Forex Leverage Significantly Reduced by Proposed CFTC Regulations
Controversial New Forex Rules Upset Industry
(www.forexlawblog.com)
The 193 pages of proposed rules by the CFTC do much more than simply require managers to register as forex CTAs, CPOs or IBs - they also significantly reduce the amount of leverage which is available to ALL forex traders who trade through US based FCMs and RFEDs. Obviously this is not popular in the community and is surprising in that it goes much further than an earlier NFA rule which increased the margin requirements for both the majors and secondaries (see NFA Proposed Leverage Rule which was subsequently approved by the CFTC). These new rules, along with the earlier NFA prohibition against hedging, are affecting managers’ investment programs. The following provides more details on this story.
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On January 13, 2010, the CFTC finally released its proposed new regulations, featuring the four major provisions that will significantly affect current forex players:
- Most futures commission merchants (FCMs) and retail foreign exchange dealers (RFEDs) will be required to register with the CFTC;
- Other entities that intermediate retail forex transactions will be required to register with the CFTC as introducing brokers (IBs), commodity trading advisors (CTAs), community pool operators (CPOs), and/or associated persons (APs);
- A minimum net capital requirement of $20 million will be imposed for all FCMs and RFEDs, plus an additional requirement of 5% of the amount by which liabilities to forex customers exceed $10 million; and
- A new restriction of 10:1 as the maximum leverage allowed to be offered to retail clients.
Public Complaints and Controversy Surrounding New Leverage Requirement
Although retail service providers will have 60 days to comment on the CFTC’s proposed regulations, only one day has passed since the announcement, and there has already been an outcry of complaints against the new leverage requirement specifically. The main group advocating against the new 10:1 leverage proposal (10:1 leverage means that for every $1 a trader puts down, s/he will be able to control 10 times that amount by borrowing the remaining $9 from the forex broker, in this case allowing the trader to control $10) is the Foreign Exchange Dealers Coalition (FXDC) which is composed of the top 9 U.S. FDMs: GFT, Oanda, IBFX, Gain Capital, FXCM, FX Solutions, FXDD, PFG Best, and CMS Forex.
FXDC is arguing that making the leverage requirement so low, as opposed to the 100:1 leverage allowance that has, in the past several years, become common and favorable in the retail forex community, will deter traders who are willing to invest their money in U.S. FDMs because they will no longer have the flexibility of higher leverage options. Accordingly, FXDC’s primary concern is that traders will move their accounts to offshore FDMs, such as ones in Great Britain, who do not have enforced leverage regulation and who can often offer leverages as high as 200:1. Those in agreement with FXDC’s position are arguing that as much of 90% of U.S. FDM business could be lost, essentially crippling the U.S. market altogether.
So far, the public is in agreement that the new registration requirements for forex entities (as noted above) is a positive step toward the regulation and prevention of corruption in the market. The line is drawn, however, at these registration requirements―the majority response as of today argues that not only will the new leverage rules not accomplish what they sent out to do (which is control corruption), they will have a severe affect on the growth of the U.S. off-exchange forex market and drive the majority of its business to offshore accounts where leverage is not as highly regulated.
Finally, the FXDC and Francesc Riverola (CEO and Founder of FXstreet.com) argue that the U.S. retail forex industry employs thousands of people, and if traders begin taking their accounts offshore, this will result in many lost jobs, increasing the already disastrous U.S. employment rate. Additionally, they argue that the retail forex industry’s $1 billion taxable domestic revenue is financially beneficial to the U.S., and that if U.S. accounts are sent offshore, this revenue can no longer be booked as tax money.
To Be Continued…
At this point, I have been unable to find any individuals or groups (aside from the CFTC, of course) who are arguing in favor of the new leverage rules. We will be monitoring all developments during the 60-day comment period (which ceases on March 22, 2010) and providing you with all updates as they arise.
Additionally, we will continue to monitor the conversation surrounding the new leverage rules and the controversy surrounding them.
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Other related forex law articles include:
Bart Mallon, Esq. of runs the Hedge Fund Law Blog and provides forex registration service through Mallon P.C. Mr. Mallon also runs the Forex Law Blog. He can be reached directly at 415-868-5345.
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this is going to kill my business which wont be able to get off the ground before it even starts.