22 (reporting to pool
c. Regulation 1.10—Financial reports RFEDs and FCMs engaging in off- c. Regulation 4.13—Exemption from
of futures commission merchants and exchange retail forex transactions to registration as a commodity pool
introducing brokers. close out offsetting positions would operator.
Proposed new provisions would apply regardless of whether the off- As proposed, the NFA-specified
require all IBs and all applicants for exchange retail forex customer has minimum security deposit for off-
registration as IBs in connection with instructed otherwise.54 Also, unlike the exchange retail forex transactions would
retail off-exchange forex transactions to existing provision for transactions in on- be included among the amounts that
enter into a guarantee agreement with exchange futures and option contracts, cannot exceed 5 percent of the
an RFED or an FCM.53 To date, those no exception is proposed for omnibus liquidation value of the pool’s portfolio
persons who have introduced off- accounts because they are not used in in order for the operator to claim
exchange retail forex customers to off-exchange retail forex trading. An exemption from registration under
counterparties have not been required to RFED or FCM could, if permitted by the Regulation 4.13(a)(3). Again, such
register as IBs, and fraudulent rules of a self-regulatory organization amounts are roughly equivalent to
solicitation and sales practices have (‘‘SRO’’) of which the RFED or FCM is initial margin and option premiums.59
been commonplace. See supra note 46. a member, offset at the retail forex d. Regulation 4.14—Exemption from
The Commission believes that by customer’s request off-exchange retail registration as a commodity trading
requiring guarantee agreements between forex transactions of the same size, if the advisor.
all off-exchange retail forex IBs and the retail forex customer holds other As proposed, an RFED that provided
FCM/RFED counterparties to which transactions of a different size, but the trading advice solely in connection with
they introduce off-exchange retail forex RFED or FCM would be required to its business as an RFED would be
customers, the counterparties will be offset a transaction against the oldest exempt from registration as a CTA. This
forced to more carefully vet the persons transaction of the same size.55 is consistent with treating FCMs and
who solicit business on their behalf and RFEDs comparably, where
2. Part 4 of the Commission’s appropriate.60
the practices those persons employ.
Regulations—CPOs and CTAs e. Regulations 4.24 and 4.34—General
The Commission will be preparing a
a. Regulation 4.7—Exemption from disclosures required for CPO and CTA
new Part C guarantee agreement to the
certain part 4 requirements for Disclosure Documents.
Form 1–FR–IB, modeled on the As proposed, the prescribed risk
guarantee agreement existing in Part B commodity pool operators with respect
to offerings to qualified eligible persons disclosure language for the front of the
of Form 1–FR–IB, that will provide that Disclosure Document would be required
FCMs and RFEDs that guarantee and for commodity trading advisors
with respect to advising qualified to include language warning that off-
performance by an introducing broker exchange retail forex transactions may
that introduces off-exchange retail forex eligible persons.
As proposed, in determining whether not be given the same preferential
transactions will be jointly and severally treatment as commodity customer
liable for all obligations of the a person is a ‘‘qualified eligible person’’
(‘‘QEP’’) the NFA-specified minimum claims under the Bankruptcy Code.61
introducing broker under the Act and This warning is necessary because
Commission regulations with respect to security deposit for off-exchange retail
forex transactions would be included in definitions for such terms as
the solicitation of, and transactions ‘‘commodity contract,’’ ‘‘customer’’ and
involving, all retail forex customer the calculation of the portfolio
requirement.56 Such amounts are ‘‘customer property’’ in Subchapter IV of
accounts of the introducing broker Chapter 7 of the Bankruptcy Code do
entered into on or after the effective date roughly equivalent to exchange-
specified initial margin and option not include or refer to off-exchange
of the guarantee agreement. The transactions, generally, or to off-
Commission believes that the guarantee premium. In addition, in order to treat
RFEDs and FCMs comparably, RFEDs exchange retail forex transactions or
requirement serves the public’s interest customers engaged in such transaction,
in a marketplace where improper would be included among the persons
that do not have to meet the portfolio specifically.62
practices by IBs are discouraged while
still permitting FCMs and RFEDs to requirement to be QEPs.57 3. Part 166 of the Commission’s
make use of outside salespeople. An IB b. Regulation 4.12—Exemption from Regulations—Customer Protection Rules
that is guaranteed by an FCM or RFED provisions of part 4.
As proposed, the NFA-specified a. Section 166.5—Dispute settlement
will not be subject to the minimum procedures.
capital requirements set forth in minimum security deposit for off-
As proposed, the section of the
Regulation 1.17(a)(1)(iii). exchange retail forex transactions would
Commission’s customer protection
d. Regulation 1.46—Application and be included among the amounts that
regulations dealing with dispute
closing out of offsetting long and short cannot exceed 10 percent of the fair
settlement procedures would be
positions. market value of a pool’s assets in order
amended to expressly apply where a
Like FCMs engaging in on-exchange for the operator to claim exemption
claim or grievance arises out of a retail
futures and option transactions under under Regulation 4.12(b). Again, such
forex transaction and the defined term
the existing regulation, RFEDs and amounts are roughly equivalent to on-
customer would be amended to include
FCMs engaging in off-exchange retail exchange initial margin and option
forex transactions would be required to premiums.58 59 Regulation 4.13(a)(3)(ii).

close out offsetting long and short 54 NFA’s experience supports the conclusion that
60 Regulation 4.14(a)(7)(ii). As noted in the
positions in an off-exchange retail forex Conference Report that accompanied the CRA, ‘‘To
keeping open long and short positions in a retail the extent their risk profiles are similar, the
customer’s account. But unlike existing forex customer’s account removes the opportunity managers intend for FCMs and RFEDs to be
Regulation 1.46, the requirement on for the customer to profit on the transactions, regulated substantially equivalently in terms of
increases the fees paid by the customer and invites their off-exchange retail foreign currency business.’’
participants), 4.23 and 4.33 (recordkeeping), and abuse. H.R. Rep. No. 110–627, at 980 (2008) (Conf. Rep.).
55 Regulation 1.46(a)(2).
4.24 and 4.34 (required disclosures). The Conference Report is available via the Internet
53 Regulations 1.10(a)(4), 1.10(j)(3), 56 Regulation 4.7(a)(1)(v)(B). on the CFTC’s website.
57 Regulation 4.7(a)(2)(i)(B). 61 Regulations 4.24(b) and 4.34(b).
1.10(j)(9)(i)(A)(2) and 1.10(j)(9)(i)(B)(2). See also,
Proposed Regulation 5.18(h). 58 Regulation 4.12(b)(i)(C). 62 11 U.S.C. 761 et seq.
a retail forex customer.63 The existing requirements applicable to persons dealing in exchange-traded futures, will
text could be read to exclude customer engaged in retail forex business are also be required to register as RFEDs.
claims arising out of retail forex defined in Regulation 5.1 to clarify their Because there will be two categories of
transactions from coverage under use elsewhere in part 5.69 registrants competing for these
Regulation 166.5. customers, the stated Congressional
2. Proposed Regulation 5.2—Prohibited
Transactions: Antifraud intent is that an entity should not be
C. New Part 5
advantaged or disadvantaged as a result
As noted earlier, the proposed new As noted above, under the proposal, of registering as an RFED instead of an
part 5 to the Commission’s regulations existing Regulation 1.1 prohibiting fraud FCM.72 The Commission has therefore
is intended to permit, as much as in connection with foreign currency endeavored to draft regulations that
possible, reference to a single portion of transactions would be removed and provide equivalent treatment of FCMs
the regulations for matters concerning replaced with new Regulation 5.2, and RFEDs wherever possible.
off-exchange retail forex. Although it which, in addition to prohibiting The enactment of the CFMA
has been necessary to make changes to fraudulent conduct in connection with permitted registered FCMs and certain
provisions elsewhere in the regulations, retail forex transactions, now prohibits of their unregistered affiliates to act as
the Commission believes that in most anyone from acting as the counterparty counterparties to retail forex
cases, initial reference to part 5 should for a retail forex transaction in an transactions, but it did not specifically
be sufficient to resolve questions (or to account for which that person has require that intermediaries such as
direct the reader by cross-reference to discretionary trading authority. introducing brokers, account managers
the appropriate provision elsewhere). 3. Proposed Regulation 5.3— or pool operators be registered in order
1. Proposed Regulation 5.1—Definitions Registration to engage in forex transactions with
retail participants. This created
Proposed part 5 begins with a set of The CRA amends the Act to require
problems when unregistered entities
definitions of terms specific to off- that certain intermediaries for forex
began soliciting retail customers. The
exchange retail forex and to the futures and options and for look-alike
lack of vetting by a regulatory agency or
regulatory requirements that apply to contracts (i.e., those at issue in Zelener)
an SRO created a situation where
off-exchange retail forex. ‘‘Retail forex register in such capacity as the
members of the general public were
transaction’’ is defined by reference to Commission shall determine and
being solicited by entities and persons
the description in sections 2(c)(2)(B) become members of a registered futures
regarding whom they were unable to
and 2(c)(2)(C) of the Act. The proposed association.70 The Commission has
obtain any background information. In
definition expressly excludes futures determined that the appropriate
some cases, persons banned from
and commodity option contracts traded registration categories for those
registering in the futures industry as a
on a designated contract market or intermediaries are as follows. Persons
result of past misconduct were
derivatives transaction execution who solicit or accept orders for an
operating as unregistered intermediaries
facility.64 ‘‘Retail foreign exchange RFED, an FCM, or an affiliate of an FCM
in retail forex transactions because of
dealer’’ is defined as anyone who offers should be registered as IBs. Persons who
the lack of minimum requirements to
to be or who is a counterparty to a retail exercise discretionary trading authority
operate in the forex business. Pursuant
forex transaction, except for those over accounts should be registered as
to the CRA, certain affiliates of FCMs
persons excluded from the definition by CTAs. Persons who operate or solicit
may continue to be proper forex
the CRA.65 In order to apply the IB, funds or property for a pooled
counterparties if the affiliated FCM
CPO, CTA and AP registration and other investment vehicle should be registered
makes and keeps the risk assessment
requirements to analogous retail forex as CPOs. Finally, associated persons of
records required in Section 4f(c)(2)(B) of
market participants, notwithstanding the foregoing should be registered as
the Act and the affiliate has at least $20
that statutory and regulatory definitions APs. The proposed regulations include
million in adjusted net capital.73
of the identifying terms do not provisions to implement this part of the
However, under the proposed
necessarily comprehend involvement in CRA.
Prior to the passage of the CRA, many regulations, the affiliates will have to
retail forex trading, the terms are register in the appropriate capacity in
separately defined for the purposes of entities registered as FCMs solely to
engage in retail forex transactions. The order to serve as a counterparty.
part 5.66 ‘‘Affiliated person of a futures Proposed Regulation 5.3 imposes the
commission merchant’’ (a term not CRA provides that registered FCMs who
currently trade retail forex may continue registration requirements called for by
previously defined in the Commission’s the CRA upon specified categories of
regulations) and an AP of such a person to do so as FCMs, or may be required
to register as RFEDs, depending on their persons intermediating retail forex
are defined by reference to section transactions. RFEDs are required to
2(c)(2)(B)(i)(II)(cc)(BB) of the Act.67 circumstances. A traditional FCM that is
primarily or substantially engaged in register as such.74 FCMs not ‘‘primarily
‘‘Primarily or substantially’’ is defined or substantially’’ engaged in FCM
for use in determining whether a exchange-traded futures business may
continue to engage in retail forex as an business are required to register as
registered FCM is primarily or RFEDs,75 and FCM-affiliated persons
substantially engaged in FCM activities, FCM, and need not register as an
RFED.71 Currently registered FCMs who that serve as retail forex counterparties
such that it need not also register as an are also required to register as RFEDs.76
RFED in order to conduct retail forex solely trade in retail forex, or FCMs who
Persons introducing forex accounts are
business.68 Certain terms used in are not primarily or substantially
required to register as IBs.77 Operators
determining the financial and reporting 69 See, proposed Regulations 5.1(b), (i), (j), (k) and 72 See, H.R. Rep. No. 110–627, at 980 (2008)
63 Regulations
(l).
166.5(a)(1) and (a)(2). 70 See, (Conf. Rep.).
64 See, proposed Regulation 5.1(m).
7 U.S.C. 2(c)(2)(B)(iv) and 2(c)(2)(C)(iii). 73 See, 7 U.S.C. 2(c)(2)(B)(i)(II)(cc)(BB).
71 The Commission is directed to determine,
65 See, proposed Regulation 5.1(h). 74 See, proposed Regulation 5.3(a)(6).
through notice and comment rulemaking such as
66 See, proposed Regulations 5.1(d), (e) and (f). 75 See, proposed Regulation 5.3(a)(4).
this, what ‘‘primarily or substantially’’ means in this
67 See, proposed Regulations 5.1(a) and (c). 76 See, proposed Regulation 5.3(a)(1).
context. H.R. Rep. No. 110–627, at 980 (2008) (Conf.
68 See, proposed Regulation 5.1(g) Rep.); see also, Proposed Regulation 5.1(g). 77 See, proposed Regulation 5.3(a)(5).
of pooled investment vehicles that entities that are not eligible contract Congressional intent to ensure that
engage in retail forex transactions are participants as defined in Section 1a of substantially undercapitalized ‘‘shell’’
required to register as CPOs, and the Act (i.e., retail customers). These FCM off-exchange retail forex dealers
persons providing forex trading advice transactions serve no broad price and their affiliates, from whom it may
are required to register as CTAs.78 discovery function, and the Commission be impossible to recover funds in the
Finally, associated persons of all of the believes both that the vast majority of event of customer claims, do not engage
foregoing are required to register as APs. retail customers who enter these in off-exchange retail forex activity. The
The CRA’s registration requirements transactions do so solely for speculative existing regulation for the calculation of
do not apply to certain otherwise purposes, and that relatively few of FCM net capital has been proposed for
regulated entities (e.g., broker-dealers), these participants trade profitably. the calculation of net capital for RFEDs
their associated persons, or persons who Whether or not this is actually the case, and FCMs offering off-exchange retail
would be exempt from registration if the Commission believes that disclosure forex, with the intent that an FCM
they were engaging in such transactions of the percentage of profitable accounts offering retail forex should only have
on or subject to the rules of a contract maintained by RFEDs and FCMs one calculation of its adjusted net
market with regard to forex futures or engaging in off-exchange retail forex capital. However, the CRA’s higher
options 79 or look-alike contracts.80 This will provide the retail customer with dollar threshold of minimum capital
is consistent with the original intent of vital information when deciding required, $20 million, will apply, as
the Treasury Amendment that entities whether or not to engage in such well as an additional early warning
engaging in forex transactions should transactions. requirement of 110%, resulting in a
not be subject to regulation by multiple notice reporting net capital level of $22
6. Proposed Regulations 5.6 and 5.7—
regulators concerning the same activity. million. The proposed early warning
Minimum Financial Requirements
Proposed Regulation 5.3 excludes from level of 110% is lower than the FCM
the registration requirement the persons Under proposed Regulation 5.7, early warning level of 150% due to the
specified in the CRA. RFEDs and FCMs engaging in retail substantially higher minimum dollar
forex trading are required to meet the threshold established in the CRA, which
4. Proposed Regulation 5.4—Operative minimum net capital requirements results in an adequate minimum early
Requirements for CPOs and CTAs prescribed in the CRA.82 Proposed warning ‘‘buffer’’ of no less than $2
Proposed Regulation 5.4 applies all of Regulation 5.6 sets forth the ‘‘early million.
the disclosure, recordkeeping, reporting warning’’ notification requirements An amount of minimum net capital in
and other existing requirements pursuant to which RFEDs and FCMs addition to the minimum $20 million is
currently applicable to CPOs and CTAs engaging in retail forex trading are proposed to the extent that an FCM or
in the context of on-exchange futures required to notify SROs and the RFED has a total retail forex obligation
and commodity option contracts to Commission if an RFED or an FCM in excess of $10,000,000. After that
persons defined as, and required to engaging in retail forex trading has threshold, as proposed the FCM or
register as, CPOs and CTAs because experienced declines in capital, has RFED must have net capital of no less
those persons operate pooled discovered a material inadequacy in than $20,000,000 plus five percent of
investment vehicles that engage in retail internal controls or has become the total retail forex obligation in excess
forex transactions or because they undercapitalized.83 Because there is no of $10,000,000. This proposal is
provide retail forex trading advice. equivalent to the futures regime of strict intended to address concerns that,
segregation of customer funds in off- although the capital level contained in
5. Proposed Regulation 5.5—Risk exchange retail foreign currency the CRA is believed to be high at
Disclosure by FCMs, RFEDs and IBs dealing, the notice requirement for $20,000,000, at particularly high levels
Proposed Regulation 5.5 requires RFEDs with respect to undersegregation of retail customer obligations there
RFEDs, FCMs and IBs to provide retail is not included in the proposed should be commensurate increases in an
forex customers with a risk disclosure regulation. However, a requirement has entity’s minimum required net capital.
statement similar to that currently been proposed that an RFED or FCM The NFA has enacted a similar
required by Regulation 1.55, but tailored engaging in off-exchange retail forex requirement applicable to all its forex
to address the risks, conflicts of interest transactions give notice if it is holding dealer members except those that only
and unique characteristics of retail forex liquid assets less than the aggregate provide ‘‘straight through processing.’’
retail forex obligation (as defined). The The Commission’s proposal has no
trading. For example, the required risk
aggregate retail forex obligation is exceptions for FCMs engaging in off-
disclosure statement would also be
proposed to be the net obligation to all exchange retail forex or for RFEDs.
required to disclose the number of non-
off-exchange retail foreign currency Under the existing net capital
discretionary retail forex accounts
customers at all times (excluding deficit regulation for FCMs contained in
maintained by an RFED or FCM, the
accounts). Commission Regulation 1.17, an FCM
percentage of such accounts that were The minimum net capital regulation that becomes undercapitalized must
profitable for each of the four most for RFEDs and FCMs offering off- immediately cease business and transfer
recent quarters, and a statement that exchange retail forex is proposed based its customers’ positions to another FCM,
past performance is not necessarily on the significantly higher minimum net unless the Commission believes that it
indicative of future results.81 capital level for RFEDs and FCMs will be able to quickly remedy the
Under Section 2(c) of the Act, the offering retail forex established in the situation, in which case the Commission
Commission’s jurisdiction with regard CRA. The Commission believes that the may provide up to an additional 10
to off-exchange forex transactions higher level of $20 million reflects business days to return to compliance
extends to transactions involving before ceasing business. Because the
78 See, proposed Regulations 5.3(a)(2) and
82 Analogous to Regulation 1.17 for FCMs trading
retail forex contracts at issue are not
only futures and commodity options. exchange-traded, and therefore,
5.3(a)(3). 83 The proposed requirement is analogous to
79 See, 7 U.S.C. 2(c)(2)(B)(iv)(II).
existing Regulation 1.12 for FCMs that trade only
positions are not fungible among retail
80 See, 7 U.S.C. 2(c)(2)(C)(iii)(II).
on-exchange futures and commodity option forex FCMs and RFEDs, should an RFED
81 See, proposed Regulation 5.5(e). contracts. become undercapitalized, the
Commission proposes that it either existing net capital regulation for FCMs, commodity options trading.85 The
liquidate or transfer all off-exchange is derived from the SEC’s net capital Commission recognizes that the retail
retail forex accounts (with a transfer charges for options that are not options forex obligation is not an equivalent
envisioned as a full novation of the on futures. Because these retail forex substitute for the segregated funds
retail forex contracts for such accounts transactions are, by nature, off-exchange regime, which cannot be replicated in
by assignment and assumption of the transactions, the resulting charge under the context of off-exchange retail forex
contracts by another RFED or FCM) the SEC rule would be the charge for trading. Unlike segregation of customer
under the direction and supervision of ‘‘unlisted’’ options. This charge is based funds deposited for futures trading,
the Commission or the entity’s on the notional transactional size of the such amounts would not be provided
designated self-regulatory organization option which may result in a very any preferential treatment to unsecured
(‘‘DSRO’’). The same 10 business day significant capital implication for retail creditors in a bankruptcy, and would
period has been proposed for the forex transactions which are options. not be held in separately titled accounts
Commission or DSRO to delay such However, this result is consistent with under the CEA. Because of the lack of
liquidation or transfer if determined the existing requirements for all off- bankruptcy preference with respect to
appropriate. The proposal requires the exchange or unlisted foreign exchange the funds of retail forex customers held
refund or transfer of all funds associated options for existing FCMs and broker- at FCMs or RFEDs, the Commission
with off-exchange retail forex accounts dealers. does not intend to propose a separation
contemporaneous with the liquidation of funds requirement which may be
or transfer. The possibility of an entity 7. Proposed Regulation 5.8—Aggregate misconstrued as being similar to the
needing to refund all customers’ Retail Forex Assets protections that are afforded to
accounts and liquidate all positions in customers engaged in exchange-traded
Proposed Regulation 5.8 requires
such circumstances makes it necessary futures and options. As previously
RFEDs and FCMs engaging in retail
to include a proposal to require such discussed, Regulation 5.8 has been
forex transactions to compute the net
entity to maintain liquid assets available proposed to ensure that RFEDs and
credit balance resulting from combining
equal to the amount owed to off- FCMs hold liquid assets in appropriate
all money, securities and property
exchange retail forex customers. jurisdictions should they be required to
deposited by retail forex customers into
Although not permissible to be be refunded to customers or seized to
their accounts, adjusted for realized and
counted as a liquid asset for fulfilling compensate customers. NFA first
unrealized net profit or loss, and not
the requirement of Regulation 5.8, under established under Section 14 of its
including any accounts that contain net
the proposed net capital regulation, the Financial Requirements its version of
liquidating balances (the ‘‘retail forex
unsecured receivable resulting from an this requirement, due to its difficulty in
obligation’’ of the RFED or FCM).84
RFED or FCM offsetting currency ultimately obtaining any funds for
Under proposed Regulation 5.8(a) each
exposure with one of several restitution with respect to failures of
RFED or FCM engaging in retail forex
enumerated parties (regulated financial forex dealers and cases of fraud. The
transactions is required to hold assets of
intermediaries or foreign equivalents proposal follows the NFA’s rule in this
the type permitted under Regulation
approved by NFA) will be treated as a regard while further requiring that the
1.25 equal to the retail forex obligation.
current asset. The Commission proposes types of assets held to meet the
Such assets would have to be
this, with the counterparty limitation, to requirement must also be of the kind
maintained at one or more qualifying
balance an RFED’s or FCM’s need to and character permitted for the
institutions in the U.S., or in money
hedge its net position from offering off- investments of futures customer funds
center countries (as defined in
exchange retail forex with the concern under existing Commission Regulation
Regulation 1.49) where such countries
that such receivables are collectible for 1.25. These types of assets are limited to
have agreements acceptable to NFA that
net capital purposes. Without this generally liquid financial instruments,
authorize sharing account information
proposed addition to the net capital which the Commission believes to be an
with NFA.
calculation, RFEDs and FCMs would appropriate limitation, should it become
have to take a 100% capital charge for The requirement to hold assets equal necessary to liquidate retail forex
such unrealized gains. The Commission to the retail forex obligation is separate accounts, transfer funds, or seize or
understands that NFA, under from the adjusted net capital freeze funds in the event of fraud.
subparagraph (c) of its Section 11 requirement. In computing their
adjusted net capital, pursuant to 8. Proposed Regulation 5.9—Security
Financial Requirements for Forex Dealer Deposits for Retail Forex Transactions
Members, has been permitting existing proposed Regulation 5.8(d), RFEDs and
forex dealer members to not take such FCMs could not include assets held for Proposed Regulation 5.9(a) would
a charge to the extent the counterparty purposes of complying with proposed require each RFED and each FCM that
has been considered regulated and Regulation 5.8(a) as current assets, or engages in retail forex transactions, in
approved by NFA, and is not an affiliate otherwise recording any property advance of any such transaction, to
of the Forex Dealer Member. Thus, the received from retail forex customers as collect from the retail forex customer a
Commission proposes that a DSRO be an asset without recording a security deposit (in cash or in financial
afforded the continuing ability to assess corresponding liability to such instruments that meet the requirements
the appropriateness of counterparties for customers. of Regulation 1.25) equal to ten percent
this purpose going forward, while The requirement to maintain assets of the notional value of the retail forex
making explicit the ability of an entity equal to or in excess of the retail forex transaction, ten percent of the notional
to cover the net exposure without the obligation is intended to provide some value of short retail forex options in
burden of a 100% net capital charge degree of protection for customers in the addition to the premium received, or the
being applied. Also, the existing net absence of the protections afforded by full premium received for long options,
capital charge with respect to options the segregation of customer funds that is
85 The retail forex obligation is also a factor in one
has been applied to off-exchange retail required in the context of futures and
of the options for computation of the RFED’s or
forex transactions that are options. This FCM’s net capital requirement. See, proposed
net capital charge, with respect to the 84 Defined in proposed Regulation 5.1(l). Regulation 5.7(a)(1)(i)(B).
as the case may be. Pursuant to currencies, and the proposal by the and permitting extensions of time to
proposed Regulation 5.9(b), the RFED or Financial Industry Regulatory Authority file, have been proposed for RFEDs.
FCM would be required to collect (‘‘FINRA’’) to limit the maximum
additional security deposit or to leverage on certain retail forex 11. Proposed Regulation 5.13—
liquidate the retail forex customer’s transactions offered by broker-dealers to Reporting to Customers
position if the amount of security 4 to 1.87 RFEDs and FCMs engaging in retail
deposit collected fails to meet the forex transactions are required by
requirements of paragraph (a). 9. Proposed Regulations 5.10 and 5.11—
Risk Assessment proposed Regulation 5.13 to furnish
The extreme volatility of the foreign
each retail forex customer with monthly
currency markets exposes retail forex
Proposed Regulation 5.10 imposes statements and confirmation statements
customers to substantial risk. Forex
risk assessment recordkeeping in a manner comparable to that required
dealers currently extend leverage to
their customers at ratios of between 25:1 requirements, and Regulation 5.11 of FCMs under Regulation 1.33. The
to 400:1 or higher, which allows establishes risk assessment reporting Commission believes that proposed
customers to control contracts worth requirements, for RFEDs. These sections Regulation 5.13 has been drafted in such
significantly more than their cash are patterned on the corresponding a manner as to make the required
investment. Given these high leverage existing requirements for FCMs in statements meaningful and useful to
ratios, even minor fluctuations in existing Regulations 1.14 and 1.15, customers in light of the distinctive
currency rates can exponentially because the same rationale behind risk characteristics of retail forex
increase a customer’s losses and gains. assessment procedures for FCMs applies transactions relative to exchange-traded
Even a small move against a customer’s equally to RFEDs. futures and commodity option
position can result in a significant loss. transactions. FCMs could combine their
10. Proposed Regulation 5.12— forex monthly and/or confirmation
Under current practices, customer Financial Reporting to Regulators
positions are usually closed out once statements with statements they may
the losses in an account exceed the Proposed Regulation 5.12 requires otherwise be required by Regulation
initial investment. However, if, for any applicants for registration as RFEDs to 1.33 to furnish, so long as the futures
reason, the positions are not closed out submit their applications for registration and commodity options information and
at a zero balance, the customer could be with a Form 1–FR–FCM, the same the retail forex information are each
liable for additional losses. financial reporting form that FCMs are properly identified as such. The
Customers also face counterparty risk, required to file, certified by an proposed section also provides that the
as there is no central counterparty for independent public accountant.88 required statements can be furnished
forex transactions. Customers may not Registered RFEDs would be required to electronically with the customer’s
know that customer funds held by a (revocable) consent, and RFEDs are
file Form 1–FR–FCM monthly and
forex counterparty do not receive the required to keep copies of monthly and
annually. In addition, RFEDs, like
bankruptcy protections applicable to confirmation statements in accordance
FCMs, when notified in writing by NFA
funds held by an FCM engaged in on- with the requirements of Regulation
or the Commission, would have to file
exchange trading on the customers 1.31.
Form 1–FR–FCM or such other financial
behalf.86 Given the risks that inhere in information as NFA or the Commission 12. Proposed Regulation 5.14—
the trading of off-exchange forex may request at such other times as may Financial Recordkeeping
contracts by retail customers, the only be specified in the notice.89 The
funds that should be invested in the off- proposed regulation for RFED financial Proposed Regulation 5.14(a) requires
exchange retail forex market are those reporting is intended to require the RFEDs to keep the same ledgers or
that the investor can afford to lose. The substantial equivalent of independent IB similar records as FCMs are required to
Commission’s proposed regulation and FCM financial reporting to the keep under Regulation 1.18, showing
regarding security deposits is intended Commission and DSROs, with certified transactions affecting assets, liabilities,
both to mitigate the risk to which financial reports required from income, expense and capital accounts,
customers are exposed and to provide independent auditors qualified under classified in the manner set forth in
some capital to cover customer funds existing Commission Regulation 1.16 Form 1–FR–FCM, or in categories
held by a failing firm (albeit without the and similar reports on material consistent with generally accepted
bankruptcy preference applicable to inadequacies by such auditors. The accounting principles. Proposed
funds held in segregation for exchange- existing reporting requirements as Regulation 5.14(b) requires
traded contracts). In determining the separately proposed to be amended for recordkeeping regarding net capital
appropriate leverage or security deposit FCMs, including methods of receiving computations, comparable to existing
level to propose, the Commission reports, determining fiscal year ends Regulation 1.18(b) for FCMs.
considered current industry practices,
as well as NFA’s current leverage 13. Proposed Regulations 5.15 and
87 NFA leverage rules are set forth in Section 12,
restrictions of 100 to 1 on major 5.16—Unlawful Representations and
‘‘Security Deposits for Forex Transactions with
currencies and 25 to 1 on non-major FDMs’’, of the NFA rules. On June 4, 2009, FINRA Prohibitions of Guarantees Against Loss
submitted to the U.S. Securities and Exchange
86 As discussed above, an FCM holding customer Commission a proposed rule change to adopt As with CPOs and CTAs dealing only
funds for trading on-exchange futures contracts is FINRA Rule 2380 to limit the leverage ratio offered in futures and commodity options,
required to have, at all times, in its possession and by broker-dealers for certain forex transactions to be RFEDs, FCMs, IBs, CPOs and CTAs
control, segregated property sufficient to pay all a maximum of 1.5:1. 74 FR 32022 (July 6, 2009).
FINRA subsequently adopted 2 amendments to this
subject to Part 5, as well as their
customers with credit balances, without deduction
for customer debit balances (which must be made proposal, the second of which revised the principals and those who solicit for
up from the FCM’s own capital). In an FCM maximum leverage ratio from 1.5:1 to 4:1. See SR– them, are prohibited by proposed
bankruptcy, customers share the segregated FINRA–2009–40 available on FINRA’s website at Regulation 5.15 from representing that
property pro rata in proportion to their claims, http://www.finra.org/Industry/Regulation/
RuleFilings/2009/P118864.
the Commission or the Federal
without any support from a compensation fund.
See, generally, Part 190 of the Commission’s 88 See, Regulation 1.10. government has sponsored,
Regulations, 17 CFR Part 190 (2009). 89 See, Regulation 1.10(b)(4). recommended or approved them in any
way.90 RFEDs, FCMs and IBs are maintain transaction records and make applies for registration as an IB in order
prohibited under proposed Regulation them available to customers (including to solicit or accept off-exchange retail
5.16 from guaranteeing against or time and price information, account forex orders, and each person who
limiting customer losses, from failing to records, trading platform price changes succeeds to the business of an IB that
collect margin or security deposits, or and volume, and any algorithm used to solicits or accepts retail forex orders to
from representing that they will do any determine bid and ask prices). enter into a guarantee agreement with
of those things.91 This prohibition does Paragraph (c) of the proposed an FCM or an RFED. As discussed above
not prevent an RFED, FCM or IB from Regulation prohibits a retail forex in relation to revisions to Commission
sharing in a loss resulting from error or counterparty from disclosing that it Regulation 1.10, the Commission
mishandling of an order, and guarantees holds another person’s order unless believes that the requirement that
entered into prior to effectiveness of the disclosure is necessary for execution. RFEDs and FCMs enter a guarantee
prohibition will only be affected if an Paragraphs (d) and (e) ensure that agreement with the IBs that solicit
attempt is made to extend, modify or related persons of retail forex business on their behalf serves the
renew them. counterparties do not open accounts public’s interest by discouraging FCMs
with other retail forex counterparties and RFEDs from associating with IBs
14. Proposed Regulation 5.17— without the knowledge and without regard to the sales practices
Authorization to Trade authorization of the account they employ.
Proposed Regulation 5.17 requires surveillance personnel of the retail forex Paragraph (i) of proposed Regulation
RFEDs, FCMs, IBs and their APs to have counterparties with which they are 5.18 would require retail forex
specific authorization by the customer related. Paragraph (f) prohibits retail counterparties to calculate on a
before effecting a retail forex forex counterparties from: (1) Entering a quarterly basis the percentage of non-
transaction. For the most part, proposed retail forex transaction to be executed at discretionary accounts that were
Regulation 5.17 follows existing a price that is not at or near prices at profitable, and to maintain records of
Regulation 166.2 for on-exchange which other retail forex customers have those calculations together with
futures and commodity option executed transactions with the retail supporting data for five years in
transactions. The Commission believes forex counterparty during the same time accordance with Regulation 1.31. As
that registrants acting as off-exchange period unless done pursuant to NFA discussed above, Proposed Regulation
retail forex counterparties should have rules; (2) changing prices after execution 5.5 requires that RFEDs, FCMs and IBs
to obtain authorization for each unless pursuant to NFA rules; (3) provided retail forex customers with a
transaction like other registrants. providing a customer a new bid price risk disclosure statement that includes
that is higher (or lower) than previously the percentage of accounts that were
15. Proposed Regulation 5.18—Trading profitable for each of the four most
without providing a new asked price
Standards recent quarters. Proposed Regulation 5.8
that is higher (or lower) as well; and (4)
Proposed Regulation 5.18 contains establishing a new position for a buttresses this requirement by directing
provisions specific to retail forex customer (except to offset an existing retail forex counterparties to make such
transactions that were developed to position) if the retail forex counterparty calculations on a quarterly basis and
prevent some of the deceptive or unfair holds one or more outstanding orders of maintain records reflecting the
practices identified by the Commission other retail forex customers for the same calculation.
and NFA in recent years. Each retail currency pair at a comparable price. Finally, paragraph (j) would require
forex counterparty 92 would be required Additionally, paragraph (g) of each retail forex counterparty to
to establish and enforce internal rules, proposed Regulation 5.18 would require designate at least one principal to serve
procedures and controls: (1) To prevent each retail forex counterparty and each as its chief compliance officer, who
‘‘front running,’’ where transactions in CPO, CTA and IB subject to part 5 to would be required to certify annually to
accounts of the retail forex counterparty maintain records of all communications the Commission and to NFA that the
or its related persons 93 are executed they receive concerning possible retail forex counterparty had in place
before a like customer order; (2) to violations of the Act or Commission policies and procedures reasonably
establish settlement prices fairly and regulations involving their retail forex designed to achieve compliance with
objectively; and (3) to record and business. The required records would the Act and the Commission’s
include the complainant’s identity (if regulations. The Commission intends
90 Similar prohibitions already apply to CPOs and provided), the date of the transaction or that retail forex counterparties adhere to
CTAs (section 4o(b) of the Act) and to leverage contract at issue, and the name of the the highest professional standards and
transaction merchants (Regulation 31.19). See also person who received the that they take their compliance
NFA Compliance Rule 2–22 which speaks to all
NFA members. The Commission believes that a communication. The retail forex responsibilities seriously. With the
broad statement of the prohibition is appropriate counterparty, CPO, CTA or IB would be requirement of a high level compliance
here to ensure that customers do not misapprehend required to provide copies of such officer and annual certification,
the implications of registration as previously records to the Commission. Commission registrants will be expected
unregistered off-exchange retail forex market
participants come into compliance with the
The Commission believes that, given to meet these standards and required to
registration requirements imposed on them by the the volume of cases it has prosecuted in identify the person within the entity
CRA. recent years involving retail forex fraud, responsible for meeting them.
91 See, Regulation 1.56 for the existing

requiring the maintenance of detailed
prohibition affecting FCMs and IBs engaged in records of customer complaints will 16. Proposed Regulation 5.19—Pending
futures and commodity option transactions.
provide such intermediaries with a Legal Proceedings
92 ‘‘Retail forex counterparty’’ is defined for
purposes of Regulation 5.18 to include RFEDs, comprehensive view of the types and Proposed Regulation 5.19 requires
FCMs and affiliated persons of FCMs. numbers of problems that exist within RFEDs, FCMs CPOs, CTAs and IBs to
93 ‘‘Related person’’ of a forex counterparty is
their operations, and will provide the disclose pending legal matters and
defined for purposes of Regulation 5.18 as a general Commission with ready access to specifies the manner in which such
partner, officer, director, owner of more than a ten
percent interest, associated person, employee, information regarding such problems. matters are to be reported to the
relative or spouse of the foregoing or relative of a Paragraph (h) of proposed Regulation Commission, as well as the criteria for
spouse who shares the same home. 5.18 would require each person who determining which proceedings are
required to be disclosed. As discussed account in connection with retail forex and those that that engage in them.
above, given the high incidence of fraud transactions. Specifically, the provisions of Sections
in connection with retail forex 4b, 4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)–(e),
20. Proposed Regulation 5.23—Bulk
transactions, the Commission desires to 6b, 6c, 8(a)–(e), 8a, and 12(f) apply to
Transfers and Bulk Liquidations
monitor legal actions taken against off-exchange retail forex transactions
registrants. Requiring reporting of such Proposed Regulation 5.23 is patterned just as they do to exchange-traded
actions is one of the most direct ways generally upon existing Regulation 1.65, transactions.
of determining where problems exist but has been modified to take into
account certain rules of the National III. Related Matters
and what registrants may have failed to
deal fairly with customers. Futures Association, that have been A. Regulatory Flexibility Act
approved by the Commission, that
17. Proposed Regulation 5.20—Special govern the transfer or liquidation of the FCMs and CPOs: The Regulatory
Calls for Information accounts of retail forex customers.95 Flexibility Act (‘‘RFA’’) 97 requires that
Proposed Regulation 5.23 permits agencies, in proposing rules, consider
Proposed Regulation 5.20 is patterned transfers that are requested by the retail the impact of those rules on small
on existing Regulations 21.00 through forex customer or expressly consented businesses.98 The Commission has
21.03. The purpose of proposed to by the retail forex customer’s prior, already established certain definitions
Regulation 5.20 is to ensure that the specific consent in writing, or those of ‘‘small entities’’ to be used in
Commission has the authority to obtain done in accordance with rules adopted evaluating the impact of its rules on
information regarding retail forex by the DSRO of the RFED, FCM or IB, such small entities in accordance with
accounts and transactions when such as the case may be, and approved by the the RFA.99 In that statement, the
information is necessary to enable the Commission that establish notice and Commission concluded that neither
Commission to carry out its other requirements for such assignments FCMs nor registered CPOs should be
responsibilities under the Act, and to set and transfers. The proposed regulation considered to be small entities for
forth the responsibilities and duties of also duplicates, for the most part, the purposes of the RFA. With respect to
RFEDs, FCMs, and IBs when a special requirements applicable to bulk transfer FCMs, the Commission’s determination
call is issued. notices to the Commission under was based in part upon their obligation
Regulation 1.65. However, the draft to meet the capital requirement
18. Proposed Regulation 5.21— established by the Commission and the
Supervision of Retail Forex Accounts regulation requires notice not only of
bulk transfers, but also bulk purposes of protecting financial
liquidations, and effectively defines the integrity.100
Proposed Regulation 5.21 imposes the
term ‘‘bulk’’ to mean the transfer or As for CPOs, the Commission
same supervision requirements set forth
liquidation of 50 percent or more of the determined that registered CPOs are not
in existing Regulation 166.3 upon
total retail forex customer accounts small entities based upon its existing
Commission registrants subject to Part 5.
carried by the RFED, FCM or IB.96 regulatory standard for exempting
A separate provision for retail forex is
certain small CPOs from the
included in order to avoid any question 21. Proposed Regulation 5.24— requirement to register under the Act.101
whether the same duties apply to Applicability of Other Parts of the (A CPO need not register with the
persons with supervisory Commission’s Regulations Commission if the gross capital
responsibilities in the context of retail contributions for all pools under its
forex trading activity. Proposed Regulation 5.24 states that,
insofar as consistent with the management do not exceed $400,000
19. Proposed Regulation 5.22— requirements of part 5, the requirements and there are not more than fifteen
Registered Futures Association of other parts of the Commission’s participants in any one of those
Membership regulations that apply to a person shall pools.102)
apply to that person as though those Thus, with respect to FCMs and
In addition to registering with the provisions were expressly set forth in registered CPOs, the Commission
Commission, the CRA provides that part 5. For example, Regulation 1.31 sets believes that the Proposal will not have
RFEDs and persons who provide retail forth the Commission’s generally a significant economic impact on a
forex trading advice, operate retail forex applicable recordkeeping requirements substantial number of small entities.
pools or solicit retail forex customers or and speaks in terms of ‘‘persons.’’ CTAs: The Commission has
accounts must also become members of Proposed Regulation 5.24 is intended to previously decided to evaluate, within
a registered futures association.94 incorporate such provisions by the context of a particular rule proposal,
Accordingly, proposed Regulation 5.22 reference to the extent that part 5 does whether all or some CTAs should be
requires registered futures association not impose contradictory requirements. considered to be small entities, and if
membership for RFEDs, and for each so, to then analyze the economic impact
person (1) required to register as an IB 22. Proposed Regulation 5.25— on them of any such rule.103 CTAs
because the person accepts orders for Applicability of Act
retail forex transactions; (2) required to Proposed Section 5.25 incorporates 97 5 U.S.C. et seq.
98 By its terms, the RFA does not apply to
register as a CPO because the person various provisions of the Act which
‘‘individuals.’’ See 48 FR 14933, n. 115 (April 6,

operates, or solicits funds, securities or apply generally to registrants, specifying 1983). Because associated persons must be
property for, a pooled investment that the provisions of those sections are individuals, (see Commission Regulation 1.3(aa)
vehicle that engages in retail forex to be read to include the categories of and proposed Regulations 5.1(c), (d)(2), (e)(2), (g)(2)
transactions; or (3) required to register forex registrants identified in proposed and (i)(2)), the RFA does not apply to APs and no
analysis of the economic impact of this rule
as a CTA because the person exercises Section 5.1, and that the provisions of proposal on such persons is required.
discretionary trading authority, or those sections are to be read to include 99 47 FR 18618 (April 30, 1982).
obtains written authority over, an off-exchange retail forex transactions 100 Id. at 18619.
101 Id. at 18619–20.
94 See, 7 U.S.C. 2(c)(2)(B)(i)(II)(gg); 2(c)(2)(B)(iv); 95 See, proposed Regulation 5.23(a)(1). 102 17 CFR 4.13(a)(2) (2009).
2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii). 96 See, proposed Regulation 5.23(a)(2). 103 47 FR at 18620.
wishing to advise retail forex customers imposed upon RFEDs to ensure that several of the proposals contained
may include both currently registered they maintain sufficient capital herein consist of proposed amendments
CTAs and previously unregistered resources to guarantee their financial to rules which have already been
persons who now will be required to accountability and to promote assigned OMB control numbers, the
register. As to the first group, there responsible and reliable business Commission assumes that the amended
should be no significant new economic operations. Moreover, the Commission rules will be assigned the same OMB
impact. As to the second group, has sought to fashion its proposed control number. Similarly, the
registration will require the submission regulatory program for RFEDs in a Commission is proposing that the new
of application forms, fingerprinting of manner which is responsive to the registrants use amendments to existing
principals, and payment of registration function, purposes, and size of the forms in order to comply with
fees. To the extent that CTAs can be entity being regulated consistent with registration and financial reporting
considered to be small entities, the the objective of the RFA. In particular, requirements, those forms, as amended,
Commission does not consider either the minimum capital requirement will in all likelihood retain the same
the proposed registration fee or the required by the CRA effectuates the OMB control number which they have
proposed fingerprinting requirement for Congressional purpose that RFEDs at present. Finally, as to RFEDs, a new
newly registered CTAs to have maintain sufficient reserve of capital to category of registrant, new OMB control
significant economic impact.104 remain economically viable. For the numbers will be assigned to new
IBs: In its 1982 policy statement, the reasons stated above, the Commission collections; to the extent existing
Commission proposed that for purposes hereby proposes not to define RFEDs as regulations have been amended to
of the RFA and future rulemakings, the small entities for RFA purposes. include RFEDs, the collections
Commission would not consider associated with those regulations will be
introducing brokers to be ‘‘small B. Paperwork Reduction Act
amended to reflect the new category of
entities’’ for essentially the same reasons The Proposal contains information registrant. Each effected collection and
that FCMs had previously been collection requirements. The Paperwork the new part 5 collection are discussed
determined not to be small entities.105 Reduction Act of 1995 (‘‘PRA’’) 107 separately below.
However, this determination was based, imposes certain requirements of federal
in part, on the fact that IBs, like FCMs, agencies (including the Commission) in 2. Existing Collections
are required to maintain a specified conducting or sponsoring any collection a. Collection 3038–0024 (Part 1 of the
level of adjusted net capital. Under the of information as defined by the PRA. Regulations)
proposal, retail forex IBs would not be The Commission has submitted to the Generally speaking, collections
subject to a capital requirement; rather, Director of the Office of Management occurring by operation of part 1
they would have to operate pursuant to and Budget (‘‘OMB’’), pursuant to the regulations affect FCMs and IBs. Those
a guarantee agreement. Nevertheless, as provisions of the PRA, an explanation entities that will be required to register
discussed above with regard to CTAs, and details of the information collection as RFEDs are currently registered as
registration of previously unregistered and recordkeeping requirements which FCMs, so existing Collection 3038–0024
entities will require the submission of would be necessary to implement the has been amended, where appropriate,
application forms, fingerprinting of Proposal. to reflect fewer FCM respondents. The
principals, and payment of registration 1. Collection of Information collection has also been amended,
fees. To the extent that IBs can be where appropriate, to reflect additional
considered to be small entities, the If adopted, the Proposal would
require existing and new registrants in IB registrants, who were not previously
Commission does not consider either required to register to conduct off-
the proposed registration fee or the the FCM, RFED, CTA, CPO and IB
categories to submit certain filings to the exchange retail forex business and now
proposed fingerprinting requirement for will be.
IBs subject to Part 5 to have significant Commission which had not been
Estimated number of respondents:
economic impact. previously required; these collections of
2,160.
RFEDs: RFEDs are a new category of information are found primarily in the Annual responses by each
registrant. Accordingly, the Commission new part 5 of the proposed regulations. respondent: 38,894.
has not addressed the question of To the extent industry participants are Estimated average hours per response:
whether such persons are, in fact, small currently registered as CTAs, CPOs, IBs 1.9.
entities for purposes of the RFA. The or FCMs, and intend to engage in retail Annual reporting burden: 21,229.
Commission does not believe that there forex transactions, the obligations
imposed by the proposed rules would b. Collection 3038–0023 (Part 3 of the
are regulatory alternatives to those being
not be significantly altered, but the Regulations)
proposed which would be consistent
with the statutory mandate to provide existing collections will be amended to Part 3 of the Commission’s regulations
protection to the public against reflect additional, new registrants concern registration requirements.
irresponsible or fraudulent business within these categories, and the part 5 Existing Collection 3038–0023 has been
practices. For purposes of the RFA and collection will include any additional amended to reflect the obligations
future rulemakings, the Commission is information collections not captured in associated with the registration of new
hereby proposing that RFEDs not be existing collections. The estimated entrants, such as CTAs, CPOs, IBs, and
considered to be ‘‘small entities’’ for numbers of respondents, annual APs, that had not previously been
essentially the same reasons that FCMs responses by each, average hours per required to register in order to conduct
have previously been determined not to response and annual reporting burden off-exchange retail forex transactions.
be small entities.106 As with FCMs, a reflected in section 2 immediately Since the registration requirements are
requirement to maintain a specified below represent estimates from the last in all respects the same as for current
level of adjusted net capital would be update of the collection plus new registrants, the collection has been
respondents, responses and a new amended only insofar as it concerns the
104 48 FR 35248 at 35276 (August 3, 1983). calculation of associated burdens. Since increased estimated number of
105 47 FR at 18619. respondents and the corresponding
106 Id. 107 44 U.S.C. 3501, et seq. estimated annual burden.
Estimated number of respondents: would require the development and are to respond, including through the
71,857. distribution of risk disclosure use of appropriate automated,
Annual responses by each documents by RFEDs, FCMs and IBs electronic, mechanical, or other
respondent: 73,694. transacting off-exchange retail forex. technological collection techniques or
Estimated average hours per response: Regulation 5.6 would require reporting other forms of information technology,
0.09. by RFEDs that fail to meet minimum e.g., permitting electronic submissions
Annual reporting burden: 6,632. financial requirements or are otherwise of responses.
required to provide early warning Organizations and individuals
c. Collection 3038–0005 (Part 4 of the desiring to submit comments on the
notices. Regulation 5.11 would require
Commission’s Regulations) information collection should contact
annual risk assessment reporting by
Part 4 of the Commission’s regulations RFEDs, and Regulation 5.12 would the Office of Information and Regulatory
concerns the operations of CTAs and require financial reports of RFEDs Affairs, Office of Management and
CPOs, and the circumstances under applying for registration. Regulation Budget, Room 10235, New Executive
which they may be exempted from 5.13 concerns reporting to customers by Office Building, Washington, DC 20503,
registration. As discussed above, the RFEDS and FCMs. Regulation 5.18 ATTN: Desk Officer of the Commodity
estimated average time spent per generally concerns trading and Futures Trading Commission. OMB is
response has not been altered. However, operational standards for retail forex required to make a decision concerning
adjustments have been made to the counterparties and intermediaries. the collection of information contained
collection to account for additional Among the sections within Regulation in the Proposal between 30 and 60 days
CPOs and CTAs: filing for exemptions 5.18 requiring collections of information after publication of his document in the
from the Part 4 rules, developing and are 5.18(g), which requires all Federal Register. Therefore, a comment
distributing required disclosure counterparties and intermediaries to to OMB is best assured of having its full
documents; complying with required forward to the Commission records of effect if OMB receives it within 30 days
reporting requirements. communications received concerning of publication. This does not affect the
Estimated number of respondents: facts giving rise to possible violations of deadline for the public comment to the
9,486. the Act or Regulations, and 5.18(j), Commission on the proposed rules.
Annual responses by each which requires forex counterparties to C. Cost-Benefit Analysis
respondent: 37,930. provide the Commission with an annual
Estimated average hours per response: Section 15(a) of the Act 109 requires
compliance certification. Regulation
17. the Commission to consider the costs
5.19 would require all forex
Annual reporting burden: 183,700.108 and benefits of its action before issuing
counterparties and intermediaries to
new regulations under the Act. By its
d. Collection 3038–0055 (Part 160 of the provide the Commission with notice of terms, section 15(a) does not require the
Regulations) legal proceedings to which they are Commission to quantify the costs and
parties. Finally, Regulation 5.23 benefits of a new regulation or to
Part 160 requires financial institutions concerns the notices that must be given
to provide notice to customers regarding determine whether the benefits of the
in the event of bulk transfers or regulation outweigh its costs. Rather,
privacy policies and practices. As liquidations.
discussed above, the estimated average section 15(a) simply requires the
OMB Control Number 3038—NEW.
time spent per response has not been Estimated number of respondents: Commission to ‘‘consider the costs and
amended; rather, the collection has been 1,156. benefits’’ of its action.
Annual responses by each Section 15(a) further specifies that
amended to reflect new registrants that
respondent: 4,493. costs and benefits shall be evaluated in
will have to comply with the part 160
Estimated average hours per response: light of five broad areas of market and
requirements.
1.8. public concern, enumerated below.
Estimated number of respondents:
Annual reporting burden: 4,202. Accordingly, the Commission could, in
4,066.
Copies of the information collection its discretion, give greater weight to any
Annual responses by each
submission to OMB are available from one of the five enumerated areas and
respondent: 96.
the CFT Clearance Officer, 1155 21st could, in its discretion, determine that,
Estimated average hours per response:
Street, NW., Washington, DC 20581, notwithstanding its costs, a particular
0.24.
(202) 418–5160. The Commission rule was necessary or appropriate to
Annual reporting burden: 6,186.
considers comments by the public on protect the public interest or to
3. New Collection 3038—NEW this proposed collection of information effectuate any of the provisions or to
(Proposed Part 5 of the Regulations) in— accomplish any of the purposes of the
Part 5 of the proposed regulations Evaluating whether the proposed Act.
collections of information are necessary As discussed in more detail above, the
requires various information collections
for the proper performance of the Proposal would create a comprehensive
by various registrants. The Commission
functions of the Commission, including scheme to implement the requirements
is seeking a new and separate control
whether the information will have a of the CRA. It would put in place
number for collections occurring
practical use; requirements including registration,
pursuant to part 5. Among the sections

Evaluating the accuracy of the disclosure, recordkeeping, financial
requiring information collections in the
Commission’s estimate of the burden of reporting, minimum capital and other
new part 5 is Regulation 5.5, which
the proposed collection of information, operational standards. This would be
108 Due to a mathematical error in the previous including the validity of the achieved through both amendments to
Collection 3038–0005, the current estimated methodology and assumptions used; existing regulations and the creation of
numbers reflect a large increase in the burden to Enhancing the quality, utility and a new, free-standing part to the
respondents. The estimated increase in the annual clarity of the information to be Commission’s regulations. The
responses to by each respondent is increased by 721
as a result of this rulemaking. The estimated annual collected; and Commission is considering the costs
increase in the hours of reporting burden is Minimizing the burden of the
increased by 4,833 as a result of this rulemaking. collection of information on those who 109 7 U.S.C. 19(a).
and benefits of the Proposal in light of soundness of firms—have been borne 17 CFR Part 145
the specific provisions of section 15(a) out on the exchange-traded side and Confidential business information,
as follows: will be of significant benefit with regard Freedom of information.
1. Protection of market participants to its oversight of retail forex
and the public. The Proposal should counterparties. 17 CFR Part 147
enhance considerably the protection of 5. Other public interest Sunshine Act.
market participants and the public considerations. The retail, off-exchange
because it requires, for the first time, the 17 CFR Part 160
forex market has been largely
registration of several categories of unregulated until now. The Commission Consumer financial information,
market participants and requires believes that the Proposal is beneficial Definitions, Nonpublic personal
adherence to operational standards that in that will provide needed protections information, Privacy.
had not previously applied. The benefits for members of the public engaging in 17 CFR Part 166
that inhere in the imposition of these these transactions. The Proposal will
requirements to a sector of the off- Arbitration, Authorization to trade,
also bring much needed oversight to the
exchange market that has been largely Customer protection, Definitions,
forex counterparties and intermediaries
unregulated to this point, and which is Dispute settlement; Litigation;
that interact with the public.
geared towards the retail public, are Reparations.
After considering these factors, the
manifest. For the reasons presented above, the
Commission has determined to issue the
2. Efficiency and competition. In its Commission hereby proposes to amend
Proposal. The Commission invites
Conference Report, Congress indicated Chapter I of Title 17 of the Code of
public comment on its application of
that the Commission should avoid Federal Regulations as follows:
the cost-benefit provision. Commenters
creating two different regulatory regimes
also are invited to submit any data that PART 1—GENERAL REGULATIONS
for similar business models with respect
they may have quantifying the costs and UNDER THE COMMODITY EXCHANGE
to FCMs or RFEDs engaging in off-
benefits of the Proposal with their ACT
exchange retail forex transactions.110
comment letters.
Accordingly, the Commission has 1. The authority citation for part 1
endeavored to ensure that these entities List of Subjects continues to read as follows:
be treated in comparable fashion
17 CFR Part 1 Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a,
relative to one another. Moreover, the
6b, 6c, 6d, 6e, 6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n,
Commission has endeavored, wherever Definitions, Minimum financial and 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a–1,
possible, to propose regulations in the reporting requirements. Recordkeeping 16, 16a, 19, 21, 23 and 24.
proposed part 5 that are analogous to requirements, Prohibited transactions in
regulations imposed upon commodity options, Miscellaneous. § 1.1 [Removed and Reserved]
intermediaries engaged in on-exchange 2. Section 1.1 is removed and
transactions. Accordingly, the 17 CFR Part 3 reserved.
Commission believes that it has Definitions, Customer protection, 3. Section 1.3 is amended by revising
provided an evenhanded regulatory Licensing, Registration. paragraphs (nn) and (yy) to read as
scheme that will be familiar to industry follows:
participants. 17 CFR Part 4
§ 1.3 Definitions.
3. Financial integrity of futures Advertising, Brokers, Commodity
markets and price discovery. The * * * * *
futures, Commodity pool operators, (nn) Guarantee agreement. This term
Proposal’s regulations concern retail, Commodity trading advisors, Consumer
off-exchange markets. These markets means an agreement of guaranty in the
protection, Exemption from registration, form set forth in part B or C of Form 1–
serve primarily as a vehicle for members Reporting and recordkeeping
of the retail public to engage in FR, executed by a registered futures
requirements. commission merchant or retail foreign
speculative transactions. Accordingly,
the Commission does not perceive a 17 CFR Part 5 exchange dealer, as appropriate, and by
significant intersection between the an introducing broker or applicant for
Bulk transfers, Commodity pool registration as an introducing broker on
operations of these markets and the operators, Commodity trading advisors,
financial integrity or price discovery behalf of an introducing broker or
Consumer protection, Customer’s applicant for registration as an
functions of the markets generally. money, securities and property,
4. Sound risk management practices. introducing broker in satisfaction of the
Definitions, Foreign exchange, alternative adjusted net capital
The Proposal includes requirements Minimum financial and reporting
regarding capital, financial reporting, requirement set forth in § 1.17(a)(1)(iii).
requirements, Prohibited transactions in
risk assessment recordkeeping, and risk * * * * *
retail foreign exchange, Recordkeeping (yy) Commodity Interest. This term
assessment reporting that are requirements, Retail foreign exchange
comparable to those required of entities means:
dealers, Risk assessment, Special calls, (1) Any contract for the purchase or
engaged in on-exchange trading. The Trading practices. sale of a commodity for future delivery;
Commission believes that the benefits of

these risk management requirements— 17 CFR Part 10 (2) Any contract, agreement or
which strive to ensure the financial transaction subject to Commission
Adjudicatory proceedings, Rules of regulation under section 4c or 19 of the
110 As
practice. Act; and
noted in the Conference Report that
accompanied the CRA, ‘‘To the extent their risk 17 CFR Part 140 (3) Any contract, agreement or
profiles are similar, the managers intend for FCMs transaction subject to Commission
and RFEDs to be regulated substantially Authority delgations (Government jurisdiction under section 2(c)(2) of the
equivalently in terms of their off-exchange retail
foreign currency business.’’ H.R. Rep. No. 110–627,
agencies, Conflict of interests, Act.
at 980 (2008) (Conf. Rep.). The Conference Report Organization and functions 4. Section 1.4 is revised to read as
is available via the Internet on the CFTC’s Web site. (Government agencies). follows:
§ 1.4 Use of electronic signatures. management authority for the limited retail foreign exchange dealer and the
For purposes of complying with any liability company or limited liability introducing broker;
provision in the Commodity Exchange partnership. (ii) For good cause shown, by either
Act or the rules or regulations in this (2) No futures commission merchant party giving written notice of its
Chapter I that requires a document to be or retail foreign exchange dealer may intention to terminate the agreement,
signed by a customer of a futures enter into a guarantee agreement if: signed by an appropriate person, to the
commission merchant or introducing (i) It knows or should have known other party to the agreement, to the
broker, a retail forex customer of a retail that its adjusted net capital is less than Commission, and to the designated self-
foreign exchange dealer or futures the amount set forth in § 1.12(b) of this regulatory organizations of the futures
commission merchant, a pool part or § 5.6(b) of this chapter, as commission merchant or retail foreign
participant or a client of a commodity applicable; or exchange dealer and the introducing
trading advisor, an electronic signature (ii) There is filed against the futures broker; or
executed by the customer, participant or commission merchant or retail foreign (iii) By either party giving written
client will be sufficient, if the futures exchange dealer an adjudicatory notice of its intention to terminate the
commission merchant, retail foreign proceeding brought by or before the agreement, signed by an appropriate
exchange dealer, introducing broker, Commission pursuant to the provisions person, at least 30 days prior to the
commodity pool operator or commodity of sections 6(c), 6(d), 6c, 6d, 8a or 9 of proposed termination date, to the other
trading advisor elects generally to the Act or §§ 3.55, 3.56 or 3.60 of this party to the agreement, to the
accept electronic signatures; Provided, chapter. Commission, and to the designated self-
however, That the electronic signature (3) A retail foreign exchange dealer regulatory organizations of the futures
must comply with applicable Federal may enter into a guarantee agreement commission merchant or retail foreign
laws and other Commission rules; And, only with an introducing broker as exchange dealer and the introducing
Provided further, That the futures defined in § 5.1(f)(1). A retail foreign broker.
commission merchant, retail foreign exchange dealer may not enter into a (7) The termination of a guarantee
exchange dealer, introducing broker, guarantee agreement with an agreement by a futures commission
commodity pool operator or commodity introducing broker as defined in merchant, retail foreign exchange dealer
trading advisor must adopt and utilize § 1.3(mm) of this part. or an introducing broker, or the
reasonable safeguards regarding the use (4) A guarantee agreement filed in expiration of such an agreement, shall
of electronic signatures, including at a connection with an application for not relieve any party from any liability
minimum safeguards employed to initial registration as an introducing or obligation arising from acts or
prevent alteration of the electronic broker in accordance with the omissions which occurred during the
record with which the electronic provisions of § 3.10(a) of this chapter term of the agreement.
signature is associated, after such record shall become effective upon the granting (8) An introducing broker may not
has been electronically signed. of registration or, if appropriate, a simultaneously be a party to more than
5. Section 1.10 is amended by revising temporary license, to the introducing one guarantee agreement: Provided,
paragraph (j) to read as follows: broker. A guarantee agreement filed however, That the provisions of this
other than in connection with an paragraph (j)(8) shall not be deemed to
§ 1.10 Financial reports of futures application for initial registration as an preclude an introducing broker from
commission merchants and introducing introducing broker shall become entering into a guarantee agreement
brokers. with another futures commission
effective as of the date agreed to by the
* * * * * parties. merchant or retail foreign exchange
(j) Requirements for guarantee (5)(i) If the registration of the dealer if the introducing broker, futures
agreement. (1) A guarantee agreement introducing broker is suspended, commission merchant or retail foreign
filed pursuant to this section must be revoked, or withdrawn in accordance exchange dealer which is a party to the
signed in a manner sufficient to be a with the provisions of this chapter, the existing agreement has provided notice
binding guarantee under local law by an guarantee agreement shall expire as of of termination of the existing agreement
appropriate person on behalf of the the date of such suspension, revocation in accordance with the provisions of
futures commission merchant or retail or withdrawal. paragraph (j)(6) of this section, and the
foreign exchange dealer and the (ii) If the registration of the futures new guarantee agreement does not
introducing broker, and each signature commission merchant or retail foreign become effective until the day following
must be accompanied by evidence that exchange dealer is suspended or the date of termination of the existing
the signatory is authorized to enter the revoked, the guarantee agreement shall agreement: And, provided further, That
agreement on behalf of the futures expire 30 days after such suspension or the provisions of this paragraph (j)(8)
commission merchant, retail foreign revocation, or at such earlier time as shall not be deemed to preclude an
exchange dealer, or introducing broker may be approved by the Commission, introducing broker from entering into a
and is such an appropriate person. For the introducing broker, and the guarantee agreement with another
purposes of this paragraph (j), an introducing broker’s designated self- futures commission merchant or retail
appropriate person shall be the regulatory organization. foreign exchange dealer if the futures
proprietor, if the firm is a sole (6) A guarantee agreement may be commission merchant or retail foreign
proprietorship; a general partner, if the terminated at any time during the term exchange dealer which is a party to the
firm is a partnership; and either the thereof: existing agreement ceases to remain
chief executive officer or the chief (i) By mutual written consent of the registered and the existing agreement
financial officer, if the firm is a parties, signed by an appropriate person would therefore expire in accordance
corporation; and, if the firm is a limited on behalf of each party, with prompt with the provisions of paragraph
liability company or limited liability written notice thereof, signed by an (j)(6)(ii) of this section.
partnership, either the chief executive appropriate person on behalf of each (9)(i)(A) An introducing broker that is
officer, the chief financial officer, the party, to the Commission and to the a party to a guarantee agreement that
manager, the managing member, or designated self-regulatory organizations has been terminated in accordance with
those members vested with the of the futures commission merchant or the provisions of paragraph (j)(6) of this
section, or that is due to expire in provisions of paragraph (j)(6)(ii) of this of a contract market shall retain the
accordance with the provisions of section shall not be deemed to be in required records, data, and memoranda
paragraph (j)(5)(ii) of this section, must violation of the minimum adjusted net in accordance with the requirements of
cease doing business as an introducing capital requirement of § 1.17(a)(1)(iii) or § 1.31, and produce them for inspection
broker on or before the effective date of (a)(2) for 30 days following such and furnish true and correct information
such termination or expiration unless, termination. Such an introducing broker and reports as to the contents or the
on or before 10 days prior to the must cease doing business as an meaning thereof, when and as requested
effective date of such termination or introducing broker on or after the by an authorized representative of the
expiration or such other period of time effective date of such termination, and Commission or the United States
as the Commission or the designated may not resume doing business as an Department of Justice. Included among
self-regulatory organization may allow introducing broker unless and until it such records shall be all orders (filled,
for good cause shown, the introducing files a new agreement or either: unfilled, or canceled), trading cards,
broker files with its designated self- (1) A Form 1–FR–IB certified by an signature cards, street books, journals,
regulatory organization either a new independent public accountant in ledgers, canceled checks, copies of
guarantee agreement effective as of the accordance with § 1.16 as of a date not confirmations, copies of statements of
day following the date of termination of more than 45 days prior to the date on purchase and sale, and all other records,
the existing agreement, or, in the case of which the report is filed; or data and memoranda, which have been
a guarantee agreement that is due to (2) A Form 1–FR–IB as of a date not prepared in the course of its business of
expire in accordance with the more than 17 business days prior to the dealing in commodity futures, retail
provisions of paragraph (j)(4)(ii) of this date on which the report is filed and a forex transactions, commodity options,
section, a new guarantee agreement Form 1–FR–IB certified by an and cash commodities. Among such
effective on or before such expiration, or independent public accountant in records each member of a contract
either: accordance with § 1.16 as of a date not market must retain and produce for
(1) A Form 1–FR–IB certified by an more than one year prior to the date on inspection are all documents on which
independent public accountant in which the report is filed: Provided, trade information is originally recorded,
accordance with § 1.16 as of a date not however, that an introducing broker as whether or not such documents must be
more than 45 days prior to the date on defined in § 5.1(f)(1) of this chapter that prepared pursuant to the rules or
which the report is filed; or is party to a guarantee agreement that regulations of either the Commission or
(2) A Form 1–FR–IB as of a date not has been terminated must cease doing the contract market. For purposes of this
more than 17 business days prior to the business as an introducing broker from section, such documents are referred to
date on which the report is filed and a and after the effective date of such as ‘‘original source documents.’’
Form 1–FR–IB certified by an termination, and may not resume doing (a–1) Futures commission merchants,
independent public accountant in business as an introducing broker as retail foreign exchange dealers,
accordance with § 1.16 as of a date not defined in § 5.1(f)(1) of this chapter introducing brokers, and members of
more than one year prior to the date on unless and until it files a new guarantee contract markets: Recording of
which the report is filed: Provided, agreement. customers’ and option customers’
however, that an introducing broker as (B) Each person filing a Form 1–FR– orders. (1) Each futures commission
defined in § 5.1(f)(1) of this chapter that IB in accordance with this section must merchant, each retail foreign exchange
is party to a guarantee agreement that include with the financial report a dealer and each introducing broker
has been terminated or that has expired statement describing the source of his receiving a customer’s, retail forex
must cease doing business as an current assets and representing that his customer’s or option customer’s order,
introducing broker on or before the capital has been contributed for the as applicable, shall immediately upon
effective date of such termination or purpose of operating his business and receipt thereof prepare a written record
expiration unless, on or before 10 days will continue to be used for such of the order including the account
prior to the effective date of such purpose. identification, except as provided in
termination or expiration or such other * * * * * paragraph (a–1)(5) of this section, and
period of time as the Commission or the 6. Section 1.35 is amended by revising order number, and shall record thereon,
designated self-regulatory organization paragraphs (a), (a-1) and (b) to read as by timestamp or other timing device, the
may allow for good cause shown, the follows: date and time, to the nearest minute, the
introducing broker files with its order is received, and in addition, for
designated self-regulatory organization a § 1.35 Records of cash commodity, option customers’ orders, the time, to
new guarantee agreement effective on or futures, and option transactions. the nearest minute, the order is
before the termination or expiration date (a) Futures commission merchants, transmitted for execution.
of the terminating or expiring guarantee retail foreign exchange dealers, (2)(i) Each member of a contract
agreement. introducing brokers, and members of market who on the floor of such contract
(B) Each person filing a Form 1–FR– contract markets. Each futures market receives a customer’s or option
IB in accordance with this section must commission merchant, retail foreign customer’s order which is not in the
include with the financial report a exchange dealer, introducing broker, form of a written record including the
statement describing the source of his and member of a contract market shall account identification, order number,
current assets and representing that his keep full, complete, and systematic and the date and time, to the nearest
capital has been contributed for the records, together with all pertinent data minute, the order was transmitted or
purpose of operating his business and and memoranda, of all transactions received on the floor of such contract
will continue to be used for such relating to its business of dealing in market, shall immediately upon receipt
purpose. commodity futures, retail forex thereof prepare a written record of the
(ii)(A) Notwithstanding the provisions transactions, commodity options, and order in nonerasable ink, including the
of paragraph (j)(9)(i) of this section or of cash commodities (including account identification, except as
§ 1.17(a), an introducing broker that is a currencies). Each futures commission provided in paragraph (a–1)(5) of this
party to a guarantee agreement that has merchant, retail foreign exchange section or appendix C to this part, and
been terminated in accordance with the dealer, introducing broker, and member order number and shall record thereon,
by timestamp or other timing device, the effective reconstruction of the order included in bunched orders need not be
date and time, to the nearest minute, the placement and execution; and recorded at time of order placement or
order is received. (C) Be submitted to contract market upon report of execution if the
(ii) Except as provided in paragraph personnel or clearing members in requirements of paragraphs (a–1)(5)(i)–
(a–1)(3) of this section: accordance with contract market rules (iv) of this section are met.
(A) Each contract market member who adopted pursuant to paragraph (j)(1) of (i) Eligible account managers. The
on the floor of such contract market this section. person placing and directing the
receives an order from another member (3)(i) The requirements of paragraph allocation of an order eligible for post-
present on the floor which is not in the (a–1)(2)(ii) of this section will not apply execution allocation must have been
form of a written record shall, if a contract market maintains in effect granted written investment discretion
immediately upon receipt of such order, rules which have been submitted to the with regard to participating customer
prepare a written record of the order or Commission pursuant to section accounts. The following persons shall
obtain from the member who placed the 5a(a)(12)(A) of the Act and Commission qualify as eligible account managers:
order a written record of the order, in Regulation 1.41, which provide for an (A) A commodity trading advisor
non-erasable ink including the account exemption where: registered with the Commission
identification and order number and (A) A contract market member places pursuant to the Act or excluded or
shall record thereon, by time-stamp or with another member of such contract exempt from registration under the Act
other timing device, the date and time, market an order that is part of a spread or the Commission’s rules, except for
transaction; entities exempt under § 4.14(a)(3) or
to the nearest minute, the order is
(B) The member placing the order § 4.14(a)(6) of this chapter;
received; or
personally executes one or more legs of (B) An investment adviser registered
(B) When a contract market member the spread; and
present on the floor places an order, with the Securities and Exchange
(C) The member receiving and Commission pursuant to the Investment
which is not in the form of a written executing such order immediately upon
record, for his own account or an Advisers Act of 1940 or with a state
execution of the order records the time pursuant to applicable state law or
account over which he has control, with of execution to the nearest minute on
another member of such contract market excluded or exempt from registration
his trading card or other record under such Act or applicable state law
for execution: maintained in accordance with the
(1) The member placing such order or rule;
requirements of paragraph (d) of this (C) A bank, insurance company, trust
immediately upon placement of the section.
order shall record the order and time of company, or savings and loan
(ii) Each contract market shall, as part association subject to federal or state
placement to the nearest minute on a of its trade practice surveillance
sequentially-numbered trading card regulation; or
program, conduct surveillance for (D) A foreign adviser that exercises
maintained in accordance with the compliance with the recordkeeping and discretionary trading authority solely
requirements of paragraph (d) of this other requirements under paragraphs over the accounts of non-U.S. persons,
section; (a–1) (2) and (3) of this section, and for as defined in § 4.7(a)(1)(iv) of this
(2) The member receiving and trading abuses related to the execution chapter.
executing such order immediately upon of orders for members present on the (ii) Information. Eligible account
execution of the order shall record the floor of the contract market. managers shall make the following
time of execution to the nearest minute (4) Each member of a contract market information available to customers upon
on a trading card or other record reporting the execution from the floor of request:
maintained pursuant to the the contract market of a customer’s or (A) The general nature of the
requirements of paragraph (d) of this option customer’s order or the order of allocation methodology the account
section; and another member of the contract market manager will use;
(3) The member receiving and received in accordance with paragraphs (B) Whether accounts in which the
executing the order shall return such (a–1)(2)(i) or (a–1)(2)(ii)(A) of this account manager may have any interest
trading card or other record to the section, shall record on a written record may be included with customer
member placing the order. The member of the order, including the account accounts in bunched orders eligible for
placing the order then must submit identification, except as provided in post-execution allocation; and
together both of the trading cards or paragraph (a–1)(5) of this section, and (C) Summary or composite data
other records documenting such trade to order number, by timestamp or other sufficient for that customer to compare
contract market personnel or the timing device, the date and time to the its results with those of other
clearing member, in accordance with nearest minute such report of execution comparable customers and, if
contract market rules adopted pursuant is made. Each member of a contract applicable, any account in which the
to paragraph (j)(1) of this section. market shall submit the written records account manager has an interest.
(iii) Each contract market may adopt of customer orders or orders from other (iii) Allocation. Orders eligible for
rules, which must be submitted to the contract market members to contract post-execution allocation must be
Commission pursuant to section market personnel or to the clearing allocated by an eligible account manager
5a(a)(12)(A) of the Act and Commission member responsible for the collection of in accordance with the following:
Regulation 1.41, that provide alternative orders prepared pursuant to this (A) Allocations must be made as soon
requirements to those contained in paragraph as required by contract as practicable after the entire transaction
paragraph (a–1)(2)(ii) of this section. market rules adopted in accordance is executed, but in any event account
Such rules shall, at a minimum, require with paragraph (j)(1) of this section. The managers must provide allocation
that the contemporaneous written execution price and other information information to futures commission
records: reported on the order tickets must be merchants no later than a time
(A) Contain the terms of the order; written in nonerasable ink. sufficiently before the end of the day the
(B) Include reliable timing data for the (5) Post-execution allocation of order is executed to ensure that clearing
initiation and execution of the order bunched orders. Specific customer records identify the ultimate customer
which would permit complete and account identifiers for accounts for each trade.
(B) Allocations must be fair and opportunity for a prompt hearing in underlying physical, strike price, details
equitable. No account or group of accordance with the provisions of of the purchase price of the option,
accounts may receive consistently § 21.03(g) of this chapter. including premium, mark-up,
favorable or unfavorable treatment. * * * * * commission and fees and the person for
(C) The allocation methodology must (b) Futures commission merchants, whom the transaction was made; and
be sufficiently objective and specific to retail foreign exchange dealers, (iv) In the case of an introducing
permit independent verification of the introducing brokers, and clearing broker, the record or journal required by
fairness of the allocations using that members of contract markets. Each this paragraph (b)(3) shall also include
methodology by appropriate regulatory futures commission merchant, each the futures commission merchant or
and self-regulatory authorities and by retail foreign exchange dealer, and each retail foreign exchange dealer carrying
outside auditors. clearing member of a contract market the account for which each commodity
(iv) Records. (A) Eligible account and, for purposes of paragraph (b)(3) of futures, retail forex and commodity
managers shall keep and must make option transaction was executed on that
this section, each introducing broker,
available upon request of any day. Provided, however, that where
shall, as a minimum requirement,
representative of the Commission, the reproductions on microfilm, microfiche
prepare regularly and promptly, and
United States Department of Justice, or or optical disk are substituted for hard
keep systematically and in permanent
other appropriate regulatory agency, the copy in accordance with the provisions
form, the following:
information specified in paragraph (a– of § 1.31(b) of this part, the requirements
(1) A financial ledger record which
1)(5)(ii) of this section. of paragraphs (b)(1) and (b)(2) of this
(B) Eligible account managers shall will show separately for each customer
section will be considered met if the
keep and must make available upon or retail forex customer or option
person required to keep such records is
request of any representative of the customer all charges against and credits
ready at all times to provide, and
Commission, the United States to such customer’s or retail forex
immediately provides in the same city
Department of Justice, or other customer’s or option customer’s
as that in which such person’s
appropriate regulatory agency, records account, including but not limited to
commodity’ retail forex or commodity
sufficient to demonstrate that all customer or retail forex customer funds
option books and records are
allocations meet the standards of deposited, withdrawn, or transferred,
maintained, at the expense of such
paragraph (a–1)(5)(iii) of this section and charges or credits resulting from
person, reproduced copies which show
and to permit the reconstruction of the losses or gains on closed transactions; the records as specified in paragraphs
handling of the order from the time of (2) A record of transactions which (b)(1) and (b)(2) of this section, on
placement by the account manager to will show separately for each account request of any representatives of the
the allocation to individual accounts. (including proprietary accounts): Commission or the U.S. Department of
(C) Futures commission merchants (i) All commodity futures transactions Justice.
that execute orders or that carry executed for such account, including
the date, price, quantity, market, * * * * *
accounts eligible for post-execution 7. Section 1.36 is amended by revising
allocation, and members of contract commodity and future;
paragraph (a) to read as follows:
markets that execute such orders, must (ii) All retail forex transactions
maintain records that, as applicable, executed for such account, including § 1.36 Record of securities and property
identify each order subject to post- the date, price, quantity, and currency; received from customers and option
execution allocation and the accounts to and customers.
which contracts executed for such order (iii) All commodity option (a) Each futures commission merchant
are allocated. transactions executed for such account, and each retail foreign exchange dealer
(D) In addition to any other remedies including the date, whether the shall maintain, as provided in § 1.31, a
that may be available under the Act or transaction involved a put or call, record of all securities and property
otherwise, if the Commission has reason expiration date, quantity, underlying received from customers, retail forex
to believe that an account manager has contract for future delivery or customers or option customers in lieu of
failed to provide information requested underlying physical, strike price, and money to margin, purchase, guarantee,
pursuant to paragraph (a–1)(5)(iv)(A) or details of the purchase price of the or secure the commodity, retail forex or
(a–1)(5)(iv)(B) of this section, the option, including premium, mark-up, commodity option transactions of such
Commission may inform in writing any commission and fees; and customers, retail forex customers or
designated contract market or (3) A record or journal which will option customers. Such record shall
derivatives transaction execution separately show for each business day show separately for each customer,
facility and that designated contract complete details of: retail forex customer or option
market or derivatives transaction (i) All commodity futures transactions customer: a description of the securities
execution facility shall prohibit the executed on that day, including the or property received; the name and
account manager from submitting orders date, price, quantity, market, address of such customer, retail forex
for execution except for liquidation of commodity, future and the person for customer or option customer; the dates
open positions and no futures whom such transaction was made; when the securities or property were
commission merchants shall accept (ii) All retail forex transactions received; the identity of the depositories
orders for execution on any designated executed on that day for such account, or other places where such securities or
contract market or derivatives including the date, price, quantity, property are segregated or held; the
transaction execution facility from the currency and the person for whom such dates of deposits and withdrawals from
account manager except for liquidation transaction was made; and such depositories; and the dates of
of open positions. (iii) All commodity option return of such securities or property to
(E) Any account manager that believes transactions executed on that day, such customer, retail forex customer or
he or she is or may be adversely affected including the date, whether the option customer, or other disposition
or aggrieved by action taken by the transaction involved a put or call, the thereof, together with the facts and
Commission under paragraph (a– expiration date, quantity, underlying circumstances of such other disposition.
1)(5)(iv)(D) of this section shall have the contract for future delivery, or In the event any futures commission
merchant deposits with the clearing true source of or authority for the transaction for the sale of the same
organization of a contract market, information contained therein. currency;
directly or with a bank or trust company 10. Section 1.46 is amended by (ii) Engages in a retail forex
acting as custodian for such clearing revising paragraphs (a) and (b) to read transaction involving the sale of any
organization, securities and/or property as follows: currency for the account of any retail
which belong to a particular customer or forex customer when the account of
§ 1.46 Application and closing out of such retail forex customer at the time of
option customer, such futures offsetting long and short positions.
commission merchant shall obtain such sale has an open retail forex
written acknowledgment from such (a) Application of purchases and transaction for the purchase of the same
clearing organization that it was sales. (1) Except with respect to currency;
informed that such securities or purchases or sales which are for (iii) Purchases a put or call option
property belong to customers or option omnibus accounts, or where the involving foreign currency for the
customers of the futures commission customer or account controller has account of any option customer when
merchant making the deposit. Such instructed otherwise, any futures the account of such option customer at
acknowledgment shall be retained as commission merchant who, on or the time of such purchase has a short
provided in § 1.31. subject to the rules of a designated put or call option position with the
contract market or registered derivatives same underlying currency, strike price,
* * * * * transaction execution facility: and expiration date as that purchased;
8. Section 1.37 is amended by revising (i) Purchases any commodity for or
paragraph (a)(1) to read as follows: future delivery for the account of any (iv) Sells a put or call option
customer when the account of such involving foreign currency for the
§ 1.37 Customer’s or option customer’s
name, address, and occupation recorded; customer at the time of such purchase account of any option customer when
record of guarantor or controller of has a short position in the same future the account of such option customer at
account. of the same commodity on the same the time of such sale has a long put or
market; call option position with the same
(a)(1) Each futures commission (ii) Sells any commodity for future underlying currency, strike price, and
merchant, retail foreign exchange delivery for the account of any customer expiration date as that sold—shall
dealer, introducing broker, and member when the account of such customer at immediately apply such purchase or
of a contract market shall keep a record the time of such sale has a long position sale against such previously held
in permanent form which shall show for in the same future of the same opposite transaction, and shall promptly
each commodity futures, retail forex or commodity on the same market; furnish such retail forex customer a
option account carried or introduced by (iii) Purchases a put or call option for statement showing the financial result
it the true name and address of the the account of any option customer of the transactions involved and, if
person for whom such account is when the account of such option applicable, that the account was
carried or introduced and the principal customer at the time of such purchase introduced to the futures commission
occupation or business of such person has a short put or call option position merchant or retail foreign exchange
as well as the name of any other person with the same underlying futures dealer by an introducing broker and the
guaranteeing such account or exercising contract or same underlying physical, names of the futures commission
any trading control with respect to such strike price, expiration date and contract merchant or retail foreign exchange
account. For each such commodity market as that purchased; or dealer, and the introducing broker.
option account, the records kept by such (iv) Sells a put or call option for the (b) Close-out against oldest open
futures commission merchant, account of any option customer when position. In all instances wherein the
introducing broker, and member of a the account of such option customer at short or long futures, retail forex
contract market must also show the the time of such sale has a long put or transaction or option position in such
name of the person who has solicited call option position with the same customer’s, retail forex customer’s or
and is responsible for each option underlying futures contract or same option customer’s account immediately
customer’s account or assign account underlying physical, strike price, prior to such offsetting purchase or sale
numbers in such a manner to identify expiration date and contract market as is greater than the quantity purchased or
that person. that sold—shall on the same day apply sold, the futures commission merchant
* * * * * such purchase or sale against such or retail foreign exchange dealer shall
9. Section 1.40 is revised to read as previously held short or long futures or apply such offsetting purchase or sale to
follows: option position, as the case may be, and the oldest portion of the previously held
shall, for futures transactions, promptly short or long position: Provided, That
§ 1.40 Crop, market information letters, furnish such customer a statement upon specific instructions from the
reports; copies required. customer or option customer the
showing the financial result of the
Each futures commission merchant, transactions involved and, if applicable, offsetting transaction shall be applied as
each retail foreign exchange dealer, each that the account was introduced to the specified by the customer or option
introducing broker and each member of futures commission merchant by an customer without regard to the date of
a contract market shall, upon request, introducing broker and the names of the acquisition of the previously held
furnish or cause to be furnished to the futures commission merchant and position; and Provided, further, that a
Commission a true copy of any letter, introducing broker. futures commission merchant or retail
circular, telegram, or report published (2) Any futures commission merchant foreign exchange dealer, if permitted by
or given general circulation by such or retail foreign exchange dealer who: the rules of a registered futures
futures commission merchant, retail (i) Engages in a retail forex transaction association, may offset, at the
foreign exchange dealer, introducing involving the purchase of any currency customer’s request, retail forex
broker or member which concerns crop for the account of any retail forex transactions of the same size, even if the
or market information or conditions that customer when the account of such customer holds other transactions of a
affect or tend to affect the price of any retail forex customer at the time of such different size, but in each case must
commodity or exchange rate, and the purchase has an open retail forex offset the transaction against the oldest
transaction of the same size. Such organization shall submit for exchange dealer, or introducing broker
instructions may also be accepted from Commission approval any modification which is a member of more than one
any person who, by power of attorney or other amendments to such rules. self-regulatory organization; * * *
or otherwise, actually directs trading in Such requirements must be the same as, (h) After the Commission has
the customer’s, retail forex customer’s or or more stringent than, those contained approved a plan or part of one under
option customer’s account unless the in §§ 1.10 and 1.17, for futures § 1.52(g), a self-regulatory organization
person directing the trading is the commission merchants and introducing relieved of responsibility must notify
futures commission merchant or retail brokers, and § 5.7 for retail foreign each of its members which is subject to
foreign exchange dealer (including any exchange dealers. The definition of such a plan:
partner thereof), or is an officer, adjusted net capital must be the same as (1) Of the limited nature of its
employee, or agent of the futures that prescribed in § 1.17(c) for futures responsibility for such a member’s
commission merchant or retail foreign commission merchants and introducing compliance with its minimum financial
exchange dealer. With respect to every brokers, and § 5.7(b)(2) for futures and related reporting requirements; and
such offsetting transaction that, in commission merchants offering or (2) Of the identity of the designated
accordance with such specific engaging in retail forex transactions and self-regulatory organization which has
instructions, is not applied to the oldest for retail foreign exchange dealers: been delegated responsibility for such a
portion of the previously held position, Provided, however, A designated self- member.
the futures commission merchant or regulatory organization may permit its * * * * *
retail foreign exchange dealer shall member registrants which are registered (j) Whenever a registered futures
clearly show on the statement issued to with the Securities and Exchange commission merchant, a registered retail
the customer, retail forex customer or Commission as securities brokers or foreign exchange dealer, or a registered
option customer in connection with the dealers to file (in accordance with introducing broker holding membership
transaction, that because of the specific § 1.10(h)) a copy of their Financial and in a self-regulatory organization ceases
instructions given by or on behalf of the Operational Combined Uniform Single to be a member in good standing of that
customer, retail forex customer or Report under the Securities Exchange self-regulatory organization, such self-
option customer the transaction was not Act of 1934, Part II, Part IIA, or Part II regulatory organization must, on the
applied in the usual manner, i.e., CSE, in lieu of Form 1–FR: And, same day that event takes place, give
against the oldest portion of the provided further, A designated self- telegraphic notice of that event to the
previously held position. However, no regulatory organization may permit its principal office of the Commission in
such showing need be made if the member introducing brokers to file a Washington, DC, and send a copy of that
futures commission merchant or retail Form 1–FR–IB in lieu of a Form 1–FR– notification to such futures commission
foreign exchange dealer has received FCM. merchant, retail foreign exchange
such specific instructions in writing dealer, or such introducing broker.
* * * * * (k) Nothing in this section shall
from the customer, retail forex customer (c) Any two or more self-regulatory
or option customer for whom such preclude the Commission from
organizations may file with the examining any futures commission
account is carried. Commission a plan for delegating to a
* * * * * merchant, retail foreign exchange
designated self-regulatory organization, dealer, or introducing broker for
11. Section 1.52 is amended by: for any registered futures commission
a. Revising paragraphs (a) and (c); compliance with the minimum financial
merchant, any registered retail foreign and related reporting requirements to
b. Revising paragraphs (g)(3) and exchange dealer, or any registered
(g)(4); and which such futures commission
introducing broker which is a member merchant, retail foreign exchange
c. Revising paragraphs (h), (j), and (k)
of more than one such self-regulatory dealer, or introducing broker is subject.
to read as follows:
organization, the responsibility of:
(1) Monitoring and auditing for * * * * *
§ 1.52 Self-regulatory organization
adoption and surveillance of minimum compliance with the minimum financial PART 3—REGISTRATION
financial requirements. and related reporting requirements
(a) Each self-regulatory organization adopted by such self-regulatory 12. The authority citation for part 3
must adopt, and submit for Commission organizations in accordance with continues to read as follows:
approval, rules prescribing minimum paragraph (a) of this section; and Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d,
financial and related reporting (2) Receiving the financial reports 6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a,
requirements for all its members who necessitated by such minimum financial 12, 12a, 13b, 13c, 16a, 18, 19, 21 and 23.
are registered futures commission and related reporting requirements. 13. Section 3.1 is amended by revising
merchants or registered retail foreign * * * * * paragraph (c) to read as follows:
exchange dealers. Each self-regulatory (g) * * *
organization other than a contract (3) Reduces multiple monitoring and § 3.1 Definitions.
market must adopt, and submit for auditing for compliance with the * * * * *
Commission approval, rules prescribing minimum financial rules of the self- (c) Sponsor. Sponsor means the
minimum financial and related regulatory organizations submitting the futures commission merchant, retail
reporting requirements for all its plan for any futures commission foreign exchange dealer, introducing
members who are registered introducing merchant, retail foreign exchange broker, commodity trading advisor,
brokers. Each contract market which dealer, or introducing broker which is a commodity pool operator or leverage
elects to have a category of membership member of more than one self-regulatory transaction merchant which makes the
for introducing brokers must adopt, and organization; certification required by § 3.12 of this
submit for Commission approval, rules (4) Reduces multiple reporting of the part for the registration of an associated
prescribing minimum financial and financial information necessitated by person of such sponsor.
related reporting requirements for all its such minimum financial and related * * * * *
members who are registered introducing reporting requirements by any futures 14. Section 3.4 is amended by revising
brokers. Each self-regulatory commission merchant, retail foreign paragraph (a) to read as follows:
§ 3.4 Registration in one capacity not pool operator or leverage transaction associated person unless that person
included in registration in any other merchant in accordance with paragraph shall have registered under the Act as an
capacity. (a) of this section will continue to be so associated person of that sponsoring
(a) Except as may be otherwise registered until the effective date of any futures commission merchant, retail
provided in the Act or in any rule, revocation or withdrawal of such foreign exchange dealer, introducing
regulation, or order of the Commission, registration. Such person will be broker, commodity trading advisor,
each futures commission merchant, prohibited from engaging in activities commodity pool operator or leverage
retail foreign exchange dealer, floor requiring registration under the Act or transaction merchant in accordance
broker, floor trader, associated person, from representing himself to be a with the procedures in paragraphs (c),
commodity trading advisor, commodity registrant under the Act or the (d), (f), or (i), of this section or is exempt
pool operator, introducing broker, and representative or agent of any registrant from such registration pursuant to
leverage transaction merchant must during the pendency of any suspension paragraph (h) of this section.
register as such under the Act. of such registration. * * * * *
Registration in one capacity under the (2) A person registered as an (f) * * *
Act shall not include registration in any introducing broker who was a party to (1) * * *
other capacity: Provided, however, That a guarantee agreement with a futures (iii) * * *
a registered floor broker need not also commission merchant or retail foreign (E) Associated person’s supervision of
register as a floor trader in order to exchange dealer in accordance with any person or persons engaged in any of
engage in activity as a floor trader. § 1.10(j) of this chapter will have its the foregoing solicitations or
* * * * * registration cease thirty days after the acceptances, with respect to any
15. Section 3.10 is amended by: termination of such guarantee customers common to it and any other
a. Revising the heading; agreement unless the procedures set futures commission merchant, retail
b. Revising paragraph (a)(1); forth in § 1.10(j)(8) of this chapter are foreign exchange dealer, introducing
c. Revising paragraph (b); and followed. broker, commodity trading advisor,
d. Revising paragraph (d) to read as * * * * * commodity pool operator, or leverage
follows: (d) On a date to be established by the transaction merchant with which the
§ 3.10 Registration of futures commission National Futures Association, and in associated person is associated.
merchants, retail foreign exchange dealers, accordance with procedures established * * * * *
introducing brokers, commodity trading by the National Futures Association, (4) If a person is associated with a
advisors, commodity pool operators and each registrant as a futures commission futures commission merchant, with a
leverage transaction merchants. merchant, retail foreign exchange retail foreign exchange dealer, or with
(a) Application for registration. (1)(i) dealer, introducing broker, commodity an introducing broker and he directs
Except as provided in paragraph (a)(3) trading advisor, commodity pool customers seeking a managed account to
of this section, application for operator or leverage transaction use the services of a commodity trading
registration as a futures commission merchant shall, on an annual basis, advisor(s) approved by the futures
merchant, retail foreign exchange review and update registration commission merchant, retail foreign
dealers, introducing broker, commodity information maintained with the exchange dealer or introducing broker
trading advisor, commodity pool National Futures Association. The and all such customers’ accounts
operator or leverage transaction failure to complete the review and solicited or accepted by the associated
merchant must be on Form 7–R, update within thirty days following the person are carried by the futures
completed and filed with the National date established by the National Futures commission merchant, retail foreign
Futures Association in accordance with Association shall be deemed to be a exchange dealer or introduced by the
the instructions thereto. request for withdrawal from registration, introducing broker with which the
(ii) Applicants for registration as a which shall be processed in accordance associated person is associated, such a
futures commission merchant, retail with the provisions of § 3.33(f). person shall be deemed to be associated
foreign exchange dealer or introducing * * * * * solely with the futures commission
broker must accompany their Form 7–R 16. Section 3.12 is amended by merchant, retail foreign exchange dealer
with a Form 1–FR–FCM or Form 1–FR– a. Revising the heading; or introducing broker and may not also
IB, respectively, in accordance with the b. Revising paragraph (a); register as an associated person of the
provisions of § 1.10 of this chapter: c. Revising paragraph (f)(1)(iii)(E); commodity trading advisor(s).
Provided, however, That an applicant d. Revising paragraph (f)(4); * * * * *
for registration as a futures commission e. Revising paragraph (h)(1)(i) and (h) * * *
merchant or introducing broker which is paragraph (h)(1)(iii); and (1) * * *
registered with the Securities and f. Removing paragraph (j) (i) Registered under the Act as a
Exchange Commission as a securities The revisions read as follows: futures commission merchant, retail
broker or dealer may accompany its foreign exchange dealer, floor broker, or
§ 3.12 Registration of associated persons
Form 7–R with a copy of its Financial of futures commission merchants, retail as an introducing broker;
and Operational Combined Uniform foreign exchange dealers, introducing * * * * *
Single Report under the Securities brokers, commodity trading advisors, (iii) The chief operating officer,
Exchange Act of 1934, Part II or Part II commodity pool operators and leverage general partner or other person in the
A, in accordance with the provisions of transaction merchants. supervisory chain-of-command,
§ 1.10(h) of this chapter. (a) Registration required. It shall be provided the futures commission
* * * * * unlawful for any person to be associated merchant, retail foreign exchange
(b) Duration of registration. (1) A with a futures commission merchant, dealer, introducing broker, commodity
person registered as a futures retail foreign exchange dealer, trading advisor, commodity pool
commission merchant, retail foreign introducing broker, commodity trading operator, or leverage transaction
exchange dealer, introducing broker, advisor, commodity pool operator or merchant engages in commodity interest
commodity trading advisor, commodity leverage transaction merchant as an related activity for customers as no more
than ten percent of its total revenue on associated person (or persons) who has (3) Does not have direct supervisory
an annual basis, the firm is not subject been vested with full supervisory responsibility over persons engaged in
to a pending proceeding brought by the authority, including authority to hire the activities referred to in paragraphs
Commission or a self-regulatory and fire personnel, over the customer (c)(1) and (c)(2) of this section; and
organization alleging fraud or failure to commodity interest related activities of (4) * * *:
supervise, and has not been found in the firm in the event that all of those (i) The name of the futures
such a proceeding to have committed previously designated in accordance commission merchant, retail foreign
fraud or failed to supervise, as required with paragraph (h)(1)(iii)(C) of this exchange dealer, introducing broker,
by the Act, the rules promulgated section have been relieved of such commodity trading advisor, commodity
thereunder or the rules of a self- authority. Subsequent changes in pool operator, leverage transaction
regulatory organization, the person for supervisory authority shall be reported merchant, or applicant for registration
whom exemption is sought and the in the same manner; or in any of these capacities of which the
person designated in accordance with * * * * * person is an outside director;
paragraphs (h)(1)(iii)(C) or (h)(1)(iii)(D) 17. Section 3.21 is amended by: * * * * *
of this section are listed as principals of a. Revising paragraph (b)(3); and 18. Section 3.30 is amended by
the firm, the fitness examination b. Revising paragraph (c)(1) through revising paragraph (a) to read as follows:
conducted by the National Futures (3) and (c)(4)(i) to read as follows:
Association with respect to these § 3.30 Current address for purpose of
persons discloses no derogatory § 3.21 Exemption from fingerprinting delivery of communications from the
requirement in certain cases. Commission or the National Futures
information that would disqualify any
Association.
of such persons as a principal or as an * * * * *
associated person, and the firm files (b) * * * (a) The address of each registrant,
with the National Futures Association (3) With respect to the fingerprints of applicant for registration and principal,
corporate or partnership resolutions a principal. An officer, if the futures as submitted on the application for
stating that: commission merchant, retail foreign registration (Form 7–R or Form 8–R) or
(A) Such supervisory person is not exchange dealer, commodity trading as submitted on the biographical
authorized to: advisor, commodity pool operator, supplement (Form 8–R) shall be deemed
(1) Solicit or accept customers’, retail introducing broker, or leverage to be the address for delivery to the
forex customers’, or leverage customers’ transaction merchant with which the registrant, applicant or principal for any
orders, principal will be affiliated is a communications from the Commission
(2) Solicit a client’s or prospective corporation, a general partner, if a or the National Futures Association,
client’s discretionary account, partnership, or the sole proprietor, if a including any summons, complaint,
(3) Solicit funds, securities or sole proprietorship. reparation claim, order, subpoena,
property for a participation in a (c) Outside directors. Any futures special call, request for information,
commodity pool, or commission merchant, retail foreign notice, and other written documents or
(4) Exercise any line supervisory exchange dealer, introducing broker, correspondence, unless the registrant,
authority over those persons so engaged; commodity trading advisor, commodity applicant or principal specifies another
(B) Such supervisory person has no pool operator or leverage transaction address for this purpose: Provided, That
authority with respect to hiring, firing or merchant that has a principal who is a the Commission or the National Futures
other personnel matters involving director but is not also an officer or Association may address any
persons engaged in activities subject to employee of the firm may, in lieu of correspondence relating to a
regulation under the Act; submitting a fingerprint card in biographical supplement submitted for
(C) Another person (or persons) accordance with the provisions of or on behalf of a principal to the futures
designated therein, who is registered as §§ 3.10(a)(2) and 3.31(a)(2), file a commission merchant, retail foreign
an associated person(s) or who has ‘‘Notice Pursuant to Rule 3.21(c)’’ with exchange dealer, commodity trading
applied for registration as an associated the National Futures Association. Such advisor, commodity pool operator,
person(s) and is not subject to a pending notice shall state, if true, that such introducing broker, or leverage
proceeding brought by the Commission outside director: transaction merchant with which the
or a self-regulatory organization alleging (1) Is not engaged in: principal is affiliated and may address
fraud or failure to supervise, and has not (i) The solicitation or acceptance of any correspondence relating to the
been found in such a proceeding to have customers’ orders or retail forex registration of an associated person to
committed fraud or failed to supervise, customers’ orders, the futures commission merchant, retail
as required by the Act, the rules (ii) The solicitation of funds, foreign exchange dealer, commodity
promulgated thereunder or the rules of securities or property for a participation trading advisor, commodity pool
a self-regulatory organization, holds and in a commodity pool, operator, introducing broker, or leverage
exercises full and final supervisory (iii) The solicitation of a client’s or transaction merchant with which the
authority, including authority to hire prospective client’s discretionary associated person or the applicant for
and fire personnel, over the customer account, registration is or will be associated as an
commodity interest related activities of (iv) The solicitation or acceptance of associated person.
the firm; and leverage customers’ orders for leverage * * * * *

(D) If the person (or persons) so transactions; 19. Section 3.31 is amended by
designated in accordance with (2) Does not regularly have access to revising paragraphs (a)(1), (b), (c), and
paragraph (h)(1)(iii)(C) of this section the keeping, handling or processing of: (d) to read as follows:
ceases to have the authority referred to (i) Commodity interest transactions;
therein, the firm will notify the National (ii) Customer funds, retail forex § 3.31 Deficiencies, inaccuracies, and
Futures Association within twenty days customer funds, leverage customer changes, to be reported.
of such occurrence by means of a funds, foreign futures or foreign options (a)(1) Each applicant or registrant as a
subsequent resolution which resolution secured amount, or adjusted net capital; futures commission merchant, retail
must also include the name of another or foreign exchange dealer, commodity
trading advisor, commodity pool exchange dealer, commodity trading duly authorized by the registrant and
operator, introducing broker, or leverage advisor, commodity pool operator, must specify:
transaction merchant shall, in introducing broker, or leverage * * * * *
accordance with the instructions transaction merchant, and the reasons (6) If a basis for withdrawal from
thereto, promptly correct any deficiency therefor. registration under paragraph (a)(1) of
or inaccuracy in Form 7–R or Form 8– (2) Each person registered as, or this section is that the registrant has
R which no longer renders accurate and applying for registration as, a futures ceased engaging in activities requiring
current the information contained commission merchant, retail foreign registration, then, with respect to each
therein. Each such correction shall be exchange dealer, commodity trading capacity for which the registrant has
made on Form 3–R and shall be advisor, commodity pool operator, ceased such activities:
prepared and filed in accordance with introducing broker or leverage (i) That all customer, retail forex
the instructions thereto. Provided, transaction merchant must, within customer or option customer
however, that where a registrant is thirty days after the termination of the agreements, if any, have been
reporting a change in the form of affiliation of a principal with the terminated;
organization from or to a sole registrant or applicant, file a notice (ii) That all customer, retail forex
proprietorship, the registrant must file a thereof with the National Futures customer or option customer positions,
Form 7–W regarding the pre-existing Association. if any, have been transferred on behalf
organization and a Form 7–R regarding of customers or option customers or
(3) Any notice required by paragraph
the newly formed organization. closed;
(c) of this section must be filed on Form
* * * * * 8–T or on a Uniform Termination Notice (iii) That all customer, retail forex
(b) Each applicant or registrant as a for Securities Industry Registration. customer or option customer cash
floor broker, floor trader or associated balances, securities, or other property, if
(d) Each contract market or
person, and each principal of a futures any, have been transferred on behalf of
derivatives transaction execution
commission merchant, retail foreign customers, retail forex customers or
facility that has granted trading
exchange dealer, commodity trading option customers or returned, and that
privileges to a person who is registered,
advisor, commodity pool operator, there are no obligations to customers,
has received a temporary license, or has
introducing broker, or leverage retail forex customers or option
applied for registration as a floor broker
transaction merchant must, in customers outstanding;
or floor trader, must notify the National
accordance with the instructions (iv) In the case of a commodity pool
Futures Association within sixty days
thereto, promptly correct any deficiency operator, that all interests in, and assets
after such person has ceased having
or inaccuracy in the Form 8–R or of, any commodity pool have been
trading privileges on such contract
supplemental statement thereto which redeemed, distributed, or transferred, on
market or derivatives transaction
renders no longer accurate and current behalf of the participants therein, and
execution facility.
the information contained in the Form that there are no obligations to such
8–R or supplemental statement. Each (Approved by the Office of Management participants outstanding;
such correction must be made on Form and Budget under control number 3038– (v) In the case of a leverage
3–R and must be prepared and filed in 0023) transaction merchant:
accordance with the instructions (A) Either that all leverage customer
20. Section 3.33 is amended by
thereto. agreements, if any, and all leverage
revising paragraphs (a) introductory
(c)(1) After the filing of a Form 8–R contracts have been terminated, and that
text, (b) introductory text, (b)(6), and (e)
or a Form 3–R by or on behalf of any all leverage customer cash balances,
to read as follows:
person for the purpose of permitting securities or other property, if any, have
that person to be an associated person § 3.33 Withdrawal from registration. been returned, or
of a futures commission merchant, retail (B) Alternatively, that pursuant to
foreign exchange dealer, commodity (a) A futures commission merchant, Commission approval, the leverage
trading advisor, commodity pool retail foreign exchange dealer, contract obligations of the leverage
operator, introducing broker, or a introducing broker, commodity trading transaction merchant have been
leverage transaction merchant, that advisor, commodity pool operator, assumed by another leverage transaction
futures commission merchant, retail leverage transaction merchant, floor merchant and all leverage customer cash
foreign exchange dealer, commodity broker or floor trader may request that balances, securities or other property, if
trading advisor, commodity pool its registration be withdrawn in any, have been transferred to such
operator, introducing broker or leverage accordance with the requirements of leverage transaction merchant on behalf
transaction merchant must, within this section if: of leverage customers or returned, and
thirty days after the occurrence of either * * * * * that there are no obligations to leverage
of the following, file a notice thereof (b) A request for withdrawal from customers outstanding;
with the National Futures Association registration as a futures commission (vi) The nature and extent of any
indicating: merchant, retail foreign exchange pending customer, retail forex customer,
(i) The failure of that person to dealer, introducing broker, commodity option customer, leverage customer, or
become associated with the futures trading advisor, commodity pool commodity pool participant claims
commission merchant, retail foreign operator, or leverage transaction against the registrant, and, to the best of
exchange dealer, commodity trading merchant must be made on Form 7–W, the registrant’s knowledge and belief,
advisor, commodity pool operator, and a request for withdrawal from the nature and extent of any anticipated
introducing broker, or leverage registration as a floor broker or floor or threatened customer, option
transaction merchant, and the reasons trader must be made on Form 8–W, customer, leverage customer, or
therefor; or completed and filed with National commodity pool participant claims
(ii) The termination of the association Futures Association in accordance with against the registrant; and
of the associated person with the futures the instructions thereto. The request for (vii) In the case of a futures
commission merchant, retail foreign withdrawal must be made by a person commission merchant or a retail foreign
exchange dealer which is a party to a commission merchant or retail foreign § 3.50 Service.
guarantee agreement, that all such exchange dealer that has executed the * * * * *
agreements have been or will be guarantee agreement required by (b) * * *
terminated in accordance with the paragraph (a)(1) of this section, stating (2) Any futures commission merchant
provisions of § 1.10(j) of this chapter not that: or retail foreign exchange dealer which
more than thirty days after the filing of (i) The futures commission merchant has entered into a guarantee agreement
the request for withdrawal from or retail foreign exchange dealer has in accordance with § 1.10(j) of this
registration. verified the information on the Forms chapter, if the applicant or registrant is
* * * * * 8–R filed pursuant to paragraph (a)(3) of registered as or applying for registration
(e) A request for withdrawal from this section which relate to education as an introducing broker.
registration as a futures commission and employment history of the * * * * *
merchant, retail foreign exchange applicant’s principals (including each 24. Section 3.60 is amended by
dealer, introducing broker, commodity branch office manager) thereof during revising paragraph (b)(2)(i)(B) to read as
trading advisor, commodity pool the preceding three years; and follows:
operator, leverage transaction merchant (ii) To the best of the futures
on Form 7–W, and a request for § 3.60 Procedure to deny, condition,
commission merchant’s or retail foreign suspend, revoke or place restrictions upon
withdrawal from registration as a floor exchange dealer’s knowledge, registration pursuant to sections 8a(2),
broker or floor trader on Form 8–W, information, and belief, all of the 8a(3) and 8a(4) of the Act.
must be filed with the National Futures publicly available information supplied * * * * *
Association and a copy of such request by the applicant and its principals and (b) * * *
must be sent by the National Futures each branch office manager of the (2)(i) * * *
Association within three business days applicant on the Form 7–R and Forms (B) In the case of a sponsor which is
of the receipt of such withdrawal 8–R, as appropriate, is accurate and a futures commission merchant, a retail
request to the Commodity Futures complete; and foreign exchange dealer or a leverage
Trading Commission, Division of (5) The fingerprints of the applicant, transaction merchant, the sponsor is not
Clearing and Intermediary Oversight, if a sole proprietor, and of each subject to the reporting requirements of
Three Lafayette Centre, 1155 21st Street, principal (including each branch office § 1.12(b), § 5.6(b) or § 31.7(b) of this
NW., Washington, DC 20581. In manager) thereof on fingerprint cards chapter, respectively; and
addition, any floor broker or floor trader provided by the National Futures * * * * *
requesting withdrawal from registration Association for that purpose: Provided,
must file a copy of his Form 8–W with that a principal who has a current Form PART 4—COMMODITY POOL
each contract market that has granted 8–R on file with the National Futures OPERATORS AND COMMODITY
him trading privileges. Within three Association or the Commission is not TRADING ADVISORS
business days of any determination by required to submit a fingerprint card.
the National Futures Association under 25. The authority citation for part 4
* * * * * continues to read as follows:
§ 3.10(d) to treat the failure by a 22. Section 3.45 is amended by
registrant to file an annual Form 7–R as revising paragraph (b) to read as follows: Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m,
a request for withdrawal, the National 6n, 6o, 12a and 23.
Futures Association shall send the § 3.45 Restrictions upon activities. 26. Section 4.7 is amended by:
Commission notice of that * * * * * a. Revising paragraph (a)(1)(v)(B); and
determination. (b) An applicant for registration as an b. Revising paragraph (a)(2)(i) to read
* * * * * introducing broker who has received a as follows:
21. Section 3.44 is amended by temporary license may be guaranteed by
revising paragraphs (a)(1) through (5) to § 4.7 Exemption from certain part 4
a futures commission merchant or retail requirements for commodity pool operators
read as follows: foreign exchange dealer other than the with respect to offerings to qualified eligible
futures commission merchant or retail persons and for commodity trading
§ 3.44 Temporary licensing of applicants
for guaranteed introducing broker foreign exchange dealer which provided advisors with respect to advising qualified
registration. the initial guarantee agreement eligible persons.
(a) * * * described in § 3.44(a)(1) of this subpart: * * * * *
(1) A properly completed guarantee Provided, That, at least 10 days prior to (a) * * *
agreement (Form 1–FR part B) from a the effective date of the termination of (1) * * *
futures commission merchant or retail the existing guarantee agreement in (v) * * *
foreign exchange dealer which is accordance with the provisions of § 1.10 (B) Has had on deposit with a futures
eligible to enter into such an agreement (j)(4)(ii) or (j)(5) of this chapter, or such commission merchant, for its own
pursuant to § 1.10(j)(2) of this chapter; other period of time as the National account at any time during the six-
(2) A Form 7–R properly completed in Futures Association may allow for good month period preceding either the date
accordance with the instructions cause shown, the applicant files with of sale to that person of a pool
thereto; the National Futures Association— participation in the exempt pool or the
(3) A Form 8–R for the applicant, if (1) Written notice of such termination date that the person opens an exempt
a sole proprietor, and each principal and account with the commodity trading
(including each branch office manager) (2) A new guarantee agreement with advisor, at least $200,000 in exchange-
thereof, properly completed in another futures commission merchant or specified initial margin and option
accordance with the instructions retail foreign exchange dealer effective premiums, together with NFA-specified
thereto, all of whom would be eligible the day following the last effective date minimum security deposit for retail
for a temporary license if they had of the existing guarantee agreement. forex transactions (as defined in section
applied as associated persons. 23. Section 3.50 is amended by 5.1(m) of this chapter) for commodity
(4) A certification executed by a revising paragraph (b)(2) to read as interest transactions; or
person duly authorized by the futures follows: * * * * *
(2) * * * by the size of the contract, in contract received from a futures commission
(i)(A) A futures commission merchant units (taking into account any multiplier merchant or retail foreign exchange
registered pursuant to section 4d of the specified in the contract), by the current dealer.
Act, or a principal thereof; market price per unit, and for each such * * * * *
(B) A retail foreign exchange dealer option position by multiplying the (b) Concerning the commodity pool
registered pursuant to section number of contracts by the size of the operator: (1) An itemized daily record of
2(c)(2)(B)(i)(II)(gg) of the Act, or a contract, adjusted by its delta, in each commodity interest transaction of
principal thereof; contract units (taking into account any the commodity pool operator and each
* * * * * multiplier specified in the contract), by principal thereof, showing the
27. Section 4.12 is amended by the strike price per unit, and for each transaction date, quantity, commodity
revising paragraph (b)(1)(i)(C) to read as such retail forex transaction, by interest, and, as applicable, price or
follows: calculating the value in U.S. Dollars of premium, delivery month or expiration
such transaction, at the time the date, whether a put or a call, strike
§ 4.12 Exemption from provisions of part transaction was established, excluding
4. price, underlying contract for future
for this purpose the value in U.S. delivery or underlying physical, the
* * * * * Dollars of offsetting long and short futures commission merchant or retail
(b) * * * transactions, if any; and
(1) * * * foreign exchange dealer carrying the
* * * * * account and the introducing broker, if
(i) * * * 29. Section 4.14 is amended by
(C) Will not enter into commodity any whether the commodity interest
revising paragraph (a)(7) to read as was purchased, sold, exercised, or
interest transactions for which the
follows: expired, and the gain or loss realized.
aggregate initial margin and premiums,
and NFA-specified minimum security § 4.14 Exemption from registration as a (2) Each confirmation of a commodity
deposit for retail forex transactions (as commodity trading advisor. interest transaction, each purchase and
defined in § 5.1(m) of this chapter) * * * * * sale statement and each monthly
exceed 10 percent of the fair market (a) * * * statement furnished by a futures
value of the pool’s assets, after taking (7)(i) It is registered under the Act as commission merchant or retail foreign
into account unrealized profits and a leverage transaction merchant and the exchange dealer to:
unrealized losses on any such contracts person’s trading advice is solely in (i) The commodity pool operator
it has entered into; Provided, however, connection with its business as a relating to a personal account of the
That in the case of an option that is in- leverage transaction merchant; pool operator; and
the-money at the time of purchase, the (ii) It is registered under the Act as a (ii) Each principal of the pool operator
in-the-money amount as defined in retail foreign exchange dealer and the relating to a personal account of such
§ 190.01(x) may be excluded in person’s trading advice is solely in principal.
computing such 10 percent; and connection with its business as a retail * * * * *
* * * * * foreign exchange dealer. 31. Section 4.24 is amended by:
28. Section 4.13 is amended by: * * * * * a. Revising paragraph (b)(1)
a. Revising paragraph (a)(3)(ii)(A): and 30. Section 4.23 is amended by: introductory text and the first three
b. Revising paragraph (a)(3)(ii)(B)(1) to a. Revising paragraph (a)(1); sentences of the Risk Disclosure
read as follows: b. Revising paragraph (a)(7); and Statement in paragraph (b)(1);
c. Revising paragraph (b)(1) and (2) to
b. Adding paragraph (b)(4);
§ 4.13 Exemption from registration as a read as follows:
commodity pool operator. c. Revising paragraph (e)(6);
* * * * * § 4.23 Recordkeeping. d. Revising paragraph (g);
(a) * * * (a) Concerning the commodity pool: e. Revising paragraphs (h)(2) and
(3) * * * (1) An itemized daily record of each (h)(4)(iii);
(ii) * * * commodity interest transaction of the f. Revising paragraph (i)(2)(ii);
(A) The aggregate initial margin, pool, showing the transaction date, g. Redesignating paragraph (i)(2)(xii)
premiums, and NFA-specified quantity, commodity interest, and, as as paragraph (i)(2)(xiii) and adding new
minimum security deposit for retail applicable, price or premium, delivery paragraph (i)(2)(xii);
forex transactions (as defined in section month or expiration date, whether a put h. Revising paragraphs (j)(1)(vi) and
5.1(m) of this chapter) required to or a call, strike price, underlying (j)(3); and
establish such positions, determined at contract for future delivery or i. Revising paragraphs (l)(1)(iii), (l)(2)
the time the most recent position was underlying physical, the futures introductory text and (l)(2)(i).
established, will not exceed 5 percent of commission merchant and/or retail The addition and revisions to read as
the liquidation value of the pool’s foreign exchange dealer carrying the follows:
portfolio, after taking into account account and the introducing broker, if
unrealized profits and unrealized losses any, whether the commodity interest § 4.24 General disclosures required.
on any such positions it has entered was purchased, sold (including, in the * * * * *
into; Provided, That in the case of an case of a retail forex transaction, offset), (b) Risk Disclosure Statement. (1) The
option that is in-the-money at the time exercised, expired (including, in the following Risk Disclosure Statement
of purchase, the in-the-money amount case of a retail forex transaction, must be prominently displayed
as defined in § 190.01(x) of this chapter whether it was rolled forward), and the immediately following any disclosures
may be excluded in computing such 5 gain or loss realized. required to appear on the cover page of
percent; or * * * * * the Disclosure Document as provided by
(B) * * * (7) Copies of each confirmation of a the Commission, by any applicable
(1) The term ‘‘notional value’’ shall be commodity interest transaction of the federal or state securities laws and
calculated for each such futures position pool, each purchase and sale statement regulations or by any applicable laws of
by multiplying the number of contracts and each monthly statement for the pool non-United States jurisdictions.
RISK DISCLOSURE STATEMENT futures commission merchant and/or whereby a person may benefit, directly
retail foreign exchange dealer. or indirectly, from the maintenance of
YOU SHOULD CAREFULLY
* * * * * the pool’s account with the futures
CONSIDER WHETHER YOUR
(g) Principal risk factors. A discussion commission merchant and/or retail
FINANCIAL CONDITION PERMITS
of the principal risk factors of foreign exchange dealer, or from the
YOU TO PARTICIPATE IN A
participation in the offered pool. This introduction of the pool’s account to a
COMMODITY POOL. IN SO DOING,
discussion must include, without futures commission merchant and/or
YOU SHOULD BE AWARE THAT
limitation, risks relating to volatility, retail foreign exchange dealer by an
COMMODITY INTEREST TRADING
leverage, liquidity, counterparty introducing broker (such as payment for
CAN QUICKLY LEAD TO LARGE
creditworthiness, as applicable to the order flow or soft dollar arrangements)
LOSSES AS WELL AS GAINS. SUCH
types of trading programs to be or from an investment of pool assets in
TRADING LOSSES CAN SHARPLY
followed, trading structures to be investee pools or funds or other
REDUCE THE NET ASSET VALUE OF
employed and investment activity investments.
THE POOL AND CONSEQUENTLY THE
VALUE OF YOUR INTEREST IN THE (including retail forex transactions) * * * * *
POOL. IN ADDITION, RESTRICTIONS expected to be engaged in by the offered (l) * * *
ON REDEMPTIONS MAY AFFECT pool. (1) * * *
YOUR ABILITY TO WITHDRAW YOUR (h) * * * (iii) The pool’s futures commission
(2) A description of the trading and merchants and/or retail foreign
PARTICIPATION IN THE POOL. * * *
investment programs and policies that exchange dealers and its introducing
* * * * * will be followed by the offered pool, brokers, if any.
(4) If the pool may engage in retail including the method chosen by the (2) With respect to a futures
Forex transactions, the Risk Disclosure pool operator concerning how futures commission merchant and/or retail
Statement must further state: commission merchants and/or retail foreign exchange dealer or an
YOU SHOULD ALSO BE AWARE foreign exchange dealers carrying the introducing broker, an action will be
THAT THIS COMMODITY POOL MAY pool’s accounts shall treat offsetting considered material if:
ENGAGE IN OFF-EXCHANGE FOREIGN positions pursuant to § 1.46 of this (i) The action would be required to be
CURRENCY TRADING. SUCH chapter, if the method is other than to disclosed in the notes to the futures
TRADING IS NOT CONDUCTED IN close out all offsetting positions or to commission merchant’s, retail foreign
THE INTERBANK MARKET. THE close out offsetting positions on other exchange dealer’s or introducing
FUNDS THAT THE POOL USES FOR than a first-in, first-out basis, and any broker’s financial statements prepared
OFF-EXCHANGE FOREIGN CURRENCY material restrictions or limitations on pursuant to generally accepted
TRADING WILL NOT RECEIVE THE trading required by the pool’s accounting principles;
SAME PROTECTIONS AS FUNDS organizational documents or otherwise. * * * * *
USED TO MARGIN OR GUARANTEE This description must include, if 32. Section 4.25 is amended by
EXCHANGE-TRADED FUTURES AND applicable, an explanation of the revising paragraph (c)(3)(ii) to read as
OPTION CONTRACTS. IF THE POOL systems used to select commodity follows:
DEPOSITS SUCH FUNDS WITH A trading advisors, investee pools and
COUNTERPARTY AND THAT types of investment activity to which § 4.25 Performance disclosures.
COUNTERPARTY BECOMES pool assets will be committed; * * * * *
INSOLVENT, THE POOL’S CLAIM FOR * * * * * (c) * * *
AMOUNTS DEPOSITED OR PROFITS (4) * * * (3) * * *
EARNED ON TRANSACTIONS WITH (iii) If assets deposited by the pool as (ii) If a major commodity trading
THE COUNTERPARTY MAY NOT BE margin or as security deposit generate advisor has not previously traded
TREATED AS A COMMODITY income, to whom that income will be accounts, the pool operator must
CUSTOMER CLAIM FOR PURPOSES paid. prominently display the following
OF SUBCHAPTER IV OF CHAPTER 7 (i) * * * statement:
OF THE BANKRUPTCY CODE AND (2) * * * (Name of the major commodity
THE REGULATIONS THEREUNDER. (ii) Brokerage fees and commissions, trading advisor), A COMMODITY
THE POOL MAY BE A GENERAL including interest income paid to TRADING ADVISOR THAT HAS
CREDITOR AND ITS CLAIM MAY BE futures commission merchants, and any DISCRETIONARY TRADING
PAID, ALONG WITH THE CLAIMS OF fees incurred to maintain an open AUTHORITY OVER (percentage of the
OTHER GENERAL CREDITORS, FROM position in retail forex transactions; pool’s funds available for commodity
ANY MONIES STILL AVAILABLE * * * * * interest trading allocated to that trading
AFTER PRIORITY CLAIMS ARE PAID. (xii) Any costs or fees included in the advisor) PERCENT OF THE POOL’S
EVEN POOL FUNDS THAT THE spread between bid and asked prices for COMMODITY INTEREST TRADING
COUNTERPARTY KEEPS SEPARATE retail forex transactions; and HAS NOT PREVIOUSLY DIRECTED
FROM ITS OWN FUNDS MAY NOT BE * * * * * ANY ACCOUNTS.
SAFE FROM THE CLAIMS OF (j) * * * * * * * *
PRIORITY AND OTHER GENERAL (1) * * *

CREDITORS. (vi) Any other person providing Subpart C—Commodity Trading
* * * * * services to the pool or soliciting Advisors
(e) * * * participants for the pool, or acting as a 33. Section 4.30 is revised to read as
(6) If known, the futures commission counterparty to the pool’s retail forex follows:
merchant and/or retail foreign exchange transactions (as defined in section
dealer through which the pool will 5.1(m) of this chapter). § 4.30 Prohibited activities.
execute its trades, and, if applicable, the * * * * * No commodity trading advisor may
introducing broker through which the (3) Included in the description of such solicit, accept or receive from an
pool will introduce its trades to the conflicts must be any arrangement existing or prospective client funds,
securities or other property in the f. Revising paragraphs (k)(1)(ii), TO THE INTENDED AMOUNTS, SINCE
trading advisor’s name (or extend credit (k)(1)(iii), (k)(2) introductory text, and MARKET CONDITIONS MAY MAKE IT
in lieu thereof) to purchase, margin, (k)(2)(i) to read as follows: IMPOSSIBLE TO EXECUTE SUCH
guarantee or secure any commodity ORDERS.
§ 4.34 General disclosures required. A ‘‘SPREAD’’ POSITION MAY NOT
interest of the client; Provided, however,
That this section shall not apply to a * * * * * BE LESS RISKY THAN A SIMPLE
future commission merchant that is (b) Risk Disclosure Statement. (1) The ‘‘LONG’’ OR ‘‘SHORT’’ POSITION.
registered as such under the Act or to a following Risk Disclosure Statement THE HIGH DEGREE OF LEVERAGE
leverage transaction merchant that is must be prominently displayed THAT IS OFTEN OBTAINABLE IN
registered as a commodity trading immediately following any disclosures COMMODITY INTEREST TRADING
advisor under the Act or to a retail required to appear on the cover page of CAN WORK AGAINST YOU AS WELL
foreign exchange dealer that is the Disclosure Document as provided by AS FOR YOU. THE USE OF LEVERAGE
registered as such under the Act. the Commission, by any applicable CAN LEAD TO LARGE LOSSES AS
34. Section 4.33 is amended by: federal or state securities laws and WELL AS GAINS.
a. Revising paragraph (a)(6); and regulations or by any applicable laws of IN SOME CASES, MANAGED
b. Revising paragraphs (b)(1) and (2) non-United States jurisdictions: COMMODITY ACCOUNTS ARE
to read as follows: SUBJECT TO SUBSTANTIAL
RISK DISCLOSURE STATEMENT CHARGES FOR MANAGEMENT AND
§ 4.33 Recordkeeping. THE RISK OF LOSS IN TRADING ADVISORY FEES. IT MAY BE
* * * * * COMMODITY INTERESTS CAN BE NECESSARY FOR THOSE ACCOUNTS
(a) * * * SUBSTANTIAL. YOU SHOULD THAT ARE SUBJECT TO THESE
(6) Copies of each confirmation of a THEREFORE CAREFULLY CONSIDER CHARGES TO MAKE SUBSTANTIAL
commodity interest transaction, each WHETHER SUCH TRADING IS TRADING PROFITS TO AVOID
purchase and sale statement and each SUITABLE FOR YOU IN LIGHT OF DEPLETION OR EXHAUSTION OF
monthly statement received from a YOUR FINANCIAL CONDITION. IN THEIR ASSETS. THIS DISCLOSURE
futures commission merchant or a retail CONSIDERING WHETHER TO TRADE DOCUMENT CONTAINS, AT PAGE
foreign exchange dealer. OR TO AUTHORIZE SOMEONE ELSE (insert page number), A COMPLETE
TO TRADE FOR YOU, YOU SHOULD DESCRIPTION OF EACH FEE TO BE
* * * * *
BE AWARE OF THE FOLLOWING: CHARGED TO YOUR ACCOUNT BY
(b) Concerning the commodity trading IF YOU PURCHASE A COMMODITY THE COMMODITY TRADING
advisor: OPTION YOU MAY SUSTAIN A ADVISOR.
(1) An itemized daily record of each TOTAL LOSS OF THE PREMIUM AND THIS BRIEF STATEMENT CANNOT
commodity interest transaction of the OF ALL TRANSACTION COSTS. DISCLOSE ALL THE RISKS AND
commodity trading advisor, showing the IF YOU PURCHASE OR SELL A OTHER SIGNIFICANT ASPECTS OF
transaction date, quantity, commodity COMMODITY FUTURES CONTRACT THE COMMODITY INTEREST
interest, and, as applicable, price or OR SELL A COMMODITY OPTION OR MARKETS. YOU SHOULD THEREFORE
premium, delivery month or expiration ENGAGE IN OFF-EXCHANGE FOREIGN CAREFULLY STUDY THIS
date, whether a put or a call, strike CURRENCY TRADING YOU MAY DISCLOSURE DOCUMENT AND
price, underlying contract for future SUSTAIN A TOTAL LOSS OF THE COMMODITY INTEREST TRADING
delivery or underlying physical, the INITIAL MARGIN FUNDS OR BEFORE YOU TRADE, INCLUDING
futures commission merchant and/or SECURITY DEPOSIT AND ANY THE DESCRIPTION OF THE
retail foreign exchange dealer carrying ADDITIONAL FUNDS THAT YOU PRINCIPAL RISK FACTORS OF THIS
the account and the introducing broker, DEPOSIT WITH YOUR BROKER TO INVESTMENT, AT PAGE (insert page
if any, whether the commodity interest ESTABLISH OR MAINTAIN YOUR number).
was purchased, sold (including, in the POSITION. IF THE MARKET MOVES (2)(i) If the commodity trading advisor
case of a retail forex transaction, offset), AGAINST YOUR POSITION, YOU MAY may trade foreign futures or options
exercised, expired (including, in the BE CALLED UPON BY YOUR BROKER contracts pursuant to the offered trading
case of a retail forex transaction, TO DEPOSIT A SUBSTANTIAL program, the Risk Disclosure Statement
whether it was rolled forward), and the AMOUNT OF ADDITIONAL MARGIN must further state the following:
gain or loss realized. FUNDS, ON SHORT NOTICE, IN YOU SHOULD ALSO BE AWARE
(2) Each confirmation of a commodity ORDER TO MAINTAIN YOUR THAT THIS COMMODITY TRADING
interest transaction, each purchase and POSITION. IF YOU DO NOT PROVIDE ADVISOR MAY ENGAGE IN TRADING
sale statement and each monthly THE REQUESTED FUNDS WITHIN THE FOREIGN FUTURES OR OPTIONS
statement furnished by a futures PRESCRIBED TIME, YOUR POSITION CONTRACTS. TRANSACTIONS ON
commission merchant or retail foreign MAY BE LIQUIDATED AT A LOSS, MARKETS LOCATED OUTSIDE THE
exchange dealer to: AND YOU WILL BE LIABLE FOR ANY UNITED STATES, INCLUDING
(i) The commodity trading advisor RESULTING DEFICIT IN YOUR MARKETS FORMALLY LINKED TO A
relating to a personal account of the ACCOUNT. UNITED STATES MARKET MAY BE
trading advisor; and UNDER CERTAIN MARKET SUBJECT TO REGULATIONS WHICH
(ii) Each principal of the trading CONDITIONS, YOU MAY FIND IT OFFER DIFFERENT OR DIMINISHED
advisor relating to a personal account of DIFFICULT OR IMPOSSIBLE TO PROTECTION. FURTHER, UNITED
such principal. LIQUIDATE A POSITION. THIS CAN STATES REGULATORY AUTHORITIES
* * * * * OCCUR, FOR EXAMPLE, WHEN THE MAY BE UNABLE TO COMPEL THE
35. Section 4.34 is amended by: MARKET MAKES A ‘‘LIMIT MOVE.’’ ENFORCEMENT OF THE RULES OF
a. Revising paragraph (b); THE PLACEMENT OF CONTINGENT REGULATORY AUTHORITIES OR
b. Revising paragraph (e)(2); ORDERS BY YOU OR YOUR TRADING MARKETS IN NON-UNITED STATES
c. Revising paragraphs (g) and (h); ADVISOR, SUCH AS A ‘‘STOP-LOSS’’ JURISDICTIONS WHERE YOUR
d. Revising paragraph (i)(2); OR ‘‘STOP-LIMIT’’ ORDER, WILL NOT TRANSACTIONS MAY BE EFFECTED.
e. Revising paragraphs (j)(1) and (j)(3); NECESSARILY LIMIT YOUR LOSSES BEFORE YOU TRADE YOU SHOULD
INQUIRE ABOUT ANY RULES CLIENT FOR TRADING COMMODITY (i) The commodity trading advisor;
RELEVANT TO YOUR PARTICULAR INTERESTS. YOU MUST PLACE ALL (ii) Any futures commission merchant
CONTEMPLATED TRANSACTIONS FUNDS FOR TRADING IN THIS and/or retail foreign exchange dealer
AND ASK THE FIRM WITH WHICH TRADING PROGRAM DIRECTLY WITH with which the client will be required
YOU INTEND TO TRADE FOR A FUTURES COMMISSION to maintain its commodity interest
DETAILS ABOUT THE TYPES OF MERCHANT OR RETAIL FOREIGN account;
REDRESS AVAILABLE IN BOTH YOUR EXCHANGE DEALER, AS (iii) Any introducing broker through
LOCAL AND OTHER RELEVANT APPLICABLE. which the client will be required to
JURISDICTIONS. * * * * * introduce its account to a futures
(ii) If the commodity trading advisor (e) * * * commission merchant and/or retail
may engage in retail forex transactions (2) The futures commission merchant foreign exchange dealer; and
pursuant to the offered trading program, and/or retail foreign exchange dealer (iv) Any principal of the foregoing.
the Risk Disclosure Statement must with which the commodity trading * * * * *
further state the following: advisor will require the client to (3) Included in the description of any
YOU SHOULD ALSO BE AWARE maintain its account or, if the client is such conflict must be any arrangement
THAT THIS COMMODITY TRADING free to choose the futures commission whereby the trading advisor or any
ADVISOR MAY ENGAGE IN OFF- merchant or retail foreign exchange principal thereof may benefit, directly
EXCHANGE FOREIGN CURRENCY dealer with which it will maintain its or indirectly, from the maintenance of
TRADING. SUCH TRADING IS NOT account, the trading advisor must make the client’s commodity interest account
CONDUCTED IN THE INTERBANK a statement to that effect; and with a futures commission merchant
MARKET. THE FUNDS DEPOSITED
* * * * * and/or retail foreign exchange dealer, or
WITH A COUNTERPARTY FOR SUCH
(g) Principal risk factors. A discussion the introduction of such account
TRANSACTIONS WILL NOT RECEIVE
of the principal risk factors of this through an introducing broker (such as
THE SAME PROTECTIONS AS FUNDS
trading program. This discussion must payment for order flow or soft dollar
USED TO MARGIN OR GUARANTEE
include, without limitation, risks due to arrangements).
EXCHANGE-TRADED FUTURES AND
volatility, leverage, liquidity, and (k) * * *
OPTION CONTRACTS. IF THE
counterparty creditworthiness, as (1) * * *
COUNTERPARTY BECOMES
applicable to the trading program and (ii) Any futures commission merchant
INSOLVENT AND YOU HAVE A
CLAIM FOR AMOUNTS DEPOSITED the types of transactions and investment or retail foreign exchange dealer with
OR PROFITS EARNED ON activity expected to be engaged in which the client will be required to
TRANSACTIONS WITH THE pursuant to such program (including maintain its commodity interest
COUNTERPARTY, YOUR CLAIM MAY retail forex transactions, if any). account; and
NOT BE TREATED AS A COMMODITY (h) Trading program. A description of (iii) Any introducing broker through
CUSTOMER CLAIM FOR PURPOSES the trading program, which must which the client will be required to
OF SUBCHAPTER IV OF CHAPTER 7 include the method chosen by the introduce its account to the futures
OF THE BANKRUPTCY CODE AND commodity trading advisor concerning commission merchant and/or retail
REGULATIONS THEREUNDER. YOU how futures commission merchants foreign exchange dealer.
MAY BE A GENERAL CREDITOR AND and/or retail foreign exchange dealers (2) With respect to a futures
YOUR CLAIM MAY BE PAID, ALONG carrying accounts it manages shall treat commission merchant, retail foreign
WITH THE CLAIMS OF OTHER offsetting positions pursuant to § 1.46 of exchange dealer or introducing broker,
GENERAL CREDITORS, FROM ANY this chapter, if the method is other than an action will be considered material if:
MONIES STILL AVAILABLE AFTER to close out all offsetting positions or to (i) The action would be required to be
PRIORITY CLAIMS ARE PAID. EVEN close out offsetting positions on other disclosed in the notes to the futures
FUNDS THAT THE COUNTERPARTY than a first-in, first-out basis, and the commission merchant’s, retail foreign
KEEPS SEPARATE FROM ITS OWN types of commodity interests and other exchange dealer’s or introducing
FUNDS MAY NOT BE SAFE FROM interests the commodity trading advisor broker’s financial statements prepared
THE CLAIMS OF PRIORITY AND intends to trade, with a description of pursuant to generally accepted
OTHER GENERAL CREDITORS. any restrictions or limitations on such accounting principles;
FURTHER, YOU SHOULD trading established by the trading * * * * *
CAREFULLY REVIEW THE advisor or otherwise. 36. Part 5 is added to read as follows:
INFORMATION CONTAINED IN THE (i) * * *
RISK DISCLOSURE STATEMENT OF (2) Where any fee is determined by PART 5—OFF-EXCHANGE FOREIGN
THE FUTURES COMMISSION reference to a base amount including, CURRENCY TRANSACTIONS
MERCHANT OR RETAIL FOREIGN but not limited to, ‘‘net assets,’’ ‘‘gross
profits,’’ ‘‘net profits,’’ ‘‘net gains,’’ ‘‘pips’’ Sec.
EXCHANGE DEALER THAT YOU 5.1 Definitions.
SELECT TO CARRY YOUR ACCOUNT. or ‘‘bid-asked spread,’’ the trading
5.2 Prohibited transactions.
(3) If the commodity trading advisor advisor must explain how such base 5.3 Registration of persons engaged in
is not also a registered futures amount will be calculated. Where any retail forex transactions.
commission merchant or a registered fee is based on the difference between 5.4 Applicability of part 4 of this chapter
retail foreign exchange dealer, the bid and asked prices on retail forex to commodity pool operators and
trading advisor must make the transactions (as defined in § 5.1 of this commodity trading advisors.
additional following statement in the chapter), the trading advisor must 5.5 Distribution of ‘‘Risk Disclosure
explain how such fee will be calculated; Statement’’ by retail foreign exchange
Risk Disclosure Statement, to be dealers, futures commission merchants
included as the last paragraph thereof: * * * * * and introducing brokers regarding retail
THIS COMMODITY TRADING (j) Conflicts of interest. (1) A full forex transactions.
ADVISOR IS PROHIBITED BY LAW description of any actual or potential 5.6 Maintenance of minimum financial
FROM ACCEPTING FUNDS IN THE conflicts of interest regarding any aspect requirements by retail foreign exchange
TRADING ADVISOR’S NAME FROM A of the trading program on the part of: dealers and futures commission
merchants offering or engaging in retail (2) Associated person of a commodity (1) Such activities account for more
forex transactions. pool operator, for purposes of this part, than fifty percent of the futures
5.7 Minimum financial requirements for means any natural person associated commission merchant’s gross revenues,
retail foreign exchange dealers and
with a commodity pool operator as computed in accordance with generally
futures commission merchants offering
or engaging in retail forex transactions. defined in paragraph (d)(1) of this accepted accounting principles, on an
5.8 Aggregate retail forex assets. section as a partner, officer, employee, annual basis;
5.9 Security deposits for retail forex consultant or agent (or any natural (2) The futures commission merchant
transactions. person occupying a similar status or receives gross revenues, computed in
5.10 Risk assessment recordkeeping performing similar functions), in any accordance with generally accepted
requirements for retail foreign exchange capacity which involves: accounting principles, from such
dealers. (i) The solicitation of funds, activities in excess of $500,000 in any
5.11 Risk assessment reporting
securities, or property for a participation twelve month period; or
requirements for retail foreign exchange
dealers. in a pooled investment vehicle; or (3) The futures commission merchant
5.12 Financial reports of retail foreign (ii) The supervision of any person or is a clearing member of a registered
exchange dealers. persons so engaged; derivatives clearing organization.
5.13 Reporting to customers of retail (e)(1) Commodity trading advisor, for (h)(1) Retail foreign exchange dealer
foreign exchange dealers and futures purposes of this part, means any person means any person that is, or that offers
commission merchants; monthly and who exercises discretionary trading to be, the counterparty to a retail forex
confirmation statements. authority or obtains written transaction, except for a person
5.14 Records to be kept by retail foreign
exchange dealers and futures
authorization to exercise discretionary described in sub-paragraph (aa), (bb),
commission Merchants. trading authority over any account for or (cc)(AA), (dd), (ee) or (ff) of section
5.15 Unlawful representations. on behalf of any person that is not an 2(c)(2)(B)(i)(II) of the Act;
5.16 Prohibition of guarantees against loss. eligible contract participant as defined (2) Associated person of a retail
5.17 Authorization to trade. in section 1a(12) of the Act, in foreign exchange dealer means any
5.18 Trading and operational standards. connection with retail forex natural person associated with a retail
5.19 Pending legal proceedings. transactions; foreign exchange dealer as defined in
5.20 Special calls for account and (2) Associated person of a commodity paragraph (i)(1) of this section as a
transaction information.
5.21 Supervision.
trading advisor, for purposes of this partner, officer or employee (or any
5.22 Registered futures association part, means any natural person natural person occupying a similar
membership. associated with a commodity trading status or performing similar functions),
5.23 Notice of bulk transfers and bulk advisor as defined in paragraph (e)(1) of in any capacity which involves:
liquidations. this section as a partner, officer, (i) The solicitation or acceptance of
5.24 Applicability of other parts of this employee, consultant or agent (or any retail forex customers’ orders (other
chapter. natural person occupying a similar than in a clerical capacity); or
5.25 Applicability of the Act. status or performing similar functions), (ii) The supervision of any person or
Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, in any capacity which involves: persons so engaged;
6e, 6f, 6g, 6h, 6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, (i) The solicitation of a client’s or (i) Retail forex account means the
12, 12a, 13b, 13c, 16a, 18, 19, 21, 23. prospective client’s discretionary account of a person who is not an
§ 5.1 Definitions. account; or eligible contract participant as defined
(ii) The supervision of any person or in section 1a(12) of the Act, established
(a) Affiliated person of a futures
persons so engaged; with a retail foreign exchange dealer or
commission merchant means a person
(f)(1) Introducing broker, for purposes a futures commission merchant, in
described in section
of this part, means any person who which account retail forex transactions
2(c)(2)(B)(i)(II)(cc)(BB) of the Act;
(b) Aggregate retail forex assets means solicits or accepts orders from a (including options on contracts for the
an amount of liquid assets held in customer that is not an eligible contract purchase or sale of foreign currency)
accordance with section 5.8 of this part; participant as defined in section 1a(12) with such retail foreign exchange dealer
(c) Associated person of an affiliated of the Act, in connection with retail or futures commission merchant as
person of a futures commission forex transactions; counterparty are undertaken, or which
merchant means any natural person (2) Associated person of an account is established in order to enter
associated with an affiliated person of a introducing broker, for purposes of this into such transactions.
futures commission merchant as a part, means any natural person (j) Retail forex account agreement
partner, officer or employee (or any associated with an introducing broker as means the contractual agreement
natural person occupying a similar defined in paragraph (g)(1) of this between a futures commission merchant
status or performing similar functions), section as a partner, officer, employee, or retail foreign exchange dealer and
in any capacity which involves: or agent (or any natural person any person who is not an eligible
(1) The solicitation or acceptance of occupying a similar status or performing contract participant as defined in
retail forex customers’ orders (other similar functions), in any capacity section 1a(12) of the Act, which
than in a clerical capacity); or which involves: agreement contains the terms governing
(2) The supervision of any person or (i) The solicitation or acceptance of the person’s retail forex account with
persons so engaged; retail forex customers’ orders (other such futures commission merchant or
(d)(1) Commodity pool operator, for than in a clerical capacity); or retail foreign exchange dealer.
purposes of this part, means any person (ii) The supervision of any person or (k) Retail forex customer means a
who operates or solicits funds, persons so engaged; person, other than an eligible contract
securities, or property for a pooled (g) Primarily or substantially means, participant as defined in section 1a(12)
investment vehicle that is not an eligible when used to describe the extent of a of the Act, acting on its own behalf and
contract participant as defined in futures commission merchant’s trading in any account, agreement,
section 1a(12) of the Act, and that engagement in the activities described contract or transaction described in
engages in retail forex transactions; in section 1a(20) of the Act, that: section 2(c)(2)(B) or 2(c)(2)(C) of the Act.
(l) Retail forex obligation means the to the registration provisions under the (ii) Any associated person of an
net credit balance at a retail foreign Act and to part 3 of this chapter: introducing broker, as defined in
exchange dealer or futures commission (1)(i) Any affiliated person of a futures § 5.1(f)(2) of this part, is required to
merchant that would be obtained by commission merchant, as defined in register as an associated person of an
combining all money, securities and section 5.1(a) of this part, which introducing broker;
property deposited by a retail forex affiliated person: (6)(i) Any retail foreign exchange
customer into a retail forex account or (A) Solicits or accepts orders from any dealer, as defined in § 5.1(h)(1) of this
accounts, adjusted for the realized and person that is not an eligible contract part is required to register as a retail
unrealized net profit or loss, if any, participant in connection with any retail foreign exchange dealer;
accruing on the open trades, contracts or forex transaction; or (ii) Any associated person of a retail
transactions in the retail forex account (B) Accepts money, securities, or foreign exchange dealer, as defined in
or accounts, without including any property (or extends credit in lieu § 5.1(h)(2) of this part, is required to
retail forex customers’ accounts that thereof) in connection with such register as an associated person of a
contain negative net liquidating solicitation or acceptance of orders in retail foreign exchange dealer;
balances. order to engage in any retail forex (b) Any person described in paragraph
(m) Retail forex transaction means transaction, is required to register as a (a) of this section that is already
any account, agreement, contract or retail foreign exchange dealer; and registered in the required capacity
transaction described in section (ii) Any associated person of an specified in paragraph (a) is not
2(c)(2)(B) or 2(c)(2)(C) of the Act. A affiliated person of a futures required under this section to register
retail forex transaction does not include commission merchant, as defined in twice in the same capacity; Provided,
an account, agreement, contract or § 5.1(c) of this part, is required to however, that a person already
transaction in foreign currency that is a register as an associated person of an registered as an associated person of one
contract of sale of a commodity for affiliated person of a futures class of registrant may also be required
future delivery (or an option thereon) commission merchant. to register as an associated person of
that is executed, traded on or otherwise (2)(i) Any commodity pool operator, another class of registrant in order to
subject to the rules of a contract market as defined in § 5.1(d)(1) of this part, is comply with this section.
designated pursuant to section 5(a) of required to register as a commodity pool § 5.4 Applicability of part 4 of this chapter
the Act or a derivatives transaction operator; to commodity pool operators and
execution facility registered pursuant to (ii) Any associated person of a commodity trading advisors.
section 5a(c) of the Act. commodity pool operator, as defined in Part 4 of this chapter applies to any
§ 5.1(d)(2) of this part, is required to person required pursuant to the
§ 5.2 Prohibited transactions.
register as an associated person of a provisions of this part 5 to register as a
(a) Scope. The provisions of this commodity pool operator;
section shall be applicable to any retail commodity pool operator or as a
(3)(i) Any commodity trading advisor,
forex transaction. commodity trading advisor. Failure by
as defined in § 5.1(e)(1) of this part, is
(b) Fraudulent conduct prohibited. It any such person to comply with the
required to register as a commodity
shall be unlawful for any person, by use requirements of part 4 will constitute a
trading advisor;
of the mails or by any means or violation of this section and the relevant
(ii) Any associated person of a
instrumentality of interstate commerce, section of part 4.
commodity trading advisor, as defined
directly or indirectly, in or in in § 5.1(e)(2) of this part, is required to § 5.5 Distribution of ‘‘Risk Disclosure
connection with any retail forex register as an associated person of a Statement’’ by retail foreign exchange
transaction: commodity trading advisor; dealers, futures commission merchants and
(1) To cheat or defraud or attempt to (4)(i) Any person registered as a introducing brokers regarding retail forex
cheat or defraud any person; futures commission merchant: transactions.
(2) Willfully to make or cause to be (A) That is not primarily or (a) Except as provided in § 5.23 of this
made to any person any false report or substantially engaged in the business part, no retail foreign exchange dealer,
statement or cause to be entered for any activities described in section 1a(20) of futures commission merchant, or in the
person any false record; or the Act; case of an introduced account no
(3) Willfully to deceive or attempt to (B) That solicits or accepts orders introducing broker, may open an
deceive any person by any means
from any person that is not an eligible account that will engage in retail forex
whatsoever.
contract participant in connection with transactions for a retail forex customer,
(c) Acting as counterparty and
exercising discretion prohibited. (1) No any retail forex transaction; and unless the retail foreign exchange
(C) That accepts money, securities, or dealer, futures commission merchant or
person who acts as the counterparty for
property (or extends credit in lieu introducing broker first:
any retail forex transaction may do so
thereof) in connection with such (1)(i) In the case of a retail foreign
for an account for which the person or
solicitation or acceptance of orders in exchange dealer or a person required to
any affiliate of the person is authorized
order to engage in retail forex register as an introducing broker solely
(by contract, power of attorney or
transactions, is required to register as a by reason of this part, furnishes the
otherwise) to cause transactions to be
retail foreign exchange dealer; retail forex customer with a separate
effected without the client’s specific

(ii) Any associated person of a futures written disclosure statement containing
authorization.
(2) For purposes of this paragraph (c), commission merchant described in only the language set forth in paragraph
an ‘‘affiliate’’ of a person means a person paragraph (a)(4)(i) of this section is (b) of this section and the disclosure
controlling, controlled by or under required to register as an associated required by paragraph (e) of this section;
common control with, the first person. person of a futures commission (ii) In the case of a futures
merchant; commission merchant or a person
§ 5.3 Registration of persons engaged in (5)(i) Any introducing broker, as required to register as an introducing
retail forex transactions. defined in § 5.1(f)(1) of this part, is broker because it engages in the
(a) Subject to paragraph (b) of this required to register as an introducing activities described in § 1.3(mm) of this
section, each of the following is subject broker; chapter, furnishes the retail forex
customer with a separate written (2) AN ELECTRONIC TRADING from outside sources or not in its
disclosure statement containing only the PLATFORM FOR RETAIL FOREIGN discretion. Your dealer may establish its
language set forth in paragraph (b) of CURRENCY TRANSACTIONS IS NOT prices by offering spreads from third
this section and the disclosure required AN EXCHANGE. IT IS AN party prices, but it is under no
by paragraph (e) of this section; ELECTRONIC CONNECTION FOR obligation to do so or to continue to do
Provided, however, that the disclosure ACCESSING YOUR DEALER. THE so. Your dealer may offer different
statement may be attached to other TERMS OF AVAILABILITY OF SUCH A prices to different customers at any
documents as the initial page(s) of such PLATFORM ARE GOVERNED ONLY point in time on its own terms. The
documents and as the only material on BY YOUR CONTRACT WITH YOUR terms of your account agreement alone
such page(s); and DEALER. govern the obligations your dealer has to
(2) Receives from the retail forex Any trading platform that you may you to offer prices and offer offset or
customer an acknowledgment signed use to enter off-exchange foreign liquidating transactions in your account
and dated by the retail forex customer currency transactions is only connected and make any payments to you. The
that he received and understood the to your futures commission merchant or prices offered by your dealer may or
disclosure statement. retail foreign exchange dealer. You are may not reflect prices available
(b) The language set forth in the accessing that trading platform only to elsewhere at any exchange, interbank, or
written disclosure statement required by transact with your dealer. You are not other market for foreign currency.
paragraph (a) of this section shall be as trading with any other entities or (5) PAID SOLICITORS MAY HAVE
follows: customers of the dealer by accessing UNDISCLOSED CONFLICTS
such platform. The availability and The futures commission merchant or
Risk Disclosure Statement
operation of any such platform, retail foreign exchange dealer may
OFF-EXCHANGE FOREIGN including the consequences of the compensate introducing brokers for
CURRENCY TRANSACTIONS unavailability of the trading platform for introducing your account in ways which
INVOLVE THE LEVERAGED TRADING any reason, is governed only by the are not disclosed to you. Such paid
OF CONTRACTS DENOMINATED IN terms of your account agreement with solicitors are not required to have, and
FOREIGN CURRENCY CONDUCTED the dealer. may not have, any special expertise in
WITH A FUTURES COMMISSION (3) YOUR DEPOSITS WITH THE trading, and may have conflicts of
MERCHANT OR A RETAIL FOREIGN DEALER HAVE NO REGULATORY interest based on the method by which
EXCHANGE DEALER AS YOUR PROTECTIONS. they are compensated. Solicitors
COUNTERPARTY. All of your rights associated with your
BECAUSE OF THE LEVERAGE AND working on behalf of futures
retail forex trading, including the
THE OTHER RISKS DISCLOSED HERE, commission merchants and retail
manner and denomination of any
YOU CAN RAPIDLY LOSE ALL OF THE foreign exchange dealers are required to
payments made to you, are governed by
FUNDS YOU DEPOSIT FOR SUCH register. You should confirm that they
the contract terms established in your
TRADING AND YOU MAY LOSE MORE are, in fact registered. You should
account agreement with the futures
THAN YOU DEPOSIT. commission merchant or retail foreign thoroughly investigate the manner in
YOU SHOULD BE AWARE OF AND exchange dealer. Funds deposited by which all such solicitors are
CAREFULLY CONSIDER THE you with a futures commission compensated and be very cautious in
FOLLOWING POINTS BEFORE merchant or retail foreign exchange granting any person or entity authority
DETERMINING WHETHER SUCH dealer for trading off-exchange foreign to trade on your behalf. You should
TRADING IS APPROPRIATE FOR YOU. currency transactions are not subject to always consider obtaining dated written
(1) TRADING IS NOT ON A the customer funds protections confirmation of any information you are
REGULATED MARKET OR provided to customers trading on a relying on from your dealer or a solicitor
EXCHANGE—YOUR DEALER IS YOUR contract market that is designated by the in making any trading or account
TRADING PARTNER WHICH IS A Commodity Futures Trading decisions.
DIRECT CONFLICT OF INTEREST. Commission. Your dealer may FINALLY, YOU SHOULD
BEFORE YOU ENGAGE IN ANY commingle your funds with its own THOROUGHLY INVESTIGATE ANY
RETAIL FOREIGN EXCHANGE operating funds or use them for other STATEMENTS BY ANY DEALERS OR
TRADING, YOU SHOULD CONFIRM purposes. In the event your dealer SALES REPRESENTATIVES WHICH
THE REGISTRATION STATUS OF becomes bankrupt, any funds the dealer MINIMIZE THE IMPORTANCE OF, OR
YOUR COUNTERPARTY. is holding for you in addition to any CONTRADICT, ANY OF THE TERMS
The off-exchange foreign currency amounts owed to you resulting from OF THIS RISK DISCLOSURE. SUCH
trading you are entering into is not trading, whether or not any assets are STATEMENTS MAY INDICATE
conducted on an interbank market, nor maintained in separate deposit accounts POTENTIAL SALES FRAUD.
is it conducted on a futures exchange by the dealer, may be treated as an THIS BRIEF STATEMENT CANNOT,
subject to regulation as a designated unsecured creditor’s claim. OF COURSE, DISCLOSE ALL THE
contract market by the Commodity (4) YOU ARE LIMITED TO YOUR RISKS AND OTHER ASPECTS OF
Futures Trading Commission. The DEALER TO OFFSET OR LIQUIDATE TRADING OFF-EXCHANGE FOREIGN
foreign currency trades you transact are ANY TRADING POSITIONS SINCE THE CURRENCY TRANSACTIONS WITH A
trades with the futures commission TRANSACTIONS ARE NOT MADE ON FUTURES COMMISSION MERCHANT
merchant or retail foreign exchange AN EXCHANGE OR MARKET, AND OR RETAIL FOREIGN EXCHANGE
dealer as your counterparty. WHEN YOUR DEALER MAY SET ITS OWN DEALER.
YOU SELL, THE DEALER IS THE PRICES. I hereby acknowledge that I have
BUYER. WHEN YOU BUY, THE Your ability to close your transactions received and understood this risk
DEALER IS THE SELLER. As a result, or offset positions is limited to what disclosure statement.
when you lose money trading, your your dealer will offer to you, as there is lllllllllllllllllll
dealer is making money on such trades, no other market for these transactions. Date
in addition to any fees, commissions, or Your dealer may offer any prices it lllllllllllllllllll
spreads the dealer may charge. wishes, and it may offer prices derived Signature of Customer
(c) The acknowledgment required by registration as a retail foreign exchange taken to correct the material
paragraph (a) of this section must be dealer, who knows or should have inadequacy.
retained by the retail foreign exchange known that its adjusted net capital at (e) Whenever any self-regulatory
dealer, futures commission merchant or any time is less than the minimum organization learns that a member
introducing broker in accordance with required by § 5. 7 of this part or by the registrant has failed to file a notice or
§ 1.31 of this chapter. capital rule of a registered futures written report as required by § 5.6 of
(d) This section does not relieve a association of which it is a member, this part, that self-regulatory
retail foreign exchange dealer, futures must: organization must immediately report
commission merchant or introducing (1) Give telephonic notice, to be this failure by telephone, confirmed in
broker from any other disclosure confirmed in writing by facsimile writing immediately by facsimile notice,
obligation it may have under applicable notice, that the applicant’s or as provided in paragraph (h) of this
law. registrant’s adjusted net capital is less section.
(e)(1) Immediately following the than that required by § 5.7 of this part. (f) A retail foreign exchange dealer or
language set forth in paragraph (b) of The notice must be given immediately a futures commission merchant offering
this section, the statement required by after the applicant or registrant knows or engaging in retail forex transactions
paragraph (a) of this section shall or should know that its adjusted net shall provide written notice of a
include, for each of the most recent four capital is less than that required by any substantial reduction in capital as
quarters during which the counterparty of the aforesaid rules to which the compared to that last reported in a
maintained retail forex accounts: applicant or registrant is subject; and financial report filed with the
(i) The total number of non (2) Provide together with such notice Commission pursuant to § 5.12 of this
discretionary retail forex accounts documentation in such form as part. This notice shall be provided as
maintained by the retail foreign necessary to adequately reflect the follows:
exchange dealer or futures commission applicant’s or registrant’s capital (1) If any event or series of events,
merchant; condition as of any date such person’s including any withdrawal, advance,
(ii) The percentage of such accounts adjusted net capital is less than the loan or loss cause, on a net basis, a
that were profitable; and minimum required. The applicant or reduction in net capital of 20 percent or
(iii) the percentage of such accounts registrant must provide similar more, notice must be provided within
that were not profitable. documentation for other days as the two business days of the event or series
(2) Identification of retail forex Commission may request. of events causing the reduction; and
accounts for purposes of this disclosure (b) Each applicant or registrant, who (2) If the equity capital of the retail
and calculation of each such account’s knows or should have known that its foreign exchange dealer or futures
profit or loss must be made in adjusted net capital at any time is less commission merchant offering or
accordance with § 5.18(i) of this part. than the greatest of: engaging in retail forex transactions or
Such statement of profitable trades shall (1) $22,000,000; the equity capital of a subsidiary or
include the following legend: PAST (2) 110 percent of the amount affiliate of the retail foreign exchange
PERFORMANCE IS NOT required by § 5.7(a)(1)(i)(B) of this part; dealer or futures commission merchant
NECESSARILY INDICATIVE OF or offering or engaging in retail forex
FUTURE RESULTS. Each retail foreign (3) 110 percent of the amount of transactions consolidated pursuant to
exchange dealer or futures commission adjusted net capital required by a § 1.17(f) of this chapter would be
merchant shall provide, upon request, to registered futures association of which withdrawn by action of a stockholder or
any retail forex customer or prospective the futures commission merchant or a partner or a limited liability company
retail forex customer the total number of retail foreign exchange dealer is a member or by redemption or repurchase
non discretionary retail forex accounts member, must file written notice to that of shares of stock by any of the
maintained by such retail foreign effect within 24 hours of such event. consolidated entities or through the
exchange dealer or futures commission (c) If an applicant or registrant at any payment of dividends or any similar
merchant, the percentage of such time fails to make or keep current the distribution, or an unsecured advance or
accounts that were profitable, and the books and records required by these loan would be made to a stockholder,
percentage of such accounts that were regulations, such applicant or registrant partner, sole proprietor, limited liability
unprofitable, calculated in accordance must, on the same day such event company member, employee or affiliate,
with § 5.18(i) of this part, for each occurs, provide facsimile notice of such such that the withdrawal, advance or
quarter during the most recent five year fact, specifying the books and records loan would cause, on a net basis, a
period during which such retail foreign which have not been made or which are reduction in excess adjusted net capital
exchange dealer or futures commission not current, and within 48 hours after of 30 percent or more, notice must be
merchant maintained non discretionary giving such notice file a written report provided at least two business days
retail forex accounts. stating what steps have been and are prior to the withdrawal, advance or loan
§ 5.6 Maintenance of minimum financial being taken to correct the situation. that would cause the reduction:
requirements by retail foreign exchange (d) Whenever any applicant or Provided, however, That the provisions
dealers and futures commission merchants registrant discovers or is notified by an of paragraphs (f)(1) and (f)(2) of this
offering or engaging in retail forex independent public accountant, section do not apply to any retail foreign
transactions. pursuant to § 1.16(e)(2) of this chapter, exchange transaction in the ordinary
(a) Each futures commission merchant of the existence of any material course of business between a retail
offering or engaging in retail forex inadequacy, as specified in § 1.16(d)(2) foreign exchange dealer and any affiliate
transactions or who files an application of this chapter, such applicant or where the retail foreign exchange dealer
for registration as a futures commission registrant must give facsimile notice of makes payment to or on behalf of such
merchant that will offer or engage in such material inadequacy within 24 affiliate for such transaction and then
retail forex transactions and each person hours, and within 48 hours after giving receives payment from such affiliate for
registered as a retail foreign exchange such notice file a written report stating such transaction within two business
dealer or who files an application for what steps have been and are being days from the date of the transaction.
(3) Upon receipt of such notice from electronic form using a form of user and must be able to demonstrate such
a futures commission merchant offering authentication assigned in accordance compliance to the satisfaction of the
or engaging in retail forex transactions with procedures established by or Commission or the registrant’s
or a retail foreign exchange dealer, the approved by the Commission, and designated self-regulatory organization.
Director of the Division of Clearing and otherwise in accordance with (4) A registrant who is not in
Intermediary Oversight or the Director’s instructions issued by or approved by compliance with this section, or is
designee may require that the futures the Commission, if the futures unable to demonstrate such compliance
commission merchant offering or commission merchant, retail foreign as required by paragraph (a)(3) of this
engaging in retail forex transactions or exchange dealer or a designated self- section, shall, as directed by and under
retail foreign exchange dealer provide or regulatory organization has provided the the supervision of the Commission or
cause a Material Affiliated Person (as Commission with the means necessary the registrant’s designated self-
that term is defined in § 5.10(a)(2) of to read and to process the information regulatory organization, either liquidate
this part) to provide, within three contained in such report. Any such or transfer all retail forex accounts
business days from the date of the electronic submission must clearly (including the novation of retail forex
request or such shorter period as the indicate the registrant or applicant on contracts) and refund or transfer all
Director or designee may specify, such whose behalf such filing is made and funds associated with such retail forex
other information as the Director or the use of such user authentication in accounts and immediately cease offering
designee determines to be necessary submitting such filing will constitute or engaging in retail forex transactions
based upon market conditions, reports and become a substitute for the manual until such time as the firm is able to
provided by the retail foreign exchange signature of the authorized signer. demonstrate to the Commission or the
dealer or futures commission merchant registrant’s designated self-regulatory
offering or engaging in retail forex § 5.7 Minimum financial requirements for
organization such compliance:
transactions, or other available retail foreign exchange dealers and futures
commission merchants offering or Provided, however, That if such
information. registrant immediately demonstrates to
(g) Whenever a person registered as a engaging in retail forex transactions.
(a)(1)(i) Each futures commission the satisfaction of the Commission or
futures commission merchant offering the registrant’s designated self-
or engaging in retail forex transactions merchant offering or engaging in retail
forex transactions and each retail regulatory organization the ability to
or a retail foreign exchange dealer achieve compliance, the Commission or
knows or should know that the total foreign exchange dealer must maintain
adjusted net capital equal to or in excess the registrant’s designated self-
amount of its retail forex obligation regulatory organization may in its
exceeds the amount of the aggregate of the greatest of:
(A) $20,000,000; discretion allow such registrant up to a
retail forex assets the registrant maximum of 10 business days, or such
maintains in accordance with the (B) $20,000,000 plus five percent of
the futures commission merchant’s or additional time as determined by the
provisions of § 5.8 of this chapter, the Commission, in which to achieve
registrant must report such deficiency retail foreign exchange dealer’s total
retail forex obligation in excess of compliance without having to liquidate
immediately by telephone notice,
$10,000,000; positions or transfer accounts and cease
confirmed immediately in writing by
(C) any amount required under § 1.17 doing business as required above.
facsimile notice.
(h) Every notice and written report of this chapter, as applicable; or Nothing in this paragraph (a)(4) shall be
required to be given or filed with the (D) the amount of adjusted net capital construed as preventing the
Commission by this section by an required by a registered futures Commission or the registrant’s
applicant must be filed with the association of which the futures designated self-regulatory organization
regional office of the Commission with commission merchant or retail foreign from taking action against a registrant
jurisdiction over the state in which the exchange dealer is a member. for non-compliance with any of the
applicant’s principal place of business (ii) Section 1.17 of this chapter shall provisions of this section.
is located, and with the National apply to retail foreign exchange dealers (b) For the purposes of this section:
Futures Association. Every notice and as if such retail foreign exchange dealers (1) Where the applicant or registrant
written report required to be given or were futures commission merchants, or has an asset or liability which is defined
filed with the Commission by this as applicable, applicants or registrants, in Securities Exchange Act Rule 15c3–
section by a registrant or self-regulatory as stated in § 1.17 for the purpose of 1 (§ 240.15c3–1 of this title) the
organization must be filed with the determining the adjusted net capital inclusion or exclusion of all or part of
regional office of the Commission with under this section. For the purpose of such asset or liability for the
jurisdiction over the state in which the applying this section, ‘‘applicant’’ or computation of adjusted net capital
registrant’s principal place of business ‘‘registrant’’ shall include retail foreign shall be in accordance with § 240.15c3–
is located, and with the registrant’s exchange dealers and futures 1 of this title, unless specifically stated
designated self-regulatory organization. commission merchants offering or otherwise in this section or in § 1.17 of
In addition, every notice and written engaging in retail forex transactions and this chapter.
report required to be given by this applicants therefore. (2) The adjusted net capital of an
section must also be filed with the Chief (2) No person applying for registration applicant or registrant for the purpose of
Accountant of the Division of Clearing as a retail foreign exchange dealer or a this section shall be determined by the
and Intermediary Oversight at the futures commission merchant that will application of § 1.17 pursuant to
Commission’s principal office in engage in retail forex transactions shall paragraph (a)(1)(ii) of this section, with
Washington, DC. be so registered unless such person the following additions:
(i) In lieu of filing paper copies with affirmatively demonstrates to the (i) All positions in retail forex
the Commission, all filings or other satisfaction of a registered futures accounts and other financial positions
notices prepared by a futures association that it complies with the and instruments of the applicant or
commission merchant or retail foreign financial requirements of this section. registrant must be marked to market and
exchange dealer pursuant to this section (3) Each registrant must be in adjusted daily by referencing to current
may be submitted to the Commission in compliance with this section at all times market prices or rates of exchange.
(ii) Current assets must exclude any no capital deductions for retail forex § 5.8 Aggregate retail forex assets.
retail forex account which liquidates to transactions covered (as defined in (a) Each retail foreign exchange dealer
a deficit or contains a debit ledger § 1.17(j) of this chapter) by the applicant and futures commission merchant
balance only and is not secured in or registrant by open futures contracts to offering or engaging in retail forex
accordance with § 1.17(c)(3). the extent such futures contracts are not transactions shall calculate its total
(iii) Current assets must exclude any otherwise designated as cover for any retail forex obligation and shall at all
unsecured receivable accrued from any other net capital purposes. For purposes times hold assets solely of the type
over-the-counter transaction in foreign of this paragraph (b)(2)(v)(A), such retail permissible under § 1.25 of this chapter
currency, options on foreign currency or forex transactions shall be treated as if equal to or in excess of the total retail
options on contracts for the purchase or they were inventory and cover were forex obligation at one or more
sale of foreign currency, or arising from therefore applicable. A retail foreign qualifying institutions in the United
the deposit of collateral or exchange dealer or futures commission States or money center countries as
compensating balances with respect to merchant may not use an affiliate defined in § 1.49 of this chapter.
such transactions, unless such (unless approved by the firm’s (b) For assets held in the United
unsecured receivable is from a person designated self-regulatory organization) States, a qualifying institution is:
who is an eligible contract participant or any person that is considered
that also is: unregulated under the rules of the firm’s (1) A bank or trust company regulated
(A) A bank or trust company regulated designated self-regulatory organization by a United States banking regulator;
by a United States banking regulator; to cover its currency positions for (2) A broker-dealer registered with the
(B) A broker-dealer registered with the purposes of this section. Securities and Exchange Commission
Securities and Exchange Commission (B) In computing adjusted net capital, and a member of the Financial Industry
and a member of the Financial Industry the capital deductions set forth in Regulatory Authority; or
Regulatory Authority; § 1.17(c)(5)(vi) of this chapter shall (3) A futures commission merchant
(C) A futures commission merchant apply to all retail forex transactions that registered with the Commission and a
registered with the Commission and a are options. member of the National Futures
member of the National Futures (C) For the purpose of applying Association.
Association; capital deductions on open proprietary (c) For assets held in a money center
(D) A retail foreign exchange dealer futures positions under § 1.17(c)(5)(x) of country, a qualifying institution is:
registered with the Commission and a this chapter, net or individual positions (1) A bank or trust company regulated
member of the National Futures in retail forex transactions shall not in a money center country, Provided
Association; constitute cover under § 1.17(j) for the that the bank or trust company has
(E) An entity regulated as a foreign purpose of applying such charges. regulatory capital in excess of $1 billion;
equivalent of any of the persons listed (c) An applicant or registrant must (2) An entity regulated in a money
in paragraphs (b)(2)(iii)(A) through (D) prepare, and keep current, ledgers or center country as an equivalent of a
of this section, if such person is other similar records which show or
broker-dealer or futures commission
regulated in a money center country as summarize, with appropriate references
merchant as determined by the retail
defined in § 1.49 of this chapter and to supporting documents, each
foreign exchange dealer’s or futures
recognized by the futures commission transaction affecting the applicant’s or
commission merchant’s designated self-
merchant’s or retail foreign exchange registrant’s asset, liability, income,
regulatory organization, Provided that
dealer’s designated self-regulatory expense and capital accounts, and in
the entity maintains regulatory capital
organization as a foreign equivalent; which (except as otherwise permitted in
in excess of $100 million; or
(F) Any other entity approved by the writing by the Commission) all the
futures commission merchant’s or retail applicant’s or registrant’s asset, liability (3) A futures commission merchant
foreign exchange dealer’s designated and capital accounts are classified into registered with the Commission and a
self-regulatory organization. the account classification subdivisions member of the National Futures
(iv) The value attributed to any retail specified on Form 1–FR–FCM. Each Association.
forex transaction that is an option shall applicant or registrant shall prepare and (d) Assets held in a money center
be the difference between the option’s keep current such records. country are not eligible to meet the
exercise value or striking value and the (d) An applicant or registrant must requirements of paragraph (a) of this
market value of the underlying. In the make and keep as a record in section unless the retail foreign
case of a call, if the market value of the accordance with § 5.14 of this part exchange dealer or futures commission
underlying is less than the exercise formal computations of its adjusted net merchant has entered into an agreement
value or striking value of such call, it capital and of its minimum financial that is acceptable to the firm’s
shall be given no value; and, in the case requirements pursuant to this section as designated self-regulatory organization
of a put, if the market value of the of the close of business each month and and that authorizes the qualifying
underlying is more than the exercise on other such dates called for by the institution to provide account
value or striking value of the put, it Commission, the National Futures information to the Commission and the
shall be given no value. Association, or another self-regulatory firm’s designated self-regulatory
(v)(A) In computing adjusted net organization of which the firm is a organization.
capital, the capital deductions set forth member. Such computations must be (e) In computing its adjusted net
in § 1.17(c)(5)(ii) of this chapter shall completed and made available for capital pursuant to § 5.7 of this part, a
apply to retail forex transactions other inspection by any representative of the retail foreign exchange dealer or futures
than options. The capital deductions Commission, the National Futures commission merchant may not include
which apply are six percent for net Association, a self-regulatory aggregate retail forex assets as current
positions in Euros, British pounds, organization of which the firm is a assets or otherwise record any property
Canadian dollars, Japanese yen, or member, or the United States received from retail forex customers as
Swiss francs and 20 percent for net Department of Justice commencing the an asset without recording a
positions in all other foreign currencies, first month-end after the date the corresponding liability to the retail forex
Provided, however, That there shall be application for registration is filed. customers.
§ 5.9 Security deposits for retail forex (A) Method(s) for monitoring and accounting principles, which
transactions. controlling financial and operational consolidated statements shall be audited
(a) Each futures commission merchant risks to it resulting from the activities of by an independent certified public
engaging, or offering to engage, in retail any of its affiliated persons; accountant if an annual audit is
forex transactions and each retail (B) Financing and capital adequacy, performed in the ordinary course of
foreign exchange dealer must collect including information regarding sources business, but which otherwise may be
from each retail forex customer a of funding, together with a narrative unaudited, and which shall include
minimum security deposit in the form discussion by management of the appropriate explanatory notes. The
of cash or other financial instruments liquidity of the material assets of the consolidating statements may be those
that comply with the requirements retail foreign exchange dealer, the prepared by the retail foreign exchange
specified in § 1.25 of this chapter for structure of debt capital, and sources of dealer’s highest level Material Affiliated
each retail forex transaction equal to: alternative funding; Person as part of its internal financial
(1) Ten percent of the notional value (C) Establishing and maintaining reporting process. Any additional
of the retail forex transaction; internal controls with respect to market information required to be filed under
(2) For short options, ten percent of risk, credit risk, and other risks created § 5.11(a)(2)(iii) shall also be maintained
the notional value of the retail forex by the retail foreign exchange dealer’s and preserved.
transaction, plus the premium received trading activities, including systems and (2) The determination of whether an
by the futures commission merchant or policies for supervising, monitoring, affiliated person of a retail foreign
retail foreign exchange dealer; or reporting and reviewing trading exchange dealer is a Material Affiliated
(3) For long options, the full premium activities in forex transactions, Person shall involve consideration of all
charged and received by the futures securities, futures contracts, commodity aspects of the activities of, and the
commission merchant or retail foreign options, forward contracts and financial relationship between, both entities,
exchange dealer. instruments; policies for hedging or including without limitation, the
(b) A futures commission merchant or managing risks created by trading following factors:
retail foreign exchange dealer is activities or supervising accounts (i) The legal relationship between the
required to collect additional security carried for affiliates, including a retail foreign exchange dealer and the
deposits from a retail forex customer or description of the types of reviews affiliated person;
liquidate the retail forex customer’s conducted to monitor positions; and (ii) The overall financing
positions if the amount of the retail policies relating to restrictions or requirements of the retail foreign
forex customer’s security deposits limitations on trading activities: exchange dealer and the affiliated
maintained with the futures commission Provided, however, that if the retail person, and the degree, if any, to which
merchant or retail foreign exchange foreign exchange dealer has no such the retail foreign exchange dealer and
dealer are not sufficient to meet the written policies, procedures or systems, the affiliated person are financially
requirements in paragraph (a) of this it must so state in writing; dependent on each other;
section. (iii) Fiscal year-end consolidated and (iii) The degree to which the retail
consolidating balance sheets for the foreign exchange dealer and the
§ 5.10 Risk assessment recordkeeping highest level Material Affiliated Person affiliated person directly or indirectly
requirements for retail foreign exchange within the retail foreign exchange engage in over-the-counter transactions
dealers. dealer’s organizational structure, which with each other;
(a) Requirement to maintain and shall include the retail foreign exchange (iv) The degree, if any, to which the
preserve information. (1) Each retail dealer and its other Material Affiliated retail foreign exchange dealer or its
foreign exchange dealer registered with Persons, prepared in accordance with customers rely on the affiliated person
the Commission pursuant to section generally accepted accounting for operational support or services in
2(c)(2)(B)(i)(II)(gg) of the Act shall principles, which consolidated balance connection with the retail foreign
prepare, maintain and preserve the sheets shall be audited by an exchange dealer’s business;
following information: independent certified public accountant (v) The level of market, credit or other
(i) An organizational chart which if an annual audit is performed in the risk present in the activities of the
includes the retail foreign exchange ordinary course of business, but which affiliated person; and
dealer and each of its affiliated persons. otherwise may be unaudited, and which (vi) The extent to which the affiliated
Included in the organizational chart shall include appropriate explanatory person has the authority or the ability to
shall be a designation of which affiliated notes. The consolidating balance sheets cause a withdrawal of capital from the
persons are ‘‘Material Affiliated Persons’’ may be those prepared by the retail retail foreign exchange dealer.
as that term is used in paragraph (a)(2) foreign exchange dealer’s highest level (3) For purposes of this section and
of this section, which Material Affiliated Material Affiliated Person as part of its § 5.11 of this part, the term Material
Persons file routine financial or risk internal financial reporting process. Any Affiliated Person does not include a
exposure reports with the Securities and additional information required to be natural person.
Exchange Commission, a federal filed under § 5.11(a)(2)(iii) of this part (4) The information, reports and
banking agency, an insurance shall also be maintained and preserved; records required by this section shall be
commissioner or other similar official or and maintained and preserved, and made
agency of a state, or a foreign regulatory (iv) Fiscal year-end consolidated and readily available for inspection, in
authority, and which Material Affiliated consolidating income statements and accordance with the provisions of § 1.31
Persons are dealers in financial consolidated cash flow statements for of this chapter.
instruments with off-balance sheet risk the highest level Material Affiliated (b) Special provisions with respect to
and, if a Material Affiliated Person is Person within the retail foreign Material Affiliated Persons subject to
such a dealer, whether it is also an end- exchange dealer’s organizational the supervision of certain domestic
user of such instruments; structure, which shall include the retail regulators. A retail foreign exchange
(ii) Written policies, procedures, or foreign exchange dealer and its other dealer shall be deemed to be in
systems concerning the retail foreign Material Affiliated Persons, prepared in compliance with the recordkeeping
exchange dealer’s: accordance with generally accepted requirements of paragraphs (a)(1)(i), (iii)
and (iv) of this section with respect to available, for inspection by the maintaining the records shall file with
a Material Affiliated Person if: Commission in accordance with the the Commission a written undertaking,
(1) The Material Affiliated Person is provisions of this section copies of any in a form acceptable to the Commission,
required to maintain and preserve financial or risk exposure reports filed signed by a duly authorized person, to
information pursuant to § 240.17h–1T of by such Material Affiliated Person with the effect that the records will be treated
this title, or such other risk assessment a foreign futures authority or other as if the retail foreign exchange dealer
regulations as the Securities and foreign regulatory authority, provided were maintaining the records pursuant
Exchange Commission may adopt, and that: to this section and that the entity
the retail foreign exchange dealer (i) The retail foreign exchange dealer maintaining the records will permit
maintains and makes available for agrees to use its best efforts to obtain examination of such records at any time,
inspection by the Commission in from the Material Affiliated Person and or from time to time during business
accordance with the provisions of this to cause the Material Affiliated Person hours, by representatives or designees of
section copies of the records and reports to provide, directly or through its the Commission and promptly furnish
maintained and filed on Form 17–H (or foreign futures authority or other foreign the Commission representative or its
such other forms or reports as may be regulatory authority, any supplemental designee true, correct, complete and
required) by the Material Affiliated information the Commission may current hard copy of all or any part of
Person with the Securities and request and there is no statute or other such records. The election to maintain
Exchange Commission pursuant to bar in the foreign jurisdiction that records at the principal place of
§§ 240.17h–1T and 240.17h–2T of this would preclude the retail foreign business of the Material Affiliated
title, or such other risk assessment exchange dealer, the Material Affiliated Person or at a records storage facility
regulations as the Securities and Person, the foreign futures authority or pursuant to the provisions of this
Exchange Commission may adopt; other foreign regulatory authority from paragraph shall not relieve the retail
(2) In the case of a Material Affiliated providing such information to the foreign exchange dealer required to
Person (including a foreign banking Commission; or maintain and preserve such records
organization) that is subject to (ii) The foreign futures authority or from any of its responsibilities under
examination by, or the reporting other foreign regulatory authority with this section or § 5.11 of this part.
requirements of, a Federal banking whom the Material Affiliated Person (f) Confidentiality. All information
agency, the retail foreign exchange files such reports has entered into an obtained by the Commission pursuant to
dealer or such Material Affiliated Person information-sharing agreement with the the provisions of this section from a
maintains and makes available for Commission which is in effect as of the retail foreign exchange dealer
inspection by the Commission in retail foreign exchange dealer’s fiscal concerning a Material Affiliated Person
accordance with the provisions of this year-end and which will allow the shall be deemed confidential
section copies of all reports submitted Commission to obtain the type of information for the purposes of section
by such Material Associated Person to information required herein. 8 of the Act.
the Federal banking agency pursuant to (2) The retail foreign exchange dealer (g) Implementation schedule. Each
section 5211 of the Revised Statutes, shall maintain a copy of the original retail foreign exchange dealer who is
section 9 of the Federal Reserve Act, report and a copy translated into the subject to the requirements of this
section 7(a) of the Federal Deposit English language. For the purposes of section shall maintain and preserve the
Insurance Act, section 10(b) of the this section, the term ‘‘Foreign Futures information required by paragraphs
Home Owners’ Loan Act, or section 5 of Authority’’ shall have the meaning set (a)(1)(i) and (ii) of this section
the Bank Holding Company Act of 1956; forth in section 1a(10) of the Act. commencing 60 calendar days after
or (d) Exemptions. The Commission may
registration becomes effective and the
(3) In the case of a Material Affiliated exempt any retail foreign exchange
information required by paragraphs
Person that is subject to the supervision dealer from any provision of this section
(a)(1)(iii) and (iv) of this section
of an insurance commissioner or other if it finds that the exemption is not
commencing 105 calendar days
similar official or agency of a state, the contrary to the public interest and the
following the first fiscal year-end
retail foreign exchange dealer or such purposes of the provisions from which
occurring after registration becomes
Material Affiliated Person maintains the exemption is sought. The
effective.
and makes available for inspection by Commission may grant the exemption
the Commission in accordance with the subject to such terms and conditions as § 5.11 Risk assessment reporting
provisions of this section copies of the it may find appropriate. requirements for retail foreign exchange
annual statements with schedules and (e) Location of records. A retail dealers.
exhibits prepared by the Material foreign exchange dealer required to (a) Reporting requirements with
Affiliated Person on forms prescribed by maintain records concerning Material respect to information required to be
the National Association of Insurance Affiliated Persons pursuant to this maintained by section 5.10 of this part.
Commissioners or by a state insurance section may maintain those records (1) Each retail foreign exchange dealer
commissioner. either at the principal office of the registered with the Commission
(c)(1) Special provisions with respect Material Affiliated Person or at a records pursuant to Section 2(c)(2)(B)(i)(II)(gg)
to Material Affiliated Persons subject to storage facility, provided that, except as of the Act shall file the following with
the supervision of a Foreign Regulatory set forth in paragraph (c) of this section, the regional office of the Commission
Authority. A retail foreign exchange the records are located within the with which it files periodic financial
dealer shall be deemed to be in boundaries of the United States and the reports within 60 calendar days after the
compliance with the recordkeeping records are kept and available for effective date of such registration:
requirements of paragraphs (a)(1)(iii) inspection in accordance with § 1.31 of (i) A copy of the organizational chart
and (iv) of this section with respect to this chapter. If such records are maintained by the retail foreign
a Material Affiliated Person if such maintained at a place other than the exchange dealer pursuant to
retail foreign exchange dealer maintains retail foreign exchange dealer’s § 5.10(a)(l)(i) of this part. Where there is
and makes available, or causes such principal place of business, the Material a material change in information
Material Affiliated Person to make Affiliated Person or other entity provided, an updated organizational
chart shall be filed within sixty calendar statements may be those prepared by the requirements of, a Federal banking
days after the end of the fiscal quarter retail foreign exchange dealer’s highest agency, the retail foreign exchange
in which the change has occurred; and level Material Affiliated Person as part dealer shall be deemed to be in
(ii) Copies of the financial, of its internal financial reporting compliance with the reporting
operational, and risk management process; and requirements of paragraph (a)(2) of this
policies, procedures and systems (iii) Upon receiving written notice section with respect to such Material
maintained by the retail foreign from any representative of the Affiliated Person if the retail foreign
exchange dealer pursuant to Commission and within the time period exchange dealer or such Material
§ 5.10(a)(l)(ii) of this part. If the retail specified in the written notice, such Affiliated Person maintains in
foreign exchange dealer has no such additional information which the accordance with § 5.10 of this part
written policies, procedures or systems, Commission determines is necessary for copies of all reports filed by the Material
it must file a statement so indicating. a complete understanding of a particular Affiliated Person with the Federal
Where there is a material change in affiliate’s financial impact on the retail banking agency pursuant to section
information provided, such change shall foreign exchange dealer’s organizational 5211 of the Revised Statutes, section 9
be reported within sixty calendar days structure. of the Federal Reserve Act, section 7(a)
after the end of the fiscal quarter in (3) For the purposes of this section, of the Federal Deposit Insurance Act,
which the change has occurred. the term Material Affiliated Person shall section 10(b) of the Home Owners’ Loan
(2) Each retail foreign exchange dealer have the meaning used in § 5.10 of this Act, or section 5 of the Bank Holding
registered with the Commission part. Company Act of 1956.
pursuant to section 2(c)(2)(B)(i)(II)(gg) of (4) The reports required to be filed (3) In the case of a retail foreign
the Act shall file the following with the pursuant to paragraphs (a)(1) and (2) of exchange dealer that has a Material
regional office with which it files this section shall be considered filed Affiliated Person that is subject to the
periodic financial reports within 105 when received by the regional office of supervision of an insurance
calendar days after the end of each fiscal the Commission with whom the retail commissioner or other similar official or
year or, if a filing is made pursuant to foreign exchange dealer files financial agency of a state, such retail foreign
a written notice issued under paragraph reports pursuant to § 5.12 of this part. exchange dealer shall be deemed to be
(a)(2)(iii) of this section, within the time (b) Exemptions. The Commission may in compliance with the reporting
period specified in the written notice: exempt any retail foreign exchange requirements of paragraph (a)(2) of this
(i) Fiscal year-end consolidated and dealer from any provision of this section section with respect to the Material
consolidating balance sheets for the if it finds that the exemption is not Affiliated Person if:
highest level Material Affiliated Person contrary to the public interest and the (i) With respect to a Material
within the retail foreign exchange purposes of the provisions from which Affiliated Person organized as a mutual
dealer’s organizational structure, which the exemption is sought. The insurance company or a non-public
shall include the retail foreign exchange Commission may grant the exemption stock company, the retail foreign
dealer and its other Material Affiliated subject to such terms and conditions as exchange dealer or such Material
Persons, prepared in accordance with it may find appropriate. Affiliated Person maintains in
generally accepted accounting (c) Special provisions with respect to accordance with § 5.14 of this part
principles, which consolidated balance Material Affiliated Persons subject to copies of the annual statements with
sheets shall be audited by an the supervision of certain domestic schedules and exhibits prepared by the
independent certified public accountant regulators. (1) In the case of a Material Material Affiliated Person on forms
if an annual audit is performed in the Affiliated Person that is required to prescribed by the National Association
ordinary course of business, but which maintain and preserve information of Insurance Commissioners or by a
otherwise may be unaudited, and which pursuant to section 240.17h–1T of this state insurance commissioner; and
consolidated balance sheets shall title, or such other risk assessment (ii) With respect to a Material
include appropriate explanatory notes. regulations as the Securities and Affiliated Person organized as a public
The consolidating balance sheets may Exchange Commission may adopt, the stock company, the retail foreign
be those prepared by the retail foreign retail foreign exchange dealer shall be exchange dealer or such Material
exchange dealer’s highest level Material deemed to be in compliance with the Affiliated Person maintains, in addition
Affiliated Person as part of its internal reporting requirements of paragraph to the annual statements with schedules
financial reporting process; (a)(2) of this section with respect to such and exhibits required to be maintained
(ii) Fiscal year-end annual Material Affiliated Person if the retail pursuant to § 1.14 of this chapter, copies
consolidated and consolidating income foreign exchange dealer maintains and of the filings made by the Material
statements and consolidated cash flow makes available for inspection by the Affiliated Person pursuant to sections
statements for the highest level Material Commission in accordance with the 13 or 15 of the Securities Exchange Act
Affiliated Person within the retail provisions of this section copies of the of 1934 and the Investment Company
foreign exchange dealer’s organizational records and reports maintained and Act of 1940.
structure, which shall include the retail filed on Form 17–H (or such other forms (4) No retail foreign exchange dealer
foreign exchange dealer and its other or reports as may be required) by the shall be required to furnish to the
Material Affiliated Persons, prepared in Material Affiliated Person with the Commission any examination report of
accordance with generally accepted Securities and Exchange Commission any Federal banking agency or any
accounting principles, which pursuant to §§ 240.17h–1T and supervisory recommendations or
consolidated statements shall be audited 240.17h–2T of this title, or such other analyses contained therein with respect
by an independent certified public risk assessment regulations as the to a Material Affiliated Person that is
accountant if an annual audit is Securities and Exchange Commission subject to the regulation of a Federal
performed in the ordinary course of may adopt; banking agency. All information
business, but which otherwise may be (2) In the case of a Material Affiliated received by the Commission pursuant to
unaudited, and which consolidated Person (including a foreign banking this section concerning a Material
statements shall include appropriate organization) that is subject to Affiliated Person that is subject to
explanatory notes. The consolidating examination by, or the reporting examination by or the reporting
requirements of a Federal banking (f) Implementation schedule. Each dealer with the National Futures
agency shall be deemed confidential for retail foreign exchange dealer who is Association must be filed electronically
the purposes of section 8 of the Act. subject to the requirements of this in accordance with electronic filing
(5) The furnishing of any information section shall file the information procedures established by the National
or documents by a retail foreign required by paragraph (a)(1) of this Futures Association, however a paper
exchange dealer pursuant to this section section within 60 calendar days after copy of any such filing with the original
shall not constitute an admission for registration is granted, and the manually signed certification must be
any purpose that a Material Affiliated information required by paragraph (a)(2) maintained by the applicant for
Person is otherwise subject to the Act. of this section within 105 calendar days registration as a retail foreign exchange
(d) Special provisions with respect to after registration is granted. dealer in accordance with § 1.31.
Material Affiliated Persons subject to (c) Each Form 1–FR–FCM required by
§ 5.12 Financial reports of retail foreign the provisions of paragraphs (a)(1) and
the supervision of a Foreign Regulatory exchange dealers.
Authority. A retail foreign exchange (b)(2) of this section to be certified by
dealer shall be deemed to be in (a)(1) Each person who files an an independent public accountant must
compliance with the reporting application for registration as a retail be certified in accordance with § 1.16 of
requirements of paragraph (a)(2) of this foreign exchange dealer with the this chapter, and must be accompanied
section with respect to a Material National Futures Association shall by the accountant’s report on material
Affiliated Person if such retail foreign submit, concurrently with the filing of inadequacies in accordance with the
exchange dealer furnishes, or causes such application, either: provisions of § 1.16(c)(5) of this chapter.
(i) A Form 1–FR–FCM certified by an In all other respects, the independent
such Material Affiliated Person to make
independent public accountant as of a public accountant shall act in
available, in accordance with the
date not more than 45 days prior to the accordance with the provisions of § 1.16
provisions of this section, copies of any
date on which such report is filed; or (except paragraph (f)) of this chapter:
financial or risk exposure reports filed (ii) A Form 1–FR–FCM as of a date
by such Material Affiliated Person with Provided, however, that the term ‘‘§ 5.7’’
not more than 17 business days prior to shall be substituted for the term ‘‘§ 1.17,’’
a foreign futures authority or other the date on which such report is filed
foreign regulatory authority, provided and the term ‘‘retail foreign exchange
and a Form 1–FR–FCM certified by an dealer’’ shall be substituted for the term
that: independent public accountant as of a
(1) The retail foreign exchange dealer ‘‘futures commission merchant.’’
date not more than one year prior to the (d) Upon receiving written notice
agrees to use its best efforts to obtain date on which such report is filed. from any representative of the
from the Material Affiliated Person and (2) Each such person must include Commission, National Futures
to cause the Material Affiliated Person with such financial report a statement Association, or any self-regulatory
to provide, directly or through its describing the source of his current organization of which the firm is a
foreign futures authority or other foreign assets and representing that his capital member, a retail foreign exchange dealer
regulatory authority, any supplemental has been contributed for the purpose of or applicant for such registration, must,
information the Commission may operating his business and will continue monthly or at such times as specified,
request and there is no statute or other to be used for such purpose. furnish the Commission, National
bar in the foreign jurisdiction that (3) The provisions of paragraph (a)(1) Futures Association, or self-regulatory
would preclude the retail foreign of this section do not apply to any organization a Form 1–FR–FCM or such
exchange dealer, the Material Affiliated person succeeding to and continuing the other financial information requested in
Person, the foreign futures authority or business of another retail foreign the written notice. Each such Form 1–
other foreign regulatory authority from exchange dealer. FR–FCM or such other information must
providing such information to the (b)(1) Each person registered as a be furnished within the time period
Commission; or retail foreign exchange dealer must file specified in the written notice, and in
(2) The foreign futures authority or a Form 1–FR–FCM as of the close of accordance with the provisions of
other foreign regulatory authority with business each month. Each Form 1–FR paragraph (i) of this section.
whom the Material Affiliated Person must be filed no later than 17 business (e)(1) Each Form 1–FR–FCM filed
files such reports has entered into an days after the date for which the report pursuant to this § 5.12 which is not
information sharing agreement with the is made. required to be certified by an
Commission which is in effect as of the (2) In addition to the monthly independent public accountant must be
retail foreign exchange dealer’s fiscal financial reports required by paragraph completed in accordance with the
year-end and which will allow the (b)(1) of this section, each person instructions to the form and contain:
Commission to obtain the type of registered as a retail foreign exchange (i) A statement of financial condition
information required herein. The retail dealer must file a Form 1–FR–FCM as of as of the date for which the report is
foreign exchange dealer shall file a copy the close of its fiscal year, which must made;
of the original report and a copy be certified by an independent public (ii) A statement of income (loss) for
translated into the English language. For accountant and must be filed no later the period between the date of the most
the purposes of this section, the term than 90 days after the close of the retail recent statement of financial condition
‘‘Foreign Futures Authority’’ shall have foreign exchange dealer’s fiscal year. filed with the Commission and the date
the meaning set forth in section 1a(10) (3) A Form 1–FR–FCM required to be for which the report is made;
of the Act. certified by an independent public (iii) A statement of changes in
(e) Confidentiality. All information accountant which is filed by a retail ownership equity for the period
obtained by the Commission pursuant to foreign exchange dealer must be filed in between the date of the most recent
the provisions of this section from a paper form and may not be filed statement of financial condition filed
retail foreign exchange dealer electronically with the Commission. A with the Commission and the date for
concerning a Material Associated Person Form 1–FR–FCM required to be certified which the report is made;
shall be deemed confidential by an independent public accountant (iv) A statement of changes in
information for the purposes of section which is filed by an applicant for liabilities subordinated to claims of
8 of the Act. registration as a retail foreign exchange general creditors for the period between
the date of the most recent statement of financial condition is presented in a the filing by the registrant of a copy
financial condition filed with the format as consistent as possible with the with the Commission, and a written
Commission and the date for which the Form 1–FR–FCM and a reconciliation is notice of denial shall be effective as of
report is made; provided reconciling such statement of the date of the notice.
(v) A statement of the computation of financial condition to the statement of (g) In the event a retail foreign
the minimum capital requirements the computation of the minimum capital exchange dealer or applicant for
pursuant to § 5.7 of this part as of the requirements pursuant to § 5.7 of this registration as a retail foreign exchange
date for which the report is made; and part. Such reconciliation must be dealer finds that it cannot file its Form
(vi) In addition to the information certified by an independent public 1–FR–FCM for any period within the
expressly required, such further accountant in accordance with § 1.16 of time specified in paragraph (b)(1) or (2)
material information as may be this chapter. of this section without substantial
necessary to make the required (4) Attached to each Form 1–FR–FCM undue hardship, it may request
statements and schedules not filed pursuant to this section must be an approval for an extension of time by
misleading. oath or affirmation that to the best filing an application for an extension of
(2) Each Form 1–FR–FCM filed knowledge and belief of the individual time with, in the case of a registrant, its
pursuant to this § 5.12 which is required making such oath or affirmation the designated self-regulatory organization,
to be certified by an independent public information contained in the Form or, in the case of an applicant, the
accountant must be completed in 1–FR–FCM is true and correct. The National Futures Association. The
accordance with the instructions to the individual making such oath or registrant or applicant also must file a
form and contain: affirmation must be: If the registrant or copy of its application for an extension
(i) A statement of financial condition applicant is a sole proprietorship, the of time with the Commission. The
as of the date for which the report is proprietor; if a partnership, any general application shall be approved or denied
made; partner; if a corporation, the chief in writing by the National Futures
(ii) Statements of income (loss), cash executive officer or chief financial Association or designated self-
flows, changes in ownership equity, and officer; and, if a limited liability regulatory organization, as applicable.
changes in liabilities subordinated to company or limited liability The registrant or applicant must file
claims of general creditors, for the partnership, the chief executive officer, immediately with the Commission a
period between the date of the most the chief financial officer, the manager, copy of any notice it receives approving
recent certified statement of financial the managing member, or those or denying the request for extension of
condition filed with the Commission members vested with the management time. A written notice of approval shall
and the date for which the report is authority for the limited liability become effective upon the filing by the
made: Provided, That for an applicant company or limited liability registrant or applicant of a copy with
filing pursuant to paragraph (a) of this partnership. the Commission, and a written notice of
section the period must be the year (f) Election of fiscal year. (1) An denial shall be effective as of the date
ending as of the date of the statement of applicant wishing to establish a fiscal of the notice.
financial condition; year other than the calendar year may (h) Public availability of reports. (1)
(iii) A statement of the computation of do so by notifying the National Futures Forms 1–FR–FCM filed pursuant to this
the minimum capital requirements Association of its election of such fiscal section will be treated as exempt from
pursuant to § 5.7 of this part as of the year, in writing, concurrently with the mandatory public disclosure for
date for which the report is made; filing of the Form 1–FR–FCM pursuant purposes of the Freedom of Information
(iv) Appropriate footnote disclosures; to paragraph (a)(1) of this section, but in Act and the Government in the
(v) A reconciliation, including no event may such fiscal year end more Sunshine Act and parts 145 and 147 of
appropriate explanations, of the than one year from the date of the Form this chapter, except for the information
statement of the computation of the 1–FR–FCM filed pursuant to paragraph described in paragraph (i)(2) of this
minimum capital requirements pursuant (a)(1) of this section. An applicant that section.
to § 5.7 of this part, in the certified Form does not so notify the National Futures (2) The following information in
1–FR–FCM with the applicant’s or Association will be deemed to have Forms 1–FR–FCM will be publicly
registrant’s corresponding uncertified elected the calendar year as its fiscal available:
most recent Form 1–FR–FCM filing year. (i) The amount of the applicant’s or
when material differences exist or, if no (2)(i) A registrant must continue to registrant’s adjusted net capital; the
material differences exist, a statement so use its elected fiscal year, calendar or amount of its minimum net capital
indicating; and otherwise, unless a change in such fiscal requirement under § 5.7 of this chapter;
(vi) In addition to the information year has been approved pursuant to this the amount of its adjusted net capital in
expressly required, such further paragraph (f)(2). excess of its minimum net capital
material information as may be (ii) A registrant may file with its requirement; and the amount of the
necessary to make the required designated self-regulatory organization retail forex obligation owed to its retail
statements not misleading. an application to change its fiscal year, forex customers; and
(3) The statements required by a copy of which the registrant must file (ii) The Statement of Financial
paragraphs (e)(2)(i) and (ii) of this with the Commission. The application Condition and the opinion of the
section may be presented in accordance shall be approved or denied in writing independent public accountant in the
with generally accepted accounting by the registrant’s designated self- certified annual financial reports of
principles in the certified reports filed regulatory organization. The registrant retail foreign exchange dealers.
as of the close of the registrant’s fiscal must file immediately with the (3) All information that is exempt
year pursuant to paragraph (b)(2) of this Commission a copy of any notice it from mandatory public disclosure under
section or accompanying the application receives from its designated self- paragraph (h)(1) of this section will,
for registration pursuant to paragraph regulatory organization to approve or however, be available for official use by
(a)(1) of this section, rather than in the deny the registrant’s application to any official or employee of the United
format specifically prescribed by these change its fiscal year. A written notice States or any State, by the National
regulations: Provided, the statement of of approval shall become effective upon Futures Association or any other self-
regulatory organization of which the affirmation referred to in paragraph (b) Confirmation statement. Each
person filing such report is a member, (e)(4) of this section. retail foreign exchange dealer or futures
and by any other person to whom the § 5.13 Reporting to customers of retail commission merchant must, not later
Commission believes disclosure of such foreign exchange dealers and futures than the next business day after any
information is in the public interest. commission merchants; monthly and retail forex or forex option transaction,
Nothing in this paragraph (h) will limit confirmation statements. furnish:
the authority of any self-regulatory (a) Monthly statements. Each retail (1) To each retail forex customer, a
organization to request or receive any foreign exchange dealer or futures written confirmation of each retail forex
information relative to its members’ commission merchant must promptly transaction caused to be executed by it
financial condition. furnish in writing to each retail forex for the customer, including offsetting
(i)(1) In the case of an applicant, all customer, as of the close of the last transactions executed during the same
filings or other notices provided for in business day of each month or as of any business day and the rollover of an open
this section will be considered filed regular monthly date selected, except retail forex transaction to the next
when received by the regional office of for accounts in which there are neither business day.
the Commission with jurisdiction over open positions at the end of the (2) To each retail forex customer
the state in which the applicant’s statement period nor any changes to the engaging in forex option transactions, a
principal place of business is located account balance since the prior written confirmation of each forex
and by the National Futures statement period, but in any event not option transaction, containing at least
Association. In the case of a registrant, less frequently than once every three the following information:
all filings or other notices provided for months, a statement which clearly (i) The retail forex customer’s account
in this section will be considered filed shows: identification number;
when received by the regional office of (1) For each retail forex customer: (ii) A separate listing of the actual
the Commission with jurisdiction over (i) The open retail forex transactions amount of the premium, as well as each
the state in which the registrant’s with prices at which acquired; mark-up thereon, if applicable, and all
principal place of business is located (ii) The net unrealized profits or other commissions, costs, fees and other
and by the registrant’s designated self- losses in all open retail forex charges incurred in connection with the
regulatory organization. Any copy that transactions marked to the market; and forex option transaction;
(iii) The strike price;
under paragraph (f)(2) or (g) is required (iii) Any money, securities or other
(iv) The underlying retail forex
to be filed with the Commission shall be property carried with the retail foreign
transaction or underlying currency;
filed with the regional office of the exchange dealer or futures commission (v) The final exercise date of the forex
Commission with jurisdiction over the merchant; and option purchased or sold; and
state in which the registrant’s principal (iv) A detailed accounting of all (vi) The date the forex option
place of business is located. financial charges and credits to such transaction was executed.
(2) All filings or other notices filed retail forex accounts during the monthly (3) To each retail forex customer
pursuant to this section which need not reporting period, including money, engaging in forex option transactions,
be certified in accordance with § 1.16 securities or property received from or upon the expiration or exercise of any
may be submitted to the Commission in disbursed to such customer and realized forex option, a written confirmation
electronic form using a form of user profits and losses; and statement thereof, which statement shall
authentication assigned in accordance (2) For each retail forex customer include the date of such occurrence, a
with procedures established by or engaging in forex option transactions: description of the forex option involved,
approved by the Commission, and (i) All forex options purchased, sold, and, in the case of exercise, the details
otherwise in accordance with exercised, or expired during the of the retail forex or physical currency
instructions issued by or approved by monthly reporting period, identified by position which resulted therefrom
the Commission, if the retail foreign underlying retail forex transaction or including, if applicable, the final trading
exchange dealer or a designated self underlying currency, strike price, date of the retail forex transaction
regulatory organization has provided the transaction date, and expiration date; underlying the option.
Commission with the means necessary (ii) The open forex option positions (4) Notwithstanding the provisions of
to read and to process the information carried for such customer as of the end paragraphs (b)(1) through (3) of this
contained in such report. Any such of the monthly reporting period, section, a retail forex transaction or
electronic submission must clearly identified by underlying retail forex forex option transaction that is caused
indicate the registrant or applicant on transaction or underlying currency, to be executed for a pooled investment
whose behalf such filing is made and strike price, transaction date, and vehicle that engages in retail forex
the use of such user authentication in expiration date; transactions need be confirmed only to
submitting such filing will constitute (iii) All open forex option positions the operator of such pooled investment
and become a substitute for the manual marked to the market and the amount vehicle.
signature of the authorized signer. In the each position is in the money, if any; (c) Controlled accounts. With respect
case of a Form 1–FR filed via electronic (iv) Any money, securities or other to any account controlled by any person
transmission in accordance with property carried with the retail foreign other than the retail forex customer or
procedures established by or approved exchange dealer or futures commission forex option customer for whom such
by the Commission, such transmission merchant; and account is carried, each retail foreign
must be accompanied by the user (v) A detailed accounting of all exchange dealer or futures commission
authentication assigned to the financial charges and credits to such merchant shall promptly furnish in
authorized signer under such retail forex account(s) during the writing to such other person the
procedures, and the use of such user monthly reporting period, including information required by paragraphs (a)
authentication will constitute and money, securities and property received and (b) of this section.
become a substitute for the manual from or disbursed to such customer, (d) Recordkeeping. Each retail foreign
signature of the authorized signer for the premiums charged and received, and exchange dealer or futures commission
purpose of making the oath or realized profits and losses. merchant shall retain, in accordance
with § 1.31 of this chapter, a copy of § 5.14 Records to be kept by retail foreign (1) Guarantee such person against
each monthly statement and exchange dealers and futures commission loss;
confirmation required by this section. merchants. (2) Limit the loss of such person; or
(e) Introduced accounts. Each (a) No person shall be registered as a (3) Not call for or attempt to collect
statement provided pursuant to the retail foreign exchange dealer under the security deposits, margin, or other
provisions of this section must, if Act unless, commencing on the date his deposits as established for retail forex
applicable, show that the account for application for such registration is filed, customers.
which the retail foreign exchange dealer he prepares and keeps current ledgers or (b) No person may in any way
or futures commission merchant is other similar records which show or represent that a retail foreign exchange
providing the statement was introduced summarize, with appropriate references dealer, futures commission merchant or
by an introducing broker and the names to supporting documents, each introducing broker will engage in any of
of the retail foreign exchange dealer or transaction affecting his asset, liability, the acts or practices described in
futures commission merchant and income, expense and capital accounts, paragraph (a) of this section.
introducing broker. and in which (except as otherwise (c) This section shall not be construed
(g) Electronic transmission of permitted in writing by the to prevent a retail foreign exchange
statements. (1) The statements required Commission) all his asset, liability and dealer, futures commission merchant or
by this section may be furnished to a capital accounts are classified into introducing broker from assuming or
retail forex customer by means of either the account classification sharing in the losses resulting from an
electronic media if the retail forex subdivisions specified on Form 1–FR– error or mishandling of an order.
customer so consents, Provided, FCM or categories that are in accord (d) This section shall not affect any
however, that a retail foreign exchange with generally accepted accounting guarantee entered into prior to [effective
dealer or futures commission merchant principles as applicable. Each person so date of final rule], but this section shall
must, prior to the transmission of any registered shall prepare and keep apply to any extension, modification or
statement by means of electronic media, current such records. renewal thereof entered into after such
disclose the electronic medium or (b) Each applicant or registrant must date.
source through which statements will be make and keep as a record in
accordance with § 1.31 of this chapter § 5.17 Authorization to trade.
delivered, the duration, whether
formal computations of its adjusted net No retail foreign exchange dealer,
indefinite or not, of the period during
capital and of its minimum financial futures commission merchant,
which consent will be effective, any
requirements pursuant to § 1.17 or § 5.7 introducing broker or any of their
charges for such service, the information
of this chapter, or the requirements of associated persons may directly or
that will be delivered by such means,
the designated self-regulatory indirectly effect a retail forex
and that consent to electronic delivery
organization to which it is subject, as transaction for the account of any
may be revoked at any time, and
applicable, as of the close of business customer unless before the transaction
provided, further, that a retail foreign
each month. Such computations must the customer, or person designated by
exchange dealer or futures commission
be completed and made available for the customer to control the account
merchant must obtain the retail forex
inspection by any representative of the specifically authorized the retail foreign
customer’s signed consent
National Futures Association, in the exchange dealer, futures commission
acknowledging such disclosure prior to
case of an applicant, or of the merchant, introducing broker or any of
the transmission of any statement by
Commission or designated self- their associated persons to effect the
means of electronic media.
regulatory organization, if any, in the transaction. A transaction is
(2) Any statement required to be
case of a registrant, within 17 business ‘‘specifically authorized’’ if the customer
furnished to a person other than a retail
days after the date for which the or person designated by the customer to
forex customer in accordance with
computations are made, commencing control the account specifies:
paragraph (g) of this section may be
the first month end after the date the (a) The precise retail forex transaction
furnished by electronic media.
application for registration is filed. to be effected;
(3) A retail foreign exchange dealer or (b) The exact amount of the foreign
futures commission merchant who § 5.15 Unlawful representations. currency to be purchased or sold; and
furnishes statements to a retail forex It shall be unlawful for any person (c) In the case of an option, the
customer by means of electronic media registered pursuant to the requirements identity of the foreign currency or
must retain a daily confirmation of this part to represent or imply in any contract that underlies the option.
statement for such retail forex customer manner whatsoever that such person
as of the end of the trading session, has been sponsored, recommended or § 5.18 Trading and operational standards.
reflecting all transactions made during approved, or that its abilities or (a) For purposes of this section:
that session for the customer, in qualifications have been reviewed or (1) The term retail forex counterparty
accordance with § 1.31 of this chapter. evaluated, by the Commission, the includes, as appropriate:
(h) Combination with other Federal government or any agency (i) A retail foreign exchange dealer as
statements. Any futures commission thereof. defined in § 5.1 of this part;
merchant required to deliver statements (ii) A futures commission merchant as
to retail forex customers in accordance § 5.16 Prohibition of guarantees against defined in section 1a(20) of the Act; and
with § 1.33 of this chapter may combine loss. (iii) An affiliated person of a futures
into one monthly statement or (a) No retail foreign exchange dealer, commission merchant as defined in
confirmation statement, as the case may futures commission merchant or § 5.1 of this part.
be, the information required by this introducing broker may in any way (2) The term related person when
section and the information required by represent that it will, with respect to used in reference to a retail forex
§ 1.33, provided that retail forex account any retail foreign exchange transaction counterparty means any general partner,
information is separately identified from in any account carried by a retail foreign officer, director, owner of more than ten
any other trading or account activity of exchange dealer or futures commission percent of the equity interest, associated
the retail forex customer. merchant for or on behalf of any person: person or employee of the retail forex
counterparty, and any relative or spouse (I) If a trading platform is used, the copies of all statements for such account
of any of the foregoing persons, or any date and time the order is transmitted to and of all written records prepared upon
relative of such spouse, who shares the the trading platform; the receipt of orders for such account
same home as any of the foregoing (J) If a trading platform is used, the pursuant to paragraph (b)(2) of this
persons. date and time the order is executed; section.
(b) Prior to engaging in a retail forex (K) The size and price at which the (e) No related person of a retail forex
transaction, each retail forex order is executed, or in the case of an counterparty shall have an account,
counterparty shall, at a minimum, option, the amount of the premium paid directly or indirectly, with another retail
establish and enforce internal rules, for each option purchased, or the forex counterparty unless:
procedures and controls to: amount credited for each option sold; (1) It receives written authorization to
(1) Ensure, to the extent possible, that and maintain such an account from a person
each order received from a retail forex (L) For options, whether the option is designated by the retail forex
customer which order is executable at or a put or call, the strike price, and counterparty of which it is a related
near the price that the retail forex expiration date. person with responsibility for the
counterparty has quoted to the customer (ii) Account records that contain the surveillance over such account pursuant
is entered for execution before any order following information: to paragraph (b)(2) of this section; and
(A) The funds in the account, net of (2) Copies of all statements for such
in any retail forex transaction for any
any commissions and fees; account and of all written records
proprietary account, any other account
(B) The net profits and losses on open prepared by such other retail forex
in which a related person of the retail
trades; and counterparty upon receipt of orders for
forex counterparty has an interest, or (C) The funds in the account plus or such account pursuant to paragraph
any account for which such a related minus the net profits and losses on open (d)(2) of this section are transmitted on
person may originate orders without the trades. (In the case of open option a regular basis to the retail forex
prior specific consent of the account positions, the account balance should be counterparty of which it is a related
owner (if such related person has gained adjusted for the net option value); person.
knowledge of the retail forex customer’s (iii) If a trading platform is used, daily (f) No retail forex counterparty shall:
order prior to the transmission of an logs showing each price change on the (1) Enter into a retail forex
order for a proprietary account), an platform, the time of the change to the transaction, to be executed pursuant to
account in which such a related person nearest second, and the trading volume a market or limit order at a price that is
has an interest, or an account in which at that time and price; and not at or near the price at which other
such a related person may originate (iv) Any method or algorithm used to retail forex customers, during that same
orders without the prior specific determine the bid or asked price for any time period, have executed retail forex
consent of the account owner; and retail forex transaction or the prices at transactions with the retail forex
(2) Prevent related persons of forex which customer orders are executed, counterparty; Provided, however, that
counterparties from placing orders, including, but not limited to, any this paragraph (f)(1) shall not prohibit
directly or indirectly, with another markups, fees, commissions or other such practice if done in accordance with
person in a manner designed to items which affect the profitability or the rules of a registered futures
circumvent the provisions of paragraph risk of loss of a retail forex customer’s association, and of which such retail
(b)(1) of this section; transaction. foreign exchange dealer, futures
(3) Fairly and objectively establish (c) No retail forex counterparty shall commission merchant or affiliated
settlement prices for retail forex disclose that an order of another person person of a futures commission
transactions; and is being held by the retail forex merchant is a member;
(4) Record and maintain essential counterparty, unless such disclosure is (2) Adjust or alter prices for a retail
information regarding customer orders necessary to the effective execution of forex transaction after the transaction
and account activity, and to provide such order or is made at the request of has been confirmed to the retail forex
such information to customers upon an authorized representative of the customer; Provided, however, that this
request. Such information shall include: Commission, or a futures association paragraph (f)(2) shall not prohibit such
(i) Transaction records for the registered with the Commission practice if in accordance with the rules
customer’s account, including: pursuant to section 17 of the Act. of a registered futures association, and
(A) The date and time each order is (d) No retail forex counterparty shall of which such retail foreign exchange
received by the retail forex knowingly handle the account of any dealer, futures commission merchant or
counterparty; related person of another retail forex affiliated person of a futures
(B) The price at which each order is counterparty unless it: commission merchant is a member;
placed, or, in the case of an option, the (1) Receives written authorization (3)(i) Provide a retail forex customer
premium paid; from a person designated by such other a new bid price for a retail forex
retail forex counterparty with transaction that is higher than its
(C) If the transaction was entered into
responsibility for the surveillance over previous bid without providing a new
by means of a trading platform, the price
such account pursuant to paragraph asked price that is also higher than its
quoted on the trading platform when the
(b)(2) of this section; previous asked price by a similar
order was placed, or, in the case of an (2) Prepares immediately upon receipt
option, the premium quoted; amount;
of an order for such account a written (ii) Provide a retail forex customer a
(D) The customer account record of such order, including the new bid price for a retail forex
identification information; account identification and order transaction that is lower than its
(E) The currency pair; number, and records thereon to the previous bid without providing a new
(F) The size of the transaction; nearest minute, by time-stamp or other asked price that is also lower than its
(G) Whether the order was a buy or timing device, the date and time the previous asked price by a similar
sell order; order is received; and amount; or
(H) The type of order, if the order was (3) Transmits on a regular basis to (4) Establish a new position for a
not a market order; such other retail forex counterparty retail forex customer (except one that
offsets an existing position for that retail (j) Each retail forex counterparty shall expeditious means to the Commission’s
forex customer) where the retail forex designate one or more principals to headquarters office in Washington, DC,
counterparty holds outstanding orders serve as a chief compliance officer(s). Attention: Director, Division of
of other retail forex customers for the The chief compliance officer(s) shall Enforcement. All documents required
same currency pair at a comparable certify to the Commission and a by this section to be submitted to the
price. registered national futures association Commission as to matters pending on
(g)(1) Each retail forex counterparty annually that the retail forex [effective date of final rule] shall be
and each CPO, CTA and IB subject to counterparty has in place processes to mailed to the Commission within 45
this Part 5 shall maintain a record of all establish, maintain, review, modify and days of that effective date. Thereafter,
communications received by such test policies and procedures reasonably all decisions and notices of appeal
person concerning facts giving rise to designed to achieve compliance with required to be submitted by retail
possible violations of the Act, rules, the Act, rules, regulations and orders foreign exchange dealers, futures
regulations or orders thereunder, related thereunder. The certification shall commission merchants, CPOs, CTAs or
to their retail forex business. The record include a statement that the IBs shall be mailed within 10 days of
shall contain the name of the counterparty has in place compliance the filing or receipt by the retail foreign
complainant, if provided, the date of the processes, and that the chief compliance exchange dealer or futures commission
communication, the agreement, contract officer(s) has apprised the chief merchant of the relevant notice of
or transaction, the substance of the executive officer of the compliance appeal. For purposes of paragraph (a)
communication, and the name of the efforts to date and identify and address and (b) of this section, a ‘‘material legal
person who received the significant compliance problems and proceeding’’ includes but is not limited
communication. plans to address those problems. to actions involving alleged violations of
(2) Each retail forex counterparty and the Commodity Exchange Act or the
each CPO, CTA and IB subject to this § 5.19 Pending legal proceedings.
Commission’s regulations. However, a
Part 5 shall provide to the Division of (a) Every retail foreign exchange
legal proceeding is not ‘‘material’’ for the
Enforcement of the Commission, dealer or futures commission merchant
purposes of this rule if the proceeding
electronically, a copy of the record of and each CPO, CTA or IB subject to this
is not in a federal or state court or if the
each communication received pursuant Part 5 shall submit to the Commission
Commission is a party.
to paragraph (g)(1) of this section. Such copies of any dispositive or partially
copy shall be provided to the Division dispositive decision for which a notice § 5.20 Special calls for account and
of Enforcement of the Commission no of appeal has been filed, the notice of transaction information.
later than 30 calendar days after the appeal and such further documents as (a) Preparation and transmission of
communication is received: Provided, the Commission may thereafter request information upon special call. All
however, that in the case of a filed in any material legal proceeding to information required upon special call
communication concerning facts giving which the retail foreign exchange shall be prepared in such form and
rise to possible fraud under the Act or dealer, futures commission merchant, manner and in accordance with such
Commission regulations, such copy CPO, CTA or IB is a party or to which instructions, and shall be transmitted at
shall be provided to the Division of its property or assets is subject with such time and to such office of the
Enforcement of the Commission within respect to retail forex transactions. Commission, as may be specified in the
three business days after the (b) Every retail foreign exchange call.
communication is received. dealer or futures commission merchant
(h) An introducing broker as defined and each CPO, CTA or IB subject to this (b) Special calls for information on
in § 5.11(a)(1) of this part, or an Part 5 shall submit to the Commission controlled accounts from retail foreign
applicant for registration as an copies of any dispositive or partially exchange dealers, futures commission
introducing broker as defined in dispositive decision concerning which a merchants and introducing brokers.
§ 5.1(f)(1) of this part, or any person notice of appeal has been filed, the Upon call by the Commission, each
succeeding to and continuing the notice of appeal, and such further retail foreign exchange dealer, futures
business of another introducing broker documents as the Commission may commission merchant and introducing
as defined in § 5.1(f)(1) of this part, must thereafter request filed in any material broker shall file with the Commission
enter into a guarantee agreement with a legal proceeding instituted against any the names and addresses of all persons
retail foreign exchange dealer or futures person who is a principal of the retail who, by power of attorney or otherwise,
commission merchant. foreign exchange dealer, futures exercise trading control over any
(i) Each retail forex counterparty shall commission merchant, CPO, CTA or IB customer’s account in retail forex
prepare and maintain on a quarterly (as the term ‘‘principal’’ is defined in transactions.
basis a calculation of the percentage of § 3.1(a) of this chapter) arising from (c) Special calls for information on
non discretionary retail forex accounts conduct in such person’s capacity as a open transactions in accounts carried or
open for any period of time during the principal of the retail foreign exchange introduced by retail foreign exchange
quarter that earned a profit, and the dealer, futures commission merchant, dealers, futures commission merchants,
percentage of such accounts that CPO, CTA or IB and alleging violations, and introducing brokers. Upon special
experienced a loss. The calculation of with regard to retail forex transactions, call by the Commission for information
profit or loss for each retail forex of: relating to retail forex transactions held
account must be net of fees, (1) The Act or any rule, regulation, or or introduced on the dates specified in
commissions, any other expenses, order thereunder; or the call, each retail foreign exchange
trading losses, customer funds (2) Provisions of state law relating to dealer, futures commission merchant, or
deposited, and customer funds a duty or obligation owed by such a introducing broker shall furnish to the
withdrawn. Retail forex counterparties principal. Commission the following information
shall maintain such calculations along (c) All documents required by this concerning accounts of traders owning
with all data supporting such section to be submitted to the or controlling such retail forex
calculations for five years in accordance Commission shall be mailed via first- transaction positions, as may be
with § 1.31. class or submitted by other more specified in the call:
(1) The name, address, and telephone § 5.22 Registered futures association retail forex customer or transfer the
number of the person for whom each membership. account to a firm of the retail forex
account is carried; (a) Each person registered as a retail customer’s selection.
(2) The principal business or foreign exchange dealer must become (3) For assignments and transfers
occupation of the person for whom each and remain a member of at least one made under this section, other than at
account is introduced or carried, as futures association that is registered the retail forex customer’s request, the
specified in the call; under section 17 of the Act and that transferee retail foreign exchange dealer,
provides for the membership therein of futures commission merchant or
(3) The name, address and principal such retail foreign exchange dealer. introducing broker must provide to the
business or occupation of any person (b) Each person required to register as: retail forex customer the risk disclosure
who controls the trading of each (1) An introducing broker, because the statements and forms of
account; person solicits or accepts orders for acknowledgment required by Part 5 of
(4) The name and address of any retail forex transactions; this chapter and receive the required
person having a financial interest of ten (2) A commodity pool operator signed acknowledgments within sixty
percent or more in each account; because the person operates, or solicits days of such assignments or transfers.
funds, securities, or property for, a This requirement shall not apply:
(5) The number of open retail forex pooled investment vehicle that engages
transaction positions introduced or (i) If the transferee retail foreign
in retail forex transactions; or exchange dealer, futures commission
carried in each account, as specified in (3) A commodity trading advisor
the call; and merchant or introducing broker has
because the person exercises clear written evidence that the retail
(6) The total number of retail forex discretionary trading authority, or forex customer has received and
transactions against which delivery has obtains written authorization to exercise acknowledged receipt of the required
been made. discretionary trading authority over, an disclosure statements; or
(d) Delegation of authority to the account in connection with retail forex (ii) If the transfer of accounts is made
Director of the Division of Clearing and transactions, must become and remain a from one introducing broker to another
Intermediary Oversight and the Director member of at least one futures introducing broker guaranteed by the
of the Division of Market Oversight. The association that is registered under same retail foreign exchange dealer or
Commission hereby delegates, until the section 17 of the Act and that provides futures commission merchant pursuant
Commission orders otherwise, to the for the membership therein of such to a guarantee agreement in accordance
Director of the Division of Clearing and person. with the requirements of § 1.10(j) of this
Intermediary Oversight and the Director § 5.23 Notice of bulk transfers and bulk chapter and such retail foreign exchange
of the Division of Market Oversight, or liquidations. dealer or futures commission merchant
to the respective Director’s designees, (a) Notice and Disclosure to Retail maintains the relevant
the authority set forth in this section to Forex Customers of a Bulk Transfer. (1) acknowledgments required by Part 5 of
make special calls for information on A retail foreign exchange dealer, futures this chapter.
controlled accounts from retail foreign commission merchant or introducing (b) Notice to the Commission. Each
exchange dealers, futures commission broker must obtain the written prior and retail foreign exchange dealer, futures
merchants and from introducing specific consent of its retail forex commission merchant or introducing
brokers, and to make special calls for customer to the assignment of any broker shall file with the Commission
information on open contracts in position or transfer of any account of the prior notice of any transfer of accounts
accounts carried or introduced by retail forex customer to another retail of any retail forex customer that is not
futures commission merchants, foreign exchange dealer, futures initiated at the request of the customer,
introducing brokers, and foreign commission merchant or introducing where the transfer involves 50 percent
brokers. Either Director may submit to broker, unless made at the retail forex or more of the transferor’s total number
the Commission for its consideration customer’s request. of retail forex customer accounts.
any matter that has been delegated (2) Absent a request of the retail forex (c) Contents of Notice to the
pursuant to this section. Nothing in this customer or the consent described in Commission. The notice required by
section shall be deemed to prohibit the paragraph (a)(1) of this section, paragraph (b) of this section shall
Commission, at its election, from assignments of positions and transfers of include:
exercising the authority delegated in accounts of retail forex customers may (1) The name, principal business
this section to the Directors. be permitted under rules of the retail address and telephone number of the
forex dealer’s, futures commission transferor futures retail foreign exchange
§ 5.21 Supervision.
merchant’s, or introducing broker’s dealer, futures commission merchant or
Each Commission registrant subject to designated self-regulatory organization introducing broker;
this Part 5, except an associated person that establish notice and other (2) The name, principal business
who has no supervisory duties, must requirements with respect to the address and telephone number of each
diligently supervise the handling by its assignment of positions and transfers of transferee retail foreign exchange dealer,
partners, officers, employees and agents accounts of retail forex customers. If futures commission merchant or
(or persons occupying a similar status or such rules permit implied consent as a introducing broker;
performing a similar function) of all result of the failure of the retail forex (3) The designated self-regulatory
retail forex accounts carried, operated, customer to object after having received organization for the transferor and
advised or introduced by the registrant notice of the proposed assignment or transferee firms;
and all other activities of its partners, transfer, such rules must provide that (4) A brief statement as to the reasons
officers, employees and agents (or the notice must include a statement that for the transfer;
persons occupying a similar status or the retail forex customer is not required (5) A copy of any notices to customers
performing a similar function) relating to accept the proposed assignment or regarding the transfers; and
to its business as a Commission transfer and may direct the transferor (6) A statement of the number of
registrant. firm to liquidate the positions of the accounts to be transferred.
(d) Notice of the Bulk Liquidation of though such provisions were expressly (2) All functions reserved to the
Retail Forex Transactions. A retail set forth in this part. Commission in § 5.10 of this chapter;
foreign exchange dealer or futures (3) All functions reserved to the
commission merchant may not initiate § 5.25 Applicability of the Act. Commission in § 5.11 of this chapter;
the bulk liquidation of properly Except as otherwise specified in this (4) All functions reserved to the
margined retail forex transactions unless part and unless the context otherwise Commission in § 5.12 of this chapter,
such liquidation complies with the rules requires, the provisions of Sections 4b, except for those relating to nonpublic
and procedures of the retail forex 4c(b), 4f, 4g, 4k, 4m, 4n, 4o, 6(c)–(e), 6b, treatment of reports set forth in § 5.12(i)
dealer’s or futures commission 6c, 8(a)–(e), 8a and 12(f) of the Act shall of this chapter; and
merchant’s designated self-regulatory apply to retail forex transactions that are (5) All functions reserved to the
organization and the retail forex dealer subject to the requirements of this part Commission in § 5.14 of this chapter.
or futures commission merchant as though such provisions were set forth (b) The Director of the Division of
provides the Commission with prior herein and included specific references Clearing and Intermediary Oversight
written notice of the liquidation. to retail forex transactions and the may submit any matter which has been
(e) Contents of Notice of Bulk persons defined in § 5.1 of this part. delegated to him under paragraph (a) of
Liquidation. The notice required by this section to the Commission for its
paragraph (d) of this section shall PART 10—RULES OF PRACTICE consideration.
include: 37. The authority citation for part 10 (c) Nothing in this section may
(1) The name, principal business continues to read as follows: prohibit the Commission, at its election,
address and telephone number of the from exercising the authority delegated
Authority: Pub. L. 93–463, sec. 101(a)(11), to the Director of the Division of
initiating retail foreign exchange dealer
88 Stat. 1391; 7 U.S.C. 2a(12).
or futures commission merchant; Clearing and Intermediary Oversight
(2) A brief statement of the reasons for 38. Section 10.1 is amended by under paragraph (a) of this section.
the liquidation; revising paragraph (a) to read as follows:
(3) A copy of any notices to customers PART 145—COMMISSION RECORDS
§ 10.1 Scope and applicability of rules of AND INFORMATION
regarding the liquidation; and
practice.
(4) A statement of the number of
* * * * * 41. The authority citation for part 145
accounts to be liquidated.
(a) Denial, suspension, revocation, continues to read as follows:
(f) Filing of Notices. The notice
required by paragraph (b) and (d) of this conditioning, restricting or modifying of Authority: Pub. L. 99–570, 100 Stat. 3207;
section shall be filed five business days registration as a futures commission Pub. L. 89–554, 80 Stat. 383; Pub. L. 90–23,
prior to the transfer or liquidation of the merchant, retail foreign exchange 81 Stat. 54; Pub. L. 98–502, 88 Stat. 1561–
dealer, introducing broker, or associated 1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93–
retail forex transaction with the Deputy 463, 88 Stat. 1389 (5 U.S.C. 4a(j)); unless
Director, Compliance and Registration person, floor broker, floor trader,
otherwise noted.
Section, Division of Clearing and commodity pool operator, commodity
Intermediary Oversight, Commodity trading advisor or leverage transaction 42. Section 145.5 is amended by
Futures Trading Commission, Three merchant pursuant to sections 6(c), revising paragraphs (d)(1)(viii) and (h)
Lafayette Centre, 1155 21st Street, NW., 8a(2), 8a(3), 8a(4) and 8a(11) of the Act, to read as follows:
Washington, DC 20581; the National 7 U.S.C. 9 and 15, 12a(2), 12a(3), 12a(4)
§ 145.5 Disclosure of nonpublic records.
Futures Association Attn: Vice and 12(a)(11), or denial, suspension, or
revocation of designation as a contract * * * * *
President-Compliance; and the (d) * * *
designated self-regulatory organization market pursuant to sections 6(a) and
6(b) of the Act, 7 U.S.C. 8; (1) * * *
for the transferor firm. (viii) The following reports and
(g) No effect on other obligations. The * * * * *
statements that are also set forth in
requirements of this section shall not paragraph (h) of this section, except as
affect the obligations of a retail foreign PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEEDINGS OF specified in 17 CFR 1.10(g)(2), 17 CFR
exchange dealer, futures commission 31.13(m), or 17 CFR 5.12(h): Forms
merchant or introducing broker under THE COMMISSION
1–FR required to be filed pursuant to 17
the rules of a self-regulatory 39. The authority citation for part 140 CFR 1.10 or 17 CFR 5.12; FOCUS
organization or applicable customer continues to read as follows: reports that are filed in lieu of Forms
account agreement with respect to 1–FR pursuant to 17 CFR 1.10(h); Forms
assignments of positions or transfers of Authority: 7 U.S.C. 2 and 12a.
2–FR required to be filed pursuant to 17
accounts or liquidation of positions. 40. Section 140.94 is amended by CFR 31.13; the accountant’s report on
(h) Corrective notice. If a proposed adding to read as follows: material inadequacies filed in
transfer is not completed in accordance
§ 140.94 Delegation of authority to the accordance with 17 CFR 1.16(c)(5); and
with the notice required to be filed by
Director of the Division of Clearing and all reports and statements required to be
paragraph (b) of this section, a
Intermediary Oversight. filed pursuant to 17 CFR 1.17(c)(6);
corrective notice shall be filed within
five business days of the date such (a) The Commission hereby delegates, * * * * *
proposed transfer was to occur until such time as the Commission (h) Contained in or related to
explaining why the proposed transfer orders otherwise, the following examinations, operating, or condition
was not completed. functions to the Director of the Division reports prepared by, on behalf of, or for
of Clearing and Intermediary Oversight the use of the Commission or any other
§ 5.24 Applicability of other parts of this and to such members of the agency responsible for the regulation or
chapter. Commission’s staff acting under his supervision of financial institutions,
Insofar as it is consistent with the direction as he may designate from time including, but not limited to the
requirements of this part, all other to time: following reports and statements that
provisions of this chapter that apply to (1) All functions reserved to the are also set forth in paragraph (d)(1)(viii)
a person shall apply to such person as Commission in § 5.7 of this chapter; of this section, except as specified in 17
CFR 1.10(g)(2), 17 CFR 5.12(h) or 17 accountant’s report on material (5) and adding new paragraph (w)(2);
CFR 31.13(m): Forms 1–FR required to inadequacies filed in accordance with and
be filed pursuant to 17 CFR 1.10 or 17 17 CFR 1.16(c)(5); and all reports and g. Adding new paragraph (x) to read
CFR 5.12; FOCUS reports that are filed statements required to be filed pursuant as follows:
in lieu of Forms 1–FR pursuant to 17 to 17 CFR 1.17(c)(6);
CFR 1.10(h); Forms 2–FR required to be § 160.3 Definitions.
* * * * *
filed pursuant to 17 CFR 31.13; the * * * * *
accountant’s report on material PART 160—PRIVACY OF CONSUMER (a) Affiliate of a futures commission
inadequacies filed in accordance with FINANCIAL INFORMATION merchant, retail foreign exchange
17 CFR 1.16(c)(5); and all reports and dealer, commodity trading advisor,
45. The authority citation for part 160 commodity pool operator or introducing
statements required to be filed pursuant
continues to read as follows: broker means any company that
to 17 CFR 1.17(c)(6); and
* * * * * Authority: 7 U.S.C. 7b–2 and 12a(5); 15 controls, is controlled by, or is under
U.S.C. 6801, et seq. common control with a futures
PART 147—OPEN COMMISSION 46. Section 160.1 is amended by commission merchant, retail foreign
MEETINGS revising paragraph (b) to read as follows: exchange dealer, commodity trading
advisor, commodity pool operator or
43. The authority citation for part 147 § 160.1 Purpose and scope. introducing broker that is subject to the
continues to read as follows: * * * * * jurisdiction of the Commission. In
Authority: Sec. 3(a), Pub. L. 94–409, 90 (b) Scope. This part applies only to addition, a futures commission
Stat. 1241 (5 U.S.C. 552b); sec. 101(a)(11), nonpublic personal information about merchant, retail foreign exchange
Pub. L. 93–463, 88 Stat. 1391 (7 U.S.C. 4a(j) individuals who obtain financial dealer, commodity trading advisor,
(Supp. V, 1975)), unless otherwise noted. products or services primarily for commodity pool operator or introducing
44. Section 147.3 is amended by personal, family, or household purposes broker subject to the jurisdiction of the
revising paragraphs (b)(4)(i)(H) and from the institutions listed below. This Commission will be deemed an affiliate
(b)(8) to read as follows: part does not apply to information about of a company for purposes of this part
companies or about individuals who if:
§ 147.3 General requirement of open obtain financial products or services
meetings; grounds upon which meetings * * * * *
may be closed.
primarily for business, commercial, or (2) Rules adopted by the Federal
agricultural purposes. This part applies Trade Commission or another federal
* * * * * to all futures commission merchants,
(b) * * * functional regulator under Title V of the
retail foreign exchange dealers, GLB Act treat the futures commission
(4) * * *
(i) * * * commodity trading advisors, commodity merchant, retail foreign exchange
(H) The following reports and pool operators and introducing brokers dealer, commodity trading advisor,
statements that are also set forth in that are subject to the jurisdiction of the commodity pool operator or introducing
paragraph (b)(8) of this section, except Commission, regardless whether they broker as an affiliate of that company.
as specified in 17 CFR 1.10(g)(2), 17 are required to register with the * * * * *
CFR 5.12, or 17 CFR 31.13(m): Forms Commission. These entities are (k) * * *
1–FR required to be filed pursuant to 17 hereinafter referred to in this part as (2) * * *
CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR ‘‘you.’’ This part does not apply to (i) * * *
31.13(m); FOCUS reports that are filed foreign (non-resident) futures (B) You are a retail foreign exchange
in lieu of Forms 1–FR pursuant to 17 commission merchants, retail foreign dealer with whom a consumer has
CFR 1.10(h); Forms 2–FR required to be exchange dealers, commodity trading opened an account, or that effects or
filed pursuant to 17 CFR 31.13; the advisors, commodity pool operators and engages in retail forex transactions with
accountant’s report on material introducing brokers that are not or for a consumer, even if you do not
inadequacies filed in accordance with registered with the Commission. hold any assets of the consumer.
17 CFR 1.16(c)(5); and all reports and Nothing in this part modifies, limits or (C) You are an introducing broker that
statements required to be filed pursuant supersedes the standards governing solicits or accepts specific orders for
to 17 CFR 1.17(c)(6); individually identifiable health trades;
information promulgated by the (D) You are a commodity trading
* * * * *
(8) Disclose information contained in Secretary of Health and Human Services advisor with whom a consumer has a
or related to examination, operating, or under the authority of sections 262 and contract or subscription, either written
condition reports prepared by, on behalf 264 of the Health Insurance Portability or oral, regardless of whether the advice
of, or for the use of the Commission or and Accountability Act of 1996, 42 is standardized, or is based on, or
any other agency responsible for the U.S.C. 1320d–1320d–8. tailored to, the commodity interest or
47. Section 160.3 is amended by:
regulation or supervision of financial a. Revising paragraph (a) introductory cash market positions or other
institutions, including, but not limited text and paragraph (a)(2); circumstances or characteristics of the
to the following reports and statements b. Redesignating paragraphs particular consumer;
that are also set forth in paragraph (k)(2)(i)(B) through (F) as paragraphs (E) You are a commodity pool
(b)(4)(i)(H) of this section, except as (k)(2)(i)(C) through (G) and republishing operator, and you accept or receive from
specified in 17 CFR 1.10(g)(2), 17 CFR them, and adding new paragraph the consumer, funds, securities, or
5.12, or 17 CFR 31.13(m): Forms 1–FR (k)(2)(i)(B); property for the purpose of purchasing
required to be filed pursuant to 17 CFR c. Revising paragraphs (n)(1)(i) and an interest in a commodity pool;
1.10, 17 CFR 5.12(h)(2), or 17 CFR (n)(2)(i); (F) You hold securities or other assets
31.12(m); FOCUS reports that are filed d. Revising paragraph (o)(1)(i); as collateral for a loan made to the
in lieu of Forms 1–FR pursuant to 17 e. Revising paragraph (u)(2)(i)(A); consumer, even if you did not make the
CFR 1.10(h); Forms 2–FR required to be f. Redesignating paragraphs (w)(2) loan or do not effect any transactions on
filed pursuant to 17 CFR 31.13; the through (4) as paragraphs (w)(3) through behalf of the consumer; or
(G) You regularly effect or engage in transfer in accordance with § 1.65, if introducing broker or any of their
commodity interest transactions with or you are a transferee futures commission associated persons to effect transactions
for a consumer even if you do not hold merchant, retail foreign exchange dealer in commodity interests for the account
any assets of the consumer. or introducing broker. without the customer’s specific
* * * * * * * * * * authorization; Provided, however, That
(n)(1) * * * 49. Section 160.30 is amended by if any such futures commission
(i) Any futures commission merchant, revising the introductory text to read as merchant, introducing broker or any of
retail foreign exchange dealer, follows: their associated persons is also
commodity trading advisor, commodity authorized to effect transactions in
pool operator or introducing broker that § 160.30 Procedures to safeguard foreign futures or foreign options
is registered with the Commission as customer records and information. without the customer’s specific
such or is otherwise subject to the Every futures commission merchant, authorization, such authorization must
Commission’s jurisdiction; and retail foreign exchange dealer, be expressly documented.
* * * * * commodity trading advisor, commodity 52. Section 166.5 is amended by:
(2) * * * pool operator and introducing broker a. Removing paragraph (a)(1)(iv),
(i) Any person or entity, other than a subject to the jurisdiction of the redesignating paragraphs (a)(1)(i)
futures commission merchant, retail Commission must adopt policies and through (a)(1)(iii) as paragraphs
foreign exchange dealer, commodity procedures that address administrative, (a)(1)(i)(A) through (a)(1)(i)(C), and
trading advisor, commodity pool technical and physical safeguards for adding new paragraph (a)(1)(ii);
operator or introducing broker that, with the protection of customer records and b. Revising paragraphs (a)(2) and
respect to any financial activity, is information. These policies and (a)(3);
subject to the jurisdiction of the procedures must be reasonably designed c. Revising paragraphs (c)(5)(i)(A) and
Commission under the Act. to: (c)(5)(i)(C) to read as follows:
* * * * * * * * * *
§ 166.5 Dispute settlement procedures.
(o)(1) * * *
(i) Any product or service that a PART 166—CUSTOMER PROTECTION (a) * * *
futures commission merchant, retail RULES (ii) Arises out of any retail forex
foreign exchange dealer, commodity transaction (as defined in § 5.1(m) of
50. The authority citation for part 166
trading advisor, commodity pool this chapter).
remains as follows:
operator, or introducing broker could (2) The term customer as used in this
Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, section includes an option customer (as
offer that is subject to the Commission’s
6h, 6k, 6l, 6o, 7, 12a and 23, as amended by defined in § 1.3(jj) of this chapter), a
jurisdiction; and the Commodity Futures Modernization Act of
* * * * * retail forex customer (as defined in
2000, Appendix E of Pub. L. 106–554, 114
(u) * * * § 5.1(k) of this chapter) and any person
Stat. 2763 (2000).
(2) * * * for or on behalf of whom a member of
(i) * * * 51. Section 166.2 is revised as a designated contract market, or a
(A) Information a consumer provides follows: participant transacting on or through
to you on an application to open a § 166.2 Authorization to trade.
such designated contract market, effects
commodity interest trading account, to a transaction on such contract market,
No futures commission merchant, except another member of or participant
invest in a commodity pool, or to obtain retail foreign exchange dealer,
another financial product or service; in such designated contract market;
introducing broker or any of their Provided, however, a person who is an
* * * * * associated persons may directly or
(w) * * * ‘‘eligible contract participant’’ as defined
indirectly effect a transaction in a in section 1a(12) of the Act shall not be
(2) Any retail foreign exchange dealer; commodity interest for the account of
* * * * * deemed to be a customer within the
any customer unless before the meaning of this section.
(x) Retail foreign exchange dealer has transaction the customer, or person
the same meaning as in § 5.3(i)(1) of this (3) The term Commission registrant as
designated by the customer to control used in this section means a person
chapter. the account:
48. Section 160.4 is amended by: registered under the Act as a futures
(a) With respect to any commodity
a. Revising paragraph (c)(2)(ii); and commission merchant, retail foreign
interest as defined in § 1.3(yy)(1)
b. Revising paragraph (e)(1)(iv) to read exchange dealer, introducing broker,
through (3) of this chapter, specifically
as follows: floor broker, commodity pool operator,
authorized the futures commission
commodity trading advisor, or
§ 160.4 Initial privacy notice to consumers merchant, retail foreign exchange
associated person.
required. dealer, introducing broker or any of
their associated persons to effect the * * * * *
* * * * *
(c) * * * transaction (a transaction is ‘‘specifically (c) * * *
(2) * * * authorized’’ if the customer or person (5) * * *
(ii) Opens a retail forex account, or designated by the customer to control (i) * * *
opens a commodity interest account the account specifies— (A) The designated contract market, if
through an introducing broker or with a (1) The precise commodity interest to applicable and if available, upon which
futures commission merchant that clears be purchased or sold and the transaction giving rise to the dispute
transactions for its customers through (2) The exact amount of the was executed or could have been
you on a fully-disclosed basis; commodity interest to be purchased or executed;
* * * * * sold); or * * * * *
(e) * * * (b) With respect to any commodity (C) At least one other organization
(1) * * * interest as defined in § 1.3(yy)(1) or (2) that will provide the customer with the
(iv) You have established a customer of this chapter, authorized in writing the opportunity to select the location of the
relationship with a customer in a bulk futures commission merchant, arbitration proceeding from among
several major cities in diverse that are not otherwise associated with authorized to act as a decision-maker in
geographic regions and that will provide the designated contract market (mixed such matters.
the customer with the choice of a panel panel), if applicable: Provided, however, * * * * *
or other decision-maker composed of at that the list of qualified organizations Issued in Washington, DC, on January 7,
least one or more persons, of which at provided by a Commission registrant 2010, by the Commission.
least a majority are not members or that is a floor broker need not include David A. Stawick,
associated with a member of the a registered futures association unless a Secretary of the Commission.
designated contract market, if registered futures association has been [FR Doc. 2010–456 Filed 1–19–10; 8:45 am]
applicable, or employee thereof, and
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Commodity Futures Trading Commission: Wednesday, January 20, 2010

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Wednesday,

January 20, 2010

Pub. L. 110–246, 122 Stat. 1651, 2189–2204 (2008). 2(c)(2)(C)(ii)(III). 2(c)(2)(C)(iii)(III).

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

forex transactions would be required to premiums.58 59 Regulation 4.13(a)(3)(ii).

91 See, Regulation 1.56 for the existing

‘‘individuals.’’ See 48 FR 14933, n. 115 (April 6,

2(c)(2)(C)(i)(II)(aa); and 2(c)(2)(C)(iii). 96 See, proposed Regulation 5.23(a)(2). 103 47 FR at 18620.

pursuant to part 5. Among the sections

Commission believes that the benefits of

the firm; and leverage customers’ orders for leverage * * * * *

PRIORITY AND OTHER GENERAL (1) * * *

effected without the client’s specific

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