Friday, February 19, 2010


In an attempt to fight fraud, the Commodity Futures Trading Commission (“CFTC”) issued a proposal that would give the CFTC tighter control over off-exchange foreign currency transactions made with retail members. The proposal is open for comment until March 22, 2010.

Traditionally, the CFTC has regulated commodity futures and options markets. However, as these markets have expanded out of agricultural goods into an array of highly complex financial futures contracts, the CFTC has extended its regulations to control these complex transactions. Falling into this category, certain leveraged or margined contracts made in foreign currencies that are offered to and sold to retail customers, or so called FOREX transactions, are now regulated by the CFTC.

The proposed comprehensive regulatory agenda would implement more stringent requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards for transacting retail FOREX trades. More specifically, the proposed regulations would require persons acting as counterparties to a retail FOREX transaction to be registered as foreign exchange dealers (“RFED”) with the CFTC. Counterparties that are primarily engaged in the exchange traded futures business or are registered futures commission merchants (“RFCM”) would be exempt from this registration requirement. Any registering RFED or RFCM would be required to have a $20 million minimum net capital requirement. Also, these registrants would have to collect security depositions in a specified minimum amount in order to limit the leverage available to retail clients. Registrants would also be required to seek approval for an additional volume-based minimum capital threshold that would be calculated based upon the amount that registrant owed as a counterparty to a retail FOREX transaction.

More importantly, the proposed changes would extend the registrations requirement beyond the immediate counterparties to the intermediaries of the transaction. Accordingly, intermediate parties that introduced a retail FOREX transaction to an RFED or RFCM would have to register with the CFTC as an introducing broker, commodity trading advisor, commodity pool operator, or associated persons of the RFED and RFCM and comply with the appropriate set of existing rules. Additionally the proposal would require any introducing broker that introduced a retail FOREX transaction to an RFED or RFCM to be guaranteed by that introduced party.

Critics claim that these additional regulations will stifle the current retail FOREX market, while others claim the regulations will mean more money in fund managers’ pockets. However, most can agree that the regulations are a fraud fighting measure meant to instill more confidence in the marketplace.

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