Currency trading: What has "The Farm Bill" got to do with Forex?

The CFTC says that it has witnessed increasing numbers, and a growing complexity, of financial investment opportunities in recent years, including a sharp rise in foreign currency (forex) trading scams.

The Commodity Futures Modernisation Act of 2000 (CFMA) made clear that the CFTC has jurisdiction and authority to investigate and take legal action to close down a wide assortment of unregulated firms offering or selling foreign currency futures and options contracts to the general public. The CFTC also has jurisdiction to investigate and prosecute foreign currency fraud occuring in its registered firms and their affiliates.

Over the past decade, a series of warnings has been produced, the USA calls them "advisories."

The Division of Trading and Markets (now Division of Clearing and Intermediary Oversight, or DCIO) issued an advisory in 2002 concerning foreign currency trading by retail customers (PDF). The advisory affirms that off-exchange trading of foreign currency futures and options contracts with retail customers by a counterparty that is not a regulated financial entity as set forth in the CFMA is unlawful. The advisory further states that, if there is a lawful counterparty to the transaction, such as a person registered as a futures commission merchant, the persons acting as intermediaries to such a transaction, that is, in the manner of an introducing broker, commodity trading advisor or commodity pool operator, would not need to register under the CEA if that is their only involvement in futures or option transactions.

Subsequently, DCIO issued an additional advisory in 2007 concerning foreign currency trading by retail customers(PDF). The DCIO Advisory addresses the following issues:

(1) registration requirements for associated persons of firms registered as introducing brokers (IBs), commodity trading advisors, and commodity pool operators that are involved in forex transactions;

(2) the permissibility of certain unregistered affiliates of a futures commission merchant (FCM) to act as proper counterparties in forex transactions;

(3) claims that forex customer funds are segregated;

(4) introducing entities acting as FCMs;

(5) the applicability of the IB guarantee agreement to forex transactions and prohibiting guaranteed IBs from introducing forex transactions to an FCM that is not its guarantor FCM;

(6) prohibiting forex account statements of an FCM’s unregistered affiliate from being included in the FCM’s account statements to its customers; and

(7) prohibiting retail customers from acting as counterparties to each other in forex transactions.

The proposed rules (cftc.gov) include a raft of acronyms. A retail foreign exchange dealer becomes an RFED, a registered futures commission merchant becomes an FCM (no "R" you will notice), an introducing broker becomes an IB and many more.

The proposals will have an immediate and direct impact on small operators: it will " implement the $20 million minimum net capital standard established in the CRA for registering as an RFED or offering retail forex transactions as an FCM; propose an additional volume-based minimum capital threshold calculated on the amount an FCM or RFED owes as counterparty to retail forex transactions; and require RFEDs or FCMs engaging in retail forex transactions to collect security deposits in a minimum amount in order to prudentially limit the leverage available to their retail."

The last comment appears to authorise highly leveraged positions on margin but to ban 100% lending.

The proposal also makes it clear that any unauthorised FOREX trade is already illegal and has been since the mid 1980s.

In January this year, Trevor G Cook, a resident of Minnesota, was jailed by a federal court for breaching an asset freezing order made against him. The Court found that Cooke had dissipated funds and failed to surrender some USD35 million. The assets include "USD27 million located in offshore accounts, a BMW and two Lexus automobiles, a submarine, a houseboat, a collection of expensive watches, a collection of Faberge eggs and USD670,000 in cash." The CFTC also charges that Cook and the other defendants misappropriated millions of dollars of customer funds, using them to purchase property, develop a hotel and casino in Panama, buy seven luxury cars, a house boat and a submarine and to fund their frequent gambling.

All of that makes sense, except for one question.

What has any of this got to do with farming?