Obama Threatens Forex
By James Bibbings
Created 3 Aug 2010
On July 21, 2010, President Obama signed into law the âDodd-Frank Wall Street Reform Actâ (the âDodd-Frank Actâ or âActâ). 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 (âTTPâ), James Bibbings, has teamed up with attorney Nicole Kuchera, from Chicagoâs 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 (âCFTCâ) regulated entities and National Futures Association (âNFAâ) member firms.
The impact of the Act on commodity futures, over-the-counter retail foreign currency (âOTC forexâ), and over-the-counter retail precious metals (âOTC metalsâ) 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:
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 âZelener fixâ 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 â 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 courtsâ 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 âprivate adviserâ exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (âAdvisers Actâ), will be eliminated within one year of the Actâs 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 (âQEPâ). 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 individualâs primary residence when calculating net worth. In particular, the SEC has interpreted this provision as follows:
Co-Authors: Nicole Kuchera
By James Bibbings
Created 3 Aug 2010
On July 21, 2010, President Obama signed into law the âDodd-Frank Wall Street Reform Actâ (the âDodd-Frank Actâ or âActâ). 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 (âTTPâ), James Bibbings, has teamed up with attorney Nicole Kuchera, from Chicagoâs 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 (âCFTCâ) regulated entities and National Futures Association (âNFAâ) member firms.
The impact of the Act on commodity futures, over-the-counter retail foreign currency (âOTC forexâ), and over-the-counter retail precious metals (âOTC metalsâ) 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 â 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 âZelener fixâ 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 â 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 courtsâ 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 âprivate adviserâ exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (âAdvisers Actâ), will be eliminated within one year of the Actâs 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 (âQEPâ). 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 individualâs 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
