The Commodity Exchange Act (the Act) was recently amended to make clear that it is unlawful to offer foreign currency futures and option contracts to retail customers unless the offeror is a regulated financial entity as enumerated in the Act,¹ including futures commission merchants (FCM) and their affiliates. Off-exchange trading of foreign currency futures or options with retail customers by counterparties that are not within one of the enumerated categories is a violation of Section 4(a) of the Act.²
Thus, to the extent there was confusion as to the applicability of the Act and the jurisdiction of the CFTC in this area, Congress has made clear that the Act is applicable to, and the CFTC has jurisdiction over, foreign currency futures and options trading involving retail customers where the counterparty does not fall within one of the enumerated categories.³ Trading of foreign currency futures and options on organized exchanges continues to be permitted. Therefore, trading of foreign currency futures contracts, or options thereon, is lawful if it occurs on designated contract markets or derivatives transaction execution facilities. Trading of options on foreign currency also is lawful if conducted on national securities exchanges registered pursuant to Section 6(a) of the Securities Exchange Act of 1934.
Generally, retail customers are: (1) individuals with less than $10 million in total assets, or less than $5 million in total assets if entering into the transaction to manage risk, and who are not registered as futures or securities professionals; (2) companies, other than financial institutions and investment companies, with less than $10 million in total assets, or a net worth less than $1 million if entering into the transaction in connection with the conduct of their businesses; and (3) commodity pools that have less than $5 million in total assets.4 The enumerated counterparties who may lawfully conduct off-exchange foreign currency trading with retail customers are regulated financial entities. These include, among others, FCMs and affiliates of FCMs.5 FCMs and their affiliates that are not also regulated as one of the other enumerated financial entities, remain subject to the Commission’s anti-fraud jurisdiction with respect to foreign currency transactions.
– 7 U.S.C. § 1 et seq. (1994), as amended by the Commodity Futures Modernization Act of 2000 (“CFMA”), Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (to be codified as amended in scattered sections of 7 U.S. C.). Relevant portions of the CFMA are attached.
– 7 U.S.C. § 6 (a).
– As a result of this legislative clarification, the issue of whether trading occurs on a “board of trade,” as that term was used in the former so-called “Treasury Amendment,” no longer exists. See CFTC v. Frankwell, Ltd., 99 F.3d 299 (9th Cir. 1996).
– See Section 1a(12) of the newly-amended Act (CFMA Section 101(3)) for the definition of “Eligible Contract Participant.” Any Person not falling within this definition is a retail customer.
– The other enumerated counterparties are: (1) financial institutions; (2) registered broker-dealers; (3) associated persons of registered broker-dealers; (4) insurance companies or affiliates thereof; (5) financial holding companies; and (6) investment bank holding companies. See section 2(c)(2)(B)(ii) of the newly-amended Act (CFMA Section 102). Note that introducing brokers are not one of the permitted counterparties and therefore cannot be lawfully involved in off-exchange foreign currency transactions with retail customers.
Investors can obtain information about any firm or individual registered with the CFTC, including any actions taken against a registrant, through the National Futures Association (NFA) Background Affiliation Status Information Center (BASIC), available on the NFA website at: www.nfa.futures.org/basicnet/. Similarly, information on firms or individuals registered with the Securities and Exchange Commission may be found through the National Association of Securities Dealers (NASD) public disclosure program, available on the NASD regulation website at: www.nasdr.com/2000.htm. Information on affiliates of FCMs and BDs, however, is confidential under the respective risk assessment provisions.6 As such, it will not be available on the NFA or NASD websites. Potential customers that are approached by firms claiming to be permitted counterparties as affiliates of an FCM or BD are strongly advised to inquire about the name of the affiliated FCM or BD and to obtain the name of a contact person at the FCM or BD who can verify the affiliation.