United States: Federal Reserve Adopts Retail Forex Rules

Standards for banking organizations regulated by the Federal Reserve for Retail Forex are generally comparable to rules adopted by other regulators.

On April 3, the Board of Governors of the Federal Reserve System (Board) adopted final rules to permit banking organizations under its supervision to engage in retail foreign exchange (Retail Forex) transactions (Final Rules).1 The Final Rules establish requirements for Retail Forex transactions with regard to risk disclosures to customers, recordkeeping, capital and margin, business conduct, and documentation. The Final Rules cover entities regulated by the Board, including state-chartered banks that are members of the Federal Reserve System; bank and savings and loan holding companies; Edge Act and agreement corporations; and uninsured, state-licensed branches and agencies of foreign banks. Any banking organization for which the Board is the primary regulator should review its existing Retail Forex practices and implement any necessary changes prior to the May 13, 2013, effective date of the Final Rules.2

Regulation of Retail Forex

The term "Retail Forex" covers all foreign exchange transactions conducted in the over-the-counter market between persons that are not eligible contract participants (ECPs) (i.e., retail market participants) and permitted counterparties, which include banks, broker-dealers, futures commission merchants (FCMs), and retail foreign exchange dealers (RFEDs).3 Retail Forex transactions generally include, for example, currency forwards,4 currency options, and rolling-spot transactions, but do not include "spot" transactions,5 nonleveraged transactions, or transactions carried out in connection with a line of business.

Prior to October 2010, non-ECP investors were required to conduct Retail Forex transactions with entities that were licensed as banks, broker-dealers, FCMs, insurance companies, or material affiliates of broker-dealers or FCMs; however, the activity was not subject to statutorily mandated rules. Institutional foreign exchange was not directly regulated. Congress created a regulatory regime for Retail Forex with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Dodd-Frank amended the Act to provide that a U.S. financial institution for which there is a federal regulatory agency may not enter into, or offer to enter into, Retail Forex transactions except pursuant to a rule or regulation of a federal regulatory agency prescribing the transactions' terms and conditions.6 Although there is no legislative history explaining Congress's purpose in requiring adoption of the Retail Forex rules, it is generally understood that Congress was seeking to ensure that entities conducting Retail Forex activities were subject to a comprehensive regulatory scheme protecting small, unsophisticated retail clients from potentially problematic business practices employed by a class of thinly capitalized Retail Forex dealers.7 As a result of this amendment, other federal regulatory agencies have adopted rules addressing Retail Forex, including the Securities and Exchange Commission (SEC),8 the Federal Deposit Insurance Corporation (FDIC),9 and the Office of the Comptroller of the Currency (OCC).10 The Commodity Futures Trading Commission (CFTC) previously adopted rules addressing Retail Forex for persons subject to CFTC jurisdiction.11

Comparison of Final Rules and Proposed Rules

The Final Rules largely adopt the proposed rules from the Board's July 28, 2011, notice of proposed rulemaking (Proposed Rules),12 and, except as described below, are largely consistent with the requirements previously adopted by the FDIC and the OCC. In adopting the Final Rules, the Board identified important differences between the Final Rules and the Proposed Rules and provided guidance in interpreting the Final Rules.

Disclosure and Reporting of Spreads

The Proposed Rules set forth requirements that pricing disclosures provided to customers must include disclosure of "any fee, charge, or commission" that the banking institution may impose on the Retail Forex customer. The parallel rules adopted by the FDIC and the OCC required disclosure of "any fee, charge, commission, or spreads" that the entity may impose on the Retail Forex customer. In adopting the Final Rules, the Board amended its proposed language to include "spreads." It noted, however, that spreads were covered by its proposed language and that it only was adding the word "spreads" to make this coverage explicit. Elsewhere in the Final Rules, for example, in connection with monthly statements that must be provided to customers, the Board did not amend the clause "fees, charges, and commissions" to include spreads. Based on the language in the Adopting Release, however, the Board apparently intends any discussion of fees, charges, or commissions to include disclosure of spreads. The Board also clarified that interest paid by a banking institution to its customer on cash margin used to secure Retail Forex transactions is not a "fee, charge, or commission" that must be disclosed by the banking institution.

Savings and Loan Holding Companies

The term "banking institution" is used to define the types of entities regulated by the Board that may conduct Retail Forex transactions.13 Although not listed in the Proposed Rules, the Board included savings and loan holding companies in the "banking institution" definition in the Final Rules and set forth related capital requirements that require savings and loan holding companies to be "well capitalized," as defined in Regulation LL. The Board noted that savings and loan holding companies were added to the regulation to reflect the transfer of regulatory responsibility for savings and loan holding companies to the Board on July 21, 2011.

Reservation of Authority

In adopting the Final Rules, the Board added a broad "reservation of authority" permitting it to modify "the disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation, or other standards or requirements . . . for a specific [R]etail [F]orex transaction or a class of [R]etail [F]orex transactions if the Board determines that the modification is consistent with safety and soundness and the protection of [R]etail [F]orex customers." This provision is not contained in the FDIC or the OCC rules and effectively permits the Board to adopt more stringent requirements for specific categories of Retail Forex transactions than set forth under its Final Rules.

Antifraud Standard

The Final Rules prohibit a banking institution and its related persons from engaging in fraudulent conduct in connection with Retail Forex transactions. In the Proposed Rules, the Board set forth that a Retail Forex counterparty may not "[d]efraud or attempt to defraud" any person in connection with a Retail Forex transaction. The Act and other regulators (e.g., CFTC, FDIC, and OCC) used the phrase "cheat or defraud or attempt to cheat or defraud," and the Board adopted this language in its Final Rules. Additionally, consistent with the Proposed Rules, the Final Rules prohibit a Retail Forex counterparty from (i) knowingly making or causing to be made any false report or statement to any person or causing to be entered any false record for any person and (ii) knowingly deceiving or attempting to deceive any person by any means whatsoever.

Accounts of Related Persons

The Final Rules addressing trading and operational standards are designed to ensure that related persons (e.g., officers, directors, 10% or more owners, associated persons, employees, and relatives or spouses who share the same home of any of the foregoing persons) of a Retail Forex counterparty (including a banking institution) do not open accounts with another banking institution without the knowledge and authorization of the account surveillance personnel of the Retail Forex counterparty with which they are affiliated. In the Final Rules, the Board added a requirement that, when an employee working in the Retail Forex business of a banking institution establishes an account at another Retail Forex counterparty, the other Retail Forex counterparty must prepare written records of orders for such person that are time stamped to the nearest minute. The purpose of this rule is to allow the surveillance department of the employee's banking institution to monitor the trading of the employee and to detect abuses, such as front running of orders handled by the banking institution.

Dispute Resolution

The Final Rules prohibit 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 in accordance with any predetermined settlement procedure. The Board recognized, however, that Retail Forex transactions between the foreign branch or office of a banking institution and a U.S. customer could be cross-border transactions subject to treaty obligations to enforce international commercial arbitration agreements and to recognize and enforce international commercial arbitral awards. In adopting the Final Rules, the Board provided an exception to the prohibition on arbitration agreements covered by chapters two or three of the Federal Arbitration Act, which implement the treaty obligations regarding arbitration of cross-border transactions.

Customer Instructions Regarding Offset

The Final Rules require a banking institution to apply offsetting transactions that close out a customer's open Retail Forex positions against the oldest open position (i.e., on a first-in, first-out basis), unless the customer provides specific instructions regarding the application of the offsetting transaction. In the Adopting Release, the Board stated that blanket instructions are not sufficient for this purpose but also noted that trade-by-trade instructions are not required. Rather, instructions that apply to a specifically defined set of transactions would be sufficient. Any such instruction may be given orally or in writing, and the banking institution must create and maintain a record of each offset instruction.

Definition of "Eligible Contract Participant"

The Final Rules expressly adopted the "ECP" definition set forth in the Act, as well as the CFTC's rules interpreting the definition, which provide a safe harbor for the "look through" of commodity pools that trade foreign exchange to determine whether investors in the commodity pool are themselves ECPs.14 Under the CFTC's ECP rulemaking, a commodity pool that enters into foreign exchange transactions will be an ECP if the commodity pool (i) was not formed for the purpose of evading the Retail Forex rules, (ii) has total assets exceeding $10,000,000, and (iii) is formed and operated by a registered commodity pool operator (CPO) or a CPO that is exempt from registration under CFTC Rule 1.13(a)(3).

In the Adopting Release, the Board stated that a banking institution that enters into Retail Forex trades with a non-ECP customer who later becomes an ECP may continue to treat the customer as a Retail Forex customer. Board staff has separately clarified that, if a banking institution wishes to apply the Final Rules in lieu of the swap rules that otherwise apply to foreign exchange swap transactions with ECPs, the banking institution would need to obtain guidance from the CFTC with regard to the application of the swap rules to non-ECP customers who subsequently become ECPs. The Board would not object to continuing to apply the Final Rules to such customers.

Symmetrical Requoting of Prices

The Final Rules require a banking institution to requote prices on a symmetrical basis. A banking institution may not provide a customer with a new bid price for a Retail Forex transaction that is higher (or lower) than its previous bid without providing a new ask price that is also higher (or lower) than its previous ask price by a similar amount. In the Adopting Release, the Board acknowledged that market practice is not to provide "requotes," but rather to reject orders and advise customers that they may submit a new order. The Board confirmed in the Adopting Release that this market practice was acceptable.

Primary Distinctions Between the Final Rules and Other Banking Regulators' Rules

Another distinction between the Final Rules and the rules adopted by the FDIC and the OCC is the right of the banking institution to set off losses that the customer experiences on Retail Forex transactions against other assets of the customer held at the bank.

Under the OCC and the FDIC rules, the bank is prohibited from applying losses that the customer experiences on Retail Forex transactions to any customer funds or property other than those the customer has provided or pledged as margin. Under the Final Rules, however, a banking institution may apply losses that the customer experiences on Retail Forex transactions to any customer funds or property held at the banking institution, not just those held for Retail Forex activities. The banking institution must provide the customer with disclosure of whether or not it will retain this set-off right, and if it does retain the set-off right, the banking institution must obtain a signed and dated written acknowledgement from the customer, indicating that the customer received and understood this disclosure.

Because of these differing set-off rights, the OCC and the FDIC require collateral to be held in an account separate from the customer's other accounts with the bank, so the bank may not treat all assets of the customer held by the bank as margin for Retail Forex activities. The OCC and the FDIC indicated, however, that customer margin may be held in an omnibus margin account. The Final Rules do not require margin to be held separate from the other assets of the customer, which would facilitate the ability of the banking institution to exercise its right to set off.


Although the Final Rules are largely consistent with those of the CFTC and other banking regulators, there are important variations among the rules as written, which likely will develop as the interpretations of the agencies evolve through the application of their respective rules. There was no obligation for the functional regulators to consult each other in connection with their respective rulemakings and no obligation for the functional regulators to consult each other going forward when interpreting their rules. Institutions that offer Retail Forex transactions should be aware of these variations and the impact they have on their Retail Forex business.


1. Retail Foreign Exchange Transactions (Regulation NN), 78 Fed. Reg. 21,019 (Apr. 9, 2013) (to be codified at 12 C.F.R. pt. 240), available here [hereinafter Adopting Release].

2. In the Adopting Release, the Board stated that a banking institution that is engaged in a Retail Forex business as of the effective date of the Final Rules and that promptly notifies the Board will have six months or a longer period provided by the Board to bring their operations into conformance with the Final Rules.

3. See Commodity Exchange Act, § 1a(18).

4. In the Adopting Release, the Board does not specifically state that physically settled forwards that are entered into for speculative purposes or nondeliverable forwards would be subject to its rules. The Adopting Release references only the following as Retail Forex: currency futures, options on currency futures, currency options other than those traded on a national securities exchange, and certain leveraged or margined transactions, including rolling-spot transactions. The Adopting Release excludes the following from the "Retail Forex" definition: physically settled spot transactions settled within T+2, forward transactions between commercial entities as defined in the Commodity Exchange Act (Act), and spot transactions settled beyond T+2 and effected in connection with the purchase or sale of securities. Notwithstanding the language in the Adopting Release, we read the Final Rules to include (as "leveraged, margined or financed transactions") physically settled currency forwards and nondeliverable currency forwards with non-ECPs, which are expressly covered by the other banking regulators' rules.

5. "Spot transactions" are defined in section 2(c)(2)(B)(v)(II)(bb)(AA) of the Act as transactions that are settled through physical delivery in two days or less. Additionally, physically settled foreign exchange transactions effected in connection with the purchase and sale of a security are deemed to be bona fide spot transactions. See Further Definition of "Swap," "Security-Based Swap," and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 Fed. Reg. 48,208 (Aug. 13, 2012) (to be codified at 17 C.F.R. pts. 230, 240, 241), available here.

6. See Commodity Exchange Act, § 2(c)(2)(E).

7. See, e.g., CFTC, Foreign Exchange Currency Fraud: CFTC/NASAA Investor Alert, available here; SEC, Office of Investor Educ. & Advocacy, Investor Bulletin; Foreign Currency Exchange (Forex) Trading for Individual Investors (July 2011), available here.

8. See 17 C.F.R. § 240.15b12-1T; Retail Foreign Exchange Transactions, Interim Final Temporary Rule, 76 Fed. Reg. 41,676 (July 15, 2011).

9. See 12 C.F.R. pt. 349; Retail Foreign Exchange Transactions, Final Rule, 76 Fed. Reg. 40,779 (July 12, 2011).

10. See 12 C.F.R. pt. 48; Retail Foreign Exchange Transactions, Final Rule, 76 Fed. Reg. 41,375 (July 14, 2011).

11. See 17 C.F.R. pt. 5; Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, Final Rule, 75 Fed. Reg. 55,409 (Sept. 10, 2010).

12. Retail Foreign Exchange Transactions (Regulation NN), Proposed Rule, 76 Fed. Reg. 46,652 (Aug. 3, 2011), available here.

13. In the Adopting Release, the Board specifically noted that subsidiaries of a "banking institution" that are organized under foreign law are not covered by the Final Rules, regardless of whether the customer is or is not a U.S. person. It should be noted, however, that the person acting as or offering to be a counterparty to a U.S. person in a Retail Forex transaction must be one of those entities enumerated under the Act. Accordingly, it is not clear that a foreign subsidiary would be permitted to offer Retail Forex transactions to U.S. persons, regardless of the application of the Final Rules.

14. In adopting the CFTC's "ECP" definition, the Board also declined to provide reduced disclosure requirements, reduced margin requirements, or transaction execution flexibility for sophisticated ECP customers (i.e., professional non-ECPs), as requested by commenters.

Copyright 2013. Morgan, Lewis & Bockius LLP. All Rights Reserved.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.