Comment Text:
i0-001
COMMENT
CL-06720
From:
Sent:
To:
Subject:
Attach:
Ford, Mildred Y.
Wednesday, March 10, 2010 9:58 AM
secretary
FW: Comments on Proposed Regulation of Retail Foreign Exchange Transactions and
Intermediaries, RIN 3038-AC 61
Letter. pdf
From:
Ng, Sharon [mailto:[email protected]]
Sent." Tuesday, March 09, 2010 4:51 PM
To:
Stawick, David
C¢: Gensler, Gary; Dunn, Michael; Sommers, Jill; Chilton, Bart; O'Malia, Scott; Radhakrishnan, Ananda; Penner, William; Smith,
Thomas J.
Subject: Comments on Proposed Regulation of Retail Foreign Exchange Transactions and Intermediaries, RIN 3038-AC 61
Please find the attached letter with enclosure from William Nissen. Thanks.
Sharon Ng
Legal Secretary for
William Nissen, Hugh Abrams & Tom Hankinson
Sidley Austin LLP
One South Dearborn Street
Chicago, IL 60603
phone: (312) 853-7590
fax: (312) 853-7036
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WASHINGTON, D.C.
March 9, 2010
By Facsimile (202-418-5521),
Email and Federal Express
Mr. David A. Stawick
Office of the Secretariat
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21
sl
Street, N.W.
Washington, DC 20581
Re:
Comments on Proposed Regulation of Retail Foreign
Exchanq~ Transactions and Intermediaries~ RIN 3038-AC 61
Dear Mr. Stawick:
This letter is written on behalf of Global Futures & Forex, Ltd., doing business as Global
Forex Trading ("GFT"). GFT is registered with the Commodity Futures Trading Commission
("Commission") as a futures commission merchant ("FCM"), and is a Forex Dealer Member
("FDM") of National Futures Association ("NFA"). GFT is also a member of the Foreign
Exchange Dealers Coalition ("FXDC"), an organization which is composed of the leading FDMs
and which advocates for responsible regulation of the retail foreign exchange ("forex") industry
before the Commission and the Congress. GFT appreciates the opportunity to comment on the
Commission's proposed rules for regulating retail forex transactions and
intermediaries.
Summary of Comments
Overall, with one significant exception, GFT believes that the Commission's proposed
rules provide a constructive approach toward implementing the provisions of the 2008 Farm Bill
and establishing a comprehensive regulatory program for retail forex in the United States. The
significant exception is proposed Regulation 5.9, which would require forex dealers to collect
margin of no less than 10% of the notional value of each forex contract from each retail
customer. As a member of FXDC0 GFT has opposed the adoption of this proposed rule, and on
January 25, 2010, GFT participated in a meeting of FXDC representatives with the
Commission's Chairman and members of the Commission's staff to voice that opposition.
Proposed Regulation 5.9 should not be adopted because it is unnecessary to protect
customers, and it would effectively put the U.S. retail forex industry out of business, as forex
dealers in the U.S, would be unable to compete against foreign dealers which typically permit
trading on 1% margin.
Sidley Austin LLP iS a lirniteO liability par~arship practicing in ~ffiliati~n with other Sidley Austin parizl~rshipsS~SID/EY A~STIN LLP
1
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Mr. David A. Stawick
March 9, 2010
Page 2
With the exception of proposed Regulation 5.9, the Commission's overall approach in
the proposed rules is constructive. Nevertheless, GFT believes some changes should be made
before the final rules are issued. These changes fall into two broad categories. First, some of
the proposed rules unjustifiably place retail forex dealers at a competitive disadvantage in
relation to FCMs and exchanges offering exchange-traded currency futures. The proposed
rules should not be adopted to the extent they impose these unwarranted anticompetitive
burdens, and instead should be made consistent with the regulations applicable to exchange-
traded futures. Second, some of the proposed rules appear to be based on a misunderstanding
of the differences in how orders for forex transactions are placed and executed, as these
proposals incorrectly assume that orders for forex transactions are placed and executed in a
manner similar to the placement and execution of orders with FCMs for futures transactions.
The proposals should be changed to conform to the way forex contracts are actually traded.
GFT believes that the retail forex industry has made significant contributions to our
economy while producing additional trading opportunities for retail customers. Retail forex
dealers such as GFT are aggregators of smaller orders which in turn are combined into
institutional-size transactions which retail forex dealers enter into with banks and other
institutional dealers. The large trades resulting from this aggregation promote price discovery
and help narrow spreads in the larger institutional currency markets. In addition, retail
customers, who previously had limited access to these forex markets, can now participate in
them through the retail dealers. The forex dealers, moreover, have customers throughout the
world and by serving these customers, they generate economic activity and jobs in the U.S. that
would otherwise take place in other countries.
The goal of the regulatory reforms reflected in the 2008 Farm Bill was to provide for the
continued economic viability of the retail forex industry while creating additional regulatory
protections for customers that did not previously exist. If adopted, the Commission's proposed
regulations generally promote this goaf, but specific changes should be made, as outlined
below, to better achieve Congress's objectives.
Discussion of Comments
1.
Proposed Regulation 5.9 Should Not Be Adopted.
Enclosed is a statement issued by the FXDC in opposition to proposed Regulation 5.9,
which would require margin of at least 10% for each forex transaction. GFT hereby
incorporates this statement by reference in this letter. For the reasons stated by FXDC,
proposed Regulation 5.9 should not be issued as a final rule.
2.
Proposed Rules Which Place an Unwarranted Competitive Disadvantage On Retail
Forex Dealers Should Not Be Adopted.
Section 15(b) of the Commodity Exchange Act ("CEA") requires the Commission to take
the antitrust laws into consideration and to endeavor to take the feast anticompetitive means ofMr. David A. Stawick
March 9, 2010
Page 3
achieving the obiectives of the CEA. GFT and other members of FXDC
are
competitors of the
exchanges offering currency futures and of FCMs brokering such futures. These exchanges
and FCMs would have an unwarranted and unfair competitive advantage if only retail forex
dealers, and not FCMs brokering retail currency futures trades, were made subject to some of
the proposed rules. In order to comply with the statutory requirement, and to prevent such an
unwarranted anticompetitive impact on the forex dealers, the Commission should change these
rules, so that retail forex dealers and FCMs acting as brokers for exchange-traded futures are
treated similarly.
a.
Proposed Regulations 5.5(e) And 5.18(i) Should Be Revised.
Proposed Regulation 5.5(e) would require retail forex dealers to provide each
customer opening an account with a written disclosure stating the following for the most recent
four quarters: (i) the total number of retail forex accounts maintained by the dealer, (ii) the
percentage of such accounts that were profitable, and (iii) the percentage of such accounts that
were not profitable. Similarly, proposed Regulation 5.18(i) would require forex dealers to keep
the records of unprofitable accounts that would be needed to make this disclosure.
These proposed rules should not be adopted in their current forms. They are
anticompetitive, because they unfairly impose on retail forex dealers a requirement that is not
imposed on FCMs with respect to similar retail futures accounts.
GFT does not believe there is a rational basis to assume that the percentage of
unprofitable retail forex accounts is greater than the percentage of unprofitable retail futures
retail accounts, and there is therefore no valid reason to impose these requirements on forex
accounts when they are not required for retail futures accounts. Moreover, if a study were
made, it is possible that the retail futures accounts would show a greater percentage of
unprofitable accounts because of the transaction costs associated with the requirement that an
FCM act as intermediary between the customers and the market-makers on the exchanges.
Because retail forex customers deal directly with the market-maker,
Le.,
the
dealer,
they do not
have these transaction costs.
If the Commission believes that the percentage of profitable retail forex accounts
is less than the percentage of profitable retail futures accounts, the Commission should
undertake a study to determine whether this is true. Without such a study or other evidence of a
disparity, there is no rational basis to impose an anticompetitive and potentially misleading
burden on retail forex dealers, as opposed to FCMs brokering exchange-traded futures for retail
customers.
b.
Proposed Re,qulation 5.18(h) Should Be Deleted.
This proposal would require every forex introducing broker ("IB") to be
guaranteed by the forex dealer to which it introduces accounts. If adopted, this proposed rule
would be inconsistent with the regulatory treatment of IBs introducing futures accounts, whichSISIDL~Y AU$TIFJ LLP
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Mr. David A. Stawick
March 9, 2010
Page 4
are allowed to be independent if they maintain their own capitaf, and the proposal is therefore
anticompetitive.
IBs who are willing to post their own capital and maintain their own compliance
functions should be permitted to operate independently when they introduce forex accounts, just
as they do when they introduce futures accounts. There is no rational reason to distinguish
between futures and forex IBs in relation to guarantees, and such a requirement would impose
an unwarranted anticompetitive burden on forex dealers to which accounts are introduced by
IBs. Therefore, the Commission should permit IBs introducing forex accounts to be
independent as long as they comply with the same regulatory requirements as futures IBs.
c.
Proposed Re.qulation 5.2(c) Should Not Be Adopted...
Proposed Regulation 5.2(c) would prevent a forex dealer from accepting trades
for a customer account where the forex dealer or its affiliate exercises discretion over the
transactions in the account. This proposed rule would also impose an unfair competitive
disadvantage on forex dealers in relation to exchanges offering currency futures and FCMs
brokering these futures.
GFT understands the rationale for this proposed restriction to be that the dealer
or affiliate would have a conflict of interest in exercising discretion, because it would be able to
deal with itself by ordering discretionary trades where it takes the other side. In exchange-
traded futures, however, there is a similar conflict of interest, because a broker who is
compensated by commissions can increase the broker's own income by making additional
discretionary trades and thereby earning additional commissions. The Commission also permits
a commodity trading advisor ("CTA
°')
to exercise discretion despite a similar conflict of interest,
because CTAs are allowed to receive commission income. See CFTC Regulation lo3(mm).
The Commission and the courts have had no difficulty dealing with the conflicts
of interest inherent in the grant of discretion to a broker or CTA who is compensated with
commissions. First, conflicts of interest such as these must be disclosed to the customer so
that the customer can make an informed decision whether to grant the discretion. In addition,
churning of an account by a broker or CTA with discretion is a violation of the CEA, which can
create liability for brokers and CTAs who abuse their discretion by placing their own interests in
generating commission income above their customers' interests in achieving profitable trading
results.
Forex dealers with discretion should be subject to rules similar to those
governing FCMs and CTAs who take discretion and receive commission income. NFA currently
has in effect a rule preventing forex dealers, and their associated persons from taking
discretion. GFT disagrees that NFA's rule is appropriate, but even NFA°s rule does not go so
far as to prevent a dealer from accepting a trade where an affiliate has discretion. Particularly
now that CTA registration and associated regulatory requirements will be imposed on separate
entities that manage forex accounts, there is no valid reason to prevent forex dealers fromSI$1DLEY AUSTII~ LLP
1
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Mr. David A. Stawick
March 9, 2010
Page 5
accepting discretionary orders from affiliates. The Commission has had a longstanding policy of
permitting brokers and CTAs to take discretion and receive commission income from the
resulting trades, and there is no rational reason to prohibit forex dealers and their affiliates from
taking discretion where the forex dealer is the counterparty to the trade.
Proposed Regulation 5.18 Should Be Amended to Accurately Reflect How Forex Tradin.q
is Conducted.
Proposed Regulation 5.18, which would establish trading and operational standards for
retail forex trading, has valid customer protection objectives. In some of its specific provisions,
however, it does not accurately address the ways in which retail forex orders are entered and
executed. Instead it assumes a futures brokerage model which does not apply. Adoption of
these proposed rules would therefore cause confusion and fail to achieve the valid regulatory
objectives that are intended. GFT believes that with some changes to reflect actual forex
practices, these regulations can achieve their intended objectives.
a.
Proposed Re.qulation 5.18(b)(1) Should Be Revised.
This proposed rule would require that an executable order received from a retail
forex customer be entered before entry of any proprietary order or order of a related person.
This proposed rule has a valid objective of preventing preferential treatment of proprietary and
related orders, but it is based on the faulty assumption that a forex dealer, like a broker, first
receives an order and then enters it for execution with a third party market-maker. In fact, forex
orders are entered directly by the customers with the forex dealers, who are the market-makers,
through an electronic order-entry system where the orders are immediately executed if the price
is available. There is no opportunity for a forex dealer, as there is with a futures broker, to
withhold some orders from the market while executing others. Moreover, every executable
order filled by a forex dealer involves a proprietary trade, because the forex dealer takes the
opposite side of every customer order.
GFT recommends that this proposed rule be revised to provide that each retail
forex dealer's electronic trade matching system shall operate in a non-discriminatory manner
such that executable orders are filled in the order received, and such that the system is not
capable of delaying an executable order of a customer to fill a later-received order of a related
person. Such a requirement would prevent the abuse which the Commission rightly seeks to
prevent, while conforming to the way in which the retail forex market operates.
b.
Proposed Re.qulation 5.18(f)(4) Should Be Eliminated.
This proposal would prevent a forex dealer from establishing a new position for a
customer, except one that offsets an existing position for that customer, if the dealer holds
outstanding orders of other retail customers for the same currency pair at a comparable price, tt
is not clear what this proposed rule actually seeks to accomplish, but in any event, it is not
operationally or economically feasible.S SIDLEY A~STIN LLP
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Mr. David A. Stawick
March 9, 2010
Page 6
If the purpose of this proposed rule is to require that one customer order be offset
against another customer order, rather than against the forex dealer, this is not operationally
feasible, and it is based on the faulty assumption that a forex dealer operates like an exchange.
Unlike electronic matching systems of exchanges, the electronic trading platforms operated by
forex dealers are not set up to match one customer order against another, but rather are
designed for the dealer to immediately and automatically take the other side of all executable
orders as soon as they are received.
This proposed rule is also not economically feasible because dealers, like other
market-makers, are compensated by revenues derived from sefling at a higher offer price and
buying at a lower bid price. Dealers do not customarily charge transaction fees or commissions
like exchanges and brokers. Therefore if the dealers were required to offset one customer order
against another before being allowed to take the other side of a customer order, they would be
providing their services and taking the risks of the business without compensation.
Other rules proposed by the Commission, as well as NFA requirements, will
adequately ensure that customers will receive fair prices. Indeed, the growth and success of
the retail forex industry demonstrates that competition among dealers has resulted in fair prices,
or else customers would not be trading with the dealers in the increasing volume that has
occurred since retail forex trading first became available to the general public. Therefore, there
is no valid customer protection objective that requires this proposed rule, and because it is
operationally and economically not feasible in any event, it should not be adopted.
c.
Proposed Re.qulations 5.18(d)(3) and 5.18(e)(2) Should Be Revised.
Proposed Regulations 5.18(d)(3) and 5.18(e)(2)would require each forex dealer,
when carrying an account for a related person of another forex dealer, to regularly transmit
copies of all account statements and all order detail for the account to the other dealer. This
proposal has a valid objective of preventing an employee of one forex dealer from using an
account at another forex dealer contrary to the interests of the individual's employer. The
requirement to transmit all statements and order detail, however, is overly burdensome. It is
also inconsistent with the way forex statements are provided to customers, and with the level of
order detail customarily provided to customers.
The obiectives of this proposal could be achieved by making these provisions
consistent with proposed Regulation 5.13, which recognizes that forex statements can be made
available for customers to access electronically, rather than requiring transmission of
statements, and proposed Regulation 5.18(b)(4), which requires order detail information to be
provided to customers only on request. Proposed Regulations 5.18(d)(3) and 5.18(e)(2) should
therefore be changed so that the forex dealer employing the trader is given access to the same
online account records as the trader. That way, the employer would be able to see the account
activity of its employee, and if it needed additional order detail, it could obtain it on request, just
as the customer may obtain it on request.Mr. David A. Stawick
March 9, 2010
Page 7
Conclusion
For the foregoing reasons, the Commission's proposed rules should be changed as
outlined above. These changes would provide for strong regulation while permitting the retail
forex business to continue to provide trading opportunities for customers, price discovery for the
foreign currency markets, and activity for our economy. GFT looks forward to continuing to
work with the Commission to achieve these goals.
Very truty yours,
William J. Nissen
Enclosure
Chairman Gary Gensler
(by emait)
Commissioner Michael Dunn
(by emait)
Commissioner Jill E. Sommers
(by email)
Commissioner Bart Chilton
(by email)
Commissioner Scott D. O'Malia
(b7 email)
Ananda Radhakrishnan
(by email)
William Penner
(by emait)
Thomas Smith
(by email)
CH1 52202t4v.1FOREIGN EXCHANGE I~EALFR.~ COALITION
Over the past decade the domestic retail foreign exchange industry has enjoyed a tremendous growth
spurt and its prospects going forward are more promising than perhaps in any other sector of financial
services. However, the CFTC's recent rule proposal, which would limit customer trading leverage to 10
to 1, would be a crippling blow to the industry and drive it offshore into the hands of foreign competitors.
Even worse, it would encourage fi'aud both at home and abroad as customers seeking to trade retail forex
would have no other legitimate domestic alternative.
Today the U,S. retail forex industry can boast hundreds of thousands of live accounts. Should the
10 to 1 leverage rule be adopted 90% of those accounts can be expected to go offshore. And the
first place they'll go is to the United Kingdom where customers can trade with leverage as high as
200 to 1,
The U,S, retail forex industry (forex dealers and introducing brokers) employs thousands of
people, The vast majority of these jobs are high paying, white collar jobs that require advanced
education and range from software developers to accountants to foreign exchange dealers. The
industry is just as much a high tech industry as it is a financial services industry.
The domestic industry's revenue is well over $1 billion. This revenue is money generated from a
product that is in many- ways an export. Furthermore, as capitaI markets open in the BRIC
countries the number of new accounts that will flow out &places like China and India will lead
to huge job and revenue gains in the United States. Trillions of dollars of trade volume are at
stake. This is money that could (and should) be booked in the United States as taxable revenue.
But if this rule passes the United States could well be costing itself bitlions of doll~xs in taxes
down the road.
The problem of Forex fraud will get worse absent legitimate dealers offering retail forex. Retail
forex fraud is not something that is caused by the actions of retail forex dealers; rather it is caused
by unlicensed con-men who masquerade as forex experts promising silly and unjustifiable returns
before disappearing with customer funds. That is why the FXDC fully supports the CFTC's rule
requiring all introducing brokers be licensed. That rule will solve forex fraud, not 10 to 1
leverage.
The 10 to 1 leverage rule will be highly unpopular with traders. The fact is I00 to leverage is
vet)' popular with the retail forex trading punic. They simply will not accept 10 to 1 leverage.
Unregulated dealers from around the world will also be the beneficiaries of the 10 to 1 leverage
rule. These unregulated forex dealers don't have to worry about capital requirements, risk
management models, marketing ethics, dealing practices or even returning a customer's funds.
These dealers will be out of the reach of the CFTC and they will thrive.
The case against the 10 to 1 leverage rule is clear. The rule will be a boon to foreign forex dealers (both
regulated and unregulated) who will grow entirely at the expense of retail forex dealers in the United
States. Thousands of high paying jobs will be lost and the potential for tens of thousands of more jobs
will forever vanish as well. Consumers will be hurt and more vulnerable to fraud. And the United States
will toss away one of the Tnost promising export industries that it has, all in the midst of 10%
unemployment. There is no good reason that this should be so.
