On September 10, 2010, the CFTC published in the Federal Register final regulations concerning off-exchange retail foreign currency transactions. (75 Fed. Reg. 55410.) The rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions. The final rules become effective October 18, 2010.
The final forex rules put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards. Specifically, the regulations require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. “Otherwise regulated” entities, such as financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.
The final rules include financial requirements designed to ensure the financial integrity of firms engaging in retail forex transactions and robust customer protections. For example, FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries are required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements.
In 2001, 2002, and 2007 – prior to the release of the proposed and final rules – the Commission and Division of Clearing and Intermediary Oversight had issued a number of advisories regarding foreign currency trading by retail customers. These advisories are superseded and no longer effective.
The CFTC’s regulatory jurisdiction does not extend to fraudulent activities in connection with using U.S. dollars to purchase foreign currency for its actual physical delivery.
Final Rule: Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries
Performance of Registration Functions by National Futures Association With Respect to Retail Foreign Exchange Dealers and Associated Persons
Proposed Rule: Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries; Comment File: 748
Fact Sheet for Final Rule Regarding Retail Foreign Exchange Transactions
Questions and Answers Regarding Final Retail Foreign Exchange Rule
CFTC Releases Final Rules Regarding Retail Forex Transactions
Fraud Advisory from the CFTC: Foreign Currency (Forex) Fraud
CFTC Brochure on Forex Fraud (PDF)
Foreign Exchange Currency Fraud: CFTC/NASAA Investor Alert