Retail Foreign Exchange Transactions (Regulation NN), 46652-46668 [2011-19535]
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Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Proposed Rules
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SUPPLEMENTARY INFORMATION:
Dated at Rockville, Maryland, this 14th day
of July 2011.
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For the Nuclear Regulatory Commission.
Darren B. Ash,
Acting Executive Director for Operations.
[FR Doc. 2011–19639 Filed 8–2–11; 8:45 am]
form in Room MP–500 of the Board’s
Martin Building (20th and C Streets,
NW.) between 9 a.m. and 5 p.m. on
weekdays.
BILLING CODE 7590–01–P
FOR FURTHER INFORMATION CONTACT:
FEDERAL RESERVE SYSTEM
Scott Holz, Senior Counsel, Legal
Division, (202) 452–2966.
SUPPLEMENTARY INFORMATION:
12 CFR Part 240
I. Background
[Docket No. R–1428]
On July 21, 2010, President Obama
signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010 (Dodd-Frank Act).1 As
amended by section 742(c)(2) of the
Dodd-Frank Act,2 the Commodity
Exchange Act (CEA) provides that a
United States financial institution 3 for
which there is a Federal regulatory
agency 4 shall not enter into, or offer to
enter into, certain types of foreign
exchange transactions described in
section 2(c)(2)(B)(i)(I) of the CEA with a
retail customer 5 except pursuant to a
rule or regulation of a Federal regulatory
agency allowing the transaction under
such terms and conditions as the
Federal regulatory agency shall
prescribe 6 (a ‘‘retail forex rule’’).
Section 2(c)(2)(B)(i)(I) includes ‘‘an
agreement, contract, or transaction in
foreign currency that * * * is a contract
of sale of a commodity for future
delivery (or an option on such a
contract) or an option (other than an
option executed or traded on a national
securities exchange registered pursuant
to section 6(a) of the Securities
Exchange Act of 1934 (15 U.S.C.
78f(a)).’’ 7 A Federal regulatory agency’s
retail forex rule must treat all such
futures and options and all agreements,
contracts, or transactions that are
functionally or economically similar to
such futures and options similarly.8
RIN 7100–AD 79
Retail Foreign Exchange Transactions
(Regulation NN)
Board of Governors of the
Federal Reserve System.
ACTION: Notice of proposed rulemaking
and request for comment.
AGENCY:
The Board of Governors of the
Federal Reserve System (‘‘Board’’) is
publishing for comment a regulation to
permit banking organizations under its
supervision to engage in off-exchange
transactions in foreign currency with
retail customers. The proposed rule also
describes various requirements with
which banking organizations must
comply to conduct such transactions.
DATES: Comments on this notice of
proposed rulemaking must be received
by October 11, 2011.
ADDRESSES: You may submit comments
identified by Docket No. R–1428 and
RIN No. 7100–AD 79, by using any of
the methods below. Please submit your
comments using only one method.
Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
htpp://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
E-mail:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
Facsimile: (202) 452–3819 or (202)
452–3102.
Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at htpp://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying
information. Public comments may also
be viewed electronically or in paper
SUMMARY:
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1 Public
Law 111–203, 124 Stat. 1376.
Act § 742(c)(2) (to be codified at 7
U.S.C. 2(c)(2)(E)). In this preamble, citations to the
retail forex statutory provisions will be the section
where the provisions will be codified in the
Commodity Exchange Act.
3 The CEA defines ‘‘financial institution’’ to
include an agreement corporation, an Edge Act
corporation, a depository institution (as defined in
section 3 of the Federal Deposit Insurance Act), a
financial holding company (as defined in section 2
of the Bank Holding Company Act of 1956), a trust
company, or ‘‘a similarly regulated subsidiary or
affiliate of an entity’’ described above. 7 U.S.C.
1a(21).
4 For purposes of the retail forex rules, ‘‘Federal
regulatory agency’’ includes ‘‘an appropriate
Federal banking agency.’’ 7 U.S.C. 2(c)(2)(E)(i)(III).
The Board is an ‘‘appropriate Federal banking
agency’’ under the CEA. 7 U.S.C. 1a(2).
5 A retail customer is a person who is not an
‘‘eligible contract participant’’ under the CEA. See,
7 U.S.C. 1a(18).
6 7 U.S.C. 2(c)(2)(E)(ii)(I).
7 7 U.S.C. 2(c)(2)(B)(i)(I).
8 7 U.S.C. 2(c)(2)(E)(iii)(II).
2 Dodd-Frank
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Retail forex rules must prescribe
appropriate requirements with respect
to disclosure, recordkeeping, capital and
margin, reporting, business conduct,
and documentation requirements, and
may include such other standards or
requirements as the Federal regulatory
agency determines to be necessary.9
This Dodd-Frank Act amendment to the
CEA takes effect 360 days from the
enactment of the Act.10 Therefore, as of
July 16, 2011, state member banks,
uninsured state-licensed branches of
foreign banks, financial holding
companies, bank holding companies,
agreement corporations, and Edge Act
corporations (collectively, banking
institutions) may not engage in a retail
forex transaction except pursuant to a
retail forex rule issued by the Board.
On September 10, 2010, the
Commodity Futures Trading
Commission (CFTC) adopted a retail
forex rule for persons subject to its
jurisdiction.11 After studying and
considering the CFTC’s retail forex rule,
and being mindful of the desirability of
issuing comparable rules, the Board is
proposing to adopt a substantially
similar rule for banking institutions
wishing to engage in retail forex
transactions. The Dodd-Frank Act does
not require that retail forex rules be
issued jointly, or on a coordinated basis,
with any other Federal regulatory
agency. The Federal banking agencies
(the Board, Office of the Comptroller of
the Currency (OCC), and Federal
Deposit Insurance Corporation (FDIC))
have consulted with each other and
generally agree on their respective
approaches to regulating retail forex
transactions. However, each banking
agency is issuing separate rules.12
The retail forex rule proposed today
provides for banking institutions to
notify the Board before engaging in
retail forex transactions. It would also
require that such banking institutions
generally be ‘‘well-capitalized,’’ and it
would prohibit fraudulent transactions
and unlawful representations in
connection with this business. The rule
would require customers be given a
97
U.S.C. 2(c)(2)(E)(iii)(I).
Dodd-Frank Act § 754.
11 Regulation of Off-Exchange Retail Foreign
Exchange Transactions and Intermediaries, 75 FR
55409 (Sept. 10, 2010) (Final CFTC Retail Forex
Rule). The CFTC proposed these rules prior to the
enactment of the Dodd-Frank Act. Regulation of
Off-Exchange Retail Foreign Exchange Transactions
and Intermediaries, 75 FR 3281 (Jan. 20, 2010)
(Proposed CFTC Retail Forex Rule).
12 The OCC’s proposed rule was published on
April 22, 2011 (76 FR 22633); its final rule was
published on July 14, 2011 (76 FR 41375). The
FDIC’s proposed rule was published on May 17,
2011 (76 FR 28358); its final rule was published on
July 12, 2011 (76 FR 40779).
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10 See
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standardized risk disclosure statement
before engaging in retail forex
transactions, along with a calculation of
the number of profitable retail forex
accounts maintained by the banking
institution in the past year. The rule
would impose customer margin
requirements, and require confirmations
and monthly statements be provided to
the customer. Recordkeeping
requirements are specified for the
banking institution, along with certain
trading and operational standards.
The Board’s proposed retail forex rule
is modeled on the CFTC’s retail forex
rule to promote consistent treatment of
retail forex transactions regardless of
whether a retail forex customer’s dealer
is a banking institution or a CFTC
registrant. The proposal includes
various changes that reflect differences
between Board and CFTC supervisory
regimes and differences between
banking organizations and CFTC
registrants. For example:
• The Board’s proposed retail forex
rule leverages the Board’s existing
comprehensive supervision of banking
institutions. For example, the Board’s
proposed retail forex rule does not
include registration requirements,
because banking institutions are already
subject to comprehensive supervision
by the Board. Thus, instead of a
registration requirement, banking
institutions must provide 60 days notice
to the Board to conduct a retail forex
business.
• Because banking institutions are
already subject to various capital and
other supervisory requirements,13 the
Board’s proposed retail forex rule
generally requires banking institutions
wishing to engage in retail forex
transactions to be ‘‘well capitalized.’’
• The proposed rule would require
that the risk disclosure statement
highlight that a retail forex transaction
is not insured by the FDIC. The CFTC’s
regulations do not address FDIC
insurance because no financial
intermediaries under the CFTC’s
jurisdiction are insured depository
institutions.
The Board has consulted with the
OCC and FDIC in preparing its proposed
retail forex regulation. Although the
Board’s proposed rule is substantially
similar to the OCC’s and FDIC’s rules,
there are some differences between the
Board’s proposal and the rules adopted
by the other two bank regulatory
agencies. For example:
• The Board’s proposed rule would
not prohibit a bank from exercising a
right of set off, i.e., applying a retail
forex customer’s losses or margin call
13 See,
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46653
against other assets of the customer held
by bank other than money or property
given as margin. The OCC and FDIC
have adopted rules to prohibit retail
forex dealers under their supervision
from exercising a right of set off and
have further required that retail forex
customer margin be held in a separate
account that holds only retail forex
margin. The Board is not proposing to
require a separate retail forex margin
account, but is requesting comment on
whether these prohibitions would be
appropriate.
• The Board’s proposed rule would
bar the use of mandatory pre-dispute
arbitration agreements. The CFTC and
the OCC have adopted rules that permit
pre-dispute arbitration agreements,
while the FDIC has adopted a
prohibition similar to the one being
proposed by the Board. The Board is
requesting comment on whether such
agreements should be permitted.
II. Section-by-Section Description of the
Rule
While many sections contain
questions for commenters, the Board
invites comments on all aspects of the
proposed rule.
Section 240.1—Authority, Purpose, and
Scope
This section authorizes a banking
institution to conduct retail forex
transactions.
The Board notes that some state
member banks may also engage in retail
forex transactions through their foreign
branches. The CEA does not clearly
define whether foreign branches or
subsidiaries of state member banks and
foreign subsidiaries of bank holding
companies and financial holding
companies may be considered United
States financial institutions that can be
included in the scope of this proposed
rule. The proposed retail forex rule
would define the term ‘‘banking
institution’’ to include entities
organized under the laws of the United
States or under the laws of any U.S.
state, and any branch or office of that
entity, wherever located. After receiving
comments on their proposed rules, the
OCC and FDIC have adopted retail forex
rules that exempt foreign branches of
national and state nonmember banks
when they engage in retail forex
transactions with non-U.S. customers.
This allows foreign branches dealing
with non-U.S. customers to apply only
those disclosure, recordkeeping, capital,
margin, reporting, business conduct,
documentation and other requirements
of foreign law applicable to the branch,
while affording U.S. customers the
protections of a retail forex regulation
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adopted pursuant to the Dodd-Frank
Act. The Board is proposing to adopt
this exemption as well. The Board’s
proposed rule would also include U.S.
subsidiaries of banking institutions,
except for those for which there is
another federal regulatory agency
authorized to prescribe rules or
regulations under section 2(c)(2)(E) of
the CEA.14 The term ‘‘banking
institution’’ would not include entities
organized under the laws of a foreign
country. Therefore, foreign branches of
state member banks, as well as foreign
offices of U.S. bank holding companies
and financial holding companies would
be subject to the proposed rule when
dealing with U.S. customers.
Subsidiaries of a banking institution
that are organized under foreign law
would not be covered regardless of the
customer’s nationality.
Question II.1.1: The Board requests
comment on whether this rule should
apply to foreign branches of state
member banks, or bank holding
companies and financial holding
companies conducting retail forex
transactions abroad through entities
organized under the laws of the United
States, and whether this rule should
apply to transactions with U.S. or
foreign customers.
Section 240.2—Definitions
This section proposes definitions of
terms specific to retail forex transactions
and to the regulatory requirements that
apply to retail forex transactions.
The definition of ‘‘retail forex
transaction’’ generally includes the
following transactions in foreign
currency between a banking institution
and a person that is not an eligible
contract participant: 15 (i) A future or
option on such a future; 16 (ii) options
not traded on a registered national
securities exchange; 17 and (iii) certain
leveraged or margined transactions. This
definition has several important
features.
First, certain transactions in foreign
currency are not ‘‘retail forex
transactions,’’ and therefore are not
subject to the prohibition in section
742(c)(2) of the Dodd-Frank Act. For
example, a ‘‘spot’’ forex transaction
where one currency is bought for
another and the two currencies are
exchanged within two days is not a
‘‘future’’ and would not meet the
definition of a ‘‘retail forex transaction,’’
since actual delivery occurs as soon as
14 7
U.S.C. 2(c)(2)(E).
definition of ‘‘eligible contract participant’’
is found in section 1a(18) of the CEA and is
discussed below.
16 7 U.S.C. 2(c)(2)(B)(i)(I).
17 7 U.S.C. 2(c)(2)(B)(i)(I).
15 The
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practicable.18 Similarly, a ‘‘retail forex
transaction’’ does not include a forward
contract with a commercial entity that
creates an enforceable obligation to
make or take delivery, provided the
commercial counterparty has the ability
to make delivery and accept delivery in
connection with its line of business.19 In
addition, ‘‘retail forex transaction’’ does
not include an ‘‘identified banking
product’’ or a part of an ‘‘identified
banking product,’’ as defined in section
401(b) of the Legal Certainty for Bank
Product Act of 2000.20 Finally, the
definition does not include transactions
executed on an exchange or designated
contract market.
Second, the proposal would cover
rolling spot forex transactions (so-called
Zelener 21 contracts), including without
limitation such transactions traded on
the Internet, through a mobile phone, or
on an electronic platform. A rolling spot
forex transaction normally requires
delivery of currency within two days,
like spot transactions. However, in
practice, these contracts are indefinitely
renewed every other day and no
currency is actually delivered until one
party affirmatively closes out the
position.22 Therefore, the contracts are
18 See generally, CFTC v. Int’l Fin. Servs. (New
York), Inc., 323 F. Supp. 2d 482, 495 (S.D.N.Y.
2004) (distinguishing between foreign exchange
futures contracts and spot contracts in foreign
exchange, and noting that foreign currency trades
settled within two days are ordinarily spot
transactions rather than futures contracts); see also
Bank Brussels Lambert v. Intermetals Corp., 779 F.
Supp. 741, 748 (S.D.N.Y. 1991).
19 See generally, CFTC v. Int’l Fin. Servs. (New
York), Inc., 323 F. Supp. 2d 482, 495 (S.D.N.Y.
2004) (distinguishing between forward contracts in
foreign exchange and foreign exchange futures
contracts); see also William L. Stein, The ExchangeTrading Requirement of the Commodity Exchange
Act, 41 Vand. L. Rev. 473, 491 (1988). In contrast
to forward contracts, futures contracts generally
include several or all of the following
characteristics: (i) Standardized nonnegotiable
terms (other than price and quantity); (ii) parties are
required to deposit initial margin to secure their
obligations under the contract; (iii) parties are
obligated and entitled to pay or receive variation
margin in the amount of gain or loss on the position
periodically over the period the contract is
outstanding; (iv) purchasers and sellers are
permitted to close out their positions by selling or
purchasing offsetting contracts; and (v) settlement
may be provided for by either (a) Cash payment
through a clearing entity that acts as the
counterparty to both sides of the contract without
delivery of the underlying commodity; or (b)
physical delivery of the underlying commodity.
See, Edward F. Greene et al., U.S. Regulation of
International Securities and Derivatives Markets
§ 14.08[2] (8th ed. 2006).
20 7 U.S.C. 27(b).
21 CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004);
see also CFTC v. Erskine, 512 F.3rd 309 (6th Cir.
2008).
22 For example, in Zelener, the retail forex dealer
retained the right, at the date of delivery of the
currency to deliver the currency, roll the
transaction over, or offset all or a portion of the
transaction with another open position held by the
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economically more like futures than
spot contracts, although some courts
have held them to be spot contracts in
form.23 For this reason, the proposal
regulates these rolling spot forex
transactions as retail forex transactions
when conducted with a person that is
not an eligible contract participant.
This section defines several terms by
reference to the CEA, including ‘‘eligible
contract participant.’’ Foreign currency
transactions with eligible contract
participants are not considered retail
forex transactions and are therefore not
subject to this rule. The proposed
definition covers a variety of financial
entities, governmental entities, certain
businesses, and individuals that meet
certain investment thresholds.24
Question II.2.2: Does the Commodity
Exchange Act’s definition of ‘‘eligible
contract participant’’ appropriately
capture who is not a retail customer for
purposes of this proposed rule? Should
the Board expand the definition of retail
forex customer to include persons who
are eligible contract participants? If so,
which eligible contract participants
should be considered retail forex
customers?
Section 240.3—Prohibited Transactions
This section prohibits a banking
institution and its related persons from
customer. See CFTC v. Zelener, 373 F.3d 861, 869
(7th Cir. 2004).
23 See, e.g., CFTC v. Erskine, 512 F.3d 309, 326
(6th Cir. 2008); CFTC v. Zelener, 373 F.3d 861, 869
(7th Cir. 2004).
24 The term ‘‘eligible contract participant’’ is
defined at 7 U.S.C. 1a(18), and for purposes most
relevant to this proposed rule generally includes:
(a) A corporation, partnership, proprietorship,
organization, trust, or other entity—
(1) That has total assets exceeding $10,000,000;
(2) The obligations of which under an agreement,
contract, or transaction are guaranteed or otherwise
supported by a letter of credit or keepwell, support,
or other agreement by certain other eligible contract
participants; or
(3) That—
(i) Has a net worth exceeding $1,000,000; and
(ii) Enters into an agreement, contract, or
transaction in connection with the conduct of the
entity’s business or to manage the risk associated
with an asset or liability owned or incurred or
reasonably likely to be owned or incurred by the
entity in the conduct of the entity’s business;
(b) Subject to certain exclusions,
(1) A governmental entity (including the United
States, a State, or a foreign government) or political
subdivision of a governmental entity;
(2) A multinational or supranational
governmental entity; or
(3) An instrumentality, agency or department of
an entity described in (b)(1) or (2); and
(c) An individual who has amounts invested on
a discretionary basis, the aggregate of which is in
excess of—
(1) $10,000,000; or
(2) $5,000,000 and who enters into the agreement,
contract, or transaction in order to manage the risk
associated with an asset owned or liability incurred,
or reasonably likely to be owned or incurred, by the
individual.
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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 II.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 in
writing.
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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).
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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 II.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 II.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 II.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 II.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).
CFTC Retail Forex Rule, 75 FR at
28 Proposed
25 7
U.S.C. 2(c)(2)(E)(ii)(I).
CFTC Retail Forex Rule, 75 FR at
3287 n.54.
26 Proposed
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3289.
29 Final CFTC Retail Forex Rule, 75 FR at 55412.
30 17 CFR 5.5(b).
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Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Proposed Rules
Section 240.7—Recordkeeping
This section specifies which
documents and records a banking
institution engaged in retail forex
transactions must retain for examination
by the Board. Banking institutions are
required to maintain retail forex account
records, financial ledgers, transactions
records, daily records, order tickets, and
records showing allocations and
noncash margin, as well as records
relating to possible violations of law.
This section also prescribes document
maintenance standards, including the
manner and length of maintenance.
Finally, this section requires banking
institutions to record and maintain
transaction records and make them
available to customers.
emcdonald on DSK2BSOYB1PROD with PROPOSALS
Section 240.8—Capital Requirements
This proposal does not amend the
Board’s regulations regarding capital.
This section generally requires that a
banking institution that offers or enters
into retail forex transactions must be
‘‘well capitalized’’ as defined in the
Board’s Regulations H or Y 31 or the
banking institution must obtain an
exemption from the Board. An
uninsured state-licensed U.S. branch or
agency of a foreign bank must apply the
capital rules that are made applicable to
it pursuant to section 225.2(r)(3) of the
Board’s Regulation Y.32 An Edge
corporation or agreement corporation
must comply with the capital adequacy
guidelines that are made applicable to
an Edge corporation engaged in banking
pursuant to section 211.12(c)(2) of the
Board’s Regulation K.33
In addition, a banking institution
must continue to hold capital against
retail forex transactions as provided in
the Board’s regulations.
Section 240.9—Margin Requirements
Paragraph (a) requires a banking
institution that engages in retail forex
transactions, in advance of any such
transaction, to collect from the retail
forex customer margin equal to at least
two percent of the notional value of the
retail forex transaction if the transaction
is in a major currency pair, and at least
five percent of the notional value of the
retail forex transaction otherwise. These
margin requirements are identical to the
requirements imposed by the CFTC’s
retail forex rule. A major currency pair
is a currency pair with two major
currencies. Under the proposal, the
major currencies would be the U.S.
Dollar (USD), Canadian Dollar (CAD),
Euro (EUR), United Kingdom Pound
31 12
CFR 208.43 and 12 CFR 225.2(r).
CFR 225.2(r)(3).
33 12 CFR 211.12(c)(2).
32 12
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(GBP), Japanese Yen (JPY), Swiss franc
(CHF), New Zealand Dollar (NZD),
Australian Dollar (AUD), Swedish
Kronor (SEK), Danish Kroner (DKK),
and Norwegian Krone (NOK),34 or any
other currency as determined by the
Board.
Question II.9.1: The Board requests
comment on whether this list of major
currencies is appropriate and how the
Board should identify a major currency
or major currency pair.
Prior to the CFTC’s rule, non-bank
dealers routinely permitted customers to
trade with 1 percent margin (leverage of
100:1) and sometimes with as little as
0.25 percent margin (leverage of 400:1).
When the CFTC proposed its retail forex
rule in January 2010, it proposed a
margin requirement of 10 percent
(leverage of 10:1). In response to
comments, the CFTC reduced the
required margin in the final rule to 2
percent (leverage of 50:1) for trades
involving major currencies and 5
percent (leverage of 20:1) for trades
involving non-major currencies.
Question II.9.2: The Board’s proposed
rule would adopt the margin
requirements adopted in final by the
CFTC. The Board invites comments on
whether the requirements should be
adjusted and if so, how.
Paragraph (b) specifies the acceptable
forms of margin that customers may
post. Under the proposal, banking
institutions must establish policies and
procedures providing for haircuts for
noncash margin collected from
customers and must review these
haircuts annually. It may be prudent for
banking institutions to review and
modify the size of the haircuts more
frequently.
Question II.9.3: Should the Board
specify haircuts for noncash margin
posted for retail forex transactions? If so,
how should those haircuts be
determined?
Paragraph (c) requires a banking
institution to collect additional margin
from the customer or to liquidate the
customer’s position if the amount of
margin held by the banking institution
fails to meet the requirements of
paragraph (a). The proposed rule
requires the banking institution to mark
the customer’s open retail forex
positions and the value of the
customer’s margin to the market daily to
ensure that a retail forex customer does
34 See National Futures Association, Forex
Transaction: A Regulatory Guide 17 (Feb. 2011);
New York Federal Reserve Bank, Survey of North
American Foreign Exchange Volume tbl. 3e (Jan.
2011); Bank for International Settlements, Report on
Global Foreign Exchange Market Activity in 2010 at
15 tbl. B.6 (Dec. 2010).
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not accumulate substantial losses not
covered by margin.
Question II.9.4: How frequently do
banking institutions currently mark
retail forex customers’ open retail forex
positions and the value of the
customers’ margin to the market?
Should the rule require marking
customer positions and margin to the
market daily, or would more frequent
marks be more appropriate in light of
the speed at which currency markets
move? What is the most frequent mark
to market requirement that is practical
in light of the characteristics of the forex
markets and the assets that retail forex
customers may pledge as margin for
retail forex transaction?
The retail forex regulations adopted
by the OCC and FDIC both prohibit setoff, i.e., the bank forex dealer would be
prohibited from applying a retail forex
customer’s losses against any asset or
liability of the retail forex customer
other than money or property given as
margin. Banks generally have broad
rights to set off mutual debts to cover
customer obligations. It is not clear that
limiting a bank’s right of set-off in these
particular transactions would provide
appropriate incentives for retail forex
customers.
Question II.9.5: Would limiting the
right of set-off encourage a retail
customer to take on more risk in forex
transactions, because the customer’s
other assets would be protected against
losses from the forex transactions? Does
allowing a banking institution to
exercise its right of set-off with regard
to retail forex transactions strike the
appropriate balance of incentives and
protections for retail customers?
In order to effectuate the prohibition
against a bank retail forex dealer
exercising a right of set-off, the OCC and
FDIC require that each customer’s retail
forex transaction margin be held in a
separate account that holds only that
customer’s retail forex transaction
margin. The Board is not proposing to
require the use of a separate margin
account, as it is not proposing to
prohibit a banking institution from
exercising a right of set-off.
Section 240.10—Required Reporting to
Customers
This section requires a banking
institution engaging in retail forex
transactions to provide each retail forex
customer confirmations and monthly
statements, and describes the
information to be included.
Question II.10.1: The Board requests
comment on whether this section
provides for statements that would be
meaningful and useful to retail
customers, or whether, in light of the
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distinctive characteristics of retail forex
transactions, other information would
be more appropriate.
Section 240.11—Unlawful
Representations
This section prohibits a banking
institution and its related persons from
representing that the Federal
government, the Board, or any other
Federal agency has sponsored,
recommended, or approved retail forex
transactions or products in any way.
This section also prohibits a banking
institution from implying or
representing that it will guarantee
against or limit retail forex customer
losses or not collect margin as required
by section 240.9. This section does not
prohibit a banking institution from
sharing in a loss resulting from error or
mishandling of an order, and guaranties
entered into prior to the effectiveness of
the prohibition would only be affected
if an attempt is made to extend, modify,
or renew them. This section also does
not prohibit a banking institution from
hedging or otherwise mitigating its own
exposure to retail forex transactions or
any other foreign exchange risk.
emcdonald on DSK2BSOYB1PROD with PROPOSALS
Section 240.12—Authorization To
Trade
This section requires a banking
institution to have specific
authorization from a retail forex
customer before effecting a retail forex
transaction for that customer.
Section 240.13—Trading and
Operational Standards
This section largely follows the
trading standards of the CFTC’s retail
forex rule, which were developed to
prevent some of the deceptive or unfair
practices identified by the CFTC and the
National Futures Association.
Under paragraph (a), a banking
institution engaging in retail forex
transactions is required to establish and
enforce internal rules, procedures and
controls to prevent front running, in
which transactions in accounts of the
banking institution or its related persons
are executed before a similar customer
order, and to establish settlement prices
fairly and objectively.
Paragraph (b) prohibits a banking
institution engaging in retail forex
transactions from disclosing that it
holds another person’s order unless
disclosure is necessary for execution or
is made at the Board’s request.
Paragraph (c) ensures that related
persons of another retail forex
counterparty do not open accounts with
a banking institution without the
knowledge and authorization of the
account surveillance personnel of the
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other retail forex counterparty to which
they are affiliated. Similarly, paragraph
(d) ensures that related persons of a
banking institution do not open
accounts with other retail forex
counterparties without the knowledge
and authorization of the account
surveillance personnel of the banking
institution to which they are affiliated.
Paragraph (e) prohibits a banking
institution engaging in retail forex
transactions from (1) Entering a retail
forex transaction to be executed at a
price that is not at or near prices at
which other retail forex customers have
executed materially similar transactions
with the banking institution during the
same time period, (2) changing prices
after confirmation, (3) providing a retail
forex customer with a new bid price that
is higher (or lower) than previously
provided without providing a new ask
price that is similarly higher (or lower)
as well, and (4) establishing a new
position for a retail forex customer
(except to offset an existing position) if
the banking institution holds one or
more outstanding orders of other retail
forex customers for the same currency
pair at a comparable price.
Paragraphs (e)(3) and (e)(4) do not
prevent a banking institution from
changing the bid or ask prices of a retail
forex transaction to respond to market
events. The Board understands that
market practice among CFTC-registrants
is not to offer requotes, but to simply
reject orders and advise customers they
may submit a new order (which the
dealer may or may not accept).
Similarly, a banking institution may
reject an order and advise customers
they may submit a new order.
Question II.13.1: Does this
requirement appropriately protect retail
forex customers? If not, how should it
be modified? Would it be simpler for the
rule to simply prohibit requoting,
because banking institutions may
instead reject an order and accept new
orders from their retail forex customers?
Paragraph (e)(5) requires a banking
institution to use consistent market
prices for customers executing retail
forex transactions during the same time.
It also prevents a banking institution
from offering preferred execution to
some of its retail forex customers but
not others.
Section 240.14—Supervision
This section imposes on a banking
institution and its agents, officers, and
employees a duty to supervise
subordinates with responsibility for
retail forex transactions to ensure
compliance with the Board’s retail forex
rule.
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Section 240.15—Notice of Transfers
This section describes the
requirements for transferring a retail
forex account. Generally, a banking
institution must provide retail forex
customers 30 days’ prior notice before
transferring or assigning their account.
Affected customers may then instruct
the banking institution to transfer the
account to an institution of their
choosing or liquidate the account. There
are three exceptions to the above notice
requirement: A transfer in connection
with the receivership or conservatorship
under the Federal Deposit Insurance
Act; a transfer pursuant to a retail forex
customer’s specific request; and a
transfer otherwise allowed by applicable
law. A banking institution that is the
transferee of retail forex accounts must
generally provide the transferred
customers with the risk disclosure
statement of section 240.6 and obtain
each affected customer’s written
acknowledgement within 60 days.
Section 240.16—Customer Dispute
Resolution
This section prohibits 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 to any settlement
procedure.
This provision differs from the
applicable CFTC dispute settlement
procedures, which permit mandatory
pre-dispute settlement agreements
under certain conditions.35 The
substance of the CFTC dispute
settlement regulation, however, dates
back to August 10, 2001. Since that
time, Congress enacted seven provisions
in the Dodd-Frank Act that prohibit the
use of pre-dispute arbitration
provisions.36 Consonant with this
35 17 CFT 166.5. The CFTC’s regulation permits
predispute dispute settlement agreements with a
customer with certain restrictions such as that
signing the agreement must not be made a condition
for the customer to utilize the services offered by
the CFTC registrant.
36 See Dodd-Frank Act section 748 (amending
CEA section 23(n)(2) to provide: ‘‘No predispute
arbitration agreement shall be valid or enforceable,
if the agreement requires arbitration of a dispute
arising under this section.’’); section 921(a) (adding
similar provisions to section 15o to the Securities
Exchange Act of 1934 and section 205(f) to the
Investment Advisers Act of 1940); section 922(c)
(adding a similar provision to 18 U.S.C. 1514A,
which provides employee protections, including a
right to a jury trial to enforce such protections, to
employees of publicly registered companies and
nationally recognized statistical rating
organizations); section 1028 (requiring the
Consumer Financial Protection Bureau (CFPB) to
conduct a study and report to Congress on the use
of predispute arbitration agreements ‘‘between
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Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Proposed Rules
Statement to retail forex transactions
that the Board should address?
Interagency Statement on Retail Sales of
Nondeposit Investment Products
For banking institutions, the
requirements in this proposed rule
would overlap with applicable
expectations contained in the
Interagency Statement on Retail Sales of
Nondeposit Investment Products (NDIP
Policy Statement).37 The NDIP Policy
Statement sets out guidance regarding
the Board’s expectations when a
banking institution engages in the sale
of nondeposit investment products to
retail customers. The NDIP Policy
Statement addresses issues such as
disclosure, suitability, sales practices,
compensation, and compliance. The
Board views retail forex transactions as
nondeposit investment products, but the
terms ‘‘retail forex customer’’ in this
proposed rule and ‘‘retail customer’’ in
the NDIP Policy Statement are not
necessarily co-extensive. After the
effective date of the final version of this
proposed rule, the Board will expect
banking institutions engaging in or
offering retail forex transactions to also
comply with the NDIP Policy Statement
to the extent such compliance does not
conflict with the requirements of the
Board’s final retail forex rule.
Question II.17: Does the proposed
regulation create issues concerning
application of the NDIP Policy
emcdonald on DSK2BSOYB1PROD with PROPOSALS
demonstrated Congressional concern
with such agreements, the Board is
proposing, pursuant to its authority to
adopt ‘‘such other standards or
requirements as [it] shall determine to
be necessary,’’ to prohibit a banking
institution from entering into a predispute settlement agreement with a
retail forex customer. The OCC’s final
retail forex regulation follows the
CFTC’s approach, while the FDIC’s final
regulation prohibits pre-dispute
settlement agreements similar to the
approach being proposed by the Board.
Question III.16.1: Should the Board
permit pre-dispute arbitration
provisions, as long as the banking
institution does not require a customer
to agree to pre-dispute arbitration as a
condition of opening a retail forex
account?
IV. Regulatory Analysis
covered persons and consumers in connection with
the offering or providing of consumer financial
products or services’’ and giving the CFPB authority
to adopt regulations prohibiting such agreements;
section 1057(d) (prohibiting predispute arbitration
agreements that affect the employee protection
rights of a person that is employed by an entity
subject to CFPB regulation; and section 1414
(amending section 129C of the Truth in Lending Act
to prohibit predispute arbitration agreements with
respect to residential mortgage loans and home
equity loans).
37 See SR Letter 94–11 (Feb. 17, 1994); see also
SR Letter 95–46 (Sept. 14, 1995).
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III. Request for Comments
The Board requests comment on all
aspects of the proposed rule, including
the questions posed in the preamble. In
addition, the Board requests comments
on the following questions:
• Question III.1: Does the proposed
rule appropriately protect retail forex
customers of banking institutions?
• Question III.2: Are the proposed
rule’s variations from the CFTC retail
forex rule appropriately tailored to the
differences between banking institutions
and CFTC registrants and the regulatory
regimes applicable to each?
To assist in the review of comments, the
Board requests that commenters identify
their comments by question number.
A. Regulatory Flexibility Act
In accordance with section 3(a) of the
Regulatory Flexibility Act, 5 U.S.C. 601
et seq. (RFA), the Board is publishing an
initial regulatory flexibility analysis for
the proposed rule. The RFA generally
requires an agency to provide an initial
regulatory flexibility analysis with the
proposed rule or to certify that the
proposed rule will not have a significant
economic impact on a substantial
number of small entities. The Board
welcomes comment on all aspects of the
initial regulatory flexibility analysis. A
final regulatory flexibility analysis will
be conducted after consideration of the
comments received during the comment
period.
1. Statement of objectives of the
proposal. Section 2(c)(2)(E) of the
Commodity Exchange Act (7 U.S.C.
2(c)(2)(E)) will prohibit a U.S. financial
institution from conducting retail
foreign exchange transactions unless
done pursuant a rule or regulation of a
Federal regulatory agency allowing such
transactions. The Board is proposing a
new regulation to allow banking
institutions under its supervision to
engage in retail foreign exchange
transactions.
2. Small entities affected by the
proposal. Under regulations issued by
the Small Business Administration, a
banking institution is considered a
‘‘small entity’’ if it has assets of $175
million or less.38 As of December 21,
2010, there were approximately 398
small state member banks, 20 small
Edge Act and agreement corporations,
62 small uninsured branches of foreign
38 U.S. Small Business Administration, Table of
Small Business Size Matched to North American
Industry Classification System Codes, 13 CFR
121.201.
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banks, 3,988 small bank holding
companies and 267 small financial
holding companies. The Board is not
aware of any small institutions engaged
in retail forex transactions.
3. Compliance requirements. A
description of the projected
recordkeeping and other compliance
requirements can be found below in
section B, ‘‘Paperwork Reduction Act,’’
under the following headings: Reporting
Requirements, Disclosure Requirements,
and Policies and Procedures;
Recordkeeping. The Board believes that
there are no other compliance
requirements for this proposed rule.
4. Other Federal rules. The Board
believes that no Federal rules duplicate,
overlap, or conflict with the proposed
rule. As noted in the supplementary
information above, retail forex
transactions would also be subject to the
Interagency Statement on Retail Sales of
Nondeposit Investment Products, but
this rule would govern to the extent of
a conflict.
5. Significant alternatives to the
proposed rule. As discussed above, the
Board has requested comment on
required disclosures, margin, and
reporting requirements for all banking
institutions engaging in retail foreign
exchange transactions and has solicited
comment on any approaches that would
reduce the burden on all counterparties,
including small entities. The Board
welcomes comment on any significant
alternatives that would minimize the
impact of the proposal on small entities.
B. Paperwork Reduction Act
Request for Comment on Proposed
Information Collection
In accordance with section 3512 of
the Paperwork Reduction Act (PRA) of
1995 (44 U.S.C. 3501–3521), the Board
may not conduct or sponsor, and a
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number. The information collection
requirements are found in §§ 240.4–
240.7, 240.9–240.10, 240.13, 240.15–
24016.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the Board’s functions,
including whether the information has
practical utility;
(b) The accuracy of the estimate of the
burden of the information collection,
including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
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(d) Ways to minimize the burden of
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology; and
(e) Estimates of capital or startup costs
and costs of operation, maintenance,
and purchase of services to provide
information.
Comments on the collection of
information should be sent to Cynthia
Ayouch, Acting Federal Reserve
Clearance Officer, Division of Research
and Statistics, Mail Stop 95–A, Board of
Governors of the Federal Reserve
System, Washington, DC 20551, with
copies of such comments sent to the
Office of Management and Budget,
Paperwork Reduction Project (7100–
New), Washington, DC 20503. You may
also submit comments electronically,
identified by Docket number, by any of
the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments
on the https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail: regs.comments@
federalreserve.gov. Include docket
number in the subject line of the
message. All comments will become a
matter of public record.
emcdonald on DSK2BSOYB1PROD with PROPOSALS
Proposed Information Collection
Title of Information Collection:
Reporting, recordkeeping, and
disclosure requirements associated with
Regulation NN.
Frequency of Response: On occasion.
Affected Public: Businesses or other
for-profit.
Respondents: Agreement
corporations, Edge Act corporations,
state member banks, uninsured
branches of foreign banks, financial
holding companies and bank holding
companies (collectively, ‘‘banking
institutions’’).
Reporting Requirements
The reporting requirements in § 240.4
would require that, prior to initiating a
retail forex business, a banking
institution provide the Board with prior
notice. The notice must certify that the
banking institution has written policies
and procedures, and risk measurement
and management systems in controls in
place to ensure that retail forex
transactions are conducted in a safe and
sound manner. The banking institution
must also provide other information
required by the Board, such as
documentation of customer due
diligence, new product approvals, and
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haircuts applied to noncash margins. A
banking institution already engaging in
a retail forex business may continue to
do so, provided it requests an extension
of time.
Disclosure Requirements
Section 240.5, regarding the
application and closing out of offsetting
long and short positions, would require
a banking institution to promptly
provide the customer with a statement
reflecting the financial result of the
transactions and the name of the
introducing broker to the account. The
customer would provide specific
written instructions on how the
offsetting transaction should be applied.
Section 240.6 would require that a
banking institution furnish a retail forex
customer with a written disclosure
before opening an account that will
engage in retail forex transactions for a
retail forex customer and receive an
acknowledgment from the customer that
it was received and understood. It also
requires the disclosure by a banking
institution of its fees and other charges
and its profitable accounts ratio.
Section 240.10 would require a
banking institution to issue monthly
statements to each retail forex customer
and to send confirmation statements
following transactions.
Section 240.13(b) would allow
disclosure by a banking institution that
an order of another person is being held
by them only when necessary to the
effective execution of the order or when
the disclosure is requested by the Board.
Section 240.13(c) would prohibit a
banking institution engaging in retail
forex transactions from knowingly
handling the account of any related
person of another retail forex
counterparty unless it receives proper
written authorization, promptly
prepares a written record of the order,
and transmits to the counterparty copies
of all statements and written records.
Section 240.13(d) would prohibit a
related person of a banking institution
engaging in forex transactions from
having an account with another retail
forex counterparty unless it receives
proper written authorization and copies
of all statements and written records for
such accounts are transmitted to the
counterparty.
Section 240.15 would require a
banking institution to provide a retail
forex customer with 30 days’ prior
notice of any assignment of any position
or transfer of any account of the retail
forex customer. It would also require a
banking institution to which retail forex
accounts or positions are assigned or
transferred to provide the affected
customers with risk disclosure
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46659
statements and forms of
acknowledgment and receive the signed
acknowledgments within 60 days.
The customer dispute resolution
provisions in § 240.16 would require
certain endorsements,
acknowledgments, and signature
language. It also would require that
within 10 days after receipt of notice
from the retail forex customer that they
intend to submit a claim to arbitration,
the banking institution provide them
with a list of persons qualified in the
dispute resolution and that the customer
must notify the banking institution of
the person selected within 45 days of
receipt of such list.
Policies and Procedures; Recordkeeping
Section 240.7 would require that a
banking institution engaging in retail
forex transactions keep full, complete,
and systematic records and establish
and implement internal rules,
procedures, and controls. Section 240.7
also would require that a banking
institution keep account, financial
ledger, transaction and daily records, as
well as memorandum orders, postexecution allocation of bunched orders,
records regarding its ratio of profitable
accounts, possible violations of law,
records for noncash margin, and
monthly statements and confirmations.
Section 240.9 would require policies
and procedures for haircuts for noncash
margin collected under the rule’s
margin requirements, and annual
evaluations and modifications of the
haircuts.
Estimated PRA Burden
Estimated Number of Respondents: 5
banking institutions; 2 service
providers.
Total Reporting Burden: 80 hours.
Total Disclosure Burden: 5,510 hours.
Total Recordkeeping Burden: 1,280
hours.
Total Annual Burden: 6,870 hours.
C. Plain Language
Section 722 of the Gramm-LeachBliley Act requires the Board to use
plain language in all proposed and final
rules published after January 1, 2000.
The Board invites comment on how to
make this proposed rule easier to
understand. For example, the Board
requests comment on such questions as:
• Have we organized the material to
suit your needs? If not, how could the
material be better organized?
• Have we clearly stated the
requirements of the rule? If not, how
could the rule be more clearly stated?
• Does the rule contain technical
language or jargon that is not clear? If
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so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes would make the regulation
easier to understand?
• What else could we do to make the
regulation easier to understand?
List of Subjects in 12 CFR Part 240
Banks, Banking, Consumer protection,
Foreign currencies, Foreign exchange,
Holding companies, Investments,
Reporting and recordkeeping
requirements.
For the reasons stated in the
preamble, the Board proposes to amend
12 CFR Chapter II as follows:
1. Add new part 240 to read as
follows:
PART 240—RETAIL FOREIGN
EXCHANGE TRANSACTIONS
(REGULATION NN)
Sec.
240.1 Authority, purpose, and scope.
240.2 Definitions.
240.3 Prohibited transactions.
240.4 Notification.
240.5 Application and closing out of
offsetting long and short positions.
240.6 Disclosure.
240.7 Recordkeeping.
240.8 Capital requirements.
240.9 Margin requirements.
240.10 Required reporting to customers.
240.11 Unlawful representations.
240.12 Authorization to trade.
240.13 Trading and operational standards.
240.14 Supervision.
240.15 Notice of transfers.
240.16 Customer dispute resolution.
Authority: 7 U.S.C. 2(c)(2)(E), 12 U.S.C.
248, 321–338, 1813(q), 1818, 1844(b), 3106a,
3108.
emcdonald on DSK2BSOYB1PROD with PROPOSALS
§ 240.1
Authority, purpose and scope.
(a) Authority. This part is issued by
the Board of Governors of the Federal
Reserve System (the Board) under the
authority of section 2(c)(2)(E) of the
Commodity Exchange Act (7 U.S.C.
2(c)(2)(E)), sections 9 and 11 of the
Federal Reserve Act (12 U.S.C. 321–338
and 248), section 5(b) of the Bank
Holding Company Act of 1956 (12
U.S.C. 1844(b)), sections 9 and 13a of
the International Banking Act of 1978
(12 U.S.C. 3106a and 3108), and
sections 3 and 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q) and
1818).
(b) Purpose. This part establishes
rules applicable to retail foreign
exchange transactions engaged in by
banking institutions and applies on or
after the effective date.
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(c) Scope. Except as provided in
paragraph (d) of this section, this part
applies to banking institutions, as
defined in section 240.2(b) of this part,
and any branches or offices of those
institutions wherever located. This part
applies to subsidiaries of banking
institutions organized under the laws of
the United States or any U.S. state that
are not subject to the jurisdiction of
another federal regulatory agency
authorized to prescribe rules or
regulations under section 2(c)(2)(E) of
the Commodity Exchange Act (7 U.S.C.
(2)(c)(2)(E)).
(d) International applicability.
Sections 240.3 and 240.5 through 240.16
do not apply to retail foreign exchange
transactions between a foreign branch or
office of a banking institution and a
non-U.S. customer. With respect to
those transactions, the foreign branch or
office remains subject to any disclosure,
recordkeeping, capital, margin,
reporting, business conduct,
documentation, and other requirements
of applicable foreign law.
§ 240.2
Definitions.
For purposes of this part, the
following terms have the same meaning
as in the Commodity Exchange Act (7
U.S.C. 1 et seq.): ‘‘affiliated person of a
futures commission merchant’’;
‘‘associated person’’; ‘‘contract of sale’’;
‘‘commodity’’; ‘‘eligible contract
participant’’; ‘‘futures commission
merchant’’; ‘‘future delivery’’; ‘‘option’’;
‘‘security’’; and ‘‘security futures
product.’’
(a) Affiliate has the same meaning as
in section 2(k) of the Bank Holding
Company Act of 1956 (12 U.S.C.
1841(k)).
(b) Banking institution means:
(1) A state member bank (as defined
in 12 CFR 208.2);
(2) An uninsured state-licensed U.S.
branch or agency of a foreign bank;
(3) A financial holding company (as
defined in section 2 of the Bank Holding
Company Act of 1956; 12 U.S.C. 1841);
(4) A bank holding company (as
defined in section 2 of the Bank Holding
Company Act of 1956; 12 U.S.C. 1841);
(5) A corporation operating under the
fifth undesignated paragraph of section
25 of the Federal Reserve Act (12 U.S.C.
603), commonly known as ‘‘an
agreement corporation;’’ and
(6) A corporation organized under
section 25A of the Federal Reserve Act
(12 U.S.C. 611 et seq.), commonly
known as an ‘‘Edge Act corporation.’’
(c) Commodity Exchange Act means
the Commodity Exchange Act (7 U.S.C.
1 et seq.).
(d) Forex means foreign exchange.
(e) Identified banking product has the
same meaning as in section 401(b) of the
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Legal Certainty for Bank Products Act of
2000 (7 U.S.C. 27(b)).
(f) Institution-affiliated party or IAP
has the same meaning as in 12 U.S.C.
1813(u)(1), (2), or (3).
(g) Introducing broker means any
person who solicits or accepts orders
from a retail forex customer in
connection with retail forex
transactions.
(h) Related person, when used in
reference to a retail forex counterparty,
means:
(1) Any general partner, officer,
director, or owner of ten percent or
more of the capital stock of the banking
institution;
(2) An associated person or employee
of the retail forex counterparty, if the
retail forex counterparty is not an
insured depository institution;
(3) An IAP, if the retail forex
counterparty is an insured depository
institution; and
(4) Any relative or spouse of any of
the foregoing persons, or any relative of
such spouse, who shares the same home
as any of the foregoing persons.
(i) Retail foreign exchange dealer
means any person other than a retail
forex customer that is, or that offers to
be, the counterparty to a retail forex
transaction, except for a person
described in item (aa), (bb), (cc)(AA),
(dd), or (ff) of section 2(c)(2)(B)(i)(II) of
the Commodity Exchange Act (7 U.S.C.
2(c)(2)(B)(i)(II)).
(j) Retail forex account means the
account of a retail forex customer,
established with a banking institution,
in which retail forex transactions with
the banking institution as counterparty
are undertaken, or the account of a retail
forex customer that is established in
order to enter into such transactions.
(k) Retail forex account agreement
means the contractual agreement
between a banking institution and a
retail forex customer that contains the
terms governing the customer’s retail
forex account with the banking
institution.
(l) Retail forex business means
engaging in one or more retail forex
transactions with the intent to derive
income from those transactions, either
directly or indirectly.
(m) Retail forex counterparty
includes, as appropriate:
(1) A banking institution;
(2) A retail foreign exchange dealer;
(3) A futures commission merchant;
(4) An affiliated person of a futures
commission merchant; and
(5) A broker or dealer registered under
section 15(b) (except paragraph (11)
thereof) or 15C of the Securities
Exchange Act of 1934 (15 U.S.C. 78o(b),
78o–5) or a U.S. financial institution
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other than a banking institution,
provided the counterparty is subject to
a rule or regulation of a Federal
regulatory agency covering retail forex
transactions.
(n) Retail forex customer means a
customer that is not an eligible contract
participant, acting on his, her, or its
own behalf and engaging in retail forex
transactions.
(o) Retail forex proprietary account
means a retail forex account carried on
the books of a banking institution for
one of the following persons; a retail
forex account of which 10 percent or
more is owned by one of the following
persons; or a retail forex account of
which an aggregate of 10 percent or
more of which is owned by more than
one of the following persons:
(1) The banking institution;
(2) An officer, director or owner of ten
percent or more of the capital stock of
the banking institution; or
(3) An employee of the banking
institution, whose duties include:
(i) The management of the banking
institution’s business;
(ii) The handling of the banking
institution’s retail forex transactions;
(iii) The keeping of records, including
without limitation the software used to
make or maintain those records,
pertaining to the banking institution’s
retail forex transactions; or
(iv) The signing or co-signing of
checks or drafts on behalf of the banking
institution;
(4) A spouse or minor dependent
living in the same household as of any
of the foregoing persons; or
(5) An affiliate of the banking
institution;
(p) Retail forex transaction means an
agreement, contract, or transaction in
foreign currency, other than an
identified banking product or a part of
an identified banking product, that is
offered or entered into by a banking
institution with a person that is not an
eligible contract participant and that is:
(1) A contract of sale of a commodity
for future delivery or an option on such
a contract; or
(2) An option, other than an option
executed or traded on a national
securities exchange registered pursuant
to section 6(a) of the Securities
Exchange Act of 1934 (15 U.S.C. 78f(a));
or
(3) Offered or entered into on a
leveraged or margined basis, or financed
by a banking institution, its affiliate, or
any person acting in concert with the
banking institution or its affiliate on a
similar basis, other than:
(i) A security that is not a security
futures product as defined in section
1a(47) of the Commodity Exchange Act
(7 U.S.C. 1a(47)); or
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(ii) A contract of sale that—
(A) Results in actual delivery within
two days; or
(B) Creates an enforceable obligation
to deliver between a seller and buyer
that have the ability to deliver and
accept delivery, respectively, in
connection with their line of business;
or
(iii) An agreement, contract, or
transaction that the Board determines is
not functionally or economically similar
to an agreement, contract, or transaction
described in paragraph (p)(1) or (p)(2) of
this section.
§ 240.3
Prohibited transactions.
(a) Fraudulent conduct prohibited. No
banking institution or its related persons
may, directly or indirectly, in or in
connection with any retail forex
transaction:
(1) Defraud or attempt to defraud any
person;
(2) Knowingly make or cause to be
made to any person any false report or
statement or cause to be entered for any
person any false record; or
(3) Knowingly deceive or attempt to
deceive any person by any means
whatsoever.
(b) Acting as counterparty and
exercising discretion prohibited. A
banking institution that has authority to
cause retail forex transactions to be
effected for a retail forex customer
without the retail forex customer’s
specific authorization may not (and an
affiliate of such an institution may not)
act as the counterparty for any retail
forex transaction with that retail forex
customer.
§ 240.4
Notification.
(a) Notification required. Before
commencing a retail forex business, a
banking institution shall provide the
Board with prior written notice in
compliance with this section. The
notice will become effective 60 days
after a complete notice is received by
the Board, provided the Board does not
request additional information or object
in writing. In the event the Board
requests additional information, the
notice will become effective 60 days
after all information requested by the
Board is received by the Board unless
the Board objects in writing.
(b) Notification requirements. A
banking institution shall provide the
following in its written notification:
(1) Information concerning customer
due diligence, including without
limitation credit evaluations, customer
appropriateness, and ‘‘know your
customer’’ documentation;
(2) The haircuts to be applied to
noncash margin as provided in
240.9(b)(2);
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(3) Information concerning new
product approvals;
(4) Information on addressing
conflicts of interest; and
(5) A resolution by the banking
institution’s Board of Directors that the
banking institution has established and
implemented written policies,
procedures, and risk measurement and
management systems and controls for
the purpose of ensuring that it conducts
retail forex transactions in a safe and
sound manner and in compliance with
this part.
(c) Treatment of existing retail forex
businesses. A banking institution that is
engaged in a retail forex business on the
effective date of this part may continue
to do so, until and unless the Board
objects in writing, so long as the
institution submits the information
required to be submitted under
paragraphs (b)(1) through (5) of this
section within 30 days of the effective
date of this part, subject to an extension
of time by the Board, and such
additional information as requested by
the Board thereafter.
(d) Compliance with the Commodity
Exchange Act. A banking institution
that is engaged in a retail forex business
on the effective date of this part and
complies with paragraph (c) of this
section shall be deemed to be acting
pursuant to a rule or regulation
described in section 2(c)(2)(E)(ii)(I) of
the Commodity Exchange Act (7 U.S.C.
2(c)(2)(E)(ii)(I)).
§ 240.5 Application and closing out of
offsetting long and short positions.
(a) Application of purchases and
sales. Any banking institution that—
(1) Engages in a retail forex
transaction involving the purchase of
any currency for the account of any
retail forex customer when the account
of such retail forex customer at the time
of such purchase has an open retail
forex transaction for the sale of the same
currency;
(2) Engages in a retail forex
transaction involving the sale of any
currency for the account of any retail
forex customer when the account of
such retail forex customer at the time of
such sale has an open retail forex
transaction for the purchase of the same
currency;
(3) Purchases a put or call option
involving foreign currency for the
account of any retail forex customer
when the account of such retail forex
customer at the time of such purchase
has a short put or call option position
with the same underlying currency,
strike price, and expiration date as that
purchased; or
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(4) Sells a put or call option involving
foreign currency for the account of any
retail forex customer when the account
of such retail forex customer at the time
of such sale has a long put or call option
position with the same underlying
currency, strike price, and expiration
date as that sold shall:
(i) Immediately apply such purchase
or sale against such previously held
opposite transaction with the same
customer; and
(ii) Promptly furnish such retail forex
customer with a statement showing the
financial result of the transactions
involved and the name of any
introducing broker to the account.
(b) Close-out against oldest open
position. In all instances in which the
short or long position in a customer’s
retail forex account immediately prior to
an offsetting purchase or sale is greater
than the quantity purchased or sold, the
banking institution shall apply such
offsetting purchase or sale to the oldest
portion of the previously held short or
long position.
(c) Transactions to be applied as
directed by customer. Notwithstanding
paragraphs (a) and (b) of this section,
the offsetting transaction shall be
applied as directed by a retail forex
customer’s specific instructions. These
instructions may not be made by the
banking institution or a related person.
emcdonald on DSK2BSOYB1PROD with PROPOSALS
§ 240.6
Disclosure.
(a) Risk disclosure statement required.
No banking institution may open or
maintain an account that will engage in
retail forex transactions for a retail forex
customer unless the banking institution
has furnished the retail forex customer
with a separate written disclosure
statement containing only the language
set forth in paragraph (d) of this section
and the disclosures required by
paragraphs (e), (f), and (g) of this
section.
(b) Acknowledgement of risk
disclosure statement required. The
banking institution must receive from
the retail forex customer a written
acknowledgement signed and dated by
the customer that the customer received
and understood the written disclosure
statement required by paragraph (a) of
this section.
(c) Placement of risk disclosure
statement. The disclosure statement
may be attached to other documents as
the initial page(s) of such documents
and as the only material on such
page(s).
(d) Content of risk disclosure
statement. The language set forth in the
written disclosure statement required by
paragraph (a) of this section shall be as
follows:
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Risk Disclosure Statement
Retail forex transactions generally
involve the leveraged trading of
contracts denominated in foreign
currency with a banking institution as
your counterparty. Because of the
leverage and the other risks disclosed
here, you can rapidly lose all of the
funds or property you give the banking
institution as margin for such trading
and you may lose more than you pledge
as margin.
You should be aware of and carefully
consider the following points before
determining whether such trading is
appropriate for you.
(1) Trading foreign currencies is a not
on a regulated market or exchange—
your banking institution is your trading
counterparty and has conflicting
interests. The retail forex transaction
you are entering into is not conducted
on an interbank market, nor is it
conducted on a futures exchange subject
to regulation by the Commodity Futures
Trading Commission. The foreign
currency trades you transact are trades
with your banking institution as the
counterparty. When you sell, the
banking institution is the buyer. When
you buy, the banking institution is the
seller. As a result, when you lose money
trading, your banking institution is
making money on such trades, in
addition to any fees, commissions, or
spreads the banking institution may
charge.
(2) Any electronic trading platform
that you may use for retail foreign
currency transactions with your banking
institution is not a regulated exchange.
It is an electronic connection for
accessing your banking institution. The
terms of availability of such a platform
are governed only by your contract with
your banking institution. Any trading
platform that you may use to enter into
off-exchange foreign currency
transactions is only connected to your
banking institution. You are accessing
that trading platform only to transact
with your banking institution. You are
not trading with any other entities or
customers of the banking institution by
accessing such platform. The
availability and operation of any such
platform, including the consequences of
the unavailability of the trading
platform for any reason, is governed
only by the terms of your account
agreement with the banking institution.
(3) You may be able to offset or
liquidate any trading positions only
through your banking institution
because the transactions are not made
on an exchange, and your banking
institution may set its own prices. Your
ability to close your transactions or
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offset positions is limited to what your
banking institution will offer to you, as
there is no other market for these
transactions. Your banking institution
may offer any prices it wishes. Your
banking institution may establish its
prices by offering spreads from third
party prices, but it is under no
obligation to do so or to continue to do
so. Your banking institution may offer
different prices to different customers at
any point in time on its own terms. The
terms of your account agreement alone
govern the obligations your banking
institution has to you to offer prices and
offer offset or liquidating transactions in
your account and make any payments to
you. The prices offered by your banking
institution may or may not reflect prices
available elsewhere at any exchange,
interbank, or other market for foreign
currency.
(4) Paid solicitors may have
undisclosed conflicts. The banking
institution may compensate introducing
brokers for introducing your account in
ways that are not disclosed to you. Such
paid solicitors are not required to have,
and may not have, any special expertise
in trading, and may have conflicts of
interest based on the method by which
they are compensated. You should
thoroughly investigate the manner in
which all such solicitors are
compensated and be very cautious in
granting any person or entity authority
to trade on your behalf. You should
always consider obtaining dated written
confirmation of any information you are
relying on from your banking institution
in making any trading or account
decisions.
(5) Retail forex transactions are not
insured by the Federal Deposit
Insurance Corporation.
(6) Retail forex transactions are not a
deposit in, or guaranteed by, a banking
institution.
(7) Retail forex transactions are
subject to investment risks, including
possible loss of all amounts invested.
Finally, you should thoroughly
investigate any statements by any
banking institution that minimize the
importance of, or contradict, any of the
terms of this risk disclosure. Such
statements may indicate sales fraud.
This brief statement cannot, of course,
disclose all the risks and other aspects
of trading off-exchange foreign currency
with a banking institution.
I hereby acknowledge that I have
received and understood this risk
disclosure statement.
llllllllllllllllll
l
Date
llllllllllllllllll
l
Signature of Customer
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(e)(1) Disclosure of profitable
accounts ratio. Immediately following
the language set forth in paragraph (d)
of this section, the statement required
by paragraph (a) of this section shall
include, for each of the most recent four
calendar quarters during which the
banking institution maintained retail
forex customer accounts:
(i) The total number of retail forex
customer accounts maintained by the
banking institution over which the
banking institution does not exercise
investment discretion;
(ii) The percentage of such accounts
that were profitable for retail forex
customer accounts during the quarter;
and
(iii) The percentage of such accounts
that were not profitable for retail forex
customer accounts during the quarter.
(2) Statement of profitable trades. (i)
The banking institution’s statement of
profitable trades shall include the
following legend: Past performance is
not necessarily indicative of future
results.
(ii) Each banking institution shall
provide, upon request, to any retail
forex customer or prospective retail
forex customer the total number of retail
forex accounts maintained by the
banking institution for which the
banking institution does not exercise
investment discretion, the percentage of
such accounts that were profitable, and
the percentage of such accounts that
were not profitable for each calendar
quarter during the most recent five-year
period during which the banking
institution maintained such accounts.
(f) Disclosure of fees and other
charges. Immediately following the
language required by paragraph (e) of
this section, the statement required by
paragraph (a) of this section shall
include:
(1) The amount of any fee, charge, or
commission that the banking institution
may impose on the retail forex customer
in connection with a retail forex account
or retail forex transaction;
(2) An explanation of how the
banking institution will determine the
amount of such fees, charges, or
commissions; and
(3) The circumstances under which
the banking institution may impose
such fees, charges, or commissions.
(g) Set off. Immediately following the
language required by paragraph (f) of
this section, the statement required by
paragraph (a) of this section shall
include:
(1) A statement as to whether the
banking institution will or will not
retain the right to set off obligations of
the retail forex customer arising from
the customer’s retail forex transactions,
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including margin calls and losses,
against the customer’s other assets held
by the banking institution;
(2) If the banking institution states
that it reserves its right to set off
obligations of the retail forex customer
arising from the customer’s retail forex
transactions against the customer’s other
assets, the banking institution must
receive from the retail forex customer a
written acknowledgement signed and
dated by the customer that the customer
received and understood the written
disclosure required by paragraph (g)(1)
of this section.
(h) Future disclosure requirements. If,
with regard to a retail forex customer,
the banking institution changes any fee,
charge, or commission required to be
disclosed under paragraph (f) of this
section, then the banking institution
shall mail or deliver to the retail forex
customer a notice of the changes at least
15 days prior to the effective date of the
change.
(i) Form of disclosure requirements.
The disclosures required by this section
shall be clear and conspicuous and
designed to call attention to the nature
and significance of the information
provided.
(j) Other disclosure requirements
unaffected. This section does not relieve
a banking institution from any other
disclosure obligation it may have under
applicable law.
§ 240.7
Recordkeeping.
(a) General rule. A banking institution
engaging in retail forex transactions
shall keep full, complete and systematic
records, together with all pertinent data
and memoranda, of all transactions
relating to its retail forex business,
including:
(1) Retail forex account records. For
each retail forex account:
(i) The name and address of the
person for whom such retail forex
account is carried or introduced and the
principal occupation or business of the
person.
(ii) The name of any other person
guaranteeing the account or exercising
trading control with respect to the
account;
(iii) The establishment or termination
of the account;
(iv) A means to identify the person
who has solicited and is responsible for
the account or assign account numbers
in such a manner as to identify that
person;
(v) The funds in the account, net of
any commissions and fees;
(vi) The account’s net profits and
losses on open trades;
(vii) The funds in the account plus or
minus the net profits and losses on open
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trades, adjusted for the net option value
in the case of open options positions;
(viii) Financial ledger records that
show separately for each retail forex
customer all charges against and credits
to such retail forex customer’s account,
including but not limited to retail forex
customer funds deposited, withdrawn,
or transferred, and charges or credits
resulting from losses or gains on closed
transactions; and
(ix) A list of all retail forex
transactions executed for the account,
with the details specified in paragraph
(a)(2) of this section.
(2) Retail forex transaction records.
For each retail forex transaction:
(i) The date and time the banking
institution received the order;
(ii) The price at which the banking
institution placed the order, or, in the
case of an option, the premium that the
retail forex customer paid;
(iii) The customer account
identification information;
(iv) The currency pair;
(v) The size or quantity of the order;
(vi) Whether the order was a buy or
sell order;
(vii) The type of order, if the order
was not a market order;
(viii) The size and price at which the
order is executed, or in the case of an
option, the amount of the premium paid
for each option purchased, or the
amount credited for each option sold;
(ix) For options, whether the option is
a put or call, expiration date, quantity,
underlying contract for future delivery
or underlying physical, strike price, and
details of the purchase price of the
option, including premium, mark-up,
commission, and fees;
(x) For futures, the delivery date; and
(xi) If the order was made on a trading
platform:
(A) The price quoted on the trading
platform when the order was placed, or,
in the case of an option, the premium
quoted;
(B) The date and time the order was
transmitted to the trading platform; and
(C) The date and time the order was
executed.
(3) Price changes on a trading
platform. If a trading platform is used,
daily logs showing each price change on
the platform, the time of the change to
the nearest second, and the trading
volume at that time and price.
(4) Methods or algorithms. Any
method or algorithm used to determine
the bid or asked price for any retail
forex transaction or the prices at which
customers orders are executed,
including, but not limited to, any markups, fees, commissions or other items
which affect the profitability or risk of
loss of a retail forex customer’s
transaction.
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(5) Daily records which show for each
business day complete details of:
(i) All retail forex transactions that are
futures transactions executed on that
day, including the date, price, quantity,
market, currency pair, delivery date,
and the person for whom such
transaction was made;
(ii) All retail forex transactions that
are option transactions executed on that
day, including the date, whether the
transaction involved a put or call, the
expiration date, quantity, currency pair,
delivery date, strike price, details of the
purchase price of the option, including
premium, mark-up, commission and
fees, and the person for whom the
transaction was made; and
(iii) All other retail forex transactions
executed on that day for such account,
including the date, price, quantity,
currency and the person for whom such
transaction was made.
(6) Other records. Written
acknowledgements of receipt of the risk
disclosure statement required by
§ 240.6(b), offset instructions pursuant
to § 240.5(c), records required under
paragraphs (b) through (f) of this
section, trading cards, signature cards,
street books, journals, ledgers, payment
records, copies of statements of
purchase, and all other records, data
and memoranda that have been
prepared in the course of the banking
institution’s retail forex business.
(b) Ratio of profitable accounts. (1)
With respect to its active retail forex
customer accounts over which it did not
exercise investment discretion and that
are not retail forex proprietary accounts
open for any period of time during the
quarter, a banking institution shall
prepare and maintain on a quarterly
basis (calendar quarter):
(i) A calculation of the percentage of
such accounts that were profitable;
(ii) A calculation of the percentage of
such accounts that were not profitable;
and
(iii) Data supporting the calculations
described in paragraphs (b)(1)(i) and
(b)(1)(ii) of this section.
(2) In calculating whether a retail
forex account was profitable or not
profitable during the quarter, the
banking institution shall compute the
realized and unrealized gains or losses
on all retail forex transactions carried in
the retail forex account at any time
during the quarter, and subtract all fees,
commissions, and any other charges
posted to the retail forex account during
the quarter, and add any interest income
and other income or rebates credited to
the retail forex account during the
quarter. All deposits and withdrawals of
funds made by the retail forex customer
during the quarter must be excluded
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from the computation of whether the
retail forex account was profitable or not
profitable during the quarter.
Computations that result in a zero or
negative number shall be considered a
retail forex account that was not
profitable. Computations that result in a
positive number shall be considered a
retail forex account that was profitable.
(3) A retail forex account shall be
considered ‘‘active’’ for purposes of
paragraph (b)(1) of this section if and
only if, for the relevant calendar quarter,
a retail forex transaction was executed
in that account or the retail forex
account contained an open position
resulting from a retail forex transaction.
(c) Records related to possible
violations of law. A banking institution
engaging in retail forex transactions
shall make a record of all
communications received by the
banking institution or its related persons
concerning facts giving rise to possible
violations of law related to the banking
institution’s retail forex business. The
record shall contain: the name of the
complainant, if provided; the date of the
communication; the relevant agreement,
contract, or transaction; the substance of
the communication; and the name of the
person who received the
communication and the final
disposition of the matter.
(d) Records for noncash margin. A
banking institution shall maintain a
record of all noncash margin collected
pursuant to § 240.9. The record shall
show separately for each retail forex
customer:
(1) A description of the securities or
property received;
(2) The name and address of such
retail forex customer;
(3) The dates when the securities or
property were received;
(4) The identity of the depositories or
other places where such securities or
property are segregated or held, if
applicable;
(5) The dates on which the banking
institution placed or removed such
securities or property into or from such
depositories; and
(6) The dates of return of such
securities or property to such retail
forex customer, or other disposition
thereof, together with the facts and
circumstances of such other disposition.
(e) Order tickets.
(1) Except as provided in paragraph
(e)(2) of this section, immediately upon
the receipt of a retail forex transaction
order, a banking institution shall
prepare an order ticket for the order
(whether unfulfilled, executed or
canceled). The order ticket shall
include:
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(i) Account identification (account or
customer name with which the retail
forex transaction was effected);
(ii) Order number;
(iii) Type of order (market order, limit
order, or subject to special instructions);
(iv) Date and time, to the nearest
minute, the retail forex transaction order
was received (as evidenced by
timestamp or other timing device);
(v) Time, to the nearest minute, the
retail forex transaction order was
executed; and
(vi) Price at which the retail forex
transaction was executed.
(2) Post-execution allocation of
bunched orders. Specific identifiers for
retail forex accounts included in
bunched orders need not be recorded at
time of order placement or upon report
of execution as required under
paragraph (e)(1) of this section if the
following requirements are met:
(i) The banking institution placing
and directing the allocation of an order
eligible for post-execution allocation has
been granted written investment
discretion with regard to participating
customer accounts and makes the
following information available to
customers upon request:
(A) The general nature of the postexecution allocation methodology the
banking institution will use;
(B) Whether the banking institution
has any interest in accounts which may
be included with customer accounts in
bunched orders eligible for postexecution allocation; and
(C) Summary or composite data
sufficient for that customer to compare
the customer’s results with those of
other comparable customers and, if
applicable, any account in which the
banking institution has an interest.
(ii) Post-execution allocations are
made as soon as practicable after the
entire transaction is executed;
(iii) Post-execution allocations are fair
and equitable, with no account or group
of accounts receiving consistently
favorable or unfavorable treatment; and
(iv) The post-execution allocation
methodology is sufficiently objective
and specific to permit the Board to
verify fairness of the allocations using
that methodology.
(f) Record of monthly statements and
confirmations. A banking institution
shall retain a copy of each monthly
statement and confirmation required by
§ 240.10.
(g) Form of record and manner of
maintenance. The records required by
this section must clearly and accurately
reflect the information required and
provide an adequate basis for the audit
of the information. A banking
institution must create and maintain
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audio recordings of oral orders and oral
offset instructions. Record maintenance
may include the use of automated or
electronic records provided that the
records are easily retrievable, and
readily available for inspection.
(h) Length of maintenance. A banking
institution shall keep each record
required by this section for at least five
years from the date the record is created.
§ 240.8
Capital requirements.
(a) Capital required for a state
member bank. A banking institution
defined in section 240.2(b)(1) offering or
entering into retail forex transactions
must be well-capitalized as defined in
section 208.43 of Regulation H (12 CFR
208.243).
(b) Capital required for an uninsured
state-licensed branch of a foreign bank.
A banking institution defined in section
240.2(b)(2) offering or entering into
retail forex transactions must be wellcapitalized under the capital rules made
applicable to it pursuant to section
225.2(r)(3) of Regulation Y (12 CFR
225.2(r)(3).
(c) Capital required for financial
holding companies and bank holding
companies. A banking institution
defined in section 240.2(b)(3) or (4)
offering or entering into retail forex
transactions must be well-capitalized as
defined in section 225.2(r) of Regulation
Y (12 CFR Part 225.2(r)).
(d) Capital required for an agreement
corporation or Edge Act corporation. A
banking institution defined in section
240.2(b)(5) or (6) offering or entering
into retail forex transactions must
maintain capital in compliance with the
capital adequacy guidelines that are
made applicable to an Edge corporation
engaged in banking pursuant to section
211.12(c)(2) of Regulation K (12 CFR
211.12(c)(2)).
emcdonald on DSK2BSOYB1PROD with PROPOSALS
§ 240.9
Margin requirements.
(a) Margin required. A banking
institution engaging, or offering to
engage, in retail forex transactions must
collect from each retail forex customer
an amount of margin not less than:
(1) Two percent of the notional value
of the retail forex transaction for major
currency pairs and 5 percent of the
notional value of the retail forex
transaction for all other currency pairs;
(2) For short options, 2 percent for
major currency pairs and 5 percent for
all other currency pairs of the notional
value of the retail forex transaction, plus
the premium received by the retail forex
customer; or
(3) For long options, the full premium
charged and received by the banking
institution.
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(b)(1) Form of margin. Margin
collected under paragraph (a) of this
section or pledged by a retail forex
customer for retail forex transactions in
excess of the requirements of paragraph
(a) of this section must be in the form
of cash or the following financial
instruments:
(i) Obligations of the United States
and obligations fully guaranteed as to
principal and interest by the United
States;
(ii) General obligations of any State or
of any political subdivision thereof;
(iii) General obligations issued or
guaranteed by any enterprise, as defined
in 12 U.S.C. 4502(10);
(iv) Certificates of deposit issued by
an insured depository institution, as
defined in section 3(c)(2) of the Federal
Deposit Insurance Act (12 U.S.C.
1813(c)(2));
(v) Commercial paper;
(vi) Corporate notes or bonds;
(vii) General obligations of a sovereign
nation;
(viii) Interests in money market
mutual funds; and
(ix) Such other financial instruments
as the Board deems appropriate.
(2) Haircuts. A banking institution
shall establish written policies and
procedures that include:
(i) Haircuts for noncash margin
collected under this section; and
(ii) Annual evaluation, and, if
appropriate, modification of the
haircuts.
(c) Major currencies. (1) for the
purposes of subsections (a)(1) and (a)(2),
major currency means:
(i) United States Dollar (USD)
(ii) Canadian Dollar (CAD)
(iii) Euro (EUR)
(iv) United Kingdom Pound (GBP)
(v) Japanese Yen (JPY)
(vi) Swiss Franc (CHF)
(vii) New Zealand Dollar (NZD)
(viii) Australian Dollar (AUD)
(ix) Swedish Kronor (SEK)
(x) Danish Kroner (DKK)
(xi) Norwegian Krone (NOK), and
(xii) Any other currency as determined
by the Board.
(d) Margin calls; liquidation of
position. For each retail forex customer,
at least once per day, a banking
institution shall:
(1) Mark the value of the retail forex
customer’s open retail forex positions to
market;
(2) Mark the value of the margin
collected under this section from the
retail forex customer to market;
(3) Determine whether, based on the
marks in paragraphs (d)(1) and (d)(2) of
this section, the banking institution has
collected margin from the retail forex
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customer sufficient to satisfy the
requirements of this section; and
(4) If, pursuant to paragraph (d)(3) of
this section, the banking institution
determines that it has not collected
margin from the retail forex customer
sufficient to satisfy the requirements of
this section then, within a reasonable
period of time, the banking institution
shall either:
(i) Collect margin from the retail forex
customer sufficient to satisfy the
requirements of this section; or
(ii) Liquidate the retail forex
customer’s retail forex transactions.
§ 240.10
Required reporting to customers.
(a) Monthly statements. Each banking
institution must promptly furnish to
each retail forex customer, as of the
close of the last business day of each
month or as of any regular monthly date
selected, except for accounts in which
there are neither open positions at the
end of the statement period nor any
changes to the account balance since the
prior statement period, but in any event
not less frequently than once every three
months, a statement that clearly shows:
(1) For each retail forex customer:
(i) The open retail forex transactions
with prices at which acquired;
(ii) The net unrealized profits or
losses in all open retail forex
transactions marked to the market;
(iii) Any money, securities or other
property required by § 240.9(d); and
(iv) A detailed accounting of all
financial charges and credits to the
retail forex customer’s retail forex
accounts during the monthly reporting
period, including: money, securities, or
property received from or disbursed to
such customer; realized profits and
losses; and fees, charges, and
commissions.
(2) For each retail forex customer
engaging in retail forex transactions that
are options:
(i) All such options purchased, sold,
exercised, or expired during the
monthly reporting period, identified by
underlying retail forex transaction or
underlying currency, strike price,
transaction date, and expiration date;
(ii) The open option positions carried
for such customer and arising as of the
end of the monthly reporting period,
identified by underlying retail forex
transaction or underlying currency,
strike price, transaction date, and
expiration date;
(iii) All such option positions marked
to the market and the amount each
position is in the money, if any;
(iv) Any money, securities or other
property required by § 240.9(c); and
(v) A detailed accounting of all
financial charges and credits to the
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retail forex customer’s retail forex
accounts during the monthly reporting
period, including: money, securities, or
property received from or disbursed to
such customer; realized profits and
losses; premiums and mark-ups; and
fees, charges, and commissions.
(b) Confirmation statement. Each
banking institution must, not later than
the next business day after any retail
forex transaction, send:
(1) To each retail forex customer, a
written confirmation of each retail forex
transaction caused to be executed by it
for the customer, including offsetting
transactions executed during the same
business day and the rollover of an open
retail forex transaction to the next
business day;
(2) To each retail forex customer
engaging in forex option transactions, a
written confirmation of each forex
option transaction, containing at least
the following information:
(i) The retail forex customer’s account
identification number;
(ii) A separate listing of the actual
amount of the premium, as well as each
mark-up thereon, if applicable, and all
other commissions, costs, fees and other
charges incurred in connection with the
forex option transaction;
(iii) The strike price;
(iv) The underlying retail forex
transaction or underlying currency;
(v) The final exercise date of the forex
option purchased or sold; and
(vi) The date the forex option
transaction was executed.
(3) To each retail forex customer
engaging in forex option transactions,
upon the expiration or exercise of any
option, a written confirmation statement
thereof, which statement shall include
the date of such occurrence, a
description of the option involved, and,
in the case of exercise, the details of the
retail forex or physical currency
position which resulted therefrom
including, if applicable, the final trading
date of the retail forex transaction
underlying the option.
(c) Notwithstanding the provisions of
paragraphs (b)(1) through (3) of this
section, a retail forex transaction that is
caused to be executed for a pooled
investment vehicle that engages in retail
forex transactions need be confirmed
only to the operator of such pooled
investment vehicle.
(d) Controlled accounts. With respect
to any account controlled by any person
other than the retail forex customer for
whom such account is carried, each
banking institution shall promptly
furnish in writing to such other person
the information required by paragraphs
(a) and (b) of this section.
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(e) Introduced accounts. Each
statement provided pursuant to the
provisions of this section must, if
applicable, show that the account for
which the banking institution was
introduced by an introducing broker
and the name of the introducing broker.
§ 240.11
(2) The exact amount of the foreign
currency to be purchased or sold; and
(3) In the case of an option, the
identity of the foreign currency or
contract that underlies the option.
§ 240.13 Trading and operational
standards.
Unlawful representations.
(a) Internal rules, procedures, and
controls required. A banking institution
engaging in retail forex transactions
shall establish and implement internal
rules, procedures, and controls
designed, at a minimum, to:
(1) Ensure, to the extent reasonable,
that each order received from a retail
forex customer that is executable at or
near the price that the banking
institution has quoted to the customer is
entered for execution before any order
in any retail forex transaction for:
(i) A proprietary account;
(ii) An account in which a related
person has an interest, or any account
for which such a related person may
originate orders without the prior
specific consent of the account owner if
the related person has gained
knowledge of the retail forex customer’s
order prior to the transmission of an
order for a proprietary account;
(iii) An account in which a related
person has an interest, if the related
person has gained knowledge of the
retail forex customer’s order prior to the
transmission of an order for a
proprietary account; or
(iv) An account in which a related
person may originate orders without the
prior specific consent of the account
owner, if the related person has gained
knowledge of the retail forex customer’s
order prior to the transmission of an
order for a proprietary account;
(2) Prevent banking institution related
persons from placing orders, directly or
indirectly, with another person in a
manner designed to circumvent the
provisions of paragraph (a)(1) of this
section; and
(3) Fairly and objectively establish
settlement prices for retail forex
transactions.
§ 240.12 Authorization to trade.
(b) Disclosure of retail forex
(a) Specific authorization required. No
transactions. No banking institution
banking institution may directly or
engaging in retail forex transactions may
indirectly effect a retail forex
disclose that an order of another person
transaction for the account of any retail
is being held by the banking institution,
forex customer unless, before the
unless the disclosure is necessary to the
transaction occurs, the retail forex
effective execution of such order or the
customer specifically authorized the
disclosure is made at the request of the
banking institution to effect the retail
Board.
forex transaction.
(c) Handling of retail forex accounts
(b) A retail forex transaction is
of related persons of retail forex
‘‘specifically authorized’’ for purposes
counterparties. No banking institution
of this section if the retail forex
engaging in retail forex transactions
customer specifies:
(1) The precise retail forex transaction shall knowingly handle the retail forex
account of any related person of another
to be effected;
(a) No implication or representation of
limiting losses. No banking institution
engaged in retail foreign exchange
transactions or its related persons may
imply or represent that it will, with
respect to any retail customer forex
account, for or on behalf of any person:
(1) Guarantee such person or account
against loss;
(2) Limit the loss of such person or
account; or
(3) Not call for or attempt to collect
margin as established for retail forex
customers.
(b) No implication of representation of
engaging in prohibited acts. No banking
institution or its related persons may in
any way imply or represent that it will
engage in any of the acts or practices
described in paragraph (a) of this
section.
(c) No Federal government
endorsement. No banking institution or
its related persons may represent or
imply in any manner whatsoever that
any retail forex transaction or retail
forex product has been sponsored,
recommended, or approved by the
Board, the Federal government, or any
agency thereof.
(d) Assuming or sharing of liability
from bank error. This section shall not
be construed to prevent a banking
institution from assuming or sharing in
the losses resulting from the banking
institution’s error or mishandling of a
retail forex transaction.
(e) Certain guaranties unaffected. This
section shall not affect any guarantee
entered into prior to the effective date
of this part, but this section shall apply
to any extension, modification or
renewal thereof entered into after such
date.
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retail forex counterparty unless the
banking institution:
(1) Receives written authorization
from a person designated by such other
retail forex counterparty with
responsibility for the surveillance over
such account pursuant to paragraph
(a)(2) of this section;
(2) Prepares immediately upon receipt
of an order for the account a written
record of the order, including the
account identification and order
number, and records thereon to the
nearest minute, by time-stamp or other
timing device, the date and time the
order is received; and
(3) Transmits on a regular basis to the
other retail forex counterparty copies of
all statements for the account and of all
written records prepared upon the
receipt of orders for the account
pursuant to paragraph (c)(2) of this
section.
(d) Related person of banking
institution establishing account at
another retail forex counterparty. No
related person of a banking institution
working in the banking institution’s
retail forex business may have an
account, directly or indirectly, with
another retail forex counterparty unless
the other retail forex counterparty:
(1) Receives written authorization to
open and maintain the account from a
person designated by the banking
institution of which it is a related
person with responsibility for the
surveillance over the account pursuant
to paragraph (a)(2) of this section; and
(2) Transmits on a regular basis to the
banking institution copies of all
statements for the account and of all
written records prepared by the other
retail forex counterparty upon receipt of
orders for such account pursuant to
paragraph (c)(2) of this section.
(e) Prohibited trading practices. No
banking institution engaging in retail
forex transactions may:
(1) Enter into a retail forex
transaction, to be executed pursuant to
a market or limit order at a price that is
not at or near the price at which other
retail forex customers, during that same
time period, have executed retail forex
transactions with the banking
institution;
(2) Adjust or alter prices for a retail
forex transaction after the transaction
has been confirmed to the retail forex
customer;
(3) Provide a retail forex customer a
new bid price for a retail forex
transaction that is higher than its
previous bid without providing a new
asked price that is also higher than its
previous asked price by a similar
amount;
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(4) Provide a retail forex customer a
new bid price for a retail forex
transaction that is lower than its
previous bid without providing a new
asked price that is also lower than its
previous asked price by a similar
amount; or
(5) Establish a new position for a
retail forex customer (except one that
offsets an existing position for that retail
forex customer) where the banking
institution holds outstanding orders of
other retail forex customers for the same
currency pair at a comparable price.
which retail forex accounts or positions
are assigned or transferred under
paragraph (a) of this section must
provide to the affected retail forex
customers the risk disclosure statements
and forms of acknowledgment required
by this part and receive the required
signed acknowledgments within sixty
days of such assignments or transfers.
This requirement shall not apply if the
banking institution has clear written
evidence that the retail forex customer
has received and acknowledged receipt
of the required disclosure statements.
§ 240.14
§ 240.16
Supervision.
(a) Supervision by the banking
institution. A banking institution
engaging in retail forex transactions
shall diligently supervise the handling
by its officers, employees, and agents (or
persons occupying a similar status or
performing a similar function) of all
retail forex accounts carried, operated,
or advised by the banking institution
and all activities of its officers,
employees, and agents (or persons
occupying a similar status or performing
a similar function) relating to its retail
forex business.
(b) Supervision by officers, employees,
or agents. An officer, employee, or agent
of a banking institution must diligently
supervise his or her subordinates’
handling of all retail forex accounts at
the banking institution and all the
subordinates’ activities relating to the
banking institution’s retail forex
business.
§ 240.15
Notice of transfers.
(a) Prior notice generally required.
Except as provided in paragraph (b) of
this section, a banking institution must
provide a retail forex customer with 30
days’ prior notice of any assignment of
any position or transfer of any account
of the retail forex customer. The notice
must include a statement that the retail
forex customer is not required to accept
the proposed assignment or transfer and
may direct the banking institution to
liquidate the positions of the retail forex
customer or transfer the account to a
retail forex counterparty of the retail
forex customer’s selection.
(b) Exceptions. The requirements of
paragraph (a) of this section shall not
apply to transfers:
(1) Requested by the retail forex
customer;
(2) Made by the Federal Deposit
Insurance Corporation as receiver or
conservator under the Federal Deposit
Insurance Act; or
(3) Otherwise authorized by
applicable law.
(c) Obligations of transferee banking
institution. A banking institution to
PO 00000
Frm 00017
Fmt 4702
Sfmt 4702
Customer dispute resolution.
(a) No banking institution shall enter
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 any
claim or grievance regarding any retail
forex transaction or disclosure to any
settlement procedure.
(b) Election of forum.
(1) Within 10 business days after the
receipt of notice from the retail forex
customer that the customer intends to
submit a claim to arbitration, the
banking institution shall provide the
customer with a list of persons qualified
in dispute resolution.
(2) The customer must, within 45
days after receipt of such list, notify the
national bank of the person selected.
The customer’s failure to provide such
notice shall give the banking institution
the right to select a person from the list.
(c) Enforceability. A dispute
settlement procedure may require
parties using the procedure to agree,
under applicable state law, submission
agreement, or otherwise, to be bound by
an award rendered in the procedure if
the agreement to submit the claim or
grievance to the procedure was made
after the claim or grievance arose. Any
award so rendered by the procedure will
be enforceable in accordance with
applicable law.
(d) Time limits for submission of
claims. The dispute settlement
procedure used by the parties may not
include any unreasonably short
limitation period foreclosing submission
of a customer’s claims or grievances or
counterclaims.
(e) Counterclaims. A procedure for the
settlement of a retail forex customer’s
claims or grievances against a banking
institution or employee thereof may
permit the submission of a counterclaim
in the procedure by a person against
whom a claim or grievance is brought if
the counterclaim:
(1) Arises out of the transaction or
occurrence that is the subject of the
retail forex customer’s claim or
grievance; and
E:\FR\FM\03AUP1.SGM
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46668
Federal Register / Vol. 76, No. 149 / Wednesday, August 3, 2011 / Proposed Rules
[FR Doc. 2011–19535 Filed 8–2–11; 8:45 am]
Commission also proposes to direct
pipelines that reported combined
interstate and intrastate data on lines (1)
through (12) of page 700 of their 2010
Form 6 to file a revised page 700
containing only interstate data for the
years 2009 and 2010.
DATES: Comments are due October 3,
2011.
BILLING CODE 6210–01–P
FOR FURTHER INFORMATION CONTACT:
(2) Does not require for adjudication
the presence of essential witnesses,
parties, or third persons over which the
settlement process lacks jurisdiction.
By order of the Board of Governors of the
Federal Reserve System, July 28, 2011.
Jennifer J. Johnson,
Secretary of the Board.
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 240
[Release No. 34–64766; File No. S7–25–11]
RIN 3235–AL10
Business Conduct Standards for
Security-Based Swap Dealers and
Major Security-Based Swap
Participants
Correction
In proposed rule document number
2011–16758, appearing on pages 42396–
42455 in the issue of Monday, July 18,
2011, make the following corrections:
PART 240 § 240.15Fh–3 [Corrected]
1. On page 42455, in the third
column, § 240.15Fh–3 (f)(2), paragraph
two ‘‘(g)(1)’’ should read ‘‘(f)(1)’’.
2. On the same page, in the same
column, § 240.15Fh–3, paragraph nine
‘‘(h)’’ should read ‘‘(g)’’.
3. On the same page, in the same
column, third from the bottom of the
page, ‘‘(i)’’ should read ‘‘(h)’’.
[FR Doc. C1–2011–16758 Filed 8–3–11; 8:45 am]
BILLING CODE 1505–01–D
DEPARTMENT OF ENERGY
SUPPLEMENTARY INFORMATION:
July 29, 2011.
1. The Federal Energy Regulatory
Commission (Commission) proposes to
amend the instructions on page 700,
Annual Cost of Service Based Analysis
Schedule, of FERC Form No. 6, Annual
Report of Oil Pipeline Companies,
(Form 6) to ensure that pipelines report
interstate-only barrel and barrel-mile
data and not a combination of interstate
and intrastate throughput. The
Commission also directs pipelines that
reported combined interstate and
intrastate data in any field on lines (1)
through (12) of page 700 of their 2010
Form 6 1 to file within 90 days of the
final rule’s publication in the Federal
Register a revised page 700 containing
only interstate data for the years 2009
and 2010.
Background
Federal Energy Regulatory
Commission
Federal Energy Regulatory
Commission.
ACTION: Notice of proposed rulemaking.
2. Page 700 of Form 6 serves as a
preliminary screening tool for pipeline
rate filings with the Commission.2
Specifically, page 700 enables shippers
to evaluate proposed rate changes under
the indexing methodology 3 and to
determine whether a pipeline’s cost of
service or per barrel-mile costs are so
substantially divergent from the
revenues produced to warrant a
The Federal Energy
Regulatory Commission (Commission)
proposes to amend the instructions on
page 700 of FERC Form No. 6 (Form 6)
to ensure that pipelines report
interstate-only barrel and barrel-mile
data and not a combination of interstate
and intrastate throughput. The
1 Pipelines filed their 2010 FERC Form 6 on April
18, 2011.
2 All jurisdictional pipelines are required to file
page 700, including pipelines exempt from filing
the full Form 6. 18 CFR 357.2(a)(2) and (a)(3)
(2011).
3 Cost of Service Requirements and Filing
Requirements for Oil Pipelines, Order No. 571,
FERC Stats. & Regs. ¶ 31,006, at 31,168 (1995).
18 CFR Part 357
[Docket No. RM11–21–000]
Revision to Form No. 6
AGENCY:
emcdonald on DSK2BSOYB1PROD with PROPOSALS
Andrew Knudsen (Legal Information),
Office of the General Counsel, 888
First Street, NE., Washington, DC
20426, (202) 502–6527,
Andrew.Knudsen@ferc.gov.
Michael Lacy (Technical Information),
Office of Energy Market Regulation,
888 First Street, NE., Washington, DC
20426, (202) 502–8843,
Michael.Lacy@ferc.gov.
Brian Holmes (Technical Information),
Office of Enforcement, 888 First
Street, NE., Washington, DC 20426,
(202) 502–6008,
Brian.Holmes@ferc.gov.
SUMMARY:
VerDate Mar<15>2010
16:11 Aug 02, 2011
Jkt 223001
PO 00000
Frm 00018
Fmt 4702
Sfmt 4702
challenge.4 In Order No. 620, the
Commission clarified that it intended
page 700 to include only the interstate
costs and interstate revenues, and not a
combination of interstate and intrastate
data.5
Discussion
3. The Commission proposes to
modify the instructions on page 700 to
specify that pipelines must report
interstate throughput levels and exclude
throughput associated with intrastate
movements. The current instructions on
page 700 for lines (11) and (12) may
inadvertently have caused some
pipelines to report barrel and barrelmile throughput that combines
interstate and intrastate data. The
instruction for line (12) on page 700
directs pipelines to report the same
barrel-mile figures as those reported on
line 33a of page 600 of the Form 6.
Similarly, the instruction for line (11)
on page 700 directs pipelines to report
the same barrel figures as those reported
on line 33b of page 601 of the Form 6.
Thus, the instructions on page 700
specify that the throughput data
reported on page 700 is the same
throughput data that is reported on page
600–601.6 The instructions for page 600
direct pipelines to include ‘‘all oils
received’’ by the pipeline,7 which
consequently may have led some filers
to report combined interstate and
intrastate barrel-miles on lines (11) and
(12) of page 700.
4. It is an axiomatic rule of ratemaking
that the same set of costs and volumes
must be used to determine rates.8 The
Commission did not intend for the cost
of service per-barrel/mile data provided
by page 700 to include interstate-only
costs and revenues alongside
throughput data that combines interstate
and intrastate totals. To address this
reporting issue, the Commission now
proposes to modify the instructions for
line (11) 9 and line (12) 10 of page 700 to
more precisely direct pipelines to report
4 Revisions to and Electronic Filing of the FERC
Form No. 6 and Related Uniform Systems of
Accounts, Order No. 620, FERC Stats. & Regs.
¶ 31,115, at 31,960, on reh’g, 94 FERC 61,130
(2001).
5 Order No. 620, FERC Stats. & Regs. at 31,959,
on reh’g, 94 FERC at 61,498.
6 Pages 600–601 are entitled Statistics of
Operations.
7 Pipelines filing pages 600–601 as well as page
700 may transport both interstate and intrastate
barrels.
8 Five-Year Review of Oil Pipeline Pricing Index,
75 FR 80300, 80308 (Dec. 22, 2010), 133 FERC
¶ 61,228, at P 85 (2010), order on reh’g, 135 FERC
¶ 61,172 (2011).
9 Instruction number 4 on page 700 of the
Form 6.
10 Instruction number 5 on page 700 of the
Form 6.
E:\FR\FM\03AUP1.SGM
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]]>Agencies
[Federal Register Volume 76, Number 149 (Wednesday, August 3, 2011)]
[Proposed Rules]
[Pages 46652-46668]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19535]
=======================================================================
-----------------------------------------------------------------------
FEDERAL RESERVE SYSTEM
12 CFR Part 240
[Docket No. R-1428]
RIN 7100-AD 79
Retail Foreign Exchange Transactions (Regulation NN)
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Notice of proposed rulemaking and request for comment.
-----------------------------------------------------------------------
SUMMARY: The Board of Governors of the Federal Reserve System
(``Board'') is publishing for comment a regulation to permit banking
organizations under its supervision to engage in off-exchange
transactions in foreign currency with retail customers. The proposed
rule also describes various requirements with which banking
organizations must comply to conduct such transactions.
DATES: Comments on this notice of proposed rulemaking must be received
by October 11, 2011.
ADDRESSES: You may submit comments identified by Docket No. R-1428 and
RIN No. 7100-AD 79, by using any of the methods below. Please submit
your comments using only one method.
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at htpp://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov. Follow the
instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket number in
the subject line of the message.
Facsimile: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC 20551.
All public comments are available from the Board's Web site at
htpp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying information.
Public comments may also be viewed electronically or in paper form in
Room MP-500 of the Board's Martin Building (20th and C Streets, NW.)
between 9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Scott Holz, Senior Counsel, Legal
Division, (202) 452-2966.
SUPPLEMENTARY INFORMATION:
I. Background
On July 21, 2010, President Obama signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank
Act).\1\ As amended by section 742(c)(2) of the Dodd-Frank Act,\2\ the
Commodity Exchange Act (CEA) provides that a United States financial
institution \3\ for which there is a Federal regulatory agency \4\
shall not enter into, or offer to enter into, certain types of foreign
exchange transactions described in section 2(c)(2)(B)(i)(I) of the CEA
with a retail customer \5\ except pursuant to a rule or regulation of a
Federal regulatory agency allowing the transaction under such terms and
conditions as the Federal regulatory agency shall prescribe \6\ (a
``retail forex rule''). Section 2(c)(2)(B)(i)(I) includes ``an
agreement, contract, or transaction in foreign currency that * * * is a
contract of sale of a commodity for future delivery (or an option on
such a contract) or an option (other than an option executed or traded
on a national securities exchange registered pursuant to section 6(a)
of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).'' \7\ A
Federal regulatory agency's retail forex rule must treat all such
futures and options and all agreements, contracts, or transactions that
are functionally or economically similar to such futures and options
similarly.\8\
---------------------------------------------------------------------------
\1\ Public Law 111-203, 124 Stat. 1376.
\2\ Dodd-Frank Act Sec. 742(c)(2) (to be codified at 7 U.S.C.
2(c)(2)(E)). In this preamble, citations to the retail forex
statutory provisions will be the section where the provisions will
be codified in the Commodity Exchange Act.
\3\ The CEA defines ``financial institution'' to include an
agreement corporation, an Edge Act corporation, a depository
institution (as defined in section 3 of the Federal Deposit
Insurance Act), a financial holding company (as defined in section 2
of the Bank Holding Company Act of 1956), a trust company, or ``a
similarly regulated subsidiary or affiliate of an entity'' described
above. 7 U.S.C. 1a(21).
\4\ For purposes of the retail forex rules, ``Federal regulatory
agency'' includes ``an appropriate Federal banking agency.'' 7
U.S.C. 2(c)(2)(E)(i)(III). The Board is an ``appropriate Federal
banking agency'' under the CEA. 7 U.S.C. 1a(2).
\5\ A retail customer is a person who is not an ``eligible
contract participant'' under the CEA. See, 7 U.S.C. 1a(18).
\6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
\7\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\8\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
---------------------------------------------------------------------------
[[Page 46653]]
Retail forex rules must prescribe appropriate requirements with
respect to disclosure, recordkeeping, capital and margin, reporting,
business conduct, and documentation requirements, and may include such
other standards or requirements as the Federal regulatory agency
determines to be necessary.\9\ This Dodd-Frank Act amendment to the CEA
takes effect 360 days from the enactment of the Act.\10\ Therefore, as
of July 16, 2011, state member banks, uninsured state-licensed branches
of foreign banks, financial holding companies, bank holding companies,
agreement corporations, and Edge Act corporations (collectively,
banking institutions) may not engage in a retail forex transaction
except pursuant to a retail forex rule issued by the Board.
---------------------------------------------------------------------------
\9\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
\10\ See Dodd-Frank Act Sec. 754.
---------------------------------------------------------------------------
On September 10, 2010, the Commodity Futures Trading Commission
(CFTC) adopted a retail forex rule for persons subject to its
jurisdiction.\11\ After studying and considering the CFTC's retail
forex rule, and being mindful of the desirability of issuing comparable
rules, the Board is proposing to adopt a substantially similar rule for
banking institutions wishing to engage in retail forex transactions.
The Dodd-Frank Act does not require that retail forex rules be issued
jointly, or on a coordinated basis, with any other Federal regulatory
agency. The Federal banking agencies (the Board, Office of the
Comptroller of the Currency (OCC), and Federal Deposit Insurance
Corporation (FDIC)) have consulted with each other and generally agree
on their respective approaches to regulating retail forex transactions.
However, each banking agency is issuing separate rules.\12\
---------------------------------------------------------------------------
\11\ Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 55409 (Sept. 10, 2010) (Final
CFTC Retail Forex Rule). The CFTC proposed these rules prior to the
enactment of the Dodd-Frank Act. Regulation of Off-Exchange Retail
Foreign Exchange Transactions and Intermediaries, 75 FR 3281 (Jan.
20, 2010) (Proposed CFTC Retail Forex Rule).
\12\ The OCC's proposed rule was published on April 22, 2011 (76
FR 22633); its final rule was published on July 14, 2011 (76 FR
41375). The FDIC's proposed rule was published on May 17, 2011 (76
FR 28358); its final rule was published on July 12, 2011 (76 FR
40779).
---------------------------------------------------------------------------
The retail forex rule proposed today provides for banking
institutions to notify the Board before engaging in retail forex
transactions. It would also require that such banking institutions
generally be ``well-capitalized,'' and it would prohibit fraudulent
transactions and unlawful representations in connection with this
business. The rule would require customers be given a standardized risk
disclosure statement before engaging in retail forex transactions,
along with a calculation of the number of profitable retail forex
accounts maintained by the banking institution in the past year. The
rule would impose customer margin requirements, and require
confirmations and monthly statements be provided to the customer.
Recordkeeping requirements are specified for the banking institution,
along with certain trading and operational standards.
The Board's proposed retail forex rule is modeled on the CFTC's
retail forex rule to promote consistent treatment of retail forex
transactions regardless of whether a retail forex customer's dealer is
a banking institution or a CFTC registrant. The proposal includes
various changes that reflect differences between Board and CFTC
supervisory regimes and differences between banking organizations and
CFTC registrants. For example:
The Board's proposed retail forex rule leverages the
Board's existing comprehensive supervision of banking institutions. For
example, the Board's proposed retail forex rule does not include
registration requirements, because banking institutions are already
subject to comprehensive supervision by the Board. Thus, instead of a
registration requirement, banking institutions must provide 60 days
notice to the Board to conduct a retail forex business.
Because banking institutions are already subject to
various capital and other supervisory requirements,\13\ the Board's
proposed retail forex rule generally requires banking institutions
wishing to engage in retail forex transactions to be ``well
capitalized.''
---------------------------------------------------------------------------
\13\ See, e.g., 12 CFR parts 208, 211, and 225.
---------------------------------------------------------------------------
The proposed rule would require that the risk disclosure
statement highlight that a retail forex transaction is not insured by
the FDIC. The CFTC's regulations do not address FDIC insurance because
no financial intermediaries under the CFTC's jurisdiction are insured
depository institutions.
The Board has consulted with the OCC and FDIC in preparing its
proposed retail forex regulation. Although the Board's proposed rule is
substantially similar to the OCC's and FDIC's rules, there are some
differences between the Board's proposal and the rules adopted by the
other two bank regulatory agencies. For example:
The Board's proposed rule would not prohibit a bank from
exercising a right of set off, i.e., applying a retail forex customer's
losses or margin call against other assets of the customer held by bank
other than money or property given as margin. The OCC and FDIC have
adopted rules to prohibit retail forex dealers under their supervision
from exercising a right of set off and have further required that
retail forex customer margin be held in a separate account that holds
only retail forex margin. The Board is not proposing to require a
separate retail forex margin account, but is requesting comment on
whether these prohibitions would be appropriate.
The Board's proposed rule would bar the use of mandatory
pre-dispute arbitration agreements. The CFTC and the OCC have adopted
rules that permit pre-dispute arbitration agreements, while the FDIC
has adopted a prohibition similar to the one being proposed by the
Board. The Board is requesting comment on whether such agreements
should be permitted.
II. Section-by-Section Description of the Rule
While many sections contain questions for commenters, the Board
invites comments on all aspects of the proposed rule.
Section 240.1--Authority, Purpose, and Scope
This section authorizes a banking institution to conduct retail
forex transactions.
The Board notes that some state member banks may also engage in
retail forex transactions through their foreign branches. The CEA does
not clearly define whether foreign branches or subsidiaries of state
member banks and foreign subsidiaries of bank holding companies and
financial holding companies may be considered United States financial
institutions that can be included in the scope of this proposed rule.
The proposed retail forex rule would define the term ``banking
institution'' to include entities organized under the laws of the
United States or under the laws of any U.S. state, and any branch or
office of that entity, wherever located. After receiving comments on
their proposed rules, the OCC and FDIC have adopted retail forex rules
that exempt foreign branches of national and state nonmember banks when
they engage in retail forex transactions with non-U.S. customers. This
allows foreign branches dealing with non-U.S. customers to apply only
those disclosure, recordkeeping, capital, margin, reporting, business
conduct, documentation and other requirements of foreign law applicable
to the branch, while affording U.S. customers the protections of a
retail forex regulation
[[Page 46654]]
adopted pursuant to the Dodd-Frank Act. The Board is proposing to adopt
this exemption as well. The Board's proposed rule would also include
U.S. subsidiaries of banking institutions, except for those for which
there is another federal regulatory agency authorized to prescribe
rules or regulations under section 2(c)(2)(E) of the CEA.\14\ The term
``banking institution'' would not include entities organized under the
laws of a foreign country. Therefore, foreign branches of state member
banks, as well as foreign offices of U.S. bank holding companies and
financial holding companies would be subject to the proposed rule when
dealing with U.S. customers. Subsidiaries of a banking institution that
are organized under foreign law would not be covered regardless of the
customer's nationality.
---------------------------------------------------------------------------
\14\ 7 U.S.C. 2(c)(2)(E).
---------------------------------------------------------------------------
Question II.1.1: The Board requests comment on whether this rule
should apply to foreign branches of state member banks, or bank holding
companies and financial holding companies conducting retail forex
transactions abroad through entities organized under the laws of the
United States, and whether this rule should apply to transactions with
U.S. or foreign customers.
Section 240.2--Definitions
This section proposes definitions of terms specific to retail forex
transactions and to the regulatory requirements that apply to retail
forex transactions.
The definition of ``retail forex transaction'' generally includes
the following transactions in foreign currency between a banking
institution and a person that is not an eligible contract participant:
\15\ (i) A future or option on such a future; \16\ (ii) options not
traded on a registered national securities exchange; \17\ and (iii)
certain leveraged or margined transactions. This definition has several
important features.
---------------------------------------------------------------------------
\15\ The definition of ``eligible contract participant'' is
found in section 1a(18) of the CEA and is discussed below.
\16\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\17\ 7 U.S.C. 2(c)(2)(B)(i)(I).
---------------------------------------------------------------------------
First, certain transactions in foreign currency are not ``retail
forex transactions,'' and therefore are not subject to the prohibition
in section 742(c)(2) of the Dodd-Frank Act. For example, a ``spot''
forex transaction where one currency is bought for another and the two
currencies are exchanged within two days is not a ``future'' and would
not meet the definition of a ``retail forex transaction,'' since actual
delivery occurs as soon as practicable.\18\ Similarly, a ``retail forex
transaction'' does not include a forward contract with a commercial
entity that creates an enforceable obligation to make or take delivery,
provided the commercial counterparty has the ability to make delivery
and accept delivery in connection with its line of business.\19\ In
addition, ``retail forex transaction'' does not include an ``identified
banking product'' or a part of an ``identified banking product,'' as
defined in section 401(b) of the Legal Certainty for Bank Product Act
of 2000.\20\ Finally, the definition does not include transactions
executed on an exchange or designated contract market.
---------------------------------------------------------------------------
\18\ See generally, CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
foreign exchange futures contracts and spot contracts in foreign
exchange, and noting that foreign currency trades settled within two
days are ordinarily spot transactions rather than futures
contracts); see also Bank Brussels Lambert v. Intermetals Corp., 779
F. Supp. 741, 748 (S.D.N.Y. 1991).
\19\ See generally, CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
forward contracts in foreign exchange and foreign exchange futures
contracts); see also William L. Stein, The Exchange-Trading
Requirement of the Commodity Exchange Act, 41 Vand. L. Rev. 473, 491
(1988). In contrast to forward contracts, futures contracts
generally include several or all of the following characteristics:
(i) Standardized nonnegotiable terms (other than price and
quantity); (ii) parties are required to deposit initial margin to
secure their obligations under the contract; (iii) parties are
obligated and entitled to pay or receive variation margin in the
amount of gain or loss on the position periodically over the period
the contract is outstanding; (iv) purchasers and sellers are
permitted to close out their positions by selling or purchasing
offsetting contracts; and (v) settlement may be provided for by
either (a) Cash payment through a clearing entity that acts as the
counterparty to both sides of the contract without delivery of the
underlying commodity; or (b) physical delivery of the underlying
commodity. See, Edward F. Greene et al., U.S. Regulation of
International Securities and Derivatives Markets Sec. 14.08[2] (8th
ed. 2006).
\20\ 7 U.S.C. 27(b).
---------------------------------------------------------------------------
Second, the proposal would cover rolling spot forex transactions
(so-called Zelener \21\ contracts), including without limitation such
transactions traded on the Internet, through a mobile phone, or on an
electronic platform. A rolling spot forex transaction normally requires
delivery of currency within two days, like spot transactions. However,
in practice, these contracts are indefinitely renewed every other day
and no currency is actually delivered until one party affirmatively
closes out the position.\22\ Therefore, the contracts are economically
more like futures than spot contracts, although some courts have held
them to be spot contracts in form.\23\ For this reason, the proposal
regulates these rolling spot forex transactions as retail forex
transactions when conducted with a person that is not an eligible
contract participant.
---------------------------------------------------------------------------
\21\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3rd 309 (6th Cir. 2008).
\22\ For example, in Zelener, the retail forex dealer retained
the right, at the date of delivery of the currency to deliver the
currency, roll the transaction over, or offset all or a portion of
the transaction with another open position held by the customer. See
CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
\23\ See, e.g., CFTC v. Erskine, 512 F.3d 309, 326 (6th Cir.
2008); CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
---------------------------------------------------------------------------
This section defines several terms by reference to the CEA,
including ``eligible contract participant.'' Foreign currency
transactions with eligible contract participants are not considered
retail forex transactions and are therefore not subject to this rule.
The proposed definition covers a variety of financial entities,
governmental entities, certain businesses, and individuals that meet
certain investment thresholds.\24\
---------------------------------------------------------------------------
\24\ The term ``eligible contract participant'' is defined at 7
U.S.C. 1a(18), and for purposes most relevant to this proposed rule
generally includes:
(a) A corporation, partnership, proprietorship, organization,
trust, or other entity--
(1) That has total assets exceeding $10,000,000;
(2) The obligations of which under an agreement, contract, or
transaction are guaranteed or otherwise supported by a letter of
credit or keepwell, support, or other agreement by certain other
eligible contract participants; or
(3) That--
(i) Has a net worth exceeding $1,000,000; and
(ii) Enters into an agreement, contract, or transaction in
connection with the conduct of the entity's business or to manage
the risk associated with an asset or liability owned or incurred or
reasonably likely to be owned or incurred by the entity in the
conduct of the entity's business;
(b) Subject to certain exclusions,
(1) A governmental entity (including the United States, a State,
or a foreign government) or political subdivision of a governmental
entity;
(2) A multinational or supranational governmental entity; or
(3) An instrumentality, agency or department of an entity
described in (b)(1) or (2); and
(c) An individual who has amounts invested on a discretionary
basis, the aggregate of which is in excess of--
(1) $10,000,000; or
(2) $5,000,000 and who enters into the agreement, contract, or
transaction in order to manage the risk associated with an asset
owned or liability incurred, or reasonably likely to be owned or
incurred, by the individual.
---------------------------------------------------------------------------
Question II.2.2: Does the Commodity Exchange Act's definition of
``eligible contract participant'' appropriately capture who is not a
retail customer for purposes of this proposed rule? Should the Board
expand the definition of retail forex customer to include persons who
are eligible contract participants? If so, which eligible contract
participants should be considered retail forex customers?
Section 240.3--Prohibited Transactions
This section prohibits a banking institution and its related
persons from
[[Page 46655]]
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 II.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 in writing.
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\
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\25\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
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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).
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\26\ Proposed CFTC Retail Forex Rule, 75 FR at 3287 n.54.
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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).
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.
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\27\ 17 CFR 5.5(e)(1).
\28\ Proposed CFTC Retail Forex Rule, 75 FR at 3289.
\29\ Final CFTC Retail Forex Rule, 75 FR at 55412.
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Question II.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.
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\30\ 17 CFR 5.5(b).
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Question II.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 II.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 II.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?
[[Page 46656]]
Section 240.7--Recordkeeping
This section specifies which documents and records a banking
institution engaged in retail forex transactions must retain for
examination by the Board. Banking institutions are required to maintain
retail forex account records, financial ledgers, transactions records,
daily records, order tickets, and records showing allocations and
noncash margin, as well as records relating to possible violations of
law. This section also prescribes document maintenance standards,
including the manner and length of maintenance. Finally, this section
requires banking institutions to record and maintain transaction
records and make them available to customers.
Section 240.8--Capital Requirements
This proposal does not amend the Board's regulations regarding
capital. This section generally requires that a banking institution
that offers or enters into retail forex transactions must be ``well
capitalized'' as defined in the Board's Regulations H or Y \31\ or the
banking institution must obtain an exemption from the Board. An
uninsured state-licensed U.S. branch or agency of a foreign bank must
apply the capital rules that are made applicable to it pursuant to
section 225.2(r)(3) of the Board's Regulation Y.\32\ An Edge
corporation or agreement corporation must comply with the capital
adequacy guidelines that are made applicable to an Edge corporation
engaged in banking pursuant to section 211.12(c)(2) of the Board's
Regulation K.\33\
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\31\ 12 CFR 208.43 and 12 CFR 225.2(r).
\32\ 12 CFR 225.2(r)(3).
\33\ 12 CFR 211.12(c)(2).
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In addition, a banking institution must continue to hold capital
against retail forex transactions as provided in the Board's
regulations.
Section 240.9--Margin Requirements
Paragraph (a) requires a banking institution that engages in retail
forex transactions, in advance of any such transaction, to collect from
the retail forex customer margin equal to at least two percent of the
notional value of the retail forex transaction if the transaction is in
a major currency pair, and at least five percent of the notional value
of the retail forex transaction otherwise. These margin requirements
are identical to the requirements imposed by the CFTC's retail forex
rule. A major currency pair is a currency pair with two major
currencies. Under the proposal, the major currencies would be the U.S.
Dollar (USD), Canadian Dollar (CAD), Euro (EUR), United Kingdom Pound
(GBP), Japanese Yen (JPY), Swiss franc (CHF), New Zealand Dollar (NZD),
Australian Dollar (AUD), Swedish Kronor (SEK), Danish Kroner (DKK), and
Norwegian Krone (NOK),\34\ or any other currency as determined by the
Board.
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\34\ See National Futures Association, Forex Transaction: A
Regulatory Guide 17 (Feb. 2011); New York Federal Reserve Bank,
Survey of North American Foreign Exchange Volume tbl. 3e (Jan.
2011); Bank for International Settlements, Report on Global Foreign
Exchange Market Activity in 2010 at 15 tbl. B.6 (Dec. 2010).
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Question II.9.1: The Board requests comment on whether this list of
major currencies is appropriate and how the Board should identify a
major currency or major currency pair.
Prior to the CFTC's rule, non-bank dealers routinely permitted
customers to trade with 1 percent margin (leverage of 100:1) and
sometimes with as little as 0.25 percent margin (leverage of 400:1).
When the CFTC proposed its retail forex rule in January 2010, it
proposed a margin requirement of 10 percent (leverage of 10:1). In
response to comments, the CFTC reduced the required margin in the final
rule to 2 percent (leverage of 50:1) for trades involving major
currencies and 5 percent (leverage of 20:1) for trades involving non-
major currencies.
Question II.9.2: The Board's proposed rule would adopt the margin
requirements adopted in final by the CFTC. The Board invites comments
on whether the requirements should be adjusted and if so, how.
Paragraph (b) specifies the acceptable forms of margin that
customers may post. Under the proposal, banking institutions must
establish policies and procedures providing for haircuts for noncash
margin collected from customers and must review these haircuts
annually. It may be prudent for banking institutions to review and
modify the size of the haircuts more frequently.
Question II.9.3: Should the Board specify haircuts for noncash
margin posted for retail forex transactions? If so, how should those
haircuts be determined?
Paragraph (c) requires a banking institution to collect additional
margin from the customer or to liquidate the customer's position if the
amount of margin held by the banking institution fails to meet the
requirements of paragraph (a). The proposed rule requires the banking
institution to mark the customer's open retail forex positions and the
value of the customer's margin to the market daily to ensure that a
retail forex customer does not accumulate substantial losses not
covered by margin.
Question II.9.4: How frequently do banking institutions currently
mark retail forex customers' open retail forex positions and the value
of the customers' margin to the market? Should the rule require marking
customer positions and margin to the market daily, or would more
frequent marks be more appropriate in light of the speed at which
currency markets move? What is the most frequent mark to market
requirement that is practical in light of the characteristics of the
forex markets and the assets that retail forex customers may pledge as
margin for retail forex transaction?
The retail forex regulations adopted by the OCC and FDIC both
prohibit set-off, i.e., the bank forex dealer would be prohibited from
applying a retail forex customer's losses against any asset or
liability of the retail forex customer other than money or property
given as margin. Banks generally have broad rights to set off mutual
debts to cover customer obligations. It is not clear that limiting a
bank's right of set-off in these particular transactions would provide
appropriate incentives for retail forex customers.
Question II.9.5: Would limiting the right of set-off encourage a
retail customer to take on more risk in forex transactions, because the
customer's other assets would be protected against losses from the
forex transactions? Does allowing a banking institution to exercise its
right of set-off with regard to retail forex transactions strike the
appropriate balance of incentives and protections for retail customers?
In order to effectuate the prohibition against a bank retail forex
dealer exercising a right of set-off, the OCC and FDIC require that
each customer's retail forex transaction margin be held in a separate
account that holds only that customer's retail forex transaction
margin. The Board is not proposing to require the use of a separate
margin account, as it is not proposing to prohibit a banking
institution from exercising a right of set-off.
Section 240.10--Required Reporting to Customers
This section requires a banking institution engaging in retail
forex transactions to provide each retail forex customer confirmations
and monthly statements, and describes the information to be included.
Question II.10.1: The Board requests comment on whether this
section provides for statements that would be meaningful and useful to
retail customers, or whether, in light of the
[[Page 46657]]
distinctive characteristics of retail forex transactions, other
information would be more appropriate.
Section 240.11--Unlawful Representations
This section prohibits a banking institution and its related
persons from representing that the Federal government, the Board, or
any other Federal agency has sponsored, recommended, or approved retail
forex transactions or products in any way. This section also prohibits
a banking institution from implying or representing that it will
guarantee against or limit retail forex customer losses or not collect
margin as required by section 240.9. This section does not prohibit a
banking institution from sharing in a loss resulting from error or
mishandling of an order, and guaranties entered into prior to the
effectiveness of the prohibition would only be affected if an attempt
is made to extend, modify, or renew them. This section also does not
prohibit a banking institution from hedging or otherwise mitigating its
own exposure to retail forex transactions or any other foreign exchange
risk.
Section 240.12--Authorization To Trade
This section requires a banking institution to have specific
authorization from a retail forex customer before effecting a retail
forex transaction for that customer.
Section 240.13--Trading and Operational Standards
This section largely follows the trading standards of the CFTC's
retail forex rule, which were developed to prevent some of the
deceptive or unfair practices identified by the CFTC and the National
Futures Association.
Under paragraph (a), a banking institution engaging in retail forex
transactions is required to establish and enforce internal rules,
procedures and controls to prevent front running, in which transactions
in accounts of the banking institution or its related persons are
executed before a similar customer order, and to establish settlement
prices fairly and objectively.
Paragraph (b) prohibits a banking institution engaging in retail
forex transactions from disclosing that it holds another person's order
unless disclosure is necessary for execution or is made at the Board's
request.
Paragraph (c) ensures that related persons of another retail forex
counterparty do not open accounts with a banking institution without
the knowledge and authorization of the account surveillance personnel
of the other retail forex counterparty to which they are affiliated.
Similarly, paragraph (d) ensures that related persons of a banking
institution do not open accounts with other retail forex counterparties
without the knowledge and authorization of the account surveillance
personnel of the banking institution to which they are affiliated.
Paragraph (e) prohibits a banking institution engaging in retail
forex transactions from (1) Entering a retail forex transaction to be
executed at a price that is not at or near prices at which other retail
forex customers have executed materially similar transactions with the
banking institution during the same time period, (2) changing prices
after confirmation, (3) providing a retail forex customer with a new
bid price that is higher (or lower) than previously provided without
providing a new ask price that is similarly higher (or lower) as well,
and (4) establishing a new position for a retail forex customer (except
to offset an existing position) if the banking institution holds one or
more outstanding orders of other retail forex customers for the same
currency pair at a comparable price.
Paragraphs (e)(3) and (e)(4) do not prevent a banking institution
from changing the bid or ask prices of a retail forex transaction to
respond to market events. The Board understands that market practice
among CFTC-registrants is not to offer requotes, but to simply reject
orders and advise customers they may submit a new order (which the
dealer may or may not accept). Similarly, a banking institution may
reject an order and advise customers they may submit a new order.
Question II.13.1: Does this requirement appropriately protect
retail forex customers? If not, how should it be modified? Would it be
simpler for the rule to simply prohibit requoting, because banking
institutions may instead reject an order and accept new orders from
their retail forex customers?
Paragraph (e)(5) requires a banking institution to use consistent
market prices for customers executing retail forex transactions during
the same time. It also prevents a banking institution from offering
preferred execution to some of its retail forex customers but not
others.
Section 240.14--Supervision
This section imposes on a banking institution and its agents,
officers, and employees a duty to supervise subordinates with
responsibility for retail forex transactions to ensure compliance with
the Board's retail forex rule.
Section 240.15--Notice of Transfers
This section describes the requirements for transferring a retail
forex account. Generally, a banking institution must provide retail
forex customers 30 days' prior notice before transferring or assigning
their account. Affected customers may then instruct the banking
institution to transfer the account to an institution of their choosing
or liquidate the account. There are three exceptions to the above
notice requirement: A transfer in connection with the receivership or
conservatorship under the Federal Deposit Insurance Act; a transfer
pursuant to a retail forex customer's specific request; and a transfer
otherwise allowed by applicable law. A banking institution that is the
transferee of retail forex accounts must generally provide the
transferred customers with the risk disclosure statement of section
240.6 and obtain each affected customer's written acknowledgement
within 60 days.
Section 240.16--Customer Dispute Resolution
This section prohibits 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 to any settlement procedure.
This provision differs from the applicable CFTC dispute settlement
procedures, which permit mandatory pre-dispute settlement agreements
under certain conditions.\35\ The substance of the CFTC dispute
settlement regulation, however, dates back to August 10, 2001. Since
that time, Congress enacted seven provisions in the Dodd-Frank Act that
prohibit the use of pre-dispute arbitration provisions.\36\ Consonant
with this
[[Page 46658]]
demonstrated Congressional concern with such agreements, the Board is
proposing, pursuant to its authority to adopt ``such other standards or
requirements as [it] shall determine to be necessary,'' to prohibit a
banking institution from entering into a pre-dispute settlement
agreement with a retail forex customer. The OCC's final retail forex
regulation follows the CFTC's approach, while the FDIC's final
regulation prohibits pre-dispute settlement agreements similar to the
approach being proposed by the Board.
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\35\ 17 CFT 166.5. The CFTC's regulation permits predispute
dispute settlement agreements with a customer with certain
restrictions such as that signing the agreement must not be made a
condition for the customer to utilize the services offered by the
CFTC registrant.
\36\ See Dodd-Frank Act section 748 (amending CEA section
23(n)(2) to provide: ``No predispute arbitration agreement shall be
valid or enforceable, if the agreement requires arbitration of a
dispute arising under this section.''); section 921(a) (adding
similar provisions to section 15o to the Securities Exchange Act of
1934 and section 205(f) to the Investment Advisers Act of 1940);
section 922(c) (adding a similar provision to 18 U.S.C. 1514A, which
provides employee protections, including a right to a jury trial to
enforce such protections, to employees of publicly registered
companies and nationally recognized statistical rating
organizations); section 1028 (requiring the Consumer Financial
Protection Bureau (CFPB) to conduct a study and report to Congress
on the use of predispute arbitration agreements ``between covered
persons and consumers in connection with the offering or providing
of consumer financial products or services'' and giving the CFPB
authority to adopt regulations prohibiting such agreements; section
1057(d) (prohibiting predispute arbitration agreements that affect
the employee protection rights of a person that is employed by an
entity subject to CFPB regulation; and section 1414 (amending
section 129C of the Truth in Lending Act to prohibit predispute
arbitration agreements with respect to residential mortgage loans
and home equity loans).
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Question III.16.1: Should the Board permit pre-dispute arbitration
provisions, as long as the banking institution does not require a
customer to agree to pre-dispute arbitration as a condition of opening
a retail forex account?
Interagency Statement on Retail Sales of Nondeposit Investment Products
For banking institutions, the requirements in this proposed rule
would overlap with applicable expectations contained in the Interagency
Statement on Retail Sales of Nondeposit Investment Products (NDIP
Policy Statement).\37\ The NDIP Policy Statement sets out guidance
regarding the Board's expectations when a banking institution engages
in the sale of nondeposit investment products to retail customers. The
NDIP Policy Statement addresses issues such as disclosure, suitability,
sales practices, compensation, and compliance. The Board views retail
forex transactions as nondeposit investment products, but the terms
``retail forex customer'' in this proposed rule and ``retail customer''
in the NDIP Policy Statement are not necessarily co-extensive. After
the effective date of the final version of this proposed rule, the
Board will expect banking institutions engaging in or offering retail
forex transactions to also comply with the NDIP Policy Statement to the
extent such compliance does not conflict with the requirements of the
Board's final retail forex rule.
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\37\ See SR Letter 94-11 (Feb. 17, 1994); see also SR Letter 95-
46 (Sept. 14, 1995).
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Question II.17: Does the proposed regulation create issues
concerning application of the NDIP Policy Statement to retail forex
transactions that the Board should address?
III. Request for Comments
The Board requests comment on all aspects of the proposed rule,
including the questions posed in the preamble. In addition, the Board
requests comments on the following questions:
Question III.1: Does the proposed rule appropriately
protect retail forex customers of banking institutions?
Question III.2: Are the proposed rule's variations from
the CFTC retail forex rule appropriately tailored to the differences
between banking institutions and CFTC registrants and the regulatory
regimes applicable to each?
To assist in the review of comments, the Board requests that commenters
identify their comments by question number.
IV. Regulatory Analysis
A. Regulatory Flexibility Act
In accordance with section 3(a) of the Regulatory Flexibility Act,
5 U.S.C. 601 et seq. (RFA), the Board is publishing an initial
regulatory flexibility analysis for the proposed rule. The RFA
generally requires an agency to provide an initial regulatory
flexibility analysis with the proposed rule or to certify that the
proposed rule will not have a significant economic impact on a
substantial number of small entities. The Board welcomes comment on all
aspects of the initial regulatory flexibility analysis. A final
regulatory flexibility analysis will be conducted after consideration
of the comments received during the comment period.
1. Statement of objectives of the proposal. Section 2(c)(2)(E) of
the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)) will prohibit a U.S.
financial institution from conducting retail foreign exchange
transactions unless done pursuant a rule or regulation of a Federal
regulatory agency allowing such transactions. The Board is proposing a
new regulation to allow banking institutions under its supervision to
engage in retail foreign exchange transactions.
2. Small entities affected by the proposal. Under regulations
issued by the Small Business Administration, a banking institution is
considered a ``small entity'' if it has assets of $175 million or
less.\38\ As of December 21, 2010, there were approximately 398 small
state member banks, 20 small Edge Act and agreement corporations, 62
small uninsured branches of foreign banks, 3,988 small bank holding
companies and 267 small financial holding companies. The Board is not
aware of any small institutions engaged in retail forex transactions.
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\38\ U.S. Small Business Administration, Table of Small Business
Size Matched to North American Industry Classification System Codes,
13 CFR 121.201.
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3. Compliance requirements. A description of the projected
recordkeeping and other compliance requirements can be found below in
section B, ``Paperwork Reduction Act,'' under the following headings:
Reporting Requirements, Disclosure Requirements, and Policies and
Procedures; Recordkeeping. The Board believes that there are no other
compliance requirements for this proposed rule.
4. Other Federal rules. The Board believes that no Federal rules
duplicate, overlap, or conflict with the proposed rule. As noted in the
supplementary information above, retail forex transactions would also
be subject to the Interagency Statement on Retail Sales of Nondeposit
Investment Products, but this rule would govern to the extent of a
conflict.
5. Significant alternatives to the proposed rule. As discussed
above, the Board has requested comment on required disclosures, margin,
and reporting requirements for all banking institutions engaging in
retail foreign exchange transactions and has solicited comment on any
approaches that would reduce the burden on all counterparties,
including small entities. The Board welcomes comment on any significant
alternatives that would minimize the impact of the proposal on small
entities.
B. Paperwork Reduction Act
Request for Comment on Proposed Information Collection
In accordance with section 3512 of the Paperwork Reduction Act
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or
sponsor, and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The information collection
requirements are found in Sec. Sec. 240.4-240.7, 240.9-240.10, 240.13,
240.15-24016.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the Board's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
[[Page 46659]]
(d) Ways to minimize the burden of information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or startup costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on the collection of information should be sent to Cynthia
Ayouch, Acting Federal Reserve Clearance Officer, Division of Research
and Statistics, Mail Stop 95-A, Board of Governors of the Federal
Reserve System, Washington, DC 20551, with copies of such comments sent
to the Office of Management and Budget, Paperwork Reduction Project
(7100-New), Washington, DC 20503. You may also submit comments
electronically, identified by Docket number, by any of the following
methods:
Agency Web Site: https://www.federalreserve.gov. Follow
the instructions for submitting comments on the https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message. All comments will become a
matter of public record.
Proposed Information Collection
Title of Information Collection: Reporting, recordkeeping, and
disclosure requirements associated with Regulation NN.
Frequency of Response: On occasion.
Affected Public: Businesses or other for-profit.
Respondents: Agreement corporations, Edge Act corporations, state
member banks, uninsured branches of foreign banks, financial holding
companies and bank holding companies (collectively, ``banking
institutions'').
Reporting Requirements
The reporting requirements in Sec. 240.4 would require that, prior
to initiating a retail forex business, a banking institution provide
the Board with prior notice. The notice must certify that the banking
institution has written policies and procedures, and risk measurement
and management systems in controls in place to ensure that retail forex
transactions are conducted in a safe and sound manner. The banking
institution must also provide other information required by the Board,
such as documentation of customer due diligence, new product approvals,
and haircuts applied to noncash margins. A banking institution already
engaging in a retail forex business may continue to do so, provided it
requests an extension of time.
Disclosure Requirements
Section 240.5, regarding the application and closing out of
offsetting long and short positions, would require a banking
institution to promptly provide the customer with a statement
reflecting the financial result of the transactions and the name of the
introducing broker to the account. The customer would provide specific
written instructions on how the offsetting transaction should be
applied.
Section 240.6 would require that a banking institution furnish a
retail forex customer with a written disclosure before opening an
account that will engage in retail forex transactions for a retail
forex customer and receive an acknowledgment from the customer that it
was received and understood. It also requires the disclosure by a
banking institution of its fees and other charges and its profitable
accounts ratio.
Section 240.10 would require a banking institution to issue monthly
statements to each retail forex customer and to send confirmation
statements following transactions.
Section 240.13(b) would allow disclosure by a banking institution
that an order of another person is being held by them only when
necessary to the effective execution of the order or when the
disclosure is requested by the Board. Section 240.13(c) would prohibit
a banking institution engaging in retail forex transactions from
knowingly handling the account of any related person of another retail
forex counterparty unless it receives proper written authorization,
promptly prepares a written record of the order, and transmits to the
counterparty copies of all statements and written records. Section
240.13(d) would prohibit a related person of a banking institution
engaging in forex transactions from having an account with another
retail forex counterparty unless it receives proper written
authorization and copies of all statements and written records for such
accounts are transmitted to the counterparty.
Section 240.15 would require a banking institution to provide a
retail forex customer with 30 days' prior notice of any assignment of
any position or transfer of any account of the retail forex customer.
It would also require a banking institution to which retail forex
accounts or positions are assigned or transferred to provide the
affected customers with risk disclosure statements and forms of
acknowledgment and receive the signed acknowledgments within 60 days.
The customer dispute resolution provisions in Sec. 240.16 would
require certain endorsements, acknowledgments, and signature language.
It also would require that within 10 days after receipt of notice from
the retail forex customer that they intend to submit a claim to
arbitration, the banking institution provide them with a list of
persons qualified in the dispute resolution and that the customer must
notify the banking institution of the person selected within 45 days of
receipt of such list.
Policies and Procedures; Recordkeeping
Section 240.7 would require that a banking institution engaging in
retail forex transactions keep full, complete, and systematic records
and establish and implement internal rules, procedures, and controls.
Section 240.7 also would require that a banking institution keep
account, financial ledger, transaction and daily records, as well as
memorandum orders, post-execution allocation of bunched orders, records
regarding its ratio of profitable accounts, possible violations of law,
records for noncash margin, and monthly statements and confirmations.
Section 240.9 would require policies and procedures for haircuts for
noncash margin collected under the rule's margin requirements, and
annual evaluations and modifications of the haircuts.
Estimated PRA Burden
Estimated Number of Respondents: 5 banking institutions; 2 service
providers.
Total Reporting Burden: 80 hours.
Total Disclosure Burden: 5,510 hours.
Total Recordkeeping Burden: 1,280 hours.
Total Annual Burden: 6,870 hours.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the Board to use
plain language in all proposed and final rules published after January
1, 2000. The Board invites comment on how to make this proposed rule
easier to understand. For example, the Board requests comment on such
questions as:
Have we organized the material to suit your needs? If not,
how could the material be better organized?
Have we clearly stated the requirements of the rule? If
not, how could the rule be more clearly stated?
Does the rule contain technical language or jargon that is
not clear? If
[[Page 46660]]
so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
What else could we do to make the regulation easier to
understand?
List of Subjects in 12 CFR Part 240
Banks, Banking, Consumer protection, Foreign currencies, Foreign
exchange, Holding companies, Investments, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, the Board proposes to amend
12 CFR Chapter II as follows:
1. Add new part 240 to read as follows:
PART 240--RETAIL FOREIGN EXCHANGE TRANSACTIONS (REGULATION NN)
Sec.
240.1 Authority, purpose, and scope.
240.2 Definitions.
240.3 Prohibited transactions.
240.4 Notification.
240.5 Application and closing out of offsetting long and short
positions.
240.6 Disclosure.
240.7 Recordkeeping.
240.8 Capital requirements.
240.9 Margin requirements.
240.10 Required reporting to customers.
240.11 Unlawful representations.
240.12 Authorization to trade.
240.13 Trading and operational standards.
240.14 Supervision.
240.15 Notice of transfers.
240.16 Customer dispute resolution.
Authority: 7 U.S.C. 2(c)(2)(E), 12 U.S.C. 248, 321-338,
1813(q), 1818, 1844(b), 3106a, 3108.
Sec. 240.1 Authority, purpose and scope.
(a) Authority. This part is issued by the Board of Governors of the
Federal Reserve System (the Board) under the authority of section
2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)),
sections 9 and 11 of the Federal Reserve Act (12 U.S.C. 321-338 and
248), section 5(b) of the Bank Holding Company Act of 1956 (12 U.S.C.
1844(b)), sections 9 and 13a of the International Banking Act of 1978
(12 U.S.C. 3106a and 3108), and sections 3 and 8 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(q) and 1818).
(b) Purpose. This part establishes rules applicable to retail
foreign exchange transactions engaged in by banking institutions and
applies on or after the effective date.
(c) Scope. Except as provided in paragraph (d) of this section,
this part applies to banking institutions, as defined in section
240.2(b) of this part, and any branches or offices of those
institutions wherever located. This part applies to subsidiaries of
banking institutions organized under the laws of the United States or
any U.S. state that are not subject to the jurisdiction of another
federal regulatory agency authorized to prescribe rules or regulations
under section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C.
(2)(c)(2)(E)).
(d) International applicability. Sections 240.3 and 240.5 through
240.16 do not apply to retail foreign exchange transactions between a
foreign branch or office of a banking institution and a non-U.S.
customer. With respect to those transactions, the foreign branch or
office remains subject to any disclosure, recordkeeping, capital,
margin, reporting, business conduct, doc
