The Commodity Futures Trading Commission’s forex proposal last January stirred up a hornet’s nest of opposition.
It seemed awfully odd that just a month or so after the National Futures Association (NFA) instituted new tougher standards for forex, that the CFTC would propose something so different. The NFA, after all, is the agency who has dealt on the front lines with the forex problem. There has been a lot more continuity in the leadership and the staff of the NFA in recent years than at the CFTC yet the CFTC proposed a leverage standard 10X more restrictive than the NFA rules that had just gone into affect.
At the time we spoke to some experts who figured the CFTC was using the 10-1 leverage level as bargaining chip to soften some of the other elements. The final rules are a much less restrictive, setting leverage of 50-1 for the major currency pairs, but there is some question of whether U.S. traders will be able to access non U.S. forex dealers. Many traders are still unhappy and although leverage of 50-1 seems reasonable, there is still dissatisfaction and a feeling that the new regime will be more active and knows better that the folks they are regulating. We hope that is not the case because retail traders are not the problem. They, at times, have been the victim of forex fraud and that is what clearly defining a regulatory scheme for forex is supposed to do .
As we noted when the original rules were proposed, “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.”
It is positive that the CFTC appears to have listened to the industry who overwhelmingly rejected the original proposal but it seemed that it needed to set a somewhat more restrictive measure in order to save face. However, for them to propose something so different that their fellow futures regulator--we know that FINRA has proposed much more restrictive leverage levels--in the first place is still hard to understand unless they were trying to make a statement. And as we noted, their focus was in the wrong place.
The measure of the new rules will be how affective the CFTC is at ferreting out the bad actors in the forex space, not if less traders bust out due to over leveraging positions.