CFTC Staff Letter 02-05: Regulation of Off-Exchange Foreign Currency Trading by FCMs and Licensees

CFTC Letter No. 02-05
CFTC Letter No. 02-05
January 8, 2002
Interpretation
Division of Trading and Markets
Re: "X" & "Y" Licensees
Dear:
This is in response to your letter dated April 16, 2001, to "A" of the Division of Enforcement of the Commodity Futures Trading Commission ("Commission"), which was forwarded to the Division of Trading and Markets (the "Division") for reply, as supplemented by your letter dated November 26, 2001, and telephone conversations with Commission staff. By your correspondence, you request, on behalf of "X" and its "Y" licensees, that the Commission interpret the "Y" licensees to be affiliates of "X" or, in the alternative, permit the "Y" licensees to register as introducing brokers ("IBs"). The Commodity Futures Modernization Act of 2000 As you are aware, the Commodity Futures Modernization Act of 2000 ("CFMA")[1] amended the Commodity Exchange Act (the "Act")[2] to clarify the application of the Act and the Commission's jurisdiction in the area of foreign currency trading.[3] Generally, offering foreign currency futures and options contracts, other than those that are executed or traded on an organized exchange[4] ("off￾exchange"), to retail customers[5] is unlawful unless the counterparty is a regulated entity enumerated in the Act. The counterparties enumerated include registered futures commission merchants ("FCMs") and certain affiliated persons of registered FCMs.[6] The Activities of "X" "X" offers trading in foreign currency, primarily over the Internet, and you have indicated that most of "X's" customers would be retail customers under the Act. You represented that "X" acts as a counterparty to retail customers "in almost all of its trading activities."[7] Effective October 14, 2001, "X" became registered as an FCM, and thus qualifies as one of the enumerated counterparties under the Act. "X's" trading platform, for foreign currency trading over the Internet, is a software program called "Y". "X", in addition to utilizing "Y" on its own website, licenses its "Y" software to licensees. These licensees market the platform under their own brand names and set up their own structure for charging customer commissions. According to your representations, as part of the licensing agreement, licensees must agree that customer funds traded over the "X" "Y" system be "placed in accounts with "X" . . . so file:///S|/Website%20Management/LegacyDataCopyasof2010-04-21/tm/letters/02letters/tm02-05.htm (1 of 5) [5/6/2010 5:44:00 PM]