[Federal Register Volume 76, Number 133 (Tuesday, July 12, 2011)]
[Rules and Regulations]
[Pages 40779-40797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17396]
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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: Final rule.
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SUMMARY: The FDIC is adopting a final rule that imposes requirements
for foreign currency futures, options on futures, and options that an
insured depository institution supervised by the FDIC engages in with
retail customers. The final rule also imposes requirements on other
foreign currency transactions that are functionally or economically
similar, including 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 do not apply to traditional foreign currency
forwards, spots, or swap transactions that an insured depository
institution engages in with business customers to hedge foreign
exchange risk. The final rule applies to all state nonmember banks and,
as of July 21, 2011, also to all state savings associations.
DATES: This final rule is effective July 15, 2011.
FOR FURTHER INFORMATION CONTACT: Nancy W. Hunt, Associate Director,
(202) 898-6643; Bobby R. Bean, Chief, 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
[[Page 40780]]
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 similarly all such
futures and options and all agreements, contracts, or transactions that
are functionally or economically similar to such futures and
options.\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 section 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813(q)). 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
section 3(q) of the Federal Deposit Insurance Act, 12 U.S.C. section
1813(q), hereafter referred to as an 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 under
the CEA (ECP) except pursuant to a retail forex rule issued by the
FDIC. The restrictions in the final rule do not apply to (1)
transactions with a customer who qualifies as an ECP, (2) transactions
that are spot contracts irrespective of whether the customer is or is
not an ECP; or (3) forward contracts between a seller and a buyer that
have the ability to deliver and accept delivery, respectively, in
connection with their line of business. 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 sec. 754.
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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.\10\
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\10\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
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II. Overview of the Final Rule and Related Action
On September 10, 2010, the Commodity Futures Trading Commission
(CFTC) adopted a retail forex rule for persons subject to its
jurisdiction.\11\ On April 22, 2011, the OCC proposed a retail forex
rule for FDIC-supervised IDIs modeled on the CFTC's retail forex
rule.\12\ On May 11, 2011, the FDIC approved for publication a notice
of proposed rulemaking. The NPR was published in the Federal Register
on May 17, 2011 and the comment period closed on June 16, 2011. In
response to NPR, the FDIC received six comments: Two comments from
banks; a comment from a banking trade association; and three comments
from individuals.
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\11\ Regulation of Off-Exchange Retail Foreign Exchange
Transactions and Intermediaries, 75 FR 55409 (Sept. 10, 2010) (Final
CFTC Retail Forex Rule). The CFTC proposed these rules prior to the
enactment of the Dodd-Frank Act. Regulation of Off-Exchange Retail
Foreign Exchange Transactions and Intermediaries, 75 FR 3281 (Jan.
20, 2010) (Proposed CFTC Retail Forex Rule).
\12\ Retail Foreign Exchange Transactions, 76 FR 22633 (Apr. 22,
2011).
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The FDIC is now adopting the proposed rule text as a final rule
with few modifications.
In the preamble to the proposal, the FDIC indicated that retail
forex transactions are subject to the Interagency Statement on Retail
Sales of Nondeposit Investment Products (NDIP Policy Statement).\13\
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.
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\13\ See FDIC FIL-9-94 (Feb. 15, 1994); see also FDIC FIL-61-95
(Sept. 13, 1995).
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In the proposal, the FDIC asked for comment on whether application
of the NDIP Policy Statement created issues that the FDIC should
address.
One commenters said that the NDIP Policy Statement should not apply
to retail forex transactions, asserting that the retail forex rule,
alone, would be sufficient to protect retail customers, and the
imposition of the NDIP Policy Statement on retail forex transactions
would create confusion and ambiguity. No specific provisions were
identified, however, that create confusion or ambiguity. The commenter
further argued that because the NDIP Policy Statement does not apply to
CFTC registrants, its application to retail forex transactions would
not promote consistent regulatory treatment of retail forex
transactions.
The FDIC believes that it is appropriate to apply the NDIP Policy
Statement to retail forex transactions. The consumer protections that
the NDIP Policy Statement provides are no less important for retail
forex transactions than for other nondeposit investment products.
Moreover, there is no direct conflict between this rule and the NDIP
Policy Statement because the Statement requires FDIC-supervised IDIs to
develop policies and procedures to ensure that nondeposit investment
product sales are conducted in compliance with applicable laws and
regulations. If an FDIC-supervised IDI has questions regarding how the
NDIP Policy Statement applies to its retail forex business, it should
seek clarification from its examiners.
III. Section-by-Section Analysis
Section 349.1--Authority, Purpose, and Scope
This section authorizes an FDIC-supervised IDI to conduct retail
forex transactions. As mentioned in the proposed rule, the FDIC will
become the ``appropriate Federal banking agency'' for State savings
association upon the transfer of the powers of the Office of Thrift
Supervision to the FDIC and other federal banking agencies.
Accordingly, by virtue of this statutorily-mandated transfer of power,
State savings associations will become FDIC-supervised IDIs as of the
transfer date (July 21, 2011) and thus will be subject to the FDIC's
final retail forex rule.
The FDIC requested comment on whether the retail forex rule should
apply to an FDIC-supervised IDI's foreign branches conducting retail
forex transactions abroad, whether with U.S. or foreign customers. One
commenter responded that there is no U.S. policy interest in applying
U.S. consumer protection rules to transactions with non-U.S. residents
conducted by foreign
[[Page 40781]]
branches. Such transactions are subject to foreign regulatory
requirements that could be inconsistent with the retail forex rule.
Subjecting those transactions to two sets of regulatory requirements
would also place FDIC-supervised IDIs at a competitive disadvantage
abroad.
One commenter opposed applying the retail forex rule to any
transaction conducted out of a foreign branch of a U.S. depository
institution, whether with a U.S. or non-U.S. retail customer. The
commenter argued that foreign customers and U.S. persons with accounts
overseas will be unnecessarily confused by the reach of the U.S. rule,
especially when similar accounts at non-U.S. banks may not be subject
to margin rules that are part of the retail forex rule. The commenter
also argues that, by including foreign branches in its scope, the rule
may inadvertently apply to products that were never intended to be
covered, because they are not available or offered in the United
States.
The FDIC recognizes the concerns raised by the commenter. Retail
forex transactions between a foreign branch of an FDIC-supervised IDI
and a non-U.S. customer are subject to any applicable disclosure,
recordkeeping, capital, margin, reporting, business conduct,
documentation, and other requirements of applicable foreign law.
Therefore, those transactions are not subject to the requirements of
Sec. Sec. 349.3 and 349.5 to 349.16.
Section 349.2--Definitions
This section defines 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 eligible contract
participant: \14\ (i) A future or option on such a future; \15\ (ii)
options not traded on a registered national securities exchange; \16\
and (iii) certain leveraged, margined, or bank-financed
transactions,\17\ including rolling spot forex transactions. The
definition generally tracks the statutory language in section
2(c)(2)(B) and (C) of the CEA.\18\
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\14\ The definition of ``eligible contract participant'' is
found in the CEA and is discussed below.
\15\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\16\ 7 U.S.C. 2(c)(2)(B)(i)(I).
\17\ 7 U.S.C. 2(c)(2)(C).
\18\ 7 U.S.C. 2(c)(2)(B) and (C).
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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 ``retail forex
transaction.'' \19\ Similarly, ``retail forex transaction'' does not
include a forward contract that creates an enforceable obligation to
make or take delivery, provided that each counterparty has the ability
to deliver and accept delivery in connection with its line of
business.\20\ In addition, the definition does not include transactions
done through an exchange, because in those cases the exchange would be
the counterparty to both the FDIC-supervised IDI and the retail forex
customer, rather than the FDIC-supervised IDI directly facing the
retail forex customer.
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\19\ See generally CFTC v. Int'l Fin. Servs. (New York), Inc.,
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between
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).
\20\ See 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(BB); 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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The proposed rule sought comment on whether leveraged, margined, or
bank-financed forex transactions, including rolling spot forex
transactions (so-called Zelener \21\ contracts), should be regulated as
retail forex transactions; the FDIC preliminarily believed that they
should.\22\
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\21\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also
CFTC v. Erskine, 512 F.3d 309 (6th Cir. 2008).
\22\ 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)
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One commenter supported the inclusion of rolling spot transactions
in the definition of ``retail forex transactions.'' 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.\23\
Therefore, the contracts are economically more like futures than spot
contracts, although courts have held them to be spot contracts in
form.\24\ Like the CFTC's retail forex rule and the OCC's proposed
retail forex rule, the final rule's definition includes leveraged,
margined, or bank-financed rolling spot forex transactions, as well as
certain other leveraged, margined, or bank-financed transactions.
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\23\ 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).
\24\ 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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Two commenters sought clarification that forex forwards would not
be included in the definition, because transactions that convert or
exchange actual currencies for any commercial or investment purpose are
a traditional product offered by FDIC-supervised IDIs and do not raise
the consumer protection issues associated with futures or rolling spot
forex transactions.
The FDIC agrees that a forex forward that is not leveraged,
margined, or financed by the FDIC-supervised IDI does not meet the
definition of ``retail forex transaction.'' However, a leveraged,
margined, or bank-financed forex forward is a retail forex transaction
unless it 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 \25\ or the
FDIC determines that the forward is not functionally or economically
similar to a forex future or option, as described below.
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\25\ See 7 U.S.C. 2(c)(2)(C)(i)(II)(bb)(BB).
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One commenter sought clarification whether the term ``retail forex
transaction'' includes a product known as a non-deliverable forex
forward (NDF). The commenter describes an NDF as a cash-settled forward
in which contractual parties are obligated to settle on the settlement
date. In an NDF, the commenter explained, instead of taking physical
delivery of the underlying foreign currency upon settlement, settlement
is made in U.S. dollars based on the difference between the contractual
forward rate and fixing rate.
[[Page 40782]]
An NDF would not be a covered transaction if a bank's customer were
an ECP. Where the counterparty is a non-ECP, that is, a retail
customer, an NDF would be a covered transactions if it were entered
into on a leveraged or margined basis, or financed by the bank.
The final rule contains a provision that allows the FDIC to exempt
specific transactions or types of transaction from the third prong of
the ``retail forex transaction'' definition. The FDIC is concerned that
certain traditional banking products, which are distinguishable from
speculative rolling spot forex transactions, may inadvertently fall
within the definition of ``retail forex transaction'' as leveraged,
margined, or bank-financed forex transactions. This result was not
intended by the Dodd-Frank Act, which requires retail forex rules to
treat similarly transactions that are functionally or economically
similar to forex futures or options.\26\ FDIC-supervised IDIs may seek
a determination that a given transaction or types of transaction does
not fall within the third prong of the ``retail forex transaction''
definition by submitting a written request to the FDIC.
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\26\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
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One commenter asked for confirmation that deposit accounts with
foreign exchange features are outside the scope of the rule. The Legal
Certainty for Bank Products Act of 2000, as amended by the Dodd-Frank
Act, generally exempts ``identified banking products'' from the
CEA.\27\ Identified banking products include: Deposit accounts, savings
accounts, certificates of deposit, or other deposit instruments issued
by a bank; banker's acceptances; letters of credit issued or loans made
by a bank; debit accounts at a bank arising from a credit card or
similar arrangement; and certain loan participations.\28\ Because
identified banking products are not subject to the CEA, they are not
prohibited by section 2(c)(2)(E)(ii) of the CEA. To provide clarity,
the final rule excludes identified banking products from the definition
of ``retail forex transaction.'' Identified banking products that have
embedded foreign exchange features, for example a deposit account in
which the customer may deposit funds in one currency and withdraw funds
in another, are not retail forex transactions.
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\27\ 7 U.S.C. 27a(a)(1). An identified banking product offered
by an FDIC-supervised IDI could become subject to the CEA if the
FDIC determines, in consultation with the CFTC and the Securities
and Exchange Commission, that the product would meet the definition
of a ``swap'' under the CEA or a ``security-based swap'' under
Securities Exchange Act of 1934 and has become known to the trade as
a swap or security-based swap, or otherwise has been structured as
an identified banking product for the purpose of evading the
provisions of the CEA, the Securities Act of 1933, or the Securities
Exchange Act of 1934. 7 U.S.C. 27a(b).
\28\ 7 U.S.C. 27(b) (citing Gramm-Leach-Bliley Act sec.
206(a)(1) to (5)).
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This section defines several terms by reference to the CEA, the
most important of which is ``eligible contract participant.'' Foreign
currency transactions with eligible contract participants 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 eligible
contract participants.\29\
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\29\ 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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Section 349.3--Prohibited Transactions
This section prohibits an FDIC-supervised IDI and its institution-
affiliated parties from engaging in fraudulent conduct in connection
with retail forex transactions. This section also prohibits an FDIC-
supervised IDI from acting as a counterparty to a retail forex
transaction if the FDIC-supervised IDI or its affiliate exercises
discretion over the customer's retail forex account because the FDIC
views such self-dealing as inappropriate.
The FDIC received no comments to this section, and adopts it as
proposed.
Section 349.4--Filing Procedures
This section requires that, before engaging in a retail forex
business, as defined in section 349.2, an FDIC-supervised IDI shall
provide prior written notice and obtain the FDIC's prior written
consent. 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 section 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 section 349.6,
discussed below.
The FDIC may request additional information, as necessary, prior to
issuing its consent.
For FDIC-supervised IDIs that have an existing retail forex
business, the final rule will 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.
The FDIC received no comment on this section and adopts it as
proposed.
Section 349.5--Application and Closing Out of Offsetting Long and Short
Positions
This section requires an FDIC-supervised IDI to close out
offsetting long and short positions in a retail forex account. The
FDIC-supervised IDI 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
[[Page 40783]]
on the transactions, increases the fees paid by the customer and
invites abuse.'' \30\ The FDIC agreed with this concern in the notice
of proposed rulemaking.
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\30\ Proposed CFTC Retail Forex Rule, 75 FR at 3287 n.54.
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One commenter indicated that a customer should be given the
opportunity to provide instructions with respect to the manner in which
the customer's retail forex transaction are offset when: (i) The
customer maintains separate accounts managed by different advisors;
(ii) the customer maintains separate accounts using different trading
strategies; or (iii) the customer employs different trading strategies
in one account and lies certain orders to risk-manage that exposure.
Two commenters also sought clarification that a customer could provide
specific offset instructions in writing or orally, and that such
instructions could be on a blanket basis.
The FDIC agrees that a customer should be able to offset retail
forex transactions in a particular manner, if he or she so chooses.
Paragraph (c) has been modified to provide that, notwithstanding the
default offset rules in paragraphs (a) and (b), the FDIC-supervised IDI
must offset retail forex transactions pursuant to a customer's specific
instructions. Blanket instructions are not sufficient for this purpose,
as they could obviate the default rule. However, offset instructions
need not be given separately for each pair of orders in order to be
``specific.'' Instructions that apply to sufficiently defined sets of
transactions could be specific enough. Finally, consistent with the
changes to section 349.12, offset instructions may be provided in
writing or orally provided that any oral instruction be captured by a
recording mechanism.
Section 349.6--Disclosure
This section requires 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.
Two commenters agreed with the need for a robust risk disclosure
statement, but suggested that a shorter, clearer, more direct, and less
redundant statement would be more effective. One commenter recommended
that the proposed disclosure statement be a sample or safe harbor
language for banks to use as they find appropriate.
After careful consideration, the final rule incorporates several
changes to the disclosures to eliminate redundancies, address
ambiguities, and convey the information more clearly.
The proposal requested comment on whether the risk disclosure
statement should disclose the percentage of profitable retail forex
accounts.
One commenter said that disclosing the ratio of profitable to
nonprofitable retail forex accounts is not useful because those ratios
depend on many factors (including the trading expertise of customers)
and could suggest that a bank is a more attractive retail forex
counterparty than another.
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.\31\ The CFTC 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.'' \32\ 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.'' \33\ The FDIC agrees with the CFTC and thus the final rule
requires this disclosure.
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\31\ 17 CFR 5.5(e)(1).
\32\ Proposed CFTC Retail Forex Rule, 75 FR at 3289.
\33\ Final CFTC Retail Forex Rule, 75 FR at 55412.
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The proposal requested comment on whether the risk disclosure
statement should include a disclosure that when a retail customer loses
money trading, the dealer makes money.
One of the commenters said that this disclosure is inaccurate
because in most cases a bank may immediately hedge retail forex
transactions or nets them with similar transactions and therefore does
not profit from exchange rate fluctuations. The commenter argued it is
more accurate to inform customers that the bank may or does mark-up (or
down) transactions or apply commission rates to transactions that will
result in income to the bank.
The FDIC understands that the economic model of a retail forex
business may be to profit from spreads, fees, and commissions.
Nonetheless, because any FDIC-supervised IDI engaging in retail forex
transactions is trading as principal, by definition, when the retail
forex customer loses money, the FDIC-supervised IDI makes money on that
transaction. The FDIC therefore believes that this disclosure is
accurate and helps potential retail forex customers understand the
nature of retail forex transactions. 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.\34\ The final rule includes this
disclosure requirement.
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\34\ 17 CFR 5.5(b).
---------------------------------------------------------------------------
The proposal asked whether it would be convenient to banks and
retail forex customers to allow the retail forex risk disclosure to be
combined with other disclosures that FDIC-supervised IDIs make to their
customers.
One commenter asked the FDIC to confirm that banks may add topics
to the risk disclosure statement.
The FDIC is concerned that the effectiveness of the disclosure
could be diminished if surrounded by other topics. Therefore, the final
rule requires the risk disclosure statement to be given to potential
retail forex customers as set forth in the rule. FDIC-supervised IDIs
may describe and provide additional information on retail forex
transactions in a separate document.
One commenter further asked the FDIC to confirm that the risk
disclosure statement may be appended to account opening agreements or
forms, and that a single signature by the customer on a combined
account agreement and disclosure form can be used as long as the
customer is directed to and acknowledges the risk disclosure statement
immediately prior to the signature line.
The FDIC believes that a separate risk disclosure document
appropriately highlights the risks in retail forex transactions, and
that requiring a separate signature for the separate risk disclosure
appropriately calls a potential retail forex customer's attention to
the risk disclosure statement. However, a bank may attach the risk
disclosure to a related document, such as the account agreement.
The proposal requested comment on whether the risk disclosure
statement should include a disclosure of fees the bank charges retail
forex customers.
One of the commenters agreed that the disclosure of fees is
appropriate, but should not include income from hedging retail forex
customers' positions or income streams not charged to the customer.
Moreover, the same commenter stated it is impractical to
[[Page 40784]]
numerically state the bid/ask spread given that it may vary.
The final rule, like the proposed rule, does not require FDIC-
supervised IDIs to disclose income streams not charged to the retail
forex customer. However, an FDIC-supervised IDI must do more than
simply describe the means by which they earn revenue. To the extent
practical, it must quantify the fees, commissions, spreads, and charges
it charges the retail forex customer. The FDIC further believes that
disclosure of the bid/ask spread is possible in a variety of ways. If
an FDIC-supervised IDI bases its prices off of the prices provided by a
third party, then the FDIC-supervised IDI may disclose the use of the
third party's pricing and the markup charged to retail forex customers.
Alternatively, the FDIC-supervised IDI may disclose the bid/ask spread
by quoting both the bid and ask prices to retail forex customers prior
to entering into a retail forex transaction. These quotes may be
provided as part of an electronic trading platform or, after a retail
forex customer calls the FDIC-supervised IDI for a retail forex
transaction, by providing both a bid and ask price for the transaction.
One of the bank commenters read the proposed disclosure to suggest
that a bank cannot seek to recover losses not covered by a customer's
margin account via an appropriate dispute resolution forum, and asked
the FDIC confirm that this was not the case.
It is not clear how common it will be for a retail forex customer
to incur retail forex obligations, including losses, in excess of
margin funds. Section 48.9(d)(4) requires an FDIC-supervised IDI, in
the event that a retail forex customer's margin falls below the amount
needed to satisfy the margin requirement to either: (1) Collect
sufficient margin from the retail forex customer; or (2) liquidate the
retail forex customer's retail forex transactions. This requirement
precludes an FDIC-supervised IDI from allowing customer's retail forex
transactions to remain open and continuing to accrue losses after it
has determined that additional margin funds are required. The final
rule does not forbid an FDIC-supervised IDI, from seeking to recover a
deficiency from a retail forex customer by obtaining a money judgment
or other enforceable order in an appropriate venue and then exercising
its collection rights as a judgment creditor. The disclosure has been
revised to make this fact clear.
Finally, the commenter said that the disclosure regarding the
availability of FDIC-insurance for retail forex transactions should be
clarified.
In the final rule, the disclosure requires an FDIC-supervised IDI
to state that retail forex transactions are not FDIC-insured. The
commenter agreed with that statement. It noted, however, that margin
funds may be insured deposits. The FDIC is charged with interpreting
the deposit insurance provisions of the FDI Act, and the insured status
of margin funds will turn on whether the funds are held in a way
consistent with those provisions, as interpreted by the FDIC.
Nevertheless, an FDIC-supervised IDI may disclose the availability of
FDIC insurance for retail forex margin accounts in a separate document
if permitted by law, including FDIC requirements related to such
disclosure and applicable provisions of the NDIP Policy Statement.
Section 349.7--Recordkeeping
This section specifies which documents and records an FDIC-
supervised IDI engaged in retail forex transactions must retain for
examination by the FDIC. This section also prescribes document
maintenance standards. The FDIC notes that records may be kept
electronically as permitted under the Electronic Signatures in Global
and National Commerce Act.\35\
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\35\ 15 U.S.C. 7001(d).
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One of the commenters, had a concern with proposed section
349.7(a)(5), which states that immediately upon the written or verbal
receipt of a retail forex transactions order, an FDIC-supervised IDI
shall prepare a written order memorandum, sometimes referred to as a
trade confirmation, for the order. The commenter requested
clarification about whether the use of a telephone recording system and
the retention of telephone recordings would satisfy such recordkeeping
requirements if details of the transaction are affirmed or confirmed
with the customer over a recorded telephone line.
After considering this comment, the FDIC has amended section 349.7
to permit the use of oral phone orders provided they are recorded and
customers are advised that they are speaking on a recorded line.
Recordkeeping requirements found in section 349.13(a)(4) of the
proposed rule were moved into this section to centralize recordkeeping
requirements in one section. Furthermore, the recordkeeping
requirements for order tickets are now medium-neutral: an FDIC-
supervised IDI may prepare an order ticket by recording an oral
conversation, for example via a telephone recording system. This change
reflects a change to section 349.12 that allows a retail customer to
authorize a retail forex transaction orally.
Section 349.8--Capital Requirements
This section requires 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 \36\ or the
FDIC-supervised IDI must obtain an exemption from the FDIC. In
addition, an FDIC-supervised IDI must continue to hold capital against
retail forex transactions as provided in the FDIC's capital
regulation.\37\ This rule does not amend the FDIC's prompt corrective
action regulation or capital regulation.
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\36\ 12 CFR part 6.
\37\ 12 CFR part 3.
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Section 349.9--Margin Requirements
Paragraph (a) requires 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.
The proposed rule requested comment on whether it should define the
major currencies in the final rule, but no comments addressed this
issue. The proposed approach to identifying major currencies is adopted
in the final 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).\38\ 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 obtain an interpretive letter
from the FDIC prior to treating any currency other than those listed
above as a ``major currency.'' \39\
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\38\ See National Futures Association, Forex Transactions: A
Regulatory Guide 17 (Feb. 2011); Federal Reserve Bank of New York,
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).
\39\ The Final CFTC Retail Forex Rule similarly does not define
``major currency.''
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For retail forex transactions, margin protects the retail forex
customer from
[[Page 40785]]
the risks related to trading with excessive leverage. The volatility of
the foreign currency markets exposes retail forex customers to
substantial risk of loss. High leverage 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 that inherent in the
trading of retail forex transactions by retail customers, 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.
The proposal requested comment on whether these margin requirements
were appropriate to protect retail forex customers.
One commenter, while not objecting to the amount of margin
required, suggested that customers should have some reasonable time to
meet margin calls before they are deemed to have defaulted and face a
forced liquidation of their positions.
Subject to reasonable collection times as described below, an FDIC-
supervised IDI must ensure that there is always sufficient margin in a
retail forex customer's margin account for the customer's open retail
forex transactions. If the amount of margin in a retail forex
customer's margin account is insufficient to meet the requirements of
paragraph (a), then the FDIC-supervised IDI must make a margin call to
replenish the margin account to an acceptable level. Retail forex
customers should have a reasonable amount of time to post required
margin for retail forex transactions. The general market practice is
for retail forex counterparties to make margin calls at the close of
trading on a trading day based on margin levels at the end of that day
or at the open of trading on the next trading day based on margin
levels at the end of that prior day. If the retail forex customer does
not post sufficient margin by the end of the next close of trading,
then the retail forex counterparty liquidates the customer's retail
forex account. In other words, by the close of business on a given
trading day, the margin account must be sufficient to meet the margin
requirements as at the end of the prior trading day.
Paragraph (b) specifies 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. However, it may be
prudent for FDIC-supervised IDIs to review and modify the size of the
haircuts more frequently. The FDIC requested comment on whether the
final rule should specify haircuts for noncash margin. The FDIC
received no comments on this paragraph and adopts this paragraph as
proposed.
Paragraph (c) requires an FDIC-supervised IDI to hold each retail
forex customer's retail forex transaction margin in a separate account.
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.
One commenter requested clarification that this paragraph allows
FDIC-supervised IDIs to place margin into an omnibus or commingled
account for operational convenience, provided that the bank keeps
records of each customer's margin balance.
FDIC-supervised IDIs may place margin collected from retail forex
customers into an omnibus or commingled account if the bank keeps
records of each retail forex customer's margin balance. A ``separate
account'' is one separate from the retail forex customer's other
accounts at the bank. For example, margin for retail forex transactions
cannot be held in a retail forex customer's savings account. Funds in a
savings account pledged as retail forex margin must be transferred to a
separate margin account, which could be an individual or an omnibus
margin account. The final rule contains slightly modified language to
clarify this intent.
Paragraph (d) requires 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 FDIC-supervised IDI fails to meet the
requirements of paragraph (a). The proposed rule would have required
the FDIC-supervised IDI 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.
The proposal requested comment on how frequently retail forex
customers' margin accounts should be marked to market.
One commenter asked that the final rules permit marking to market
more frequently than daily if the FDIC-supervised IDI's systems and
customer agreements permit. The final rule, like the proposed rule,
requires marking to market at least once per day. Nothing in paragraph
(d) forbids a more frequent schedule.
Paragraph (e) prohibits 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 pledged as 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 a retail forex dealer regulated by
the CFTC. The FDIC believes it is 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 or an affiliate.
However, should a retail forex customer's losses exceed the amount of
margin he or she has pledged, this rule does not forbid an FDIC-
supervised IDI from seeking to recover the deficiency in an appropriate
forum, such as a court of law. The FDIC-supervised IDI would be an
unsecured creditor of the retail forex customer with respect to that
claim.
One commenter suggested that retail forex customers should be able
to pledge assets other than those held in the customer's margin
account. For example, a customer could nominate a deposit account as
containing margin for its retail forex transactions.
Nothing in this rule prevents retail forex customers from pledging
other assets they have at the bank as margin for retail forex
transactions. However, once those assets are pledged as margin, the
FDIC-supervised IDI must transfer them to the separate margin account.
For example, if a retail forex customer pledges $500 in her checking
account as margin, then the bank must deduct $500 from the checking
account and place
[[Page 40786]]
$500 in the margin account. The FDIC believes this transfer
appropriately alerts retail forex customers to the nature of the
pledge. An FDIC-supervised IDI may not evade this requirement by merely
taking a security interest in assets pledged as margin: pledged assets
must be placed in a separate margin account.
Section 349.10--Required Reporting to Customers
This section requires an FDIC-supervised IDI engaging in retail
forex transactions to provide each retail forex customer a monthly
statement and confirmation statements.
The proposal sought comment on whether this section provides for
statements that would be useful and meaningful for retail forex
customers, or whether other information would be more appropriate.
One commenter sought clarification that the statements may be
provided electronically, and also suggested that retail forex customers
would be better served with continuous online access to account
information rather than monthly statements. One commenter recommended
that the customer should have the opportunity to opt out of receiving
monthly statements (whether paper or electronic) and confirmation
statements for each retail forex transaction.
The FDIC encourages FDIC-supervised IDIs to provide real-time,
continuous access to account information, and this rule does not
prevent FDIC-supervised IDIs from doing so. However, the FDIC believes
it is valuable to require FDIC-supervised IDIs to provide retail forex
account information to retail forex customers at least once per month.
Monthly statements may be provided electronically as permitted under
the Electronic Signatures in Global and National Commerce Act.\40\
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\40\ 15 U.S.C. 7001(c).
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Section 349.11--Unlawful Representations
This section prohibits an FDIC-supervised IDI and its institution-
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 prohibits 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. This section does 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. This section also does not
prohibit an FDIC-supervised IDI from hedging or otherwise mitigating
its own exposure to retail forex transactions or any other foreign
exchange risk.
The FDIC received no comments on this section and adopts it as
proposed.
Section 349.12--Authorization To Trade
The proposed rule required FDIC-supervised IDIs to have specific
written authorization from a retail forex customer before effecting a
retail forex transaction. Three commenters said that requiring specific
written authorization from a retail forex customer before effecting a
retail forex transaction for that customer would be impractical. One of
the commenters indicated that such a requirement could be burdensome
and detrimental to the customer's interests, for example if the
customer cannot, due to technical difficulties, convey written
instructions.
The FDIC agrees with this concern, and further notes that the
CFTC's retail forex rule does not require written authorization for
each retail forex transaction. The final rule requires an FDIC-
supervised IDI to obtain a retail forex customer's specific
authorization to effect a particular trade. FDIC-supervised IDIs must
keep records of authorizations to trade pursuant to this rule and if
the customer conveys his or her authorization orally by telephone, the
authorization must be preserved by recording.
Section 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), an FDIC-supervised IDI engaging in retail
forex transactions is 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; and (2) to
establish settlement prices fairly and objectively.
One commenter requested clarification that the prohibition on front
running applies only when the person entering orders for the bank's
account or the account of related persons has knowledge of unexecuted
retail customer orders, and that a bank may comply with this provision
by erecting a firewall between the retail forex order book and other
forex trading desks.
The final rule requires FDIC-supervised IDIs to establish
reasonable policies, procedures, and controls to address front running.
This provision is designed to prevent the FDIC-supervised IDIs from
unfairly taking advantage of information they gain from customer
trades. Effective firewalls and information barriers are reasonable
policies, procedures, and controls to ensure that an FDIC-supervised
IDI does not take unfair advantage of its retail forex customers. The
final rule clarifies paragraph (a) accordingly.
Paragraph (b) prohibits 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. The FDIC received no comments on this paragraph and adopts
this paragraph as proposed.
Paragraph (c) ensures that related persons 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 with which they are affiliated.
Similarly, paragraph (d) ensures that related persons 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 with which they are
affiliated.
One commenter requested confirmation that FDIC-supervised IDIs may
rely on a representation of potential customers that they are not
affiliated with a retail forex counterparty. Paragraph (c) prohibits an
FDIC-supervised IDI from knowingly handling the retail forex account of
a related person of a retail forex counterparty. To the extent
reasonable, FDIC-supervised IDIs may rely on representations of
potential retail forex customers. However, if an FDIC-supervised IDI
has actual knowledge that a retail forex customer is a related person
of a retail forex counterparty, then no representation by the customer
will allow the bank to handle that retail forex account. An FDIC-
supervised IDI should inquire as to whether a potential retail forex
customer is related to a retail forex counterparty to avoid violating
paragraph (c) through willful ignorance.
One commenter also requested clarification that these paragraphs
apply only to employees of firms that offer
[[Page 40787]]
retail forex transactions, and, in the case of banks, only employees of
the retail forex business and not any employee of the bank that offers
retail forex transactions. The FDIC agrees that the prohibition in
paragraph (c) and (d) should only apply to employees working in the
retail forex business; paragraphs (c) and (d) are designed to prevent
evasion of the prohibition against front running. The final rule
clarifies this point.
Paragraph (e) prohibits 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.
Paragraph (e)(3) does 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 may reject an order
and advise customers they may submit a new order.
The proposal sought comment on whether paragraph (e)(3)
appropriately protected retail forex customers, or whether a
prohibition on re-quoting would be simpler.
One commenter argued that the prohibition on re-quoting in
paragraph (e)(3) is overly broad and should permit new bids or offers
to reflect updated spreads. In the alternative, the commenter suggested
prohibiting re-quoting and requiring that, in the event an order is not
confirmed, the customer must submit a new order at the then-currently
displayed price. As stated above, rather than allowing re-quotes, an
FDIC-supervised IDI may reject orders and request that customers submit
a new order. Paragraph (e)(3) is consistent with the CFTC's retail
forex rule and the FDIC adopts it as proposed.
Paragraph (e)(4) requires an FDIC-supervised IDI engaging in retail
forex transactions to execute similar orders in the order they are
received. The prohibition prevents an FDIC-supervised IDI from offering
preferred execution to some of its retail forex customers but not
others.
Section 349.14--Supervision
This section imposes 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.
The proposal requested comment on whether this section imposed
requirements not already encompassed by safety and soundness standards.
Having received no comment on this section, the FDIC adopts it as
proposed.
Section 349.15--Notice of Transfers
This section describes the requirements for transferring a retail
forex account. Generally, an FDIC-supervised IDI must 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
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 must generally provide the
transferred customers with the risk disclosure statement of section 6
and obtain each affected customer's written acknowledgement within 60
days.
The FDIC received no comments to this section and adopts it as
proposed.
Section 349.16--Customer Dispute Resolution
This section imposes limitations on how an FDIC-supervised IDI may
handle disputes arising out of a retail forex transaction. For example,
this section would restrict an FDIC-supervised IDI's ability to require
mandatory arbitration for such disputes.
The FDIC received no comments to this section and adopts it as
proposed.
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 final 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.\41\ The rule would impose recordkeeping
and disclosure requirements on any FDIC-supervised IDI, including one
that engages in retail forex transactions with their customers.
---------------------------------------------------------------------------
\41\ 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 banks under $1
billion in assets 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.
Further, in response to the NPR, the FDIC received no comments with
respect to RFA.
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 the notice of proposed rulemaking were
submitted by the FDIC to OMB for review and approval under section 3506
of the PRA and section 1320.11 of OMB's implementing regulations (5 CFR
part 1320 et seq.). In response, OMB filed comments with the FDIC in
accordance with 5 CFR 1320.11(c). The comments indicated that OMB was
withholding approval at that time. The FDIC was directed to examine
public comment in response to the NPRM and include in the supporting
statement of the
[[Page 40788]]
Information Collection Request (ICR) to be filed at the final rule
stage a description of how the agency has responded to any public
comments on the ICR, including comments maximizing the practical
utility of the collection and minimizing the burden. The FDIC did
receive several comments addressing the substance and/or method of the
disclosure and reporting requirements contained in the rule. These
comments and the FDIC's response to the comments are included in the
preamble discussion and in a revised Supporting Statement submitted to
OMB. The information collection requirements in the final rule are
found in sections 349.4-349.7, 349.9-349.10, 349.13, 349.15-349.16.
The FDIC has a continuing interest in comments on its information
collections. Therefore, 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;
(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.
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 process in section 349.4 requires 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 section 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 requests the FDIC's written consent.
Disclosure Requirements
Section 349.5, regarding the application and closing out of
offsetting long and short positions, requires 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 must provide specific written instructions on
how the offsetting transaction should be applied.
Section 349.6 requires that an FDIC-supervised IDI furnish a retail
forex customer with a written disclosure before opening an account 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.
Section 349.10 requires an FDIC-supervised IDI to issue monthly
statements to each retail forex customer and to send confirmation
statements following transactions.
Section 349.13(b) allows 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. Section 349.13(c) prohibits 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. Section 349.13(d) prohibits 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.
Section 349.15 requires 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
also requires 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 section 349.16
require certain endorsements, acknowledgments, and signature language.
It also requires 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
Sections 349.7 and 349.13 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. Section 349.7 also requires 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. Section 349.9 requires 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. Effective Date Under the Administrative Procedures Act
This final rule takes effect on July 15, 2011. 5 U.S.C. 553(d)(1)
requires publication of a substantive rule not less than 30 days before
its effective date, except in cases where the rule grants or recognizes
an exemption or relieves a restriction. Section 2(c)(2)(E)(ii) of the
CEA would prohibit FDIC-supervised IDIs from engaging in retail forex
transactions unless this final rule becomes effective on July 16, 2011.
This final rule would relieve that restriction and allow FDIC-
supervised IDIs to continue to engage in retail forex transactions
without delay. Furthermore, under 5 U.S.C. 553(d)(3), an agency may
find good cause to publish a rule less than 30 days before its
effective date. The FDIC finds such good cause, as the 30-day delayed
effective date is unnecessary under the provisions of the final rule.
In Section 349.4(c) of the final rule, the FDIC
[[Page 40789]]
allows FDIC-supervised IDIs a 30-day grace period to inform the FDIC of
its retail forex activity, along with up to a six-month window to
comply with the provisions of the retail forex rule.
D. Effective Date Under the CDRI Act
The Riegle Community Development and Regulatory Improvement Act of
1994 (CDRI Act), 12 U.S.C. 4801 et seq., provides that new regulations
that impose additional reporting or disclosure requirements on insured
depository institutions do not take effect until the first day of a
calendar quarter after the regulation is published, unless the agency
determines there is good cause for the regulation to become effective
at an earlier date. The FDIC finds good cause that this final rule
should become effective on July 15, 2011, as it would be in the public
interest to require the disclosure and consumer protection provisions
in this rule to take effect at this earlier date. If the rule did not
become effective until October 1, 2011, then FDIC-supervised IDIs would
not be able to provide retail forex transactions to customers to meet
their financial needs.
E. Small Business Regulatory Enforcement Fairness Act
The Office of Management and Budget (OMB) has determined that the
Final Rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Act of 1996
(SBREFA), 5 U.S.C. 801 et seq.
F. Solicitation of Comments on Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act, Public Law 106-102, 113
Stat. 1338, 1471 (Nov. 12, 1999), requires the federal banking agencies
to use plain language in all proposed and final rules published after
January 1, 2000. No commenters suggested that the proposed rule was
materially unclear, and the FDIC believes that the Final Rule is
substantively similar to the proposed rule.
List of Subjects in 12 CFR Part 349
Banks, Consumer protection, Definitions, Foreign currencies,
Foreign exchange, State nonmember insured bank, Reporting and
recordkeeping requirements.
For the reasons stated in the preamble, the FDIC adds 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.
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), 27 et seq.
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. Except as provided in paragraph (d) of this section,
this part applies to FDIC-supervised insured depository institutions.
(d) International applicability. Sections 349.3 and 349.5 to 349.16
do not apply to retail foreign exchange transactions between a foreign
branch of an FDIC-supervised IDI and a non-U.S. customer. With respect
to those transactions, an FDIC-supervised IDI must comply with any
disclosure, recordkeeping, capital, margin, reporting, business
conduct, documentation, and other requirements of applicable foreign
law.
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 Sec. 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 for which the Federal Deposit Insurance
Corporation is the appropriate Federal banking agency pursuant to Sec.
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.
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 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:
[[Page 40790]]
(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 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.
Related person, when used in reference to a retail forex
counterparty, means:
(1) Any general partner, officer, director, or owner of ten percent
or more of the capital stock of the 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 forex transaction means an agreement, contract, or
transaction in foreign currency, other than an identified banking
product or a part of an identified banking product, that is offered or
entered into by 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 Sec. 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
Sec. 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; or
(iii) An agreement, contract, or transaction that the FDIC
determines is not functionally or economically similar to:
(A) A contract of sale of a commodity for future delivery or an
option on such a contract; or
(B) 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)).
Retail forex obligations means obligations of a retail forex
customer with respect to retail forex transactions, including, but not
limited to, trading losses, fees, and commissions.
Sec. 349.3 Prohibited transactions.
(a) Fraudulent conduct prohibited. No FDIC-supervised insured
depository 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 subparagraph (c)(1) of this part, 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 July 15, 2011 may continue to do so for up to six
[[Page 40791]]
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 July 15, 2011 shall be deemed, during the six-month
period (including any extension) provided in paragraph (e) of this
section, to be acting pursuant to a rule or regulation described in
Sec. 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 paragraphs (a) and (b) of this section, the offsetting
transaction shall be applied as directed by a retail forex customer's
specific instructions. These instructions may not be made by the 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 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 or property 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
[[Page 40792]]
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) Retail forex transactions are not insured by the Federal
Deposit Insurance Corporation.
(6) Retail forex transactions are not a deposit in, or guaranteed
by, an FDIC-supervised insured depository institution.
(7) Retail forex transactions are subject to investment risks,
including possible loss of all amounts invested.
Finally, you should thoroughly investigate any statements by any
FDIC-supervised insured depository institution that minimize the
importance of, or contradict, any of the terms of this risk disclosure.
These 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 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,
pertaining to its retail forex business, including:
(1) Retail forex account records. For each retail forex account:
(i) The name and address of the person for whom the account is
carried or introduced and the principal occupation or business of the
person.
(ii) The name of any other person guaranteeing the account or
exercising trading control with respect to the account;
(iii) The establishment or termination of the account; and
(iv) A means to identify the person who has solicited and is
responsible for the account or assign account numbers in such a manner
as to identify that person.
(v) The funds in the account, net of any commissions and fees;
(vi) The account's net profits and losses on open trades;
(vii) The funds in the account plus or minus the net profits and
losses on open trades, adjusted for the net option value in the case of
open options positions;
[[Page 40793]]
(viii) Financial ledger records that show separately for each
retail forex customer all charges against and credits to such retail
forex customer's account, including deposits, withdrawals, and
transfers, and charges or credits resulting from losses or gains on
closed transactions; and
(ix) A list of all retail forex transactions executed for the
account, with the details specified in paragraph (a)(2) of this
section;
(2) Retail forex transaction records. For each retail forex
transaction:
(i) The price at which the FDIC-supervised insured depository
institution placed the order, or, in the case of an option, the premium
that the retail forex customer paid;
(ii) The customer account identification information;
(iii) The currency pair;
(iv) The size or quantity of the order;
(v) Whether the order was a buy or sell order;
(vi) The type of order, if the order was not a market order;
(vii) 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;
(viii) For options, whether the option is a put or call, expiration
date, quantity, underlying contract for future delivery or underlying
physical, strike price, and details of the purchase price of the
option, including premium, mark-up, commission, and fees; and
(ix) For futures, the delivery date; and
(x) If the order was made on a trading platform:
(A) The price quoted on the trading platform when the order was
placed, or, in the case of an option, the premium quoted;
(B) The date and time the order was transmitted to the trading
platform; and
(C) The date and time the order was executed;
(3) Price changes on a trading platform. If a trading platform is
used, daily logs showing each price change on the platform, the time of
the change to the nearest second, and the trading volume at that time
and price;
(4) Methods or algorithms. Any method or algorithm used to
determine the bid or asked price for any retail forex transaction or
the prices at which customer orders are executed, including, but not
limited to, any markups, fees, commissions or other items which affect
the profitability or risk of loss of a retail forex customer's
transaction;
(5) Daily records which show for each business day complete details
of:
(i) All retail forex transactions that are futures transactions
executed on that day, including the date, price, quantity, market,
currency pair, delivery date, and the person for whom such transaction
was made;
(ii) All retail forex transactions that are option transactions
executed on that day, including the date, whether the transaction
involved a put or call, the expiration date, quantity, currency pair,
delivery date, strike price, details of the purchase price of the
option, including premium, mark-up, commission and fees, and the person
for whom the transaction was made;
(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; and
(6) Other records. Written acknowledgements of receipt of the risk
disclosure statement required by section 349.6(b), records required
under paragraph (b) through (f) of this section, trading cards,
signature cards, street books, journals, ledgers, payment records,
copies of statements of purchase, and all other records, data and
memoranda that have been prepared in the course of the 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 section 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) Order Tickets. (1) Except as provided in paragraph (e)(2) of
this section, immediately upon the receipt of a retail forex
transaction order, an FDIC-supervised insured depository institution
must prepare an order ticket for the order (whether unfulfilled,
executed, or canceled). The order ticket must include:
[[Page 40794]]
(i) Account identification (account or customer name with which the
retail forex transaction was effected);
(ii) Order number;
(iii) Type of order (market order, limit order, or subject to
special instructions);
(iv) Date and time, to the nearest minute, the retail forex
transaction order was received (as evidenced by timestamp or other
timing device);
(v) Time, to the nearest minute, the retail forex transaction order
was executed; and
(vi) Price at which the retail forex transaction was executed.
(2) Post-execution allocation of bunched orders. Specific
identifiers for retail forex accounts included in bunched orders need
not be recorded at time of order placement or upon report of execution
as required under paragraph (e)(1) of this section if the following
requirements are met:
(i) The 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 retail forex customers upon request:
(A) The general nature of the post-execution 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) Post-execution allocations are made as soon as practicable
after the entire transaction is executed;
(iii) Post-execution allocations are fair and equitable, with no
account or group of accounts receiving consistently favorable or
unfavorable treatment; and
(iv) The post-execution allocation methodology is sufficiently
objective and specific to permit the FDIC to verify the fairness of the
allocations using that methodology.
(f) Record of monthly statements and confirmations. An FDIC-
supervised insured depository institution shall retain a copy of each
monthly statement and confirmation required by section 349.10.
(g) 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.
(h) 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 for retail forex
transactions in excess of the requirements of paragraph (a) of this
section must be in the form of cash or the following financial
instruments:
(i) Obligations of the United States and obligations fully
guaranteed as to principal and interest by the United States;
(ii) General obligations of any State or of any political
subdivision thereof;
(iii) General obligations issued or guaranteed by any enterprise,
as defined in 12 U.S.C. 4502(10);
(iv) Certificates of deposit issued by an insured depository
institution, as defined in Sec. 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 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 (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 retail forex obligations
against any funds or other asset of the retail forex customer other
than margin in the separate margin account described in paragraph (c)
of this section;
(2) Apply a retail forex customer's retail forex obligations 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
[[Page 40795]]
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 (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.
(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 to effect
the retail forex transaction.
(b) Requirements for specific authorization. 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.
[[Page 40796]]
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 policies,
procedures, and controls designed, at a minimum, to:
(1) Ensure, to the extent reasonable, that each order received from
a retail forex transaction that is executable at or near the price that
the FDIC-supervised insured depository institution has quoted to the
retail forex customer is entered for execution before any order in any
retail forex transaction for
(i) A any proprietary account;
(ii) An account in which a related person has an interest, or any
account for which such a related person may originate orders without
the prior specific consent of the account owner if the related person
has gained knowledge of the retail forex customer's order prior to the
transmission of an order for a proprietary account;
(iii) an account in which such a related person has an interest, if
the related person has gained knowledge of the retail forex customer's
order prior to the transmission of an order for a proprietary account;
or
(iv) an account in which such a related person may originate orders
without the prior specific consent of the account owner if the related
person has gained knowledge of the retail forex customer's order prior
to the transmission of an order for a proprietary account.
(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
(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 may knowingly handle the retail
forex account of an employee of another retail forex counterparty's
retail forex business unless the FDIC-supervised insured depository
institution:
(1) Receives written authorization from a person designated by the
other retail forex counterparty with responsibility for the
surveillance over the account pursuant to paragraph (a)(2) of this
section;
(2) Prepares immediately upon receipt of an order for the account a
written record of the order, including the account identification and
order number, and records thereon to the nearest minute, by time-stamp
or other timing device, the date and time the order is received; and
(3) Transmits on a regular basis to the other retail forex
counterparty copies of all statements for the account and of all
written records prepared upon the receipt of orders for 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
working in the institution's retail forex business may have an account,
directly or indirectly, with another retail forex counterparty unless
the other retail forex counterparty:
(1) Receives written authorization to open and maintain the an
account from a person designated by the FDIC-supervised insured
depository institution of which it is a related person with
responsibility for the surveillance over the account pursuant to
paragraph (a)(2) of this section; and
(2) Transmits on a regular basis to the FDIC-supervised insured
depository institution copies of all statements for such account and of
all written records prepared by the other retail forex counterparty
upon receipt of orders for the 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
[[Page 40797]]
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 sixty 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) Voluntary submission of claims to dispute or settlement
procedures. No FDIC-supervised insured depository institution may enter
into any agreement or understanding with a retail forex customer in
which the customer agrees, prior to the time a claim or grievance
arises, to submit such claim or grievance to any settlement procedure.
(b) Election of forum. (1) Within ten business days after receipt
of notice from the retail forex customer that the customer intends to
submit a claim to arbitration, 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) Enforceability. A dispute settlement procedure may require
parties using such procedure to agree, under applicable state law,
submission agreement or otherwise, to be bound by an award rendered in
the procedure, provided that the agreement to submit the claim or
grievance to the voluntary procedure under paragraph (a) of this
section or that agreement to submit the claim or grievance was made
after the claim or grievance arose. Any award so rendered shall be
enforceable in accordance with applicable law.
(d) Time limits for submission of claims. The dispute settlement
procedure used by the parties shall not include any unreasonably short
limitation period foreclosing submission of a customer's claims or
grievances or counterclaims.
(e) Counterclaims. A procedure for the settlement of a retail forex
customer's claims or grievances against an FDIC-supervised insured
depository institution or employee thereof may permit the submission of
a counterclaim in the procedure by a person against whom a claim or
grievance is brought. 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 6th of July 2011.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2011-17396 Filed 7-11-11; 8:45 am]
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