The National Futures Association (NFA) sent a notice to its Forex Dealers Members (FDMs) reminding them that it’s proposed amendments to FDM financial requirements are set to go into effect on October 31st. The amendments, expected to be approved by the CFTC prior to their effective date, enforce the first stage in the capital requirement increases passed by Congress last spring as part of the CFTC Reauthorization Act of 2008. The amendments will require FDMs to maintain a minimum net capital of $10 million. This is the first of three requirement increases set to culminate in a $20 million requirement in the spring of 2009. Forex Dealer Members who intend to continue operating past the deadline must submit estimated net capital computations to the NFA by 10am on October 31st.
The amendment also includes a revision to NFA financial requirements Section 12(b). Section 12(b) called for increased capital requirements of 200% of the base requirement for FDMs that take advantage of the security deposit exemption allowing clients to hold less than 1% margin on open positions. Under the amended requirements, firms who fall under the security deposit exemption will only be required to maintain 150% of the base requirement.
The latter revision does alleviate some of the unnecessary regulatory overhead on firms who utilize the exemption. Nevertheless the requirement does not take into account the amount of leverage used by the respective firms. Thus, the requirement still places undue burden on smaller firms while potentially exposing larger firms to excessive risk. As of late, several Forex dealers have commented on the need for a formula based rule properly addressing the risks of lower margin requirements.