Standards for banking organizations regulated by the Federal Reserve for Retail Forex are generally comparable to rules adopted by other regulators.
On April 3, the Board of Governors of the Federal Reserve System (Board) adopted final rules to permit banking organizations under its supervision to engage in retail foreign exchange (Retail Forex) transactions (Final Rules).  The Final Rules establish requirements for Retail Forex transactions with regard to risk disclosures to customers, recordkeeping, capital and margin, business conduct, and documentation. The Final Rules cover entities regulated by the Board, including state-chartered banks that are members of the Federal Reserve System; bank and savings and loan holding companies; Edge Act and agreement corporations; and uninsured, state-licensed branches and agencies of foreign banks. Any banking organization for which the Board is the primary regulator should review its existing Retail Forex practices and implement any necessary changes prior to the May 13, 2013, effective date of the Final Rules. 
Regulation of Retail Forex
The term "Retail Forex" covers all foreign exchange transactions conducted in the over-the-counter market between persons that are not eligible contract participants (ECPs) (i.e., retail market participants) and permitted counterparties, which include banks, broker-dealers, futures commission merchants (FCMs), and retail foreign exchange dealers (RFEDs).  Retail Forex transactions generally include, for example, currency forwards,  currency options, and rolling-spot transactions, but do not include "spot" transactions,  nonleveraged transactions, or transactions carried out in connection with a line of business.
Prior to October 2010, non-ECP investors were required to conduct Retail Forex transactions with entities that were licensed as banks, broker-dealers, FCMs, insurance companies, or material affiliates of broker-dealers or FCMs; however, the activity was not subject to statutorily mandated rules. Institutional foreign exchange was not directly regulated. Congress created a regulatory regime for Retail Forex with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).
Dodd-Frank amended the Act to provide that a U.S. financial institution for which there is a federal regulatory agency may not enter into, or offer to enter into, Retail Forex transactions except pursuant to a rule or regulation of a federal regulatory agency prescribing the transactions' terms and conditions.  Although there is no legislative history explaining Congress's purpose in requiring adoption of the Retail Forex rules, it is generally understood that Congress was seeking to ensure that entities conducting Retail Forex activities were subject to a comprehensive regulatory scheme protecting small, unsophisticated retail clients from potentially problematic business practices employed by a class of thinly capitalized Retail Forex dealers.  As a result of this amendment, other federal regulatory agencies have adopted rules addressing Retail Forex, including the Securities and Exchange Commission (SEC),  the Federal Deposit Insurance Corporation (FDIC),  and the Office of the Comptroller of the Currency (OCC).  The Commodity Futures Trading Commission (CFTC) previously adopted rules addressing Retail Forex for persons subject to CFTC jurisdiction. 
Comparison of Final Rules and Proposed Rules
The Final Rules largely adopt the proposed rules from the Board's July 28, 2011, notice of proposed rulemaking (Proposed Rules),  and, except as described below, are largely consistent with the requirements previously adopted by the FDIC and the OCC. In adopting the Final Rules, the Board identified important differences between the Final Rules and the Proposed Rules and provided guidance in interpreting the Final Rules.
Disclosure and Reporting of Spreads
The Proposed Rules set forth requirements that pricing disclosures provided to customers must include disclosure of "any fee, charge, or commission" that the banking institution may impose on the Retail Forex customer. The parallel rules adopted by the FDIC and the OCC required disclosure of "any fee, charge, commission, or spreads" that the entity may impose on the Retail Forex customer. In adopting the Final Rules, the Board amended its proposed language to include "spreads." It noted, however, that spreads were covered by its proposed language and that it only was adding the word "spreads" to make this coverage explicit. Elsewhere in the Final Rules, for example, in connection with monthly statements that must be provided to customers, the Board did not amend the clause "fees, charges, and commissions" to include spreads. Based on the language in the Adopting Release, however, the Board apparently intends any discussion of fees, charges, or commissions to include disclosure of spreads. The Board also clarified that interest paid by a banking institution to its customer on cash margin used to secure Retail Forex transactions is not a "fee, charge, or commission" that must be disclosed by the banking institution.
Savings and Loan Holding Companies
The term "banking institution" is used to define the types of entities regulated by the Board that may conduct Retail Forex transactions.  Although not listed in the Proposed Rules, the Board included savings and loan holding companies in the "banking institution" definition in the Final Rules and set forth related capital requirements that require savings and loan holding companies to be "well capitalized," as defined in Regulation LL. The Board noted that savings and loan holding companies were added to the regulation to reflect the transfer of regulatory responsibility for savings and loan holding companies to the Board on July 21, 2011.
Reservation of Authority
In adopting the Final Rules, the Board added a broad "reservation of authority" permitting it to modify "the disclosure, recordkeeping, capital and margin, reporting, business conduct, documentation, or other standards or requirements . . . for a specific [R]etail [F]orex transaction or a class of [R]etail [F]orex transactions if the Board determines that the modification is consistent with safety and soundness and the protection of [R]etail [F]orex customers." This provision is not contained in the FDIC or the OCC rules and effectively permits the Board to adopt more stringent requirements for specific categories of Retail Forex transactions than set forth under its Final Rules.
The Final Rules prohibit a banking institution and its related persons from engaging in fraudulent conduct in connection with Retail Forex transactions. In the Proposed Rules, the Board set forth that a Retail Forex counterparty may not "[d]efraud or attempt to defraud" any person in connection with a Retail Forex transaction. The Act and other regulators (e.g., CFTC, FDIC, and OCC) used the phrase "cheat or defraud or attempt to cheat or defraud," and the Board adopted this language in its Final Rules. Additionally, consistent with the Proposed Rules, the Final Rules prohibit a Retail Forex counterparty from (i) knowingly making or causing to be made any false report or statement to any person or causing to be entered any false record for any person and (ii) knowingly deceiving or attempting to deceive any person by any means whatsoever.
Accounts of Related Persons
The Final Rules addressing trading and operational standards are designed to ensure that related persons (e.g., officers, directors, 10% or more owners, associated persons, employees, and relatives or spouses who share the same home of any of the foregoing persons) of a Retail Forex counterparty (including a banking institution) do not open accounts with another banking institution without the knowledge and authorization of the account surveillance personnel of the Retail Forex counterparty with which they are affiliated. In the Final Rules, the Board added a requirement that, when an employee working in the Retail Forex business of a banking institution establishes an account at another Retail Forex counterparty, the other Retail Forex counterparty must prepare written records of orders for such person that are time stamped to the nearest minute. The purpose of this rule is to allow the surveillance department of the employee's banking institution to monitor the trading of the employee and to detect abuses, such as front running of orders handled by the banking institution.
The Final Rules prohibit a banking institution from entering into any agreement or understanding with a Retail Forex customer in which the customer agrees, prior to the time a claim or grievance arises, to submit the claim or grievance in accordance with any predetermined settlement procedure. The Board recognized, however, that Retail Forex transactions between the foreign branch or office of a banking institution and a U.S. customer could be cross-border transactions subject to treaty obligations to enforce international commercial arbitration agreements and to recognize and enforce international commercial arbitral awards. In adopting the Final Rules, the Board provided an exception to the prohibition on arbitration agreements covered by chapters two or three of the Federal Arbitration Act, which implement the treaty obligations regarding arbitration of cross-border transactions.
Customer Instructions Regarding Offset
The Final Rules require a banking institution to apply offsetting transactions that close out a customer's open Retail Forex positions against the oldest open position (i.e., on a first-in, first-out basis), unless the customer provides specific instructions regarding the application of the offsetting transaction. In the Adopting Release, the Board stated that blanket instructions are not sufficient for this purpose but also noted that trade-by-trade instructions are not required. Rather, instructions that apply to a specifically defined set of transactions would be sufficient. Any such instruction may be given orally or in writing, and the banking institution must create and maintain a record of each offset instruction.
Definition of "Eligible Contract Participant"
The Final Rules expressly adopted the "ECP" definition set forth in the Act, as well as the CFTC's rules interpreting the definition, which provide a safe harbor for the "look through" of commodity pools that trade foreign exchange to determine whether investors in the commodity pool are themselves ECPs.  Under the CFTC's ECP rulemaking, a commodity pool that enters into foreign exchange transactions will be an ECP if the commodity pool (i) was not formed for the purpose of evading the Retail Forex rules, (ii) has total assets exceeding $10,000,000, and (iii) is formed and operated by a registered commodity pool operator (CPO) or a CPO that is exempt from registration under CFTC Rule 1.13(a)(3).
In the Adopting Release, the Board stated that a banking institution that enters into Retail Forex trades with a non-ECP customer who later becomes an ECP may continue to treat the customer as a Retail Forex customer. Board staff has separately clarified that, if a banking institution wishes to apply the Final Rules in lieu of the swap rules that otherwise apply to foreign exchange swap transactions with ECPs, the banking institution would need to obtain guidance from the CFTC with regard to the application of the swap rules to non-ECP customers who subsequently become ECPs. The Board would not object to continuing to apply the Final Rules to such customers.
Symmetrical Requoting of Prices
The Final Rules require a banking institution to requote prices on a symmetrical basis. A banking institution may not provide a customer with a new bid price for a Retail Forex transaction that is higher (or lower) than its previous bid without providing a new ask price that is also higher (or lower) than its previous ask price by a similar amount. In the Adopting Release, the Board acknowledged that market practice is not to provide "requotes," but rather to reject orders and advise customers that they may submit a new order. The Board confirmed in the Adopting Release that this market practice was acceptable.
Primary Distinctions Between the Final Rules and Other Banking Regulators' Rules
Another distinction between the Final Rules and the rules adopted by the FDIC and the OCC is the right of the banking institution to set off losses that the customer experiences on Retail Forex transactions against other assets of the customer held at the bank.
Under the OCC and the FDIC rules, the bank is prohibited from applying losses that the customer experiences on Retail Forex transactions to any customer funds or property other than those the customer has provided or pledged as margin. Under the Final Rules, however, a banking institution may apply losses that the customer experiences on Retail Forex transactions to any customer funds or property held at the banking institution, not just those held for Retail Forex activities. The banking institution must provide the customer with disclosure of whether or not it will retain this set-off right, and if it does retain the set-off right, the banking institution must obtain a signed and dated written acknowledgement from the customer, indicating that the customer received and understood this disclosure.
Because of these differing set-off rights, the OCC and the FDIC require collateral to be held in an account separate from the customer's other accounts with the bank, so the bank may not treat all assets of the customer held by the bank as margin for Retail Forex activities. The OCC and the FDIC indicated, however, that customer margin may be held in an omnibus margin account. The Final Rules do not require margin to be held separate from the other assets of the customer, which would facilitate the ability of the banking institution to exercise its right to set off.
Although the Final Rules are largely consistent with those of the CFTC and other banking regulators, there are important variations among the rules as written, which likely will develop as the interpretations of the agencies evolve through the application of their respective rules. There was no obligation for the functional regulators to consult each other in connection with their respective rulemakings and no obligation for the functional regulators to consult each other going forward when interpreting their rules. Institutions that offer Retail Forex transactions should be aware of these variations and the impact they have on their Retail Forex business.