[Federal Register Volume 76, Number 95 (Tuesday, May 17, 2011)]
[Proposed Rules]
[Pages 28358-28373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-11853]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 349
RIN 3064-AD81
Retail Foreign Exchange Transactions
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is proposing regulations that would impose
requirements for foreign currency futures, options on futures, and
options that an insured depository institution supervised by the
Federal Deposit Insurance Corporation engages in with retail customers.
Pursuant to section 742(c) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, such transactions will be prohibited as of
July 16, 2011, in the absence of the proposed requirements. The
proposed regulations would also impose requirements on other foreign
currency transactions that are functionally or economically similar to
futures, options on futures, or options. These similar transactions
include so-called ``rolling spot'' transactions that an individual
enters into with a foreign currency dealer, usually through the
Internet or other electronic platform, to transact in foreign currency.
The regulations would not apply to traditional foreign currency
forwards or spot transactions that a depository institution engages in
with business customers to hedge foreign exchange risk.
DATES: Comments must be received by June 16, 2011.
ADDRESSES: You may submit comments by any of the following methods:
Agency Web Site: http:www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on
the Agency Web Site.
E-mail: [email protected]. Include ``Retail Foreign
Exchange Transactions'' in the subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EDT).
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Public Inspection: All comments received will be posted
without change to http://www.fdic.gov/regulations/laws/federal
including any personal information provided. Paper copies of public
comments may be ordered from the Public Information Center by telephone
at (877) 275-3342 or (703) 562-2200.
FOR FURTHER INFORMATION CONTACT: Nancy W. Hunt, Associate Director,
(202) 898-6643, Bobby R. Bean, Chief,
[[Page 28359]]
Policy Section, (202) 898-6705, John Feid, Senior Capital Markets
Specialist, (202) 898-8649, Division of Risk Management Supervision,
David N. Wall, Assistant General Counsel, (703) 562-2440, Thomas Hearn,
Counsel, (202) 898-6967, Diane Nguyen, Counsel, (703) 562-6102, Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
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 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, a transaction 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\
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\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 to the section where the provisions
will be codified in the CEA.
\3\ The CEA defines ``financial institution'' as including ``a
depository institution (as defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813)).'' 7 U.S.C. 1a(21)(E).
\4\ Section 2(c)(2)(E)(i)(III) of the CEA, as amended by Sec.
742(c), defines a ``Federal regulatory agency'' to mean the CFTC,
the Securities and Exchange Commission, an appropriate Federal
banking agency, the National Credit Union Association, and the Farm
Credit Administration. Section 1a(2) of the CEA defines an
``appropriate Federal banking agency'' by incorporation of Sec. 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)).
When the proposed rule is published in the Federal Register, the
FDIC is the appropriate Federal banking agency for any State
nonmember insured bank and any foreign bank having an insured
branch. 12 U.S.C. 1813(q)(3). When the powers of the Office of
Thrift Supervision are transferred to the Office of Comptroller of
the Currency, the FDIC and the Board of Governors of the Federal
Reserve System, the FDIC will be the appropriate Federal banking
agency for any State nonmember insured bank, any foreign bank having
an insured branch and any State savings association. See Dodd-Frank
Act Sec. 312(c) (amending 12 U.S.C. 1813(q) to redefine
``appropriate Federal banking agency'').
\5\ A retail customer is a person who is not an ``eligible
contract participant'' under the CEA.
\6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
\7\ 7 U.S.C. 2(c)(2)B(i)(II).
\8\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
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This Dodd-Frank Act amendment to the CEA takes effect 360 days from
the enactment of the Act.\9\ After that date an institution for which
the FDIC is the ``appropriate Federal banking agency'' pursuant to
Sec. 3(q) of the Federal Deposit Insurance Act, 12 U.S.C. 1813(q)
(FDIC-supervised IDI) may not engage in off-exchange foreign currency
futures and options with a customer who does not qualify as an eligible
contract participant (ECP) under the CEA (ECP) except pursuant to a
retail forex rule issued by the FDIC.\10\ The restrictions in the
Proposed Rule do not apply to (1) transactions with a customer who
qualifies as an ECP, or (2) transactions that are spot contracts or
forward contracts irrespective of whether the customer is or is not an
ECP. The retail forex rule does, however, apply to ``rolling spot''
transactions in foreign currency. The discussion of the definition of
``retail forex transaction'' below elaborates on the distinctions
between rolling spot transactions and spot and forward contracts.
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\9\ See Dodd-Frank Act 754.
\10\ Under 12 U.S.C. 1813(q), the FDIC is the ``appropriate
Federal banking agency'' for a foreign bank having an insured
branch.
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Any retail forex rule 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.\11\
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\11\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
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On September 10, 2010, the Commodity Futures Trading Commission
(CFTC) adopted a retail forex rule for persons subject to its
jurisdiction.\12\ After studying and considering the CFTC's retail
forex rule, and being mindful of the desirability of issuing comparable
rules, the FDIC is proposing to adopt a substantially similar rule for
FDIC-supervised IDIs 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. While each Federal banking agency is issuing a separate
proposed rule, the Federal banking agencies are coordinating their
efforts. The FDIC's notice of proposed rulemaking is substantially
similar to the OCC's notice of proposed rulemaking regarding retail
foreign currency transactions published on April 22, 2011.\13\
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\12\ 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).
\13\ See Retail Foreign Exchange Transactions, 76 FR 22633 (Apr.
22, 2011).
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The requirements in this proposed rule may overlap with applicable
expectations contained in the Interagency Statement on Retail Sales of
Nondeposit Investment Products (NDIP Policy Statement).\14\ The NDIP
Policy Statement describes the FDIC's expectations for an FDIC-
supervised IDI that 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 FDIC preliminarily 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 FDIC will expect
FDIC-supervised IDIs 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 FDIC's final
retail forex rule.
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\14\ FDIC FIL-61-95 (Sept. 13, 1995).
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Question I.1: Does the proposed rule create issues concerning
application of the NDIP Policy Statement to retail forex transactions
that the FDIC should address in this rule or through updates to the
NDIP Policy Statement? Does the Agencies' proposed method for
developing retail forex rules create material confusion for the
marketplace?
II. Section-by-Section Description of the Rule
Structure and Approach
The FDIC's proposed retail forex rule is designed to promote
consistent treatment of retail forex transactions regardless of whether
a retail forex customer's dealer is an FDIC-supervised IDI or a CFTC
registrant. While the FDIC's proposed rule is modeled on the CFTC's
retail forex rule, the FDIC has adapted the CFTC's rule to reflect
differences between FDIC and CFTC supervisory regimes and differences
[[Page 28360]]
between FDIC-supervised IDIs and CFTC registrants. For example:
The FDIC's proposed retail forex rule does not include
registration requirements, because FDIC-supervised IDIs are already
subject to comprehensive supervision by the FDIC. Instead of a
registration requirement, the proposed rule would require an FDIC-
supervised IDI to obtain the FDIC's consent prior to conducting a
retail forex business.
Because FDIC-supervised IDIs are already subject to
various capital and other supervisory requirements,\15\ proposed Sec.
349.8 would require institutions wishing to engage in retail forex
transactions to be ``well capitalized.''
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\15\ See 12 CFR part 325.
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Proposed Sec. 349.6 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 financial intermediaries under the CFTC's
jurisdiction are not insured depository institutions.
Proposed Sec. 349.9 would prohibit cross-
collateralization or set-off against a retail customer's other property
or accounts held at the financial institution. This is consistent with
the heightened customer protection provided to banking customers.
Proposed Rule 349.1--Authority, Purpose, and Scope
This section would provide that an FDIC-supervised IDI that engages
in covered retail forex transactions with retail customers would be
subject to requirements contained in part 349.
The FDIC notes that some FDIC-supervised IDIs may wish to engage in
retail forex transactions through a foreign branch. The CEA does not
clearly define whether foreign branches of FDIC-supervised IDIs may be
considered United States financial institutions that can be included in
the rule.\16\
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\16\ See 7 U.S.C. 2(c)(2)(B)(i)(II)(aa).
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Question II.1.1: Should foreign branches of FDIC-supervised IDIs
that wish to conduct retail forex transactions abroad, whether with
U.S. or foreign customers, be permitted to engage in the activity?
Proposed Rule 349.2--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 an FDIC-
supervised IDI and a person that is not an ECP:\17\ (a) A future or
option on such a future;\18\ (b) options not traded on a registered
national securities exchange;\19\ and (c) certain leveraged or margined
transactions.\20\ This definition has several important features.
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\17\ The definition of ``eligible contract participant'' is
found in CEA section 1a(18) and is discussed below.
\18\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\19\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\20\ 7 U.S.C. 2(c)(2)(C).
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First, certain transactions in foreign currency are not ``retail
forex transactions.'' For example, a ``spot'' forex transaction where
one currency is bought for another and the two currencies are exchanged
within two days would not meet the definition of a ``retail forex
transaction,'' since actual delivery occurs as soon as practicable.\21\
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.\22\ In addition, the definition
does not include transactions executed on an exchange or designated
contract market; those transactions are subject to CFTC regulation.
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\21\ 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).
\22\ 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).
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Second, rolling spot forex transactions (so-called Zelener \23\
contracts), including without limitation such transactions traded on
the Internet, through a mobile phone, or on an electronic platform,
could fall within the definition's third category. This notice of
proposed rulemaking proposes that rolling spot transactions with retail
customers (non-ECPs) should be regulated as retail forex
transactions.\24\ A rolling spot forex transaction nominally requires
delivery of currency within two days, like spot transactions. However,
in practice, the contracts are indefinitely renewed every other day and
no currency is actually delivered until one party affirmatively closes
out the position.\25\ Therefore, the the FDIC believes that these
contracts are better viewed as economically more like futures than spot
contracts, although some courts have held them to be spot contracts in
form.\26\
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\23\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008).
\24\ 7 U.S.C. 2(c)(2)(E)(iii) (requiring that retail forex rules
treat all functionally or economically similar transactions
similarly); see 17 CFR 5.1(m) (defining ``retail forex transaction''
for CFTC-registered retail forex dealers).
\25\ 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, 868 (7th Cir. 2004).
\26\ 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).
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This section would also define several terms by reference to the
CEA, the most important of which is ``eligible contract participant.''
Foreign currency transactions with ECPs are not considered retail forex
transactions and are therefore not subject to this rule. In addition to
a variety of financial entities, certain governmental entities,
businesses, and individuals may be ECPs.\27\
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\27\ 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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[[Page 28361]]
Question II.2.1: What types of customers engage in retail forex
transactions, including rolling spot transactions? Should regulations
governing retail forex transactions cover additional categories of
retail customers, that is, those customers that are ECPs? If so, which
eligible contract participants should be considered retail forex
customers?
Proposed Rule 349.3--Prohibited Transactions
This section would prohibit an FDIC-supervised IDI and its
institution-affiliated parties from engaging in fraudulent conduct in
connection with retail forex transactions. This section would also
prohibit an FDIC-supervised IDI from acting as a counterparty to a
retail forex transaction if the institution or its affiliate exercises
discretion over the customer's retail forex account because the FDIC
views such self-dealing as inappropriate.
Proposed Rule 349.4--Filing Procedures
The proposed rule would require that, before engaging in a retail
forex business, as defined in proposed Sec. 349.2, an FDIC-supervised
IDI shall provide prior written notice and obtain the FDIC's prior
written consent. Under the proposed rule, the notice would be filed
with the appropriate FDIC office and would include: (1) A brief
description of the FDIC-supervised IDI's proposed retail forex business
and the manner in which it will be conducted; (2) the amount of the
institution's existing or proposed direct or indirect investment in the
retail forex business as well as calculations sufficient to indicate
compliance with all capital requirements in proposed Sec. 349.8,
discussed below, and all other applicable capital standards; (3) a copy
of the institution's comprehensive business plan that includes a
discussion of, among other things, conflict of interest and how the
operation of the retail forex business is consistent with the
institution's overall strategy; (4) a description of the institution's
target customers for its proposed retail forex business and related
information, including without limitation credit evaluations, customer
appropriateness, and ``know your customer'' documentation; (5) a
resolution by the institution's board of directors that the proposed
retail forex business is an appropriate activity for the institution
and that the institution's written policies, procedures, and risk
measurement and management systems and controls address conducting
retail forex business in a safe and sound manner and in compliance with
this part; and (6) sample disclosures sufficient to demonstrate
compliance with proposed Sec. 349.6, discussed below.
The FDIC may request additional information, as necessary.
Question: The FDIC invites comment on whether additional specific
information should be required in the notice.
For FDIC-supervised IDIs that have an existing retail forex
business, the proposed rule would allow the entity to continue to
operate the business for up to six months if it provides the written
notice and requests the FDIC's written consent within 30 days of the
effective date of this rule.
Question IV.I.I: With respect to FDIC-supervised IDIs that have an
existing retail forex business, does a 30-day time period provide
adequate time to provide notification to the FDIC?
Proposed Rule 349.5--Application and Closing Out of Offsetting Long and
Short Positions
This section would require an FDIC-supervised IDI to close out
offsetting long and short positions in a retail forex account. The
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.''\28\ The FDIC agrees with this concern. Under the proposed
rule, an FDIC-supervised IDI may offset retail forex transactions as
instructed by the retail forex customer or the customer's agent if the
instructions do not come from the institution.
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\28\ Proposed CFTC Retail Forex Rule, 75 FR at 3287 n.54.
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Proposed Rule 349.6--Disclosure
This section would require an FDIC-supervised IDI 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 FDIC-supervised IDIs.
The prescribed risk disclosure statement would describe the risks
associated with retail forex transactions. The disclosure statement
would make clear that an FDIC-supervised IDI is prohibited from
applying customer losses arising out of retail forex transactions
against any property of a customer other than money or property
specifically transferred to the FDIC-supervised IDI as margin for
retail forex transactions; the FDIC-supervised IDI may not use rights
of set-off to collect margin against other assets it may hold for the
retail forex customer to cover losses arising out of retail forex
transactions. Under the proposed rule, the risk disclosure must be
provided as a separate document and be signed by the retail forex
customer.
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.\29\ 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.''\30\ 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.''\31\ The FDIC generally agrees with the CFTC and this
proposed rule requires this disclosure; however, the FDIC invites
comments regarding this approach.
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\29\ 17 CFR 5.5(e)(1).
\30\ Proposed CFTC Retail Forex Rule, 75 FR at 3289.
\31\ Final CFTC Retail Forex Rule, 75 FR at 55412.
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Question II.6.1: Would this disclosure provide meaningful
information to retail customers of FDIC- IDIs? Would alternative
disclosures more effectively accomplish the objectives of the
disclosure?
Similarly, the CFTC's retail forex rule requires a disclosure that
when a retail customer loses money trading, the dealer makes money on
such trades, in addition to any fees, commissions, or spreads.\32\ The
proposed rule includes this disclosure requirement.
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\32\ 17 CFR 5.5(b).
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Question II.6.2: Would this disclosure provide meaningful
information to retail customers of FDIC-supervised IDIs? Would
alternative disclosures more
[[Page 28362]]
effectively accomplish the objectives of the disclosure?
Question II.6.3: Should FDIC-supervised IDIs be allowed to combine
the retail forex risk disclosure with other disclosures that
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
FDIC-supervised IDI charges retail forex customers for retail forex
transactions? What fees do FDIC-supervised IDIs currently charge retail
forex customers for retail forex transactions? Are there other costs to
retail forex customers of engaging in retail forex transactions that
FDIC-supervised IDIs should disclose? If so, what are these costs?
Proposed Rule 349.7--Recordkeeping
This section would specify which documents and records an FDIC-
supervised IDI engaged in retail forex transactions must retain for
examination by the FDIC. This section would also prescribe document
maintenance standards.
Proposed Rule 349.8--Capital Requirements
This section would require that an FDIC-supervised IDI that offers
or enters into retail forex transactions must be ``well capitalized''
as defined in the FDIC's prompt corrective action regulation \33\ or
the FDIC-supervised IDI must obtain an exemption from the FDIC. In
addition, under the proposed rule, an FDIC-supervised IDI must continue
to hold capital against retail forex transactions as provided in the
FDIC's capital regulation.\34\ This rule does not amend the FDIC's
prompt corrective action regulation or capital regulation.
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\33\ 12 CFR part 325.
\34\ 12 CFR part 325.
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Proposed Rule 349.9--Margin Requirements
Under the proposed rule, paragraph (a) would require an FDIC-
supervised IDI that engages in retail forex transactions, in advance of
any such transaction, to collect from the retail forex customer margin
equal to at least 2 percent of the notional value of the retail forex
transaction if the transaction is in a major currency pair, and at
least 5 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. The major currencies currently
are 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).\35\ An evolving market could
change the major currencies, so the FDIC is not proposing to define the
term ``major currency,'' but rather expects that FDIC-supervised IDIs
will adhere to standard market interpretations.\36\
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\35\ 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).
\36\ The Final CFTC Retail Forex Rule similarly does not define
``major currency.''
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Question II.9.1: The FDIC requests comment on whether it should
explicitly define the major currencies or major currency pairs in the
proposed rule and whether commenters have any other suggestions on how
the FDIC should identify a major currency or major currency pair.
For retail forex transactions involving rolling spots, for example,
higher margin requirements protects the retail forex customer from the
risks related to trading with excessive leverage. The volatility of the
foreign currency markets exposes retail forex customers with high
leverage to greater risk of substantial losses. High leverage ratios
can significantly increase a customer's losses and gains. Even a small
move against a customer's position can result in a substantial loss.
Even with required margin, losses can exceed the margin posted, and if
the account is not closed out, and depending on the specific
circumstances, the customer could be liable for additional losses.
Given the risks involved in the trading of retail forex transactions by
retail customers using high leverage, the only funds that should be
invested in such transactions are those that the customer can afford to
lose.
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: Will the proposed margin requirements provide
adequate protection for retail customers engaged in this particular
type of trade or should the requirements be adjusted and how?
Under the proposed rule, paragraph (b) would specify the acceptable
forms of margin that customers may post. FDIC-supervised IDIs 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 FDIC-supervised IDIs to review and
modify the size of the haircuts more frequently.
Question II.9.3: Should the FDIC provide for haircuts for noncash
margin posted for retail forex transactions? If so, how should those
haircuts be determined?
In proposed rule 349.9(c), the FDIC would require an FDIC-
supervised IDI to hold each retail forex customer's retail forex
transaction margin in a separate account that contains only that
customer's retail forex margin. This paragraph is designed to work with
the prohibition on set-off in paragraph (e), so that an FDIC-supervised
IDI may not have an account agreement that treats all of a retail forex
customer's assets held by a bank as margin for retail forex
transactions.
Paragraph (d) would require an FDIC-supervised IDI to collect
additional margin from the customer or to liquidate the customer's
position if the amount of margin held by the institution fails to meet
the requirements of paragraph (a). The proposed rule would require the
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 FDIC-supervised IDIs 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?
Paragraph (e) would prohibit an FDIC-supervised IDI 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
[[Page 28363]]
margin. An FDIC-supervised IDI's relationship with a retail forex
customer may evolve out of a prior relationship of providing financial
services or may evolve into such a relationship. Thus it is more likely
that an FDIC-supervised IDI acting as a retail forex counterparty will
hold other assets or liabilities of a retail forex customer, for
example a deposit account or mortgage, than it is for a retail forex
dealer regulated by the CFTC to hold such other assets. The FDIC
believes it would be inappropriate to allow an FDIC-supervised IDI to
leave trades open and allow additional losses to accrue that can be
applied against a retail forex customer's other assets or liabilities
held by the FDIC-supervised IDI.
Question II.9.5: The FDIC requests comment on whether this section
provides sufficient incentives for FDIC-supervised IDIs to liquidate a
retail forex customer's losing position within a reasonably short
period of time in an effort to minimize such losses. Do the proposed
rules accomplish that objective? Are there more effective methods of
achieving the objective?
Proposed Rule 349.10--Required Reporting to Customers
This section would require an FDIC-supervised IDI engaging in
retail forex transactions to provide each retail forex customer a
monthly statement and confirmation statements.
Question II.10.1: Does proposed Sec. 349.10 provide meaningful
statements that would be useful to retail customers, or, in light of
the distinctive characteristics of retail forex transactions, would
other information be more appropriate? If so, what information would be
more appropriate?
Proposed Rule 349.11--Unlawful Representations
Under the proposed rule, this section would prohibit an FDIC-
supervised IDI and its institutional-affiliated parties from
representing that the Federal government, the FDIC, or any other
Federal agency has sponsored, recommended, or approved retail forex
transactions or products in any way. This section also would prohibit
an FDIC-supervised IDI from implying or representing that it will
guarantee against or limit retail forex customer losses or not collect
margin as required by section 349.9. However, this section would not
prohibit an FDIC-supervised IDI from sharing in a loss resulting from
error or mishandling of an order, and guaranties entered into prior to
effectiveness of the prohibition would only be affected if an attempt
is made to extend, modify, or renew them. Further, this section would
not prohibit an FDIC-supervised IDI from hedging or otherwise
mitigating its own exposure to retail forex transactions or any other
foreign exchange risk.
Proposed Rule 349.12--Authorization to Trade
This section would require an FDIC-supervised IDI to have specific
written authorization from a retail forex customer before effecting a
retail forex transaction for that customer.
Proposed Rule 349.13--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) of the proposed rule, an FDIC-supervised IDI
engaged in retail forex transactions would be required to establish and
enforce internal rules, procedures and controls (1) to prevent front
running, in which transactions in accounts of the FDIC-supervised IDI
or its related persons are executed before a similar customer order;
(2) to establish settlement prices fairly and objectively; and (3) to
record and maintain transaction records and make them available to
customers.
Paragraph (b) would prohibit an FDIC-supervised IDI 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 FDIC's request.
As written, paragraph (c) would ensure that institution-affiliated
parties of another retail forex counterparty do not open accounts with
an FDIC-supervised IDI without the knowledge and authorization of the
account surveillance personnel of the other retail forex counterparty
to which they are affiliated. Similarly, paragraph (d) would ensure
that institution-affiliated parties of an FDIC-supervised IDI do not
open accounts with other retail forex counterparties without the
knowledge and authorization of the account surveillance personnel of
the FDIC-supervised IDI to which they are affiliated.
Paragraph (e) would prohibit an FDIC-supervised IDI 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 FDIC-supervised IDI 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 FDIC-supervised
IDI holds one or more outstanding orders of other retail forex
customers for the same currency pair at a comparable price.
However, paragraph (e)(3) would not prevent an FDIC-supervised IDI
from changing the bid or ask prices of a retail forex transaction to
respond to market events. The FDIC 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, an FDIC-supervised IDI could
reject an order and advise customers they may submit a new order.
Question II.13.1: Would this requirement appropriately protect
retail forex customers? If not, how it should be modified? Would it be
simpler for the rule to simply prohibit requoting, because FDIC-
supervised IDIs may instead reject an order and accept new orders from
their retail forex customers?
Paragraph (e)(4) would require an FDIC-supervised IDI engaging in
retail forex transactions to execute similar orders in the order they
are received. The prohibition would prevent an FDIC-supervised IDI from
offering preferred execution to some of its retail forex customers but
not others.
Proposed Rule 349.14--Supervision
This section would impose on an FDIC-supervised IDI and its agents,
officers, and employees a duty to supervise subordinates with
responsibility for retail forex transactions to ensure compliance with
the FDIC's retail forex rule.
Question II.14.1: Would this section impose any additional
requirements not already encompassed by safety and soundness standards
applicable to FDIC-supervised IDIs and their agents, officers, and
employees?
Proposed Rule 349.15--Notice of Transfers
This section describes the requirements for transferring a retail
forex account. Generally, an FDIC-supervised IDI would be required to
provide retail forex customers 30 days' prior notice before
transferring or assigning their account. Affected customers may then
instruct the FDIC-supervised IDI to transfer the account to an
institution of their choosing or liquidate the account. There are three
exceptions to the above notice
[[Page 28364]]
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. An FDIC-supervised IDI that is the
transferee of retail forex accounts generally would be required to
provide the transferred customers with the risk disclosure statement of
proposed Sec. 349.6 and obtain each affected customer's written
acknowledgement within 60 days.
Proposed Rule 349.16--Customer Dispute Resolution
This section would prohibit an FDIC-supervised IDI 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 pre-dispute settlement procedures under
certain conditions.\37\ The substance of the CFTC dispute settlement
resolution regulation, however, dates back to August 10, 2001. Since
that time, concerns about predispute settlement resolution agreements
have emerged. Congress addressed these concerns in seven provisions in
the Dodd-Frank Act that prohibit, or give the agency involved the
authority to prohibit, the use of predispute arbitration
provisions.\38\ Consonant with this demonstrated Congressional concern
with such agreements, the FDIC is proposing, pursuant to its authority
to adopt ``such other standards or requirements as [it] shall determine
to be necessary,'' to prohibit a FDIC-supervised IDI from entering into
a pre-dispute settlement dispute resolution agreement with a retail
forex customer.
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\37\ 17 CFR 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.
\38\ 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 15(o) 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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III. Request for Comments
The FDIC requests comment on all aspects of the proposed rule,
including the questions posed in the preamble. In addition, the FDIC
requests comments on the following questions:
Question III.1: Would the proposed rule appropriately
protect retail forex customers of FDIC-supervised IDIs?
Question III.2: Are the proposed rule's variations from
the CFTC retail forex rule appropriately tailored to the differences
between FDIC-supervised IDIs and CFTC registrants and the regulatory
regimes applicable to each?
Question III.3: Should the proposed rule include further
disclosure requirements with respect to whether or not retail forex
transactions or margin for retail forex transactions are insured by the
FDIC?
Question III.4: Should the proposed rule limit the ability
of an FDIC-supervised IDI to enter into speculative retail forex
transactions, such as rolling spot transactions, with only certain
retail forex customers? Do FDIC-supervised IDIs limit customer access
to these transactions at this time? How do FDIC-supervised IDIs
determine if these types of trades may be appropriate for those
customers?
To assist in the review of comments, the FDIC requests that commenters
identify their comments by question number.
IV. Regulatory Analysis
A. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601 et seq. (RFA)
generally requires an agency that is issuing a proposed rule to prepare
and make available for public comment an initial regulatory flexibility
analysis that describes the impact of the proposed rule on small
entities. The RFA provides that an agency is not required to prepare
and publish an initial regulatory flexibility analysis if the agency
certifies that the proposed rule will not, if promulgated as a final
rule, have a significant economic impact on a substantial number of
small entities. Under regulations issued by the Small Business
Administration, a small entity includes an FDIC-supervised IDI with
assets of $175 million or less.\39\ The proposed rule would impose
recordkeeping and disclosure requirements on any FDIC-supervised IDI,
including one that engages in retail forex transactions with their
customers.
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\39\ Small Business Administration regulations define ``small
entities'' to include banks with a four-quarter average of total
assets of $175 million or less (13 CFR 121.201).
---------------------------------------------------------------------------
Pursuant to section 605(b) of the RFA, the FDIC certifies that this
proposed rule will not have a significant economic impact on a
substantial number of the small entities it supervises. Accordingly, a
regulatory flexibility analysis is not required. In making this
determination, the FDIC estimated that there are no small banks
currently engaging in retail forex transactions with their customers.
Therefore, the FDIC estimates that no small banks under its supervision
would be affected by the proposed rule.
Persons wishing to submit written comments regarding the FDIC's
certification under the RFA should refer to the instructions for
submitting comments in the front of this release. Such comments will be
considered and placed in the same public file as comments on the
proposal itself.
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 FDIC 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 contained in this notice of proposed rulemaking have been
submitted by the FDIC to OMB for review and approval under section 3506
of the PRA and Sec. 1320.11 of OMB's implementing regulations (5 CFR
1320 et seq.). The information collection requirements are found in
Sec. Sec. 349.4-349.7, 349.9-349.10, 349.13, 349.15-349.16.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the FDIC'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 28365]]
(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.
Proposed Information Collection
Title of Information Collection: Retail Foreign Exchange
Transactions.
Frequency of Response: On occasion.
Affected Public: Businesses or other for-profit.
Respondents: State nonmember insured banks and foreign banks having
insured branches.
Filing Requirements
The filing requirements in proposed Sec. 349.4 would require that,
prior to initiating a retail forex business, an FDIC-supervised IDI
provide the FDIC with prior notice, obtain the FDIC's prior written
consent, and submit the documents provided for in proposed Sec.
349.4(c). The FDIC-supervised IDI must also provide other information
required by the FDIC, such as documentation of customer due diligence.
An FDIC-supervised IDI already engaged in a retail forex business may
continue to do so, provided it request the FDIC's written consent.
Disclosure Requirements
Proposed Sec. 349.5, regarding the application and closing out of
offsetting long and short positions, would require an FDIC-supervised
IDI 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.
Proposed Sec. 349.6 would require that an FDIC-supervised IDI
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
an FDIC-supervised IDI of its fees and other charges and its profitable
accounts ratio.
Proposed Sec. 349.10 would require an FDIC-supervised IDI to issue
monthly statements to each retail forex customer and to send
confirmation statements following transactions.
Proposed Sec. 349.13(b) would allow disclosure by an FDIC-
supervised IDI 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 FDIC. Proposed rule 349.13(c) would
prohibit an FDIC-supervised IDI 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 all statements and written
records. Proposed Rule 349.13(d) would prohibit a related person of an
FDIC-supervised IDI 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.
Proposed Sec. 349.15 would require an FDIC-supervised IDI 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 an FDIC-supervised IDI 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. 349.16 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 FDIC-supervised IDI provide them with a list of
persons qualified in the dispute resolution and that the customer must
notify the FDIC-supervised IDI of the person selected within 45 days of
receipt of such list.
Policies and Procedures; Recordkeeping
Proposed Sec. Sec. 349.7 and 349.13 would require that an FDIC-
supervised IDI engaging in retail forex transactions keep full,
complete, and systematic records and establish and implement internal
rules, procedures, and controls. Proposed Sec. 349.7 also would
require that an FDIC-supervised IDI 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. Proposed Sec. 349.9
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: 3 FDIC-supervised IDIs; 1 service
provider.
Total Reporting Burden: 48 hours.
Total Disclosure Burden: 5,326 hours.
Total Recordkeeping Burden: 664 hours.
Total Annual Burden: 6,038 hours.
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act requires the FDIC to use
plain language in all proposed and final rules published after January
1, 2000. The FDIC invites comment on how to make this proposed rule
easier to understand. For example, the FDIC 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 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 349
Consumer protection, Definitions, Foreign currencies, Foreign
exchange, State nonmember insured bank, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, the FDIC proposes to add
part 349 to Title 12, Chapter III of the Code of Federal Regulations to
read as follows:
PART 349--RETAIL FOREIGN EXCHANGE TRANSACTIONS
Sec.
349.1 Authority, purpose, and scope.
349.2 Definitions.
349.3 Prohibited transactions.
349.4 Filing procedures.
349.5 Application and closing out of offsetting long and short
positions.
349.6 Disclosure.
349.7 Recordkeeping.
349.8 Capital requirements.
349.9 Margin requirements.
349.10 Required reporting to customers.
349.11 Unlawful representations.
[[Page 28366]]
349.12 Authorization to trade.
349.13 Trading and operational standards.
349.14 Supervision.
349.15 Notice of transfers.
349.16 Customer dispute resolution.
Authority: 12 U.S.C. 1813(q), 1818, 1819, and 3108; 7 U.S.C.
2(c)(2)(E).
Sec. 349.1 Authority, purpose and scope.
(a) Authority. An FDIC-supervised insured depository institution
that engages in retail forex transactions shall comply with the
requirements of this part.
(b) Purpose. This part establishes rules applicable to retail forex
transactions engaged in by FDIC-supervised insured depository
institutions and applies on or after the effective date.
(c) Scope. This part applies to FDIC-supervised insured depository
institutions.
Sec. 349.2 Definitions.
For purposes of this part, the following terms have the same
meaning as in the Commodity Exchange Act: ``affiliated person of a
futures commission merchant''; ``associated person''; ``contract of
sale''; ``commodity''; ``eligible contract participant''; ``futures
commission merchant''; ``security''; and ``security futures product.''
Affiliate has the same meaning as in section 2(k) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
Commodity Exchange Act means the Commodity Exchange Act (7 U.S.C. 1
et seq.).
FDIC-supervised insured depository institution means any insured
depository institution, or foreign bank having an insured branch for
which the Federal Deposit Insurance Corporation is the appropriate
Federal banking agency pursuant to section 3(q) of the Federal Deposit
Insurance Act, 12 U.S.C. 1813(q).
Forex means foreign exchange.
Institution-affiliated party or IAP has the same meaning as in 12
U.S.C. 1813(u)(1), (2), or (3).
Insured depository institution or IDI has the same meaning as in 12
U.S.C. 1813(c)(2).
Introducing broker means any person who solicits or accepts orders
from a retail forex customer in connection with retail forex
transactions.
Related person, when used in reference to a retail forex
counterparty, means:
(1) Any general partner, officer, director, or owner of 10 percent
or more of the capital stock of the FDIC-supervised insured depository
institution;
(2) An associated person or employee of the retail forex
counterparty, if the retail forex counterparty is not an FDIC-
supervised insured depository institution;
(3) An IAP, if the retail forex counterparty is an FDIC-supervised
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.
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)).
Retail forex account means the account of a retail forex customer,
established with an FDIC-supervised insured depository institution, in
which retail forex transactions with the FDIC-supervised insured
depository institution as counterparty are undertaken, or the account
of a retail forex customer that is established in order to enter into
such transactions.
Retail forex account agreement means the contractual agreement
between an FDIC-supervised insured depository institution and a retail
forex customer that contains the terms governing the customer's retail
forex account with the FDIC-supervised insured depository institution.
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.
Retail forex counterparty includes, as appropriate:
(1) An FDIC-supervised insured depository institution;
(2) A retail foreign exchange dealer;
(3) A futures commission merchant; and
(4) An affiliated person of a futures commission merchant.
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.
Retail forex proprietary account means a retail forex account
carried on the books of an FDIC-supervised insured depository
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 FDIC-supervised insured depository institution;
(2) An officer, director or owner of ten percent or more of the
capital stock of the FDIC-supervised insured depository institution; or
(3) An employee of the FDIC-supervised insured depository
institution, whose duties include:
(i) The management of the FDIC-supervised insured depository
institution's business;
(ii) The handling of the FDIC-supervised insured depository
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
FDIC-supervised insured depository institution's retail forex
transactions; or
(iv) The signing or co-signing of checks or drafts on behalf of the
FDIC-supervised insured depository 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 FDIC-supervised insured depository
institution;
Retail forex transaction means an agreement, contract, or
transaction in foreign currency that is offered or entered into by an
FDIC-supervised insured depository 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;
(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. 78(f)(a)); or
(3) Offered or entered into on a leveraged or margined basis, or
financed by an FDIC-supervised insured depository institution, its
affiliate, or any person acting in concert with the FDIC-supervised
insured depository 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
(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.
Sec. 349.3 Prohibited transactions.
(a) Fraudulent conduct prohibited. No FDIC-supervised insured
depository
[[Page 28367]]
institution or its IAPs may, directly or indirectly, in or in
connection with any retail forex transaction:
(1) Cheat or defraud or attempt to cheat or defraud any person;
(2) Willfully 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) Willfully deceive or attempt to deceive any person by any means
whatsoever.
(b) Acting as counterparty and exercising discretion prohibited. If
an FDIC-supervised insured depository institution can cause retail
forex transactions to be effected for a retail forex customer without
the retail forex customer's specific authorization, then neither the
FDIC-supervised insured depository institution nor its affiliates may
act as the counterparty for any retail forex transaction with that
retail forex customer.
Sec. 349.4 Filing procedures.
(a) General. Before commencing a retail forex business, an FDIC-
supervised insured depository institution shall provide the FDIC prior
written notice and obtain the FDIC's prior written consent.
(b) Where to file. A notice required by this section shall be
submitted in writing to the appropriate FDIC office.
(c) Contents of filing. A complete letter notice shall include the
following information:
(1) Filings generally. (i) A brief description of the FDIC-
supervised institution's proposed retail forex business and the manner
in which it will be conducted;
(ii) The amount of the institution's existing or proposed direct or
indirect investment in the retail forex business as well as
calculations sufficient to indicate compliance with all capital
requirements in Sec. 349.8 and all other applicable capital standards;
(iii) A copy of the FDIC-supervised insured depository
institution's comprehensive business plan that includes a discussion
of, among other things, how the operation of the retail forex business
is consistent with the institution's overall strategy;
(iv) A description of the FDIC-supervised insured depository
institution's target customers for its proposed retail forex business
and related information, including without limitation credit
evaluations, customer appropriateness, and ``know your customer''
documentation;
(v) A resolution by the FDIC-supervised insured depository
institution's board of directors that the proposed retail forex
business is an appropriate activity for the institution and that the
institution's written policies, procedures, and risk measurement and
management systems and controls address conducting retail forex
business in a safe and sound manner and in compliance with this part;
(vi) Sample risk disclosures sufficient to demonstrate compliance
with Sec. 349.6.
(2) Copy of application or notice filed with another agency. If an
FDIC-supervised insured depository institution has filed an application
or notice with another regulatory authority which contains all of the
information required by paragraph (c)(1) of this section, the
institution may submit a copy to the FDIC in lieu of a separate filing.
(3) Additional information. The FDIC may request additional
information to complete the processing of the notification.
(d) Treatment of existing retail forex Business. Any FDIC-
supervised insured depository institution that is engaged in retail
forex business on the effective date of this part may continue to do so
for up to six months, subject to an extension of time by the FDIC,
provided that it notifies the FDIC of its retail forex business and
requests the FDIC's written consent in accordance with paragraph (a) of
this section.
(e) Compliance with the Commodities Exchange Act. Any FDIC-
supervised insured depository institution that is engaged in retail
forex business on the effective date of this part shall be deemed,
during the six-month period (including any extension) provided in
paragraph (d) of this section, 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)).
Sec. 349.5 Application and closing out of offsetting long and short
positions.
(a) Application of purchases and sales. Any FDIC-supervised insured
depository 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
(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; 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 where
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 FDIC-supervised insured depository
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 paragraph (b) of this section, the offsetting
transaction shall be applied as directed by a retail forex customer's
specific written instructions. These instructions may not be made by
the FDIC-supervised insured depository institution or an IAP.
Sec. 349.6 Disclosure.
(a) Risk disclosure statement required. No FDIC-supervised insured
depository institution may open or maintain open an account that will
engage in retail forex transactions for a retail forex customer unless
the FDIC-supervised insured depository 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) and (f) of this section.
(b) Acknowledgement of risk disclosure statement required. The
FDIC-supervised insured depository 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
[[Page 28368]]
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:
RISK DISCLOSURE STATEMENT
RETAIL FOREX TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF
CONTRACTS DENOMINATED IN FOREIGN CURRENCY WITH AN FDIC-SUPERVISED
INSURED DEPOSITORY INSTITUTION AS YOUR COUNTERPARTY. BECAUSE OF THE
LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE
ALL OF THE FUNDS YOU GIVE THE FDIC-SUPERVISED INSURED DEPOSITORY
INSTITUTION AS MARGIN FOR SUCH TRADING AND YOU MAY LOSE MORE THAN
YOU PLEDGE AS MARGIN.
YOUR FDIC-SUPERVISED INSURED DEPOSITORY INSTITUTION IS
PROHIBITED FROM APPLYING LOSSES THAT YOU EXPERIENCE ON RETAIL FOREX
TRANSACTIONS ON ANY FUNDS OR PROPERTY OF YOURS OTHER THAN FUNDS OR
PROPERTY THAT YOU HAVE GIVEN OR PLEDGED AS MARGIN FOR RETAIL FOREX
TRANSACTIONS.
YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING
POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR
YOU.
(1) TRADING IS A NOT ON A REGULATED MARKET OR EXCHANGE--YOUR
FDIC-SUPERVISED INSURED DEPOSITORY 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 as a designated contract market by the Commodity Futures
Trading Commission. The foreign currency trades you transact are
trades with your FDIC-supervised insured depository institution as
the counterparty. WHEN YOU SELL, THE FDIC-SUPERVISED INSURED
DEPOSITORY INSTITUTION IS THE BUYER. WHEN YOU BUY, THE FDIC-
SUPERVISED INSURED DEPOSITORY INSTITUTION IS THE SELLER. As a
result, when you lose money trading, your FDIC-supervised insured
depository institution is making money on such trades, in addition
to any fees, commissions, or spreads the FDIC-supervised insured
depository institution may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY
TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR
ACCESSING YOUR FDIC-SUPERVISED INSURED DEPOSITORY INSTITUTION. THE
TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE GOVERNED ONLY BY YOUR
CONTRACT WITH YOUR FDIC-SUPERVISED INSURED DEPOSITORY INSTITUTION.
Any trading platform that you may use to enter into off-exchange
foreign currency transactions is only connected to your FDIC-
supervised insured depository institution. You are accessing that
trading platform only to transact with your FDIC-supervised insured
depository institution. You are not trading with any other entities
or customers of the FDIC-supervised insured depository 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 FDIC-supervised insured
depository institution.
(3) YOU MAY BE ABLE TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS
ONLY THROUGH YOUR BANKING ENTITY BECAUSE THE TRANSACTIONS ARE NOT
MADE ON AN EXCHANGE OR REGULATED CONTRACT MARKET, AND YOUR FDIC-
SUPERVISED INSURED DEPOSITORY INSTITUTION MAY SET ITS OWN PRICES.
Your ability to close your transactions or offset positions is
limited to what your FDIC-supervised insured depository institution
will offer to you, as there is no other market for these
transactions. Your FDIC-supervised insured depository institution
may offer any prices it wishes, including prices derived from
outside sources or not in its discretion. Your FDIC-supervised
insured depository 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 FDIC-supervised insured depository
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 FDIC-supervised insured depository
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 FDIC-supervised insured depository
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 FDIC-
supervised insured depository 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 FDIC-supervised insured
depository institution in making any trading or account decisions.
(5) THIS TRANSACTION IS NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION.
(6) THIS TRANSACTION IS NOT A DEPOSIT IN, OR GUARANTEED BY, AN
FDIC-SUPERVISED INSURED DEPOSITORY INSTITUTION.
(7) THIS TRANSACTION IS SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF ALL AMOUNTS INVESTED.
FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY
FDIC-SUPERVISED INSURED DEPOSITORY 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 AN
FDIC-SUPERVISED INSURED DEPOSITORY INSTITUTION.
I hereby acknowledge that I have received and understood this risk
disclosure statement.
-----------------------------------------------------------------------
Date
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Signature of Customer
(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 FDIC-
supervised insured depository institution maintained retail forex
customer accounts:
(i) The total number of retail forex customer accounts maintained
by the FDIC-supervised insured depository institution over which the
FDIC-supervised insured depository 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) The FDIC-supervised insured depository institution's statement
of profitable trades shall include the following legend: PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Each FDIC-
supervised insured depository 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 FDIC-supervised
insured depository institution for which the FDIC-supervised insured
depository institution does not exercise investment discretion, the
percentage of such
[[Page 28369]]
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 FDIC-supervised insured depository
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, commission, or spreads that the
FDIC-supervised insured depository 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 FDIC-supervised insured depository
institution will determine the amount of such fees, charges,
commissions, or spreads; and
(3) The circumstances under which the FDIC-supervised insured
depository institution may impose such fees, charges, commissions, or
spreads.
(g) Future disclosure requirements. If, with regard to a retail
forex customer, the FDIC-supervised insured depository institution
changes any fee, charge, commission or spreads required to be disclosed
under paragraph (f) of this section, then the FDIC-supervised insured
depository 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.
(h) 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.
(i) Other disclosure requirements unaffected. This section does not
relieve an FDIC-supervised insured depository institution from any
other disclosure obligation it may have under applicable law.
Sec. 349.7 Recordkeeping.
(a) General rule. An FDIC-supervised insured depository 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 customer reflecting:
(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 such person.
(ii) The name of any other person guaranteeing such retail forex
account or exercising trading control with respect to such account;
(iii) The establishment or termination of each retail forex
account; and
(iv) For each retail forex account the records must also show the
name of the person who has solicited and is responsible for the account
or assign account numbers in such a manner as to identify that person.
(2) 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.
(3) Transaction records that show separately for each retail forex
account and each retail forex proprietary account:
(i) All retail forex transactions that are futures transactions
executed for such account, including the date, price, quantity, market,
currency pair, and delivery date;
(ii) All retail forex transactions that are option transactions
executed for such account, including the date, whether the transaction
involved 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; and
(iii) All other retail forex transactions that are executed for
such account, including the date, price, quantity, and currency pair.
(4) 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.
(5) Memorandum order (order ticket). Except as provided in
paragraph (a)(6) of this section, immediately upon the written or
verbal receipt of a retail forex transaction order, an FDIC-supervised
insured depository institution shall prepare a separate written
memorandum order (order ticket) for the order (whether unfulfilled,
executed or canceled), including:
(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.
(6) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution as
required under paragraph (a)(5) of this section if the following
requirements are met:
(i) The FDIC-supervised insured depository 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 allocation methodology the FDIC-
supervised insured depository institution will use;
(B) Whether the FDIC-supervised insured depository institution has
any interest in accounts which may be included with customer accounts
in bunched orders eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable, any account in which the FDIC-supervised insured depository
institution has an interest.
(ii) An FDIC-supervised insured depository institution must
allocate orders eligible for post-execution allocation in accordance
with the following:
(A) Allocations must be made as soon as practicable after the
entire transaction is executed;
(B) Allocations must be fair and equitable; no account or group of
accounts may receive consistently favorable or unfavorable treatment;
and
[[Page 28370]]
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by the FDIC.
(7) Other records. Other records covered by this section include
written acknowledgements of receipt of the risk disclosure statement
required by Sec. 349.6(b), 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 FDIC-supervised insured depository
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, an FDIC-
supervised insured depository 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 FDIC-supervised insured
depository 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 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. An FDIC-
supervised insured depository institution engaging in retail forex
transactions shall make a record of all communications, including
customer complaints, received by the FDIC-supervised insured depository
institution or its IAPs concerning facts giving rise to possible
violations of law related to the FDIC-supervised insured depository
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; the name of the person who received the communication,
and the final disposition of the matter.
(d) Records for noncash margin. An FDIC-supervised insured
depository institution shall maintain a record of all noncash margin
collected pursuant to Sec. 349.9. 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 in which the FDIC-supervised insured depository
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) Record of monthly statements and confirmations. An FDIC-
supervised insured depository institution shall retain a copy of each
monthly statement and confirmation required by Sec. 349.10.
(f) 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. Record
maintenance may include the use of automated or electronic records
provided that the records are easily retrievable, readily available for
inspection, and capable of being reproduced in hard copy.
(g) Length of maintenance. An FDIC-supervised insured depository
institution shall keep each record required by this section for at
least five years from the date the record is created.
Sec. 349.8 Capital requirements.
An FDIC-supervised insured depository institution offering or
entering into retail forex transactions must be well capitalized as
defined by 12 CFR part 325, unless specifically exempted by the FDIC in
writing.
Sec. 349.9 Margin requirements.
(a) Margin required. An FDIC-supervised insured depository
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
FDIC-supervised insured depository institution.
(b)(1) Form of margin. Margin collected under paragraph (a) of this
section or pledged by a retail forex customer 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 FDIC deems
appropriate.
(2) Haircuts. An FDIC-supervised insured depository 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) Separate margin account. Margin collected by the FDIC-
supervised
[[Page 28371]]
insured depository institution from a retail forex customer for retail
forex transactions or pledged by a retail forex customer for retail
forex transactions shall be placed into a separate account containing
only such margin.
(d) Margin calls; liquidation of position. For each retail forex
customer, at least once per day, an FDIC-supervised insured depository
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 if, based on the marks in paragraphs (c)(1) and
(c)(2) of this section, the FDIC-supervised insured depository
institution has collected margin from the retail forex customer
sufficient to satisfy the requirements of this section; and
(4) Collect such margin from the retail forex customer as the FDIC-
supervised insured depository institution may require to satisfy the
requirements of this section, or liquidate the retail forex customer's
retail forex transactions.
(e) Set-off prohibited. An FDIC-supervised insured depository
institution may not:
(1) Apply a retail forex customer's losses on retail forex
transactions against any funds or other asset of the retail forex
customer other than margin in the retail forex customer's separate
margin account described in paragraph (c) of this section;
(2) Apply a retail forex customer's losses on retail forex
transactions to increase the amount owed by the retail forex customer
to the FDIC-supervised insured depository institution under any loan;
or
(3) Collect the margin required under this section by use of any
right of set-off.
Sec. 349.10 Required reporting to customers.
(a) Monthly statements. Each FDIC-supervised insured depository
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 in the separate
margin account required by Sec. 349.9(c); 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, commissions, and spreads.
(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 in the separate margin
account required by Sec. 349.9(c); and
(v) 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;
premiums and mark-ups; and fees, charges, and commissions.
(b) Confirmation statement. Each FDIC-supervised insured depository
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
(b)(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 FDIC-supervised insured depository institution shall
promptly furnish in writing to such other person the information
required by paragraphs (a) and (b) of this section.
(e) Introduced accounts. Each statement provided pursuant to the
provisions of this section must, if applicable, show that the account
for which the FDIC-supervised insured depository institution was
introduced by an introducing broker and the name of the introducing
broker.
Sec. 349.11 Unlawful representations.
(a) No implication or representation of limiting losses. No FDIC-
supervised insured depository institution engaged in retail foreign
exchange transactions or its IAPs 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 FDIC-supervised insured depository institution or its IAPs 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.
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(c) No Federal government endorsement. No FDIC-supervised insured
depository institution or its IAPs 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 FDIC, the Federal
government, or any agency thereof.
(d) Assuming or sharing of liability from bank error. This section
shall not be construed to prevent an FDIC-supervised insured depository
institution from assuming or sharing in the losses resulting from the
FDIC-supervised insured depository 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.
Sec. 349.12 Authorization to trade.
(a) Specific authorization required. No FDIC-supervised insured
depository institution may directly or indirectly effect a retail forex
transaction for the account of any retail forex customer unless, before
the transaction occurs, the retail forex customer specifically
authorized the FDIC-supervised insured depository institution, in
writing, to effect the retail forex transaction.
(b) A retail forex transaction is ``specifically authorized'' for
purposes of this section if the retail forex customer specifies:
(1) The precise retail forex transaction to be effected;
(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.
Sec. 349.13 Trading and operational standards.
(a) Internal rules, procedures, and controls required. An FDIC-
supervised insured depository 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 FDIC-supervised insured depository institution has quoted to the
customer is entered for execution before any order in any retail forex
transaction for any proprietary account, any other 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 such related person has gained knowledge of the
retail forex customer's order prior to the transmission of an order for
a proprietary account), an account in which such a related person has
an interest, or an account in which such a related person may originate
orders without the prior specific consent of the account owner;
(2) Prevent FDIC-supervised insured depository 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;
(3) Fairly and objectively establish settlement prices for retail
forex transactions; and
(4) Record and maintain essential information regarding customer
orders and account activity, and to provide such information to
customers upon request. Such information shall include:
(i) Transaction records for the customer's account, including:
(A) The date and time each order is received by the FDIC-supervised
insured depository institution;
(B) The price at which each order is placed, or, in the case of an
option, the premium paid;
(C) If the transaction was entered into by means of a trading
platform, the price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(D) The customer account identification information;
(E) The currency pair;
(F) The size of the transaction;
(G) Whether the order was a buy or sell order;
(H) The type of order, if the order was not a market order;
(I) If a trading platform is used, the date and time the order is
transmitted to the trading platform;
(J) If a trading platform is used, the date and time the order is
executed;
(K) 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; and
(L) For options, whether the option is a put or call, the strike
price, and expiration date.
(ii) Account records that contain the following information:
(A) The funds in the account, net of any commissions and fees;
(B) The net profits and losses on open trades; and
(C) The funds in the account plus or minus the net profits and
losses on open trades. (In the case of open option positions, the
account balance should be adjusted for the net option value);
(iii) 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; and
(iv) Any method or algorithm used to determine the bid or asked
price for any retail forex transaction or the prices at which customer
orders are executed, including, but not limited to, any premium and
markups, fees, commissions or other items which affect the
profitability or risk of loss of a retail forex customer's transaction.
(b) Disclosure of retail forex transactions. No FDIC-supervised
insured depository institution engaging in retail forex transactions
may disclose that an order of another person is being held by the FDIC-
supervised insured depository institution, unless the disclosure is
necessary to the effective execution of such order or the disclosure is
made at the request of the FDIC.
(c) Handling of retail forex accounts of related persons of retail
forex counterparties. No FDIC-supervised insured depository institution
engaging in retail forex transactions shall knowingly handle the retail
forex account of any related person of another retail forex
counterparty unless it:
(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 such account
a written record of such 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 such other retail forex
counterparty copies of all statements for such account and of all
written records prepared upon the receipt of orders for such account
pursuant to paragraph (a)(2) of this section.
(d) Related person of FDIC-supervised insured depository
institution establishing account at another retail forex counterparty.
No related person of an FDIC-supervised insured depository institution
engaging in retail forex transactions may have an account, directly or
indirectly, with another retail forex counterparty unless:
(1) It receives written authorization to maintain such an account
from a person designated by the FDIC-supervised
[[Page 28373]]
insured depository institution of which it is a related person with
responsibility for the surveillance over such account pursuant to
paragraph (a)(2) of this section; and
(2) Copies of all statements for such account and of all written
records prepared by such other retail forex counterparty upon receipt
of orders for such account pursuant to paragraph (c)(2) of this section
are transmitted on a regular basis to the retail forex counterparty of
which it is a related person.
(e) Prohibited trading practices. No FDIC-supervised insured
depository 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 FDIC-supervised
insured depository 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;
(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 FDIC-supervised insured depository institution holds
outstanding orders of other retail forex customers for the same
currency pair at a comparable price.
Sec. 349.14 Supervision.
(a) Supervision by the FDIC-supervised insured depository
institution. An FDIC-supervised insured depository 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 at the FDIC-supervised insured
depository 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 an FDIC-supervised insured depository institution
must diligently supervise his or her subordinates' handling of all
retail forex accounts at the FDIC-supervised insured depository
institution and all the subordinates' activities relating to the FDIC-
supervised insured depository institution's retail forex business.
Sec. 349.15 Notice of transfers.
(a) Prior notice generally required. Except as provided in
paragraph (b) of this section, an FDIC-supervised insured depository
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 FDIC-supervised insured depository
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 FDIC-supervised insured depository
institution. An FDIC-supervised insured depository institution to 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 60 days of such assignments or transfers. This requirement shall
not apply if the FDIC-supervised insured depository institution has
clear written evidence that the retail forex customer has received and
acknowledged receipt of the required disclosure statements.
Sec. 349.16 Customer dispute resolution.
(a) Prohibition on predispute arbitration agreements. No FDIC-
supervised insured depository institution shall enter into any
agreement with a retail forex customer in which the parties agree to
arbitrate any future dispute between them arising related to the
customer's retail forex account.
(b) Election of forum. (1) Where the parties agree to arbitrate a
dispute after it has arisen, within ten business days of the agreement,
the FDIC-supervised insured depository institution must provide the
customer with a list of persons qualified in dispute resolution.
(2) The customer shall, within 45 days after receipt of such list,
notify the FDIC-supervised insured depository institution of the person
selected. The customer's failure to provide such notice shall give the
FDIC-supervised insured depository institution the right to select a
person from the list.
(c) Counterclaims. An agreement to arbitrate a customer's claim
against an FDIC-supervised insured depository institution after the
claim has arisen may permit the submission of a counterclaim in the
arbitration by a person against whom a claim or grievance is brought.
Such a counterclaim may be permitted where it arises out of the
transaction or occurrence that is the subject of the customer's claim
or grievance and does not require for adjudication the presence of
essential witnesses, parties, or third persons over which the
settlement process lacks jurisdiction.
Dated at Washington, DC, this 10th of May 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-11853 Filed 5-16-11; 8:45 am]
BILLING CODE 6714-01-P