• The Dodd-Frank Wall Street Reform and Consumer Protection Act, approved past July 21st, has been designed to protect the retail consumer and to try to avoid a new big crisis like the current started in 2007 when the US financial market collapsed first, being followed by the biggest worldwide economies. The bill is introducing the biggest changes in regulation since the turn taken after the Great Depression in 1930.

The more than 2,000 pages bill recently signed by US President Obama has opened the windows to a new wave of rules and changes inside the US Forex Market. Now many questions are on the forex's table, Will the retail trade disappear? Will be able the trader to have a broker outside of the United States? How the CFTC, SEC or the Fed will regulate the market?

An issue in the spotlight is that the Dodd−Frank Wall Street Reform act is pretending to introduce that US citizens and residents won't be available, by law, to make deals with non-regulated agencies, in other words, trade with brokers outside of the United States won't be longer possible. Trying to solve that, the Act provide three actors as regulators, the CFTC, the SEC and the Fed, with a possible different leverage levels.

"A person 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 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," says the Act.

"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," affirms James Bibbings, President and CEO at Turnkey Trading Partners, and Chicago’s Henderson & Lyman's attorney Nicole Kuchera in their good article called "Obama Threatens Forex; Says Goodbye to OTC Gold Trading."

"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," Bibbings and Kuchera continue.

Two specific changes deal with the spot market: Section 742 of the Act deals with retail commodity transactions. The text of the Commodity Exchange Act is amended to include dealing with retail commodity transactions and prohibiting trading in spot forex with retail investors unless the trader is subject to regulations by a Federal regulatory agency.

"The Dodd-Frank bill largely leaves retail forex trading alone", Says Charlie Delano, Director of Government Affairs at FXCM. He continues: "There are some provisions that impact retail forex trading but they are minor in comparison to the final rules the CFTC will be releasing in the weeks ahead. The major provision we are concerned with is the provision that states the CFTC has 90 days to pass final rules on retail forex from the date Dodd-Frank is signed into law."

Regarding to leverage, despite the CFTC avoided to present their reduction to 10:1 in the past, the regulator is thinking about a reduction to 50:1, well below than actual 100:1. The bill has asked CFTC to propose rules in the next 90 days.

"These new regulations basically confirm what we already knew last year that retail Forex is essentially DEAD in the United States," says Andrei Knight, Sr Currency Strategist at fxKnight.com. "They basically just tightened up some language which was still open to interpretation, closed the loose ends," Knight concludes.

FXstreet.com has asked forex experts on this topic, read their answers on this topic and implications in the industry:


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.


Charlie Delano, Director of Government Affairs at FXCM

  • "The Dodd-Frank bill largely leaves retail forex trading alone. There are some provisions that impact retail forex trading but they are minor in comparison to the final rules the CFTC will be releasing in the weeks ahead. The major provision we are concerned with is the provision that states the CFTC has 90 days to pass final rules on retail forex from the date Dodd-Frank is signed into law. However, we're confident CFTC will do this."
  • "There are other provisions in the bill which may restrict the ability of U.S. traders to open accounts with non-registered firms outside the U.S. At this point we are not sure how such a provision will be interpreted by regulators so we are in a wait and see mode."
  • "Non-U.S. traders are not likely to be impacted by Dodd-Frank."

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 travelers 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.

Related words:

  • 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". Read the Interview.
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