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  1. #1
    fxmultitrader is offline Member
    Join Date
    Oct 2009

    Finreg (Dodd-Frank) and Forex

    I've heard a couple of Robert Green's tax webinars (very helpful) and have done some reading about the new Finreg (Dodd-Frank) law, but I still have some questions:

    1. Apparently the CFTC now has 90 days from the time Finreg was passed to enact guidelines for US forex trading. Apparently if the CFTC does not act in this timeframe, then retail spot forex trading becomes illegal in the US. My question is this: suppose that CFTC does not get its act together in time and does not enact guidelines within 90 days. In that case, does retail forex trading then become illegal for ALL US traders? Or just for US traders trading with US forex brokers/dealers? This is a huge question for all of us who now trade through UK brokers like FXCM UK. If the CFTC screws up and doesn't act in time, what can US forex traders do to keep trading or do we have to just shut down and wait?

    2. Ok let's assume that the CFTC has at least enough competence to enact guidelines within 90 days so that retail forex does not completely shut down in the US. (One would hope that would be the case, but then again we're talking about a govt agency here so one never knows for sure). In this case, will it still be the case that US traders can avoid the unbelievably stupid no-hedging and reduced leverage provisions by trading in the UK?

    3. What is the likelihood of the reduced leverage being 10:1? Are they considering easing this somewhat to say 20:1 or 25:1? Anyone want to hazard a guess as to what leverage will actually get reduced to once the guidelines are enacted?

    4. What is likely to be the overall effect of reduced leverage on the currency market volatility and/or price behavior? Will reduced leverage result in reduced liquidity meaning and greatly reduced volatility? Or will the effect be minimal?


  2. #2
    fxmultitrader is offline Member
    Join Date
    Oct 2009
    While I'm waiting for answers to the above, I found out some more info that I'll share. If the CFTC fails to act and retail forex becomes illegal unless you are a eligible contract participant (ECP), I was hoping that there would be some reasonable way for an average forex trader to become a ECP. For example, with a little work one can pass the Series 3 and 34 exams and become a CTA. Well, no such luck. Here is a URL that shows the definition of an ECP:

    Basically unless you have a net worth of several million dollars then you can forget about it.

    One can find a good review of the finreg law effects on forex here:
    Obama Threatens Forex; Says Goodbye to OTC Gold Trading -- Seeking Alpha
    This doesn't answer the questions in my original post but it still gives a pretty good overview. It also says at the end that Dodd-Frank revises the eligible participant law to apply to individuals that have a net worth of at least $1,000,000 NOT INCLUDING the value of your home. Again, most of us are left out in the cold on this one.

  3. #3
    GreenTrader Tax is offline CPA, CEO Green & Company CPAs, LLC
    Join Date
    Mar 2006
    August 5, 2010 Podcast GreenTraderTax
    Click here for mp3 file (streams quickly).

    Green discusses how the Dodd-Frank Fin Reg bill affects forex trading, prop trading and other issues of importance to traders.
    Forex traders: Congress took a new approach with the CFTC in the Dodd-Frank bill. The CFTC was dragging its feet on Congress's 2008 Farm Bill calling for forex regulation, which had been mostly overlooked by regulators for decades. With Dodd-Frank, retail forex trading will become illegal for non-participants (traders) unless the CFTC finishes its new forex regulations in short order (Dodd-Frank Bill Section 742(c)). The comment period on the CFTC proposals published in January, 2010 expired and Green expects rules to be published soon.

    We imagine the CFTC will drastically reduce allowable forex leverage from existing 100:1 to a significantly lower amount, but perhaps not as far as its proposed rule change of 10:1 leverage. Will American forex traders be able to continue using foreign trading platforms to escape the reach of Fin Reg and the CFTC (including these new rules)? Green discussed the WSJ article "Financial Bill Could Set The Stage For Uneven Retail Forex Rules" dated July 30, 2010. You can follow the progress of these regulatory changes here.

    Dodd-Frank Section 742(c) has two areas of concern. It updates the Commodity Exchange Act (CEA) Section 2(c)(2)(D) Spot Commodities (Metals) and Section 2(c)(2)(E) Spot Forex. Google these sections to learn more.

    Proprietary traders: Green gave an update on his prop trading firm alert story covered on his blog (FINRA's notice to prop traders) dated June 22, 2010. Goldman Sachs told one of the largest prop trading firms to change its payouts to prop traders to 80 percent or less, down from 100 percent. FINRA Regulatory Notice 10-18 said that 100 percent payouts were indicative of "beneficial owners" (disguised customer accounts and these firms are not registered customer-account broker dealers). Goldman seems to be closely following all rules now to stay out of trouble with the SEC.
    FXCM does not endorse and cannot vouch for any of the third-party content on this site

  4. #4
    GreenTrader Tax is offline CPA, CEO Green & Company CPAs, LLC
    Join Date
    Mar 2006

    Does Dodd Frank apply to foreign platforms too?

    The Dodd-Frank Fin Reg bill may extend the CFTC's rules for retail forex trading to foreign trading platforms marketed to Americans too. This might mean that U.S. resident traders won’t be able to evade new CFTC rules for (perhaps) 10:1 leverage (proposed) and LIFO trading (recent NFA rule change) by using a UK or other foreign trading platform. Some foreign forex trading platforms offer 200:1 leverage and spread-betting too (no requirement for LIFO accounting).

    We are working on this very important question for U.S. forex traders now and hope to have answers soon. We will discuss this issue more and perhaps answers on our conference call Thursday at 4:15pm ET. Learn how to join this free call here INTERACTIVE: FREE CONFERENCE CALLS & PODCASTS.

    As of now, the CFTC has not finalized its January 2010 proposed rule changes for trading retail forex, including a reduction of leverage from 100:1 to 10:1. See my blog “Dodd-Frank bill seeks to crack down on forex arena” at Dodd-Frank bill seeks to crack down on forex arena - GreenTrader Weblog. It links to the CFTC site to follow the entire rule making process, with the proposed rules, comments and status of rule changes.

    I asked the above questions to my tax attorney colleague and he replied by email. “Our Congress takes a very broad reach of the extraterritorial reach of our securities and commodities regulatory laws. Solicitation of customers, who are U.S. persons, even though the solicitation is made outside the U.S. by a non-U.S. person, is covered. That is why, for example, foreign futures exchanges that want to offer their products to U.S. customers must obtain a 30.10 order from the CFTC qualifying them to solicit U.S. customers. As a practical matter, of course, enforcing that extraterritorial jurisdiction can be difficult (is the US going to invade the Cayman Islands?)"

    I asked him these further questions:
    If 10:1 retail forex trading leverage is enacted by the CFTC/NFA, can U.S.-based retail spot forex brokers easily move over their U.S. trading customers to their UK affiliates on UK platforms? Wouldn't that constitute a U.S. broker marketing/soliciting to a U.S. customer and switching them to a foreign affiliate to evade U.S. regulations? Based on your general statement (above), I think it could be a problem.

    U.S. forex traders may be left with two unfortunate choices. Trade on CFTC-sanctioned foreign OTC platforms respecting CFTC rules on LIFO and (perhaps 10:1) leverage or take your chances in offshore tax havens. Why go to foreign platforms if the rules are the same and perhaps invite more IRS questions? Why go to offshore havens if it’s potentially illegal and a tax problem too?

    Tax haven platforms may never get CFTC sanction, so will they be illegal under Dodd-Frank? Or, will it be a viable way to navigate around the U.S. forex trading leverage constraints?

    I know many Comments published on the CFTC site OTC Derivatives - CFTC mentioned it’s a bad idea to chase U.S. forex trading business to tax and regulatory-havens where there is much more fraud. The way Congress wrote Dodd-Frank, it seems like it's either going to be sanctioned by U.S. regulators or prohibited entirely. Can a U.S. person report forex transactions on their tax return from counterparties that are not sanctioned?

    Dodd Frank Fin Reg Bill Text
    Text of H.R.4173 as Enrolled Bill: Dodd-Frank Wall Street Reform and Consumer Protection Act - U.S. Congress - OpenCongress

    PROHIBITION-‘(I) IN GENERAL- Except as provided in subclause (II), a person described in subparagraph (B)(i)(II) for which there is a Federal regulatory agency shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency described in subparagraph (B)(i)(I) except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe.

    If anyone has a link or other information clearly stating that foreign forex trading platforms will be exempt from the reaches of Dodd-Frank Fin Reg on Americans, please let me know at and post it here too. I hope to discuss this all with FXCM executives soon. Hopefully, American traders can escape the reaches of draconian U.S. rule changes on forex. Better yet, I hope the CFTC does not make such draconian changes.
    FXCM does not endorse and cannot vouch for any of the third-party content on this site

  5. #5
    GreenTrader Tax is offline CPA, CEO Green & Company CPAs, LLC
    Join Date
    Mar 2006
    Is the CFTC trying to put retail forex traders out of business? Join our free conference call this Thursday to find out. You may want to first read our below blog articles on the subject.

    Email invitation: Is the CFTC trying to put forex traders out of business? Join Conf. Call Thurs. 8/12

    Aug 10 10 - U.S. forex traders may not be able to skirt rules by moving accounts offshore

    Aug 07 10 - Dodd-Frank bill seeks to crack down on forex arena

    GreenTrader Weblog (Forbes blog versions)

    We will cover other current tax and regulatory issues for traders and investment managers including Dodd-Frank Fin Reg legislation, and tax changes (recently passed, still proposed and being debated).

    Aug. 12, Thursday Weekly Conference Call (Free):
    4:15 - 5:30 pm ET, Dial 312-878-0224 begin_of_the_skype_highlighting--------------312-878-0224------end_of_the_skype_highlighting begin_of_the_skype_highlighting--------------312-878-0224------end_of_the_skype_highlighting begin_of_the_skype_highlighting--------------312-878-0224------end_of_the_skype_highlighting, Access Code: 603-682-315

    Podcast to be published following the call, and available with all prior podcasts. We began the discussion about regulatory changes for forex traders on our August 5th podcast. INTERACTIVE: FREE CONFERENCE CALLS & PODCASTS

    Please spread the word on social media with the links below.
    The more questions and answers the better.

    Hosts: Robert A. Green, CPA/CEO of GreenTraderTax and GreenTraderFunds and Brent Gillett, JD of
    FXCM does not endorse and cannot vouch for any of the third-party content on this site

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