US Forex Traders: Limits and Regulation (Dodd-Frank)

ForexNewNow – Forex traders in the United States, who trade through an online trading account, have been the subject of a number of imposed limitations due to new financial regulations put into law by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The federal statute was signed into law by President Obama on the 21^st of July, 2010.

The Dodd-Frank legislation, which has been widely covered in the online forex news, has already been partially put into effect by the Commodities Futures Trading Commission or CFTC, the Federal Deposit Insurance Corporation or FDIC and the National Futures Association or NFA.

CFTC Forex Regulations

The CFTC was given broad authority through the Dodd-Frank Act and the Food, Conservation, and Energy Act of 2008 over off-exchange retail foreign exchange transactions, or trades made through an online forex broker. The CFTC began implementing some of the provisions of the Dodd-Frank Act on September 10^tt, 2010.

The provisions put in place require an online forex broker to be registered with the CFTC and comply with recordkeeping, disclosure and financial reporting, minimum capital requirements and other procedural and operational standards.

The regulations specifically oblige the online forex broker doing business for U.S. clients to be registered as either a futures commission merchant or FCM, or a new category of registrant called a retail foreign exchange dealer or RFED. Also, anyone soliciting orders, operating pools or exercising discretionary forex trading are also required to register as either associated persons or APs, introducing brokers or IBs, commodity pool operators or commodity trading advisors or CTAs.

Capital Requirements

The financial requirements for engaging in the retail forex market offer customers considerable protections. The CFTC requires FCMs and RFEDs to maintain a minimum of $20 million plus an additional 5 percent of the amount by which retail forex customer’s liabilities exceeds $10 million, a tidy sum just to open a retail online trading account for a customer.

Leverage for a retail online trading account is subject to a security deposit requirement set by the National Futures Association within the limits provided by the CFTC. Finally, the CFTC requires that all retail forex brokers distribute disclosure statements to comply with record keeping and reporting requirements.

FDIC Proposed Rule

On May 11^th of 2011 the online forex news announced that the Board of Directors of the Federal Deposit Insurance Corporation, or FDIC, approved a proposed rule for requirements on retail foreign exchange brokers supervised by the FDIC under provisions of Section 742 of the Dodd Frank Act.

The proposed rule applies only to retail forex customers involved in futures, options or rolling spot trades. The rule raises margin requirements in the interest of promoting safety and soundness on the underlying trades and also establishes requirements for disclosure, margin requirements, record keeping, capital, documentation and business conduct on behalf of the broker.

SEC Extension

The most recent developments concerning the Dodd-Frank Act according to the online forex news took place on July 15^th, 2011 when the Securities and Exchange Commission provided an extension of one year to retail forex brokers. The extension cites certain foreign exchange transactions with people who were not “eligible contract participants”, would have been prohibited as of July 16^th, 2011.

Nevertheless, in the absence of a rule allowing such transactions, the SEC adopted an interim final temporary Rule 15b12-1T that allows registered broker dealers to engage in such transactions until July 16^th, 2012.  

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