Series 34 Exam
Study Guide

CFTC Jurisdiction and Jurisdictional Limitations

CFTC:

The Commodities Futures Trading Commission (CFTC) is a government agency which is charged with enforcing the laws under the Commodities Exchange Act, as amended (CEA).  The CFTC, with regard to the CEA, is functionally equivalent to the SEC.  With regard to off-exchange foreign currency transactions, Congress has provided a mandate to the CFTC to propose rules which will require the registration of forex managers and solicitors.  Once a registration structure is enacted the CFTC will ultimately be in charge of making sure that these maangers and solicitors are operating pursuant to the regulations promulgated by the CFTC.  The CFTC will provide the NFA with the authority to monitor these managers and solicitors and oversee the registration process.

CFTC Jurisdiction:

On May 22, 2008, the Congress passed H.R. 6124, the Food, Conservation, and Energy Act of 2008 (also known as “the Farm Bill”) which contains several amendments to the Commodity Exchange Act (“CEA”).  In particular, Title XIII of the FarmBill (1) clarifies that the CFTC’s anti-fraud authority applies to certain retail off-exchange foreign currency transactions, (2) creates a new registration category for retail foreign exchange dealers, (3) requires registration for those who solicit orders, exercise discretionary trading authority and operate pools with respect to retail off-exchange foreign currency transactions, and (4) imposes minimum capital requirements for futures commission merchants and retail foreign exchange dealers that act as counterparties to such transactions.  Parts of the legislation, particularly those confirming the Commission’s anti-fraud authority, were effective upon passage.  Other parts of the legislation, such as those requiring the registration of parties engaged in these transactions and minimum capital requirements, will only be effective upon the Commission’s issuance of final regulations.  Any such changes to the information below will be accomplished through notice and comment rulemaking and will be made available in the Federal Register section of CFTC.gov.

A complete description of the amendments to the CEA effected by Title XIII of the Farm Bill can be found in the Joint Statement of Managers, pp. 291-299, which can be accessed through the House Agriculture Committee’s Farm Bill Homepage.  Interested parties should monitor the Commission’s website as well as the National Futures Association’s website, for developments.

The CFTC has witnessed increasing numbers, and a growing complexity, of financial investment opportunities in recent years, including a sharp rise in foreign currency (forex) trading scams.

The Commodity Futures Modernization Act of 2000 (CFMA) made clear that the CFTC has jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. The CFTC also has jurisdiction to investigate and prosecute foreign currency fraud occuring in its registered firms and their affiliates. The CFTC issued an advisory in 2001 that discussed these CFMA amendments to the Commodity Exchange Act (CEA), 7 USC 1, et seq.

The Division of Trading and Markets (now Division of Clearing and Intermediary Oversight, or DCIO) issued an advisory in 2002 concerning foreign currency trading by retail customers (PDF). The advisory affirms that off-exchange trading of foreign currency futures and options contracts with retail customers by a counterparty that is not a regulated financial entity as set forth in the CFMA is unlawful. The advisory further states that, if there is a lawful counterparty to the transaction, such as a person registered as a futures commission merchant, the persons acting as intermediaries to such a transaction, that is, in the manner of an introducing broker, commodity trading advisor or commodity pool operator, would not need to register under the CEA if that is their only involvement in futures or option transactions.

DCIO issued an additional advisory in 2007 concerning foreign currency trading by retail customers (PDF). The DCIO Advisory addresses the following issues: (1) registration requirements for associated persons of firms registered as introducing brokers (IBs), commodity trading advisors, and commodity pool operators that are involved in forex transactions; (2) the permissibility of certain unregistered affiliates of a futures commission merchant (FCM) to act as proper counterparties in forex transactions; (3) claims that forex customer funds are segregated; (4) introducing entities acting as FCMs; (5) the applicability of the IB guarantee agreement to forex transactions and prohibiting guaranteed IBs from introducing forex transactions to an FCM that is not its guarantor FCM; (6) prohibiting forex account statements of an FCM’s unregistered affiliate from being included in the FCM’s account statements to its customers; and (7) prohibiting retail customers from acting as counterparties to each other in forex transactions.

CFTC Jurisdictional Limitations:

CFTC Chairman Gary Gensler addressed the following limitations to the authority of the CFTC in his address to the U.S. Senate:

Retail Fraud: In the 2008 Farm Bill the Congress clarified the CFTC’s jurisdiction over fraud in retail foreign currency transactions. Since the passage of the Farm Bill, unscrupulous firms have been offering the same type of fraudulent “rolling spot” commodity contracts that were prohibited in the Farm Bill, but in other commodities that were not covered by the bill. Since the enactment of the Farm Bill, the CFTC has received more than 50 complaints from the public relating to potential fraud from such contracts. The regulatory reform package should include a provision to expand the CFTC’s jurisdiction over this type of retail fraud to all types of commodities.

Foreign Boards of Trade: As part of regulatory reform legislation, the Congress should also provide the CFTC with clear statutory authority to ensure that traders that are trading on a foreign board of trade through trading terminals in the U.S. comply with the same U.S. position limits and reporting requirements when trading a foreign contract that settles against any price of a contract traded on a U.S. exchange.

Source: CFTC Chairman Gary Gensler Address to the US Senate

http://www.cftc.gov/customerprotection/fraudawarenessandprevention/forex/index.htm

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