The marketplace

A spot forex contract is one that settles no later than two business days later than the day the “contract” is entered into, and the overwhelmingly majority are settled on a daily basis. Positions are rolled over from one day’s settlement to the next. Although a position in a particular currency can be held for a long time (theoretically, indefinitely as long as there is cash in the account to support the position) — technically the contracts are settled in the spot market.

The definition of spot contract is vital for tax and regulatory purposes. The spot forex market is not overseen by any U.S. regulator. The Commodity Futures Trading Commission’s (CFTC) position is that it does not have the authority to regulate the spot forex market hence, there is no effective regulation of the traders and advisers. Forex brokers, however, are regulated by the CFTC as Futures Commission Merchants (FCMs; similar to broker-dealers in securities) or they are banks or other financial institutions regulated by a banking regulator.

As a result, what regulation that exists in this market is imposed by the FCMs because they have their own risks. For example, if a spot forex trader wants to manage trading accounts for others, the resulting relationship (adviserclient) is not directly regulated by anyone. Rather, the forex broker, as an FCM or bank, is required to give the client the appropriate written disclosures, which are similar to those that would be furnished by the adviser if he were a Commodity Trading Adviser (CTA) regulated by the CFTC.

As a result, from a regulatory standpoint, the spot forex adviser is in a unique regulatory spot — not effectively regulated by anyone, apart from state law rules governing the duties of anyone who manages other people’s money.