The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) developed a new regulatory framework for much of the investment management community including the spot foreign exchange markets. While the language of Dodd-Frank is not always easy to understand, the important thing for the forex community to understand is that Congress did not kill the spot forex market. Indeed, the regulations we will see in the future will look more like what we have right now.
What exactly does Dodd-Frank say about spot forex?
Essentially Dodd-Frank created new section 2(c)(2)(E) of the Commodity Exchange Act which provides that persons who are not “eligible contract participants” may not enter into foreign exchange transactions unless a Federal regulatory agency has promulgated regulations governing the transactions. Dodd-Frank also requires the CFTC to implement regulations with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation and other standards. Any prohibition under the new section 2(c)(2)(E) would not affect anyone trading spot forex if the CFTC promulgates regulations (which it proposed in January of this year). Essentially what this new section is doing is forcing the CFTC to speed up implementation of the forex regulations.
What forex regulations will be adopted?
This is the question that the industry has really been focusing on over the last 8 months. As was discussed in great detail during the comment period, the big issues were the reduction of leverage to 10:1 (from either 100:1 or 25:1 under current NFA rules) and having introducing brokers guaranteed by one forex dealer or FCM. Because of significant pushback from the industry it is likely that both of these provisions will be modified once the rules are finalized sometime in the next two months or so.
Other issues from Dodd-Frank
Dodd-Frank presents other issues for managers in the investment management industry. For those person who trade in the off-exchange spot metals markets, there will be new regulations on the manner in which those contracts may be traded. Dodd-Frank also requires credit default swaps to be subject to clearing and requires hedge fund and private equity fund managers to register as investment advisers with the SEC.
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