The past July 21st, US President Obama signed the "Dodd-Frank Wall Street Reform Act" in a new and fresh attempt to regulate strongly the financial industry and to protect the consumer. Traders, brokers and other institutions are concerned about the implications that this new regulatory wave would have in the Forex industry.

Read the James Bibbings, President and CEO at Turnkey Trading Partners, report on the latest events: Obama Threatens Forex; Says Goodbye to OTC Gold Trading.

Early this year, James Chen, chief technical Strategist at FX Solutions, said in an interview to FXstreet.com that "The industry would have to face a big challenge with the new regulations over the next 10 years". Just some months after that, market are thinking deeply about this new issue.

FXstreet.com has asked forex experts on this and here we are starting a special coverage to follow closely further developments and implications in the industry.

Check their opinions in this two questions:

  • How does it affect Forex Trading?
  • How does it affect US Retail traders? Non-US retail traders?

Andrei Knight, Sr. Currency Strategist at fxKnight.com

These new regulations basically confirm what we already knew last year (since the passage of 2008's Farm Act, technically - but enforcement really began in earnest last year) - that retail Forex (and spot metals trade) is essentially DEAD in the United States. They basically just tightened up some language which was still open to interpretation, closed the loose ends.

The Dodd-Frank Wall Street Reform Act in a nutshell:

  • No over-the-counter foreign currency transactions, unless it is through a government-approved agency. Changing money for travellers good, speculation bad.
  • No spot metals transactions, unless you plan to take delivery within 28 days.
  • The "under 15 clients" exception for money managers and financial advisers is now removed.

As I've been saying all along, if you want to trade this stuff in the U.S., the CFTC very much wants you to purchase futures contracts from the CME (who authored much of the new legislation) - never forget Chicago's mob history, they don't like their monopolies disturbed. (Say, what's Obama's home state again?)

To this end, fxKnight is in the process of forming strategic partnerships with attorneys, firms, and brokers in key international financial centers in order to assist our American clients with forming corporations and trusts abroad, and moving their trading operations offshore.


Valeria Bednarik, Chief Analyst at FXstreet.com


What is this new regulation about?

While the Dodd-Frank Wall Street Reform and Consumer Protection Act is a federal statute in the United States that was signed into law by President Barack Obama on July 21, 2010, designed to avoid a new crisis like the 2007 one, is also the most challenging change to financial regulation in the United States since the Great Depression, and represents a shift in the American financial regulatory environment impacting all Federal financial regulatory agencies and affecting almost every aspect of the nation's financial services industry.

Two specific changes deal with the spot market: Section 742 of the Act deals with retail commodity transactions. In this section, the text of the Commodity Exchange Act is amended to include new Section 2(c)(2)(D) (dealing with retail commodity transactions) and new Section 2(c)(2)(E) (prohibiting trading in spot forex with retail investors unless the trader is subject to regulations by a Federal regulatory agency, i.e. CFTC, SEC, etc.).


How does it affect Forex Trading?

Essentially any spot commodities transaction (i.e. GOLD) will be subject to CFTC jurisdiction and rulemaking authority. Section 742(a) of the Act prohibits any person 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. There is an exemption for commodities which are actually delivered within 28 days. The idea is 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.


How does it affect US Retail traders? Non-US retail traders?

The strongest impact seems to be over domestic and non-U.S. fund managers and investment advisers: The Reform Act amends the Investment Advisers Act of 1940 (the "Advisers Act") by deleting the so called "private adviser exemption," that exempted investment advisers with fewer than 15 clients from registration under the Advisers Act. Most fund managers currently rely on this exemption to avoid registration with, and regulation by, the Securities and Exchange Commission (the "SEC") since individual funds are counted as a single client. Additionally, many non-U.S. investment advisers rely on this exemption since, because their principal place of business is outside the U.S., they need only count U.S.-resident clients against the 15 client limit.

Beginning in July 2011, fund managers will no longer be able to rely on the private adviser exemption. However, the Reform Act requires the SEC to provide an exemption to any investment adviser that acts solely as an adviser to Private Funds and has less than $150 million of AUM, as the Reform Act mandates new registration and regulation thresholds based on the amount of assets under management ("AUM").

Also, investment advisers that do not act exclusively for Private Funds and that have $100 million or more of AUM will be required to register with and will be regulated by the SEC.


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