Forex regulation in spotlight: regulatory ambiguity resulting from the Zelener decision is one of the major issues the CFTC is addressing in its reauthorization this year. The NFA and forex firms weigh in.

When the Commodity Futures Trading Commission (CFTC) goes through its periodic Congressional reauthorization this year, retail forex, in particular the Zelener decision, will be at the fore-front of review.

The Zelener decision produced confusion in determining when a contract is a futures contract. In CFTC vs. Zelener, the U.S. Court of Appeals for the Seventh Circuit ruled that the forex contracts offered by the defendant were spot, rather than futures contracts. Because the CFTC's jurisdiction is limited to futures contracts, the court held that the CFTC lacked jurisdiction to bring an enforcement action against the forex dealer or its alleged agents for fraud.

In the Commodity Futures Modernization Act of 2000, Congress provided a clear distinction between retail participants in foreign currency transactions, who would be subject to regulation and those participants who would not. Although the CFTC's jurisdiction on off-exchange forex contracts was clarified by the CFMA, that jurisdiction depends on a determination that a forex contract is a futures contract.

"The NFA has taken a very visible role there; we firmly believe Congress should do something that essentially overturns or corrects the problems that were caused by the Zelener decision," says Dan Driscoll, COO at the National Futures Association (NFA).

It's also important to remember that while the Zelener decision is related to a foreign exchange case, that did not limit its applicability to foreign exchange, so the NFA believes the fix has to go beyond forex to all commodities."

ZELENER "FIX"

Registered forex firms are keeping an eye on the Zelener issue as something the CFTC's reauthorization of 2005 needs to resolve.

"Firms would be interested in a Zelener fix that clarifies [that the contracts in the Zelener case] are indeed under CFTC jurisdiction, then it would require firms not currently registered to become registered. And if solicitors [of these contracts] are brought under CFTC jurisdiction those firms would have to make a choice, 'Am I going to stay in this business and go through the registration process and be subject to CFTC and probably NFA jurisdiction, or am I going to get out of that business.' Those are the major factors.

"It's bad public policy to allow people to set up boiler rooms and bucket shops that offer these things that look like, smell like and act like futures contracts. And then cleverly being able to work their contracts by saying 'you can't come after us because it's not a futures contract.' That is in our view what it comes down to," Driscoll says.