Comment Text:
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COMMENT
CL-08619
From:
Sent:
To:
Subject:
Attach:
Alexis Hall
Friday, March 19, 2010 3:35 PM
secretary
Regulation of Retail Forex
FX Solutions, LLC Comment Letter.pdf
Alexis L. Hall*
Ruddy Law Office, PLLC
1225 15th Street NW
Washington, DC 20005
(202) 797-0762
(202) 318-0543 (fax)
www. ruddvlaw, com
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under Federa~ tax ~aw. Member, New York State Bar and District of Columbia Bar.Saddle River Executive Centre.
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Mr. David Stawick, Secretary
Commodity Futures Trading Commission
1155
21
st
Street, NW
Washington, DC 20581
Re:RIN-3038-AC61
Dear Mr. Stawick:
FX Solutions, LLC ("FX Solutions") appreciates the opportunity to comment on the rule
proposed on January 20, 2010 by the Commodity Futures Trading Commission ("CFTC") "Regulation of
Off-Exchange Retail Foreign Exchange Transactions and Intermediaries.
''1
As a National Futures
Association ("NFA") registered FCM that has operated as a forex counterparty since 2002, we believe our
perspective and tenure affords us an opportunity to provide constructive comment on the CFTC's
proposed efforts to better regulate the forex industry.
FX Solutions strongly supports the CFTC's initiative to properly regulate the forex market.
Accordingly we support a majority of the CFTC's proposal. FX Solutions fully supports the comments of
the Foreign Exchange Dealers Coalition ("FXDC") in its forthcoming comment letter regarding the
Regulation of Retail Forex. We do, however, oppose additional aspects of the proposed rules, which we
set forth in detail below.
I.
Proposed Rule 5.9 Regarding Leverage
Proposed Regulation 5.9 would require forex dealers to collect a security deposit equal to ten
percent of the notional value of the retail forex transaction. The CFTC believes that this regulation will
reduce retail forex customers' exposure to risk.
With respect to Proposed Regulation 5.9, we reiterate and fully agree with the points set forth by
the FXDC. In addition to the items expressed in FXDC's letter, we have a few additional comments,
which are outlined below.
The proposed rule regarding leverage is based on the mistaken belief that margin is for the
protection of customers. In actuality, margin is for the protection of FCMs. In fact, the CFTC, has held
that the concept of margin results from the "desire that futures commissions merchants have adequate
1 FederalRegister,
Vol. 75, No. 12, pp. 3282-3330.Mr. David Stawick
March 19, 2010
Page 2
means to assure their own financial integrity and thereby contribute to the financial integrity of the entire
marketplace.
''2
Though the CFTC itself recognizes the true purpose of margin, it now seeks to use it as a
mechanism to reduce customer exposure to risk.
In attempt to reduce customer exposure to risk, the CFTC is ignoring its objective to protect
customers from the fraudulent acts of industry professionals, and is, instead, attempting to protect
customers from themselves. The proposed rule regarding leverage will, in essence, prohibit customers
from making their own economic decisions. The ultimate decision regarding a customer's risk tolerance
should remain with the customer.
Since decisions regarding risk tolerance are best left to the customers, adequate customer
protection can be derived from proper disclosure. Like commodity futures dealers, forex dealers are
already required to provide customers with risk disclosure statements. The practice of providing risk
disclosure statements to customers has been deemed an appropriate and adequate customer protection for
decades in the futures trading industry. Since the CFTC has not established any basis for holding forex
dealers to higher standards than futures dealers, the provision of risk disclosure statements should be
sufficient in the forex industry as well. Accordingly, imposing a blanket ten percent margin requirement
is unwarranted.
II.
Guarantee Agreements
A.
Requiring Guarantee Agreements Conflicts with the Intent of Congress
Prior to 1982, FCMs regularly used agents to solicit business. These agents sometimes made
misrepresentations and engaged in other wrongful acts, which caused harm to customers. As these agents
frequently had little capital, injured customers were often left without recourse. Consequently, the CFTC
sought an amendment to the Commodity Exchange Act, pursuant to which FCMs would be held liable for
the acts of agents.
Congress recognized that these agents were, for the most part, independent firms. As such, FCMs
could not exercise adequate control over these entities. As a result, Congress dismissed the notion that
FCMs should be held liable for the acts of agents. Instead, Congress created the IB registration category.
Congress determined that registrants in the new IB category should be held accountable for their own
conduct and established certain requirements to ensure such accountability. 3
Requiting guarantee agreements between IBs and RFEDs or FCMs would make RFEDs and
FCMs accountable for the actions of IBs. Thus, it appears that the CFTC is seeking to reargue the issue
of accountability, but this time it is doing so in the forex arena. The CFTC has not established any
reasoning behind applying more stringent standards to the forex industry. Thus, as the CFTC has failed in
its endeavor to hold FCMs liable for the actions of IBs in the futures arena, it must also fail in the forex
arena.
Baker v. EdwardD. Jones & Co.,
Comm. Fut. L. Rep. (CCH) ¶21,167 at 24,772 (C.F.T.C. 1981).
FederalRegister,
Vol. 48, No. 150, p. 35248.Mr. David Stawick
March 19, 2010
Page 3
B.
Guarantee Agreements are Alternatives to Meeting Net Capital Requirements
In furtherance of the goal to hold IBs accountable for their own conduct, Congress established a
minimum net capital requirement with the idea that such a requirement would "guarantee the
accountability and responsible conduct of introducing brokers.
''4
IBs that maintained the required
minimum net capital were classified as independent.
Congress held that in lieu of meeting the minimum net capital requirement, an IB could become
guaranteed by entering into a guarantee agreement with an FCM.
5
Congress noted that "the purpose of
the guarantee agreement is to enable the introducing broker to meet the alternative adjusted net capital
requirement .... ,,6 The legislative history surrounding guarantee agreements makes clear that guarantee
agreements are to be used in lieu of, and not in conjunction with, meeting the minimum net capital
requirement.
By providing IBs with the option to either meet the minimum net capital requirement or enter into
a guarantee agreement, Congress created two separate and distinct categories of IBs. When assessing an
FCM's liability for an IB, a clear distinction between independent and guaranteed IBs has been made.
With respect to independent IBs, liability will attach to an FCM where there has been a failure of a duty
to supervise.
7
An FCM will not be required to supervise the activities of an independent IB, unless it is
has been shown that the independent IB was a de facto branch office of the FCM or an agent in the
common law sense of the term. 8 The CFTC now seeks to ignore the concept of the independent IB and
require all IBs in the forex industry to enter into guarantee agreements. Requiring guarantee agreements
will make FCMs and RFEDs liable for the actions of IBs regardless of the relationship between the two.
Additionally, when determining whether an FCM should be held liable for the actions of an IB,
courts have emphasized the necessity of a case-by-case examination of the relationship between the FCM
and the lB. By requiring guarantee agreements, forex dealers will always be held liable for the actions of
the IBs. This outcome completely ignores the long history of analyzing such issues on a case-by-case
basis.
III.
The Closing Out of Offsetting Long and Short Positions
Pursuant to proposed Regulation 1.46, forex dealers engaging in off-exchange retail forex
transactions would be required to close out offsetting long and short positions in an off-exchange retail
forex customer's account. Unlike existing Regulation 1.46, the requirement that RFEDs and FCMs close
out offsetting positions would apply regardless of whether a customer instructs otherwise.
The CFTC believes that keeping open long and short positions in a retail forex customer's
account removes the opportunity for the customer to profit on the transaction, increases the fees paid by
the customer, and invites abuse. Despite this contention, there is actually no economical distinction
4!d.
~ FederalRegister,
Vol. 48, No. 150, p. 35264.
6Id.
7 In re BigRed Commodity Corp.,
Comm. Fut. L. Rep. (CCH) ¶22,263 (C.F.T.C. 1985);
Reedv. Sage Group, Inc.,
Comm. Fut. L. Rep. (CCH) ¶23,943 (C.F.T.C. 1987)
~ In re Big Red Commodity Corp.,
Comm. Fut. L. Rep. (CCH) ¶22,263 (C.F.T.C. 1985);
Reed v. Sage Group, Inc.,
Comm. Fut. L. Rep. (CCH) ¶23,943 (C.F.T.C. 1987).Mr. David Stawick
March 19, 2010
Page 4
between commodity futures and forex transactions with respect to offsetting long and short positions.
Consequently revising the rule in the context of forex makes little sense.
Absent a prohibition spread trades are common in the marketplace due to variable demand for
two positions and the ability to capture a gain on a change in spread positions. Additionally, spread
transactions are generally recognized as a more conservative method of investing than a one-side-only
transaction. Thus, at minimum customers should be able to instruct an forex dealer not to close out
offsetting long and short positions.
As previously expressed, FX Solutions strongly endorses the CFTC's initiative to properly
regulate the forex industry. For the reasons stated above, we do, however, oppose proposed regulations
1.10, 1.46 and 5.9.
Thank you for your time and consideration of our points. Please do not hesitate to contact us if
you with to further discuss our views.
Sincerely,
FX Solutions, LLC
By:
Michael Cairns
Chief Executive Officer
Hon. Gary Gensler, Chairman
Hon. Michael Dunn, Commissioner
Hon. Jill E. Sommers, Commissioner
Hon. Bart Chilton, Commissioner
Hon. Scott D. O'Malia, Commissioner
Division of Clearing and Intermediary Oversight
Ananda Radhakrishnan, Director
Office of the General Counsel
Dan Berkovitz, General Counsel
Mark E. Ruddy, Ruddy Law Office, PLLC
Susan Molinari, Bracewell & Giuliani, LLP
