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Thread: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

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    Default 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Starting July 15th, the ability for US investors to trade 'over the counter' physical precious metals, foreign exchange ( i.e. currencies ), and certain other commodities is going to be strictly limited to 'qualified investors' only ...

    from

    (snip)Accredited Investor Qualifications

    Section 413(a) of the Act alters the financial qualifications of who can be considered an accredited investor, and thus a qualified as eligible participant (“QEP”). Specifically, the revised accredited investor standard includes only the following types of individuals:

    1) A natural person whose individual net worth, or joint net worth with spouse, is at least $1,000,000, excluding the value of such investor's primary residence;

    2) A natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with spouse in excess of $300,000 in each of those years and a reasonable expectation of reaching the same income level in the current year; or

    3) A director, executive officer, or general partner of the issuer of the securities being offered or sold, or a director, executive officer, or general partner of a general partner of that issuer.

    Based on this language, it is important to note that the revised accredited investor standard only applies to new investors and does not cover existing investors. However, additional subscriptions from existing investors are generally treated as requiring confirmation of continuing investor eligibility.(snip)


    (snip)"From: FOREX.com <[email protected]>
    Date: Fri, Jun 17, 2011 at 6:11 PM
    Subject: Important Account Notice Re: Metals Trading
    To: xxx

    Important Account Notice Re: Metals Trading

    We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

    In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

    We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.

    We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team." (snip)

    (snip)Elimination of OTC Forex

    Effective 90 days from its inception, the Dodd-Frank Act bans most retail OTC forex transactions. Section 742(c) of the Act states as follows:

    …A person [which includes companies] shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe…

    This provision will not come into effect, however, if the CFTC or another eligible federal body issues guidelines relating to the regulation of foreign currency within 90 days of its enactment. Registrants and the public are currently being encouraged by the CFTC to provide insight into how the Act should be enforced. See CFTC Rulemakings regarding OTC Derivatives located at the following website address, under Section XX – Foreign Currency (Retail Off Exchange). It is essential that OTC forex participants seek professional help to discuss possible operational and regulatory contingency plans.

    Elimination of OTC Metals

    As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]from entering into, or offering to enter into, 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. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC to pursue anti-fraud actions involving rolling spot transactions and/or other leveraged forex transactions without the need to prove that they are futures contracts. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.

    The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.(snip)


    A strict interpretation of the new Dodd-Frank law would tend to support the conclusion that any middle class investors who open precious metals / foreign exchange / commodity trading accounts before the July 15th effective date of the new law will receive some 'grandfather' protection. After that date, only 'qualified investors' i.e. persons who can prove that they have a $1 million net worth or a $200k+ annual income will be allowed to trade precious metals / foreign exchange / certain other commodities.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Wow... Talk about a total crock of bs!

    "Lets take standard currency & tell people if they aren't already rich they can't trade it!"

    Helping the rich get richer, & keeping the poor people poor.

    What a joke.
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    Veteran Member Krill_'s Avatar
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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements.
    The characterization is a little disingenuous when most people have no clue what the context is. But it boils down to the bold part if you want to wrap all OTC commodity trading into one ball and try to understand what's going on here, i.e. that virtually none of the trading is for actual delivery of a product.

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    Banned Melonie's Avatar
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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    "Lets take standard currency & tell people if they aren't already rich they can't trade it!"

    Indeed it goes beyond just currency futures trading, also banning precious metals futures trading, commodity futures trading etc.

    Helping the rich get richer, & keeping the poor people poor.
    well, the 'poor' people would still be allowed to directly purchase foreign currencies, precious metals, and various commodities on a 'cash' basis ( less than 28 days delivery ). However, this severely restricts potential profitability since their ability to utilize 'leverage' is removed. Right now the ability to profit from a price move in $10,000 worth of Euros / gold / oil costs $1000 or less thanks to 'leverage'. In the future it will cost 'non-qualified' investors the full $10,000 ... and also force the person to accept delivery of physical Euro notes, gold bars, or oil barrels ... and also pay 'markups' ( or transaction fees or whatever you want to call it ) on the physical commodity purchases and sales ... which may also now become subject to state and local sales taxes since actual physical commodity transactions will be taking place !!!

    In reality this will chase the 'non-qualified' middle class investors towards mutual fund and ETF shares instead of futures contracts ... which will reduce their ability to take advantage of 'pure plays' as well as reduce their available leverage to 2:1 ( and perhaps 3:1 in a very few cases ).


    if you want to wrap all OTC commodity trading into one ball and try to understand what's going on here, i.e. that virtually none of the trading is for actual delivery of a product.
    Absolutely !!! But the trading of 'paper' currencies / precious metals / commodities with 'leverage' is where the lion's share of the profits lie. These new regulations essentially cut off the ability of 'non-qualified' investors to cash in on such futures trading income, as well as forcing the 'non-qualified' investors to pay a management fee to mutual funds and ETF's if they want to participate at all in currency / precious metal / commodity investing.

    The 'gold foil hat' crowd would point out that, in any highly inflationary future US economic environment, if history is any guide it will be currency / precious metal / commodity investment segments that are about the only segments that will produce major profits. Dodd-Frank effectively cuts off 'non-qualified' investors from equally participating in those potential major profits ( thus leaving that profit potential as the exclusive province of 'qualified' investors ) ... on the assumption that people earning less than $200k a year are either too stupid or too irresponsible to be trusted regarding the loss risks they are assuming when making such currency / precious metals / commodity futures contract investments.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Quote Originally Posted by Melonie View Post
    Dodd-Frank effectively cuts off 'non-qualified' investors from equally participating in those potential major profits ( thus leaving that profit potential as the exclusive province of 'qualified' investors ) ... on the assumption that people earning less than $200k a year are either too stupid or too irresponsible to be trusted regarding the loss risks they are assuming when making such currency / precious metals / commodity futures contract investments.
    That's not the case at all...

    The goal is curb OTC commodity speculation by funneling all trades through accredited clearinghouses so there is a paper trail with who is taking what positions.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    ^^^ obviously that is the STATED goal. However, Dodd-Frank cannot 'reach' commodity markets in Europe or Asia. Thus commodity speculation by the 'big boys' will remain as opaque and unscrutinized as it has always been ... US commodity brokers will lose trades / commissions / profits to European and Asian brokers ... and American 'little guys' will be prevented from cashing in on the commodity futures market !!!

    As is usually the case, Dodd-Frank will achieve the typical outcome for 'popular' but ill conceived new gov't regulations ... failing to actually achieve the stated intent, while at the same time hurting the very same people it was intended to help !!!

    From the NY Times ...

    (snip)"Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.

    The cutback plans are emerging even as Wall Street firms have mostly recovered from the financial crisis and are reporting substantial profits again. But those profits are not as big as they were before the crisis, and it is expected that in the coming months it will be even more difficult for firms to make money. Worries about debt in Europe and the shape that the Dodd-Frank financial overhaul rules will ultimately take, combined with the usual summer doldrums, are prompting banks to act.(snip)


    Dodd-Frank makes for good mainstream news coverage during election years though ... at least for American voters who would not have ever invested their money in anything other than an employer 401k, and who do not understand the 'unintended consequences' until ( like earlier regulations ) they have had time to circle around and bite those Americans squarely in the a$$ ! And of course there have been and always will be a significant number of Americans who can't / won't acknowledge the link between said new gov't regulations / policies and their own worsening financial condition / future. Instead they are content ( and 'steered' by certain parties ) to place the blame on 'greedy' oil companies or 'traitor' US corporations or 'fat cat' bank officers.

    ~
    Last edited by Melonie; 06-19-2011 at 10:32 AM.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Quote Originally Posted by Melonie View Post
    (snip)"Wall Street plans to get smaller this summer. Faced with weak markets and uncertainty over regulations, many of the biggest firms are preparing for deep cuts in jobs and other costs.
    In other news, vampire population shrinks? Must have glossed over the specified reductions in business like proprietary trading, which you'd really have to pretzel to characterize as an attack on the little guy.

    I understand that you're philosophically opposed to regulation Melonie, and that's fine, but obfuscating the facts to fit into an argument doesn't help anyone. In short Joe Two Story in the burbs isn't taking one to the nuts because he can't directly trade electronic gold futures now.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    In short Joe Two Story in the burbs isn't taking one to the nuts because he can't directly trade electronic gold futures now.
    Absolutely true. As I myself posted, Joe SixPack has been taking it in the nuts all along by his 401k forcing him to put his money in stock and bond and money market investments with no commodities being available.

    However, while far fewer than Joe SixPacks, there are still quite a number of middle class investors who HAVE been investing in currencies / precious metals / commodities ( very successfully over the past 2 years ), and who wish to remain middle class. Taking away their trading option essentially places them in a similar situation as Joe SixPack ... i.e. picking from a menu of 'managed' investments that all offer lower potential returns.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    I'm not a metals guy, but wasn't the point here to increase transparency by making people trade on exchanges instead of getting screwed by shady OTC deals? That way you get a fairer price than if you just ask a big institution how much they want to give you.
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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Quote Originally Posted by Krill_ View Post
    In short Joe Two Story in the burbs isn't taking one to the nuts because he can't directly trade electronic gold futures now.
    Why do gold futures OTC when there are like half a dozen big exchanges trading standard gold contracts now? OTC is for people who like losing money.
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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    there are like half a dozen big exchanges trading standard gold contracts now
    ^^^ yes there are ... and they also trade standard currency contracts, standard commodity contracts etc. However, once the new Dodd-Frank rules take effect, US citizens who do not earn the $200k a year required to be considered a 'qualified' investor won't be allowed to trade on these exchanges.


    but wasn't the point here to increase transparency by making people trade on exchanges instead of getting screwed by shady OTC deals
    ^^^ yet again, any 'major player' who does not want their transactions to be 'transparent' will still be able to make their 'opaque' trades on any of the foreign futures exchanges that Dodd-Frank cannot reach !!! This means zero increase in 'transparency', with the unintended side effect of lost trades / commissions / jobs by US futures exchanges and commodity brokers.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Well, I admit to being in a little over my head here since I've never done OTC trading of any kind, but I still don't see how the theoretical little guy is getting hosed. I literally don't know a single person who does off exchange trading as part of their personal investments. As was pointed out you can still do off exchange trading through for the purpose of taking delivery of contracts, i.e. actually buying something like gold.

    It seems like are way too many 24/7 electronic, off exchange platforms burgeoning an insane quantity of derivatives around commodities. How is this not part of the next bubble economy and why does the US need to be the major player in it? Let another country be the epicenter of the next big meltdown.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Quote Originally Posted by Melonie View Post
    ^^^ yes there are ... and they also trade standard currency contracts, standard commodity contracts etc. However, once the new Dodd-Frank rules take effect, US citizens who do not earn the $200k a year required to be considered a 'qualified' investor won't be allowed to trade on these exchanges.
    The article you link seems to me to say the rule is only about OTC trades, not exchange-cleared trades. If it is true however that the new rules will also stop mums and dads from trading commodities, currencies and metals on the exchange, then that's terrible.
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    ^^^ yes the 'qualified investor' mandate applies not only to OTC trades, but "The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin". If you eliminate leverage or margin, you are confined to cash transactions for direct physical commodity purchuases ( for physical delivery within 28 days ) and sales. That would certainly appear to eliminate retail futures contracts altogether for anyone who does not meet the 'qualified investor' criteria of $200k annual income or $1 million net worth. I assume that the extensive cites of OTC by one author in my news blurb snippet i.e. ForEx.com was the result of their business being almost entirely composed of OTC trading ... and not meant to imply that Dodd-Frank restrictions are strictly limited to OTC ( as illustrated by the above quote ).

    By inference, this still allows mom and pop to buy physical euros, physical gold, physical crude oil etc. ... IF they have the cash up front. It also still allows mom and pop to buy shares in ETF's and mutual funds tied to those currencies / precious metals / commodities ( since the ETF or mutual fund manager is actually conducting the futures contract trades ). But it will freeze out mom and pop from direct currency / precious metals / commodity futures trading. As further background I would again point out the existance of the 'Zelener Fix' in the Farm Bill ( sketchily referred to in my original news blurb snippet ), which specifically exempted farmers from having to meet 'qualified investor' status in order to ( continue to ) trade agricultural futures contracts as part of their farming business. Of course, unlike non-qualified investors who must pony up cash ( which they may not actually have ) to settle underwater futures contracts, these farmers are able to actually deliver corn / soybeans etc. to settle their corn / soybean etc. futures contracts .

    I will also reiterate the thread title's point ... that between now and July 15th it's still possible for a non-qualified investor to open a new futures trading account ... which should enjoy some element of 'grandfather protection' for some time period after July 15th. However, this will not prevent certain exchanges i.e. the Forex.com example from making the strategic decision to exit the business altogther as a result of not being able to expand their customer base.


    How is this not part of the next bubble economy and why does the US need to be the major player in it? Let another country be the epicenter of the next big meltdown
    American 'qualified investors' will still be able to make these trades ... which probably means that 95-98% of the total dollar volume of these trades will continue in the future, with virtually the same bubble effects and virtually the same meltdown risk. Dodd-Frank is only closing the door on the 2-5% of total dolloar volume of trades now made by non-qualified investors i.e. mom & pop.

    ~
    Last edited by Melonie; 06-23-2011 at 03:05 AM.

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    Default Re: 'last chance' for middle class investors ( Dodd-Frank bans on trading )

    Quote Originally Posted by Melonie View Post
    Dodd-Frank is only closing the door on the 2-5% of total dolloar volume of trades now made by non-qualified investors i.e. mom & pop.
    Again the door isn't being closed at all...more like moved from completely wide open to almost completely wide open. All that's being done here is they want the small trades being moved to exchanges with checks on the "eligible participants" trading off exchange contracts (and by extension anyone brokering through said participants). If as a result of Dodd-Frank small off exchange trading moves overseas it's not like a giant operation is packing up; the location of a server moves.

    Also, since none of the congressional Republicans who vehemently opposed the bill are picking up on this as an excuse for tactical defunding of regulatory enforcement, it leads me to believe there's no juice here.

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