Comment Text:
i0-001
COMMENT
CL-06736
From:
Sent:
To:
Subject:
Attach:
IBcoalition.org >
Wednesday, March 10, 2010 3:49 PM
secretary
Regulation of Retail Forex RIN 3038-AC61
Joint Comment Letter on CFTC 1-signed.pdf
Mr. David Stawick
Secretary
Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, DC 20581
Re: RIN 3038-AC61
Dear Mr. Stawick:
The undersigned firms appreciate the opportunity to provide our joint comments to the Commodity Futures Trading
Commission ( CFTC or Commission ) on its proposed rules for Regulation of Off-Exchange Retail Foreign
Exchange Transactions and Intermediaries, 75 FR 3282 (Jan. 20, 2010). Each of the undersigned firms is in the
business of providing intermediation services as introducing brokers to a growing class of active, sophisticated
traders many of whom consider themselves professionals who trade foreign exchange ( forex ) on an over-
the-counter basis with forex dealers. We provide traders with valuable trading support products to assist them in
developing their trading skills, enable them to analyze their trading performance on a real-time basis and promote
their understanding of the off-exchange forex markets. Importantly, we assist our trader clients in deciding which
dealers suit their needs, helping them evaluate a confusing array of dealer trading platforms, services and fee
structures from which to choose. For that part of our businesses, we each have referral relationships with multiple
forex dealers.
Please see the attached PDF for the full letter and signatures.
Please confirm your receipt of this
message. We will follow up with a faxed version.March I I. 2010
Mr. David Stawick
Secretary
Commodi ty.' Futures Trading Commissior~.
t 155 2] s~ Street_ N.W.
\Vashingtoa. DC 20581
Re:
~
Dear Mr. Stawick:
The undersigned firms app_recia~e tSe opport-tmity to provide ore joint comments to fh.e
Commodity Futures Trading Commissien C'CFT~" or
"'Commission")
o~.~ its proposed rules
_~:~r
"Regulation of Oft:Exchm~ge Retail Foreign Exchange "I>masactior~s and l~termediaries." 75 FR
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o282 ~Jan. ~,0. ~0~0.,.
each ot the m,dersign~.d ~nms ~s m t.hc b~,~smc,.~ ot providing
imemaediation se~Mces as introducing brokers m a growing class of active, sophisticated traders
----- many of whom consider fl~emaelveaprofcsaioaaIs who trade foreign exchange {'~,~aw") on
~m over-the-counter basis with l~brex dealers. ~Vk p~'ovide traders wire valuable trading suppo~
prodncts to assist tI~em in developing t}mir trading skills, enable fhem to analyze their tradh~g
performgmce on a reai-fime basis and promote tt~eir nnderstandh~g of the of{~exchaage tTorex
markets, hnpo~an~I> we assist ou~ ~ader clients in deciding which dealers suit tt~eir aeeds.
hdping them evaluate a confusing an'ay of dealer trading platforms, se~4ces and fee structures
from which to choose, For that pm:t of our bnsinesscs, we each have refc~'al reiafio~M~ips wire
multiple fbrex dealers.
\~"c support effective, se~.sib.le regulation of our forex activities, and of the broader retail tbrex
~ndustry, ummr an approach that loIl.ows the estabhsgcd futures mdust~, modcI oI seI[-rcgmat;on
of hadus/ry professionals through primary oversight by ~e National Futures Association
backstopped by CFTC oversight. As evidence of our commitme:m, eael.~ of us is registered
~e CFTC as m~ in~od-acing broker
~."IB")
and is a member of NFA. even though sue5
reg~strat~o,~ and such membership ~s ~mt ct~aently reqmred. Thins. we have each voluntar,.~y
elected to corot: ly "~ ith NFA rutes regulating g.~e tetml ~brex acttvmes o* ,is members. V~'c are
committed io developing internally s~rong complim~ce cultures fl)r complying with reqnirements
u.~der N EA roles and, ~. nee adopted. CFTC. rules.
CHIC_469"t 22,5 5M_~: David Stawick
March l 1. 2010
Page 2
We are. we believe, the types
of
firms the Commission sboMd
be
suppo~ting as alternatives to the
IFaudulem uemgistered solicitors the Commission t~as spem so much time and effort to shut
down over the years. Untbrtunately, lhoug.h, in its zeal m curtail franduient solicitation practices..
the Commission i.s proposia~g a set of ruIes ~.t~at needlessly restrict legitimate fbrex activities
wii1. if adop'~ed, serionsly undem~ine ou;" abiii
W
to operate successIi~lly as regulated alterna*ives,
especially against our nou-U.S, based competition. [udeed. features ogthe rulemaking proposal
appear to reflect biased Commission views tbm there are no legitimate segmen,t-s of the retail
tbrex ii~dustu, ar~.d that .r~o retd.[ customers sh.ould be tradi_~g forex. The Cor_nmi.ssio~ should not
adopt rules predicated upon a distorted perspective derived solely fiom its enlbrcemer~t actions
against the bad actors, but rather through empMcal data providi~g a better understandir~g of t-he
l.egitimate nature of our business.
The proposal to require a forex IB to operate as a guarameed lib of a si~:~gle CF'lTC-regulated
forex dealer is in particular detrimental to m~r busi~ess models, where o..~?ring our trader clients
tlo.e freedom, to choose among mul"tiple forex dealers is a critical element, ihe Commission
should understand the signit?cant value we provide in matching traders to the right forex denier,
We will work closely witl'., a trader to evaluate different forex deNers on a mm~ber of metrics.
including trading platfom~s, spreads, clearing practices, fees and pricing smtcmres, mad overall
customer service. We are also there as advocates ~br our trader elie~ts when they ha~'e issues or
disputes with their l",arex dealers. Arbitrarily limitic.g customer c.hoice to a single forex dealer is
m~t
in ~he customers" best interests and will deprive them of se~wices ttm~. assist them in making
i.~forrned choices on where to trade. The Commission should eliminate the guaranteed 1g
rcquircme.m and provide a forex IB wilh th.e same choice that a futures [ B has m operate either as
an i,~dependent IB or a guaranteed lIB, We see ,.~o reason t'or taking a regulatory approach t~m,*, is
contrary to l~,.ow *.i.ttures IBa are regulated. As explained more fully below, applyi.ng ~r~eot~sistem
requirements will also creale special problems for [Bs that introduce both re, rex and R~.ures
customers.
The proposed 10:1 leverage restric.tio~ is al.so troubling and should be eliminated_ as we explain
more full.v below, \Ve a! so address certain otI~er features of ~lte proposN in our cortmaents.
][I, THE COMMI[SS[ON'S UNDERST[ANDiNG
OF THE RETAIL FOREX MARKETS IS BIASED AND I[NCOMPLETE
1-he proposed rules and the Commission's explanat~or~ reflect hostility towards all ~etail R~rex
activity. The Cornmissior~ is clearly of ~he opit~ion that a]i finns prov{di~g services to retNt 17brex
customers are bad actors intent on committing ~i~aud: all retail ct~stomers are naive.
-m~sophisticate, d and ~msaimble to be trading forex: m~d "relatively few ... trade profitably.
'''
i 75 FR 3289.Mr. David Stawick
March ~ 1. z01C
I age .7
\Ve underst~md that the CFTC has brought mJrnerotis e_nforceme~at actions against forex demurs
a~d. solicitors for fraudulent practices. Of course the Commission will haYe observed practices
of ~'~soticimtio~a fraud~ a lack of transparency ~n the pricir~g and execution of transactions,
unresponsiveness m cus~om.er cornplai~.ts and targeting o.fm~sophisticated, elderly, low net worth
and other v~li~era.ble individuals
"?
i~ the
e~f~)reeme~¢
eomext: after all it is those veD
~
-o'racdees
that are the grounds for bringing the e~tbrcement action, s
It does not follow, thou.gS, that all firms providing retail forex services are bad and predisposed
to commit |:rm~d. We arc no* those firms° We have voluntarily registered and opcraie tmder
NFA's supervisio~ and ~fles. We do not engage in abusive sales .practices: we do not targe~
~'~.|nsophisticated, elderly, low net worth and olhe:, w~lnerable i~adivi.duats'" to solicit ~o trade
forex. It is m~l'~ir to view all %rex_ IBs throuah.., tl~e prism of the Commission's enforcetaent
activities.
We should also be hones~ abou.t the reasons wi~y fra~d became wide spread ir~. tSe retaii forex
markets. There is nothing inl~erently wwng or bad about tbrcx trading. The fault dies with the
nation's historically in:ational, ambiguous m~d incomplete regulatory appwach towards re,nil
forex, which Inns created opportunitie~ -(?or persons with fi'audttlent inte~.t~ including persons
barred or suspended from ~he securities or fiitures industries. to aperate behind asse~.ions tha~
~h.eir activities were not subject to any federal reg~tlation.
The Commission.:s perception of who trades in tSe retail t~.rex markets has also been skewed b5
i.ts enforeemen,', experience. -the term ~'retail'" is a misn.omer, i_~?. thai it covers a wide range of
ct~.smmers, inciuding many of ot~r customers who are par~ of a ~owing class of exp.erie~ced..
snccesst'ul ,faders who do m-~derstand and capably manage tlne risks of their I~rex trading. The
"~retail"' label is applied to anyon~ tha~ does not mee~ the (.;~2A definition of %ligib]e c~m~.ract
participant." For an. i_miividual to meet tl~.a~ defin.ition_ he or she must have
1oral
as.~ets
i~, exc~'~',~-
of $IO million or
in excess of $5 million if trading for .risk management proposes,
s
That is a
very high t1~'eshold which caprures many individ~als on the "retail" side of ti~e dividing lh~e who
are experie~ced {i~rex traders and wt~.o i~. many cases would cotasi.der themselves lo be
professiona{ .t~)rex traders. Un.der that standard, many prot~ssional traders on the iittures
exch~ges wood be considered "~retail." The CFTC has a~reed. ,hovtgh. to treat members of .a
t)tures exchange as eligible contract paaic~pa.nvs, and not as retail customers in need of
.paternalistic protection. ~o permit them to trade certain oft;exchange forex c{.mtracts cleared bytt~e CME Cleari~~g l!:[ou~ pursnam to the exclusion m3der Section 2(d)(l',, of the CEA.
4
]['he
Commissio~fs broad characterization of a]l t~tail lbrex traders as unsop_histicated is unwarrm~ted.
1"he *brex traders responsible for the ove~vhelmiag number of comment letters the Commission
has ~ecc red oblectmc, ~ ~0 tl .....
~ l0 1 k~c.ra~e~ t~opo~al ~,ould_ m~douNedl~ d~spt~t~ ~h~. C.~FC__s
charamerizNion of them.
Wc rccommcnd that the Commission undertake
a
study or direct N[:A to undertake a study to
-,
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develop a better factual undersmndit~g ot the rctm~ torex markets, i~ch,~ding
provide services to retail [brex customers and the tTpes of se~dces they ~rox, ide, ar~d who trades
retail [i)rex m3d their trading practices and levels o~" ,radiag skill and experience. The
Commission.'s ruiemaking should, be tailored ~o t~ow the £brex industry operates and the vaD'ing
degrees of trading sophis{ication captv~red under the "retail" label based on an empirical
analysis. At a mi~imum, the Commission should, based on such a~} empirica]
de~nition of ~'retail" to exclude,
. ex, t~erienced trader~ ......
who d,
*,
t~ot meet t!~e
Ct2k?s~,
eli rqble_~ . contracl
participator definition
We Mso recommend that the Corn_mission florin a Forex Advisorv Co.mmi~tee that would serve as
a forum for discussion and commur~.icatior), wit~ the forex industry: a.~d market participants. The
Committee should include representatives of forex dea!ers, forex I Bs and other firms pro¥iding
retaU forex services, as well as forex traders and other interested parties. The Committees
charter should include the authorit? to conduct public meedngs a~d submit re.por.'.s and
recommendations {o the Commission on matters of regulatoD concenL In particular, as a matter
~f highest: priority, the Committee should dcvel.op recomme~datitms for implem.e~:ing
segregation requirements with respect to IS.rods of retail tbrex customers held b2- CFTC-regu.lated
tbrex dealers, as an important element of customer protection.
IlL
T|tE CO~M~IISSION S[|O1JLD DEVELOP A _RN-IIONAL FRAI~.IEWORK
FOLLO}VING THE FUTURES INDUSTRY MOllEL
The Commission should deYelop a rational regulatory framework that protects U.S. customers.
and permits them to make a k:.~c ~'i~g choice regarding their i~westmea{s. The alternative is that
the t~>rex business wilI go off-shore, creati_ng new oppormniti.es _Dr the fraudsters who don't care
about U.S, regul.atoD: requirements, We endorse fo[lowh~g the established futures i~.dustr~
~
fra~nework which relies upon se]fLregulation of industry professioaa[s ttnougi~ fro~*-ii~e
oversight by NFA, subject .:o *lie CFTC's independent enforcement aut|aority-_
4 CFTC Order. "Determination that Chicago Mercamile Exchange Inc. Ftoor ~3rokers a~d Floor Traders are. Sub.iec*
to Certain Terms and Conditions. Eiigib[e Comract Partlcipm~ts) {March [4. 2006). Similarly. the Commissier~ has
~lso determiaed that exchange floor traders and fleet bFokers should be deemed to meel ~he eve~ mo~-e restrictive
definition of exempt commercial emit
3,
~o permit them to trade on as~ exem{~t: commercial markeL CFTC Order
. ;;l~
',.he Matt~r
~)F
the New York Mercm~i|e Exchange, Inc. :rod
,'.hm
|nterconti~enta! Exchange, I,:~c.. Petitkms fer
Treatment of F]oor Fh-okers and Floor Traders as Eligible Commercial E~ti,:ies Pursua~t to Sec;h~ l a(l ] ~tC? of the
Commodff.W Exchange Act." 68 FR 23 ! 9 (Jan. 16.2003,_Mr. David Stawick
March ! l. 201 ©
Page 5
The Con~anission. though, has o~;:red a proposal
with
the apparent objective to regulate retail
['orex trading out of business. How else k~ explain the 10:1 leverage prc, posal, whici~ marks a
drastic depart-ure fi'om NFA's carefully de-~Moped le~,-eragc requirements? Or a guaranteed IB
proposal designed to hold t:orex dealers liable for tTraudulent solicitati.o~, practices the
Commission ass~.m~es will occur even i_n a regalated envi.rom~e~p,t with N lrA's experienced
oversight of l|~ activities?
~Phe demm~d bv :'retail" customers to trade ~brex. in partic~t|ar experienced traders who rely upon
trading for *heir livelihoods, is ve~' strong and vexkv real ar~.d will not disappear simply because
the Commission wishes it to. [f firms fl~a~ are wiliing to operate in a regulated, environment are
put out of business due m overreaching regulatory requireme~.ts, or customers refuse to use their
services because regulatory constraints adx.,ersely impact their trading, gistor? ires sho-*a~
customers wi!l ~nd other memos to trade retN1 forex. And .i~ is eas~ for them to t]nd those
Ntemath.,es on the interact, without m~y deliberate intern to circ~mvent CIvTC requirements.
i.nel.t~ding fimas willing to operate i.~a disregard of t;ae law to exploit opportunities to meet
customer demands tha~ CFTC-regalated tbrex fim~.s cannot.
CFTC rules that create
oppo~unities fi~r unregistered ~iaudNent schemes to prey o,~ U.S. customers make no sense.
It is contra~3' to punic policy and protection of cus'~omers to create a regulatory t:rm~ework i.i_aa{
pt~s!:tes retail :[brex trading undergrom~d to the ve~3' ~3:pcs of firms that engage in the abush:e
practices that Congress m~d the CommissJ.o~a are seeki~:~g to curtal1. The 2007 amendments to r..hc
CEA, altl~ough far from perfect, finally provide the CFTC with. explicit rulemaking authority to
bring long overdue rationality to regulation of" retail i-i>rex acti,,.~ities. Its proposal misses tha!
opport.tmit}.'. Tl~e Comn~.issio.t~. needs to serious|y rethink its regular-or?: objectives and recognize
she harmful unintended cow,sequences that will follow if !_...:.~S. customers are denied ra.:ionally
regulated alternatives to meet their investmet~t d.emands.Mr. David Stawick
March 1!. 2010
Page 6
IV, COMMENTS ON SPECiFiC FE~iTtI!RES OF THE R[ LEMAKING PROPOSAL
l..he CFIC is proposing that a 1o.e~ IB must ~nte., rote a :s~aarant.cc aere~:mc~.,t ~wm.t a
.,e~tlated ~o~:~x dealer. Le. ~th a ~:e=~sle~ed mtures com:m~s~.oa .~nerchant (
FC~f
predomhamrtlv engaged in traditional thtures activities or a registered Re{ai~ Foreign Pfxchat~ge
Dealer ~.
R~.biD ~,
alot~g with a requirement that it may be a pa~v to only one ~uaran~ee
agreement at a*hne. See proposed Regulation 5.18(h) a~d proposed reviskms to ReguIation
~)(8}. The Commission will dic,a*e ~he temps office gua.~gmtee agreement, to be set oat in a ti~rm
fl~at will be attad~cd to fl~c FCM ~'orm 1 -FR. Sec proposed revisions to ReguI~tion 1.3hm~. 'The
CFI.'C states that ~he guarantee agreement it will. dra~ "will provide that FCMs arxd R_FEDs that
guard.tee peribrmance by an introducing broker that inh'oduces oiI~exchange retail lBrex
mmsactkms will be jointly and severally liable
~br MI obl{g,a~io~,s ~g the introducing bro~er
m~der the Act an.d Commission regulatior~s with respect to the so!icitation of. a~ad ~rm~sactio,~s
involx.ing,
all retailfore~r c~stome~"
acc¢~ttt~ls
of the {ntrodtmi~g broker en{ered into on ot
i-he eft~ctive date of-{he ~uarmnee a~,reement ,,s It is our vndorstand~n~, ~hat these provisions.
combination, are intended to reqt~ire a %rex IB to introduce retail forex customers to only one
FCM or r~ED. and to hold {hat FCM or r~ED !iable li.~r all soiicitatio~ activities of the IB.
-the Commission has suggested tha~ the guarmatee requirement, is necessary to counter
'f.,ax~dule~at solicitation and sa!es practices hax-e been commonp{ace'" among "persons who have
.imroduced off-exct.~arxge retail :forex customers ~o counterpmties.
''~
k'~y "requiring guarantee
agreements between all off-exchar, gc retail ti?rex [Bs ar~.d the .f:CM/Rt:I.:!D counterpart~es to
whicl~ {hey it~{roduce off-exchange re{all fi0rex customers, the counterpm~{ies will be fbrced to
more caref\flly vet the persons wh.o solicit business on th.ei:- belnalf and ~t~e practices those
persons empl.oy.
'''~
in short, the Commission un*~irl.'¢ assumes that all forex l Bs are fra-adsters
when. as explained above. ~gat is not |he case.
rlae remedy to combat .{~raudulen* conduct by unregistered ibrex solicitors is to require them to
register wilh the CFTC. join NFA and operaw in complia~ce with NFA and CFTC roles eu.forced
through NFA a.s the fi'ont-Iine tbr oversight, not 1o tbrce all forex iBs to be gt~aranteed. A fi~rex
IB will be suNect to stringent fitness screeni~g by NFA and required m tempi? with N3[:A and
CI:I'C requirements regardless whether it operates as m~ independent IB or a guarm~teed, lB. In
addition, an independe:~t IB is suhiect to mit~imum capital requireme~ts, whicl~ flxe Commiss~or~
deemed "an important element of customer protection" when it firs1 deYetoped the IB
-~ 75 FR. 3287 kemphasis added.-
" I.d.Mr. David Stawick
March 11. 2010
Page 7
rcgistration talcs in 1983:
s
Registration and oversight of indcpcndes.t IBs has wor.ked well. in the
futmes indusn3.. to '~protec{ the public" agains~ the %ales abuses" committed by unregistered
agents soliciting futures customers for FCMs, which led Con_~ress to create the H3 regisu:atioa
category in t982.
9
There is ~o reason to assume tha{ approach will ~mt work in t.~e tbrex
in&~stry to protect customers.
If adopted, the guarantee requiremer~t will interfere with the legitimate activities o[" many fore>~
IBs. including t~ose signirtg this comment letm~: vvq~ich have introducing relalionsNps wit}~
multiple forex dealers and in some cases also wi~ mul.tip~e FCMs fbr re~?~:ral of t~.~tures
customers. We !~iI to see how customer protection it~terests ave served by denying customers
access to forex IBs that help t~em make in~rmed decisions abom where Io trade l~,rex or by
c~ating circumstances under which every forex IB will ~bce a~ inherent conflict o.f interest
be~veen representing the best interests of its customers and the commerciN in;crests o5 the dealer
on which ~t must rdy exclusive15 for its business sur~ival.
The gum'an.tee IB requirement, if adop*ed, will have other unimended, humeral co,.~sequer.~ces.
Although technically the CFIC is no* proposing to prob_~bit a. forex IB fi'om introdtming
customers r.o p_.on-CFTC regulated forex dealers that are permissible coumerpa,-ties, such as
banks, that wil! certair~ly be tlne resNt, it is unrealistic to expect ~hat an.v. FCM or RFED would
agree to enter into a guarantee agreement without req~dring the IB to refer customers to
e.xclusiveb~, to avoid liabilitx, ur~der the guaramee agreement fbr cus~:omers referred to such other
forex dealers. 'l"ims. if adopted, the requireme~t will deny 5)rex IBs the right to refer cvkstomers
to banks and others permitted ~o trade forex with retaii customers outside the scope of the
CFTCs rulemaking m~thority...'Notably, it will also Ibrce banks and ot~er non-CFfC regulated
permissible counterpa.~ies m stop using solicitors or to use tmregi.stered solicitors, whe~-~
may- well prefer to use CFTC-regislered IBs witl~ ~l~e comfbrt of Mmwh.~ fl~at such IBs are
su[~iec~ to NFA and CFTC oversighl.
The guaramee requirement wili also severely restrict a tbrex IB's oppo~xm~.ity to act as an IB
exchange4raded foreign currency products, which fo~ a numbe~, ol. :orex IBs ~.~oula be. a nam~,a~
complement to 1heir forex b-t~siness. It would be impossible to divorce R~tures solicitation
activities from forex solicitation w1~en providing customers with ser~,,ices to ~.rade in both the
futures and t~rex markets is the vak~e offered. -l;]~us. f~r liability reasons, the ik~rex dealer that
guarat~tees the IB's 17orex activities will likely insist tlmt t.he ~B introduce ft~tures customers to it
None, assuming tt~.e dealer is an FCM. or prohibit ~he IB from engaging in. any solicitation of
*brutes customers, if the dealer is an RFED. The guarantee requi.re:~.em will also serve as a
s CFTC proposed rule~ ~m '~[ntroducing Brok,ars at~d Associated Persons of Introducing Brokers. Co~m~odi.tv
-Finding Advisors and Commodity Pool Operators: Registratior~ a~?.d Od~er Regulatog,, R,e.qt~irements.
''
48 FR ~4'-)33.
14942 {April 6. 19831
~) H,R.. Rep. No. 97-565. pt. 1, at. 49 (t982).Mr. David Sta~qck
March 11. 2010
Pa~e 8
t~eedless obstacle -~.br an indeper~det~t futures IB to expan.d its business to include forex, by
essemiall'v forcing such a fi~m to chano__e its stalus ~o a guaran~.eed
l'he CFTC should eliminate the requiremer~t that an IB must lmve a guaramce agreement wi~h an
FCM m" ~RFED. Instead. it sh.ould revise the roles m all.ow a fo,~x I~3 to have the same ct~o{ce
tl~at a Nmres IB has to opera*e either as gin. independent IB (su[2icct to the same capital
reqtmem,~ms) o~ a g uaran~eed ~ b.
B.
lO:l LEVERA Gg REQUIREJ4E:~T
The CFTC is proposing to require FCMs and RFEDs to collect sect~rity deposits from re-tail forex
customers equal to I0% of the notional value of the retail forex transaciion, witg obligm',.ons to
collect additional secv~rit3.: deposi*s as needed to maifftait~ the 10:1 leverage ratio. Proposed
Regulation 5..9. The 10:i leverage ra~io marks a sharp departure from current, industry practices
mad NFA requirem,ems. It appeea:s to be an attemp~ to quash retail demand to trade :'5_)rex.
predicmed upon the Commission's mispercep~ion that all re~ail _{:orex traders are u.~sophisticated
ar~:d incapable ~t" understanding the risks cd" leveraged tradi~g. As explained above, customer
demand to u'ade forex x~qlt not disappear, and ~raders who want m trade with higher leverage
seek. ~md readily tired, cmm.terparties to trade with them o'ver the i.n.tenact. Moreover. co~a*~raw to
the CommissioWs characterization, many retail tbrex ct~stomers are skilled ~caders ,a, ho do
understm~d the risks of leveraged tmdi~g and make orude~t decisions o~. iimiti_~g their Iradh~g
leverage consistem wi~h their financia,1 resources mad risk appetite.
In additi.om forex dealers (much like the clearing firms tha* guarm~_tee trading o~ the f~tures
exchanges) carefully monitor the trading of t~aeir customers, because they bear ultimate fmmaciat
responsibiliD
~
for any losses a customer is tmable to repay. The Commission implicifl>
recog:,~izes tb.at this dealer selginterest helps keep losses from leveraged trading in check by
noting '°Under can:eat practices, customer positions are usuatlv closed out once the losses in an
account exceed "the iaitia.I investment,
"q°
Segregation requirements would reintbrce -that selI:-
interest.
The Commission notes that it considered NFATs cun'er~t leverage restrictions of 100:1 for mai or
currencies and 25:! tbr ot~aer :cm~encies. but o~:~rs no cxplanat.ion for rejecting Nt:A*s approach.
NFA h~ developed considerable expertise in regulating the retai! t~rex activities of its members.
emd its leverage restfictio~s m'e the res-alt ol: carel~ul deliberation w~th the input of its member
firms, Tt~e Commission should permit NFA to establish the appropriate Ieverage ratios, with
current NFA restrictions as a maximum. If the Commission's o~ective is to protect
unsophisticamd customers from the magNlied ri sk of loss associated with leverag ed tradi_~e, ~hea
it could co~asider asking NFA to evaluate tt~e merits of an approach where s~ricter !everage ratios
app]y to such customers, wt~ile givi~ag experienced tradem Ia*itude to trade with higher leverage.
to 75 FR 3291.Mr. David S~awick
Marc,.b.l.l. 2010
Page 9
The opera/io~ls or" forex iBs c~m va
U
greatly in temps of the services rise3' provide and {he roles
thW pecform in the account opel~ing process or i~ receiving and trm_~smi~tir~g customer orders.
When m~ lib provides referrals solely ~l~rough means of a link to a forex dealer's website and
no involvement in the account op~'.nmg process, we believe that ~,he recordkeeping requ~,:emen~s
under Regulatio~ ~.37 shmdd be inapplicab!e. [.~nder lhe proposed revJsior~s to ~.-l~at reg~lmion, a
fi)re>', IB would be required to make and retain a permanertt record showing for each imroduced
accom~t tl~e customer's name. address and principal business occupation and the tmmc of ap~y
other person gt~.arm~Ieeing ,at exercisi~g trading discretion over the. accotm{. Tt~.e FCM or RFED
wo~ald also be required to make and re{ain such records, flaough, a,ad we ques{ion the need [br
duplication under the Iimited circumstances .described.
\Ve also beiieve that certai_~, recordkeepi.ng req-ai.rem.ents with respcc* to trading records sl~oul.d
not apply when a tk~rex I[l has no role in receivkxg or sending cus'~omer orders. We request
conl~rmation tha~ under those cirmm~stances, the requirements of Regulation 1.35(a) (to keep
rid[, c~mplem and systemic records of the customer's forex tra~sac*io~s); Reguia~iot~ 1.35(a-1
t3o prepare writ3en records of each customer's forex order: and Regulation 1.35(b) (m prepare a
daily record or .}o~trnal showing complete detai~[s of all forex trades i~ the customer's account"
would .t~.ot appl
3
.
Under proposed Regulation 5.20. an IB would be required to provide in_Cormatioa m [he
Commissm~ upo~ special call regar~Jk~g acco~mt h~dentit~,ing i~lTormation Ibr. a~d. tradiug
acti.vit5
~
in, retail customer t\-~:rex accounts. Consistent with. the above comments, we ask the
Commission .:o modify the regulatio~ 1o c]arif}' that tl~e |B -will provide s~c.h in-~brmation only to
the extent it is required ~o have such information or ott~e,'¢,ise has s~.ch int\~rma{iom
SELF-REPORTING TO CI;'TC E~,'~TORCEME.~'T DII..7.~70N
The Commission is proposing to require forex firms that regi',~.{er under the rules to sen.d, copies
of commtmications relati:ng to customer complaims to the CI!:TC I)ivision of E~.forcement
Proposed Regulmion 5.I8~.g). The obligation attaches if ~l~e ~m~ mz~kes ~J~e
determination t!~aI {he customer's facmai al{egations "{.give} rise {o possible violations of the
rules, regulations or oNers {hereundea feinted to their _re~,ait forex business.' ld. The firm would
Nso have to detem~.ine if the allegations "~[give] rise to possibie ['rm, d trader tl~e Act or
Commission .regalatio~.s." in x~:hict~, case tktc dead!inn for subm_it~ing the compNint to ~l~e
Enforcement Di~,ision is 3 business days instead of 30 calendar days. 1_rid. Presumably. the filing
is required regardless of the merits of the c~stomer's complain.to A.gai.a. 5h.e Commissiota is
unfairly treating NI retNl t~rex f'i~ns v~dth suspicion.
The exi.sting oversight ffamexvork is suP.qcient a~d does ,not need {o be supplemented. As CITTC
registran*s and NEA members, we have written policies for h.asndJ.i.t~g customer complai.~',.ts thatMr. David Stawick
March 11o 2010
Pate 10
we follow, mck~di.~g obligatio,~s to maintain records of an>' customer cornplai~rts we recein'e and
how we resolve ~hem. Our policies a~d complaim files at~e su~ect to NFA review during audits
and at- ot~er times as NFA may request. They ~e also availaNe to ~he CFTC and Justice
Department l:br review.
The Commission si~ould eliminate the self-reporting requirement. If any CFTC-regismred firm
engages in a pattern of ignorit~g customer complaims or committing customer abuses. NFA
should be trusted t.o take appropriate disciplinary action arid, when warramed, to {repose
restric6.ons on tl_~e firm's operalions, including potentialiy an ob]igation to report customer
complaints to NFA.
CONCLUSION
For the reasons explained above, we urge the Commissio,a to:
1.
[Jnde~ake. or direct NFA to undertake° a study of the retail forex marke:ts to assure that
~he rules the Commission ultimately adopts are based on a solid factual underst~mding of
the markets, including {he fim~s providing services ';o customers and the c~tstomcrs
trading forex, and are tailored accordingly.
Form a Forex Advisory Commiitee. with the authoritF under its charier to conduct public
meeti~gs and submit reports and recommertdations to tt~e ComtNssion on mat-lets
regulatory concern, inc!~ding alex:eloping recommendations to implement segregatioa
requirements with respec~ to funds of retail forex c~ustomers held by CF'TC-regula*ed
lbrex dealers, as an impormat element of customer protection.
Revtse the proposed ruies |o pem~it a forex 113 to operate eit1~er as
su~iect to tl~e same minimum capiial requiremems that apply ~o a ik~tures IB or as a
~uaranmed IB.
4.
Defer to N['A to set appr)pnate leverage restnc.,~.ns..A~ onerous leverage restr~c,ta.n that
creates opportumt~es tot umeg~stered traudulent schemes a~ expl~{ U.S. customers
comrau to the public interest.
5
Clati~ {lac recordkeeph~g obligations of .t'orcx IBs ar~dc.~ tim prop,~sed revisions to
Regulations 1.37~ 1.35(a), i.35(a-i) a~d 1,35(b}o and revise proposed Regulation 5.20
,s .th resp~act to ar~. I.B .. reporting obli~_auon,_, as recommended m Sectio:,a
~
,-"
- *," " ~
that firms registered under
6.
Eliminate the requirement under proposed Re~.ulat~on ~.t8(.g~
_
the ..... rules must re_~ort~ customer, complaints.! ............ to the ClqC Division of ~:nforcemer_..t in
deference to {iae existing framework.Mr. David Stawick
Maxch 11, 2010
Page l 6
D~-avid~I~a~noukia~-~T~ grokers
NFA #0358522Mr. David Stawick
March 11, 2010
Page 13
NFA #0342002
