On January 12, 2010, the Commodity Futures Trading Commission (“CFTC”) issued its proposed rules for the regulation of retail forex transactions (the “Proposal”). In proposing the rules, the CFTC seeks to adopt a “comprehensive regulatory scheme” to implement the CFTC Reauthorization Act of 2008 (the “CRA”)1 with respect to off-exchange transactions in foreign currency with members of the retail public (i.e., “retail forex transactions”). Any interested person may submit comments to the CFTC with respect to the proposed rules for a period of 60 days following publication in the Federal Register.

In the release, the CFTC proposes a regime that would establish requirementsfor, among other things, registration, disclosure, recordkeeping, financial reporting,minimum capital, and other operational standards. Notably—and the guiding theme of the Proposal—is that the CFTC has “endeavored, wherever possible, to apply the principles that have guided it in the Rule of on-exchange instruments.” In other words, retail forex transactions will be subject to significant regulation comparable to that of commodity futures and options.

In summary fashion, major provisions of the Proposal include:

• A new Part 5 to the CFTC’s rules devoted exclusively to retail forex transactions;
• A revised definition of “commodity interest” (i.e., futures) to include off-exchange retail forex transactions over which the CFTC has jurisdiction;
• A requirement that all IBs and all applicants for registration as IBs in connection with retail forex transactions enter into a guarantee agreement with an RFED or an FCM;
• Clarification that an RFED that provides trading advice solely in connection with its business as an RFED would be exempt from registration as a CTA;
• Registration as follows: 1) dealers in retail forex transactions would be required to register as an RFED; 2) persons who solicit or accept orders for an RFED, an FCM, or an affiliate of an FCM would be required to register as IBs; 2) persons who exercise discretionary trading authority over accounts would be required to register as CTAs; 3) persons who operate or solicit funds or property for a pooled investment vehicle would be required to register as CPOs; and 4) associated persons of the foregoing would be required to register as APs.
• Clarification that an FCM that is “primarily or substantially”2 engaged in the futures business may continue to engage in retail forex as an FCM, and need not register as an RFED. However, currently-registered FCMs who solely trade in retail forex, or FCMs who are not “primarily or substantially” dealing in exchange-traded futures, will be required to register as RFEDs;
• A requirement that RFEDs and FCMs engaging in retail forex trading are required to meet a $20 million minimum net capital requirement;
• A requirement that RFEDs and each FCMs that engage in retail forex transactions will be required to collect from the retail forex customer a security deposit equal to ten percent of the notional value of the retail forex transaction, thus imposing a 10:1 leverage ratio;
• A requirement that each “retail forex counterparty”3 would be required to establish and enforce internal rules, procedures and controls: 1) to prevent “front running;” 2) to establish settlement prices fairly and objectively; and 3) to record and maintain transaction records and make them available to customers (including time and price information, account records, trading platform price changes and volume, and any algorithm used to determine bid and ask prices);
• the imposition of the same supervision requirements set forth in Rule 166.3 upon CFTC registrants subject to Part 5.

View original document by Henderson & Lyman Financial Services Practice




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