Risks with Forex Market Bared

Jack Humphrey, Regulatory journalist
July 20, 2011 /

The Securities and Exchange Commission has issued an investor bulletin that highlights the most significant risks that foreign currency exchange transactions may pose for individual investors.

The forex market is a large and generally liquid financial market used by banks, insurance companies, and other financial institutions as well as large corporations to manage the risks associated with fluctuations in currency rates.

However, the risk of loss for individual investors who trade forex contracts can be large.

Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy, said: “Forex trading can be very risky and is not appropriate for all investors.

“Individual investors considering forex trading need to fully understand the unique characteristics of this market and consult their financial adviser before making any investment decisions.”

The SEC is adopting interim final temporary rule to maintain the ability of broker-dealers to engage in a retail forex business during a one-year period under the existing regulatory framework that now applies to broker-dealers providing these services.

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which amended the Commodity Exchange Act (CEA) providing that a person for which there is a Federal regulatory agency, including a registered broker-dealer must not enter into a transaction with a person who is not an “eligible contract participant” except pursuant to a Federal regulatory rule that allows for the “transaction under such terms and conditions as the Federal regulatory agency shall prescribe.”

The SEC issued last week an interim final temporary rule permitting registered broker-dealers to continue to engage in retail forex transactions for up to one year under the existing regulatory framework that applies to them when effecting such transactions.

Under the Dodd-Frank Act, certain foreign exchange transactions with persons who are not “eligible contract participants” (commonly referred to as “retail forex transactions”) with a registered broker or dealer will be prohibited as of July 16, 2011, in the absence of the SEC adopting a rule to allow such transactions under terms and conditions that it prescribed.

This prohibition will not apply to forex transactions with a customer who qualifies as an Eligible Contract Participant, or transactions that are spot forex contracts or forward forex contracts irrespective of whether the customer is an ECP.

The interim rule provides the SEC with time to collect additional information regarding the retail forex activities of broker-dealers and take such regulatory action as may be appropriate to reduce forex risk for investors purchasing or selling foreign securities.

The SEC solicits comment on each aspect of the rule and the nature and circumstances surrounding retail forex business conducted by broker-dealers.

The comments will be carefully considered to determine what further regulatory action, if any, would be appropriate.

In making this determination, the SEC may consider a number of alternatives with respect to retail forex transactions, including proposing new rules for public comment; issuing a final rule amending the interim final temporary rule; issuing a final rule adopting the interim final temporary rule as final; or allowing the interim final temporary rule to expire without further action, which would allow the statutory prohibition to take effect.


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