As the self-proclaimed regulatory expert at John Lothian & Co., with my first three years here spent building our regulatory database MarketsReformWiki, I am generally the go-to person on stories involving rule changes. But when I was asked about the June 1 letter from Phillip Capital CEO Lynette Lim informing customers that the firm would be no longer be offering retail forex, due to a recent ruling by the Securities and Exchange Commission, the conversation went something like this:

John: “So, what is this SEC ruling all about, and is there a story here?”

Doug: “Uhh…uuh…I don’t know.”

So, how did I miss this? Simple – there was no press release and it was not a rule change per se but rather a notice posted on a Friday afternoon, saying that a previous ruling, which allowed certain registrants to offer retail forex, but with a sunset provision of July 31, 2016, would not be renewed. The sun will officially set.  

First, a little historical context. In 2010, the CFTC approved its final rules regarding off-exchange retail foreign exchange transactions. Although the rulemaking pre-dated the Dodd-Frank Act, once the Act was signed in July 2010, the commission’s forex rules, along with the forex rules of other regulatory authorities, became a part of Dodd-Frank. As such, the CFTC has jurisdiction over retail foreign exchange transactions. The SEC was required to put forth its rules for dual registrants, or make a determination on whether broker-dealers would be allowed to offer retail forex. In 2013, the SEC issued its temporary rule allowing retail forex, with the 2016 sunset. For more on the history, visit the Off-Exchange Forex Regulation page in MarketsReformWiki.  

What the May 2016 notice says, essentially, is that broker-dealers, even those dually registered with the CFTC ( the primary regulator for retail forex), are prohibited from offering or entering into retail forex transactions, except to eligible contract participants, such as institutional customers. A full definition of an ECP can be found in MarketsReformWiki HERE. Phillip, which only recently began offering retail forex to its U.S. customers, is the first casualty. A few more dual registrant firms that offer retail forex must either change their product lineup or their entity structure in order to comply. After July 31, only CFTC-registered FCMs and retail foreign exchange dealers (RFEDs) may act as counterparties in retail forex transactions.

There are a number of “winners” from the ruling, including CFTC-registered FCMs that offer retail FX, and the top three RFEDs – Oanda, FXCM and Gain Capital. But a number of market-watchers, including me, believe the days are numbered for retail forex in the U.S. SEC commissioner Luis Aguilar, in his comments accompanying the 2013 ruling, summed up the regulatory view of retail forex quite succinctly:

“In 2010, the CFTC adopted rules applicable to such transactions because it had ‘observed a number of improper practices that have raised concern, among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints, and the targeting of unsophisticated, elderly, low net worth and other vulnerable individuals.’”

Over the years, the retail forex market has seen its net capital requirements quadruple to $20 million, and has worked to lower the maximum leverage allowance. As dual registrants are removed from the pool, there is concern that the remaining players may widen spreads, reduce transparency, and exacerbate what many in the regulatory community see as an unfair market for retail forex investors.

Call me old-fashioned, but for the retail investor looking for a liquid, transparent foreign exchange market, nothing beats listed futures and options.

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