May 10, 2011 / 2:47 PM / 8 years ago

UPDATE 2-U.S. FDIC unveils retail foreign exchange rule

* Rule is aimed at protecting individual investors

* Sets margin and record-keeping requirements

* Proposal is similar to CFTC rule (Adds Gruenberg quote and background)

By Dave Clarke

WASHINGTON, May 10 (Reuters) - U.S. bank regulators would more strictly supervise banks’ relationships with retail customers who speculate in the foreign exchange market, under a proposal issued on Tuesday.

The Federal Deposit Insurance Corp plan would require retail customers who engage in foreign exchange transactions with a bank, that are not cleared through an exchange, to post a margin amount of 2 percent in the case of major currencies, such as the dollar and euro.

The amount would rise to 5 percent of the notional value of the transaction for some other currencies.

Banks also would have to keep more transaction records and give customers more information on things such as the fees they are being charged.

The rule does not affect large companies involved in the derivatives and swaps markets and is instead aimed at protecting less-sophisticated individual investors.

The proposal is similar to a final rule published in September by the Commodity Futures Trade Commission in response what it said was retail fraud in the currency trading area. It is also similar to a proposal released last month by the Office of the Comptroller of the Currency.

The board of the FDIC voted to put the proposal out for 30 days of public comment.

The FDIC only has a small part in policing this market. It said only one of the banks it regulates is involved in the retail foreign exchange business. It did not identify the bank.

The rule is required by last year’s Dodd-Frank financial oversight law.

“It’s really focused on the speculative activity that provides higher risk and for which additional consumer protections would seem justified,” said FDIC Vice Chairman Martin Gruenberg said.

Citigroup (C.N) is among the largest banks that offer foreign exchange trading services to retail customers.

Retail customers are often individuals trying to make money by speculating on currency fluctuations. The requirements will limit how much they can borrow when making bets.

Under the rule, a retail customer is defined as someone who has less than $10 million in assets.

In January, The CFTC sued 14 firms that it alleged illegally solicited investors to participate in foreign currency transactions.

In all but two of the complaints, the CFTC alleged that defendants acted as retail foreign exchange dealer, offering to or taking the opposite side of a customer’s forex transaction without being registered. [ID:nN26202545] (Reporting by Dave Clarke, Editing by Robert MacMillan and Tim Dobbyn)

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