[Federal Register Volume 77, Number 198 (Friday, October 12, 2012)]
[Proposed Rules]
[Pages 62177-62182]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25123]


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 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 77, No. 198 / Friday, October 12, 2012 / 
Proposed Rules  

[[Page 62177]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 48

[Docket ID OCC-2012-0014]
RIN 1557-AD42


Retail Foreign Exchange Transactions

AGENCY: Office of the Comptroller of the Currency, Department of the 
Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to amend its retail foreign exchange rule for transactions 
with bank common trust funds, bank collective investment funds, and 
insurance company separate accounts and is making technical corrections 
to the rule.

DATES: Comments must be received by November 13, 2012.

FOR FURTHER INFORMATION CONTACT: Roman Goldstein, Senior Attorney, or 
Ted Dowd, Assistant Director, Securities and Corporate Practices 
Division, (202) 874-5210.

ADDRESSES: Because paper mail in the Washington, DC, area and at the 
OCC is subject to delay, commenters are encouraged to submit comments 
by the Federal eRulemaking Portal or email, if possible. Please use the 
title ``Retail Foreign Exchange Transactions'' to facilitate the 
organization and review of the comments. You may submit comments by any 
of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
http://www.regulations.gov, under the ``More Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2012-XXXX'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rule. The ``How to Use This Site'' link on 
the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     Email: [email protected].
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2012-0014'' in your comment. In general, OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to http://www.regulations.gov, under the ``More Search Options'' tab click next 
to the ``Advanced Document Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2012-XXXX'' 
to view public comments for this rulemaking action.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

SUPPLEMENTARY INFORMATION: 

I. Background

A. OCC's Retail Foreign Exchange Rulemaking

    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 the Dodd-Frank Act, the Commodity Exchange Act 
(CEA) provides that a United States financial institution \2\ for which 
there is a Federal regulatory agency \3\ shall not enter into, or offer 
to enter into, a transaction described in section 2(c)(2)(B)(i)(I) of 
the CEA with a person that is not an eligible contract participant \4\ 
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 \5\ (a retail foreign exchange 
(forex) rule). Transactions described in section 2(c)(2)(B)(i)(I) 
include foreign currency futures, options on foreign currency futures, 
and options on foreign currency (other than options executed or traded 
on a national securities exchange).\6\ A Federal regulatory agency's 
retail forex rule must treat similarly all such futures and options and 
all agreements, contracts, or transactions that are functionally or 
economically similar to such futures and options.\7\ Retail forex rules 
must prescribe appropriate requirements with respect to disclosure, 
recordkeeping, capital and margin, reporting, business conduct, 
documentation, and such other

[[Page 62178]]

standards or requirements as the Federal regulatory agency determines 
to be necessary.\8\ The OCC issued a final retail forex rule on July 
14, 2011, which became effective on July 15, 2011.\9\ On September 12, 
2011, the OCC issued an interim final rule applying the retail forex 
rule to Federal savings associations on the same terms as national 
banks.\10\
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    \1\ Pub. L. 111-203, 124 Stat. 1376.
    \2\ The CEA defines financial institution as including a 
depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)). 7 U.S.C. 1a(21)(E). 
National banks, Federal savings associations, and Federal branches 
and agencies of foreign banks are depository institutions under the 
Federal Deposit Insurance Act.
    \3\ 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 OCC is the appropriate Federal banking 
agency for national banks, Federal savings associations, and Federal 
branches and agencies of foreign banks. See 7 U.S.C. 1a(2); 12 
U.S.C. 1813(q)(1), 5411-12.
    \4\ 7 U.S.C. 1a(18).
    \5\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
    \6\ 7 U.S.C. 2(c)(2)(B)(i)(I).
    \7\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
    \8\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
    \9\ Retail Foreign Exchange Transactions, 76 FR 41375 (July 14, 
2011).
    \10\ Retail Foreign Exchange Transactions, 76 FR 56094 (Sept. 
12, 2011).
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B. Definition of Eligible Contract Participant

    The CEA distinguishes retail customers from non-retail customers 
through the term eligible contract participant (ECP).\11\ In many 
cases, the CEA provides fewer protections to ECPs than retail 
customers, i.e., non-ECPs. For example, retail forex rules do not apply 
to transactions with ECPs and ECPs may enter into off-exchange 
swaps.\12\ A person can qualify as an ECP by satisfying the 
requirements of one of the term's 14 prongs. Two of the prongs are 
relevant here: the prong for commodity pools and the prong for business 
entities.
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    \11\ 7 U.S.C. 1a(18).
    \12\ 7 U.S.C. 2(c)(2)(E)(ii)(I); 7 U.S.C. 2(e); 12 CFR 48.1 et 
seq.
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    Prior to enactment of the Dodd-Frank Act, a commodity pool \13\ was 
an ECP if it (i) had total assets exceeding $5 million and (ii) was 
formed and operated by a person subject to regulation under the CEA or 
by a foreign person performing a similar role or function subject to 
foreign regulation.\14\ The Dodd-Frank Act added a proviso to the 
second condition, which has become known as the retail forex look-
through: for purposes of CEA sections \15\ that provide the U.S. 
Commodity Futures Trading Commission (CFTC) with jurisdiction over 
certain accounts and pooled investment vehicles trading in retail 
forex, a commodity pool is not an ECP unless all of its participants 
are ECPs.\16\
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    \13\ Commodity pool means any investment trust, syndicate, or 
similar form of enterprise operated for the purpose of trading in 
commodity interests, including futures, swaps, options, retail forex 
transactions, retail commodity transactions, and leverage 
transactions. 7 U.S.C. 1a(10)(A).
    \14\ 7 U.S.C. 1a(18)(A)(iv).
    \15\ 7 U.S.C. 2(c)(2)(B)(vi) and (C)(vii).
    \16\ 7 U.S.C. 1a(18)(A)(iv)(II).
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    Also prior to the Dodd-Frank Act, a corporation, partnership, 
proprietorship, organization, trust, or other business entity that had 
total assets exceeding $10 million was an ECP.\17\ The Dodd-Frank Act 
left this provision unmodified. Many private investment vehicles, 
including certain commodity pools, availed themselves of this provision 
to be ECPs.\18\
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    \17\ 7 U.S.C. 1a(18)(A)(v)(I).
    \18\ See comment letter from James Kemp, Global Financial 
Exchange Division & Stuart J. Kaswell, Managed Funds Association, to 
the CFTC and SEC (Jan. 10, 2012), http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=50050.
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    On December 21, 2010, the CFTC and the U.S. Securities and Exchange 
Commission (SEC) jointly proposed a rule, as required by the Dodd-Frank 
Act,\19\ to further define eligible contract participant.\20\ The CFTC 
and SEC proposed to implement the retail forex look-through by 
excluding, for purposes of CEA section 2(c)(2)(B)(vi) and (C)(vii), a 
commodity pool with one or more direct or indirect participants that is 
not an ECP from the definition of eligible contract participant. The 
CFTC and SEC also proposed to prohibit a commodity pool from qualifying 
as an ECP as a business entity unless it had total assets exceeding $5 
million and was operated by a person subject to regulation under the 
CEA.\21\ The CFTC and SEC reasoned that allowing commodity pools to 
qualify as ECPs solely by having assets exceeding $10 million (as the 
test for business entities requires) would frustrate Congress' intent 
to subject commodity pools to the retail forex look-through.\22\
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    \19\ 15 U.S.C. 8302(d), 8321(b).
    \20\ Swap Entities and ECPs, 75 FR 80174 (Dec. 21, 2010).
    \21\ Id. at 80185, 80212.
    \22\ Id. at 80185.
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    On April 18, 2012, the CFTC and SEC issued a final rule further 
defining eligible contract participant.\23\ The definition took effect 
on July 23, 2012, except for certain provisions related to commodity 
pools, which take effect on December 31, 2012. The rule adopted a 
prohibition on a commodity pool qualifying as an ECP under the business 
entity prong \24\ of the ECP definition solely by having assets 
exceeding $10 million.\25\
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    \23\ Swap Entities and ECPs, 77 FR 30596 (May 23, 2012).
    \24\ 7 U.S.C. 1a(18)(A)(v).
    \25\ Swap Entities and ECPs, 77 FR 30596 (May 23, 2012).
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    The final rule differed from the proposal in three material 
respects. First, the retail forex look-through generally only applies 
to a commodity pool that directly enters into a retail forex 
transaction. A commodity pool is not subject to the retail forex look-
through simply because it invests in another commodity pool that enters 
into retail forex transactions.\26\ (However, the retail forex look-
through does apply to a commodity pool structured to evade subtitle A 
of Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act by permitting non-ECPs to participate in retail forex 
transactions.\27\) For example, in a master/feeder fund structure in 
which the master fund enters into retail forex transactions, one would 
look through the master fund to the feeder fund but generally not 
through the feeder fund to its investors. Second, the final rule 
provides that, notwithstanding the look-through, a commodity pool is an 
ECP for retail forex purposes if it (i) is not formed for the purpose 
of evading regulation under the CFTC's retail forex regime, (ii) has 
total assets exceeding $10 million, and (iii) is formed and operated by 
a registered commodity pool operator (CPO) \28\ or by a CPO exempt from 
registration under 17 CFR 4.13(a)(3).\29\ Third, the rule applies the 
retail forex look-through only to the ECP prong for commodity pools and 
business entities--not to the other prongs.\30\
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    \26\ Id. at 30650.
    \27\ Id.
    \28\ A CPO is any person engaged in a business that is of the 
nature of a commodity pool, investment trust, syndicate, or similar 
form of enterprise, and who, in connection therewith, solicits, 
accepts, or receives from others funds, securities, or property, 
either directly or through capital contributions, the sale of stock 
or other forms of securities, or otherwise, for the purpose of 
trading in commodity interests, including futures, swaps, retail 
forex, and commodity options. 7 U.S.C. 1a(11). In general, CPOs must 
register with the CFTC. 7 U.S.C. 6m(1).
    \29\ The registration exemption under 17 CFR 4.13(a)(3) applies 
to private funds with de minimis commodity positions. See Commodity 
Pool Operators and Commodity Trading Advisors: Compliance 
Obligations, 77 FR 11252, 11261-63 (Feb. 24, 2012).
    \30\ See Swap Entities and ECPs, 77 FR 30596, 30651 & n.640 (May 
23, 2012).
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    At the meeting adopting the final rule further defining eligible 
contract participant, the CFTC acknowledged that it was unclear if bank 
funds were ECPs.\31\
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    \31\ See CFTC, Open Meeting on the 26th Series of Rulemakings 
Under Dodd-Frank Act (Apr. 18, 2012), transcript available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/dfsubmission2_041812-trans.pdf (colloquy between Commissioner 
Sommers and CFTC staff on p. 80 of the transcript).
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II. Overview of Proposed Amendments to the OCC's Retail Forex Rule

A. Treatment of Bank Funds and Insurance Company Separate Accounts

    A bank fund is a bank-administered trust that holds commingled 
assets that meet specific criteria established by OCC regulation.\32\ 
The bank acts as a fiduciary for the bank fund and holds

[[Page 62179]]

legal title to the fund's assets, but the fund's participants are the 
beneficial owners of the fund's assets. While each participant owns an 
undivided interest in the aggregate assets of the bank fund, a 
participant does not directly own any specific asset held by the fund 
nor does a participant hold any certificate or other document 
representing an interest in the fund.\33\ Insurance company separate 
accounts share structural features with bank funds: they are not 
separate legal entities; they are not subject to claims from general 
creditors of the insurance company; and they divorce legal title to the 
assets from beneficial ownership.\34\
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    \32\ See generally OCC, Comptroller's Handbook: Collective 
Investment Funds 1 (Oct. 2005), available at http://www.occ.gov/publications/publications-by-type/comptrollers-handbook/_pdf/collective-investment-funds.pdf; 12 CFR 9.18.
    \33\ 12 CFR 9.18(b)(11).
    \34\ The status of separate accounts as commodity pools is 
unclear. Commodity Pool Operators, 50 FR 15868, 15872 (Apr. 23, 
1985) (``[T]he devoting of assets to commodity interest trading by 
an insurance company separate account could constitute the operation 
of a commodity pool.'')
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    The legal structure of these funds presents interpretive challenges 
under the eligible contract participant definition. For this reason, 
the OCC wishes to provide clarity regarding how its retail forex rules 
will apply to transactions with these funds. The OCC preliminarily 
believes that treating bank funds as traditional retail customers for 
purposes of the retail forex rule is not appropriate. It is only bank 
funds' status as quasi-distinct from the bank that creates this 
regulatory uncertainty: were bank funds clearly identical to the bank, 
they would be ECPs as banks; were bank funds separate legal entities, 
they would be ECPs as bank subsidiaries or affiliates.\35\
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    \35\ 7 U.S.C. 1a(18)(A)(i); 7 U.S.C. 1a(21)(I).
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    The definition of eligible contract participant contains a list of 
entities substantively regulated under the CEA or other regulatory 
schemes--banks, insurance companies, investment companies, pension 
plans, registered broker-dealers, and futures commission merchants--
suggesting that Congress did not see a need to further regulate 
already-regulated entities. Bank funds should be treated the same 
because they too are subject to substantive regulation.\36\ Congress 
did not subject registered investment companies and similarly-regulated 
foreign entities to the retail forex rules \37\ despite the fact that 
these companies cater to retail investors and are offered publicly, 
unlike bank funds.\38\ Imposing the retail forex rule's requirements on 
forex transactions between Federal depository institutions and bank 
funds is inconsistent with the treatment of registered investment 
companies and similarly regulated foreign entities and creates 
unwarranted regulatory burden. The disparate treatment creates 
competitive inequalities that Congress may not have intended.\39\
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    \36\ See, e.g., 12 U.S.C. 92a; 12 CFR 9.18. National banks' bank 
funds are subject to 12 CFR 9.18. State banks' bank funds may be 
subject to 12 CFR 9.18 because of the Internal Revenue Code, 26 
U.S.C. 584(a)(2), or because of state law. State banks' bank funds 
may also be subject to state laws specifically regulating common 
trust funds and collective investment funds, such as the Michigan 
Collective Investment Funds Act, M.C.L. Sec.  550.101 et seq.
    \37\ 7 U.S.C. 1a(18)(A)(iii).
    \38\ See 15 U.S.C. 80a-3(c)(3) (requiring bank common trust 
funds to be created and maintained for fiduciary purposes and 
generally forbidding advertising common trust funds or offering them 
for sale to the general public); 15 U.S.C. 80a-3(c)(11) (requiring 
bank collective investment funds to consist solely of assets of 
employee stock bonus, pension, or profit-sharing trusts or 
governmental plans).
    \39\ See 15 U.S.C. 8302 (instructing the CFTC and SEC, in 
adopting rules and orders defining eligible contract participant, to 
treat functionally or economically similar entities in a similar 
manner); S. Rep. No. 384, at 79-80 (1982) (directing the CFTC to 
exempt from the definition of CPO banks acting in a fiduciary 
capacity, ERISA plans and their fiduciaries, insurance companies, 
and registered investment companies).
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    Moreover, the new definition of eligible contract participant 
creates a paradoxical result: The retail forex rule will apply to 
transactions with funds that are prudentially regulated--bank funds and 
insurance company separate accounts--but not to transactions with funds 
that are not prudentially regulated--hedge funds. Hedge funds will 
qualify as ECPs under new 17 CFR 1.3(m)(8) because they generally (i) 
have assets exceeding $10 million and (ii) are operated by registered 
CPOs or CPOs exempt from registration. CFTC regulations, however, 
provide that banks and insurance companies are not CPOs when they 
manage bank funds and separate accounts, respectively.\40\ The CPO 
exclusion comes from the U.S. Senate Committee on Agriculture, 
Nutrition, and Forestry, which directed the CFTC to exclude from the 
definition of commodity pool operator banks acting in a fiduciary 
capacity, ERISA plans and their fiduciaries, registered investment 
companies, and insurance companies.\41\ The rationale was that these 
entities do not need to be regulated under the CEA as CPOs because they 
are already regulated under other law.\42\ It would be counterintuitive 
for regulatory relief--namely, the CPO exclusion for banks and 
insurance companies--to increase regulatory burden on these funds. The 
CEA requires the OCC to prescribe appropriate requirements in its 
retail forex rules \43\ and affords the OCC with flexibility to tailor 
the requirements of its retail forex rule for certain classes of 
transactions. The OCC wrote its retail forex rule with individual 
consumers in mind and prescribed requirements that it deemed 
appropriate for retail forex transactions with individual consumers. 
The further definition of eligible contract participant raises the 
issue of how the retail forex rule should apply to entities that are 
materially different from individual consumers but that are, 
nonetheless, not ECPs.
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    \40\ 17 CFR 4.5(a)(3). But see 7 U.S.C. 1A(11)(A)(ii) (defining 
commodity pool operator to include any person registered as a CPO 
with the CFTC).
    \41\ S. Rep. No. 384, at 79-80 (1982); see also id. (stating 
that registered investment companies, insurance companies, and banks 
and trust companies acting in a fiduciary capacity are not within 
the intent of the term commodity pool operator); Commodity Pool 
Operators, 50 FR 15868, 15868-69 (Apr. 23, 1985) (quoting S. Rep. 
No. 384).
    \42\ See S. Rep. No. 384 at 79-80 (1982). The CFTC originally 
proposed to exempt banks operating bank funds and insurance 
companies operating separate accounts from all of the requirements 
applicable to CPOs. The CFTC reasoned that these banks and insurance 
companies were sufficiently regulated under other regulatory schemes 
to warrant their complete exemption. Commodity Pool Operators and 
Commodity Trading Advisors, 49 FR 4778, 4783 (Feb. 8, 1984). The 
CFTC ultimately concluded that it was appropriate to provide relief 
even more extensive than it proposed: it created an exclusion from 
the definition of CPO for these banks and insurance companies. 
Commodity Pool Operators, 50 FR 15868 (Apr. 23, 1985).
    \43\ 7 U.S.C. 2(c)(2)(E)(iii).
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    The OCC preliminarily believes it appropriate to modify the 
requirements of the retail forex rule for retail forex transactions 
between Federal depository institutions \44\ and bank funds. The OCC 
proposes to apply to these transactions only the rule's antifraud and 
general provisions, sections 48.1, 48.2, 48.3(a), and 48.17. The OCC 
preliminarily believes that the same requirements should apply to 
retail forex transactions between Federal depository institutions and 
insurance company separate accounts because the CFTC's CPO exclusions 
treat them equivalently. See proposed Sec.  48.1(e).
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    \44\ Federal depository institution means a national bank, a 
Federal savings association, or Federal branch of a foreign bank. 12 
U.S.C. 1813(c)(2). In this proposal, it also includes a Federal 
agency of a foreign bank.
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    In connection with this proposed modification, the OCC proposes to 
exclude retail forex transactions with bank funds and insurance company 
separate accounts from the profitability calculations required by Sec.  
48.7(b). That paragraph requires Federal depository institutions to 
calculate the percentage of retail forex accounts that are profitable 
and the percentage of retail forex accounts that are not profitable. 
The OCC is concerned that these ratios would be less informative to 
individual consumers of the realistic prospects of profitability if 
they included trades entered into by sophisticated customers

[[Page 62180]]

like bank funds and insurance company separate accounts.

B. Adoption of CFTC and SEC Interpretations

    The OCC proposes to adopt the further definition of eligible 
contract participant in 17 CFR 1.3(m).\45\ One of the OCC's objectives 
in promulgating its retail forex rule was ensuring regulatory 
comparability among retail forex counterparties. To that end, the OCC 
modeled its rule on the CFTC's. The OCC believes that adopting the 
further definition of eligible contract participant promotes regulatory 
comparability.
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    \45\ The definition in 17 CFR 1.3(m) incorporates the statutory 
definition of eligible contract participant. The retail forex rule's 
definition of eligible contract participant therefore includes 
persons the CFTC has determined are ECPs. See 7 U.S.C. 1A(18)(C).
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    The CFTC and SEC rule further defining eligible contract 
participant contained two statutory interpretations regarding retail 
forex. First, the CFTC and SEC interpreted certain foreign funds to be 
ECPs for purposes of the retail forex rule.\46\ Second, the CFTC and 
SEC explained that retail forex counterparties may rely (if reasonable) 
on a customer's written representation that it is an ECP.\47\
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    \46\ Swap Entities and ECPs, 77 FR 30596 30654 (May 23, 2012).
    \47\ Id. at 30652-53.
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    The OCC believes that the considerations that led the CFTC and SEC 
to consider certain foreign funds to be ECPs for purposes of the retail 
forex look-through \48\ are equally applicable to the OCC's retail 
forex rule. The OCC therefore proposes to exempt from many of the 
retail forex rule's requirements retail forex transactions between a 
Federal depository institution and a foreign fund operated and managed 
by a foreign person and whose participants are foreign investors. These 
transactions will remain subject to applicable foreign law. In 
addition, a Federal depository institution must still obtain a 
supervisory non-objection to begin a retail forex business, even with 
foreign funds. See proposed Sec.  48.1(d)(2).
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    \48\ See id. at 30653 & n.666.
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    The OCC also believes that a Federal depository institution should 
not be deemed in violation of the retail forex rule if it inadvertently 
violated one of the rule's requirements because it reasonably believed 
its counterparty was an ECP, bank fund, or insurance company separate 
account. Proposed Sec.  48.18 provides a safe harbor for this 
situation. To rely on this safe harbor, a Federal depository 
institution must: have reasonable policies and procedures to verify the 
customer's status; follow these policies and procedures; and obtain a 
written representation from the counterparty that it is an ECP, bank 
fund, or insurance company separate account. Reliance on that 
representation must be reasonable. For this purpose, reliance would be 
reasonable if the representation specifies its status category--e.g., 
an investment company, a natural person with discretionary investments 
exceeding $10 million, a bank fund--unless the Federal depository 
institution has information that would cause a reasonable person to 
question the representation.

C. Additional Proposed Changes

    The OCC also proposes to make additional clarifying and conforming 
changes to the retail forex rule.
    First, the OCC proposes to clarify the capital requirements 
applicable to Federal branches and agencies of foreign banks that offer 
or enter into retail forex transactions. The current retail forex rule 
requires these Federal branches and agencies to be well capitalized 
under 12 CFR part 6. However, part 6 only applies to insured Federal 
branches and agencies.\49\ The OCC proposes to amend the capital 
requirements in Sec.  48.8 so that all Federal branches and agencies 
offering or entering into retail forex transactions must satisfy the 
requirements of 12 CFR 4.7(b)(1)(iii)(A) and (iv).\50\ For purposes of 
determining whether a Federal branch or agency complies with these 
requirements, the Federal branch or agency would have to calculate 
capital ratios consistent with 12 CFR part 3.\51\ The well capitalized 
requirement would continue to apply to insured Federal branches.
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    \49\ 12 CFR 6.1(c), 6.20.
    \50\ To satisfy these requirements, the Federal branch or agency 
must not be subject to a formal enforcement order by the OCC, 
Federal Deposit Insurance Corporation, or the Board of Governors of 
the Federal Reserve System, and the foreign bank's most recently 
reported capital adequacy positions must consist of, or be 
equivalent to, Tier 1 and total risk-based capital ratios of at 
least 6 percent and 10 percent, respectively, on a consolidated 
basis.
    \51\ See 12 CFR 28.14.
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    Second, the OCC proposes to revise the retail forex rule's 
prohibition on self dealing in 12 CFR 48.3(b) to be consistent with the 
CFTC's retail forex rule.\52\ The CFTC's rule prohibits a person from 
entering into a retail forex transaction for an account over which it 
or its affiliate has investment discretion. The OCC's retail forex 
rule, however, prohibits a national bank or its affiliate from entering 
into a retail forex transaction with a customer if the national bank 
(but not its affiliate) has investment discretion over that customer's 
account. The OCC does not intend to regulate the conduct of national 
bank affiliates, which are subject to other agencies' retail forex 
rules.\53\ Furthermore, the OCC believes it is inappropriate for a 
Federal depository institution to act as the counterparty for a retail 
forex transaction that its affiliate entered into using its investment 
discretion over a customer's account.
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    \52\ See 17 CFR 5.2(c).
    \53\ Compare 12 CFR 48.3(b) with Retail Foreign Exchange 
Transactions, 76 FR 41375, 41377 (July 14, 2011) (preamble 
description of 12 CFR 48.3(b)). The OCC does regulate a national 
bank affiliate if that affiliate is itself a national bank or 
Federal savings association.
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    Third, the OCC proposes to clarify that instruments that Congress 
or the CFTC have excluded from regulation under the CEA \54\ are not 
retail forex transactions. Because these instruments are excluded from 
regulation under the CEA, section 2(c)(2)(E) of the CEA, which 
prohibits retail forex transactions except under a retail forex rule, 
does not apply to them. Because this amendment refers to transactions 
that are already excluded from regulation under the CEA, it would 
simply clarify how the OCC's retail forex rule interacts with 
established law.
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    \54\ See, e.g., 7 U.S.C. 2(f); 7 U.S.C. 27c; 17 CFR part 34; 
Statutory Interpretation Concerning Certain Hybrid Instruments, 55 
FR 13582 (Apr. 11, 1990).
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    Finally, the OCC proposes a technical correction to a citation 
contained in the definition of retail forex transaction.

D. Interim Final Rule for Federal Savings Associations

    On September 12, 2011, the OCC published an interim final rule 
amending part 48 to allow Federal savings associations to engage in 
retail forex transactions on the same terms as national banks.\55\ The 
interim final rule requested comment, by November 14, 2011, on the 
application of the existing rule to Federal savings associations. The 
OCC received no comments on the interim final rule. The OCC plans to 
finalize the interim final rule, as published, at the same time as it 
finalizes the changes proposed in this NPR.
---------------------------------------------------------------------------

    \55\ Retail Foreign Exchange Transactions, 76 FR 56094 (Sept. 
12, 2011).
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III. Request for Comment on the Proposed Rule

    The OCC requests comments on all aspects of this proposed rule, 
including the following specific questions.
    Question 1. Does the alternative treatment proposed for retail 
forex transactions with bank funds and insurance company separate 
accounts appropriately address those transactions? If not, please 
explain why

[[Page 62181]]

not and describe the additional requirements the OCC should impose on 
transactions with bank funds and insurance company separate accounts. 
Please explain why those requirements are appropriate for transactions 
with bank funds and insurance company separate accounts but not for 
transactions with commodity pools that are ECPs under the CFTC's 
further definition.\56\
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    \56\ Swap Dealers and ECPs, 77 FR 30596 (May 23, 2012).
---------------------------------------------------------------------------

    Question 2. Is the proposed definition of bank fund in Sec.  48.2 
appropriate? If not, how should it be defined? Do any bank funds not 
fall within the definition? Are there any bank funds that are not 
directly or indirectly subject to 12 CFR 9.18, such as a bank fund of a 
state bank? If so, how are those funds regulated?
    Question 3. Is the proposed definition of insurance company 
separate account in Sec.  48.2 appropriate? If not, how should it be 
defined?
    Question 4. Is the exclusion of transactions with bank funds and 
insurance company separate accounts from the profitability calculations 
appropriate? If not, why not? What proportion of Federal depository 
institutions' forex trading is with bank funds or insurance company 
separate accounts?
    Question 5. Should the OCC's retail forex rule adopt the CFTC's and 
SEC's further definition of eligible contract participant? Why or why 
not? Is the definition of eligible contract participant proposed in 
section 48.2 appropriate?
    Question 6. Should the OCC's retail forex rule adopt the CFTC's and 
SEC's interpretation regarding how to treat foreign funds under the 
retail forex look-through? Why or why not? Is proposed Sec.  48.1(d) an 
appropriate implementation of this interpretation? Why or why not? Does 
this approach properly construe the extraterritorial reach of CEA 
section 2(c)(2)(E)? Why or why not?
    Question 7. Should the OCC adopt the CFTC's and SEC's approach to 
verifying ECP status? Why or why not? Is proposed Sec.  48.18 an 
appropriate implementation of this approach? Why or why not?

IV. Regulatory Analysis

A. Paperwork Reduction Act

    Under the Paperwork Reduction Act,\57\ the OCC may not conduct or 
sponsor, and a person is not required to respond to, an information 
collection unless the information collection displays a valid Office of 
Management and Budget (OMB) control number. The amendments in this 
notice of proposed rulemaking do not introduce any new collections of 
information into the rules, nor do they amend the rules in a way that 
modifies the collection of information that OMB has previously approved 
for part 48.\58\ Therefore, no Paperwork Reduction Act submission to 
OMB is required.
---------------------------------------------------------------------------

    \57\ 44 U.S.C. 3501-3520.
    \58\ OMB Control No. 1557-0250.
---------------------------------------------------------------------------

B. Regulatory Flexibility Act Analysis

    Under section 605(b) of the Regulatory Flexibility Act, the 
regulatory flexibility analysis otherwise required under section 604 of 
the Regulatory Flexibility Act is not required if an agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities and publishes its certification 
and a short explanatory statement in the Federal Register along with 
its rule.
    The OCC supervises 772 small entities.\59\ This proposal could 
affect approximately two of those small entities. The OCC estimates the 
cost to those small entities would be de minimis. Therefore, the OCC 
certifies that the rule will not have a significant economic impact on 
a substantial number of small entities.
---------------------------------------------------------------------------

    \59\ A small entity is defined as a bank or savings association 
with assets up to $175 million or a trust company with assets up to 
$7 million. Data as of July 20, 2012.
---------------------------------------------------------------------------

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 requires that an agency prepare a budgetary impact statement 
before promulgating a rule that includes a Federal mandate that may 
result in the expenditure by state, local, and tribal governments, in 
the aggregate, or by the private sector of $146 million or more in any 
one year. If a budgetary impact statement is required, section 205 of 
the Unfunded Mandates Reform Act also requires an agency to identify 
and consider a reasonable number of regulatory alternatives before 
promulgating a rule.
    The OCC has determined that its proposed rule would not result in 
expenditures by state, local, and tribal governments, or by the private 
sector, of $146 million or more. Accordingly, the OCC has not prepared 
a budgetary impact statement or specifically addressed the regulatory 
alternatives considered.

List of Subjects in 12 CFR Part 48

    Banks, Consumer protection, Definitions, Federal branches and 
agencies, Foreign currencies, Federal savings associations, Foreign 
exchange, National banks, Reporting and recordkeeping requirements.

    For the reasons stated in the preamble, the OCC proposes to amend 
12 CFR part 48 as follows:

PART 48--RETAIL FOREX TRANSACTIONS

    1. The authority citation for part 48 continues to read as follows:

    Authority:  7 U.S.C. 27 et seq.; 12 U.S.C. 1 et seq., 24, 93a, 
161, 1461 et seq., 1462a, 1463, 1464, 1813(q), 1818, 1831o, 3101 et 
seq., 3102, 3106a, 3108, and 5412.

    2. Amend Sec.  48.1 by revising paragraphs (c) and (d) and adding 
paragraph (e) to read as follows:


Sec.  48.1  Authority, purpose, and scope.

* * * * *
    (c) Scope. Except as provided in this section, this part applies to 
national banks.
    (d) International applicability. (1) Foreign transactions. Sections 
48.3 and 48.5 through 48.16 do not apply to retail foreign exchange 
transactions between a foreign branch of a national bank and a non-U.S. 
person.
    (2) Foreign funds. For purposes of paragraph (d)(1) of this 
section, a fund is a non-U.S. person if it is operated and managed by a 
non-U.S. person and all of its participants are non-U.S. persons. For 
purposes of this paragraph, if a participant is a fund, then the 
participant is a non-U.S. person only if all of its participants are 
non-U.S. persons.
    (3) Applicability of foreign law. Transactions described in this 
paragraph (d) and foreign branches of national banks remain subject to 
applicable foreign law, including any disclosure, recordkeeping, 
capital, margin, reporting, business conduct, and documentation 
requirements.
    (e) Transactions with qualified forex customers. Sections 48.3(b) 
and 48.4 through 48.16 do not apply to retail foreign exchange 
transactions between a national bank and a qualified forex customer.
    3. Amend Sec.  48.2 by:
    a. In the introductory text, remove the phrase ``eligible contract 
participant;'';
    b. Remove the definition of identified banking product;
    c. Amend the definition of retail forex transaction by:
    i. Removing, in the introductory text, ``other than an identified 
banking

[[Page 62182]]

product or a part of an identified banking product'' and adding in its 
place ``other than an excluded instrument or a part of an excluded 
instrument''; and
    ii. Removing, in paragraphs (2) and (3)(iii)(B), the phrase ``15 
U.S.C. 78(f)(a)'' and adding in its place the phrase ``15 U.S.C. 
78f(a)''; and
    d. Add the definitions for ``Bank fund,'' ``Eligible contract 
participant,'' ``Excluded instrument,'' ``Insurance company separate 
account,'' ``Insured branch,'' and ``Qualified forex customer'' in 
alphabetical order.
    The additions read as follows:


Sec.  48.2  Definitions.

* * * * *
    Bank fund means a fund described in 12 CFR 9.18(a)(1), (a)(2), or 
(c) that is subject to applicable requirements of 12 CFR 9.18.
* * * * *
    Eligible contract participant has the same meaning as in 17 CFR 
1.3(m).
    Excluded instrument means an agreement, contract, or transaction 
that is exempt from regulation under the Commodity Exchange Act, 
including:
    (1) An identified banking product, as defined in section 402(b) of 
the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b));
    (2) A banking product described in section 405(a) of the Legal 
Certainty for Bank Products Act of 2000 (7 U.S.C. 27c(a));
    (3) A hybrid instrument that is predominantly a security under 
section 2(f) of the Commodity Exchange Act (7 U.S.C. 2(f)); and
    (4) A hybrid instrument that is exempt from the provisions of the 
Commodity Exchange Act under 17 CFR 34.3(a).
* * * * *
    Insurance company separate account means a separate account 
established and maintained by an insurance company subject to 
regulation by a State insurance regulator or foreign insurance 
regulator.
    Insured branch has the same meaning as in section 3(s)(3) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(s)(3)).
* * * * *
    Qualified forex customer means a bank fund or an insurance company 
separate account.
* * * * *
    4. Revise Sec.  48.3(b) to read as follows:


Sec.  48.3  Prohibited Transactions.

* * * * *
    (b) If a national bank or an affiliate can cause retail forex 
transactions to be effected for a retail forex customer without the 
retail forex customer's specific authorization, then the national bank 
may not act as the counterparty for any retail forex transaction with 
that retail forex customer.
    5. Revise the introductory text of Sec.  48.7(b)(1) to read as 
follows:


Sec.  48.7  Recordkeeping.

* * * * *
    (b) * * *
    (1) With respect to its active retail forex customer accounts over 
which it did not exercise investment discretion (other than retail 
forex proprietary accounts open for any period of time during the 
quarter or accounts belonging to a qualified forex customer), a 
national bank must prepare and maintain on a quarterly basis (calendar 
quarter):
* * * * *
    6. Revise Sec.  48.8 to read as follows:


Sec.  48.8  Capital Requirements.

    (a) A national bank, other than a Federal branch or agency of a 
foreign bank that is not an insured branch, offering or entering into 
retail forex transactions must be well capitalized under 12 CFR part 6.
    (b) A Federal branch or agency of a foreign bank offering or 
entering into retail forex transactions must satisfy the requirements 
of 12 CFR 4.7(b)(1)(iii)(A) and (iv).
    7. Add Sec.  48.18 to read as follows:


Sec.  48.18  Counterparty Verification

    The OCC will not deem a national bank to have violated this part by 
engaging in a retail forex transaction without complying with this 
part's requirements if:
    (a) The national bank's counterparty represented in writing that it 
was an eligible contract participant or a qualified forex customer;
    (b) The national bank reasonably relied on that representation;
    (c) The national bank had reasonable policies and procedures in 
place to verify the counterparty's status as an eligible contract 
participant or a qualified forex customer; and
    (d) The national bank followed those policies and procedures.

    Dated: October 5, 2012.
Thomas J. Curry,
Comptroller of the Currency.
[FR Doc. 2012-25123 Filed 10-11-12; 8:45 am]
BILLING CODE 4810-33-P