The US Commodity Futures Trading Commission (CFTC) has announced the final regulations on off-exchange retail foreign currency transactions.
The original proposal – that leverage be cut to 10:1 from the current 100:1 – was greeted with some concern by industry participants. A lobby group, the Foreign Exchange Dealers’ Coalition (FXDC), was set up specifically to contest the proposal and helped galvanize a record-breaking 9,100 responses to the CFTC during the comment window that closed in mid-March. The regulator appears to have paid heed to the concerns expressed by the FXDC and other industry participants that 10:1 leverage could drive the US market offshore.
Leverage caps have yet to be imposed within the European market where an account-stripping 500:1 is still possible. The Japanese FSA imposed a 50:1 limit from August 1, with a further cut to 25:1 in the pipeline from August 2011.
The CFTC’s rules impose minimum security deposit levels that retail customers must lodge with their price provider in order to trade: the initial minimum parameters are set at 2% for ‘major’ currencies, equating to a maximum of 50:1 leverage, and 5% (i.e. 20:1 leverage) for other currencies. The CFTC will review the parameters periodically.
Within those limits, it is the responsibility of the National Futures Association (NFA) to set specific deposit levels and to define what currencies constitute ‘major’ and ‘other’. It seems unlikely that the NFA’s deposit levels will be any more strict than the CFTC’s, given that the NFA’s FX advisory committee is made up of the chief executives of major platforms.
One interesting aspect of the CFTC’s regulation is that it is possible that the designation of which currencies are major should be adjusted by the NFA “in light of such factors as changes in volatility.”
The leverage limits are the headline element, but are only part of the regulations; the requirements covering registration with the CFTC of parties offering FX (as either futures commission merchants or retail foreign exchange dealers), capital requirements, disclosure and record-keeping are in line with the CFTC’s original proposals announced in January.
The rules will become effective on October 18.