OCC Proposes Rule for Retail Foreign Exchange Transactions


On April 22nd, the Office of the Comptroller of the Currency (the “OCC”) proposed a rule (the “Proposed OCC FX Rule”)[1] authorizing national banks[2] to engage in off-exchange transactions in foreign currency with retail customers, subject to certain specified conditions. In the interest of promoting consistent treatment of retail foreign exchange transactions, the Proposed OCC FX Rule is modeled on the recent rule issued by the CFTC with respect to such transactions (the “CFTC FX Rule”).[3]

The Proposed OCC FX Rule defines “retail foreign exchange transactions” to include certain specified transactions in foreign currency between national banks and a person that is not an “eligible contract participant,” as defined in the CEA.[4] The specified foreign currency transactions are, generally: (i) futures (or options on futures); (ii) options not traded on registered national securities exchanges; and (iii) certain leveraged or margined transactions. Significantly, transactions executed on exchanges, forward transactions under which a commercial entity is obligated to make or take delivery of a currency (and has the ability to do so in connection with its line of business) and traditional “spot” foreign exchange transactions (i.e., where settlement occurs within two days of trade) would not constitute retail foreign exchange transactions. However, rolling spot transactions (i.e., also known as “Zelener contracts” under which, in practice, the contract is indefinitely renewed and no currency is actually delivered until a party affirmatively closes out its position) may constitute retail foreign exchange transactions.[5]

Under the Proposed OCC FX Rule, among other things, a national bank would not be permitted to act as a counterparty to retail foreign exchange transactions if the bank (or any of its affiliates) exercises discretion over a customer’s retail foreign exchange account, as such conduct would constitute self-dealing. Prior to engaging in retail foreign exchange transactions, a national bank would be required to obtain a written supervisory non-objection from the OCC, which would require the bank to provide information regarding its customer due diligence (including its credit and customer appropriateness evaluations), new product approvals and haircuts for non-cash margin, and to establish that it has adequate written policies, procedures and risk measurement and management systems and controls relating to this business. National banks also would be required to provide customers with risk disclosure statements which, among other things, would make clear that a national bank is prohibited from applying customer losses arising out of retail foreign exchange transactions against any other property of a customer other than that specifically given as margin for retail foreign exchange transactions. The OCC has requested comment on whether such disclosure statements should, similar to the CFTC FX Rule, disclose the percentage of retail foreign exchange accounts that earned a profit or the percentage of retail foreign exchange accounts that experienced a loss over the most recent four calendar quarters.[6]

A national bank offering or entering into retail foreign exchange transactions would be required to: (i) be “well capitalized” (as defined in the relevant OCC regulations) or would otherwise be required to obtain an exemption from the OCC; and (ii) hold capital against such transactions in accordance with OCC regulations. It also would be required to collect initial margin from retail customers of at least 2% of the notional amount for each transaction in a major currency pair (e.g., USD/EUR, EUR/GBP, USD/CAD) and at least 5% of the notional amount for each transaction not involving a major currency pair. These percentages of notional amount are consistent with those set forth in the CFTC FX rule, although the OCC has requested comment on whether they should be adjusted. A national bank also would have to mark each customer’s foreign exchange positions daily to determine whether additional margin is required from the customer. Margin could be in the form of either cash or specified financial instruments, the latter of which would be subject to haircuts (evaluated at least annually) established by written policies and procedures of the national bank. Moreover, all margin would have to be held by a national bank in a separate account that contains only such customer’s margin.

The Proposed OCC FX Rule would require national banks to provide monthly statements clearly indicating: (i) each open foreign exchange transaction and the price at which it was acquired; (ii) the net unrealized profits or losses on all open transactions, as marked to market; (iii) all property held in the customer’s separate margin account; and (iv) all financial charges and credits over the monthly reporting period (including fees, commissions, etc.). National banks also would be required to provide confirmation statements to customers no later than the next business day following the execution of a retail foreign exchange transaction. Such confirmation statements would include specified information, including any premium, strike price and exercise dates (for options). However, the OCC has requested comment on whether other information would be more appropriate in light of the distinctive characteristics of retail foreign exchange transactions.

[1] Retail Foreign Exchange Transactions, 76 Fed. Reg. 22633 (Apr. 22, 2011).

[2] The Proposed OCC FX Rule defines “national banks” to include national banks, federal branches or agencies of foreign banks, and the operating subsidiaries of the foregoing.

[3] Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75 Fed. Reg. 3282 (Sep. 10, 2011).

[4] The term “eligible contract participant” is defined under 7 U.S.C. §1a(18) to include various entities, including corporations, partnerships, trust and governmental entities, subject to specified total asset, net worth and/or discretionary investment thresholds. Note, however, that the OCC has requested comment on whether this definition adequately captures retail customers for the relevant products, or whether it should expand the scope of the rule to capture certain eligible contract participants as well.

[5] Note, however, that the OCC has requested comment on whether leveraged or margined foreign exchange transactions, including rolling spot transactions, should, in fact, be regulated under the OCC Proposed FX Rule.

[6] In proposing its own rule, the CFTC had expressed concern about the retail foreign exchange market, noting that the “vast majority” of retail customers engage in such trading solely to speculate and that very few of them do so profitably. 75 Fed. Reg. at 3289.