NFA proposes change in forex fee structure

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NFA proposes change in forex fee structure
The continuing high costs of regulating NFA's forex Members, coupled with a sharp decrease in revenue from forex firms, have resulted in an NFA proposal to change the forex fee structure. The new fees - an increase in membership dues for non-Forex Dealer Members (FDMs), a new processing fee to recoup costs of NFA's forex trade monitoring system and an increase in FDM membership dues - were approved by NFA's Board of Directors in August and were submitted to the CFTC in September.

"We have taken these steps in order to comply with our Board's longstanding directive that NFA should recover its forex-related regulatory costs from our forex Members," said Dave Hawrysz, NFA's Chief Financial Officer.

Revenue from the Forex Dealer Member (FDM) assessment fee decreased approximately 40% between fiscal year 2009 and fiscal year 2010. In the following fiscal year, assessment fee revenue continued to decrease, this time approximately 30%.

"In assessment fee revenue alone, NFA has experienced a drop of nearly 60%," said Hawrysz. "We have lost additional revenue from forex membership dues and the additional surcharge we previously collected from FDMs on unregistered solicitors but eliminated last Fall due to the CFTC's forex registration requirements."

Although the amount of forex-related revenue has dropped significantly over the past two fiscal years, the amount of resources NFA devotes to regulating Members engaging in forex activities has remained relatively stable. This is in spite of the fact that since January 2010, over 150 forex IBs, CTAs and CPOs that introduce business to FDMs have registered with the CFTC and become NFA Members.

NFA's forex-related expenses also include the resources NFA devotes to enforcement cases involving forex Members. Over the past three fiscal years, approximately 32% of all complaints issued by NFA's Business Conduct Committee have involved FDMs and their intermediary IB, CPO and CTA firms. Forex Members make up less than 5% of NFA membership.

"All of these factors have resulted in a significant gap between revenue and expenses," said Hawrysz. "In order to make the forex regulatory program a self-sustaining program and attempt over time to eliminate the accumulated deficit we have already experienced, NFA must generate significantly more forex-related revenue."

NFA has proposed to increase forex-related revenue in three areas. First, NFA proposes to increase the annual membership dues for non-FDM Members engaging in retail forex activities from $750 to $2,500.

"We believe that these non-FDM Members should bear a greater share of the costs associated with regulating their forex business," said Hawrysz.

The second component of the fee increase relates to NFA's Forex Transaction Reporting Execution Surveillance system (FORTRESS), which NFA uses to monitor FDM trading practices on a daily basis. NFA proposes to assess a fee of $.002 on all order segments processed through FORTRESS. Currently, FORTRESS processes approximately 60 million order segments each month.

The final element of the fee change proposal is an increase in FDM membership dues. The FDM membership dues are based on the FDM's annual gross revenue. Along with the dues increase, NFA proposes eliminating the assessment fee that FDMs currently pay on each forex transaction, which has proved difficult to administer.

The full text of NFA's rule submission letter to the CFTC can be found here.
 
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