Dodd-Frank bill seeks to crack down on forex arena

R

Robert A. Green

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 won’t 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. “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 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 it’s 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 it’s 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-‘(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.
 
There appears to be an active effort by lawmakers to force derivatives trading volume from off exchange venues to exchange venues such as the CME. As I understand the financial reform bill will force forward contracts onto exchanges, a big giveaway to the exchange lobby. If they are going to limit retail forex leverage to 10:1, you can bet there will be big volume increases in exchange listed currency futures. Perhaps micro currency futures were created with the anticipation of the dearth of retail forex (due to active lobbying), in anticipation of under capitalized retail forex traders moving to futures to regain their traditional levels of leverage.
 
I agree. I think Congress and the regulators don't trust off-exchange trading. They want transparency, no dark pools, reporting, and rules of the road including reasonable leverage and compliance. They certainly don't want what-they-deem unsophisticated speculators working with lightly or unregistered brokers causing havoc in the markets and unto themselves in private trading outside of regulators view and control. I said all this and more on my Aug. 5th podcast last week. Congress and regulators want to put sand-in-the-wheels of speculators without resorting to a financial-transaction tax (FTT). They don't see this freezing of small speculators as hurting forex liquidity, since its such a huge marketplace. The dollar/Euro had huge up and then down moves recently and that supports reining in leverage in their view. The argument that leverage is okay in forex because the moves are so tiny is no longer valid.
 
The same hypocrites who refused to crack down on Fannie/Freddie 7 years ago or audit the Fed now are going to war on...retail forex traders.

If it's possible, my opinion of Frank and Dodd has fallen to even lower lows...
 
My tax attorney colleague called back to say the following. Dodd-Frank has one reference to "extraterritorial" (which means foreign http://en.wikipedia.org/wiki/Extraterritoriality) saying the SEC has jurisdiction to regulate extraterritorial swap contracts. See Section 929Y excerpted below. We both think that 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 is long and it could not possibly mention every point leaving much to interpretation by regulators. We think the CFTC may interpret the below legislative text to mean that the CFTC has extraterritorial control over retail forex too. It would simply be too simple for American's to avoid the new rules with foreign brokers otherwise. If the CFTC does have extraterritorial powers on retail forex, then foreign-based brokers will probably not do business with non-qualified participants from America. 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 forex trading to move into prop trading firms - with traders joining these firms as partners - with the firms being set up outside the U.S., working with all foreign counterparties for forex trading?

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--CommentsClose CommentsPermalink

(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;CommentsClose CommentsPermalink

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

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

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

(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.
 
Thanks for keeping us updated, Robert. I'm just hoping these draconian types are voted out or get so bogged down into other things that they'll leave us alone...
 
I taught I taw a pussycat.

Is Barney Franks the biggest cunt in US politics?
I'm not a republican, both parties have more than their fair share of low life cunts, but Barney gets my vote. What a horrible piece of shit that man is.
 
Quote from GuyFawkes:

I taught I taw a pussycat.

Is Barney Franks the biggest cunt in US politics?
I'm not a republican, both parties have more than their fair share of low life cunts, but Barney gets my vote. What a horrible piece of shit that man is.
More...


Maybe he just needs to meet some attractive teenage boys who enjoy FX trading in the next "ring" running out his house...
 
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