Forex Dealers Coalition Launches Website

The Forex Dealers Coalition (“FXDC”) launched its first ever website this evening at www.fxdc.org to combat the Commodity Futures Trading Commission’s “Proposal to Regulate Retail Over-the-Counter Foreign Currency Transactions”.  To learn more about the proposal please read TTP President James Bibbings’s article “CFTC Forex Proposal; US Retail Market to Disappear?” now to determine how these rule changes may affect you.   

Haven’t heard of the FXDC yet?  Here’s some more information about them taken from their site:

“The Foreign Exchange Dealers Coalition is an alliance of the largest U.S. foreign exchange dealers. It was created to pool together industry resources to create awareness and recognition that forex dealers are a powerful choice for individuals who choose to speculate in financial markets.

 The FXDC partnership was formed in the fall of 2007 to demonstrate the viability of the forex industry and to ensure fair regulation and oversight that does not hamper freedom of choice, innovation or job creation.

 The global forex industry has boosted the national economy by training and employing a domestic workforce of thousands. In a global marketplace where Americans struggle to compete for high-tech jobs, American forex dealers lead the world in this fast-growing industry, outpacing other firms based in Europe, Japan and Australia.

 The American firms are regarded as the leaders in the industry, hiring highly-coveted, knowledge-based workers who contribute to the economy’s bottom line.”

 If you have further questions about the FXDC, the CFTC’s current proposal, or about any of TTP’s compliance solutions contact us today!  You can fill out our contact form here, or may call us at any time by dialing (312) 324-0040.

Live Coverage: Open Discussion about the CFTC 10:1 Leverage Proposal

Thursday 21st, at 14:00 GMT – 09:00 EST, FX Street.com
Valeria Bednarik, FXstreet.com Chief Analyst

Speakers:

James Bibbings President and CEO of Turnkey Trading Partners

Joseph Trevisani, Chief Market Analyst at FX Solutions and representative of the Forex Dealers Commission

Jason Rogers Ambassador for Online Communities at FXCM and representative of the Forex Dealers Commission

Join us in a  debate about the future of the Forex Retail Trading on US after the proposal of the CFTC about leverage.

James Bibbings, expert in the regulatory environment of the markets, will give his explanation and point of view about the proposal; you will also be able to ask

Joseph Trevisani and Jason Rogers what you want to know about how the new regulation may affect your trading.

Sign Up Now Here: Live Coverage: Open Discussion about the CFTC 10:1 Leverage Proposal

CFTC Forex Proposal; US Retail Market to Disappear?

On January 13^th, 2010 the Commodity Futures Trading Commission (“CFTC”) issued a press release regarding its highly anticipated rule proposal for the regulation of retail forex transactions.  The proposal seeks to adopt a new regulatory scheme to implement the CFTC Reauthorization Act of 2008.  In particular it strives to address the way the federal agency will deal with off-exchange transactions in foreign currency with the retail public.  Currently the CFTC’s proposal is open for public comment for sixty days (60) and was published in the Federal Register on January 7^th, 2010.  Before anyone can comment though, they’ll have to fully understand what the proposal says. 

What the Proposal Attempts to Establish

The following is a summary listing of the major provisions included in the CFTC’s proposal.  While reading through these items please note that they are not the only changes to the law which have been proposed.  Rather, these items represent what will be the most significant changes to the industry through the eyes of a former regulator and industry professional; they are presented in order of most important to least.

1)  The CFTC has revised its definition of “commodity interest” (i.e. futures) to include off-exchange retail forex transactions (“forex”).  This change grants the CFTC jurisdiction over the United States retail forex market.

2)  With the authority found in item one above; the CFTC will create new registration categories for retail foreign currency firms as follows: 

A) Dealers (Currently FDM’s) in retail forex transactions will be required to register as retail foreign exchange dealers or (“RFEDs”). 

B) Persons or entities that solicit or accept orders for an RFED, a Futures Clearing Merchant (“FCM”), or an affiliate of an FCM will be required to register as Introducing Brokers (“IBs”). 

C)  Persons or entities exercising discretionary authority over accounts will be required to register as Commodity Trading Advisors (“CTAs”).

D)  Persons or entities which operate or solicit funds or property for a pooled investment vehicle would be required to register as Commodity Pool Operators (“CPOs”).

E)  All persons who qualify as being “associated” with the foregoing registration categories will be required to become registered as associated persons (“AP’s).

3)  All Introducing Brokers (“IBs”) and all applicants working towards registration as IBs in connection with retail forex transactions will be required to enter into a guarantee agreement with an RFED.

4)  RFEDs and FCMs which engage in retail forex transactions will be required to collect from their customers a security deposit equal to no less than ten percent of the notional value of the retail forex transaction to be conducted; thus imposing a strict 10:1 leverage ratio.

The Implications  

Items 1 and 2: Revised Definition of “Commodity Interest”:  The definitional change of “Commodity interest” to include off-exchange retail forex transactions gives full authority of the US retail foreign currency market to the CFTC.  Based on this definitional adjustment the CFTC will now have the legal ability to require forex professionals to register with the agency.  It also means these professionals will be required to become members of a self regulatory organization (“SRO”) which in most instances will be the National Futures Association (“NFA”).  Firms will be required to register by law as RFEDs, FCMs, IBs, CTAs, and/or CPOs to solicit for or accept retail customer orders.  Many of these firm’s employees will then also be required to become APs and/or business principals.

Item 3:  All IB’s Must Be Guaranteed by an RFED:  This provision of the proposal is likely to be more devastating to the United States forex industry than any other.  The reason?  Requiring RFED’s to be entirely liable for the solicitation activity and performance of all their introducing brokers will prove to be impossible.  Since there will be no such thing as an independent forex IB, it does not seem reasonable to think that the handful of RFEDs in the United States will be willing to take on the risk of guaranteeing all of the nation’s introducing agents.  If they were to do so, the level of liability as well as the capital required to stand behind the performance of such entities would be staggering.  Further this requirement completely eliminates the role of an independent IB as it calls for each guaranteed IB to introduce client accounts to only its guarantor RFED.  This will greatly reduce consumer and IB strategy options and may also cause clients to open relationships with multiple brokerage houses.  For these two reasons, and the requirement discussed below in item 4, third party forex brokerage as it currently exists will be under tremendous stress.

Item 4:  Forex Transactions Must Adhere to 10:1 leverage:  There has been more written about this portion of the CFTC proposal than any other and perhaps rightfully so.  Currently in the US firms are able to offer clients 100:1 leverage, which is already lower than what is available in other parts of the world.  At this time US customers appear to be satisfied with security deposit levels which currently reside at either 1% or 4% (by pair traded) of a contracts notional value.  Although the CFTC may believe that lowering leverage from 100:1 may be better for clients (which in many cases it will be) I do not believe they have fully considered the ramifications of this action.

It is largely anticipated that in the event leverage in the US is reduced from 100:1 to 10:1 most US accounts will migrate to the United Kingdom.  Individual traders have voiced publically that they are unwilling to post higher levels of margin to trade within the United States.  Specifically many have shared that as long as well regulated, financially similar, trading venues exist internationally; staying in the US will not make sense with a 10% security deposit.  Therefore, if the objective of the CFTC is to protect US investors with their new proposal and this occurs, they may actually be making matters worse.  If US clients are encouraged to move their accounts abroad on to pursue higher leverage, the CFTC will then no longer have jurisdiction over the companies handling those accounts and the point will become moot. 

In addition to potentially losing jurisdiction over US client monies, should a capital exodus occur as a result of reduced leverage, the CFTC will have also made US RFED’s less competitive internationally.  The implications here are far reaching; especially when one considers the size of the global forex market space.  Furthermore, reducing leverage by as much as ten times will also drastically reduce off exchange retail currency trading volumes for RFEDs.  If this were to occur these firms would likely seek out new forms of revenue in order to supplement falling profit margins.  They would likely do so through various fees and/or by additional commissions through wider trading spreads.  This too will not be good for the US retail trader or the RFED’s which directly and indirectly create numerous employment opportunities.  Worst yet, it is conceivable that an adjustment to the security deposit, especially when coupled with the requirement to guarantee IB’s, might move some RFEDs entirely out of the country.

Options and the Long Road Ahead

Share Your Thoughts: Now that the CFTC proposal exists, what’s next for retail forex traders and brokerage firms within the United States?  The first thing that should be done if you’d like to comment on this proposal would be to submit your thoughts to the CFTC and your legislators.  The CFTC will accept comments for at least sixty days (60) starting from January 7th, 2010. 

When sending in a comment it will be important to use the subject “Proposed CFTC Regulation of Retail Forex”; Federal Register – January 7th, 2010.  After this be sure to include the proposals identification number which is RIN3038-AC61 in the body of your message.

To comment on the proposal choose one of the following options:

Emailing: secretary@cftc.gov or using the CFTC’s online form

Fax comments to (202) 418-5521, or mail to:

David Stawick,

Secretary, Commodity Futures Trading Commission

21^st Street, NW

Washington DC 20581

Industry Professionals:  Industry professionals that have not yet registered with the CFTC and elected to become NFA members; now is the time.  It is possible that the CFTC may alter some of its proposed amendments if it deems the comments received from the public are reasonable.  However, it is highly unlikely that the requirement for all forex professionals to become CFTC registrants and members of a DSRO will be omitted.  In just a short period of time every forex firm in the country will be required to register and this will create a massive back log with the NFA.  To learn more about this process it would be advisable to contact a regulatory professional and seek advice immediately.  Due to the time sensitive nature of this requirement it would also be wise to look for a company that is well versed in forex compliance.  Most importantly they should be intimately aware of the CFTC’s current proposal.  To learn more about my company and the registration process you may contact us here.  You may also be interested in reviewing “Forex Registration Almost Here” published previously.

Retail Traders:  Individuals who trade retail forex will need to consider the implications of having to post as much as ten times more capital to hold trades open.  This will materially alter trading strategies and significantly reduce the size of the positions that a person can initiate.  Customers should speak with their respective brokerage houses, the CFTC, NFA, and their legislators to let them know how this rule will impact their trading.

-James Bibbings

 ____________________

 James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, FX Street, The Financial Times, Commodity News Center and many other highly acclaimed investment publications.  He has also authored two highly sought after informational pamphlets regarding futures and forex registration which are available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

CFTC Breaks Silence on Forex

As Turnkey Trading Partners has mentioned over the past several months, the CTFC is getting closer to requiring forex brokerage firms, traders, and some systems providers to register with and become members of the NFA.  In case you missed it, just yesterday, the CFTC issued a press release related to the “Farm Bill” which will amend the Commodity Exchange Act to include retail forex as a financial market for which the CFTC will have jurisdictional authority.  More specifically the CFTC is now soliciting public comments on proposed rule changes to retail forex transactions brought forth by NFA and other financial regulatory authorities.  From a practical stand point what this means for forex traders is that these changes are getting ever closer to becoming hard and fast law.  

If you would like to learn more about this bill, would like to begin the process to comply with this new regulatory requirement, or are unsure on whether you will be required to register, please also consider reviewing our previous article “Forex Registration Almost Here.”  From there if you still have additional questions and would like a free consultation with a Turnkey Trading Partners consultant please feel free to fill out an information request here and some one will be back with you shortly.

To read the latest from the CFTC please read “CFTC Seeks Public Comment on Proposed Regulations Regarding Retail FOREX Transactions.”

-TTP’s Compliance Team

5 Strategies to Raise Capital for Your CTA or Fund in 2010

The recent uncertainty in the markets has changed the game for Commodity Trading Advisors and hedge fund managers.  While performance is still a major factor in attracting capital, in the post-Madoff era, savvy investors grow increasingly concerned with clarity, transparency, and operational integrity when they screen various managers.  Performance catches the eye on the database, but it doesn’t close the deal.

Attracting capital is about offering clients exactly what they’re looking for in a capital management firm.  A recent survey by SEI found that while 90% of institutional investors plan to maintain or increase their allocations to hedge funds, they would be exercising greater due diligence. In other words, just having great returns will not cut it. CTAs and Hedge Fund managers must present an image that builds trust and embodies operational integrity if they are looking to attract interest from both high net worth and institutional investors.

With this in mind, Turnkey Trading Partners offers 5 strategies to help you raise capital for the coming year:

Build a Team That Inspires the Confidence That is Expected of Institutions

Your public image should exude professionalism in every aspect of your firm.  It’s tough to promote your company as a top tier financial institution if there are weaknesses in your operation. Some weaknesses include having a trader wear multiple hats in the organization, or eve lacking the proper operational guidelines in place to pass an onsite due-diligence exam. While costs might be an issue for some managers, there are ways to outsource some of these critical roles. Smaller funds should seek out third party expertise to handle those functions where they may lack the needed competencies.  Ensuring your fund has no weaknesses gives you a stronger product to offer your market.

Maximize Your Exposure

Most Hedge Funds lack a solid public relations component.  While the clients to whom you can market directly are a select group, getting your name out there helps you get them to come looking for you.  Getting listed on the fund databases is a good start, but it’s only a start. You need two separate marketing strategies.  The first is to get the client’s attention.

While regulations prevent you from directly marketing your trading program to the general public, a savvy fund manager can get media exposure, and the interest that comes with it by offering thoughtful commentary on market or economic trends.  Press releases and media appearances can go a long way toward building a positive buzz for you. 

Some fund managers run blogs—that may or may not be about finance—while others write and promote books.  While you should always consult a regulatory professional before speaking directly to the public to ensure your message plays by the rules, the attention is always worth the effort.

Have Your Message Ready To Go

Prepare a presentation ahead of time.  The second part of an effective marketing strategy is to diligently develop marketing materials before making a presentation to potential investors.  When you have the opportunity to pitch to a potential client it is imperative to be well organized; there is only one chance to make a first impression.  In most instances, especially with high net worth customers, the fund’s prospectus or disclosure document alone won’t cut it.  Presenting marketing materials that explain the fund’s investment strategy and philosophy in ways that are easily understood can make all the difference.

Investors are reluctant to invest their money in strategies they don’t understand.  There’s nothing wrong with complex or unorthodox investment strategies as long as they are clearly explained and easily understood.  Your sales materials should carefully describe your investment process in an audience-friendly manner.  If you can’t readily articulate how you do what you do, you will find it all the more challenging to win the confidence of a potential client. 

Your investor relations kit must make it simple to verify your claims because your clients will be studious.  Sales materials should never make claims that are not included in the fund prospectus, and forward-looking statements must be used with great care.  Your materials must be as much about transparency as they are about sales. 

An attractive PowerPoint presentation that gets the right message across should be the centerpiece of the sales package, but you also need sales brochures, due-diligence questionnaires, a corporate introduction and sales aids.

Be Completely Transparent and Honest to Build Trust

In this market, your clients will be clenching their dollars tightly to their chests until they know they can trust you.  While this point seems a bit too obvious, it is essential that you emphasize integrity from the get-go. Don’t embellish your performance, and don’t hide things in fine print. Don’t exaggerate your previous trading experience or tell investors about how much money you are expecting to receive in the next few months.  Being honest and transparent builds trust with your clients.  If the fund performed well, explain exactly why.  Even more important is to clearly explain the reasons if the fund underperforms.  Investors expect forthrightness from their money managers, but they also appreciate it when they get it.  You want long-term relationships with your clients based on trust, so do everything you can to foster that trust and you will win more business.

Another way to build trust with your clients is to emphasize the purpose each member of your investment team plays.  This way the client can put a face with a function that is looking out for their money.

Emphasize What Makes You Different

Of course, your presentation must cover the 4 P’s: People, Process, Pedigree and Performance, but your clients have probably heard the same pitch from dozens of fund managers.  How are you different?  Try to explain your fund’s operation in ways that capture the interest of the audience. What about the trading strategy? Are you able to effectively communicate why it is different from similar programs? Many investors often scan marketing material and look only for programs that are different and unique. That is why it is important to articulate- in both written and verbal terms- what makes your program stand out from the crowd.

If you are a new or emerging manager, don’t get discouraged.  While your track record might not be as long or your pedigree might not be spectacular, there are countless examples of non-professional traders who are now managing large funds. In addition, this could be a way that you emphasize how your trading program is different from the rest.  Over the past decade, there have been several funds and investors that have formed with the focused purpose of allocating only to new or emerging managers.  Positioning yourself to market to these investor groups might prove advantageous.

Using these five strategies will go a long way to building up your capital, and keeping your firm competitive for the long run.  Turnkey Trading Partners is able to help you achieve your goals by helping you develop a marketing plan that gets the kind of attention you seek.  To learn more about what we have to offer please contact us through our webform or give us a call to see how we can assist you with your marketing and PR needs.

 -Kevin Rogers

___________________________

Kevin Rogers is a marketing consultant with Turnkey Trading Partners working to create unique and powerful branding and marketing solutions for Commodity Trading Advisors, Hedge Funds, FX and Capital Management firms.  Before teaming up with TTP, Rogers worked as an independent developer of marketing and public relations materials for a wide array of financial companies.  He is a graduate of U.C. Berkeley and holds an M.A. in business communication.  If you like Kevin’s thoughts, have ideas, or want to ask questions we’d love to hear from you.  For specialized assistance send your requests to info@turnkeytradingpartners.com and we’d be more than happy to get back with you.

Facebook Faceoff; Regulators Tackle Social Media

For the past several years’ social media sources such as Facebook, MySpace, and YouTube have been the centers of attention for marketers the world over.  Beyond the so called “big three” social media players, similar more user specific sites like Twitter, LinkedIn, and other various industry blog networks have also emerged as useful tools for promoting a business or brand.  As a financial firm there is no doubt that your company has used, or at the very least considered, any number of social media venues to grow market share.  Although these media resources continue to gain in popularity one nagging question still remains; can they be used in the financial industry without breaking the established public solicitation rules? 

Earlier this month the National Futures Association (“NFA”) submitted a rule amendment to the Commodity Futures Trading Commission (“CFTC”) regarding online media.  Specifically the rule submission was intended to voice NFA’s opinion about what is, and is not acceptable use of social media venues for its member firms.  This submission marked the first time that NFA has publicly written its position on the topic and their response affects all commodity and forex firms.  Furthermore with this rule NFA also invoked its “Ten Day” rule submission authority with the CFTC.  This means that the CFTC had ten days to notify the NFA if it wanted to further review the amendment; no notice was provided.  Thus, as the request was submitted on December 8^th, 2009 the amended Rule 2-29(h) was put into place just before Christmas of this year.

What the Rule Amendment Means

NFA Rule 2-29(h) was originally created to provide guidance to firms that engage in certain radio and/or television advertising.  Specifically, the rule requires that television and radio ads be submitted to NFA’s promotional review team at least ten days ahead of their intended use.   After last week’s amendment, this rule now includes all forms of audio and/or video advertisements which may be distributed through any type of media accessible to the public. 

What this means is that 2-29(h) now covers all forms of electronic media not previously included as radio or television (i.e. the internet).  Due to this change any online videos, tutorials, audio recordings, webinars, or other type of electronic media which may discuss trading recommendations, profit targets, or general trading results must be submitted for pre-review to NFA before public use.

For Further Consideration

At the same time 2-29(h) was amended, NFA also published an “Interpretive Notice” regarding the use of social networking groups.  The notice discusses a variety of scenarios that arise when NFA members utilize social networks to communicate with public investors.  The most important of these scenarios is NFA’s call for member firms to develop specific social networking procedures; something not previously required.  Through this literature NFA has made public their feeling that social networking sites in most instances will be considered promotional material and will be subject to NFA Rules 2-9, 2-29, 2-36, and/or 2-39.  According to the interpretive notice, NFA is requiring firms to address the following communication channels and provide methods by which they will handle supervising them via a new set of mandatory procedures.  Specifically these new procedures must address the following items:

1.  Chat Rooms

2.  Forums (Bulletin/Message Boards)

3.  Blogs

4.  Social networking sites (i.e. Facebook, Twitter, MySpace etc.)

5.  Audio/Video Sites (i.e. YouTube, MP3’s, Podcasts etc.)

6.  Hyperlinks to third party resources

How to comply with 2-29(h)

The procedures mentioned above are required for all NFA member firms regardless of what types of promotional material they create.  If your firm utilizes any type of electronic media or form of social networking it is imperative to create procedures that address the points above immediately.  After doing this it is then critical that a full review of company promotional materials be completed by appropriate firm personnel.  After that it must be determined if all promotional materials published adhere to the new policies and procedures which were created to address NFA’s newest rule amendment and interpretive notice.

Also please be advised that at this time NFA has not provided guidance as to what is required of video and audio materials created prior to the 2-29(h) amendment.  More specifically, at present there is no way to know if your old video and/or audio materials will be grandfathered in to the previous rule or have become subject to pre-review submission under the amendment.  Due to this lack of clarity it would be best to appeal to NFA in writing for further guidance if your firm has large amounts of outstanding audio or video materials in use.

As with most regulatory obligations determining how to remain compliant can be a daunting task for a trading company.  The intricacies of creating new procedures that adhere to the rules can be difficult and cumbersome to work through.  More importantly though, ensuring that all existing company policies and procedures meld together with the latest requirements will require a great deal of regulatory knowledge and ongoing monitoring.  In a world of ever changing rules, the best next step decision most firms can make will be to seek professional regulatory help. 

_________________________________

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  He has also authored two highly sought after informational pamphlets regarding futures and forex registration which are available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you. 

Marketing Your Trading Program

Have you ever considered why large, established, Commodity Trading Advisors and Hedge Funds still employ marketing directors or hire marketing agencies? It’s easy to imagine that once a manager had developed an established and successful track record investors would come knocking on their doors; yet, this scenario rarely happens. More often than not, trading firms continue to market their programs so that they can be sure that they are in front of the right investor at the right time.

Indeed, PR and marketing are components of the CTA and Hedge Fund industry that are often overlooked. There are probably several reasons why this is the case. The first has to do with the previously mentioned misconception that performance numbers alone will ultimately attract capital. While performance is definitely a key factor in raising assets it will not guarantee that investors invest in your program. There are countless examples of firms that have had to shut-down their successful trading programs because they were unable to raise enough money.

A second reason has to do with the lack of knowledge surrounding marketing in this highly regulated industry space. Many traders are overwhelmed with the compliance and regulatory requirements surrounding hedge fund and CTA marketing, that they ultimately decide “no marketing” is the best road to take.

A final reason that many fund managers skip the marketing component of their business is that they cannot afford to hire a full-time marketing director. As a result, many firms either attempt to take “marketing” in their own hands or they simply decide that they will hire a marketer once they grow their assets under management.

At Turnkey Trading Partners, we understand the financial constraints of start-up and emerging managers as well as the time burden of making sure that your marketing material, pitch book, factsheet, website, and pr are compliant with regulatory standards.  However, we also realize that importance of marketing your program to potential investors from the early stages of your business.  As a result, we have created several turnkey marketing packages that can fit most any budget.  To learn more about what we have to offer please contact us through our webform or give us a call to see how we can assist you with your marketing and PR needs.

-TTP’s Marketing Team

Forex IB’s Need Disclosure Documents; Offering Memorandum’s

Your firm has finally decided to become a CFTC registered, NFA member forex broker (“IB”) or money manager (“CTA” or “CPO”).  Congratulations, I salute you for making the right choice, but now what?  It should come as no surprise that your firm will now have to adhere to a plethora of regulatory requirements, but are you prepared?  To further educate you about your obligations as a regulated company let’s take some time to discuss a largely misunderstood NFA compliance rule that could greatly affect your business.

NFA Compliance Rule 2-41

NFA compliance rule 2-41 was put on the books in November of 2008 and became effective as of December 8^th, 2008.  Since that time there has been little written on this rule and the word on the street is that enforcement efforts related to it will be stepped up heavily during 2010.  Assuming this rule will be pushed to the forefront of regulation during the next year what can your firm do to prepare?  As with all regulatory obligations one must first understand what is required to comply with a rule so let’s start there.  Briefly NFA Rule 2-41 states the following for most forex firms:

Forex Pool Operators & Funds- Are required to prepare a disclosure document and file it with NFA 21 days prior to soliciting the funds first potential pool participant.  This document must then be supplied to the client prior to them receiving an account subscription agreement and depositing funds to a pool.  In addition if a firm will trade futures and forex products or just forex products, 2-41 requires very specific risk disclaimers.

Trading Advisors- Are required to prepare a disclosure document and file it with NFA 21 days prior to soliciting the first potential pool participant.  This document must then be supplied to the client prior to them receiving the subscription agreement and determining to follow a specific trading strategy.  In other words, before an advisor can take discretion over an account and guide client trading a disclosure document must be provided.  This disclosure document must be written in nearly an identical fashion to documents required for on-exchange traded products under CFTC 4.34, 4.35, and 4.36.  Also, just as with fund managers, in this instance a specific risk disclosure related to discretionary forex trading is required.

What this Means for Forex IB’s and CTA’s

If your forex firm is currently registered as a CTA or CPO then this rule probably isn’t that surprising to you.  However, if your company is registered as an IB you may be in for quite the shock.  Notice above that I said “Trading Advisors” not CTA’s or CPO’s; I wrote this intentionally because of the way the rule is written.  Based on the language included in 2-41, depending on a firms unique business circumstances, it is possible that introducing brokers may be required to prepare a disclosure document for their customers.  If this is the case for your company not having supplied a disclosure document to clients, or even worse, not having a document prepared altogether could be disastrous to your business operations.  Now that you know you may need such a document, the next question your firm should be asking is: “How can we determine if we are required to write and provide a disclosure document to our customers?”

Determining your Obligation

I have put together the following guidelines to help your firm in its attempts to determine if a disclosure document is needed.  When reading this list please keep in mind that all brokerages have very specific and unique business circumstances.  As a result this simple process should only be used as a tool to determine your potential obligations under NFA Rule 2-41.  If you have any doubts about your obligations you should seek proper advice from a regulatory professional.

Step 1:  Your company must first determine if its clients would be considered eligible contract participants or “ECP’s” as defined by the Commodity Exchange Act’s Section 1a (12).  In almost all retail forex circumstances the accounts you’ll be handling will not qualify as ECP’s.  Thus, for most reading this article it would be wise to move on to step two.  More specifically if you trade with ECP’s you probably are already well aware of the fact that they are qualified as such.

Step 2:  Evaluate the business model utilized by your brokerage.  Does your firm take discretion over customer trades?  Do your accounts trade in a self directed manner?  Do you promote an electronic trading strategy and require a power of attorney or letter of direction to execute trade signals on a client’s behalf?  The answer to these questions should give you more insight into whether or not you will need a disclosure document.  Generally, if you are taking discretion over client accounts and making all or the majority of trading decisions on behalf of your clients you will likely need a disclosure document.  If your accounts are self directed it is likely you will not be considered a trading advisor in the context of Rule 2-41.  Evaluating the mechanics of how electronic trading systems operate is difficult.  In my opinion there is no hard and fast way to know for certain if this type of trading would require a disclosure document.  In order to determine your obligation in this instance it would be best to hold a detailed discussion of such a system with a regulatory professional.

Step 3:  Consider how your company is being compensated by its FDM and/or its clients on account activity.  Are you paid a standard pip rebate or commission on the forex transactions running through your business?  Are you paid some type of variable performance or management fee?  The answer to these questions when considered in conjunction with step 2 above are critical to whether or not your business will need a disclosure document.  Generally when a performance or management fee is paid it is a good sign that you are operating in a manner that will require additional disclosure under 2-41. Conversely, if your firm is being paid strictly on a transactional basis and is making no trade decisions for customers it is less likely that it will be required to produce further disclosure.

Finding out for Sure, What to do if a Disclosure Document is needed

If it appears your firm will need a disclosure document or if you are unsure about your company’s obligations, what is the next step?  The next step is that your firm should contact a regulatory professional to further assist in evaluating your unique business situation.  Seeking professional help in this matter will be the only option if your firm is unable to determine its requirement under rule 2-41 on by itself.  Seeking council from NFA could be an option; however they will not be able to further assist you in the creation of a document if your company does in fact need one.  As a result your business will likely end up requiring private regulatory assistance at some point anyhow so starting there just makes the most sense.

When looking for a regulatory professional it is critical to understand that the forex trading community operates in a manner which is drastically different from that of the futures and or securities market spaces.  The forex industry is evolving almost on a daily basis, many of the rules are slightly more than a year old, and not that many firms are familiar with them.  I mention this because standard service providers are likely to improperly guide you if they apply futures and securities specific rules and regulations to your unique forex questions.  Therefore, unless you’re willing to become a guinea pig, it is imperative that you utilize a firm that is familiar with all of NFA’s forex rules.  A misstep in the way of improper customer disclosure could be devastating to your business and if the rumors are true, 2010 could bring about a very painful and long year dealing with the CFTC and NFA.

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  He has also authored two highly sought after informational pamphlets regarding futures and forex registration which are available for free upon request through his company website.  If you have any questions or comments for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

Forex Registration Almost Here

By: James Bibbings – For years traders, brokers, and money managers have been able to operate within the over-the-counter retail foreign currency markets (“forex”) with very little regulation.  As a result, trillions of dollars and millions of clients have traded within the industry with little standardization or legal oversight; that is until now.  As of the date of this article the industry is mere inches away from being entirely revamped and standardized through regulation.  The passage of the Farm Bill in May of 2008 eventually will mean mandatory registration with the Commodity Futures Trading Commission (“CFTC”) and membership with the National Futures Association (“NFA”) for nearly all forex professionals.  Have you and your firm considered what are you going to do about this?  Determining what steps you should take today may in fact determine whether or not you will still have a business tomorrow.

To Register or Not to Register

In order to gain knowledge of where the current forex regulatory environment is heading one has to understand where it has been.   Prior to May of 2008 forex solicitors and money managers were not required to be registered.  As a bit of a history lesson, in what is now an infamous 7^th Circuit Court of Appeals decision, the CFTC lost a forex fraud case commonly referred to as “Zelener.”  To be incredibly brief, the court ruled in this case that over the counter retail transactions were not futures, and thus could not be regulated by the CFTC.  To learn more on the history of this event a nice summary is available at the National Futures Association’s website from June of 2009.     

Since this landmark forex court decision, many in the regulatory industry have lobbied for the CFTC’s authority to be amended by an act of congress to include the aforementioned retail financial transactions.  This lobbying effort finally paid off during the early summer of 2008 when congressional representatives acted on their requests.  In May of 2008, HR 6124, which is commonly referred to as the “Farm Bill” was passed.  Within this bill were provisions which amended the Commodity Exchange Act to give the CFTC authority to apply its anti-fraud provisions to certain off-exchange retail foreign currency transactions (“forex”).  In addition, these provisions also created a specific registration category for retail currency brokers which solicit for and/or exercise discretion over retail forex transactions.  Sounds simple enough, everyone is required to get registered as of May 2008 right?  Well not exactly.

Am I Required to Register?

You might be wondering: “If the farm bill has passed, how come I am not yet required to be registered?”  The reason is that the farm bill has yet to be ratified and thus has not been enacted into law.  Due to this fact its forex provisions are also not yet enforceable for the CFTC.  It is this realization that has lead some in the industry to think that they do not have to become registered and created a great deal of regulatory uncertainty.  So what’s the truth of the matter in this situation?

The truth is that even though forex contracts were not seen as being futures by the US court system, there has been little doubt that over the counter forex market makers were acting in a capacity similar to futures clearing firms or leveraged transaction merchants.   As a result, forex dealers have been required to be registered and to join the membership of at least one self regulatory organization (“SRO”) for quite some time.  This is crucial to your understanding of the registration debate and determining if you must become a member of an SRO.

Since a forex dealer is required to become a registrant and to be a member of an SRO, these firms must also adhere to the rules of their specific SRO.  Here it is crucial to recognize that there is a difference between “regulations” and “rules” although it may not seem like it.  As a result of the CFTC’s inability to federally regulate forex transactions, the responsibility of governing forex has fallen squarely on the largest SRO’s (FINRA and NFA*) and their rules.  SRO rules apply solely to the respective members of a particular SRO and are not considered to be hard and fast law. 

*Since NFA has emerged as the most prevalent regulatory authority in the forex market space, I will focus primarily on the rules their membership must adhere to for the remainder of this article.

How Do NFA’s Rules Affect You? 

NFA has worked diligently to adapt their membership rules to handle the regulation of all forex transactions.  Based on the information presented above, NFA has gone about this through the creation of stringent new rules for their Forex Dealer Members (“FDM’s”).  Of these rules most require FDM’s to more adequately supervise and monitor the forex agents that they do business with.  This has been necessary as neither the CFTC nor NFA has any legal authority over those entities.  Although rules for forex IB’s, CPO’s, and CTA’s have also been created, they are often more vague, ineffective, and inconsistent with respect to how they are applied due to this lack of disciplinary authority.  Thus, with no available CFTC support until the farm bill is ratified, NFA will continue to pressure the industry into compliance through its FDM membership, regardless of how efficient that methodology may be.

Thus, as an unregistered forex IB, CTA, or CPO it is currently true that you do not have to register with the CFTC or become an NFA member.  However, if you choose not to do so you could be making one of the poorest decisions of your business career.  At some point in the near future you will be pressured or forced into becoming a member not only by NFA, but also by your respective FDM.  Further still as soon as the farm bill is ratified you will be required under US Federal law, through CFTC regulation, to become a member.  So rather than fighting the inevitable, it is a necessity that you ask yourself what steps you or your firm must take in order to meet your unique regulatory obligations.

Getting Registered, Becoming and NFA Member

Since registration is all but required, how do you take the next steps?  For starters you should contact a regulatory professional to assist you in further evaluating your unique business situation.  I wrote on the reasons this is a good idea for any CFTC registered, NFA member previously when I touched on the “Three Common Mistakes New CTA’s Make.”  Since I wrote on this previously, step one would be to review that article.  After this, it is critical to understand that the forex trading community operates in a manner which is drastically different from that of the futures and or securities market spaces.  The forex industry is evolving almost on a daily basis, many of the rules are slightly more than a year old, and not that many people are familiar with them.  I mention this because standard service providers are likely to improperly guide you if they apply futures and securities specific rules and regulations to your unique forex questions.  Therefore, unless you’re willing to become a guinea pig, it is imperative that you utilize a firm that is familiar with all of NFA’s forex rules to ensure your registration process goes as smoothly as possible. 

But how do you know if a firm of this type knows the forex industry?  For starters they should be able to readily assist you in ensuring you have the proper policies, procedures, and business practices in place to adhere to NFA’s forex rules.  In particular any firm you select must be intimately familiar with all of the requirements included in NFA’s “Forex Transactions Regulatory Guide”.  They should also know what is required of your operations from the ground up, that is they should readily be able to address any questions you might have about any of the following areas:  NFA Rule 2-41, NFA Rule 2-36, the Series 34 Examination, Bylaw 1101, if you’ll need a disclosure document, what your federal anti-money laundering (“AML”) requirements might be, your supervisory requirements, how to manage your solicitation practices, how you handle customer orders, and any other questions that relate to NFA’s requirements of its forex membership.  In general if you’d like more information on how to get started my company is offering a free forex start-up guide that details your route to registration.  If you’re interested in receiving this material sign up via the link above and I’d be more than happy to personally send additional information.

As you can see becoming a registered entity and member of an SRO can be a complicated process, especially if you already have an established business.  It is for this reason you should not go through the process of becoming an NFA member and CFTC registrant alone.   There is no time to waste as the regulatory risks to your current business grow by the day.  The time for you and or your firm to become an NFA member is now, but whatever you decide to do be sure you understand the ramifications of your actions.  For if you choose to remain unregulated, when the moment comes, your decision could literally mean life or death for your business.

-James Bibbings

James Bibbings is the President and CEO of Turnkey Trading Partners (“TTP”), a firm that supports all commodity and forex specific regulatory and business needs. Prior to founding TTP, Bibbings worked with the National Futures Association (“NFA”) as a supervising auditor. During his time with NFA he was involved in over 100 investigative audits and was able to gain a deep working knowledge of FDM, FCM, IB, CTA, and CPO operations.  Bibbings has provided financial markets content for MSN, Yahoo, FinAlternatives, Wiki-Investments, Safe Haven, Financial Sense, Market Watch, Commodity News Center and many other highly acclaimed investment publications.  If you have any questions for Bibbings he can be reached directly by email at james@turnkeytradingpartners.com and would love to hear from you.

FX IB Firms Now Required To Register

FX FIrms are now….