CFTC issues final forex exchange market rule

They didn't make it illegal directly per se, they made it illegal for US banks to facilitate the transfer of funds from US citizens to offshore gambling sites. Thus, it's still possible for US citizens to use offshore gambling sites, they just have to skirt the US banking system as a direct means of funding.

 

I skimmed thru all 167 pages of the CTFC PDF and didn't see any new language to support the offshore provision in the Dodd bill. I'm guessing this leaves the issue in relative limbo. They can come out with additional rules anytime, but until then, I imagine the 'London Loophole' stays open.

 

http://www.ibfx.com/Corporate/post/...ules-Regarding-Retail-Forex-Transactions.aspx

 

Very interesting. I spoke with someone at a broker that recently opened a Malta location, and they claimed exactly the opposite—that this would not affect their ability to service US customers at all.

 

Blog tonight: New CFTC forex trading rules call for 50:1 leverage

August 31, 2010

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. http://www.ibfx.com/Corporate/post/...ules-Regarding-Retail-Forex-Transactions.aspx

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 http://www.cftc.gov/PressRoom/PressReleases/pr5883-10.html

Final rule regarding retail foreign exchange transactions: Click here http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexfinalrulefactsheet.pdf

Questions and answers regarding final retail foreign exchange rule: Click here http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexfinalrule_qa.pdf

CFTC unveils retail currency-trading rules: Click here http://online.wsj.com/article/SB10001424052748704421104575463480313256258.html

Our Traders Association conference call on Thursday 9/2 at 4:15 will discuss this very important issue. Join on our site. I just invited Charlie Delano, Director of Govt Affairs for FXCM to join us too. Will invite the IBFX person on that link above too.

 

Can American off-exchange retail forex traders evade strict new CFTC rules by trading on offshore platforms?

September 1, 2010

Yesterday, I blogged about the new CFTC rules for off-exchange retail forex traders, and we included some important questions about the possibilities of trading offshore to evade leverage and other constraints too. In today’s blog, I ask and start to answer a few more questions along these lines. The answers are still unclear, and we await new NFA guidance – promised to one forex dealer executive – within days; which hopefully will clarify the offshore questions too.

One leading forex broker executive told me today that the CFTC author of these new retail forex trading rules said - when he asked him about the ban on foreign trading issue - that the Dodd Frank (DF) change about Financial Institutions (FI) being changed to US-only FI (see CFTC Q&A "who can offer.." section) won't be made for 360 days from DF enactment (7/21/10). This one year's timeframe gives adequate time to EU banks offering forex trading to U.S. customers to register in the U.S. But I think FI refers to banks and not CFTC-registered FCMs, which probably include the FDMs (forex dealer merchants, the prior designation) too. The DF list has FI, SEC-registered, and CFTC-registered companies, plus insurance companies and more. FI and FCM seem to be different categories.

So if this forex broker says that their U.S. retail forex traders using offshore platforms from their affiliates have more time - 360 days to close accounts - that may not be true in my view. If the foreign account is deemed a foreign affiliate of an existing CFTC-registered FDM, then using the (FI-only) 360 day extension seems inappropriate to me. If it's a foreign institution like an EU bank with no U.S. CFTC-registered FCM or FDM registrations, then maybe it’s okay to use the 360 day extension.

Hopefully, the NFA and/or CFTC will clarify this important issue further soon. There are plenty of people asking these important questions, as thousands of Americans have offshore retail forex trading accounts.

For foreign FI, it makes sense to me that DF gives 360 days to foreign institutions to form U.S. affiliates if desired. To spring a prohibition on foreign financial institutions offering forex trading to U.S. customers as of October 18, 2010 (the effective date of the new CFTC rules) would be extremely undiplomatic on global country-by-country dealing basis. There may be lawsuits and diplomatic requests made and this takes plenty of time to deal with properly.

This type of financial transaction/trading protectionism is rearing its ugly head on several international stages already. The U.S. is upset about EU rules and proposed rules requiring U.S.-based investment advisers to register in the EU for a required "passport" to raise money from EU investors - and this is a huge problem for the U.S. based investment management industry. EU banks are upset about new U.S. tax rules “FATCA” requiring EU banks to identify and report to the IRS U.S. customers in their ranks. FATCA ties in with this FI US-only forex trading rule too, as FATCA can help enforce this DF forex trading prohibition.

The forex dealer executive told me the NFA told him they planned to issue a notice to members shortly - perhaps today or in a few days - to clarify DF and the new CFTC retail forex trading rules, mostly for implementation issues. This expected notice may not speak to the foreign trading issues, although hopefully it will.

One big implementation issue is how currently CFTC-registered FDMs (under CRA) go about converting their registrations to the new DF-category of RFED? Will it be automatic or not? How can FDMs make many changes in their registration by October 18th, the implementation date for the new CFTC rules?

Why do many U.S. forex dealers currently use offshore platforms and affiliates? This executive told me for "Seg" (segregation) of funds in the UK for asset protection purposes. He said that if a U.S. person files for bankruptcy in the U.S., their UK forex trading account capital and rights are protected from U.S. bankruptcy courts. Leverage is unlimited in the UK, but usually 100:1. U.S. customers avoid the controversial NFA's hedging rule, when trading in the UK. When I asked about it, he said capital is not a big issue, many U.S. forex dealers can absorb more U.S. customers to repatriate from the UK and other international affiliates. I presume that leading forex dealers can move UK capital back to U.S. too as needed? This executive says non-residents (international business) may want to stay in the UK since the U.S. leverage is lowered to 50:1. He said U.S. platforms can handle things. The biggest concern is potential upsetting some U.S. clients who already bothered to set up foreign-based accounts and now may have to redo all the paper work back into the U.S.

U.S. FDMs in the forex dealer coalition are fine on these new rules per this executive. Most are already registered as FDMs and compliant with the NFA. 50:1 leverage is reasonable in their view. They expect the RFED change to be fairly easy to accomplish.

I see a big problem for foreign forex dealers operating from tax havens. Most don't have U.S. operations or branches and they won't want to register in the U.S. Registration for foreign companies probably requires a U.S. operation, subsidiary or branch office designation. Branch office taxes can lead to trouble on Section 482 transfer pricing tax issues (where the profits are booked). If the IRS finds trouble with tax haven cheating, the IRS and regulatory authorities can pounce on these institutions U.S. operations and branches etc. Therefore, I presume that many tax-haven forex dealers may lose lots of forex trading business to CFTC-registered RFEDs who will be happy to win back this business.

Forex IB (Introducing Broker) CFTC-registration changes are important too. The final rules are better than expected from the proposed rules. With final rules, a forex IB can simply register with the NFA on their own, in the same manner as futures IBs do now. They don't need that troublesome (proposed rule) guarantee from an FDM. Few FDMs want to take that kind of risk or tie-up their capital by guaranteeing a forex IB.

There are many characters in the forex industry that inappropriately blur the lines between education, investment advice, money management and other related services. Many of these forex players may be drawn into registration in some capacity with the NFA and CFTC, perhaps as an IB, and many will want to avoid that registration for many different reasons. Some may have trouble passing NFA back ground checks. Others don't want the NFA oversight over their perhaps fraudulent or inappropriate business models. Many don't want to be burdened with other rules like disclosure and reporting. Many will surely have trouble with the conflicts of interest rules too.

Congress and regulators have thrown the forex trading industry a huge curve ball and deadline and we are all scurrying to get answers to important questions.

My colleague Brent Gillett, JD and his associate at the Investment Law Group just wrote an article on these rule changes too. Click here http://www.investmentlawgroup.com/index.php?option=com_content&task=view&id=227&Itemid=127 to read their article.

 

The above posts were edited for my blog on forbes and our website too. Greencompany

 

Robert,

Thank you for organizing the call Thursday after the close. Very informative.

 

Thanks. Please give the link for this Traders Association podcast. I'm not allowed to post links to our site on Elite.