According to existing regulations, the National Futures Association (NFA) requires Forex Dealer Members to daily calculate the amount owed to their customers for forex transactions and hold at least the same amount of assets in a qualifying banking institution or in the US or money center country (forex funds depository).
The so-called Financial Requirements Section 14, has been amended with additional rules which will require FDMs to report the balances of these accounts to the NFA or to a third party which has been designated by the NFA. Complying with this requirement is mandatory for all FDMs.
The move comes a month after the NFA presented amendments to a crucial ruling affecting client money for US regulated FX dealers.
The regulator has chosen the CME Group to collect the balance reports directly via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. For those who have no access to SWIFT, the NFA has prepared an internal reporting system which collects the data on retail forex funds directly from forex funds depositories.
Over the last several weeks, NFA has been working closely with FDMs and their bank depositories to ensure that those banks have established connectivity with CME, or NFA directly, to report the daily balances.
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Up until now, the NFA has had access to this data by requesting it directly from the corresponding banks of the FDMs.
Starting on October 16th, the bank depositories will be required to report end of day cash balances, so FDMs must ensure that all banks holding their retail forex customer funds are sufficient to cover the amount owed to customers for foreign exchange transactions.
The NFA intends to expand its requirements over the next several months requiring all fund depositories, including prime brokers, to report all balances for accounts holding assets being used to cover an FDM’s liability to its retail forex customers.
The NFA states that it will provide FDMs with sufficient advance notice before phasing in other depositories and reporting requirements, and will of course work with the FDM and depository communities in implementing the requirements.
The US operating environment for FDMs has faced a plethora of reforms after the 2008 “great financial crisis”. With spot FX being classified as an OTC derivatives instrument, the country’s obsession with regulation of the space after the implementation of the Dodd-Frank Act, changed the entire regulatory landscape.
Several companies have already left the US retail foreign exchange market with FXDD and ILQ being the most recent examples of predatory regulatory scrutiny in the country. The number of market participants has been dwindling in the past couple of years with widespread industry consolidation.