Forex Industry Overwhelmingly Against Lower Leverage
Backlash Against CFTC Proposed Forex Regulations
The CFTC proposed forex regulations have sparked a backlash against the U.S. regulatory agency. The forex community has had plenty to say about the proposal which would decrease leverage from 100:1 (25:1 for non-majors) to 10:1. This leverage reduction provision has been the focus of the community even as other provisions have huge consequences for forex managers. Such provisions include the forex manager registration requirements and the requirement for forex introducing brokers to be guaranteed by an FCM/FDM/RFED. There are a number of interesting posts on the internet about the leverage reduction and we have reprinted some of the more interesting thoughts below.
Traders to Move Offshore?
The FXDC (Foreign Exchange Dealers Coalition) produced one of the more interesting pieces on the proposed regulations. The FXDC had a number of interesting arguments (full post can be found here). Below we outline the major points addressed:
- 90% expected to go offshore (to the UK, where they also have segregated accounts and contracts for differences)
- potentially lead to loss of high paying U.S. jobs in the forex industry
- BRIC countries are set to see large inflows which will deprive the U.S. of potential tax revenues
- forex fraud is better addressed through registration (of introducing brokers, for instance) than through significant leverage reduction
- forex traders will be upset with reduced leverage
The central claim is that if the CFTC enacts the 10:1 leverage reduction, that a majority of the forex trading which happens in the U.S. will go offshore. A number of other groups echoed this argument as well, including:
Dianne Fecteau in a post at her Forex Reflections blog stated:
While I understand you see increasing leverage requirements as increasing consumer protection, the result will be the opposite of what you intend because this provision would drive small retail traders to offshore brokers who are not subject to any regulation. As a result, they may be in danger of losing all their money, regardless of any specific trading decisions they make, because of unethical brokers.
Grace Chen in a post on the Daily Markets website said:
I am of the opinion that should this leverage rule be imposed or drastically reduced, the billion-dollar forex industry in the US will suffer greatly.
Michael Greenberg, in a popular post, predicts the end of the U.S. retail forex industry:
CFTC is all but done introducing the new requirements, and this Comment Period is just a bureaucratic procedure. US brokers should realize that the window to fend off this attack is long gone, and it’s time to adapt to a whole new reality – the US government doesn’t want you there, it prefers you to move to offshore locations.
PFGBest, a forex dealer, in a press release stated:
A leverage structure change in retail forex margining from 100 to 1 to 10 to 1 will force a great majority of forex business to be done offshore and thousands of U.S. jobs would be lost in the derivatives industry to European and other foreign competitors. Worse, U.S. forex customers would not be protected by the CFTC.
Predictions on Higher Leverage
While the majority of bloggers are talking about the effects the reduction would have on the U.S. retail forex industry, some bloggers do not seem to think that such a drastic reduction will actually happen.
Liviu Flesar in a post on the website Inner Fx writes:
I don’t think that the rule will become effective as it is proposed now, but the maximum leverage will be somewhere in between: 25:1 or 50:1. Maybe that’s the whole point of the shocking proposal: to make 25:1 or 50:1 sound decent and seem more reasonable, hence everyone being happy that cap was not set at 10:1.
John Forman notes a couple of reasons why the leverage reduction proposal will not be in the final regulations:
First of all, with the NFA having only adopted the 100:1 leverage limit in November there hasn’t been enough time for a real judgment on the impact of that rule change. It seems highly unlike the regulators will move without having collected sufficient data on the subject.
Second, this is only a request for opinion. You can be sure that the hue can cry from all participants against such a move will be very loud. The odds of that restriction being included in the final set of rules is very unlikely at this point, especially since it would actually make Forex leverage even less than that available in futures.
Alternatives to Lower Leverage?
Some commenters are proposing alternatives to the lower leverage requirements.
Dianne Fecteau, in the same post as above, wrote:
While I understand you see increasing leverage requirements as increasing consumer protection, the result will be the opposite of what you intend because this provision would drive small retail traders to offshore brokers who are not subject to any regulation. As a result, they may be in danger of losing all their money, regardless of any specific trading decisions they make, because of unethical brokers.
Rather than a blanket requirement of 10-to-1 leverage, it would be more appropriate to require some sort of training for those who intend to trade, even if this was only confined to risk management issues as opposed to a more general how to trade approach.
Michael Greenberg likewise suggested an alternative in a separate post from the one above:
Limiting leverage to novice traders is a great thing. Limiting leverage to ALL traders is horrible. I would recommend the CFTC to differentiate in their requirements and instead of imposing rules on all traders as if they were all identical set some kind of proficiency/experience test which will determine whether the trader can you use the leverage of his choice or be subject to a low leverage.
Personal Responsibility?
The overall thoughts on leverage reduction might best be summed up by Ryan O’Keefe who stated:
Regarding margin requirements, I am adamantly opposed to the proposed restrictions. I believe in personal choice, and personal responsibility. If you do not understand the damage you are a capable of doing through the use of high leverage, you should not be trading.
Comments to the Proposed Forex Regulations
While it is questionable as to whether the CFTC will be modifying the leverage rule (or any other aspects of the forex regulations), there is precedent for a governmental agency to change course on a proposal based on community feedback. Most recently the SEC proposed a custody rule which would require small investment advisory firms to go through a surprise audit. The investment advisory community was outraged by the proposal and provided the SEC with thoughtful comments on the issue. In the end the SEC did not adopt the onerous surprise audit requirement. Many in the forex community are providing advice on how to contact the CFTC with regard to this issue.
Mallon P.C., a law firm focused on helping forex managers register with the CFTC and become NFA members, will be submitting comments to the CFTC on this proposal.
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Bart Mallon, Esq. of runs the Forex Law Blog and also runs the Hedge Fund Law Blog. He can be reached directly at 415-868-5345.
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[...] On Friday, Dan Roth, the president and CEO of the National Futures Association met with CFTC Commissioner Jill Sommers regarding the proposed forex regulations. According to the text of the CFTC comment file regarding the meeting, the discussion primarily centered around the reduction in leverage from 100:1 to 10:1 which has created a backlash from the retail spot forex industry. [...]
[...] Forex Industry Overwhelmingly Against Lower Leverage [...]
[...] Forex Industry Overwhelmingly Against Lower Leverage [...]
[...] Forex Industry Overwhelmingly Against Lower Leverage [...]