With short-term interest rates around the world held at extremely low levels, many have turned to FX. It used to be that FX was relatively stable and volatility took place in interest rates. Now with quantitative easing, rates are basically zero and without volatility, FX is the place to go to. In spite of borderless trading, London still dominates the FX market.
FX is now about e-distribution, e-risk and managing the flows.
The retail forex exchange market in the US has suffered a reputation as a place where unseemly operators took advantage of naïve investors or traders.
Hence we saw a regulator proposing rules to protect small FX traders in particular. We saw a torrent of criticisms in response. Egged on by forex dealers, most of the letters received by the CFTC focused on one aspect of the proposal: Leverage.
Borrowing money to trade is the bread and butter of day-to-day FX trading. To them, ‘putting a cap on leverage is interference with the free-market system and capitalism’.
One commentator shared this sentiment: ‘You are telling the investor how to invest their money. The first steps to communism.’
The initial proposal of the commission was to cap leverage at 10:1. However, the final ruling which is to take effect on October 18, 2010, now caps leverage as follows:
1.Traders will be able to borrow up to 50 times collateral for the main currency pairs eg USDYEN, EURUSD
2.For other currencies, they can borrow up to 20 times collateral
The CFTC was aware of the prevalence of retail forex cheats as far back as the 1990s but while the commission had been able to go after fraud artists in FX derivaties, it had no jurisdiction in spot retail FX. The US Congress closed the loophole in 2008 and reaffirmed the commission’s authority with the passage of the Dodd-Frank financial reforms in July.
The resulting rules will do more than reduce leverage, they will require retail FX dealers to register with authorities and hold liquid assets covering their obligations to customers in bank or brokerage accounts and to meet the new leverage limits. They also require registrants to maintain records of customer complaints and disclose the percentage of non-discretionary retail accounts that turn a profit.
After fighting lower leverage, FX dealers are now resigned to the new regulations. One said: ’With the creation of a regulatory framework, the idea is to help the business enter the mainstream.’
Some smaller operators have been forced out of business after the National Futures Assn in 2009 issued its own rules raising FX dealers’ minimum capital from $5M to $20M.
Small FX traders can now trade ‘micro’ FX futures as launched by CMC Group in March 2009 that are one-tenth the size of its benchmark FX futures contracts, making them accessible to individuals. They can also trade on currency moves with exchange traded funds (ETF) that invest in currency futures on their behalf.
Wall Street banks offer forex trading platforms and Finra, the regulator for broker-dealers has proposed limiting leverage to 4:1, saying: ‘That level of leverage is for more consistent with the overall services and products provided by broker dealers.
The Securities and Exchange Commission has a mandate under the Dodd-Frank act to implement separate FX rules.
BEADY EYE: Regulators have to target bad practice but not scare off investors (traders especially).
Idkit aka Ana