Forex Trading Brokers: Requirements to be Licensed by NFA/CFTC

ForexNewsNow | Published on September 26, 2011 at 10:26 am

ForexNewsNow – Since President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21st, 2010, a slew of legislation was put into effect that addresses how online foreign exchange brokers with clients based in the United States must conduct themselves in order to continue executing forex trades for their U.S. based clientele.

The Dodd-Frank federal statute combined with the Food, Conservation and Energy Act of 2008 gives the Commodity Futures Trading Commission or CFTC broad authority in the regulation of off exchange retail foreign exchange transactions.

The National Futures Association or NFA follows CFTC regulations and requires all of its members engaged in off-exchange retail foreign exchange transactions to be registered with the CFTC in a variety of capacities.

CFTC Registration for Online Foreign Exchange Brokers

The CFTC and the NFA both require that an online forex broker doing business for U.S. based customers must be registered with the CFTC as a futures commission merchant or FCM or a new category of registrant called an RFED or retail foreign exchange dealer.

Also, any online forex broker which opens an online trading account for a customer, solicits orders, operates a trading pool or trades for others in a discretionary account must also be registered with the CFTC as either an associated person or AP, an introducing broker or IB, a commodity pool operator or CPO or as a commodity trading advisor or CTA.

Other provisions of the Dodd-Frank Act oblige foreign exchange brokers to maintain accurate records, give full disclosure of trading and financial activities, and maintain minimum capital requirements and other operational and procedural standards.

Financial Requirements for Forex Brokers

The CFTC’s new capital requirement for an online forex broker that opens an online trading account for a U.S. based client in the capacity of a FCM or RFED is a minimum balance of $20 million dollars plus an additional five percent on retail forex customer’s liabilities in excess of $10 million.

Also, leverage for accounts are subject to a security deposit requirement that is set by the NFA within the parameters established by the CFTC. Disclosure and other account statements must be sent to clients to comply with the reporting and record keeping requirements.

New NFA Requirements

In August of 2011, the CFTC approved amendments to the NFA requirements governing retail forex activities for NFA members. Under NFA Bylaw 306, NFA members are considered Forex Dealer Members if they are registered as RFEDs or FCMs with the CFTC and offer or act as counterparty to a retail forex transaction.

The new amendments also require Forex Dealer Members or FDMs to maintain an office in the continental United States, Alaska, Hawaii or Puerto Rico. The U.S. office would be responsible for the preparation and maintenance of CFTC and NFA records and reports and would be under the supervision of a listed principal and a registered AP of the Forex Dealer Member residing at that office.

Other amendments cover Procedures for Bulk Assignment or Liquidation of Forex Positions: Cessation of Customer Business and the Supervision of the Use of Electronic Trading Systems. The amendments were first published in a March 3rd, 2011 submission letter from the NFA to the CFTC.

The new regulations due to the Dodd-Frank Act are being gradually implemented with the CFTC and the NFA carefully assessing every detail to avoid forex fraud and provide traders with a secure trading environment. Nevertheless, many U.S. based traders are not happy with the new changes.   

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