From the March 01, 2010 issue of Futures Magazine • Subscribe!

Leverage limits vex forex

The forex industry in the United States could be in serious jeopardy if a CFTC proposal to limit leverage goes into effect, and forex firms and customers are letting the agency know it. On Jan. 13, the CFTC announced it would seek public comment on a proposal for a comprehensive scheme that would put in place requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital, and, most significantly would limit leverage for OTC forex firms to 10-1 from their current 100-1 leverage.

“[More than 90%] of the customers we hear from are against the idea of curtailing leverage to 10-1. The regulator is forcing a certain trading style on a customer. By curtailing leverage, there’s only one kind of trading that’s suitable, medium to long-term strategies. It blows short-term strategies out of the water. Customers recognize that and want to be able to trade short-term when the opportunity arises,” says Glenn Stevens, CEO of Gain Capital.

The Foreign Exchange Dealers Coalition, a group of the nine largest forex firms in the industry, including PFG Best, Oanda, GFT, FXDD, Gain Capital, FX Solutions, FXCM, IBFX and CMS Forex, said limiting leverage would “be a crippling blow to the industry and drive it offshore to the hands of foreign competitors.” The letter also said the proposal would result in loss of jobs and revenue in the multi-billion dollar U.S. forex industry as well as widespread fraud as unregulated dealers around the world would benefit.

“Reaction is universally negative. It’s not popular in Washington either. The only people who have been supporting this so far have been competitors in the United Kingdom,” says Charlie Delano, director of government affairs at FXCM.

Stevens says it’s difficult to say whether the proposal will go through because it caught the industry by surprise in the first place. “This one came without any consultation with NFA, without any consultation with providers or advisory groups. Since the process has been so anomalous, it’s hard to [know] the outcome.” On Nov. 30, 2009, the CFTC approved a rule implemented by NFA that established leverage of 100-1 for the most liquid currencies. An NFA spokesperson said that NFA would submit its comment letter about the current proposal to the CFTC before the March 22 deadline but would not comment beyond that.

“You don’t fight fraud with leverage,” Stevens adds. “The regulator should [instead] focus efforts on enforcement. With leverage, if you’re operating outside of regulatory authority, who cares if the rule changes? You’re making up your own anyway.”

In comparison to OTC forex, currency futures margins are risk-based and the initial margin for a standard $100,000 currency contract ranges from $2,500 to $4,500, depending on the currency and volatility levels (roughly 20- to 50-1).

The FXDC is continuing to meet with the CFTC to voice its concerns. “If 10-1 margin goes through, there isn’t going to be much of an industry left. Traders will just move offshore. They’re already preparing to move if this happens. Traders will leave en masse and the industry will come to an end,” Delano says.

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