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Hedge funds trading FX could be caught out by Dodd Frank
May 26, 2011 by Charles Gubert
Non-US hedge funds trading in FX could be forced to find new US counterparties if they want to avoid being inadvertently fined for non-compliance by US regulators under some of the more obscure provisions in the Dodd Frank Act.
Under Dodd Frank, hedge funds trading FX with a US investor base constituting more than 10% of the overall investors, would fall under US jurisdiction. However, if one single US investor has less than $10 million in investable assets, that fund will be classified as a retail FX fund. This is because Dodd Frank states all investors must be eligible contract participants – not just the fund.
If an FX fund has investors that fail to meet the $10 million threshold, that fund would therefore not be considered an eligible contract participant. This extra-territorial legislation could force some non-US funds to change their counterparties and use certain US Futures Commission Merchants (FCMs) or other US registrants.
Gary Alan DeWaal, senior managing director and group general counsel at prime brokerage firm Newedge, said most non-US FX hedge funds seemed unaware of these obscure, burdensome requirements. “Most hedge funds would not think that they are retail funds. However, all it takes is one US client, who fits into this bracket to make them a retail FX fund. I think a lot of hedge funds could be forced to either throw out these clients from their funds or change their counterparties,” added DeWaal.
As things stand, numerous Dodd-Frank provisions look set to be implemented within 60 days unless Congress, the Securities and Exchange Commission or the Commodity Futures Trading Commission raises any major objections or queries