When the proposed rule release hit the airwaves back in January, the shock was deafening. This would be the Commodity Futures Trading Commission’s (CFTC) proposal: Regulation of Off-Exchange Retail Foreign Exchange Transactions. The industry was well aware new regulations were in the works, it just wasn’t so sure of the details. And as they say, the devil’s in the details.
Of course there was the increase in financial requirements for futures commission merchants (FCM) and retail forex exchange dealers (RFED), which was upped to $20 million, plus 5% of the amount, “if any, by which liabilities to retail forex customers exceed $10 million.” There was the new boilerplate disclosure rules, as well as the new required registration of FCMs and RFEDs and their associated persons. These were all expected and huffed about, but accepted as a way to keep OTC forex for retail open in a period where on-exchange has become the new black. What wasn’t expected was the leverage rule, that is, leverage in retail forex customer accounts would be subject to a 10-to-1 limitation. This would be far different than the current 100-1 level that just went into effect last year.
To put this in perspective, if you wanted to trade a contract of $100,000, today you need only $1,000 in your account. With the 10-1 rules, you would need $10,000. This basically raises the margin level from 1% to 10%. In comparison, the National Futures Association (NFA) required a 100-1 limit. A futures exchange contract can vary in leverage from 20-1 to 50-1 per contract, depending on currency and volatility (see Trendlines).
The anger from the RFEDs and FCMs was loud and clear: they will be out of business or have to flee to kinder regulatory shores if this proposal passes. Their customers were more blunt: try prying 100-1 leverage from their cold, dead hands. Seriously, in reading through of the comment letters thus far, this rule has taken on a Tea Party-esque aura in which people are ready to pick up arms to defend their right to trade. Here are some examples from comment letters:
“This country is supposed to be run ‘by the people’ which is a concept that seems to have been lost since 1776. Our forefathers would be appalled if they could see what is happening to their country – they wouldn’t recognize it as every day we lose a little more freedom.”
Or: “As an investor and active retail forex trader, I expect the freedom and right to choose the amount of leverage that is appropriate for my desired risk…”
Or: “Last summer the NFA ‘tweaked’ things...and now it’s as though Pandora’s Box has been opened so you too have to get in and change something that has been fine for 20 years.”
Or: “On the subject of regulating retail forex, plain and simple…STAY OUT OF TRYING TO RUN MY PERSONAL LIFE!!!!!!”
And another: “You are out of your cotton-pickin’ mind. I want to know the name of the communist who has proposed this legislation…..”
In fairness, although all the comments were passionate, most were reasonable, stating how this 10-1 ruling would affect their business and personal trading. Many thought the earlier reduction to 100-1 from 200-1 was acceptable, but this had taken it too far and would either force them to move off shore or quit trading OTC forex.
The day the rule was proposed, I ran into someone in the business who has his finger on the pulse of regulation. He shook his head when I asked how the CFTC came up with 10-1. “I don’t have any idea,” he said. “Seems like they pulled it out of the air.” Or from somewhere else, or so OTC retail traders would say.