Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054 Page: 46,655
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Federal Register/Vol. 76, No. 149/Wednesday, August 3, 2011 /Proposed Rules
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 a counterparty to a retail forex
transaction if the banking institution or
its affiliate exercises discretion over the
customer's retail forex account.
This section uses wording that is
somewhat different from that used by
the CFTC, OCC and FDIC. First, the
Board's proposal prohibits a banking
institution from defrauding or
attempting to defraud a person, while
the other regulators use the phrase
"cheat or defraud or attempt to cheat or
defraud a person." The Board believes
that "cheat" is synonymous with
"defraud" and has used only the term
"defraud" in the proposed rule. Second,
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 believes that "knowingly"
sets a more appropriate standard of
proof.
Question 11.3.1: Does the prohibition
on "cheating" in other retail forex rules
add protections not contained in the
Board's proposal? Does the use of
"knowingly" instead of "willfully" set
the appropriate standard to protect retail
forex customers?
Section 240.4-Notification
This section requires a banking
institution to notify the Board prior to
engaging in a retail forex business. This
notice would include 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 inwriting.
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.25
A banking institution need not join a
futures self-regulatory organization as a
condition of conducting a retail forex
business.
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 a retail forex
account. The banking institution would
have to offset such positions regardless
of whether the customer has instructed
otherwise. The CFTC concluded that
"keeping open long and short positions
in a retail forex customer's account
removes the opportunity for the
customer to profit on the transactions,
increases the fees paid by the customer
and invites abuse." 26 Under the
proposal, a banking institution may
offset retail forex transactions as
instructed by the retail forex customer
or the customer's agent (other than the
banking institution itself).
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
would describe the risks associated with
retail forex transactions. The disclosure
statement would make 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).
25 7 U.S.C. 2(c)(2)(E)(ii)(I).26 Proposed CFTC Retail Forex Rule, 75 FR at
3287 n.54.In its retail forex rule, the CFTC
requires its registrants 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.27
The CFTC initially explained that "the
vast majority of retail customers who
enter these transactions do so solely for
speculative purposes, and that relatively
few of these participants trade
profitably." 28 In its final rule, the CFTC
found this requirement appropriate to
protect retail customers from "inherent
conflicts embedded in the operations of
the retail over-the-counter forex
industry." 29 The Board's proposed rule
requires this disclosure; however, the
Board invites comments regarding this
approach.
Question 11.6.1: Does this disclosure
provide meaningful information to retail
customers of banking institutions?
Would alternative disclosures more
effectively accomplish the objectives of
the disclosure?
Similarly, the CFTC's retail forex rule
requires a disclosure that states that the
dealer makes money on such trades, in
addition to any fees, commissions, or
spreads, even when a retail customer
loses money trading.30 The proposed
rule includes this disclosure
requirement.
Question 11.6.2: Does this disclosure
provide meaningful information to retail
customers of banking institutions?
Would alternative disclosures more
effectively accomplish the objectives of
the disclosure?
As proposed, the risk disclosure must
be provided as a separate document.
Question 11.6.3: Should banking
institutions be allowed to combine the
retail forex risk disclosure with other
disclosures that banking institutions
make to their customers? Or would
combining disclosures diminish the
impact of the retail forex disclosure?
Question 11.6.4: Should the rule
require disclosure of the fees the
banking institution charges retail forex
customers for retail forex transactions?
What fees do banking institutions
currently charge retail forex customers
for retail forex transactions? Are there
other costs to retail forex customers of
engaging in retail forex transactions that
banking institutions should disclose? If
so, what are these costs?
27 17 CFR 5.5(e)(1).
28Proposed CFTC Retail Forex Rule, 75 FR at
3289.
29 Final CFTC Retail Forex Rule, 75 FR at 55412.3017 CFR 5.5(b).
46655
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United States. Office of the Federal Register. Federal Register, Volume 76, Number 149, August 3, 2011, Pages 46595-47054, periodical, August 3, 2011; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc52326/m1/69/?rotate=90: accessed April 18, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.