NFA Enhanced Monitoring of Segregated Funds and Increases FOREX Capital Requirements to Protect Customer Funds

January 3, 2013 by Thomas F. Burke, P.C.

Early in 2012, the National Futures Association ("NFA"), seeking to better protect customer funds, approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer funds, including banks, clearing Futures Commission Merchants ("FCMs"), broker-dealers and money market accounts to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCMs designated self-regulatory organization ("DSRO"). Each DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to ensure that the figures corroborate each other.

In November, the NFA Board of Directors approved an amendment to Financial Requirements Section 4, requiring each FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances on a daily basis to a third party designated by NFA. The first phase of the daily confirmation system, which relates to banks, was expected to be fully implemented by December 31, 2012. Other categories of depositories will be added in 2013.

Another amendment approved by the NFA Board of Directors in November of 2012 was to increase the capital requirements for FCMs acting as counterparties in FOREX transactions in off-exchange foreign currency transactions with eligible contract participants ("ECPs"). NFA noted that three FCMs ceased to act as FOREX dealer members and were almost exclusively acting as counterparties to FOREX transactions with ECPs. NFA had concerns that these firms could be subject to inadequate capital requirements. Additionally, NFA could not find a rationalization that an FCM that acts as a counterparty to a retail FOREX transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type of transaction with an ECP must only maintain a minimum of $1 million in capital. NFA has submitted the amendment to the Commodity Futures Trading Commission for approval.