August 2010

New CFTC Forex Trading Rules Call For 50:1 Leverage

August 31, 2010 | By: Robert A. Green, CPA

Forbes

New CFTC Forex Trading Rules Call For 50:1 Leverage

The CFTC has published its highly anticipated final rules for trading off-exchange retail forex. As discussed on prior blogs, the recently enacted Dodd-Frank Fin Reg bill forced the hand of the CFTC to act by Oct. 19 because it would otherwise bar non-eligible contract participants from off-exchange retail forex trading. The CFTC acted in the nick of time because these new rules are effective on Oct. 18, 2010 — one day before the Dodd-Frank deadline. 

Some of the changes are crystal clear — like new 50:1 leverage limits on major forex currencies — but the equally important rule about allowing or barring offshore trading is not yet clear per documents published to date. One off-exchange retail forex broker concluded Tuesday that offshore trading won’t be allowed after the effective date, implying that offshore forex brokers will have to register with the CFTC as well and will be subject to these same new rules. 

The CFTC’s new leverage rule calling for a minimum 2 percent deposit on trading major forex currencies off exchange (50:1 leverage) seems on par with what commercial banks like Citi FX Pro offer their retail forex trading customers now. 

It’s a wise move by the CFTC to reduce leverage by two times — 100:1 to 50:1 under the new rules — rather than going way over board with its original proposal of 10:1 leverage. Unlike most off-exchange retail forex dealers in the U.S., Citi FX is not regulated by the CFTC; it is subject to bank regulation. 

It’s important to note the CFTC grants the NFA powers to set leverage rules higher than these new minimum percentages. 

Thankfully, the CFTC responded to the pleas from the off-exchange retail forex trading industry saying the CFTC’s proposed 10:1 leverage rule would put the industry at a huge competitive disadvantage to on-exchange currency futures trading (30:1), commercial bank forex trading (50:1) and offshore off-exchange retail forex trading (200:1). The new deposit rule for non-major currencies is 5 percent (20:1).

Regulators and Congress are often sensitive to chasing business (and fraud) abroad with new rules as well as taking business away from small businesses and handing it over to big banks. The CFTC also wants the U.S. to remain competitive for foreign traders, as foreign traders can continue to trade offshore without concern about registration in the U.S. 

It seems these new rules will put a stop to Americans trading retail forex offshore to evade CFTC rules. That trend picked up the pace in recent years and it may need to be reversed quickly. But we aren’t completely certain of this yet. We will study the new rules and see if offshore trading remains feasible for Americans under extraterritorial provisions of the Dodd-Frank Fin Reg bill. (We discussed how offshore trading might be a problem for American’s using offshore forex platforms on our recent blog and podcast.) 

We base our initial thoughts on the first documents released by the CFTC (links below). In the CFTC’s Q&A document, see the “Who can offer off-exchange forex transactions to retail customers” section. It states that Dodd-Frank Fin Reg changed the definition of allowable financial institutions to “only U.S. financial institutions.” The next section, “What is the scope of the CFTC’s jurisdiction,” implies that unless the entity is regulated by the SEC or bank regulators – again for U.S.-only financial institutions – the default catchall regulator is the CFTC. It makes sense that the CFTC would act in this manner, but again, we aren’t certain of these rules yet. Nothing in these CFTC documents specifically exempts offshore forex platforms or brokers from these new rules, either. Stay tuned for further observations.

For more information: 

CFTC releases final rules regarding retail forex transactions: Click here. 

Final rule regarding retail foreign exchange transactions (summary): Click here.

Federal Register: Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries:Click here.

Questions and answers regarding final retail foreign exchange rule: Click here.

CFTC unveils retail currency-trading rules: Click here.


U.S. Forex Traders May Not Be Able To Skirt Rules By Moving Accounts Offshore

August 10, 2010 | By: Robert A. Green, CPA

Forbes

Long Arm Of Congress Leans On Forex Traders

The Dodd-Frank Fin Reg bill may extend the CFTC’s rules for retail forex trading to foreign trading platforms that are also marketed to Americans. This might mean U.S. resident traders won’t be able to evade CFTC rules for the proposed 10:1 leverage and the recent LIFO trading NFA rule change by using a foreign trading platform. Some foreign forex trading platforms offer 200:1 leverage and spread betting (no requirement for LIFO accounting).

The CFTC hasn’t finalized its January 2010 proposed rule changes for “Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries”, including a proposed reduction of leverage from 100:1 to 10:1.

A tax and regulatory attorney colleague replied to my questions on these issues: “Our Congress takes a very broad reach of the extraterritorial reach of our securities and commodities regulatory laws. Solicitation of customers who are U.S. persons — even though the solicitation is made outside the U.S. by a non-U.S. person — is covered. That is why, for example, foreign futures exchanges that want to offer their products to U.S. customers must obtain a 30.10 order from the CFTC qualifying them to solicit U.S. customers. As a practical matter, of course, enforcing that extraterritorial jurisdiction can be difficult (is the U.S. going to invade the Cayman Islands?)”

If 10:1 retail forex trading leverage is enacted by the CFTC/NFA, can U.S.-based retail spot forex brokers easily move their U.S. trading customers to their UK affiliates? It seems like the U.S. broker would be switching them to a foreign affiliate to evade U.S. regulations, and based on my colleague’s statement, I think it could be a problem.

U.S. forex traders may be left with two unfortunate choices. Trade on CFTC-sanctioned foreign OTC platforms respecting CFTC rules on LIFO and perhaps 10:1 leverage or take their chances in offshore tax havens (reportable on tax returns). Why go to foreign platforms if the rules are the same and perhaps invite more IRS questions? Why go to offshore havens if it’s potentially illegal and a tax problem – with the IRS scrutinizing offshore accounts?

Tax-haven platforms may never get CFTC sanction, so will they be illegal under Dodd-Frank, or, will it be a viable way to navigate around the U.S. forex trading leverage constraints?

Many comments published on the CFTC site say it’s a bad idea to chase U.S. forex trading business to tax and regulatory havens where there’s much more fraud. The way Congress wrote Dodd-Frank, it seems like it’s either going to be sanctioned by U.S. regulators or prohibited entirely. Can a U.S. person report forex transactions on their tax return from counterparties that are not sanctioned?

My colleague said Dodd-Frank Section 929Y has one reference to “extraterritorial” (which means ”foreign”) saying the SEC has jurisdiction to regulate extraterritorial swap contracts. We think this same extraterritorial concept may apply to retail forex trading too. The CFTC regulates retail forex, whereas the SEC has authority over swaps. The Dodd-Frank bill couldn’t possibly mention every point, leaving much to interpretation by regulators. We think the CFTC may interpret the legislative text to mean the CFTC has extraterritorial control over retail forex too. It would be too simple for Americans to avoid the new rules with foreign brokers otherwise. If the CFTC has extraterritorial powers on retail forex, then foreign-based brokers will probably not do business with non-eligible contract participants. Good size hedge funds and proprietary trading firms may be qualified participants. Foreign banks and brokers with U.S. affiliates will fear the U.S. regulators attacking their U.S. operations. 

Might there be an opening for retail forex trading to move into prop trading firms — with traders joining these firms as partners — inside and outside the U.S.? By combining trading capital with other traders, a group of individuals may achieve eligible contract participant status. There are regulatory problems with prop trading firms too, as covered on this blog. 

We’re working on these very important issues for U.S. forex traders. We hope to have more information on our conference call Thursday at 4:15pm ET. We discussed it on last week’s podcast too.

Excerpts from the Dodd-Frank bill:

Dodd-Frank SEC. 742. RETAIL COMMODITY TRANSACTIONS.
PROHIBITION-‘(I) IN GENERAL- Except as provided in subclause (II), a person described in subparagraph (B)(i)(II) for which there is a Federal regulatory agency shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency described in subparagraph (B)(i)(I) except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe.

Dodd-Frank SEC. 929Y. STUDY ON EXTRATERRITORIAL PRIVATE RIGHTS OF ACTION.
(a) In General- The Securities and Exchange Commission of the United States shall solicit public comment and thereafter conduct a study to determine the extent to which private rights of action under the antifraud provisions of the Securities and Exchange Act of 1934 (15 U.S.C. 78u-4) should be extended to cover-

(1) conduct within the United States that constitutes a significant step in the furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors;

(2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.

(b) Contents- The study shall consider and analyze, among other things–

(1) the scope of such a private right of action, including whether it should extend to all private actors or whether it should be more limited to extend just to institutional investors or otherwise;

(2) what implications such a private right of action would have on international comity;

(3) the economic costs and benefits of extending a private right of action for transnational securities frauds; and

(4) whether a narrower extraterritorial standard should be adopted.

(c) Report- A report of the study shall be submitted and recommendations made to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House not later than 18 months after the date of enactment of this Act.



Close