Foreign Currency Trading

UPDATE: On May 22, 2008, the Congress passed H.R. 6124, the Food, Conserv

ation,

and Energy Act of 2008 (also known as “the Farm Bill”) which contains several amendments to the

Commodity Exchange Act (“CEA”). In particular, Title XIII of the Farm Bill

(1) clarifies that the CFTC’s anti-fraud authority applies to certain retail off-exchange

foreign currency transactions, (2) creates a new registration category for retail

foreign exchange dealers, (3) requires registration for those who solicit orders, exercise

discretionary trading authority and operate pools with respect to retail off-exchange

foreign currency transactions, and (4) imposes minimum capital requirements for

futures commission merchants and retail foreign exchange dealers that act as counterparties

to such transactions. Parts of the legislation, particularly those confirming

the Commission’s anti-fraud authority, were effective upon passage.

Other parts of the legislation, such as those requiring the registration

of parties engaged in these transactions and minimum capital

requirements, will only be effective upon the Commission’s issuance of

final regulations. Any such changes to the information below will be

accomplished through notice and comment rulemaking and will be

made available in the Federal Register section of CFTC.gov.

A complete description of the amendments to the CEA effected by Title XIII

of the Farm Bill can be found in the Joint Statement of Managers, pp. 291-299,

which can be accessed through the House Agriculture Committee’s Farm Bill Homepage.

Interested parties should monitor the Commission’s website as well as the National Futures Association’s website, for developments. The CFTC has witnessed

increasing numbers,

and a growing complexity, of financial investment opportunities in recent years, including a sharp rise in foreign currency (forex) trading scams.

The Commodity Futures Modernization Act of 2000 (CFMA) made clear that the CFTC has jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. The CFTC also has jurisdiction to investigate and prosecute foreign currency fraud occuring in its registered firms and their affiliates. The CFTC issued an advisory in 2001 that discussed these CFMA amendments to the Commodity Exchange Act (CEA), 7 USC 1, et seq.

The Division of Trading and Markets (now Division of Clearing and Intermediary Oversight, or DCIO) issued an advisory in 2002 concerning foreign currency trading by retail customers

(PDF). The advisory affirms that off-exchange trading of foreign currency futures

and options

contracts with retail customers by a counterparty that is not a regulated financial entity

as set forth i

n the CFMA is unlawful. The advisory further states that, if there is a lawfu

l counterparty to the transaction, such as a person registered as a futures

commission merchant, the persons acting as intermediaries to such a transaction

, that is, in the manner of an introducing broker, commodity trading advisor or commodity

pool operator, would not need to register under the CEA if that is their only involvement

in futures or option transactions.