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Publication date: 23 June 2011
Author: Eleanor Hill, Editor, FX-MM
Dodd-Frank ‘grey area’ to shut down precious metals trading?
Last Friday, FOREX.com reportedly contacted its customers with some quite shocking news (that has being doing the rounds on the rumour mill this week). According to the firm, over the counter trading of precious metals, including gold and silver, by US residents is going to be illegal from 15th July 2011 – under the Dodd-Frank Act.
As a result, the firm is closing down its metals operation and apparently all open metals positions must be closed by 5pm ET on 15th July. Any open XAU or XAG positions that remain open at the firm’s cut-off point will be automatically liquidated.
So what is going on here? Surely they wouldn’t be winding down their metals trading without feeling a veritable regulatory threat? Assuming the team at FOREX.com have done their homework, why are similar firms not doing the same and why has there not been more noise about this generally?
A spokesperson for FOREX.com cited their interpretation of Section 742(a) of Dodd-Frank as the reason for them shutting down their operations. The rule in question prohibits, “…a transaction in any commodity with a person that is not an eligible contract participant or an eligible commercial entity, on a leveraged or margined basis.”
Reactions from the market on this move have been mixed. Some industry commentators feel that FOREX.com have largely overreacted or misinterpreted the rules. A common response has been to say that Section 742(a) does not apply if the transaction in question results in actual delivery within 28 days.
However, given that most spot metals trading contracts fail to meet this requirement, it is likely that such activity will become extinct in the US – well, that is what the lawyers are saying anyway.
In other words, since the CFTC has not issued any specific rules to regulate OTC precious metal spot contracts, any transactions that are carried out off-exchange after the mid-July deadline will be in a very ‘grey area’. No surprises there then!