Updates to BSA E-Filing System for FinCEN Suspicious Activity Reports

FCMs and IBs Can Use BSA E-Filing System To File Several FinCEN Forms, Namely Suspicious Activity Reports

FinCEN (Financial Crimes Enforcement Network) recently improved its online BSA (Bank Secrecy Act) e-filing system. The security-enhanced site can be used for free and allows users (such as FCMs and IBs) to submit FinCEN forms more efficiently. Your firm’s filing organization will need to appoint a specific person to act as the initial BSA E-filing System Supervisory User. Click here to view the steps required to enroll.

The full text of the NFA press release is reprinted below and can also be found here.

The BSA e-filing system is located here.

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Notice I-10-08

February 03, 2010

FinCEN Adds Enhancements to its BSA E-Filing System

FinCEN recently requested that NFA provide NFA Member FCMs and IBs with notice of recent enhancements made to its BSA E-Filing System. FCMs and IBs may file SAR-SFs via the E-Filing System.

In September 2009, FinCEN implemented Phase I of the BSA E-Filing SAR Acknowledgements and Validation Process. Phase I provides BSA E-Filers with a receipt acknowledging their filing of a Suspicious Activity Report. In December 2009, FinCEN implemented Phase II of the project, which applies data quality checks and provides filers with information on the quality of their submission for electronically filed SARs of all types, including SAR-SFs.

The BSA E-Filing system allows FCMs and IBs to self-enroll to receive SAR acknowledgements and validation error codes. FinCEN strongly encourages filers to enroll to receive this critical feedback.

If you have any questions regarding this process, please contact the BSA E-Filing Help Desk at 1-888-827-2778 (option 6) or via email at BSAEFilingHelp@notes.tcs.treas.gov. FinCEN has also prepared a Q&A Manual on the process, including how to enroll, which you may access at http://bsaefiling.fincen.treas.gov under “Hot Topics”.

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Other related forex law articles include:

• Seattle Forex Firm Charged With Fraud
• Foreign Exchange Currency Fraud - CFTC Alert on Forex Fraud
• More on Forex Fraud from the CFTC
• NFA Revises Notice Impacting Forex Dealer Members
• Retail Forex Registration Regulations Proposed
• Series 34 Exam

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Forex Events February 2010

The following are various forex events happening this month.  Please email us if you would like us to add your event to this list.

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February 6

• Sponsor: Knowledge to Action Ltd.
• Event: Forex Secrets Seminar Workshop
• Location: Cambridge, UK

February 6

February 9

• Sponsor: AFA Trading (afatrading.co.uk)
• Event: Free Seminar
• Location: London, UK

February 14

• Sponsor: FXDD
• Event: FXDD Teams Up With The New York Rangers
• Location: Madison Square Garden, New York, NY

February 14-17

• Sponsor: Fidelity Investments
• Event: International Traders EXPO
• Location: Marriott Marquis Hotel, New York, NY

February 17

February 27

Forex Fraudster Jailed For Violating Court Orders in CFTC Anti-Fraud Action

Minnesota Federal Judge Throws Trevor G. Cook in Jail For Dissipating Funds and Failing to Surrender $35 Million+ in Assets

In November 2009, the U.S. Commodity Futures Trading Commission (CFTC) ordered an emergency freeze of assets belonging to Minnesota residents Trevor G. Cook and Patrick Kiley and their trading companies. Cook and Kiley, who were charged with fraud and the misappropriation of customers’ funds, are accused of running a “massive forex scheme that defrauded hundreds of customers of more than $190 million”. In addition to providing their customers with falsified account statements, the CFTC’s complaint accuses the defendants of “misappropriating customers funds to purchase property, develop a hotel and casino in Panama, buy seven luxury cars, a house boat and a submarine and find their frequent gambling”.

The details of this case further justify the new registration requirements under the new CFTC forex proposal released in January. These requirements have been put in place to combat the issue of fraud with respect to off-exchange foreign currency trading (forex) by allowing more regulatory oversight of the forex industry. Hopefully, this increased oversight will prevent outrageous defrauding of forex customers in the future.

The full text of the CFTC press release is reprinted below and can also be found here.

To read the initial CFTC press release from November 24, 2009, click here.

To read the full CFTC complaint, click here.

To read the full CFTC order, click here.

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Release: 5779-10

For Release: January 29, 2010

Minnesota Resident Trevor Cook Incarcerated for Violating Court Orders in CFTC Anti-Fraud Action Charging Him in $190 Million Foreign Currency Fraud

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Minnesota federal Chief Judge Michael J. Davis incarcerated CFTC defendant Trevor G. Cook on January 25, 2010, for violating the court’s asset freeze order against him by dissipating funds and failing to surrender more than $35 million in assets. The court had ordered the asset freeze in connection with a CFTC civil anti-fraud action.

In a hearing that concluded on the same day, the court found Cook in civil contempt, and U.S. Marshals escorted him from the courtroom to jail. Chief Judge Davis ordered that Cook remain in jail until he has “purged the contempt” by, among other things, surrendering $27 million located in offshore accounts, a BMW and two Lexus automobiles, a submarine, a houseboat, a collection of expensive watches, a collection of Faberge eggs and $670,000 in cash.

The CFTC filed a motion in December, 2009, alleging that Cook had violated the court’s asset freeze in the CFTC’s case against him entitled CFTC v. Trevor Gilson Cook et al., filed in U.S. District Court for the District of Minnesota on November 23, 2009 (see CFTC Press Release 5756-09, Nov. 24, 2009). The CFTC obtained an emergency court order freezing Cook’s assets on the same day the CFTC filed its complaint.

The CFTC complaint charges Cook, nationally syndicated radio host Patrick J. “Pat” Kiley, and six entities they controlled with fraud and misappropriation in connection with running a massive scheme that defrauded over 900 U.S. customers of more than $190 million. As alleged, the defendants fraudulently solicited customers for the purported purpose of trading off-exchange foreign currency (forex) contracts in managed, segregated accounts. The accounts were allegedly placed with Crown Forex, SA, a Swiss entity, in which Cook has been a majority owner since at least December 2008. The CFTC also charges that Cook and the other defendants misappropriated millions of dollars of customer funds, using them to purchase property, develop a hotel and casino in Panama, buy seven luxury cars, a house boat and a submarine and to fund their frequent gambling.

In its continuing litigation in this matter, the CFTC seeks a return of ill-gotten gains, restitution to defrauded customers and civil monetary penalties.

The CFTC appreciates the assistance of the U.S. Securities and Exchange Commission and the U.S. Attorney’s Office in Minneapolis.

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Other related forex law articles include:

• Federal Court Freezes Assets of Moroccan Resident Richmond Hamilton, Jr., and the Chicago Commodity Pool He Manages in a $1 Million Pool Anti-Fraud Case Brought by the CFTC
• Pennsylvania Resident Joseph Forte Admits to Operating a Multi-Million Dollar Ponzi Scheme in CFTC Enforcement Action
• CFTC Charges a Couple in North Carolina and Their Companies in a $22.5 Million Ponzi Scheme
• Retail Forex Registration Regulations Proposed
• Series 34 Exam

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Failure to Comply with NFA Rules Could Result in NFA Membership Suspension or Expulsion and/or Fines

CTA Required to Withdraw From NFA Membership for Compliance Violations

On August 25, 2009, the National Futures Association’s (NFA) Business Conduct Committee (BCC) filed a complaint against Las Vegas commodity trading advisor (CTA) NetBlack Capital LLC and its principal/associated person (AP) John Francis Netto. NetBlack, an NFA Member CTA since November 2008, was charged with violating NFA Compliance Rule 2-6, which provides that:

no person who has been expelled or suspended or is subject to a similar sanction by NFA in a proceeding brought pursuant to Part 3 of NFA’s Compliance Rules that temporarily or permanently prohibits the person from NFA membership or affiliation in any capacity with an NFA member shall hold himself out as a Member in good standing of NFA, or as affiliated with a Member, as the case may be, during the period during which the sanction is in effect. No Member or Associate shall conduct commodity futures or forex business with such a person during the period the sanction is in effect unless authorized by the BCC, Hearing Committee or the Appeals Committee.

The BCC found that NetBlack’s website had listed a gentleman named Jes Black (a.k.a. Jason Black) as a “Strategic Advisor” and that on a second website for NetBlack, both Netto and Black, whose phone number was listed as a contact number, were listed as managers of NetBlack. The problem was that Black, former NFA Member commodity pool operator (CPO) of Black Flag in New York, had been previously named in an NFA action by the BCC for

[providing] false and misleading information to NFA; [failing] to provide an accurate and complete disclosure document; [failing] to prepare and maintain accurate books and records; [failure to cooperate with an NFA audit; and [failing] to supervise the firm’s [Black Flag] operations.

Thus, in accordance with Compliance Rule 2-6, Netto did not have the authority to conduct business with Black, resulting in a compliance action against Netto by the NFA.

Additionally, Netto was charged with violating NFA Compliance Rule 2-29(b)(5), which states that, “No Member or Associate shall use any promotional material which included any specific numerical or statistical information about the past performance of any actual accounts”.

In response to these allegations, Netto (on behalf of NetBlack) proposed to the NFA that it take the following actions against him to settle the charges, to which the NFA agreed:

1. NetBlack agreed to withdraw from NFA membership for 5 years and pay a fine of $15,000 upon reapplication;

2. Netto agreed that he would cease all business relations with Black, and Black would be prohibited from entering his offices;

3. Netto agreed to pay a fine of $15,000 to the NFA; and

4. Netto agreed that he would submit all promotional material in advance for NFA review and approval.

The lesson to take from the Netto case is that the NFA takes its compliance rules seriously and is constantly in the process of reviewing Member’s websites, promotional material, and business conduct. The new Commodity Futures Trading Commission (CFTC) off-exchange foreign currency rules that have been proposed emphasize these compliance rules and have been put in place to prevent fraud, protect consumers, and promote appropriate business practices. Netto may have been let off lightly (the NFA could have imposed a fine of $250,000 per violation), but with the new CFTC’s rules on the horizon, you should expect harsher penalties than Netto’s.

The full text of the NFA press release is reprinted below, and can also be found here.

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For Immediate Release
February 01, 2010

For more information contact:
Larry Dyekman (312) 781-1372, ldyekman@nfa.futures.org
Karen Wuertz (312) 781-1335, kwuertz@nfa.futures.org

NFA sanctions Las Vegas commodity trading advisor and its principal

February 1, Chicago - National Futures Association (NFA) has ordered NetBlack Capital LLC (NetBlack) to withdraw from NFA membership and not reapply for NFA membership for a period of five years. NetBlack is a commodity trading advisor located in Las Vegas, Nevada. The firm must also pay a fine of $15,000 in the event it reapplies for NFA membership after five years. NFA also levied a $15,000 fine against John F. Netto, a principal and sole associated person of NetBlack.

The Decision, issued by an NFA Hearing Panel, is based on an NFA Complaint filed in August 2009 and a settlement offer submitted by NetBlack and Netto.

The Panel found that NetBlack and Netto conducted business with Jason Black (aka Jes Black), who was suspended from NFA membership as a result of a prior NFA Business Conduct Committee disciplinary action issued in February 2008. The Panel also found that NetBlack and Netto failed to maintain support for its advertised monthly rates of return as reflected in NetBlack’s promotional material.

Along with the $15,000 fine, Netto is prohibited from doing business with Black for a period of thirty months for any and all firms for which Netto is principal. Additionally, for a period of twenty-four months, Netto agreed to submit all promotional material which contains performance information to NFA for review and approval prior to use.

The complete text of the Complaint and Decision can be found on NFA’s website (www.nfa.futures.org).

NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the futures markets.

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Other related forex law articles include:

• Forex Dealer Member Barred From Industry
• NFA Interpretive Notice Re: Past or Projected Performance
• NFA Interpretive Notice Re: Deceptive Advertising II
• Retail Forex Registration Regulations Proposed

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Foreign Exchange Dealers Coalition (FXDC) Evaluates New CFTC Rules On New Website

FXDC Supports Registration Requirement, Strongly Opposes 10:1 Leverage Limit

On January 27, 2010, the Foreign Exchange Dealers Coalition (FXDC) launched its first website which focuses on the new CFTC forex proposals, particularly the new 10:1 leverage limit requirement.  FXDC formed in 2007 as an alliance of the largest U.S. forex dealers (GFT, Oanda, IBFX, Gain Capital, FXCM, FX Solutions, FXDD, PFG Best, and CMS Forex) whose mission is to “pool together industry resources to create awareness and recognition that forex dealers are a powerful choice for individuals who choose to speculate in financial markets”.  Its focus is to ensure that the forex industry is fairly regulated and that any oversight does not interfere with the freedom of choice of forex entities.

FXDC’s Current Focus

FXDC is currently focusing its energy on the new Commodity Futures Trading Commission (CFTC) forex proposals that were released on January 14, 2010.  The major regulatory changes proposed in the new rules are:

1. Mandatory registration with the CFTC through the National Futures Association (NFA) for retail foreign exchange dealers (RFEDs), futures commission merchants (FCMs), and forex commodity pool operators (CPOs), commodity trade advisors (CTAs), introducing brokers (IBs), and associated persons (APs) of the above entities;

2. Requirement of RFEDs and FCMs to maintain a minimum net capital of $20 million plus 5% of the amount by which liabilities to forex customers exceed $10 million;

3. Requirement of introducing brokers (IBs) to be guaranteed by an FCM;

4. Leverage restriction of 10:1 for all forex transactions.

In terms of the first major change, FXDC supports the proposal that these entities should be registered. FXDC believes that registration will help the forex industry to have more oversight and help decrease the amount of fraud that currently takes place.

FXDC has not said much regarding the second change.  With respect to the third, FXDC has not said much either; however, in a live online public chat hosted by FXstreet.com (the text of which can be found here) Joseph Trevisani, Chief Market Analyst at FX Solutions (one of the members of FXDC) and a representative of FXDC, stated, “One point to be made on the IB The [sic] CFTC does not require guaranteed IBs in futures [sic] Why is OTC FX [i.e. over-the-counter forex, or forex] treated differently in this rule proposal?”

FXDC’s Major Issue Regarding Leverage Proposal

The major issue FXDC has with the proposed rules is the 10:1 leverage restriction. FXDC believes that imposing such a low leverage limit will be damaging to both the forex industry as well as the American economy.  On its new website, FXDC outlines five primary reasons regarding its opposition.  FXDC argues that:

1. 90% of forex traders will move their accounts from the U.S. to offshore brokers.

2. Thousands of people who work in forex in the U.S. will lose their jobs (which require “…an advanced education and range from software developers to accountant to foreign exchange dealers”) due to traders moving their account offshore.

3. The U.S. will lose billions of dollars in trade revenue.

4. Forex fraud will worsen, not improve.

5. Unregulated offshore dealers will thrive from new all the new business, and since they are unregulated and not required to deal with “…capital requirements, risk management models, marketing ethics, dealing practices, or even returning a customer’s funds”, consumers will be more vulnerable to fraud.

FXDC Urges Consumers To Take Action

FXDC is asking consumers to submit comments to CFTC which raise objection to the new leverage rule in particular.  On the Take Action section of its website, FXDC offers suggestions of arguments consumers can use when writing their comment letters. There is no guarantee that the submission of comments will persuade the CFTC to modify its rules; however, FXDC believes that it is at least worth the shot.

For updated forex registration information and CFTC rule updates, sign up for our email updates on the forexregistration.com homepage.

To read FXDC’s full statement in response to the new proposal, click here.

To visit FXDC’s new website, click here.

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Other related forex law articles include:

• Forex Industry Overwhelmingly Against Lower Leverage
• PFGBEST Press Release On New Forex Regulations
• Forex Leverage Significantly Reduced By Proposed CFTC Regulations
• Retail Forex Registration Regulations Proposed

Bart Mallon, Esq. of Mallon P.C. runs the Forex Law Blog and provides forex registration service through forexregistration.com. Mr. Mallon also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

Forex Industry Overwhelmingly Against Lower Leverage

Backlash Against CFTC Proposed Forex Regulations

The CFTC proposed forex regulations have sparked a backlash against the U.S. regulatory agency.  The forex community has had plenty to say about the proposal which would decrease leverage from 100:1 (25:1 for non-majors) to 10:1.  This leverage reduction provision has been the focus of the community even as other provisions have huge consequences for forex managers.  Such provisions include the forex manager registration requirements and the requirement for forex introducing brokers to be guaranteed by an FCM/FDM/RFED.  There are a number of interesting posts on the internet about the leverage reduction and we have reprinted some of the more interesting thoughts below.

Traders to Move Offshore?

The FXDC (Foreign Exchange Dealers Coalition) produced one of the more interesting pieces on the proposed regulations.  The FXDC had a number of interesting arguments (full post can be found here).  Below we outline the major points addressed:

• 90% expected to go offshore (to the UK, where they also have segregated accounts and contracts for differences)
• potentially lead to loss of high paying U.S. jobs in the forex industry
• BRIC countries are set to see large inflows which will deprive the U.S. of potential tax revenues
• forex fraud is better addressed through registration (of introducing brokers, for instance) than through significant leverage reduction
• forex traders will be upset with reduced leverage

The central claim is that if the CFTC enacts the 10:1 leverage reduction, that a majority of the forex trading which happens in the U.S. will go offshore.  A number of other groups echoed this argument as well, including:

Dianne Fecteau in a post at her Forex Reflections blog stated:

While I understand you see increasing leverage requirements as increasing consumer protection, the result will be the opposite of what you intend because this provision would drive small retail traders to offshore brokers who are not subject to any regulation. As a result, they may be in danger of losing all their money, regardless of any specific trading decisions they make, because of unethical brokers.

Grace Chen in a post on the Daily Markets website said:

I am of the opinion that should this leverage rule be imposed or drastically reduced, the billion-dollar forex industry in the US will suffer greatly.

Michael Greenberg, in a popular post, predicts the end of the U.S. retail forex industry:

CFTC is all but done introducing the new requirements, and this Comment Period is just a bureaucratic procedure. US brokers should realize that the window to fend off this attack is long gone, and it’s time to adapt to a whole new reality – the US government doesn’t want you there, it prefers you to move to offshore locations.

PFGBest, a forex dealer, in a press release stated:

A leverage structure change in retail forex margining from 100 to 1 to 10 to 1 will force a great majority of forex business to be done offshore and thousands of U.S. jobs would be lost in the derivatives industry to European and other foreign competitors.  Worse, U.S. forex customers would not be protected by the CFTC.

Predictions on  Higher Leverage

While the majority of bloggers are talking about the effects the reduction would have on the U.S. retail forex industry, some bloggers do not seem to think that such a drastic reduction will actually happen.

Liviu Flesar in a post on the website Inner Fx writes:

I don’t think that the rule will become effective as it is proposed now, but the maximum leverage will be somewhere in between: 25:1 or 50:1. Maybe that’s the whole point of the shocking proposal: to make 25:1 or 50:1 sound decent and seem more reasonable, hence everyone being happy that cap was not set at 10:1.

John Forman notes a couple of reasons why the leverage reduction proposal will not be in the final regulations:

First of all, with the NFA having only adopted the 100:1 leverage limit in November there hasn’t been enough time for a real judgment on the impact of that rule change. It seems highly unlike the regulators will move without having collected sufficient data on the subject.

Second, this is only a request for opinion. You can be sure that the hue can cry from all participants against such a move will be very loud. The odds of that restriction being included in the final set of rules is very unlikely at this point, especially since it would actually make Forex leverage even less than that available in futures.

Alternatives to Lower Leverage?

Some commenters are proposing alternatives to the lower leverage requirements.

Dianne Fecteau, in the same post as above, wrote:

While I understand you see increasing leverage requirements as increasing consumer protection, the result will be the opposite of what you intend because this provision would drive small retail traders to offshore brokers who are not subject to any regulation. As a result, they may be in danger of losing all their money, regardless of any specific trading decisions they make, because of unethical brokers.

Rather than a blanket requirement of 10-to-1 leverage, it would be more appropriate to require some sort of training for those who intend to trade, even if this was only confined to risk management issues as opposed to a more general how to trade approach.

Michael Greenberg likewise suggested an alternative in a separate post from the one above:

Limiting leverage to novice traders is a great thing. Limiting leverage to ALL traders is horrible. I would recommend the CFTC to differentiate in their requirements and instead of imposing rules on all traders as if they were all identical set some kind of proficiency/experience test which will determine whether the trader can you use the leverage of his choice or be subject to a low leverage.

Personal Responsibility?

The overall thoughts on leverage reduction might best be summed up by Ryan O’Keefe who stated:

Regarding margin requirements, I am adamantly opposed to the proposed restrictions. I believe in personal choice, and personal responsibility. If you do not understand the damage you are a capable of doing through the use of high leverage, you should not be trading.

Comments to the Proposed Forex Regulations

While it is questionable as to whether the CFTC will be modifying the leverage rule (or any other aspects of the forex regulations), there is precedent for a governmental agency to change course on a proposal based on community feedback.  Most recently the SEC proposed a custody rule which would require small investment advisory firms to go through a surprise audit.  The investment advisory community was outraged by the proposal and provided the SEC with thoughtful comments on the issue.  In the end the SEC did not adopt the onerous surprise audit requirement.  Many in the forex community are providing advice on how to contact the CFTC with regard to this issue.

Mallon P.C., a law firm focused on helping forex managers register with the CFTC and become NFA members, will be submitting comments to the CFTC on this proposal.

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Bart Mallon, Esq. of runs the Forex Law Blog and also runs the Hedge Fund Law Blog.  He can be reached directly at 415-868-5345.

PFGBEST Press Release on New Forex Regulations

Forex Broker Supports CFTC But Not on Leverage Reduction

Last week forex broker BFGBEST was the first group to issue a press release on the leverage reduction component of the CFTC’s proposed retail forex regulations.  The following press release, reprinted in its entirety, can be found here.

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FOR IMMEDIATE RELEASE

PFGBEST MEDIA ADVISORY

CHICAGO, January 15, 2010

RE:   CFTC Seeks Public Comment on Proposed Regulations Regarding Retail FOREX Transactions

PFGBEST supports the CFTC’s proposed rules regarding Retail Forex Transactions but hopes that leverage will remain the same to avoid unintended negative consequences of job losses to foreign competitors.

PFGBEST is pleased to offer strong support of the CFTC as it has provided clear guidance and a comprehensive scheme of regulatory requirements to govern retail foreign exchange trading in the United States.

Once again the CFTC has provided clear regulatory guidance that in the past has made it the premier regulator of the derivatives industry.

In particular, the CFTC has fixed the regulatory capital requirement to $20 million plus 5% of liabilities that exceed $10 million, reinforcing its serious intent to protect customer interests.

PFGBEST will provide comments to the proposed rules to assist in making forex regulations similar to other derivative rules that have provided market integrity and customer protection in the futures industry.

One key component of the proposed rules that PFGBEST will comment about concerns a likely unintended negative consequence.  A leverage structure change in retail forex margining from 100 to 1 to 10 to 1 will force a great majority of forex business to be done offshore and thousands of U.S. jobs would be lost in the derivatives industry to European and other foreign competitors.  Worse, U.S. forex customers would not be protected by the CFTC.  PFGBEST feels that U.S. forex customers deserve the best protection available.

It was clearly not the intent of the Congress to destroy the U.S. retail forex industry when the CFTC was given the authority to create rules for retail foreign exchange.  Congress made it clear that the industry was to be policed, not abolished.  The 100 to 1 leverage structure was changed from 400 to 1 earlier this year when the NFA submitted rules which the CFTC approved.  This governance created clear guidance and market protection while keeping the United States competitive with the offshore competitors even though it was a higher requirement.

Contact:

Patricia Campbell

Peregrine Financial Group, Inc. (PFGBEST)

(312) 775-3411

pcampbell@pfgbest.com.

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Other related forex law articles include:

• Forex Hedge Fund Articles
• Forex Registration
• Series 34 Exam

Bart Mallon, Esq. of runs the Hedge Fund Law Blog and provides forex registration service through Mallon P.C. Mr. Mallon also runs the Forex Law Blog.  He can be reached directly at 415-868-5345.

Forex Leverage Significantly Reduced by Proposed CFTC Regulations

Controversial New Forex Rules Upset Industry

(www.forexlawblog.com)

The 193 pages of proposed rules by the CFTC do much more than simply require managers to register as forex CTAs, CPOs or IBs - they also significantly reduce the amount of leverage which is available to ALL forex traders who trade through US based FCMs and RFEDs.  Obviously this is not popular in the community and is surprising in that it goes much further than an earlier NFA rule which increased the margin requirements for both the majors and secondaries (see NFA Proposed Leverage Rule which was subsequently approved by the CFTC).  These new rules, along with the earlier NFA prohibition against hedging, are affecting managers’ investment programs.  The following provides more details on this story.

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On January 13, 2010, the CFTC finally released its proposed new regulations, featuring the four major provisions that will significantly affect current forex players:

• Most futures commission merchants (FCMs) and retail foreign exchange dealers (RFEDs) will be required to register with the CFTC;
• Other entities that intermediate retail forex transactions will be required to register with the CFTC as introducing brokers (IBs), commodity trading advisors (CTAs), community pool operators (CPOs), and/or associated persons (APs);
• A minimum net capital requirement of $20 million will be imposed for all FCMs and RFEDs, plus an additional requirement of 5% of the amount by which liabilities to forex customers exceed $10 million; and
• A new restriction of 10:1 as the maximum leverage allowed to be offered to retail clients.

Public Complaints and Controversy Surrounding New Leverage Requirement

Although retail service providers will have 60 days to comment on the CFTC’s proposed regulations, only one day has passed since the announcement, and there has already been an outcry of complaints against the new leverage requirement specifically.  The main group advocating against the new 10:1 leverage proposal (10:1 leverage means that for every $1 a trader puts down, s/he will be able to control 10 times that amount by borrowing the remaining $9 from the forex broker, in this case allowing the trader to control $10) is the Foreign Exchange Dealers Coalition (FXDC) which is composed of the top 9 U.S. FDMs: GFT, Oanda, IBFX, Gain Capital, FXCM, FX Solutions, FXDD, PFG Best, and CMS Forex.

FXDC is arguing that making the leverage requirement so low, as opposed to the 100:1 leverage allowance that has, in the past several years, become common and favorable in the retail forex community, will deter traders who are willing to invest their money in U.S. FDMs because they will no longer have the flexibility of higher leverage options.  Accordingly, FXDC’s primary concern is that traders will move their accounts to offshore FDMs, such as ones in Great Britain, who do not have enforced leverage regulation and who can often offer leverages as high as 200:1.  Those in agreement with FXDC’s position are arguing that as much of 90% of U.S. FDM business could be lost, essentially  crippling the U.S. market altogether.

So far, the public is in agreement that the new registration requirements for forex entities (as noted above) is a positive step toward the regulation and prevention of corruption in the market.  The line is drawn, however, at these registration requirements―the majority response as of today argues that not only will the new leverage rules not accomplish what they sent out to do (which is control corruption), they will have a severe affect on the growth of the U.S. off-exchange forex market and drive the majority of its business to offshore accounts where leverage is not as highly regulated.

Finally, the FXDC and Francesc Riverola (CEO and Founder of FXstreet.com) argue that the U.S. retail forex industry employs thousands of people, and if traders begin taking their accounts offshore, this will result in many lost jobs, increasing the already disastrous U.S. employment rate.  Additionally, they argue that the retail forex industry’s $1 billion taxable domestic revenue is financially beneficial to the U.S., and that if U.S. accounts are sent offshore, this revenue can no longer be booked as tax money.

To Be Continued…

At this point, I have been unable to find any individuals or groups (aside from the CFTC, of course) who are arguing in favor of the new leverage rules.  We will be monitoring all developments during the 60-day comment period (which ceases on March 22, 2010) and providing you with all updates as they arise.

Additionally, we will continue to monitor the conversation surrounding the new leverage rules and the controversy surrounding them.

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Other related forex law articles include:

• Forex Hedge Fund Articles
• Forex Registration
• Series 34 Exam

Bart Mallon, Esq. of runs the Hedge Fund Law Blog and provides forex registration service through Mallon P.C. Mr. Mallon also runs the Forex Law Blog.  He can be reached directly at 415-868-5345.

Retail FOREX Registration Regulations Proposed

Effective Date of Amendments to NFA Financial Requirements Sections 11 and 12 and the Interpretive Notice Regarding Forex Transactions

NFA has received notice that the Commodity Futures Trading Commission has approved changes to NFA Financial Requirements Sections 11 and 12 and related changes to the Interpretive Notice titled “Forex Transactions.” The amendments adopt an alternative net capital requirement for Forex Dealer Members (FDMs) and eliminate the existing exemption from the security deposit requirement. These changes will become effective on November 30, 2009.

The amendments to Section 11 revise the existing alternative net capital requirement that is based on an FDM’s liabilities to customers.¹ As of November 30, 2009, the alternative requirement is $20 million plus 5% of the amount of customer liabilities over $10 million. FDMs that exclusively use straight-through-processing for their customer transactions are exempt from this alternative requirement and need only maintain the $20 million minimum (unless the firm is subject to a higher requirement under FR Section 1).

The amendments to Section 12 eliminate the existing security deposit exemption for FDMs that maintain 150% of their required net capital. This means that, beginning on November 30, 2009, all FDMs must collect a customer security deposit of at least 1% for the currencies listed in Section 12 and at least 4% for all other currencies.²

NFA’s submission letters to the Commodity Futures Trading Commission include of the revised language and more detailed descriptions of the changes. You can access electronic copies of the February 23, 2009 submission letters at http://www.nfa.futures.org/news/PDF/CFTC/FRSec11_IntNotc021909.pdf (for the changes to Section 11) and http://www.nfa.futures.org/news/PDF/CFTC/FRSec12_IntNotc021909.pdf (for the changes to Section 12).

Questions concerning these requirements should be directed to Valerie Kretschmer, Manager, Compliance (vkretschmer@nfa.futures.org or 312-781-1290) or to Sharon Pendleton, Director, Compliance, (spendleton@nfa.futures.org or 312-781-1401).

¹ The term “customer” does not include eligible contract participants.

² The currencies that qualify for the 1% security deposit are the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone

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