The forex industry is speaking out after the Commodity Futures Trading Commission (CFTC) introduced a proposal to limit leverage for OTC forex firms to 10-1 last week. On Jan. 13, the CFTC announced it would seek public comment on the proposal for a comprehensive scheme that would put in place requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital, and other operational standards, as well as the switch to 10-1 leverage. The CFTC will make a decision on the proposal after a 60-day public comment period.
The industry wasted no time in commenting. In its statement to the CFTC, the Foreign Exchange Dealers Coalition, a group 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.
The rule proposal has led to an explosion of negative reaction in numerous forex related blogs and newsletters. The CFTC announced the rule proposal the same day that they held an open meeting to discuss its proposal on new speculative trading limits on energy futures but has declined to comment regarding its forex proposal.
“If this rule goes through [customers are] not going to trade with our firms anymore. They’re going to take our accounts and go to the UK or unregulated offshore locales. This could mortally wound the U.S. domestic industry,” says Charlie Delano, director of government affairs at FXCM.
FXCM Chief Marketing Officer Marc Prosser adds, “If this proposal is meant to protect retail forex traders, we don’t think this accomplishes that stated objective. In fact it does the opposite.”
Glenn Stevens, CEO of GAIN Capital, says, “To stay competitive in a global marketplace and protect against further incidences of fraud to the retail sector, 100-1 leverage is required. If in fact the 10-1 leverage rule proves to be highly unpopular with traders, as an informal poll from FXStreet indicates…U.S. customers may look to services based in other countries [and] more people will trade with unregulated firms.”
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).
On Nov. 30, 2009, the CFTC approved a rule implemented by the NFA that established leverage of 100-1 for the most liquid currencies. This was down from the 400-1 level that some firms offered and 200-1 available in the UK. “This reversal has come as a real surprise to the industry. It’s left everyone scratching their heads,” Delano says.
Go here to see the full proposal.
Go here to see the Federal Register Comment File on the proposal.