CFTC Final Regulations Expected Soon
Following my last week's article and the numerous comments and emails I received, I asked Bart Mallon from Mallon P.C. to elucidate this issue a bit further.
By Bart Mallon, Esq.
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) developed a new regulatory framework for much of the investment management community including the spot foreign exchange markets. While the language of Dodd-Frank is not always easy to understand, the important thing for the Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi community to understand is that Congress did not kill the spot forex market. Indeed, the regulations we will see in the future will look more like what we have right now.
What exactly does Dodd-Frank say about spot forex?
Essentially Dodd-Frank created new section 2(c)(2)(E) of the Commodity Exchange Act which provides that persons who are not “eligible contract participants” may not enter into foreign exchange transactions unless a Federal regulatory agency has promulgated regulations governing the transactions. Dodd-Frank also requires the CFTC to implement regulations with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation and other standards. Any prohibition under the new section 2(c)(2)(E) would not affect anyone trading spot forex if the CFTC promulgates regulations (which it proposed in January of this year). Essentially what this new section is doing is forcing the CFTC to speed up implementation of the forex regulations.
What forex regulations will be adopted?
This is the question that the industry has really been focusing on over the last 8 months. As was discussed in great detail during the comment period, the big issues were the reduction of Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders to 10:1 (from either 100:1 or 25:1 under current NFA rules) and having introducing brokers guaranteed by one forex dealer or FCM. Because of significant pushback from the industry it is likely that both of these provisions will be modified once the rules are finalized sometime in the next two months or so.
Other issues from Dodd-Frank
Dodd-Frank presents other issues for managers in the investment management industry. For those person who trade in the off-exchange spot metals markets, there will be new regulations on the manner in which those contracts may be traded. Dodd-Frank also requires credit default swaps to be subject to clearing and requires hedge fund and private equity fund managers to register as investment advisers with the SEC.
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This article was written by Bart Mallon of Mallon P.C. [https://www.mallonpc.com], a law firm focused on the investment management industry. Mr. Mallon has also created a free Series 34 exam guide which can be found at www.series34exam.com.
Following my last week's article and the numerous comments and emails I received, I asked Bart Mallon from Mallon P.C. to elucidate this issue a bit further.
By Bart Mallon, Esq.
The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) developed a new regulatory framework for much of the investment management community including the spot foreign exchange markets. While the language of Dodd-Frank is not always easy to understand, the important thing for the Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi community to understand is that Congress did not kill the spot forex market. Indeed, the regulations we will see in the future will look more like what we have right now.
What exactly does Dodd-Frank say about spot forex?
Essentially Dodd-Frank created new section 2(c)(2)(E) of the Commodity Exchange Act which provides that persons who are not “eligible contract participants” may not enter into foreign exchange transactions unless a Federal regulatory agency has promulgated regulations governing the transactions. Dodd-Frank also requires the CFTC to implement regulations with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation and other standards. Any prohibition under the new section 2(c)(2)(E) would not affect anyone trading spot forex if the CFTC promulgates regulations (which it proposed in January of this year). Essentially what this new section is doing is forcing the CFTC to speed up implementation of the forex regulations.
What forex regulations will be adopted?
This is the question that the industry has really been focusing on over the last 8 months. As was discussed in great detail during the comment period, the big issues were the reduction of Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders to 10:1 (from either 100:1 or 25:1 under current NFA rules) and having introducing brokers guaranteed by one forex dealer or FCM. Because of significant pushback from the industry it is likely that both of these provisions will be modified once the rules are finalized sometime in the next two months or so.
Other issues from Dodd-Frank
Dodd-Frank presents other issues for managers in the investment management industry. For those person who trade in the off-exchange spot metals markets, there will be new regulations on the manner in which those contracts may be traded. Dodd-Frank also requires credit default swaps to be subject to clearing and requires hedge fund and private equity fund managers to register as investment advisers with the SEC.
***
This article was written by Bart Mallon of Mallon P.C. [https://www.mallonpc.com], a law firm focused on the investment management industry. Mr. Mallon has also created a free Series 34 exam guide which can be found at www.series34exam.com.