US futures brokers to meet new capital requirements from June 30

The US National Futures Association (NFA) has announced a June 30 deadline for local margin foreign exchange brokers to comply with new capital requirements, closing a loophole being used by retail forex brokers to avoid meeting tighter capital controls.

The new rules pertain to brokers that act as counterparties for foreign exchange trades with non-retail eligible contract participants (ECPs). Under the rules, registered futures commission merchants (FCM) must maintain adjusted net capital equal to $1 million, or in excess of the greatest amount calculated under a number of alternatives geared specifically to FCMs with a majority of business linked to retail brokers.

The move is aimed at closing a loophole observed over the past year, where forex dealer members (FDMs) have opted to register as FCMs to avoid meeting minimum capital requirements of $20 million, but still face retail brokers as clients. Because FCMs do not act as direct counterparties to retail traders, a comparably favourable $1 million of capital is required by law.

The NFA highlights instances of FCMs that had given up FDM status but have acted as counterparties to three foreign retail forex affiliates, while another acts as introducing broker to an NFA-registered FDM.

"Given the counterparty nature of these FCMs' forex activities, NFA is extremely concerned that these firms are currently subject to inadequate capital requirements. Specifically, from a financial safeguard perspective, it makes absolutely no sense that an FDM that acts as counterparty to a single retail forex transaction must maintain at least $20 million in adjusted net capital; however, an FCM that engages in an identical type transaction with an ECP must only maintain at least $1 million in capital.

"Moreover, although other NFA Member FCMs currently act as counterparties to forex transactions with ECPs, all of those FCMs also engage in a substantial exchange-traded business and have capital requirements that exceed $20 million. NFA staff confirmed with CME Group staff that none of the FCMs for which it is the designated self-regulatory organisation have less than $20 million in adjusted net capital if they engage in forex activities with ECPs," the NFA said.