Comment Text:
i0-001
COMMENT
CL-02968
From:
Sent:
To:
Subject:
John Webb
Friday, January 22, 2010 7:06 PM
secretary
Public Comment on Proposed Regulations - Retail FOREX Transactions
Dear Secretary,
I have pleasure submitting my comments for your consideration. Thank you.
John Winston Webb
"CFTC seeks public comment on proposed regulations
regarding retail Forex transactions".
Submitted by John Winston Webb to [email protected]
Date: January 22 2010
John W Webb
John Webb was the founder and managing director of MMD, Australia's first independent interbank,
corporate cash, and short dated securities broking company. He was given approval more than 30 years
ago by The Reserve Bank of Australia, and The Australian Federal Treasury to establish the very first
onshore interbank foreign exchange broking desk in Australia.
The New Zealand Government regulators also gave him a similar approval to establish New Zealand's
first onshore interbank foreign exchange broking company. Both these companies are now part of the
ICAP Group - the world's premier inter-dealer broker. John has been involved in the financial markets in
UK, South East Asia, Australia, and New Zealand at different times over the past 45 years,
having started his career in the London Stock Exchange as a trainee stockjobber with Durlacher & Co.
He holds very strong views about the potential conflicts of interests in the dealing, and trading of
financial instruments.
John Webb maintains that companies dealing in the cash and securities markets must be either a
broker, or a dealer - he claims it is impossible to be scrupulously fair to clients by being both at the
same time.
He has written about the topic in newspaper articles, published nationally.
John Webb has held directorships of:-
Hong Kong Bank of Australia Ltd (HSBC);
First Leasing and Finance Ltd (a wholly owned subsidiary of The First National Bank of Boston);
Australian Ratings Pty. Ltd (now Standard and Poor's);
National Mortgage Market Corporation Ltd;
and several private companies.
He has acted as a financial consultant to a Treasurer of the State of Victoria, and served on both
Australian Federal and State Government committees concerned with financial markets structures.
He is currently a Member of Lloyd's of London.
Dear Secretary
! am responding to the invitation to comment regarding the proposed regulations regarding
retail FOREX transactions.i0-001
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CL-02968
My involvement in the industry is prdcised above.
As you may have already noted I have very strong views about the operations of
'brokers' versus 'dealers'.
Definitions of each are set out
below:-
Broker
A
person or entity who for a commission or a fee, brings together buyers and sellers of property or services
and, while acting as the agent of one or both of the parties, helps them negotiate contracts.
A
broker never has
title to
the property.
Dealer
Any person or company that buys or sells securities for his or her own account.
The dealer realizes profit or loss from the difference between the price paid and the price sold.
A
dealer is in contrast
to a
broker, who trades on behalf of someone else.
A
dealer always has
title to
the property, the broker never does.
MANDATED MINIMUM CAPITAL REQUIREMENTS
It is my very firm contention that 'broker' and 'dealer' should have very different
quantum's set to rules and regulations applied.
The proposed regulations should take into consideration the risk exposure, and the
fundamental operations of each.
They are vastly different, and that consequently is reflected in the commercial risk profiles
of each operation.
For example a pure broker operating a 'No dealing Desk/No requote' retail forex
platform has a fraction of the exposure that would apply to a dealer operating a retail forex
platform as a principal.
The first facilitates the showing of unrelated market makers prices to unrelated price
takers. The platform operator is providing a pure broking service, and consequently has no
sudden price movement risk as it is not operating as a dealer/principal.
However, the 'dealer' operator is taking a 'view' on a possible price movement, and is
either consequently 'long' or 'short' on their book.
At the same time that operator may be trying to give the impression of making a fair,
impartial, and just market to the retail customer.
But that not the case. This operator is a wolf in sheep's clothing!
I would like to see in large letters, prominently displayed, the fact that the operator of this
type of platform is acting as a principal, and is therefore making prices on their own
account, and therefore for their own benefit.
This would go a long way to protecting retail customers from this type of platform
operator possibly using customers 'forward sell orders' and 'stop loss orders' against the
interests of the customer.
In relation to capital adequacy ratios the amount applied should be at least a minimum 10
times greater for the dealer operator against that required for a pure broker operator.
This differential should begin to recognise the commercial risk relationship between thei0-001
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two types, which are as different as 'chalk' and 'cheese'.
(Refer: mandated minimum capital requirements for entities serving as counterparties to retail off-exchange foreign
currency transactions - release 5772-10 - Dated Jan 13, 2010)
REGISTRATION OF OFF-EXCHANGE FOREX MARKET PARTICIPANT
ENTITIES/PEOPLE (RFEDs)
I have attached information from the website of ASIC (Australia Securities & Investments
Commission) which gives the dot points for current legislation operating in Australia in
relation to the licensing of operator company' s/firms, and the representatives, and staff.
All company' s/firms, and representatives working in the financial markets are required to
be licensed, and malefactors are severely dealt with.
Further, all individuals providing advice or financial product information to retail
customers must be *RG146 qualified, and registered.
ASIC -
*Regulatory Guide 146: Licensing: Training of financial product advisers (RG 146). RG 146 sets out the minimum
training standards for financial product advisers and explains how advisers can meet these training standards.
I believe the Australian Regulators have set firm, but workable standards since their
overhaul of rules and regulations in March 2004
Australian Government - ASIC information website
Standards for financial services
Since March 2004 the law in Australia has imposed higher standards that protect you whenever you deal with
banks, building societies, credit unions, insurance companies, superannuation and managed funds or with people
like stockbrokers, financial planners and insurance brokers.
Every business must hold a licence
All businesses that offer 'financial services' must hold an Australian financial services licence. You'll hear some
people call these an 'AFS licence'.
Run a
free check
on our website to see if a business you're thinking of dealing
with is licensed.
All licensed businesses must:
operate efficiently, honestly and fairly
ensure staff and representatives are properly trained and supervised
have proper complaints handling procedures in case anything goes wrong and must
belong to an
independent complaints scheme that you may use at no cost
.How to complain about a financial product or service
have arrangements in place to compensate you if they break the law and as a result you lose money.
More about compensation arrangements [link to new URL on PI Insurance]
The only important exception applies to businesses that offer only lending products, such as credit cards, loans,
and hire purchase agreements. They operate under State and territory laws. However, ASIC does make sure that
firms don't give misleading information about loans when they advertise.
Every business must tell you what you need to knowi0-001
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Anyone advising you on or selling you financial products must give you key documents about their services, advice
and the products:
Service or product
What the document must tell you
What financial service are you
Your financial services guide tells you:
getting?
the services they offer
how they operate
how they get paid (including any commissions)
how they deal with customer complaints
about their compensation arrangements
any interests, associations or relationships that
could
influence them.
More information about financial services guides
What personal financial advice are
you getting?
Your statement of advice tells you:
the advice they've given you
the information on which it's based
how they get paid (including any commissions),
and
any interests, associations or relationships that could
influence them.
More information about statements of advice
What financial product are you
buying?
Your product disclosure statement tells you:
features of the product
fees that apply
the benefits and risks of investing
commissions that may affect your returns, and
information about complaints handling and cooling off
rights
other information that is material to your decision to invest.
More information about product disclosure statements
More information about compensation arrangements and
Australian financial services businesses
Other obligations
Financial businesses also have other obligations to you about:
handling your money when you apply for a financial product
advertising for financial products and services
confirming transactions
cooling off periods for the return of certain financial products
specific rules control how salespersons can approach you when you have not
for information.
specifically asked
Shop around
Please shop around for the right advice and most suitable products at a price you can afford. ASIC sets minimum
standards, but you may not be happy with just the minimum. Successful consumers always shop around
Australian financial services licencei0-001
COMMENT
CL-02968
Under the law, any business that offers or advises you about financial products must
hold an Australian Financial Services Licence (AFS) or
be authorised to represent a licence holder.
'Financial products' include deposit accounts, life and general insurance, superannuation and investments in
managed funds, shares, debentures, and other more complex financial investments. (Loans and direct investments
in real estate are regulated under State laws, and are excluded from ASIC licensing.)
An Australian Financial Services Licence offers you various legal protections if something goes wrong. No licence
means no protection, so check licence details for any financial services business you're thinking of dealing with.
Search our Australian Financial Services Licence register free of charge
to find important information about
the business you may be dealing with. (These licences may be called 'AFS Licences' even 'AFSLs' for short.)
Here's a guide to the results you'll get.
What you'll see on our register
Licence number
How this information can help you
Helps identify the right business from others with similar
names.
(This number must appear on the licensee's Financial
Services Guide, Statements of Advice and Product
Disclosure Statements.)
Name
The exact registered name of the company that holds
the licence. Some businesses may use a different
business name for different products or services.
(If you want to know more about the company itself, do
a company search using this name.)
Status
'Current' means they can deal with you. 'Ceased'
means they can no longer deal
Deal only with a 'current' licence holder.
ABN
Australian Business Number, used for GST purposes.
Comm. Date
Commencement date, when their licence first began.
All licences will begin at some time after March 2000.
Previous ficence details
Some types of businesses were licensed by A SIC
before March 2000.
Other types of financial services businesses did not
need the previous ASIC licence, for example
superannuation, life and general insurance companies.
Role
Previous licences were divided into separate roles.
Most licence holders were 'securities dealers'.
Licence no
The previous licence number
Comm. Date
Commencement date, when the previous llcence
started.i0-001
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Principal business address
The licensee's principal business address in Australia.
Comm. Date
Commencement date, when they started at that
address.
Service address
Where to serve official legal documents.
Comm. Date
Commencement date, when that service address
started.
Auditor of FSR licensee
Who audits the licensee's financial statements and who
must report to A$1C any breaches of licence
conditions ?
For authorised representatives for this licensee,
This link opens our register of Authorised
Authorised Representatives
Representatives, and shows you the name and other
details of any separate business whom this licensee
has authodsed as its representatives.
If you are dealing with an authorised representative,
you are still protected as though you were dealing
directly with the licensee itself.
For Licence Conditions for this Licensee, Licence
Authorisation Conditions
This link shows you what financial products and
services the licence allows this licensee to offer.
In general, if a financial product or service is not
actually mentioned, then the licensee is not authorised
to offer it. This should match what's in the licensee's
Financial Services Guide.
If you are dealing with an authorised representative,
they may offer only the products and services that their
licensee is allowed to offer.
Also see
Check that people or companies are licensed
Regulatory issues arising from the financial crisis for ASIC and for market
participants
Speech by
Tony D'Aloisio, Chairman
Australian Securities and Investments Commission
Extract ...............
* OTC markets:
"OTC markets are fundamentally important to Austrafia's financial markets and
economy. ASIC is working with industry to improve efficiency and transparency of Australian OTC
derivatives market. This includes encouraging: standardisafion of contract terms; the increased use
of electronic trading platforms, and the provision of data to regulators about trading activity, pricing,
and size and location of exposures.i0-001
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We will continue to explore ways to ensure that participants can confidently participate in Austrafian
OTC markets and assess and manage their counterparty exposures.
¯ Balance sheet strength:
I spoke last year on ASIC examining balance sheet strength and risks of
market participants. This is a specific focus for us and initially we are looking at the larger market
participants to ensure they have sound processes for managing and measuring financial and trading
book risk. This is part of a broader review of capital liquidity requirements for non-APRA regulated
ficence holders.
This means looking beyond the reported financial information to the nature of financial risks being
taken and how they are managed. For example, we will look at principal positions and how they are
used to facilitate client business from straight client facilitation through stock lending to writing
options, swaps and warrants.
¯ Risk-based Compliance:
In a similar vein we'll be taking a more active and ongoing look at
operational and business risks and how these are managed. In the next eighteen months we will
engage market participants in assessing their compfiance and risk management frameworks to see
whether they are suitable for the size and nature of the businesses.
¯ White label brokers:
We know that many of you are concerned that, there are now a large
number of licence holders that provide advice on exchange traded products with access to trading
through a market participant. The compliance structure of these entities may not be to the same
standard as that of market participants. Since our restructure became effective in September we
have been active in this area. We have conducted surveillance on a number of entities and this has
resulted in some of those ficence holders making significant changes to their compliance and risk
management structure. We have included these ficence holders in our risk-based compfiance
approach within the market participants team and we are recruiting additional staff for this purpose
¯ Retail broker issues:
We are going to conduct a survey of retail stockbroking clients to see how
they value the services you are providing.
The focus of the survey will be on the quafity and nature of financial services provided to retail
clients of stockbrokers. We want to see how well the current model is working. The areas we are
looking into include general and personal advice, and how it is provided; and we will examine
managed discretionary accounts, point of sale disclosure on complex product features including
partly paid securities and whether advice is useful and understandable".
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS
Anti fraud - anti terrorist funding - money laundering issues
Firstly, I believe the main issues are centred on two factors:-
(a) the customer l O0 point qualification being strictly implemented, and spot checked
by
the Authorities with
external random audits being conducted on operators
customer lists. Just
the threat
of a random audit, with penalties ranging from
suspension or modification of the operating license should have a fear factor
that
displays the determination of the Regulators to keep the industry 'clean'
........... and
(b) the clear differentiation of the types of transactions
into:-
Deliverable Foreign Currency transactions - where total value of the currencies dealt ini0-001
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a transaction are transferred from principal to principal
(E.g. the Physical Market)
and
Non deliverable Foreign Currency transactions - where contracts generically known as
derivatives, are settled by the payment of the 'dealing differences' between two parties.
(E.g Derivatives Market)
The physical market is the province of the international banks and my experience shows
that they are very conscious of Government provisions relating to international currency
flows.
The derivatives market does not involve the notional amount of the foreign currency
transaction changing hands. The only way I know where money can be transferred across
country boundaries would be by a customer lodging an account deposit in one country and
withdrawing it in another country. I would think that if a Retail Platform operator
executed that type of transaction for a customer there would be a genuine bonefide reason
such as the customer changing residence from one country to another. And any such
amounts are likely to be so small as to be totally insignificant in relation to current daily
turnovers of USD4 trillion in the Physical market, and USD$2 trillion in the derivative
market.
LEVERAGE/GEARING
In conclusion I wish to comment on the proposal to de leverage 'across the board' the
derivative Forex market to 10:1
I think this would be an enormously retrograde step.
If gearing reduction must be introduced, for reasons ! cannot fathom, then ! suggest the
reductions are applied to the 'principal/dealers', and not to the 'broker' operators.
What objective is trying to be achieved by the reduction of gearing levels? Is it to protect
customers from themselves?
The worst aspect of the whole proposal is that there is a real danger of creating a sub class
of financier who will jam themselves in between the customer, and the Retail Platform
Operator. And that could create enormous problems. It has already happened in other
markets with third party margin lending and the outcomes in Australia have been
disastrous E.g. Opes Prime.
The customer must be afforded the right to operate within their own choice of gearing, and
the Platform Operator must also have the same right to grant/deny/regulate the gearing to
the customers.
Gearing is a personal issue and ! believe it is a customers right to determine the amount of
risk/reward that they want.
No authority governs the size of personal indebtedness via credit card facilities etc and the
same rules MUST apply here.i0-001
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The main responsibility of every participant is to aggressively disseminate a full and fair
disclosure of information to the customer, and to get every customer to verify in writing
(or by computer recognition) the fact that they are aware of the math that applies to
gearing, both positively and negatively.
Knowledge, and more knowledge, education, and more education programs for the
participants is much more important than any attempt at prohibition, which history shows
has never succeeded.
As a member of Lloyd's of London ! am fully aware of gearing as the Syndicates ! have
participated in are geared in many cases to exactly the same degree as that currently
available in the OTC Off-Market Retail Foreign Exchange currency transactions.
And finally ! request that you consider the fact that the Retail Forex Markets have opened
up long overdue benefits for non speculators, and many of these benefits would be taken
away if the 100:1 gearing is reduced.
John W Webb
187 Goulburn Weir Road
Goulburn Weir
Victoria 3608
Australia
+61 3 57947221
+61 414859414
