United States: Retail FX Regulation To Expire On July 31, 2016 (Fed. Reg.)

The SEC announced that Securities Exchange Act Rule 15b12-1 will expire on July 31, 2016, according to its own terms. The SEC elaborated that broker-dealers, including those that are also registered dually as futures commission merchants ("FCMs"), will be prohibited under CEA Section 2(c)(2)(E) from offering or entering into transactions with persons who are not eligible contract participants, as described in the CEA ("retail forex transactions"). This means that only CFTC-registered FCMs (that are not dually registered with the SEC as broker-dealers) or retail foreign exchange dealers ("RFEDs") and certain banks may serve as counterparties in retail forex transactions.

The rule's expiration should not affect the ability of retail investors to enter into foreign exchange transactions that facilitate the settlement of foreign securities transactions into which they enter with their broker-dealers, since both the SEC and the CFTC have said on the record that FX contracts entered into for the purpose of settling transactions in non-U.S. securities are spot transactions and are not subject to the CEA's Dodd-Frank's retail forex provisions. See Further Definition of "Swap," "Security-Based Swap", and "Security-Based Swap Agreement"; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, 77 FR 48208, 48257 (August 13, 2012).

Commentary

This turn of events should come as no surprise. The SEC has always seemed reluctant to regulate retail forex. In contrast with its peers in the federal banking community, all of whom adopted detailed, final and comprehensive retail forex rules in July 2011, the SEC waited until the deadline to promulgate an "interim" rule governing the retail forex activities of broker dealers – one that contained no new substantive requirements, but merely incorporated retail forex transactions into the existing SEC and FINRA regimes. That rule had an expiration date of July 2012, which was renewed the next year – again, without substance – with a tight expiration date. The SEC did not adopt a final rule until July 2013, when it adopted one that lacked new substantive requirements yet again, and merely cross-referenced existing rules meant to regulate broker-dealers.

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