Magazine article Modern Trader

NFA Lassos Forex Markets

Magazine article Modern Trader

NFA Lassos Forex Markets

Article excerpt

PROTECTIVE CUSTODY

The Commodity Futures Modernization Act of 2000 was supposed to provide legal certainty for the regulation of retail foreign exchange trading, hut left several loopholes for the unscrupulous to prey on uninformed retail investors.

Attempting to close those loopholes, the National Futures Association (NFA) submitted to the Commodity Futures Trading Commission (CFTC) a series of rule changes.

The rule amendments, if approved, will extend the reach of the NFA's forex sales practice rules and strengthen the forex capital requirements.

Proposed Rule 2-39 adds financial requirements, including requiring futures commission merchant's (FCM) with affiliates that engage in offexchange forex transactions with retail customers to maintain a minimum of $5 million in adjusted net capital.

Cynthia Cain, NFA director of planning and development, says while sophisticated entities understand credit risk and the need for capital to be set aside, many retail customers may not understand the risk of dealing with someone who is not financially sound.

"The idea behind requiring firms to have a minimum capital requirement of $5 million is it better ensures that firms will operate ethically if it has that kind of a financial stake in their own firm," Cain says.

Another rule change attempts to give the NFA more authority over unregistered entities that conduct business through regulated NFA member firms. The original rules permitted unregulated entities to solicit for regulated members, but did not allow for the NFA to interfere with any misleading practices they may have engaged in. …

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