[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Proposed Rules]
[Pages 46652-46668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-19535]
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FEDERAL RESERVE SYSTEM
12 CFR Part 240
[Docket No. R-1428]
RIN 7100-AD 79
Retail Foreign Exchange Transactions (Regulation NN)
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking and request for comment.
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SUMMARY: The Board of Governors of the Federal Reserve System
(``Board'') is publishing for comment a regulation to permit banking
organizations under its supervision to engage in off-exchange
transactions in foreign currency with retail customers. The proposed
rule also describes various requirements with which banking
organizations must comply to conduct such transactions.
DATES: Comments on this notice of proposed rulemaking must be received
by October 11, 2011.
ADDRESSES: You may submit comments identified by Docket No. R-1428 and
RIN No. 7100-AD 79, by using any of the methods below. Please submit
your comments using only one method.
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at htpp://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
E-mail: [email protected]. Include docket number in
the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
htpp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying information.
Public comments may also be viewed electronically or in paper form in
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Scott Holz, Senior Counsel, Legal
Division, (202) 452-2966.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act).\1\ As amended by section 742(c)(2) of the Dodd-Frank Act,\2\ the
Commodity Exchange Act (CEA) provides that a United States financial
institution \3\ for which there is a Federal regulatory agency \4\
shall not enter into, or offer to enter into, certain types of foreign
exchange transactions described in section 2(c)(2)(B)(i)(I) of the CEA
with a retail customer \5\ except pursuant to a rule or regulation of a
Federal regulatory agency allowing the transaction under such terms and
conditions as the Federal regulatory agency shall prescribe \6\ (a
``retail forex rule''). Section 2(c)(2)(B)(i)(I) includes ``an
agreement, contract, or transaction in foreign currency that * * * is a
contract of sale of a commodity for future delivery (or an option on
such a contract) or an option (other than an option executed or traded
on a national securities exchange registered pursuant to section 6(a)
of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).'' \7\ A
Federal regulatory agency's retail forex rule must treat all such
futures and options and all agreements, contracts, or transactions that
are functionally or economically similar to such futures and options
similarly.\8\
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\1\ Public Law 111-203, 124 Stat. 1376.
\2\ Dodd-Frank Act Sec. 742(c)(2) (to be codified at 7 U.S.C.
2(c)(2)(E)). In this preamble, citations to the retail forex
statutory provisions will be the section where the provisions will
be codified in the Commodity Exchange Act.
\3\ The CEA defines ``financial institution'' to include an
agreement corporation, an Edge Act corporation, a depository
institution (as defined in section 3 of the Federal Deposit
Insurance Act), a financial holding company (as defined in section 2
of the Bank Holding Company Act of 1956), a trust company, or ``a
similarly regulated subsidiary or affiliate of an entity'' described
above. 7 U.S.C. 1a(21).
\4\ For purposes of the retail forex rules, ``Federal regulatory
agency'' includes ``an appropriate Federal banking agency.'' 7
U.S.C. 2(c)(2)(E)(i)(III). The Board is an ``appropriate Federal
banking agency'' under the CEA. 7 U.S.C. 1a(2).
\5\ A retail customer is a person who is not an ``eligible
contract participant'' under the CEA. See, 7 U.S.C. 1a(18).
\6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
\7\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\8\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
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[[Page 46653]]
Retail forex rules must prescribe appropriate requirements with
respect to disclosure, recordkeeping, capital and margin, reporting,
business conduct, and documentation requirements, and may include such
other standards or requirements as the Federal regulatory agency
determines to be necessary.\9\ This Dodd-Frank Act amendment to the CEA
takes effect 360 days from the enactment of the Act.\10\ Therefore, as
of July 16, 2011, state member banks, uninsured state-licensed branches
of foreign banks, financial holding companies, bank holding companies,
agreement corporations, and Edge Act corporations (collectively,
banking institutions) may not engage in a retail forex transaction
except pursuant to a retail forex rule issued by the Board.
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\9\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
\10\ See Dodd-Frank Act Sec. 754.
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On September 10, 2010, the Commodity Futures Trading Commission
(CFTC) adopted a retail forex rule for persons subject to its
jurisdiction.\11\ After studying and considering the CFTC's retail
forex rule, and being mindful of the desirability of issuing comparable
rules, the Board is proposing to adopt a substantially similar rule for
banking institutions wishing to engage in retail forex transactions.
The Dodd-Frank Act does not require that retail forex rules be issued
jointly, or on a coordinated basis, with any other Federal regulatory
agency. The Federal banking agencies (the Board, Office of the
Comptroller of the Currency (OCC), and Federal Deposit Insurance
Corporation (FDIC)) have consulted with each other and generally agree
on their respective approaches to regulating retail forex transactions.
However, each banking agency is issuing separate rules.\12\
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\11\ Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 55409 (Sept. 10, 2010) (Final
CFTC Retail Forex Rule). The CFTC proposed these rules prior to the
enactment of the Dodd-Frank Act. Regulation of Off-Exchange Retail
Foreign Exchange Transactions and Intermediaries, 75 FR 3281 (Jan.
20, 2010) (Proposed CFTC Retail Forex Rule).
\12\ The OCC's proposed rule was published on April 22, 2011 (76
FR 22633); its final rule was published on July 14, 2011 (76 FR
41375). The FDIC's proposed rule was published on May 17, 2011 (76
FR 28358); its final rule was published on July 12, 2011 (76 FR
40779).
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The retail forex rule proposed today provides for banking
institutions to notify the Board before engaging in retail forex
transactions. It would also require that such banking institutions
generally be ``well-capitalized,'' and it would prohibit fraudulent
transactions and unlawful representations in connection with this
business. The rule would require customers be given a standardized risk
disclosure statement before engaging in retail forex transactions,
along with a calculation of the number of profitable retail forex
accounts maintained by the banking institution in the past year. The
rule would impose customer margin requirements, and require
confirmations and monthly statements be provided to the customer.
Recordkeeping requirements are specified for the banking institution,
along with certain trading and operational standards.
The Board's proposed retail forex rule is modeled on the CFTC's
retail forex rule to promote consistent treatment of retail forex
transactions regardless of whether a retail forex customer's dealer is
a banking institution or a CFTC registrant. The proposal includes
various changes that reflect differences between Board and CFTC
supervisory regimes and differences between banking organizations and
CFTC registrants. For example:
The Board's proposed retail forex rule leverages the
Board's existing comprehensive supervision of banking institutions. For
example, the Board's proposed retail forex rule does not include
registration requirements, because banking institutions are already
subject to comprehensive supervision by the Board. Thus, instead of a
registration requirement, banking institutions must provide 60 days
notice to the Board to conduct a retail forex business.
Because banking institutions are already subject to
various capital and other supervisory requirements,\13\ the Board's
proposed retail forex rule generally requires banking institutions
wishing to engage in retail forex transactions to be ``well
capitalized.''
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\13\ See, e.g., 12 CFR parts 208, 211, and 225.
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The proposed rule would require that the risk disclosure
statement highlight that a retail forex transaction is not insured by
the FDIC. The CFTC's regulations do not address FDIC insurance because
no financial intermediaries under the CFTC's jurisdiction are insured
depository institutions.
The Board has consulted with the OCC and FDIC in preparing its
proposed retail forex regulation. Although the Board's proposed rule is
substantially similar to the OCC's and FDIC's rules, there are some
differences between the Board's proposal and the rules adopted by the
other two bank regulatory agencies. For example:
The Board's proposed rule would not prohibit a bank from
exercising a right of set off, i.e., applying a retail forex customer's
losses or margin call against other assets of the customer held by bank
other than money or property given as margin. The OCC and FDIC have
adopted rules to prohibit retail forex dealers under their supervision
from exercising a right of set off and have further required that
retail forex customer margin be held in a separate account that holds
only retail forex margin. The Board is not proposing to require a
separate retail forex margin account, but is requesting comment on
whether these prohibitions would be appropriate.
The Board's proposed rule would bar the use of mandatory
pre-dispute arbitration agreements. The CFTC and the OCC have adopted
rules that permit pre-dispute arbitration agreements, while the FDIC
has adopted a prohibition similar to the one being proposed by the
Board. The Board is requesting comment on whether such agreements
should be permitted.
II. Section-by-Section Description of the Rule
While many sections contain questions for commenters, the Board
invites comments on all aspects of the proposed rule.
Section 240.1--Authority, Purpose, and Scope
This section authorizes a banking institution to conduct retail
forex transactions.
The Board notes that some state member banks may also engage in
retail forex transactions through their foreign branches. The CEA does
not clearly define whether foreign branches or subsidiaries of state
member banks and foreign subsidiaries of bank holding companies and
financial holding companies may be considered United States financial
institutions that can be included in the scope of this proposed rule.
The proposed retail forex rule would define the term ``banking
institution'' to include entities organized under the laws of the
United States or under the laws of any U.S. state, and any branch or
office of that entity, wherever located. After receiving comments on
their proposed rules, the OCC and FDIC have adopted retail forex rules
that exempt foreign branches of national and state nonmember banks when
they engage in retail forex transactions with non-U.S. customers. This
allows foreign branches dealing with non-U.S. customers to apply only
those disclosure, recordkeeping, capital, margin, reporting, business
conduct, documentation and other requirements of foreign law applicable
to the branch, while affording U.S. customers the protections of a
retail forex regulation
[[Page 46654]]
adopted pursuant to the Dodd-Frank Act. The Board is proposing to adopt
this exemption as well. The Board's proposed rule would also include
U.S. subsidiaries of banking institutions, except for those for which
there is another federal regulatory agency authorized to prescribe
rules or regulations under section 2(c)(2)(E) of the CEA.\14\ The term
``banking institution'' would not include entities organized under the
laws of a foreign country. Therefore, foreign branches of state member
banks, as well as foreign offices of U.S. bank holding companies and
financial holding companies would be subject to the proposed rule when
dealing with U.S. customers. Subsidiaries of a banking institution that
are organized under foreign law would not be covered regardless of the
customer's nationality.
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\14\ 7 U.S.C. 2(c)(2)(E).
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Question II.1.1: The Board requests comment on whether this rule
should apply to foreign branches of state member banks, or bank holding
companies and financial holding companies conducting retail forex
transactions abroad through entities organized under the laws of the
United States, and whether this rule should apply to transactions with
U.S. or foreign customers.
Section 240.2--Definitions
This section proposes definitions of terms specific to retail forex
transactions and to the regulatory requirements that apply to retail
forex transactions.
The definition of ``retail forex transaction'' generally includes
the following transactions in foreign currency between a banking
institution and a person that is not an eligible contract participant:
\15\ (i) A future or option on such a future; \16\ (ii) options not
traded on a registered national securities exchange; \17\ and (iii)
certain leveraged or margined transactions. This definition has several
important features.
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\15\ The definition of ``eligible contract participant'' is
found in section 1a(18) of the CEA and is discussed below.
\16\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\17\ 7 U.S.C. 2(c)(2)(B)(i)(I).
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First, certain transactions in foreign currency are not ``retail
forex transactions,'' and therefore are not subject to the prohibition
in section 742(c)(2) of the Dodd-Frank Act. For example, a ``spot''
forex transaction where one currency is bought for another and the two
currencies are exchanged within two days is not a ``future'' and would
not meet the definition of a ``retail forex transaction,'' since actual
delivery occurs as soon as practicable.\18\ Similarly, a ``retail forex
transaction'' does not include a forward contract with a commercial
entity that creates an enforceable obligation to make or take delivery,
provided the commercial counterparty has the ability to make delivery
and accept delivery in connection with its line of business.\19\ In
addition, ``retail forex transaction'' does not include an ``identified
banking product'' or a part of an ``identified banking product,'' as
defined in section 401(b) of the Legal Certainty for Bank Product Act
of 2000.\20\ Finally, the definition does not include transactions
executed on an exchange or designated contract market.
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\18\ See generally, CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
foreign exchange futures contracts and spot contracts in foreign
exchange, and noting that foreign currency trades settled within two
days are ordinarily spot transactions rather than futures
contracts); see also Bank Brussels Lambert v. Intermetals Corp., 779
F. Supp. 741, 748 (S.D.N.Y. 1991).
\19\ See generally, CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
forward contracts in foreign exchange and foreign exchange futures
contracts); see also William L. Stein, The Exchange-Trading
Requirement of the Commodity Exchange Act, 41 Vand. L. Rev. 473, 491
(1988). In contrast to forward contracts, futures contracts
generally include several or all of the following characteristics:
(i) Standardized nonnegotiable terms (other than price and
quantity); (ii) parties are required to deposit initial margin to
secure their obligations under the contract; (iii) parties are
obligated and entitled to pay or receive variation margin in the
amount of gain or loss on the position periodically over the period
the contract is outstanding; (iv) purchasers and sellers are
permitted to close out their positions by selling or purchasing
offsetting contracts; and (v) settlement may be provided for by
either (a) Cash payment through a clearing entity that acts as the
counterparty to both sides of the contract without delivery of the
underlying commodity; or (b) physical delivery of the underlying
commodity. See, Edward F. Greene et al., U.S. Regulation of
International Securities and Derivatives Markets Sec. 14.08[2] (8th
ed. 2006).
\20\ 7 U.S.C. 27(b).
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Second, the proposal would cover rolling spot forex transactions
(so-called Zelener \21\ contracts), including without limitation such
transactions traded on the Internet, through a mobile phone, or on an
electronic platform. A rolling spot forex transaction normally requires
delivery of currency within two days, like spot transactions. However,
in practice, these contracts are indefinitely renewed every other day
and no currency is actually delivered until one party affirmatively
closes out the position.\22\ Therefore, the contracts are economically
more like futures than spot contracts, although some courts have held
them to be spot contracts in form.\23\ For this reason, the proposal
regulates these rolling spot forex transactions as retail forex
transactions when conducted with a person that is not an eligible
contract participant.
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\21\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3rd 309 (6th Cir. 2008).
\22\ For example, in Zelener, the retail forex dealer retained
the right, at the date of delivery of the currency to deliver the
currency, roll the transaction over, or offset all or a portion of
the transaction with another open position held by the customer. See
CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
\23\ See, e.g., CFTC v. Erskine, 512 F.3d 309, 326 (6th Cir.
2008); CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
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This section defines several terms by reference to the CEA,
including ``eligible contract participant.'' Foreign currency
transactions with eligible contract participants are not considered
retail forex transactions and are therefore not subject to this rule.
The proposed definition covers a variety of financial entities,
governmental entities, certain businesses, and individuals that meet
certain investment thresholds.\24\
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\24\ The term ``eligible contract participant'' is defined at 7
U.S.C. 1a(18), and for purposes most relevant to this proposed rule
generally includes:
(a) A corporation, partnership, proprietorship, organization,
trust, or other entity--
(1) That has total assets exceeding $10,000,000;
(2) The obligations of which under an agreement, contract, or
transaction are guaranteed or otherwise supported by a letter of
credit or keepwell, support, or other agreement by certain other
eligible contract participants; or
(3) That--
(i) Has a net worth exceeding $1,000,000; and
(ii) Enters into an agreement, contract, or transaction in
connection with the conduct of the entity's business or to manage
the risk associated with an asset or liability owned or incurred or
reasonably likely to be owned or incurred by the entity in the
conduct of the entity's business;
(b) Subject to certain exclusions,
(1) A governmental entity (including the United States, a State,
or a foreign government) or political subdivision of a governmental
entity;
(2) A multinational or supranational governmental entity; or
(3) An instrumentality, agency or department of an entity
described in (b)(1) or (2); and
(c) An individual who has amounts invested on a discretionary
basis, the aggregate of which is in excess of--
(1) $10,000,000; or
(2) $5,000,000 and who enters into the agreement, contract, or
transaction in order to manage the risk associated with an asset
owned or liability incurred, or reasonably likely to be owned or
incurred, by the individual.
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Question II.2.2: Does the Commodity Exchange Act's definition of
``eligible contract participant'' appropriately capture who is not a
retail customer for purposes of this proposed rule? Should the Board
expand the definition of retail forex customer to include persons who
are eligible contract participants? If so, which eligible contract
participants should be considered retail forex customers?
Section 240.3--Prohibited Transactions
This section prohibits a banking institution and its related
persons from
[[Page 46655]]
engaging in fraudulent conduct in connection with retail forex
transactions. This section also addresses potential conflicts of
interest by prohibiting a banking institution from acting as a
counterparty to a retail forex transaction if the banking institution
or its affiliate exercises discretion over the customer's retail forex
account.
This section uses wording that is somewhat different from that used
by the CFTC, OCC and FDIC. First, the Board's proposal prohibits a
banking institution from defrauding or attempting to defraud a person,
while the other regulators use the phrase ``cheat or defraud or attempt
to cheat or defraud a person.'' The Board believes that ``cheat'' is
synonymous with ``defraud'' and has used only the term ``defraud'' in
the proposed rule. Second, the Board's proposal would prohibit a
banking institution from ``knowingly'' making a false report or
deceiving a person, while the other regulators prohibit their retail
forex dealers from ``willfully'' engaging in these activities. The
Board believes that ``knowingly'' sets a more appropriate standard of
proof.
Question II.3.1: Does the prohibition on ``cheating'' in other
retail forex rules add protections not contained in the Board's
proposal? Does the use of ``knowingly'' instead of ``willfully'' set
the appropriate standard to protect retail forex customers?
Section 240.4--Notification
This section requires a banking institution to notify the Board
prior to engaging in a retail forex business. This notice would include
information on customer due diligence (including credit evaluations,
customer appropriateness, and ``know your customer'' documentation);
new product approvals; haircuts for noncash margin; and conflicts of
interest. In addition, the banking institution must certify that it has
adequate written policies, procedures, and risk measurement and
management systems and controls to engage in a retail forex business in
a safe and sound manner and in compliance with the requirements of the
Board's retail forex rule. Once a banking institution has notified the
Board pursuant to this provision, the Board will have sixty days to
seek additional information or object to the notification in writing,
or the notification will be deemed effective. If the Board asks for
additional information, the notice will become effective sixty days
after all the information requested is received by the Board, unless
the Board objects in writing.
Banking institutions engaged in retail forex transactions as of the
effective date of this rule who promptly notify the Board will have six
months, or a longer period provided by the Board, to bring their
operations into conformance with the rule. Under this rule, a banking
institution that notifies the Board within 30 days of the effective
date of the final retail forex rule, subject to an extension by the
Board, and submits the information requested by the Board thereafter
will be deemed to be operating its retail forex business pursuant to a
rule or regulation of a Federal regulatory agency, as required under
the Commodity Exchange Act, for such period.\25\
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\25\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
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A banking institution need not join a futures self-regulatory
organization as a condition of conducting a retail forex business.
Section 240.5--Application and Closing Out of Offsetting Long and Short
Positions
This section requires a banking institution to close out offsetting
long and short positions in a retail forex account. The banking
institution would have to offset such positions regardless of whether
the customer has instructed otherwise. The CFTC concluded that
``keeping open long and short positions in a retail forex customer's
account removes the opportunity for the customer to profit on the
transactions, increases the fees paid by the customer and invites
abuse.'' \26\ Under the proposal, a banking institution may offset
retail forex transactions as instructed by the retail forex customer or
the customer's agent (other than the banking institution itself).
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\26\ Proposed CFTC Retail Forex Rule, 75 FR at 3287 n.54.
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Section 240.6--Disclosure
This section requires a banking institution to provide retail forex
customers with a risk disclosure statement similar to the one required
by the CFTC's retail forex rule, but tailored to address certain unique
characteristics of retail forex in banking institutions. The prescribed
risk disclosure statement would describe the risks associated with
retail forex transactions. The disclosure statement would make clear
that a banking institution that wishes to use the right of set off to
collect margin for or cover losses arising out of retail forex
transactions must include this right in the risk disclosure statement
and obtain separate written acknowledgement (See discussion of set-off
below in section 240.9).
In its retail forex rule, the CFTC requires its registrants to
disclose to retail customers the percentage of retail forex accounts
that earned a profit, and the percentage of such accounts that
experienced a loss, during each of the most recent four calendar
quarters.\27\ The CFTC initially explained that ``the vast majority of
retail customers who enter these transactions do so solely for
speculative purposes, and that relatively few of these participants
trade profitably.'' \28\ In its final rule, the CFTC found this
requirement appropriate to protect retail customers from ``inherent
conflicts embedded in the operations of the retail over-the-counter
forex industry.'' \29\ The Board's proposed rule requires this
disclosure; however, the Board invites comments regarding this
approach.
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\27\ 17 CFR 5.5(e)(1).
\28\ Proposed CFTC Retail Forex Rule, 75 FR at 3289.
\29\ Final CFTC Retail Forex Rule, 75 FR at 55412.
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Question II.6.1: Does this disclosure provide meaningful
information to retail customers of banking institutions? Would
alternative disclosures more effectively accomplish the objectives of
the disclosure?
Similarly, the CFTC's retail forex rule requires a disclosure that
states that the dealer makes money on such trades, in addition to any
fees, commissions, or spreads, even when a retail customer loses money
trading.\30\ The proposed rule includes this disclosure requirement.
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\30\ 17 CFR 5.5(b).
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Question II.6.2: Does this disclosure provide meaningful
information to retail customers of banking institutions? Would
alternative disclosures more effectively accomplish the objectives of
the disclosure?
As proposed, the risk disclosure must be provided as a separate
document.
Question II.6.3: Should banking institutions be allowed to combine
the retail forex risk disclosure with other disclosures that banking
institutions make to their customers? Or would combining disclosures
diminish the impact of the retail forex disclosure?
Question II.6.4: Should the rule require disclosure of the fees the
banking institution charges retail forex customers for retail forex
transactions? What fees do banking institutions currently charge retail
forex customers for retail forex transactions? Are there other costs to
retail forex customers of engaging in retail forex transactions that
banking institutions should disclose? If so, what are these costs?
[[Page 46656]]
Section 240.7--Recordkeeping
This section specifies which documents and records a banking
institution engaged in retail forex transactions must retain for
examination by the Board. Banking institutions are required to maintain
retail forex account records, financial ledgers, transactions records,
daily records, order tickets, and records showing allocations and
noncash margin, as well as records relating to possible violations of
law. This section also prescribes document maintenance standards,
including the manner and length of maintenance. Finally, this section
requires banking institutions to record and maintain transaction
records and make them available to customers.
Section 240.8--Capital Requirements
This proposal does not amend the Board's regulations regarding
capital. This section generally requires that a banking institution
that offers or enters into retail forex transactions must be ``well
capitalized'' as defined in the Board's Regulations H or Y \31\ or the
banking institution must obtain an exemption from the Board. An
uninsured state-licensed U.S. branch or agency of a foreign bank must
apply the capital rules that are made applicable to it pursuant to
section 225.2(r)(3) of the Board's Regulation Y.\32\ An Edge
corporation or agreement corporation must comply with the capital
adequacy guidelines that are made applicable to an Edge corporation
engaged in banking pursuant to section 211.12(c)(2) of the Board's
Regulation K.\33\
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\31\ 12 CFR 208.43 and 12 CFR 225.2(r).
\32\ 12 CFR 225.2(r)(3).
\33\ 12 CFR 211.12(c)(2).
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In addition, a banking institution must continue to hold capital
against retail forex transactions as provided in the Board's
regulations.
Section 240.9--Margin Requirements
Paragraph (a) requires a banking institution that engages in retail
forex transactions, in advance of any such transaction, to collect from
the retail forex customer margin equal to at least two percent of the
notional value of the retail forex transaction if the transaction is in
a major currency pair, and at least five percent of the notional value
of the retail forex transaction otherwise. These margin requirements
are identical to the requirements imposed by the CFTC's retail forex
rule. A major currency pair is a currency pair with two major
currencies. Under the proposal, the major currencies would be the U.S.
Dollar (USD), Canadian Dollar (CAD), Euro (EUR), United Kingdom Pound
(GBP), Japanese Yen (JPY), Swiss franc (CHF), New Zealand Dollar (NZD),
Australian Dollar (AUD), Swedish Kronor (SEK), Danish Kroner (DKK), and
Norwegian Krone (NOK),\34\ or any other currency as determined by the
Board.
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\34\ See National Futures Association, Forex Transaction: A
Regulatory Guide 17 (Feb. 2011); New York Federal Reserve Bank,
Survey of North American Foreign Exchange Volume tbl. 3e (Jan.
2011); Bank for International Settlements, Report on Global Foreign
Exchange Market Activity in 2010 at 15 tbl. B.6 (Dec. 2010).
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Question II.9.1: The Board requests comment on whether this list of
major currencies is appropriate and how the Board should identify a
major currency or major currency pair.
Prior to the CFTC's rule, non-bank dealers routinely permitted
customers to trade with 1 percent margin (leverage of 100:1) and
sometimes with as little as 0.25 percent margin (leverage of 400:1).
When the CFTC proposed its retail forex rule in January 2010, it
proposed a margin requirement of 10 percent (leverage of 10:1). In
response to comments, the CFTC reduced the required margin in the final
rule to 2 percent (leverage of 50:1) for trades involving major
currencies and 5 percent (leverage of 20:1) for trades involving non-
major currencies.
Question II.9.2: The Board's proposed rule would adopt the margin
requirements adopted in final by the CFTC. The Board invites comments
on whether the requirements should be adjusted and if so, how.
Paragraph (b) specifies the acceptable forms of margin that
customers may post. Under the proposal, banking institutions must
establish policies and procedures providing for haircuts for noncash
margin collected from customers and must review these haircuts
annually. It may be prudent for banking institutions to review and
modify the size of the haircuts more frequently.
Question II.9.3: Should the Board specify haircuts for noncash
margin posted for retail forex transactions? If so, how should those
haircuts be determined?
Paragraph (c) requires a banking institution to collect additional
margin from the customer or to liquidate the customer's position if the
amount of margin held by the banking institution fails to meet the
requirements of paragraph (a). The proposed rule requires the banking
institution to mark the customer's open retail forex positions and the
value of the customer's margin to the market daily to ensure that a
retail forex customer does not accumulate substantial losses not
covered by margin.
Question II.9.4: How frequently do banking institutions currently
mark retail forex customers' open retail forex positions and the value
of the customers' margin to the market? Should the rule require marking
customer positions and margin to the market daily, or would more
frequent marks be more appropriate in light of the speed at which
currency markets move? What is the most frequent mark to market
requirement that is practical in light of the characteristics of the
forex markets and the assets that retail forex customers may pledge as
margin for retail forex transaction?
The retail forex regulations adopted by the OCC and FDIC both
prohibit set-off, i.e., the bank forex dealer would be prohibited from
applying a retail forex customer's losses against any asset or
liability of the retail forex customer other than money or property
given as margin. Banks generally have broad rights to set off mutual
debts to cover customer obligations. It is not clear that limiting a
bank's right of set-off in these particular transactions would provide
appropriate incentives for retail forex customers.
Question II.9.5: Would limiting the right of set-off encourage a
retail customer to take on more risk in forex transactions, because the
customer's other assets would be protected against losses from the
forex transactions? Does allowing a banking institution to exercise its
right of set-off with regard to retail forex transactions strike the
appropriate balance of incentives and protections for retail customers?
In order to effectuate the prohibition against a bank retail forex
dealer exercising a right of set-off, the OCC and FDIC require that
each customer's retail forex transaction margin be held in a separate
account that holds only that customer's retail forex transaction
margin. The Board is not proposing to require the use of a separate
margin account, as it is not proposing to prohibit a banking
institution from exercising a right of set-off.
Section 240.10--Required Reporting to Customers
This section requires a banking institution engaging in retail
forex transactions to provide each retail forex customer confirmations
and monthly statements, and describes the information to be included.
Question II.10.1: The Board requests comment on whether this
section provides for statements that would be meaningful and useful to
retail customers, or whether, in light of the
[[Page 46657]]
distinctive characteristics of retail forex transactions, other
information would be more appropriate.
Section 240.11--Unlawful Representations
This section prohibits a banking institution and its related
persons from representing that the Federal government, the Board, or
any other Federal agency has sponsored, recommended, or approved retail
forex transactions or products in any way. This section also prohibits
a banking institution from implying or representing that it will
guarantee against or limit retail forex customer losses or not collect
margin as required by section 240.9. This section does not prohibit a
banking institution from sharing in a loss resulting from error or
mishandling of an order, and guaranties entered into prior to the
effectiveness of the prohibition would only be affected if an attempt
is made to extend, modify, or renew them. This section also does not
prohibit a banking institution from hedging or otherwise mitigating its
own exposure to retail forex transactions or any other foreign exchange
risk.
Section 240.12--Authorization To Trade
This section requires a banking institution to have specific
authorization from a retail forex customer before effecting a retail
forex transaction for that customer.
Section 240.13--Trading and Operational Standards
This section largely follows the trading standards of the CFTC's
retail forex rule, which were developed to prevent some of the
deceptive or unfair practices identified by the CFTC and the National
Futures Association.
Under paragraph (a), a banking institution engaging in retail forex
transactions is required to establish and enforce internal rules,
procedures and controls to prevent front running, in which transactions
in accounts of the banking institution or its related persons are
executed before a similar customer order, and to establish settlement
prices fairly and objectively.
Paragraph (b) prohibits a banking institution engaging in retail
forex transactions from disclosing that it holds another person's order
unless disclosure is necessary for execution or is made at the Board's
request.
Paragraph (c) ensures that related persons of another retail forex
counterparty do not open accounts with a banking institution without
the knowledge and authorization of the account surveillance personnel
of the other retail forex counterparty to which they are affiliated.
Similarly, paragraph (d) ensures that related persons of a banking
institution do not open accounts with other retail forex counterparties
without the knowledge and authorization of the account surveillance
personnel of the banking institution to which they are affiliated.
Paragraph (e) prohibits a banking institution engaging in retail
forex transactions from (1) Entering a retail forex transaction to be
executed at a price that is not at or near prices at which other retail
forex customers have executed materially similar transactions with the
banking institution during the same time period, (2) changing prices
after confirmation, (3) providing a retail forex customer with a new
bid price that is higher (or lower) than previously provided without
providing a new ask price that is similarly higher (or lower) as well,
and (4) establishing a new position for a retail forex customer (except
to offset an existing position) if the banking institution holds one or
more outstanding orders of other retail forex customers for the same
currency pair at a comparable price.
Paragraphs (e)(3) and (e)(4) do not prevent a banking institution
from changing the bid or ask prices of a retail forex transaction to
respond to market events. The Board understands that market practice
among CFTC-registrants is not to offer requotes, but to simply reject
orders and advise customers they may submit a new order (which the
dealer may or may not accept). Similarly, a banking institution may
reject an order and advise customers they may submit a new order.
Question II.13.1: Does this requirement appropriately protect
retail forex customers? If not, how should it be modified? Would it be
simpler for the rule to simply prohibit requoting, because banking
institutions may instead reject an order and accept new orders from
their retail forex customers?
Paragraph (e)(5) requires a banking institution to use consistent
market prices for customers executing retail forex transactions during
the same time. It also prevents a banking institution from offering
preferred execution to some of its retail forex customers but not
others.
Section 240.14--Supervision
This section imposes on a banking institution and its agents,
officers, and employees a duty to supervise subordinates with
responsibility for retail forex transactions to ensure compliance with
the Board's retail forex rule.
Section 240.15--Notice of Transfers
This section describes the requirements for transferring a retail
forex account. Generally, a banking institution must provide retail
forex customers 30 days' prior notice before transferring or assigning
their account. Affected customers may then instruct the banking
institution to transfer the account to an institution of their choosing
or liquidate the account. There are three exceptions to the above
notice requirement: A transfer in connection with the receivership or
conservatorship under the Federal Deposit Insurance Act; a transfer
pursuant to a retail forex customer's specific request; and a transfer
otherwise allowed by applicable law. A banking institution that is the
transferee of retail forex accounts must generally provide the
transferred customers with the risk disclosure statement of section
240.6 and obtain each affected customer's written acknowledgement
within 60 days.
Section 240.16--Customer Dispute Resolution
This section prohibits a banking institution from entering into any
agreement or understanding with a retail forex customer in which the
customer agrees, prior to the time a claim or grievance arises, to
submit the claim or grievance to any settlement procedure.
This provision differs from the applicable CFTC dispute settlement
procedures, which permit mandatory pre-dispute settlement agreements
under certain conditions.\35\ The substance of the CFTC dispute
settlement regulation, however, dates back to August 10, 2001. Since
that time, Congress enacted seven provisions in the Dodd-Frank Act that
prohibit the use of pre-dispute arbitration provisions.\36\ Consonant
with this
[[Page 46658]]
demonstrated Congressional concern with such agreements, the Board is
proposing, pursuant to its authority to adopt ``such other standards or
requirements as [it] shall determine to be necessary,'' to prohibit a
banking institution from entering into a pre-dispute settlement
agreement with a retail forex customer. The OCC's final retail forex
regulation follows the CFTC's approach, while the FDIC's final
regulation prohibits pre-dispute settlement agreements similar to the
approach being proposed by the Board.
---------------------------------------------------------------------------
\35\ 17 CFT 166.5. The CFTC's regulation permits predispute
dispute settlement agreements with a customer with certain
restrictions such as that signing the agreement must not be made a
condition for the customer to utilize the services offered by the
CFTC registrant.
\36\ See Dodd-Frank Act section 748 (amending CEA section
23(n)(2) to provide: ``No predispute arbitration agreement shall be
valid or enforceable, if the agreement requires arbitration of a
dispute arising under this section.''); section 921(a) (adding
similar provisions to section 15o to the Securities Exchange Act of
1934 and section 205(f) to the Investment Advisers Act of 1940);
section 922(c) (adding a similar provision to 18 U.S.C. 1514A, which
provides employee protections, including a right to a jury trial to
enforce such protections, to employees of publicly registered
companies and nationally recognized statistical rating
organizations); section 1028 (requiring the Consumer Financial
Protection Bureau (CFPB) to conduct a study and report to Congress
on the use of predispute arbitration agreements ``between covered
persons and consumers in connection with the offering or providing
of consumer financial products or services'' and giving the CFPB
authority to adopt regulations prohibiting such agreements; section
1057(d) (prohibiting predispute arbitration agreements that affect
the employee protection rights of a person that is employed by an
entity subject to CFPB regulation; and section 1414 (amending
section 129C of the Truth in Lending Act to prohibit predispute
arbitration agreements with respect to residential mortgage loans
and home equity loans).
---------------------------------------------------------------------------
Question III.16.1: Should the Board permit pre-dispute arbitration
provisions, as long as the banking institution does not require a
customer to agree to pre-dispute arbitration as a condition of opening
a retail forex account?
Interagency Statement on Retail Sales of Nondeposit Investment Products
For banking institutions, the requirements in this proposed rule
would overlap with applicable expectations contained in the Interagency
Statement on Retail Sales of Nondeposit Investment Products (NDIP
Policy Statement).\37\ The NDIP Policy Statement sets out guidance
regarding the Board's expectations when a banking institution engages
in the sale of nondeposit investment products to retail customers. The
NDIP Policy Statement addresses issues such as disclosure, suitability,
sales practices, compensation, and compliance. The Board views retail
forex transactions as nondeposit investment products, but the terms
``retail forex customer'' in this proposed rule and ``retail customer''
in the NDIP Policy Statement are not necessarily co-extensive. After
the effective date of the final version of this proposed rule, the
Board will expect banking institutions engaging in or offering retail
forex transactions to also comply with the NDIP Policy Statement to the
extent such compliance does not conflict with the requirements of the
Board's final retail forex rule.
---------------------------------------------------------------------------
\37\ See SR Letter 94-11 (Feb. 17, 1994); see also SR Letter 95-
46 (Sept. 14, 1995).
---------------------------------------------------------------------------
Question II.17: Does the proposed regulation create issues
concerning application of the NDIP Policy Statement to retail forex
transactions that the Board should address?
III. Request for Comments
The Board requests comment on all aspects of the proposed rule,
including the questions posed in the preamble. In addition, the Board
requests comments on the following questions:
Question III.1: Does the proposed rule appropriately
protect retail forex customers of banking institutions?
Question III.2: Are the proposed rule's variations from
the CFTC retail forex rule appropriately tailored to the differences
between banking institutions and CFTC registrants and the regulatory
regimes applicable to each?
To assist in the review of comments, the Board requests that commenters
identify their comments by question number.
IV. Regulatory Analysis
A. Regulatory Flexibility Act
In accordance with section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), the Board is publishing an initial
regulatory flexibility analysis for the proposed rule. The RFA
generally requires an agency to provide an initial regulatory
flexibility analysis with the proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. The Board welcomes comment on all
aspects of the initial regulatory flexibility analysis. A final
regulatory flexibility analysis will be conducted after consideration
of the comments received during the comment period.
1. Statement of objectives of the proposal. Section 2(c)(2)(E) of
the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)) will prohibit a U.S.
financial institution from conducting retail foreign exchange
transactions unless done pursuant a rule or regulation of a Federal
regulatory agency allowing such transactions. The Board is proposing a
new regulation to allow banking institutions under its supervision to
engage in retail foreign exchange transactions.
2. Small entities affected by the proposal. Under regulations
issued by the Small Business Administration, a banking institution is
considered a ``small entity'' if it has assets of $175 million or
less.\38\ As of December 21, 2010, there were approximately 398 small
state member banks, 20 small Edge Act and agreement corporations, 62
small uninsured branches of foreign banks, 3,988 small bank holding
companies and 267 small financial holding companies. The Board is not
aware of any small institutions engaged in retail forex transactions.
---------------------------------------------------------------------------
\38\ U.S. Small Business Administration, Table of Small Business
Size Matched to North American Industry Classification System Codes,
13 CFR 121.201.
---------------------------------------------------------------------------
3. Compliance requirements. A description of the projected
recordkeeping and other compliance requirements can be found below in
section B, ``Paperwork Reduction Act,'' under the following headings:
Reporting Requirements, Disclosure Requirements, and Policies and
Procedures; Recordkeeping. The Board believes that there are no other
compliance requirements for this proposed rule.
4. Other Federal rules. The Board believes that no Federal rules
duplicate, overlap, or conflict with the proposed rule. As noted in the
supplementary information above, retail forex transactions would also
be subject to the Interagency Statement on Retail Sales of Nondeposit
Investment Products, but this rule would govern to the extent of a
conflict.
5. Significant alternatives to the proposed rule. As discussed
above, the Board has requested comment on required disclosures, margin,
and reporting requirements for all banking institutions engaging in
retail foreign exchange transactions and has solicited comment on any
approaches that would reduce the burden on all counterparties,
including small entities. The Board welcomes comment on any significant
alternatives that would minimize the impact of the proposal on small
entities.
B. Paperwork Reduction Act
Request for Comment on Proposed Information Collection
In accordance with section 3512 of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The information collection
requirements are found in Sec. Sec. 240.4-240.7, 240.9-240.10, 240.13,
240.15-24016.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
[[Page 46659]]
(d) Ways to minimize the burden of information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on the collection of information should be sent to Cynthia
Ayouch, Acting Federal Reserve Clearance Officer, Division of Research
and Statistics, Mail Stop 95-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-New), Washington, DC 20503. You may also submit comments
electronically, identified by Docket number, by any of the following
methods:
Agency Web Site: http://www.federalreserve.gov. Follow
the instructions for submitting comments on the http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message. All comments will become a
matter of public record.
Proposed Information Collection
Title of Information Collection: Reporting, recordkeeping, and
disclosure requirements associated with Regulation NN.
Frequency of Response: On occasion.
Affected Public: Businesses or other for-profit.
Respondents: Agreement corporations, Edge Act corporations, state
member banks, uninsured branches of foreign banks, financial holding
companies and bank holding companies (collectively, ``banking
institutions'').
Reporting Requirements
The reporting requirements in Sec. 240.4 would require that, prior
to initiating a retail forex business, a banking institution provide
the Board with prior notice. The notice must certify that the banking
institution has written policies and procedures, and risk measurement
and management systems in controls in place to ensure that retail forex
transactions are conducted in a safe and sound manner. The banking
institution must also provide other information required by the Board,
such as documentation of customer due diligence, new product approvals,
and haircuts applied to noncash margins. A banking institution already
engaging in a retail forex business may continue to do so, provided it
requests an extension of time.
Disclosure Requirements
Section 240.5, regarding the application and closing out of
offsetting long and short positions, would require a banking
institution to promptly provide the customer with a statement
reflecting the financial result of the transactions and the name of the
introducing broker to the account. The customer would provide specific
written instructions on how the offsetting transaction should be
applied.
Section 240.6 would require that a banking institution furnish a
retail forex customer with a written disclosure before opening an
account that will engage in retail forex transactions for a retail
forex customer and receive an acknowledgment from the customer that it
was received and understood. It also requires the disclosure by a
banking institution of its fees and other charges and its profitable
accounts ratio.
Section 240.10 would require a banking institution to issue monthly
statements to each retail forex customer and to send confirmation
statements following transactions.
Section 240.13(b) would allow disclosure by a banking institution
that an order of another person is being held by them only when
necessary to the effective execution of the order or when the
disclosure is requested by the Board. Section 240.13(c) would prohibit
a banking institution engaging in retail forex transactions from
knowingly handling the account of any related person of another retail
forex counterparty unless it receives proper written authorization,
promptly prepares a written record of the order, and transmits to the
counterparty copies of all statements and written records. Section
240.13(d) would prohibit a related person of a banking institution
engaging in forex transactions from having an account with another
retail forex counterparty unless it receives proper written
authorization and copies of all statements and written records for such
accounts are transmitted to the counterparty.
Section 240.15 would require a banking institution to provide a
retail forex customer with 30 days' prior notice of any assignment of
any position or transfer of any account of the retail forex customer.
It would also require a banking institution to which retail forex
accounts or positions are assigned or transferred to provide the
affected customers with risk disclosure statements and forms of
acknowledgment and receive the signed acknowledgments within 60 days.
The customer dispute resolution provisions in Sec. 240.16 would
require certain endorsements, acknowledgments, and signature language.
It also would require that within 10 days after receipt of notice from
the retail forex customer that they intend to submit a claim to
arbitration, the banking institution provide them with a list of
persons qualified in the dispute resolution and that the customer must
notify the banking institution of the person selected within 45 days of
receipt of such list.
Policies and Procedures; Recordkeeping
Section 240.7 would require that a banking institution engaging in
retail forex transactions keep full, complete, and systematic records
and establish and implement internal rules, procedures, and controls.
Section 240.7 also would require that a banking institution keep
account, financial ledger, transaction and daily records, as well as
memorandum orders, post-execution allocation of bunched orders, records
regarding its ratio of profitable accounts, possible violations of law,
records for noncash margin, and monthly statements and confirmations.
Section 240.9 would require policies and procedures for haircuts for
noncash margin collected under the rule's margin requirements, and
annual evaluations and modifications of the haircuts.
Estimated PRA Burden
Estimated Number of Respondents: 5 banking institutions; 2 service
providers.
Total Reporting Burden: 80 hours.
Total Disclosure Burden: 5,510 hours.
Total Recordkeeping Burden: 1,280 hours.
Total Annual Burden: 6,870 hours.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board to use
plain language in all proposed and final rules published after January
1, 2000. The Board invites comment on how to make this proposed rule
easier to understand. For example, the Board requests comment on such
questions as:
Have we organized the material to suit your needs? If not,
how could the material be better organized?
Have we clearly stated the requirements of the rule? If
not, how could the rule be more clearly stated?
Does the rule contain technical language or jargon that is
not clear? If
[[Page 46660]]
so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 240
Banks, Banking, Consumer protection, Foreign currencies, Foreign
exchange, Holding companies, Investments, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, the Board proposes to amend
12 CFR Chapter II as follows:
1. Add new part 240 to read as follows:
PART 240--RETAIL FOREIGN EXCHANGE TRANSACTIONS (REGULATION NN)
Sec.
240.1 Authority, purpose, and scope.
240.2 Definitions.
240.3 Prohibited transactions.
240.4 Notification.
240.5 Application and closing out of offsetting long and short
positions.
240.6 Disclosure.
240.7 Recordkeeping.
240.8 Capital requirements.
240.9 Margin requirements.
240.10 Required reporting to customers.
240.11 Unlawful representations.
240.12 Authorization to trade.
240.13 Trading and operational standards.
240.14 Supervision.
240.15 Notice of transfers.
240.16 Customer dispute resolution.
Authority: 7 U.S.C. 2(c)(2)(E), 12 U.S.C. 248, 321-338,
1813(q), 1818, 1844(b), 3106a, 3108.
Sec. 240.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (the Board) under the authority of section
2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)),
sections 9 and 11 of the Federal Reserve Act (12 U.S.C. 321-338 and
248), section 5(b) of the Bank Holding Company Act of 1956 (12 U.S.C.
1844(b)), sections 9 and 13a of the International Banking Act of 1978
(12 U.S.C. 3106a and 3108), and sections 3 and 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q) and 1818).
(b) Purpose. This part establishes rules applicable to retail
foreign exchange transactions engaged in by banking institutions and
applies on or after the effective date.
(c) Scope. Except as provided in paragraph (d) of this section,
this part applies to banking institutions, as defined in section
240.2(b) of this part, and any branches or offices of those
institutions wherever located. This part applies to subsidiaries of
banking institutions organized under the laws of the United States or
any U.S. state that are not subject to the jurisdiction of another
federal regulatory agency authorized to prescribe rules or regulations
under section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C.
(2)(c)(2)(E)).
(d) International applicability. Sections 240.3 and 240.5 through
240.16 do not apply to retail foreign exchange transactions between a
foreign branch or office of a banking institution and a non-U.S.
customer. With respect to those transactions, the foreign branch or
office remains subject to any disclosure, recordkeeping, capital,
margin, reporting, business conduct, documentation, and other
requirements of applicable foreign law.
Sec. 240.2 Definitions.
For purposes of this part, the following terms have the same
meaning as in the Commodity Exchange Act (7 U.S.C. 1 et seq.):
``affiliated person of a futures commission merchant''; ``associated
person''; ``contract of sale''; ``commodity''; ``eligible contract
participant''; ``futures commission merchant''; ``future delivery'';
``option''; ``security''; and ``security futures product.''
(a) Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
(b) Banking institution means:
(1) A state member bank (as defined in 12 CFR 208.2);
(2) An uninsured state-licensed U.S. branch or agency of a foreign
bank;
(3) A financial holding company (as defined in section 2 of the
Bank Holding Company Act of 1956; 12 U.S.C. 1841);
(4) A bank holding company (as defined in section 2 of the Bank
Holding Company Act of 1956; 12 U.S.C. 1841);
(5) A corporation operating under the fifth undesignated paragraph
of section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly
known as ``an agreement corporation;'' and
(6) A corporation organized under section 25A of the Federal
Reserve Act (12 U.S.C. 611 et seq.), commonly known as an ``Edge Act
corporation.''
(c) Commodity Exchange Act means the Commodity Exchange Act (7
U.S.C. 1 et seq.).
(d) Forex means foreign exchange.
(e) Identified banking product has the same meaning as in section
401(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C.
27(b)).
(f) Institution-affiliated party or IAP has the same meaning as in
12 U.S.C. 1813(u)(1), (2), or (3).
(g) Introducing broker means any person who solicits or accepts
orders from a retail forex customer in connection with retail forex
transactions.
(h) Related person, when used in reference to a retail forex
counterparty, means:
(1) Any general partner, officer, director, or owner of ten percent
or more of the capital stock of the banking institution;
(2) An associated person or employee of the retail forex
counterparty, if the retail forex counterparty is not an insured
depository institution;
(3) An IAP, if the retail forex counterparty is an insured
depository institution; and
(4) Any relative or spouse of any of the foregoing persons, or any
relative of such spouse, who shares the same home as any of the
foregoing persons.
(i) Retail foreign exchange dealer means any person other than a
retail forex customer that is, or that offers to be, the counterparty
to a retail forex transaction, except for a person described in item
(aa), (bb), (cc)(AA), (dd), or (ff) of section 2(c)(2)(B)(i)(II) of the
Commodity Exchange Act (7 U.S.C. 2(c)(2)(B)(i)(II)).
(j) Retail forex account means the account of a retail forex
customer, established with a banking institution, in which retail forex
transactions with the banking institution as counterparty are
undertaken, or the account of a retail forex customer that is
established in order to enter into such transactions.
(k) Retail forex account agreement means the contractual agreement
between a banking institution and a retail forex customer that contains
the terms governing the customer's retail forex account with the
banking institution.
(l) Retail forex business means engaging in one or more retail
forex transactions with the intent to derive income from those
transactions, either directly or indirectly.
(m) Retail forex counterparty includes, as appropriate:
(1) A banking institution;
(2) A retail foreign exchange dealer;
(3) A futures commission merchant;
(4) An affiliated person of a futures commission merchant; and
(5) A broker or dealer registered under section 15(b) (except
paragraph (11) thereof) or 15C of the Securities Exchange Act of 1934
(15 U.S.C. 78o(b), 78o-5) or a U.S. financial institution
[[Page 46661]]
other than a banking institution, provided the counterparty is subject
to a rule or regulation of a Federal regulatory agency covering retail
forex transactions.
(n) Retail forex customer means a customer that is not an eligible
contract participant, acting on his, her, or its own behalf and
engaging in retail forex transactions.
(o) Retail forex proprietary account means a retail forex account
carried on the books of a banking institution for one of the following
persons; a retail forex account of which 10 percent or more is owned by
one of the following persons; or a retail forex account of which an
aggregate of 10 percent or more of which is owned by more than one of
the following persons:
(1) The banking institution;
(2) An officer, director or owner of ten percent or more of the
capital stock of the banking institution; or
(3) An employee of the banking institution, whose duties include:
(i) The management of the banking institution's business;
(ii) The handling of the banking institution's retail forex
transactions;
(iii) The keeping of records, including without limitation the
software used to make or maintain those records, pertaining to the
banking institution's retail forex transactions; or
(iv) The signing or co-signing of checks or drafts on behalf of the
banking institution;
(4) A spouse or minor dependent living in the same household as of
any of the foregoing persons; or
(5) An affiliate of the banking institution;
(p) Retail forex transaction means an agreement, contract, or
transaction in foreign currency, other than an identified banking
product or a part of an identified banking product, that is offered or
entered into by a banking institution with a person that is not an
eligible contract participant and that is:
(1) A contract of sale of a commodity for future delivery or an
option on such a contract; or
(2) An option, other than an option executed or traded on a
national securities exchange registered pursuant to section 6(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or
(3) Offered or entered into on a leveraged or margined basis, or
financed by a banking institution, its affiliate, or any person acting
in concert with the banking institution or its affiliate on a similar
basis, other than:
(i) A security that is not a security futures product as defined in
section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)); or
(ii) A contract of sale that--
(A) Results in actual delivery within two days; or
(B) Creates an enforceable obligation to deliver between a seller
and buyer that have the ability to deliver and accept delivery,
respectively, in connection with their line of business; or
(iii) An agreement, contract, or transaction that the Board
determines is not functionally or economically similar to an agreement,
contract, or transaction described in paragraph (p)(1) or (p)(2) of
this section.
Sec. 240.3 Prohibited transactions.
(a) Fraudulent conduct prohibited. No banking institution or its
related persons may, directly or indirectly, in or in connection with
any retail forex transaction:
(1) Defraud or attempt to defraud any person;
(2) Knowingly make or cause to be made to any person any false
report or statement or cause to be entered for any person any false
record; or
(3) Knowingly deceive or attempt to deceive any person by any means
whatsoever.
(b) Acting as counterparty and exercising discretion prohibited. A
banking institution that has authority to cause retail forex
transactions to be effected for a retail forex customer without the
retail forex customer's specific authorization may not (and an
affiliate of such an institution may not) act as the counterparty for
any retail forex transaction with that retail forex customer.
Sec. 240.4 Notification.
(a) Notification required. Before commencing a retail forex
business, a banking institution shall provide the Board with prior
written notice in compliance with this section. The notice will become
effective 60 days after a complete notice is received by the Board,
provided the Board does not request additional information or object in
writing. In the event the Board requests additional information, the
notice will become effective 60 days after all information requested by
the Board is received by the Board unless the Board objects in writing.
(b) Notification requirements. A banking institution shall provide
the following in its written notification:
(1) Information concerning customer due diligence, including
without limitation credit evaluations, customer appropriateness, and
``know your customer'' documentation;
(2) The haircuts to be applied to noncash margin as provided in
240.9(b)(2);
(3) Information concerning new product approvals;
(4) Information on addressing conflicts of interest; and
(5) A resolution by the banking institution's Board of Directors
that the banking institution has established and implemented written
policies, procedures, and risk measurement and management systems and
controls for the purpose of ensuring that it conducts retail forex
transactions in a safe and sound manner and in compliance with this
part.
(c) Treatment of existing retail forex businesses. A banking
institution that is engaged in a retail forex business on the effective
date of this part may continue to do so, until and unless the Board
objects in writing, so long as the institution submits the information
required to be submitted under paragraphs (b)(1) through (5) of this
section within 30 days of the effective date of this part, subject to
an extension of time by the Board, and such additional information as
requested by the Board thereafter.
(d) Compliance with the Commodity Exchange Act. A banking
institution that is engaged in a retail forex business on the effective
date of this part and complies with paragraph (c) of this section shall
be deemed to be acting pursuant to a rule or regulation described in
section 2(c)(2)(E)(ii)(I) of the Commodity Exchange Act (7 U.S.C.
2(c)(2)(E)(ii)(I)).
Sec. 240.5 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. Any banking institution
that--
(1) Engages in a retail forex transaction involving the purchase of
any currency for the account of any retail forex customer when the
account of such retail forex customer at the time of such purchase has
an open retail forex transaction for the sale of the same currency;
(2) Engages in a retail forex transaction involving the sale of any
currency for the account of any retail forex customer when the account
of such retail forex customer at the time of such sale has an open
retail forex transaction for the purchase of the same currency;
(3) Purchases a put or call option involving foreign currency for
the account of any retail forex customer when the account of such
retail forex customer at the time of such purchase has a short put or
call option position with the same underlying currency, strike price,
and expiration date as that purchased; or
[[Page 46662]]
(4) Sells a put or call option involving foreign currency for the
account of any retail forex customer when the account of such retail
forex customer at the time of such sale has a long put or call option
position with the same underlying currency, strike price, and
expiration date as that sold shall:
(i) Immediately apply such purchase or sale against such previously
held opposite transaction with the same customer; and
(ii) Promptly furnish such retail forex customer with a statement
showing the financial result of the transactions involved and the name
of any introducing broker to the account.
(b) Close-out against oldest open position. In all instances in
which the short or long position in a customer's retail forex account
immediately prior to an offsetting purchase or sale is greater than the
quantity purchased or sold, the banking institution shall apply such
offsetting purchase or sale to the oldest portion of the previously
held short or long position.
(c) Transactions to be applied as directed by customer.
Notwithstanding paragraphs (a) and (b) of this section, the offsetting
transaction shall be applied as directed by a retail forex customer's
specific instructions. These instructions may not be made by the
banking institution or a related person.
Sec. 240.6 Disclosure.
(a) Risk disclosure statement required. No banking institution may
open or maintain an account that will engage in retail forex
transactions for a retail forex customer unless the banking institution
has furnished the retail forex customer with a separate written
disclosure statement containing only the language set forth in
paragraph (d) of this section and the disclosures required by
paragraphs (e), (f), and (g) of this section.
(b) Acknowledgement of risk disclosure statement required. The
banking institution must receive from the retail forex customer a
written acknowledgement signed and dated by the customer that the
customer received and understood the written disclosure statement
required by paragraph (a) of this section.
(c) Placement of risk disclosure statement. The disclosure
statement may be attached to other documents as the initial page(s) of
such documents and as the only material on such page(s).
(d) Content of risk disclosure statement. The language set forth in
the written disclosure statement required by paragraph (a) of this
section shall be as follows:
Risk Disclosure Statement
Retail forex transactions generally involve the leveraged trading
of contracts denominated in foreign currency with a banking institution
as your counterparty. Because of the leverage and the other risks
disclosed here, you can rapidly lose all of the funds or property you
give the banking institution as margin for such trading and you may
lose more than you pledge as margin.
You should be aware of and carefully consider the following points
before determining whether such trading is appropriate for you.
(1) Trading foreign currencies is a not on a regulated market or
exchange--your banking institution is your trading counterparty and has
conflicting interests. The retail forex transaction you are entering
into is not conducted on an interbank market, nor is it conducted on a
futures exchange subject to regulation by the Commodity Futures Trading
Commission. The foreign currency trades you transact are trades with
your banking institution as the counterparty. When you sell, the
banking institution is the buyer. When you buy, the banking institution
is the seller. As a result, when you lose money trading, your banking
institution is making money on such trades, in addition to any fees,
commissions, or spreads the banking institution may charge.
(2) Any electronic trading platform that you may use for retail
foreign currency transactions with your banking institution is not a
regulated exchange. It is an electronic connection for accessing your
banking institution. The terms of availability of such a platform are
governed only by your contract with your banking institution. Any
trading platform that you may use to enter into off-exchange foreign
currency transactions is only connected to your banking institution.
You are accessing that trading platform only to transact with your
banking institution. You are not trading with any other entities or
customers of the banking institution by accessing such platform. The
availability and operation of any such platform, including the
consequences of the unavailability of the trading platform for any
reason, is governed only by the terms of your account agreement with
the banking institution.
(3) You may be able to offset or liquidate any trading positions
only through your banking institution because the transactions are not
made on an exchange, and your banking institution may set its own
prices. Your ability to close your transactions or offset positions is
limited to what your banking institution will offer to you, as there is
no other market for these transactions. Your banking institution may
offer any prices it wishes. Your banking institution may establish its
prices by offering spreads from third party prices, but it is under no
obligation to do so or to continue to do so. Your banking institution
may offer different prices to different customers at any point in time
on its own terms. The terms of your account agreement alone govern the
obligations your banking institution has to you to offer prices and
offer offset or liquidating transactions in your account and make any
payments to you. The prices offered by your banking institution may or
may not reflect prices available elsewhere at any exchange, interbank,
or other market for foreign currency.
(4) Paid solicitors may have undisclosed conflicts. The banking
institution may compensate introducing brokers for introducing your
account in ways that are not disclosed to you. Such paid solicitors are
not required to have, and may not have, any special expertise in
trading, and may have conflicts of interest based on the method by
which they are compensated. You should thoroughly investigate the
manner in which all such solicitors are compensated and be very
cautious in granting any person or entity authority to trade on your
behalf. You should always consider obtaining dated written confirmation
of any information you are relying on from your banking institution in
making any trading or account decisions.
(5) Retail forex transactions are not insured by the Federal
Deposit Insurance Corporation.
(6) Retail forex transactions are not a deposit in, or guaranteed
by, a banking institution.
(7) Retail forex transactions are subject to investment risks,
including possible loss of all amounts invested.
Finally, you should thoroughly investigate any statements by any
banking institution that minimize the importance of, or contradict, any
of the terms of this risk disclosure. Such statements may indicate
sales fraud.
This brief statement cannot, of course, disclose all the risks and
other aspects of trading off-exchange foreign currency with a banking
institution.
I hereby acknowledge that I have received and understood this risk
disclosure statement.
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Date
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Signature of Customer
[[Page 46663]]
(e)(1) Disclosure of profitable accounts ratio. Immediately
following the language set forth in paragraph (d) of this section, the
statement required by paragraph (a) of this section shall include, for
each of the most recent four calendar quarters during which the banking
institution maintained retail forex customer accounts:
(i) The total number of retail forex customer accounts maintained
by the banking institution over which the banking institution does not
exercise investment discretion;
(ii) The percentage of such accounts that were profitable for
retail forex customer accounts during the quarter; and
(iii) The percentage of such accounts that were not profitable for
retail forex customer accounts during the quarter.
(2) Statement of profitable trades. (i) The banking institution's
statement of profitable trades shall include the following legend: Past
performance is not necessarily indicative of future results.
(ii) Each banking institution shall provide, upon request, to any
retail forex customer or prospective retail forex customer the total
number of retail forex accounts maintained by the banking institution
for which the banking institution does not exercise investment
discretion, the percentage of such accounts that were profitable, and
the percentage of such accounts that were not profitable for each
calendar quarter during the most recent five-year period during which
the banking institution maintained such accounts.
(f) Disclosure of fees and other charges. Immediately following the
language required by paragraph (e) of this section, the statement
required by paragraph (a) of this section shall include:
(1) The amount of any fee, charge, or commission that the banking
institution may impose on the retail forex customer in connection with
a retail forex account or retail forex transaction;
(2) An explanation of how the banking institution will determine
the amount of such fees, charges, or commissions; and
(3) The circumstances under which the banking institution may
impose such fees, charges, or commissions.
(g) Set off. Immediately following the language required by
paragraph (f) of this section, the statement required by paragraph (a)
of this section shall include:
(1) A statement as to whether the banking institution will or will
not retain the right to set off obligations of the retail forex
customer arising from the customer's retail forex transactions,
including margin calls and losses, against the customer's other assets
held by the banking institution;
(2) If the banking institution states that it reserves its right to
set off obligations of the retail forex customer arising from the
customer's retail forex transactions against the customer's other
assets, the banking institution must receive from the retail forex
customer a written acknowledgement signed and dated by the customer
that the customer received and understood the written disclosure
required by paragraph (g)(1) of this section.
(h) Future disclosure requirements. If, with regard to a retail
forex customer, the banking institution changes any fee, charge, or
commission required to be disclosed under paragraph (f) of this
section, then the banking institution shall mail or deliver to the
retail forex customer a notice of the changes at least 15 days prior to
the effective date of the change.
(i) Form of disclosure requirements. The disclosures required by
this section shall be clear and conspicuous and designed to call
attention to the nature and significance of the information provided.
(j) Other disclosure requirements unaffected. This section does not
relieve a banking institution from any other disclosure obligation it
may have under applicable law.
Sec. 240.7 Recordkeeping.
(a) General rule. A banking institution engaging in retail forex
transactions shall keep full, complete and systematic records, together
with all pertinent data and memoranda, of all transactions relating to
its retail forex business, including:
(1) Retail forex account records. For each retail forex account:
(i) The name and address of the person for whom such retail forex
account is carried or introduced and the principal occupation or
business of the person.
(ii) The name of any other person guaranteeing the account or
exercising trading control with respect to the account;
(iii) The establishment or termination of the account;
(iv) A means to identify the person who has solicited and is
responsible for the account or assign account numbers in such a manner
as to identify that person;
(v) The funds in the account, net of any commissions and fees;
(vi) The account's net profits and losses on open trades;
(vii) The funds in the account plus or minus the net profits and
losses on open trades, adjusted for the net option value in the case of
open options positions;
(viii) Financial ledger records that show separately for each
retail forex customer all charges against and credits to such retail
forex customer's account, including but not limited to retail forex
customer funds deposited, withdrawn, or transferred, and charges or
credits resulting from losses or gains on closed transactions; and
(ix) A list of all retail forex transactions executed for the
account, with the details specified in paragraph (a)(2) of this
section.
(2) Retail forex transaction records. For each retail forex
transaction:
(i) The date and time the banking institution received the order;
(ii) The price at which the banking institution placed the order,
or, in the case of an option, the premium that the retail forex
customer paid;
(iii) The customer account identification information;
(iv) The currency pair;
(v) The size or quantity of the order;
(vi) Whether the order was a buy or sell order;
(vii) The type of order, if the order was not a market order;
(viii) The size and price at which the order is executed, or in the
case of an option, the amount of the premium paid for each option
purchased, or the amount credited for each option sold;
(ix) For options, whether the option is a put or call, expiration
date, quantity, underlying contract for future delivery or underlying
physical, strike price, and details of the purchase price of the
option, including premium, mark-up, commission, and fees;
(x) For futures, the delivery date; and
(xi) If the order was made on a trading platform:
(A) The price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(B) The date and time the order was transmitted to the trading
platform; and
(C) The date and time the order was executed.
(3) Price changes on a trading platform. If a trading platform is
used, daily logs showing each price change on the platform, the time of
the change to the nearest second, and the trading volume at that time
and price.
(4) Methods or algorithms. Any method or algorithm used to
determine the bid or asked price for any retail forex transaction or
the prices at which customers orders are executed, including, but not
limited to, any mark-ups, fees, commissions or other items which affect
the profitability or risk of loss of a retail forex customer's
transaction.
[[Page 46664]]
(5) Daily records which show for each business day complete details
of:
(i) All retail forex transactions that are futures transactions
executed on that day, including the date, price, quantity, market,
currency pair, delivery date, and the person for whom such transaction
was made;
(ii) All retail forex transactions that are option transactions
executed on that day, including the date, whether the transaction
involved a put or call, the expiration date, quantity, currency pair,
delivery date, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees, and the person
for whom the transaction was made; and
(iii) All other retail forex transactions executed on that day for
such account, including the date, price, quantity, currency and the
person for whom such transaction was made.
(6) Other records. Written acknowledgements of receipt of the risk
disclosure statement required by Sec. 240.6(b), offset instructions
pursuant to Sec. 240.5(c), records required under paragraphs (b)
through (f) of this section, trading cards, signature cards, street
books, journals, ledgers, payment records, copies of statements of
purchase, and all other records, data and memoranda that have been
prepared in the course of the banking institution's retail forex
business.
(b) Ratio of profitable accounts. (1) With respect to its active
retail forex customer accounts over which it did not exercise
investment discretion and that are not retail forex proprietary
accounts open for any period of time during the quarter, a banking
institution shall prepare and maintain on a quarterly basis (calendar
quarter):
(i) A calculation of the percentage of such accounts that were
profitable;
(ii) A calculation of the percentage of such accounts that were not
profitable; and
(iii) Data supporting the calculations described in paragraphs
(b)(1)(i) and (b)(1)(ii) of this section.
(2) In calculating whether a retail forex account was profitable or
not profitable during the quarter, the banking institution shall
compute the realized and unrealized gains or losses on all retail forex
transactions carried in the retail forex account at any time during the
quarter, and subtract all fees, commissions, and any other charges
posted to the retail forex account during the quarter, and add any
interest income and other income or rebates credited to the retail
forex account during the quarter. All deposits and withdrawals of funds
made by the retail forex customer during the quarter must be excluded
from the computation of whether the retail forex account was profitable
or not profitable during the quarter. Computations that result in a
zero or negative number shall be considered a retail forex account that
was not profitable. Computations that result in a positive number shall
be considered a retail forex account that was profitable.
(3) A retail forex account shall be considered ``active'' for
purposes of paragraph (b)(1) of this section if and only if, for the
relevant calendar quarter, a retail forex transaction was executed in
that account or the retail forex account contained an open position
resulting from a retail forex transaction.
(c) Records related to possible violations of law. A banking
institution engaging in retail forex transactions shall make a record
of all communications received by the banking institution or its
related persons concerning facts giving rise to possible violations of
law related to the banking institution's retail forex business. The
record shall contain: the name of the complainant, if provided; the
date of the communication; the relevant agreement, contract, or
transaction; the substance of the communication; and the name of the
person who received the communication and the final disposition of the
matter.
(d) Records for noncash margin. A banking institution shall
maintain a record of all noncash margin collected pursuant to Sec.
240.9. The record shall show separately for each retail forex customer:
(1) A description of the securities or property received;
(2) The name and address of such retail forex customer;
(3) The dates when the securities or property were received;
(4) The identity of the depositories or other places where such
securities or property are segregated or held, if applicable;
(5) The dates on which the banking institution placed or removed
such securities or property into or from such depositories; and
(6) The dates of return of such securities or property to such
retail forex customer, or other disposition thereof, together with the
facts and circumstances of such other disposition.
(e) Order tickets.
(1) Except as provided in paragraph (e)(2) of this section,
immediately upon the receipt of a retail forex transaction order, a
banking institution shall prepare an order ticket for the order
(whether unfulfilled, executed or canceled). The order ticket shall
include:
(i) Account identification (account or customer name with which the
retail forex transaction was effected);
(ii) Order number;
(iii) Type of order (market order, limit order, or subject to
special instructions);
(iv) Date and time, to the nearest minute, the retail forex
transaction order was received (as evidenced by timestamp or other
timing device);
(v) Time, to the nearest minute, the retail forex transaction order
was executed; and
(vi) Price at which the retail forex transaction was executed.
(2) Post-execution allocation of bunched orders. Specific
identifiers for retail forex accounts included in bunched orders need
not be recorded at time of order placement or upon report of execution
as required under paragraph (e)(1) of this section if the following
requirements are met:
(i) The banking institution placing and directing the allocation of
an order eligible for post-execution allocation has been granted
written investment discretion with regard to participating customer
accounts and makes the following information available to customers
upon request:
(A) The general nature of the post-execution allocation methodology
the banking institution will use;
(B) Whether the banking institution has any interest in accounts
which may be included with customer accounts in bunched orders eligible
for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare the customer's results with those of other comparable customers
and, if applicable, any account in which the banking institution has an
interest.
(ii) Post-execution allocations are made as soon as practicable
after the entire transaction is executed;
(iii) Post-execution allocations are fair and equitable, with no
account or group of accounts receiving consistently favorable or
unfavorable treatment; and
(iv) The post-execution allocation methodology is sufficiently
objective and specific to permit the Board to verify fairness of the
allocations using that methodology.
(f) Record of monthly statements and confirmations. A banking
institution shall retain a copy of each monthly statement and
confirmation required by Sec. 240.10.
(g) Form of record and manner of maintenance. The records required
by this section must clearly and accurately reflect the information
required and provide an adequate basis for the audit of the
information. A banking institution must create and maintain
[[Page 46665]]
audio recordings of oral orders and oral offset instructions. Record
maintenance may include the use of automated or electronic records
provided that the records are easily retrievable, and readily available
for inspection.
(h) Length of maintenance. A banking institution shall keep each
record required by this section for at least five years from the date
the record is created.
Sec. 240.8 Capital requirements.
(a) Capital required for a state member bank. A banking institution
defined in section 240.2(b)(1) offering or entering into retail forex
transactions must be well-capitalized as defined in section 208.43 of
Regulation H (12 CFR 208.243).
(b) Capital required for an uninsured state-licensed branch of a
foreign bank. A banking institution defined in section 240.2(b)(2)
offering or entering into retail forex transactions must be well-
capitalized under the capital rules made applicable to it pursuant to
section 225.2(r)(3) of Regulation Y (12 CFR 225.2(r)(3).
(c) Capital required for financial holding companies and bank
holding companies. A banking institution defined in section 240.2(b)(3)
or (4) offering or entering into retail forex transactions must be
well-capitalized as defined in section 225.2(r) of Regulation Y (12 CFR
Part 225.2(r)).
(d) Capital required for an agreement corporation or Edge Act
corporation. A banking institution defined in section 240.2(b)(5) or
(6) offering or entering into retail forex transactions must maintain
capital in compliance with the capital adequacy guidelines that are
made applicable to an Edge corporation engaged in banking pursuant to
section 211.12(c)(2) of Regulation K (12 CFR 211.12(c)(2)).
Sec. 240.9 Margin requirements.
(a) Margin required. A banking institution engaging, or offering to
engage, in retail forex transactions must collect from each retail
forex customer an amount of margin not less than:
(1) Two percent of the notional value of the retail forex
transaction for major currency pairs and 5 percent of the notional
value of the retail forex transaction for all other currency pairs;
(2) For short options, 2 percent for major currency pairs and 5
percent for all other currency pairs of the notional value of the
retail forex transaction, plus the premium received by the retail forex
customer; or
(3) For long options, the full premium charged and received by the
banking institution.
(b)(1) Form of margin. Margin collected under paragraph (a) of this
section or pledged by a retail forex customer for retail forex
transactions in excess of the requirements of paragraph (a) of this
section must be in the form of cash or the following financial
instruments:
(i) Obligations of the United States and obligations fully
guaranteed as to principal and interest by the United States;
(ii) General obligations of any State or of any political
subdivision thereof;
(iii) General obligations issued or guaranteed by any enterprise,
as defined in 12 U.S.C. 4502(10);
(iv) Certificates of deposit issued by an insured depository
institution, as defined in section 3(c)(2) of the Federal Deposit
Insurance Act (12 U.S.C. 1813(c)(2));
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign nation;
(viii) Interests in money market mutual funds; and
(ix) Such other financial instruments as the Board deems
appropriate.
(2) Haircuts. A banking institution shall establish written
policies and procedures that include:
(i) Haircuts for noncash margin collected under this section; and
(ii) Annual evaluation, and, if appropriate, modification of the
haircuts.
(c) Major currencies. (1) for the purposes of subsections (a)(1)
and (a)(2), major currency means:
(i) United States Dollar (USD)
(ii) Canadian Dollar (CAD)
(iii) Euro (EUR)
(iv) United Kingdom Pound (GBP)
(v) Japanese Yen (JPY)
(vi) Swiss Franc (CHF)
(vii) New Zealand Dollar (NZD)
(viii) Australian Dollar (AUD)
(ix) Swedish Kronor (SEK)
(x) Danish Kroner (DKK)
(xi) Norwegian Krone (NOK), and
(xii) Any other currency as determined by the Board.
(d) Margin calls; liquidation of position. For each retail forex
customer, at least once per day, a banking institution shall:
(1) Mark the value of the retail forex customer's open retail forex
positions to market;
(2) Mark the value of the margin collected under this section from
the retail forex customer to market;
(3) Determine whether, based on the marks in paragraphs (d)(1) and
(d)(2) of this section, the banking institution has collected margin
from the retail forex customer sufficient to satisfy the requirements
of this section; and
(4) If, pursuant to paragraph (d)(3) of this section, the banking
institution determines that it has not collected margin from the retail
forex customer sufficient to satisfy the requirements of this section
then, within a reasonable period of time, the banking institution shall
either:
(i) Collect margin from the retail forex customer sufficient to
satisfy the requirements of this section; or
(ii) Liquidate the retail forex customer's retail forex
transactions.
Sec. 240.10 Required reporting to customers.
(a) Monthly statements. Each banking institution must promptly
furnish to each retail forex customer, as of the close of the last
business day of each month or as of any regular monthly date selected,
except for accounts in which there are neither open positions at the
end of the statement period nor any changes to the account balance
since the prior statement period, but in any event not less frequently
than once every three months, a statement that clearly shows:
(1) For each retail forex customer:
(i) The open retail forex transactions with prices at which
acquired;
(ii) The net unrealized profits or losses in all open retail forex
transactions marked to the market;
(iii) Any money, securities or other property required by Sec.
240.9(d); and
(iv) A detailed accounting of all financial charges and credits to
the retail forex customer's retail forex accounts during the monthly
reporting period, including: money, securities, or property received
from or disbursed to such customer; realized profits and losses; and
fees, charges, and commissions.
(2) For each retail forex customer engaging in retail forex
transactions that are options:
(i) All such options purchased, sold, exercised, or expired during
the monthly reporting period, identified by underlying retail forex
transaction or underlying currency, strike price, transaction date, and
expiration date;
(ii) The open option positions carried for such customer and
arising as of the end of the monthly reporting period, identified by
underlying retail forex transaction or underlying currency, strike
price, transaction date, and expiration date;
(iii) All such option positions marked to the market and the amount
each position is in the money, if any;
(iv) Any money, securities or other property required by Sec.
240.9(c); and
(v) A detailed accounting of all financial charges and credits to
the
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retail forex customer's retail forex accounts during the monthly
reporting period, including: money, securities, or property received
from or disbursed to such customer; realized profits and losses;
premiums and mark-ups; and fees, charges, and commissions.
(b) Confirmation statement. Each banking institution must, not
later than the next business day after any retail forex transaction,
send:
(1) To each retail forex customer, a written confirmation of each
retail forex transaction caused to be executed by it for the customer,
including offsetting transactions executed during the same business day
and the rollover of an open retail forex transaction to the next
business day;
(2) To each retail forex customer engaging in forex option
transactions, a written confirmation of each forex option transaction,
containing at least the following information:
(i) The retail forex customer's account identification number;
(ii) A separate listing of the actual amount of the premium, as
well as each mark-up thereon, if applicable, and all other commissions,
costs, fees and other charges incurred in connection with the forex
option transaction;
(iii) The strike price;
(iv) The underlying retail forex transaction or underlying
currency;
(v) The final exercise date of the forex option purchased or sold;
and
(vi) The date the forex option transaction was executed.
(3) To each retail forex customer engaging in forex option
transactions, upon the expiration or exercise of any option, a written
confirmation statement thereof, which statement shall include the date
of such occurrence, a description of the option involved, and, in the
case of exercise, the details of the retail forex or physical currency
position which resulted therefrom including, if applicable, the final
trading date of the retail forex transaction underlying the option.
(c) Notwithstanding the provisions of paragraphs (b)(1) through (3)
of this section, a retail forex transaction that is caused to be
executed for a pooled investment vehicle that engages in retail forex
transactions need be confirmed only to the operator of such pooled
investment vehicle.
(d) Controlled accounts. With respect to any account controlled by
any person other than the retail forex customer for whom such account
is carried, each banking institution shall promptly furnish in writing
to such other person the information required by paragraphs (a) and (b)
of this section.
(e) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the banking institution was introduced by an introducing
broker and the name of the introducing broker.
Sec. 240.11 Unlawful representations.
(a) No implication or representation of limiting losses. No banking
institution engaged in retail foreign exchange transactions or its
related persons may imply or represent that it will, with respect to
any retail customer forex account, for or on behalf of any person:
(1) Guarantee such person or account against loss;
(2) Limit the loss of such person or account; or
(3) Not call for or attempt to collect margin as established for
retail forex customers.
(b) No implication of representation of engaging in prohibited
acts. No banking institution or its related persons may in any way
imply or represent that it will engage in any of the acts or practices
described in paragraph (a) of this section.
(c) No Federal government endorsement. No banking institution or
its related persons may represent or imply in any manner whatsoever
that any retail forex transaction or retail forex product has been
sponsored, recommended, or approved by the Board, the Federal
government, or any agency thereof.
(d) Assuming or sharing of liability from bank error. This section
shall not be construed to prevent a banking institution from assuming
or sharing in the losses resulting from the banking institution's error
or mishandling of a retail forex transaction.
(e) Certain guaranties unaffected. This section shall not affect
any guarantee entered into prior to the effective date of this part,
but this section shall apply to any extension, modification or renewal
thereof entered into after such date.
Sec. 240.12 Authorization to trade.
(a) Specific authorization required. No banking institution may
directly or indirectly effect a retail forex transaction for the
account of any retail forex customer unless, before the transaction
occurs, the retail forex customer specifically authorized the banking
institution to effect the retail forex transaction.
(b) A retail forex transaction is ``specifically authorized'' for
purposes of this section if the retail forex customer specifies:
(1) The precise retail forex transaction to be effected;
(2) The exact amount of the foreign currency to be purchased or
sold; and
(3) In the case of an option, the identity of the foreign currency
or contract that underlies the option.
Sec. 240.13 Trading and operational standards.
(a) Internal rules, procedures, and controls required. A banking
institution engaging in retail forex transactions shall establish and
implement internal rules, procedures, and controls designed, at a
minimum, to:
(1) Ensure, to the extent reasonable, that each order received from
a retail forex customer that is executable at or near the price that
the banking institution has quoted to the customer is entered for
execution before any order in any retail forex transaction for:
(i) A proprietary account;
(ii) An account in which a related person has an interest, or any
account for which such a related person may originate orders without
the prior specific consent of the account owner if the related person
has gained knowledge of the retail forex customer's order prior to the
transmission of an order for a proprietary account;
(iii) An account in which a related person has an interest, if the
related person has gained knowledge of the retail forex customer's
order prior to the transmission of an order for a proprietary account;
or
(iv) An account in which a related person may originate orders
without the prior specific consent of the account owner, if the related
person has gained knowledge of the retail forex customer's order prior
to the transmission of an order for a proprietary account;
(2) Prevent banking institution related persons from placing
orders, directly or indirectly, with another person in a manner
designed to circumvent the provisions of paragraph (a)(1) of this
section; and
(3) Fairly and objectively establish settlement prices for retail
forex transactions.
(b) Disclosure of retail forex transactions. No banking institution
engaging in retail forex transactions may disclose that an order of
another person is being held by the banking institution, unless the
disclosure is necessary to the effective execution of such order or the
disclosure is made at the request of the Board.
(c) Handling of retail forex accounts of related persons of retail
forex counterparties. No banking institution engaging in retail forex
transactions shall knowingly handle the retail forex account of any
related person of another
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retail forex counterparty unless the banking institution:
(1) Receives written authorization from a person designated by such
other retail forex counterparty with responsibility for the
surveillance over such account pursuant to paragraph (a)(2) of this
section;
(2) Prepares immediately upon receipt of an order for the account a
written record of the order, including the account identification and
order number, and records thereon to the nearest minute, by time-stamp
or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the other retail forex
counterparty copies of all statements for the account and of all
written records prepared upon the receipt of orders for the account
pursuant to paragraph (c)(2) of this section.
(d) Related person of banking institution establishing account at
another retail forex counterparty. No related person of a banking
institution working in the banking institution's retail forex business
may have an account, directly or indirectly, with another retail forex
counterparty unless the other retail forex counterparty:
(1) Receives written authorization to open and maintain the account
from a person designated by the banking institution of which it is a
related person with responsibility for the surveillance over the
account pursuant to paragraph (a)(2) of this section; and
(2) Transmits on a regular basis to the banking institution copies
of all statements for the account and of all written records prepared
by the other retail forex counterparty upon receipt of orders for such
account pursuant to paragraph (c)(2) of this section.
(e) Prohibited trading practices. No banking institution engaging
in retail forex transactions may:
(1) Enter into a retail forex transaction, to be executed pursuant
to a market or limit order at a price that is not at or near the price
at which other retail forex customers, during that same time period,
have executed retail forex transactions with the banking institution;
(2) Adjust or alter prices for a retail forex transaction after the
transaction has been confirmed to the retail forex customer;
(3) Provide a retail forex customer a new bid price for a retail
forex transaction that is higher than its previous bid without
providing a new asked price that is also higher than its previous asked
price by a similar amount;
(4) Provide a retail forex customer a new bid price for a retail
forex transaction that is lower than its previous bid without providing
a new asked price that is also lower than its previous asked price by a
similar amount; or
(5) Establish a new position for a retail forex customer (except
one that offsets an existing position for that retail forex customer)
where the banking institution holds outstanding orders of other retail
forex customers for the same currency pair at a comparable price.
Sec. 240.14 Supervision.
(a) Supervision by the banking institution. A banking institution
engaging in retail forex transactions shall diligently supervise the
handling by its officers, employees, and agents (or persons occupying a
similar status or performing a similar function) of all retail forex
accounts carried, operated, or advised by the banking institution and
all activities of its officers, employees, and agents (or persons
occupying a similar status or performing a similar function) relating
to its retail forex business.
(b) Supervision by officers, employees, or agents. An officer,
employee, or agent of a banking institution must diligently supervise
his or her subordinates' handling of all retail forex accounts at the
banking institution and all the subordinates' activities relating to
the banking institution's retail forex business.
Sec. 240.15 Notice of transfers.
(a) Prior notice generally required. Except as provided in
paragraph (b) of this section, a banking institution must provide a
retail forex customer with 30 days' prior notice of any assignment of
any position or transfer of any account of the retail forex customer.
The notice must include a statement that the retail forex customer is
not required to accept the proposed assignment or transfer and may
direct the banking institution to liquidate the positions of the retail
forex customer or transfer the account to a retail forex counterparty
of the retail forex customer's selection.
(b) Exceptions. The requirements of paragraph (a) of this section
shall not apply to transfers:
(1) Requested by the retail forex customer;
(2) Made by the Federal Deposit Insurance Corporation as receiver
or conservator under the Federal Deposit Insurance Act; or
(3) Otherwise authorized by applicable law.
(c) Obligations of transferee banking institution. A banking
institution to which retail forex accounts or positions are assigned or
transferred under paragraph (a) of this section must provide to the
affected retail forex customers the risk disclosure statements and
forms of acknowledgment required by this part and receive the required
signed acknowledgments within sixty days of such assignments or
transfers. This requirement shall not apply if the banking institution
has clear written evidence that the retail forex customer has received
and acknowledged receipt of the required disclosure statements.
Sec. 240.16 Customer dispute resolution.
(a) No banking institution shall enter into any agreement or
understanding with a retail forex customer in which the customer
agrees, prior to the time a claim or grievance arises, to submit any
claim or grievance regarding any retail forex transaction or disclosure
to any settlement procedure.
(b) Election of forum.
(1) Within 10 business days after the receipt of notice from the
retail forex customer that the customer intends to submit a claim to
arbitration, the banking institution shall provide the customer with a
list of persons qualified in dispute resolution.
(2) The customer must, within 45 days after receipt of such list,
notify the national bank of the person selected. The customer's failure
to provide such notice shall give the banking institution the right to
select a person from the list.
(c) Enforceability. A dispute settlement procedure may require
parties using the procedure to agree, under applicable state law,
submission agreement, or otherwise, to be bound by an award rendered in
the procedure if the agreement to submit the claim or grievance to the
procedure was made after the claim or grievance arose. Any award so
rendered by the procedure will be enforceable in accordance with
applicable law.
(d) Time limits for submission of claims. The dispute settlement
procedure used by the parties may not include any unreasonably short
limitation period foreclosing submission of a customer's claims or
grievances or counterclaims.
(e) Counterclaims. A procedure for the settlement of a retail forex
customer's claims or grievances against a banking institution or
employee thereof may permit the submission of a counterclaim in the
procedure by a person against whom a claim or grievance is brought if
the counterclaim:
(1) Arises out of the transaction or occurrence that is the subject
of the retail forex customer's claim or grievance; and
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(2) Does not require for adjudication the presence of essential
witnesses, parties, or third persons over which the settlement process
lacks jurisdiction.
By order of the Board of Governors of the Federal Reserve
System, July 28, 2011.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2011-19535 Filed 8-2-11; 8:45 am]
BILLING CODE 6210-01-P