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CFTC Adopts Final Rules to Regulate Over-the-Counter Retail Forex

CFTC Adopts Final Rules to Regulate Over-the-Counter Retail Forex

Tuesday, 31 August 2010 06:17

The CFTC has adopted final rules to regulate over-the-counter (OTC) or off-exchange retail forex. The CFTC was forced to move quickly after Congress passed the recent Dodd-Frank Wall Street Reform Act. Below are the notable differences between the proposed rules from January 2010 and the final rules, released yesterday, which will become effective on October 18, 2010.

The proposed 10 to 1 leverage restriction has been replaced with a mechanism whereby the Commission sets parameters (the release specifies a minimum 2 percent security deposit in the case of major currencies and 5 percent of the notional value of the transaction for all other currencies) and periodically reviews the appropriateness of those parameters. NFA is authorized to set specific security deposit levels within those parameters, and is required to review periodically and adjust as necessary both the particular security deposit levels and the designation of which currencies are major currencies, in light of such factors as changes in volatility.

The proposed requirement that a person who registers as an IB to introduce retail forex accounts must be guaranteed by a registered FCM or RFED (and that the IB could be guaranteed by only one FCM or RFED) has been replaced with the same requirement that currently applies to IBs who introduce futures and commodity interest accounts. A forex IB may choose either to meet the minimum net capital requirements applicable to futures and commodity options IBs, or to enter into a guarantee agreement with an FCM or an RFED.

The final rules retain the requirement for RFEDs and FCMs that engage in retail forex transactions to disclose on a quarterly basis the percentage of non-discretionary accounts that realized a profit and to keep and make available records of that calculation. The final rule, however, clarifies that a retail forex account will be considered either profitable or not profitable, with not profitable including accounts that break-even. Further, only non-discretionary accounts that are not proprietary are to be considered. Finally, the recordkeeping requirement is prospective and will not require reconstruction of transactions pre-dating the effectiveness of the final rules except insofar as necessary to comply with the requirement that disclosure documents include a statement of profitable and not-profitable accounts for the preceding four quarters.


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