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.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions