Bart Mallon, Esq.
NFA to Issue Guidance on Regulations
Now that the CFTC has finalized the retail Forex regulations the Forex community will now set forth to figure out exactly what will be happening next. Today I called the NFA to get clarification on a couple of items with respect to the new regulations and I was surprised to hear that the NFA is planning to release guidance on the new regulations tomorrow. The representative that I spoke with did not know much about tomorrow’s release. Below I discuss the issues which were the subject of the conversation as well as some general thoughts and questions that we will be working on over the next 6-8 weeks with respect to the new regulations.
Registration Required by October 18, 2010
The central question I had was whether managers (forex CTAs, CPOs) and introducing brokers would need to be actually registered (i.e. completes fingerprints and forex exams) by the time that the regulations are effective. The NFA representative that I spoke with said that yes, forex managers would need to be registered by October 18, 2010. This means that firms who provide investment advice with respect to retail forex will need to cease providing such advice unless the managers are registered with the NFA. Even if a firm is registered, no APs of the firm may provide advice with respect to retail forex unless such APs have passed the Series 34 exam. However, APs which were registered as such with the NFA on May 22, 2008 do not have to pass the Series 34.
If this is the case — and we will find out tomorrow — the requirement for forex managers and IBs to be registered by October 18 presents a number of logistical issues.
The first issue is that these managers will need to have passed both the Series 3 and Series 34 exams. As many forex managers are not currently APs of a CFTC registered firm, they will generally not have the Series 3 exam. The Series 3 exam has nothing to do with retail forex trading so persons without futures/commodities industry experience will need to take special care to prepare accordingly. Managers will also need to have passed the Series 34 exam. Studying for and passing both of these exams in the next 6 weeks or so is going to be very difficult.
The second issue will be whether the NFA staff can handle the increased amount of applications from forex managers. The NFA has previously said that they specifically updated their systems to handle an increase in applications (because of forex registration requirements). However, when I asked the NFA representative whether the NFA has hired additional staff to deal with the extra registrations, the NFA representative could not answer me – I suspect the answer is “no” the NFA has not hired additional examiners.
A second part of this issue involves the review and approval of disclosure documents. Both forex CTAs and forex CPOs will need to have their disclosure documents reviewed by the NFA. While registration can be completed fairly quickly if a manager has completed the forex exams and the fingerprint requirement, the disclosure document review process is not short. Typically the review process will last anywhere from 4-8 weeks from the time that the disclosure documents are submitted to the NFA for review (which cannot be sooner than the date a firm is registered). [Note: it is most common for the review process to take around 6-8 weeks depending on the nature of the forex firm.] This means that even if a manager is able to complete the registration process by October 18, it is likely that the manager would not be able to conduct business if the disclosure documents were not approved, which could probably not happen by October 18 even if the manager completed registration tomorrow! It is unclear whether the CFTC and NFA recognize this reality or whether they will grant an exception for managers who have made a good faith effort to comply with the registration requirements.
[Note: the NFA takes much longer to approve the applications for forex IBs - genrally it will take anywhere from 4-8 months for a forex IB to become registered.]
There are a number of other questions and issues which have arisen. The following are some questions we are getting and our current responses:
How long will 100:1 leverage (majors) and 25:1 leverage (non-majors) be applicable? The NFA is now tasked with creating new leverage levels which cannot be exceed 50:1 (majors) or 20:1 (non-majors). It would make sense if the current leverage levels remain in force until October 18, 2010. The NFA is likely to propose rules with respect to leverage prior to October 18.
How will the Series 34 exam change? The current Series 34 exam is based on current NFA rules and bylaws which are currently in flux after the CFTC final forex regulations. Test takers should note that certain questions may be asked on the exam which do not comport with current law and other rulemaking. The NFA should be addressing this issue shortly.
Can managers manage accounts from the U.S. for only offshore investors at offshore forex dealers without registration? Probably not. We are still trying to figure out how the final regulations deal with this issue.
Can traders move their forex trading to SEC registered broker dealers to get higher leverage? Probably not. While the SEC will have jurisdiction over broker-dealers who want to offer retail forex, it is unlikely that the SEC will (under its own rulemaking) allow more leverage than the CFTC. The SEC would likely defer to the CFTC with respect to the leverage requirements. Also, FINRA recently proposed a leverage requirement for its member firms which was much lower than the current CFTC regulations.
Can individuals create accounts (either individually or through offshore companies) at offshore forex dealers in order to access higher leverage overseas? Probably not. The major intent of Dodd-Frank and the final CFTC regulations was to keep U.S. citizens from trading with overseas brokers. It is likely that the CFTC and NFA are going to take a hard stance on this issue.
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