Offshore Retail Forex Trading Accounts For Americans Are Being Forced Back To The U.S.

September 23, 2010 | By: Robert A. Green, CPA

Forbes

Offshore Forex Trading Is Heading Back To U.S. Shores

New CFTC retail forex rules are going into effect exactly as we thought they would. Although we’re still waiting for more formal guidance from the CFTC and NFA, they both have improved their Web site sections on the subject. 

Foreign accounts transferred back to the U.S.
Most U.S.-based retail forex brokers (not banks) are registering with the NFA as RFEDs. If they don’t register their foreign affiliates as RFEDs too, they’re automatically transferring all U.S. resident retail forex trading accounts back to their U.S. RFED firms, by the CFTC’s Oct. 18 deadline. The trader has no choice in the matter.

Remember, the new retail forex rules do not apply to “eligible contract participants,” which are large non-retail accounts defined in prior blogs and in the rules. We’re noticing that more and more offshore brokers who first thumbed their noses at the new rules are falling into line and respecting the rules. 

Foreign commercial banks unaffiliated with any U.S.-based FCM or RFED may have a 360-day extension from registering as a U.S. financial institution. We heard they may have 360 days from the date Dodd Frank Fin Reg was enacted (July 21). We have not confirmed this yet, though. 

Dummy offshore corporations: Not a good idea
Even if you hear from some that the CFTC may focus its enforcement efforts against foreign unregistered intermediaries rather than on individual traders, it’s important to understand the CFTC considers evasion a “prohibited transaction.” Forming a dummy offshore corporation to open a retail off-exchange forex trading account with an unregistered offshore bank or broker is considered evasion, according to the CFTC. Attorneys, CPAs and financial advisors who suggest using dummy corporations to evade these CFTC rules may face challenges by their professional license boards and bars on infractions to their ethical codes of conduct. 

If you are foolish enough to use a dummy offshore corporation in this regard, you still need to disclose your American ownership of the corporation to your foreign broker, who may deny the account treating it as an American-owned account. If you don’t make that “know the client” disclosure, the broker may have grounds to take action against you. 

RFED U.S.-based forex accounts lack protection
Commercial banks like Citi FX Pro offer FDIC insurance protection and segregation protection in bankruptcy. Securities brokers offer SIPIC protection. Futures brokers don’t have any quasi-governmental insurance protection, but at least they have a “segregation” of assets regime in a bankruptcy filing, which is a lesser form of protection. 

The problem for RFED forex brokers in the U.S. is they don’t have a quasi-governmental insurance program and they can’t even offer futures segregation protection in a bankruptcy filing either. For this reason, some U.S. forex brokers previously suggested that their clients use their affiliates offshore. We heard that the UK offered some money protection on forex brokerage accounts. 

In a bankruptcy filing in the U.S. (think Refco), segregated futures accounts have seniority over other creditors and equity holders, so futures account holders get paid first. The problem for forex accounts with RFEDs is that futures segregation regimes aren’t respected on forex accounts in bankruptcy filings because the rules refer to futures traded on exchanges and forex is traded off exchange. This is an oversight from Congress. This is not the case for commercial banks; only brokers. 

A CFTC official told me he feels forex is still safer under their new rules with registration of RFEDs, minimum capital requirements, better disclosure and lower leverage. There may be some money protection issues in the UK, but working with an unregistered broker or bank and using unlimited leverage might make it more unsafe overall. Traders may have trouble and higher costs seeking remedies in foreign jurisdictions too. If a retail trader enters a prohibited transaction working with an unregistered RFED offshore, he may not have rights to use U.S. courts either. Some forex brokers in the UK and other jurisdictions may register with the NFA as RFEDs and then continue to offer money protection in the UK, although they will still need to adhere to the new CFTC rules on leverage and more.

Bottom line
If you trade retail forex off exchange, make sure your broker or bank is duly registered in the appropriate manner with the CFTC, as either an RFED with the NFA or a commercial bank (U.S. or foreign) with U.S. bank regulators. Both RFEDs and commercial banks may offer leverage up to 50:1 on the major currencies. Only the commercial bank may offer protection on your money. Skip the idea of setting up a dummy offshore corporation to work with a non-registered foreign broker or bank. 

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