Enter to open, tab to navigate, enter to select
SEC Rule Allowing Broker-Dealers to Trade in Certain Retail Forex Set to Expire
Practical Law Legal Update w-002-5743 (Approx. 3 pages)
SEC Rule Allowing Broker-Dealers to Trade in Certain Retail Forex Set to Expire
by Practical Law Finance
| Published on 09 Jun 2016 • USA (National/Federal) |
The SEC published a notice in the Federal Register announcing the expiration of Rule 15b12-1, which allowed broker-dealers to engage in retail foreign exchange (FX) transactions.
On May 26, 2016, the SEC published a notice in the federal register announcing the expiration of Rule 15b12-1, which allowed broker-dealers to engage in retail foreign exchange (FX) transactions. Beginning on July 31, 2016, broker-dealers, including those that are dually registered as futures commission merchants (FCMs) with the CFTC, will no longer be able to offer or enter into these transactions with anyone that is not an eligible contract participant (ECP).
Therefore, as of July 31, 2016, only entities that are solely registered with the CFTC as FCMs may be counterparties in retail FX transactions. FCMs must de-register as broker-dealers as of that date in order to continue to offer retail forex to non-ECPs.
Section 2(c)(2)(E) of the Commodity Exchange Act (CEA) provides that a person that is subject to the oversight of a federal regulatory agency may not enter into or offer a retail forex transaction unless the federal regulatory agency authorizes it by rule. Broker-dealers, under the regulatory authority of the SEC, were authorized to engage in FX transaction by SEC Rule 15b12-1, which was originally set to expire in 2013, but which was extended until July 31, 2016.
The SEC has declined to further extend the rule, which has come as a surprise to some in the industry and may not provide broker-dealers that engage in this line of business ample time to adjust.
Retail forex transactions include transactions that are entered into in a foreign currency with an entity that is not an ECP that is:
- An agreement, contract, or transaction in foreign currency that is for the sale of a commodity for future delivery, or an option on such a contract.
- An option, other than an option executed or traded on a national securities exchange registered pursuant to section 6(a) of the Exchange Act.
- An account, agreement, contract, or transaction that is leveraged or margined, with certain exceptions.
Transactions that are not retail forex transactions that may still be entered into by broker-dealers include:
- Spot forex transactions, in which one currency is bought for another and the two currencies are exchanged within two days.
- Forward contracts that create an enforceable obligation to make or take delivery, provided that each counterparty has the ability to deliver and accept delivery in connection with its line of business.
- Options that are executed or traded on a national securities exchange registered pursuant to section 6(a) of the Exchange Act.