Off-exchange Forex Final Rules

8/8/2019 Off-exchange Forex Final Rules

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Friday,

September 10, 2010

Part II

Commodity Futures Trading Commission

17 CFR Parts 1, 3, 4, et al.

Regulation of Off-Exchange Retail ForeignExchange Transactions andIntermediaries; Final Rule

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55410 Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010/ Rules and Regulations

1Dodd-Frank Wall Street Reform and ConsumerProtection Act, Public Law 111203 (2010).

2Food, Conservation, and Energy Act of 2008,Public Law 110246, 122 Stat. 1651, 21892204(2008).

3Regulation of Off-Exchange Retail ForeignExchange Transactions and Intermediaries, 75 FR3282 (Jan. 20, 2010).

4See 75 FR 3282, 32833285.5See 75 FR 3282, 3285.

6See 75 FR 3282, 3286.7See 75 FR 3282, 32863293.8See Wall Street Reform Act, Sec. 742.

COMMODITY FUTURES TRADINGCOMMISSION

17 CFR Parts 1, 3, 4, 5, 10, 140, 145,147, 160, and 166

RIN 3038AC61

Regulation of Off-Exchange RetailForeign Exchange Transactions and

Intermediaries

AGENCY: Commodity Futures TradingCommission.

ACTION: Final rules.

SUMMARY: The Commodity FuturesTrading Commission (Commission orCFTC) is adopting a comprehensiveregulatory scheme to implement theprovisions of the Dodd-Frank WallStreet Reform and Consumer ProtectionAct of 2010 (Wall Street Reform Act) 1and the CFTC Reauthorization Act of2008 (CRA) 2 with respect to off-exchange transactions in foreigncurrency with members of the retailpublic (i.e., retail forex transactions).The new regulations and amendmentsto existing regulations published todayestablish requirements for, among otherthings, registration, disclosure,recordkeeping, financial reporting,minimum capital, and other operationalstandards.

DATES: Effective Date: October 18, 2010.

FOR FURTHER INFORMATION CONTACT: Forinformation regarding financial andrelated reporting requirements, contact:Thomas Smith, Chief Accountant and

Deputy Director, Division of Clearingand Intermediary Oversight, 1155 21stStreet, NW., Washington, DC 20581.Telephone number: 2024185495;facsimile number: 2024185547; andelectronic mail: [email protected].

Jennifer Bauer, Special Counsel,Division of Clearing and IntermediaryOversight, Division of Clearing andIntermediary Oversight, 1155 21stStreet, NW., Washington, DC 20581.Telephone number: 2024185472;facsimile number: 2024185547; andelectronic mail:[email protected].

For all other information contact:William Penner, Deputy Director,

Division of Clearing and IntermediaryOversight, 1155 21st Street, NW.,Washington, DC 20581. Telephonenumber: 2024185450; facsimilenumber: 2024185547; and electronicmail: [email protected]. ChristopherCummings, Special Counsel, Division ofClearing and Intermediary Oversight,

1155 21st Street, NW., Washington, DC20581. Telephone number (202) 4185450; facsimile number: 2024185547;and electronic mail:[email protected]. Peter Sanchez,Special Counsel, Division of Clearingand Intermediary Oversight, 1155 21stStreet, NW., Washington, DC 20581.Telephone number (202) 4185450;

facsimile number: 2024185547; andelectronic mail:[email protected] INFORMATION:

I. Background

On January 20, 2010, the Commissionpublished in the Federal Registerproposed new regulations andamendments to existing regulations inresponse to the CRA (the ProposingRelease).3 The Proposing Release setforth in detail the historical backgroundof the regulation of retail forextransactions, and the events, legislativeand otherwise, that led up to the

enactment of the CRA.4

TheCommission explained that its proposedregulations were drawn up with the aimof applying the same principles thathave guided the regulation of on-exchange instruments, while taking intoaccount the real differences between thetrading of futures contracts ondesignated contract markets (DCMs)that are cleared through Commission-registered derivatives clearingorganizations (DCOs) on the one hand,and off-exchange transactions betweenforex firms and retail customers on theother hand.5

The proposed rule changes were oftwo general sorts. The first groupincluded amendments to existingregulations to accommodate regulationof retail forex transactions and the newregistration categories created under theCRA. The second group comprised anew part 5 of the Commissionsregulations, encompassing, to the extentpracticable, the regulations pertainingspecifically to persons engaging in retailforex transactions. For example, manyof the operational or registrationrequirements in part 1 or part 3,respectively, of the Commissionsregulations referring to futures

commission merchants (FCMs) would,as a result of the CRA, now apply alsoto retail foreign exchange dealers(RFEDs). Some of the disclosure,reporting and recordkeepingrequirements in part 4 had to bemodified to apply to operators of pooledinvestment vehicles and advisors that

engage in retail forex transactions, ascalled for under the CRA. Other parts ofthe Commissions regulations requiredtheir own adaptations in order to extendcustomer protection, privacy andprocedural requirements to retail forextransactions.

The Commission also noted in itsProposing Release that in addition to the

regulations expressly called for by theCRA, it was proposing certainadditional requirements prompted both

by the essential differences between on-exchange transactions and retail forextransactions, and by the history offraudulent practices in the retail forexmarket.6 The proposed regulatorychanges were discussed, section bysection.7

Following the publication of theProposing Release, the Wall StreetReform Act was enacted which, inrelevant part, requires that specifiedFederal regulatory agencies, including

the CFTC, promulgate rules regardingretail forex transactions. Consistent withthe CRA, the Wall Street Reform Actdirects that such rules prescribeappropriate requirements with respectto disclosure, recordkeeping, capital andmargin, reporting, business conduct,and such other standards orrequirements as the Federal regulatoryagencies determine to be necessary.8

Thus, pursuant to the broad authoritygranted by the Wall Street Reform Actand the CRA, the Commission isimplementing requirements for, amongother things: Registration, disclosure,

recordkeeping, financial reporting,minimum capital, and other operationalstandards, based on existing CFTCregulations for commodity interesttransactions and commodity interestintermediaries, and on existing NationalFutures Association (NFA) rules withrespect to retail forex transactionsoffered by NFAs members. With certainexceptions, the Commission is adoptingthe rule changes delineated in theProposing Release as proposed.

Except for certain otherwise-regulatedfinancial intermediaries excluded by theCRA from the Commissions

jurisdiction, persons offering to be oracting as counterparties to retail forextransactions, but not primarily orsubstantially engaged in the exchange-traded futures business, are required toregister with the CFTC as RFEDs.Registered FCMs that are primarily orsubstantially (as defined in the newregulations) engaged in the activities setforth in the definition in the Commodity

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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55411Federal Register / Vol. 75, No. 175 / Friday, September 10, 2010/ Rules and Regulations

97 U.S.C. 1a(20) (2006).10See 7 U.S.C. 2(c)(2)(C)(iv).11See 75 FR 3282, 32843285.12The Comment letters referred to in this release

are available through the Commissions Web site:http://www.cftc.gov/LawRegulation/PublicComments/10-001.html.

13As noted above, several commentersmaintained that the proposed Regulation 5.9 wasinconsistent with security deposit levels set by NFAand approved by the Commission. In February2009, NFA proposed and the Commission approvedamendments to Section 12 of NFAs FinancialRequirements. (See Letter from Thomas W. Sexton

to David A. Stawick, dated February 23, 2009,regarding Forex Security DepositsProposedAmendments to NFA Financial RequirementsSection 12 and Interpretive Notice Regarding ForexTransactions, available on NFAs website atnfa.futures.org.) NFAs amendments left in placerequirements of a 1% security deposit for majorcurrencies and a 4% deposit for all othercurrencies, but eliminated an exemption from theserequirements for well-capitalized firms. As NFAnoted in its proposed amendments, exempted firmshad offered leverage of 200:1, 400:1 and even 700:1.NFAs February 2009 amendments effectivelyreduced the amount of leverage available to retailforex customers. The Commission approved theamendments, in accordance with the standards setin Section 17(j) of the Act.

Exchange Act (the Act) of an FCM 9 arepermitted to engage in retail forextransactions without also registering asRFEDs. Also, the $20 million minimumnet capital standard established in theCRA for registering as an RFED oroffering retail forex transactions as anFCM is incorporated in the newregulations.

The new regulations also requirecertain entities other than RFEDs andFCMs that intermediate retail forextransactions to register with theCommission as introducing brokers(IBs), commodity trading advisors(CTAs), commodity pool operators(CPOs) or associated persons (APs)of such entities, as appropriate, and to

be subject to the Act and regulationsapplicable to that registrant category.

Finally, pursuant to the authorityconferred by the CRA,10 and to addresscases where the Commissionsjurisdiction has been challenged, the

Commission is adopting the proposedregulatory provisions applicable tocertain leveraged, off-exchange retailforex transactions commonly known asZelener contracts. 11

II. The Comments on the ProposingRelease

The Commission received in excess of9,100 comments 12 from a range ofcommenters, including individuals whotrade forex, intermediaries, registeredFCMs currently serving ascounterparties in retail forextransactions, trade associations or

coalitions of industry participants, onecommittee of a county lawyersassociation, a registered futuresassociation, and numerous law firmsrepresenting institutional clients. Manycommenters offered specificrecommendations for clarification ormodification of particular rules; othercommenters objected generally toparticular proposed rules. Overall, the

bulk of the comments concerned four ofthe proposed rules:

Proposed Regulation 5.9, whichwould impose a 10 to 1 leveragelimitation on retail forex transactions.(Security Deposit Proposal orLeverage Proposal)

Proposed Regulation 5.18(h), whichwould require each IB that solicits oraccepts off-exchange retail forex ordersto enter into a guarantee agreement withthe FCM or RFED to which the IB

introduces the forex transactions.(Guaranteed IB Proposal)

Proposed Regulation 5.18(j), whichwould require all retail forexcounterparties to calculate, on aquarterly basis, the percentage of non-discretionary accounts that wereprofitable, to include the results of thiscalculation for the preceding four

quarters in required disclosures tocustomers, and to maintain and makeavailable upon request records reflectingsuch calculations for five years.(Disclosure Proposal)

Proposed Regulation 5.7, whichwould establish a minimum capitalrequirement for FCMs and RFEDs(Capital Proposal)

The comments regarding these proposedrules and the Commissions responseare discussed immediately below. TheCommissions response to commentsconcerning other aspects of theproposed rules follows later.

Given the volume of commentsreceived, the Commission cannotrespond to each and every comment orobjection. However, the Commissionhas carefully reviewed and consideredeach letter and, in the sections thatfollow, has endeavored to address boththe primary themes running throughoutmultiple letters and significant pointsraised by individual commenters.

Security Deposit Proposal. In generalterms, proposed Regulation 5.9 wouldhave required FCMs and RFEDsengaging in retail forex transactions tocollect from each retail forex customer

a minimum security deposit equal to 10percent of the notional value of eachretail forex transaction. This proposal isoften referred to in the comment lettersas a 10% or 10:1 leverage requirement(i.e., for every $10 of notional value, $1is required as a security deposit).

The Commission received asignificant number of comment lettersregarding the Security Deposit Proposalwith a substantial majority of thecommenters objecting to the proposedlevel of 10%. Many of the letterssubmitted with regard to this issueappeared to be submitted by individual

traders, were identical or nearlyidentical, and objected generally to theproposal. Within the large group ofcomments by such traders, whether inform letter objections or otherwise, themost common objections were that theleverage proposal would drive businessoff-shore, would lead to the loss of jobsin the U.S., was unnecessarilyrestrictive and would inhibit smalltraders ability to trade profitably, orthat the percentage required as asecurity deposit was arbitrary,capricious and anti-competitive.

Other commenters noted that byincreasing the security deposit level,retail forex customers are exposed togreater levels of market and credit risk.Many of these commenters believe thatthe amplification that is provided byincreased leverage is necessary forclients to earn a profit from theirpositions. Still other commenters urged

that NFAs current levels be retainedand asserted that the Commission hadalready approved these levels byallowing NFAs proposed rule regardingleverage to become effective.

Finally, one commenter encouragedthe Commission to (1) recognize thedifferent market risks and volatilityposed by different currencies, (2) adoptrequirements reflective of thosedifferences just as contract markets doin establishing their margin levels, and(3) endorse or adopt some mechanism toallow for periodic review andadjustment of the requirements if

necessary.The Commissions proposed leveragerestriction was conservative and wasproposed in an effort to providemaximum customer protection. TheCommission does not, however, believeit was arbitrary or contrary to previouslyapproved NFA rules.13 Moreover, theCommission does not believe that mostretail foreign exchange customers selecta counterparty based solely on themaximum allowable leverage, otherwisethese investors would have alreadymigrated to foreign markets, some ofwhich have no limitation on leverage.Nevertheless, after considering theconcerns expressed and argumentsmade in the comments, the Commissionhas determined to adopt a revisedsecurity deposit requirement for FCMsengaging in retail forex transactions andfor RFEDs.

In developing the revised Regulation5.9, the Commission once again

http://www.cftc.gov/LawRegulation/PublicComments/10-001.htmlhttp://www.cftc.gov/LawRegulation/PublicComments/10-001.htmlhttp://www.cftc.gov/LawRegulation/PublicComments/10-001.htmlhttp://www.cftc.gov/LawRegulation/PublicComments/10-001.htmlhttp://www.cftc.gov/LawRegulation/PublicComments/10-001.html


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14NFA is currently the only futures associationregistered with the Commission. 15See 75 FR 3282, 3285.

reviewed futures exchange marginlevels, NFAs current security depositrequirements, and comparablerequirements found in otherjurisdictions. Final Regulation 5.9permits the registered futuresassociation (RFA) of which the FCMor RFED is a member to determinespecific security deposit levels within

parameters set forth by the Commissionin the regulation.14 The Commission hasprovided minimum security depositamounts of 2 percent of the notionalvalue for major currency pairs and 5percent of the notional value for allother retail forex transactions. TheCommission will periodically reviewthe parameters it has set in light ofmarket conditions and adjust them asnecessary. Similarly, each RFA (i.e.,NFA) will be required to designatewhich currencies are major currencies,and must review, no less frequentlythan annually, major currency

designations and security depositrequirements, and must adjust thedesignations and requirements asnecessary in light of changes in thevolatility of currencies and othereconomic and market factors. It is theCommissions view that revisedRegulation 5.9 will provide amechanism for setting security depositlevels that is both anchored in, andadaptable to, market conditions.

Disclosure of Profitable vs. Non-Profitable Accounts. As proposed,Regulation 5.5(e) required that the riskdisclosure statement provided to everyretail forex customer include disclosure

of the number of non-discretionaryaccounts maintained by the FCM orRFED that were profitable and those thatwere not, during the four most recentcalendar quarters. Commenters calledthe provision anti-competitive anddoubted that measurement of profitableaccounts could be done in a way thatwould permit comparison. ProposedRegulation 5.18(i) required that eachretail forex counterparty prepare andmaintain on a quarterly basis acalculation of the percentage of non-discretionary retail forex accounts openfor any period of time during the quarter

that earned a profit, and the percentageof such accounts that experienced aloss.

Some commenters asserted that theCommission did not provide adequateguidance or a standard methodology forcalculating winners and losers.Commenters stated that the proposalwas ambiguous and that the reportedpercentages may not be comparableacross the industry. In addition,

commenters thought that there was toomuch subjectivity in determiningwinners and losers and that,therefore, the resulting disclosure wouldnot be helpful for customers. Othercommenters stated that by requiringretail forex firms to disclose thepercentage of profitable accountsquarterly, the Commission would be

unfairly singling out retail forex dealers,as this information is not required onthe futures side or for broker-dealers.

As noted in the Proposing Release,there are significant differences betweentrading futures contracts on an exchangeand entering into off-exchangetransactions between forex firms andretail customers.15 The Commission

believes that as a result of the inherentconflicts embedded in the operations ofthe retail over-the-counter forexindustry, such disclosure is necessary.To illustrate potential conflicts ofinterests in the off-exchange retail forex

industry, the Commission in itsProposing Release pointed out that theretail forex counterparty: (i) Is thecounterparty to the customer, whichsets up a zero-sum gamebetween thecustomer and the retail forex dealer;(ii) provides quotes to their customers,which may not be the best quote at thetime and may not even be a competitivequote; and (iii) enters into a principal-to-principal transaction with the non-discretionary retail forex accountholder.At each stage of the transaction, theretail forex counterparty has an inherentconflict with its non-discretionary retailforex accountholders. By contrast, in

exchange-traded futures markets,accountholders do not encounter thesame level of conflicts that retail forexcustomers face, and, therefore, arequirement to disclose the percentageof non-discretionary retail accounts thatwere profitable and not profitable isappropriate in retail forex markets,while it may not be elsewhere. As aresult of the industry structure andoperational conflicts, the Commission

believes that this disclosure is necessaryto protect the non-discretionary retailforex accountholder.

So while the Commission continues

to believe in the value and effectivenessof such disclosures, it is adoptingRegulation 5.5(e) and Regulation 5.18(i)with certain amendments, in order toaddress concerns regarding theimplementation of the rule. Asproposed, the calculation fordetermining whether a retail forexaccount was profitable or not during aquarter would be net of fees,commissions, any other expenses,trading results, customer funds

deposited, and customer fundswithdrawn. The regulation as adoptedprovides further guidance in response tocommenters concerns. The final ruleclarifies that a retail forex account will

be considered either profitable or notprofitable, with not profitableincluding accounts that break-even.

The Commission is also clarifying the

required time periods for which therequired calculations in Regulation5.5(e)(1) and 5.5(e)(2) must be made andrecords maintained and made available.Regulation 5.5(e)(1) requires thatinformation regarding profitable and notprofitable accounts for the four mostrecent quarters be included indisclosure documents; Regulation5.5(e)(2) requires that similar quarterlyinformation be maintained for five yearsand provided to requesting customers orpotential customers. As to the 5.5(e)(1)information, once these regulations areeffective, FCMs and RFEDs must

provide the required information for thepast four quarters. FCMs and RFEDsalso must update this information goingforward on a quarterly basis anddisclose the most current four quartersin disclosure documents provided topotential customers.

Regulation 5.5(e)(2) requires an RFEDor FCM to provide to a customer orpotential customer the same accountinformation as set out in Regulation5.5(e)(1) for the most recent five-yearperiod during which the RFED or FCMmaintained non-discretionary retailforex customer accounts, but only at therequest of the customer or potential

customer. The Commission intends thatthis requirement to keep and makeavailable five years worth of profitableand non-profitable account information

be prospective; following the adoptionof these rules, FCMs and RFEDs arerequired to keep and maintain such datagoing forward on a quarterly basis untilsuch time as they have amassed fiveyears worth of information, at whichpoint they will have to keep and makeavailable the information for the fivemost recent years. Furthermore, prior toamassing five years of performanceinformation, an FCM or RFED is

obligated to provide, upon request by acustomer or prospective customer, thehistorical quarterly performanceinformation for as many quarters as theFCM or RFED has available.

In addition, to provide clarityregarding the type of accounts that must

be used in making the calculation ofprofitable and unprofitable accounts,FCMs and RFEDS must use those retailforex accounts, as defined in Regulation5.1(i), that are non-discretionaryaccounts; Provided, that the retail forexaccount is not a proprietary account, as



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16NFAs Financial Requirement Section 11currently contains such an exemption from anadditional capital requirement for member firmsusing straight-through-processing for all customertransactions.

17This argument is diminished by the recentenactment of the Wall Street Reform Act, whichclearly indicates the intent of Congress that retailforex transactions in the United States either becomprehensively regulated or be prohibitedoutright. See Wall Street Reform Act, Sec. 742. 18See 46 Fed. Reg. 62841 (Dec. 29, 1981).

defined in Regulation 5.18(i)(3). TheCommission believes that excludingproprietary accounts will help minimizethe possibility of skewed resultsstemming from differing methods ofcalculation. The Commission is alsorequiring that the data be calculated ona calendar year basis for allcounterparties.

Guarantee Requirement for IBs WhoIntroduce Retail Forex Business. TheCommission proposed in Regulation5.18(h) to require that any person withinthe definition of an IB under Regulation5.1(f)(1) (or applicant for registration assuch, or successor to the business ofsuch) enter into a guarantee agreementwith an FCM or an RFED. The IB would

be permitted to enter such an agreementwith only one FCM or RFED. Therationale behind this requirement was tomake FCMs and RFEDs exercise carewith regard to entities with which theydo business by making them jointly and

severally liable for all obligations of theIB under the Act and CommissionRegulations with respect to thesolicitation of retail forex transactions.This would, in turn, discourage themfrom associating with IBs without regardto the sales practices employed by thoseIBs.

Commenters called the banning ofindependent IBs in the retail forex

business harsh and said it could lead toless customer choice and poorer service.Others said that requiring a guaranteeagreement was anticompetitive andunnecessary, as most enforcementactivity concerns unregistered industry

participants, and that guaranteeagreements have been a substitute forminimum capital for as long as the IBregistration category has existed.

After considering the comments, theCommission has determined to permitIBs who register in order to transactretail forex business (like IBs whoregister to transact futures andcommodity options business), to choose

between entering into a guaranteeagreement with an FCM or RFED, andmaintaining the existing IB minimumnet capital requirement. Accordingly,IBs, whether they register to do retail

forex business, futures business, or both,must comply with the provisions in theCommissions regulations that apply toIBs; Provided, that any IB that operatespursuant to a guarantee agreementmeeting the requirements of Regulation1.10(j) need not meet the minimum netcapital requirements set forth inRegulations 1.10, 1.12 and 1.17.

Net Capital Requirements for FCMsand RFEDs. As proposed, Regulation 5.7implements the $20 million minimumnet capital requirement for FCMsengaging in retail forex transactions and

for RFEDs (as set forth in the CRA), andto the extent that the FCMs or RFEDstotal retail forex obligation to itscustomers exceeds $10 million, theregulation requires an additional fivepercent of that excess. Severalcomments urged the Commission torevise proposed Regulation 5.7 toinclude an exemption from the

additional net capital requirement whenthe FCM or RFED uses straight-throughprocessing. 16 Referring to the costsimposed by additional capitalrequirements, the commenters arguedthat such costs, in addition to the limitsimposed by several of the otherproposed regulatory requirements,would cause much of the retail forex

business to be transferred to offshorejurisdictions without (or withsubstantially reduced) regulatoryprotections.17

The Commission considered but didnot adopt NFAs straight-through

processing exemption in its proposal,specifically because the proposedadditional capital requirement wasintended to provide a capitalrequirement that directly relates to thesize of a firms liability to retail forexcustomers. Some firms offering retailforex transactions have liabilities totheir retail customers exceeding $10million. Straight-through processing,although mitigating market exposure fora firm, does not reduce in any way thetotal liability to retail forex customerswho are direct counterparties to the firmand therefore exposed to the credit riskof such firm. Therefore, the Commission

is adopting the capital provisions inSection 5.7 as originally proposed.

Separately, a comment letter wasreceived significantly after the commentperiod was closed objecting to the netcapital charges applicable to retailforeign currency options set forth inproposed Regulation 5.7(b)(2)(v)(B). TheCommission has determined to adoptthat provision as proposed, and toclarify that for both FCMs and RFEDsunlisted retail forex options are subjectto the existing net capital charges thatare applicable to an FCM for any otherunlisted foreign currency option that is

entered into with any eligible contractparticipant (which treatment is alsoconsistent with the treatment of allunlisted options, including foreign

currency options, for securities broker-dealers).

Requirement To Appoint a ChiefCompliance Officer. ProposedRegulation 5.18(j) calls for each retailforex counterparty (defined to include aretail foreign exchange dealer, an FCMor an affiliated person of an FCM) todesignate a Chief Compliance Officer. Inproposing this requirement, theCommission sought to promotecustomer protection by focusingresponsibility for an entitys regulatorycompliance. This requirement wascriticized on the basis that potentialpersonal liability for a Chief ComplianceOffice would discourage individualsfrom assuming that position, and

because no comparable requirementexists for firms engaging in on-exchangetransactions.

The Commission continues to believethat, given the history of fraudulent andimproper behavior in the retail forex

business, requiring a Chief ComplianceOfficer is a reasonable way to ensurethat retail forex counterparties observethe highest professional standards andtake their compliance obligationsseriously. Accordingly, this requirementis retained in final Regulation 5.18.

Prohibition of Guarantees AgainstCustomer Loss. Proposed Regulation5.16 would prohibit, among otherthings, the making of guarantees againstloss to retail foreign exchange customers

by FCMs, RFEDs and IBs. One currentlyregistered FCM commented that firmsshould be allowed to guarantee thatclients will not lose more than theiraccount balance because technologyallows for automatic liquidation ofpositions if the account balance falls

below margin requirements.

The Commission notes that not allretail forex counterparties havecomparable capabilities to deal withevents such as extremely volatilemarkets. Moreover, proposed regulation5.16 is based on Commission Regulation1.56, which prohibits FCMs and IBsengaged in futures and commodityoption transactions from making similarguarantees. At the time the Commissionproposed Regulation 1.56, it specificallynoted that the use of limited-risk andguarantee-against-loss agreements hadoften been associated with patterns ofallegedly unlawful conduct by FCMs orother registrants or with the financialinstability of such persons. 18 TheCommission does not view these dualconcernsrooted in consumerprotection and the financial stability offirmsas any less compelling today and



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20See 7 U.S.C. 2(c)(2)(B)(iii).21See 7 U.S.C. 2(c)(2)(C)(ii)(I).22See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);

2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III).23See 7 U.S.C. 2(c)(2)(B)(v).24See 7 U.S.C. 12a(5) (2006).25See Wall Street Reform Act, Sec. 721(a)(13).

26The Commission also disagrees with theargument that CRA Conference Report language isinapposite. The Conference Report states that [t]othe extent their risk profiles are similar, themanagers intend for FCMs and RFEDs to beregulated substantially equivalentlyin terms oftheir off-exchange retail foreign currency business.The managers do not intend for the Commission toprovide either FCMs or RFEDs with a morefavorable regulatory environmentover the other orto create two significantly different regulatoryregimes for similar business modelsto the extentthe financial risks posed by such operations aresimilar. See H.R. Rep. No. 110627 at 980 (Conf.Rep.) (emphasis added).

27See, for example, 7 U.S.C. 2(c)(2)(B)(iii).

2875 FR 3282, 328586.297 U.S.C. 6(c) (2006).

commenter maintains that this languageis restricted to requirements relating tothe financial soundness of the forexdealer and nothing else.

The CRA contains several provisionsthat touch on the scope of theCommissions jurisdiction over retailoff-exchange foreign currency contracts,whether futures or look-alike, leveraged

contracts. Retail off-exchange forexfutures and options transactions aresubject to numerous provisions of theAct including sections 4(b), 4b, 4c(b),4o, 6(c) and 6(d), 6c, 6d, 8(a), 13(a),13(b), if they are offered or entered into

by an FCM, an RFED, or an affiliate ofan FCM that is not one of the otherwiseregulated entities specified in the Act.20The same provisions apply to look-alikeforex transactions.21 The CRA clearlygives the Commission full rulemakingauthority over the agreements, contractsor transactions in retail forex wherereasonably necessary to effectuate any

of the provisions or to accomplish anyof the purposes of [the] Act. 22 On theother hand, however, while the CRAexplicitly grants the Commissionrulemaking authority over off-exchangeretail futures and options transactionswhere such transactions are offered orentered into by FCMs, their affiliates orRFEDs,23 its rulemaking authority withregard to look-alike transactions doesnot explicitly include FCMs. Thus, thecommenter concludes that language inSections 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii)limits the Commissions authority inthis area where FCMs are concerned.

The Commission disagrees. Section8a(5) of the Act gives the Commissionthe broadest possible authority to makeand promulgate such rules andregulations as, in the judgment of theCommission, are reasonably necessaryto effectuate any of the provisions or toaccomplish any of the purposes of thisAct[.] 24 Under this authority, theCommission has promulgated rulescovering the full scope of FCM activitiesgenerally. Furthermore, the recent WallStreet Reform and Consumer ProtectionAct of 2010 specifically defines FCMs asany individual, association,partnership, corporation, or trust * * *that * * * is * * * acting as acounterparty in any agreement, contractor transaction described in Section2(c)(2)(C)(i) of the Act,25 making itclear that the offering oflook-aliketransactions falls within the scope of

regulated FCM activity. Accordingly,the Commission sees no deficiencies inits authority to fully regulate FCMsengaged in look-alike forexcontracts.26

Definition of Retail ForexTransactions. One commenter pointedout that the definition ofretail forextransactions found in proposed

Regulation 5.1(m) refers to any account,agreement, contract or transactiondescribed in Section 2(c)(2)(B) or2(c)(2)(C) of the Act and notes that theuse of the word account in this contextis confusing.

Broad language in Section 2(c)(2)(B)(i)of the Act provides the Commissionwith jurisdiction over an agreement,contract or transaction in foreigncurrency that is a contract of sale of acommodity for future delivery (or anoption on such a contract) or an option(other than one traded on a securitiesexchange). Elsewhere in Section 2(c),the statute states that certain of itsprovisions apply to agreements,contracts or transactions * * * andaccounts or pooled investment vehicles* * *. 27 In order to accurately reflectthe full scope of authority granted itunder the Act, the Commissionincluded the word accounts withinthe definition ofretail forextransactions. The Commission does notview this as in any way inconsistentwith language in Section 2(c), asamended by the CRA, and hasdetermined to adopt the regulation asproposed.

Anticompetitiveness. In addition to

similar comments specificallyreferencing proposed Regulation 5.9(security deposits) and 5.18(h)(guaranteed IBs)which are addressedabovethe Commission receivednumerous comments arguing thatvarious other sections of the proposedrules were anticompetitive insofar asthere is no comparable requirementrelative to those engaged in futurestransactions on designated contractmarkets. As the Commission pointedout in its Proposing Release, it has,whenever possible, drawn upon theprinciples that have guided it in the

regulation of on-exchange instruments.However, the Commission also notedthat there are essential differences

between the trading futures contracts ondesignated contract markets that arecleared through designated clearingorganizations, on the one hand, and off-exchange transactions between forexfirms and retail customers, on the

other.28Given the principal-to-principal

nature of retail forex transactions andthe inherent conflicts of interest in therelationship between the retail customerand the dealer/counterparty, the lack oftransparency in the pricing andexecution of such transactions, and thevolume of fraud the Commission hasseen arising from such transactions, theCommission has determined topromulgate some regulations that areunique to, and tailored to, retail forextransactions. By way of example, theCommissions proposed regulationsincluded requirements that forexregistrants maintain records of customercomplaints; that counterparties disclose,with the Risk Disclosure Statement, thepercentage of profitablenondiscretionary forex customeraccounts; and that forex counterpartiesdesignate a chief compliance officer to

be responsible for development andimplementation of customer protectionpolicies and procedures. To the extentthe final rules published today do nottrack precisely with rules applicable toon-exchange futures trading, theCommission believes that thedifferences reflect meaningfuldifferences in the market structure ofretail forex transactions and that therules issued today are no morerestrictive or burdensome thannecessary to address these differences.

Scope of Commissions Authority andApplication of Other Rules. Severalcommenters lodged criticisms or madeobservations that go to the scope of theCommissions authority, as provided inthe Act and CRA, or otherwise. Forexample, several commentersmaintained that the Commission shouldrequire segregation of customer funds bycounterparties in order to provide someprotection in the event of a counterpartyinsolvency. The Commissionssegregation requirements with regard tofutures flow from Section 4d of theAct 29 which, generally speaking,requires that customer property fortrading commodity contracts be keptapart, or segregated, from the FCMsown funds. However, as noted in the



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3075 FR 3281, 3287 and 3290 (Jan. 20, 2010).3111 U.S.C. 761, et seq.32See, for example, Section 2(c)(2)(B)(iv)(I) of the

Act, 7 U.S.C. 2(c)(2)(B)(iv)(I), which provides theCommission with the authority to register andpromulgate rules regarding specifically definedpersons or entities. See also Section 2(c)(2)(B)(ii) ofthe Act which explicitly provides for a $20 millionminimum capital requirement.

335 U.S.C. 601, et seq.34By its terms, the RFA does not apply to

individuals. See 48 FR 14933, n. 115 (April 6,1983). Because associated persons must beindividuals, (see Commission Regulation 1.3(aa)and proposed Regulations 5.1(c), (d)(2), (e)(2), (g)(2)and (i)(2)), the RFA does not apply to APs and noanalysis of the economic impact of this ruleproposal on such persons is required.

3547 FR 18618 (April 30, 1982).36 Id. at 18619.

37 Id. at 1861920.3817 CFR 4.13(a)(2) (2009).3947 FR 18618, 18620.4048 FR 35248, 35276 (August 3, 1983)4148 FR 14933, 14955 (Apr. 6, 1983). See also 47

FR 18618, 18619.

42 Id.4344 U.S.C. 3501, et seq.

Commissions proposing release,30 asegregated funds regime cannot bereplicated in the context of off-exchangeretail forex trading. Unlike segregationof customer funds deposited for futurestrading, under the relevant provisions ofthe Bankruptcy Code,31 such amountsheld in connection with retail forextrading would not receive any

preferential treatment to unsecuredcreditors in bankruptcy.

Similarly, some commenters tookissue with the definitions of certainintermediaries and the capitalrequirements, found in the ProposingRelease. Here again, the Commission is

bound by statutory language that definesthe scope of its authority.32 While theCommission appreciates the concernsexpressed by these commenters and thetime they have taken to express them, itcan do no more than its statutoryauthority permits.

III. Related Matters

A. Regulatory Flexibility Act

FCMs and CPOs: The RegulatoryFlexibility Act (RFA) 33 requires thatagencies, in proposing rules, considerthe impact of those rules on small

businesses.34 The Commission hasalready established certain definitionsofsmall entities to be used inevaluating the impact of its rules onsuch small entities in accordance withthe RFA.35 In that statement, theCommission concluded that neitherFCMs nor registered CPOs should beconsidered to be small entities forpurposes of the RFA. With respect toFCMs, the Commissions determinationwas based in part upon their obligationto meet the capital requirementestablished by the Commission and thepurposes of protecting financialintegrity.36

As for CPOs, the Commissiondetermined that registered CPOs are notsmall entities based upon its existingregulatory standard for exemptingcertain small CPOs from the

requirement to register under the Act.37(A CPO need not register with theCommission if the gross capitalcontributions for all pools under itsmanagement do not exceed $400,000and there are not more than fifteenparticipants in any one of thosepools.38)

Thus, with respect to FCMs and

registered CPOs, the Commissionbelieves that these final rules will nothave a significant economic impact ona substantial number of small entities.

CTAs: The Commission haspreviously decided to evaluate, withinthe context of a particular rule proposal,whether all or some CTAs should beconsidered to be small entities, and ifso, to then analyze the economic impacton them of any such rule.39 CTAswishing to advise retail forex customersmay include both currently registeredCTAs and previously unregisteredpersons who now will be required to

register. As to the first group, thereshould be no significant new economicimpact. As to the second group,registration will require the submissionof application forms, fingerprinting ofprincipals, and payment of registrationfees. To the extent that CTAs can beconsidered to be small entities, theCommission does not consider eitherthe proposed registration fee or theproposed fingerprinting requirement fornewly registered CTAs to havesignificant economic impact.40

IBs: In 1983, the Commissionproposed that for purposes of the RFAand future rulemakings, it would notconsider introducing brokers to besmall entities for essentially the samereasons that FCMs had previously beendetermined not to be small entities.41This was based, in part, on the fact thatIBs, like FCMs, are required to maintaina specified level of adjusted net capital.In the Proposing Release, retail forex IBswould not have been subject to a capitalrequirement; rather, they would havehad to operate pursuant to a guaranteeagreement. Under the final rules, retailforex IBs will be treated no differentlythan futures IBs. Accordingly, and inkeeping with past Commission

determinations, the Commissionbelieves that the final rules with respectto IBs will not have a significant impacton a substantial number of smallentities.

RFEDs: RFEDs are a new category ofregistrant. The Commission does not

believe that there are regulatoryalternatives to those being proposedwhich would be consistent with thestatutory mandate to provide protectionto the public against irresponsible orfraudulent business practices. In theProposing Release, the Commissionproposed that RFEDs not be consideredto be small entities for essentially the

same reasons that FCMs have previouslybeen determined not to be smallentities.42 As with FCMs, a requirementto maintain a specified level of adjustednet capital would be imposed uponRFEDs to ensure that they maintainsufficient capital resources to guaranteetheir financial accountability and topromote responsible and reliable

business operations. Moreover, theCommission has sought to fashion itsproposed regulatory program for RFEDsin a manner which is responsive to thefunction, purposes, and size of theentity being regulated consistent with

the objective of the RFA. In particular,the minimum capital requirementrequired by the CRA effectuates theCongressional purpose that RFEDsmaintain sufficient reserve of capital toremain economically viable. For thereasons stated above, the Commissionwill not define RFEDs as small entitiesfor RFA purposes.

B. Paperwork Reduction Act

Under the Paperwork Reduction Actof 1995 (PRA) 43 an agency may notconduct or sponsor, and a person is notrequired to respond to, a collection ofinformation unless it displays a

currently valid control number. TheCommissions final rules regarding retailforex transactions result in informationcollection requirements within themeaning of the PRA. The Commissionsubmitted the proposing release alongwith supporting documentation to theOffice of Management and Budget(OMB) for review in accordance with44 U.S.C. 3507(d) and 5 CFR 1320.11.The Commission requested that OMBapprove, and with respect to thecollections required under the new part5 of the Commissions regulations,assign a new control number for, the

collections of information required bythe proposing release. The informationcollection burdens created by theCommissions proposed rules, whichwere discussed in detail in theproposing release, are identical to thecollective information collection

burdens of the final rules.The Commission invited the public

and other Federal agencies to commenton any aspect of the information



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447 U.S.C. 19(a).

45As noted in the Conference Report thataccompanied the CRA, To the extent their riskprofiles are similar, the managers intend for FCMsand RFEDs to be regulated substantiallyequivalently in terms of their off-exchange retailforeign currency business. H.R. Rep. No. 110627,at 980 (2008) (Conf. Rep.). The Conference Reportis available via the Internet on the CFTCs Web site.

collection requirements discussedabove. The Commission received nocomment on its burden estimates or onany other aspect of the informationcollection requirements contained in itsproposing release. The affectedcollections are as follows:

Existing Collection 30380024 (part1 of the Commissions regulations);



Existing Collection 30380055 (part160 of the Commissions regulations);and

New Collection 30380062 (part 5of the Commissions regulations).

C. Cost-Benefit Analysis

Section 15(a) of the Act 44 requires theCommission to consider the costs and

benefits of its action before issuing newregulations under the Act. By its terms,section 15(a) does not require theCommission to quantify the costs and

benefits of a new regulation or todetermine whether the benefits of theregulation outweigh its costs. Rather,section 15(a) simply requires theCommission to consider the costs and

benefits of its action.Section 15(a) further specifies that

costs and benefits shall be evaluated inlight of five broad areas of market andpublic concern, enumerated below.Accordingly, the Commission could, inits discretion, give greater weight to anyone of the five enumerated areas andcould, in its discretion, determine that,

notwithstanding its costs, a particularrule was necessary or appropriate toprotect the public interest or toeffectuate any of the provisions or toaccomplish any of the purposes of theAct.

As discussed in more detail above,these amendments are intended tocreate a comprehensive scheme toimplement the requirements of the CRA,and to put in place requirementsincluding registration, disclosure,recordkeeping, financial reporting,minimum capital and other operationalstandards. This is to be achieved

through both amendments to existingregulations and the creation of a new,free-standing part to the Commissionsregulations. The Commission isconsidering the costs and benefits of theamendments in light of the specificprovisions of section 15(a) as follows:

1. Protection of market participantsand the public. The amendments shouldenhance considerably the protection ofmarket participants and the public

because they require, for the first time,

the registration of several categories ofmarket participants and requireadherence to operational standards thathave not previously applied. The

benefits that inhere in the imposition ofthese requirements to a sector of the off-exchange market that has been largelyunregulated to this point, and which isgeared towards the retail public, are

manifest.2. Efficiency and competition. In its

Conference Report, Congress indicatedthat the Commission should avoidcreating two different regulatory regimesfor similar business models with respectto FCMs or RFEDs engaging in off-exchange retail forex transactions.45Accordingly, the Commission hasendeavored to ensure that these entities

be treated in comparable fashionrelative to one another. Moreover, theCommission has endeavored, whereverpossible, to propose regulations in part5 that are analogous to regulations

imposed upon intermediaries engagedin on-exchange transactions.Accordingly, the Commission believesthat it has provided an even handedregulatory scheme that will be familiarto industry participants.

3. Financial integrity of futuresmarkets and price discovery. Theamendments concern retail, off-exchange markets. These markets serveprimarily as a vehicle for members ofthe retail public to engage in speculativetransactions. Accordingly, theCommission does not perceive asignificant intersection between theoperations of these markets and thefinancial integrity or price discoveryfunctions of the markets generally.

4. Sound risk management practices.The amendments include requirementsregarding capital, financial reporting,risk assessment recordkeeping, and riskassessment reporting that arecomparable to those required of entitiesengaged in on-exchange trading. TheCommission believes that the benefits ofthese risk management requirementswhich strive to ensure the financialsoundness of firmshave been borneout on the exchange-traded side andwill be of significant benefit with regard

to its oversight of retail forexcounterparties.

5. Other public interestconsiderations. The retail, off-exchangeforex market has been largelyunregulated until now. The Commission

believes that the amendments arebeneficial in that they will provideneeded protections for members of thepublic engaging in these transactions.The amendments will also bring muchneeded oversight to the forexcounterparties and intermediaries thatinteract with the public.

After considering these factors, the

Commission has determined to adoptthe proposed rule changes. TheCommission did not receive anycomments relative to its analysis of thecost-benefit provision.

List of Subjects

17 CFR Part 1

Definitions, Minimum financial andreporting requirements. Recordkeepingrequirements, Prohibited transactions incommodity options, Miscellaneous.

17 CFR Part 3

Definitions, Customer protection,Licensing, Registration.

17 CFR Part 4

Advertising, Brokers, Commodityfutures, Commodity pool operators,Commodity trading advisors, Consumerprotection, Exemption from registration,Reporting and recordkeepingrequirements.

17 CFR Part 5

Bulk transfers, Commodity pooloperators, Commodity trading advisors,Consumer protection, Customersmoney, securities and property,

Definitions, Foreign exchange,Minimum financial and reportingrequirements, Prohibited transactions inretail foreign exchange, Recordkeepingrequirements, Retail foreign exchangedealers, Risk assessment, Special calls,Trading practices.

17 CFR Part 10

Adjudicatory proceedings, Rules ofpractice.

17 CFR Part 140

Authority delgations (Governmentagencies, Conflict of interests,

Organization and functions(Government agencies).

17 CFR Part 145

Confidential business information,Freedom of information.

17 CFR Part 147

Sunshine Act.

17 CFR Part 160

Consumer financial information,Definitions, Nonpublic personalinformation, Privacy.



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17 CFR Part 166

Arbitration, Authorization to trade,Customer protection, Definitions,Dispute settlement, Litigation,Reparations.

For the reasons presented above, theCommission hereby amends Chapter I ofTitle 17 of the Code of Federal

Regulations as follows:PART 1GENERAL REGULATIONSUNDER THE COMMODITY EXCHANGEACT

1. The authority citation for part 1continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a,6b, 6c, 6d, 6e, 6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n,6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c, 13a, 13a1,16, 16a, 19, 21, 23 and 24.

1.1 [Removed and Reserved]

2. Section 1.1 is removed andreserved.

3. Section 1.3 is amended by revisingparagraphs (nn) and (yy) to read asfollows:

1.3 Definitions.

* * * * *(nn) Guarantee agreement. This term

means an agreement of guaranty in theform set forth in part B or C of Form 1FR, executed by a registered futurescommission merchant or retail foreignexchange dealer, as appropriate, and byan introducing broker or applicant forregistration as an introducing broker on

behalf of an introducing broker or

applicant for registration as anintroducing broker in satisfaction of thealternative adjusted net capitalrequirement set forth in 1.17(a)(1)(iii).

* * * * *(yy) Commodity interest. This term

means:(1) Any contract for the purchase or

sale of a commodity for future delivery;(2) Any contract, agreement or

transaction subject to Commissionregulation under section 4c or 19 of theAct; and

(3) Any contract, agreement ortransaction subject to Commission

jurisdiction under section 2(c)(2) of theAct.

4. Section 1.4 is revised to read asfollows:

1.4 Use of electronic signatures.

For purposes of complying with anyprovision in the Commodity ExchangeAct or the rules or regulations in thisChapter I that requires a document to besigned by a customer of a futurescommission merchant or introducing

broker, a retail forex customer of a retailforeign exchange dealer or futures

commission merchant, a poolparticipant or a client of a commoditytrading advisor, an electronic signatureexecuted by the customer, participant orclient will be sufficient, if the futurescommission merchant, retail foreignexchange dealer, introducing broker,commodity pool operator or commoditytrading advisor elects generally to

accept electronic signatures; Provided,however, That the electronic signaturemust comply with applicable Federallaws and other Commission rules; And,Provided further, That the futurescommission merchant, retail foreignexchange dealer, introducing broker,commodity pool operator or commoditytrading advisor must adopt and utilizereasonable safeguards regarding the useof electronic signatures, including at aminimum safeguards employed toprevent alteration of the electronicrecord with which the electronicsignature is associated, after such record

has been electronically signed. 5. Section 1.10 is amended by revisingparagraph (j) to read as follows:

1.10 Financial reports of futurescommission merchants and introducingbrokers.

* * * * *(j) Requirements for guarantee

agreement. (1) A guarantee agreementfiled pursuant to this section must besigned in a manner sufficient to be a

binding guarantee under local law by anappropriate person on behalf of thefutures commission merchant or retailforeign exchange dealer and the

introducing broker, and each signaturemust be accompanied by evidence thatthe signatory is authorized to enter theagreement on behalf of the futurescommission merchant, retail foreignexchange dealer, or introducing brokerand is such an appropriate person. Forpurposes of this paragraph (j), anappropriate person shall be theproprietor, if the firm is a soleproprietorship; a general partner, if thefirm is a partnership; and either thechief executive officer or the chieffinancial officer, if the firm is acorporation; and, if the firm is a limited

liability company or limited liabilitypartnership, either the chief executiveofficer, the chief financial officer, themanager, the managing member, orthose members vested with themanagement authority for the limitedliability company or limited liabilitypartnership.

(2) No futures commission merchantor retail foreign exchange dealer mayenter into a guarantee agreement if:

(i) It knows or should have knownthat its adjusted net capital is less thanthe amount set forth in 1.12(b) of this

part or 5.6(b) of this chapter, asapplicable; or

(ii) There is filed against the futurescommission merchant or retail foreignexchange dealer an adjudicatoryproceeding brought by or before theCommission pursuant to the provisionsof sections 6(c), 6(d), 6c, 6d, 8a or 9 ofthe Act or 3.55, 3.56 or 3.60 of this

chapter.(3) A retail foreign exchange dealer

may enter into a guarantee agreementonly with an introducing broker asdefined in 5.1(f)(1) of this chapter. Aretail foreign exchange dealer may notenter into a guarantee agreement withan introducing broker as defined in 1.3(mm) of this part.

(4) A guarantee agreement filed inconnection with an application forinitial registration as an introducing

broker in accordance with theprovisions of 3.10(a) of this chaptershall become effective upon the grantingof registration or, if appropriate, atemporary license, to the introducing

broker. A guarantee agreement filedother than in connection with anapplication for initial registration as anintroducing broker shall becomeeffective as of the date agreed to by theparties.

(5)(i) If the registration of theintroducing broker is suspended,revoked, or withdrawn in accordancewith the provisions of this chapter, theguarantee agreement shall expire as ofthe date of such suspension, revocationor withdrawal.

(ii) If the registration of the futures

commission merchant or retail foreignexchange dealer is suspended orrevoked, the guarantee agreement shallexpire 30 days after such suspension orrevocation, or at such earlier time asmay be approved by the Commission,the introducing broker, and theintroducing brokers designated self-regulatory organization.

(6) A guarantee agreement may beterminated at any time during the termthereof:

(i) By mutual written consent of theparties, signed by an appropriate personon behalf of each party, with prompt

written notice thereof, signed by anappropriate person on behalf of eachparty, to the Commission and to thedesignated self-regulatory organizationsof the futures commission merchant orretail foreign exchange dealer and theintroducing broker;

(ii) For good cause shown, by eitherparty giving written notice of itsintention to terminate the agreement,signed by an appropriate person, to theother party to the agreement, to theCommission, and to the designated self-regulatory organizations of the futures



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commission merchant or retail foreignexchange dealer and the introducing

broker; or(iii) By either party giving written

notice of its intention to terminate theagreement, signed by an appropriateperson, at least 30 days prior to theproposed termination date, to the otherparty to the agreement, to the

Commission, and to the designated self-regulatory organizations of the futurescommission merchant or retail foreignexchange dealer and the introducing

broker.(7) The termination of a guarantee

agreement by a futures commissionmerchant, retail foreign exchange dealeror an introducing broker, or theexpiration of such an agreement, shallnot relieve any party from any liabilityor obligation arising from acts oromissions which occurred during theterm of the agreement.

(8) An introducing broker may notsimultaneously be a party to more thanone guarantee agreement: Provided,however, That the provisions of thisparagraph (j)(8) shall not be deemed topreclude an introducing broker fromentering into a guarantee agreementwith another futures commissionmerchant or retail foreign exchangedealer if the introducing broker, futurescommission merchant or retail foreignexchange dealer which is a party to theexisting agreement has provided noticeof termination of the existing agreementin accordance with the provisions ofparagraph (j)(6) of this section, and thenew guarantee agreement does not

become effective until the day followingthe date of termination of the existingagreement: And, provided further, Thatthe provisions of this paragraph (j)(8)shall not be deemed to preclude anintroducing broker from entering into aguarantee agreement with anotherfutures commission merchant or retailforeign exchange dealer if the futurescommission merchant or retail foreignexchange dealer which is a party to theexisting agreement ceases to remainregistered and the existing agreementwould therefore expire in accordancewith the provisions of paragraph

(j)(6)(ii) of this section.(9)(i)(A) An introducing broker that isa party to a guarantee agreement thathas been terminated in accordance withthe provisions of paragraph (j)(6) of thissection, or that is due to expire inaccordance with the provisions ofparagraph (j)(5)(ii) of this section, mustcease doing business as an introducing

broker on or before the effective date ofsuch termination or expiration unless,on or before 10 days prior to theeffective date of such termination orexpiration or such other period of time

as the Commission or the designatedself-regulatory organization may allowfor good cause shown, the introducing

broker files with its designated self-regulatory organization either a newguarantee agreement effective as of theday following the date of termination ofthe existing agreement, or, in the case ofa guarantee agreement that is due to

expire in accordance with theprovisions of paragraph (j)(4)(ii) of thissection, a new guarantee agreementeffective on or before such expiration, oreither:

(1) A Form 1FRIB certified by anindependent public accountant inaccordance with 1.16 as of a date notmore than 45 days prior to the date onwhich the report is filed; or

(2) A Form 1FRIB as of a date notmore than 17 business days prior to thedate on which the report is filed and aForm 1FRIB certified by anindependent public accountant inaccordance with 1.16 as of a date notmore than one year prior to the date onwhich the report is filed: Provided,however, that an introducing broker asdefined in 5.1(f)(1) of this chapter thatis party to a guarantee agreement thathas been terminated or that has expiredmust cease doing business as anintroducing broker on or before theeffective date of such termination orexpiration unless, on or before 10 daysprior to the effective date of suchtermination or expiration or such otherperiod of time as the Commission or thedesignated self-regulatory organizationmay allow for good cause shown, the

introducing broker files with itsdesignated self-regulatory organization anew guarantee agreement effective on or

before the termination or expiration dateof the terminating or expiring guaranteeagreement.

(B) Each person filing a Form 1FRIB in accordance with this section mustinclude with the financial report astatement describing the source of hiscurrent assets and representing that hiscapital has been contributed for thepurpose of operating his business andwill continue to be used for suchpurpose.

(ii)(A) Notwithstanding the provisionsof paragraph (j)(9)(i) of this section or of 1.17(a), an introducing broker that is aparty to a guarantee agreement that has

been terminated in accordance with theprovisions of paragraph (j)(6)(ii) of thissection shall not be deemed to be inviolation of the minimum adjusted netcapital requirement of 1.17(a)(1)(iii) or(a)(2) for 30 days following suchtermination. Such an introducing brokermust cease doing business as anintroducing broker on or after theeffective date of such termination, and

may not resume doing business as anintroducing broker unless and until itfiles a new agreement or either:

(1) A Form 1FRIB certified by anindependent public accountant inaccordance with 1.16 as of a date notmore than 45 days prior to the date onwhich the report is filed; or

(2) A Form 1FRIB as of a date not

more than 17 business days prior to thedate on which the report is filed and aForm 1FRIB certified by anindependent public accountant inaccordance with 1.16 as of a date notmore than one year prior to the date onwhich the report is filed: Provided,however, that an introducing broker asdefined in 5.1(f)(1) of this chapter thatis party to a guarantee agreement thathas been terminated must cease doing

business as an introducing broker fromand after the effective date of suchtermination, and may not resume doing

business as an introducing broker asdefined in 5.1(f)(1) of this chapterunless and until it files a new guaranteeagreement.

(B) Each person filing a Form 1FRIB in accordance with this section mustinclude with the financial report astatement describing the source of hiscurrent assets and representing that hiscapital has been contributed for thepurpose of operating his business andwill continue to be used for suchpurpose.

* * * * * 6. Section 1.35 is amended by revisingparagraphs (a), (a1) and (b) to read asfollows:

1.35 Records of cash commodity,futures, and option transactions.

(a) Futures commission merchants,retail foreign exchange dealers,introducing brokers, and members ofcontract markets. Each futurescommission merchant, retail foreignexchange dealer, introducing broker,and member of a contract market shallkeep full, complete, and systematicrecords, together with all pertinent dataand memoranda, of all transactionsrelating to its business of dealing incommodity futures, retail forex

transactions, commodity options, andcash commodities (includingcurrencies). Each futures commissionmerchant, retail foreign exchangedealer, introducing broker, and memberof a contract market shall retain therequired records, data, and memorandain accordance with the requirements of 1.31, and produce them for inspectionand furnish true and correct informationand reports as to the contents or themeaning thereof, when and as requested

by an authorized representative of theCommission or the United States



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Department of Justice. Included amongsuch records shall be all orders (filled,unfilled, or canceled), trading cards,signature cards, street books, journals,ledgers, canceled checks, copies ofconfirmations, copies of statements ofpurchase and sale, and all other records,data and memoranda, which have beenprepared in the course of its business of

dealing in commodity futures, retailforex transactions, commodity options,and cash commodities. Among suchrecords each member of a contractmarket must retain and produce forinspection are all documents on whichtrade information is originally recorded,whether or not such documents must beprepared pursuant to the rules orregulations of either the Commission orthe contract market. For purposes of thissection, such documents are referred toas original source documents.

(a1) Futures commission merchants,retail foreign exchange dealers,

introducing brokers, and members ofcontract markets: Recording ofcustomers and option customersorders. (1) Each futures commissionmerchant, each retail foreign exchangedealer and each introducing brokerreceiving a customers, retail forexcustomers or option customers order,as applicable, shall immediately uponreceipt thereof prepare a written recordof the order including the accountidentification, except as provided inparagraph (a1)(5) of this section, andorder number, and shall record thereon,

by timestamp or other timing device, thedate and time, to the nearest minute, the

order is received, and in addition, foroption customers orders, the time, tothe nearest minute, the order istransmitted for execution.

(2)(i) Each member of a contractmarket who on the floor of such contractmarket receives a customers or optioncustomers order which is not in theform of a written record including theaccount identification, order number,and the date and time, to the nearestminute, the order was transmitted orreceived on the floor of such contractmarket, shall immediately upon receiptthereof prepare a written record of the

order in nonerasable ink, including theaccount identification, except asprovided in paragraph (a1)(5) of thissection or appendix C to this part, andorder number and shall record thereon,

by timestamp or other timing device, thedate and time, to the nearest minute, theorder is received.

(ii) Except as provided in paragraph(a1)(3) of this section:

(A) Each contract market member whoon the floor of such contract marketreceives an order from another memberpresent on the floor which is not in the

form of a written record shall,immediately upon receipt of such order,prepare a written record of the order orobtain from the member who placed theorder a written record of the order, innon-erasable ink including the accountidentification and order number andshall record thereon, by time-stamp orother timing device, the date and time,

to the nearest minute, the order isreceived; or

(B) When a contract market memberpresent on the floor places an order,which is not in the form of a writtenrecord, for his own account or anaccount over which he has control, withanother member of such contract marketfor execution:

(1) The member placing such orderimmediately upon placement of theorder shall record the order and time ofplacement to the nearest minute on asequentially-numbered trading cardmaintained in accordance with the

requirements of paragraph (d) of thissection;(2) The member receiving and

executing such order immediately uponexecution of the order shall record thetime of execution to the nearest minuteon a trading card or other recordmaintained pursuant to therequirements of paragraph (d) of thissection; and

(3) The member receiving andexecuting the order shall return suchtrading card or other record to themember placing the order. The memberplacing the order then must submittogether both of the trading cards or

other records documenting such trade tocontract market personnel or theclearing member, in accordance withcontract market rules adopted pursuantto paragraph (j)(1) of this section.

(iii) Each contract market may adoptrules, which must be submitted to theCommission pursuant to section5a(a)(12)(A) of the Act and CommissionRegulation 1.41, that provide alternativerequirements to those contained inparagraph (a1)(2)(ii) of this section.Such rules shall, at a minimum, requirethat the contemporaneous writtenrecords:

(A) Contain the terms of the order;(B) Include reliable timing data for theinitiation and execution of the orderwhich would permit complete andeffective reconstruction of the orderplacement and execution; and

(C) Be submitted to contract marketpersonnel or clearing members inaccordance with contract market rulesadopted pursuant to paragraph (j)(1) ofthis section.

(3)(i) The requirements of paragraph(a1)(2)(ii) of this section will not applyif a contract market maintains in effect

rules which have been submitted to theCommission pursuant to section5a(a)(12)(A) of the Act and CommissionRegulation 1.41, which provide for anexemption where:

(A) A contract market member placeswith another member of such contractmarket an order that is part of a spreadtransaction;

(B) The member placing the orderpersonally executes one or more legs ofthe spread; and

(C) The member receiving andexecuting such order immediately uponexecution of the order records the timeof execution to the nearest minute onhis trading card or other recordmaintained in accordance with therequirements of paragraph (d) of thissection.

(ii) Each contract market shall, as partof its trade practice surveillanceprogram, conduct surveillance forcompliance with the recordkeeping andother requirements under paragraphs(a1) (2) and (3) of this section, and fortrading abuses related to the executionof orders for members present on thefloor of the contract market.

(4) Each member of a contract marketreporting the execution from the floor ofthe contract market of a customers oroption customers order or the order ofanother member of the contract marketreceived in accordance with paragraphs(a1)(2)(i) or (a1)(2)(ii)(A) of thissection, shall record on a written recordof the order, including the accountidentification, except as provided inparagraph (a1)(5) of this section, and

order number, by timestamp or othertiming device, the date and time to thenearest minute such report of executionis made. Each member of a contractmarket shall submit the written recordsof customer orders or orders from othercontract market members to contractmarket personnel or to the clearingmember responsible for the collection oforders prepared pursuant to thisparagraph as required by contractmarket rules adopted in accordancewith paragraph (j)(1) of this section. Theexecution price and other informationreported on the order tickets must be

written in nonerasable ink.(5) Post-execution allocation ofbunched orders. Specific customeraccount identifiers for accountsincluded in bunched orders need not berecorded at time of order placement orupon report of execution if therequirements of paragraphs (a1)(5)(i)(iv) of this section are met.

(i) Eligible account managers. Theperson placing and directing theallocation of an order eligible for post-execution allocation must have beengranted written investment discretion



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retail foreign exchange dealer carryingthe account for which each commodityfutures, retail forex and commodityoption transaction was executed on thatday. Provided, however, that wherereproductions on microfilm, microficheor optical disk are substituted for hardcopy in accordance with the provisionsof 1.31(b) of this part, the requirements

of paragraphs (b)(1) and (b)(2) of thissection will be considered met if theperson required to keep such records isready at all times to provide, andimmediately provides in the same cityas that in which such personscommodity retail forex or commodityoption books and records aremaintained, at the expense of suchperson, reproduced copies which showthe records as specified in paragraphs(b)(1) and (b)(2) of this section, onrequest of any representatives of theCommission or the U.S. Department of

Justice.

* * * * * 7. Section 1.36 is amended by revisingparagraph (a) to read as follows:

1.36 Record of securities and propertyreceived from customers and optioncustomers.

(a) Each futures commission merchantand each retail foreign exchange dealershall maintain, as provided in 1.31, arecord of all securities and propertyreceived from customers, retail forexcustomers or option customers in lieu ofmoney to margin, purchase, guarantee,or secure the commodity, retail forex orcommodity option transactions of such

customers, retail forex customers oroption customers. Such record shallshow separately for each customer,retail forex customer or optioncustomer: A description of the securitiesor property received; the name andaddress of such customer, retail forexcustomer or option customer; the dateswhen the securities or property werereceived; the identity of the depositoriesor other places where such securities orproperty are segregated or held; thedates of deposits and withdrawals fromsuch depositories; and the dates ofreturn of such securities or property to

such customer, retail forex customer oroption customer, or other dispositionthereof, together with the facts andcircumstances of such other disposition.In the event any futures commissionmerchant deposits with the clearingorganization of a contract market,directly or with a bank or trust companyacting as custodian for such clearingorganization, securities and/or propertywhich belong to a particular customer oroption customer, such futurescommission merchant shall obtainwritten acknowledgment from such

clearing organization that it wasinformed that such securities orproperty belong to customers or optioncustomers of the futures commissionmerchant making the deposit. Suchacknowledgment shall be retained asprovided in 1.31.

* * * * * 8. Section 1.37 is amended by revisingparagraph (a)(1) to read as follows:

1.37 Customers or option customersname, address, and occupation recorded;record of guarantor or controller ofaccount.

(a)(1) Each futures commissionmerchant, retail foreign exchangedealer, introducing broker, and memberof a contract market shall keep a recordin permanent form which shall show foreach commodity futures, retail forex oroption account carried or introduced byit the true name and address of theperson for whom such account iscarried or introduced and the principaloccupation or business of such personas well as the name of any other personguaranteeing such account or exercisingany trading control with respect to suchaccount. For each such commodityoption account, the records kept by suchfutures commission merchant,introducing broker, and member of acontract market must also show thename of the person who has solicitedand is responsible for each optioncustomers account or assign accountnumbers in such a manner to identifythat person.

* * * * * 9. Section 1.40 is revised to read asfollows:

1.40 Crop, market information letters,reports; copies required.

Each futures commission merchant,each retail foreign exchange dealer, eachintroducing broker and each member ofa contract market shall, upon request,furnish or cause to be furnished to theCommission a true copy of any letter,circular, telegram, or report publishedor given general circulation by suchfutures commission merchant, retailforeign exchange dealer, introducing

broker or member which concerns cropor market information or conditions thataffect or tend to affect the price of anycommodity or exchange rate, and thetrue source of or authority for theinformation contained therein. 10. Section 1.46 is amended byrevising paragraphs (a) and (b) to readas follows:

1.46 Application and closing out ofoffsetting long and short positions.

(a) Application of purchases andsales. (1) Except with respect to

purchases or sales which are foromnibus accounts, or where thecustomer or account controller hasinstructed otherwise, any futurescommission merchant who, on orsubject to the rules of a designatedcontract market or registered derivativestransaction execution facility:

(i) Purchases any commodity for

future delivery for the account of anycustomer when the account of suchcustomer at the time of such purchasehas a short position in the same futureof the same commodity on the samemarket;

(ii) Sells any commodity for futuredelivery for the account of any customerwhen the account of such customer atthe time of such sale has a long positionin the same future of the samecommodity on the same market;

(iii) Purchases a put or call option forthe account of any option customerwhen the account of such optioncustomer at the time of such purchasehas a short put or call option positionwith the same underlying futurescontract or same underlying physical,strike price, expiration date and contractmarket as that purchased; or

(iv) Sells a put or call option for theaccount of any option customer whenthe account of such option customer atthe time of such sale has a long put orcall option position with the sameunderlying futures contract or sameunderlying physical, strike price,expiration date and contract market asthat soldshall on the same day applysuch purchase or sale against such

previously held short or long futures oroption position, as the case may be, andshall, for futures transactions, promptlyfurnish such customer a statementshowing the financial result of thetransactions involved and, if applicable,that the account was introduced to thefutures commission merchant by anintroducing broker and the names of thefutures commission merchant andintroducing broker.

(2) Any futures commission merchantor retail foreign exchange dealer who:

(i) Engages in a retail forex transactioninvolving the purchase of any currency

for the account of any retail forexcustomer when the account of suchretail forex customer at the time of suchpurchase has an open retail forextransaction for the sale of the samecurrency;

(ii) Engages in a retail forextransaction involving the sale of anycurrency for the account of any retailforex customer when the account ofsuch retail forex customer at the time ofsuch sale has an open retail forextransaction for the purchase of the samecurrency;



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(iii) Purchases a put or call optioninvolving foreign currency for theaccount of any option customer whenthe account of such option customer atthe time of such purchase has a shortput or call option position with thesame underlying currency, strike price,and expiration date as that purchased;or

(iv) Sells a put or call optioninvolving foreign currency for theaccount of any option customer whenthe account of such option customer atthe time of such sale has a long put orcall option position with the sameunderlying currency, strike price, andexpiration date as that soldshallimmediately apply such purchase orsale against such previously heldopposite transaction, and shall promptlyfurnish such retail forex customer astatement showing the financial resultof the transactions involved and, ifapplicable, that the account was

introduced to the futures commissionmerchant or retail foreign exchangedealer by an introducing broker and thenames of the futures commissionmerchant or retail foreign exchangedealer, and the introducing broker.

(b) Close-out against oldest openposition. In all instances wherein theshort or long futures, retail forextransaction or option position in suchcustomers, retail forex customers oroption customers account immediatelyprior to such offsetting purchase or saleis greater than the quantity purchased orsold, the futures commission merchantor retail foreign exchange dealer shall

apply such offsetting purchase or sale tothe oldest portion of the previously heldshort or long position: Provided, Thatupon specific instructions from thecustomer or option customer theoffsetting transaction shall be applied asspecified by the customer or optioncustomer without regard to the date ofacquisition of the previously heldposition; and Provided, further, that afutures commission merchant or retailforeign exchange dealer, if permitted bythe rules of a registered futuresassociation, may offset, at thecustomers request, retail forex

transactions of the same size, even if thecustomer holds other transactions of adifferent size, but in each case mustoffset the transaction against the oldesttransaction of the same size. Suchinstructions may also be accepted fromany person who, by power of attorneyor otherwise, actually directs trading inthe customers, retail forex customers oroption customers account unless theperson directing the trading is thefutures commission merchant or retailforeign exchange dealer (including anypartner thereof), or is an officer,

employee, or agent of the futurescommission merchant or retail foreignexchange dealer. With respect to everysuch offsetting transaction that, inaccordance with such specificinstructions, is not applied to the oldestportion of the previously held position,the futures commission merchant orretail foreign exchange dealer shall

clearly show on the statement issued tothe customer, retail forex customer oroption customer in connection with thetransaction, that because of the specificinstructions given by or on behalf of thecustomer, retail forex customer oroption customer the transaction was notapplied in the usual manner, i.e., againstthe oldest portion of the previously heldposition. However, no such showingneed be made if the futures commissionmerchant or retail foreign exchangedealer has received such specificinstructions in writing from thecustomer, retail forex customer or

option customer for whom such accountis carried.

* * * * * 11. Section 1.52 is amended by: a. Revising paragraphs (a), and (c)introductory text, (c)(1), and (c)(2);b. Revising paragraphs (g)(3) and(g)(4); and c. Revising paragraphs (h), (j), and (k)to read as follows:

1.52 Self-regulatory organizationadoption and surveillance of minimumfinancial requirements.

(a) Each self-regulatory organizationmust adopt, and submit for Commission

approval, rules prescribing minimumfinancial and related reportingrequirements for all its members whoare registered futures commissionmerchants or registered retail foreignexchange dealers. Each self-regulatoryorganization other than a contractmarket must adopt, and submit forCommission approval, rules prescribingminimum financial and relatedreporting requirements for all itsmembers who are registered introducing

brokers. Each contract market whichelects to have a category of membershipfor introducing brokers must adopt, and

submit for Commission approval, rulesprescribing minimum financial andrelated reporting requirements for all itsmembers who are registered introducing

brokers. Each self-regulatoryorganization shall submit forCommission approval any modificationor other amendments to such rules.Such requirements must be the same as,or more stringent than, those containedin 1.10 and 1.17, for futurescommission merchants and introducing

brokers, and 5.7 of this chapter forretail foreign exchange dealers. The

definition of adjusted net capital mustbe the same as that prescribed in 1.17(c) for futures commissionmerchants and introducing brokers, and 5.7(b)(2) of this chapter for futurescommission merchants offering orengaging in retail forex transactions andfor ret

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