Trading Of Over The Counter Gold And Silver To Be Illegal Beginning July 15

Trading Of Over The Counter Gold And Silver To Be Illegal Beginning July 15

Submitted by Tyler Durden on 06/18/2011 13:23 -0400


One small step toward Executive Order 6102 part 2, and one giant leap for corrupt congress mankind.

From: FOREX.com
Date: Fri, Jun 17, 2011 at 6:11 PM
Subject: Important Account Notice Re: Metals Trading
To: xxx

Important Account Notice Re: Metals Trading


We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.

We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.

Sincerely,
The Team at FOREX.com

So far we have only received this warning from Forex.com. We are waiting to see which other dealers inform their customers that trading gold and silver over the counter will soon be illegal.

It appears that Forex.com's interpretation of the law stems primarily from Section 742(a) of the Dodd-Frank act which "prohibits any person [which again includes companies]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."

Some prehistory from Hedge Fund Law Blog:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) has changed a number of laws in all of the securities acts including the Commodity Exchange Act. Two specific changes deal with certain transactions in commodities on the spot market. Specifically, 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.). According to a congressional rulemaking spreadsheet, these are effective 180 days from the date of enactment.

We provide an overview of the new sections and have reprinted them in full below.

New CEA Section 2(c)(2)(D) – Concerning Spot Commodities (Metals)

The central import of new CEA Section 2(c)(2)(D) is to broaden the CFTC’s power with respect to retail commodity transactions. Essentially any spot commodities transaction (i.e. spot metals) will be subject to CFTC jurisdiction and rulemaking authority. There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period (see here).

It is likely we will see the CFTC propose regulations under this new section and we will keep you updated on any regulatory pronouncements with respect to this new section.

New CEA Section 2(c)(2)(E) – Concerning Spot Forex

The central import of new CEA Section 2(c)(2)(E) is to regulate the spot forex markets. While the section requires the CFTC to finalize regulations with respect to spot forex (which were proposed earlier in January), it also, interestingly, provides oversight of the markets to other federal regulatory agencies such as the CFTC. This means that in the future, different market participants may be subject to different regulatory regimes with respect to trading in same underlying instruments. A Wall Street Journal article discusses the impact of this with respect to firms which engage in other activities in addition to retail forex transactions. The CFTC’s proposed rules establish certain compliance parameters for retail forex transactions, requires registration of retail forex managers and requires such managers to pass a new regulatory exam called the Series 34 exam. We do not yet know whether the other regulatory agencies will adopt rules similar to the CFTC or if they will write rules from scratch.

Next, from Henderson & Lyman:

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

The actual rule language exempts a transaction if it "results in actual delivery within 28 days or such other period as the Commission may determine by rule or regulation based upon the longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved;" Alas, the commission has decided not to intervene and keep the exemption status window so small as to affect virtually all exchanges which transact in the gold and silver spot market.

More here:

Elimination of OTC Forex

Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:

…A person [which includes companies] 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…

This provision will not come into effect, however, if the CFTC or another eligible federal body issues guidelines relating to the regulation of foreign currency within 90 days of its enactment. Registrants and the public are currently being encouraged by the CFTC to provide insight into how the Act should be enforced. See CFTC Rulemakings regarding OTC Derivatives located at the following website address, under Section XX – Foreign Currency (Retail Off Exchange). It is essential that OTC forex participants seek professional help to discuss possible operational and regulatory contingency plans.

Elimination of OTC Metals

As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]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. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC 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. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

Small Pool Exemption Eliminated

Pursuant to Section 403 of Act, the “privateadviser” exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”), will be eliminated within one year of the Act’s effective date (July 21, 2011). Historically, many unregistered U.S. fund managers had relied on this exemption to avoid registration where they:

(1) had fewer than 15 clients in the past 12 months;

(2) do not hold themselves out generally to the public as investment advisers; and

(3) do not act as investment advisers to a registered investment company or business development company.

At present, advisers can treat the unregistered funds that they advise, rather than the investors in those funds, as their clients for purposes of this exemption. A common practice has thus evolved whereby certain advisers manage up to 14 unregistered funds without having to register under the Advisers Act. Accordingly, the removal of this exemption represents a significant shift in the regulatory landscape, as this practice will no longer be allowable in approximately one year.

Also an important consideration, the Dodd-Frank Act mandates new federal registration and regulation thresholds based on the amount of assets a manager has under management ("AUM"). Although not yet underway, it is possible that various states may enact legislation designed to create a similar registration framework for managers whose AUM fall beneath the new federal levels.

Accredited Investor Qualifications

Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals:

1) A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor's primary residence;

2) A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or

3) A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.

Based on this language, it is important to note that the revised accredited investor standard only applies to new investors and does not cover existing investors. However, additional subscriptions from existing investors are generally treated as requiring confirmation of continuing investor eligibility.

On July 27th, 2010, the SEC provided additional clarity regarding the valuation of an individual’s primary residence when calculating net worth. In particular, the SEC has interpreted this provision as follows:

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation…Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

h/t Ryan

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June 18, 2011 1:21 pm

Dodd-Frank Bill Outlaws Sale of Gold/Silver Starting July 15 2011

Danny Panzella
TruthSquad.TV
6/18/2011

Courtesy of ZeroHedge.com and Lew Rockwell

From: FOREX.com
Date: Fri, Jun 17, 2011 at 6:11 PM
Subject: Important Account Notice Re: Metals Trading
To: xxx
Important Account Notice Re: Metals Trading

We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated. We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.

Sincerely,
The Team at FOREX.com

So far we have only received this warning from Forex.com. We are waiting to see which other dealers inform their customers that trading gold and silver over the counter will soon be illegal.

It appears that Forex.com’s interpretation of the law stems primarily from Section 742(a) of the Dodd-Frank act which “prohibits any person [which again includes companies]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.”

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Hedge Funds Review Reports:

“There is a lot of stuff buried in Dodd-Frank and in other rules that have come out as a result of the Act that people need to pay attention to. Collectively these things have a lot of extra-­territoriality impact,” warned Gary DeWaal, senior managing director and group general counsel at Newedge.

In mid-July, 175 Dodd Frank provisions are scheduled to go into effect automatically unless Congress or the regulators – the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) – change the deadline. More provisions are scheduled to go into effect on September 14 while there are around 66 proposed rules, concept releases and interim final rules proposed by the SEC and the CFTC.

The Obama Administrations assault on precious metals began with the passage of Obamacare. Section 9006 of the Patient Protection and Affordable Care Act amended the Internal Revenue Code to expand the scope of Form 1099. Currently, 1099 forms are used to track and report the miscellaneous income associated with services rendered by independent contractors or self-employed individuals.

Starting Jan. 1, 2012, Form 1099s will become a means of reporting to the Internal Revenue Service the purchases of all goods and services by small businesses and self-employed people that exceed $600 during a calendar year. Precious metals such as coins and bullion fall into this category.

Not only does the Dodd-Frank financial reform bill now outlaw over the counter precious metals, the IRS is requiring dealers who sell more than $600 in precious metals to the government, giving them a database of potential outlaw gold buyers. Will Gold be completely outlawed like it was during The Great Depression?

Another interesting note, when the Dodd-Frank rules were announced in Oct 2010 some astute investment advisers started telling their clients to “short the U.S. dollar.”

Some prehistory from Hedge Fund Law Blog:

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Act”) has changed a number of laws in all of the securities acts including the Commodity Exchange Act. Two specific changes deal with certain transactions in commodities on the spot market. Specifically, 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.). According to a congressional rulemaking spreadsheet, these are effective 180 days from the date of enactment.
We provide an overview of the new sections and have reprinted them in full below.
New CEA Section 2(c)(2)(D) – Concerning Spot Commodities (Metals)
The central import of new CEA Section 2(c)(2)(D) is to broaden the CFTC’s power with respect to retail commodity transactions. Essentially any spot commodities transaction (i.e. spot metals) will be subject to CFTC jurisdiction and rulemaking authority. There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period (see here).
It is likely we will see the CFTC propose regulations under this new section and we will keep you updated on any regulatory pronouncements with respect to this new section.
New CEA Section 2(c)(2)(E) – Concerning Spot Forex
The central import of new CEA Section 2(c)(2)(E) is to regulate the spot forex markets. While the section requires the CFTC to finalize regulations with respect to spot forex (which were proposed earlier in January), it also, interestingly, provides oversight of the markets to other federal regulatory agencies such as the CFTC. This means that in the future, different market participants may be subject to different regulatory regimes with respect to trading in same underlying instruments. A Wall Street Journalarticle discusses the impact of this with respect to firms which engage in other activities in addition to retail forex transactions. The CFTC’s proposed rules establish certain compliance parameters for retail forex transactions, requires registration of retail forex managers and requires such managers to pass a new regulatory exam called the Series 34 exam. We do not yet know whether the other regulatory agencies will adopt rules similar to the CFTC or if they will write rules from scratch.

Next, from Henderson & Lyman:

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements.As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

The actual rule language exempts a transaction if it “results in actual delivery within 28 days or such other longer period as the Commission may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved;” Alas, the commission has decided not to intervene and keep the exemption status window so small as to affect virtually all exchanges which transact in the gold and silver spot market.

More here:

Elimination of OTC Forex

Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:

…A person [which includes companies] 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…

This provision will not come into effect, however, if the CFTC or another eligible federal body issues guidelines relating to the regulation of foreign currency within 90 days of its enactment. Registrants and the public are currently being encouraged by the CFTC to provide insight into how the Act should be enforced. See CFTC Rulemakings regarding OTC Derivatives located at the following website address, under Section XX – Foreign Currency (Retail Off Exchange). It is essential that OTC forex participants seek professional help to discuss possible operational and regulatory contingency plans.

Elimination of OTC Metals

As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]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. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC 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. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

Small Pool Exemption Eliminated

Pursuant to Section 403 of Act, the “privateadviser” exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”), will be eliminated within one year of the Act’s effective date (July 21, 2011). Historically, many unregistered U.S. fund managers had relied on this exemption to avoid registration where they:

(1) had fewer than 15 clients in the past 12 months;

(2) do not hold themselves out generally to the public as investment advisers; and

(3) do not act as investment advisers to a registered investment company or business development company.

At present, advisers can treat the unregistered funds that they advise, rather than the investors in those funds, as their clients for purposes of this exemption. A common practice has thus evolved whereby certain advisers manage up to 14 unregistered funds without having to register under the Advisers Act. Accordingly, the removal of this exemption represents a significant shift in the regulatory landscape, as this practice will no longer be allowable in approximately one year.

Also an important consideration, the Dodd-Frank Act mandates new federal registration and regulation thresholds based on the amount of assets a manager has under management (“AUM”). Although not yet underway, it is possible that various states may enact legislation designed to create a similar registration framework for managers whose AUM fall beneath the new federal levels.

Accredited Investor Qualifications

Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals:

1) A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor’s primary residence;

2) A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or

3) A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.

Based on this language, it is important to note that the revised accredited investor standard only applies to new investors and does not cover existing investors. However, additional subscriptions from existing investors are generally treated as requiring confirmation of continuing investor eligibility.

On July 27th, 2010, the SEC provided additional clarity regarding the valuation of an individual’s primary residence when calculating net worth. In particular, the SEC has interpreted this provision as follows:

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation…Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

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February 11, 2011

Conflict Minerals and the Dodd-Frank Act: Long-Distance Accountability?

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As recently reported in Fast Company, the SEC has proposed a Dodd-Frank Act provision that requires public companies to “disclose if and how they are involved in the manufacture, mining, or final-end use of conflict minerals.”

An important regulation, and here’s why, from the Fast Company coverage:

Halfway around the world, human rights atrocities are too commonplace for most to even imagine. To some of the factions warring for political control in central Africa, murder, rape, torture, and slavery are mere battle tactics. And average Americans play a role in financing these horrors every day.

For your reference, here’s what law firms and lawyers on JD Supra are writing about the Dodd-Frank Conflict Minerals provision:

- SEC Proposes Rules Relating To Specialized Disclosure Of Use Of Conflict Minerals (by Wilson Sonsini Goodrich & Rosati):

“On December 15, 2010, the Securities and Exchange Commission (SEC) proposed rules to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which requires new disclosures by reporting issuers concerning their use of conflict minerals (generally tantalum, tin, gold, or tungsten) that originated in the Democratic Republic of the Congo or an adjoining country.

Section 1502 of the Dodd-Frank Act amended the Securities Exchange Act by adding a new Section 13(p), which requires the SEC to promulgate disclosure and reporting regulations regarding the use of conflict minerals from the Democratic Republic of the Congo and adjoining countries (together, the DRC Countries). According to the Dodd-Frank Act, the extreme levels of violence in the eastern Democratic Republic of the Congo financed by the exploitation and trade of conflict minerals originating in the DRC Countries led Congress to enact this provision…” Read on»

- SEC Issues Proposed Rules for “Conflict Minerals” Disclosure (by Bryan Cave):

“Congress stated its concern in Section 1502(a) that ‘the exploitation and trade of conflict minerals originating in [that region] is helping to finance conflict that is characterized by extreme levels of violence … particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation.’ This provision of Dodd-Frank is another example of Congress using the disclosure requirements applicable to public companies to implement social policy.

The new law and related proposed rules (primarily contained in a new Item 104 to Regulation S-K) have broad applicability. Any reporting company, including foreign private issuers and smaller reporting companies, that manufactures or contracts to manufacture products for which “conflict minerals” are “necessary to the functionality or production” of those products must comply…” Read on»

- SEC Proposes Rules to Implement Dodd-Frank Conflict Minerals Disclosure Requirement (by Womble Carlyle):

“The proposetsd rules would require any company that is subject to SEC reporting requirements pursuant to Section 13(a) or 15(d) of the Exchange Act and for which conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that company to disclose in its annual report whether its conflict minerals originated in the Democratic Republic of the Congo or an adjoining country. If so, the company would be required to furnish a separate report as an exhibit to its annual report that would include, among other things, a description of the measures taken by the company to exercise due diligence on the source and chain of custody of its conflict minerals and an independent private sector audit of the company’s report. The SEC is soliciting comments on the proposed rules through January 31, 2011 and is required to adopt final rules implementing the conflict minerals disclosure requirements no later than April 15, 2011…” Read on»

- SEC Issues Proposed Rules Regarding Conflict Minerals Disclosure (by Katten Muchin):

“Section 1502(e)(4) of the Dodd-Frank Act defines ‘conflict mineral’ as cassiterite, columbite-tantalite, gold, wolframite, or their derivatives, or any other minerals or their derivatives determined by the Secretary of State to be financing conflict in the DRC countries. The proposed rules are expected to apply to many more issuers than might have first been expected due to the various uses of conflict minerals and their derivatives and the SEC’s broad definition of ‘manufacture’…” Read on»

- SEC Proposes “Conflict Minerals” Disclosure Rules to Implement Dodd-Frank Provisions (McDermott Will & Emery):

“…requirements for audits and reports by public companies to show whether certain minerals used in their manufactured goods originate in war-torn Congo or adjoining countries in Africa. The law is intended to address widespread corruption, human abuse and genocide in that region by imposing supply-chain due diligence on manufacturers that use in their products “conflict minerals” that fund groups responsible for the atrocities. Public U.S. manufacturers should closely monitor and comment on this rulemaking to ensure practicable compliance…” Read on»

- Congo Conflict Minerals Legislation Passes Congress: Affects Technology, Automotive, Mining, Jewelry, and Aerospace Companies (by Foley Hoag LLP):

“The conflict minerals legislation is intended to address the ongoing conflict in the eastern DRC. The premise of the bill is that the sale of certain minerals are helping armed groups continue to buy weapons and fund their fighting. These minerals are frequently referred to as “conflict minerals,” and are comprised of tantalum (coltan), cassiterite (tin), wolframite (tungsten), and gold. These minerals are commonly utilized in a variety of commercial products, such as automobiles, cellular phones, and airplane engines. The legislation therefore affects a large spectrum of industries, including technology, automotive, mining, jewelry, and aerospace.

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Congo Conflict Minerals Legislation Passes Congress: Affects Technology, Automotive, Mining, Jewelry, and Aerospace Companies

* By:
* Foley Hoag LLP

The U.S. Congress has passed legislation requiring companies that utilize “conflict minerals” to conduct due diligence and demonstrate that their products are not fuelling conflict in the Democratic Republic of the Congo (“DRC”). The legislation was added as an amendment to the Wall Street Reform and Consumer Protection Act, which was sponsored by Senator Christopher Dodd (D-CT) and Representative Barney Frank (D-MA), and voted into law on July 15, 2010.

The conflict minerals legislation is intended to address the ongoing conflict in the eastern DRC. The premise of the bill is that the sale of certain minerals are helping armed groups continue to buy weapons and fund their fighting. These minerals are frequently referred to as “conflict minerals,” and are comprised of tantalum (coltan), cassiterite (tin), wolframite (tungsten), and gold. These minerals are commonly utilized in a variety of commercial products, such as automobiles, cellular phones, and airplane engines. The legislation therefore affects a large spectrum of industries, including technology, automotive, mining, jewelry, and aerospace.

Please see full alert below for more information.


Congo Conflict Minerals Legislation Passes Congress: Affects Technology, Automotive, Mining, Jewelry, and Aerospace Companies July 16, 2010 CORPORATE SOCIAL RESPONSIBILITY ALERT - JULY 16, 2010 written by Amy K. Lehr, Gare A. Smith The U.S. Congress has passed legislation requiring companies that utilize “conflict minerals” to conduct due diligence and demonstrate that their products are not fuelling conflict in the Democratic Republic of the Congo (“DRC”). The legislation was added as an amendment to the Wall Street Reform and Consumer Protection Act, which was sponsored by Senator Christopher Dodd (D-CT) and Representative Barney Frank (D-MA), and voted into law on July 15, 2010. The conflict minerals legislation is intended to address the ongoing conflict in the eastern DRC. The premise of the bill is that the sale of certain minerals are helping armed groups continue to buy weapons and fund their fighting. These minerals are frequently referred to as “conflict minerals,” and are comprised of tantalum (coltan), cassiterite (tin), wolframite (tungsten), and gold. These minerals are commonly utilized in a variety of commercial products, such as automobiles, cellular phones, and airplane engines. The legislation therefore affects a large spectrum of industries, including technology, automotive, mining, jewelry, and aerospace. The aim of the legislation is not to ban the use of these minerals if they originate from the DRC, but rather to ensure that the minerals do not come from conflict areas of the DRC or otherwise help fund the conflict. To this end, the legislation requires annual disclosure to the Securities and Exchange Commission (“SEC”) regarding whether potential conflict minerals originated in the DRC or an adjoining country. If the minerals originated in these countries, companies must report on the due diligence measures that they utilize to identify the source and chain of custody. These measures are expected to include an audit by an independent professional audit company. In the SEC report, companies also must submit a description of products that they manufacture that are not DRC conflict-free. Products are conflict-free if they do not contain minerals that directly or indirectly finance or benefit armed groups in the DRC or an adjoining country. Products are considered to benefit such groups if they come from areas where armed groups physically control mines or force civilians to mine, transport, or sell conflict minerals; tax, extort, or control any part of trade routes for the minerals up to the point of export; or tax, extort, or control trading facilities, in whole or in part. The Department of Commerce can designate specific independent private sector auditors and due diligence processes as “unreliable.” If, in its reporting, an entity relies on a determination of an independent private sector audit or other due diligence process that is deemed unreliable, the report does not satisfy the SEC reporting requirement. Therefore, it is particularly important that due diligence processes are robust.

The U.S. State Department is required by the legislation to develop a conflict map that is to be updated every 180 days, and the State Department has already developed the first such map. The legislation does not specify whether companies can simply rely on the map to demonstrate that their products come from conflict-free areas. Companies should, therefore, consider how they will demonstrate that they conducted due diligence to ensure that the mines from which their minerals emanate, as well as the routes and trading depots through which the minerals travel, are conflict-free. For end-user companies, this will mean ensuring, at a minimum, that smelters have robust due diligence processes on the ground, and obtaining an independent audit of those due diligence processes.

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18 June 2011
US Seeks to Curtail OTC Highly Leveraged Retail Trading in Paper Commodities and Currencies

As part of the reform of derivatives, Dodd-Frank is seeking to prohibit Over the Counter (meaning non-exchange) trading of commodities at leverage of greater than 10:1.

The off exchange traders, particularly those trading in currencies, had expanded their markets into various commodities, offering non-product backed paper trading at very high rates of leverage.

The Congress and CFTC started taking a dim view of this sort of activity, and has tentative prohibited it as of July 15.

This does not curtail any on-exchange trading, such as the CME, or any ETFs, or any other product with a leverage of less than 10:1 or actually involving substantial physical backing or intended delivery of product within 28 days.

I have not quite gotten the time to assess the impact if any this might have on retail trading in forex itself. I have included a few forex related documents below. My initial take was that this is targeted at retail currency speculation, and gold and oil fall into it as a secondary effect. I have relatives visiting this weekend to celebrate my wife's recovery from her recent illness so I have not had time to inquire further.

This is my reading of the situation, subject to additional information. I am trying to obtain the forex type contracts detail to understand customer rights, if any, in obtaining delivery of spot commodities.

There *could* be something to this if there is in fact a means to obtain delivery in some reasonable way. But otherwise it looks like a crackdown on speculation by smaller specs in off exchange products and push to move them to exchanges for all but the larger 'exempt few' who enjoy privileged access to almost everything.

I am a little surprised that people were not screaming about 'currency controls' which might be a little more to the point that talk about prohibiting the trading in gold, oil, and silver.

For the most part it seems like much ado about nothing with regard to gold and silver and oil etc., but its good for clicks, and it helps to cheer up those sitting in depreciating paper on the sidelines who have missed the commodity bull markets.

Gold money was not private property in the 1930's, it was an instrument of the state, and subject to the state's disposal. That is not the case now.

Forex.com reportedly sent out this notice to customers on Friday.

Date: Fri, Jun 17, 2011 at 6:11 PM
Subject: Important Account Notice Re: Metals Trading

Important Account Notice Re: Metals Trading

We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.

We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.

Sincerely,
The Team at FOREX.com


Here is one of the relevant products offered by Forex.com:

How Leverage for Spot Gold Works

Leverage for spot gold trading is set at 100:1. This means that for every $1 you have in your account balance, you have $100 in buying and selling power for gold trading. As a result, leverage increase a client's buying and selling power and enables clients to participate in a market that may otherwise be cost prohibitive. Keep in mind that increasing leverage increases risk.


This is the long and short of it. If you want to trade paper, there are still plenty of ways to do it. But you might not be able to do it in the US unless you are using an exchange with structured counter party risk and contracts, and regulated leverage.


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Time Running Out on Retail Currency Business for SEC-Registered Broker-Dealers

By P. Georgia Bullitt, Michael A. Piracci, F. Mindy Lo, Investment Management Practice

As things currently stand, on July 16, when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[1] becomes effective, Securities and Exchange Commission (SEC)-registered broker-dealers (BDs) will no longer be able to enter into many types of foreign currency transactions for their retail customers. Although the law is not entirely clear, there is even a question as to whether BDs may purchase foreign currency for retail customers in connection with foreign securities trades if the settlement date for the currency transaction extends beyond two days.[2] The reason for these changes is that the Dodd-Frank Act included a requirement that the applicable functional regulator pass rules governing conduct of a regulated entity regarding retail forex in order for an entity to be able conduct such business. The Commodity Futures Trading Commission (CFTC) has passed rules[3] and the Federal Deposit Insurance Corporation (FDIC)[4] and the Office of the Comptroller of the Currency (OCC)[5] have proposed rules, but the SEC has done neither.

The bad news for BDs does not end there. A provision in the Dodd-Frank Act disallows a BD from using its CFTC-registered futures commission merchant (FCM) to conduct such foreign currency transactions (even though a stand-alone FCM may legally carry out the trades), and the CFTC has provided in its rules that a BD may not solve its problem by registering as a retail foreign exchange dealer (Forex Dealer). Going forward, unless the SEC acts, the only types of entities that may solicit and effect foreign exchange transactions with customers that are not "eligible contract participants" (ECPs) are banks and stand-alone FCMs and Forex Dealers. Investment advisers that assist retail customers will also have to separately register as commodity trading advisers (CTAs) in order to advise on foreign exchange trades carried out at FCMs and Forex Dealers.

The potential impact of these changes on existing transactions between retail customers and BDs leaves room for doubt regarding their ongoing validity. As a result, BDs and investment advisers that work with retail customers should evaluate their current foreign exchange business and evaluate how best to address the changes from a structural perspective, including possibly moving existing transactions to a bank affiliate or a stand-alone FCM or Forex Dealer.

Retail Forex Transactions

The Commodity Exchange Act (CEA) provides that only enumerated regulated entities are permitted to "solicit" or transact in off-exchange foreign currency transactions (forex transactions) for non-ECPs.[6] These regulated entities include U.S.-regulated banks, SEC-registered BDs, FCMs, and Forex Dealers. Covered forex transactions include forwards and options conducted in the over-the-counter market as well as off-exchange futures and leveraged transactions that do not result in actual delivery of currency. An ECP is defined in Section 1a(18) of the CEA, as amended by the Dodd-Frank Act, and includes, for purposes of transacting in foreign exchange, (i) a corporation, partnership, organization, trust, or other entity (other than a commodity pool) that has total assets exceeding $10 million; (ii) an individual that has in excess of $10 million "invested on a discretionary basis";[7] and (iii) a commodity pool that is formed and operated by a person regulated under the CEA (but only if all of the participants in the pool are ECPs).

Spot transactions are excluded from the scope of the regulation, as are physically settled transactions that are not "offered, or entered into, on a leveraged or margined basis, or financed by the offeror." Spot transactions are narrowly defined to include only physically settled transactions settling in two business days and transactions that create an enforceable obligation to deliver among persons that have the ability to do so in connection with a line of business.[8] Neither the SEC nor the CFTC has provided interpretive guidance on what it means for a transaction to be entered into on a leveraged or margined basis or to be financed by the offeror. Although it would be appear contrary to the common meaning of the term "financing," a currency conversion carried out by a BD in connection with a securities purchase for a retail customer could be interpreted to be a "financing" due to the settlement risk. As a result, to the extent that the statute was to be interpreted in this way, BDs would not be eligible to carry out those conversions for retail customers after July 16, absent SEC relief. While a BD could avoid this result by settling the foreign currency conversion T+2 (ahead of the T+3 settlement for the security), that approach would impose additional market risk on either the customer or BD, depending upon how the one-day pricing risk was allocated.

Broker-Dealers Offering Retail Forex

Although the CEA provides that enumerated regulated entities may act or offer to act as counterparty in retail forex transactions, the Dodd-Frank Act added Section 2(c)(2)(E)[9] to the CEA, which provides that an otherwise regulated entity, such as a bank or BD, for which there is a federal regulator, may not offer or enter into retail forex transactions unless offered pursuant to rules of the applicable federal regulator.[10] The applicable regulator for BDs is the SEC. However, to date, the SEC has not published rules and the staff has informally suggested that the SEC is not likely to do so. As a result, as of July 16, 2011, BDs will no longer be able to effect transactions to purchase or sell currency for their retail customers, unless the currency transaction will be physically settled in two business days or otherwise falls outside the coverage of the CEA (e.g., because the transaction is not leveraged, margined, or financed). The CEA does not include exemptions for hedging or de minimis transactions.

The prohibition on soliciting and transacting in retail forex applies to every type of BD. As a result, clearing firms will not be able to facilitate retail forex trades for customers of their U.S. and foreign correspondents. A correspondent BD would not be allowed to handle execution of retail foreign exchange itself (e.g., through its institutional foreign exchange desk) unless the customers are ECPs. BDs that direct retail forex to another entity that is appropriately registered for the business (e.g., an FCM) would not be affected.

The CFTC's ability to fix this problem is limited. The CFTC is not allowed to regulate or have its rules apply to a BD. The CEA expressly provides that a BD may not qualify to carry out this activity by routing the business through an FCM that is part of the BD. In its forex rules, the CFTC has similarly provided that a BD may not address the problem by dually registering as a Forex Dealer.[11] As a result, unless the SEC acts, retail forex may only be conducted by a regulated entity that is outside of a BD.

BDs who currently conduct retail forex transactions for their customers should work with their customers to open separate accounts for the business at an FCM, bank, or Forex Dealer. In terms of legacy transactions, it is not clear whether or not they would continue to be enforceable and legal if carried by the BD. As a result, absent SEC relief, BDs may want to consider novating them to a properly regulated FCM, bank, or Forex Dealer.

Investment Advisers

Investment advisers are also impacted by these rules. Under the CEA and CFTC rules, a person who exercises discretionary authority over a retail forex account carried at an FCM or Forex Dealer must itself register as a CTA. The CEA excludes from this requirement other regulated entities that are permitted to act as counterparty to retail transactions, but does not exclude registered investment advisers. Since BDs will no longer be a type of authorized entity for such activity, financial advisers and other types of registered investment advisers (RIAs) will no longer be able to advise retail customers on foreign exchange transactions conducted through an FCM or Forex Dealer unless they are licensed as a CTA with the CFTC. To the extent that the retail foreign exchange transactions on which an adviser provides advice are executed through a bank, a discretionary adviser will not be required to register as a CTA.

Conclusion

Section 4(a) of the CEA provides that contracts executed in violation of the CEA are illegal. As a result-notwithstanding that many of the retail forex transactions carried out today may in fact be outside of the class of transactions regulated by the CEA, as may be much of the advice on forex that is provided to retail customers by investment advisers-given the lack of clarity and the fact that transactions conducted in violation of the CEA pose risks regarding the enforceability of trades, BDs and investment advisers should examine their retail foreign exchange activities and consider moving their affected business to an FCM, Forex Dealer, or a bank.

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis attorneys:

New York
P. Georgia Bullitt
Michael A Piracci
F. Mindy Lo

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[1]. Pub. L. No. 111-203 (2010).

[2]. As an example, if a customer places an order to purchase ordinary shares of British Petroleum, payment must be made in British pounds sterling. If the customer only has U.S. dollars in his or her account, the BD executing the transaction must purchase the pounds by settlement date to deliver in payment for the ordinary shares. Settlement of the stock purchase is typically T+3, or longer than the two business days referenced in the Commodity Exchange Act for "spot" currency transactions that are excluded from the requirement that a regulated entity act as counterparty. Whether the conversion may be legally carried out by a BD depends on whether the BD would be deemed to be "financing" the conversion or not.

[3]. See [You must be registered and logged in to see this link.]

[4]. See 76 Fed. Reg. 28358 (May 17, 2011).

[5]. See 76 Fed. Reg. 22633 (Apr. 22, 2011).

[6]. Section 2(c)(2)(B)(i)(II of the CEA

[7]. This provision is stricter than the current definition that counts as an ECP a natural person having more than $10 million in assets.

[8]. Section 2(c)(2)(B)(i)(II) of the CEA.

[9]. Section 742(c) of the Dodd-Frank Act.

[10]. Section 2(c)(2)(E)(ii)(I) of the CEA prohibits an otherwise regulated entity, such as a registered BD, from entering into a forex transaction described in 2(c)(2)(B)(i)(I) of the CEA, unless done pursuant to rules of a federal regulatory agency. The transaction described in section 2(c)(2)(B)(i)(I) of the CEA is a transaction in foreign currency that "is a contract of sale of a commodity for future delivery (or an option on such a contract) or an option" not executed or traded on an exchange. The scope of what constitutes a transaction that would be covered by the provision is not clear and has been the source of prior litigation. See CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004), reh'g denied, 378 F.3d 624 (7th Cir.).

[11]. 17 C.F.R. § 5.1(h)(1).

Obama Threatens Forex; Says Goodbye to OTC Gold Trading

38 comments | by: James Bibbings August 4, 2010

By James Bibbings and Nicole Kuchera
On July 21, 2010, President Obama signed into law the “Dodd-Frank Wall Street Reform Act” (the “Dodd-Frank Act” or “Act”). The Dodd-Frank Act most likely will bring about sweeping regulatory changes within the financial services industry. However, at over 2,300 pages in length, few people have read this legislation in its entirety. Of those individuals who have read the Act, few can comprehend the implications of such sweeping reform. As a result, I have teamed up with attorney Nicole Kuchera, from Chicago’s Henderson & Lyman, to review the content of the Dodd-Frank Act. Through this process we were able to identify some areas of the Act that are most likely to affect Commodity Futures Trading Commission (“CFTC”) regulated entities and National Futures Association (“NFA”) member firms.

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. 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. To assist commodities firms in complying with and understanding the Dodd-Frank Act, we have attempted to identify several of its most sweeping provisions. Our thoughts do not constitute legal advice and should not be relied upon in particular circumstances. We recommend that you contact competent counsel or a legal professional before taking any action in this complex area.

That being said, based on the current language of the Act, the following four areas are likely to have the most significant implications for commodity futures, OTC forex, and OTC precious metals market participants:

Elimination of OTC Forex

Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:

…A person [which includes companies] 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…

This provision will not come into effect, however, if the CFTC or another eligible federal body issues guidelines relating to the regulation of foreign currency within 90 days of its enactment. Registrants and the public are currently being encouraged by the CFTC to provide insight into how the Act should be enforced. See CFTC Rulemakings regarding OTC Derivatives located at the following website address, under Section XX – Foreign Currency (Retail Off Exchange). It is essential that OTC forex participants seek professional help to discuss possible operational and regulatory contingency plans.

Elimination of OTC Metals

As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]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. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC 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. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.

The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.

Small Pool Exemption Eliminated

Pursuant to Section 403 of Act, the “privateadviser” exemption, namelySection 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”), will be eliminated within one year of the Act’s effective date (July 21, 2011). Historically, many unregistered U.S. fund managers had relied on this exemption to avoid registration where they:

(1) had fewer than 15 clients in the past 12 months;

(2) do not hold themselves out generally to the public as investment advisers; and

(3) do not act as investment advisers to a registered investment company or business development company.

At present, advisers can treat the unregistered funds that they advise, rather than the investors in those funds, as their clients for purposes of this exemption. A common practice has thus evolved whereby certain advisers manage up to 14 unregistered funds without having to register under the Advisers Act. Accordingly, the removal of this exemption represents a significant shift in the regulatory landscape, as this practice will no longer be allowable in approximately one year.

Also an important consideration, the Dodd-Frank Act mandates new federal registration and regulation thresholds based on the amount of assets a manager has under management ("AUM"). Although not yet underway, it is possible that various states may enact legislation designed to create a similar registration framework for managers whose AUM fall beneath the new federal levels.

Accredited Investor Qualifications

Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals:

1) A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor's primary residence;

2) A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or

3) A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.

Based on this language, it is important to note that the revised accredited investor standard only applies to new investors and does not cover existing investors. However, additional subscriptions from existing investors are generally treated as requiring confirmation of continuing investor eligibility.

On July 27th, 2010, the SEC provided additional clarity regarding the valuation of an individual’s primary residence when calculating net worth. In particular, the SEC has interpreted this provision as follows:

Section 413(a) of the Dodd-Frank Act does not define the term “value,” nor does it address the treatment of mortgage and other indebtedness secured by the residence for purposes of the net worth calculation…Pending implementation of the changes to the Commission’s rules required by the Act, the related amount of indebtedness secured by the primary residence up to its fair market value may also be excluded. Indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth.

Seek Guidance Now

As is evident from reading the provisions detailed above, President Obama’s sweeping reform is far from simple. At the present date, the Dodd-Frank Act offers up more questions than it provides answers. One thing is certain though; in time there will be significant implications for the financial industry as a whole.

Nicole Kuchera is an associate in Henderson & Lyman's Financial Services Practice Group. She concentrates her practice on transactional and litigation support for securities, futures, and derivatives industry clients. Presently Ms. Kuchera counsels clients regarding a wide range of compliance and regulatory matters involving rules and regulations of SEC and CFTC, as well as self-regulatory organizations and exchanges. She also represents financial services industry clients in a wide range of litigation matters in various forums, including state and federal courts and in industry arbitrations and mediations. Ms. Kuchera is also a member of the Chicago Bar Association’s Securities, Financial and Investment Services, and Futures and Derivatives Law Committees.


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Hedge funds trading FX could be caught out by Dodd Frank

May 26, 2011 by Charles Gubert

Non-US hedge funds trading in FX could be forced to find new US counterparties if they want to avoid being inadvertently fined for non-compliance by US regulators under some of the more obscure provisions in the Dodd Frank Act.

Under Dodd Frank, hedge funds trading FX with a US investor base constituting more than 10% of the overall investors, would fall under US jurisdiction. However, if one single US investor has less than $10 million in investable assets, that fund will be classified as a retail FX fund. This is because Dodd Frank states all investors must be eligible contract participants – not just the fund.

If an FX fund has investors that fail to meet the $10 million threshold, that fund would therefore not be considered an eligible contract participant. This extra-territorial legislation could force some non-US funds to change their counterparties and use certain US Futures Commission Merchants (FCMs) or other US registrants.

Gary Alan DeWaal, senior managing director and group general counsel at prime brokerage firm Newedge, said most non-US FX hedge funds seemed unaware of these obscure, burdensome requirements. “Most hedge funds would not think that they are retail funds. However, all it takes is one US client, who fits into this bracket to make them a retail FX fund. I think a lot of hedge funds could be forced to either throw out these clients from their funds or change their counterparties,” added DeWaal.

As things stand, numerous Dodd-Frank provisions look set to be implemented within 60 days unless Congress, the Securities and Exchange Commission or the Commodity Futures Trading Commission raises any major objections or queries


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Commodity Futures Trading Commission
Office of Public Affairs

Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
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Q & A – Final Retail Foreign Exchange Rules

What is a “retail forex transaction”?

A retail forex transaction is one between an eligible counterparty and a retail customer. Generally, retail customers are:

•Individuals with less than $10 million in total assets, or less than $5 million in total assets if entering into the transaction to manage risk, and who are not registered as futures or securities professionals;
•Companies, other than financial institutions and investment companies, with less than $10 million in total assets, or a net worth less than $1 million if entering into the transaction in connection with the conduct of their businesses; and
•Commodity pools that have less than $5 million in total assets.

Where can I find the text of the rules?

The Commission’s regulations governing retail foreign exchange transactions were published at 75 Fed. Reg. 55409 (Sept. 10, 2010), and they became effective on October 18, 2010. They are accessible through the Commission’s website.

How do the CFTC Reauthorization Act and Dodd-Frank Act affect the way retail forex transactions are regulated?

Prior to the passage of the CFTC Reauthorization Act of 2008 (CRA), which modifies the Commodity Exchange Act (CEA), the CEA required that, in order to offer to serve as a counterparty to a retail forex transaction, an entity had to be one of several regulated entities, such as a financial institution, an SEC-registered broker or dealer, an insurance company, a financial holding company, an investment bank or a CFTC-registered futures commission merchant (FCM). While the CFTC had the authority to pursue fraud actions against CFTC registrants and those forex entities that were not otherwise regulated, it had no statutory authority to write rules governing the activity.

The CRA amended the CEA and provided the Commission with authority to write and enforce the rules and regulations necessary to effectuate any of the provisions of the Act in connection with off-exchange retail foreign currency futures, options, and options on futures, as well as leveraged off-exchange forex contracts offered to or entered into with retail customers. The CFTC was also given authority to write and enforce rules regarding registration of those who solicit, exercise discretionary trading authority or operate (or solicit funds for) pools in connection with any of these types of transactions.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, further modified the CEA in a number of ways. It requires that all off-exchange retail foreign currency transactions be done pursuant to the rules of a Federal regulatory agency. It also requires that unless Federal regulators prepare rules regarding off-exchange retail forex transactions within specified time periods, the transactions are prohibited. If any Federal regulatory agency had already proposed such rules prior to the enactment of the Dodd-Frank Act – as had the CFTC – the agency has 90 days following enactment to adopt final rules, or the same prohibition takes effect.

The Dodd-Frank Act directs Federal regulators to prescribe appropriate requirements with respect to:

•Disclosure;
•Recordkeeping;
•Capital and margin;
•Reporting;
•Business conduct;
•Documentation; and
•Such other standards or requirements as the Federal regulatory agency shall determine to be necessary.

For the CFTC, the Dodd-Frank Act reconfirms the Commission’s authority to regulate off-exchange retail forex transactions and establishes a date – October 19, 2010 – by which final rules must be in place. For other Federal regulators whose regulatees are expressly permitted to serve as counterparties (such as United States financial institutions and broker dealers), it requires the preparation of similar rules or such transactions by their regulatees are prohibited.

Who can offer off-exchange forex transactions to retail customers?

Prior to the passage of the CRA, the CEA required that, to offer to serve as a counterparty to an off-exchange retail forex transaction, an entity had to be one of several regulated entities, such as:

•Financial institutions,
•SEC-registered brokers or dealers (or their affiliates),
•Insurance companies,
•Financial holding companies,
•Investment bank holding companies, or
•CFTC-registered FCMs (or their affiliates).
The CRA retained this “regulated entity” requirement with one significant addition: retail foreign exchange dealers (RFEDs) – were added to the list of entities permitted to serve as counterparties. RFEDs are a new category of CFTC-registered entity created by the CRA.

The Dodd-Frank Act further modifies the list of eligible counterparties by eliminating insurance companies and investment bank holding companies. Moreover, where the list of eligible counterparties previously included “financial institutions,” the Dodd-Frank Act specifically provides that among financial institutions, only United States financial institutions are permitted to act as counterparties.

What is the scope of the CFTC’s jurisdiction with regard to off-exchange forex transactions?

While the CEA permits several types of entities to act as counterparties to retail forex transactions, the question of who regulates the activity depends on the type of entity offering to be the counterparty.

For example, SEC-registered brokers or dealers doing retail forex transactions are regulated by the SEC and financial institutions are regulated by banking regulators. The CEA provides that the CFTC has jurisdiction over FCMs, RFEDs, or entities that are not otherwise regulated.
None of the provisions of the CRA affect forex futures or options traded on exchanges, so trading of foreign currency futures and options on organized exchanges continues to be permitted under existing rules. Similarly, transactions entered into by sophisticated parties (i.e., transactions on the inter-bank market), or conducted through foreign exchange windows (where customers exchange one currency for another) are unaffected by the provisions of the CRA.
What do the rules require?

Following the CRA’s and Dodd-Frank Act’s mandates, the CFTC has adopted final rules applicable to off-exchange retail forex transactions and the entities that offer, solicit, provide advice regarding, or operate pools involving such transactions. The final rules are based, in large part, on the CFTC’s existing regulations for commodity interest transactions and commodity interest intermediaries, as well as rules of the National Futures Association (NFA) that are already in effect with respect to retail forex transactions offered by NFA’s members. Broadly speaking, the final rules require:

•Registration of various parties engaging in retail forex business,
•Distribution of disclosure documents to customers and potential customers regarding risk and potential conflicts of interest,
•Making and keeping of various records,
•Maintenance of prescribed minimum amounts of capital, and
•Trading and operational standards.

Who has to register under the new regulations?

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 CEA – will have to register with the CFTC either as FCMs or RFEDs.

•Those 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.
•Those that will serve primarily as retail forex counterparties are 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.

What are the financial requirements and to whom do they apply?

The new rules implement the $20 million minimum net capital standard established in the CRA for those registering as RFEDs or offering retail forex transactions as FCMs. The capital requirement includes an additional volume-based minimum capital amount calculated on the amount an FCM or RFED owes as counterparty to retail forex transactions.

Do the new rules have a leverage requirement?

The proposed rules included a requirement that FCMs and RFEDs serving as counterparties in off-exchange forex transactions collect from retail customers a security deposit of 10 percent of the notional value of the transaction.

This requirement has often been referred to as a “10 to 1 leverage” requirement.
The leverage requirement in the proposed rule has been replaced in the final rules 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 the Commission periodically reviews the appropriateness of those parameters. 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.

Are there other areas where the final rules are significantly different from the proposed rules?

The other major difference between the proposed rules and the final rules concerns IBs. The proposed rules included a 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).

This proposal has been replaced in the final rules with the same requirement that currently applies to IBs who introduce futures and commodity interest accounts. Thus, 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.

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