SeeS. Rep. No. 384 at 79-80 (1982). The CFTC originally proposed to exempt banks operating bank funds and insurance companies operating separate accounts from all of the requirements applicable to CPOs. The CFTC reasoned that these banks and insurance companies were sufficiently regulated under other regulatory schemes to warrant their complete exemption. Commodity Pool Operators and Commodity Trading Advisors, 49 FR 4778, 4783 (Feb. 8, 1984). The CFTC ultimately concluded that it was appropriate to provide relief even more extensive than it proposed: it created an exclusion from the definition of CPO for these banks and insurance companies. Commodity Pool Operators, 50 FR 15868 (Apr. 23, 1985).
437 U.S.C. 2(c)(2)(E)(iii).
The OCC preliminarily believes it appropriate to modify the requirements of the retail forex rule for retail forex transactions between Federal depository institutions44
and bank funds. The OCC proposes to apply to these transactions only the rule's antifraud and general provisions, sections 48.1, 48.2, 48.3(a), and 48.17. The OCC preliminarily believes that the same requirements should apply to retail forex transactions between Federal depository institutions and insurance company separate accounts because the CFTC's CPO exclusions treat them equivalently. See proposed § 48.1(e).
Federal depository institutionmeans a national bank, a Federal savings association, or Federal branch of a foreign bank. 12 U.S.C. 1813(c)(2). In this proposal, it also includes a Federal agency of a foreign bank.
In connection with this proposed modification, the OCC proposes to exclude retail forex transactions with bank funds and insurance company separate accounts from the profitability calculations required by § 48.7(b). That paragraph requires Federal depository institutions to calculate the percentage of retail forex accounts that are profitable and the percentage of retail forex accounts that are not profitable. The OCC is concerned that these ratios would be less informative to individual consumers of the realistic prospects of profitability if they included trades entered into by sophisticated customerslike bank funds and insurance company separate accounts.
B. Adoption of CFTC and SEC Interpretations
The OCC proposes to adopt the further definition ofeligible contract participantin 17 CFR 1.3(m).45
One of the OCC's objectives in promulgating its retail forex rule was ensuring regulatory comparability among retail forex counterparties. To that end, the OCC modeled its rule on the CFTC's. The OCC believes that adopting the further definition ofeligible contract participantpromotes regulatory comparability.
45The definition in 17 CFR 1.3(m) incorporates the statutory definition ofeligible contract participant.The retail forex rule's definition ofeligible contract participanttherefore includes persons the CFTC has determined are ECPs.See7 U.S.C. 1A(18)(C).
The CFTC and SEC rule further definingeligible contract participantcontained two statutory interpretations regarding retail forex. First, the CFTC and SEC interpreted certain foreign funds to be ECPs for purposes of the retail forex rule.46
Second, the CFTC and SEC explained that retail forex counterparties may rely (if reasonable) on a customer's written representation that it is an ECP.47
46Swap Entities and ECPs, 77 FR 30596 30654 (May 23, 2012).
The OCC believes that the considerations that led the CFTC and SEC to consider certain foreign funds to be ECPs for purposes of the retail forex look-through48
are equally applicable to the OCC's retail forex rule. The OCC therefore proposes to exempt from many of the retail forex rule's requirements retail forex transactions between a Federal depository institution and a foreign fund operated and managed by a foreign person and whose participants are foreign investors. These transactions will remain subject to applicable foreign law. In addition, a Federal depository institution must still obtain a supervisory non-objection to begin a retail forex business, even with foreign funds. See proposed § 48.1(d)(2).
See id.at 30653 & n.666.
The OCC also believes that a Federal depository institution should not be deemed in violation of the retail forex rule if it inadvertently violated one of the rule's requirements because it reasonably believed its counterparty was an ECP, bank fund, or insurance company separate account. Proposed § 48.18 provides a safe harbor for this situation. To rely on this safe harbor, a Federal depository institution must: have reasonable policies and procedures to verify the customer's status; follow these policies and procedures; and obtain a written representation from the counterparty that it is an ECP, bank fund, or insurance company separate account. Reliance on that representation must be reasonable. For this purpose, reliance would be reasonable if the representation specifies its status category—e.g., an investment company, a natural person with discretionary investments exceeding $10 million, a bank fund—unless the Federal depository institution has information that would cause a reasonable person to question the representation.
C. Additional Proposed Changes
The OCC also proposes to make additional clarifying and conforming changes to the retail forex rule.
First, the OCC proposes to clarify the capital requirements applicable to Federal branches and agencies of foreign banks that offer or enter into retail forex transactions. The current retail forex rule requires these Federal branches and agencies to be well capitalized under 12 CFR part 6. However, part 6 only applies to insured Federal branches and agencies.49
The OCC proposes to amend the capital requirements in § 48.8 so that all Federal branches and agencies offering or entering into retail forex transactions must satisfy the requirements of 12 CFR 4.7(b)(1)(iii)(A) and (iv).50
For purposes of determining whether a Federal branch or agency complies with these requirements, the Federal branch or agency would have to calculate capital ratios consistent with 12 CFR part 3.51
The well capitalized requirement would continue to apply to insured Federal branches.
4912 CFR 6.1(c), 6.20.
50To satisfy these requirements, the Federal branch or agency must not be subject to a formal enforcement order by the OCC, Federal Deposit Insurance Corporation, or the Board of Governors of the Federal Reserve System, and the foreign bank's most recently reported capital adequacy positions must consist of, or be equivalent to, Tier 1 and total risk-based capital ratios of at least 6 percent and 10 percent, respectively, on a consolidated basis.
See12 CFR 28.14.
Second, the OCC proposes to revise the retail forex rule's prohibition on self dealing in 12 CFR 48.3(b) to be consistent with the CFTC's retail forex rule.52
The CFTC's rule prohibits a person from entering into a retail forex transaction for an account over which it or its affiliate has investment discretion. The OCC's retail forex rule, however, prohibits a national bank or its affiliate from entering into a retail forex transaction with a customer if the national bank (but not its affiliate) has investment discretion over that customer's account. The OCC does not intend to regulate the conduct of national bank affiliates, which are subject to other agencies' retail forex rules.53
Furthermore, the OCC believes it is inappropriate for a Federal depository institution to act as the counterparty for a retail forex transaction that its affiliate entered into using its investment discretion over a customer's account.
See17 CFR 5.2(c).
Compare12 CFR 48.3(b)withRetail Foreign Exchange Transactions, 76 FR 41375, 41377 (July 14, 2011) (preamble description of 12 CFR 48.3(b)). The OCC does regulate a national bank affiliate if that affiliate is itself a national bank or Federal savings association.
Third, the OCC proposes to clarify that instruments that Congress or the CFTC have excluded from regulation under the CEA54
are not retail forex transactions. Because these instruments are excluded from regulation under the CEA, section 2(c)(2)(E) of the CEA, which prohibits retail forex transactions except under a retail forex rule, does not apply to them. Because this amendment refers to transactions that are already excluded from regulation under the CEA, it would simply clarify how the OCC's retail forex rule interacts with established law.
See, e.g.,7 U.S.C. 2(f); 7 U.S.C. 27c; 17 CFR part 34; Statutory Interpretation Concerning Certain Hybrid Instruments, 55 FR 13582 (Apr. 11, 1990).
Finally, the OCC proposes a technical correction to a citation contained in the definition ofretail forex transaction.
D. Interim Final Rule for Federal Savings Associations
On September 12, 2011, the OCC published an interim final rule amending part 48 to allow Federal savings associations to engage in retail forex transactions on the same terms as national banks.55
The interim final rule requested comment, by November 14, 2011, on the application of the existing rule to Federal savings associations. The OCC received no comments on the interim final rule. The OCC plans to finalize the interim final rule, as published, at the same time as it finalizes the changes proposed in this NPR.
55Retail Foreign Exchange Transactions, 76 FR 56094 (Sept. 12, 2011).
III. Request for Comment on the Proposed Rule
The OCC requests comments on all aspects of this proposed rule, including the following specific questions.
Question 1.Does the alternative treatment proposed for retail forex transactions with bank funds and insurance company separate accounts appropriately address those transactions? If not, please explain whynot and describe the additional requirements the OCC should impose on transactions with bank funds and insurance company separate accounts. Please explain why those requirements are appropriate for transactions with bank funds and insurance company separate accounts but not for transactions with commodity pools that are ECPs under the CFTC's further definition.56
56Swap Dealers and ECPs, 77 FR 30596 (May 23, 2012).
Question 2.Is the proposed definition ofbank fundin § 48.2 appropriate? If not, how should it be defined? Do any bank funds not fall within the definition? Are there any bank funds that are not directly or indirectly subject to 12 CFR 9.18, such as a bank fund of a state bank? If so, how are those funds regulated?
Question 3.Is the proposed definition ofinsurance company separate accountin § 48.2 appropriate? If not, how should it be defined?
Question 4.Is the exclusion of transactions with bank funds and insurance company separate accounts from the profitability calculations appropriate? If not, why not? What proportion of Federal depository institutions' forex trading is with bank funds or insurance company separate accounts?
Question 5.Should the OCC's retail forex rule adopt the CFTC's and SEC's further definition ofeligible contract participant? Why or why not? Is the definition ofeligible contract participantproposed in section 48.2 appropriate?
Question 6.Should the OCC's retail forex rule adopt the CFTC's and SEC's interpretation regarding how to treat foreign funds under the retail forex look-through? Why or why not? Is proposed § 48.1(d) an appropriate implementation of this interpretation? Why or why not? Does this approach properly construe the extraterritorial reach of CEA section 2(c)(2)(E)? Why or why not?
Question 7.Should the OCC adopt the CFTC's and SEC's approach to verifying ECP status? Why or why not? Is proposed § 48.18 an appropriate implementation of this approach? Why or why not?
IV. Regulatory Analysis
A. Paperwork Reduction Act
Under the Paperwork Reduction Act,57
the OCC may not conduct or sponsor, and a person is not required to respond to, an information collection unless the information collection displays a valid Office of Management and Budget (OMB) control number. The amendments in this notice of proposed rulemaking do not introduce any new collections of information into the rules, nor do they amend the rules in a way that modifies the collection of information that OMB has previously approved for part 48.58
Therefore, no Paperwork Reduction Act submission to OMB is required.
5744 U.S.C. 3501-3520.
58OMB Control No. 1557-0250.
B. Regulatory Flexibility Act Analysis
Under section 605(b) of the Regulatory Flexibility Act, the regulatory flexibility analysis otherwise required under section 604 of the Regulatory Flexibility Act is not required if an agency certifies that the rule will not have a significant economic impact on a substantial number of small entities and publishes its certification and a short explanatory statement in theFederal Registeralong with its rule.
The OCC supervises 772 small entities.59
This proposal could affect approximately two of those small entities. The OCC estimates the cost to those small entities would bede minimis.Therefore, the OCC certifies that the rule will not have a significant economic impact on a substantial number of small entities.
59A small entity is defined as a bank or savings association with assets up to $175 million or a trust company with assets up to $7 million. Data as of July 20, 2012.
C. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 104-4 requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a Federal mandate that may result in the expenditure by state, local, and tribal governments, in the aggregate, or by the private sector of $146 million or more in any one year. If a budgetary impact statement is required, section 205 of the Unfunded Mandates Reform Act also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule.
The OCC has determined that its proposed rule would not result in expenditures by state, local, and tribal governments, or by the private sector, of $146 million or more. Accordingly, the OCC has not prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered.
List of Subjects in 12 CFR Part 48
Banks, Consumer protection, Definitions, Federal branches and agencies, Foreign currencies, Federal savings associations, Foreign exchange, National banks, Reporting and recordkeeping requirements.
For the reasons stated in the preamble, the OCC proposes to amend 12 CFR part 48 as follows:
PART 48—RETAIL FOREX TRANSACTIONS
1. The authority citation for part 48 continues to read as follows:
7 U.S.C. 27et seq.;12 U.S.C. 1et seq.,24, 93a, 161, 1461et seq.,1462a, 1463, 1464, 1813(q), 1818, 1831o, 3101et seq.,3102, 3106a, 3108, and 5412.
2. Amend § 48.1 by revising paragraphs (c) and (d) and adding paragraph (e) to read as follows:
Authority, purpose, and scope.
(c)Scope.Except as provided in this section, this part applies to national banks.
(d)International applicability.(1)Foreign transactions.Sections 48.3 and 48.5 through 48.16 do not apply to retail foreign exchange transactions between a foreign branch of a national bank and a non-U.S. person.
(2)Foreign funds.For purposes of paragraph (d)(1) of this section, a fund is a non-U.S. person if it is operated and managed by a non-U.S. person and all of its participants are non-U.S. persons. For purposes of this paragraph, if a participant is a fund, then the participant is a non-U.S. person only if all of its participants are non-U.S. persons.
(3)Applicability of foreign law.Transactions described in this paragraph (d) and foreign branches of national banks remain subject to applicable foreign law, including any disclosure, recordkeeping, capital, margin, reporting, business conduct, and documentation requirements.
(e)Transactions with qualified forex customers.Sections 48.3(b) and 48.4 through 48.16 do not apply to retail foreign exchange transactions between a national bank and a qualified forex customer.
3. Amend § 48.2 by:
a. In the introductory text, remove the phrase “eligible contract participant;”;
b. Remove the definition ofidentified banking product;
c. Amend the definition ofretail forex transactionby:
i. Removing, in the introductory text, “other than an identified bankingproduct or a part of an identified banking product” and adding in its place “other than an excluded instrument or a part of an excluded instrument”; and
ii. Removing, in paragraphs (2) and (3)(iii)(B), the phrase “15 U.S.C. 78(f)(a)” and adding in its place the phrase “15 U.S.C. 78f(a)”; and
d. Add the definitions for “Bank fund,”“Eligible contract participant,” “Excluded instrument,” “Insurance company separate account,”“Insured branch,”and“Qualified forex customer”in alphabetical order.
The additions read as follows:
Bank fundmeans a fund described in 12 CFR 9.18(a)(1), (a)(2), or (c) that is subject to applicable requirements of 12 CFR 9.18.
Eligible contract participanthas the same meaning as in 17 CFR 1.3(m).
Excluded instrumentmeans an agreement, contract, or transaction that is exempt from regulation under the Commodity Exchange Act, including:
(1) An identified banking product, as defined in section 402(b) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27(b));
(2) A banking product described in section 405(a) of the Legal Certainty for Bank Products Act of 2000 (7 U.S.C. 27c(a));
(3) A hybrid instrument that is predominantly a security under section 2(f) of the Commodity Exchange Act (7 U.S.C. 2(f)); and
(4) A hybrid instrument that is exempt from the provisions of the Commodity Exchange Act under 17 CFR 34.3(a).
Insurance company separate accountmeans a separate account established and maintained by an insurance company subject to regulation by a State insurance regulator or foreign insurance regulator.
Insured branchhas the same meaning as in section 3(s)(3) of the Federal Deposit Insurance Act (12 U.S.C. 1813(s)(3)).
Qualified forex customermeans a bank fund or an insurance company separate account.
4. Revise § 48.3(b) to read as follows:
(b) If a national bank or an affiliate can cause retail forex transactions to be effected for a retail forex customer without the retail forex customer's specific authorization, then the national bank may not act as the counterparty for any retail forex transaction with that retail forex customer.
5. Revise the introductory text of § 48.7(b)(1) to read as follows:
(b) * * *
(1) With respect to its active retail forex customer accounts over which it did not exercise investment discretion (other than retail forex proprietary accounts open for any period of time during the quarter or accounts belonging to a qualified forex customer), a national bank must prepare and maintain on a quarterly basis (calendar quarter):
6. Revise § 48.8 to read as follows:
(a) A national bank, other than a Federal branch or agency of a foreign bank that is not an insured branch, offering or entering into retail forex transactions must be well capitalized under 12 CFR part 6.
(b) A Federal branch or agency of a foreign bank offering or entering into retail forex transactions must satisfy the requirements of 12 CFR 4.7(b)(1)(iii)(A) and (iv).
7. Add § 48.18 to read as follows:
The OCC will not deem a national bank to have violated this part by engaging in a retail forex transaction without complying with this part's requirements if:
(a) The national bank's counterparty represented in writing that it was an eligible contract participant or a qualified forex customer;
(b) The national bank reasonably relied on that representation;
(c) The national bank had reasonable policies and procedures in place to verify the counterparty's status as an eligible contract participant or a qualified forex customer; and
(d) The national bank followed those policies and procedures.
Dated: October 5, 2012.
Thomas J. Curry,
Comptroller of the Currency.