Legislative Update: U.S. Banks and Retail Currency Trading

Originally posted on May 13, 2011 at the Aite Group Blog

There is an unusual level of expediency at most regulators over requirements and deadlines imposed by the Dodd-Frank Act. As we approach the July 21 anniversary of this landmark legislation, regulators from seven U.S. regulatory bodies —  CFTC, SEC/FINRA, OCC, FDIC, Federal Reserve, NCUA, and FCA – have an important task ahead: setting up rules for retail currency trading.

Retail FX (also known as Forex) deals with regular people who wish to day-trade the dollar against the euro instead of buying Apple and selling Microsoft. Many financial institutions in the market have not yet realized how popular retail FX is, and could miss an opportunity to influence the rules that will govern the space for the foreseeable future.

The OCC and the FDIC have recently announced rules governing retail FX, and are in the public comment stage. The rules for the OCC, most of which are modeled after the CFTC rules, would go into effect as of

July 22, 2011. Meanwhile, the Federal Reserve Board is devoting April to June of this year to request comments on retail FX rules yet to be released from entities it supervises.

Under Dodd-Frank, the CFTC was designated as the default overseer of retail FX unless an entity offering such service was a registrant to an existing regulatory agency. One catch: Each of these six additional “prudential regulators” has until July 19, 2011 to announce its own rules, else its registrants cannot offer retail FX and will be left out of an industry that Aite Group estimates generated worldwide brokerage revenue of US$9.8 billion in 2010. The remaining prudential regulators are the SEC (FINRA), the National Credit Union Association (NCUA), and the Farm Credit Administration (FCA). The NCUA has nothing in its website remotely associated with FX. The FCA, however, has begun review of its FX rules to see if a revision is desirable.

The SEC is the one regulator that has remained notoriously silent — they declined to comment when I asked whether they will issue new retail FX rules within the time set by Dodd-Frank. It should be noted that the SEC commissioned FINRA with a set of retail FX rules (Rule 2380, Federal Register Vol. 74, No. 127), but that the SEC has neither approved nor denied it since June 2009, when the final version of Rule 2380 was sent on. This position is particularly interesting in that several large securities firms have a clear interest in seeing the SEC pronounce itself on the issue and offer competitive rules.

With both the OCC and FDIC rules voluntarily following most CFTC rules, we’re beginning to see uniformity in the way retail FX will be treated in the United States.

Banks have certain major advantages over retail FX brokers. Under the OCC rules, banks would be able to offer clients segregated accounts — something that many traders want and off-exchange FX brokers can’t, by law, offer.

Banks also have a branch network that allows prospects to make an investment decision while talking to someone local. A 2007 Fed study indicated that 38% of U.S. households made investment decisions by talking to a seller of financial services, while only 30% did so by responding to what they find on the Internet.

In a day and age when banks can secure the technology and support to run efficient, compliant, and very profitable retail FX operations with little effort, not many banks are yet on top of this major retail finance trend.