NFA Starts Registering Forex Brokers and "Solicitors"


The CFTC final rules on the regulation of retail foreign exchange have now been officially published in the Federal Register. At the same time they have also authorized the NFA "to process and grant applications for initial registration, renewed registration and withdrawals of retail foreign exchange dealers (RFEDs) and their associated persons (APs)", effective from September 10th.

The CFTC has previously authorized NFA to perform the full range of registration functions with regard to FCMs, IBs, CTAs, CPOs and their respective APs, including granting applications for initial registration and renewed registration; enabling withdrawals and issuing temporary licenses to eligible APs; and conducting proceedings to deny, condition, suspend, restrict or revoke the registration of existing registrants or applicants for registration in each category. By today’s order the Commission authorizes NFA to perform these functions with regard to RFEDs and their APs.

Retail foreign exchange dealers (‘RFEDs’) are a new class of regulated entity permitted by the new regulations to act as counterparties to off-exchange retail forex contracts. As the CFTC puts it:

RFEDs are counterparties not engaged primarily or substantially in the offer and sale of exchange-traded futures.

In plainer English, if your forex broker doesn't allow you to trade futures as well as spot forex they have until October 18th to get registered with the NFA as an RFED, or they won't be legally entitled to accept your orders. This means the brokers themselves now have to join the queues of IBs waiting to get registered with the NFA since September 2nd. As you can see on the NFA website even the biggest names are having to go through this process. FXCM's application to become an RFED has been pending since September 8th, for example.

The new regulations also:

Require the registration of intermediaries who solicit retail customers to participate in off-exchange forex contracts, who pool customer money for the purpose of trading off-exchange currency contracts, or who manage customer money for this purpose. In the final rules published today, the Commission has determined that these entities should be registered in the existing categories of introducing broker (‘‘IB’’), commodity pool operator (‘‘CPO’’), or commodity trading advisor (‘‘CTA’’), as appropriate.

Amongst other things, the NFA registration process states that:

All forex firms registering as a Retail Foreign Exchange Dealer, Introducing Broker (Independent or Guaranteed), Commodity Trading Advisor or Commodity Pool Operator must meet the following requirements:

  • Applicants must file a completed 7-R form through NFA's Online Registration System (ORS).
  • Applicants registering as Guaranteed Introducing Brokers must submit a completed Guarantee Agreement (Form 1-FR-IB Part B) from an RFED or FCM. Applicants registering as Independent Introducing Brokers must meet additional financial requirements.

as well as:

All individuals who solicit retail off-exchange forex business or who supervise that activity will be required to take and pass two exams. One is the National Commodity Futures Examination (NCFE or Series 3), which covers on-exchange futures trading theory, terminology, and regulation. The second exam is the Retail Off-Exchange Forex Examination, Series 34.

and that:

NFA requires all individual applicants to submit fingerprint cards, which are sent to the Federal Bureau of Investigation (FBI) to determine if the applicant has a criminal record.

I'm not a lawyer, but my interpretation is that not only will anyone who advertises forex brokers have to do a lot of paperwork and join the NFA. They'll have to study and pass an exam on forex too. On top of that they'll also have to do the exam for on-exchange futures. All before October 18th.  If that does in fact prove to be the case then a question arises about what will be done with anyone unfortunate enough not to have completed the process in time. It's all very well making lots of new laws, rules and regulations, but what happens when the time comes to enforce them? Do the NFA and the CFTC have the means to track down and prosecute each and every transgressor? It's not that long ago that the CFTC were complaining that they didn't have sufficient resources for their current workload.  How will they possibly be able to cope with this additional burden?

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