Shipkevich Bitcoin and ICO Attorney
Felix Shipkevich June 22, 2011

Forex.com, via a blogger at ZeroHedge, caused an internet frenzy early this week when they sent notices to customers that, as of July 15th, they would no longer offer retail over-the-counter precious metal trading. These bespoke spots were placed under CFTC jurisdiction by the Dodd-Frank Wall Street Reform and Consumer Protection Act last year. Since the Commission has issued no rules governing OTC precious metals, and did not include the relevant provision (Section 742 of the Dodd-Frank Act) among those granted relief until December, these trades will become illegal when Dodd-Frank takes effect on July 16th.

Section 742 of the Dodd-Frank Act places “any agreement, contract, or transaction in any commodity that is entered into with, or offered to (even if not entered into with), a person that is not an eligible contract participant or eligible commercial entity; and entered into, or offered (even if not entered into), on a leveraged or margined basis, or financed by the offeror, the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis” under the CFTC’s authority. This has been interpreted to mean retail OTC precious mental spot transactions.

However, there are some critical exemptions to this Dodd-Frank rule. Any contract that will be physically delivered in 28-days or is otherwise an enforceable obligation to deliver will not be touched (countering blog-induced hysteria that “OTC” refers to the nonfinancial definition of over-the-counter, and that buying actual coins over anyone’s physical counter will be illegal). Furthermore, eligible contract participants may also continue to trade spot contracts off-exchange. However, any retail traders must find an exchange to trade these precious metal contracts on. Warns NFA vice president Dan Driscoll, “In order to trade, it needs to be done in a exchange, or it can’t be done at all…[Firms that] continue to offer these run the risk of government action.”

Since the Zelener Case, when the CFTC lost much of its anti-fraud enforcement authority against precious metal rolling spot scams, the Commission has been itching to crack down on this niche industry. But is it is unexpected that the CFTC is shutting down the entire off-exchange retail market. It will be interesting to see if these retail OTC precious metals trades will move oversees.

Read more about this Dodd-Frank consequence.
Creative Commons License photo credit: BullionVault

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