In case there are some who didn’t see this: Obama recently signed the “Dodd-Frank Wall Street Reform Act” which is a comprehensive reform of the financial industry, including OTC products such as forex.
Most of the posts on the internet focused on the ominous analysis of this reform by James Bibbings of Turnkey Trading Partners mainly because James was the first, and probably the only, one to actually analyze this reform and try to understand how this may affect forex.
James identified four key points which may severely affect OTC forex in the US:
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- Elimination of OTC Forex: Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows: “…A person [which includes companies] shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe…”
- Elimination of OTC Metals: As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies] from entering into, or offering to enter into, a transaction in any commodity with a person that is not an eligible contract participant or an eligible commercial entity, on a leveraged or margined basis. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC to pursue anti-fraud actions involving rolling spot transactions and/or other leveraged forex transactions without the need to prove that they are futures contracts. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.
- Small Pool Exemption Eliminated: Pursuant to Section 403 of Act, the “private adviser” exemption, namely Section 203(b)(3) of the Investment Advisers Act of 1940 (“Advisers Act”), will be eliminated within one year of the Act’s effective date (July 21, 2011). Historically, many unregistered U.S. fund managers had relied on this exemption to avoid registration where they: (1) had fewer than 15 clients in the past 12 months; (2) do not hold themselves out generally to the public as investment advisers; and (3) do not act as investment advisers to a registered investment company or business development company.
- Accredited Investor Qualifications: Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals: 1) A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor’s primary residence; 2) A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or 3) A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.
This analysis indeed sounds disturbing and I spent sometime talking to my friends and contacts in the US forex industry to try and understand their view on things. Most of them are indeed worried that this may be a severe blow to the industry if passes the way it is however they all seem confident that the CFTC will stand on its feet and will protect the industry by introducing its own regulations as the reform demands.
Talking to Bart Mallon from Mallon P.C. it seems that there is actually little new in this bill and that the CFTC will need to complete its own rules within the next 2.5 months or so. These rules include the infamous leverage and guaranteed IB requirements however Bart feels that the final rules will not be as bad as some may think.
Whatever the case is I advise US forex traders once again to shift their accounts to more sane regulatory locations, as even Obama himself may ‘have a tooth against’ retail forex 😉 I wonder which broker hunted his stops…