This article was originally published in Janurary 2010. To get the most recent and disheartening facts on the sad state of U.S. retail forex read Forex Vs. Dodd-Frank Wall Street Reform Act

The new proposed regulations by the CFTC which would limit spot forex leverage to 10:1 is the biggest event in U.S. retail forex history. While we are awaiting the outcome now that the time for public comments has ended, it does appear that the CFTC is listening to the overwhelming majority of traders who are against this proposal. It does seem like the CFTC is attempting to reconsider their initial proposal and has met to re-discuss it after receiving over 6,000 negative comments (the most feedback they’ve received for anything, EVER). Even lawmakers in Congress seem bewildered by the proposal with a quote from House Agricultural Chairman Colin Patterson saying “I don’t get what we are trying to accomplish here by lowering this to 10 to 1,” saying the proposal appears to put investors’ money even more at risk. “Who are you trying to protect here?”

How did we get to this point?

I feel it is important to give some context to the situation we are currently in here, but the history of regulation in the U.S. foreign exchange market is a long and complex one, so I will be brief. In 2004 the federal court in the U.S. ruled that the CFTC (Commodity Trading Futures Commission) could not target fraud cases in the OTC forex markets because they were outside its remit. Then in 2008 the U.S. Congress passed legislation that returned regulatory authority of the forex markets back to the CFTC after a flood of cases involving fraudulent foreign exchange dealers targeting retail investors.

That’s when the NFA (National Futures Association) came into being. Andrei Pehar, Chief Currency Strategist at  fxKnight.com says “What happens is the NFA suggests these rules, and the CFTC accepts and enacts them (the CFTC fully admits forex is not their area of expertise, which is why they originally empowered the NFA to take this area over). The problem is that the NFA is NOT a consumer protection agency (their website is .org, not .gov) – they are a trade organization made up of, funded by, and created to further the interests of… futures brokers. National Futures Association. And there’s no denying that retail forex competes directly with their members’ business interests… It gets worse! Starting April 1st, the NFA intends to try and start legislating across borders, by forcing offshore brokers and IBs to register with them as well.”

What CFTC proposes

To achieve regulation and crack down on the tremendous amount of scams, the CFTC wants to include the ruling passed by the NFA last year that  all foreign exchange dealers are registered with a regulator. This has been welcomed by dealers, so too has the proposal to impose a minimum capital requirement of $20 million dollars in order to be a registered broker in the U.S. which acts as a capital cushion to protect consumers and is an important step towards regulating the industry.  Also in November of last year the NFA already reduced the leverage ratio for foreign exchange trades from 400:1 to 100:1. But now the proposal to slash the amount of leverage from 100:1 to 10:1 has unleashed an outcry from brokers and dealers alike.

This new CFTC ruling , if enacted, would mean that a client would need to increase the amount of money they post in a security deposit account held with their dealer to 10 percent of the value of each trade from the current level of about one percent. This would mean that for every $10 you want to trade on foreign exchange you have to post $1 as a security. This move was unexpected because leverage limits were dramatically reduced six months ago by the NFA, the CFTC’s little stooge  to the forex industry in the U.S.

On January 20th, an FXCM client wrote: FXCM sent a letter out to all their clients actually stating they oppose this and asking them to write to the CTFC. I’m amazed… I’ve heard individual people who work there grumble about the rules (off the record), but I have never seen a big company like this take such a public stance on an issue.

I’m still waiting on FXDD to do the same, especially since just 2 months ago they received their licensing with the NFA. Must be great to get a license with the same group that’s going to put you out of business in just a few more months!

So what’s being done about this?

The Foreign Exchange Dealers Coalition (FXDC), which is made up of nine major firms, is working on a unified response to the CFTC’s proposals. The coalition is trying to ensure a balance between protecting the consumer whilst not stifling business. The FXDC affirms on its statement that the U.S. $1 billion industry is in danger if CFTC proposal passes. “This revenue is money generated from a product that is in many ways an export. Furthermore, as capital markets open in the BRIC countries the number of new accounts that will flow out of places like China and India will lead to huge job and revenue gains in the United States.” Says the Foreign Exchange Dealers Coalition. “Trillions of dollars of trade volume are at stake. This is money that could (and should) be booked in the United States as taxable revenue. But if this rule passes the United States could well be costing itself billions of dollars in taxes down the road.”

Also from the FXDC letter last week:
“The case against the 10 to 1 leverage rule is clear. The rule will be a boon to foreign forex dealers (both regulated and unregulated) who will grow entirely at the expense of retail forex dealers in the United States. Thousands of high paying jobs will be lost and the potential for tens of thousands of more jobs will forever vanish as well. Consumers will be hurt and more vulnerable to fraud. And the United States will toss away one of the most promising export industries that it has, all in the midst of 10% unemployment. There is no good reason that this should be so.”

In Summary

Basically, if implemented, the proposed changes could have the opposite effect from what the CFTC is trying to achieve. All you do is drive legitimate traders like myself off shore, and what you still have left in the U.S. are the fraudulent dealers who don’t operate within the law anyway. It will cost US jobs, US tax revenue (like I give a rat’s ass, but it’s true) and more traders will get ripped off by brokers outside of US jurisdiction where there is less regulation, so it does more harm than good!

In my opinion, the cure is EDUCATION, not restricting what people can and cannot do with their investment decisions. As with any investment strategy, you are responsible for what you do with your money and that includes investigating those you will have to ultimately partner with and trust in the process. Government was invented to protect people and their property, not to limit their potential! This is a classic example of government over regulation. The United States of America is the land of the free, where each forex trader should be able to make their own EDUCATED decisions about their money and sites like this one are here to help.

Please send an email to: secretary@cftc.gov

Include “Regulation of Retail Forex” in your subject heading as well as the identification number RIN 3038-AC61 in the body of the message.

CFCT Makes Final Ruling on Leverage

Well it came sooner rather than later, but the final decision has been made as to how the new U.S. Retail forex market will be regulated by the CFTC and current government legislation. Final Decision: 50:1 for all major currencies, and 20;1 for the rest. As I’ve stated in both my articles, this will be the end of U.S. retail forex. It’s been swell!

For a ongoing analysis of the effects of the final ruling, please visit: FXstreet.com How the Dodd?Frank WS Reform act will affect the Forex Market?

Also Check Out: Forex Vs. Dodd-Frank Wall Street Reform Act

The International Traders’ Alliance is an advocacy group which represents the interests of private investors and independent traders, and seek to establish fair and transparent regulatory structures which are open to public input, supportive of innovation and small business, and respect international borders. basically everything the CFTC is not. Furthermore, since the futures industry has their own trade association and lobbyists to promote their self-serving interests,  and in response to the unreasonable new rules the CFTC is proposing (details below this post), we have decided that retail forex traders, who are the life blood of this industry, should have one as well!  I invite you to join us in a coordinated effort to fight this new proposal, as well as standing up for the interests of the international trading community in general (such as when a broker attempts to rip someone off, or a new trading robot fails to issue refunds in a timely manner, and so forth).

We ask that you join our discussion group so that you can be kept up on the latest developments:

International Traders’ Alliance
www.TradersAlliance.org

Please help us spread the word as quickly as possible by posting the above address to your favorite forums, chat rooms, and mailing lists.  The time has come to stand up for what’s right!
Thanks Andrei