CFTC to enact Dodd-Frank rule aimed at retail-commodities trading

A rule aimed at protecting small investors who buy U.S. commodity contracts from retail brokers will go into effect tomorrow.

The Retail Commodity Transactions rule from the Dodd-Frank Act will allow the agency’s enforcement lawyers to pursue brokerages that offer custom-made futures contracts, not traded on exchanges, that are sold under the guise of spot contracts, according to documents posted on the U.S. Commodity Futures Trading Commission website.

“The people who were offering leverage to retail customers were skating in a gray area,” Frank McGhee, the head dealer of Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The government feels a lot of these shops don’t have the actual metal behind the trade. They’ll be forced to go with a regulated environment, and this will provide some customer protection.”

Speculative demand has helped fuel a surge in commodity investing and prices during the past decade. About $9.61 billion went into commodity funds in the first quarter, more than triple the $2.77 billion a year earlier, EPFR Global, a Cambridge, Massachusetts-based research firm, said in a report in April. Gold futures surged to a record $1,594.90 an ounce yesterday on the Comex in New York.

The CFTC and the Securities and Exchange Commission are finalizing Dodd-Frank rules aimed at reducing risk and boosting transparency after largely unregulated trades helped fuel the 2008 credit crisis.
–Bloomberg News–