Series 34 Exam
Study Guide

Forex Counterparty & Regulated Entities

Counterparties or dealers act as counterparties to off-exchange retail forex transactions. Examples of counterparties are Futures Commission Merchants (FCMs),  Retail Foreign Exchange Dealer (RFEDs), and other regulated entities listed in the Commodity Exchange Act

Futures Commission Merchant (FCM)

The term “futures commission merchant” means an individual, association, partnership, corporation, or trust that:

(A) is engaged in soliciting or in accepting orders for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market or derivatives transaction execution facility;

and

(B) is in or in connection with such solicitation or acceptance of orders, accepts any money, securities, or property (or extends credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result or may result there from.

Retail Forex Exchange Dealer (RFED)

A retail forex exchange dealer is a firm acting only as the counterparty to retail off-exchange foreign exchange contracts. These firms will be required to register as Retail Foreign Exchange Dealers (RFEDs).

→ NOTE:

An RFED or an FCM that is substantially engaged in on-exchange activities and acts as a retail forex counterparty will be designated under NFA rules as an approved forex dealer member (FDM) of NFA.

Forex Dealer Member

The term “forex dealer member” is not defined in the Commodities Exchange Act (CEA) and is not a specific CFTC registration category. The term “forex dealer member” was simply created by the NFA. In general, forex dealer members are NFA Members who act as counterparties to forex transactions. This is a self-executing requirement, which means that any NFA Member who qualifies is automatically a forex dealer member. There is no application form and no approval requirement.

Commodity Pool Operator (CPO)

A CPO is a person engaged in a business similar to an investment trust or a syndicate and who solicits or accepts funds, securities, or property for the purpose of trading commodity futures contracts or commodity options. The commodity pool operator either itself makes trading decisions on behalf of the pool or engages a commodity trading advisor (CTA) to do so.

Commodity Trading Advisor (CTA)

A CTA is a person who, for pay, regularly engages in the business of advising others as to the value of commodity futures or options or the advisability of trading in commodity futures or options, or issues analyses or reports concerning commodity futures or options.

Associated Person (AP)

An AP is an individual who solicits or accepts (other than in a clerical capacity) orders, discretionary accounts, or participation in a commodity pool, or supervises any individual so engaged, on behalf of a futures commission merchant, an introducing broker, a commodity trading advisor, a commodity pool operator, or an agricultural trade option merchant.

Principal

A principal of a firm is:

• a sole proprietor of a sole proprietorship or a general partner of a partnership;

• a director, president, CEO, COO, CFO, or a person in charge of a business unit, division or function subject to regulation by CFTC of a corporation, limited liability company or limited partnership; or

a manager, managing member, or a member vested with the management authority for a limited liability company or limited liability partnership; or an individual who directly or indirectly, through agreement, holding companies, nominees, trusts or otherwise:

• is the owner of 10% or more of the outstanding shares of any class of an entity’s stock;

• is entitled to vote 10% or more of any class of an entity’s voting securities;

• has the power to sell or direct the sale of 10% or more of any class of an entity’s voting securities;

• has contributed 10% or more of an applicant or registrant’s capital;

• is entitled to receive 10% or more of an applicant or registrant’s net profits; or

• has the power to exercise a controlling influence over an applicant or registrant’s activities that are subject to regulation by the Commission; or

an entity that

• is a general partner of a partnership;

• is the direct owner of 10% or more of any class of an entity’s securities; or

• has directly contributed 10% or more of an applicant or registrant’s capital unless such capital contribution consists of subordinated debt contributed by:

• an unaffiliated bank insured by the Federal Deposit Insurance Corporation;

• a United States branch or agency of an unaffiliated foreign bank that is licensed under the laws of the United States and regulated, supervised and examined by United States government authorities having regulatory responsibility for such financial institutions; or

• an insurance company subject to regulation by any State.

Introducing Broker (IB)

An IB is a firm or individual that solicits and accepts futures orders from customers but does not accept money, securities or property from the customer. An IB must be registered with the CFTC and must carry all of its accounts through an FCM on a fully disclosed basis. The new CFTC rules have made it a requirement for all introducing broker to be guaranteed by an FCM. This type of IB has no minimum capital or financial reporting requirements. All of the accounts of a guaranteed IB must be carried by the guaranteeing FCM.