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In a move to heed to lobbying parties, the U.S. Securities and Exchange Commission (SEC) decided to adopt a temporary rule (known as Rule 15b12-1T) that would suspend the implementation of Section 742(c) of the Dodd-Frank Act until July 16, 2012.

What exactly is Section 742(c)?

“…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…”

In plain English, the clause prohibits brokers to execute retail foreign exchange futures and options with individuals or companies that have less than 10 million USD in assets, and those not registered as futures or securities professionals.

Luckily, lobbyists were able to convince the SEC with their pleas and puppy dog eyes to allow them to carry on with their retail forex business transactions… for now. They insisted that that the Dodd-Frank Act still remains vague and it would be best to put it off until regulators come up with more comprehensive rules.

For instance, they cited that the Act also prohibits SEC-registered broker-dealers to enter transactions in behalf of their clients. Some brokerage firms argued that the implementation of the law would mean that “legitimate” trades would also be considered illegal. How?

You see, a few investors wishing to acquire foreign stocks sometimes ask broker-dealers to make the necessary currency exchange in their behalf. Perhaps they’re just into stocks and are intimidated by the forex market.

However, if the SEC keeps brokers from making the forex transactions for their clients, investors who aren’t used to the volatility of the market would have to be exposed to foreign exchange risk.

Skipping the fist fights and trash talking, the SEC and brokers came to a compromise. Brokerage firms will still be allowed to facilitate retail forex contracts until the SEC comes up with a more concrete set of rules to regulate the market.

If you will recall, the Dodd-Frank Act was signed into law to increase accountability for financial firms and increase consumer protection from all kinds of abusive financial practices.

The clause is the policymakers’ response to concerns over the escalating numbers of fraud and over-leveraging in the forex market. However, some market junkies are worried that perhaps financial authorities are being too restrictive.

Now don’t worry forex friends–spot and forward forex contracts wouldn’t have been affected if the implementation pushed through. But keep in mind that the limitations would’ve still weighed down on market liquidity. Consequently, reduced liquidity may make the markets even more volatile, which can be reason enough to convince a handful of investors to exit spot FX markets. Yikes!

Some naysayers are concerned that this that this could be the beginning of the end of retail forex trading in the U.S. What’s your take on it?