US CFTC goes after foreign currency trading fraud

WASHINGTON Jan 13 (Reuters) - The U.S. futures market regulator on Wednesday proposed rules that would make it easier to fight retail fraud in foreign currency trading taking place outside of regulated futures exchanges.

The Commodity Futures Trading Commission was given clearer authority in farm legislation passed by Congress in 2008 to go after foreign currency (forex) trading scams being pulled off in the unregulated over-the-counter market.

Lawmakers acted on pleas from the CFTC to clarify the agency's authority after a federal court in 2004 curtailed the CFTC ability to combat forex fraud in the OTC market.

At the time, the court ruled that the forex contracts were not futures contracts, which agency has jurisdiction over, but a type of spot contract that could not be the basis for a CFTC fraud case.

The CFTC said because of the 2004 ruling it had lost some key forex cases and it was more difficult for the agency to prosecute forex fraud. Congress cleared up any confusion with the courts through the legislation.

Now, the agency is using its authority from Congress to put in place requirements for, among other things, registering the counterparties offering retail forex contracts as either futures commission merchants or retail foreign exchange dealers, which is a new category created by Congress.

"These proposed rules for retail foreign exchange trading are important steps in implementing the additional consumer protections authorized," said CFTC Chairman Gary Gensler.

Persons who solicit orders, exercise discretionary trading authority and operate investment pools with respect to retail forex would also be required to register.

As was the case before Congress acted, other entities such as financial institutions and Securities and Exchange Commission-registered brokers or dealers can still serve as counterparties in such transactions under the oversight of their primary federal regulators.

The proposed regulations also include requirements to ensure the financial integrity of the firms engaging in forex transactions is sound and to protect customers.

For example, firms and dealers would be required to maintain net capital of $20 million plus 5 percent of the amount that liabilities to retail forex customers exceed $10 million.

Firms and dealers would also have to collect enough in security deposits from their clients to limit the leverage available to their retail customers on such transactions at 10 to 1.

The CFTC will take public comment on its proposed regulations for 60 days. (Reporting by Tom Doggett; Editing by Marguerita Choy)