[Federal Register Volume 78, Number 68 (Tuesday, April 9, 2013)]
[Rules and Regulations]
[Pages 21019-21035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-08163]
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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: Final rule.
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SUMMARY: The Board of Governors of the Federal Reserve System
(``Board'') is adopting a final rule to permit banking organizations
under its supervision to engage in off-exchange transactions in
[[Page 21020]]
foreign currency with retail customers. The final rule also describes
various requirements with which banking organizations must comply to
conduct such transactions.
DATES: This rule is effective on May 13, 2013.
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) (codified at 7 U.S.C.
2(c)(2)(E) (2011).
\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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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\ The Board's rule applies to ``banking
institutions,'' a term defined in section 240.2(b) to mean state member
banks, uninsured state-licensed branches of foreign banks, financial
holding companies, bank holding companies, savings and loan holding
companies,\10\ agreement corporations, and Edge Act corporations.
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\9\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
\10\ The Board's proposed rule did not explicitly cover savings
and loan holding companies (SLHCs). They have been added to the
regulation to reflect the transfer to the Board of regulatory
responsibility for SLHCs on July 21, 2011.
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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 consulting with the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC),
the Board approved for publication a notice of proposed rulemaking
(NPR) for retail forex transactions effected by banking institutions on
July 28, 2011. The NPR was published in the Federal Register on August
3, 2011,\12\ and the comment period closed on October 11, 2011. In
response to the NPR, the Board received six comments: three from
individuals, one from a bank, and two from trade associations. One of
the individual commenters did not address the rule, while another
individual commenter expressed general support for the rule. The third
individual (hereinafter ``the individual commenter'') and the bank
(hereinafter ``the bank commenter'') generally supported the rule while
requesting certain clarifications and changes. One trade association
requested changes to reduce the burden on certain entities that would
qualify as ``retail forex customers'' under the proposed regulation.
The other trade association letter requested changes to address retail
customers who use foreign exchange in connection with the purchase or
sale of a security denominated in a foreign currency. These comments
are addressed in the Section-by-Section Analysis below. The Board is
adopting a final rule that is substantially the same as the proposed
rule, with certain clarifications as discussed below.
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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\ 76 FR 46652 (August 3, 2011).
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II. Section-by-Section Analysis
Section 240.1--Authority, Purpose, and Scope
This section authorizes a banking institution to conduct retail
forex transactions.
The scope of the regulation covers branches and offices of banking
institutions, although foreign branches and offices of these
institutions are not subject to sections 240.3 and 240.5 through 240.16
unless the branch or office is dealing with a United States customer.
Since sections 240.1 and 240.2 cover the authority, purpose and scope
of the regulation and the definitions used in the regulation, if a
banking institution's only retail forex transactions are conducted by a
foreign branch or office and limited to non-U.S. customers, the only
operative section of the regulation that would apply would be section
240.4. As described below, this section requires a banking institution
that wishes to engage in retail forex transactions to notify the Board
before commencing a retail forex business.
The regulation also covers subsidiaries of banking institutions
that are organized under the laws of the United States or a U.S. state,
unless the subsidiary is subject to the jurisdiction of another federal
regulatory agency that is authorized to prescribe retail forex rules
under section 2(c)(2)(E) of the Commodity Exchange Act.\13\
Subsidiaries of a banking institution that are organized under foreign
law are not covered regardless of the nationality of the customer.
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\13\ 7 U.S.C. 2(c)(2)(E). The federal regulatory authorities
other than the Board are the CFTC, OCC, FDIC, the Securities and
Exchange Commission, the National Credit Union Association, and the
Farm Credit Administration.
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The rule is applicable to retail forex transactions engaged in by
banking institutions on or after the effective date.
Section 240.2--Definitions
This section defines 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
[[Page 21021]]
contract participant: \14\ (i) A future or option on such a future;
\15\ (ii) options not traded on a registered national securities
exchange; \16\ and (iii) certain leveraged or margined transactions.
This definition has several important features.
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\14\ The definition of ``eligible contract participant'' is
found in section 1a(18) of the CEA and is discussed below.
\15\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\16\ 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.\17\ 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.\18\ 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.\19\ Finally, the definition does not include transactions
executed on a securities exchange and banking institutions are
ineligible to effect retail forex transactions on a designated contract
market.
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\17\ 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).
\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
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).
\19\ 7 U.S.C. 27(b).
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Second, the definition of ``retail forex transaction'' covers
rolling spot forex transactions offered or entered into on a leveraged
or margin basis (so-called Zelener \20\ 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.\21\ Therefore, the
contracts are economically more like futures than spot contracts,
although some courts have held them to be spot contracts in form.\22\
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\20\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3rd 309 (6th Cir. 2008).
\21\ 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).
\22\ 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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One of the trade association comment letters was submitted by the
American Bankers Association and the Global Financial Markets
Association's Global Foreign Exchange Division (hereinafter ``the ABA/
GFMA letter''). The comment letter sought clarification or relief that
would result in the exemption of certain forex transactions by retail
customers initiated solely for the purpose of completing a transaction
in foreign securities. This comment letter was addressed to all of the
federal regulatory agencies that have promulgated or proposed retail
forex rules: the Board, CFTC, FDIC, OCC, and Securities and Exchange
Commission. On July 18, 2012, the CFTC issued a final rule that
included an interpretation regarding foreign exchange spot transactions
that responded to the ABA/GFMA letter. Specifically, the CFTC defined a
bona fide spot forex transaction to include the purchase or sale of an
amount of foreign currency equal to the price of a foreign security
where (i) the security and related foreign currency transactions are
executed contemporaneously in order to effect delivery by the relevant
securities settlement deadline, and (ii) actual delivery of the foreign
currency occurs by such deadline. By interpreting the CEA to exclude
these types of retail forex transactions effected in connection with
securities purchases and sales, the CFTC has confirmed that the
transactions are not subject to the provisions of the CEA that are
referenced by section 742 of the Dodd-Frank Act. The Board believes
that no amendment to the final rule is required to address this issue.
The Board has also added a section to the final rule to clarify that
the Board may modify the provisions of this rule for a specific retail
forex transaction or a class of retail forex transactions if the Board
determines that the modification is consistent with safety and
soundness and protection of retail forex customers.
Section 240.2 defines several terms by reference to the CEA,
including ``eligible contract participant'' (ECP). Foreign currency
transactions with eligible contract participants are not considered
retail forex transactions and are therefore not subject to this rule.
The definition covers a variety of financial entities, governmental
entities, certain businesses, and individuals that meet certain
investment thresholds.\23\
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\23\ The term ``eligible contract participant'' is defined at 7
U.S.C. 1a(18) and generally requires a corporation, partnership,
proprietorship, organization, trust or other entity to have total
assets exceeding $10 million and an individual to have more than $10
million in assets invested on a discretionary basis.
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The comment letter filed by the Global Financial Markets
Association's Global FX Division (hereinafter ``the GFMA letter'') and
the bank commenter stated their belief that the definition of
``eligible contract participant'' is too narrow and unnecessarily
requires banking institutions to provide retail protections to
sophisticated customers who fail to qualify as ECPs because they do not
meet the $10 million asset threshold in the statutory definition. The
trade association commenter and the bank commenter recommended that the
definition of ``retail forex customer'' in section 240.2(n) carve out
institutional non-ECPs represented by registered investment advisers.
The trade association commenter also sought reduced burden for a
commodity pool that is unable to prove that all of its participants are
themselves ECPs. The GFMA letter also suggested that, if the Board does
not exempt these entities from all aspects of the regulation, the Board
at a minimum should allow what it calls ``professional non-ECPs'' to
(1) Opt out of disclosure requirements, including the profitable
accounts ratio described in section 240.6(e), (2) post reduced margin
compared to retail customers, and (3) accommodate transaction execution
flexibility not
[[Page 21022]]
permissible under the proposed regulation.
The Board is not adopting the suggestion that a non-ECP be treated
as an ECP based on its use of an investment adviser as it believes that
CEA section 2(c)(2)(E) requires the application of retail forex rules
to transactions with non-ECPs. Although large investment advisers may
choose to avoid dealing with unsophisticated investors, the Board does
not believe that the involvement of a large investment adviser is a
substitute for the retail protections sought by Congress in enacting
section 2(C)(2)(E) of the CEA.
The issue regarding the ECP status of commodity pools engaging in
foreign exchange transactions was included in the CFTC's notice of
proposed rulemaking regarding further definition of certain Dodd-Frank
Act terms, including ``eligible contract participant,'' \24\ and
addressed in their final rule adopted April 6, 2012.\25\ The CFTC's
definition of ECP reduces the burden on commodity pools seeking to
establish that all of their members are themselves ECPs. The Board is
amending the definition of ECP in section 240.2 of the regulation to
incorporate the CFTC's revised definition of ECP. This will allow
banking institutions to use the same standard for ECP status as retail
forex dealers subject to CFTC jurisdiction when dealing with commodity
pools. Consistent with the provisions of the CEA and the CFTC's final
rule, the Board is not adopting the commenters' suggestion that
commodity pools be exempt from the statutory requirement of
establishing that its members are themselves ECPs. The GFMA letter also
sought clarification that a banking institution with a retail forex
customer who later becomes an ECP may continue to treat the customer as
a retail forex customer (i.e., as a non-ECP). The Board believes a
banking institution may continue to comply with the regulation for such
a customer. Indeed, a banking institution may apply the provisions of
Regulation NN to transactions with any customer, although it is only
required to apply the regulation to retail forex transactions with
retail forex customers.
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\24\ Further Definition of ``Swap Dealer,'' ``Security-Based
Swap Dealer,'' ``Major Swap Participant'' `and ``Eligible Contract
Participant,'' 75 FR 80174 (December 21, 2010)(joint proposed rule
with the SEC).
\25\ 77 FR 30596 (May 23, 2012).
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The Board received no comments on the proposed definitions other
than ``eligible contract participant.'' In addition to modifying the
definition of ECP, the Board is adding a definition of ``savings and
loan holding company.'' In all other respects, this section is being
adopted substantially as proposed.
Section 240.3--Prohibited Transactions
This section prohibits a banking institution and its related
persons from 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
counterparty to a retail forex transaction if the banking institution
or its affiliate exercises discretion over the customer's retail forex
account.
The Board's proposal used wording somewhat different from that used
by the CFTC, OCC and FDIC. While the retail forex rules of other
federal regulatory authorities state that a retail forex counterparty
may not ``cheat or defraud or attempt to cheat or defraud'' any person,
the Board's proposal used the phrase ``defraud or attempt to defraud.''
The individual commenter recommended using ``cheat or defraud'' instead
of ``defraud,'' which he believes would promote regulatory consistency
across regulators. The Board notes that the phrase ``cheat or defraud''
is used in section 6b of the CEA (``Contracts designed to defraud or
mislead'') \26\ and is amending its proposal to use the same language
as the CEA and other regulators.
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\26\ 7 U.S.C. 6b
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In addition, 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 stated its
belief that ``knowingly'' sets a more appropriate standard of proof.
The individual commenter preferred the language used by other
regulators, in part to improve regulatory consistency.
The Department of Justice's (DOJ's) US Attorneys' Manual discusses
the difference between ``knowingly'' and ``willfully'' with respect to
18 U.S.C. 1001, the federal criminal code's general anti-fraud
provision.\27\ This discussion is consistent with a Supreme Court case
concerning another provision of the criminal code.\28\ Both the DOJ and
the Court indicate that a ``willful'' violation requires proof that the
defendant acted with knowledge that his or her conduct was unlawful,
while a ``knowing'' violation requires knowledge of the facts
constituting the offence, as distinguished from knowledge of the law.
The Board believes that ``knowingly'' sets the more appropriate
standard, as it will cover making a false report or deceptive behavior
without requiring proof that the banking institution knew it was
violating Regulation NN.
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\27\ United States Attorneys' Manual, Chapter 9.
\28\ Bryan v. United States, 524 U.S. 184 (1998).
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Section 240.4--Notification
This section requires a banking institution to notify the Board
prior to engaging in a retail forex business. This notice includes
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.
Although the statutory requirements with respect to futures and
options contracts are currently in effect, some banking institutions
may currently engage in retail forex transactions that would be covered
by this rule, such as the so-called ``Zelener contracts.'' 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.\29\
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\29\ 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.
[[Page 21023]]
The Board received no comments to this section and adopts it as
proposed.
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 the same currency in a retail forex
account. Nevertheless, a banking institution may offset retail forex
transactions by the retail forex customer or the customer's agent
(other than the banking institution itself) pursuant to a customer's
specific instructions. Blanket instructions are not sufficient for this
purpose, as they could obviate the general rule. However, offset
instructions need not be given separately for each pair of orders in
order to be ``specific.'' Instructions that apply to sufficiently
defined sets of transactions could be specific enough. Offset
instructions may be provided in writing or orally. The banking
institution must create and maintain a record of each offset
instruction.
The Board received no comments to this section and adopts it as
proposed.
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 describes the risks associated with retail
forex transactions. The disclosure statement makes 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).
The final rules of the CFTC, OCC, and FDIC require retail forex
dealers 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.\30\ The individual commenter suggested that this ``profitable
accounts ratio'' could be manipulated, although he did not describe how
this could be done, and recommended adoption of an objective and
uniform calculation methodology for the ratio. The commenter also
recommended that the calculation should be weighted by the amount of
profit or loss to show the amount of profitability or loss, rather than
just whether any account made any profit. The Board believes a
calculation of the amount of profitability would be more likely to
cause retail customers to believe that past performance is an
indication of future results and is retaining the profitable accounts
ratio and statement of profitable trades as proposed. In addition, the
Board believes a uniform calculation of profitable accounts and
statement of profitable trades for all retail forex dealers affords
greater retail consumer protection by allowing comparison across
different types of dealers. Finally, the Board notes that section
240.7(b) provides a calculation methodology for the profitable accounts
ratio that is uniform across the bank regulatory agencies.\31\
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\30\ 17 CFR 5.5(e)(1), 12 CFR 48.6(e)(1), and 12 CFR
349.6(e)(1).
\31\ See, 12 CFR 48.7(b) and 12 CFR 349.7(b).
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As proposed, the risk disclosure must be provided as a separate
document. The Board requested comment on whether banking institutions
should be allowed to combine the retail forex risk disclosure with
other disclosures that banking institutions make to their customers.
The individual commenter supported the Board's proposal, which is
consistent with the final rules adopted by the other bank regulatory
agencies.
The individual commenter sought clarification as to whether the
requirement in section 240.6(f) that the banking institution disclose
``any fee, charge, or commission'' imposed on the customer for retail
forex transactions includes spreads. The final rules adopted by the OCC
and FDIC both require disclosure of ``any fee, charge, spread, or
commission'' and the individual commenter recommended that the Board
add the word ``spread'' to its rules. The Board believes that spreads
are covered by the proposed language, but is adding the word
``spreads'' to this section to make such coverage explicit.
The individual commenter also asked for confirmation that the
disclosure of ``any fee, charge, or commission'' includes interest
income on the retail forex account or retail forex transaction. The
rate of interest income paid on cash margin is not a fee, charge,
spread, or commission, and so is not required to be disclosed under
section 240.6.
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.
The individual commenter suggested that records required under this
section be retained by the retail forex dealer forever, rather than the
minimum five year period specified in section 240.7(h). The Board does
not believe it is appropriate to require records be maintained
indefinitely and notes that the five year period is consistent with
retention requirements for many supervision and regulation records
required by the Board.
This section is being adopted as proposed.
Section 240.8--Capital Requirements
The Board's retail forex rule does not change 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, Y and LL \32\ 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.\33\ 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.\34\
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\32\ 12 CFR 208.43, 12 CFR 225.2(r), and 12 CFR 238.2(s).
\33\ 12 CFR 225.2(r)(3).
\34\ 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.
The Board received no comments to this section and adopts it as
proposed.
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
[[Page 21024]]
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 retail forex rules of the CFTC, OCC,
and FDIC. A major currency pair is a currency pair with two major
currencies. The major currencies specified in the regulation are 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),\35\ as well as any other currency as
determined by the Board.
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\35\ 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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Prior to implementation of 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. These margin requirements were also adopted by
the OCC and FDIC. The Board received no comments regarding the
appropriate level of margin and is adopting the same requirements as
the CFTC and other bank regulatory agencies.
Paragraph (b) specifies the acceptable forms of margin that
customers may post, including margin pledged in excess of the
requirements of paragraph (a). 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.
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.
The retail forex regulations adopted by the OCC and FDIC both
prohibit set-off, i.e., the bank forex dealer is 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. The Board's proposed
rule did not include this prohibition and no comments were received
opposing this proposal. The Board is adopting these provisions as
proposed.
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. As proposed, the Board is not requiring the use of a separate
margin account, as it is not prohibiting 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.
The Board received no comments to this section and adopts it as
proposed.
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.
The Board received no comments to this section and adopts it as
proposed.
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.
The Board received no comments to this section and adopts it as
proposed.
Section 240.13--Trading and Operational Standards
This section largely follows the trading standards of the retail
forex rules adopted by the CFTC, OCC and FDIC, 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
[[Page 21025]]
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.
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.
The Board received no comments to this section and adopts it as
proposed.
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.
The Board received no comments to this section and adopts it as
proposed.
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.
The Board received no comments to this section and adopts it as
proposed.
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 and OCC dispute
settlement procedures, which permit mandatory pre-dispute settlement
agreements under certain conditions.\36\ The Board proposed to prohibit
a banking institution from entering into a pre-dispute settlement
agreement with a retail forex customer, similar to the final rule
adopted by the FDIC.
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\36\ See 17 CFR 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.
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The Department of State has advised that transactions between the
foreign branch or office of a banking institution and a U.S. customer
could be cross-border transactions subject to the New York \37\ and
Panama Conventions.\38\ These Conventions, implemented in the United
States by chapters 2 and 3 of the Federal Arbitration Act (FAA),\39\
create treaty obligations to enforce international commercial
arbitration agreements and to recognize and enforce international
commercial arbitral awards. The Board is amending section 240.16 to
provide that it will not apply to transactions covered by chapters 2 or
3 of the FAA.
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\37\ Convention on the Recognition and Enforcement of Foreign
Arbitral Awards (1970).
\38\ Inter-American Convention on International Commercial
Arbitration (1990).
\39\ 9 U.S.C. 1 et seq. Chapter 2 of the FAA (secs. 201-208)
contains provisions implementing the New York Convention, while
Chapter 3 of the FAA (secs. 301--307) contains provisions
implementing the Panama Convention.
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Section 240.17--Reservation of Authority.
This section allows the Board to modify certain requirements of
this rule consistent with safety and soundness and the protection of
retail forex customers. The Board understands the need for flexibility
as foreign exchange trading procedures develop and to ensure that such
products or trading procedures are subject to appropriate customer
protection and safety and soundness standards.
Interagency Statement on Retail Sales of Nondeposit Investment Products
For banking institutions, the requirements in the Board's retail
forex regulation overlap with applicable expectations contained in the
Interagency Statement on Retail Sales of Nondeposit Investment Products
(NDIP Policy Statement).\40\ 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 rule and
``retail customer'' in the NDIP Policy Statement are not necessarily
co-extensive. The Board requested comment on whether the proposed
regulation created issues concerning application of the NDIP policy
statement to retail forex transactions that the Board should address.
The Board received no comments on this issue. As the Board noted in its
proposal, after the effective date of the final 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.
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\40\ See SR Letter 94-11 (Feb. 17, 1994); see also SR Letter 95-
46 (Sept. 14, 1995).
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III. Regulatory Analysis
A. Regulatory Flexibility Act
In accordance with Section 4(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq, (RFA), the Board must publish a final regulatory
flexibility analysis with this rulemaking. The RFA requires an agency
either to provide a final regulatory flexibility analysis with a final
rule for which a general notice of proposed rulemaking is required or
to certify that the final rule will not have a significant economic
impact on a substantial number of small entities. Based on this
analysis and for the reasons stated below, the Board believes that the
final rule would not have a significant economic impact on a
substantial number of small entities. Nevertheless, the Board is
publishing a final regulatory flexibility analysis.
1. A succinct statement of the need for, and objectives of, the rule.
Section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C.
2(c)(2)(E))
[[Page 21026]]
prohibits a U.S. financial institution from conducting certain retail
foreign exchange transactions unless done pursuant a rule or regulation
of a Federal regulatory agency allowing such transactions. The Board is
adopting a new regulation to allow banking institutions under its
supervision to engage in retail foreign exchange transactions.
2. A Summary of the Significant Issues Raised by the Public Comments in
Response to the Initial Regulatory Flexibility Analysis, a Summary of
the Assessment of the Agency of Such Issues, and a Statement of Any
Changes Made in the Proposed Rule as a Result of Such Comments
The Board requested comment on required reporting, disclosure, and
recordkeeping 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. In response to the notice of proposed
rulemaking, the Board received no comments with respect to RFA.
3. A Description of and an Estimate of the Number of Small Entities To
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is
Available
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.\41\ As of June 30, 2012, there were
approximately 368 small state member banks, 6 small Edge Act and
agreement corporations, 48 small uninsured branches of foreign banks,
3,736 small bank holding companies, 213 small financial holding
companies, and 229 small saving and loan holding companies. The Board
is not aware of any small institutions engaged in retail forex
transactions.
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\41\ U.S. Small Business Administration, Table of Small Business
Size Matched to North American Industry Classification System Codes,
13 CFR 121.201.
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4. A Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Rule, Including an Estimate of the
Classes of Small Entities Which Will Be Subject to the Requirement and
the Type of Professional Skills Necessary for Preparation of the Report
or Record
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 Recordkeeping Requirements. The Board believes that
there are no other compliance requirements for this rule.
5. A Description of the Steps the Agency Has Taken To Minimize the
Significant Economic Impact on Small Entities Consistent With the
Stated Objectives of Applicable Statutes, Including a Statement of the
Factual, Policy, and Legal Reasons for Selecting the Alternative
Adopted in the Final Rule and Why Each One of the Other Significant
Alternatives to the Rule Considered by the Agency Which Affect the
Impact on Small Entities Was Rejected
The Board believes that no Federal rules duplicate, overlap, or
conflict with the rule. The Board has solicited comments on the
proposed rule and received relatively few comments. The Board did not
receive any comments from small entities and is unaware of any small
entities that will be affected by the rule. The Board's rule is
consistent with other banking regulators that also solicited comment on
their rules. As noted in the supplementary information above, retail
forex transactions are also subject to the Interagency Statement on
Retail Sales of Nondeposit Investment Products, but this rule would
govern to the extent of a conflict.
B. Paperwork Reduction Act
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 Board reviewed the final rule
under the authority delegated to the Board by OMB. The OMB control
number for these information collections will be assigned. The Board
received no comments regarding the Paperwork Reduction Act implications
of its retail forex regulation.
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'').
Abstract: The information collection requirements of the final rule
are found in Sec. Sec. 240.4-240.7, 240.9-240.10, 240.13, 240.15-
240.16.
Reporting Requirements
The reporting requirements in Sec. 240.4 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, requires 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 may provide specific written instructions on
how the offsetting transaction should be applied.
Section 240.6 requires 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 requires a banking institution to issue monthly
statements to each retail forex customer and to send confirmation
statements following transactions.
Section 240.13(b) allows 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) prohibits 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 all statements and written records. Section
240.13(d)
[[Page 21027]]
prohibits 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 requires 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
also requires 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 requires
certain endorsements, acknowledgments, and signature language. It also
requires 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 will 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.
Recordkeeping Requirements
Sections 240.7 and 240.13(a) 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 requires 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 requires 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
Number of Respondents: 5 banking institutions; 2 service providers.
Estimated Average Hours per Response: 16 hours reporting burden;
787 hours disclosure burden; and 183 hours recordkeeping burden
Total Estimated Annual Burden: 6,870 hours (80 hours reporting
burden; 5,509 hours disclosure burden; and 1,281 hours recordkeeping
burden).
The Board has a continuing interest in the public's opinions of
collections of information. At any time, comments regarding the burden
estimate, or any other aspect of this collection of information,
including suggestions for reducing the burden, may be sent to:
Secretary, Board of Governors of the Federal Reserve System, 20th and C
Streets NW., Washington, DC 20551; and to the Office of Management and
Budget, Paperwork Reduction Project, Washington, DC 20503.
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. No commenters suggested that the proposed rule was materially
unclear, and the Board believes that the Final Rule is substantively
similar to the proposed rule.
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 amends 12 CFR
Chapter II by adding 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.
240.17 Reservation of authority.
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(q) 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 on or
after May 13, 2013.
(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''; ``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);
[[Page 21028]]
(5) A savings and loan holding company (as defined in section 10 of
the Home Owners Loan Act; 12 U.S.C. 1467a)
(6) 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
(7) 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) Eligible contract participant has the same meaning as in the
Commodity Exchange Act (7 U.S.C. 1 et seq., as implemented in 17 CFR
1.3(m).
(e) Forex means foreign exchange.
(f) 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)).
(g) Institution-affiliated party or IAP has the same meaning as in
12 U.S.C. 1813(u)(1), (2), or (3).
(h) Introducing broker means any person who solicits or accepts
orders from a retail forex customer in connection with retail forex
transactions.
(i) 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 retail forex counterparty;
(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.
(j) 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)).
(k) 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.
(l) 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.
(m) 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.
(n) 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 other than a
banking institution, provided the counterparty is subject to a rule or
regulation of a Federal regulatory agency covering retail forex
transactions.
(o) 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.
(p) 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;
(q) 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) Cheat or defraud or attempt to cheat or 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
[[Page 21029]]
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
(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 for a retail forex customer for the purpose
of engaging in retail forex transactions 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
[[Page 21030]]
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.
-----------------------------------------------------------------------
Date
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Signature of Customer
(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, spread, 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, spreads, or commissions; and
(3) The circumstances under which the banking institution may
impose such fees, charges, spreads, 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;
[[Page 21031]]
(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.
(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);
[[Page 21032]]
(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 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 208.43).
(b) Capital required for an uninsured state-licensed branch of a
foreign bank. A banking institution defined in Sec. 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
Sec. 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 Sec. 240.2(b)(3)
or (4) offering or entering into retail forex transactions must be
well-capitalized as defined in Sec. 225.2(r) of Regulation Y (12 CFR
225.2(r)).
(d) Capital required for savings and loan holding companies. A
banking institution defined in Sec. 240.2(b)(5) offering or entering
into retail forex transactions must be well-capitalized as defined in
Sec. 238.2(s) of Regulation LL (12 CFR 238.2(s)).
(e) Capital required for an agreement corporation or Edge Act
corporation. A banking institution defined in Sec. 240.2(b)(6) or (7)
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
Sec. 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 paragraphs (a)(1) and
(a)(2) of this section, 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
[[Page 21033]]
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 held as margin for
retail forex transactions; 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 held as margin for
retail forex transactions; and
(v) 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;
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
[[Page 21034]]
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 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;
(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;
(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 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 (d)(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:
[[Page 21035]]
(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 other law; 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 banking institution 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
(2) Does not require for adjudication the presence of essential
witnesses, parties, or third persons over which the settlement process
lacks jurisdiction.
(f) Cross-border transactions. This section shall not apply to
transactions within the scope of sections 202, 302, and 305 of the
Federal Arbitration Act (9 U.S.C. 202, 302, and 305).
Sec. 240.17 Reservation of authority.
The Board may modify the disclosure, recordkeeping, capital and
margin, reporting, business conduct, documentation, or other standards
or requirements under this part for a specific retail forex transaction
or a class of retail forex transactions if the Board determines that
the modification is consistent with safety and soundness and the
protection of retail forex customers.
By order of the Board of Governors of the Federal Reserve
System, April 3, 2013.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2013-08163 Filed 4-8-13; 8:45 am]
BILLING CODE 6210-01-P