2010-21729

FR Doc 2010-21729[Federal Register: September 10, 2010 (Volume 75, Number 175)]

[Rules and Regulations]

[Page 55409-55452]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr10se10-14]

[[Page 55409]]

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Part II

Commodity Futures Trading Commission

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17 CFR Parts 1, 3, 4, et al.

Regulation of Off-Exchange Retail Foreign Exchange Transactions and

Intermediaries; Final Rule

[[Page 55410]]

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 3, 4, 5, 10, 140, 145, 147, 160, and 166

RIN 3038-AC61

Regulation of Off-Exchange Retail Foreign Exchange Transactions

and Intermediaries

AGENCY: Commodity Futures Trading Commission.

ACTION: Final rules.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or

``CFTC'') is adopting a comprehensive regulatory scheme to implement

the provisions of the Dodd-Frank Wall Street Reform and Consumer

Protection Act of 2010 (``Wall Street Reform Act'') \1\ and the CFTC

Reauthorization Act of 2008 (``CRA'') \2\ with respect to off-exchange

transactions in foreign currency with members of the retail public

(i.e., ``retail forex transactions''). The new regulations and

amendments to existing regulations published today establish

requirements for, among other things, registration, disclosure,

recordkeeping, financial reporting, minimum capital, and other

operational standards.

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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

Public Law 111-203 (2010).

\2\ Food, Conservation, and Energy Act of 2008, Public Law 110-

246, 122 Stat. 1651, 2189-2204 (2008).

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DATES: Effective Date: October 18, 2010.

FOR FURTHER INFORMATION CONTACT: For information regarding financial

and related reporting requirements, contact: Thomas Smith, Chief

Accountant and Deputy Director, Division of Clearing and Intermediary

Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

number: 202-418-5495; facsimile number: 202-418-5547; and electronic

mail: [email protected] Jennifer Bauer, Special Counsel, Division of

Clearing and Intermediary Oversight, Division of Clearing and

Intermediary Oversight, 1155 21st Street, NW., Washington, DC 20581.

Telephone number: 202-418-5472; facsimile number: 202-418-5547; and

electronic mail: [email protected]

For all other information contact: William Penner, Deputy Director,

Division of Clearing and Intermediary Oversight, 1155 21st Street, NW.,

Washington, DC 20581. Telephone number: 202-418-5450; facsimile number:

202-418-5547; and electronic mail: [email protected] Christopher

Cummings, Special Counsel, Division of Clearing and Intermediary

Oversight, 1155 21st Street, NW., Washington, DC 20581. Telephone

number (202) 418-5450; facsimile number: 202-418-5547; and electronic

mail: [email protected] Peter Sanchez, Special Counsel, Division of

Clearing and Intermediary Oversight, 1155 21st Street, NW., Washington,

DC 20581. Telephone number (202) 418-5450; facsimile number: 202-418-

5547; and electronic mail: [email protected]

SUPPLEMENTARY INFORMATION:

I. Background

On January 20, 2010, the Commission published in the Federal

Register proposed new regulations and amendments to existing

regulations in response to the CRA (the ``Proposing Release'').\3\ The

Proposing Release set forth in detail the historical background of the

regulation of retail forex transactions, and the events, legislative

and otherwise, that led up to the enactment of the CRA.\4\ The

Commission explained that its proposed regulations were drawn up with

the aim of applying the same principles that have guided the regulation

of on-exchange instruments, while taking into account the real

differences between the trading of futures contracts on designated

contract markets (``DCMs'') that are cleared through Commission-

registered derivatives clearing organizations (``DCOs'') on the one

hand, and off-exchange transactions between forex firms and retail

customers on the other hand.\5\

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\3\ Regulation of Off-Exchange Retail Foreign Exchange

Transactions and Intermediaries, 75 FR 3282 (Jan. 20, 2010).

\4\ See 75 FR 3282, 3283-3285.

\5\ See 75 FR 3282, 3285.

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The proposed rule changes were of two general sorts. The first

group included amendments to existing regulations to accommodate

regulation of retail forex transactions and the new registration

categories created under the CRA. The second group comprised a new part

5 of the Commission's regulations, encompassing, to the extent

practicable, the regulations pertaining specifically to persons

engaging in retail forex transactions. For example, many of the

operational or registration requirements in part 1 or part 3,

respectively, of the Commission's regulations referring to futures

commission merchants (``FCMs'') would, as a result of the CRA, now

apply also to retail foreign exchange dealers (``RFEDs''). Some of the

disclosure, reporting and recordkeeping requirements in part 4 had to

be modified to apply to operators of pooled investment vehicles and

advisors that engage in retail forex transactions, as called for under

the CRA. Other parts of the Commission's regulations required their own

adaptations in order to extend customer protection, privacy and

procedural requirements to retail forex transactions.

The Commission also noted in its Proposing Release that in addition

to the regulations expressly called for by the CRA, it was proposing

certain additional requirements prompted both by the essential

differences between on-exchange transactions and retail forex

transactions, and by the history of fraudulent practices in the retail

forex market.\6\ The proposed regulatory changes were discussed,

section by section.\7\

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\6\ See 75 FR 3282, 3286.

\7\ See 75 FR 3282, 3286-3293.

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Following the publication of the Proposing Release, the Wall Street

Reform Act was enacted which, in relevant part, requires that specified

Federal regulatory agencies, including the CFTC, promulgate rules

regarding retail forex transactions. Consistent with the CRA, the Wall

Street Reform Act directs that such rules prescribe appropriate

requirements with respect to disclosure, recordkeeping, capital and

margin, reporting, business conduct, and such other standards or

requirements as the Federal regulatory agencies determine to be

necessary.\8\

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\8\ See Wall Street Reform Act, Sec. 742.

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Thus, pursuant to the broad authority granted by the Wall Street

Reform Act and the CRA, the Commission is implementing requirements

for, among other things: Registration, disclosure, recordkeeping,

financial reporting, minimum capital, and other operational standards,

based on existing CFTC regulations for commodity interest transactions

and commodity interest intermediaries, and on existing National Futures

Association (``NFA'') rules with respect to retail forex transactions

offered by NFA's members. With certain exceptions, the Commission is

adopting the rule changes delineated in the Proposing Release as

proposed.

Except for certain otherwise-regulated financial intermediaries

excluded by the CRA from the Commission's jurisdiction, persons

offering to be or acting as counterparties to retail forex

transactions, but not primarily or substantially engaged in the

exchange-traded futures business, are required to register with the

CFTC as RFEDs. Registered FCMs that are ``primarily or substantially''

(as defined in the new regulations) engaged in the activities set forth

in the definition in the Commodity

[[Page 55411]]

Exchange Act (the ``Act'') of an FCM \9\ are permitted to engage in

retail forex transactions without also registering as RFEDs. Also, the

$20 million minimum net capital standard established in the CRA for

registering as an RFED or offering retail forex transactions as an FCM

is incorporated in the new regulations.

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\9\ 7 U.S.C. 1a(20) (2006).

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The new regulations also require certain entities other than RFEDs

and FCMs that intermediate retail forex transactions to register with

the Commission as introducing brokers (``IBs''), commodity trading

advisors (``CTAs''), commodity pool operators (``CPOs'') or associated

persons (``APs'') of such entities, as appropriate, and to be subject

to the Act and regulations applicable to that registrant category.

Finally, pursuant to the authority conferred by the CRA,\10\ and to

address cases where the Commission's jurisdiction has been challenged,

the Commission is adopting the proposed regulatory provisions

applicable to certain leveraged, off-exchange retail forex transactions

commonly known as ``Zelener contracts.'' \11\

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\10\ See 7 U.S.C. 2(c)(2)(C)(iv).

\11\ See 75 FR 3282, 3284-3285.

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II. The Comments on the Proposing Release

The Commission received in excess of 9,100 comments \12\ from a

range of commenters, including individuals who trade forex,

intermediaries, registered FCMs currently serving as counterparties in

retail forex transactions, trade associations or coalitions of industry

participants, one committee of a county lawyers' association, a

registered futures association, and numerous law firms representing

institutional clients. Many commenters offered specific recommendations

for clarification or modification of particular rules; other commenters

objected generally to particular proposed rules. Overall, the bulk of

the comments concerned four of the proposed rules:

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\12\ The Comment letters referred to in this release are

available through the Commission's Web site: http://www.cftc.gov/

LawRegulation/PublicComments/10-001.html.

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Proposed Regulation 5.9, which would impose a 10 to 1

leverage limitation on retail forex transactions. (``Security Deposit

Proposal'' or ``Leverage Proposal'')

Proposed Regulation 5.18(h), which would require each IB

that solicits or accepts off-exchange retail forex orders to enter into

a guarantee agreement with the FCM or RFED to which the IB introduces

the forex transactions. (``Guaranteed IB Proposal'')

Proposed Regulation 5.18(j), which would require all

retail forex counterparties to calculate, on a quarterly basis, the

percentage of non-discretionary accounts that were profitable, to

include the results of this calculation for the preceding four quarters

in required disclosures to customers, and to maintain and make

available upon request records reflecting such calculations for five

years. (``Disclosure Proposal'')

Proposed Regulation 5.7, which would establish a minimum

capital requirement for FCMs and RFEDs (``Capital Proposal'')

The comments regarding these proposed rules and the Commission's

response are discussed immediately below. The Commission's response to

comments concerning other aspects of the proposed rules follows later.

Given the volume of comments received, the Commission cannot

respond to each and every comment or objection. However, the Commission

has carefully reviewed and considered each letter and, in the sections

that follow, has endeavored to address both the primary themes running

throughout multiple letters and significant points raised by individual

commenters.

Security Deposit Proposal. In general terms, proposed Regulation

5.9 would have required FCMs and RFEDs engaging in retail forex

transactions to collect from each retail forex customer a minimum

security deposit equal to 10 percent of the notional value of each

retail forex transaction. This proposal is often referred to in the

comment letters as a 10% or 10:1 leverage requirement (i.e., for every

$10 of notional value, $1 is required as a security deposit).

The Commission received a significant number of comment letters

regarding the Security Deposit Proposal with a substantial majority of

the commenters objecting to the proposed level of 10%. Many of the

letters submitted with regard to this issue appeared to be submitted by

individual traders, were identical or nearly identical, and objected

generally to the proposal. Within the large group of comments by such

traders, whether in ``form'' letter objections or otherwise, the most

common objections were that the leverage proposal would drive business

off-shore, would lead to the loss of jobs in the U.S., was

unnecessarily restrictive and would inhibit small traders' ability to

trade profitably, or that the percentage required as a security deposit

was arbitrary, capricious and anti-competitive.

Other commenters noted that by increasing the security deposit

level, retail forex customers are exposed to greater levels of market

and credit risk. Many of these commenters believe that the

amplification that is provided by increased leverage is necessary for

clients to earn a profit from their positions. Still other commenters

urged that NFA's current levels be retained and asserted that the

Commission had already approved these levels by allowing NFA's proposed

rule regarding leverage to become effective.

Finally, one commenter encouraged the Commission to (1) recognize

the different market risks and volatility posed by different

currencies, (2) adopt requirements reflective of those differences just

as contract markets do in establishing their margin levels, and (3)

endorse or adopt some mechanism to allow for periodic review and

adjustment of the requirements if necessary.

The Commission's proposed leverage restriction was conservative and

was proposed in an effort to provide maximum customer protection. The

Commission does not, however, believe it was arbitrary or contrary to

previously approved NFA rules.\13\ Moreover, the Commission does not

believe that most retail foreign exchange customers select a

counterparty based solely on the maximum allowable leverage, otherwise

these investors would have already migrated to foreign markets, some of

which have no limitation on leverage. Nevertheless, after considering

the concerns expressed and arguments made in the comments, the

Commission has determined to adopt a revised security deposit

requirement for FCMs engaging in retail forex transactions and for

RFEDs.

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\13\ As noted above, several commenters maintained that the

proposed Regulation 5.9 was inconsistent with security deposit

levels set by NFA and approved by the Commission. In February 2009,

NFA proposed and the Commission approved amendments to Section 12 of

NFA's Financial Requirements. (See Letter from Thomas W. Sexton to

David A. Stawick, dated February 23, 2009, regarding Forex Security

Deposits--Proposed Amendments to NFA Financial Requirements Section

12 and Interpretive Notice Regarding Forex Transactions, available

on NFA's website at nfa.futures.org.) NFA's amendments left in place

requirements of a 1% security deposit for major currencies and a 4%

deposit for all other currencies, but eliminated an exemption from

these requirements for well-capitalized firms. As NFA noted in its

proposed amendments, exempted firms had offered leverage of 200:1,

400:1 and even 700:1. NFA's February 2009 amendments effectively

reduced the amount of leverage available to retail forex customers.

The Commission approved the amendments, in accordance with the

standards set in Section 17(j) of the Act.

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In developing the revised Regulation 5.9, the Commission once again

[[Page 55412]]

reviewed futures exchange margin levels, NFA's current security deposit

requirements, and comparable requirements found in other jurisdictions.

Final Regulation 5.9 permits the registered futures association

(``RFA'') of which the FCM or RFED is a member to determine specific

security deposit levels within parameters set forth by the Commission

in the regulation.\14\ The Commission has provided minimum security

deposit amounts of 2 percent of the notional value for major currency

pairs and 5 percent of the notional value for all other retail forex

transactions. The Commission will periodically review the parameters it

has set in light of market conditions and adjust them as necessary.

Similarly, each RFA (i.e., NFA) will be required to designate which

currencies are ``major currencies,'' and must review, no less

frequently than annually, major currency designations and security

deposit requirements, and must adjust the designations and requirements

as necessary in light of changes in the volatility of currencies and

other economic and market factors. It is the Commission's view that

revised Regulation 5.9 will provide a mechanism for setting security

deposit levels that is both anchored in, and adaptable to, market

conditions.

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\14\ NFA is currently the only futures association registered

with the Commission.

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Disclosure of Profitable vs. Non-Profitable Accounts. As proposed,

Regulation 5.5(e) required that the risk disclosure statement provided

to every retail forex customer include disclosure of the number of non-

discretionary accounts maintained by the FCM or RFED that were

profitable and those that were not, during the four most recent

calendar quarters. Commenters called the provision anti-competitive and

doubted that measurement of profitable accounts could be done in a way

that would permit comparison. Proposed Regulation 5.18(i) required that

each retail forex counterparty prepare and maintain on a quarterly

basis a calculation of the percentage of non-discretionary retail forex

accounts open for any period of time during the quarter that earned a

profit, and the percentage of such accounts that experienced a loss.

Some commenters asserted that the Commission did not provide

adequate guidance or a standard methodology for calculating ``winners''

and ``losers.'' Commenters stated that the proposal was ambiguous and

that the reported percentages may not be comparable across the

industry. In addition, commenters thought that there was too much

subjectivity in determining ``winners'' and ``losers'' and that,

therefore, the resulting disclosure would not be helpful for customers.

Other commenters stated that by requiring retail forex firms to

disclose the percentage of profitable accounts quarterly, the

Commission would be unfairly singling out retail forex dealers, as this

information is not required on the futures side or for broker-dealers.

As noted in the Proposing Release, there are significant

differences between trading futures contracts on an exchange and

entering into off-exchange transactions between forex firms and retail

customers.\15\ The Commission believes that as a result of the inherent

conflicts embedded in the operations of the retail over-the-counter

forex industry, such disclosure is necessary. To illustrate potential

conflicts of interests in the off-exchange retail forex industry, the

Commission in its Proposing Release pointed out that the retail forex

counterparty: (i) Is the counterparty to the customer, which sets up a

``zero-sum game'' between the customer and the retail forex dealer;

(ii) provides quotes to their customers, which may not be the best

quote at the time and may not even be a competitive quote; and (iii)

enters into a principal-to-principal transaction with the non-

discretionary retail forex accountholder. At each stage of the

transaction, the retail forex counterparty has an inherent conflict

with its non-discretionary retail forex accountholders. By contrast, in

exchange-traded futures markets, accountholders do not encounter the

same level of conflicts that retail forex customers face, and,

therefore, a requirement to disclose the percentage of non-

discretionary retail accounts that were profitable and not profitable

is appropriate in retail forex markets, while it may not be elsewhere.

As a result of the industry structure and operational conflicts, the

Commission believes that this disclosure is necessary to protect the

non-discretionary retail forex accountholder.

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\15\ See 75 FR 3282, 3285.

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So while the Commission continues to believe in the value and

effectiveness of such disclosures, it is adopting Regulation 5.5(e) and

Regulation 5.18(i) with certain amendments, in order to address

concerns regarding the implementation of the rule. As proposed, the

calculation for determining whether a retail forex account was

profitable or not during a quarter would be net of fees, commissions,

any other expenses, trading results, customer funds deposited, and

customer funds withdrawn. The regulation as adopted provides further

guidance in response to commenters' concerns. The final rule clarifies

that a retail forex account will be considered either ``profitable'' or

``not profitable,'' with ``not profitable'' including accounts that

break-even.

The Commission is also clarifying the required time periods for

which the required calculations in Regulation 5.5(e)(1) and 5.5(e)(2)

must be made and records maintained and made available. Regulation

5.5(e)(1) requires that information regarding profitable and not

profitable accounts for the four most recent quarters be included in

disclosure documents; Regulation 5.5(e)(2) requires that similar

quarterly information be maintained for five years and provided to

requesting customers or potential customers. As to the 5.5(e)(1)

information, once these regulations are effective, FCMs and RFEDs must

provide the required information for the past four quarters. FCMs and

RFEDs also must update this information going forward on a quarterly

basis and disclose the most current four quarters in disclosure

documents provided to potential customers.

Regulation 5.5(e)(2) requires an RFED or FCM to provide to a

customer or potential customer the same account information as set out

in Regulation 5.5(e)(1) for the most recent five-year period during

which the RFED or FCM maintained non-discretionary retail forex

customer accounts, but only at the request of the customer or potential

customer. The Commission intends that this requirement to keep and make

available five years worth of profitable and non-profitable account

information be prospective; following the adoption of these rules, FCMs

and RFEDs are required to keep and maintain such data going forward on

a quarterly basis until such time as they have amassed five years worth

of information, at which point they will have to keep and make

available the information for the five most recent years. Furthermore,

prior to amassing five years of performance information, an FCM or RFED

is obligated to provide, upon request by a customer or prospective

customer, the historical quarterly performance information for as many

quarters as the FCM or RFED has available.

In addition, to provide clarity regarding the type of accounts that

must be used in making the calculation of profitable and unprofitable

accounts, FCMs and RFEDS must use those retail forex accounts, as

defined in Regulation 5.1(i), that are non-discretionary accounts;

Provided, that the retail forex account is not a proprietary account,

as

[[Page 55413]]

defined in Regulation 5.18(i)(3). The Commission believes that

excluding proprietary accounts will help minimize the possibility of

skewed results stemming from differing methods of calculation. The

Commission is also requiring that the data be calculated on a calendar

year basis for all counterparties.

Guarantee Requirement for IBs Who Introduce Retail Forex Business.

The Commission proposed in Regulation 5.18(h) to require that any

person within the definition of an IB under Regulation 5.1(f)(1) (or

applicant for registration as such, or successor to the business of

such) enter into a guarantee agreement with an FCM or an RFED. The IB

would be permitted to enter such an agreement with only one FCM or

RFED. The rationale behind this requirement was to make FCMs and RFEDs

exercise care with regard to entities with which they do business by

making them jointly and severally liable for all obligations of the IB

under the Act and Commission Regulations with respect to the

solicitation of retail forex transactions. This would, in turn,

discourage them from associating with IBs without regard to the sales

practices employed by those IBs.

Commenters called the banning of independent IBs in the retail

forex business harsh and said it could lead to less customer choice and

poorer service. Others said that requiring a guarantee agreement was

anticompetitive and unnecessary, as most enforcement activity concerns

unregistered industry participants, and that guarantee agreements have

been a substitute for minimum capital for as long as the IB

registration category has existed.

After considering the comments, the Commission has determined to

permit IBs who register in order to transact retail forex business

(like IBs who register to transact futures and commodity options

business), to choose between entering into a guarantee agreement with

an FCM or RFED, and maintaining the existing IB minimum net capital

requirement. Accordingly, IBs, whether they register to do retail forex

business, futures business, or both, must comply with the provisions in

the Commission's regulations that apply to IBs; Provided, that any IB

that operates pursuant to a guarantee agreement meeting the

requirements of Regulation 1.10(j) need not meet the minimum net

capital requirements set forth in Regulations 1.10, 1.12 and 1.17.

Net Capital Requirements for FCMs and RFEDs. As proposed,

Regulation 5.7 implements the $20 million minimum net capital

requirement for FCMs engaging in retail forex transactions and for

RFEDs (as set forth in the CRA), and to the extent that the FCM's or

RFED's total retail forex obligation to its customers exceeds $10

million, the regulation requires an additional five percent of that

excess. Several comments urged the Commission to revise proposed

Regulation 5.7 to include an exemption from the additional net capital

requirement when the FCM or RFED uses ``straight-through processing.''

\16\ Referring to the costs imposed by additional capital requirements,

the commenters argued that such costs, in addition to the limits

imposed by several of the other proposed regulatory requirements, would

cause much of the retail forex business to be transferred to offshore

jurisdictions without (or with substantially reduced) regulatory

protections.\17\

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\16\ NFA's Financial Requirement Section 11 currently contains

such an exemption from an additional capital requirement for member

firms using straight-through-processing for all customer

transactions.

\17\ This argument is diminished by the recent enactment of the

Wall Street Reform Act, which clearly indicates the intent of

Congress that retail forex transactions in the United States either

be comprehensively regulated or be prohibited outright. See Wall

Street Reform Act, Sec. 742.

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The Commission considered but did not adopt NFA's straight-through

processing exemption in its proposal, specifically because the proposed

additional capital requirement was intended to provide a capital

requirement that directly relates to the size of a firm's liability to

retail forex customers. Some firms offering retail forex transactions

have liabilities to their retail customers exceeding $10 million.

Straight-through processing, although mitigating market exposure for a

firm, does not reduce in any way the total liability to retail forex

customers who are direct counterparties to the firm and therefore

exposed to the credit risk of such firm. Therefore, the Commission is

adopting the capital provisions in Section 5.7 as originally proposed.

Separately, a comment letter was received significantly after the

comment period was closed objecting to the net capital charges

applicable to retail foreign currency options set forth in proposed

Regulation 5.7(b)(2)(v)(B). The Commission has determined to adopt that

provision as proposed, and to clarify that for both FCMs and RFEDs

unlisted retail forex options are subject to the existing net capital

charges that are applicable to an FCM for any other unlisted foreign

currency option that is entered into with any eligible contract

participant (which treatment is also consistent with the treatment of

all unlisted options, including foreign currency options, for

securities broker-dealers).

Requirement To Appoint a Chief Compliance Officer. Proposed

Regulation 5.18(j) calls for each retail forex counterparty (defined to

include a retail foreign exchange dealer, an FCM or an affiliated

person of an FCM) to designate a Chief Compliance Officer. In proposing

this requirement, the Commission sought to promote customer protection

by focusing responsibility for an entity's regulatory compliance. This

requirement was criticized on the basis that potential personal

liability for a Chief Compliance Office would discourage individuals

from assuming that position, and because no comparable requirement

exists for firms engaging in on-exchange transactions.

The Commission continues to believe that, given the history of

fraudulent and improper behavior in the retail forex business,

requiring a Chief Compliance Officer is a reasonable way to ensure that

retail forex counterparties observe the highest professional standards

and take their compliance obligations seriously. Accordingly, this

requirement is retained in final Regulation 5.18.

Prohibition of Guarantees Against Customer Loss. Proposed

Regulation 5.16 would prohibit, among other things, the making of

guarantees against loss to retail foreign exchange customers by FCMs,

RFEDs and IBs. One currently registered FCM commented that firms should

be allowed to guarantee that clients will not lose more than their

account balance because technology allows for automatic liquidation of

positions if the account balance falls below margin requirements.

The Commission notes that not all retail forex counterparties have

comparable capabilities to deal with events such as extremely volatile

markets. Moreover, proposed regulation 5.16 is based on Commission

Regulation 1.56, which prohibits FCMs and IBs engaged in futures and

commodity option transactions from making similar guarantees. At the

time the Commission proposed Regulation 1.56, it specifically noted

that the use of limited-risk and guarantee-against-loss agreements had

``often been associated with patterns of allegedly unlawful conduct by

FCMs or other registrants or with the financial instability of such

persons.'' \18\ The Commission does not view these dual concerns--

rooted in consumer protection and the financial stability of firms--as

any less compelling today and

[[Page 55414]]

has determined to issue the regulation as proposed.

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\18\ See 46 Fed. Reg. 62841 (Dec. 29, 1981).

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Specific Authorization for Trades. Two commenters expressed a

concern regarding proposed Regulation 5.17, which requires RFEDs, FCMs,

IBs, and their APs to have specific authorization by the customer

before effecting a retail forex transaction. The concerns centered on

the use of automated systems that generate orders based on the trader's

specifications. According to the commenters, both IBs and forex

counterparties may run such software on their servers for traders.

Neither commenter provided a great deal of detail regarding the

mechanics of such automated trading programs, and the Commission cannot

offer its view of any particular program. However, the Commission

believes that if such programs are nothing more than automated order

entry platforms, and all relevant trading parameters are set and

controlled by the customer--including, for example, the designation of

the currency pair to be traded, the amount of currency to be bought or

sold, the price at which orders should be placed, and the amount of

money to be committed to trading--then trades generated by such

programs would originate from the customer and no additional

authorization would be required. However, Commission staff will monitor

the use of such programs. Any features that would appear to constitute

discretion, strategy or advice on the behalf of the sponsoring entity

would require a different analysis and, in addition to potentially

triggering application of Regulation 5.17, may have additional

registration implications.

Requirement To Close Out Offsetting Positions. One commenter

objected to the Commission's proposed amendment to Regulation 1.46,

which would require RFEDs and FCMs engaging in off-exchange retail

forex transactions to close out offsetting long and short positions in

a retail forex customer's account, regardless of whether a customer

instructs otherwise. Citing the prevalence of spread trades in futures

trading, the commenter maintained that there is no economic distinction

between commodity futures and forex transactions with respect to

offsetting long and short positions.

The Commission continues to believe that maintaining open long and

short positions in a retail forex customer's account removes the

opportunity for the customer to profit on the transaction, increases

the fees paid by the customer, and invites abuse. Nothing submitted by

any commenter has demonstrated otherwise. Moreover, spread trades

executed on-exchange typically involve the purchase of one futures

delivery month against the sale of another futures delivery month of

the same commodity, or the purchase of one delivery month of one

commodity against the sale of that same delivery month of a different

commodity. Because retail forex contracts are not listed by delivery

month, spread trades of this sort are not possible in retail forex

accounts, and open long and short contracts in the same currency pair

are truly offsetting. Accordingly, the Commission has determined to

adopt Regulation 1.46 as proposed.

Re-quoting. Two comments were received regarding Regulation

5.18(f), which would, among other things, prohibit retail forex

counterparties from providing a customer a new bid (or asked) price

that is higher (or lower) than a previous price without providing a new

asked (or bid) price that is higher (or lower) as well. One commenter

maintained that the proposed rule would not take into account that in

the forex market, spreads can increase dramatically, which might cause

the new bid price to be higher and the new ask price to be lower.

While a fast-moving market may affect the spread, the Commission's

proposed rule is intended to apply to those situations where a customer

is quoted one bid/asked price, and rather than fill the order, the FCM

or RFED provides a second quote. In this situation, the Commission

believes that if the forex dealer re-quotes the price, then at a

minimum, the spread should remain the same.

A second commenter suggested that the Commission clarify that all

``re-quote'' practices are required to be objective and evenhanded and

that a counterparty that re-quotes a price must do so regardless of the

direction the market moves. Further, the commenter suggested that the

Commission require counterparties to disclose to customers how orders

that reach the platform at a price no longer available are handled.

The Commission believes the intent of proposed Regulation 5.18 is

clear. It requires that, when re-quoting prices, forex counterparties

are obligated to do so in a symmetrical fashion, so that the re-quoted

prices do not represent an increase in the spread from the initially

quoted prices, regardless of the direction the market moves. As to the

objectiveness of the re-quote, the Commission believes that the

requirement that both bid and asked prices be re-quoted symmetrically

will encourage objectivity. Moreover, proposed Regulations 5.18(b)(3)

and 5.18(b)(iv) require, respectively, that forex counterparties

establish and enforce internal rules, procedures and controls to

``[f]airly and objectively establish settlement prices for retail forex

transactions'' and to maintain records reflecting ``any method or

algorithm used to determine the bid or asked price for any retail forex

transaction or the prices at which the customer orders are executed * *

*.'' The Commission believes that this should provide adequate

incentive for firms to deal fairly and objectively with their customers

with regard to re-quoting.

Finally, as to the suggested disclosure, as proposed, Regulation

5.5 would require FCMs, RFEDs and IBs engaged in retail forex

transactions to distribute to retail forex customers a written

disclosure statement containing, among other things, the following

statement:

Your ability to close your transactions or offset positions is

limited to what your dealer will offer to you, as there is no other

market for these transactions. Your dealer may offer any prices it

wishes, and it may offer prices derived from outside sources or not

in its discretion. Your dealer may establish its prices by offering

spreads from third party prices, but it is under no obligation to do

so or to continue to do so. Your dealer may offer different prices

to different customers at any point in time on its own terms. The

terms of your account agreement alone govern the obligations your

dealer has to you to offer prices and offer offset or liquidating

transactions in your account and make any payments to you. The

prices offered by your dealer may or may not reflect prices

available elsewhere at any exchange, interbank, or other market for

foreign currency.

While the proposed disclosure language does not require a statement

regarding how re-quoted prices are handled, it does inform the customer

that it is within the discretion of the forex dealer to set prices

(provided they otherwise comply with the requirements of Regulation

5.18). For this reason, and those cited above, the Commission has

determined to issue Regulation 5.18(f) as proposed.

CFTC Authority To Regulate Zelener Contracts. One commenter, a law

firm, argued that the CRA did not grant the Commission the authority to

regulate, other than for fraud, FCMs that are primarily or

substantially engaged in trading futures contracts on registered

exchanges to the extent they also offer off-exchange Zelener, or

``futures look-alike'' forex, contracts.\19\ To the extent legislative

history suggests that similarly situated RFEDs and FCMs should be

subject to the same regulations, the

[[Page 55415]]

commenter maintains that this language is restricted to requirements

relating to the financial soundness of the forex dealer and nothing

else.

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\19\ See 7 U.S.C. 2(c)(2)(C)(ii) and 2(c)(2)(C)(iii) regarding

the scope of the Commission's authority to write rules with regard

to leveraged or margined foreign currency contracts offered to non-

ECPs.

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The CRA contains several provisions that touch on the scope of the

Commission's jurisdiction over retail off-exchange foreign currency

contracts, whether futures or look-alike, leveraged contracts. Retail

off-exchange forex futures and options transactions are subject to

numerous provisions of the Act including sections 4(b), 4b, 4c(b), 4o,

6(c) and 6(d), 6c, 6d, 8(a), 13(a), 13(b), if they are offered or

entered into by an FCM, an RFED, or an affiliate of an FCM that is not

one of the otherwise regulated entities specified in the Act.\20\ The

same provisions apply to look-alike forex transactions.\21\ The CRA

clearly gives the Commission full rulemaking authority over the

agreements, contracts or transactions in retail forex where

``reasonably necessary to effectuate any of the provisions or to

accomplish any of the purposes of [the] Act.'' \22\ On the other hand,

however, while the CRA explicitly grants the Commission rulemaking

authority over off-exchange retail futures and options transactions

where such transactions are offered or entered into by FCMs, their

affiliates or RFEDs,\23\ its rulemaking authority with regard to look-

alike transactions does not explicitly include FCMs. Thus, the

commenter concludes that language in Sections 2(c)(2)(C)(ii) and

2(c)(2)(C)(iii) limits the Commission's authority in this area where

FCMs are concerned.

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\20\ See 7 U.S.C. 2(c)(2)(B)(iii).

\21\ See 7 U.S.C. 2(c)(2)(C)(ii)(I).

\22\ See 7 U.S.C. 2(c)(2)(B)(iv)(III); 2(c)(2)(B)(v);

2(c)(2)(C)(ii)(III); 2(c)(2)(C)(iii)(III).

\23\ See 7 U.S.C. 2(c)(2)(B)(v).

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The Commission disagrees. Section 8a(5) of the Act gives the

Commission the broadest possible authority to ``make and promulgate

such rules and regulations as, in the judgment of the Commission, are

reasonably necessary to effectuate any of the provisions or to

accomplish any of the purposes of this Act[.]'' \24\ Under this

authority, the Commission has promulgated rules covering the full scope

of FCM activities generally. Furthermore, the recent Wall Street Reform

and Consumer Protection Act of 2010 specifically defines FCMs as any

``individual, association, partnership, corporation, or trust * * *

that * * * is * * * acting as a counterparty in any agreement, contract

or transaction described in Section 2(c)(2)(C)(i)'' of the Act,\25\

making it clear that the offering of ``look-alike'' transactions falls

within the scope of regulated FCM activity. Accordingly, the Commission

sees no deficiencies in its authority to fully regulate FCMs engaged in

``look-alike'' forex contracts.\26\

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\24\ See 7 U.S.C. 12a(5) (2006).

\25\ See Wall Street Reform Act, Sec. 721(a)(13).

\26\ The Commission also disagrees with the argument that CRA

Conference Report language is inapposite. The Conference Report

states that ``[t]o the extent their risk profiles are similar, the

managers intend for FCMs and RFEDs to be regulated substantially

equivalently in terms of their off-exchange retail foreign currency

business. The managers do not intend for the Commission to provide

either FCMs or RFEDs with a more favorable regulatory environment

over the other or to create two significantly different regulatory

regimes for similar business models--to the extent the financial

risks posed by such operations are similar.'' See H.R. Rep. No. 110-

627 at 980 (Conf. Rep.) (emphasis added).

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Definition of Retail Forex Transactions. One commenter pointed out

that the definition of ``retail forex transactions'' found in proposed

Regulation 5.1(m) refers to ``any account, agreement, contract or

transaction'' described in Section 2(c)(2)(B) or 2(c)(2)(C) of the Act

and notes that the use of the word ``account'' in this context is

confusing.

Broad language in Section 2(c)(2)(B)(i) of the Act provides the

Commission with jurisdiction over ``an agreement, contract or

transaction in foreign currency'' that is a contract of sale of a

commodity for future delivery (or an option on such a contract) or an

option (other than one traded on a securities exchange). Elsewhere in

Section 2(c), the statute states that certain of its provisions apply

to ``agreements, contracts or transactions * * * and accounts or pooled

investment vehicles * * *.'' \27\ In order to accurately reflect the

full scope of authority granted it under the Act, the Commission

included the word ``accounts'' within the definition of ``retail forex

transactions.'' The Commission does not view this as in any way

inconsistent with language in Section 2(c), as amended by the CRA, and

has determined to adopt the regulation as proposed.

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\27\ See, for example, 7 U.S.C. 2(c)(2)(B)(iii).

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Anticompetitiveness. In addition to similar comments specifically

referencing proposed Regulation 5.9 (security deposits) and 5.18(h)

(guaranteed IBs)--which are addressed above--the Commission received

numerous comments arguing that various other sections of the proposed

rules were ``anticompetitive'' insofar as there is no comparable

requirement relative to those engaged in futures transactions on

designated contract markets. As the Commission pointed out in its

Proposing Release, it has, whenever possible, drawn upon the principles

that have guided it in the regulation of on-exchange instruments.

However, the Commission also noted that there are essential differences

between the trading futures contracts on designated contract markets

that are cleared through designated clearing organizations, on the one

hand, and off-exchange transactions between forex firms and retail

customers, on the other.\28\

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\28\ 75 FR 3282, 3285-86.

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Given the principal-to-principal nature of retail forex

transactions and the inherent conflicts of interest in the relationship

between the retail customer and the dealer/counterparty, the lack of

transparency in the pricing and execution of such transactions, and the

volume of fraud the Commission has seen arising from such transactions,

the Commission has determined to promulgate some regulations that are

unique to, and tailored to, retail forex transactions. By way of

example, the Commission's proposed regulations included requirements

that forex registrants maintain records of customer complaints; that

counterparties disclose, with the Risk Disclosure Statement, the

percentage of profitable nondiscretionary forex customer accounts; and

that forex counterparties designate a chief compliance officer to be

responsible for development and implementation of customer protection

policies and procedures. To the extent the final rules published today

do not track precisely with rules applicable to on-exchange futures

trading, the Commission believes that the differences reflect

meaningful differences in the market structure of retail forex

transactions and that the rules issued today are no more restrictive or

burdensome than necessary to address these differences.

Scope of Commission's Authority and Application of Other Rules.

Several commenters lodged criticisms or made observations that go to

the scope of the Commission's authority, as provided in the Act and

CRA, or otherwise. For example, several commenters maintained that the

Commission should require segregation of customer funds by

counterparties in order to provide some protection in the event of a

counterparty insolvency. The Commission's segregation requirements with

regard to futures flow from Section 4d of the Act \29\ which, generally

speaking, requires that customer property for trading commodity

contracts be kept apart, or segregated, from the FCM's own funds.

However, as noted in the

[[Page 55416]]

Commission's proposing release,\30\ a segregated funds regime cannot be

replicated in the context of off-exchange retail forex trading. Unlike

segregation of customer funds deposited for futures trading, under the

relevant provisions of the Bankruptcy Code,\31\ such amounts held in

connection with retail forex trading would not receive any preferential

treatment to unsecured creditors in bankruptcy.

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\29\ 7 U.S.C. 6(c) (2006).

\30\ 75 FR 3281, 3287 and 3290 (Jan. 20, 2010).

\31\ 11 U.S.C. 761, et seq.

---------------------------------------------------------------------------

Similarly, some commenters took issue with the definitions of

certain intermediaries and the capital requirements, found in the

Proposing Release. Here again, the Commission is bound by statutory

language that defines the scope of its authority.\32\ While the

Commission appreciates the concerns expressed by these commenters and

the time they have taken to express them, it can do no more than its

statutory authority permits.

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\32\ See, for example, Section 2(c)(2)(B)(iv)(I) of the Act, 7

U.S.C. 2(c)(2)(B)(iv)(I), which provides the Commission with the

authority to register and promulgate rules regarding specifically

defined persons or entities. See also Section 2(c)(2)(B)(ii) of the

Act which explicitly provides for a $20 million minimum capital

requirement.

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III. Related Matters

A. Regulatory Flexibility Act

FCMs and CPOs: The Regulatory Flexibility Act (``RFA'') \33\

requires that agencies, in proposing rules, consider the impact of

those rules on small businesses.\34\ The Commission has already

established certain definitions of ``small entities'' to be used in

evaluating the impact of its rules on such small entities in accordance

with the RFA.\35\ In that statement, the Commission concluded that

neither FCMs nor registered CPOs should be considered to be small

entities for purposes of the RFA. With respect to FCMs, the

Commission's determination was based in part upon their obligation to

meet the capital requirement established by the Commission and the

purposes of protecting financial integrity.\36\

---------------------------------------------------------------------------

\33\ 5 U.S.C. 601, et seq.

\34\ By its terms, the RFA does not apply to ``individuals.''

See 48 FR 14933, n. 115 (April 6, 1983). Because associated persons

must be individuals, (see Commission Regulation 1.3(aa) and proposed

Regulations 5.1(c), (d)(2), (e)(2), (g)(2) and (i)(2)), the RFA does

not apply to APs and no analysis of the economic impact of this rule

proposal on such persons is required.

\35\ 47 FR 18618 (April 30, 1982).

\36\ Id. at 18619.

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As for CPOs, the Commission determined that registered CPOs are not

small entities based upon its existing regulatory standard for

exempting certain small CPOs from the requirement to register under the

Act.\37\ (A CPO need not register with the Commission if the gross

capital contributions for all pools under its management do not exceed

$400,000 and there are not more than fifteen participants in any one of

those pools.\38\)

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\37\ Id. at 18619-20.

\38\ 17 CFR 4.13(a)(2) (2009).

---------------------------------------------------------------------------

Thus, with respect to FCMs and registered CPOs, the Commission

believes that these final rules will not have a significant economic

impact on a substantial number of small entities.

CTAs: The Commission has previously decided to evaluate, within the

context of a particular rule proposal, whether all or some CTAs should

be considered to be small entities, and if so, to then analyze the

economic impact on them of any such rule.\39\ CTAs wishing to advise

retail forex customers may include both currently registered CTAs and

previously unregistered persons who now will be required to register.

As to the first group, there should be no significant new economic

impact. As to the second group, registration will require the

submission of application forms, fingerprinting of principals, and

payment of registration fees. To the extent that CTAs can be considered

to be small entities, the Commission does not consider either the

proposed registration fee or the proposed fingerprinting requirement

for newly registered CTAs to have significant economic impact.\40\

---------------------------------------------------------------------------

\39\ 47 FR 18618, 18620.

\40\ 48 FR 35248, 35276 (August 3, 1983)

---------------------------------------------------------------------------

IBs: In 1983, the Commission proposed that for purposes of the RFA

and future rulemakings, it would not consider introducing brokers to be

``small entities'' for essentially the same reasons that FCMs had

previously been determined not to be small entities.\41\ This was

based, in part, on the fact that IBs, like FCMs, are required to

maintain a specified level of adjusted net capital. In the Proposing

Release, retail forex IBs would not have been subject to a capital

requirement; rather, they would have had to operate pursuant to a

guarantee agreement. Under the final rules, retail forex IBs will be

treated no differently than futures IBs. Accordingly, and in keeping

with past Commission determinations, the Commission believes that the

final rules with respect to IBs will not have a significant impact on a

substantial number of small entities.

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\41\ 48 FR 14933, 14955 (Apr. 6, 1983). See also 47 FR 18618,

18619.

---------------------------------------------------------------------------

RFEDs: RFEDs are a new category of registrant. The Commission does

not believe that there are regulatory alternatives to those being

proposed which would be consistent with the statutory mandate to

provide protection to the public against irresponsible or fraudulent

business practices. In the Proposing Release, the Commission proposed

that RFEDs not be considered to be ``small entities'' for essentially

the same reasons that FCMs have previously been determined not to be

small entities.\42\ As with FCMs, a requirement to maintain a specified

level of adjusted net capital would be imposed upon RFEDs to ensure

that they maintain sufficient capital resources to guarantee their

financial accountability and to promote responsible and reliable

business operations. Moreover, the Commission has sought to fashion its

proposed regulatory program for RFEDs in a manner which is responsive

to the function, purposes, and size of the entity being regulated

consistent with the objective of the RFA. In particular, the minimum

capital requirement required by the CRA effectuates the Congressional

purpose that RFEDs maintain sufficient reserve of capital to remain

economically viable. For the reasons stated above, the Commission will

not define RFEDs as small entities for RFA purposes.

---------------------------------------------------------------------------

\42\ Id.

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B. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995 (``PRA'') \43\ an agency

may not conduct or sponsor, and a person is not required to respond to,

a collection of information unless it displays a currently valid

control number. The Commission's final rules regarding retail forex

transactions result in information collection requirements within the

meaning of the PRA. The Commission submitted the proposing release

along with supporting documentation to the Office of Management and

Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5

CFR 1320.11. The Commission requested that OMB approve, and with

respect to the collections required under the new part 5 of the

Commission's regulations, assign a new control number for, the

collections of information required by the proposing release. The

information collection burdens created by the Commission's proposed

rules, which were discussed in detail in the proposing release, are

identical to the collective information collection burdens of the final

rules.

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\43\ 44 U.S.C. 3501, et seq.

---------------------------------------------------------------------------

The Commission invited the public and other Federal agencies to

comment on any aspect of the information

[[Page 55417]]

collection requirements discussed above. The Commission received no

comment on its burden estimates or on any other aspect of the

information collection requirements contained in its proposing release.

The affected collections are as follows:

Existing Collection 3038-0024 (part 1 of the Commission's

regulations);

Existing Collection 3038-0023 (part 3 of the Commission's

regulations);

Existing Collection 3038-0005 (part 4 of the Commission's

regulations);

Existing Collection 3038-0055 (part 160 of the

Commission's regulations); and

New Collection 3038-0062 (part 5 of the Commission's

regulations).

C. Cost-Benefit Analysis

Section 15(a) of the Act \44\ requires the Commission to consider

the costs and benefits of its action before issuing new regulations

under the Act. By its terms, section 15(a) does not require the

Commission to quantify the costs and benefits of a new regulation or to

determine whether the benefits of the regulation outweigh its costs.

Rather, section 15(a) simply requires the Commission to ``consider the

costs and benefits'' of its action.

---------------------------------------------------------------------------

\44\ 7 U.S.C. 19(a).

---------------------------------------------------------------------------

Section 15(a) further specifies that costs and benefits shall be

evaluated in light of five broad areas of market and public concern,

enumerated below. Accordingly, the Commission could, in its discretion,

give greater weight to any one of the five enumerated areas and could,

in its discretion, determine that, notwithstanding its costs, a

particular rule was necessary or appropriate to protect the public

interest or to effectuate any of the provisions or to accomplish any of

the purposes of the Act.

As discussed in more detail above, these amendments are intended to

create a comprehensive scheme to implement the requirements of the CRA,

and to put in place requirements including registration, disclosure,

recordkeeping, financial reporting, minimum capital and other

operational standards. This is to be achieved through both amendments

to existing regulations and the creation of a new, free-standing part

to the Commission's regulations. The Commission is considering the

costs and benefits of the amendments in light of the specific

provisions of section 15(a) as follows:

1. Protection of market participants and the public. The amendments

should enhance considerably the protection of market participants and

the public because they require, for the first time, the registration

of several categories of market participants and require adherence to

operational standards that have not previously applied. The benefits

that inhere in the imposition of these requirements to a sector of the

off-exchange market that has been largely unregulated to this point,

and which is geared towards the retail public, are manifest.

2. Efficiency and competition. In its Conference Report, Congress

indicated that the Commission should avoid creating two different

regulatory regimes for similar business models with respect to FCMs or

RFEDs engaging in off-exchange retail forex transactions.\45\

Accordingly, the Commission has endeavored to ensure that these

entities be treated in comparable fashion relative to one another.

Moreover, the Commission has endeavored, wherever possible, to propose

regulations in part 5 that are analogous to regulations imposed upon

intermediaries engaged in on-exchange transactions. Accordingly, the

Commission believes that it has provided an even handed regulatory

scheme that will be familiar to industry participants.

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\45\ As noted in the Conference Report that accompanied the CRA,

``To the extent their risk profiles are similar, the managers intend

for FCMs and RFEDs to be regulated substantially equivalently in

terms of their off-exchange retail foreign currency business.'' H.R.

Rep. No. 110-627, at 980 (2008) (Conf. Rep.). The Conference Report

is available via the Internet on the CFTC's Web site.

---------------------------------------------------------------------------

3. Financial integrity of futures markets and price discovery. The

amendments concern retail, off-exchange markets. These markets serve

primarily as a vehicle for members of the retail public to engage in

speculative transactions. Accordingly, the Commission does not perceive

a significant intersection between the operations of these markets and

the financial integrity or price discovery functions of the markets

generally.

4. Sound risk management practices. The amendments include

requirements regarding capital, financial reporting, risk assessment

recordkeeping, and risk assessment reporting that are comparable to

those required of entities engaged in on-exchange trading. The

Commission believes that the benefits of these risk management

requirements--which strive to ensure the financial soundness of firms--

have been borne out on the exchange-traded side and will be of

significant benefit with regard to its oversight of retail forex

counterparties.

5. Other public interest considerations. The retail, off-exchange

forex market has been largely unregulated until now. The Commission

believes that the amendments are beneficial in that they will provide

needed protections for members of the public engaging in these

transactions. The amendments will also bring much needed oversight to

the forex counterparties and intermediaries that interact with the

public.

After considering these factors, the Commission has determined to

adopt the proposed rule changes. The Commission did not receive any

comments relative to its analysis of the cost-benefit provision.

List of Subjects

17 CFR Part 1

Definitions, Minimum financial and reporting requirements.

Recordkeeping requirements, Prohibited transactions in commodity

options, Miscellaneous.

17 CFR Part 3

Definitions, Customer protection, Licensing, Registration.

17 CFR Part 4

Advertising, Brokers, Commodity futures, Commodity pool operators,

Commodity trading advisors, Consumer protection, Exemption from

registration, Reporting and recordkeeping requirements.

17 CFR Part 5

Bulk transfers, Commodity pool operators, Commodity trading

advisors, Consumer protection, Customer's money, securities and

property, Definitions, Foreign exchange, Minimum financial and

reporting requirements, Prohibited transactions in retail foreign

exchange, Recordkeeping requirements, Retail foreign exchange dealers,

Risk assessment, Special calls, Trading practices.

17 CFR Part 10

Adjudicatory proceedings, Rules of practice.

17 CFR Part 140

Authority delgations (Government agencies, Conflict of interests,

Organization and functions (Government agencies).

17 CFR Part 145

Confidential business information, Freedom of information.

17 CFR Part 147

Sunshine Act.

17 CFR Part 160

Consumer financial information, Definitions, Nonpublic personal

information, Privacy.

[[Page 55418]]

17 CFR Part 166

Arbitration, Authorization to trade, Customer protection,

Definitions, Dispute settlement, Litigation, Reparations.

0

For the reasons presented above, the Commission hereby amends Chapter I

of Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

0

1. The authority citation for part 1 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e,

6f, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12c,

13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

Sec. 1.1 [Removed and Reserved]

0

2. Section 1.1 is removed and reserved.

0

3. Section 1.3 is amended by revising paragraphs (nn) and (yy) to read

as follows:

Sec. 1.3 Definitions.

* * * * *

(nn) Guarantee agreement. This term means an agreement of guaranty

in the form set forth in part B or C of Form 1-FR, executed by a

registered futures commission merchant or retail foreign exchange

dealer, as appropriate, and by an introducing broker or applicant for

registration as an introducing broker on behalf of an introducing

broker or applicant for registration as an introducing broker in

satisfaction of the alternative adjusted net capital requirement set

forth in Sec. 1.17(a)(1)(iii).

* * * * *

(yy) Commodity interest. This term means:

(1) Any contract for the purchase or sale of a commodity for future

delivery;

(2) Any contract, agreement or transaction subject to Commission

regulation under section 4c or 19 of the Act; and

(3) Any contract, agreement or transaction subject to Commission

jurisdiction under section 2(c)(2) of the Act.

0

4. Section 1.4 is revised to read as follows:

Sec. 1.4 Use of electronic signatures.

For purposes of complying with any provision in the Commodity

Exchange Act or the rules or regulations in this Chapter I that

requires a document to be signed by a customer of a futures commission

merchant or introducing broker, a retail forex customer of a retail

foreign exchange dealer or futures commission merchant, a pool

participant or a client of a commodity trading advisor, an electronic

signature executed by the customer, participant or client will be

sufficient, if the futures commission merchant, retail foreign exchange

dealer, introducing broker, commodity pool operator or commodity

trading advisor elects generally to accept electronic signatures;

Provided, however, That the electronic signature must comply with

applicable Federal laws and other Commission rules; And, Provided

further, That the futures commission merchant, retail foreign exchange

dealer, introducing broker, commodity pool operator or commodity

trading advisor must adopt and utilize reasonable safeguards regarding

the use of electronic signatures, including at a minimum safeguards

employed to prevent alteration of the electronic record with which the

electronic signature is associated, after such record has been

electronically signed.

0

5. Section 1.10 is amended by revising paragraph (j) to read as

follows:

Sec. 1.10 Financial reports of futures commission merchants and

introducing brokers.

* * * * *

(j) Requirements for guarantee agreement. (1) A guarantee agreement

filed pursuant to this section must be signed in a manner sufficient to

be a binding guarantee under local law by an appropriate person on

behalf of the futures commission merchant or retail foreign exchange

dealer and the introducing broker, and each signature must be

accompanied by evidence that the signatory is authorized to enter the

agreement on behalf of the futures commission merchant, retail foreign

exchange dealer, or introducing broker and is such an appropriate

person. For purposes of this paragraph (j), an appropriate person shall

be the proprietor, if the firm is a sole proprietorship; a general

partner, if the firm is a partnership; and either the chief executive

officer or the chief financial officer, if the firm is a corporation;

and, if the firm is a limited liability company or limited liability

partnership, either the chief executive officer, the chief financial

officer, the manager, the managing member, or those members vested with

the management authority for the limited liability company or limited

liability partnership.

(2) No futures commission merchant or retail foreign exchange

dealer may enter into a guarantee agreement if:

(i) It knows or should have known that its adjusted net capital is

less than the amount set forth in Sec. 1.12(b) of this part or Sec.

5.6(b) of this chapter, as applicable; or

(ii) There is filed against the futures commission merchant or

retail foreign exchange dealer an adjudicatory proceeding brought by or

before the Commission pursuant to the provisions of sections 6(c),

6(d), 6c, 6d, 8a or 9 of the Act or Sec. Sec. 3.55, 3.56 or 3.60 of

this chapter.

(3) A retail foreign exchange dealer may enter into a guarantee

agreement only with an introducing broker as defined in Sec. 5.1(f)(1)

of this chapter. A retail foreign exchange dealer may not enter into a

guarantee agreement with an introducing broker as defined in Sec.

1.3(mm) of this part.

(4) A guarantee agreement filed in connection with an application

for initial registration as an introducing broker in accordance with

the provisions of Sec. 3.10(a) of this chapter shall become effective

upon the granting of registration or, if appropriate, a temporary

license, to the introducing broker. A guarantee agreement filed other

than in connection with an application for initial registration as an

introducing broker shall become effective as of the date agreed to by

the parties.

(5)(i) If the registration of the introducing broker is suspended,

revoked, or withdrawn in accordance with the provisions of this

chapter, the guarantee agreement shall expire as of the date of such

suspension, revocation or withdrawal.

(ii) If the registration of the futures commission merchant or

retail foreign exchange dealer is suspended or revoked, the guarantee

agreement shall expire 30 days after such suspension or revocation, or

at such earlier time as may be approved by the Commission, the

introducing broker, and the introducing broker's designated self-

regulatory organization.

(6) A guarantee agreement may be terminated at any time during the

term thereof:

(i) By mutual written consent of the parties, signed by an

appropriate person on behalf of each party, with prompt written notice

thereof, signed by an appropriate person on behalf of each party, to

the Commission and to the designated self-regulatory organizations of

the futures commission merchant or retail foreign exchange dealer and

the introducing broker;

(ii) For good cause shown, by either party giving written notice of

its intention to terminate the agreement, signed by an appropriate

person, to the other party to the agreement, to the Commission, and to

the designated self-regulatory organizations of the futures

[[Page 55419]]

commission merchant or retail foreign exchange dealer and the

introducing broker; or

(iii) By either party giving written notice of its intention to

terminate the agreement, signed by an appropriate person, at least 30

days prior to the proposed termination date, to the other party to the

agreement, to the Commission, and to the designated self-regulatory

organizations of the futures commission merchant or retail foreign

exchange dealer and the introducing broker.

(7) The termination of a guarantee agreement by a futures

commission merchant, retail foreign exchange dealer or an introducing

broker, or the expiration of such an agreement, shall not relieve any

party from any liability or obligation arising from acts or omissions

which occurred during the term of the agreement.

(8) An introducing broker may not simultaneously be a party to more

than one guarantee agreement: Provided, however, That the provisions of

this paragraph (j)(8) shall not be deemed to preclude an introducing

broker from entering into a guarantee agreement with another futures

commission merchant or retail foreign exchange dealer if the

introducing broker, futures commission merchant or retail foreign

exchange dealer which is a party to the existing agreement has provided

notice of termination of the existing agreement in accordance with the

provisions of paragraph (j)(6) of this section, and the new guarantee

agreement does not become effective until the day following the date of

termination of the existing agreement: And, provided further, That the

provisions of this paragraph (j)(8) shall not be deemed to preclude an

introducing broker from entering into a guarantee agreement with

another futures commission merchant or retail foreign exchange dealer

if the futures commission merchant or retail foreign exchange dealer

which is a party to the existing agreement ceases to remain registered

and the existing agreement would therefore expire in accordance with

the provisions of paragraph (j)(6)(ii) of this section.

(9)(i)(A) An introducing broker that is a party to a guarantee

agreement that has been terminated in accordance with the provisions of

paragraph (j)(6) of this section, or that is due to expire in

accordance with the provisions of paragraph (j)(5)(ii) of this section,

must cease doing business as an introducing broker on or before the

effective date of such termination or expiration unless, on or before

10 days prior to the effective date of such termination or expiration

or such other period of time as the Commission or the designated self-

regulatory organization may allow for good cause shown, the introducing

broker files with its designated self-regulatory organization either a

new guarantee agreement effective as of the day following the date of

termination of the existing agreement, or, in the case of a guarantee

agreement that is due to expire in accordance with the provisions of

paragraph (j)(4)(ii) of this section, a new guarantee agreement

effective on or before such expiration, or either:

(1) A Form 1-FR-IB certified by an independent public accountant in

accordance with Sec. 1.16 as of a date not more than 45 days prior to

the date on which the report is filed; or

(2) A Form 1-FR-IB as of a date not more than 17 business days

prior to the date on which the report is filed and a Form 1-FR-IB

certified by an independent public accountant in accordance with Sec.

1.16 as of a date not more than one year prior to the date on which the

report is filed: Provided, however, that an introducing broker as

defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

agreement that has been terminated or that has expired must cease doing

business as an introducing broker on or before the effective date of

such termination or expiration unless, on or before 10 days prior to

the effective date of such termination or expiration or such other

period of time as the Commission or the designated self-regulatory

organization may allow for good cause shown, the introducing broker

files with its designated self-regulatory organization a new guarantee

agreement effective on or before the termination or expiration date of

the terminating or expiring guarantee agreement.

(B) Each person filing a Form 1-FR-IB in accordance with this

section must include with the financial report a statement describing

the source of his current assets and representing that his capital has

been contributed for the purpose of operating his business and will

continue to be used for such purpose.

(ii)(A) Notwithstanding the provisions of paragraph (j)(9)(i) of

this section or of Sec. 1.17(a), an introducing broker that is a party

to a guarantee agreement that has been terminated in accordance with

the provisions of paragraph (j)(6)(ii) of this section shall not be

deemed to be in violation of the minimum adjusted net capital

requirement of Sec. 1.17(a)(1)(iii) or (a)(2) for 30 days following

such termination. Such an introducing broker must cease doing business

as an introducing broker on or after the effective date of such

termination, and may not resume doing business as an introducing broker

unless and until it files a new agreement or either:

(1) A Form 1-FR-IB certified by an independent public accountant in

accordance with Sec. 1.16 as of a date not more than 45 days prior to

the date on which the report is filed; or

(2) A Form 1-FR-IB as of a date not more than 17 business days

prior to the date on which the report is filed and a Form 1-FR-IB

certified by an independent public accountant in accordance with Sec.

1.16 as of a date not more than one year prior to the date on which the

report is filed: Provided, however, that an introducing broker as

defined in Sec. 5.1(f)(1) of this chapter that is party to a guarantee

agreement that has been terminated must cease doing business as an

introducing broker from and after the effective date of such

termination, and may not resume doing business as an introducing broker

as defined in Sec. 5.1(f)(1) of this chapter unless and until it files

a new guarantee agreement.

(B) Each person filing a Form 1-FR-IB in accordance with this

section must include with the financial report a statement describing

the source of his current assets and representing that his capital has

been contributed for the purpose of operating his business and will

continue to be used for such purpose.

* * * * *

0

6. Section 1.35 is amended by revising paragraphs (a), (a-1) and (b) to

read as follows:

Sec. 1.35 Records of cash commodity, futures, and option

transactions.

(a) Futures commission merchants, retail foreign exchange dealers,

introducing brokers, and members of contract markets. Each futures

commission merchant, retail foreign exchange dealer, introducing

broker, and member of a contract market shall keep full, complete, and

systematic records, together with all pertinent data and memoranda, of

all transactions relating to its business of dealing in commodity

futures, retail forex transactions, commodity options, and cash

commodities (including currencies). Each futures commission merchant,

retail foreign exchange dealer, introducing broker, and member of a

contract market shall retain the required records, data, and memoranda

in accordance with the requirements of Sec. 1.31, and produce them for

inspection and furnish true and correct information and reports as to

the contents or the meaning thereof, when and as requested by an

authorized representative of the Commission or the United States

[[Page 55420]]

Department of Justice. Included among such records shall be all orders

(filled, unfilled, or canceled), trading cards, signature cards, street

books, journals, ledgers, canceled checks, copies of confirmations,

copies of statements of purchase and sale, and all other records, data

and memoranda, which have been prepared in the course of its business

of dealing in commodity futures, retail forex transactions, commodity

options, and cash commodities. Among such records each member of a

contract market must retain and produce for inspection are all

documents on which trade information is originally recorded, whether or

not such documents must be prepared pursuant to the rules or

regulations of either the Commission or the contract market. For

purposes of this section, such documents are referred to as ``original

source documents.''

(a-1) Futures commission merchants, retail foreign exchange

dealers, introducing brokers, and members of contract markets:

Recording of customers' and option customers' orders. (1) Each futures

commission merchant, each retail foreign exchange dealer and each

introducing broker receiving a customer's, retail forex customer's or

option customer's order, as applicable, shall immediately upon receipt

thereof prepare a written record of the order including the account

identification, except as provided in paragraph (a-1)(5) of this

section, and order number, and shall record thereon, by timestamp or

other timing device, the date and time, to the nearest minute, the

order is received, and in addition, for option customers' orders, the

time, to the nearest minute, the order is transmitted for execution.

(2)(i) Each member of a contract market who on the floor of such

contract market receives a customer's or option customer's order which

is not in the form of a written record including the account

identification, order number, and the date and time, to the nearest

minute, the order was transmitted or received on the floor of such

contract market, shall immediately upon receipt thereof prepare a

written record of the order in nonerasable ink, including the account

identification, except as provided in paragraph (a-1)(5) of this

section or appendix C to this part, and order number and shall record

thereon, by timestamp or other timing device, the date and time, to the

nearest minute, the order is received.

(ii) Except as provided in paragraph (a-1)(3) of this section:

(A) Each contract market member who on the floor of such contract

market receives an order from another member present on the floor which

is not in the form of a written record shall, immediately upon receipt

of such order, prepare a written record of the order or obtain from the

member who placed the order a written record of the order, in non-

erasable ink including the account identification and order number and

shall record thereon, by time-stamp or other timing device, the date

and time, to the nearest minute, the order is received; or

(B) When a contract market member present on the floor places an

order, which is not in the form of a written record, for his own

account or an account over which he has control, with another member of

such contract market for execution:

(1) The member placing such order immediately upon placement of the

order shall record the order and time of placement to the nearest

minute on a sequentially-numbered trading card maintained in accordance

with the requirements of paragraph (d) of this section;

(2) The member receiving and executing such order immediately upon

execution of the order shall record the time of execution to the

nearest minute on a trading card or other record maintained pursuant to

the requirements of paragraph (d) of this section; and

(3) The member receiving and executing the order shall return such

trading card or other record to the member placing the order. The

member placing the order then must submit together both of the trading

cards or other records documenting such trade to contract market

personnel or the clearing member, in accordance with contract market

rules adopted pursuant to paragraph (j)(1) of this section.

(iii) Each contract market may adopt rules, which must be submitted

to the Commission pursuant to section 5a(a)(12)(A) of the Act and

Commission Regulation 1.41, that provide alternative requirements to

those contained in paragraph (a-1)(2)(ii) of this section. Such rules

shall, at a minimum, require that the contemporaneous written records:

(A) Contain the terms of the order;

(B) Include reliable timing data for the initiation and execution

of the order which would permit complete and effective reconstruction

of the order placement and execution; and

(C) Be submitted to contract market personnel or clearing members

in accordance with contract market rules adopted pursuant to paragraph

(j)(1) of this section.

(3)(i) The requirements of paragraph (a-1)(2)(ii) of this section

will not apply if a contract market maintains in effect rules which

have been submitted to the Commission pursuant to section 5a(a)(12)(A)

of the Act and Commission Regulation 1.41, which provide for an

exemption where:

(A) A contract market member places with another member of such

contract market an order that is part of a spread transaction;

(B) The member placing the order personally executes one or more

legs of the spread; and

(C) The member receiving and executing such order immediately upon

execution of the order records the time of execution to the nearest

minute on his trading card or other record maintained in accordance

with the requirements of paragraph (d) of this section.

(ii) Each contract market shall, as part of its trade practice

surveillance program, conduct surveillance for compliance with the

recordkeeping and other requirements under paragraphs (a-1) (2) and (3)

of this section, and for trading abuses related to the execution of

orders for members present on the floor of the contract market.

(4) Each member of a contract market reporting the execution from

the floor of the contract market of a customer's or option customer's

order or the order of another member of the contract market received in

accordance with paragraphs (a-1)(2)(i) or (a-1)(2)(ii)(A) of this

section, shall record on a written record of the order, including the

account identification, except as provided in paragraph (a-1)(5) of

this section, and order number, by timestamp or other timing device,

the date and time to the nearest minute such report of execution is

made. Each member of a contract market shall submit the written records

of customer orders or orders from other contract market members to

contract market personnel or to the clearing member responsible for the

collection of orders prepared pursuant to this paragraph as required by

contract market rules adopted in accordance with paragraph (j)(1) of

this section. The execution price and other information reported on the

order tickets must be written in nonerasable ink.

(5) Post-execution allocation of bunched orders. Specific customer

account identifiers for accounts included in bunched orders need not be

recorded at time of order placement or upon report of execution if the

requirements of paragraphs (a-1)(5)(i)-(iv) of this section are met.

(i) Eligible account managers. The person placing and directing the

allocation of an order eligible for post-execution allocation must have

been granted written investment discretion

[[Page 55421]]

with regard to participating customer accounts. The following persons

shall qualify as eligible account managers:

(A) A commodity trading advisor registered with the Commission

pursuant to the Act or excluded or exempt from registration under the

Act or the Commission's rules, except for entities exempt under Sec.

4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;

(B) An investment adviser registered with the Securities and

Exchange Commission pursuant to the Investment Advisers Act of 1940 or

with a state pursuant to applicable state law or excluded or exempt

from registration under such Act or applicable state law or rule;

(C) A bank, insurance company, trust company, or savings and loan

association subject to federal or state regulation; or

(D) A foreign adviser that exercises discretionary trading

authority solely over the accounts of non-U.S. persons, as defined in

Sec. 4.7(a)(1)(iv) of this chapter.

(ii) Information. Eligible account managers shall make the

following information available to customers upon request:

(A) The general nature of the allocation methodology the account

manager will use;

(B) Whether accounts in which the account manager may have any

interest may be included with customer accounts in bunched orders

eligible for post-execution allocation; and

(C) Summary or composite data sufficient for that customer to

compare its results with those of other comparable customers and, if

applicable, any account in which the account manager has an interest.

(iii) Allocation. Orders eligible for post-execution allocation

must be allocated by an eligible account manager in accordance with the

following:

(A) Allocations must be made as soon as practicable after the

entire transaction is executed, but in any event account managers must

provide allocation information to futures commission merchants no later

than a time sufficiently before the end of the day the order is

executed to ensure that clearing records identify the ultimate customer

for each trade.

(B) Allocations must be fair and equitable. No account or group of

accounts may receive consistently favorable or unfavorable treatment.

(C) The allocation methodology must be sufficiently objective and

specific to permit independent verification of the fairness of the

allocations using that methodology by appropriate regulatory and self-

regulatory authorities and by outside auditors.

(iv) Records. (A) Eligible account managers shall keep and must

make available upon request of any representative of the Commission,

the United States Department of Justice, or other appropriate

regulatory agency, the information specified in paragraph (a-1)(5)(ii)

of this section.

(B) Eligible account managers shall keep and must make available

upon request of any representative of the Commission, the United States

Department of Justice, or other appropriate regulatory agency, records

sufficient to demonstrate that all allocations meet the standards of

paragraph (a-1)(5)(iii) of this section and to permit the

reconstruction of the handling of the order from the time of placement

by the account manager to the allocation to individual accounts.

(C) Futures commission merchants that execute orders or that carry

accounts eligible for post-execution allocation, and members of

contract markets that execute such orders, must maintain records that,

as applicable, identify each order subject to post-execution allocation

and the accounts to which contracts executed for such order are

allocated.

(D) In addition to any other remedies that may be available under

the Act or otherwise, if the Commission has reason to believe that an

account manager has failed to provide information requested pursuant to

paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the

Commission may inform in writing any designated contract market or

derivatives transaction execution facility and that designated contract

market or derivatives transaction execution facility shall prohibit the

account manager from submitting orders for execution except for

liquidation of open positions and no futures commission merchants shall

accept orders for execution on any designated contract market or

derivatives transaction execution facility from the account manager

except for liquidation of open positions.

(E) Any account manager that believes he or she is or may be

adversely affected or aggrieved by action taken by the Commission under

paragraph (a-1)(5)(iv)(D) of this section shall have the opportunity

for a prompt hearing in accordance with the provisions of Sec.

21.03(g) of this chapter.

* * * * *

(b) Futures commission merchants, retail foreign exchange dealers,

introducing brokers, and clearing members of contract markets. Each

futures commission merchant, each retail foreign exchange dealer, and

each clearing member of a contract market and, for purposes of

paragraph (b)(3) of this section, each introducing broker, shall, as a

minimum requirement, prepare regularly and promptly, and keep

systematically and in permanent form, the following:

(1) A financial ledger record which will show separately for each

customer or retail forex customer or option customer all charges

against and credits to such customer's or retail forex customer's or

option customer's account, including but not limited to customer or

retail forex customer funds deposited, withdrawn, or transferred, and

charges or credits resulting from losses or gains on closed

transactions;

(2) A record of transactions which will show separately for each

account (including proprietary accounts):

(i) All commodity futures transactions executed for such account,

including the date, price, quantity, market, commodity and future;

(ii) All retail forex transactions executed for such account,

including the date, price, quantity, and currency; and

(iii) All commodity option transactions executed for such account,

including the date, whether the transaction involved a put or call,

expiration date, quantity, underlying contract for future delivery or

underlying physical, strike price, and details of the purchase price of

the option, including premium, mark-up, commission and fees; and

(3) A record or journal which will separately show for each

business day complete details of:

(i) All commodity futures transactions executed on that day,

including the date, price, quantity, market, commodity, future and the

person for whom such transaction was made;

(ii) All retail forex transactions executed on that day for such

account, including the date, price, quantity, currency and the person

for whom such transaction was made; and

(iii) All commodity option transactions executed on that day,

including the date, whether the transaction involved a put or call, the

expiration date, quantity, underlying contract for future delivery, or

underlying physical, strike price, details of the purchase price of the

option, including premium, mark-up, commission and fees and the person

for whom the transaction was made; and

(iv) In the case of an introducing broker, the record or journal

required by this paragraph (b)(3) shall also include the futures

commission merchant or

[[Page 55422]]

retail foreign exchange dealer carrying the account for which each

commodity futures, retail forex and commodity option transaction was

executed on that day. Provided, however, that where reproductions on

microfilm, microfiche or optical disk are substituted for hard copy in

accordance with the provisions of Sec. 1.31(b) of this part, the

requirements of paragraphs (b)(1) and (b)(2) of this section will be

considered met if the person required to keep such records is ready at

all times to provide, and immediately provides in the same city as that

in which such person's commodity retail forex or commodity option books

and records are maintained, at the expense of such person, reproduced

copies which show the records as specified in paragraphs (b)(1) and

(b)(2) of this section, on request of any representatives of the

Commission or the U.S. Department of Justice.

* * * * *

0

7. Section 1.36 is amended by revising paragraph (a) to read as

follows:

Sec. 1.36 Record of securities and property received from customers

and option customers.

(a) Each futures commission merchant and each retail foreign

exchange dealer shall maintain, as provided in Sec. 1.31, a record of

all securities and property received from customers, retail forex

customers or option customers in lieu of money to margin, purchase,

guarantee, or secure the commodity, retail forex or commodity option

transactions of such customers, retail forex customers or option

customers. Such record shall show separately for each customer, retail

forex customer or option customer: A description of the securities or

property received; the name and address of such customer, retail forex

customer or option customer; the dates when the securities or property

were received; the identity of the depositories or other places where

such securities or property are segregated or held; the dates of

deposits and withdrawals from such depositories; and the dates of

return of such securities or property to such customer, retail forex

customer or option customer, or other disposition thereof, together

with the facts and circumstances of such other disposition. In the

event any futures commission merchant deposits with the clearing

organization of a contract market, directly or with a bank or trust

company acting as custodian for such clearing organization, securities

and/or property which belong to a particular customer or option

customer, such futures commission merchant shall obtain written

acknowledgment from such clearing organization that it was informed

that such securities or property belong to customers or option

customers of the futures commission merchant making the deposit. Such

acknowledgment shall be retained as provided in Sec. 1.31.

* * * * *

0

8. Section 1.37 is amended by revising paragraph (a)(1) to read as

follows:

Sec. 1.37 Customer's or option customer's name, address, and

occupation recorded; record of guarantor or controller of account.

(a)(1) Each futures commission merchant, retail foreign exchange

dealer, introducing broker, and member of a contract market shall keep

a record in permanent form which shall show for each commodity futures,

retail forex or option account carried or introduced by it the true

name and address of the person for whom such account is carried or

introduced and the principal occupation or business of such person as

well as the name of any other person guaranteeing such account or

exercising any trading control with respect to such account. For each

such commodity option account, the records kept by such futures

commission merchant, introducing broker, and member of a contract

market must also show the name of the person who has solicited and is

responsible for each option customer's account or assign account

numbers in such a manner to identify that person.

* * * * *

0

9. Section 1.40 is revised to read as follows:

Sec. 1.40 Crop, market information letters, reports; copies required.

Each futures commission merchant, each retail foreign exchange

dealer, each introducing broker and each member of a contract market

shall, upon request, furnish or cause to be furnished to the Commission

a true copy of any letter, circular, telegram, or report published or

given general circulation by such futures commission merchant, retail

foreign exchange dealer, introducing broker or member which concerns

crop or market information or conditions that affect or tend to affect

the price of any commodity or exchange rate, and the true source of or

authority for the information contained therein.

0

10. Section 1.46 is amended by revising paragraphs (a) and (b) to read

as follows:

Sec. 1.46 Application and closing out of offsetting long and short

positions.

(a) Application of purchases and sales. (1) Except with respect to

purchases or sales which are for omnibus accounts, or where the

customer or account controller has instructed otherwise, any futures

commission merchant who, on or subject to the rules of a designated

contract market or registered derivatives transaction execution

facility:

(i) Purchases any commodity for future delivery for the account of

any customer when the account of such customer at the time of such

purchase has a short position in the same future of the same commodity

on the same market;

(ii) Sells any commodity for future delivery for the account of any

customer when the account of such customer at the time of such sale has

a long position in the same future of the same commodity on the same

market;

(iii) Purchases a put or call option for the account of any option

customer when the account of such option customer at the time of such

purchase has a short put or call option position with the same

underlying futures contract or same underlying physical, strike price,

expiration date and contract market as that purchased; or

(iv) Sells a put or call option for the account of any option

customer when the account of such option customer at the time of such

sale has a long put or call option position with the same underlying

futures contract or same underlying physical, strike price, expiration

date and contract market as that sold--shall on the same day apply such

purchase or sale against such previously held short or long futures or

option position, as the case may be, and shall, for futures

transactions, promptly furnish such customer a statement showing the

financial result of the transactions involved and, if applicable, that

the account was introduced to the futures commission merchant by an

introducing broker and the names of the futures commission merchant and

introducing broker.

(2) Any futures commission merchant or retail foreign exchange

dealer who:

(i) Engages in a retail forex transaction involving the purchase of

any currency for the account of any retail forex customer when the

account of such retail forex customer at the time of such purchase has

an open retail forex transaction for the sale of the same currency;

(ii) Engages in a retail forex transaction involving the sale of

any currency for the account of any retail forex customer when the

account of such retail forex customer at the time of such sale has an

open retail forex transaction for the purchase of the same currency;

[[Page 55423]]

(iii) Purchases a put or call option involving foreign currency for

the account of any option customer when the account of such option

customer at the time of such purchase has a short put or call option

position with the same underlying currency, strike price, and

expiration date as that purchased; or

(iv) Sells a put or call option involving foreign currency for the

account of any option customer when the account of such option customer

at the time of such sale has a long put or call option position with

the same underlying currency, strike price, and expiration date as that

sold--shall immediately apply such purchase or sale against such

previously held opposite transaction, and shall promptly furnish such

retail forex customer a statement showing the financial result of the

transactions involved and, if applicable, that the account was

introduced to the futures commission merchant or retail foreign

exchange dealer by an introducing broker and the names of the futures

commission merchant or retail foreign exchange dealer, and the

introducing broker.

(b) Close-out against oldest open position. In all instances

wherein the short or long futures, retail forex transaction or option

position in such customer's, retail forex customer's or option

customer's account immediately prior to such offsetting purchase or

sale is greater than the quantity purchased or sold, the futures

commission merchant or retail foreign exchange dealer shall apply such

offsetting purchase or sale to the oldest portion of the previously

held short or long position: Provided, That upon specific instructions

from the customer or option customer the offsetting transaction shall

be applied as specified by the customer or option customer without

regard to the date of acquisition of the previously held position; and

Provided, further, that a futures commission merchant or retail foreign

exchange dealer, if permitted by the rules of a registered futures

association, may offset, at the customer's request, retail forex

transactions of the same size, even if the customer holds other

transactions of a different size, but in each case must offset the

transaction against the oldest transaction of the same size. Such

instructions may also be accepted from any person who, by power of

attorney or otherwise, actually directs trading in the customer's,

retail forex customer's or option customer's account unless the person

directing the trading is the futures commission merchant or retail

foreign exchange dealer (including any partner thereof), or is an

officer, employee, or agent of the futures commission merchant or

retail foreign exchange dealer. With respect to every such offsetting

transaction that, in accordance with such specific instructions, is not

applied to the oldest portion of the previously held position, the

futures commission merchant or retail foreign exchange dealer shall

clearly show on the statement issued to the customer, retail forex

customer or option customer in connection with the transaction, that

because of the specific instructions given by or on behalf of the

customer, retail forex customer or option customer the transaction was

not applied in the usual manner, i.e., against the oldest portion of

the previously held position. However, no such showing need be made if

the futures commission merchant or retail foreign exchange dealer has

received such specific instructions in writing from the customer,

retail forex customer or option customer for whom such account is

carried.

* * * * *

0

11. Section 1.52 is amended by:

0

a. Revising paragraphs (a), and (c) introductory text, (c)(1), and

(c)(2);

0

b. Revising paragraphs (g)(3) and (g)(4); and

0

c. Revising paragraphs (h), (j), and (k) to read as follows:

Sec. 1.52 Self-regulatory organization adoption and surveillance of

minimum financial requirements.

(a) Each self-regulatory organization must adopt, and submit for

Commission approval, rules prescribing minimum financial and related

reporting requirements for all its members who are registered futures

commission merchants or registered retail foreign exchange dealers.

Each self-regulatory organization other than a contract market must

adopt, and submit for Commission approval, rules prescribing minimum

financial and related reporting requirements for all its members who

are registered introducing brokers. Each contract market which elects

to have a category of membership for introducing brokers must adopt,

and submit for Commission approval, rules prescribing minimum financial

and related reporting requirements for all its members who are

registered introducing brokers. Each self-regulatory organization shall

submit for Commission approval any modification or other amendments to

such rules. Such requirements must be the same as, or more stringent

than, those contained in Sec. Sec. 1.10 and 1.17, for futures

commission merchants and introducing brokers, and Sec. 5.7 of this

chapter for retail foreign exchange dealers. The definition of adjusted

net capital must be the same as that prescribed in Sec. 1.17(c) for

futures commission merchants and introducing brokers, and Sec.

5.7(b)(2) of this chapter for futures commission merchants offering or

engaging in retail forex transactions and for retail foreign exchange

dealers: Provided, however, A designated self-regulatory organization

may permit its member registrants which are registered with the

Securities and Exchange Commission as securities brokers or dealers to

file (in accordance with Sec. 1.10(h)) a copy of their Financial and

Operational Combined Uniform Single Report under the Securities

Exchange Act of 1934, Part II, Part IIA, or Part II CSE, in lieu of

Form 1-FR: And, provided further, A designated self-regulatory

organization may permit its member introducing brokers to file a Form

1-FR-IB in lieu of a Form 1-FR-FCM.

* * * * *

(c) Any two or more self-regulatory organizations may file with the

Commission a plan for delegating to a designated self-regulatory

organization, for any registered futures commission merchant, any

registered retail foreign exchange dealer, or any registered

introducing broker which is a member of more than one such self-

regulatory organization, the responsibility of:

(1) Monitoring and auditing for compliance with the minimum

financial and related reporting requirements adopted by such self-

regulatory organizations in accordance with paragraph (a) of this

section; and

(2) Receiving the financial reports necessitated by such minimum

financial and related reporting requirements.

* * * * *

(g) * * *

(3) Reduces multiple monitoring and auditing for compliance with

the minimum financial rules of the self-regulatory organizations

submitting the plan for any futures commission merchant, retail foreign

exchange dealer, or introducing broker which is a member of more than

one self-regulatory organization;

(4) Reduces multiple reporting of the financial information

necessitated by such minimum financial and related reporting

requirements by any futures commission merchant, retail foreign

exchange dealer, or introducing broker which is a member of more than

one self-regulatory organization;

* * * * *

(h) After the Commission has approved a plan or part of one under

Sec. 1.52(g), a self-regulatory organization relieved of

responsibility must notify

[[Page 55424]]

each of its members which is subject to such a plan:

(1) Of the limited nature of its responsibility for such a member's

compliance with its minimum financial and related reporting

requirements; and

(2) Of the identity of the designated self-regulatory organization

which has been delegated responsibility for such a member.

* * * * *

(j) Whenever a registered futures commission merchant, a registered

retail foreign exchange dealer, or a registered introducing broker

holding membership in a self-regulatory organization ceases to be a

member in good standing of that self-regulatory organization, such

self-regulatory organization must, on the same day that event takes

place, give telegraphic notice of that event to the principal office of

the Commission in Washington, DC, and send a copy of that notification

to such futures commission merchant, retail foreign exchange dealer, or

such introducing broker.

(k) Nothing in this section shall preclude the Commission from

examining any futures commission merchant, retail foreign exchange

dealer, or introducing broker for compliance with the minimum financial

and related reporting requirements to which such futures commission

merchant, retail foreign exchange dealer, or introducing broker is

subject.

* * * * *

PART 3--REGISTRATION

0

12. The authority citation for part 3 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19, 21

and 23.

0

13. Section 3.1 is amended by revising paragraph (c) to read as

follows:

Sec. 3.1 Definitions.

* * * * *

(c) Sponsor. Sponsor means the futures commission merchant, retail

foreign exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant which makes

the certification required by Sec. 3.12 of this part for the

registration of an associated person of such sponsor.

* * * * *

0

14. Section 3.4 is amended by revising paragraph (a) to read as

follows:

Sec. 3.4 Registration in one capacity not included in registration in

any other capacity.

(a) Except as may be otherwise provided in the Act or in any rule,

regulation, or order of the Commission, each futures commission

merchant, retail foreign exchange dealer, floor broker, floor trader,

associated person, commodity trading advisor, commodity pool operator,

introducing broker, and leverage transaction merchant must register as

such under the Act. Registration in one capacity under the Act shall

not include registration in any other capacity: Provided, however, That

a registered floor broker need not also register as a floor trader in

order to engage in activity as a floor trader.

* * * * *

0

15. Section 3.10 is amended by:

0

a. Revising the heading;

0

b. Revising paragraph (a)(1);

0

c. Revising paragraph (b); and

0

d. Revising paragraph (d) to read as follows:

Sec. 3.10 Registration of futures commission merchants, retail

foreign exchange dealers, introducing brokers, commodity trading

advisors, commodity pool operators and leverage transaction merchants.

(a) Application for registration. (1)(i) Except as provided in

paragraph (a)(3) of this section, application for registration as a

futures commission merchant, retail foreign exchange dealers,

introducing broker, commodity trading advisor, commodity pool operator

or leverage transaction merchant must be on Form 7-R, completed and

filed with the National Futures Association in accordance with the

instructions thereto.

(ii) Applicants for registration as a futures commission merchant,

retail foreign exchange dealer or introducing broker must accompany

their Form 7-R with a Form 1-FR-FCM or Form 1-FR-IB, respectively, in

accordance with the provisions of Sec. 1.10 of this chapter: Provided,

however, That an applicant for registration as a futures commission

merchant or introducing broker which is registered with the Securities

and Exchange Commission as a securities broker or dealer may accompany

its Form 7-R with a copy of its Financial and Operational Combined

Uniform Single Report under the Securities Exchange Act of 1934, Part

II or Part II A, in accordance with the provisions of Sec. 1.10(h) of

this chapter.

* * * * *

(b) Duration of registration. (1) A person registered as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator or leverage

transaction merchant in accordance with paragraph (a) of this section

will continue to be so registered until the effective date of any

revocation or withdrawal of such registration. Such person will be

prohibited from engaging in activities requiring registration under the

Act or from representing himself to be a registrant under the Act or

the representative or agent of any registrant during the pendency of

any suspension of such registration.

(2) A person registered as an introducing broker who was a party to

a guarantee agreement with a futures commission merchant or retail

foreign exchange dealer in accordance with Sec. 1.10(j) of this

chapter will have its registration cease thirty days after the

termination of such guarantee agreement unless the procedures set forth

in Sec. 1.10(j)(8) of this chapter are followed.

* * * * *

(d) On a date to be established by the National Futures

Association, and in accordance with procedures established by the

National Futures Association, each registrant as a futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator or leverage transaction

merchant shall, on an annual basis, review and update registration

information maintained with the National Futures Association. The

failure to complete the review and update within thirty days following

the date established by the National Futures Association shall be

deemed to be a request for withdrawal from registration, which shall be

processed in accordance with the provisions of Sec. 3.33(f).

* * * * *

0

16. Section 3.12 is amended by

0

a. Revising the heading;

0

b. Revising paragraph (a);

0

c. Revising paragraph (f)(1)(iii)(E);

0

d. Revising paragraph (f)(4);

0

e. Revising paragraph (h)(1)(i) and paragraph (h)(1)(iii); and

0

f. Removing paragraph (j). The revisions read as follows:

Sec. 3.12 Registration of associated persons of futures commission

merchants, retail foreign exchange dealers, introducing brokers,

commodity trading advisors, commodity pool operators and leverage

transaction merchants.

(a) Registration required. It shall be unlawful for any person to

be associated with a futures commission merchant, retail foreign

exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant as an

associated person unless that person shall have registered under the

Act as an associated person of that sponsoring futures commission

merchant, retail foreign exchange dealer, introducing

[[Page 55425]]

broker, commodity trading advisor, commodity pool operator or leverage

transaction merchant in accordance with the procedures in paragraphs

(c), (d), (f), or (i), of this section or is exempt from such

registration pursuant to paragraph (h) of this section.

* * * * *

(f) * * *

(1) * * *

(iii) * * *

(E) Associated person's supervision of any person or persons

engaged in any of the foregoing solicitations or acceptances, with

respect to any customers common to it and any other futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator, or leverage transaction

merchant with which the associated person is associated.

* * * * *

(4) If a person is associated with a futures commission merchant,

with a retail foreign exchange dealer, or with an introducing broker

and he directs customers seeking a managed account to use the services

of a commodity trading advisor(s) approved by the futures commission

merchant, retail foreign exchange dealer or introducing broker and all

such customers' accounts solicited or accepted by the associated person

are carried by the futures commission merchant, retail foreign exchange

dealer or introduced by the introducing broker with which the

associated person is associated, such a person shall be deemed to be

associated solely with the futures commission merchant, retail foreign

exchange dealer or introducing broker and may not also register as an

associated person of the commodity trading advisor(s).

* * * * *

(h) * * *

(1) * * *

(i) Registered under the Act as a futures commission merchant,

retail foreign exchange dealer, floor broker, or as an introducing

broker;

* * * * *

(iii) The chief operating officer, general partner or other person

in the supervisory chain-of-command, provided the futures commission

merchant, retail foreign exchange dealer, introducing broker, commodity

trading advisor, commodity pool operator, or leverage transaction

merchant engages in commodity interest related activity for customers

as no more than ten percent of its total revenue on an annual basis,

the firm is not subject to a pending proceeding brought by the

Commission or a self-regulatory organization alleging fraud or failure

to supervise, and has not been found in such a proceeding to have

committed fraud or failed to supervise, as required by the Act, the

rules promulgated thereunder or the rules of a self-regulatory

organization, the person for whom exemption is sought and the person

designated in accordance with paragraphs (h)(1)(iii)(C) or

(h)(1)(iii)(D) of this section are listed as principals of the firm,

the fitness examination conducted by the National Futures Association

with respect to these persons discloses no derogatory information that

would disqualify any of such persons as a principal or as an associated

person, and the firm files with the National Futures Association

corporate or partnership resolutions stating that:

(A) Such supervisory person is not authorized to:

(1) Solicit or accept customers', retail forex customers', or

leverage customers' orders,

(2) Solicit a client's or prospective client's discretionary

account,

(3) Solicit funds, securities or property for a participation in a

commodity pool, or

(4) Exercise any line supervisory authority over those persons so

engaged;

(B) Such supervisory person has no authority with respect to

hiring, firing or other personnel matters involving persons engaged in

activities subject to regulation under the Act;

(C) Another person (or persons) designated therein, who is

registered as an associated person(s) or who has applied for

registration as an associated person(s) and is not subject to a pending

proceeding brought by the Commission or a self-regulatory organization

alleging fraud or failure to supervise, and has not been found in such

a proceeding to have committed fraud or failed to supervise, as

required by the Act, the rules promulgated thereunder or the rules of a

self-regulatory organization, holds and exercises full and final

supervisory authority, including authority to hire and fire personnel,

over the customer commodity interest related activities of the firm;

and

(D) If the person (or persons) so designated in accordance with

paragraph (h)(1)(iii)(C) of this section ceases to have the authority

referred to therein, the firm will notify the National Futures

Association within twenty days of such occurrence by means of a

subsequent resolution which resolution must also include the name of

another associated person (or persons) who has been vested with full

supervisory authority, including authority to hire and fire personnel,

over the customer commodity interest related activities of the firm in

the event that all of those previously designated in accordance with

paragraph (h)(1)(iii)(C) of this section have been relieved of such

authority. Subsequent changes in supervisory authority shall be

reported in the same manner; or

* * * * *

0

17. Section 3.21 is amended by:

0

a. Revising paragraph (b)(3); and

0

b. Revising paragraphs (c) introductory text, (c)(1) through (3), and

(c)(4)(i) to read as follows:

Sec. 3.21 Exemption from fingerprinting requirement in certain cases.

* * * * *

(b) * * *

(3) With respect to the fingerprints of a principal. An officer, if

the futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator, introducing broker,

or leverage transaction merchant with which the principal will be

affiliated is a corporation, a general partner, if a partnership, or

the sole proprietor, if a sole proprietorship.

(c) Outside directors. Any futures commission merchant, retail

foreign exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator or leverage transaction merchant that has a

principal who is a director but is not also an officer or employee of

the firm may, in lieu of submitting a fingerprint card in accordance

with the provisions of Sec. Sec. 3.10(a)(2) and 3.31(a)(2), file a

``Notice Pursuant to Rule 3.21(c)'' with the National Futures

Association. Such notice shall state, if true, that such outside

director:

(1) Is not engaged in:

(i) The solicitation or acceptance of customers' orders or retail

forex customers' orders,

(ii) The solicitation of funds, securities or property for a

participation in a commodity pool,

(iii) The solicitation of a client's or prospective client's

discretionary account,

(iv) The solicitation or acceptance of leverage customers' orders

for leverage transactions;

(2) Does not regularly have access to the keeping, handling or

processing of:

(i) Commodity interest transactions;

(ii) Customer funds, retail forex customer funds, leverage customer

funds, foreign futures or foreign options secured amount, or adjusted

net capital; or

(3) Does not have direct supervisory responsibility over persons

engaged in the activities referred to in paragraphs (c)(1) and (c)(2)

of this section; and

[[Page 55426]]

(4) * * *

(i) The name of the futures commission merchant, retail foreign

exchange dealer, introducing broker, commodity trading advisor,

commodity pool operator, leverage transaction merchant, or applicant

for registration in any of these capacities of which the person is an

outside director;

* * * * *

18. Section 3.30 is amended by revising paragraph (a) to read as

follows:

Sec. 3.30 Current address for purpose of delivery of communications

from the Commission or the National Futures Association.

(a) The address of each registrant, applicant for registration and

principal, as submitted on the application for registration (Form 7-R

or Form 8-R) or as submitted on the biographical supplement (Form 8-R)

shall be deemed to be the address for delivery to the registrant,

applicant or principal for any communications from the Commission or

the National Futures Association, including any summons, complaint,

reparation claim, order, subpoena, special call, request for

information, notice, and other written documents or correspondence,

unless the registrant, applicant or principal specifies another address

for this purpose: Provided, That the Commission or the National Futures

Association may address any correspondence relating to a biographical

supplement submitted for or on behalf of a principal to the futures

commission merchant, retail foreign exchange dealer, commodity trading

advisor, commodity pool operator, introducing broker, or leverage

transaction merchant with which the principal is affiliated and may

address any correspondence relating to the registration of an

associated person to the futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator,

introducing broker, or leverage transaction merchant with which the

associated person or the applicant for registration is or will be

associated as an associated person.

* * * * *

0

19. Section 3.31 is amended by revising paragraphs (a)(1), (b), (c),

and (d) to read as follows:

Sec. 3.31 Deficiencies, inaccuracies, and changes, to be reported.

(a)(1) Each applicant or registrant as a futures commission

merchant, retail foreign exchange dealer, commodity trading advisor,

commodity pool operator, introducing broker, or leverage transaction

merchant shall, in accordance with the instructions thereto, promptly

correct any deficiency or inaccuracy in Form 7-R or Form 8-R which no

longer renders accurate and current the information contained therein.

Each such correction shall be made on Form 3-R and shall be prepared

and filed in accordance with the instructions thereto. Provided,

however, that where a registrant is reporting a change in the form of

organization from or to a sole proprietorship, the registrant must file

a Form 7-W regarding the pre-existing organization and a Form 7-R

regarding the newly formed organization.

* * * * *

(b) Each applicant or registrant as a floor broker, floor trader or

associated person, and each principal of a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator, introducing broker, or leverage transaction merchant

must, in accordance with the instructions thereto, promptly correct any

deficiency or inaccuracy in the Form 8-R or supplemental statement

thereto which renders no longer accurate and current the information

contained in the Form 8-R or supplemental statement. Each such

correction must be made on Form 3-R and must be prepared and filed in

accordance with the instructions thereto.

(c)(1) After the filing of a Form 8-R or a Form 3-R by or on behalf

of any person for the purpose of permitting that person to be an

associated person of a futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator,

introducing broker, or a leverage transaction merchant, that futures

commission merchant, retail foreign exchange dealer, commodity trading

advisor, commodity pool operator, introducing broker or leverage

transaction merchant must, within thirty days after the occurrence of

either of the following, file a notice thereof with the National

Futures Association indicating:

(i) The failure of that person to become associated with the

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator, introducing broker, or

leverage transaction merchant, and the reasons therefor; or

(ii) The termination of the association of the associated person

with the futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator, introducing broker,

or leverage transaction merchant, and the reasons therefor.

(2) Each person registered as, or applying for registration as, a

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator, introducing broker or

leverage transaction merchant must, within thirty days after the

termination of the affiliation of a principal with the registrant or

applicant, file a notice thereof with the National Futures Association.

(3) Any notice required by paragraph (c) of this section must be

filed on Form 8-T or on a Uniform Termination Notice for Securities

Industry Registration.

(d) Each contract market or derivatives transaction execution

facility that has granted trading privileges to a person who is

registered, has received a temporary license, or has applied for

registration as a floor broker or floor trader, must notify the

National Futures Association within sixty days after such person has

ceased having trading privileges on such contract market or derivatives

transaction execution facility.

* * * * *

0

20. Section 3.33 is amended by revising paragraphs (a) introductory

text, (b) introductory text, (b)(6), and (e) to read as follows:

Sec. 3.33 Withdrawal from registration.

(a) A futures commission merchant, retail foreign exchange dealer,

introducing broker, commodity trading advisor, commodity pool operator,

leverage transaction merchant, floor broker or floor trader may request

that its registration be withdrawn in accordance with the requirements

of this section if:

* * * * *

(b) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator, or leverage

transaction merchant must be made on Form 7-W, and a request for

withdrawal from registration as a floor broker or floor trader must be

made on Form 8-W, completed and filed with National Futures Association

in accordance with the instructions thereto. The request for withdrawal

must be made by a person duly authorized by the registrant and must

specify:

* * * * *

(6) If a basis for withdrawal from registration under paragraph

(a)(1) of this section is that the registrant has ceased engaging in

activities requiring

[[Page 55427]]

registration, then, with respect to each capacity for which the

registrant has ceased such activities:

(i) That all customer, retail forex customer or option customer

agreements, if any, have been terminated;

(ii) That all customer, retail forex customer or option customer

positions, if any, have been transferred on behalf of customers or

option customers or closed;

(iii) That all customer, retail forex customer or option customer

cash balances, securities, or other property, if any, have been

transferred on behalf of customers, retail forex customers or option

customers or returned, and that there are no obligations to customers,

retail forex customers or option customers outstanding;

(iv) In the case of a commodity pool operator, that all interests

in, and assets of, any commodity pool have been redeemed, distributed,

or transferred, on behalf of the participants therein, and that there

are no obligations to such participants outstanding;

(v) In the case of a leverage transaction merchant:

(A) Either that all leverage customer agreements, if any, and all

leverage contracts have been terminated, and that all leverage customer

cash balances, securities or other property, if any, have been

returned, or

(B) Alternatively, that pursuant to Commission approval, the

leverage contract obligations of the leverage transaction merchant have

been assumed by another leverage transaction merchant and all leverage

customer cash balances, securities or other property, if any, have been

transferred to such leverage transaction merchant on behalf of leverage

customers or returned, and that there are no obligations to leverage

customers outstanding;

(vi) The nature and extent of any pending customer, retail forex

customer, option customer, leverage customer, or commodity pool

participant claims against the registrant, and, to the best of the

registrant's knowledge and belief, the nature and extent of any

anticipated or threatened customer, option customer, leverage customer,

or commodity pool participant claims against the registrant; and

(vii) In the case of a futures commission merchant or a retail

foreign exchange dealer which is a party to a guarantee agreement, that

all such agreements have been or will be terminated in accordance with

the provisions of Sec. 1.10(j) of this chapter not more than thirty

days after the filing of the request for withdrawal from registration.

* * * * *

(e) A request for withdrawal from registration as a futures

commission merchant, retail foreign exchange dealer, introducing

broker, commodity trading advisor, commodity pool operator, leverage

transaction merchant on Form 7-W, and a request for withdrawal from

registration as a floor broker or floor trader on Form 8-W, must be

filed with the National Futures Association and a copy of such request

must be sent by the National Futures Association within three business

days of the receipt of such withdrawal request to the Commodity Futures

Trading Commission, Division of Clearing and Intermediary Oversight,

Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In

addition, any floor broker or floor trader requesting withdrawal from

registration must file a copy of his Form 8-W with each contract market

that has granted him trading privileges. Within three business days of

any determination by the National Futures Association under Sec.

3.10(d) to treat the failure by a registrant to file an annual Form 7-R

as a request for withdrawal, the National Futures Association shall

send the Commission notice of that determination.

* * * * *

0

21. Section 3.44 is amended by revising paragraphs (a)(1) through (5)

to read as follows:

Sec. 3.44 Temporary licensing of applicants for guaranteed

introducing broker registration.

(a) * * *

(1) A properly completed guarantee agreement (Form 1-FR part B)

from a futures commission merchant or retail foreign exchange dealer

which is eligible to enter into such an agreement pursuant to Sec.

1.10(j)(2) of this chapter;

(2) A Form 7-R properly completed in accordance with the

instructions thereto;

(3) A Form 8-R for the applicant, if a sole proprietor, and each

principal (including each branch office manager) thereof, properly

completed in accordance with the instructions thereto, all of whom

would be eligible for a temporary license if they had applied as

associated persons.

(4) A certification executed by a person duly authorized by the

futures commission merchant or retail foreign exchange dealer that has

executed the guarantee agreement required by paragraph (a)(1) of this

section, stating that:

(i) The futures commission merchant or retail foreign exchange

dealer has verified the information on the Forms 8-R filed pursuant to

paragraph (a)(3) of this section which relate to education and

employment history of the applicant's principals (including each branch

office manager) thereof during the preceding three years; and

(ii) To the best of the futures commission merchant's or retail

foreign exchange dealer's knowledge, information, and belief, all of

the publicly available information supplied by the applicant and its

principals and each branch office manager of the applicant on the Form

7-R and Forms 8-R, as appropriate, is accurate and complete; and

(5) The fingerprints of the applicant, if a sole proprietor, and of

each principal (including each branch office manager) thereof on

fingerprint cards provided by the National Futures Association for that

purpose: Provided, that a principal who has a current Form 8-R on file

with the National Futures Association or the Commission is not required

to submit a fingerprint card.

* * * * *

0

22. Section 3.45 is amended by revising paragraph (b) to read as

follows:

Sec. 3.45 Restrictions upon activities.

* * * * *

(b) An applicant for registration as an introducing broker who has

received a temporary license may be guaranteed by a futures commission

merchant or retail foreign exchange dealer other than the futures

commission merchant or retail foreign exchange dealer which provided

the initial guarantee agreement described in Sec. 3.44(a)(1) of this

subpart: Provided, That, at least 10 days prior to the effective date

of the termination of the existing guarantee agreement in accordance

with the provisions of Sec. 1.10 (j)(5) of this chapter, or such other

period of time as the National Futures Association may allow for good

cause shown, the applicant files with the National Futures

Association--

(1) Written notice of such termination and

(2) A new guarantee agreement with another futures commission

merchant or retail foreign exchange dealer effective the day following

the last effective date of the existing guarantee agreement.

0

23. Section 3.50 is amended by revising paragraph (b)(2) to read as

follows:

Sec. 3.50 Service.

* * * * *

(b) * * *

(2) Any futures commission merchant or retail foreign exchange

dealer which

[[Page 55428]]

has entered into a guarantee agreement in accordance with Sec. 1.10(j)

of this chapter, if the applicant or registrant is registered as or

applying for registration as an introducing broker.

* * * * *

0

24. Section 3.60 is amended by revising paragraph (b)(2)(i)(B) to read

as follows:

Sec. 3.60 Procedure to deny, condition, suspend, revoke or place

restrictions upon registration pursuant to sections 8a(2), 8a(3) and

8a(4) of the Act.

* * * * *

(b) * * *

(2)(i) * * *

(B) In the case of a sponsor which is a futures commission

merchant, a retail foreign exchange dealer or a leverage transaction

merchant, the sponsor is not subject to the reporting requirements of

Sec. 1.12(b), Sec. 5.6(b) or Sec. 31.7(b) of this chapter,

respectively; and

* * * * *

PART 4--COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS

0

25. The authority citation for part 4 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 4, 6b, 6c, 6l, 6m, 6n, 6o, 12a and

23.

0

26. Section 4.7 is amended by:

0

a. Revising paragraph (a)(1)(v)(B); and

0

b. Revising paragraph (a)(2)(i) to read as follows:

Sec. 4.7 Exemption from certain part 4 requirements for commodity

pool operators with respect to offerings to qualified eligible persons

and for commodity trading advisors with respect to advising qualified

eligible persons.

* * * * *

(a) * * *

(1) * * *

(v) * * *

(B) Has had on deposit with a futures commission merchant, for its

own account at any time during the six-month period preceding either

the date of sale to that person of a pool participation in the exempt

pool or the date that the person opens an exempt account with the

commodity trading advisor, at least $200,000 in exchange-specified

initial margin and option premiums, together with required minimum

security deposit for retail forex transactions (as defined in Sec.

5.1(m) of this chapter) for commodity interest transactions; or

* * * * *

(2) * * *

(i)(A) A futures commission merchant registered pursuant to section

4d of the Act, or a principal thereof;

(B) A retail foreign exchange dealer registered pursuant to section

2(c)(2)(B)(i)(II)(gg) of the Act, or a principal thereof;

* * * * *

0

27. Section 4.12 is amended by revising paragraph (b)(1)(i)(C) to read

as follows:

Sec. 4.12 Exemption from provisions of part 4.

* * * * *

(b) * * *

(1) * * *

(i) * * *

(C) Will not enter into commodity interest transactions for which

the aggregate initial margin and premiums, and required minimum

security deposit for retail forex transactions (as defined in Sec.

5.1(m) of this chapter) exceed 10 percent of the fair market value of

the pool's assets, after taking into account unrealized profits and

unrealized losses on any such contracts it has entered into; Provided,

however, That in the case of an option that is in-the-money at the time

of purchase, the in-the-money amount as defined in Sec. 190.01(x) of

this chapter may be excluded in computing such 10 percent; and

* * * * *

0

28. Section 4.13 is amended by:

0

a. Revising paragraph (a)(3)(ii)(A): and

0

b. Revising paragraph (a)(3)(ii)(B)(1) to read as follows:

Sec. 4.13 Exemption from registration as a commodity pool operator.

* * * * *

(a) * * *

(3) * * *

(ii) * * *

(A) The aggregate initial margin, premiums, and required minimum

security deposit for retail forex transactions (as defined in Sec.

5.1(m) of this chapter) required to establish such positions,

determined at the time the most recent position was established, will

not exceed 5 percent of the liquidation value of the pool's portfolio,

after taking into account unrealized profits and unrealized losses on

any such positions it has entered into; Provided, That in the case of

an option that is in-the-money at the time of purchase, the in-the-

money amount as defined in Sec. 190.01(x) of this chapter may be

excluded in computing such 5 percent; or

(B) * * *

(1) The term ``notional value'' shall be calculated for each such

futures position by multiplying the number of contracts by the size of

the contract, in contract units (taking into account any multiplier

specified in the contract), by the current market price per unit, and

for each such option position by multiplying the number of contracts by

the size of the contract, adjusted by its delta, in contract units

(taking into account any multiplier specified in the contract), by the

strike price per unit, and for each such retail forex transaction, by

calculating the value in U.S. Dollars of such transaction, at the time

the transaction was established, excluding for this purpose the value

in U.S. Dollars of offsetting long and short transactions, if any; and

* * * * *

0

29. Section 4.14 is amended by revising paragraph (a)(7) to read as

follows:

Sec. 4.14 Exemption from registration as a commodity trading advisor.

* * * * *

(a) * * *

(7)(i) It is registered under the Act as a leverage transaction

merchant and the person's trading advice is solely in connection with

its business as a leverage transaction merchant;

(ii) It is registered under the Act as a retail foreign exchange

dealer and the person's trading advice is solely in connection with its

business as a retail foreign exchange dealer.

* * * * *

0

30. Section 4.23 is amended by:

0

a. Revising paragraph (a)(1);

0

b. Revising paragraph (a)(7); and

0

c. Revising paragraph (b)(1) and (2) to read as follows:

Sec. 4.23 Recordkeeping.

* * * * *

(a) Concerning the commodity pool: (1) An itemized daily record of

each commodity interest transaction of the pool, showing the

transaction date, quantity, commodity interest, and, as applicable,

price or premium, delivery month or expiration date, whether a put or a

call, strike price, underlying contract for future delivery or

underlying physical, the futures commission merchant and/or retail

foreign exchange dealer carrying the account and the introducing

broker, if any, whether the commodity interest was purchased, sold

(including, in the case of a retail forex transaction, offset),

exercised, expired (including, in the case of a retail forex

transaction, whether it was rolled forward), and the gain or loss

realized.

* * * * *

(7) Copies of each confirmation of a commodity interest transaction

of the pool, each purchase and sale statement and each monthly

statement for the pool received from a futures commission

[[Page 55429]]

merchant or retail foreign exchange dealer.

* * * * *

(b) Concerning the commodity pool operator: (1) An itemized daily

record of each commodity interest transaction of the commodity pool

operator and each principal thereof, showing the transaction date,

quantity, commodity interest, and, as applicable, price or premium,

delivery month or expiration date, whether a put or a call, strike

price, underlying contract for future delivery or underlying physical,

the futures commission merchant or retail foreign exchange dealer

carrying the account and the introducing broker, if any whether the

commodity interest was purchased, sold, exercised, or expired, and the

gain or loss realized.

(2) Each confirmation of a commodity interest transaction, each

purchase and sale statement and each monthly statement furnished by a

futures commission merchant or retail foreign exchange dealer to:

(i) The commodity pool operator relating to a personal account of

the pool operator; and

(ii) Each principal of the pool operator relating to a personal

account of such principal.

* * * * *

0

31. Section 4.24 is amended by:

0

a. Revising paragraph (b)(1) introductory text and the first three

sentences of the Risk Disclosure Statement in paragraph (b)(1);

0

b. Adding paragraph (b)(4);

0

c. Revising paragraph (e)(6);

0

d. Revising paragraph (g);

0

e. Revising paragraphs (h)(2) and (h)(4)(iii);

0

f. Revising paragraph (i)(2)(ii);

0

g. Redesignating paragraph (i)(2)(xii) as paragraph (i)(2)(xiii) and

adding new paragraph (i)(2)(xii);

0

g. Revising paragraphs (j)(1)(vi) and (j)(3); and

0

h. Revising paragraphs (l)(1)(iii), (l)(2) introductory text and

(l)(2)(i).

The addition and revisions read as follows:

Sec. 4.24 General disclosures required.

* * * * *

(b) Risk Disclosure Statement. (1) The following Risk Disclosure

Statement must be prominently displayed immediately following any

disclosures required to appear on the cover page of the Disclosure

Document as provided by the Commission, by any applicable federal or

state securities laws and regulations or by any applicable laws of non-

United States jurisdictions.

RISK DISCLOSURE STATEMENT

YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION

PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD

BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE

LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET

ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN

THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR

ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. * * *

* * * * *

(4) If the pool may engage in retail Forex transactions, the Risk

Disclosure Statement must further state:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY ENGAGE IN

OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT CONDUCTED IN

THE INTERBANK MARKET. THE FUNDS THAT THE POOL USES FOR OFF-EXCHANGE

FOREIGN CURRENCY TRADING WILL NOT RECEIVE THE SAME PROTECTIONS AS FUNDS

USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED FUTURES AND OPTION

CONTRACTS. IF THE POOL DEPOSITS SUCH FUNDS WITH A COUNTERPARTY AND THAT

COUNTERPARTY BECOMES INSOLVENT, THE POOL'S CLAIM FOR AMOUNTS DEPOSITED

OR PROFITS EARNED ON TRANSACTIONS WITH THE COUNTERPARTY MAY NOT BE

TREATED AS A COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF

CHAPTER 7 OF THE BANKRUPTCY CODE AND THE REGULATIONS THEREUNDER. THE

POOL MAY BE A GENERAL CREDITOR AND ITS CLAIM MAY BE PAID, ALONG WITH

THE CLAIMS OF OTHER GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE

AFTER PRIORITY CLAIMS ARE PAID. EVEN POOL FUNDS THAT THE COUNTERPARTY

KEEPS SEPARATE FROM ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF

PRIORITY AND OTHER GENERAL CREDITORS.

* * * * *

(e) * * *

(6) If known, the futures commission merchant and/or retail foreign

exchange dealer through which the pool will execute its trades, and, if

applicable, the introducing broker through which the pool will

introduce its trades to the futures commission merchant and/or retail

foreign exchange dealer.

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of participation in the offered pool. This discussion must

include, without limitation, risks relating to volatility, leverage,

liquidity, counterparty creditworthiness, as applicable to the types of

trading programs to be followed, trading structures to be employed and

investment activity (including retail forex transactions) expected to

be engaged in by the offered pool.

(h) * * *

(2) A description of the trading and investment programs and

policies that will be followed by the offered pool, including the

method chosen by the pool operator concerning how futures commission

merchants and/or retail foreign exchange dealers carrying the pool's

accounts shall treat offsetting positions pursuant to Sec. 1.46 of

this chapter, if the method is other than to close out all offsetting

positions or to close out offsetting positions on other than a first-

in, first-out basis, and any material restrictions or limitations on

trading required by the pool's organizational documents or otherwise.

This description must include, if applicable, an explanation of the

systems used to select commodity trading advisors, investee pools and

types of investment activity to which pool assets will be committed;

* * * * *

(4) * * *

(iii) If assets deposited by the pool as margin or as security

deposit generate income, to whom that income will be paid.

(i) * * *

(2) * * *

(ii) Brokerage fees and commissions, including interest income paid

to futures commission merchants, and any fees incurred to maintain an

open position in retail forex transactions;

* * * * *

(xii) Any costs or fees included in the spread between bid and

asked prices for retail forex transactions; and

* * * * *

(j) * * *

(1) * * *

(vi) Any other person providing services to the pool or soliciting

participants for the pool, or acting as a counterparty to the pool's

retail forex transactions (as defined in Sec. 5.1(m) of this chapter).

* * * * *

(3) Included in the description of such conflicts must be any

arrangement

[[Page 55430]]

whereby a person may benefit, directly or indirectly, from the

maintenance of the pool's account with the futures commission merchant

and/or retail foreign exchange dealer, or from the introduction of the

pool's account to a futures commission merchant and/or retail foreign

exchange dealer by an introducing broker (such as payment for order

flow or soft dollar arrangements) or from an investment of pool assets

in investee pools or funds or other investments.

* * * * *

(l) * * *

(1) * * *

(iii) The pool's futures commission merchants and/or retail foreign

exchange dealers and its introducing brokers, if any.

(2) With respect to a futures commission merchant and/or retail

foreign exchange dealer or an introducing broker, an action will be

considered material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant's, retail foreign exchange dealer's or

introducing broker's financial statements prepared pursuant to

generally accepted accounting principles;

* * * * *

0

32. Section 4.25 is amended by revising paragraph (c)(3)(ii) to read as

follows:

Sec. 4.25 Performance disclosures.

* * * * *

(c) * * *

(3) * * *

(ii) If a major commodity trading advisor has not previously traded

accounts, the pool operator must prominently display the following

statement:

(name of the major commodity trading advisor), A COMMODITY TRADING

ADVISOR THAT HAS DISCRETIONARY TRADING AUTHORITY OVER (percentage of

the pool's funds available for commodity interest trading allocated to

that trading advisor) PERCENT OF THE POOL'S COMMODITY INTEREST TRADING

HAS NOT PREVIOUSLY DIRECTED ANY ACCOUNTS.

* * * * *

Subpart C--Commodity Trading Advisors

0

33. Section 4.30 is revised to read as follows:

Sec. 4.30 Prohibited activities.

No commodity trading advisor may solicit, accept or receive from an

existing or prospective client funds, securities or other property in

the trading advisor's name (or extend credit in lieu thereof) to

purchase, margin, guarantee or secure any commodity interest of the

client; Provided, however, That this section shall not apply to a

future commission merchant that is registered as such under the Act or

to a leverage transaction merchant that is registered as a commodity

trading advisor under the Act or to a retail foreign exchange dealer

that is registered as such under the Act.

0

34. Section 4.33 is amended by:

0

a. Revising paragraph (a)(6); and

0

b. Revising paragraphs (b)(1) and (2) to read as follows:

Sec. 4.33 Recordkeeping.

* * * * *

(a) * * *

(6) Copies of each confirmation of a commodity interest

transaction, each purchase and sale statement and each monthly

statement received from a futures commission merchant or a retail

foreign exchange dealer.

* * * * *

(b) * * *

(1) An itemized daily record of each commodity interest transaction

of the commodity trading advisor, showing the transaction date,

quantity, commodity interest, and, as applicable, price or premium,

delivery month or expiration date, whether a put or a call, strike

price, underlying contract for future delivery or underlying physical,

the futures commission merchant and/or retail foreign exchange dealer

carrying the account and the introducing broker, if any, whether the

commodity interest was purchased, sold (including, in the case of a

retail forex transaction, offset), exercised, expired (including, in

the case of a retail forex transaction, whether it was rolled forward),

and the gain or loss realized.

(2) Each confirmation of a commodity interest transaction, each

purchase and sale statement and each monthly statement furnished by a

futures commission merchant or retail foreign exchange dealer to:

(i) The commodity trading advisor relating to a personal account of

the trading advisor; and

(ii) Each principal of the trading advisor relating to a personal

account of such principal.

* * * * *

0

35. Section 4.34 is amended by:

0

a. Revising paragraph (b);

0

b. Revising paragraph (e)(2);

0

c. Revising paragraphs (g) and (h);

0

d. Revising paragraph (i)(2);

0

e. Revising paragraphs (j)(1) and (j)(3);

0

f. Revising paragraphs (k)(1)(ii), (k)(1)(iii), (k)(2) introductory

text, and (k)(2)(i) to read as follows:

Sec. 4.34 General disclosures required.

* * * * *

(b) Risk Disclosure Statement. (1) The following Risk Disclosure

Statement must be prominently displayed immediately following any

disclosures required to appear on the cover page of the Disclosure

Document as provided by the Commission, by any applicable federal or

state securities laws and regulations or by any applicable laws of non-

United States jurisdictions:

RISK DISCLOSURE STATEMENT

THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL.

YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS

SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. IN CONSIDERING

WHETHER TO TRADE OR TO AUTHORIZE SOMEONE ELSE TO TRADE FOR YOU, YOU

SHOULD BE AWARE OF THE FOLLOWING:

IF YOU PURCHASE A COMMODITY OPTION YOU MAY SUSTAIN A TOTAL LOSS OF

THE PREMIUM AND OF ALL TRANSACTION COSTS.

IF YOU PURCHASE OR SELL A COMMODITY FUTURES CONTRACT OR SELL A

COMMODITY OPTION OR ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING YOU

MAY SUSTAIN A TOTAL LOSS OF THE INITIAL MARGIN FUNDS OR SECURITY

DEPOSIT AND ANY ADDITIONAL FUNDS THAT YOU DEPOSIT WITH YOUR BROKER TO

ESTABLISH OR MAINTAIN YOUR POSITION. IF THE MARKET MOVES AGAINST YOUR

POSITION, YOU MAY BE CALLED UPON BY YOUR BROKER TO DEPOSIT A

SUBSTANTIAL AMOUNT OF ADDITIONAL MARGIN FUNDS, ON SHORT NOTICE, IN

ORDER TO MAINTAIN YOUR POSITION. IF YOU DO NOT PROVIDE THE REQUESTED

FUNDS WITHIN THE PRESCRIBED TIME, YOUR POSITION MAY BE LIQUIDATED AT A

LOSS, AND YOU WILL BE LIABLE FOR ANY RESULTING DEFICIT IN YOUR ACCOUNT.

UNDER CERTAIN MARKET CONDITIONS, YOU MAY FIND IT DIFFICULT OR

IMPOSSIBLE TO LIQUIDATE A POSITION. THIS CAN OCCUR, FOR EXAMPLE, WHEN

THE MARKET MAKES A ``LIMIT MOVE.''

THE PLACEMENT OF CONTINGENT ORDERS BY YOU OR YOUR TRADING ADVISOR,

SUCH AS A ``STOP-LOSS'' OR ``STOP-LIMIT'' ORDER, WILL NOT NECESSARILY

LIMIT YOUR LOSSES

[[Page 55431]]

TO THE INTENDED AMOUNTS, SINCE MARKET CONDITIONS MAY MAKE IT IMPOSSIBLE

TO EXECUTE SUCH ORDERS.

A ``SPREAD'' POSITION MAY NOT BE LESS RISKY THAN A SIMPLE ``LONG''

OR ``SHORT'' POSITION.

THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY

INTEREST TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF

LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS.

IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO

SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE

NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE

SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR

ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS, AT PAGE (insert page

number), A COMPLETE DESCRIPTION OF EACH FEE TO BE CHARGED TO YOUR

ACCOUNT BY THE COMMODITY TRADING ADVISOR.

THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER

SIGNIFICANT ASPECTS OF THE COMMODITY INTEREST MARKETS. YOU SHOULD

THEREFORE CAREFULLY STUDY THIS DISCLOSURE DOCUMENT AND COMMODITY

INTEREST TRADING BEFORE YOU TRADE, INCLUDING THE DESCRIPTION OF THE

PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE (insert page

number).

(2)(i) If the commodity trading advisor may trade foreign futures

or options contracts pursuant to the offered trading program, the Risk

Disclosure Statement must further state the following:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

ENGAGE IN TRADING FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON

MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY

LINKED TO A UNITED STATES MARKET MAY BE SUBJECT TO REGULATIONS WHICH

OFFER DIFFERENT OR DIMINISHED PROTECTION. FURTHER, UNITED STATES

REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE

RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES

JURISDICTIONS WHERE YOUR TRANSACTIONS MAY BE EFFECTED. BEFORE YOU TRADE

YOU SHOULD INQUIRE ABOUT ANY RULES RELEVANT TO YOUR PARTICULAR

CONTEMPLATED TRANSACTIONS AND ASK THE FIRM WITH WHICH YOU INTEND TO

TRADE FOR DETAILS ABOUT THE TYPES OF REDRESS AVAILABLE IN BOTH YOUR

LOCAL AND OTHER RELEVANT JURISDICTIONS.

(ii) If the commodity trading advisor may engage in retail forex

transactions pursuant to the offered trading program, the Risk

Disclosure Statement must further state the following:

YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY TRADING ADVISOR MAY

ENGAGE IN OFF-EXCHANGE FOREIGN CURRENCY TRADING. SUCH TRADING IS NOT

CONDUCTED IN THE INTERBANK MARKET. THE FUNDS DEPOSITED WITH A

COUNTERPARTY FOR SUCH TRANSACTIONS WILL NOT RECEIVE THE SAME

PROTECTIONS AS FUNDS USED TO MARGIN OR GUARANTEE EXCHANGE-TRADED

FUTURES AND OPTION CONTRACTS. IF THE COUNTERPARTY BECOMES INSOLVENT AND

YOU HAVE A CLAIM FOR AMOUNTS DEPOSITED OR PROFITS EARNED ON

TRANSACTIONS WITH THE COUNTERPARTY, YOUR CLAIM MAY NOT BE TREATED AS A

COMMODITY CUSTOMER CLAIM FOR PURPOSES OF SUBCHAPTER IV OF CHAPTER 7 OF

THE BANKRUPTCY CODE AND REGULATIONS THEREUNDER. YOU MAY BE A GENERAL

CREDITOR AND YOUR CLAIM MAY BE PAID, ALONG WITH THE CLAIMS OF OTHER

GENERAL CREDITORS, FROM ANY MONIES STILL AVAILABLE AFTER PRIORITY

CLAIMS ARE PAID. EVEN FUNDS THAT THE COUNTERPARTY KEEPS SEPARATE FROM

ITS OWN FUNDS MAY NOT BE SAFE FROM THE CLAIMS OF PRIORITY AND OTHER

GENERAL CREDITORS.

FURTHER, YOU SHOULD CAREFULLY REVIEW THE INFORMATION CONTAINED IN

THE RISK DISCLOSURE STATEMENT OF THE FUTURES COMMISSION MERCHANT OR

RETAIL FOREIGN EXCHANGE DEALER THAT YOU SELECT TO CARRY YOUR ACCOUNT.

(3) If the commodity trading advisor is not also a registered

futures commission merchant or a registered retail foreign exchange

dealer, the trading advisor must make the additional following

statement in the Risk Disclosure Statement, to be included as the last

paragraph thereof:

THIS COMMODITY TRADING ADVISOR IS PROHIBITED BY LAW FROM ACCEPTING

FUNDS IN THE TRADING ADVISOR'S NAME FROM A CLIENT FOR TRADING COMMODITY

INTERESTS. YOU MUST PLACE ALL FUNDS FOR TRADING IN THIS TRADING PROGRAM

DIRECTLY WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE

DEALER, AS APPLICABLE.

* * * * *

(e) * * *

(2) The futures commission merchant and/or retail foreign exchange

dealer with which the commodity trading advisor will require the client

to maintain its account or, if the client is free to choose the futures

commission merchant or retail foreign exchange dealer with which it

will maintain its account, the trading advisor must make a statement to

that effect; and

* * * * *

(g) Principal risk factors. A discussion of the principal risk

factors of this trading program. This discussion must include, without

limitation, risks due to volatility, leverage, liquidity, and

counterparty creditworthiness, as applicable to the trading program and

the types of transactions and investment activity expected to be

engaged in pursuant to such program (including retail forex

transactions, if any).

(h) Trading program. A description of the trading program, which

must include the method chosen by the commodity trading advisor

concerning how futures commission merchants and/or retail foreign

exchange dealers carrying accounts it manages shall treat offsetting

positions pursuant to Sec. 1.46 of this chapter, if the method is

other than to close out all offsetting positions or to close out

offsetting positions on other than a first-in, first-out basis, and the

types of commodity interests and other interests the commodity trading

advisor intends to trade, with a description of any restrictions or

limitations on such trading established by the trading advisor or

otherwise.

(i) * * *

(2) Where any fee is determined by reference to a base amount

including, but not limited to, ``net assets,'' ``gross profits,'' ``net

profits,'' ``net gains,'' ``pips'' or ``bid-asked spread,'' the trading

advisor must explain how such base amount will be calculated. Where any

fee is based on the difference between bid and asked prices on retail

forex transactions (as defined in Sec. 5.1(m) of this chapter), the

trading advisor must explain how such fee will be calculated;

* * * * *

(j) Conflicts of interest. (1) A full description of any actual or

potential conflicts of interest regarding any aspect of the trading

program on the part of:

[[Page 55432]]

(i) The commodity trading advisor;

(ii) Any futures commission merchant and/or retail foreign exchange

dealer with which the client will be required to maintain its commodity

interest account;

(iii) Any introducing broker through which the client will be

required to introduce its account to a futures commission merchant and/

or retail foreign exchange dealer; and

(iv) Any principal of the foregoing.

* * * * *

(3) Included in the description of any such conflict must be any

arrangement whereby the trading advisor or any principal thereof may

benefit, directly or indirectly, from the maintenance of the client's

commodity interest account with a futures commission merchant and/or

retail foreign exchange dealer, or the introduction of such account

through an introducing broker (such as payment for order flow or soft

dollar arrangements).

(k) * * *

(1) * * *

(ii) Any futures commission merchant or retail foreign exchange

dealer with which the client will be required to maintain its commodity

interest account; and

(iii) Any introducing broker through which the client will be

required to introduce its account to the futures commission merchant

and/or retail foreign exchange dealer.

(2) With respect to a futures commission merchant, retail foreign

exchange dealer or introducing broker, an action will be considered

material if:

(i) The action would be required to be disclosed in the notes to

the futures commission merchant's, retail foreign exchange dealer's or

introducing broker's financial statements prepared pursuant to

generally accepted accounting principles;

* * * * *

0

36. Part 5 is added to read as follows:

PART 5--OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

Sec.

5.1 Definitions.

5.2 Prohibited transactions.

5.3 Registration of persons engaged in retail forex transactions.

5.4 Applicability of part 4 of this chapter to commodity pool

operators and commodity trading advisors.

5.5 Distribution of ``Risk Disclosure Statement'' by retail foreign

exchange dealers. futures commission merchants and introducing

brokers regarding retail forex transactions.

5.6 Maintenance of minimum financial requirements by retail foreign

exchange dealers and futures commission merchants offering or

engaging in retail forex transactions.

5.7 Minimum financial requirements for retail foreign exchange

dealers and futures commission merchants offering or engaging in

retail forex transactions.

5.8 Aggregate retail forex assets.

5.9 Security deposits for retail forex transactions.

5.10 Risk assessment recordkeeping requirements for retail foreign

exchange dealers.

5.11 Risk assessment reporting requirements for retail foreign

exchange dealers.

5.12 Financial reports of retail foreign exchange dealers.

5.13 Reporting to customers of retail foreign exchange dealers and

futures commission merchants; monthly and confirmation statements.

5.14 Records to be kept by retail foreign exchange dealers and

futures commission merchants.

5.15 Unlawful representations.

5.16 Prohibition of guarantees against loss.

5.17 Authorization to trade.

5.18 Trading and operational standards.

5.19 Pending legal proceedings.

5.20 Special calls for account and transaction information.

5.21 Supervision.

5.22 Registered futures association membership.

5.23 Notice of bulk transfers and bulk liquidations.

5.24 Applicability of other parts of this chapter.

5.25 Applicability of the Act.

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,

6i, 6k, 6m, 6n, 6o, 6p, 8, 9, 9a, 12, 12a, 13b, 13c, 16a, 18, 19,

21, 23.

Sec. 5.1 Definitions.

(a) Affiliated person of a futures commission merchant means a

person described in section 2(c)(2)(B)(i)(II)(cc)(BB) of the Act;

(b) Aggregate retail forex assets means an amount of liquid assets

held in accordance with Sec. 5.8 of this part;

(c) Associated person of an affiliated person of a futures

commission merchant means any natural person associated with an

affiliated person of a futures commission merchant as a partner,

officer or employee (or any natural person occupying a similar status

or performing similar functions), in any capacity which involves:

(1) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(2) The supervision of any person or persons so engaged;

(d)(1) Commodity pool operator, for purposes of this part, means

any person who operates or solicits funds, securities, or property for

a pooled investment vehicle that is not an eligible contract

participant as defined in section 1a(12) of the Act, and that engages

in retail forex transactions;

(2) Associated person of a commodity pool operator, for purposes of

this part, means any natural person associated with a commodity pool

operator as defined in paragraph (d)(1) of this section as a partner,

officer, employee, consultant or agent (or any natural person occupying

a similar status or performing similar functions), in any capacity

which involves:

(i) The solicitation of funds, securities, or property for a

participation in a pooled investment vehicle; or

(ii) The supervision of any person or persons so engaged;

(e)(1) Commodity trading advisor, for purposes of this part, means

any person who exercises discretionary trading authority or obtains

written authorization to exercise discretionary trading authority over

any account for or on behalf of any person that is not an eligible

contract participant as defined in section 1a(12) of the Act, in

connection with retail forex transactions;

(2) Associated person of a commodity trading advisor, for purposes

of this part, means any natural person associated with a commodity

trading advisor as defined in paragraph (e)(1) of this section as a

partner, officer, employee, consultant or agent (or any natural person

occupying a similar status or performing similar functions), in any

capacity which involves:

(i) The solicitation of a client's or prospective client's

discretionary account; or

(ii) The supervision of any person or persons so engaged;

(f)(1) Introducing broker, for purposes of this part, means any

person who solicits or accepts orders from a customer that is not an

eligible contract participant as defined in section 1a(12) of the Act,

in connection with retail forex transactions;

(2) Associated person of an introducing broker, for purposes of

this part, means any natural person associated with an introducing

broker as defined in paragraph (g)(1) of this section as a partner,

officer, employee, or agent (or any natural person occupying a similar

status or performing similar functions), in any capacity which

involves:

(i) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(ii) The supervision of any person or persons so engaged;

(g) Primarily or substantially means, when used to describe the

extent of a futures commission merchant's engagement in the activities

described in section 1a(20) of the Act, that:

[[Page 55433]]

(1) Such activities account for more than fifty percent of the

futures commission merchant's gross revenues, computed in accordance

with generally accepted accounting principles, on an annual basis;

(2) The futures commission merchant receives gross revenues,

computed in accordance with generally accepted accounting principles,

from such activities in excess of $500,000 in any twelve month period;

or

(3) The futures commission merchant is a clearing member of a

registered derivatives clearing organization.

(h)(1) Retail foreign exchange dealer means any person that is, or

that offers to be, the counterparty to a retail forex transaction,

except for a person described in sub-paragraph (aa), (bb), (cc)(AA),

(dd), (ee) or (ff) of section 2(c)(2)(B)(i)(II) of the Act;

(2) Associated person of a retail foreign exchange dealer means any

natural person associated with a retail foreign exchange dealer as

defined in paragraph (i)(1) of this section as a partner, officer or

employee (or any natural person occupying a similar status or

performing similar functions), in any capacity which involves:

(i) The solicitation or acceptance of retail forex customers'

orders (other than in a clerical capacity); or

(ii) The supervision of any person or persons so engaged;

(i) Retail forex account means the account of a person who is not

an eligible contract participant as defined in section 1a(12) of the

Act, established with a retail foreign exchange dealer or a futures

commission merchant, in which account retail forex transactions

(including options on contracts for the purchase or sale of foreign

currency) with such retail foreign exchange dealer or futures

commission merchant as counterparty are undertaken, or which account is

established in order to enter into such transactions.

(j) Retail forex account agreement means the contractual agreement

between a futures commission merchant or retail foreign exchange dealer

and any person who is not an eligible contract participant as defined

in section 1a(12) of the Act, which agreement contains the terms

governing the person's retail forex account with such futures

commission merchant or retail foreign exchange dealer.

(k) Retail forex customer means a person, other than an eligible

contract participant as defined in section 1a(12) of the Act, acting on

its own behalf and trading in any account, agreement, contract or

transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the Act.

(l) Retail forex obligation means the net credit balance at a

retail foreign exchange dealer or futures commission merchant that

would be obtained by combining all money, securities and property

deposited by a retail forex customer into a retail forex account or

accounts, adjusted for the realized and unrealized net profit or loss,

if any, accruing on the open trades, contracts or transactions in the

retail forex account or accounts, without including any retail forex

customers' accounts that contain negative net liquidating balances.

(m) Retail forex transaction means any account, agreement, contract

or transaction described in section 2(c)(2)(B) or 2(c)(2)(C) of the

Act. A retail forex transaction does not include an account, agreement,

contract or transaction in foreign currency that is a contract of sale

of a commodity for future delivery (or an option thereon) that is

executed, traded on or otherwise subject to the rules of a contract

market designated pursuant to section 5(a) of the Act or a derivatives

transaction execution facility registered pursuant to section 5a(c) of

the Act.

Sec. 5.2 Prohibited transactions.

(a) Scope. The provisions of this section shall be applicable to

any retail forex transaction.

(b) Fraudulent conduct prohibited. It shall be unlawful for any

person, by use of the mails or by any means or instrumentality of

interstate commerce, directly or indirectly, in or in connection with

any retail forex transaction:

(1) To cheat or defraud or attempt to cheat or defraud any person;

(2) Willfully to make or cause to be made to any person any false

report or statement or cause to be entered for any person any false

record; or

(3) Willfully to deceive or attempt to deceive any person by any

means whatsoever.

(c) Acting as counterparty and exercising discretion prohibited.

(1) No person who acts as the counterparty for any retail forex

transaction may do so for an account for which the person or any

affiliate of the person is authorized (by contract, power of attorney

or otherwise) to cause transactions to be effected without the client's

specific authorization.

(2) For purposes of this paragraph (c), an ``affiliate'' of a

person means a person controlling, controlled by or under common

control with, the first person.

Sec. 5.3 Registration of persons engaged in retail forex

transactions.

(a) Subject to paragraph (b) of this section, each of the following

is subject to the registration provisions under the Act and to part 3

of this chapter:

(1)(i) Any affiliated person of a futures commission merchant, as

defined in Sec. 5.1(a) of this part, which affiliated person:

(A) Solicits or accepts orders from any person that is not an

eligible contract participant in connection with any retail forex

transaction; or

(B) Accepts money, securities, or property (or extends credit in

lieu thereof) in connection with such solicitation or acceptance of

orders in order to engage in any retail forex transaction, is required

to register as a retail foreign exchange dealer; and

(ii) Any associated person of an affiliated person of a futures

commission merchant, as defined in Sec. 5.1(c) of this part, is

required to register as an associated person of an affiliated person of

a futures commission merchant.

(2)(i) Any commodity pool operator, as defined in Sec. 5.1(d)(1)

of this part, is required to register as a commodity pool operator;

(ii) Any associated person of a commodity pool operator, as defined

in Sec. 5.1(d)(2) of this part, is required to register as an

associated person of a commodity pool operator;

(3)(i) Any commodity trading advisor, as defined in Sec. 5.1(e)(1)

of this part, is required to register as a commodity trading advisor;

(ii) Any associated person of a commodity trading advisor, as

defined in Sec. 5.1(e)(2) of this part, is required to register as an

associated person of a commodity trading advisor;

(4)(i) Any person registered as a futures commission merchant:

(A) That is not primarily or substantially engaged in the business

activities described in section 1a(20) of the Act;

(B) That solicits or accepts orders from any person that is not an

eligible contract participant in connection with any retail forex

transaction; and

(C) That accepts money, securities, or property (or extends credit

in lieu thereof) in connection with such solicitation or acceptance of

orders in order to engage in retail forex transactions, is required to

register as a retail foreign exchange dealer;

(ii) Any associated person of a futures commission merchant

described in paragraph (a)(4)(i) of this section is required to

register as an associated person of a futures commission merchant;

(5)(i) Any introducing broker, as defined in Sec. 5.1(f)(1) of

this part, is required to register as an introducing broker;

[[Page 55434]]

(ii) Any associated person of an introducing broker, as defined in

Sec. 5.1(f)(2) of this part, is required to register as an associated

person of an introducing broker;

(6)(i) Any retail foreign exchange dealer, as defined in Sec.

5.1(h)(1) of this part is required to register as a retail foreign

exchange dealer;

(ii) Any associated person of a retail foreign exchange dealer, as

defined in Sec. 5.1(h)(2) of this part, is required to register as an

associated person of a retail foreign exchange dealer;

(b) Any person described in paragraph (a) of this section that is

already registered in the required capacity specified in paragraph (a)

is not required under this section to register twice in the same

capacity; Provided, however, that a person already registered as an

associated person of one class of registrant may also be required to

register as an associated person of another class of registrant in

order to comply with this section.

Sec. 5.4 Applicability of part 4 of this chapter to commodity pool

operators and commodity trading advisors.

Part 4 of this chapter applies to any person required pursuant to

the provisions of this part 5 to register as a commodity pool operator

or as a commodity trading advisor. Failure by any such person to comply

with the requirements of part 4 will constitute a violation of this

section and the relevant section of part 4.

Sec. 5.5 Distribution of ``Risk Disclosure Statement'' by retail

foreign exchange dealers, futures commission merchants and introducing

brokers regarding retail forex transactions.

(a) Except as provided in Sec. 5.23 of this part, no retail

foreign exchange dealer, futures commission merchant, or in the case of

an introduced account no introducing broker, may open an account that

will engage in retail forex transactions for a retail forex customer,

unless the retail foreign exchange dealer, futures commission merchant

or introducing broker first:

(1)(i) In the case of a retail foreign exchange dealer or a person

required to register as an introducing broker solely by reason of this

part, furnishes the retail forex customer with a separate written

disclosure statement containing only the language set forth in

paragraph (b) of this section and the disclosure required by paragraph

(e) of this section;

(ii) In the case of a futures commission merchant or a person

required to register as an introducing broker because it engages in the

activities described in Sec. 1.3(mm) of this chapter, furnishes the

retail forex customer with a separate written disclosure statement

containing only the language set forth in paragraph (b) of this section

and the disclosure required by paragraph (e) of this section; Provided,

however, that the disclosure statement may be attached to other

documents as the initial page(s) of such documents and as the only

material on such page(s); and

(2) Receives from the retail forex customer an acknowledgment

signed and dated by the retail forex customer that he received and

understood the disclosure statement.

(b) The language set forth in the written disclosure statement

required by paragraph (a) of this section shall be as follows:

RISK DISCLOSURE STATEMENT

OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED

TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A

FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR

COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED

HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH

TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT.

YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS

BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.

(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE--YOUR DEALER

IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE

YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM

THE REGISTRATION STATUS OF YOUR COUNTERPARTY.

The off-exchange foreign currency trading you are entering into is

not conducted on an interbank market, nor is it conducted on a futures

exchange subject to regulation as a designated contract market by the

Commodity Futures Trading Commission. The foreign currency trades you

transact are trades with the futures commission merchant or retail

foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER

IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when

you lose money trading, your dealer is making money on such trades, in

addition to any fees, commissions, or spreads the dealer may charge.

(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY

TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR

ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE

GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER.

Any trading platform that you may use to enter off-exchange foreign

currency transactions is only connected to your futures commission

merchant or retail foreign exchange dealer. You are accessing that

trading platform only to transact with your dealer. You are not trading

with any other entities or customers of the dealer by accessing such

platform. The availability and operation of any such platform,

including the consequences of the unavailability of the trading

platform for any reason, is governed only by the terms of your account

agreement with the dealer.

(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS.

All of your rights associated with your retail forex trading,

including the manner and denomination of any payments made to you, are

governed by the contract terms established in your account agreement

with the futures commission merchant or retail foreign exchange dealer.

Funds deposited by you with a futures commission merchant or retail

foreign exchange dealer for trading off-exchange foreign currency

transactions are not subject to the customer funds protections provided

to customers trading on a contract market that is designated by the

Commodity Futures Trading Commission. Your dealer may commingle your

funds with its own operating funds or use them for other purposes. In

the event your dealer becomes bankrupt, any funds the dealer is holding

for you in addition to any amounts owed to you resulting from trading,

whether or not any assets are maintained in separate deposit accounts

by the dealer, may be treated as an unsecured creditor's claim.

(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY

TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR

MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES.

Your ability to close your transactions or offset positions is

limited to what your dealer will offer to you, as there is no other

market for these transactions. Your dealer may offer any prices it

wishes, and it may offer prices derived

[[Page 55435]]

from outside sources or not in its discretion. Your dealer may

establish its prices by offering spreads from third party prices, but

it is under no obligation to do so or to continue to do so. Your dealer

may offer different prices to different customers at any point in time

on its own terms. The terms of your account agreement alone govern the

obligations your dealer has to you to offer prices and offer offset or

liquidating transactions in your account and make any payments to you.

The prices offered by your dealer may or may not reflect prices

available elsewhere at any exchange, interbank, or other market for

foreign currency.

(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS

The futures commission merchant or retail foreign exchange dealer

may compensate introducing brokers for introducing your account in ways

which are not disclosed to you. Such paid solicitors are not required

to have, and may not have, any special expertise in trading, and may

have conflicts of interest based on the method by which they are

compensated. Solicitors working on behalf of futures commission

merchants and retail foreign exchange dealers are required to register.

You should confirm that they are, in fact registered. You should

thoroughly investigate the manner in which all such solicitors are

compensated and be very cautious in granting any person or entity

authority to trade on your behalf. You should always consider obtaining

dated written confirmation of any information you are relying on from

your dealer or a solicitor in making any trading or account decisions.

FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY

DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR

CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS

MAY INDICATE POTENTIAL SALES FRAUD.

THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND

OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS

WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.

I hereby acknowledge that I have received and understood this risk

disclosure statement.

-----------------------------------------------------------------------

Date

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Signature of Customer

(c) The acknowledgment required by paragraph (a) of this section

must be retained by the retail foreign exchange dealer, futures

commission merchant or introducing broker in accordance with Sec. 1.31

of this chapter.

(d) This section does not relieve a retail foreign exchange dealer,

futures commission merchant or introducing broker from any other

disclosure obligation it may have under applicable law.

(e)(1) Immediately following the language set forth in paragraph

(b) of this section, the statement required by paragraph (a) of this

section shall include, for each of the most recent four calendar

quarters during which the counterparty maintained retail forex customer

accounts:

(i) The total number of non discretionary retail forex customer

accounts maintained by the retail foreign exchange dealer or futures

commission merchant;

(ii) The percentage of such accounts that were profitable during

the quarter; and

(iii) The percentage of such accounts that were not profitable

during the quarter.

(2) Identification of retail forex customer accounts for the

purpose of this disclosure and the calculation in determining whether

each such account was profitable or not profitable must be made in

accordance with Sec. 5.18(i) of this part. Such statement of

profitable trades shall include the following legend: PAST PERFORMANCE

IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each retail foreign

exchange dealer or futures commission merchant shall provide, upon

request, to any retail forex customer or prospective retail forex

customer the total number of non discretionary retail forex accounts

maintained by such foreign exchange dealer or futures commission

merchant, the percentage of such accounts that were profitable and the

percentage of such accounts that were not profitable, calculated in

accordance with Sec. 5.18(i) of this part, for each calendar quarter

during the most recent five year period during which such retail

foreign exchange dealer or futures commission merchant maintained non

discretionary retail forex customer accounts.

Sec. 5.6 Maintenance of minimum financial requirements by retail

foreign exchange dealers and futures commission merchants offering or

engaging in retail forex transactions.

(a) Each futures commission merchant offering or engaging in retail

forex transactions or who files an application for registration as a

futures commission merchant that will offer or engage in retail forex

transactions and each person registered as a retail foreign exchange

dealer or who files an application for registration as a retail foreign

exchange dealer, who knows or should have known that its adjusted net

capital at any time is less than the minimum required by Sec. 5.7 of

this part or by the capital rule of a registered futures association of

which it is a member, must:

(1) Give telephonic notice, to be confirmed in writing by facsimile

notice, that the applicant's or registrant's adjusted net capital is

less than that required by Sec. 5.7 of this part. The notice must be

given immediately after the applicant or registrant knows or should

know that its adjusted net capital is less than that required by any of

the aforesaid rules to which the applicant or registrant is subject;

and

(2) Provide together with such notice documentation in such form as

necessary to adequately reflect the applicant's or registrant's capital

condition as of any date such person's adjusted net capital is less

than the minimum required. The applicant or registrant must provide

similar documentation for other days as the Commission may request.

(b) Each applicant or registrant, who knows or should have known

that its adjusted net capital at any time is less than the greatest of:

(1) $22,000,000;

(2) 110 percent of the amount required by Sec. 5.7(a)(1)(i)(B) of

this part; or

(3) 110 percent of the amount of adjusted net capital required by a

registered futures association of which the futures commission merchant

or retail foreign exchange dealer is a member, must file written notice

to that effect within 24 hours of such event.

(c) If an applicant or registrant at any time fails to make or keep

current the books and records required by these regulations, such

applicant or registrant must, on the same day such event occurs,

provide facsimile notice of such fact, specifying the books and records

which have not been made or which are not current, and within 48 hours

after giving such notice file a written report stating what steps have

been and are being taken to correct the situation.

(d) Whenever any applicant or registrant discovers or is notified

by an independent public accountant, pursuant to Sec. 1.16(e)(2) of

this chapter, of the existence of any material inadequacy, as specified

in Sec. 1.16(d)(2) of this chapter, such applicant or registrant must

give facsimile notice of such material inadequacy within 24

[[Page 55436]]

hours, and within 48 hours after giving such notice file a written

report stating what steps have been and are being taken to correct the

material inadequacy.

(e) Whenever any self-regulatory organization learns that a member

registrant has failed to file a notice or written report as required by

Sec. 5.6 of this part, that self-regulatory organization must

immediately report this failure by telephone, confirmed in writing

immediately by facsimile notice, as provided in paragraph (h) of this

section.

(f) A retail foreign exchange dealer or a futures commission

merchant offering or engaging in retail forex transactions shall

provide written notice of a substantial reduction in capital as

compared to that last reported in a financial report filed with the

Commission pursuant to Sec. 5.12 of this part. This notice shall be

provided as follows:

(1) If any event or series of events, including any withdrawal,

advance, loan or loss cause, on a net basis, a reduction in net capital

of 20 percent or more, notice must be provided within two business days

of the event or series of events causing the reduction; and

(2) If the equity capital of the retail foreign exchange dealer or

futures commission merchant offering or engaging in retail forex

transactions or the equity capital of a subsidiary or affiliate of the

retail foreign exchange dealer or futures commission merchant offering

or engaging in retail forex transactions consolidated pursuant to Sec.

1.17(f) of this chapter would be withdrawn by action of a stockholder

or a partner or a limited liability company member or by redemption or

repurchase of shares of stock by any of the consolidated entities or

through the payment of dividends or any similar distribution, or an

unsecured advance or loan would be made to a stockholder, partner, sole

proprietor, limited liability company member, employee or affiliate,

such that the withdrawal, advance or loan would cause, on a net basis,

a reduction in excess adjusted net capital of 30 percent or more,

notice must be provided at least two business days prior to the

withdrawal, advance or loan that would cause the reduction: Provided,

however, That the provisions of paragraphs (f)(1) and (f)(2) of this

section do not apply to any retail foreign exchange transaction in the

ordinary course of business between a retail foreign exchange dealer

and any affiliate where the retail foreign exchange dealer makes

payment to or on behalf of such affiliate for such transaction and then

receives payment from such affiliate for such transaction within two

business days from the date of the transaction.

(3) Upon receipt of such notice from a futures commission merchant

offering or engaging in retail forex transactions or a retail foreign

exchange dealer, the Director of the Division of Clearing and

Intermediary Oversight or the Director's designee may require that the

futures commission merchant offering or engaging in retail forex

transactions or retail foreign exchange dealer provide or cause a

Material Affiliated Person (as that term is defined in Sec. 5.10(a)(2)

of this part) to provide, within three business days from the date of

the request or such shorter period as the Director or designee may

specify, such other information as the Director or designee determines

to be necessary based upon market conditions, reports provided by the

retail foreign exchange dealer or futures commission merchant offering

or engaging in retail forex transactions, or other available

information.

(g) Whenever a person registered as a futures commission merchant

offering or engaging in retail forex transactions or a retail foreign

exchange dealer knows or should know that the total amount of its

retail forex obligation exceeds the amount of the aggregate retail

forex assets the registrant maintains in accordance with the provisions

of Sec. 5.8 of this chapter, the registrant must report such

deficiency immediately by telephone notice, confirmed immediately in

writing by facsimile notice.

(h) Every notice and written report required to be given or filed

with the Commission by this section by an applicant must be filed with

the regional office of the Commission with jurisdiction over the state

in which the applicant's principal place of business is located, and

with the National Futures Association. Every notice and written report

required to be given or filed with the Commission by this section by a

registrant or self-regulatory organization must be filed with the

regional office of the Commission with jurisdiction over the state in

which the registrant's principal place of business is located, and with

the registrant's designated self-regulatory organization. In addition,

every notice and written report required to be given by this section

must also be filed with the Chief Accountant of the Division of

Clearing and Intermediary Oversight at the Commission's principal

office in Washington, DC.

(i) In lieu of filing paper copies with the Commission, all filings

or other notices prepared by a futures commission merchant or retail

foreign exchange dealer pursuant to this section may be submitted to

the Commission in electronic form using a form of user authentication

assigned in accordance with procedures established by or approved by

the Commission, and otherwise in accordance with instructions issued by

or approved by the Commission, if the futures commission merchant,

retail foreign exchange dealer or a designated self-regulatory

organization has provided the Commission with the means necessary to

read and to process the information contained in such report. Any such

electronic submission must clearly indicate the registrant or applicant

on whose behalf such filing is made and the use of such user

authentication in submitting such filing will constitute and become a

substitute for the manual signature of the authorized signer.

Sec. 5.7 Minimum financial requirements for retail foreign exchange

dealers and futures commission merchants offering or engaging in retail

forex transactions.

(a)(1)(i) Each futures commission merchant offering or engaging in

retail forex transactions and each retail foreign exchange dealer must

maintain adjusted net capital equal to or in excess of the greatest of:

(A) $20,000,000;

(B) $20,000,000 plus five percent of the futures commission

merchant's or retail foreign exchange dealer's total retail forex

obligation in excess of $10,000,000;

(C) any amount required under Sec. 1.17 of this chapter, as

applicable; or

(D) the amount of adjusted net capital required by a registered

futures association of which the futures commission merchant or retail

foreign exchange dealer is a member.

(ii) Section 1.17 of this chapter shall apply to retail foreign

exchange dealers as if such retail foreign exchange dealers were

futures commission merchants, or as applicable, applicants or

registrants, as stated in Sec. 1.17 for the purpose of determining the

adjusted net capital under this section. For the purpose of applying

this section, ``applicant'' or ``registrant'' shall include retail

foreign exchange dealers and futures commission merchants offering or

engaging in retail forex transactions and applicants therefore.

(2) No person applying for registration as a retail foreign

exchange dealer or a futures commission merchant that will engage in

retail forex transactions shall be so registered unless such person

affirmatively demonstrates to the satisfaction of a registered futures

association that it complies with the financial requirements of this

section.

[[Page 55437]]

(3) Each registrant must be in compliance with this section at all

times and must be able to demonstrate such compliance to the

satisfaction of the Commission or the registrant's designated self-

regulatory organization.

(4) A registrant who is not in compliance with this section, or is

unable to demonstrate such compliance as required by paragraph (a)(3)

of this section, shall, as directed by and under the supervision of the

Commission or the registrant's designated self-regulatory organization,

either liquidate or transfer all retail forex accounts (including the

novation of retail forex contracts) and refund or transfer all funds

associated with such retail forex accounts and immediately cease

offering or engaging in retail forex transactions until such time as

the firm is able to demonstrate to the Commission or the registrant's

designated self-regulatory organization such compliance: Provided,

however, That if such registrant immediately demonstrates to the

satisfaction of the Commission or the registrant's designated self-

regulatory organization the ability to achieve compliance, the

Commission or the registrant's designated self-regulatory organization

may in its discretion allow such registrant up to a maximum of 10

business days, or such additional time as determined by the Commission,

in which to achieve compliance without having to liquidate positions or

transfer accounts and cease doing business as required above. Nothing

in this paragraph (a)(4) shall be construed as preventing the

Commission or the registrant's designated self-regulatory organization

from taking action against a registrant for non-compliance with any of

the provisions of this section.

(b) For the purposes of this section:

(1) Where the applicant or registrant has an asset or liability

which is defined in Securities Exchange Act Rule 15c3-1 (Sec.

240.15c3-1 of this title) the inclusion or exclusion of all or part of

such asset or liability for the computation of adjusted net capital

shall be in accordance with Sec. 240.15c3-1 of this title, unless

specifically stated otherwise in this section or in Sec. 1.17 of this

chapter.

(2) The adjusted net capital of an applicant or registrant for the

purpose of this section shall be determined by the application of Sec.

1.17 pursuant to paragraph (a)(1)(ii) of this section, with the

following additions:

(i) All positions in retail forex accounts and other financial

positions and instruments of the applicant or registrant must be marked

to market and adjusted daily by referencing to current market prices or

rates of exchange.

(ii) Current assets must exclude any retail forex account which

liquidates to a deficit or contains a debit ledger balance only and is

not secured in accordance with Sec. 1.17(c)(3).

(iii) Current assets must exclude any unsecured receivable accrued

from any over-the-counter transaction in foreign currency, options on

foreign currency or options on contracts for the purchase or sale of

foreign currency, or arising from the deposit of collateral or

compensating balances with respect to such transactions, unless such

unsecured receivable is from a person who is an eligible contract

participant that also is:

(A) A bank or trust company regulated by a United States banking

regulator;

(B) A broker-dealer registered with the Securities and Exchange

Commission and a member of the Financial Industry Regulatory Authority;

(C) A futures commission merchant registered with the Commission

and a member of the National Futures Association;

(D) A retail foreign exchange dealer registered with the Commission

and a member of the National Futures Association;

(E) An entity regulated as a foreign equivalent of any of the

persons listed in paragraphs (b)(2)(iii)(A) through (D) of this

section, if such person is regulated in a money center country as

defined in Sec. 1.49 of this chapter and recognized by the futures

commission merchant's or retail foreign exchange dealer's designated

self-regulatory organization as a foreign equivalent;

(F) Any other entity approved by the futures commission merchant's

or retail foreign exchange dealer's designated self-regulatory

organization.

(iv) The value attributed to any retail forex transaction that is

an option shall be the difference between the option's exercise value

or striking value and the market value of the underlying. In the case

of a call, if the market value of the underlying is less than the

exercise value or striking value of such call, it shall be given no

value; and, in the case of a put, if the market value of the underlying

is more than the exercise value or striking value of the put, it shall

be given no value.

(v)(A) In computing adjusted net capital, the capital deductions

set forth in Sec. 1.17(c)(5)(ii) of this chapter shall apply to retail

forex transactions other than options. The capital deductions which

apply are six percent for net positions in Euros, British pounds,

Canadian dollars, Japanese yen, or Swiss francs and 20 percent for net

positions in all other foreign currencies, Provided, however, That

there shall be no capital deductions for retail forex transactions

covered (as defined in Sec. 1.17(j) of this chapter) by the applicant

or registrant by open futures contracts to the extent such futures

contracts are not otherwise designated as cover for any other net

capital purposes. For purposes of this paragraph (b)(2)(v)(A), such

retail forex transactions shall be treated as if they were inventory

and cover were therefore applicable. A retail foreign exchange dealer

or futures commission merchant may not use an affiliate (unless

approved by the firm's designated self-regulatory organization) or any

person that is considered unregulated under the rules of the firm's

designated self-regulatory organization to cover its currency positions

for purposes of this section.

(B) In computing adjusted net capital, the capital deductions set

forth in Sec. 1.17(c)(5)(vi) of this chapter shall apply to all retail

forex transactions that are options.

(C) For the purpose of applying capital deductions on open

proprietary futures positions under Sec. 1.17(c)(5)(x) of this

chapter, net or individual positions in retail forex transactions shall

not constitute cover under Sec. 1.17(j) for the purpose of applying

such charges.

(c) An applicant or registrant must prepare, and keep current,

ledgers or other similar records which show or summarize, with

appropriate references to supporting documents, each transaction

affecting the applicant's or registrant's asset, liability, income,

expense and capital accounts, and in which (except as otherwise

permitted in writing by the Commission) all the applicant's or

registrant's asset, liability and capital accounts are classified into

the account classification subdivisions specified on Form 1-FR-FCM.

Each applicant or registrant shall prepare and keep current such

records.

(d) An applicant or registrant must make and keep as a record in

accordance with Sec. 5.14 of this part formal computations of its

adjusted net capital and of its minimum financial requirements pursuant

to this section as of the close of business each month and on other

such dates called for by the Commission, the National Futures

Association, or another self-regulatory organization of which the firm

is a member. Such computations must be completed and made available for

inspection by any representative of the Commission, the National

Futures Association, a self-regulatory organization of which the firm

is a member, or the United States Department of Justice commencing the

[[Page 55438]]

first month-end after the date the application for registration is

filed.

Sec. 5.8 Aggregate retail forex assets.

(a) Each retail foreign exchange dealer and futures commission

merchant offering or engaging in retail forex transactions shall

calculate its total retail forex obligation and shall at all times hold

assets solely of the type permissible under Sec. 1.25 of this chapter

equal to or in excess of the total retail forex obligation at one or

more qualifying institutions in the United States or money center

countries as defined in Sec. 1.49 of this chapter.

(b) For assets held in the United States, a qualifying institution

is:

(1) A bank or trust company regulated by a United States banking

regulator;

(2) A broker-dealer registered with the Securities and Exchange

Commission and a member of the Financial Industry Regulatory Authority;

or

(3) A futures commission merchant registered with the Commission

and a member of the National Futures Association.

(c) For assets held in a money center country, a qualifying

institution is:

(1) A bank or trust company regulated in a money center country,

Provided that the bank or trust company has regulatory capital in

excess of $1 billion;

(2) An entity regulated in a money center country as an equivalent

of a broker-dealer or futures commission merchant as determined by the

retail foreign exchange dealer's or futures commission merchant's

designated self-regulatory organization, Provided that the entity

maintains regulatory capital in excess of $100 million; or

(3) A futures commission merchant registered with the Commission

and a member of the National Futures Association.

(d) Assets held in a money center country are not eligible to meet

the requirements of paragraph (a) of this section unless the retail

foreign exchange dealer or futures commission merchant has entered into

an agreement that is acceptable to the firm's designated self-

regulatory organization and that authorizes the qualifying institution

to provide account information to the Commission and the firm's

designated self-regulatory organization.

(e) In computing its adjusted net capital pursuant to Sec. 5.7 of

this part, a retail foreign exchange dealer or futures commission

merchant may not include aggregate retail forex assets as current

assets or otherwise record any property received from retail forex

customers as an asset without recording a corresponding liability to

the retail forex customers.

Sec. 5.9 Security deposits for retail forex transactions.

(a) Each futures commission merchant engaging, or offering to

engage, in retail forex transactions and each retail foreign exchange

dealer must collect from each retail forex customer a minimum security

deposit for each retail forex transaction equal to the applicable

percentage as set by the registered futures association of which they

are a member; Provided, that the registered futures association's

security deposit requirement cannot be less than:

(1) 2% of the notional value of the retail forex transaction for

major currency pairs and 5% of the notional value of the retail forex

transaction for all other currency pairs;

(2) For short options, 2% for major currency pairs and 5% for all

other currency pairs of the notional value of the retail forex

transaction, plus the premium received by the retail forex customer; or

(3) For long options, the full premium charged and received by the

futures commission merchant or retail foreign exchange dealer from the

retail forex customer.

(b) Security deposits must be made in the form of cash or other

financial instruments that comply with the requirements specified in

Sec. 1.25 of this chapter.

(c) A futures commission merchant or retail foreign exchange dealer

is required to collect additional security deposits from a retail forex

customer, or liquidate the retail forex customer's positions, if the

amount of the retail forex customer's security deposits maintained with

the futures commission merchant or retail foreign exchange dealer are

not sufficient to meet the requirements of this section.

(d) A major currency pair security deposit percentage is only

applicable when both sides of a retail over-the-counter foreign

exchange transaction involve major currencies.

(e) Any registered futures association whose members serve as

counterparties to retail forex transaction shall designate which

currencies are ``major currencies'', and shall review, no less

frequently than annually, major currency designations and security

deposit requirements, and shall adjust the designations and

requirements as necessary.

Sec. 5.10 Risk assessment recordkeeping requirements for retail

foreign exchange dealers.

(a) Requirement to maintain and preserve information. (1) Each

retail foreign exchange dealer registered with the Commission pursuant

to section 2(c)(2)(B)(i)(II)(gg) of the Act shall prepare, maintain and

preserve the following information:

(i) An organizational chart which includes the retail foreign

exchange dealer and each of its affiliated persons. Included in the

organizational chart shall be a designation of which affiliated persons

are ``Material Affiliated Persons'' as that term is used in paragraph

(a)(2) of this section, which Material Affiliated Persons file routine

financial or risk exposure reports with the Securities and Exchange

Commission, a federal banking agency, an insurance commissioner or

other similar official or agency of a state, or a foreign regulatory

authority, and which Material Affiliated Persons are dealers in

financial instruments with off-balance sheet risk and, if a Material

Affiliated Person is such a dealer, whether it is also an end-user of

such instruments;

(ii) Written policies, procedures, or systems concerning the retail

foreign exchange dealer's:

(A) Method(s) for monitoring and controlling financial and

operational risks to it resulting from the activities of any of its

affiliated persons;

(B) Financing and capital adequacy, including information regarding

sources of funding, together with a narrative discussion by management

of the liquidity of the material assets of the retail foreign exchange

dealer, the structure of debt capital, and sources of alternative

funding;

(C) Establishing and maintaining internal controls with respect to

market risk, credit risk, and other risks created by the retail foreign

exchange dealer's trading activities, including systems and policies

for supervising, monitoring, reporting and reviewing trading activities

in forex transactions, securities, futures contracts, commodity

options, forward contracts and financial instruments; policies for

hedging or managing risks created by trading activities or supervising

accounts carried for affiliates, including a description of the types

of reviews conducted to monitor positions; and policies relating to

restrictions or limitations on trading activities: Provided, however,

that if the retail foreign exchange dealer has no such written

policies, procedures or systems, it must so state in writing;

(iii) Fiscal year-end consolidated and consolidating balance sheets

for the highest level Material Affiliated Person within the retail

foreign exchange dealer's organizational structure, which shall include

the retail foreign exchange dealer and its other Material Affiliated

[[Page 55439]]

Persons, prepared in accordance with generally accepted accounting

principles, which consolidated balance sheets shall be audited by an

independent certified public accountant if an annual audit is performed

in the ordinary course of business, but which otherwise may be

unaudited, and which shall include appropriate explanatory notes. The

consolidating balance sheets may be those prepared by the retail

foreign exchange dealer's highest level Material Affiliated Person as

part of its internal financial reporting process. Any additional

information required to be filed under Sec. 5.11(a)(2)(iii) of this

part shall also be maintained and preserved; and

(iv) Fiscal year-end consolidated and consolidating income

statements and consolidated cash flow statements for the highest level

Material Affiliated Person within the retail foreign exchange dealer's

organizational structure, which shall include the retail foreign

exchange dealer and its other Material Affiliated Persons, prepared in

accordance with generally accepted accounting principles, which

consolidated statements shall be audited by an independent certified

public accountant if an annual audit is performed in the ordinary

course of business, but which otherwise may be unaudited, and which

shall include appropriate explanatory notes. The consolidating

statements may be those prepared by the retail foreign exchange

dealer's highest level Material Affiliated Person as part of its

internal financial reporting process. Any additional information

required to be filed under Sec. 5.11(a)(2)(iii) shall also be

maintained and preserved.

(2) The determination of whether an affiliated person of a retail

foreign exchange dealer is a Material Affiliated Person shall involve

consideration of all aspects of the activities of, and the relationship

between, both entities, including without limitation, the following

factors:

(i) The legal relationship between the retail foreign exchange

dealer and the affiliated person;

(ii) The overall financing requirements of the retail foreign

exchange dealer and the affiliated person, and the degree, if any, to

which the retail foreign exchange dealer and the affiliated person are

financially dependent on each other;

(iii) The degree to which the retail foreign exchange dealer and

the affiliated person directly or indirectly engage in over-the-counter

transactions with each other;

(iv) The degree, if any, to which the retail foreign exchange

dealer or its customers rely on the affiliated person for operational

support or services in connection with the retail foreign exchange

dealer's business;

(v) The level of market, credit or other risk present in the

activities of the affiliated person; and

(vi) The extent to which the affiliated person has the authority or

the ability to cause a withdrawal of capital from the retail foreign

exchange dealer.

(3) For purposes of this section and Sec. 5.11 of this part, the

term Material Affiliated Person does not include a natural person.

(4) The information, reports and records required by this section

shall be maintained and preserved, and made readily available for

inspection, in accordance with the provisions of Sec. 1.31 of this

chapter.

(b) Special provisions with respect to Material Affiliated Persons

subject to the supervision of certain domestic regulators. A retail

foreign exchange dealer shall be deemed to be in compliance with the

recordkeeping requirements of paragraphs (a)(1)(i), (iii) and (iv) of

this section with respect to a Material Affiliated Person if:

(1) The Material Affiliated Person is required to maintain and

preserve information pursuant to Sec. 240.17h-1T of this title, or

such other risk assessment regulations as the Securities and Exchange

Commission may adopt, and the retail foreign exchange dealer maintains

and makes available for inspection by the Commission in accordance with

the provisions of this section copies of the records and reports

maintained and filed on Form 17-H (or such other forms or reports as

may be required) by the Material Affiliated Person with the Securities

and Exchange Commission pursuant to Sec. Sec. 240.17h-1T and 240.17h-

2T of this title, or such other risk assessment regulations as the

Securities and Exchange Commission may adopt;

(2) In the case of a Material Affiliated Person (including a

foreign banking organization) that is subject to examination by, or the

reporting requirements of, a Federal banking agency, the retail foreign

exchange dealer or such Material Affiliated Person maintains and makes

available for inspection by the Commission in accordance with the

provisions of this section copies of all reports submitted by such

Material Associated Person to the Federal banking agency pursuant to

section 5211 of the Revised Statutes, section 9 of the Federal Reserve

Act, section 7(a) of the Federal Deposit Insurance Act, section 10(b)

of the Home Owners' Loan Act, or section 5 of the Bank Holding Company

Act of 1956; or

(3) In the case of a Material Affiliated Person that is subject to

the supervision of an insurance commissioner or other similar official

or agency of a state, the retail foreign exchange dealer or such

Material Affiliated Person maintains and makes available for inspection

by the Commission in accordance with the provisions of this section

copies of the annual statements with schedules and exhibits prepared by

the Material Affiliated Person on forms prescribed by the National

Association of Insurance Commissioners or by a state insurance

commissioner.

(c)(1) Special provisions with respect to Material Affiliated

Persons subject to the supervision of a Foreign Regulatory Authority. A

retail foreign exchange dealer shall be deemed to be in compliance with

the recordkeeping requirements of paragraphs (a)(1)(iii) and (iv) of

this section with respect to a Material Affiliated Person if such

retail foreign exchange dealer maintains and makes available, or causes

such Material Affiliated Person to make available, for inspection by

the Commission in accordance with the provisions of this section copies

of any financial or risk exposure reports filed by such Material

Affiliated Person with a foreign futures authority or other foreign

regulatory authority, provided that:

(i) The retail foreign exchange dealer agrees to use its best

efforts to obtain from the Material Affiliated Person and to cause the

Material Affiliated Person to provide, directly or through its foreign

futures authority or other foreign regulatory authority, any

supplemental information the Commission may request and there is no

statute or other bar in the foreign jurisdiction that would preclude

the retail foreign exchange dealer, the Material Affiliated Person, the

foreign futures authority or other foreign regulatory authority from

providing such information to the Commission; or

(ii) The foreign futures authority or other foreign regulatory

authority with whom the Material Affiliated Person files such reports

has entered into an information-sharing agreement with the Commission

which is in effect as of the retail foreign exchange dealer's fiscal

year-end and which will allow the Commission to obtain the type of

information required herein.

(2) The retail foreign exchange dealer shall maintain a copy of the

original report and a copy translated into the English language. For

the purposes of this section, the term ``Foreign Futures

[[Page 55440]]

Authority'' shall have the meaning set forth in section 1a(10) of the

Act.

(d) Exemptions. The Commission may exempt any retail foreign

exchange dealer from any provision of this section if it finds that the

exemption is not contrary to the public interest and the purposes of

the provisions from which the exemption is sought. The Commission may

grant the exemption subject to such terms and conditions as it may find

appropriate.

(e) Location of records. A retail foreign exchange dealer required

to maintain records concerning Material Affiliated Persons pursuant to

this section may maintain those records either at the principal office

of the Material Affiliated Person or at a records storage facility,

provided that, except as set forth in paragraph (c) of this section,

the records are located within the boundaries of the United States and

the records are kept and available for inspection in accordance with

Sec. 1.31 of this chapter. If such records are maintained at a place

other than the retail foreign exchange dealer's principal place of

business, the Material Affiliated Person or other entity maintaining

the records shall file with the Commission a written undertaking, in a

form acceptable to the Commission, signed by a duly authorized person,

to the effect that the records will be treated as if the retail foreign

exchange dealer were maintaining the records pursuant to this section

and that the entity maintaining the records will permit examination of

such records at any time, or from time to time during business hours,

by representatives or designees of the Commission and promptly furnish

the Commission representative or its designee true, correct, complete

and current hard copy of all or any part of such records. The election

to maintain records at the principal place of business of the Material

Affiliated Person or at a records storage facility pursuant to the

provisions of this paragraph shall not relieve the retail foreign

exchange dealer required to maintain and preserve such records from any

of its responsibilities under this section or Sec. 5.11 of this part.

(f) Confidentiality. All information obtained by the Commission

pursuant to the provisions of this section from a retail foreign

exchange dealer concerning a Material Affiliated Person shall be deemed

confidential information for the purposes of section 8 of the Act.

(g) Implementation schedule. Each retail foreign exchange dealer

who is subject to the requirements of this section shall maintain and

preserve the information required by paragraphs (a)(1)(i) and (ii) of

this section commencing 60 calendar days after registration becomes

effective and the information required by paragraphs (a)(1)(iii) and

(iv) of this section commencing 105 calendar days following the first

fiscal year-end occurring after registration becomes effective.

Sec. 5.11 Risk assessment reporting requirements for retail foreign

exchange dealers.

(a) Reporting requirements with respect to information required to

be maintained by Sec. 5.10 of this part. (1) Each retail foreign

exchange dealer registered with the Commission pursuant to Section

2(c)(2)(B)(i)(II)(gg) of the Act shall file the following with the

regional office of the Commission with which it files periodic

financial reports within 60 calendar days after the effective date of

such registration:

(i) A copy of the organizational chart maintained by the retail

foreign exchange dealer pursuant to Sec. 5.10(a)(l)(i) of this part.

Where there is a material change in information provided, an updated

organizational chart shall be filed within sixty calendar days after

the end of the fiscal quarter in which the change has occurred; and

(ii) Copies of the financial, operational, and risk management

policies, procedures and systems maintained by the retail foreign

exchange dealer pursuant to Sec. 5.10(a)(l)(ii) of this part. If the

retail foreign exchange dealer has no such written policies, procedures

or systems, it must file a statement so indicating. Where there is a

material change in information provided, such change shall be reported

within sixty calendar days after the end of the fiscal quarter in which

the change has occurred.

(2) Each retail foreign exchange dealer registered with the

Commission pursuant to section 2(c)(2)(B)(i)(II)(gg) of the Act shall

file the following with the regional office with which it files

periodic financial reports within 105 calendar days after the end of

each fiscal year or, if a filing is made pursuant to a written notice

issued under paragraph (a)(2)(iii) of this section, within the time

period specified in the written notice:

(i) Fiscal year-end consolidated and consolidating balance sheets

for the highest level Material Affiliated Person within the retail

foreign exchange dealer's organizational structure, which shall include

the retail foreign exchange dealer and its other Material Affiliated

Persons, prepared in accordance with generally accepted accounting

principles, which consolidated balance sheets shall be audited by an

independent certified public accountant if an annual audit is performed

in the ordinary course of business, but which otherwise may be

unaudited, and which consolidated balance sheets shall include

appropriate explanatory notes. The consolidating balance sheets may be

those prepared by the retail foreign exchange dealer's highest level

Material Affiliated Person as part of its internal financial reporting

process;

(ii) Fiscal year-end annual consolidated and consolidating income

statements and consolidated cash flow statements for the highest level

Material Affiliated Person within the retail foreign exchange dealer's

organizational structure, which shall include the retail foreign

exchange dealer and its other Material Affiliated Persons, prepared in

accordance with generally accepted accounting principles, which

consolidated statements shall be audited by an independent certified

public accountant if an annual audit is performed in the ordinary

course of business, but which otherwise may be unaudited, and which

consolidated statements shall include appropriate explanatory notes.

The consolidating statements may be those prepared by the retail

foreign exchange dealer's highest level Material Affiliated Person as

part of its internal financial reporting process; and

(iii) Upon receiving written notice from any representative of the

Commission and within the time period specified in the written notice,

such additional information which the Commission determines is

necessary for a complete understanding of a particular affiliate's

financial impact on the retail foreign exchange dealer's organizational

structure.

(3) For the purposes of this section, the term Material Affiliated

Person shall have the meaning used in Sec. 5.10 of this part.

(4) The reports required to be filed pursuant to paragraphs (a)(1)

and (2) of this section shall be considered filed when received by the

regional office of the Commission with whom the retail foreign exchange

dealer files financial reports pursuant to Sec. 5.12 of this part.

(b) Exemptions. The Commission may exempt any retail foreign

exchange dealer from any provision of this section if it finds that the

exemption is not contrary to the public interest and the purposes of

the provisions from which the exemption is sought. The Commission may

grant the exemption subject to such terms and conditions as it may find

appropriate.

(c) Special provisions with respect to Material Affiliated Persons

subject to the supervision of certain domestic

[[Page 55441]]

regulators. (1) In the case of a Material Affiliated Person that is

required to maintain and preserve information pursuant to Sec.

240.17h-1T of this title, or such other risk assessment regulations as

the Securities and Exchange Commission may adopt, the retail foreign

exchange dealer shall be deemed to be in compliance with the reporting

requirements of paragraph (a)(2) of this section with respect to such

Material Affiliated Person if the retail foreign exchange dealer

maintains and makes available for inspection by the Commission in

accordance with the provisions of this section copies of the records

and reports maintained and filed on Form 17-H (or such other forms or

reports as may be required) by the Material Affiliated Person with the

Securities and Exchange Commission pursuant to Sec. Sec. 240.17h-1T

and 240.17h-2T of this title, or such other risk assessment regulations

as the Securities and Exchange Commission may adopt;

(2) In the case of a Material Affiliated Person (including a

foreign banking organization) that is subject to examination by, or the

reporting requirements of, a Federal banking agency, the retail foreign

exchange dealer shall be deemed to be in compliance with the reporting

requirements of paragraph (a)(2) of this section with respect to such

Material Affiliated Person if the retail foreign exchange dealer or

such Material Affiliated Person maintains in accordance with Sec. 5.10

of this part copies of all reports filed by the Material Affiliated

Person with the Federal banking agency pursuant to section 5211 of the

Revised Statutes, section 9 of the Federal Reserve Act, section 7(a) of

the Federal Deposit Insurance Act, section 10(b) of the Home Owners'

Loan Act, or section 5 of the Bank Holding Company Act of 1956.

(3) In the case of a retail foreign exchange dealer that has a

Material Affiliated Person that is subject to the supervision of an

insurance commissioner or other similar official or agency of a state,

such retail foreign exchange dealer shall be deemed to be in compliance

with the reporting requirements of paragraph (a)(2) of this section

with respect to the Material Affiliated Person if:

(i) With respect to a Material Affiliated Person organized as a

mutual insurance company or a non-public stock company, the retail

foreign exchange dealer or such Material Affiliated Person maintains in

accordance with Sec. 5.14 of this part copies of the annual statements

with schedules and exhibits prepared by the Material Affiliated Person

on forms prescribed by the National Association of Insurance

Commissioners or by a state insurance commissioner; and

(ii) With respect to a Material Affiliated Person organized as a

public stock company, the retail foreign exchange dealer or such

Material Affiliated Person maintains, in addition to the annual

statements with schedules and exhibits required to be maintained

pursuant to Sec. 1.14 of this chapter, copies of the filings made by

the Material Affiliated Person pursuant to sections 13 or 15 of the

Securities Exchange Act of 1934 and the Investment Company Act of 1940.

(4) No retail foreign exchange dealer shall be required to furnish

to the Commission any examination report of any Federal banking agency

or any supervisory recommendations or analyses contained therein with

respect to a Material Affiliated Person that is subject to the

regulation of a Federal banking agency. All information received by the

Commission pursuant to this section concerning a Material Affiliated

Person that is subject to examination by or the reporting requirements

of a Federal banking agency shall be deemed confidential for the

purposes of section 8 of the Act.

(5) The furnishing of any information or documents by a retail

foreign exchange dealer pursuant to this section shall not constitute

an admission for any purpose that a Material Affiliated Person is

otherwise subject to the Act.

(d) Special provisions with respect to Material Affiliated Persons

subject to the supervision of a Foreign Regulatory Authority. A retail

foreign exchange dealer shall be deemed to be in compliance with the

reporting requirements of paragraph (a)(2) of this section with respect

to a Material Affiliated Person if such retail foreign exchange dealer

furnishes, or causes such Material Affiliated Person to make available,

in accordance with the provisions of this section, copies of any

financial or risk exposure reports filed by such Material Affiliated

Person with a foreign futures authority or other foreign regulatory

authority, provided that:

(1) The retail foreign exchange dealer agrees to use its best

efforts to obtain from the Material Affiliated Person and to cause the

Material Affiliated Person to provide, directly or through its foreign

futures authority or other foreign regulatory authority, any

supplemental information the Commission may request and there is no

statute or other bar in the foreign jurisdiction that would preclude

the retail foreign exchange dealer, the Material Affiliated Person, the

foreign futures authority or other foreign regulatory authority from

providing such information to the Commission; or

(2) The foreign futures authority or other foreign regulatory

authority with whom the Material Affiliated Person files such reports

has entered into an information sharing agreement with the Commission

which is in effect as of the retail foreign exchange dealer's fiscal

year-end and which will allow the Commission to obtain the type of

information required herein. The retail foreign exchange dealer shall

file a copy of the original report and a copy translated into the

English language. For the purposes of this section, the term ``Foreign

Futures Authority'' shall have the meaning set forth in section 1a(10)

of the Act.

(e) Confidentiality. All information obtained by the Commission

pursuant to the provisions of this section from a retail foreign

exchange dealer concerning a Material Associated Person shall be deemed

confidential information for the purposes of section 8 of the Act.

(f) Implementation schedule. Each retail foreign exchange dealer

who is subject to the requirements of this section shall file the

information required by paragraph (a)(1) of this section within 60

calendar days after registration is granted, and the information

required by paragraph (a)(2) of this section within 105 calendar days

after registration is granted.

Sec. 5.12 Financial reports of retail foreign exchange dealers.

(a)(1) Each person who files an application for registration as a

retail foreign exchange dealer with the National Futures Association

shall submit, concurrently with the filing of such application, either:

(i) A Form 1-FR-FCM certified by an independent public accountant

as of a date not more than 45 days prior to the date on which such

report is filed; or

(ii) A Form 1-FR-FCM as of a date not more than 17 business days

prior to the date on which such report is filed and a Form 1-FR-FCM

certified by an independent public accountant as of a date not more

than one year prior to the date on which such report is filed.

(2) Each such person must include with such financial report a

statement describing the source of his current assets and representing

that his capital has been contributed for the purpose of operating his

business and will continue to be used for such purpose.

(3) The provisions of paragraph (a)(1) of this section do not apply

to any person succeeding to and continuing the

[[Page 55442]]

business of another retail foreign exchange dealer.

(b)(1) Each person registered as a retail foreign exchange dealer

must file a Form 1-FR-FCM as of the close of business each month. Each

Form 1-FR must be filed no later than 17 business days after the date

for which the report is made.

(2) In addition to the monthly financial reports required by

paragraph (b)(1) of this section, each person registered as a retail

foreign exchange dealer must file a Form 1-FR-FCM as of the close of

its fiscal year, which must be certified by an independent public

accountant and must be filed no later than 90 days after the close of

the retail foreign exchange dealer's fiscal year.

(3) A Form 1-FR-FCM required to be certified by an independent

public accountant which is filed by a retail foreign exchange dealer

must be filed in paper form and may not be filed electronically with

the Commission. A Form 1-FR-FCM required to be certified by an

independent public accountant which is filed by an applicant for

registration as a retail foreign exchange dealer with the National

Futures Association must be filed electronically in accordance with

electronic filing procedures established by the National Futures

Association, however a paper copy of any such filing with the original

manually signed certification must be maintained by the applicant for

registration as a retail foreign exchange dealer in accordance with

Sec. 1.31.

(c) Each Form 1-FR-FCM required by the provisions of paragraphs

(a)(1) and (b)(2) of this section to be certified by an independent

public accountant must be certified in accordance with Sec. 1.16 of

this chapter, and must be accompanied by the accountant's report on

material inadequacies in accordance with the provisions of Sec.

1.16(c)(5) of this chapter. In all other respects, the independent

public accountant shall act in accordance with the provisions of Sec.

1.16 (except paragraph (f)) of this chapter: Provided, however, that

the term ``Sec. 5.7'' shall be substituted for the term ``Sec.

1.17,'' and the term ``retail foreign exchange dealer'' shall be

substituted for the term ``futures commission merchant.''

(d) Upon receiving written notice from any representative of the

Commission, National Futures Association, or any self-regulatory

organization of which the firm is a member, a retail foreign exchange

dealer or applicant for such registration, must, monthly or at such

times as specified, furnish the Commission, National Futures

Association, or self-regulatory organization a Form 1-FR-FCM or such

other financial information requested in the written notice. Each such

Form 1-FR-FCM or such other information must be furnished within the

time period specified in the written notice, and in accordance with the

provisions of paragraph (i) of this section.

(e)(1) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which

is not required to be certified by an independent public accountant

must be completed in accordance with the instructions to the form and

contain:

(i) A statement of financial condition as of the date for which the

report is made;

(ii) A statement of income (loss) for the period between the date

of the most recent statement of financial condition filed with the

Commission and the date for which the report is made;

(iii) A statement of changes in ownership equity for the period

between the date of the most recent statement of financial condition

filed with the Commission and the date for which the report is made;

(iv) A statement of changes in liabilities subordinated to claims

of general creditors for the period between the date of the most recent

statement of financial condition filed with the Commission and the date

for which the report is made;

(v) A statement of the computation of the minimum capital

requirements pursuant to Sec. 5.7 of this part as of the date for

which the report is made; and

(vi) In addition to the information expressly required, such

further material information as may be necessary to make the required

statements and schedules not misleading.

(2) Each Form 1-FR-FCM filed pursuant to this Sec. 5.12 which is

required to be certified by an independent public accountant must be

completed in accordance with the instructions to the form and contain:

(i) A statement of financial condition as of the date for which the

report is made;

(ii) Statements of income (loss), cash flows, changes in ownership

equity, and changes in liabilities subordinated to claims of general

creditors, for the period between the date of the most recent certified

statement of financial condition filed with the Commission and the date

for which the report is made: Provided, That for an applicant filing

pursuant to paragraph (a) of this section the period must be the year

ending as of the date of the statement of financial condition;

(iii) A statement of the computation of the minimum capital

requirements pursuant to Sec. 5.7 of this part as of the date for

which the report is made;

(iv) Appropriate footnote disclosures;

(v) A reconciliation, including appropriate explanations, of the

statement of the computation of the minimum capital requirements

pursuant to Sec. 5.7 of this part, in the certified Form 1-FR-FCM with

the applicant's or registrant's corresponding uncertified most recent

Form 1-FR-FCM filing when material differences exist or, if no material

differences exist, a statement so indicating; and

(vi) In addition to the information expressly required, such

further material information as may be necessary to make the required

statements not misleading.

(3) The statements required by paragraphs (e)(2)(i) and (ii) of

this section may be presented in accordance with generally accepted

accounting principles in the certified reports filed as of the close of

the registrant's fiscal year pursuant to paragraph (b)(2) of this

section or accompanying the application for registration pursuant to

paragraph (a)(1) of this section, rather than in the format

specifically prescribed by these regulations: Provided, the statement

of financial condition is presented in a format as consistent as

possible with the Form 1-FR-FCM and a reconciliation is provided

reconciling such statement of financial condition to the statement of

the computation of the minimum capital requirements pursuant to Sec.

5.7 of this part. Such reconciliation must be certified by an

independent public accountant in accordance with Sec. 1.16 of this

chapter.

(4) Attached to each Form 1-FR-FCM filed pursuant to this section

must be an oath or affirmation that to the best knowledge and belief of

the individual making such oath or affirmation the information

contained in the Form 1-FR-FCM is true and correct. The individual

making such oath or affirmation must be: If the registrant or applicant

is a sole proprietorship, the proprietor; if a partnership, any general

partner; if a corporation, the chief executive officer or chief

financial officer; and, if a limited liability company or limited

liability partnership, the chief executive officer, the chief financial

officer, the manager, the managing member, or those members vested with

the management authority for the limited liability company or limited

liability partnership.

(f) Election of fiscal year. (1) An applicant wishing to establish

a fiscal year other than the calendar year may do so by notifying the

National Futures Association of its election of such fiscal year, in

writing, concurrently with the filing of the Form 1-FR-FCM pursuant

[[Page 55443]]

to paragraph (a)(1) of this section, but in no event may such fiscal

year end more than one year from the date of the Form 1-FR-FCM filed

pursuant to paragraph (a)(1) of this section. An applicant that does

not so notify the National Futures Association will be deemed to have

elected the calendar year as its fiscal year.

(2)(i) A registrant must continue to use its elected fiscal year,

calendar or otherwise, unless a change in such fiscal year has been

approved pursuant to this paragraph (f)(2).

(ii) A registrant may file with its designated self-regulatory

organization an application to change its fiscal year, a copy of which

the registrant must file with the Commission. The application shall be

approved or denied in writing by the registrant's designated self-

regulatory organization. The registrant must file immediately with the

Commission a copy of any notice it receives from its designated self-

regulatory organization to approve or deny the registrant's application

to change its fiscal year. A written notice of approval shall become

effective upon the filing by the registrant of a copy with the

Commission, and a written notice of denial shall be effective as of the

date of the notice.

(g) In the event a retail foreign exchange dealer or applicant for

registration as a retail foreign exchange dealer finds that it cannot

file its Form 1-FR-FCM for any period within the time specified in

paragraph (b)(1) or (2) of this section without substantial undue

hardship, it may request approval for an extension of time by filing an

application for an extension of time with, in the case of a registrant,

its designated self-regulatory organization, or, in the case of an

applicant, the National Futures Association. The registrant or

applicant also must file a copy of its application for an extension of

time with the Commission. The application shall be approved or denied

in writing by the National Futures Association or designated self-

regulatory organization, as applicable. The registrant or applicant

must file immediately with the Commission a copy of any notice it

receives approving or denying the request for extension of time. A

written notice of approval shall become effective upon the filing by

the registrant or applicant of a copy with the Commission, and a

written notice of denial shall be effective as of the date of the

notice.

(h) Public availability of reports. (1) Forms 1-FR-FCM filed

pursuant to this section will be treated as exempt from mandatory

public disclosure for purposes of the Freedom of Information Act and

the Government in the Sunshine Act and parts 145 and 147 of this

chapter, except for the information described in paragraph (i)(2) of

this section.

(2) The following information in Forms 1-FR-FCM will be publicly

available:

(i) The amount of the applicant's or registrant's adjusted net

capital; the amount of its minimum net capital requirement under Sec.

5.7 of this chapter; the amount of its adjusted net capital in excess

of its minimum net capital requirement; and the amount of the retail

forex obligation owed to its retail forex customers; and

(ii) The Statement of Financial Condition and the opinion of the

independent public accountant in the certified annual financial reports

of retail foreign exchange dealers.

(3) All information that is exempt from mandatory public disclosure

under paragraph (h)(1) of this section will, however, be available for

official use by any official or employee of the United States or any

State, by the National Futures Association or any other self-regulatory

organization of which the person filing such report is a member, and by

any other person to whom the Commission believes disclosure of such

information is in the public interest. Nothing in this paragraph (h)

will limit the authority of any self-regulatory organization to request

or receive any information relative to its members' financial

condition.

(i)(1) In the case of an applicant, all filings or other notices

provided for in this section will be considered filed when received by

the regional office of the Commission with jurisdiction over the state

in which the applicant's principal place of business is located and by

the National Futures Association. In the case of a registrant, all

filings or other notices provided for in this section will be

considered filed when received by the regional office of the Commission

with jurisdiction over the state in which the registrant's principal

place of business is located and by the registrant's designated self-

regulatory organization. Any copy that under paragraph (f)(2) or (g) of

this section is required to be filed with the Commission shall be filed

with the regional office of the Commission with jurisdiction over the

state in which the registrant's principal place of business is located.

(2) All filings or other notices filed pursuant to this section

which need not be certified in accordance with Sec. 1.16 may be

submitted to the Commission in electronic form using a a form of user

authentication assigned in accordance with procedures established by or

approved by the Commission, and otherwise in accordance with

instructions issued by or approved by the Commission, if the retail

foreign exchange dealer or a designated self-regulatory organization

has provided the Commission with the means necessary to read and to

process the information contained in such report. Any such electronic

submission must clearly indicate the registrant or applicant on whose

behalf such filing is made and the use of such user authentication in

submitting such filing will constitute and become a substitute for the

manual signature of the authorized signer. In the case of a Form 1-FR

filed via electronic transmission in accordance with procedures

established by or approved by the Commission, such transmission must be

accompanied by the user authentication assigned to the authorized

signer under such procedures, and the use of such user authentication

will constitute and become a substitute for the manual signature of the

authorized signer for the purpose of making the oath or affirmation

referred to in paragraph (e)(4) of this section.

Sec. 5.13 Reporting to customers of retail foreign exchange dealers

and futures commission merchants; monthly and confirmation statements.

(a) Monthly statements. Each retail foreign exchange dealer or

futures commission merchant must promptly furnish in writing to each

retail forex customer, as of the close of the last business day of each

month or as of any regular monthly date selected, except for accounts

in which there are neither open positions at the end of the statement

period nor any changes to the account balance since the prior statement

period, but in any event not less frequently than once every three

months, a statement which clearly shows:

(1) For each retail forex customer:

(i) The open retail forex transactions with prices at which

acquired;

(ii) The net unrealized profits or losses in all open retail forex

transactions marked to the market; and

(iii) Any money, securities or other property carried with the

retail foreign exchange dealer or futures commission merchant; and

(iv) A detailed accounting of all financial charges and credits to

such retail forex accounts during the monthly reporting period,

including money, securities or property received from or disbursed to

such customer and realized profits and losses; and

[[Page 55444]]

(2) For each retail forex customer engaging in forex options

transactions:

(i) All forex options purchased, sold, exercised, or expired during

the monthly reporting period, identified by underlying retail forex

transaction or underlying currency, strike price, transaction date, and

expiration date;

(ii) The open forex option positions carried for such customer as

of the end of the monthly reporting period, identified by underlying

retail forex transaction or underlying currency, strike price,

transaction date, and expiration date;

(iii) All open forex option positions marked to the market and the

amount each position is in the money, if any;

(iv) Any money, securities or other property carried with the

retail foreign exchange dealer or futures commission merchant; and

(v) A detailed accounting of all financial charges and credits to

such retail forex account(s) during the monthly reporting period,

including money, securities and property received from or disbursed to

such customer, premiums charged and received, and realized profits and

losses.

(b) Confirmation statement. Each retail foreign exchange dealer or

futures commission merchant must, not later than the next business day

after any retail forex or forex option transaction, furnish:

(1) To each retail forex customer, a written confirmation of each

retail forex transaction caused to be executed by it for the customer,

including offsetting transactions executed during the same business day

and the rollover of an open retail forex transaction to the next

business day.

(2) To each retail forex customer engaging in forex option

transactions, a written confirmation of each forex option transaction,

containing at least the following information:

(i) The retail forex customer's account identification number;

(ii) A separate listing of the actual amount of the premium, as

well as each mark-up thereon, if applicable, and all other commissions,

costs, fees and other charges incurred in connection with the forex

option transaction;

(iii) The strike price;

(iv) The underlying retail forex transaction or underlying

currency;

(v) The final exercise date of the forex option purchased or sold;

and

(vi) The date the forex option transaction was executed.

(3) To each retail forex customer engaging in forex option

transactions, upon the expiration or exercise of any forex option, a

written confirmation statement thereof, which statement shall include

the date of such occurrence, a description of the forex option

involved, and, in the case of exercise, the details of the retail forex

or physical currency position which resulted therefrom including, if

applicable, the final trading date of the retail forex transaction

underlying the option.

(4) Notwithstanding the provisions of paragraphs (b)(1) through (3)

of this section, a retail forex transaction or forex option transaction

that is caused to be executed for a pooled investment vehicle that

engages in retail forex transactions need be confirmed only to the

operator of such pooled investment vehicle.

(c) Controlled accounts. With respect to any account controlled by

any person other than the retail forex customer or forex option

customer for whom such account is carried, each retail foreign exchange

dealer or futures commission merchant shall promptly furnish in writing

to such other person the information required by paragraphs (a) and (b)

of this section.

(d) Recordkeeping. Each retail foreign exchange dealer or futures

commission merchant shall retain, in accordance with Sec. 1.31 of this

chapter, a copy of each monthly statement and confirmation required by

this section.

(e) Introduced accounts. Each statement provided pursuant to the

provisions of this section must, if applicable, show that the account

for which the retail foreign exchange dealer or futures commission

merchant is providing the statement was introduced by an introducing

broker and the names of the retail foreign exchange dealer or futures

commission merchant and introducing broker.

(f) Electronic transmission of statements. (1) The statements

required by this section may be furnished to a retail forex customer by

means of electronic media if the retail forex customer so consents,

Provided, however, that a retail foreign exchange dealer or futures

commission merchant must, prior to the transmission of any statement by

means of electronic media, disclose the electronic medium or source

through which statements will be delivered, the duration, whether

indefinite or not, of the period during which consent will be

effective, any charges for such service, the information that will be

delivered by such means, and that consent to electronic delivery may be

revoked at any time, and provided, further, that a retail foreign

exchange dealer or futures commission merchant must obtain the retail

forex customer's signed consent acknowledging such disclosure prior to

the transmission of any statement by means of electronic media.

(2) Any statement required to be furnished to a person other than a

retail forex customer in accordance with paragraph (f) of this section

may be furnished by electronic media.

(3) A retail foreign exchange dealer or futures commission merchant

who furnishes statements to a retail forex customer by means of

electronic media must retain a daily confirmation statement for such

retail forex customer as of the end of the trading session, reflecting

all transactions made during that session for the customer, in

accordance with Sec. 1.31 of this chapter.

(g) Combination with other statements. Any futures commission

merchant required to deliver statements to retail forex customers in

accordance with Sec. 1.33 of this chapter may combine into one monthly

statement or confirmation statement, as the case may be, the

information required by this section and the information required by

Sec. 1.33, provided that retail forex account information is

separately identified from any other trading or account activity of the

retail forex customer.

Sec. 5.14 Records to be kept by retail foreign exchange dealers and

futures commission merchants.

(a) No person shall be registered as a retail foreign exchange

dealer under the Act unless, commencing on the date his application for

such registration is filed, he prepares and keeps current ledgers or

other similar records which show or summarize, with appropriate

references to supporting documents, each transaction affecting his

asset, liability, income, expense and capital accounts, and in which

(except as otherwise permitted in writing by the Commission) all his

asset, liability and capital accounts are classified into either the

account classification subdivisions specified on Form 1-FR-FCM or

categories that are in accord with generally accepted accounting

principles as applicable. Each person so registered shall prepare and

keep current such records.

(b) Each applicant or registrant must make and keep as a record in

accordance with Sec. 1.31 of this chapter formal computations of its

adjusted net capital and of its minimum financial requirements pursuant

to Sec. 1.17 or Sec. 5.7 of this chapter, or the requirements of the

designated self-regulatory organization to which it is subject, as

applicable, as of the close of business each month. Such computations

must be completed and made available for inspection by any

representative of the National Futures Association, in the

[[Page 55445]]

case of an applicant, or of the Commission or designated self-

regulatory organization, if any, in the case of a registrant, within 17

business days after the date for which the computations are made,

commencing the first month end after the date the application for

registration is filed.

Sec. 5.15 Unlawful representations.

It shall be unlawful for any person registered pursuant to the

requirements of this part to represent or imply in any manner

whatsoever that such person has been sponsored, recommended or

approved, or that its abilities or qualifications have been reviewed or

evaluated, by the Commission, the Federal government or any agency

thereof.

Sec. 5.16 Prohibition of guarantees against loss.

(a) No retail foreign exchange dealer, futures commission merchant

or introducing broker may in any way represent that it will, with

respect to any retail foreign exchange transaction in any account

carried by a retail foreign exchange dealer or futures commission

merchant for or on behalf of any person:

(1) Guarantee such person against loss;

(2) Limit the loss of such person; or

(3) Not call for or attempt to collect security deposits, margin,

or other deposits as established for retail forex customers.

(b) No person may in any way represent that a retail foreign

exchange dealer, futures commission merchant or introducing broker will

engage in any of the acts or practices described in paragraph (a) of

this section.

(c) This section shall not be construed to prevent a retail foreign

exchange dealer, futures commission merchant or introducing broker from

assuming or sharing in the losses resulting from an error or

mishandling of an order.

(d) This section shall not affect any guarantee entered into prior

to October 18, 2010, but this section shall apply to any extension,

modification or renewal thereof entered into after such date.

Sec. 5.17 Authorization to trade.

No retail foreign exchange dealer, futures commission merchant,

introducing broker or any of their associated persons may directly or

indirectly effect a retail forex transaction for the account of any

customer unless before the transaction the customer, or person

designated by the customer to control the account specifically

authorized the retail foreign exchange dealer, futures commission

merchant, introducing broker or any of their associated persons to

effect the transaction. A transaction is ``specifically authorized'' if

the customer or person designated by the customer to control the

account specifies:

(a) The precise retail forex transaction to be effected;

(b) The exact amount of the foreign currency to be purchased or

sold; and

(c) In the case of an option, the identity of the foreign currency

or contract that underlies the option.

Sec. 5.18 Trading and operational standards.

(a) For purposes of this section:

(1) The term retail forex counterparty includes, as appropriate:

(i) A retail foreign exchange dealer as defined in Sec. 5.1 of

this part;

(ii) A futures commission merchant as defined in section 1a(20) of

the Act; and

(iii) An affiliated person of a futures commission merchant as

defined in Sec. 5.1 of this part.

(2) The term related person when used in reference to a retail

forex counterparty means any general partner, officer, director, owner

of more than ten percent of the equity interest, associated person or

employee of the retail forex counterparty, and any relative or spouse

of any of the foregoing persons, or any relative of such spouse, who

shares the same home as any of the foregoing persons.

(b) Prior to engaging in a retail forex transaction, each retail

forex counterparty shall, at a minimum, establish and enforce internal

rules, procedures and controls to:

(1) Ensure, to the extent possible, that each order received from a

retail forex customer which order is executable at or near the price

that the retail forex counterparty has quoted to the customer is

entered for execution before any order in any retail forex transaction

for any proprietary account, any other account in which a related

person of the retail forex counterparty has an interest, or any account

for which such a related person may originate orders without the prior

specific consent of the account owner (if such related person has

gained knowledge of the retail forex customer's order prior to the

transmission of an order for a proprietary account), an account in

which such a related person has an interest, or an account in which

such a related person may originate orders without the prior specific

consent of the account owner; and

(2) Prevent related persons of forex counterparties from placing

orders, directly or indirectly, with another person in a manner

designed to circumvent the provisions of paragraph (b)(1) of this

section;

(3) Fairly and objectively establish settlement prices for retail

forex transactions; and

(4) Record and maintain essential information regarding customer

orders and account activity, and to provide such information to

customers upon request. Such information shall include:

(i) Transaction records for the customer's account, including:

(A) The date and time each order is received by the retail forex

counterparty;

(B) The price at which each order is placed, or, in the case of an

option, the premium paid

(C) If the transaction was entered into by means of a trading

platform, the price quoted on the trading platform when the order was

placed, or, in the case of an option, the premium quoted;

(D) The customer account identification information;

(E) The currency pair;

(F) The size of the transaction;

(G) Whether the order was a buy or sell order;

(H) The type of order, if the order was not a market order;

(I) If a trading platform is used, the date and time the order is

transmitted to the trading platform;

(J) If a trading platform is used, the date and time the order is

executed;

(K) The size and price at which the order is executed, or in the

case of an option, the amount of the premium paid for each option

purchased, or the amount credited for each option sold; and

(L) For options, whether the option is a put or call, the strike

price, and expiration date.

(ii) Account records that contain the following information:

(A) The funds in the account, net of any commissions and fees;

(B) The net profits and losses on open trades; and

(C) The funds in the account plus or minus the net profits and

losses on open trades. (In the case of open option positions, the

account balance should be adjusted for the net option value);

(iii) If a trading platform is used, daily logs 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; and

(iv) Any method or algorithm used to determine the bid or asked

price for any retail forex transaction or the prices at which customer

orders are executed, including, but not limited to, any markups, fees,

commissions or other items which affect the profitability or risk of

loss of a retail forex customer's transaction.

(c) No retail forex counterparty shall disclose that an order of

another person

[[Page 55446]]

is being held by the retail forex counterparty, unless such disclosure

is necessary to the effective execution of such order or is made at the

request of an authorized representative of the Commission, or a futures

association registered with the Commission pursuant to section 17 of

the Act.

(d) No retail forex counterparty shall knowingly handle the account

of any related person of another retail forex counterparty unless it:

(1) Receives written authorization from a person designated by such

other retail forex counterparty with responsibility for the

surveillance over such account pursuant to paragraph (b)(2) of this

section;

(2) Prepares immediately upon receipt of an order for such account

a written record of such order, including the account identification

and order number, and records thereon to the nearest minute, by time-

stamp or other timing device, the date and time the order is received;

and

(3) Transmits on a regular basis to such other retail forex

counterparty copies of all statements for such account and of all

written records prepared upon the receipt of orders for such account

pursuant to paragraph (b)(2) of this section.

(e) No related person of a retail forex counterparty shall have an

account, directly or indirectly, with another retail forex counterparty

unless:

(1) It receives written authorization to maintain such an account

from a person designated by the retail forex counterparty of which it

is a related person with responsibility for the surveillance over such

account pursuant to paragraph (b)(2) of this section; and

(2) Copies of all statements for such account and of all written

records prepared by such other retail forex counterparty upon receipt

of orders for such account pursuant to paragraph (d)(2) of this section

are transmitted on a regular basis to the retail forex counterparty of

which it is a related person.

(f) No retail forex counterparty shall:

(1) Enter into a retail forex transaction, to be executed pursuant

to a market or limit order at a price that is not at or near the price

at which other retail forex customers, during that same time period,

have executed retail forex transactions with the retail forex

counterparty; Provided, however, that this paragraph (f)(1) shall not

prohibit such practice if done in accordance with the rules of a

registered futures association, and of which such retail foreign

exchange dealer, futures commission merchant or affiliated person of a

futures commission merchant is a member;

(2) Adjust or alter prices for a retail forex transaction after the

transaction has been confirmed to the retail forex customer; Provided,

however, that this paragraph (f)(2) shall not prohibit such practice if

in accordance with the rules of a registered futures association, and

of which such retail foreign exchange dealer, futures commission

merchant or affiliated person of a futures commission merchant is a

member;

(3)(i) Provide a retail forex customer a new bid price for a retail

forex transaction that is higher than its previous bid without

providing a new asked price that is also higher than its previous asked

price by a similar amount;

(ii) Provide a retail forex customer a new bid price for a retail

forex transaction that is lower than its previous bid without providing

a new asked price that is also lower than its previous asked price by a

similar amount; or

(4) Establish a new position for a retail forex customer (except

one that offsets an existing position for that retail forex customer)

where the retail forex counterparty holds outstanding orders of other

retail forex customers for the same currency pair at a comparable

price.

(g)(1) Each retail forex counterparty and each CPO, CTA and IB

subject to this Part 5 shall maintain a record of all communications

received by such person concerning facts giving rise to possible

violations of the Act, rules, regulations or orders thereunder, related

to their retail forex business. The record shall contain the name of

the complainant, if provided, the date of the communication, the

agreement, contract or transaction, the substance of the communication,

and the name of the person who received the communication.

(2) Each retail forex counterparty and each CPO, CTA and IB subject

to this Part 5 shall provide to the Division of Enforcement of the

Commission, electronically, a copy of the record of each communication

received pursuant to paragraph (g)(1) of this section. Such copy shall

be provided to the Division of Enforcement of the Commission no later

than 30 calendar days after the communication is received: Provided,

however, that in the case of a communication concerning facts giving

rise to possible fraud under the Act or Commission regulations, such

copy shall be provided to the Division of Enforcement of the Commission

within three business days after the communication is received.

(h) An introducing broker as defined in Sec. 5.1(f)(1) of this

part, applicant for registration as an introducing broker as defined in

Sec. 5.1(f)(1) of this part, or person succeeding to and continuing

the business of another introducing broker as defined in Sec.

5.1(f)(1) of this part must comply with all provisions applicable to an

introducing broker under this chapter; Provided, however, that an

introducing broker operating pursuant to, or an applicant for

registration as an introducing broker who has filed concurrently with

its application for registration, a guarantee agreement meeting the

requirements of Sec. 1.10(j) of this chapter is not subject to the

minimum capital and related financial reporting requirements of

Sec. Sec. 1.10, 1.12 and 1.17 of this chapter.

(i)(1) Each retail forex counterparty shall prepare and maintain on

a quarterly basis (calendar quarter) a calculation of the percentage of

nondiscretionary retail forex customer accounts open for any period of

time during the quarter that were profitable, and the percentage of

such accounts that were not profitable. In calculating whether a retail

forex account was profitable or not profitable during the quarter, the

FCM or RFED must compute the realized and unrealized gains and/or

losses on all retail forex transactions carried in the retail forex

account at any time during the quarter, and subtract all fees,

commissions, and any other charges posted to the retail forex account

during the quarter, and add any interest income and other income or

rebates credited to the retail forex account during the quarter. All

deposits and/or withdrawals of funds made by a retail forex customer

during the quarter must be excluded from the computation of whether the

retail forex account was profitable or not profitable during the

quarter. Computations that result in a zero or negative number shall be

considered a retail forex account that was not profitable. Computations

that result in a positive number shall be considered a retail forex

account that was profitable. RFEDs and FCMs shall maintain such

calculations along with data supporting such calculations for five

years in accordance with Sec. 1.31.

(2) In calculating its percentages of nondiscretionary retail forex

customer accounts that were profitable or not profitable, the retail

forex counterparty may only use those retail forex accounts, as defined

in Sec. 5.1(i) of this part, that are nondiscretionary accounts;

provided, that the retail forex account is not a proprietary account,

as defined in paragraph (i)(3) of this section.

(3) Proprietary account for this section means a retail forex

account carried on

[[Page 55447]]

the books of a retail foreign exchange dealer or a futures commission

merchant for one of the following persons, or of which ten percent or

more is owned by one of the following persons, or of which an aggregate

of ten percent or more of which is owned by more than one of the

following persons:

(i) Such retail foreign exchange dealer or futures commission

merchant itself;

(ii) If the retail foreign exchange dealer or futures commission

merchant is a partnership, a general partner in such partnership;

(iii) If the retail foreign exchange dealer or futures commission

merchant is a limited partnership, a limited or special partner in such

partnership whose duties include:

(A) The management of the partnership business or any part thereof,

(B) The handling of retail forex transactions of such partnership,

(C) The keeping of records pertaining to retail forex transactions,

or

(D) The signing or co-signing of checks or drafts on behalf of such

partnership;

(iv) If the retail foreign exchange dealer or futures commission

merchant is a corporation or association, an officer, director or owner

of ten percent or more of the capital stock, of such organization;

(v) An employee of such retail foreign exchange dealer or futures

commission merchant whose duties include:

(A) The management of the business of such retail foreign exchange

dealer or futures commission merchant or any part thereof,

(B) The handling of retail forex transactions of such retail

foreign exchange dealer or futures commission merchant,

(C) The keeping of records pertaining to retail forex transactions

of such retail foreign exchange dealer or futures commission merchant,

or

(D) The signing or co-signing of checks or drafts on behalf of such

retail foreign exchange dealer or futures commission merchant;

(vi) A spouse or minor dependent living in the same household of

any of the foregoing persons;

(vii) A business affiliate that directly or indirectly controls

such retail foreign exchange dealer or futures commission merchant; or

(viii) A business affiliate that, directly or indirectly is

controlled by or is under common control with, such retail foreign

exchange dealer or futures commission merchant.

(j) Each retail forex counterparty shall designate one or more

principals to serve as a chief compliance officer(s). The chief

compliance officer(s) shall certify to the Commission and a registered

national futures association annually that the retail forex

counterparty has in place processes to establish, maintain, review,

modify and test policies and procedures reasonably designed to achieve

compliance with the Act, rules, regulations and orders thereunder. The

certification shall include a statement that the counterparty has in

place compliance processes, and that the chief compliance officer(s)

has apprised the chief executive officer of the compliance efforts to

date and identify and address significant compliance problems and plans

to address those problems.

Sec. 5.19 Pending legal proceedings.

(a) Every retail foreign exchange dealer or futures commission

merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

the Commission copies of any dispositive or partially dispositive

decision for which a notice of appeal has been filed, the notice of

appeal and such further documents as the Commission may thereafter

request filed in any material legal proceeding to which the retail

foreign exchange dealer, futures commission merchant, CPO, CTA or IB is

a party or to which its property or assets is subject with respect to

retail forex transactions.

(b) Every retail foreign exchange dealer or futures commission

merchant and each CPO, CTA or IB subject to this Part 5 shall submit to

the Commission copies of any dispositive or partially dispositive

decision concerning which a notice of appeal has been filed, the notice

of appeal, and such further documents as the Commission may thereafter

request filed in any material legal proceeding instituted against any

person who is a principal of the retail foreign exchange dealer,

futures commission merchant CPO, CTA or IB (as the term ``principal''

is defined in Sec. 3.1(a) of this chapter) arising from conduct in

such person's capacity as a principal of the retail foreign exchange

dealer, futures commission merchant, CPO, CTA or IB and alleging

violations, with regard to retail forex transactions, of:

(1) The Act or any rule, regulation, or order thereunder; or

(2) Provisions of state law relating to a duty or obligation owed

by such a principal.

(c) All documents required by this section to be submitted to the

Commission shall be mailed via first-class or submitted by other more

expeditious means to the Commission's headquarters office in

Washington, DC, Attention: Director, Division of Enforcement. All

documents required by this section to be submitted to the Commission as

to matters pending on October 18, 2010 shall be mailed to the

Commission within 45 days of that effective date. Thereafter, all

decisions and notices of appeal required to be submitted by retail

foreign exchange dealers, futures commission merchants, CPOs, CTAs or

IBs shall be mailed within 10 days of the filing or receipt by the

retail foreign exchange dealer or futures commission merchant of the

relevant notice of appeal. For purposes of paragraph (a) and (b) of

this section, a ``material legal proceeding'' includes but is not

limited to actions involving alleged violations of the Commodity

Exchange Act or the Commission's regulations. However, a legal

proceeding is not ``material'' for the purposes of this rule if the

proceeding is not in a federal or state court or if the Commission is a

party.

Sec. 5.20 Special calls for account and transaction information.

(a) Preparation and transmission of information upon special call.

All information required upon special call shall be prepared in such

form and manner and in accordance with such instructions, and shall be

transmitted at such time and to such office of the Commission, as may

be specified in the call.

(b) Special calls for information on controlled accounts from

retail foreign exchange dealers, futures commission merchants and

introducing brokers. Upon call by the Commission, each retail foreign

exchange dealer, futures commission merchant and introducing broker

shall file with the Commission the names and addresses of all persons

who, by power of attorney or otherwise, exercise trading control over

any customer's account in retail forex transactions.

(c) Special calls for information on open transactions in accounts

carried or introduced by retail foreign exchange dealers, futures

commission merchants, and introducing brokers. Upon special call by the

Commission for information relating to retail forex transactions held

or introduced on the dates specified in the call, each retail foreign

exchange dealer, futures commission merchant, or introducing broker

shall furnish to the Commission the following information concerning

accounts of traders owning or controlling such retail forex transaction

positions, as may be specified in the call:

(1) The name, address, and telephone number of the person for whom

each account is carried;

(2) The principal business or occupation of the person for whom

each

[[Page 55448]]

account is introduced or carried, as specified in the call;

(3) The name, address and principal business or occupation of any

person who controls the trading of each account;

(4) The name and address of any person having a financial interest

of ten percent or more in each account;

(5) The number of open retail forex transaction positions

introduced or carried in each account, as specified in the call; and

(6) The total number of retail forex transactions against which

delivery has been made.

(d) Delegation of authority to the Director of the Division of

Clearing and Intermediary Oversight and the Director of the Division of

Market Oversight. The Commission hereby delegates, until the Commission

orders otherwise, to the Director of the Division of Clearing and

Intermediary Oversight and the Director of the Division of Market

Oversight, or to the respective Director's designees, the authority set

forth in this section to make special calls for information on

controlled accounts from retail foreign exchange dealers, futures

commission merchants and from introducing brokers, and to make special

calls for information on open contracts in accounts carried or

introduced by futures commission merchants, introducing brokers, and

foreign brokers. Either Director may submit to the Commission for its

consideration any matter that has been delegated pursuant to this

section. Nothing in this section shall be deemed to prohibit the

Commission, at its election, from exercising the authority delegated in

this section to the Directors.

Sec. 5.21 Supervision.

Each Commission registrant subject to this Part 5, except an

associated person who has no supervisory duties, must diligently

supervise the handling by its partners, officers, employees and agents

(or persons occupying a similar status or performing a similar

function) of all retail forex accounts carried, operated, advised or

introduced by the registrant and all other activities of its partners,

officers, employees and agents (or persons occupying a similar status

or performing a similar function) relating to its business as a

Commission registrant.

Sec. 5.22 Registered futures association membership.

(a) Each person registered as a retail foreign exchange dealer must

become and remain a member of at least one futures association that is

registered under section 17 of the Act and that provides for the

membership therein of such retail foreign exchange dealer.

(b) Each person required to register as:

(1) An introducing broker, because the person solicits or accepts

orders for retail forex transactions;

(2) A commodity pool operator because the person operates, or

solicits funds, securities, or property for, a pooled investment

vehicle that engages in retail forex transactions; or

(3) A commodity trading advisor because the person exercises

discretionary trading authority, or obtains written authorization to

exercise discretionary trading authority over, an account in connection

with retail forex transactions, must become and remain a member of at

least one futures association that is registered under section 17 of

the Act and that provides for the membership therein of such person.

Sec. 5.23 Notice of bulk transfers and bulk liquidations.

(a) Notice and disclosure to retail forex customers of a bulk

transfer. (1) A retail foreign exchange dealer, futures commission

merchant or introducing broker must obtain the written prior and

specific consent of its retail forex customer to the assignment of any

position or transfer of any account of the retail forex customer to

another retail foreign exchange dealer, futures commission merchant or

introducing broker, unless made at the retail forex customer's request.

(2) Absent a request of the retail forex customer or the consent

described in paragraph (a)(1) of this section, assignments of positions

and transfers of accounts of retail forex customers may be permitted

under rules of the retail forex dealer's, futures commission

merchant's, or introducing broker's designated self-regulatory

organization that establish notice and other requirements with respect

to the assignment of positions and transfers of accounts of retail

forex customers. If such rules permit implied consent as a result of

the failure of the retail forex customer to object after having

received notice of the proposed assignment or transfer, such rules must

provide that the notice must include a statement that the retail forex

customer is not required to accept the proposed assignment or transfer

and may direct the transferor firm to liquidate the positions of the

retail forex customer or transfer the account to a firm of the retail

forex customer's selection.

(3) For assignments and transfers made under this section, other

than at the retail forex customer's request, the transferee retail

foreign exchange dealer, futures commission merchant or introducing

broker must provide to the retail forex customer the risk disclosure

statements and forms of acknowledgment required by Part 5 of this

chapter and receive the required signed acknowledgments within sixty

days of such assignments or transfers. This requirement shall not

apply:

(i) If the transferee retail foreign exchange dealer, futures

commission merchant or introducing broker has clear written evidence

that the retail forex customer has received and acknowledged receipt of

the required disclosure statements; or

(ii) If the transfer of accounts is made from one introducing

broker to another introducing broker guaranteed by the same retail

foreign exchange dealer or futures commission merchant pursuant to a

guarantee agreement in accordance with the requirements of Sec.

1.10(j) of this chapter and such retail foreign exchange dealer or

futures commission merchant maintains the relevant acknowledgments

required by Part 5 of this chapter.

(b) Notice to the Commission. Each retail foreign exchange dealer,

futures commission merchant or introducing broker shall file with the

Commission prior notice of any transfer of accounts of any retail forex

customer that is not initiated at the request of the customer, where

the transfer involves 50 percent or more of the transferor's total

number of retail forex customer accounts.

(c) Contents of notice to the Commission. The notice required by

paragraph (b) of this section shall include:

(1) The name, principal business address and telephone number of

the transferor futures retail foreign exchange dealer, futures

commission merchant or introducing broker;

(2) The name, principal business address and telephone number of

each transferee retail foreign exchange dealer, futures commission

merchant or introducing broker;

(3) The designated self-regulatory organization for the transferor

and transferee firms;

(4) A brief statement as to the reasons for the transfer;

(5) A copy of any notices to customers regarding the transfers; and

(6) A statement of the number of accounts to be transferred.

(d) Notice of the bulk liquidation of retail forex transactions. A

retail foreign exchange dealer or futures commission merchant may not

initiate the bulk liquidation of properly margined retail forex

transactions unless such liquidation complies with the rules and

procedures of the retail forex dealer's or

[[Page 55449]]

futures commission merchant's designated self-regulatory organization

and the retail forex dealer or futures commission merchant provides the

Commission with prior written notice of the liquidation.

(e) Contents of notice of bulk liquidation. The notice required by

paragraph (d) of this section shall include:

(1) The name, principal business address and telephone number of

the initiating retail foreign exchange dealer or futures commission

merchant;

(2) A brief statement of the reasons for the liquidation;

(3) A copy of any notices to customers regarding the liquidation;

and

(4) A statement of the number of accounts to be liquidated.

(f) Filing of notices. The notice required by paragraph (b) and (d)

of this section shall be filed five business days prior to the transfer

or liquidation of the retail forex transaction with the Deputy

Director, Compliance and Registration Section, Division of Clearing and

Intermediary Oversight, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581; the

National Futures Association Attn: Vice President-Compliance; and the

designated self-regulatory organization for the transferor firm.

(g) No effect on other obligations. The requirements of this

section shall not affect the obligations of a retail foreign exchange

dealer, futures commission merchant or introducing broker under the

rules of a self-regulatory organization or applicable customer account

agreement with respect to assignments of positions or transfers of

accounts or liquidation of positions.

(h) Corrective notice. If a proposed transfer is not completed in

accordance with the notice required to be filed by paragraph (b) of

this section, a corrective notice shall be filed within five business

days of the date such proposed transfer was to occur explaining why the

proposed transfer was not completed.

Sec. 5.24 Applicability of other parts of this chapter

Insofar as it is consistent with the requirements of this part, all

other provisions of this chapter that apply to a person shall apply to

such person as though such provisions were expressly set forth in this

part.

Sec. 5.25 Applicability of the Act.

Except as otherwise specified in this part and unless the context

otherwise requires, the provisions of Sections 4b, 4c(b), 4f, 4g, 4k,

4m, 4n, 4o, 6(c)-(e), 6b, 6c, 8(a)-(e), 8a and 12(f) of the Act shall

apply to retail forex transactions that are subject to the requirements

of this part as though such provisions were set forth herein and

included specific references to retail forex transactions and the

persons defined in Sec. 5.1 of this part.

PART 10--RULES OF PRACTICE

0

37. The authority citation for part 10 continues to read as follows:

Authority: Pub. L. 93-463, sec. 101(a)(11), 88 Stat. 1391; 7

U.S.C. 2a(12).

0

38. Section 10.1 is amended by revising paragraph (a) to read as

follows:

Sec. 10.1 Scope and applicability of rules of practice.

* * * * *

(a) Denial, suspension, revocation, conditioning, restricting or

modifying of registration as a futures commission merchant, retail

foreign exchange dealer, introducing broker, or associated person,

floor broker, floor trader, commodity pool operator, commodity trading

advisor or leverage transaction merchant pursuant to sections 6(c),

8a(2), 8a(3), 8a(4) and 8a(11) of the Act, 7 U.S.C. 9 and 15, 12a(2),

12a(3), 12a(4) and 12(a)(11), or denial, suspension, or revocation of

designation as a contract market pursuant to sections 6(a) and 6(b) of

the Act, 7 U.S.C. 8;

* * * * *

PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION

0

39. The authority citation for part 140 continues to read as follows:

Authority: 7 U.S.C. 2 and 12a.

0

40. Section 140.94 is added to read as follows:

Sec. 140.94 Delegation of authority to the Director of the Division

of Clearing and Intermediary Oversight.

(a) The Commission hereby delegates, until such time as the

Commission orders otherwise, the following functions to the Director of

the Division of Clearing and Intermediary Oversight and to such members

of the Commission's staff acting under his direction as he may

designate from time to time:

(1) All functions reserved to the Commission in Sec. 5.7 of this

chapter;

(2) All functions reserved to the Commission in Sec. 5.10 of this

chapter;

(3) All functions reserved to the Commission in Sec. 5.11 of this

chapter;

(4) All functions reserved to the Commission in Sec. 5.12 of this

chapter, except for those relating to nonpublic treatment of reports

set forth in Sec. 5.12(i) of this chapter; and

(5) All functions reserved to the Commission in Sec. 5.14 of this

chapter.

(b) The Director of the Division of Clearing and Intermediary

Oversight may submit any matter which has been delegated to him under

paragraph (a) of this section to the Commission for its consideration.

(c) Nothing in this section may prohibit the Commission, at its

election, from exercising the authority delegated to the Director of

the Division of Clearing and Intermediary Oversight under paragraph (a)

of this section.

PART 145--COMMISSION RECORDS AND INFORMATION

0

41. The authority citation for part 145 continues to read as follows:

Authority: Pub. L. 99-570, 100 Stat. 3207; Pub. L. 89-554, 80

Stat. 383; Pub. L. 90-23, 81 Stat. 54; Pub. L. 98-502, 88 Stat.

1561-1564 (5 U.S.C. 552); Sec. 101(a), Pub. L. 93-463, 88 Stat. 1389

(5 U.S.C. 4a(j)); unless otherwise noted.

0

42. Section 145.5 is amended by revising paragraphs (d)(1)(viii) and

(h) to read as follows:

Sec. 145.5 Disclosure of nonpublic records.

* * * * *

(d) * * *

(1) * * *

(viii) The following reports and statements that are also set forth

in paragraph (h) of this section, except as specified in 17 CFR

1.10(g)(2), 17 CFR 31.13(m), or 17 CFR 5.12(h): Forms 1-FR required to

be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are

filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

required to be filed pursuant to 17 CFR 31.13; the accountant's report

on material inadequacies filed in accordance with 17 CFR 1.16(c)(5);

and all reports and statements required to be filed pursuant to 17 CFR

1.17(c)(6);

* * * * *

(h) Contained in or related to examinations, operating, or

condition reports prepared by, on behalf of, or for the use of the

Commission or any other agency responsible for the regulation or

supervision of financial institutions, including, but not limited to

the following reports and statements that are also set forth in

paragraph (d)(1)(viii) of this section, except as specified in 17 CFR

1.10(g)(2), 17 CFR 5.12(h) or 17 CFR 31.13(m): Forms 1-FR required to

be filed pursuant to 17 CFR 1.10 or 17 CFR 5.12; FOCUS reports that are

filed in lieu of Forms 1-FR pursuant to 17 CFR 1.10(h); Forms 2-FR

required to be filed pursuant to 17 CFR 31.13; the accountant's report

on material inadequacies filed in

[[Page 55450]]

accordance with 17 CFR 1.16(c)(5); and all reports and statements

required to be filed pursuant to 17 CFR 1.17(c)(6); and

* * * * *

PART 147--OPEN COMMISSION MEETINGS

0

43. The authority citation for part 147 continues to read as follows:

Authority: Sec. 3(a), Pub. L. 94-409, 90 Stat. 1241 (5 U.S.C.

552b); sec. 101(a)(11), Pub. L. 93-463, 88 Stat. 1391 (7 U.S.C.

4a(j) (Supp. V, 1975)), unless otherwise noted.

0

44. Section 147.3 is amended by revising paragraphs (b)(4)(i)(H) and

(b)(8) to read as follows:

Sec. 147.3 General requirement of open meetings; grounds upon which

meetings may be closed.

* * * * *

(b) * * *

(4) * * *

(i) * * *

(H) The following reports and statements that are also set forth in

paragraph (b)(8) of this section, except as specified in 17 CFR

1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to be

filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR 31.13(m);

FOCUS reports that are filed in lieu of Forms 1-FR pursuant to 17 CFR

1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR 31.13; the

accountant's report on material inadequacies filed in accordance with

17 CFR 1.16(c)(5); and all reports and statements required to be filed

pursuant to 17 CFR 1.17(c)(6);

* * * * *

(8) Disclose information contained in or related to examination,

operating, or condition reports prepared by, on behalf of, or for the

use of the Commission or any other agency responsible for the

regulation or supervision of financial institutions, including, but not

limited to the following reports and statements that are also set forth

in paragraph (b)(4)(i)(H) of this section, except as specified in 17

CFR 1.10(g)(2), 17 CFR 5.12, or 17 CFR 31.13(m): Forms 1-FR required to

be filed pursuant to 17 CFR 1.10, 17 CFR 5.12(h)(2), or 17 CFR

31.12(m); FOCUS reports that are filed in lieu of Forms 1-FR pursuant

to 17 CFR 1.10(h); Forms 2-FR required to be filed pursuant to 17 CFR

31.13; the accountant's report on material inadequacies filed in

accordance with 17 CFR 1.16(c)(5); and all reports and statements

required to be filed pursuant to 17 CFR 1.17(c)(6);

* * * * *

PART 160--PRIVACY OF CONSUMER FINANCIAL INFORMATION

0

45. The authority citation for part 160 continues to read as follows:

Authority: 7 U.S.C. 7b-2 and 12a(5); 15 U.S.C. 6801, et seq.

0

46. Section 160.1 is amended by revising paragraph (b) to read as

follows:

Sec. 160.1 Purpose and scope.

* * * * *

(b) Scope. This part applies only to nonpublic personal information

about individuals who obtain financial products or services primarily

for personal, family, or household purposes from the institutions

listed below. This part does not apply to information about companies

or about individuals who obtain financial products or services

primarily for business, commercial, or agricultural purposes. This part

applies to all futures commission merchants, retail foreign exchange

dealers, commodity trading advisors, commodity pool operators and

introducing brokers that are subject to the jurisdiction of the

Commission, regardless whether they are required to register with the

Commission. These entities are hereinafter referred to in this part as

``you.'' This part does not apply to foreign (non-resident) futures

commission merchants, retail foreign exchange dealers, commodity

trading advisors, commodity pool operators and introducing brokers that

are not registered with the Commission. Nothing in this part modifies,

limits or supersedes the standards governing individually identifiable

health information promulgated by the Secretary of Health and Human

Services under the authority of sections 262 and 264 of the Health

Insurance Portability and Accountability Act of 1996, 42 U.S.C. 1320d--

1320d-8.

47. Section 160.3 is amended by:

0

a. Revising paragraph (a) introductory text and paragraph (a)(2);

0

b. Redesignating paragraphs (k)(2)(i)(B) through (F) as paragraphs

(k)(2)(i)(C) through (G) and republishing them, and adding new

paragraph (k)(2)(i)(B);

0

c. Revising paragraphs (n)(1)(i) and (n)(2)(i);

0

d. Revising paragraph (o)(1)(i);

0

e. Revising paragraph (u)(2)(i)(A);

0

f. Redesignating paragraphs (w)(2) through (4) as paragraphs (w)(3)

through (5) and adding new paragraph (w)(2); and

0

g. Adding new paragraph (x) to read as follows:

Sec. 160.3 Definitions.

* * * * *

(a) Affiliate of a futures commission merchant, retail foreign

exchange dealer, commodity trading advisor, commodity pool operator or

introducing broker means any company that controls, is controlled by,

or is under common control with a futures commission merchant, retail

foreign exchange dealer, commodity trading advisor, commodity pool

operator or introducing broker that is subject to the jurisdiction of

the Commission. In addition, a futures commission merchant, retail

foreign exchange dealer, commodity trading advisor, commodity pool

operator or introducing broker subject to the jurisdiction of the

Commission will be deemed an affiliate of a company for purposes of

this part if:

* * * * *

(2) Rules adopted by the Federal Trade Commission or another

federal functional regulator under Title V of the GLB Act treat the

futures commission merchant, retail foreign exchange dealer, commodity

trading advisor, commodity pool operator or introducing broker as an

affiliate of that company.

* * * * *

(k) * * *

(2) * * *

(i) * * *

(B) You are a retail foreign exchange dealer with whom a consumer

has opened an account, or that effects or engages in retail forex

transactions with or for a consumer, even if you do not hold any assets

of the consumer;

(C) You are an introducing broker that solicits or accepts specific

orders for trades;

(D) You are a commodity trading advisor with whom a consumer has a

contract or subscription, either written or oral, regardless of whether

the advice is standardized, or is based on, or tailored to, the

commodity interest or cash market positions or other circumstances or

characteristics of the particular consumer;

(E) You are a commodity pool operator, and you accept or receive

from the consumer, funds, securities, or property for the purpose of

purchasing an interest in a commodity pool;

(F) You hold securities or other assets as collateral for a loan

made to the consumer, even if you did not make the loan or do not

effect any transactions on behalf of the consumer; or

(G) You regularly effect or engage in commodity interest

transactions with or for a consumer even if you do not hold any assets

of the consumer.

* * * * *

(n)(1) * * *

(i) Any futures commission merchant, retail foreign exchange

dealer,

[[Page 55451]]

commodity trading advisor, commodity pool operator or introducing

broker that is registered with the Commission as such or is otherwise

subject to the Commission's jurisdiction; and

* * * * *

(2) * * *

(i) Any person or entity, other than a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator or introducing broker that, with respect to any financial

activity, is subject to the jurisdiction of the Commission under the

Act.

* * * * *

(o)(1) * * *

(i) Any product or service that a futures commission merchant,

retail foreign exchange dealer, commodity trading advisor, commodity

pool operator, or introducing broker could offer that is subject to the

Commission's jurisdiction; and

* * * * *

(u) * * *

(2) * * *

(i) * * *

(A) Information a consumer provides to you on an application to

open a commodity interest trading account, to invest in a commodity

pool, or to obtain another financial product or service;

* * * * *

(w) * * *

(2) Any retail foreign exchange dealer;

* * * * *

(x) Retail foreign exchange dealer has the same meaning as in Sec.

5.3(i)(1) of this chapter.

0

48. Section 160.4 is amended by:

0

a. Revising paragraph (c)(2)(ii); and

0

b. Revising paragraph (e)(1)(iv) to read as follows:

Sec. 160.4 Initial privacy notice to consumers required.

* * * * *

(c) * * *

(2) * * *

(ii) Opens a retail forex account, or opens a commodity interest

account through an introducing broker or with a futures commission

merchant that clears transactions for its customers through you on a

fully-disclosed basis;

* * * * *

(e) * * *

(1) * * *

(iv) You have established a customer relationship with a customer

in a bulk transfer in accordance with Sec. 1.65, if you are a

transferee futures commission merchant, retail foreign exchange dealer

or introducing broker.

* * * * *

0

49. Section 160.30 is amended by revising the introductory text to read

as follows:

Sec. 160.30 Procedures to safeguard customer records and information.

Every futures commission merchant, retail foreign exchange dealer,

commodity trading advisor, commodity pool operator and introducing

broker subject to the jurisdiction of the Commission must adopt

policies and procedures that address administrative, technical and

physical safeguards for the protection of customer records and

information. These policies and procedures must be reasonably designed

to:

* * * * *

PART 166--CUSTOMER PROTECTION RULES

0

50. The authority citation for part 166 continues to read as follows:

Authority: 7 U.S.C. 1a, 2, 6b, 6c, 6d, 6g, 6h, 6k, 6l, 6o, 7,

12a and 23, as amended by the Commodity Futures Modernization Act of

2000, Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000).

0

51. Section 166.2 is revised to read as follows:

Sec. 166.2 Authorization to trade.

No futures commission merchant, retail foreign exchange dealer,

introducing broker or any of their associated persons may directly or

indirectly effect a transaction in a commodity interest for the account

of any customer unless before the transaction the customer, or person

designated by the customer to control the account:

(a) With respect to any commodity interest as defined in Sec.

1.3(yy)(1) through (3) of this chapter, specifically authorized the

futures commission merchant, retail foreign exchange dealer,

introducing broker or any of their associated persons to effect the

transaction (a transaction is ``specifically authorized'' if the

customer or person designated by the customer to control the account

specifies--

(1) The precise commodity interest to be purchased or sold; and

(2) The exact amount of the commodity interest to be purchased or

sold); or

(b) With respect to any commodity interest as defined in Sec.

1.3(yy)(1) or (2) of this chapter, authorized in writing the futures

commission merchant, introducing broker or any of their associated

persons to effect transactions in commodity interests for the account

without the customer's specific authorization; Provided, however, That

if any such futures commission merchant, introducing broker or any of

their associated persons is also authorized to effect transactions in

foreign futures or foreign options without the customer's specific

authorization, such authorization must be expressly documented.

0

52. Section 166.5 is amended by:

0

a. Removing paragraph (a)(1)(iv), redesignating paragraphs (a)(1)(i)

through (a)(1)(iii) as paragraphs (a)(1)(i)(A) through (a)(1)(i)(C),

and adding new paragraph (a)(1)(ii);

0

b. Revising paragraphs (a)(2) and (a)(3);

0

c. Revising paragraphs (c)(5)(i)(A) and (c)(5)(i)(C) to read as

follows:

Sec. 166.5 Dispute settlement procedures.

(a) * * * (1) * * *

(ii) Arises out of any retail forex transaction (as defined in

Sec. 5.1(m) of this chapter).

(2) The term customer as used in this section includes an option

customer (as defined in Sec. 1.3(jj) of this chapter), a retail forex

customer (as defined in Sec. 5.1(k) of this chapter) and any person

for or on behalf of whom a member of a designated contract market, or a

participant transacting on or through such designated contract market,

effects a transaction on such contract market, except another member of

or participant in such designated contract market; Provided, however, a

person who is an ``eligible contract participant'' as defined in

section 1a(12) of the Act shall not be deemed to be a customer within

the meaning of this section.

(3) The term Commission registrant as used in this section means a

person registered under the Act as a futures commission merchant,

retail foreign exchange dealer, introducing broker, floor broker,

commodity pool operator, commodity trading advisor, or associated

person.

* * * * *

(c) * * *

(5) * * *

(i) * * *

(A) The designated contract market, if applicable and if available,

upon which the transaction giving rise to the dispute was executed or

could have been executed;

* * * * *

(C) At least one other organization that will provide the customer

with the opportunity to select the location of the arbitration

proceeding from among several major cities in diverse geographic

regions and that will provide the customer with the choice of a panel

or other decision-maker composed of at least one or more persons, of

which at least a majority are not members or associated with a member

of the designated contract market, if applicable, or employee thereof,

and

[[Page 55452]]

that are not otherwise associated with the designated contract market

(mixed panel), if applicable: Provided, however, that the list of

qualified organizations provided by a Commission registrant that is a

floor broker need not include a registered futures association unless a

registered futures association has been authorized to act as a

decision-maker in such matters.

* * * * *

Issued in Washington, DC, on August 26, 2010, by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. 2010-21729 Filed 9-9-10; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: September 10, 2010