Comment Text:
i0-001
COMMENT
CL-08617
From:
Sent:
To:
Subject:
Attach:
David Kozak < [email protected]>
Friday, March 19, 2010 3:31 PM
secretary
Regulation of Retail Forex
Comment Itr CFTC FOREX proposal March 2010(2).pdf
Office of the Secretary - please find attached the comment letter of John W. Henry & Company, Inc. on the above-referenced rule
proposals.
David Kozak
General Counsel
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March 19, 2010
David Stawick, Secretary
Commodity Futures Trading Commission
1155 21 st Street, N. W.
Washington, D.C. 20581
Re: Regulation of Retail Forex
Dear Mr. Stawick:
These comments are addressed to the proposed rules regarding "Regulation of Off-Exchange
Retail Foreign Exchange Transactions and Intermediaries," published in the Federal Register by
the Commission on January 20, 2010 (the "Proposal"). John W. Henry & Company, Inc.
("JWH") is registered as a commodity trading advisor ("CTA") and commodity pool operator
("CPO") under the Commodity Exchange Act, as amended, (the "Act") and has conducted its
CTA business since 1982. It therefore has a direct interest in the regulation of CTAs and CPOs.
JWH understands that the purpose of the Proposal is to "adopt a comprehensive regulatory
scheme.., to implement the CFTC Reauthorization Act of 2008... with respect to off-exchange
transactions in foreign currency with members of the retail public..." as noted on page 3282 of
the Proposal. However, we have concerns about the scope and application of the Proposal to
CTAs and CPOs now registered as such and already subject to existing Commission and
National Futures Association ("NFA") rules. The Proposal does not acknowledge the
application of the rules in the Proposal to current registrants in order to alert such firms of these
proposed obligations, and does not recognize the potential for overlapping regulation in certain
areas.
The Commission states that the statutory definitions of entities such as CTAs and CPOs do not
anticipate persons engaged in off-exchange activities (footnote 45), and that "the statutory and
regulatory definitions of the identifying terms do not necessarily comprehend involvement in
retail forex trading" (page 3288). The Commission determined, however, that those categories
of registrants would be employed in the proposed rules.
Proposed rules 5. l(d) and (e) create definitions of CTAs and CPOs for the proposed Part 5 rules.
These forex CTA and CPO definitions are so broadly drawn that they include firms already
registered as CTAs or CPOs, and which may have only a small portion of their business devoted
to the forex transactions that are the concern of the proposed regulations. For example, a
currently registered CPO may be operating a pool that is not an eligible contract participant
("ECP") due to the fact that it just began to raise assets and has not yet reached a level of assets
to attain ECP status, or a long-established pool that has had its assets reduced over time due to
redemptions or trading losses and so no longer qualifies as an ECP. A currently registered CTA
may have a small number of managed accounts that are not owned by eligible contractparticipants but which trade forex as part of diversified trading programs. As a consequence,
such firms would be subject to the Part 5 forex requirements for such pools or accounts, even
though they do not apply to the great majority of their pool or account business. New and
different obligations would thus be created from those that apply to the balance of their business.
For example, proposed rule 5.19 would require notification to the Commission of material
proceedings with respect to retail forex transactions.
We note that the Commission has taken into account a comparable situation -- futures
commission merchants ("FCMs") that are primarily or substantially engaged in business that
falls within the Commodity Exchange Act's definition of an FCM. The commission provided
that such FCMs would be permitted to engage in retail forex transactions without also registering
as retail foreign exchange dealers. Accordingly, a new definition of"primarily or substantially
"is
included in Section 5. l(g) of the Proposal, which is based in part on the source of revenues
derived from the FCM's business, as defined in Section la (20) of the Act. In order to provide
for parity in regulatory treatment, we propose that a similar "primarily or substantially"
exemption be created for CTAs and CPOs that are not engaged generally in the retail forex
business, based on a 50% test regarding assets under management devoted to trading forex. The
test for exemption for CPOs would be based on having less than 50% of the assets in its pools
devoted to forex trading; the test for exemption for CTAs would be based on having less than
50% of the assets in the accounts that it manages devoted to forex trading. That would focus the
Part 5 rules on firms that are conducting essentially a forex trading business, but would exclude
CPOs that only trade forex as a relatively small part of their pool business and CTAs that trade
forex as one component of their trading programs. The exemption could be conditioned on a
requirement that CPOs or CTAs seeking the exemption not market or hold out their services as
designed to provide forex exposure to their clients.
Although the Proposal is intended to coordinate with existing NFA rules regarding retail forex
(page 3282), that intention has not been carried through completely. For example, the "General
Disclosure Required - Risk Disclosure Statements" in proposed rules 4.24 and 4.34 contain
disclosure statements about the risks of trading forex. Those disclosure statements do not
correspond to those currently required by NFA, in NFA's publication "Disclosure Documents:
Guide for CPOs and CTAs - March 2010," available on the NFA website. The statements vary
in several respects, as, for example, in stating whether the funds of a pool or account trading
forex "may" (NFA) or "will" (Commission) receive the same protections as funds used to trade
on exchanges. We urge the Commission and NFA to develop uniform language for risk
disclosures regarding forex transactions.
Sincerely yours,
DMKo~k
David M. Kozak
General Counsel
