The CFTC’s proposed new regulations for retail forex are officially titled: “Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries”. What the regulations basically address is the relationship between retail forex customers
(you and me), and their brokers (Oanda, FXCM, IBFX, etc.).
FOREX POP-QUIZ:
Q: How many times does the word “broker” appear in the CFTC’s proposed new regulations?
A: Zero — except in reference to Introducing Brokers (who do not execute trades for customers).
There’s much more to this than just a random choice of words. The CFTC does not recognize the existence of a “retail forex broker”. The registered entity you call your “broker”, the CFTC calls a “dealer” — and they have made up a new designation
(or title) for these entities: [B]Retail Foreign Exchange Dealers (RFED’s).[/B]
Let’s distinguish between a “broker” and a “dealer”.
When you sell your house, you likely engage the services of a real estate agent or broker, to act on your behalf; and this person has a specific fiduciary responsibility to obtain the best deal and the best terms for you.
On the other hand, when you sell your gold coins, you likely visit your local coin dealer to hear his BID price; and if his price is acceptable to you, you will likely sell to him. He has a moral obligation to deal with you honestly, and that includes honestly giving you the current market price of gold. But, he has no fiduciary responsibility to help you obtain the highest price possible for your coins. He trades with you for his own benefit, not yours.
The CFTC says that the entities who solicit and transact your retail forex business are dealers, like the gold-coin dealer —
— not brokers, like the real estate broker.
[B]Furthermore, they say that all these forex dealers — RFED’s — are market makers.[/B]
All the stuff you’ve been told about “no dealing desk” and “straight-through processing” does not alter the fact that your so-called “broker” is the BUYER when you sell, and the SELLER when you buy. Furthermore, this places your “broker” in a conflict of interest with you, his customer.
“Conflict of interest” sounds unscrupulous, even illegal, but is isn’t. The conflict of interest which naturally exists between you and your forex dealer is no more evil than the conflict of interest which naturally exists between you and your coin dealer. But, this conflict of interest has to be emphasized, because of the no-dealing-desk smoke-screens that some forex dealers have thrown up in recent years.
Rest assured that the CFTC proposed regulation of retail forex WILL BECOME LAW, with the possible exception of the notorious proposed 10% margin requirement. When these proposed regulations become law, every forex dealer (RFED) will be required to furnish to every prospective retail forex customer a Risk Disclosure Statement which essentially says what we’ve just discussed. This Risk Disclosure Statement applies to all RFED’s, regardless of how they handle customer orders.
To spell it out:
[ul]
[li]All RFED’s (what we used to call brokers) are MARKET MAKERS
[/li]
[li]A built-in conflict of interest exists between all RFED’s and their customers
[/li]
[li]It doesn’t matter what your RFED (broker) does with his side of your trade (whether he holds it, offsets it in-house, passes it upstream to an ECN or directly to a bank), he is still dealing with you as a MARKET MAKER.
[/li]He is not your “agent”. He is not your “broker”. He is a “dealer”, dealing for his own benefit.
[/ul]
Here is the actual text of the Risk Disclosure Statement, which your RFED will be required to give to you, and you will be required to sign, as published in the Federal Register. This WILL become law:
Risk Disclosure Statement
OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVE THE LEVERAGED TRADING OF CONTRACTS DENOMINATED IN FOREIGN CURRENCY CONDUCTED WITH A FUTURES COMMISSION MERCHANT OR A RETAIL FOREIGN EXCHANGE DEALER AS YOUR COUNTERPARTY. BECAUSE OF THE LEVERAGE AND THE OTHER RISKS DISCLOSED HERE, YOU CAN RAPIDLY LOSE ALL OF THE FUNDS YOU DEPOSIT FOR SUCH TRADING AND YOU MAY LOSE MORE THAN YOU DEPOSIT. YOU SHOULD BE AWARE OF AND CAREFULLY CONSIDER THE FOLLOWING POINTS BEFORE DETERMINING WHETHER SUCH TRADING IS APPROPRIATE FOR YOU.
(1) TRADING IS NOT ON A REGULATED MARKET OR EXCHANGE—YOUR DEALER IS YOUR TRADING PARTNER WHICH IS A DIRECT CONFLICT OF INTEREST. BEFORE YOU ENGAGE IN ANY RETAIL FOREIGN EXCHANGE TRADING, YOU SHOULD CONFIRM THE REGISTRATION STATUS OF YOUR COUNTERPARTY. The off-exchange foreign currency trading you are entering into is not conducted on an interbank market, nor is it conducted on a futures exchange subject to regulation as a designated contract market by the Commodity Futures Trading Commission. The foreign currency trades you transact are trades with the futures commission merchant or retail foreign exchange dealer as your counterparty. WHEN YOU SELL, THE DEALER IS THE BUYER. WHEN YOU BUY, THE DEALER IS THE SELLER. As a result, when you lose money trading, your dealer is making money on such trades, in addition to any fees, commissions, or spreads the dealer may charge.
(2) AN ELECTRONIC TRADING PLATFORM FOR RETAIL FOREIGN CURRENCY TRANSACTIONS IS NOT AN EXCHANGE. IT IS AN ELECTRONIC CONNECTION FOR ACCESSING YOUR DEALER. THE TERMS OF AVAILABILITY OF SUCH A PLATFORM ARE GOVERNED ONLY BY YOUR CONTRACT WITH YOUR DEALER. Any trading platform that you may use to enter off-exchange foreign currency transactions is only connected to your futures commission merchant or retail foreign exchange dealer. You are accessing that trading platform only to transact with your dealer. You are not trading with any other entities or customers of the dealer by accessing such platform. The availability and operation of any such platform, including the consequences of the unavailability of the trading platform for any reason, is governed only by the terms of your account agreement with the dealer.
(3) YOUR DEPOSITS WITH THE DEALER HAVE NO REGULATORY PROTECTIONS. All of your rights associated with your retail forex trading, including the manner and denomination of any payments made to you, are governed by the contract terms established in your account agreement with the futures commission merchant or retail foreign exchange dealer. Funds deposited by you with a futures commission merchant or retail foreign exchange dealer for trading off-exchange foreign currency transactions are not subject to the customer funds protections provided to customers trading on a contract market that is designated by the Commodity Futures Trading Commission. Your dealer may commingle your funds with its own operating funds or use them for other purposes. In the event your dealer becomes bankrupt, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor’s claim.
(4) YOU ARE LIMITED TO YOUR DEALER TO OFFSET OR LIQUIDATE ANY TRADING POSITIONS SINCE THE TRANSACTIONS ARE NOT MADE ON AN EXCHANGE OR MARKET, AND YOUR DEALER MAY SET ITS OWN PRICES. Your ability to close your transactions or offset positions is limited to what your dealer will offer to you, as there is no other market for these transactions. Your dealer may offer any prices it wishes, and it may offer prices derived from outside sources or not in its discretion. Your dealer 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 dealer 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 dealer 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 dealer may or may not reflect prices available elsewhere at any exchange, interbank, or other market for foreign currency.
(5) PAID SOLICITORS MAY HAVE UNDISCLOSED CONFLICTS. The futures commission merchant or retail foreign exchange dealer may compensate introducing brokers for introducing your account in ways which 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. Solicitors working on behalf of futures commission merchants and retail foreign exchange dealers are required to register. You should confirm that they are, in fact registered. 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 dealer or a solicitor in making any trading or account decisions. FINALLY, YOU SHOULD THOROUGHLY INVESTIGATE ANY STATEMENTS BY ANY DEALERS OR SALES REPRESENTATIVES WHICH MINIMIZE THE IMPORTANCE OF, OR CONTRADICT, ANY OF THE TERMS OF THIS RISK DISCLOSURE. SUCH STATEMENTS MAY INDICATE POTENTIAL SALES FRAUD. THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF TRADING OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS WITH A FUTURES COMMISSION MERCHANT OR RETAIL FOREIGN EXCHANGE DEALER.
I hereby acknowledge that I have received and understood this risk disclosure statement.
___________________ Date
___________________ Signature of Customer
I have re-formatted the Risk Disclosure Statement, as printed in the Federal Register, to make it more readable. None of the wording has been changed.
Here is a link to the entire CFTC proposal, as published in the Federal Register. The Risk Disclosure Statement is covered in
§ 5.5 on pages 3312-3313:
It gets better!
Paragraph (e) of § 5.5 says that your RFED must include, along with the Risk Disclosure Statement, the following information, for each of the past four calendar quarters:
[ul]
[li]The total number of non discretionary retail forex accounts maintained by the retail foreign exchange dealer or futures commission merchant.
[/li]
[li]The percentage of such accounts that were profitable.
[/li]
[li]The percentage of such accounts that were not profitable.
[/li][/ul]
And, if you request it, your RFED must furnish to you the same information listed above for each calendar quarter for the past five years.
For people who trade through a U.S. forex “dealer”, things are about to get MUCH more transparent.