The U.S. Securities and Exchange Commission on Wednesday voted to delay by one year implementation of a rule blocking brokers from trading in foreign currencies for retail clients.
The bar on retail foreign exchange transactions, required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, was set to go into effect Saturday. But in response to concerns from brokerage houses that the rule would hinder international stock trades, the SEC delayed its effective date until July 16, 2012, which will provide time for a review.
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People wishing to invest in foreign stocks typically buy bank certificates called American Depositary Receipts that trade on U.S. exchanges and represent the shares of a foreign company. But some investors, believing they can get better pricing, seek to buy the shares through their broker directly on an overseas exchange.
To facilitate such stock trades, some brokerages offer to purchase foreign currency on behalf of their customers, thereby shielding them from foreign exchange risk. Other firms simply require customers to take on the foreign-exchange exposure tied to buying the foreign shares.
Brokerages argued that, without the certainty such conversion trades were still legal, they would be forced to require their customers to take on foreign exchange risk or to route the trades through a nonbrokerage sister company. The latter change could impose a fair amount of restructuring on brokerages and clearing firms that wish to permit the transactions.