Comment Text:
i0-001
COMMENT
CL-08895
From:
Sent:
To:
Cc:
Subject:
Attach:
Tammy Botsford
Monday, March 22, 2010 4:42 PM
secretary
Gensler, Gary ; Dunn, Michael ;
Sommers, Jill ; Chilton, Bart ;
O'Malia, Scott ; Radhakrishnan, Ananda
; Smith, Thomas J. ; Bauer,
Jennifer ; Penner, William ;
Cummings, Christopher W. ; Sanchez, Peter
; Shilts, Richard A. ; Berkovitz,
Dan M
Regulation of Retail Forex - FIA Comment Letter
FIA FINAL comment CFTC Retail Forex Transactions & Intermediaries.pdf
Attached please find the Futures Industry Association's comment letter regarding proposed regulation of
off-exchange retail foreign exchange transactions and intermediaries.
Please do not hesitate to contact me with any questions.
Tammy
Tammy Botsford
Vice President and
Assistant General Counsel
Futures Industry Association
2001 Pennsylvania Ave. NW
Suite 600
Washington, DC 20006
[email protected]
Tel: 202-772-3036
Fax: 202-772-3091Futures
Industry Assoda~tm
2001 Pent~syIvm~ia Av~', NW
Suite 600
Wad~ing~on, DC 20006-1823
202,466.5460
202.296.3! 84
March 22, 2010
David Stawick, Secretaw
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, N.W.
Washington, D.C. 20581
Re:
Proposed Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 Fed. ReR. 3282 Oan. 20, 2010)
Dear Mr. Stawick:
The Futures Industry Association
~
submits these comments on the Commodity Futures
Trading Commissio~a's Notice
at"
Public Rulemaking entitled "Regulation of Off-Exchange
Retail Foreign Exchange Transactions and Intermediaries." F!A supports almost all aspects of
the Commission's proposal., and strongly supports the overarching goal of the rulemaking: to
protect customers and prevent fraud in the retail FX business.
Congress has made protectillg customers one of the cor~erstone purposes of the
Commodity Exchange Act (CEA § 3(b)). FIA fully supports that statutory mandate and has
itself proposed changes to the CEA that Congress has enacted to strengthen customer protection
and fraud prevention in the retail FX business. We applaud the Commission for thoroughly
implementing the new rulemaki~g powers granted in the Commodity Futures Trading
Commission Reauthorization Act of 2008.
FIA does oppose three aspects of the Commission's proposals and offers one conceptual
comment for Commission consideration. While our letter vvitl focus on those areas of
disagreement, we do not want that focus to be misread as a negative appraisal of the
Commission's entire customer protection package. Nothing could be further fi-om the truth. FIA
believes that the overall strength of the Comlnission's proposed reforms, when implemented
For
the record, FIA is a pri~.~cipaI spokesma,.~ for the commodity futures and options industry. FIA!s regular
naembership is comprised of approximately 30 of the largest futures commission merchants ("FCMs') in the
United States. Among its associate members are representatives from virtually all other segments of the futures
industry, both national and international. Reflecting the scope and diversity of its membership, FIA estimates
that its members effect more than eighty percent of all customer transactions executed o~.~. United States
designated cow, tract markets.David Stawick, Secretary
March 22, 2010
Page 2
fully and enforced vigorously, should make it unnecessary to adopt the elem.ents of the
Colnmission's proposal which we question.
Where we disagree with the Commission's proposal, we believe customer protection
actually would be better served by a di:fferent approach. FIA urges the Comm.issio~a to
reconsider its ten percent security deposit requirement because National Futures Association's
current standards, when coupled with the rest of the Commission's new refbrms, will better
protect customer interests. FIA would ask the Commission to wait until its reforms have taken
full effect before reconsidering whether any changes to NFA's security deposit levels are
warranted. FIA also reqt~ests that the Commission modify one element of its mandated
disclosures and clarify its proposal that all the introducing brokers (IBs) must be guaranteed by
retail foreign exchange dealers (RFEDs) or futures commission merchants (FCMs).
I.
THE TEN PERCENT SECURITY DEPOSIT SHOULD NOT BE ADOPTED
The Commission proposes a new security deposit requirement for retail FX trades.
Proposed Regulation 5.9 would require each RFED or FCM that engages in. retail. FX
trm~sactiot)s to collect from customers a security deposit equal to ten percent of the l~_ot.J.o~_~a!
value of the retail FX transaction2 St, e Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 Fed. Reg. 3282, 3290-91. (Jan. 20, 2010). This rule
effectively imposes a leverage limit of 10 to 1 on these transactions; for $100 of notional FX
exposure, a custorner must post $10.
This security deposit level would expose customers to greater potential losses than
current law. National Futures Association rules, which the CFTC has revievved and approved,
allow for 100-1 leverage for major currencies and 25-t leverage for other currencies.' NFA's
original security deposit rule went into effect on December 1, 2003. It required customers to
post a security deposit equaI to two percent of the notional value of transactions in "major
currencies" and four percent of the notional value of transactions in all other currencies.
4
In
2004, NFA amended this rule so that c,~stomers could post a security deposit of one percent of
3
4
With respect to short options, Proposed Regulation 5.9 requires that the customer post a security deposit of ten
percent of the notional value of short retail forex options in addition to the premium received. For tong options,
the customer must post the full premium received.
With respect to options transactions, the NFA's leverage rule is identical to Proposed Regniation 5.9.
Tt~e British ponnd, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the AustraIian dollar, th.e
New Zeat.m~d dollar, the Swedish krona, the Norwegian krone, and the Danish krone were specified as "major
currencies."David Stawick, Secretary
March 22, 2010
Page 3
the notional value tSr transactions in "major currencies.
''5
Originally, NFA instituted a security
deposit requirement as a way to ensure that FX dealers did not offer customers so much leverage
that the customer would have little chance to profit. NFA also ~vanted to closure that its security
deposit requirement would be in line with that allowed for retail FX custorners of banks and
other dealers in the international currency market. See National Futures Association, Letter to
Jean A. Webb, Commodity Futures Trading Commission Re: National Futures Association:
iProposed Amendments to NFA Bylaws 306 and 1301, NFA Compliance Rule 2-36 and Section
! of NFA's Code of Arbitration, and Proposed Adoption of Sections 11 and 12 of NFA Financial
Requirements and an Interpretive Notice entitled, "Forex Transactions with Forex Dealer
Members" (Jun. 2, 2003).
FIA believes current NFA's security deposit requirements provide more customer
protection than the Commission's proposal. Setting a security deposit level requires finding a
balance point. On the one hand, the security deposit level should not be so low as to be rigged or
inherently frau&~lent -- whereby "super" leverage and nonnat price voIatility will combine to
make it virtually impossible for a customer to profit from trading. (Before NFA stepped in years
ago, some retail FX firnrs did just that.) On the other hand, once a security deposit is set at a
level that aIlows the customer a fair opportunity to profit, the level sh.ould not be set too high
because it actually could lead to greater customer losses.
In our view, NEA's security deposit levels set an appropriate balance and should be
retained, at least until the Commission has had an. opportunity to observe how those levels wilI
work within, the new and extensive customer protection regime the Commission is proposing.
Th.e Commission's proposal to increase the NFA levels by either 400% or 1000% should be held
in abeyance. As we will discuss, the Commission's levels may actually inadvertently harm
customer interests. Moreover, at least on this record, the Commission's proposed security
deposit level may not pass muster substantively or procedurally under the Administrative
Procedure Act.
A.
Proposed Regulation 5.9 could harm the interests of customers.
The CFTC's reason for proposing to replace the one or four percent NFA security deposit
level with a ten percent security deposit is to protect the retail FX customers of REEDs and
FCMs. See 75 Fed. Reg. 329i. We share the Commission's concern for retail FX customers. In
The 2004 Amendment also exempted FX dealers who maintained adjusted net capitat of at Ieast twice the
required amount from collecting security deposits. In 2008, the NFA changed the rule so that FX dealers who
maintained adjusted net capital of at least 150% of tee reqz~ired amount could qualify for the exemptiom In
2009, the NEA rem.oved this exemption entirely, so all FX dealers subject to NFA ruIes had to coIlect security
deposits.David Sta.wick, Secretary
March 22, 2010
Page 4
our view, however, NFA's approach places less customer funds at risk arid offers better customer
protection.
Th.e Commission argues that retail FX involves inherent risks to customers, and lists
those risks -- the risk of a market loss,
6
the risk the stop-loss protections of the P_FED or FCM
will be breached, the risk of the bankruptcy of the R_FED or FCM will cause it to be unable to
pay customers that earn trading profits, and the risk customer's funds will be commingled with
those of the RFED or FCM. For each risk, the CFTC claims that requiring the customer to put
up more money to open a retail. FX position offers better customer protection.
FIA disagrees. We believe putting less, not more, customer money at risk would protect
custorners. When comparing the CFTC's proposed, required, security deposit level to that the
NFA now requires, the NFA security deposit levels better protect customers by putting less
custolner money at risk. NFA requires customers to put up $1 or $2.5 for every $i00 of
exposure, while the CFTC would require $10 [br every $100. FIA believes a reasonable
customer would prefer to have $t or $2.50 at risk, than $10, for the same transaction. In that
sense, the NFA security deposit rules woutd of.fer more protection for the interests of customers.
The Commission concedes that "usually" retail FX customer accounts are "closed out
once the losses in. an account exceed the initial investment." 75 Fed. Reg. at 3291. That is one
element that distinguishes the retail FX business model from the exchange-traded model. Again,
if the usual "close out" practice is followed, the CFTC's proposal would expose $10 to loss,
while NFA would expose $1 or $2.50. NFA's approach involves less risk for the customer.
The Commission argues that, if, for any reason, "the positions are not closed out at a zero
balance, the customer could be liable for additional losses."
See
75 Fed. Reg. at 3291. The
CFTC is right that such additional Iosses are possible. But customers' interests are not helped by
increasing the amount of the security deposit.
Consider this example. Assume a sharp market increase or decrease in price. In that
situation, it is possible any retail FX customer could suffer serious losses (or reap corresponding
profits) and those losses might eclipse the deficit balance safeguards the RFED or FCM has in
place. In that case, the CFTC's larger ($I0/100) security deposit would expose more customer
funds to loss than the NFA's lower amounts ($i or $2.5/! 00). In other words, if a firm is going
to put the brakes on a customer's losses just before or after the deficit balance level is reached,
customers would be better served if the brakes m'e applied sooner, not later. Then even if the
The Commission argues that "[t]he extreme volatility of the foreign exchange currency markets exposes retaiI
FX customers to substantial risk." ~%e 75 Fed. Reg. at 3291. The CFTC provides no data or study to show that
FX markets are more volatile than other marketsDavid Stawick, Secretary
March 22, 2010
Page 5
brakes don't stop the losses immediately, they will have a better chance of stopping the losses
sooner, resulting in less loss for ~he customer.
Of course, customers always could put up more money (or have less leverage) for their
security deposit if they so desired. No RFED or FCM is going to turn down a customer that
wants to trade on less leverage. But if customers have been trading on 100-i or 25-1 leverage
under the NFA rules and want to continue to do so, those customers will simply trade with banks
or overseas firms where NFA-level, or much higher leverage, is available. Alternatively,
customers could finance the required security deposit, which wouid not, as a matter of
economics, change the leverage ratio at all.
The CFTC also argues that it wants higher ctlstomer security deposits "to provide some
capital to cushion funds held by a failing firm," implying that putting more customer funds at
risk is desirable because those monies can be used to cushion a failing RFED or FCM, which is
accepting bi-laterai credit risk in these uncleared transactions. This rationale turns customer
protection on its head. It is hardly customer protection to make "extra" customer funds available
to help bail-out any RFEDs or FCMs that fail. In any event, Congress has already addressed the
issue of minimum finm~c~a! rules for RFIEDs and FCMs with the statuto~,/$20 million net capital
standard. There is no evidence that this statutory minimum is inadequate.
Regulation 5.9 should be re-assessed. The CFTC shouI.d wait until its new anti-i?aud and
customer protection provisions take effect before considering whether to implement stricter
security deposit requirements, if, after a trial period, the Commission still believes security
deposit improvements are necessary, it could adopt them or ask NFA to do so. For now,
however, this is a step the CFTC does not need to, and should not, take.
The CFTC provides no evidence to support its choice of a ten percent
security deposit.
The Commission's methodology in choosing a ten percen.t security deposit requirement
is, at best, unclear. The CFTC's proposal provided no data to justify its choice of a ten percent
security deposit requirement. An agency's authority to promulgate rules is based, in part, on the
premise that agencies have expertise in a given area. This expertise is the "lifeblood of the
administrative process," but the CFTC should explai~a its reasoning so that the interested public
can tmderstand how the agency is exercising its expertise.
See Burlington Trucl~ Lines v. Ur~ited
States
371 U.S. !56, 168 (t963) (finding that the Interstate Commerce Commission improperly
granted an "additional certificate of service" to prevent a union boycott of non-unionized
stockholder carriers froln disrupting shipping services in several regions).
The CFTC's rationale for requiring a ten percent security deposit, as stated in the Federal
Register, is simply that ten percent falls between FtNRA's proposed twenty-five percentDavid Stawick, Secretary
March 22, 2010
Page 6
requirement and NFA's existing four percent (or one percent) recluirement.
See
75 Fed. Reg. at
3291. This rationale ignores the basic contradiction of FINRA's proposed level -- a proposal to
protect customers will actually put more customer funds at risk -- wltich should disqualify it as
an appropriate bel~chlnark.
See
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change to Adopt FINRA Rt~le 2380 To Limit
the Leverage Ratio Offered by Broker-Dealers for Celntain FX Transactions, 74 Fed. Reg. 32022,
32023 (JuI. 6, 2009).
~
FINRA states that it wants to increase the amount of a customer's security deposit in
order to limit the customer's losses. FINRA must have found the NFA standards to be
inadequate. FINRA was wrong, as this example shows. First, assume an investor posts a $1
deposit on a notional FX position of $100. The trading increment (tick size) is 12.5 cents. If the
market moves 5 ticks against the investor's position, 62.5 cents of the $1 deposit is depleted,
which would be the same amount of Ioss if the investor posted a $25 security deposit, as FINRA
would require. But, if the market moves 30 ticks against the investor's position, for a loss of
$3.75, the investor would likely
not lose more than $1 under the NFA rule because his position
would have been closed out by the RFED or FCM as it approached de.fi.cit status (as the CFTC
acknowledges), if the same investor posted a $25 security deposit under FINP,2~'s rule,
however, he would have lost the full $3.75. FINRA's proposal will therefore allow for greater
losses :for customers who enter into retail FX positions than NFA's rules. The CFTC should not
rely on FINRA's proposal as a credible benchmark.
In contrast to its misplaced reliance on FINRA's rule, the CFTC does not explain its past
role in the adoption of NFA's standards. Put simply, for almost seven years, the CFTC has been
responsible for, and has even approved, the NFA security deposit requirements. Under Section
17(j) of the CEA, NFA submits its rules to the CFTC and may request CFTC approval (or the
CFTC may review and approve those rul.es on its own motion). The record shows that on certain
occasions the CFTC affirmatively approved NFA's security deposit ruIes.
See
National Futures
Association, Notice 1-03-14, "New Forex Rules Will Become Effective December t, 2003"
(Oct. 2, 2003) ("The Commodity Futures Trading Commission (CFTC) has approved
amendments to NFA Bylaws, Compliance Rules, Financial Requirements, and Code of
Arbitration, and a new Interpretive Notice regarding off-exchange foreign currency futures and
options transactions with retail, customers."). By law, the CFTC only approves those NFA rules
that the CFTC determines to be consiste~t with the customer protection and other provisions of
Section 17 and not otherwise in violation of the Act.
This notice proposes a teverage limit of 1.5 to 1. FINRA amended this notice on November 12, 2009 to
propose a 4 to 1 leverage limit, but did ~ot chm~ge the rationale ~br having a Ieverage limit in tt~e :first place.David Stawi.ck, Secretary
March 22, 2010
Page 7
Having accepted NFA's leverage rules for many years, the CFTC now claims those ruIes
are inadequate to protect customers. FIA respects the Commission's right to change its mind,
but believes that the public is entitled to an explanation for this about-face. The Commission,
however, has offered none. FIA believes NFA's security deposit levels actually better protect
customers than the Commission's proposed tevels and should be retained. We would be
interested to learn why the Commission disagrees with that conclusion.
The Commission has
not taken
the least anticompetitive m.eans of achieving
the Act's
objectives in violation of Section
15(b).
Section 15(b) of the Commodity Exchange Act requires the CFTC, when it adopts any
rule, to "endeavor to take the least anti-competitive means of achieving the objectives" of the
Act. The CFTC has not acknowledged that its proposal would make it prohibitively expensive
and risky for ct~stomers to enter into retail FX transactions with RFEDs and FCMs, leaving
banks with an effective monopoly on the retail FX business in the U.S. As shown above, the
CFTC has available to it less anti-competitive, and more effective, meal, s of protecting retail FX
customers. If the CFTC adopts its proposed rule, it would contravene CEA § 15(b).
Section 15(b) of the Commodity Exchange Act requires the Commission to do two things
when promulgating regulations. The Commission must: i) "take into consideration the public
interest to be protected by the antitrust laws;" and ii) "endeavor to take the least anticompetitive
means" to achieve the objectives of the CEA. See 7 U.S.C. § I9(b). The Commission has not
explained either factor with respect to Proposed Regulation 5.9.
~
See
75 Fed. Reg. at 3295-3296.
Therefore the public has no way of knowing whether the agency has discharged its legaI duty.
Without such an explanation, the CFTC denies the public meaningful opportunity to comment on
the proposal.
THE DISCLOSURE REQUIREMENT IS UNPRECEDENTED AND COULD
MISLEAD
CUSTOMERS
The Commission proposes to require RFEDs, FCMs and IBs to "provide retail forex
customers with a risk disclosure statement similar to that currently required by Regulation 1.55,
but tailored to address the risks, conflicts of interest and unique characteristics of retail forex
trading."
See
75 Fed. Reg. at 3289. FIA s~pports the effective and accurate disclosure of risk to
customers, but we question one element of the proposed retail FX disclosure. The proposal
would require RFEDs and FCMs to disclose the number of non-discretionary retail FX acconnts
maintained by an RFED or FCM, and the percentage of such accounts that were profitable for
each of the four most recent quarters. The CFTC grounds this proposal in its belief that the "vast
Indeed, the Commission does not address either factor with respect to any proposed regulation in the proposing
release.David Stawick, Secretary
Marcia 22, 2010
Page 8
majority of retail customers who enter these transactions do so solely for speculative purposes,
and that reIatively few of these participants trade profitably." See 75 Fed. Reg. at 3289. Instead
of presenting supporting data, however, the Commission states that even if it is mistaken, this
disclosure will be helpful to customers. As proposed, we respectfully disagree because the
proposal is unprecedented and could mislead customers in certain circumstances.
FIA agrees with the Commission that RFEDs and FCMs should provide potential
customers with sufficient material information to allow them to make inforn~ed decisions about
whether to enter the retail FX market. FIA also comrnends the Commission's effort to tailor
disc!osure obligations to the specific risks of the retail FX market. Bm the novel requirement
mandating disclosure of the number of accounts that were profitable for each of the past four
quarters lacks balance and will likely misinform customers.
Legitimate questions could be raised about the value of providing any past accom~t
performance data for retail laX. The CFTC's rules for disclosure of performance by trading
professionals always contain the mandated warning that "past performance is not necessarily
indicative of future results." The disclosure is required to caution prospective investors against
over-reliance on past perfbrmance information, because markets are dynamic and unlikely to be
replicated in the future. This is especially true for FX markets because retail customer
performance turns on each customer's trading ability. Customers, as a whole, have a broad rm~ge
of experience and trading acumen. FIA therefore believes that the data on past profitability may
wel! be particularly unreliable and unhelpful as predictors of future prospects.
In addition, some customers may well enter into retail FX contracts to hedge FX
exposures; as a hedge, an unprofitable retail FX trade may well indicate a successful strategy.
Disclosing the loss out of con.text could be misleading.
Furthermore, requiring disclosure of the number of '°accounts that were profitable for
eacl,
of the tbur most recent quarters" may mislead the very investors the CFTC seeks to inform.
See 75 Fed. Reg. at 3289 (emphasis added). As written, this requirement could understate th.e
number of truly proi~table retail FX accounts. A customer could have a very profitable trading
year or two (or more) but still have an unprofitable quarter or two. On an overall net basis, the
customer could have a healtl~y profit. Yet, for the quarter or two where the customer's trading
was not successful, the customer would be included in the calculation of those suffering losses.
9
This s~mpshot approach does l~ot give a prospective customer an accurate description of the
9
The proposal, refers to "accom~ts that were profitable" rather than accomats that suffered losses. A dormant
account will th.erefore be allocated to the unprofitable category. Tl~at disclosure would ,~ot give an. i~avestor an
accurate picture.David Stawick, Secretary
March 22,201.0
Page 9
trader's overall acmai experience. In short, the proposaI's mandatory past customer performance
summary may actually misinform prospective customers about past performance. 10
lII.
REQUIRING ALL INTRODUCING BROKERS TO BE GUAIL~kNTEED BY AN
RFED OR FCM IS TOO RESTRICTIVE
The Commission proposes to require all IBs and all applicants for registratiol~ as IBs in
connection with retail off-exchm~ge FX transactions to enter into a guarantee agreernent with an
RFED or FCM.
See
75 Fed. Reg. at 3287. As part of this e[[brt, the Commission notes that it
will prepare a new guarantee agreement providing that FCMs and RFEDs who guarantee
performance by an IB are jointly and severally liable for all the IB's obligations under the CEA
and CFTC regulatiolas. This liability will extend to the solicitation of, and transactions
involving, all retail FX customer accounts of the IB,
agreement.
See id.
The Colnmissior~ suggests that this
RFEDs and FCMs to vet carefulIy the quatificatio~s
behalf and the practices those persons employ.
See id.
as of the effective date of the guarantee
requirement will prevent fraud by forcing
of persons wh.o solicit business on their
While the FIA supports this objective, it
beiieves that the Commission may not have considered the ramifications of its proposal and
respectfuIly requests that the Commission clarify the application of this ru!e.
The language of Proposed Regulation t.100)(8
)
makes clear that an tB may not
"simultaneously be a party to more than. one guarantee agreement."
See
75 Fed. Reg. at 3294.
The Commission appears to be giving IBs a choice -- either surrender your independent IB status
and agree to solicit business for a single R_FED or FCM (in effect becoming a branch office of
that enterprise) or retain your independence and solicit business for banks or overseas dealers.
From the proposal, it is not clear whether the Commission intends to prohibit IBs that are
guaranteed by m~. RFED or FCM from introducing retail FX business to banks or overseas
dealers. FIA is not certain the Commission actually has the authority to prohibit IBs from
soliciting customers for entities operating outside the CEA. In any event, FIA assumes the
Commission intends that the RFED or FCM would be legally responsible for its guaranteed IBs'
solicitations for the RFED or FCM alone, and not any of the IB's actions to find business for the
bank or overseas competitors of the RFED or FCM. It would be grossly unfair, to say the least,
to make the P_FED or FCM responsible legally for the solicitations of IBs for their competitors.
The Commission should clarify its intent in that regard.
~
10
FIA also believes that the Commission should clarify fliat a single custom.er signature is all that is required for
the mandatory risk disclosure. Requiring nmltiple sig~amres in different places i~ disclosure documents can
lead to confusion and undue administrative costs.
The need for an extra measure of clarity with the respect to the scope of an FCM's liability for its 1Bs is
consistent with the Commission's history when it approved the FCM-1B guara~tee agreement form in 1983.
Then, the Commission adopted final rules contai~ing tl~e form lat~guage that purported to expand an FCM'sDavid Stawick, Secretary
March 22, 2010
Page 10
To the extent, the CFTC is proposing to preclude the operations of independent iBs, FIA
urges the Commission to reconsider. The CFTC's proposed retail FX regulatory regime may be
more thal~ adequate to address the potential for fraud and sales practice abuses by IBs. The
Commission's new rules sh.ould be implemented and tested in the market place before any
applicable business model is banned. In fact, retaining the independent IB category may well
help to protect customers because the CFTC's sales practice and antifraud rules are surely more
stringent than those an independent IB would face if it only introduced business to banks and.
overseas dealers. Independent IBs also may perform a customer service by referring customers
to one of several retail FX trading platforms depending on the needs of the customer, tf all IBs
retest be guaranteed by a single R_FED or FCM, and that RFED or FCM does not offer trading in
a currency the customer wants to trade, the IB's ability to fulfill that customer's request would be
comprised. Braining independent IBs would seem to be a harsh result that could lead to less
customer choice and service, outcomes that do not appear to be consistent with the
Commission's goals.
IV.
"NON-ECP" CUSTOMERS ARE A DIVERSE CLASS
FtA understands the CFTC's regu!ato~.i scheme is intended to protect a!! retail customers,
called non-Eligible Contract Participants. The ECP definition establishes high thresholds for
determi~i.ng who is a retail customer and who is not. As a result, the breadth of the non-ECP
category is vast (and pending legislation may make scope of that category even broader). For
example, an individt~al with $100,000 in assets is generally quite different in terms of investment
sophistication and experience from an individual with $9.5 million in assets. Both individuals
would be non-ECPs under the CEA, of course. But no one would expect both individuals to need
generally the same types of protections from sales abuse and sharp practices.
FIA does not have a specific proposal in this regard. We would simply observe that as
the CFTC finalizes its new regulations for protecting non-ECPs it should take into account the
range of non-ECPs it is trying to protect and adjust its rules accordingly.
CONCLUSION
In 2008, Congress strengthened CFTC regulation of the retail FX business in an attempt
to continue the pattern of hnproved business practices in this popular market. The CFTC has
largely implemented its new authority with great skill. Its new regulations should add a
substantial measure of additional protections for customers that enter into retail FX contracts
with RFEDs or FCMs. FIA strongly supports those efforts, although it has taken issue with
certain aspects of the Commission's proposals.
liability beyond financial obligations of its IBs. The Commission, however, never asked for comment on, or
explained, tlais aspect of its IB regulations creating unnecessary confusion and legal uncertainty in this area.David Stawick, Secretary
March 22, 2010
Page t 1
In particular, FIA believes the CFTC should reconsider and at least defer action on its
security deposit proposal, tn our view, the current NFA standards, especially when buttressed by
the Commission's new customer protection framework, will better serve the interests of
customers than the proposed ten percent rule. At a minirnum, we encourage the Commission to
take the time to assess the effectiveness of the NFA security deposit levels in combination with
the new retail FX safeguards the Commission will implemem to protect the public.
Thank you for your consideratiom
Futures Industry Association
Honorable Gary Gensler, Chairman
Hor~orable Michael Dum~, Commissioner
Honorable JiI1 E. Sommers, Commissioner
Honorable Bart Cl~ilton, Commissioner
Honorable Scott O'Malia, Commissioner
Division of Clearing and Intermediary Oversight
Ananda K. Radhakrishnan
Thomas Smith
Jennifer Bauer
Willam Penner
Christopher Ct~mmings
Peter Sanchez
Division of Market Oversight
Richard Shilts
Ofi]ce of the General Counsel
Dan Berkovitz
