NFA Ramps up Regulations in Reaction to the SNB Storm

Higher capital requirements and tighter risk management standards are around the corner for Futures Commission Merchants

The U.S. National Futures Association has come up with a proposal for amending the rules under which Forex Dealer Members (FDMs) are regulated. These include all US-based foreign exchange dealers.

The NFA announcement did not mention FXCM by name, but however outlined that a certain FX dealer had fallen short of $220 million to match its capital requirements in January, therefore triggering the move.

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After the turmoil sparked by the Swiss National Bank’s decision in January to scrap the floor under EUR/CHF exchange rate, the capital requirements and risk management practices by FDMs have been questioned.

The resulting repercussions for the U.S. regulated brokers could be significant, especially for those who are not also regulated as Futures Commission Merchants (FCMs). The new requirements on risk management practices aim to bring the status of the FDMs closer to those of FCMs and Swap Dealers (SDs).

The newly proposed rules will also require brokers to hold more capital in trades with large customers  as well as with their subsidiaries outside of the U.S.

While the rules are yet to be approved by the U.S. Commodity Futures Trading Commission, this is usually a formality rather than a thorough review process. Costs for retail foreign exchange traders could increase as a result of the actions undertaken by the U.S. regulators.

As per the definitions used in the NFA announcement, the new capital requirements for FDMs will take into account the risks associated with forex transactions between the FDM and eligible contract participant (ECP) counterparties, especially those acting as foreign dealers.

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The main concern here is that the bulk of FXCM’s losses came from its UK-based subsidiary. In case of a company bankruptcy, which was prevented with the loan from Leucadia National, the clients  would have been treated as general creditors with no preference in bankruptcy, and the customer losses would have been significant.

Consequently, under the new regulatory framework, FDMs will be required to collect security deposits from ECP counterparties, furthermore, FDMs should be prohibited from acting as counterparties to an ECP acting as a dealer, unless that dealer collects and maintains from its customers and ECP counterparties security deposit amounts of at least equal to the amount that the FDM is required to collect and maintain.

FDMs will also have to make public disclosures similar in nature to those required of FCMs under the risk management program for FCMs.

The Board of the NFA determined that each FDM should also be required to adopt a risk management program designed to monitor and manage the risks associated with its forex activities.

As mentioned before, the new capital requirements touch on the activities of subsidiaries of the companies operating outside of the U.S. FDMs will be required to maintain an adjusted net capital equal to $20,000,000 plus 5% of all liabilities the Forex Dealer Member owes to customers.
Yet, this is not where it ends, 10% has been added on top of all liabilities the FDM owes to eligible contract participant counterparties affiliated with the broker (including regional subsidiaries) and those acting as a dealer.

In addition, 10% of all liabilities that the FDMs owe to eligible contract participant counterparties acting as a dealer not  affiliated to the FDM in question, including liabilities related to retail commoding transactions.

Taking a look at the latest set of CFTC data from March, all of the major FDMs regulated in the U.S. will meet the new capital requirements relating to 5% of their liabilities to customers. FXCM has an excess net capital totaling $42.5 million, GAIN Capital has $20 million, IBFX has about $14 million, while OANDA’s reserve stands at around $60 million.


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