The SEC recently announced that the rule permitting broker-dealers to offer retail forex to their customers will not be renewed. Specifically, Rule 15b12-1, will expire on July 31, 2016. Following that date, broker-dealers, including those that are dually registered as FCMs, will be prohibited from offering or entering into forex transactions with persons that are not eligible contract participants (“ECP”). Generally, an ECP includes any individual who has $10 million or more invested on a discretionary basis, or $5 million or more invested on a discretionary basis if the transactions are hedging a risk associated with an asset owned or a liability incurred. Retail forex transactions are transactions in foreign currency that are contracts of sale of a commodity for future delivery (or an option on such a contract) that is offered to, or entered into with, a person that is not an ECP.
Retail forex transactions do not include: (i) “spot forex transactions” where one currency is bought for another and the two currencies are exchanged within two days; (ii) forward contracts that require delivery, provided each party has the ability to make delivery; or (iii) options that are traded on a recognized exchange. Generally, based on the recent announcement, the SEC has determined that broker-dealers should not be offering retail forex to its customers. However, this Rule will undoubtedly impact entities whose primary business is acting as an FCM, but also maintain a broker-dealer registration. The SEC has not provided any statistics or other information on how many broker-dealers are also registered as FCMs, or will otherwise be affected by the Rule’s expiration. Until such firms can operate their FCMs as separate entities from their broker-dealers (which presumably will require an additional capital commitment), effective August 1, 2016, such FCMs will be unable to offer retail forex transactions to their customers that are not ECPs.