[Federal Register Volume 78, Number 68 (Tuesday, April 9, 2013)]
[Rules and Regulations]
[Pages 21019-21035]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-08163]


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FEDERAL RESERVE SYSTEM

12 CFR Part 240

[Docket No. R-1428]
RIN 7100-AD 79


Retail Foreign Exchange Transactions (Regulation NN)

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

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SUMMARY: The Board of Governors of the Federal Reserve System 
(``Board'') is adopting a final rule to permit banking organizations 
under its supervision to engage in off-exchange transactions in

[[Page 21020]]

foreign currency with retail customers. The final rule also describes 
various requirements with which banking organizations must comply to 
conduct such transactions.

DATES: This rule is effective on May 13, 2013.

FOR FURTHER INFORMATION CONTACT: Scott Holz, Senior Counsel, Legal 
Division, (202) 452-2966.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 21, 2010, President Obama signed into law the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank 
Act).\1\ As amended by section 742(c)(2) of the Dodd-Frank Act,\2\ the 
Commodity Exchange Act (CEA) provides that a United States financial 
institution \3\ for which there is a Federal regulatory agency \4\ 
shall not enter into, or offer to enter into, certain types of foreign 
exchange transactions described in section 2(c)(2)(B)(i)(I) of the CEA 
with a retail customer \5\ except pursuant to a rule or regulation of a 
Federal regulatory agency allowing the transaction under such terms and 
conditions as the Federal regulatory agency shall prescribe \6\ (a 
``retail forex rule''). Section 2(c)(2)(B)(i)(I) includes ``an 
agreement, contract, or transaction in foreign currency that * * * is a 
contract of sale of a commodity for future delivery (or an option on 
such a contract) or an option (other than an option executed or traded 
on a national securities exchange registered pursuant to section 6(a) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).'' \7\ A 
Federal regulatory agency's retail forex rule must treat all such 
futures and options and all agreements, contracts, or transactions that 
are functionally or economically similar to such futures and options 
similarly.\8\
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    \1\ Public Law 111-203, 124 Stat. 1376.
    \2\ Dodd-Frank Act Sec.  742(c)(2) (codified at 7 U.S.C. 
2(c)(2)(E) (2011).
    \3\ The CEA defines ``financial institution'' to include an 
agreement corporation, an Edge Act corporation, a depository 
institution (as defined in section 3 of the Federal Deposit 
Insurance Act), a financial holding company (as defined in section 2 
of the Bank Holding Company Act of 1956), a trust company, or ``a 
similarly regulated subsidiary or affiliate of an entity'' described 
above. 7 U.S.C. 1a(21).
    \4\ For purposes of the retail forex rules, ``Federal regulatory 
agency'' includes ``an appropriate Federal banking agency.'' 7 
U.S.C. 2(c)(2)(E)(i)(III). The Board is an ``appropriate Federal 
banking agency'' under the CEA. 7 U.S.C. 1a(2).
    \5\ A retail customer is a person who is not an ``eligible 
contract participant'' under the CEA. See, 7 U.S.C. 1a(18).
    \6\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
    \7\ 7 U.S.C. 2(c)(2)(B)(i)(I).
    \8\ 7 U.S.C. 2(c)(2)(E)(iii)(II).
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    Retail forex rules must prescribe appropriate requirements with 
respect to disclosure, recordkeeping, capital and margin, reporting, 
business conduct, and documentation requirements, and may include such 
other standards or requirements as the Federal regulatory agency 
determines to be necessary.\9\ The Board's rule applies to ``banking 
institutions,'' a term defined in section 240.2(b) to mean state member 
banks, uninsured state-licensed branches of foreign banks, financial 
holding companies, bank holding companies, savings and loan holding 
companies,\10\ agreement corporations, and Edge Act corporations.
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    \9\ 7 U.S.C. 2(c)(2)(E)(iii)(I).
    \10\ The Board's proposed rule did not explicitly cover savings 
and loan holding companies (SLHCs). They have been added to the 
regulation to reflect the transfer to the Board of regulatory 
responsibility for SLHCs on July 21, 2011.
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    On September 10, 2010, the Commodity Futures Trading Commission 
(CFTC) adopted a retail forex rule for persons subject to its 
jurisdiction.\11\ After studying and considering the CFTC's retail 
forex rule, and consulting with the Office of the Comptroller of the 
Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC), 
the Board approved for publication a notice of proposed rulemaking 
(NPR) for retail forex transactions effected by banking institutions on 
July 28, 2011. The NPR was published in the Federal Register on August 
3, 2011,\12\ and the comment period closed on October 11, 2011. In 
response to the NPR, the Board received six comments: three from 
individuals, one from a bank, and two from trade associations. One of 
the individual commenters did not address the rule, while another 
individual commenter expressed general support for the rule. The third 
individual (hereinafter ``the individual commenter'') and the bank 
(hereinafter ``the bank commenter'') generally supported the rule while 
requesting certain clarifications and changes. One trade association 
requested changes to reduce the burden on certain entities that would 
qualify as ``retail forex customers'' under the proposed regulation. 
The other trade association letter requested changes to address retail 
customers who use foreign exchange in connection with the purchase or 
sale of a security denominated in a foreign currency. These comments 
are addressed in the Section-by-Section Analysis below. The Board is 
adopting a final rule that is substantially the same as the proposed 
rule, with certain clarifications as discussed below.
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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\ 76 FR 46652 (August 3, 2011).
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II. Section-by-Section Analysis

Section 240.1--Authority, Purpose, and Scope

    This section authorizes a banking institution to conduct retail 
forex transactions.
    The scope of the regulation covers branches and offices of banking 
institutions, although foreign branches and offices of these 
institutions are not subject to sections 240.3 and 240.5 through 240.16 
unless the branch or office is dealing with a United States customer. 
Since sections 240.1 and 240.2 cover the authority, purpose and scope 
of the regulation and the definitions used in the regulation, if a 
banking institution's only retail forex transactions are conducted by a 
foreign branch or office and limited to non-U.S. customers, the only 
operative section of the regulation that would apply would be section 
240.4. As described below, this section requires a banking institution 
that wishes to engage in retail forex transactions to notify the Board 
before commencing a retail forex business.
    The regulation also covers subsidiaries of banking institutions 
that are organized under the laws of the United States or a U.S. state, 
unless the subsidiary is subject to the jurisdiction of another federal 
regulatory agency that is authorized to prescribe retail forex rules 
under section 2(c)(2)(E) of the Commodity Exchange Act.\13\ 
Subsidiaries of a banking institution that are organized under foreign 
law are not covered regardless of the nationality of the customer.
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    \13\ 7 U.S.C. 2(c)(2)(E). The federal regulatory authorities 
other than the Board are the CFTC, OCC, FDIC, the Securities and 
Exchange Commission, the National Credit Union Association, and the 
Farm Credit Administration.
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    The rule is applicable to retail forex transactions engaged in by 
banking institutions on or after the effective date.

Section 240.2--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 a banking 
institution and a person that is not an eligible

[[Page 21021]]

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 or margined transactions. 
This definition has several important features.
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    \14\ The definition of ``eligible contract participant'' is 
found in section 1a(18) of 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).
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    First, certain transactions in foreign currency are not ``retail 
forex transactions,'' and therefore are not subject to the prohibition 
in section 742(c)(2) of the Dodd-Frank Act. For example, a ``spot'' 
forex transaction where one currency is bought for another and the two 
currencies are exchanged within two days is not a ``future'' and would 
not meet the definition of a ``retail forex transaction,'' since actual 
delivery occurs as soon as practicable.\17\ Similarly, a ``retail forex 
transaction'' does not include a forward contract with a commercial 
entity that creates an enforceable obligation to make or take delivery, 
provided the commercial counterparty has the ability to make delivery 
and accept delivery in connection with its line of business.\18\ In 
addition, ``retail forex transaction'' does not include an ``identified 
banking product'' or a part of an ``identified banking product,'' as 
defined in section 401(b) of the Legal Certainty for Bank Product Act 
of 2000.\19\ Finally, the definition does not include transactions 
executed on a securities exchange and banking institutions are 
ineligible to effect retail forex transactions on a designated contract 
market.
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    \17\ 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).
    \18\ See generally, CFTC v. Int'l Fin. Servs. (New York), Inc., 
323 F. Supp. 2d 482, 495 (S.D.N.Y. 2004) (distinguishing between 
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).
    \19\ 7 U.S.C. 27(b).
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    Second, the definition of ``retail forex transaction'' covers 
rolling spot forex transactions offered or entered into on a leveraged 
or margin basis (so-called Zelener \20\ contracts), including without 
limitation such transactions traded on the Internet, through a mobile 
phone, or on an electronic platform. A rolling spot forex transaction 
normally requires delivery of currency within two days, like spot 
transactions. However, in practice, these contracts are indefinitely 
renewed every other day and no currency is actually delivered until one 
party affirmatively closes out the position.\21\ Therefore, the 
contracts are economically more like futures than spot contracts, 
although some courts have held them to be spot contracts in form.\22\
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    \20\ CFTC v. Zelener, 373 F.3d 861 (7th Cir. 2004); see also 
CFTC v. Erskine, 512 F.3rd 309 (6th Cir. 2008).
    \21\ For example, in Zelener, the retail forex dealer retained 
the right, at the date of delivery of the currency to deliver the 
currency, roll the transaction over, or offset all or a portion of 
the transaction with another open position held by the customer. See 
CFTC v. Zelener, 373 F.3d 861, 869 (7th Cir. 2004).
    \22\ 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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    One of the trade association comment letters was submitted by the 
American Bankers Association and the Global Financial Markets 
Association's Global Foreign Exchange Division (hereinafter ``the ABA/
GFMA letter''). The comment letter sought clarification or relief that 
would result in the exemption of certain forex transactions by retail 
customers initiated solely for the purpose of completing a transaction 
in foreign securities. This comment letter was addressed to all of the 
federal regulatory agencies that have promulgated or proposed retail 
forex rules: the Board, CFTC, FDIC, OCC, and Securities and Exchange 
Commission. On July 18, 2012, the CFTC issued a final rule that 
included an interpretation regarding foreign exchange spot transactions 
that responded to the ABA/GFMA letter. Specifically, the CFTC defined a 
bona fide spot forex transaction to include the purchase or sale of an 
amount of foreign currency equal to the price of a foreign security 
where (i) the security and related foreign currency transactions are 
executed contemporaneously in order to effect delivery by the relevant 
securities settlement deadline, and (ii) actual delivery of the foreign 
currency occurs by such deadline. By interpreting the CEA to exclude 
these types of retail forex transactions effected in connection with 
securities purchases and sales, the CFTC has confirmed that the 
transactions are not subject to the provisions of the CEA that are 
referenced by section 742 of the Dodd-Frank Act. The Board believes 
that no amendment to the final rule is required to address this issue. 
The Board has also added a section to the final rule to clarify that 
the Board may modify the provisions of this rule for a specific retail 
forex transaction or a class of retail forex transactions if the Board 
determines that the modification is consistent with safety and 
soundness and protection of retail forex customers.
    Section 240.2 defines several terms by reference to the CEA, 
including ``eligible contract participant'' (ECP). Foreign currency 
transactions with eligible contract participants are not considered 
retail forex transactions and are therefore not subject to this rule. 
The definition covers a variety of financial entities, governmental 
entities, certain businesses, and individuals that meet certain 
investment thresholds.\23\
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    \23\ The term ``eligible contract participant'' is defined at 7 
U.S.C. 1a(18) and generally requires a corporation, partnership, 
proprietorship, organization, trust or other entity to have total 
assets exceeding $10 million and an individual to have more than $10 
million in assets invested on a discretionary basis.
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    The comment letter filed by the Global Financial Markets 
Association's Global FX Division (hereinafter ``the GFMA letter'') and 
the bank commenter stated their belief that the definition of 
``eligible contract participant'' is too narrow and unnecessarily 
requires banking institutions to provide retail protections to 
sophisticated customers who fail to qualify as ECPs because they do not 
meet the $10 million asset threshold in the statutory definition. The 
trade association commenter and the bank commenter recommended that the 
definition of ``retail forex customer'' in section 240.2(n) carve out 
institutional non-ECPs represented by registered investment advisers. 
The trade association commenter also sought reduced burden for a 
commodity pool that is unable to prove that all of its participants are 
themselves ECPs. The GFMA letter also suggested that, if the Board does 
not exempt these entities from all aspects of the regulation, the Board 
at a minimum should allow what it calls ``professional non-ECPs'' to 
(1) Opt out of disclosure requirements, including the profitable 
accounts ratio described in section 240.6(e), (2) post reduced margin 
compared to retail customers, and (3) accommodate transaction execution 
flexibility not

[[Page 21022]]

permissible under the proposed regulation.
    The Board is not adopting the suggestion that a non-ECP be treated 
as an ECP based on its use of an investment adviser as it believes that 
CEA section 2(c)(2)(E) requires the application of retail forex rules 
to transactions with non-ECPs. Although large investment advisers may 
choose to avoid dealing with unsophisticated investors, the Board does 
not believe that the involvement of a large investment adviser is a 
substitute for the retail protections sought by Congress in enacting 
section 2(C)(2)(E) of the CEA.
    The issue regarding the ECP status of commodity pools engaging in 
foreign exchange transactions was included in the CFTC's notice of 
proposed rulemaking regarding further definition of certain Dodd-Frank 
Act terms, including ``eligible contract participant,'' \24\ and 
addressed in their final rule adopted April 6, 2012.\25\ The CFTC's 
definition of ECP reduces the burden on commodity pools seeking to 
establish that all of their members are themselves ECPs. The Board is 
amending the definition of ECP in section 240.2 of the regulation to 
incorporate the CFTC's revised definition of ECP. This will allow 
banking institutions to use the same standard for ECP status as retail 
forex dealers subject to CFTC jurisdiction when dealing with commodity 
pools. Consistent with the provisions of the CEA and the CFTC's final 
rule, the Board is not adopting the commenters' suggestion that 
commodity pools be exempt from the statutory requirement of 
establishing that its members are themselves ECPs. The GFMA letter also 
sought clarification that a banking institution with a retail forex 
customer who later becomes an ECP may continue to treat the customer as 
a retail forex customer (i.e., as a non-ECP). The Board believes a 
banking institution may continue to comply with the regulation for such 
a customer. Indeed, a banking institution may apply the provisions of 
Regulation NN to transactions with any customer, although it is only 
required to apply the regulation to retail forex transactions with 
retail forex customers.
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    \24\ Further Definition of ``Swap Dealer,'' ``Security-Based 
Swap Dealer,'' ``Major Swap Participant'' `and ``Eligible Contract 
Participant,'' 75 FR 80174 (December 21, 2010)(joint proposed rule 
with the SEC).
    \25\ 77 FR 30596 (May 23, 2012).
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    The Board received no comments on the proposed definitions other 
than ``eligible contract participant.'' In addition to modifying the 
definition of ECP, the Board is adding a definition of ``savings and 
loan holding company.'' In all other respects, this section is being 
adopted substantially as proposed.

Section 240.3--Prohibited Transactions

    This section prohibits a banking institution and its related 
persons from engaging in fraudulent conduct in connection with retail 
forex transactions. This section also addresses potential conflicts of 
interest by prohibiting a banking institution from acting as 
counterparty to a retail forex transaction if the banking institution 
or its affiliate exercises discretion over the customer's retail forex 
account.
    The Board's proposal used wording somewhat different from that used 
by the CFTC, OCC and FDIC. While the retail forex rules of other 
federal regulatory authorities state that a retail forex counterparty 
may not ``cheat or defraud or attempt to cheat or defraud'' any person, 
the Board's proposal used the phrase ``defraud or attempt to defraud.'' 
The individual commenter recommended using ``cheat or defraud'' instead 
of ``defraud,'' which he believes would promote regulatory consistency 
across regulators. The Board notes that the phrase ``cheat or defraud'' 
is used in section 6b of the CEA (``Contracts designed to defraud or 
mislead'') \26\ and is amending its proposal to use the same language 
as the CEA and other regulators.
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    \26\ 7 U.S.C. 6b
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    In addition, the Board's proposal would prohibit a banking 
institution from ``knowingly'' making a false report or deceiving a 
person, while the other regulators prohibit their retail forex dealers 
from ``willfully'' engaging in these activities. The Board stated its 
belief that ``knowingly'' sets a more appropriate standard of proof. 
The individual commenter preferred the language used by other 
regulators, in part to improve regulatory consistency.
    The Department of Justice's (DOJ's) US Attorneys' Manual discusses 
the difference between ``knowingly'' and ``willfully'' with respect to 
18 U.S.C. 1001, the federal criminal code's general anti-fraud 
provision.\27\ This discussion is consistent with a Supreme Court case 
concerning another provision of the criminal code.\28\ Both the DOJ and 
the Court indicate that a ``willful'' violation requires proof that the 
defendant acted with knowledge that his or her conduct was unlawful, 
while a ``knowing'' violation requires knowledge of the facts 
constituting the offence, as distinguished from knowledge of the law. 
The Board believes that ``knowingly'' sets the more appropriate 
standard, as it will cover making a false report or deceptive behavior 
without requiring proof that the banking institution knew it was 
violating Regulation NN.
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    \27\ United States Attorneys' Manual, Chapter 9.
    \28\ Bryan v. United States, 524 U.S. 184 (1998).
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Section 240.4--Notification

    This section requires a banking institution to notify the Board 
prior to engaging in a retail forex business. This notice includes 
information on customer due diligence (including credit evaluations, 
customer appropriateness, and ``know your customer'' documentation); 
new product approvals; haircuts for noncash margin; and conflicts of 
interest. In addition, the banking institution must certify that it has 
adequate written policies, procedures, and risk measurement and 
management systems and controls to engage in a retail forex business in 
a safe and sound manner and in compliance with the requirements of the 
Board's retail forex rule. Once a banking institution has notified the 
Board pursuant to this provision, the Board will have sixty days to 
seek additional information or object to the notification in writing, 
or the notification will be deemed effective. If the Board asks for 
additional information, the notice will become effective sixty days 
after all the information requested is received by the Board, unless 
the Board objects in writing.
    Although the statutory requirements with respect to futures and 
options contracts are currently in effect, some banking institutions 
may currently engage in retail forex transactions that would be covered 
by this rule, such as the so-called ``Zelener contracts.'' Banking 
institutions engaged in retail forex transactions as of the effective 
date of this rule who promptly notify the Board will have six months, 
or a longer period provided by the Board, to bring their operations 
into conformance with the rule. Under this rule, a banking institution 
that notifies the Board within 30 days of the effective date of the 
final retail forex rule, subject to an extension by the Board, and 
submits the information requested by the Board thereafter will be 
deemed to be operating its retail forex business pursuant to a rule or 
regulation of a Federal regulatory agency, as required under the 
Commodity Exchange Act, for such period.\29\
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    \29\ 7 U.S.C. 2(c)(2)(E)(ii)(I).
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    A banking institution need not join a futures self-regulatory 
organization as a condition of conducting a retail forex business.

[[Page 21023]]

    The Board received no comments to this section and adopts it as 
proposed.

Section 240.5--Application and Closing Out of Offsetting Long and Short 
Positions

    This section requires a banking institution to close out offsetting 
long and short positions in the same currency in a retail forex 
account. Nevertheless, a banking institution may offset retail forex 
transactions by the retail forex customer or the customer's agent 
(other than the banking institution itself) pursuant to a customer's 
specific instructions. Blanket instructions are not sufficient for this 
purpose, as they could obviate the general 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. Offset 
instructions may be provided in writing or orally. The banking 
institution must create and maintain a record of each offset 
instruction.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.6--Disclosure

    This section requires a banking institution to provide retail forex 
customers with a risk disclosure statement similar to the one required 
by the CFTC's retail forex rule, but tailored to address certain unique 
characteristics of retail forex in banking institutions. The prescribed 
risk disclosure statement describes the risks associated with retail 
forex transactions. The disclosure statement makes clear that a banking 
institution that wishes to use the right of set-off to collect margin 
for or cover losses arising out of retail forex transactions must 
include this right in the risk disclosure statement and obtain separate 
written acknowledgement (see discussion of set-off below in section 
240.9).
    The final rules of the CFTC, OCC, and FDIC require retail forex 
dealers 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.\30\ The individual commenter suggested that this ``profitable 
accounts ratio'' could be manipulated, although he did not describe how 
this could be done, and recommended adoption of an objective and 
uniform calculation methodology for the ratio. The commenter also 
recommended that the calculation should be weighted by the amount of 
profit or loss to show the amount of profitability or loss, rather than 
just whether any account made any profit. The Board believes a 
calculation of the amount of profitability would be more likely to 
cause retail customers to believe that past performance is an 
indication of future results and is retaining the profitable accounts 
ratio and statement of profitable trades as proposed. In addition, the 
Board believes a uniform calculation of profitable accounts and 
statement of profitable trades for all retail forex dealers affords 
greater retail consumer protection by allowing comparison across 
different types of dealers. Finally, the Board notes that section 
240.7(b) provides a calculation methodology for the profitable accounts 
ratio that is uniform across the bank regulatory agencies.\31\
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    \30\ 17 CFR 5.5(e)(1), 12 CFR 48.6(e)(1), and 12 CFR 
349.6(e)(1).
    \31\ See, 12 CFR 48.7(b) and 12 CFR 349.7(b).
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    As proposed, the risk disclosure must be provided as a separate 
document. The Board requested comment on whether banking institutions 
should be allowed to combine the retail forex risk disclosure with 
other disclosures that banking institutions make to their customers. 
The individual commenter supported the Board's proposal, which is 
consistent with the final rules adopted by the other bank regulatory 
agencies.
    The individual commenter sought clarification as to whether the 
requirement in section 240.6(f) that the banking institution disclose 
``any fee, charge, or commission'' imposed on the customer for retail 
forex transactions includes spreads. The final rules adopted by the OCC 
and FDIC both require disclosure of ``any fee, charge, spread, or 
commission'' and the individual commenter recommended that the Board 
add the word ``spread'' to its rules. The Board believes that spreads 
are covered by the proposed language, but is adding the word 
``spreads'' to this section to make such coverage explicit.
    The individual commenter also asked for confirmation that the 
disclosure of ``any fee, charge, or commission'' includes interest 
income on the retail forex account or retail forex transaction. The 
rate of interest income paid on cash margin is not a fee, charge, 
spread, or commission, and so is not required to be disclosed under 
section 240.6.

Section 240.7--Recordkeeping

    This section specifies which documents and records a banking 
institution engaged in retail forex transactions must retain for 
examination by the Board. Banking institutions are required to maintain 
retail forex account records, financial ledgers, transactions records, 
daily records, order tickets, and records showing allocations and 
noncash margin, as well as records relating to possible violations of 
law. This section also prescribes document maintenance standards, 
including the manner and length of maintenance. Finally, this section 
requires banking institutions to record and maintain transaction 
records and make them available to customers.
    The individual commenter suggested that records required under this 
section be retained by the retail forex dealer forever, rather than the 
minimum five year period specified in section 240.7(h). The Board does 
not believe it is appropriate to require records be maintained 
indefinitely and notes that the five year period is consistent with 
retention requirements for many supervision and regulation records 
required by the Board.
    This section is being adopted as proposed.

Section 240.8--Capital Requirements

    The Board's retail forex rule does not change the Board's 
regulations regarding capital. This section generally requires that a 
banking institution that offers or enters into retail forex 
transactions must be ``well capitalized'' as defined in the Board's 
Regulations H, Y and LL \32\ or the banking institution must obtain an 
exemption from the Board. An uninsured state-licensed U.S. branch or 
agency of a foreign bank must apply the capital rules that are made 
applicable to it pursuant to section 225.2(r)(3) of the Board's 
Regulation Y.\33\ An Edge corporation or agreement corporation must 
comply with the capital adequacy guidelines that are made applicable to 
an Edge corporation engaged in banking pursuant to section 211.12(c)(2) 
of the Board's Regulation K.\34\
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    \32\ 12 CFR 208.43, 12 CFR 225.2(r), and 12 CFR 238.2(s).
    \33\ 12 CFR 225.2(r)(3).
    \34\ 12 CFR 211.12(c)(2).
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    In addition, a banking institution must continue to hold capital 
against retail forex transactions as provided in the Board's 
regulations.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.9--Margin Requirements

    Paragraph (a) requires a banking institution that engages in retail 
forex transactions, in advance of any such transaction, to collect from 
the retail forex customer margin equal to at least two percent of the 
notional value of the

[[Page 21024]]

retail forex transaction if the transaction is in a major currency 
pair, and at least five percent of the notional value of the retail 
forex transaction otherwise. These margin requirements are identical to 
the requirements imposed by the retail forex rules of the CFTC, OCC, 
and FDIC. A major currency pair is a currency pair with two major 
currencies. The major currencies specified in the regulation are the 
U.S. Dollar (USD), Canadian Dollar (CAD), Euro (EUR), United Kingdom 
Pound (GBP), Japanese Yen (JPY), Swiss franc (CHF), New Zealand Dollar 
(NZD), Australian Dollar (AUD), Swedish Kronor (SEK), Danish Kroner 
(DKK), and Norwegian Krone (NOK),\35\ as well as any other currency as 
determined by the Board.
---------------------------------------------------------------------------

    \35\ See National Futures Association, Forex Transaction: A 
Regulatory Guide 17 (Feb. 2011); New York Federal Reserve Bank, 
Survey of North American Foreign Exchange Volume tbl. 3e (Jan. 
2011); Bank for International Settlements, Report on Global Foreign 
Exchange Market Activity in 2010 at 15 tbl. B.6 (Dec. 2010).
---------------------------------------------------------------------------

    Prior to implementation of 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. These margin requirements were also adopted by 
the OCC and FDIC. The Board received no comments regarding the 
appropriate level of margin and is adopting the same requirements as 
the CFTC and other bank regulatory agencies.
    Paragraph (b) specifies the acceptable forms of margin that 
customers may post, including margin pledged in excess of the 
requirements of paragraph (a). Banking institutions must establish 
policies and procedures providing for haircuts for noncash margin 
collected from customers and must review these haircuts annually. It 
may be prudent for banking institutions to review and modify the size 
of the haircuts more frequently.
    Paragraph (c) requires a banking institution to collect additional 
margin from the customer or to liquidate the customer's position if the 
amount of margin held by the banking institution fails to meet the 
requirements of paragraph (a). The proposed rule requires the banking 
institution to mark the customer's open retail forex positions and the 
value of the customer's margin to the market daily to ensure that a 
retail forex customer does not accumulate substantial losses not 
covered by margin.
    The retail forex regulations adopted by the OCC and FDIC both 
prohibit set-off, i.e., the bank forex dealer is prohibited from 
applying a retail forex customer's losses against any asset or 
liability of the retail forex customer other than money or property 
given as margin. Banks generally have broad rights to set off mutual 
debts to cover customer obligations. It is not clear that limiting a 
bank's right of set-off in these particular transactions would provide 
appropriate incentives for retail forex customers. The Board's proposed 
rule did not include this prohibition and no comments were received 
opposing this proposal. The Board is adopting these provisions as 
proposed.
    In order to effectuate the prohibition against a bank retail forex 
dealer exercising a right of set-off, the OCC and FDIC require that 
each customer's retail forex transaction margin be held in a separate 
account that holds only that customer's retail forex transaction 
margin. As proposed, the Board is not requiring the use of a separate 
margin account, as it is not prohibiting a banking institution from 
exercising a right of set-off.

Section 240.10--Required reporting to customers

    This section requires a banking institution engaging in retail 
forex transactions to provide each retail forex customer confirmations 
and monthly statements, and describes the information to be included.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.11--Unlawful Representations

    This section prohibits a banking institution and its related 
persons from representing that the Federal government, the Board, or 
any other Federal agency has sponsored, recommended, or approved retail 
forex transactions or products in any way. This section also prohibits 
a banking institution from implying or representing that it will 
guarantee against or limit retail forex customer losses or not collect 
margin as required by section 240.9. This section does not prohibit a 
banking institution from sharing in a loss resulting from error or 
mishandling of an order, and guaranties entered into prior to the 
effectiveness of the prohibition would only be affected if an attempt 
is made to extend, modify, or renew them. This section also does not 
prohibit a banking institution from hedging or otherwise mitigating its 
own exposure to retail forex transactions or any other foreign exchange 
risk.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.12--Authorization to Trade

    This section requires a banking institution to have specific 
authorization from a retail forex customer before effecting a retail 
forex transaction for that customer.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.13--Trading and Operational Standards

    This section largely follows the trading standards of the retail 
forex rules adopted by the CFTC, OCC and FDIC, which were developed to 
prevent some of the deceptive or unfair practices identified by the 
CFTC and the National Futures Association.
    Under paragraph (a), a banking institution engaging in retail forex 
transactions is required to establish and enforce internal rules, 
procedures and controls to prevent front running, in which transactions 
in accounts of the banking institution or its related persons are 
executed before a similar customer order, and to establish settlement 
prices fairly and objectively.
    Paragraph (b) prohibits a banking institution engaging in retail 
forex transactions from disclosing that it holds another person's order 
unless disclosure is necessary for execution or is made at the Board's 
request.
    Paragraph (c) ensures that related persons of another retail forex 
counterparty do not open accounts with a banking institution without 
the knowledge and authorization of the account surveillance personnel 
of the other retail forex counterparty to which they are affiliated. 
Similarly, paragraph (d) ensures that related persons of a banking 
institution do not open accounts with other retail forex counterparties 
without the knowledge and authorization of the account surveillance 
personnel of the banking institution to which they are affiliated.
    Paragraph (e) prohibits a banking institution engaging in retail 
forex transactions from (1) Entering a retail forex transaction to be 
executed at a price that is not at or near prices at which other retail 
forex customers have executed materially similar transactions with the 
banking institution during the same time period, (2) changing prices 
after confirmation, (3) providing a retail forex customer with a new 
bid price that is higher (or lower) than previously provided without 
providing a new ask

[[Page 21025]]

price that is similarly higher (or lower) as well, and (4) establishing 
a new position for a retail forex customer (except to offset an 
existing position) if the banking institution holds one or more 
outstanding orders of other retail forex customers for the same 
currency pair at a comparable price.
    Paragraphs (e)(3) and (e)(4) do not prevent a banking institution 
from changing the bid or ask prices of a retail forex transaction to 
respond to market events. The Board understands that market practice 
among CFTC-registrants is not to offer requotes, but to simply reject 
orders and advise customers they may submit a new order (which the 
dealer may or may not accept). Similarly, a banking institution may 
reject an order and advise customers they may submit a new order.
    Paragraph (e)(5) requires a banking institution to use consistent 
market prices for customers executing retail forex transactions during 
the same time. It also prevents a banking institution from offering 
preferred execution to some of its retail forex customers but not 
others.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.14--Supervision

    This section imposes on a banking institution and its agents, 
officers, and employees a duty to supervise subordinates with 
responsibility for retail forex transactions to ensure compliance with 
the Board's retail forex rule.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.15--Notice of Transfers

    This section describes the requirements for transferring a retail 
forex account. Generally, a banking institution must provide retail 
forex customers 30 days' prior notice before transferring or assigning 
their account. Affected customers may then instruct the banking 
institution to transfer the account to an institution of their choosing 
or liquidate the account. There are three exceptions to the above 
notice requirement: a transfer in connection with the receivership or 
conservatorship under the Federal Deposit Insurance Act; a transfer 
pursuant to a retail forex customer's specific request; and a transfer 
otherwise allowed by applicable law. A banking institution that is the 
transferee of retail forex accounts must generally provide the 
transferred customers with the risk disclosure statement of section 
240.6 and obtain each affected customer's written acknowledgement 
within 60 days.
    The Board received no comments to this section and adopts it as 
proposed.

Section 240.16--Customer Dispute Resolution

    This section prohibits a banking institution from entering into any 
agreement or understanding with a retail forex customer in which the 
customer agrees, prior to the time a claim or grievance arises, to 
submit the claim or grievance to any settlement procedure.
    This provision differs from the applicable CFTC and OCC dispute 
settlement procedures, which permit mandatory pre-dispute settlement 
agreements under certain conditions.\36\ The Board proposed to prohibit 
a banking institution from entering into a pre-dispute settlement 
agreement with a retail forex customer, similar to the final rule 
adopted by the FDIC.
---------------------------------------------------------------------------

    \36\ See 17 CFR 166.5. The CFTC's regulation permits predispute 
dispute settlement agreements with a customer with certain 
restrictions such as that signing the agreement must not be made a 
condition for the customer to utilize the services offered by the 
CFTC registrant.
---------------------------------------------------------------------------

    The Department of State has advised that transactions between the 
foreign branch or office of a banking institution and a U.S. customer 
could be cross-border transactions subject to the New York \37\ and 
Panama Conventions.\38\ These Conventions, implemented in the United 
States by chapters 2 and 3 of the Federal Arbitration Act (FAA),\39\ 
create treaty obligations to enforce international commercial 
arbitration agreements and to recognize and enforce international 
commercial arbitral awards. The Board is amending section 240.16 to 
provide that it will not apply to transactions covered by chapters 2 or 
3 of the FAA.
---------------------------------------------------------------------------

    \37\ Convention on the Recognition and Enforcement of Foreign 
Arbitral Awards (1970).
    \38\ Inter-American Convention on International Commercial 
Arbitration (1990).
    \39\ 9 U.S.C. 1 et seq. Chapter 2 of the FAA (secs. 201-208) 
contains provisions implementing the New York Convention, while 
Chapter 3 of the FAA (secs. 301--307) contains provisions 
implementing the Panama Convention.
---------------------------------------------------------------------------

Section 240.17--Reservation of Authority.

    This section allows the Board to modify certain requirements of 
this rule consistent with safety and soundness and the protection of 
retail forex customers. The Board understands the need for flexibility 
as foreign exchange trading procedures develop and to ensure that such 
products or trading procedures are subject to appropriate customer 
protection and safety and soundness standards.

Interagency Statement on Retail Sales of Nondeposit Investment Products

    For banking institutions, the requirements in the Board's retail 
forex regulation overlap with applicable expectations contained in the 
Interagency Statement on Retail Sales of Nondeposit Investment Products 
(NDIP Policy Statement).\40\ The NDIP Policy Statement sets out 
guidance regarding the Board's expectations when a banking institution 
engages in the sale of nondeposit investment products to retail 
customers. The NDIP Policy Statement addresses issues such as 
disclosure, suitability, sales practices, compensation, and compliance. 
The Board views retail forex transactions as nondeposit investment 
products, but the terms ``retail forex customer'' in this rule and 
``retail customer'' in the NDIP Policy Statement are not necessarily 
co-extensive. The Board requested comment on whether the proposed 
regulation created issues concerning application of the NDIP policy 
statement to retail forex transactions that the Board should address. 
The Board received no comments on this issue. As the Board noted in its 
proposal, after the effective date of the final rule, the Board will 
expect banking institutions engaging in or offering retail forex 
transactions to also comply with the NDIP Policy Statement to the 
extent such compliance does not conflict with the requirements of the 
Board's final retail forex rule.
---------------------------------------------------------------------------

    \40\ See SR Letter 94-11 (Feb. 17, 1994); see also SR Letter 95-
46 (Sept. 14, 1995).
---------------------------------------------------------------------------

III. Regulatory Analysis

A. Regulatory Flexibility Act

    In accordance with Section 4(a) of the Regulatory Flexibility Act, 
5 U.S.C. 601 et seq, (RFA), the Board must publish a final regulatory 
flexibility analysis with this rulemaking. The RFA requires an agency 
either to provide a final regulatory flexibility analysis with a final 
rule for which a general notice of proposed rulemaking is required or 
to certify that the final rule will not have a significant economic 
impact on a substantial number of small entities. Based on this 
analysis and for the reasons stated below, the Board believes that the 
final rule would not have a significant economic impact on a 
substantial number of small entities. Nevertheless, the Board is 
publishing a final regulatory flexibility analysis.
1. A succinct statement of the need for, and objectives of, the rule.
    Section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 
2(c)(2)(E))

[[Page 21026]]

prohibits a U.S. financial institution from conducting certain retail 
foreign exchange transactions unless done pursuant a rule or regulation 
of a Federal regulatory agency allowing such transactions. The Board is 
adopting a new regulation to allow banking institutions under its 
supervision to engage in retail foreign exchange transactions.
2. A Summary of the Significant Issues Raised by the Public Comments in 
Response to the Initial Regulatory Flexibility Analysis, a Summary of 
the Assessment of the Agency of Such Issues, and a Statement of Any 
Changes Made in the Proposed Rule as a Result of Such Comments
    The Board requested comment on required reporting, disclosure, and 
recordkeeping requirements for all banking institutions engaging in 
retail foreign exchange transactions and has solicited comment on any 
approaches that would reduce the burden on all counterparties, 
including small entities. In response to the notice of proposed 
rulemaking, the Board received no comments with respect to RFA.
3. A Description of and an Estimate of the Number of Small Entities To 
Which the Rule Will Apply or an Explanation of Why No Such Estimate Is 
Available
    Under regulations issued by the Small Business Administration, a 
banking institution is considered a ``small entity'' if it has assets 
of $175 million or less.\41\ As of June 30, 2012, there were 
approximately 368 small state member banks, 6 small Edge Act and 
agreement corporations, 48 small uninsured branches of foreign banks, 
3,736 small bank holding companies, 213 small financial holding 
companies, and 229 small saving and loan holding companies. The Board 
is not aware of any small institutions engaged in retail forex 
transactions.
---------------------------------------------------------------------------

    \41\ U.S. Small Business Administration, Table of Small Business 
Size Matched to North American Industry Classification System Codes, 
13 CFR 121.201.
---------------------------------------------------------------------------

4. A Description of the Projected Reporting, Recordkeeping, and Other 
Compliance Requirements of the Rule, Including an Estimate of the 
Classes of Small Entities Which Will Be Subject to the Requirement and 
the Type of Professional Skills Necessary for Preparation of the Report 
or Record
    A description of the projected recordkeeping and other compliance 
requirements can be found below in section B, ``Paperwork Reduction 
Act,'' under the following headings: Reporting Requirements, Disclosure 
Requirements, and Recordkeeping Requirements. The Board believes that 
there are no other compliance requirements for this rule.
5. A Description of the Steps the Agency Has Taken To Minimize the 
Significant Economic Impact on Small Entities Consistent With the 
Stated Objectives of Applicable Statutes, Including a Statement of the 
Factual, Policy, and Legal Reasons for Selecting the Alternative 
Adopted in the Final Rule and Why Each One of the Other Significant 
Alternatives to the Rule Considered by the Agency Which Affect the 
Impact on Small Entities Was Rejected
    The Board believes that no Federal rules duplicate, overlap, or 
conflict with the rule. The Board has solicited comments on the 
proposed rule and received relatively few comments. The Board did not 
receive any comments from small entities and is unaware of any small 
entities that will be affected by the rule. The Board's rule is 
consistent with other banking regulators that also solicited comment on 
their rules. As noted in the supplementary information above, retail 
forex transactions are also subject to the Interagency Statement on 
Retail Sales of Nondeposit Investment Products, but this rule would 
govern to the extent of a conflict.

B. Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act 
(PRA) of 1995 (44 U.S.C. 3501-3521), the Board may not conduct or 
sponsor, and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The Board reviewed the final rule 
under the authority delegated to the Board by OMB. The OMB control 
number for these information collections will be assigned. The Board 
received no comments regarding the Paperwork Reduction Act implications 
of its retail forex regulation.
    Title of Information Collection: Reporting, recordkeeping, and 
disclosure requirements associated with Regulation NN.
    Frequency of Response: On occasion.
    Affected Public: Businesses or other for-profit.
    Respondents: Agreement corporations, Edge Act corporations, state 
member banks, uninsured branches of foreign banks, financial holding 
companies, and bank holding companies (collectively, ``banking 
institutions'').
    Abstract: The information collection requirements of the final rule 
are found in Sec. Sec.  240.4-240.7, 240.9-240.10, 240.13, 240.15-
240.16.
Reporting Requirements
    The reporting requirements in Sec.  240.4 require that, prior to 
initiating a retail forex business, a banking institution provide the 
Board with prior notice. The notice must certify that the banking 
institution has written policies and procedures, and risk measurement 
and management systems in controls in place to ensure that retail forex 
transactions are conducted in a safe and sound manner. The banking 
institution must also provide other information required by the Board, 
such as documentation of customer due diligence, new product approvals, 
and haircuts applied to noncash margins. A banking institution already 
engaging in a retail forex business may continue to do so, provided it 
requests an extension of time.
Disclosure Requirements
    Section 240.5, regarding the application and closing out of 
offsetting long and short positions, requires a banking institution to 
promptly provide the customer with a statement reflecting the financial 
result of the transactions and the name of the introducing broker to 
the account. The customer may provide specific written instructions on 
how the offsetting transaction should be applied.
    Section 240.6 requires that a banking institution furnish a retail 
forex customer with a written disclosure before opening an account that 
will engage in retail forex transactions for a retail forex customer 
and receive an acknowledgment from the customer that it was received 
and understood. It also requires the disclosure by a banking 
institution of its fees and other charges and its profitable accounts 
ratio.
    Section 240.10 requires a banking institution to issue monthly 
statements to each retail forex customer and to send confirmation 
statements following transactions.
    Section 240.13(b) allows disclosure by a banking institution that 
an order of another person is being held by them only when necessary to 
the effective execution of the order or when the disclosure is 
requested by the Board. Section 240.13(c) prohibits a banking 
institution engaging in retail forex transactions from knowingly 
handling the account of any related person of another retail forex 
counterparty unless it receives proper written authorization, promptly 
prepares a written record of the order, and transmits to the 
counterparty copies all statements and written records. Section 
240.13(d)

[[Page 21027]]

prohibits a related person of a banking institution engaging in forex 
transactions from having an account with another retail forex 
counterparty unless it receives proper written authorization and copies 
of all statements and written records for such accounts are transmitted 
to the counterparty.
    Section 240.15 requires a banking institution to provide a retail 
forex customer with 30 days' prior notice of any assignment of any 
position or transfer of any account of the retail forex customer. It 
also requires a banking institution to which retail forex accounts or 
positions are assigned or transferred to provide the affected customers 
with risk disclosure statements and forms of acknowledgment and receive 
the signed acknowledgments within 60 days.
    The customer dispute resolution provisions in Sec.  240.16 requires 
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 
banking institution will provide them with a list of persons qualified 
in the dispute resolution and that the customer must notify the banking 
institution of the person selected within 45 days of receipt of such 
list.
Recordkeeping Requirements
    Sections 240.7 and 240.13(a) require that a banking institution 
engaging in retail forex transactions keep full, complete, and 
systematic records and establish and implement internal rules, 
procedures, and controls. Section 240.7 also requires that a banking 
institution keep account, financial ledger, transaction and daily 
records, as well as memorandum orders, post-execution allocation of 
bunched orders, records regarding its ratio of profitable accounts, 
possible violations of law, records for noncash margin, and monthly 
statements and confirmations.
    Section 240.9 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
    Number of Respondents: 5 banking institutions; 2 service providers.
    Estimated Average Hours per Response: 16 hours reporting burden; 
787 hours disclosure burden; and 183 hours recordkeeping burden
    Total Estimated Annual Burden: 6,870 hours (80 hours reporting 
burden; 5,509 hours disclosure burden; and 1,281 hours recordkeeping 
burden).
    The Board has a continuing interest in the public's opinions of 
collections of information. At any time, comments regarding the burden 
estimate, or any other aspect of this collection of information, 
including suggestions for reducing the burden, may be sent to: 
Secretary, Board of Governors of the Federal Reserve System, 20th and C 
Streets NW., Washington, DC 20551; and to the Office of Management and 
Budget, Paperwork Reduction Project, Washington, DC 20503.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act requires the Board to use 
plain language in all proposed and final rules published after January 
1, 2000. No commenters suggested that the proposed rule was materially 
unclear, and the Board believes that the Final Rule is substantively 
similar to the proposed rule.

List of Subjects in 12 CFR Part 240

    Banks, banking, Consumer protection, Foreign currencies, Foreign 
exchange, Holding companies, Investments, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble, the Board amends 12 CFR 
Chapter II by adding new part 240 to read as follows:

PART 240--RETAIL FOREIGN EXCHANGE TRANSACTIONS (REGULATION NN)

Sec.
240.1 Authority, purpose, and scope.
240.2 Definitions.
240.3 Prohibited transactions.
240.4 Notification.
240.5 Application and closing out of offsetting long and short 
positions.
240.6 Disclosure.
240.7 Recordkeeping.
240.8 Capital requirements.
240.9 Margin requirements.
240.10 Required reporting to customers.
240.11 Unlawful representations.
240.12 Authorization to trade.
240.13 Trading and operational standards.
240.14 Supervision.
240.15 Notice of transfers.
240.16 Customer dispute resolution.
240.17 Reservation of authority.

    Authority:  7 U.S.C. 2(c)(2)(E), 12 U.S.C. 248, 321-338, 
1813(q), 1818, 1844(b), 3106a, 3108.


Sec.  240.1  Authority, purpose and scope.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (the Board) under the authority of section 
2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(E)), 
sections 9 and 11 of the Federal Reserve Act (12 U.S.C. 321-338 and 
248), section 5(b) of the Bank Holding Company Act of 1956 (12 U.S.C. 
1844(b)), sections 9 and 13a of the International Banking Act of 1978 
(12 U.S.C. 3106a and 3108), and sections 3(q) and 8 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(q) and 1818).
    (b) Purpose. This part establishes rules applicable to retail 
foreign exchange transactions engaged in by banking institutions on or 
after May 13, 2013.
    (c) Scope. Except as provided in paragraph (d) of this section, 
this part applies to banking institutions, as defined in section 
240.2(b) of this part, and any branches or offices of those 
institutions wherever located. This part applies to subsidiaries of 
banking institutions organized under the laws of the United States or 
any U.S. state that are not subject to the jurisdiction of another 
federal regulatory agency authorized to prescribe rules or regulations 
under section 2(c)(2)(E) of the Commodity Exchange Act (7 U.S.C. 
(2)(c)(2)(E)).
    (d) International applicability. Sections 240.3 and 240.5 through 
240.16 do not apply to retail foreign exchange transactions between a 
foreign branch or office of a banking institution and a non-U.S. 
customer. With respect to those transactions, the foreign branch or 
office remains subject to any disclosure, recordkeeping, capital, 
margin, reporting, business conduct, documentation, and other 
requirements of applicable foreign law.


Sec.  240.2  Definitions.

    For purposes of this part, the following terms have the same 
meaning as in the Commodity Exchange Act (7 U.S.C. 1 et seq.): 
``affiliated person of a futures commission merchant''; ``associated 
person''; ``contract of sale''; ``commodity''; ``futures commission 
merchant''; ``future delivery''; ``option''; ``security''; and 
``security futures product.''
    (a) Affiliate has the same meaning as in section 2(k) of the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841(k)).
    (b) Banking institution means:
    (1) A state member bank (as defined in 12 CFR 208.2);
    (2) An uninsured state-licensed U.S. branch or agency of a foreign 
bank;
    (3) A financial holding company (as defined in section 2 of the 
Bank Holding Company Act of 1956; 12 U.S.C. 1841);
    (4) A bank holding company (as defined in section 2 of the Bank 
Holding Company Act of 1956; 12 U.S.C. 1841);

[[Page 21028]]

    (5) A savings and loan holding company (as defined in section 10 of 
the Home Owners Loan Act; 12 U.S.C. 1467a)
    (6) A corporation operating under the fifth undesignated paragraph 
of section 25 of the Federal Reserve Act (12 U.S.C. 603), commonly 
known as ``an agreement corporation;'' and
    (7) A corporation organized under section 25A of the Federal 
Reserve Act (12 U.S.C. 611 et seq.), commonly known as an ``Edge Act 
corporation.''
    (c) Commodity Exchange Act means the Commodity Exchange Act (7 
U.S.C. 1 et seq.).
    (d) Eligible contract participant has the same meaning as in the 
Commodity Exchange Act (7 U.S.C. 1 et seq., as implemented in 17 CFR 
1.3(m).
    (e) Forex means foreign exchange.
    (f) Identified banking product has the same meaning as in section 
401(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 
27(b)).
    (g) Institution-affiliated party or IAP has the same meaning as in 
12 U.S.C. 1813(u)(1), (2), or (3).
    (h) Introducing broker means any person who solicits or accepts 
orders from a retail forex customer in connection with retail forex 
transactions.
    (i) 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 retail forex counterparty;
    (2) An associated person or employee of the retail forex 
counterparty, if the retail forex counterparty is not an insured 
depository institution;
    (3) An IAP, if the retail forex counterparty is an insured 
depository institution; and
    (4) Any relative or spouse of any of the foregoing persons, or any 
relative of such spouse, who shares the same home as any of the 
foregoing persons.
    (j) Retail foreign exchange dealer means any person other than a 
retail forex customer that is, or that offers to be, the counterparty 
to a retail forex transaction, except for a person described in item 
(aa), (bb), (cc)(AA), (dd), or (ff) of section 2(c)(2)(B)(i)(II) of the 
Commodity Exchange Act (7 U.S.C. 2(c)(2)(B)(i)(II)).
    (k) Retail forex account means the account of a retail forex 
customer, established with a banking institution, in which retail forex 
transactions with the banking institution as counterparty are 
undertaken, or the account of a retail forex customer that is 
established in order to enter into such transactions.
    (l) Retail forex account agreement means the contractual agreement 
between a banking institution and a retail forex customer that contains 
the terms governing the customer's retail forex account with the 
banking institution.
    (m) 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.
    (n) Retail forex counterparty includes, as appropriate:
    (1) A banking institution;
    (2) A retail foreign exchange dealer;
    (3) A futures commission merchant;
    (4) An affiliated person of a futures commission merchant; and
    (5) A broker or dealer registered under section 15(b) (except 
paragraph (11) thereof) or 15C of the Securities Exchange Act of 1934 
(15 U.S.C. 78o(b), 78o-5) or a U.S. financial institution other than a 
banking institution, provided the counterparty is subject to a rule or 
regulation of a Federal regulatory agency covering retail forex 
transactions.
    (o) 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.
    (p) Retail forex proprietary account means a retail forex account 
carried on the books of a banking institution for one of the following 
persons; a retail forex account of which 10 percent or more is owned by 
one of the following persons; or a retail forex account of which an 
aggregate of 10 percent or more of which is owned by more than one of 
the following persons:
    (1) The banking institution;
    (2) An officer, director or owner of ten percent or more of the 
capital stock of the banking institution; or
    (3) An employee of the banking institution, whose duties include:
    (i) The management of the banking institution's business;
    (ii) The handling of the banking institution's retail forex 
transactions;
    (iii) The keeping of records, including without limitation the 
software used to make or maintain those records, pertaining to the 
banking institution's retail forex transactions; or
    (iv) The signing or co-signing of checks or drafts on behalf of the 
banking institution;
    (4) A spouse or minor dependent living in the same household as of 
any of the foregoing persons; or
    (5) An affiliate of the banking institution;
    (q) Retail forex transaction means an agreement, contract, or 
transaction in foreign currency, other than an identified banking 
product or a part of an identified banking product, that is offered or 
entered into by a banking institution with a person that is not an 
eligible contract participant and that is:
    (1) A contract of sale of a commodity for future delivery or an 
option on such a contract; or
    (2) An option, other than an option executed or traded on a 
national securities exchange registered pursuant to section 6(a) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78f(a)); or
    (3) Offered or entered into on a leveraged or margined basis, or 
financed by a banking institution, its affiliate, or any person acting 
in concert with the banking institution or its affiliate on a similar 
basis, other than:
    (i) A security that is not a security futures product as defined in 
section 1a(47) of the Commodity Exchange Act (7 U.S.C. 1a(47)); or
    (ii) A contract of sale that--
    (A) Results in actual delivery within two days; or
    (B) Creates an enforceable obligation to deliver between a seller 
and buyer that have the ability to deliver and accept delivery, 
respectively, in connection with their line of business; or
    (iii) An agreement, contract, or transaction that the Board 
determines is not functionally or economically similar to an agreement, 
contract, or transaction described in paragraph (p)(1) or (p)(2) of 
this section.


Sec.  240.3  Prohibited transactions.

    (a) Fraudulent conduct prohibited. No banking institution or its 
related persons may, directly or indirectly, in or in connection with 
any retail forex transaction:
    (1) Cheat or defraud or attempt to cheat or defraud any person;
    (2) Knowingly make or cause to be made to any person any false 
report or statement or cause to be entered for any person any false 
record; or
    (3) Knowingly deceive or attempt to deceive any person by any means 
whatsoever.
    (b) Acting as counterparty and exercising discretion prohibited. A 
banking institution that has authority to cause retail forex 
transactions to be effected for a retail forex customer without the 
retail forex customer's specific authorization may not (and an 
affiliate of such an institution may not) act as the counterparty for 
any retail forex transaction with that retail forex customer.


Sec.  240.4  Notification.

    (a) Notification required. Before commencing a retail forex 
business, a

[[Page 21029]]

banking institution shall provide the Board with prior written notice 
in compliance with this section. The notice will become effective 60 
days after a complete notice is received by the Board, provided the 
Board does not request additional information or object in writing. In 
the event the Board requests additional information, the notice will 
become effective 60 days after all information requested by the Board 
is received by the Board unless the Board objects in writing.
    (b) Notification requirements. A banking institution shall provide 
the following in its written notification:
    (1) Information concerning customer due diligence, including 
without limitation credit evaluations, customer appropriateness, and 
``know your customer'' documentation;
    (2) The haircuts to be applied to noncash margin as provided in 
240.9(b)(2);
    (3) Information concerning new product approvals;
    (4) Information on addressing conflicts of interest; and
    (5) A resolution by the banking institution's Board of Directors 
that the banking institution has established and implemented written 
policies, procedures, and risk measurement and management systems and 
controls for the purpose of ensuring that it conducts retail forex 
transactions in a safe and sound manner and in compliance with this 
part.
    (c) Treatment of existing retail forex businesses. A banking 
institution that is engaged in a retail forex business on the effective 
date of this part may continue to do so, until and unless the Board 
objects in writing, so long as the institution submits the information 
required to be submitted under paragraphs (b)(1) through (5) of this 
section within 30 days of the effective date of this part, subject to 
an extension of time by the Board, and such additional information as 
requested by the Board thereafter.
    (d) Compliance with the Commodity Exchange Act. A banking 
institution that is engaged in a retail forex business on the effective 
date of this part and complies with paragraph (c) of this section shall 
be deemed to be acting pursuant to a rule or regulation described in 
section 2(c)(2)(E)(ii)(I) of the Commodity Exchange Act (7 U.S.C. 
2(c)(2)(E)(ii)(I)).


Sec.  240.5  Application and closing out of offsetting long and short 
positions.

    (a) Application of purchases and sales. Any banking institution 
that--
    (1) Engages in a retail forex transaction involving the purchase of 
any currency for the account of any retail forex customer when the 
account of such retail forex customer at the time of such purchase has 
an open retail forex transaction for the sale of the same currency;
    (2) Engages in a retail forex transaction involving the sale of any 
currency for the account of any retail forex customer when the account 
of such retail forex customer at the time of such sale has an open 
retail forex transaction for the purchase of the same currency;
    (3) Purchases a put or call option involving foreign currency for 
the account of any retail forex customer when the account of such 
retail forex customer at the time of such purchase has a short put or 
call option position with the same underlying currency, strike price, 
and expiration date as that purchased; or
    (4) Sells a put or call option involving foreign currency for the 
account of any retail forex customer when the account of such retail 
forex customer at the time of such sale has a long put or call option 
position with the same underlying currency, strike price, and 
expiration date as that sold shall:
    (i) Immediately apply such purchase or sale against such previously 
held opposite transaction with the same customer; and
    (ii) Promptly furnish such retail forex customer with a statement 
showing the financial result of the transactions involved and the name 
of any introducing broker to the account.
    (b) Close-out against oldest open position. In all instances in 
which the short or long position in a customer's retail forex account 
immediately prior to an offsetting purchase or sale is greater than the 
quantity purchased or sold, the banking institution shall apply such 
offsetting purchase or sale to the oldest portion of the previously 
held short or long position.
    (c) Transactions to be applied as directed by customer. 
Notwithstanding paragraphs (a) and (b) of this section, the offsetting 
transaction shall be applied as directed by a retail forex customer's 
specific instructions. These instructions may not be made by the 
banking institution or a related person.


Sec.  240.6  Disclosure.

    (a) Risk disclosure statement required. No banking institution may 
open or maintain an account for a retail forex customer for the purpose 
of engaging in retail forex transactions unless the banking institution 
has furnished the retail forex customer with a separate written 
disclosure statement containing only the language set forth in 
paragraph (d) of this section and the disclosures required by 
paragraphs (e), (f), and (g) of this section.
    (b) Acknowledgement of risk disclosure statement required. The 
banking institution must receive from the retail forex customer a 
written acknowledgement signed and dated by the customer that the 
customer received and understood the written disclosure statement 
required by paragraph (a) of this section.
    (c) Placement of risk disclosure statement. The disclosure 
statement may be attached to other documents as the initial page(s) of 
such documents and as the only material on such page(s).
    (d) Content of risk disclosure statement. The language set forth in 
the written disclosure statement required by paragraph (a) of this 
section shall be as follows:

Risk Disclosure Statement

    Retail forex transactions generally involve the leveraged 
trading of contracts denominated in foreign currency with a banking 
institution as your counterparty. Because of the leverage and the 
other risks disclosed here, you can rapidly lose all of the funds or 
property you give the banking institution as margin for such trading 
and you may lose more than you pledge as margin. You should be aware 
of and carefully consider the following points before determining 
whether such trading is appropriate for you.
    (1) Trading foreign currencies is a not on a regulated market or 
exchange--your banking institution is your trading counterparty and 
has conflicting interests. The retail forex transaction you are 
entering into is not conducted on an interbank market, nor is it 
conducted on a futures exchange subject to regulation by the 
Commodity Futures Trading Commission. The foreign currency trades 
you transact are trades with your banking institution as the 
counterparty. When you sell, the banking institution is the buyer. 
When you buy, the banking institution is the seller. As a result, 
when you lose money trading, your banking institution is making 
money on such trades, in addition to any fees, commissions, or 
spreads the banking institution may charge.
    (2) Any electronic trading platform that you may use for retail 
foreign currency transactions with your banking institution is not a 
regulated exchange. It is an electronic connection for accessing 
your banking institution. The terms of availability of such a 
platform are governed only by your contract with your banking 
institution. Any trading platform that you may use to enter into 
off-exchange foreign currency transactions is only connected to your 
banking institution. You are accessing that trading platform only to 
transact with your banking institution. You are not trading with any 
other entities or customers of the banking institution by accessing 
such platform. The availability and operation of any such platform, 
including the consequences of the unavailability of the

[[Page 21030]]

trading platform for any reason, is governed only by the terms of 
your account agreement with the banking institution.
    (3) You may be able to offset or liquidate any trading positions 
only through your banking institution because the transactions are 
not made on an exchange, and your banking institution may set its 
own prices. Your ability to close your transactions or offset 
positions is limited to what your banking institution will offer to 
you, as there is no other market for these transactions. Your 
banking institution may offer any prices it wishes. Your banking 
institution may establish its prices by offering spreads from third 
party prices, but it is under no obligation to do so or to continue 
to do so. Your banking institution may offer different prices to 
different customers at any point in time on its own terms. The terms 
of your account agreement alone govern the obligations your banking 
institution has to you to offer prices and offer offset or 
liquidating transactions in your account and make any payments to 
you. The prices offered by your banking institution may or may not 
reflect prices available elsewhere at any exchange, interbank, or 
other market for foreign currency.
    (4) Paid solicitors may have undisclosed conflicts. The banking 
institution may compensate introducing brokers for introducing your 
account in ways that are not disclosed to you. Such paid solicitors 
are not required to have, and may not have, any special expertise in 
trading, and may have conflicts of interest based on the method by 
which they are compensated. You should thoroughly investigate the 
manner in which all such solicitors are compensated and be very 
cautious in granting any person or entity authority to trade on your 
behalf. You should always consider obtaining dated written 
confirmation of any information you are relying on from your banking 
institution in making any trading or account decisions.
    (5) Retail forex transactions are not insured by the Federal 
Deposit Insurance Corporation.
    (6) Retail forex transactions are not a deposit in, or 
guaranteed by, a banking institution.
    (7) Retail forex transactions are subject to investment risks, 
including possible loss of all amounts invested.
    Finally, you should thoroughly investigate any statements by any 
banking institution that minimize the importance of, or contradict, 
any of the terms of this risk disclosure. Such statements may 
indicate sales fraud.
    This brief statement cannot, of course, disclose all the risks 
and other aspects of trading off-exchange foreign currency with a 
banking institution. I hereby acknowledge that I have received and 
understood this risk disclosure statement.

-----------------------------------------------------------------------
Date

-----------------------------------------------------------------------
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 banking 
institution maintained retail forex customer accounts:
    (i) The total number of retail forex customer accounts maintained 
by the banking institution over which the banking institution does not 
exercise investment discretion;
    (ii) The percentage of such accounts that were profitable for 
retail forex customer accounts during the quarter; and
    (iii) The percentage of such accounts that were not profitable for 
retail forex customer accounts during the quarter.
    (2) Statement of profitable trades. (i) The banking institution's 
statement of profitable trades shall include the following legend: Past 
performance is not necessarily indicative of future results.
    (ii) Each banking institution shall provide, upon request, to any 
retail forex customer or prospective retail forex customer the total 
number of retail forex accounts maintained by the banking institution 
for which the banking institution does not exercise investment 
discretion, the percentage of such accounts that were profitable, and 
the percentage of such accounts that were not profitable for each 
calendar quarter during the most recent five-year period during which 
the banking institution maintained such accounts.
    (f) Disclosure of fees and other charges. Immediately following the 
language required by paragraph (e) of this section, the statement 
required by paragraph (a) of this section shall include:
    (1) The amount of any fee, charge, spread, or commission that the 
banking institution may impose on the retail forex customer in 
connection with a retail forex account or retail forex transaction;
    (2) An explanation of how the banking institution will determine 
the amount of such fees, charges, spreads, or commissions; and
    (3) The circumstances under which the banking institution may 
impose such fees, charges, spreads, or commissions.
    (g) Set-off. Immediately following the language required by 
paragraph (f) of this section, the statement required by paragraph (a) 
of this section shall include:
    (1) A statement as to whether the banking institution will or will 
not retain the right to set off obligations of the retail forex 
customer arising from the customer's retail forex transactions, 
including margin calls and losses, against the customer's other assets 
held by the banking institution;
    (2) If the banking institution states that it reserves its right to 
set off obligations of the retail forex customer arising from the 
customer's retail forex transactions against the customer's other 
assets, the banking institution must receive from the retail forex 
customer a written acknowledgement signed and dated by the customer 
that the customer received and understood the written disclosure 
required by paragraph (g)(1) of this section.
    (h) Future disclosure requirements. If, with regard to a retail 
forex customer, the banking institution changes any fee, charge, or 
commission required to be disclosed under paragraph (f) of this 
section, then the banking institution shall mail or deliver to the 
retail forex customer a notice of the changes at least 15 days prior to 
the effective date of the change.
    (i) Form of disclosure requirements. The disclosures required by 
this section shall be clear and conspicuous and designed to call 
attention to the nature and significance of the information provided.
    (j) Other disclosure requirements unaffected. This section does not 
relieve a banking institution from any other disclosure obligation it 
may have under applicable law.


Sec.  240.7  Recordkeeping.

    (a) General rule. A banking institution engaging in retail forex 
transactions shall keep full, complete and systematic records, together 
with all pertinent data and memoranda, of all transactions relating to 
its retail forex business, including:
    (1) Retail forex account records. For each retail forex account:
    (i) The name and address of the person for whom such retail forex 
account is carried or introduced and the principal occupation or 
business of the person;
    (ii) The name of any other person guaranteeing the account or 
exercising trading control with respect to the account;
    (iii) The establishment or termination of the account;
    (iv) A means to identify the person who has solicited and is 
responsible for the account or assign account numbers in such a manner 
as to identify that person;
    (v) The funds in the account, net of any commissions and fees;
    (vi) The account's net profits and losses on open trades;
    (vii) The funds in the account plus or minus the net profits and 
losses on open trades, adjusted for the net option value in the case of 
open options positions;

[[Page 21031]]

    (viii) Financial ledger records that show separately for each 
retail forex customer all charges against and credits to such retail 
forex customer's account, including but not limited to retail forex 
customer funds deposited, withdrawn, or transferred, and charges or 
credits resulting from losses or gains on closed transactions; and
    (ix) A list of all retail forex transactions executed for the 
account, with the details specified in paragraph (a)(2) of this 
section.
    (2) Retail forex transaction records. For each retail forex 
transaction:
    (i) The date and time the banking institution received the order;
    (ii) The price at which the banking institution placed the order, 
or, in the case of an option, the premium that the retail forex 
customer paid;
    (iii) The customer account identification information;
    (iv) The currency pair;
    (v) The size or quantity of the order;
    (vi) Whether the order was a buy or sell order;
    (vii) The type of order, if the order was not a market order;
    (viii) The size and price at which the order is executed, or in the 
case of an option, the amount of the premium paid for each option 
purchased, or the amount credited for each option sold;
    (ix) For options, whether the option is a put or call, expiration 
date, quantity, underlying contract for future delivery or underlying 
physical, strike price, and details of the purchase price of the 
option, including premium, mark-up, commission, and fees;
    (x) For futures, the delivery date; and
    (xi) If the order was made on a trading platform:
    (A) The price quoted on the trading platform when the order was 
placed, or, in the case of an option, the premium quoted;
    (B) The date and time the order was transmitted to the trading 
platform; and
    (C) The date and time the order was executed.
    (3) Price changes on a trading platform. If a trading platform is 
used, daily logs showing each price change on the platform, the time of 
the change to the nearest second, and the trading volume at that time 
and price.
    (4) Methods or algorithms. Any method or algorithm used to 
determine the bid or asked price for any retail forex transaction or 
the prices at which customers orders are executed, including, but not 
limited to, any mark-ups, 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; and
    (iii) All other retail forex transactions executed on that day for 
such account, including the date, price, quantity, currency and the 
person for whom such transaction was made.
    (6) Other records. Written acknowledgements of receipt of the risk 
disclosure statement required by Sec.  240.6(b), offset instructions 
pursuant to Sec.  240.5(c), records required under paragraphs (b) 
through (f) of this section, trading cards, signature cards, street 
books, journals, ledgers, payment records, copies of statements of 
purchase, and all other records, data and memoranda that have been 
prepared in the course of the banking institution's retail forex 
business.
    (b) Ratio of profitable accounts. (1) With respect to its active 
retail forex customer accounts over which it did not exercise 
investment discretion and that are not retail forex proprietary 
accounts open for any period of time during the quarter, a banking 
institution shall prepare and maintain on a quarterly basis (calendar 
quarter):
    (i) A calculation of the percentage of such accounts that were 
profitable;
    (ii) A calculation of the percentage of such accounts that were not 
profitable; and
    (iii) Data supporting the calculations described in paragraphs 
(b)(1)(i) and (b)(1)(ii) of this section.
    (2) In calculating whether a retail forex account was profitable or 
not profitable during the quarter, the banking institution shall 
compute the realized and unrealized gains or losses on all retail forex 
transactions carried in the retail forex account at any time during the 
quarter, and subtract all fees, commissions, and any other charges 
posted to the retail forex account during the quarter, and add any 
interest income and other income or rebates credited to the retail 
forex account during the quarter. All deposits and withdrawals of funds 
made by the retail forex customer during the quarter must be excluded 
from the computation of whether the retail forex account was profitable 
or not profitable during the quarter. Computations that result in a 
zero or negative number shall be considered a retail forex account that 
was not profitable. Computations that result in a positive number shall 
be considered a retail forex account that was profitable.
    (3) A retail forex account shall be considered ``active'' for 
purposes of paragraph (b)(1) of this section if and only if, for the 
relevant calendar quarter, a retail forex transaction was executed in 
that account or the retail forex account contained an open position 
resulting from a retail forex transaction.
    (c) Records related to possible violations of law. A banking 
institution engaging in retail forex transactions shall make a record 
of all communications received by the banking institution or its 
related persons concerning facts giving rise to possible violations of 
law related to the banking institution's retail forex business. The 
record shall contain: the name of the complainant, if provided; the 
date of the communication; the relevant agreement, contract, or 
transaction; the substance of the communication; and the name of the 
person who received the communication and the final disposition of the 
matter.
    (d) Records for noncash margin. A banking institution shall 
maintain a record of all noncash margin collected pursuant to Sec.  
240.9. The record shall show separately for each retail forex customer:
    (1) A description of the securities or property received;
    (2) The name and address of such retail forex customer;
    (3) The dates when the securities or property were received;
    (4) The identity of the depositories or other places where such 
securities or property are segregated or held, if applicable;
    (5) The dates on which the banking institution placed or removed 
such securities or property into or from such depositories; and
    (6) The dates of return of such securities or property to such 
retail forex customer, or other disposition thereof, together with the 
facts and circumstances of such other disposition.
    (e) Order tickets.
    (1) Except as provided in paragraph (e)(2) of this section, 
immediately upon the receipt of a retail forex transaction order, a 
banking institution shall prepare an order ticket for the order 
(whether unfulfilled, executed or canceled). The order ticket shall 
include:
    (i) Account identification (account or customer name with which the 
retail forex transaction was effected);

[[Page 21032]]

    (ii) Order number;
    (iii) Type of order (market order, limit order, or subject to 
special instructions);
    (iv) Date and time, to the nearest minute, the retail forex 
transaction order was received (as evidenced by timestamp or other 
timing device);
    (v) Time, to the nearest minute, the retail forex transaction order 
was executed; and
    (vi) Price at which the retail forex transaction was executed.
    (2) Post-execution allocation of bunched orders. Specific 
identifiers for retail forex accounts included in bunched orders need 
not be recorded at time of order placement or upon report of execution 
as required under paragraph (e)(1) of this section if the following 
requirements are met:
    (i) The banking institution placing and directing the allocation of 
an order eligible for post-execution allocation has been granted 
written investment discretion with regard to participating customer 
accounts and makes the following information available to customers 
upon request:
    (A) The general nature of the post-execution allocation methodology 
the banking institution will use;
    (B) Whether the banking institution has any interest in accounts 
which may be included with customer accounts in bunched orders eligible 
for post-execution allocation; and
    (C) Summary or composite data sufficient for that customer to 
compare the customer's results with those of other comparable customers 
and, if applicable, any account in which the banking institution has an 
interest.
    (ii) Post-execution allocations are made as soon as practicable 
after the entire transaction is executed;
    (iii) Post-execution allocations are fair and equitable, with no 
account or group of accounts receiving consistently favorable or 
unfavorable treatment; and
    (iv) The post-execution allocation methodology is sufficiently 
objective and specific to permit the Board to verify fairness of the 
allocations using that methodology.
    (f) Record of monthly statements and confirmations. A banking 
institution shall retain a copy of each monthly statement and 
confirmation required by Sec.  240.10.
    (g) Form of record and manner of maintenance. The records required 
by this section must clearly and accurately reflect the information 
required and provide an adequate basis for the audit of the 
information. A banking institution must create and maintain audio 
recordings of oral orders and oral offset instructions. Record 
maintenance may include the use of automated or electronic records 
provided that the records are easily retrievable, and readily available 
for inspection.
    (h) Length of maintenance. A banking institution shall keep each 
record required by this section for at least five years from the date 
the record is created.


Sec.  240.8  Capital requirements.

    (a) Capital required for a state member bank. A banking institution 
defined in section 240.2(b)(1) offering or entering into retail forex 
transactions must be well-capitalized as defined in section 208.43 of 
Regulation H (12 CFR 208.43).
    (b) Capital required for an uninsured state-licensed branch of a 
foreign bank. A banking institution defined in Sec.  240.2(b)(2) 
offering or entering into retail forex transactions must be well-
capitalized under the capital rules made applicable to it pursuant to 
Sec.  225.2(r)(3) of Regulation Y (12 CFR 225.2(r)(3)).
    (c) Capital required for financial holding companies and bank 
holding companies. A banking institution defined in Sec.  240.2(b)(3) 
or (4) offering or entering into retail forex transactions must be 
well-capitalized as defined in Sec.  225.2(r) of Regulation Y (12 CFR 
225.2(r)).
    (d) Capital required for savings and loan holding companies. A 
banking institution defined in Sec.  240.2(b)(5) offering or entering 
into retail forex transactions must be well-capitalized as defined in 
Sec.  238.2(s) of Regulation LL (12 CFR 238.2(s)).
    (e) Capital required for an agreement corporation or Edge Act 
corporation. A banking institution defined in Sec.  240.2(b)(6) or (7) 
offering or entering into retail forex transactions must maintain 
capital in compliance with the capital adequacy guidelines that are 
made applicable to an Edge corporation engaged in banking pursuant to 
Sec.  211.12 (c)(2) of Regulation K (12 CFR 211.12(c)(2)).


Sec.  240.9  Margin requirements

    (a) Margin required. A banking institution engaging, or offering to 
engage, in retail forex transactions must collect from each retail 
forex customer an amount of margin not less than:
    (1) Two percent of the notional value of the retail forex 
transaction for major currency pairs and 5 percent of the notional 
value of the retail forex transaction for all other currency pairs;
    (2) For short options, 2 percent for major currency pairs and 5 
percent for all other currency pairs of the notional value of the 
retail forex transaction, plus the premium received by the retail forex 
customer; or
    (3) For long options, the full premium charged and received by the 
banking institution.
    (b)(1) Form of margin. Margin collected under paragraph (a) of this 
section or pledged by a retail forex customer for retail forex 
transactions in excess of the requirements of paragraph (a) of this 
section must be in the form of cash or the following financial 
instruments:
    (i) Obligations of the United States and obligations fully 
guaranteed as to principal and interest by the United States;
    (ii) General obligations of any State or of any political 
subdivision thereof;
    (iii) General obligations issued or guaranteed by any enterprise, 
as defined in 12 U.S.C. 4502(10);
    (iv) Certificates of deposit issued by an insured depository 
institution, as defined in section 3(c)(2) of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(c)(2));
    (v) Commercial paper;
    (vi) Corporate notes or bonds;
    (vii) General obligations of a sovereign nation;
    (viii) Interests in money market mutual funds; and
    (ix) Such other financial instruments as the Board deems 
appropriate.
    (2) Haircuts. A banking institution shall establish written 
policies and procedures that include:
    (i) Haircuts for noncash margin collected under this section; and
    (ii) Annual evaluation, and, if appropriate, modification of the 
haircuts.
    (c) Major currencies. (1) for the purposes of paragraphs (a)(1) and 
(a)(2) of this section, major currency means:
    (i) United States Dollar (USD)
    (ii) Canadian Dollar (CAD)
    (iii) Euro (EUR)
    (iv) United Kingdom Pound (GBP)
    (v) Japanese Yen (JPY)
    (vi) Swiss Franc (CHF)
    (vii) New Zealand Dollar (NZD)
    (viii) Australian Dollar (AUD)
    (ix) Swedish Kronor (SEK)
    (x) Danish Kroner (DKK)
    (xi) Norwegian Krone (NOK), and
    (xii) Any other currency as determined by the Board.
    (d) Margin calls; liquidation of position. For each retail forex 
customer, at least once per day, a banking institution shall:
    (1) Mark the value of the retail forex customer's open retail forex 
positions to market;
    (2) Mark the value of the margin collected under this section from 
the retail forex customer to market;
    (3) Determine whether, based on the marks in paragraphs (d)(1) and 
(d)(2) of

[[Page 21033]]

this section, the banking institution has collected margin from the 
retail forex customer sufficient to satisfy the requirements of this 
section; and
    (4) If, pursuant to paragraph (d)(3) of this section, the banking 
institution determines that it has not collected margin from the retail 
forex customer sufficient to satisfy the requirements of this section 
then, within a reasonable period of time, the banking institution shall 
either:
    (i) Collect margin from the retail forex customer sufficient to 
satisfy the requirements of this section; or
    (ii) Liquidate the retail forex customer's retail forex 
transactions.


Sec.  240.10  Required reporting to customers.

    (a) Monthly statements. Each banking institution must promptly 
furnish to each retail forex customer, as of the close of the last 
business day of each month or as of any regular monthly date selected, 
except for accounts in which there are neither open positions at the 
end of the statement period nor any changes to the account balance 
since the prior statement period, but in any event not less frequently 
than once every three months, a statement that clearly shows:
    (1) For each retail forex customer:
    (i) The open retail forex transactions with prices at which 
acquired;
    (ii) The net unrealized profits or losses in all open retail forex 
transactions marked to the market;
    (iii) Any money, securities or other property held as margin for 
retail forex transactions; and
    (iv) A detailed accounting of all financial charges and credits to 
the retail forex customer's retail forex accounts during the monthly 
reporting period, including: money, securities, or property received 
from or disbursed to such customer; realized profits and losses; and 
fees, charges, and commissions.
    (2) For each retail forex customer engaging in retail forex 
transactions that are options:
    (i) All such options purchased, sold, exercised, or expired during 
the monthly reporting period, identified by underlying retail forex 
transaction or underlying currency, strike price, transaction date, and 
expiration date;
    (ii) The open option positions carried for such customer and 
arising as of the end of the monthly reporting period, identified by 
underlying retail forex transaction or underlying currency, strike 
price, transaction date, and expiration date;
    (iii) All such option positions marked to the market and the amount 
each position is in the money, if any;
    (iv) Any money, securities or other property held as margin for 
retail forex transactions; 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 banking institution must, not 
later than the next business day after any retail forex transaction, 
send:
    (1) To each retail forex customer, a written confirmation of each 
retail forex transaction caused to be executed by it for the customer, 
including offsetting transactions executed during the same business day 
and the rollover of an open retail forex transaction to the next 
business day;
    (2) To each retail forex customer engaging in forex option 
transactions, a written confirmation of each forex option transaction, 
containing at least the following information:
    (i) The retail forex customer's account identification number;
    (ii) A separate listing of the actual amount of the premium, as 
well as each mark-up thereon, if applicable, and all other commissions, 
costs, fees and other charges incurred in connection with the forex 
option transaction;
    (iii) The strike price;
    (iv) The underlying retail forex transaction or underlying 
currency;
    (v) The final exercise date of the forex option purchased or sold; 
and
    (vi) The date the forex option transaction was executed.
    (3) To each retail forex customer engaging in forex option 
transactions, upon the expiration or exercise of any option, a written 
confirmation statement thereof, which statement shall include the date 
of such occurrence, a description of the option involved, and, in the 
case of exercise, the details of the retail forex or physical currency 
position which resulted therefrom including, if applicable, the final 
trading date of the retail forex transaction underlying the option.
    (c) Notwithstanding the provisions of paragraphs (b)(1) through (3) 
of this section, a retail forex transaction that is caused to be 
executed for a pooled investment vehicle that engages in retail forex 
transactions need be confirmed only to the operator of such pooled 
investment vehicle.
    (d) Controlled accounts. With respect to any account controlled by 
any person other than the retail forex customer for whom such account 
is carried, each banking institution shall promptly furnish in writing 
to such other person the information required by paragraphs (a) and (b) 
of this section.
    (e) Introduced accounts. Each statement provided pursuant to the 
provisions of this section must, if applicable, show that the account 
for which the banking institution was introduced by an introducing 
broker and the name of the introducing broker.


Sec.  240.11  Unlawful representations.

    (a) No implication or representation of limiting losses. No banking 
institution engaged in retail foreign exchange transactions or its 
related persons may imply or represent that it will, with respect to 
any retail customer forex account, for or on behalf of any person:
    (1) Guarantee such person or account against loss;
    (2) Limit the loss of such person or account; or
    (3) Not call for or attempt to collect margin as established for 
retail forex customers.
    (b) No implication of representation of engaging in prohibited 
acts. No banking institution or its related persons may in any way 
imply or represent that it will engage in any of the acts or practices 
described in paragraph (a) of this section.
    (c) No Federal government endorsement. No banking institution or 
its related persons may represent or imply in any manner whatsoever 
that any retail forex transaction or retail forex product has been 
sponsored, recommended, or approved by the Board, the Federal 
government, or any agency thereof.
    (d) Assuming or sharing of liability from bank error. This section 
shall not be construed to prevent a banking institution from assuming 
or sharing in the losses resulting from the banking institution's error 
or mishandling of a retail forex transaction.
    (e) Certain guaranties unaffected. This section shall not affect 
any guarantee entered into prior to the effective date of this part, 
but this section shall apply to any extension, modification or renewal 
thereof entered into after such date.


Sec.  240.12  Authorization to trade.

    (a) Specific authorization required. No banking 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 banking 
institution to effect the retail forex transaction.
    (b) A retail forex transaction is ``specifically authorized'' for 
purposes

[[Page 21034]]

of this section if the retail forex customer specifies:
    (1) The precise retail forex transaction to be effected;
    (2) The exact amount of the foreign currency to be purchased or 
sold; and
    (3) In the case of an option, the identity of the foreign currency 
or contract that underlies the option.


Sec.  240.13  Trading and operational standards.

    (a) Internal rules, procedures, and controls required. A banking 
institution engaging in retail forex transactions shall establish and 
implement internal rules, procedures, and controls designed, at a 
minimum, to:
    (1) Ensure, to the extent reasonable, that each order received from 
a retail forex customer that is executable at or near the price that 
the banking institution has quoted to the customer is entered for 
execution before any order in any retail forex transaction for:
    (i) A proprietary account;
    (ii) An account in which a related person has an interest, or any 
account for which such a related person may originate orders without 
the prior specific consent of the account owner, if the related person 
has gained knowledge of the retail forex customer's order prior to the 
transmission of an order for a proprietary account;
    (iii) An account in which a related person has an interest, if the 
related person has gained knowledge of the retail forex customer's 
order prior to the transmission of an order for a proprietary account; 
or
    (iv) An account in which a related person may originate orders 
without the prior specific consent of the account owner, if the related 
person has gained knowledge of the retail forex customer's order prior 
to the transmission of an order for a proprietary account;
    (2) Prevent banking institution related persons from placing 
orders, directly or indirectly, with another person in a manner 
designed to circumvent the provisions of paragraph (a)(1) of this 
section; and
    (3) Fairly and objectively establish settlement prices for retail 
forex transactions.
    (b) Disclosure of retail forex transactions. No banking institution 
engaging in retail forex transactions may disclose that an order of 
another person is being held by the banking institution, unless the 
disclosure is necessary to the effective execution of such order or the 
disclosure is made at the request of the Board.
    (c) Handling of retail forex accounts of related persons of retail 
forex counterparties. No banking institution engaging in retail forex 
transactions shall knowingly handle the retail forex account of any 
related person of another retail forex counterparty unless the banking 
institution:
    (1) Receives written authorization from a person designated by such 
other retail forex counterparty with responsibility for the 
surveillance over such account;
    (2) Prepares immediately upon receipt of an order for the account a 
written record of the order, including the account identification and 
order number, and records thereon to the nearest minute, by time-stamp 
or other timing device, the date and time the order is received; and
    (3) Transmits on a regular basis to the other retail forex 
counterparty copies of all statements for the account and of all 
written records prepared upon the receipt of orders for the account 
pursuant to paragraph (c)(2) of this section.
    (d) Related person of banking institution establishing account at 
another retail forex counterparty. No related person of a banking 
institution working in the banking institution's retail forex business 
may have an account, directly or indirectly, with another retail forex 
counterparty unless the other retail forex counterparty:
    (1) Receives written authorization to open and maintain the account 
from a person designated by the banking institution of which it is a 
related person with responsibility for the surveillance over the 
account pursuant to paragraph (a)(2) of this section;
    (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 banking institution copies 
of all statements for the account and of all written records prepared 
by the other retail forex counterparty upon receipt of orders for such 
account pursuant to paragraph (d)(2) of this section.
    (e) Prohibited trading practices. No banking institution engaging 
in retail forex transactions may:
    (1) Enter into a retail forex transaction, to be executed pursuant 
to a market or limit order at a price that is not at or near the price 
at which other retail forex customers, during that same time period, 
have executed retail forex transactions with the banking institution;
    (2) Adjust or alter prices for a retail forex transaction after the 
transaction has been confirmed to the retail forex customer;
    (3) Provide a retail forex customer a new bid price for a retail 
forex transaction that is higher than its previous bid without 
providing a new asked price that is also higher than its previous asked 
price by a similar amount;
    (4) Provide a retail forex customer a new bid price for a retail 
forex transaction that is lower than its previous bid without providing 
a new asked price that is also lower than its previous asked price by a 
similar amount; or
    (5) Establish a new position for a retail forex customer (except 
one that offsets an existing position for that retail forex customer) 
where the banking institution holds outstanding orders of other retail 
forex customers for the same currency pair at a comparable price.


Sec.  240.14  Supervision.

    (a) Supervision by the banking institution. A banking institution 
engaging in retail forex transactions shall diligently supervise the 
handling by its officers, employees, and agents (or persons occupying a 
similar status or performing a similar function) of all retail forex 
accounts carried, operated, or advised by the banking institution and 
all activities of its officers, employees, and agents (or persons 
occupying a similar status or performing a similar function) relating 
to its retail forex business.
    (b) Supervision by officers, employees, or agents. An officer, 
employee, or agent of a banking institution must diligently supervise 
his or her subordinates' handling of all retail forex accounts at the 
banking institution and all the subordinates' activities relating to 
the banking institution's retail forex business.


Sec.  240.15  Notice of transfers.

    (a) Prior notice generally required. Except as provided in 
paragraph (b) of this section, a banking institution must provide a 
retail forex customer with 30 days' prior notice of any assignment of 
any position or transfer of any account of the retail forex customer. 
The notice must include a statement that the retail forex customer is 
not required to accept the proposed assignment or transfer and may 
direct the banking institution to liquidate the positions of the retail 
forex customer or transfer the account to a retail forex counterparty 
of the retail forex customer's selection.
    (b) Exceptions. The requirements of paragraph (a) of this section 
shall not apply to transfers:

[[Page 21035]]

    (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 other law; or
    (3) Otherwise authorized by applicable law.
    (c) Obligations of transferee banking institution. A banking 
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 banking institution 
has clear written evidence that the retail forex customer has received 
and acknowledged receipt of the required disclosure statements.


Sec.  240.16  Customer dispute resolution.

    (a) No banking institution shall enter into any agreement or 
understanding with a retail forex customer in which the customer 
agrees, prior to the time a claim or grievance arises, to submit any 
claim or grievance regarding any retail forex transaction or disclosure 
to any settlement procedure.
    (b) Election of forum. (1) Within 10 business days after the 
receipt of notice from the retail forex customer that the customer 
intends to submit a claim to arbitration, the banking institution shall 
provide the customer with a list of persons qualified in dispute 
resolution.
    (2) The customer must, within 45 days after receipt of such list, 
notify the banking institution of the person selected. The customer's 
failure to provide such notice shall give the banking institution the 
right to select a person from the list.
    (c) Enforceability. A dispute settlement procedure may require 
parties using the procedure to agree, under applicable state law, 
submission agreement, or otherwise, to be bound by an award rendered in 
the procedure if the agreement to submit the claim or grievance to the 
procedure was made after the claim or grievance arose. Any award so 
rendered by the procedure will be enforceable in accordance with 
applicable law.
    (d) Time limits for submission of claims. The dispute settlement 
procedure used by the parties may not include any unreasonably short 
limitation period foreclosing submission of a customer's claims or 
grievances or counterclaims.
    (e) Counterclaims. A procedure for the settlement of a retail forex 
customer's claims or grievances against a banking institution or 
employee thereof may permit the submission of a counterclaim in the 
procedure by a person against whom a claim or grievance is brought if 
the counterclaim:
    (1) Arises out of the transaction or occurrence that is the subject 
of the retail forex customer's claim or grievance; and
    (2) Does not require for adjudication the presence of essential 
witnesses, parties, or third persons over which the settlement process 
lacks jurisdiction.
    (f) Cross-border transactions. This section shall not apply to 
transactions within the scope of sections 202, 302, and 305 of the 
Federal Arbitration Act (9 U.S.C. 202, 302, and 305).


Sec.  240.17  Reservation of authority.

    The Board may modify the disclosure, recordkeeping, capital and 
margin, reporting, business conduct, documentation, or other standards 
or requirements under this part for a specific retail forex transaction 
or a class of retail forex transactions if the Board determines that 
the modification is consistent with safety and soundness and the 
protection of retail forex customers.

    By order of the Board of Governors of the Federal Reserve 
System, April 3, 2013.
Margaret McCloskey Shanks,
Deputy Secretary of the Board.
[FR Doc. 2013-08163 Filed 4-8-13; 8:45 am]
BILLING CODE 6210-01-P