Similarly, no FDM that utilizes straight-through processing can suggest that they are not the counterparty to a customer's trade. Additionally, an FDM or an IB may not represent that it offers "no-slippage" or can guarantee fills unless it can demonstrate that all orders on its platform have been executed at the price initially quoted when the order was placed on the platform and it does not have the authority to adjust customer accounts so as to have the effect of changing the price at which the order was executed.
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In other words, if an FDM "re-quotes" prices or has the contractual right to make adjustments that directly or indirectly change the price of an order after it is executed, it cannot claim to have no slippage. Any reference to hypothetical performance results that could have been achieved using your trading system must comply with NFA Compliance Rule c and the related Interpretive Notice as if the performance results were for on-exchange transactions. Finally, promotional materials may never guarantee against loss. Members remain responsible for meeting their regulatory obligations in situations where they utilize or promote forex trading systems developed by third parties.
Specifically, an FDM has direct responsibility for misleading promotional material if the FDM prepares or distributes it; has agency responsibility if the trading system developer is an agent of the FDM under established principles of agency law; and has supervisory responsibility if the Member fails to supervise its own employees in its activities with a third-party system developer. Members must maintain all promotional material for five years from the date of last use and must keep it readily accessible for the first two years. Furthermore, Members must maintain supporting documentation for all statements, claims and performance results included in promotional materials.
FDMs, and their Associates, may not exercise trading authority over a customer account for which the FDM is, or is offering to be the counterparty. An FDM may not carry offsetting positions in a customer account and must offset the positions on a first-in, first-out basis. A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size, but the transaction must be offset against the oldest transaction of that size.
An FDM is prohibited from directly or indirectly canceling or adjusting the price of executed customer orders, with two exceptions. The first exception is where the adjustment is done to settle a customer complaint in the favor of the customer. An FDM may also adjust orders even in the absence of individual customer complaints if the customer were adversely affected by a technical problem with the Member's trading platform. However, an FDM may not adjust prices on customer orders that benefitted from the error and may not cherry-pick which account to adjust. The second exception is where the FDM uses exclusively "straight-through processing" such that it automatically executes without human intervention and without exception an offsetting position to a customer order with another counterparty prior to providing an execution to the customer order.
An FDM that adjusts an executed customer order based on an adjustment by a counterparty must provide notice to the affected customer within fifteen minutes of the customer order having been executed.
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The notice must state that the Member intends to cancel or adjust the price of the order to reflect the adjusted price provided by the Member's counterparty and must include documentation of the cancelation or price adjustment from the counterparty. The Member must either cancel or adjust all customer orders executed during the same time period and in the same currency pair or option regardless of whether they were buy or sell orders. All cancellations or adjustments of executed customer orders must be reviewed and approved in writing by a listed principal of the Member who is also an AP.
Such review must include the documentation from the counterparty and must be provided to NFA. Finally, any Member that may elect to cancel or adjust executed customer orders based upon liquidity provider price changes must provide customers with written notice of that fact prior to the time the customer first engages in forex transactions with the Member. In the context of FDM trading systems, price slippage sometimes occurs between the time a customer first submits an order and the time the order reaches the FDM's system. When this occurs, some FDMs immediately requote the customer the current price and require the customer to confirm that it still wants to place the order at the requoted price.
Other FDMs have built in slippage parameters that permit execution of the order if the slippage is within the established parameters. FDMs that use slippage parameters must apply the slippage settings uniformly regardless of the direction the market has moved. If the FDM requotes prices when the market moves against it, it must requote prices when the market moves in its favor.
FDMs are prohibited from permitting customers to fund their commodity interest accounts with a credit card or other electronic funding mechanisms that draw funds from a credit card. FDMs may accept customer deposits from electronic payment mechanisms that draw funds directly from a customer's account at a financial institution provided that the FDM is able to distinguish, prior to accepting funds, between an electronic funding method that draws funds from a customer's account at a financial institution and a traditional credit card, and be able to reject the credit card before accepting customer funds.
See Notice to Members I Each Member must maintain books and records necessary to conduct its business and FDMs must provide forex customers with timely and accurate notice of the status of their accounts. Account activity includes offsetting transactions, rollovers, deliveries, option exercise, option expirations, trades that have been reversed or adjusted, and monetary adjustments. In those cases where a customer's account had either no open positions at the end of the monthly statement or any changes to the account balance since the prior statement, the Member is must still provide a monthly statement at least once every three months.
Each FDM must, not later than the next business day after any retail forex or forex option transaction, furnish the retail customer with the following:. Upon the request of an FDM's customer with respect to a particular executed forex transaction of that customer, an FDM must provide the customer, within 30 minutes of the customer's request, with certain transaction data for the 15 forex transactions that occur immediately before and after in the same currency pair of the customer's transaction.
Members and their Associates that have supervisory responsibilities must diligently supervise the Member's forex business. This includes supervising the activities of the Member's employees and agents. The annual report must include a certification by the FDM's CCO or chief executive officer that to the best of his or her knowledge and reasonable belief, and under penalty of law, the information contained in the annual report is accurate and complete.
Members must establish, maintain, and enforce written supervisory procedures reasonably designed to detect and prevent violations of NFA rules. While these interpretive notices do not directly apply to forex transactions, the principles included in them are equally applicable to those transactions. NFA recognizes that, given the differences in the size and complexity of the operations of Members, there must be some degree of flexibility in determining what constitutes "diligent supervision" for each firm.
Firms should tailor their procedures to their unique circumstances as long as they meet certain minimum requirements. An adequate supervisory program includes on-site visits to branch offices and guaranteed IBs that conduct forex business on behalf of the Member.
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Your firm should consider the characteristics of the branch office or guaranteed IB when deciding how often to visit it and what the visit should cover. How formal the training program is will depend on the size of the firm and the nature of its business. CFTC Regulation 5. The requirements also apply to an FDM that uses another entity's trading system through a "white-labeling" agreement. An FDM must adopt and enforce written procedures to address security, capacity, credit and risk management controls, recordkeeping, and trade integrity with regard to its electronic trading platform.
Each year, a principal who is also registered as an AP of the Member must certify that the firm has met the relevant standards for their electronic trading system. Members must protect the reliability and confidentiality of customer orders and account information, and the procedures must assign responsibility for overseeing the process to one or more individuals who understand how it works and who are capable of evaluating whether the process complies with the firm's procedures.
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Members must maintain adequate personnel and facilities for the timely and efficient delivery of customer orders and reporting of executions and for the timely and efficient execution of customer orders. In addition, the procedures must be designed to handle customer complaints about order delivery, execution, and reporting and to handle those complaints in a timely manner.
Members must have procedures reasonably designed to prevent customers from entering into trades that create undue financial risks for the Member or the Member's other customers. FDMs who have trading platforms that claim to automatically liquidate positions before an account goes into a deficit must set the automatic liquidation levels high enough so that positions will be closed out at prices that will prevent the account from going into a deficit position under all but the most extraordinary market conditions. The Member's trading system must record and maintain essential information regarding customer orders and account activity.
The Member's trading system must also produce daily exception reports showing price adjustments and orders filled outside of the price range displayed by the system when the customer order reached the platform. The Member should review these reports for suspicious or unjustifiable activity. The Member's trading system must also produce daily reports showing each price change on the platform, the time of the change to the nearest second, and the trading volume at that time and price as well as the method used to determine the price for any forex transactions.
Members must have in place procedures reasonably designed to ensure the integrity of trades placed on their trading platforms. Three areas of particular concern include the following:.
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A Member becomes responsible for these dues when it first offers to be a counterparty to a forex transaction or accepts a forex trade. Thereafter, NFA assesses dues on the firm's membership renewal date and will base them on the FDM's most recent certified financial statement. An "order segment" is a record of any line of data associated with an order. Each of these is a separate segment: 1 an order is added, 2 an order is modified, and 3 an order is cancelled or filled.
In addition, any unfilled open orders that are carried over by the system are considered a new order segment the next day. FDMs must collect security deposits from customers. These security deposits help protect FDMs against losses from defaulting customers and ECP counterparties, which, if significant enough, could cause an FDM to become insolvent and put the funds of its other, non-defaulting customers and ECP counterparties at risk. The security deposit must be at least:. An FDM may not, however, decrease the required security deposit amount below the highest minimum security deposit amount as applicable to a particular currency under NFA Financial Requirements Section Additionally, an FDM is prohibited from acting as a counterparty to an ECP acting as a dealer unless that dealer [2] collects and maintains from its customers and ECP counterparties security deposit amounts for forex equal or greater to the amounts required by NFA Financial Requirements Section If the currency pair includes currencies with different security deposit requirements, the Member must collect the higher percentage amount.
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Therefore, if the transaction pairs the U. For short options, the FDM must collect the security deposit plus the premium the customer received. For long options, the FDM must simply collect the entire premium from the customer. The FDM must calculate the security deposit when the positions are initiated and at least daily thereafter.