Obama Threatens Forex

Obama Threatens Forex
By James Bibbings
Created 3 Aug 2010

On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform Act” (the “Dodd-Frank Act” or “Act”). The Dodd-Frank Act most likely will bring about sweeping regulatory changes within the financial services industry. However, at over 2,300 pages in length, few people have read this legislation in its entirety. Of those individuals who have read the Act, few can comprehend the implications of such sweeping reform. As a result, the President of Turnkey Trading Partners (“TTP”), James Bibbings, has teamed up with attorney Nicole Kuchera, from Chicago’s Henderson & Lyman, to review the content of the Dodd-Frank Act. Through this process we were able to identify some areas of the Act that are most likely to affect Commodity Futures Trading Commission (“CFTC”) regulated entities and National Futures Association (“NFA”) member firms.

The impact of the Act on commodity futures, over-the-counter retail foreign currency (“OTC forex”), and over-the-counter retail precious metals (“OTC metals”) transactions has been largely ignored by the media to date. Although the Dodd-Frank Act has been championed as a victory for consumer protection and rigid Wall Street reform, there is little actual clarity with respect to its practical implications. Since being signed into law, FCMs, IBs, CPOs, and CTAs have reached out to us regarding the vast amount of regulatory uncertainty now present in the financial industry. To assist commodities firms in complying with and understanding the Dodd-Frank Act, we have attempted to identify several of its most sweeping provisions. Our thoughts do not constitute legal advice and should not be relied upon in particular circumstances. We recommend that you contact competent counsel or a legal professional before taking any action in this complex area.

That being said, based on the current language of the Act, the following four areas are likely to have the most significant implications for commodity futures, OTC forex, and OTC precious metals market participants:

Elimination of OTC Forex

Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:

This provision will not come into effect, however, if the CFTC or another eligible federal body issues guidelines relating to the regulation of foreign currency within 90 days of its enactment. Registrants and the public are currently being encouraged by the CFTC to provide insight into how the Act should be enforced. See CFTC Rulemakings regarding OTC Derivatives located at the following website address [1], under Section XX – Foreign Currency (Retail Off Exchange). As this provision is potentially devastating to the forex industry, affected readers are encouraged to voice their opinions to the CFTC directly. To do so commentary should be forwarded to via email to:

Secretary@cftc.gov

Attn: David A. Stawick, Secretary

Commodity Futures Trading Commission

Three Lafayette Center

1155 21st Street, NW

Washington, DC 20581

It is essential that OTC forex participants seek professional help to discuss possible operational and regulatory contingency plans.

Elimination of OTC Metals

As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]from entering into, or offering to enter into, a transaction in any commodity with a person that is not an eligible contract participant or an eligible commercial entity, on a leveraged or margined basis. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC to pursue anti-fraud actions involving rolling spot transactions and/or other leveraged forex transactions without the need to prove that they are futures contracts. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

Small Pool Exemption Eliminated

Pursuant to Section 403 of Act, the “private adviser” exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”), will be eliminated within one year of the Act’s effective date (July 21, 2011). Historically, many unregistered U.S. fund managers had relied on this exemption to avoid registration where they:

(1) had fewer than 15 clients in the past 12 months;

(2) do not hold themselves out generally to the public as investment advisers; and

(3) do not act as investment advisers to a registered investment company or business development company.

At present, advisers can treat the unregistered funds that they advise, rather than the investors in those funds, as their clients for purposes of this exemption. A common practice has thus evolved whereby certain advisers manage up to 14 unregistered funds without having to register under the Advisers Act. Accordingly, the removal of this exemption represents a significant shift in the regulatory landscape, as this practice will no longer be allowable in approximately one year.

Also an important consideration, the Dodd-Frank Act mandates new federal registration and regulation thresholds based on the amount of assets a manager has under management ("AUM"). Although not yet underway, it is possible that various states may enact legislation designed to create a similar registration framework for managers whose AUM fall beneath the new federal levels.

Accredited Investor Qualifications

Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals:

A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor's primary residence;

A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or
A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.
Based on this language, it is important to note that the revised accredited investor standard only applies to new investors and does not cover existing investors. However, additional subscriptions from existing investors are generally treated as requiring confirmation of continuing investor eligibility.

On July 27th, 2010, the SEC provided additional clarity regarding the valuation of an individual’s primary residence when calculating net worth. In particular, the SEC has interpreted this provision as follows:

James Bibbings and Nicole Kuchera

Co-Authors: Nicole Kuchera

 

Yes, can we please have this order flow done on the exchanges so we can all benefit from the liquidity provided by uninformed traders rather than it being internalised in the bucket shops...

 

I can't wait for these changes. You got it!

 

You guys are able to read, right?

"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"

Meaning, NFA or Cftc registered firms wont be affected.

 

Soo...would this mean it is illegal for me as a customer from the USA to use IBFX Australia as my dealer....or any Forex firm that is not regulated by the CFTC and enforced by the NFA?

ES

 

in Canada each province/territory has its own financial regulator and here in British
Columbia the regs required brokers to have a physical office in the province in order
to do business with BC residents, although there's an out via a national registration
- still requiring a physical office

bottom line is I now have a choice of 3 fx brokers; several UK and US brokers state
on their sites they don't accept applications from BC residents - applications from
Canadian residents of other provinces are accepted

currently I have an account with an fx broker in another country but they recently
emailed me to say they will no longer do business with North American clients
although they haven't stated it's a direct result of Canadian/US regulations

I haven't checked to learn which brokers in which countries will/not accept a BC
resident's application - or any client from NA for that matter - the main reason I went
off-shore was high margin - but I'll presume if the UK brokers won't accept my app
it'll be the same at all the other EU brokers and probably Australian brokers too

 

The U.S. and B.C. rules can only under international law be applied to foreign entities if those entities have a presence (such as an office or advertising) in the U.S. or B.C. respectively.

Most banks and large brokers have affiliates in the U.S. and Canada, or might have same in the future, so they are afraid that that might be enough at some point for a U.S. or Canadian court to decide that they had a presence there and hence were subject to those laws.

If you look far and wide, you may find some foreign forex dealer that has no connection to the U.S. or Canada, or has a very aggressive legal department that is prepared to fight off (or ignore) attempted regulation from the U.S. and Canada.

I have seen cases where if you sign a form attesting that you were not solicited to open the account, the broker will allow you to open it.

 

More regulation . Good for customers/investors bad for brokers . They will hire there lobbyist and make it look like its bad for america and its a socialist move. I look forward to it . Bringing down the leverage was a good start for newbies to stop losing there shirts .

 

No, it's bad for customers/traders who know what they're doing and use higher leverage profitably and responsibly. Idiots who can't even spell "their" correctly deserve to lose their shirts if they venture into something (FX) beyond their capacity.

 

If your using the 100:1 your obviously a broke ass trader trying to make a living off a $5K account. That's what the brokers love is a guy like you putting $10K in an account and trying to make $60 K a year.