Retail Foreign Exchange Transactions

AGENCY:

Office of the Comptroller of the Currency, Department of the Treasury.

ACTION:

Final rule.

SUMMARY:

The Office of the Comptroller of the Currency (OCC) is adopting a final rule authorizing national banks, Federal branches and agencies of foreign banks, and their operating subsidiaries to engage in off-exchange transactions in foreign currency with retail customers. The rule also describes various requirements with which national banks, Federal branches and agencies of foreign banks, and their operating subsidiaries must comply to conduct such transactions.

DATES:

This rule is effective July 15, 2011.

FOR FURTHER INFORMATION CONTACT:

Tena Alexander, Senior Counsel, or Roman Goldstein, Attorney, Securities and Corporate Practices Division, (202) 874-5120.

SUPPLEMENTARY INFORMATION:

I. Background

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). As amended by the Dodd-Frank Act, the Commodity Exchange Act (CEA) provides that a United States financial institution for which there is a Federal regulatory agency shall not enter into, or offer to enter into, a transaction described in section 2(c)(2)(B)(i)(I) of the CEA with a retail customer except pursuant to a rule or regulation of a Federal regulatory agency allowing the transaction under such terms and conditions as the Federal regulatory agency shall prescribe (a “retail forex rule”). Section 2(c)(2)(B)(i)(I) includes “an agreement, contract, or transaction in foreign currency that * * * is a contract of sale of a commodity for future delivery (or an option on such a contract) or an option (other than an option executed or traded on a national securities exchange registered pursuant to section 6(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78f(a)).” A Federal regulatory agency's retail forex rule must treat similarly all such futures and options and all agreements, contracts, or transactions that are functionally or economically similar to such futures and options.

Retail forex rules must prescribe appropriate requirements with respect to disclosure, recordkeeping, capital and margin, reporting, business conduct, and documentation requirements and may include such other standards or requirements as the Federal regulatory agency determines to be necessary. This Dodd-Frank Act amendment to the CEA takes effect 360 days from the enactment of the Act. Therefore, as of July 16, 2011, national banks, Federal branches and agencies of foreign banks, and operating subsidiaries of the foregoing (collectively, national banks) may not engage in a retail forex transaction except pursuant to retail forex rules issued by the OCC.

In addition, on July 21, 2011, the OCC will become the appropriate Federal banking agency for Federal savings associations. The OCC plans to regulate retail forex transactions conducted by Federal savings associations under the same terms as in this rule. However, the OCC cannot issue regulations governing Federal savings associations until July 21, 2011. Therefore, the OCC anticipates issuing on that date an interim final rule with request for public comment that would expand the scope of this regulation to cover Federal savings associations.

II. Overview of the Proposed Rule and Related Actions

On September 10, 2010, the Commodity Futures Trading Commission (CFTC) issued a retail forex rule for persons subject to its jurisdiction. On April 22, 2011, the OCC proposed a retail forex rule for national banks modeled on the CFTC's retail forex rule. The OCC decided to model its retail forex rule on the CFTC's rule to promote regulatory comparability and because the CFTC developed its retail forex rule with the benefit of over 9,100 comments from a range of commenters, including individuals who trade forex, intermediaries, CFTC registrants currently serving as counterparties in retail forex transactions, trade associations or coalitions of industry participants, one committee of a county lawyers' association, a registered futures association, and numerous law firms representing institutional clients. The OCC proposed to authorize national banks to engage in retail forex transactions and subject those transactions to requirements relating to disclosure, record keeping, capital and margin, reporting, business conduct, and documentation.

On May 17, 2011, the Federal Deposit Insurance Corporation (FDIC) proposed a retail forex rule for entities for which it is the appropriate Federal banking agency under the Federal Deposit Insurance Act. The OCC's and the FDIC's proposals were substantially similar.

III. Comments on the Proposed Rule

The comment period for the proposed OCC retail forex rule ended on May 23, 2011. The OCC received a total of three comments by that date. Of these, one was submitted by a large bank that engages in retail forex transactions (the commenter) and two were submitted by individuals. The latter two comments did not relate to the proposal. The commenter generally supported the OCC's proposed rule while requesting certain clarifications and changes. The commenter's comments to specific sections of the proposal are addressed in the Section-by-Section Analysis below. In light of the comments received, the final rule, for the most part, is similar to the proposed rule; the significant changes are described in the Section-by-Section analysis.

In the preamble to the proposal, the OCC indicated that retail forex transactions are subject to the Interagency Statement on Retail Sales of Nondeposit Investment Products (NDIP Policy Statement). The NDIP Policy Statement sets out guidance regarding the OCC's expectations when a national bank engages in the sale of nondeposit investment products to retail customers. The NDIP Policy Statement addresses issues such as disclosure, suitability, sales practices, compensation, and compliance.

In the proposal, the OCC asked for comment on whether application of the NDIP Policy Statement created issues that the OCC should address.

The commenter said that the NDIP Policy Statement should not apply to retail forex transactions, asserting that the retail forex rule, alone, would be sufficient to protect retail customers, and the imposition of the NDIP Policy Statement on retail forex transactions would create confusion and ambiguity. No specific provisions were identified, however, that create confusion or ambiguity. The commenter further argued that because the NDIP Policy Statement does not apply to CFTC registrants, its application to retail forex transactions would not promote consistent regulatory treatment of retail forex transactions.

The OCC believes that it is appropriate to apply the NDIP Policy Statement to retail forex transactions. The consumer protections that the NDIP Policy Statement provides are no less important for retail forex transactions than for other nondeposit investment products. Moreover, there is no direct conflict between this rule and the NDIP Policy Statement because the statement requires national banks to develop policies and procedures to ensure that nondeposit investment product sales are conducted in compliance with applicable laws and regulations. If a national bank has questions regarding how the NDIP Policy Statement applies to its retail forex business, it should seek clarification from its examiners.

IV. Section-by-Section Analysis

Section 48.1—Authority, Purpose, and Scope

This section authorizes a national bank to conduct retail forex transactions.

The OCC requested comment on whether the retail forex rule should apply to national banks' foreign branches conducting retail forex transactions abroad, whether with U.S. or foreign customers.

The commenter responded that there is no U.S. policy interest in applying U.S. consumer protection rules to transactions with non-U.S. residents conducted by foreign branches. Those transactions are subject to foreign regulatory requirements that could be inconsistent with the retail forex rule. Subjecting those transactions to two sets of regulatory requirements would also place national banks at a competitive disadvantage abroad.

The OCC recognizes the concerns raised by the commenter.

Retail forex transactions between a foreign branch of a national bank and a non-U.S. customer are subject to any applicable disclosure, recordkeeping, capital, margin, reporting, business conduct, documentation, and other requirements of applicable foreign law. Therefore, those transactions are not subject to the requirements of §§ 48.3 and 48.5 to 48.16.

Section 48.2—Definitions

This section defines terms specific to retail forex transactions and to the regulatory requirements that apply to retail forex transactions.

The definition of “retail forex transaction” generally includes the following transactions in foreign currency between a national bank and a person that is not an eligible contract participant: (i) A future or option on such a future; (ii) options not traded on a registered national securities exchange; and (iii) certain leveraged, margined, or bank-financed transactions, including rolling spot forex transactions. The definition generally tracks the statutory language in section 2(c)(2)(B) and (C) of the CEA.

Certain transactions in foreign currency are not “retail forex transactions.” For example, a spot forex transaction in which one currency is bought for another and the two currencies are exchanged within two days would not meet the definition of “retail forex transaction.” Similarly, “retail forex transaction” does not include a forward contract that creates an enforceable obligation to make or take delivery, provided that each counterparty has the ability to deliver and accept delivery in connection with its line of business. In addition, the definition does not include transactions conducted through an exchange, because in those cases the exchange would be the counterparty to both the national bank and the retail forex customer, rather than the national bank directly facing the retail forex customer.

The proposed rule sought comment on whether leveraged, margined, or bank-financed forex transactions, including rolling spot forex transactions (so-called Zelener contracts), should be regulated as retail forex transactions; the OCC preliminary believed that they should.

The commenter supported the inclusion of rolling spot forex transactions in the definition of “retail forex transaction.” A rolling spot forex transaction nominally requires delivery of currency within two days, like spot transactions. However, in practice, the contracts are indefinitely renewed every other day and no currency is actually delivered until one party affirmatively closes out the position. Therefore, the contracts are economically more like futures than spot contracts, although courts have held them to be spot contracts in form. Like the CFTC's retail forex rule and the FDIC's proposed retail forex rule, the final rule's definition of “retail forex transaction” includes leveraged, margined, or bank-financed rolling spot forex transactions, as well as certain other leveraged, margined, or bank-financed forex transactions.

The commenter sought clarification that forex forwards would not be included in the definition, because transactions that convert or exchange actual currencies for any commercial or investment purpose are a traditional product offered by national banks and do not raise the consumer protection issues associated with futures or rolling spot forex transactions.

The OCC agrees that a forex forward that is not leveraged, margined, or financed by the national bank does not meet the definition of “retail forex transaction.” However, a leveraged, margined, or bank-financed forex forward is a retail forex transaction unless it creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver and accept delivery, respectively, in connection with their line of business or the OCC determines that the forward is not functionally or economically similar to a forex future or option, as described below.

The final rule contains a provision that allows the OCC to exempt specific transactions or kinds of transaction from the third prong of the “retail forex transaction” definition. The OCC is concerned that certain traditional banking products, which are distinguishable from speculative rolling spot forex transactions, may inadvertently fall within the definition of “retail forex transaction” as leveraged, margined, or bank-financed forex transactions. This result was not intended by the Dodd-Frank Act, which requires retail forex rules to treat similarly transactions that are functionally or economically similar to forex futures or options. National banks may seek a determination that a given transaction or kind of transaction does not fall within the third prong of the “retail forex transaction” definition by submitting a written request to the OCC.

The commenter asked for confirmation that deposit accounts with foreign exchange features are outside the scope of the rule.

The Legal Certainty for Bank Products Act of 2000, as amended by the Dodd-Frank Act, generally exempts “identified banking products” from the CEA. Identified banking products include: Deposit accounts, savings accounts, certificates of deposit, or other deposit instruments issued by a bank; banker's acceptances; letters of credit issued or loans made by a bank; debit accounts at a bank arising from a credit card or similar arrangement; and certain loan participations. Because identified banking products are not subject to the CEA, they are not prohibited by section 2(c)(2)(E)(ii) of the CEA. To provide clarity, the final rule excludes identified banking products from the definition of “retail forex transaction.” Identified banking products that have embedded foreign exchange features, for example a deposit account in which the customer may deposit funds in one currency and withdraw funds in another, are not retail forex transactions.

This section defines several terms by reference to the CEA, the most important of which is “eligible contract participant.” Foreign currency transactions with eligible contract participants are not considered retail forex transactions and are therefore not subject to this rule. In addition to a variety of financial entities, certain governmental entities, businesses, and individuals may be eligible contract participants.

Section 48.3—Prohibited Transactions

This section prohibits a national bank and its institution-affiliated parties from engaging in fraudulent conduct in connection with retail forex transactions. This section also prohibits a national bank from acting as a counterparty to a retail forex transaction if the national bank or its affiliate exercises discretion over the customer's retail forex account because the OCC views such self-dealing as inappropriate.

The OCC received no comments to this section and adopts it as proposed.

Section 48.4—Supervisory Non-Objection

This section requires a national bank to obtain a written supervisory non-objection prior to engaging in a retail forex business. To obtain such non-objection, the national bank will have to provide such information as the OCC deems necessary to determine that the national bank would satisfy the requirements of the rule. This information will include information on: Customer due diligence (including credit evaluations, customer appropriateness, and “know your customer” documentation); new product approvals; haircuts for noncash margin; and conflicts of interest. In addition, the national bank must establish that it has adequate written policies, procedures, and risk measurement and management systems and controls.

National banks engaged in retail forex transactions as of the effective date of this rule that promptly request the OCC's review of their retail forex business will have six months, or a longer period provided by the OCC, to bring their operations into conformance with the rule. Under this rule, a national bank that requests the OCC's review within 30 days of the effective date of the final retail forex rule and submits such information as the OCC may request within the timeframe the OCC provides will be deemed to be operating its retail forex business pursuant to a rule or regulation of a Federal regulatory agency, as required under the CEA, for such period.

A national bank need not join a futures self-regulatory organization as a condition of conducting a retail forex business.

The commenter supported the adoption of this section, and the OCC adopts it as proposed.

Section 48.5—Application and Closing Out of Offsetting Long and Short Positions

This section requires a national bank to close out offsetting long and short positions in a retail forex account. The national bank would have to offset such positions regardless of whether the customer has instructed otherwise. The CFTC concluded that keeping open long and short positions in a retail forex customer's account removes the opportunity for the customer to profit on the transactions, increases the fees paid by the customer, and invites abuse. The OCC agreed with this concern in the notice of proposed rulemaking.

The commenter stated that a customer should be permitted to provide instructions with respect to the manner in which the customer's retail forex transaction are offset when: (i) The customer maintains separate accounts managed by different advisors; (ii) the customer maintains separate accounts using different trading strategies; or (iii) the customer employs different trading strategies in one account and applies certain orders to risk-manage that exposure. The commenter also sought clarification that a customer could provide specific offset instructions in writing or orally, and that those instructions can be made on a blanket basis.

The OCC agrees that a customer should be able to offset retail forex transactions in a particular manner, if he or she so chooses. Paragraph (c) has been modified to provide that, notwithstanding the default offset rules in paragraphs (a) and (b), the national bank must offset retail forex transactions pursuant to a customer's specific instructions. Blanket instructions are not sufficient for this purpose, as they could obviate the default rule. However, offset instructions need not be given separately for each pair of orders in order to be “specific.” Instructions that apply to sufficiently defined sets of transactions could be specific enough. Finally, consistent with the changes to § 48.12, retail forex customers may make offset instructions in writing or orally. The national bank must create and maintain a record of each offset instruction.

Section 48.6—Disclosure

This section requires a national bank to provide retail forex customers with a risk disclosure statement similar to the one required by the CFTC's retail forex rule but tailored to address certain unique characteristics of retail forex in national banks. The prescribed risk disclosure statement would describe the risks associated with retail forex transactions.

The commenter agreed with the need for a robust risk disclosure statement but suggested that a shorter, clearer, more direct, and less redundant statement would be more effective. The final rule incorporates several changes to the disclosures to eliminate redundancies, address ambiguities, and convey the information more clearly.

The proposal requested comment on whether the risk disclosure statement should disclose the percentage of profitable retail forex accounts.

The commenter said that disclosing the ratio of profitable to nonprofitable retail forex accounts is not useful because those ratios depend on many factors (including the trading expertise of customers) and could suggest one national bank is a more attractive retail forex counterparty than another.

In its retail forex rule, the CFTC requires its registrants to disclose to retail customers the percentage of retail forex accounts that earned a profit and the percentage of such accounts that experienced a loss during each of the most recent four calendar quarters. The CFTC explained that the vast majority of retail customers who enter these transactions do so solely for speculative purposes and that relatively few of these participants trade profitably. In its final rule, the CFTC found this requirement appropriate to protect retail customers from inherent conflicts embedded in the operations of the retail over-the-counter forex industry. The OCC agrees with the CFTC and the final rule requires this disclosure.

The proposal requested comment on whether the risk disclosure statement should include a disclosure that when a retail customer loses money trading, the dealer makes money.

The commenter said that this disclosure is inaccurate because the bank immediately hedges retail forex transactions or nets them with similar transactions and therefore does not profit from exchange rate fluctuations. The commenter argued it is more accurate to inform customers that the bank may or does mark-up (or mark-down) transactions or apply commission rates to transactions that will create income for the bank.

The OCC understands that the economic model of a retail forex business may be to profit from spreads, fees, and commissions. Nonetheless, because a national bank engaging in retail forex transactions is trading as principal, by definition, when the retail forex customer loses money on a retail forex transaction, the national bank makes money on that transaction. The OCC therefore believes that this disclosure is accurate and helps potential retail forex customers understand the nature of retail forex transactions. Similarly, the CFTC's retail forex rule requires a disclosure that when a retail customer loses money trading, the dealer makes money on such trades, in addition to any fees, commissions, or spreads. The final rule includes this disclosure requirement.

The proposal asked whether it would be convenient to national banks and retail forex customers to allow the retail forex risk disclosure to be combined with other disclosures that national banks make to their customers.

The commenter asked the OCC to confirm that national banks may add topics to the risk disclosure statement.

The OCC is concerned that the effectiveness of the disclosure could be diminished if surrounded by other topics. Therefore, the final rule requires the risk disclosure statement to be given to potential retail forex customers as set forth in the rule. National banks may describe and provide additional information on retail forex transactions in a separate document.

The commenter further asked the OCC to confirm that the risk disclosure statement may be appended to account opening agreements or forms and that a single signature by the customer on a combined account agreement and disclosure form can be used as long as the customer is directed to and acknowledges the risk disclosure statement immediately prior to the signature line.

The OCC believes that a separate risk disclosure document appropriately highlights the risks in retail forex transactions and that requiring a separate signature for the separate risk disclosure appropriately calls a potential retail forex customer's attention to the risk disclosure statement. However, a national bank may attach the risk disclosure to a related document, such as the account agreement.

The proposal requested comment on whether the risk disclosure statement should include a disclosure of fees that the national bank charges to retail forex customers.

The commenter agreed that the disclosure of fees is appropriate, but should not include income from hedging retail forex customers' positions or income streams not charged to the customer. Moreover, the commenter stated that it is impractical to numerically state the bid/ask spread given that it may vary.

The final rule, like the proposed rule, does not require national banks to disclose income streams not charged to the retail forex customer. However, a national bank must do more than simply describe the means by which it earns revenue. To the extent practical, it must quantify the fees, charges, spreads, or commissions that the national bank may impose on the retail forex customer in connection with the customer's retail forex account or a retail forex transaction. The OCC further believes that disclosure of the bid/ask spread is possible in a variety of ways. If a national bank bases its prices off of the prices provided by a third party, then the national bank may disclose the use of the third party's pricing and the markup charged to retail forex customers. Alternatively, the national bank may disclose the bid/ask spread by quoting both the bid and ask prices to retail forex customers prior to entering into a retail forex transaction. These quotes may be provided as part of an electronic trading platform or, after a retail forex customer calls the national bank for a retail forex transaction, by providing both a bid and ask price for the transaction.

The commenter read the disclosure to suggest that the national bank cannot seek to recover losses not covered by a customer's margin account via an appropriate dispute resolution forum and asked the OCC to confirm that this was not the case.

Section 48.9(d)(4) requires a national bank, in the event that a retail forex customer's margin falls below the amount needed to satisfy the margin requirement to either: (1) Collect sufficient margin from the retail forex customer; or (2) liquidate the retail forex customer's retail forex transactions. The final rule does not forbid a national bank from seeking to recover a deficiency from a retail forex customer in an appropriate venue. The disclosure has been revised to make this fact clear.

Finally, the commenter said that the disclosure regarding the availability of FDIC-insurance for retail forex transactions should be clarified.

The disclosure requires a national bank to state that retail forex transactions are not FDIC-insured. The commenter agreed with that statement. It noted, however, that margin funds may be insured deposits. The FDIC-insured status of funds held in a retail forex margin account will depend on whether such funds are held in a manner that meets the requirements of the Federal Deposit Insurance Act and its implementing regulations. National banks may accurately disclose the availability of FDIC insurance for retail forex margin accounts in a separate document as permitted by law.

Section 48.7—Recordkeeping

This section specifies which documents and records that a national bank engaged in retail forex transactions must retain for examination by the OCC. This section also prescribes document maintenance standards. The OCC notes that records may be kept electronically as permitted under the Electronic Signatures in Global and National Commerce Act.

The OCC received no comments on this section. Recordkeeping requirements found in § 48.13(a)(3) of the proposed rule were moved into this section to centralize recordkeeping requirements in one section. Furthermore, the recordkeeping requirements have been modified to accommodate oral orders and offset instructions. A national bank must create an audio recording of oral orders and offset instructions.

Section 48.8—Capital Requirements

This section requires that a national bank that offers or enters into retail forex transactions must be “well capitalized” as defined in the OCC's prompt corrective action regulation. In addition, a national bank must continue to hold capital against retail forex transactions as provided in the OCC's capital regulation. This rule does not amend the OCC's prompt corrective action regulation or capital regulation.

The proposed rule contained a provision allowing the OCC to exempt a national bank from the well-capitalized requirement. This provision has been removed in light of the general reservation of authority in § 48.17.

Section 48.9—Margin Requirements

Paragraph (a) requires a national bank that engages in retail forex transactions, in advance of any such transaction, to collect from the retail forex customer margin equal to at least 2 percent of the notional value of the retail forex transaction if the transaction is in a major currency pair and at least 5 percent of the notional value of the retail forex transaction otherwise. These margin requirements are identical to the requirements imposed by the CFTC's retail forex rule.

The proposal requested comments on whether it should define the major currencies in the final rule but did not receive any. The final rule adopts the proposal's approach to identifying the major currencies.

A major currency pair is a currency pair with two major currencies. The major currencies currently are the U.S. Dollar (USD), Canadian Dollar (CAD), Euro (EUR), United Kingdom Pound (GBP), Japanese Yen (JPY), Swiss Franc (CHF), New Zealand Dollar (NZD), Australian Dollar (AUD), Swedish Kronor (SEK), Danish Kroner (DKK), and Norwegian Krone (NOK). An evolving market could change the major currencies, so the OCC is not proposing to define the term “major currency,” but rather expects that national banks will obtain an interpretive letter from the OCC prior to treating any currency other than those listed above as a “major currency.”

For retail forex transactions, margin protects the retail forex customer from the risks related to trading with excessive leverage. The volatility of the foreign currency markets exposes retail forex customers to substantial risk of loss. High leverage ratios can significantly increase a customer's losses and gains. Even a small move against a customer's position can result in a substantial loss. Even with required margin, losses can exceed the margin posted and, if the account is not closed out, and, depending on the specific circumstances, the customer could be liable for additional losses. Given the risks that are inherent in the trading of retail forex transactions by retail customers, the only funds that should be invested in such transactions are those that the customer can afford to lose.

Prior to the CFTC's rule, nonbank dealers routinely permitted customers to trade with 1 percent margin (leverage of 100:1) and sometimes with as little as 0.25 percent margin (leverage of 400:1). When the CFTC proposed its retail forex rule in January 2010, it proposed a margin requirement of 10 percent (leverage of 10:1). In response to comments, the CFTC reduced the required margin in the final rule to 2 percent (leverage of 50:1) for trades involving major currencies and 5 percent (leverage of 20:1) for trades involving non-major currencies.

The proposal requested comment on whether these margin requirements were appropriate to protect retail forex customers.

The commenter did not object to the amount of margin required. However, the commenter suggested that the margin required by this paragraph should be initial margin rather than maintenance margin. The commenter also suggested that national banks be allowed to set maintenance margin levels as a matter of the banks' credit and risk policies in a manner that balances (i) protecting customers from a forced close-put of their positions as soon as an adverse market move erodes margin under the 2 or 5 percent minimum level with (ii) the need to promptly collect margin and close out positions when a customer fails to meet a margin call. The commenter also suggested that customers should have some reasonable time to meet margin calls before they are deemed to have defaulted and face a forced liquidation of their positions.

Subject to reasonable collection times as described below, a national bank must ensure that there is always sufficient margin in a retail forex customer's margin account for the customer's open retail forex transactions. If the amount of margin in a retail forex customer's margin account is insufficient to meet the requirements of paragraph (a), then § 48.9(d)(4) requires the national bank to make a margin call to replenish the margin account to an acceptable level and, if the customer does not comply with the margin call, to liquidate the retail forex customer's retail forex transactions. Retail forex customers should have a reasonable amount of time to post required margin for retail forex transactions. Market practice is for retail forex counterparties to make margin calls at the close of trading on a trading day based on margin levels at the end of that day or at the open of trading on the next trading day based on margin levels at the end of that prior day. If the retail forex customer does not post sufficient margin by the end of the next close of trading, then the retail forex counterparty liquidates the customer's retail forex account. In other words, by the close of business on a given trading day, the margin account must be sufficient to meet the margin requirements as at the end of the prior trading day.

Paragraph (b) specifies the acceptable forms of margin that customers may post. National banks must establish policies and procedures providing for haircuts for noncash margin collected from customers and must review these haircuts annually. It may be prudent for national banks to review and modify the size of the haircuts more frequently. The OCC requested comment on whether the final rule should specify haircuts for noncash margin. The OCC received no comments on this paragraph and adopts this paragraph as proposed.

Paragraph (c) requires a national bank to hold each retail forex customer's retail forex transaction margin in a separate account. This paragraph is designed to work with the prohibition on set-off in paragraph (e), so that a national bank may not have an account agreement that treats all of a retail forex customer's assets held by a bank as margin for retail forex transactions.

The commenter requested clarification that this paragraph allows national banks to place margin into an omnibus or commingled account for operational convenience, provided that the bank keeps records of each customer's margin balance.

A national bank may place margin collected from retail forex customers into an omnibus or commingled account if the bank keeps records of each retail forex customer's margin balance. A “separate account” is one separate from the retail forex customer's other accounts at the bank. For example, margin for retail forex transactions cannot be held in a retail forex customer's savings account. Funds in a savings account pledged as retail forex margin must be transferred to a separate margin account, which could be an individual or an omnibus margin account. The final rule contains slightly modified language to clarify this intent. The FDIC-insured status of funds held in an omnibus account will depend on whether such funds are held in a manner that meets the requirements of the Federal Deposit Insurance Act and its implementing regulations.

Paragraph (d) requires a national bank to collect additional margin from the customer or to liquidate the customer's position if the amount of margin held by the national bank fails to meet the requirements of paragraph (a). The proposed rule would have required the national bank to mark the customer's open retail forex positions and the value of the customer's margin to the market daily to ensure that a retail forex customer does not accumulate substantial losses not covered by margin.

The proposal requested comment on how frequently retail forex customers' margin accounts should be marked to market.

The commenter asked that the final rules permit marking to market more frequently than daily if the national bank's systems and customer agreements permit. The final rule, like the proposed rule, requires marking to market at least once per day. Nothing in paragraph (d) forbids a more frequent schedule.

Paragraph (e) prohibits a national bank from applying a retail forex customer's retail forex obligations against any asset or liability of the retail forex customer other than money or property pledged as margin. A national bank's relationship with a retail forex customer may evolve out of a prior relationship of providing financial services or may evolve into such a relationship. Thus, it is more likely that a national bank acting as a retail forex counterparty will hold other assets or liabilities of a retail forex customer, for example a deposit account or mortgage, than a retail forex dealer regulated by the CFTC. The OCC believes that it is inappropriate to allow a national bank to leave trades open and allow additional obligations to accrue that can be applied against a retail forex customer's other assets or liabilities held by the national bank. However, should a retail forex customer's retail forex obligations exceed the amount of margin he or she has pledged, this rule does not forbid a national bank from seeking to recover the deficiency in an appropriate forum, such as a court of law. Paragraph (e) does not apply to debts a retail forex customer owes to a national bank as recognized in a judgment of a court of competent jurisdiction.

The commenter suggested that retail forex customers should be able to pledge assets other than those held in the customer's margin account. For example, a customer could nominate a deposit account as containing margin for its retail forex transactions.

Nothing in this rule prevents retail forex customers from pledging other assets they have at the bank as margin for retail forex transactions. However, once those assets are pledged as margin, the national bank must transfer them to the separate margin account. For example, if a retail forex customer pledges $500 in her checking account as margin, then the bank must deduct $500 from the checking account and place $500 in the margin account. The OCC believes this transfer appropriately alerts retail forex customers to the nature of the pledge. A national bank may not evade this requirement by merely taking a security interest in assets pledged as margin: pledged assets must be placed in a separate margin account.

Section 48.10—Required Reporting to Customers

This section requires a national bank engaging in retail forex transactions to provide each retail forex customer a monthly statement and confirmation statements.

The proposal sought comment on whether this section provides for statements that would be useful and meaningful to retail forex customers or whether other information would be more appropriate.

The commenter sought clarification that the statements may be provided electronically, and also suggested that retail forex customers would be better served with continuous online access to account information rather than monthly statements.

The OCC encourages national banks to provide real-time, continuous access to account information. This rule does not prevent national banks from doing so. However, the OCC believes it is valuable to require national banks to provide retail forex account information to retail forex customers at least once per month. Monthly statements may be provided electronically as permitted under the Electronic Signatures in Global and National Commerce Act.

Section 48.11—Unlawful Representations

This section prohibits a national bank and its institution-affiliated parties from representing that the Federal government, the OCC, or any other Federal agency has sponsored, recommended, or approved retail forex transactions or products in any way. This section also prohibits a national bank from implying or representing that it will guarantee against or limit retail forex customer losses or not collect margin as required by § 48.9. This section does not prohibit a national bank from sharing in a loss resulting from error or mishandling of an order. Guaranties entered into prior to effectiveness of the prohibition would only be affected if an attempt is made to extend, modify, or renew them. This section also does not prohibit a national bank from hedging or otherwise mitigating its own exposure to retail forex transactions or any other foreign exchange risk.

The OCC received no comments to this section and adopts it as proposed.

Section 48.12—Authorization to Trade

The proposed rule required national banks to have specific written authorization from a retail forex customer before effecting a retail forex transaction.

The commenter said that requiring specific written authorization from a retail forex customer before effecting a retail forex transaction for that customer would be burdensome and detrimental to the customer's interests, if, for example, the customer cannot convey written instructions because of technical difficulties.

The OCC agrees with this concern and further notes that the CFTC's retail forex rule does not require written authorization for each retail forex transaction. The final rule requires a national bank to obtain a retail forex customer's specific authorization (written or oral) to effect a particular trade. National banks must keep records of authorizations to trade pursuant to this rule.

Section 48.13—Trading and Operational Standards

This section largely follows the trading standards of the CFTC's retail forex rule, which were developed to prevent some of the deceptive or unfair practices identified by the CFTC and the National Futures Association.

Under paragraph (a), a national bank engaging in retail forex transactions is required to establish and enforce internal rules, procedures, and controls (1) to prevent front running, a practice in which transactions in accounts of the national bank or its related persons are executed before a similar customer order; and (2) to establish settlement prices fairly and objectively.

The commenter requested clarification that the prohibition on front running applies only when the person entering orders for the bank's account or the account of related persons has knowledge of unexecuted retail customer orders, and that a national bank may comply with this provision by erecting a firewall between the retail forex order book and other forex trading desks.

The final rule requires national banks to establish reasonable policies, procedures, and controls to address front running. This provision is designed to prevent the national banks from unfairly taking advantage of information they gain from customer trades. Effective firewalls and information barriers are reasonable policies, procedures, and controls to ensure that a national bank does not take unfair advantage of its retail forex customers. The final rule clarifies paragraph (a) accordingly.

Paragraph (b) prohibits a national bank engaging in retail forex transactions from disclosing that it holds another person's order unless disclosure is necessary for execution or is made at the OCC's request. The OCC received no comments on this paragraph and adopts this paragraph as proposed.

Paragraph (c) ensures that related persons of another retail forex counterparty do not open accounts with a national bank without the knowledge and authorization of the account surveillance personnel of the other retail forex counterparty with which they are affiliated. Similarly, paragraph (d) ensures that related persons of a national bank do not open accounts with other retail forex counterparties without the knowledge and authorization of the account surveillance personnel of the national bank with which they are affiliated.

The commenter requested confirmation that national banks may rely on a representation of potential customers that they are not affiliated with a retail forex counterparty. Paragraph (c) prohibits a national bank from knowingly handling the retail forex account of a related person of a retail forex counterparty. To the extent reasonable, national banks may rely on representations of potential retail forex customers. If, however, a national bank has actual knowledge that a retail forex customer is a related person of a retail forex counterparty, then no representation by the customer will allow the bank to handle that retail forex account. A national bank should inquire as to whether a potential retail forex customer is related to a retail forex counterparty to avoid violating paragraph (c) through willful ignorance.

The commenter also requested clarification that these paragraphs apply only to employees of firms that offer retail forex transactions, and, in the case of banks, only employees of the retail forex business and not any employee of the bank that offers retail forex transactions. The OCC agrees that the prohibitions in paragraph (c) and (d) should only apply to employees working in the retail forex business; paragraphs (c) and (d) are designed to prevent evasion of the prohibition against front running. The final rule clarifies this point.

Paragraph (e) prohibits a national bank engaging in retail forex transactions from (1) entering a retail forex transaction to be executed at a price that is not at or near prices at which other retail forex customers have executed materially similar transactions with the national bank during the same time period, (2) changing prices after confirmation, (3) providing a retail forex customer with a new bid price that is higher (or lower) than previously provided without providing a new ask price that is similarly higher (or lower) as well, and (4) establishing a new position for a retail forex customer (except to offset an existing position) if the national bank holds one or more outstanding orders of other retail forex customers for the same currency pair at a comparable price.

Paragraph (e)(3) does not prevent a national bank from changing the bid or ask prices of a retail forex transaction to respond to market events. The OCC understands that market practice among CFTC-registrants is not to offer requotes but to simply reject orders and advise customers they may submit a new order (which the dealer may or may not accept). Similarly, a national bank may reject an order and advise customers that they may submit a new order.

The proposal sought comment on whether paragraph (e)(3) appropriately protected retail forex customers or whether a prohibition on re-quoting would be simpler.

The commenter argued that the prohibition on re-quoting in paragraph (e)(3) is overly broad and should permit new bids or offers to reflect updated spreads. In the alternative, the commenter suggested prohibiting re-quoting and requiring that, in the event an order is not confirmed, the customer must submit a new order at the then-currently displayed price. As stated above, rather than allowing requotes, a national bank may reject orders and request that customers submit a new order. Paragraph (e)(3) is consistent with the CFTC's retail forex rule and the OCC adopts it as proposed.

Paragraph (e)(4) requires a national bank engaging in retail forex transactions to execute similar orders in the order they are received. The prohibition prevents a national bank from offering preferred execution to some of its retail forex customers but not others.

Section 48.14—Supervision

This section imposes on a national bank and its agents, officers, and employees a duty to supervise subordinates with responsibility for retail forex transactions to ensure compliance with the OCC's retail forex rule.

The proposal requested comment on whether this section imposed requirements not already encompassed by safety and soundness standards. Having received no comments to this section, the OCC adopts it as proposed.

Section 48.15—Notice of Transfers

This section describes the requirements for transferring a retail forex account. Generally, a national bank must provide retail forex customers 30 days' prior notice before transferring or assigning their account. Affected customers may then instruct the national bank to transfer the account to an institution of their choosing or liquidate the account. There are three exceptions to the above notice requirement: a transfer in connection with the receivership or conservatorship under the Federal Deposit Insurance Act; a transfer pursuant to a retail forex customer's specific request; and a transfer otherwise allowed by applicable law. A national bank that is the transferee of retail forex accounts must generally provide the transferred customers with the risk disclosure statement of § 48.6 and obtain each affected customer's written acknowledgement within 60 days.

The OCC received no comments to this section and adopts it as proposed.

Section 48.16—Customer Dispute Resolution

This section imposes limitations on how a national bank may handle disputes arising out of a retail forex transaction. For example, this section would restrict a national bank's ability to require mandatory arbitration for such disputes.

The OCC received no comments to this section and adopts is as proposed.

Section 48.17—Reservation of Authority

This section allows the OCC to modify certain requirements of this rule consistent with safety and soundness and the protection of retail forex customers. The OCC understands the need for flexibility as foreign exchange products or foreign exchange trading procedures develop and to ensure that such products or trading procedures are subject to appropriate customer protection and safety and soundness standards.

V. Regulatory Analysis

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA), 5 U.S.C. 601 et seq., generally requires an agency that is issuing a proposed rule to prepare and make available for public comment an initial regulatory flexibility analysis that describes the impact of the proposed rule on small entities. The RFA provides that an agency is not required to prepare and publish an initial regulatory flexibility analysis if the agency certifies that the proposed rule will not, if promulgated as a final rule, have a significant economic impact on a substantial number of small entities. Under regulations issued by the Small Business Administration, a small entity includes a commercial bank with assets of $175 million or less. This rule as proposed would impose recordkeeping and disclosure requirements on banks, including small banks, which engage in retail forex transactions with their customers.

Pursuant to section 605(b) of the RFA, the OCC certified that this rule, as proposed, would not have a significant economic impact on a substantial number of the small entities it supervises. Accordingly, a regulatory flexibility analysis was not required. In making this determination, the OCC estimated that there were no small banking organizations currently engaging in retail forex transactions with their customers. Therefore, the OCC estimates that no small banking organizations under its supervision would be affected by this final rule.

B. Paperwork Reduction Act

In conjunction with the Notice of Proposed Rulemaking (NPRM), the OCC submitted the information collection requirements contained therein to OMB for review under the Paperwork Reduction Act (PRA). In response, the Office of Management and Budget (OMB) filed comments with the OCC in accordance with 5 CFR 1320.11(c). The comments indicated that OMB was withholding approval at that time. The Agencies were directed to examine public comment in response to the NPRM and include in the supporting statement of the information collection request (ICR) to be filed at the final rule stage a description of how the agency has responded to any public comments on the ICR, including comments maximizing the practical utility of the collection and minimizing the burden. The OCC received one comment addressing the substance and/or method of the disclosure and reporting requirements contained in the proposed rule. This comment and the OCC's response to the comment is included in the preamble discussion and in a revised Supporting Statement submitted to OMB.

The information collection requirements contained in this final rule have been submitted by the OCC to OMB for review and approval under 44 U.S.C. 3506 and 5 CFR part 1320. In accordance with section 3512 of the PRA, 44 U.S.C. 3512, the OCC may not conduct or sponsor, and a respondent is not required to respond to, an information collection unless it displays a currently valid OMB control number. The information collection requirements are found in §§ 48.4-48.7, 48.9-48.10, 48.13, and 48.15-48.16.

Comments continue to be invited on:

(a) Whether the collection of information is necessary for the proper performance of the OCC's functions, including whether the information has practical utility;

(b) The accuracy of the estimate of the burden of the information collection, including the validity of the methodology and assumptions used;

(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d) Ways to minimize the burden of information collection on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) Estimates of capital or startup costs and costs of operation, maintenance, and purchase of services to provide information.

All comments will become a matter of public record. Comments should be addressed to: Communications Division, Office of the Comptroller of the Currency, Public Information Room, Mailstop 2-3, Attention: 1557-0250, 250 E Street, SW., Washington, DC 20219. In addition, comments may be sent by fax to 202-874-5274, or by electronic mail to regs.comments@occ.treas.gov. You may personally inspect and photocopy comments at the OCC, 250 E Street, SW., Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling 202-874-4700. Upon arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect and photocopy comments.

Additionally, you should send a copy of your comments to the OMB Desk Officer, by mail to U.S. Office of Management and Budget, 725 17th Street, NW., 10235, Washington, DC 20503, or by fax to 202-395-6974.

Proposed Information Collection

Title of Information Collection: Retail Foreign Exchange Transactions.

Frequency of Response: On occasion.

Affected Public: Businesses or other for-profit.

Respondents: National banks and Federal branches and agencies of foreign banks.

Reporting Requirements

The reporting requirements in § 48.4 require that, prior to initiating a retail forex business, a national bank provide the OCC with prior notice and obtain a written supervisory non-objection letter. In order to obtain a supervisory non-objection letter, a national bank must have written policies and procedures and risk measurement and management systems and controls in place to ensure that retail forex transactions are conducted in a safe and sound manner. The national bank must also provide other information required by the OCC, such as documentation of customer due diligence, new product approvals, and haircuts applied to noncash margins. A national bank already engaging in a retail forex business may continue to do so, provided it requests an extension of time.

Disclosure Requirements

Section 48.5, regarding the application and closing out of offsetting long and short positions, requires a national bank to promptly provide the customer with a statement reflecting the financial result of the transactions and the name of the introducing broker to the account. The customer provides specific written instructions on how the offsetting transaction should be applied.

Section 48.6 requires that a national bank furnish a retail forex customer with a written disclosure before opening an account that will engage in retail forex transactions for a retail forex customer and receive an acknowledgment from the customer that it was received and understood. It also requires the disclosure by a national bank of its fees and other charges and its profitable accounts ratio.

Section 48.10 requires a national bank to issue monthly statements to each retail forex customer and to send confirmation statements following transactions.

Section 48.13(b) allows disclosure by a national bank that an order of another person is being held by them only when necessary to the effective execution of the order or when the disclosure is requested by the OCC. Section 48.13(c) prohibits a national bank engaging in retail forex transactions from knowingly handling the account of any related person of another retail forex counterparty unless it receives proper written authorization, promptly prepares a written record of the order, and transmits to the counterparty copies all statements and written records. Section 48.13(d) prohibits a related person of a national bank engaging in forex transactions from having an account with another retail forex counterparty unless the counterparty receives proper written authorization and transmits copies of all statements and written records for the related person's retail forex accounts to the national bank.

Section 48.15 requires a national bank to provide a retail forex customer with 30 days' prior notice of any assignment of any position or transfer of any account of the retail forex customer. It also requires a national bank to which retail forex accounts or positions are assigned or transferred to provide the affected customers with risk disclosure statements and forms of acknowledgment and receive the signed acknowledgments within 60 days.

The customer dispute resolution provisions in § 48.16 requires certain endorsements, acknowledgments, and signature language. Section 48.16 also requires that within 10 days after receipt of notice from the retail forex customer that the customer intends to submit a claim to arbitration, the national bank provides to the customer a list of persons qualified in the dispute resolution, and that the customer must notify the national bank of the person selected within 45 days of receipt of such list.

Policies and Procedures; Recordkeeping

Sections 48.7 and 48.13(a) require that a national bank engaging in retail forex transactions keep full, complete, and systematic records and establish and implement internal rules, procedures, and controls. Section 48.7 also requires that a national bank keep account, financial ledger, transaction and daily records; price logs; records of methods used to determine bids or asked prices; memorandum orders; post-execution allocation of bunched orders; records regarding its ratio of profitable accounts and possible violations of law; records for noncash margin; order tickets; and monthly statements and confirmations. Section 48.9 requires policies and procedures for haircuts for noncash margin collected under the rule's margin requirements and annual evaluations and modifications of the haircuts.

Estimated PRA Burden

Estimated Number of Respondents: 42 national banks; 3 service providers.

Total Reporting Burden: 672 hours.

Total Disclosure Burden: 54,166 hours.

Total Recordkeeping Burden: 12,416 hours.

Total Annual Burden: 67,254 hours.

C. Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded Mandates Act), 2 U.S.C. 1532, requires that an agency prepare a budgetary impact statement before promulgating any rule likely to result in a Federal mandate that may result in the expenditure by State, local, and tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC has determined that this rule will not result in expenditures by State, local, and tribal governments, or by the private sector, of $100 million or more in any one year. Accordingly, this final rule is not subject to section 202 of the Unfunded Mandates Act.

D. Effective Date Under the Administrative Procedures Act

This final rule takes effect on July 15, 2011. 5 U.S.C. 553(d)(1) requires publication of a substantive rule not less than 30 days before its effective date, except in cases in which the rule grants or recognizes an exemption or relieves a restriction. Section 2(c)(2)(E)(ii) of the CEA would prohibit national banks from engaging in retail forex transactions unless this final rule becomes effective on July 16, 2011. This final rule would relieve that restriction and allow national banks to continue to engage in retail forex transactions without delay. Furthermore, under 5 U.S.C. 553(d)(3), an agency may find good cause to publish a rule less than 30 days before its effective date. The OCC finds such good cause, as the 30-day delayed effective date is unnecessary under the provisions of the final rule. In § 48.4(c) of the final rule, the OCC allows national banks a 30-day grace period to inform the OCC of its retail forex activity, along with up to a six-month window to comply with the provisions of the retail forex rule.

E. Effective Date Under the CDRI Act

The Riegle Community Development and Regulatory Improvement Act of 1994 (CDRI Act), 12 U.S.C. 4801 et seq., provides that new regulations that impose additional reporting or disclosure requirements on insured depository institutions do not take effect until the first day of a calendar quarter after the regulation is published, unless the agency determines there is good cause for the regulation to become effective at an earlier date. The OCC finds good cause that this final rule should become effective on July 15, 2011, as it would be in the public interest to require the disclosure and consumer protection provisions in this rule to take effect at this earlier date. If the rule did not become effective until October 1, 2011, then national banks would not be able to provide retail forex transactions to customers to meet their financial needs.

List of Subjects in 12 CFR Part 48

• Banks
• Consumer protection
• Definitions
• Federal branches and agencies
• Foreign currencies
• Foreign exchange
• National banks
• Reporting and recordkeeping requirements

For the reasons stated in the preamble, part 48 to Title 12, Chapter I of the Code of Federal Regulations is added to read as follows:

PART 48—RETAIL FOREIGN EXCHANGE TRANSACTIONS

Authority: 7 U.S.C. 27 et seq.; 12 U.S.C. 1 et seq., 24, 93a, 161, 1813(q), 1818, 1831o, 3102, 3106a, 3108.