CFTC settles on 50-1 leverage for retail FX

August 30, 2010 07:00 PM

The Commodity Futures Trading Commission (CFTC) released final rules for retail foreign exchange transactions on Aug. 30, which among other things will limit leverage available to retail forex traders to 50-1 on major currency pairs and 20-1 for all others. The final rules will go into effect on Oct. 18 as proscribed by the Dodd-Frank Act. The Act required the CFTC to issue final rules on retail forex 90 days after passage.

The CFTC created quite a stir in January when their rule proposal for retail forex transaction included limiting leverage to 10-1. The regulator received more than 9,000 comment letters the vast majority of which were negative. Many retail dealers and traders said limiting leverage to 10-1 would kill the market or send it overseas. The proposal came out shortly after rules set by the National Futures Exchange (NFA) limited leverage to 100-1. Previously there was no standard and some forex firms offered leverage as high as 400-1. The rule actually give the NFA the authority to set leverage (minimum security deposit) levels but sets a minimum parameter of a 2% security deposit on major currencies and 5% deposit for all other currencies. Both the CFTC and NFA will periodically review the appropriateness of those parameters.

The new rules also require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), and sets requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards.

The CFTC put out: “Questions and Answers Regarding Final Retail Foreign Exchange Rule,” to answer inquiries regarding the final rule.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.