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CFTC Forex Rules In Effect October 18, 2010

After much anticipation forex traders and brokerages in the United States can finally breathe a sigh of relief.  On August 30, 2010, the Commodity Futures Trading Commission (“CFTC” or “Commission”) published its final rules (“Final Rules”) on Over-the-counter Retail Foreign Currency transactions (“Forex”).  This is ground breaking news for the industry as brokers and money managers were previously able to operate within these markets with little to no oversight - no longer.  What exactly do these new regulations mean for forex introducing brokers, trading advisers, and fund managers?  Are the Final Rules as devastating to the industry as the proposed rules, published by the CFTC in January of this year, were thought to be?  Let’s find out.
The following information was taken directly from the CFTC’s website and addresses the three largest areas of concern included within the original forex rule proposal.  The Final Rules, including the below requirements, come into effect on October 18, 2010.
Final Rule – Brokers, Advisors, and Money Managers Must Register with CFTC
Entities that wish to serve as counterparties to off-exchange retail forex transactions – and that are not among the otherwise regulated entities enumerated in the Commodity Exchange Act (“CEA”) – will have to register with the CFTC as either futures commission merchants (“FCMs”) or retail foreign exchange dealers (“RFEDs”).
Entities that wish to engage in retail forex transactions, but would be primarily or substantially involved in on-exchange business, will be required to register as FCMs.  And, finally, entities that will serve primarily as retail forex counterparties will be required to register as RFEDs.
Additionally, for the first time, entities other than RFEDs and FCMs that intermediate retail forex transactions will be required to register with the CFTC, as applicable, as introducing brokers (“IBs”), commodity trading advisors (“CTAs”), commodity pool operators (“CPOs”) or associated persons (“APs”) of such entities.
Final Rule – Leverage Maximums will be 50:1 or 20:1
The proposed 10 to 1 leverage restriction has been replaced with a mechanism whereby the Commission sets parameters (the release specifies a minimum 2 percent security deposit in the case of major currencies and 5 percent of the notional value of the transaction for all other currencies) and periodically reviews the appropriateness of those parameters The National Futures Association(“NFA”) is authorized to set specific security deposit levels within those parameters, and is required to review periodically and adjust as necessary both the particular security deposit levels and the designation of which currencies are “major” currencies, in light of such factors as changes in volatility.
Final Rule – IBs Are Not Required To Be Guaranteed
The proposed requirement that a person who registers as an IB to introduce retail forex accounts must be guaranteed by a registered FCM or RFED (and that the IB could be guaranteed by only one FCM or RFED) has been replaced with the same requirement that currently applies to IBs who introduce futures and commodity interest accounts. A forex IB may choose either to meet the minimum net capital requirements applicable to futures and commodity options IBs, or to enter into a guarantee agreement with an FCM or an RFED.
 In sum, the major points of the Final Rules are as follows:
1) Anyone soliciting retail forex accounts will be required to register with the CFTC and become NFAmembers, with very few exceptions.  As a result, many more people will need to pass the Series 34 and Series 3 exams;
2) Introducing forex firms will not be required to establish a guarantee agreement with an FCM or RFED;
3) Leverage will have maximum boundaries of 50:1 on major currency pairs and 20:1 on exotic currency pairs.  These parameters will, however, be monitored by the CFTC, as well as NFA, and from time to time may be lower than these prescribed levels.
To best determine how you and your firm will comply with the CFTC’s new requirements contact Turnkey Trading Partners today.  We offer assistance in the creation of procedures, disclosure documents, track record/performance accounting, and virtually all other required CFTC or NFA requirements – click here for a free consultation.
James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in approximately 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Since departing from NFA, Bibbings has owned and operated an independent introducing brokerage and participated in international forums on proposed CFTC regulatory requirements.  He has also provided financial markets content for MSN, Yahoo, Financial Times, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, The Wall Street Journal’s Market Watch, Forex Journal, FX Street, Forex Factory, Commodity News Center and many other highly acclaimed investment publications.  Two highly sought after informational pamphlets regarding futures and forex registration authored by Bibbings are currently available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at and would love to hear from you.

Disclosure: None