SEC Adopts Retail Foreign Exchange Rule in Order to Prevent Dodd-Frank Amendment from Disrupting the Retail Forex Markets

by Dechert LLP

The U.S. Securities and Exchange Commission (“SEC”) on July 11, 2013 adopted Rule 15b12-1 (“Final Rule”) under the Securities Exchange Act of 1934 as amended (“Exchange Act”) in order to allow market participants to continue to benefit from accessing the retail foreign exchange (“forex”) markets.1 In the absence of the Final Rule, an amendment to the Commodity Exchange Act as amended (“CEA”) effected by Section 742 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) would have prevented broker-dealers from entering into or executing retail forex transactions with any person except an eligible contract participant” (“ECP”).2

Dodd-Frank Section 742

Only retail forex dealers, banks, insurance companies, futures commission merchants (“FCMs”) and broker-dealers registered with the SEC may act as market makers in forex transactions. The majority of forex transactions that these parties enter into are with ECPs, such as corporations and banks that are seeking to hedge the risk involved with fluctuations in foreign currencies in which their assets may be denominated. However, as the SEC explained in the Adopting Release, “[i]n recent years, a secondary off-exchange market for forex has developed for retail customers.”3

Due to perceived risks to retail investors in this market, the Dodd-Frank Act amended the CEA to make it unlawful for any broker-dealer4 to enter into a retail forex transaction, unless the counterparty is an ECP, except pursuant to a rule promulgated by the SEC. To implement this provision, the SEC initially adopted interim final temporary Rule 15b12-1T in order to allow broker-dealers to continue to operate in the retail forex markets without any disruption.5 The interim final rule was set to expire on July 16, 2013; the Final Rule allows broker-dealers to operate pursuant to a rule promulgated by the SEC until the Final Rule’s sunset provision takes effect on July 16, 2016.

SEC Concerns with Market Disruption

Citing the potential inability of broker-dealers to settle foreign currency denominated securities transactions for retail customers, the SEC was concerned that, without initial final temporary Rule 15b12-1T or the Final Rule, Dodd-Frank Section 742 “may have serious adverse consequences for certain markets in the absence of rulemaking by the [SEC].”6 Another concern expressed by the SEC with allowing the interim final temporary rule to expire was that FCM/broker-dealers dually registered with the CFTC and the SEC would have to close their retail forex accounts while FCMs registered only with the CFTC would be allowed to continue to operate pursuant to CFTC rules. The consequence of this scenario would have been that customers of the FCM/broker-dealers would have had to close their accounts and open new accounts with FCMs in order to access the retail forex markets.

In light of these concerns, the Final Rule allows the retail forex markets to continue to function in their current state so that the SEC can “assess the market . . . and potentially develop more targeted rules for retail forex or to consider any rules that [a self-regulatory organization ("SRO")] may propose regarding its members’ retail forex activities.”Additionally, the SEC stated that it believes that not allowing the Dodd-Frank amendment to interfere with the retail forex markets “is appropriate at this time to allow broker-dealers to continue engaging in retail forex transactions subject to existing restrictions under [SEC] and FINRA rules while any additional requirements for retail forex are considered in order to retain existing options for retail investors to access the foreign exchange markets.”8

The SEC also acknowledged its concerns regarding the retail forex markets, particularly the potential for abusive practices such as misleading advertising or sales practices. At the same time, the SEC also weighed the concerns mentioned above, including disrupting legitimate activity in the retail forex markets. Having considered these competing factors, the SEC included a sunset provision providing for a termination date of the Final Rule on July 16, 2016, so that the SEC had “a reasonable period of time to consider further whether additional requirements for broker-dealers engaging in a retail forex business may be appropriate while avoiding any disruption or unintended consequences to broker-dealers and their customers.”9

Final Rule 15b12-1

The Final Rule is simple in its application – any broker-dealer may engage in retail forex transactions as long as the broker-dealer complies with the Exchange Act and the rules thereunder, and complies with the relevant rules of any SRO of which the broker-dealer is a member. Further, the Final Rule states that any registered broker-dealer that complies with such SRO rules will be “deemed to be acting pursuant to a rule or regulation” as required by the Dodd-Frank amendment to the CEA.

A key issue considered by the SEC was the definition of a retail forex transaction. The Adopting Release lists certain types of transactions excluded from the definition, such as:

  • spot forex transactions, which occur when one currency is exchanged for another and the exchange happens within two days – spot forex transactions include conversion trades, which occur when a foreign exchange transaction “facilitates the settlement of a foreign security transaction;”10
  • forward contracts, subject to certain conditions; and
  • options executed on an exchange registered under Section 6(a) of the Exchange Act.

Importantly, the definition of a retail forex transaction includes a transaction with a person other than an ECP in a foreign currency and that is:

  • a contract of sale of a commodity for future delivery (or an option on such a contract);
  • an option (other than an option executed or traded on a national securities exchange registered pursuant to Section 6(a) of the Exchange Act); or
  • offered by a broker or dealer on a leveraged or margined basis, or otherwise financed by a broker or dealer.11

This definition includes speculative trading and hedging in a foreign currency. Also included are rolling spot transactions, which are contracts that normally require delivery within two days but the counterparties indefinitely renew the contract every other day so that no currency is ever delivered until one party closes out the position well past the initial two-day agreement.12 Additionally, in order for a broker-dealer’s retail forex activities to come into compliance with Rule 15b12-1, the broker-dealer must comply with certain other requirements, including disclosure, recordkeeping, net capital, margin, reporting and business conduct requirements.


The SEC has taken the appropriate step of allowing the retail forex markets to operate under the status quo for three more years while it conducts further studies in order to make informed changes to the retail forex markets. The SEC’s adoption of the Final Rule in this form has shown the SEC’s willingness to heed the Congressional mandate imposed on it by Dodd-Frank Section 742 while, at the same time, attempting to avoid additional market disruption.


1. Retail Foreign Exchange Transactions, 78 FR 42439 (Jul. 16, 2013) (“Adopting Release”).

2. An ECP, among others, as relevant to this rule, is an individual who has aggregate amounts invested on a discretionary basis of more than $10 million, or $5 million if the transactions were entered into in order to manage the risk associated with an asset owned or liability incurred (or reasonably likely to be owned or incurred) by such individual. See CEA Section 1a(18).

3. Adopting Release at 42439.

4. The Dodd-Frank amendment also includes any other person who is regulated by the Commodity Futures Trading Commission (“CFTC”), an appropriate Federal banking agency, the National Credit Union Association or the Farm Credit Administration. Additionally, the CEA and CFTC have extensive provisions relating to retail forex participants and transactions. See e.g., CEA Section 2(c)(2)(B) and (C) and CFTC Part 5 Rules. 

5. See 76 Fed. Reg. 41676 (Jul. 15, 2011) (“Interim Rule Release”).

6. Interim Rule Release at 41677; see also Adopting Release at 42444 (“We believe that the same reasons behind the adoption of the Interim Rule in 2011 and its extension in 2012 and discussed throughout this release continue to apply to the retail forex rule we are adopting today”).

7. Adopting Release at 42441.

8. Id. at 42442.

9. Id. at 42443.

10. Conversion trades were excluded from the definition pursuant to an interpretation issued by the CFTC in a joint rulemaking with the SEC in August 2012. Adopting Release at 42439.  See also Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping; Final Rule, 77 FR 48207 (Aug. 13, 2012).

11. Rule 15b12-1(a)(3).

12. Adopting Release at 42444.


Written by:

Dechert LLP

Dechert LLP on:

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