“Unlike other derivatives, FX swaps and forwards already trade in a highly-transparent, liquid and efficient market,” the Treasury Department said. “This final determination is narrowly tailored.”

Others aren’t so sure. The Commodity Markets Council claimed last year that such an exemption could undercut the Dodd-Frank mandate.

“Exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,” stated a letter from the CMC to the Treasury.

The Treasury has exempted FX swaps from rules that will otherwise work to regulate the $640 trillion OTC derivatives market. Though, for now it appears that FX swaps will still contribute to the agencies reporting requirement. Last week the CFTC announced a weekly “Swaps Report” open for public comment now.

It also appears that FX options, currency swaps, and non-deliverable forwards will not be exempt from regulation.

FX Risks Made Worse by Technology?

Part of the Treasury’s argument is that FX swaps are already a self-regulating market, and that introducing new trading technologies could upset the balance.

“Treasury believes that requiring foreign exchange swaps and forwards to be cleared and settled through the use of new systems and technologies could introduce new, unforeseen risks in this market,” the department said in the final exemption order.

Many are not convinced. Citing the Treasury’s decision, Darrell Duffie, a professor at Stanford University’s business school, explains that according to the prevailing logic, any market could eventually escape the Dodd-Frank mandate.

“Does the logic of this exemption imply that credit default swaps or interest rate swaps should also be exempted from regulation once practices improve in those markets? Surely that should not be the case,” Duffie Said.

Read more.

The post U.S. Treasury Exempts FX Swaps From Dodd-Frank Regulation appeared first on FX Compliance.

“Unlike other derivatives, FX swaps and forwards already trade in a highly-transparent, liquid and efficient market,” the Treasury Department said. “This final determination is narrowly tailored.”

Others aren’t so sure. The Commodity Markets Council claimed last year that such an exemption could undercut the Dodd-Frank mandate.

“Exempting foreign exchange forwards and swaps at this time from the clearing and trading requirements of Dodd-Frank could increase systemic risk at a time when regulators around the globe are trying to reduce it,” stated a letter from the CMC to the Treasury.

The Treasury has exempted FX swaps from rules that will otherwise work to regulate the $640 trillion OTC derivatives market. Though, for now it appears that FX swaps will still contribute to the agencies reporting requirement. Last week the CFTC announced a weekly “Swaps Report” open for public comment now.

It also appears that FX options, currency swaps, and non-deliverable forwards will not be exempt from regulation.

Part of the Treasury’s argument is that FX swaps are already a self-regulating market, and that introducing new trading technologies could upset the balance.

“Treasury believes that requiring foreign exchange swaps and forwards to be cleared and settled through the use of new systems and technologies could introduce new, unforeseen risks in this market,” the department said in the final exemption order.

Many are not convinced. Citing the Treasury’s decision, Darrell Duffie, a professor at Stanford University’s business school, explains that according to the prevailing logic, any market could eventually escape the Dodd-Frank mandate.

“Does the logic of this exemption imply that credit default swaps or interest rate swaps should also be exempted from regulation once practices improve in those markets? Surely that should not be the case,” Duffie Said.

Read more.

The post FX Swaps Exempted by Treasury: Controversial Move appeared first on FX Compliance.

CTAs that place orders at FCMs and RFEDs must incorporate the following regulations into their procedures:

• The CTA must determine the quantity of lots or contracts for a bunched order based on the equity in each individual sub-account, rather than the equity in the master account;
• The CTA may not exceed the quantity of tradable sized contracts allowed on the basis of the quantity in each individual account;
• The CTA must inform the FCM or RFED prior to placing the order of the number of customer contracts that will be received upon order;
• The CTA must allocate contracts to each individual account using a pre-determined procedure;
• Customer may make additions to or withdraw from their accounts in a timely, non-intrusive manner, so as not to affect other customers being managed by the CTA in the same program.

The amended rule upholds Futures Commission Merchants and Retail Foreign Exchange Dealers to certain obligations, including:

• Receiving sufficient information from an account manager to perform its functions, including information specifying the number of contracts to be allocated to each account in the bunch order. FCMs/RFEDs may maintain a copy of the allocation instructions via facsimile, email, or other electronic transmission. If the allocation is provided orally,t he FCM/RFED must create and maintain a written account.
• If an FCM or RFED should receive an alert that allocations may be fraudulent, they must take action to investigate the matter. Following investigation, they must refer the issue to the CFTC, NFA, or its DSRO.

Read more about the amendment in the NFA’s September 2, 2011 Submission Letter to the CFTC.

Photo credit: Katrina Tuliao

The post CFTC approves NFA amendment for retail forex rules for CTAs, FCMs and RFEDs appeared first on FX Compliance.

CFTC Regulation 5.1(h) defines the term “retail foreign exchange dealer” (“RFED”) as “any person that is, or that offers to be, the counterparty to a retail forex transaction, except for…” and offers several exceptions. Two of these exceptions have been removed from the list of excepted counterparties–insurance counterparties (including a regulated subsidiary or affiliate) and investment bank holding companies.

Read more about this Dodd-Frank amendment.

The post Dodd-Frank amends permitted RFED counterparties appeared first on FX Compliance.

The new system, to be called Harmony CreditLink, will allow prime brokers to oversee their clients’ credit risk in real time. Should a flash crash form, the brokers would be able to suspend all trading activity until the problem was resolved.

Though forex markets haven’t experienced a major flash crash yet, the May 2010 Dow Jones flash crash inspired them to act preemptively.  In London, up to 25% if forex trading is done on high frequency systems, which that could be thrown into a tailspin by a flash crash. Says Michael Irwin, a Morgan Stanley forex head: “The increase in high frequency and algorithmic foreign exchange trading has made the provision of adequate control and real-time risk management of critical importance.” “The foreign exchange market doesn’t wait for problems to occur before addressing them,” added Gil Mandelzis of Traiana. “There has been tremendous innovation in the foreign-exchange market, which has a tendency to not wait for regulators to force things upon them.”

Read more about this technological development.

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According to the notice, regulators have noticed an uptick in deficient recordkeeping since October 2010, a trend probably linked to the increase in registrants and the new OTC forex recordkeeping requirements. CTAs are required to keep their own set of records, which should include both performance and client information. In the course of NFA examination, regulators have noticed problems in both of these areas.

For example, CTAs are required to maintain copies of client trade confirmations, purchase and sale statements, and month account statements from FCMs, RFEDs, and other counterparty entities. However, an unusual number of CTAs were relying on access to a partner FCM or RFED’s back office system to obtain their performance records.  Not only is this in violation of regulation, but CTAs were also vulnerable to access restrictions placed on that data by its proprietor. This additional hurdle can severely impede the flow of information necessary for the NFA to properly discharge its duties.

Similarly, CTAs have been found to rely on FCMs, RFEDs, and others to store basic client information (name, occupation, financial information, etc), to provide them with adequate risk-disclosure, and to obtain written trading authorizations.  This regulatory reminder was issued to give CTAs who perhaps did not understand the letter of the law a chance to mend their habits. Those who do not come into compliance may face disciplinary action.

Read more about this NFA regulatory reminder.

photo credit: mrmanc

The post Calling all CTAs: Do you have your paper work in order? appeared first on FX Compliance.

• Registration. There is no arduous application process needed to commence retail forex transactions. Interested institutions only need to notify the FDIC in writing of their intentions, provide business details, and wait for written confirmation to begin trading.
• Capital requirements. The FDIC only requires that institutions be “well capitalized” according to agency standards to earn permission to enter the retail forex market.
• Margin requirements. Institutions must collect margins in cash or other approved financial instruments from retail customers according to the position and currency type of their transaction.
• Recordkeeping. Th FDIC mandates that institutions keep detailed records on retail customers and their transactions for five years after the records are created.

Other topics covered in the proposed rule include reporting, risk disclosure, position closing, and consumer protection.

For a detailed summary by the Shipkevich PLLC regulatory team, click here.

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In addition to these changes, NFA modified the Questionnaire as follows:

In order to implement these changes, the NFA also amended the related Interpretive Notice 9020 – Compliance Rules 2-9, 2-36 and 2-39: Self-Audit Questionnaires to specifically require FDMs to complete the Questionnaire and to require other Members engaging in forex transactions to use the Questionnaire to review their forex operations. The amendments to the Interpretive Notice also clarify that a supervisory person in a Member’s branch office must review the branch office’s operations. These amendments became effective April 8, 2011.

The revised Questionnaire is available on NFA’s website. Members should use the revised Questionnaire at the time of their next annual review.

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