Congress took a new approach with the CFTC in the Dodd-Frank bill. The CFTC was dragging its feet on Congress's CFTC Reauthorization Act of 2008 (CRA) calling for forex regulation, which had been mostly overlooked by regulators for decades. With Dodd-Frank, retail forex trading will become illegal for non-participants (traders) unless the CFTC finishes its new forex regulations in short order (Dodd-Frank Bill Section 742(c)). The comment period on the CFTC proposals published in January expired and I expect rules to be published soon. We imagine the CFTC will drastically reduce allowable forex leverage from existing 100:1 to a significantly lower amount, but perhaps not as far as its proposed rule change of 10:1 leverage. Will American forex traders be able to continue using foreign trading platforms to escape the reach of Fin Reg and the CFTC (including these new rules)? You can follow the progress of these regulatory changes on the CFTC site here http://www.cftc.gov/LawRegulation/OTCDerivatives/otc_rules.html. Also, see the WSJ article "Financial Bill Could Set The Stage For Uneven Retail Forex Rules" dated July 30, 2010 at http://online.wsj.com/article/BT-CO-20100730-715762.html. Dodd-Frank Section 742(c) has two areas of concern. It updates the Commodity Exchange Act (CEA) Section 2(c)(2)(D) Spot Commodities (Metals) and Section 2(c)(2)(E) Spot Forex. See a link to the bill text below. Google these Sections as well. The Dodd-Frank Fin Reg bill may extend the CFTC's rules for retail forex trading to foreign trading platforms marketed to Americans too. This might mean that U.S. resident traders wonât be able to evade new CFTC rules for (perhaps) 10:1 leverage (proposed) and LIFO trading (recent NFA rule change) by using a UK or other foreign trading platform. Some foreign forex trading platforms offer 200:1 leverage and spread-betting too (no requirement for LIFO accounting). We are working on this very important question for U.S. forex traders now and hope to have answers soon. We will discuss this issue and perhaps have more answers on our conference call Thursday at 4:15pm ET. We discussed it on last week's podcast too. As of now, the CFTC has not finalized its January 2010 proposed rule changes for trading retail forex, including a reduction of leverage from 100:1 to 10:1. http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-456a.pdf I asked the above questions to a tax and regulatory attorney colleague and he replied by email. âOur 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 US going to invade the Cayman Islands?)" I asked him these further questions and he said he would reply soon. If 10:1 retail forex trading leverage is enacted by the CFTC/NFA, can U.S.-based retail spot forex brokers easily move over their U.S. trading customers to their UK affiliates on UK platforms? Wouldn't that constitute a U.S. broker marketing/soliciting to a U.S. customer and switching them to a foreign affiliate to evade U.S. regulations? Based on your general statement (above), 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 your chances in offshore tax havens. Why go to foreign platforms if the rules are the same and perhaps invite more IRS questions? Why go to offshore havens if itâs potentially illegal and a tax problem too? 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? I know many Comments published on the CFTC site http://www.cftc.gov/LawRegulation/OTCDerivatives/otc_rules.html mentioned itâs a bad idea to chase U.S. forex trading business to tax and regulatory-havens where there is 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? Dodd Frank Fin Reg Bill Text http://www.opencongress.org/bill/111-h4173/text?version=enr&nid=t0:enr:371 SEC. 742. RETAIL COMMODITY TRANSACTIONS. Excerpt: PROHIBITION-â(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. If anyone has a link or other information clearly stating that foreign forex trading platforms will be exempt from the reaches of Dodd-Frank Fin Reg on Americans, please let me know and post it here too. Hopefully, American traders can escape the reaches of draconian U.S. rule changes on forex. Better yet, I hope the CFTC does not make such draconian changes.