One of our contacts in the forex industry forwarded me a note with a link to the comment letters on the Commodity Futures Trading Commission rule proposal limiting leverage for retail forex traders to 10-1. There are nearly 5,000 comments and from the couple of dozen I saw, people are hopping mad.
No one likes being preached to and the rule has a sense of the CFTC protecting the retail masses from themselves. Many letters were from individual traders who noted that they were trading for years and could take care of themselves.
While many of the letters were prompted by the Forex Dealers Coalition (FXDC), a group of forex dealers opposed to the rule, that provided traders a link to post comments and suggested talking points, 5,000 is still a huge number. The Commission received a total of 4,659 comments in 2006 when it was looking at potential changes in its Commitment of Traders report. Prior to that the most comments received on a particular issue was slightly more than 1,000.
It got me thinking about the Refco bankruptcy and how the customers of the unregulated Refco FX affiliate ended up taking a bath. They shouldn’t have because there was a buyer for those accounts but the Creditors Committee did not approve it. Why a judge didn’t force the matter, I never could understand but customers ended up getting a fraction of their money back when they could have been made whole.
What I was thinking about is that if this rule was in affect back then — as least theoretically — those customers would have had to fund their account at a much higher level and hence would have lost much more money. It is theoretical because they probably would have transferred the account to an overseas broker that offered the leverage level they wanted but if it was the only game in town, they would have had to put more money in their account, trade less or simply get out.
While lower leverage may be prudent, requiring traders to use prudence is not the role of the regulator. That is what margin calls are for. The main role of the regulator is to ensure fair markets. The retail public does not need a regulator to be a nag, protecting them from risky behavior — people will select the risk level appropriate to them — they need a regulator to ensure a fair market place. Perhaps requiring segregation like in futures would be an appropriate step. At least one of the comment letters mentioned that.
It has nearly been one and half years since the Congress passed the Troubled Asset Relief Program (TARP), which allocated $700 billion to bail out our banking industry. In addition to that the Federal Reserve has made available around $2 trillion in various special auction facilities to help keep the banking industry afloat yet Congress and the regulators are still trying to put together regulatory reform. Firms that were the beneficiaries of TARP money are now spending millions to lobby against greater reform.
Remember the problem of “too big too fail”?
When a retail trader opens up a forex account for a few thousands dollars, over trades and blows up, the rest of us are not required to bail him out. Large investment banks were bailed out and now are passing out bonuses and spending money lobbying Congress. Regulators need to keep their eye on the ball. The retail public does not need to be protected from themselves, they need to be protected from once again being on the hook for someone else’s losses.