Comment Text:
i0-001
COMMENT
CL-08891
From:
Sent:
To:
Subject:
Attach:
Klejna, Dennis (NY Int)
Monday, March 22, 2010 4:24 PM
secretary
FW: Regulation of Off-Exchange Retail Foreign Exchange Transactions and
Intermediaries, 75 Fed.Reg. 3282 (January 26, 2010)
CFTC - Retail Foreign Currency Rules Comment letter.DOC
Mr. David A. Stawick
Secretary to the Commission
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, N.W.
Washington
D.C. 20581
[email protected]
Regulation of Off-Exchange Retail Foreign Exchange Transactions
and Intermediaries, 75 Fed.Reg. 3282 (January 26, 2010)
Dear Mr. Stawick:
Please see the attached comment letter of MF Global Inc. regarding the Commission's proposed regulatory
scheme to implement the CFTC Reauthorization Act of 2008 with respect to Off Exchange Retail Foreign
Exchange Transactions.
Kind regards,
Dennis A. Klejna
Senior Vice President and
Assistant General Counsel
MF Global Inc.
717 Fifth Avenue
New York, New York 10022-8101
Tel. 212 935 3750
Fax. 212 589 6246
Email [email protected]
DISCLAIMER: MF Global Inc ("MFGI") is a US registered futures commission merchant and a member of the NFA and is a US registered broker-dealer and a
member of the CBOE, FINRA and SIPC. Except as otherwise indicated, references to MFGI also refer to all affiliates of MFGI (collectively "MFG"). MFG does not
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strategies cited herein is not necessarily indicative of future performance. Privacy policy available upon request.March 22, 2010
Mr. David A. Stawick
Secretary
Commodity Futures Trading Commission
1155 21
st
Street NW
Washington DC 20581
Re:
Regulation of Off-Exchange Retail Foreign Exchange Transactions
and Intermediaries, 75 Fed.Reg. 3282 (January 26, 2010)
Dear Mr. Stawick:
MF Global, Inc. ("MFG")
1
is pleased to submit this letter in response to the Commodity
Futures Trading Commission's ("Commission's") request for comments on the Commission's
proposed rules governing the offer and sale of over the counter foreign exchange transactions
to retail customers
2
through intermediaries subject to the Commission's jurisdiction. The
proposed rules are proposed to implement the provisions of section 2(c)(2)(B) and (C) of the
Commodity Exchange Act ("Act"), which authorize the Commission to "make, promulgate,
and enforce such rules and regulations as, in the judgment of the Commission, are reasonably
necessary to effectuate any of the provisions of or to accomplish any of the purposes of this
chapter in connection with agreements, contracts, or transactions" in foreign exchange as
further described in this section of the Act."
MFG strongly supports, as it always has, a comprehensive regulatory regime that will protect
retail foreign exchange customers from fraud and other misconduct that may be perpetrated
by intermediaries subject to the Commission's jurisdiction, and we welcome most of the
proposed regulations. Like many others, however, we believe that certain of the
Commission's proposals go too far and may well have the contrary effect, causing
intermediaries to avoid Commission regulation entirely by conducting business through other
MFG is registered with the Commission as a futures commission merchant CFCM") and with the
Securities and Exchange Commission as a broker-dealer. MFG is a wholly owned subsidiary of MF Global
Holdings Ltd. which, through its various affiliates (collectively, "MF Global"), is a leading broker of exchange-
listed futures and options with offices in Bermuda, New York, London, Chicago, Paris, Mumbai, Singapore,
Sydney, Toronto, Tokyo, Hong Kong, Taipei and Dubai. We provide execution and clearing services for
exchange-traded and over-the-counter derivative products as well as for non-derivative foreign exchange
products and securities in the cash market. MF Global operates across a broad range of trading markets,
including interest rates, equities, currencies, energy, metals, agricultural and other commodities. MFG and its
affiliates conduct business in 12 countries on more than 70 exchanges, providing access to the world's largest
and fastest growing financial markets.
2
The term "retail customers" means customers that do not fall within the definition of "eligible contract
participants," as set forth in section la(12) of the Commodity Exchange Act.Mr. David A. Stawick
March __, 2010
Page2
permitted counterparties - banks and other financial institutions - authorized under section
2(c)(2)(B) and (C) of the Act. These other permitted counterparties may be subject to sales
practice and related rules that are less stringent than the Commission's proposed rules.
Moreover, these provisions of the proposed rules place Commission registrants at such a
severe competitive disadvantage that they may be effectively prohibited from engaging in this
otherwise lawful activity.
The 10:1 Required Security Deposit
The proposed rules require FCMs and retail foreign exchange dealers ("RFEDs"), as the latter
group is defined in proposed rule 5.1(h), to collect security deposits from their retail
customers in an amount at least equal to 10 percent of the notional value of the retail foreign
exchange transaction. The Commission acknowledges that forex dealers currently offer far
greater leverage - anywhere from 400:1 to 25:1. Indeed, NFA rules permit leverage of 100:1
for major currencies. The Commission's primary reason for this ten-fold increase is the threat
of significant customer loss caused by even a small move against a customer's position. The
Commission explicitly recognizes, however, that "[u]nder current market practices, customer
positions are usually closed out once the losses in an account exceed the initial investment.
''3
In fact, many retail FX dealers conduct business on platforms that automatically close out
customer positions when the customer's positions are at a zero balance, a protection against
unlimited loss that exchange traded futures contracts do not provide. The Commission's
proposed rule, however, effectively ignores this key feature. As a result, on the same market
move against any given position, a customer would lose 10 times the amount currently at risk
without ever having to post additional margin.
This can hardly be seen as enhancing
customer protection. There may be a few platforms that do not provide such automatic (and
timely) close-out but, to that extent, they would be no different from any designated contract
market.
As further support, the Commission notes that there is no central counterparty for forex
transactions and retail foreign exchange customers are thus subject to counterparty risk. The
proposed above-market security deposit does nothing to ameliorate this risk. To the contrary,
requiring that a customer deposit more of its funds with its counterparty only means that the
customer will lose more of its funds in the event of
Commission also argues that greater customer deposits
customer funds held by a failing firm" and that this
bankruptcy preference accorded customer funds held
the counterparty's bankruptcy. The
will "provide some capital to cover
is justified by the absence of the
in segregation for exchange-traded
contracts. Even without the substantial benefit of the segregation of customer funds, we
believe it is inappropriate effectively to require customers to prop-up a failing firm.
Counterparty risk is better dealt with by requiring an FCM or retail foreign exchange dealer to
maintain sufficient capital to meet its obligations. The $20 million minimum capital
75 Fed.Reg. 3282,3291(January26,2010).Mr. David A. Stawick
March __, 2010
Page3
requirement established by Congress, which NFA has adopted and the Commission has
4
proposed, appears to be more than sufficient to address this concern.
The Commission's proposed security deposit amount greatly exceeds the security deposits
required in the OTC foreign currency markets generally, including among banks that deal
with retail customers. By denying FCMs and retail foreign exchange dealers the ability to
offer their customers a product that is financially competitive with that of other permitted
counterparties, the proposed amount would effectively prohibit these registrants from
engaging in conduct that Congress specifically authorized. Under the Commission's
oversight, the NFA's retail forex rules have included security deposit requirements since
2003. The Commission acknowledges that NFA currently requires a minimum security
deposit of one percent of the notional value of the transaction in the case of major currencies
and four percent in the case of non-major currencies. RFEDs that have lawfully operated for
years within these parameters may very well be put out of business as their customers quickly
move to the banks that are offering retail foreign exchange. We respectfully submit that this
cannot be what Congress intended when it twice explicitly permitted FCMs to engage in the
off-exchange retail forex business and when it authorized the Commission to regulate it in
2008.
5
MFG believes that the business disruption and competitive disadvantage to be caused
by the Commission's proposed 10:1 rule is unnecessary given the many other elements of the
comprehensive regulatory regime the Commission is proposing. We agree with the Futures
Industry Association that the Commission should retain the NFA's security deposit levels at
least until the Commission has had the opportunity to observe the effectiveness of the many
other proposed regulations under consideration that it will surely (and rightly) adopt.
Guaranteed Introducing Brokers
Proposed rule 5.18(h) provides that any introducing broker that solicits or accepts orders for
retail forex transactions must be guaranteed by an FCM or retail foreign exchange dealer.
This means that the FCM or retail foreign exchange dealer must agree to be jointly and
severally liable for all obligations of the introducing broker under the Act or the
Commission's rules with respect to the solicitation and acceptance of retail forex transactions
entered into after the effective date of the guarantee agreement.
In addition, under the Commission's rules, an introducing broker may enter into a guarantee
agreement with only one FCM or retail foreign exchange dealer at any time. Further,
proposed Rule 5.24 provides that: "Insofar as it is consistent with the requirements of this
part, all other provisions of [the Commission's rules] shall apply to such person as though
We understand that the increase in the minimum net capital requirement for FCMs and retail foreign
exchange dealers to $20 million has caused less well-capitalized dealers to withdraw from registration with the
Commission and as members of NFA. This has been accomplished without affecting the ability of better
capitalized FCMs to continue to provide appropriate foreign exchange services to their customers.
5
Title XIII, Farm, Conservation and Energy Act of 2008.Mr. David A. Stawick
March __, 2010
Page4
such provisions were expressly set forth in this part." Therefore, it would appear that
Commission Rule 1.57, which requires an introducing broker to open and carry all accounts
that it introduces with its guarantor FCM, would apply. Consequently, each introducing
broker would be required to introduce accounts only to its guarantor FCM or RFED.
Each introducing broker, therefore, would effectively become a branch office of its guarantor.
Among other responsibilities, under NFA rules, the guarantor FCM or retail foreign exchange
dealer would have to conduct an annual compliance audit of the introducing broker, including
any branch offices that the introducing broker might have.
We believe the proposed rule imposes an undue burden on introducing brokers that, even if
well-capitalized, would be able to introduce its clients to only one FCM or foreign exchange
dealer. Many of these introducing brokers may also introduce clients to different FCMs for
trading on organized futures exchanges, and the proposed rule might well result in limiting
their ability to conduct such business activities. Similarly, the proposed rule would place an
undue burden on FCMs and RFEDs, which would be forced to guarantee all introducing
brokers or forgo the use of these registrants entirely.
Many FCMs and retail foreign exchange dealers already require introducing brokers to be
registered with the Commission and become members of NFA as a sound business practice
although they are not currently required to do so. We are not aware of any evidence that these
registrants are engaging in fraud or other misconduct to a degree that justifies a requirement
that they be guaranteed.
Risk Disclosure
Section 5.5 of the proposed rules sets out a detailed risk disclosure statement that must be
provided by each FCM, retail forex dealer and introducing broker before opening an account
for a retail customer. As a general matter, we respectfully object to the tone of the disclosure
statement, which lacks the objectivity of the futures risk disclosure statement.
More specifically, we object to the proposed disclosure requirements set out in subparagraph
(e), which provides that, immediately following the risk disclosure statement, the statement
include, for each of the most recent four quarters during which the counterparty maintained
retail foreign exchange accounts:
(i) The total number of non discretionary retail foreign exchange accounts maintained by the
retail foreign exchange dealer or FCM;
(ii) The percentage of such accounts that was profitable; and
(iii) The percentage of such accounts that was not profitable.
The Commission's Part 4 rules properly require commodity trading advisors and commodity
pool operators that exercise discretionary authority over accounts to report the results of theirMr. David A. Stawick
March __, 2010
Page5
trading activities to their customers. If FCMs and retail foreign exchange dealers do not
exercise discretionary trading authority over their customers' foreign exchange accounts, the
percentage of customer accounts that are profitable or unprofitable would appear to be
irrelevant to a market participant willing to make his or her own trading decisions. The
Commission should not single out off-exchange foreign exchange transactions in this way. It
suggests that the Commission truly intends to discourage, if not dissuade, retail investors or
traders from participating in this market - even within the sweeping regulatory framework the
Commission is now proposing and which MFG largely supports.
Conclusion
The off-exchange foreign exchange experience has been a painful one. For years, firms and
individuals sought to position their activities beyond the reach of even the Commission's anti-
fraud authority. Courts grappled with the sometimes difficult question of the Commission's
jurisdiction and occasionally disagreed. Over time, Congress carefully (even painstakingly)
identified the types of regulated entities that may offer off-exchange retail forex contracts and,
in 2008, finally granted the Commission badly needed regulatory authority. MF Global
applauded this development and we are now very pleased to support most of the regulations
the Commission has proposed. We respectfully submit, however, that certain of the
Commission's proposals -particularly the required security deposit - are as yet unnecessary,
and will make it virtually impossible for FCMs to compete with banks and other financial
institutions. Indeed, with a stroke of the regulatory pen, it could ban businesses that have
operated for years within the regulatory requirements of NFA as overseen by the
Commission.
MY Global Inc. is grateful for this opportunity to comment on the Commission's proposed
regulations. If you have any comments or questions you may contact me at 212-589-6235 or
[email protected] or Dennis Klejna, Assistant General Counsel, at 212-935-3750 or
dklej na@mflgobal, com.
Sincerely,
Laurie R. Ferber
General Counsel
