Release: #4833-03
For Release: August 26, 2003

CFTC and NFA Announce New Rules to Combat Fraud in the
Retail Off-Exchange Forex Foreign Currency Market

Washington, DC & Chicago IL August 26, 2003 -- The Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) today announced the CFTC’s approval of several NFA rules designed to protect investors in the retail off-exchange foreign currency (forex) futures and option market. The new rules impose tougher standards on firms that are forex dealer Members of the Association.

Commenting on the Commission’s recent approval of NFA’s forex rules, CFTC Chairman James E. Newsome said, “The Commission fully supports the NFA’s rulemaking. We feel strongly that these rules represent a significant step in our joint effort to protect investors from fraudulent and illegal activity in the retail off-exchange forex markets.” (August 26th Press Briefing Remarks by Chairman Newsome.)

The Commodity Futures Modernization Act of 2000 (CFMA) makes clear the Commission’s authority and jurisdiction to investigate and take action to close down entities selling illegal off-exchange foreign currency futures and option contracts to retail customers. Since the CFMA became effective in December 2000, the CFTC has been very active in applying the statute to retail forex activities and has filed 41 cases against forex entities, involving approximately $75 million taken from at least 3,500 victims.

Since the passage of the CFMA, however, a problem remains with unregulated individuals soliciting retail customers for forex transactions, particularly where a futures commission merchant (FCM) is a counterparty to the trade. NFA’s new rules address this problem by, among other things, making FCMs take responsibility for the activities of these unregulated individuals.

NFA began to address this problem in June 2002 when it created a separate membership category for CFTC-registered firms that offer off-exchange retail forex products to the public and prohibited them from engaging in fraudulent business practices. Since that time, NFA has taken emergency enforcement actions against three Member firms for forex activities.

“The rules we adopted last year served as an effective starting point for protecting customers,” said Daniel J. Roth, President and Chief Executive Officer of NFA. “We believe, however, that additional regulatory requirements are needed to protect investors from any fraudulent practices in the area of off-exchange retail forex trading.”

In addition to making NFA’s forex dealer Member firms take responsibility for the activities of these unregulated solicitors, the new rules, which will become effective on December 1, 2003, impose several other requirements, including:

• observing high standards of commercial honor and just and equitable principles of trade in connection with the retail forex business;
• supervising their employees and agents and any affiliates that act as counterparties to retail forex transactions;
• maintaining a minimum net capital requirement based on the value of open customer positions; and
• collecting security deposits from those customers.

“By adopting these rules, NFA has acted swiftly and deliberately to protect retail forex customers against unethical business practices and loss of funds due to insolvency or related problems,” said Mr. Roth. “However, this does not mean the work of the CFTC and NFA is finished. We will continue to monitor this area and may issue additional rules to protect investors.”

In an effort to educate customers about the risks of forex trading, in February 2001 the CFTC issued a Forex Consumer Advisory cautioning the public to be skeptical of newspaper advertisements, radio and television promotions, and Internet Web sites that tout high-return, low-risk investment opportunities in forex trading. The CFTC also issued an Advisory in March 2002 on how firms may lawfully offer forex futures and option trading opportunities to the retail public.

To complement the CFTC’s efforts, NFA has prepared an Investor Alert highlighting some of the risks involved in retail off-exchange forex trading. NFA is also preparing an educational brochure to help customers make informed decisions about investing in the retail forex market and a regulatory guide to help its forex Member firms understand their regulatory responsibilities. Both of these publications will be available in the fourth quarter of 2003.

For more information contact:
Alan Sobba 202-418-5034 (CFTC)
R. David Gary 202-418-5085 (CFTC)
Dennis Holden 202-418-5088 (CFTC)
Cynthia Cain 312-781-1490 (NFA)
Larry Dyekman 312-781-1372 (NFA)