ADVISORY
ON FOREIGN CURRENCY
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.
