The Role of the CFTC in Preventing Forex Fraud

Chris Lee

Few official organizations involve themselves in the regulation of the huge, global forex market that makes up the largest financial market in the world and sees a daily turnover on the order of $3 trillion.

Nevertheless, one of the most prominent government regulatory agencies which oversee and helps regulate the retail forex market to some degree in the United States is the U.S. Commodities Futures Trading Commission or CFTC.

See the increasing numbers of enforcement action from the CFTC.

The CFTC: A Brief History

The CFTC was the result of legislation originally enacted in 1936 called the Commodity Exchange Act. This law prohibits fraudulent conduct in the trading of futures contracts. The original Commodity Exchange Act replaced the Grain Futures Act of 1922.

In 1974, the U.S. Congress amended the Commodity Exchange Act in order to provide a better regulatory framework for trading in commodity futures contracts. This subsequently created the CFTC to replace the former Commodity Exchange Authority.

The CFTC’s stated mission consists of protecting futures market participants and the general public from fraud, manipulation and illegal and abusive practices related to the trading of financial and commodity futures and options.

The agency is also charged with maintaining the integrity and soundness of the futures and options markets in the United States.

The commission consists of five people appointed by the President of the United States to serve staggered five year terms. The President also designates one of these five Commissioners as the Chairman of the CFTC.

CFTC Jurisdiction, Market Oversight and Enforcement

The CFTC operates and performs regulatory oversight in the United States. A company not based in the United States does not fall into the regulatory jurisdiction of the CFTC if it does not do business with U.S. based clients.

Hence, a customer of these companies would not have any protection or legal recourse — at least from the CFTC — if a problem arose and there was a dispute that required litigation to resolve it.

Furthermore, new regulations proposed by the CFTC as of January of 2010 would severely limit forex trading in the United States, if passed. One of the proposed regulations — capping leverage on forex trades to 10:1 — is perhaps the most unpopular new regulation among retail forex traders.

The proposed regulations also include new rules which would require all retail forex brokers doing business with clients based in the United States to register with the CFTC as “retail foreign exchange dealers.”

This would obligate them to fulfill certain capital requirements to mitigate their risk as a forex counterparty, which certainly seems like a good thing from a retail trader’s perspective.

Also, any “Introducing Brokers” or IBs — those acting as intermediaries between brokers and customers — would be required to sign exclusivity agreements with the dealers they do business for. The dealer would also have to vouch for the introducing broker.

The CFTC Division of Market Oversight

The CFTC’s Division of Market Oversight is currently responsible for overseeing the trade execution facilities of regulated exchanges. The same department is also responsible for market surveillance, investigation, trade practice and rule enforcement reviews and investigations.

In addition, the Market Oversight Division also reviews product and market related rule amendments and market and product related studies.

The CFTC’s Enforcement Division

The Enforcement Division of the CFTC has the responsibility of investigating and prosecuting alleged violations of the Commodity Exchange Act and the regulations of the CFTC.

The agency has the authority to file complaints in U.S. District Courts, as well as before the agency’s administrative law judges. The CFTC often refers cases to the Justice Department for prosecution.

In addition, the CFTC provides support for case development and expert help in related cases to U.S. States Attorneys and prosecutors throughout the United States. The agency also routinely advises the public about fraud in the markets.

New Proposed CFTC Regulations May Hamper U.S. Retail Forex Trading

While the CFTC wields a considerable amount of influence in the U.S. capital markets, outside of the United States, the agency cannot enforce its regulations or do more than advise the authorities in the country where the a fraud is being perpetrated.

The new regulations proposed by the CFTC will undoubtedly make forex trading safer for U.S. residents. Nevertheless, such safety will come at a steep price, since limiting leverage on forex trades to 10:1 will severely impair the retail forex market in the United States and may send many traders looking for another market to speculate in.

While many U.S. residents will undoubtedly consider opening accounts with brokers in other countries to continue trading with the increased leverage they are used to, legislation may soon follow which might impede Americans from reaping the increased risk taking benefits offered by such foreign accounts.

The CFTC Has Made Forex Trading Safer and Fought Forex Fraud

Nevertheless, the CFTC has made trading in the forex market safer for many people and has also investigated and prosecuted a number of forex fraud related cases. In some cases, defrauded investors have even recovered part or all of their funds thanks in large part to the CFTC’s legal efforts and involvement in a case.

Even though many forex brokers and traders find the proposed regulations too stringent, they will undoubtedly reduce the amount of fraud perpetrated in the forex market — at least the fraud aimed at U.S. residents.

The CFTC continues being one of two regulatory agencies that oversee the forex market in the United States and one of the few regulating agencies worldwide. While a great many honest forex brokers exist, having a regulating agency overseeing the broker’s activities helps keeps forex brokers relatively honest.

CFTC’s warning signs of forex fraud.

Read about new rules and regulations by CFTC and NFA.

Read about one of the most spectacular Ponzi schemes ever, where $12-20 billion of investor money was lost.

Chris Lee

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