Comment Text:
i0-001
COMMENT
CL-04788
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Sent:
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Vizbaras, Andris
Tuesday, February 2, 2010 2:56 PM
secretary >~
Regulation of Retail Forex
Letter to CFTC re regulation of retail forex 6560915 1.PDF
Please see the attached letter.
Warm regards.
Andris Vizbaras
Carter Ledyard & Milburu LLP
2 Wall Street
New York, New York 10005
212-238-8698
[email protected]
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February 2, 2010
VIA EMAIL
Commodity Futures Trading Commission
1155 21
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Street, N.W.
Washington, D.C. 20581
[email protected]
Re: Regulation of Retail Forex
Ladies and Gentlemen:
Carter Ledyard & Milburn LLP appreciates the opportunity to submit these comments in
response to the Commission's request for public comment on its proposed rules regarding off-
exchange retail foreign exchange transactions and intermediaries.1
The many harsh features of the Proposal that would affect futures commission merchants
whose sole business is retail foreign exchange ("RFEDs") -- such as the requirement for RFEDs
to guarantee their introducing brokers, the requirement that each introducing broker be exclusive
to one RFED, the limit of margin to 10 percent, and the requirement to disclose the ratio of
unprofitable customer accounts -- already have provoked an outcry from both dealers and
customers. They are right. These types of provisions are unprecedented and paternalistic, and as
a practical matter would end a lawful business. Congress authorized the Commission to regulate
RFEDs -- not to suffocate them.
The focus of this letter, however, is more narrow: Throughout the Proposal are
provisions that would restrict not just RFEDs, but also the foreign exchange activities of futures
commission merchants that are primarily or substantially engaged in trading futures contracts on
registered exchanges ("FCMs") -- even when dealing only in the types of "rollover" contracts
that were held by two federal appellate courts not to be futures contracts. Congress did not grant
the Commission general jurisdiction to regulate transactions in rollover foreign exchange
contracts by FCMs. The portions of the Proposal that purport to do so would exceed the
jurisdiction of the Commission.
~ Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 Fed. Reg. 3282 (January
20, 2010) (hereinafter, the "Proposing Release").
656032t.1-2-
Congress did not grant the Commission general jurisdiction to regulate
"rollover" foreign exchange contracts when the dealer is an FCM.
With the decisions in
CFTC v. Zelener
2
in 2004 and
CFTC v. Ersla'ne
3
in early 2008, two
federal appeals courts drew a sharp distinction between futures contracts, on one hand, and
"rollover" contracts on the other. When Congress considered the amendments to the Commodity
Exchange Act (the "CEA") that it enacted with the CFTC Reauthorization Act of 2008, both the
Commission and the National Futures Association strenuously appealed to Congress to simply
eliminate this distinction with respect to foreign exchange. Congress, however, elected not to do
so. The basic grant of jurisdiction over transactions in foreign exchange, in Section
2(c)(2)(B)(i), still is limited to "an agreement, contract, or 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." This was the same language that the courts in
Zelener and Erskine
considered and held
not to include rollover contracts.
Rather, Congress acted in 2008 to grant the Commission jurisdiction over rollover
foreign exchange contracts only on a selective basis:
¯
Where the transaction is speculative
4,
and the counterparty is an FCM or an RFED,
the antifraud provisions of the CEA apply even to a rollover contract. Section
2(c)(2)(C)(ii)(I).
¯
Where the transaction is speculative, and the counterparty is an RFED
(but not an
FCM),
the Congress authorized the Commission to make rules in its judgment that
would apply even to a rollover contract. Section 2(c)(2)(C)(ii)(IIl).
The Commission acknowledges this limit on its jurisdiction in the Proposal: "The
Commission... retains rulemaking authority with regard to look-alike transactions only where
such transactions are offered or entered into by RFEDs.
''5
The Proposal would purport to regulate "rollover" foreign exchange
contracts even when the dealer is an FCM.
Even though the CEA did not grant the Commission general jurisdiction to make rules
regarding rollover foreign exchange contracts when the counterparty is an FCM, and the
Proposal acknowledges this restriction, the Proposal goes on to propose precisely that. All of the
most onerous provisions of the Proposal would apply both to RFEDs and FCMs:
2 373 F.3d 861 (7th Cir. 2004), reh'g and reh'g en banc denied, 387 F.3d 624 (7th Cir. 2004)
~ 512 F.3d 309 (6th Cir. 2008)
4 In this letter, "speculative" is a shorthand reference to the criteria of CEA Section 2(c)(2)(C)(i)(II)(bb)(BB): A
contract that neither results in actual delivery within 2 days nor creates an enforceable obligation to deliver between
a seller and buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of
business.
~ Proposal at n. 43
6560321.1-3-
¯
Regulation 1.10(j) would require an FCM (and not just an RFED) to guarantee the
obligations of its introducing brokers relating to retail foreign exchange transactions.
¯
Regulation 1.10(j)(8) would forbid an introducing broker to an FCM (and not just an
RFED) to be a party to more than one guarantee agreement relating to retail foreign
exchange transactions.
¯
Regulation 5.9 would require an FCM (and not just an RFED) to collect a minimum
security deposit from each retail foreign exchange customer of at least 10 percent.
¯
Regulation 5.5(a)(1)(ii) would require an FCM (and not just an RFED) to furnish
each retail foreign exchange customer with a written disclosure statement that, among
other things, states the percentage of the unprofitable retail foreign exchange accounts
maintained by the FCM.
The Proposal does not explain this apparent contradiction, other than to refer to a "stated
Congressional intent" in the legislative history "that an entity should not be advantaged or
disadvantaged as a result of registering as an RFED instead of an FCM," with a footnote
reference to the Conference Report for the CFTC Reauthorization Act of 2008.
6
This portion of
the Conference Report does not support the proposition for which the Proposal cites it. It
immediately follows a discussion of minimum capital requirements and reads,
In addition, to maintaining a minimum of $20 million in adjusted net capital, the
managers expect the Commission to use the rulemaking authority provided under
this section to promulgate any other requirements necessary to ensure the
financial soundness of RFEDs.
The rules and regulations issued under this section should appropriately address
the level of financial risk posed by RFEDs and their operations. To the extent
their risk profiles are similar, the managers intend for FCMs and RFEDs to be
regulated substantially equivalently in terms of their off-exchange retail foreign
currency business. The managers do not intend for the Commission to provide
either FCMs or RFEDs with a more favorable regulatory environment over the
other or create two significantly different regulatory regimes for similar business
models-to the extent the financial risks posed by such operations are similar]
With this context, it is clear that the "stated Congressional intent" is limited to net capital
requirements and other requirements relating to the financial soundness of the dealer -- and does
not, as the Proposal claims, support the proposition that the Commission has general jurisdiction
to regulate FCMs equally with RFEDs in such matters as customer disclosures, minimum
deposits or guarantees of introducing brokers. Indeed, it could not, because Congress
conspicuously and expressly exempted FCMs from such regulation. Congress expressly
exempted any person that is "described in item (aa) through (ft) of subparagraph (B)(i)(II)" from
the Commission's general jurisdiction to regulate "rollover" foreign exchange contracts in CEA
Proposal at n. 72, citing H.R. Repo No. 110-627, at 980 (2008)(Conf. Rep.)
H.R. Rep. No. 110-627, at 980 (2008)(Conf. Rep.)
6560321.1-4-
Section 2(c)(2)(C)(ii)(III), and that exemption clearly applies to an FCM, as a person described
in item (cc) (but not an RFED, as a person described in item (gg)).
We appreciate the opportunity to share our views with the Commission on this important
topic. Please contact Andris Vizbaras (by telephone at 212-238-8698, or by email at
[email protected]) if we may provide any additional information.
Sincerely,
6560321.t
