NFA announces effective date for increased minimum net capital requirements for Forex Dealer Members
Beginning on December 21, 2007, NFA Forex Dealer Members (FDMs) will be required to maintain a minimum net capital requirement of $5 million. The increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). The amendments to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions" were approved by the Commodity Futures Trading Commission (CFTC) in late September.
New guidelines could alter forex brokerage space. Thatís the day new requirements passed by the National Futures Association (NFA) will go into effect, mandating every Forex Dealer Member (FDM) that is a member of the NFA have at least $5 million in capital. Firms offering more than 50:1 leverage will be required to have at least $10 million.
Many forex firms are below that capital threshold, but what happens to them on Dec. 21 is still unclear. Many say they will have the necessary capital by that time, others are likely to be purchased by larger firms, and a few will probably go out of business.
In addition to the increased capital requirements, the amendments eliminate the concentration charge and replace it with restrictions on the types of firms with which an FCM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17.
"We have taken these steps because a Forex Dealer Member's activities create greater financial risks than the type of transactions involved in traditional exchange-traded futures and options," says NFA General Counsel Tom Sexton. "The increased capital requirement will result in greater customer protection."
FDM capital requirements have been a great cause of concern recently. During the past ten years, NFA has issued 11 emergency enforcement actions against FDMs for failing to demonstrate compliance with NFA financial requirements. In addition, since March 2007, nine different FDMs have fallen under the early warning requirement of $1.5 million.
"Customers trading off-exchange forex do not receive a priority under the Bankruptcy Code in the event of a firm's insolvency," says Sexton, "so it's crucial that FDMs have adequate capital."
NFA is closely monitoring its FDMs to ensure that those firms that wish to continue operating past December 21 will take the necessary steps to meet their new financial requirements.
Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance (email@example.com or 312-658-6540) or Valerie Kretschmer, Field Supervisor, Compliance (firstname.lastname@example.org or 312-658-6588).