I’ve met some animals in my time in FX, so it always makes sense to me that retail FX should be covered by the Farm Bill in the US, which was passed back in May 2008. Anyway, the bill’s sponsor, the US Commodity Futures Trading Commission (CFTC), has decided it needs to take things further.
The CFTC is now proposing further measures, including registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards. Specifically, the proposed regulations would require the registration of counterparties offering retail foreign currency contracts as futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant created by the Farm Bill.
Perhaps the most important new proposal is that FCMs and RFEDs will be required to maintain net capital of $20 million plus 5% of the amount by which liabilities to retail FX customers exceed $10 million. The CFTC is also suggesting that retail clients will be limited to 10% margins. Retail service providers have 60 days to respond to the proposals but they have already expressed their fears through a new body, the Foreign Exchnage Dealers’ Coalition (FXDC). This represents FXCM, GFT, Oanda, IBFX, Gain Capital, FX Solutions, FXDD, PFG Best and CMS Forex.
“Over the past decade the domestic retail foreign exchange industry has enjoyed a tremendous growth spurt and its prospects going forward are more promising than perhaps in any other sector of financial services. However, the CFTC’s recent rule proposal, which would limit customer trading leverage to 10 to 1, would be a crippling blow to the industry and drive it offshore into the hands of foreign competitors. Even worse, it would encourage fraud both at home and abroad as customers seeking to trade retail forex would have no other legitimate domestic alternative,” the FXDC warns.
It adds: “Today the US retail forex industry can boast hundreds of thousands of live accounts. Should the 10-to-1 leverage rule be adopted 90% of those accounts can be expected to go offshore. And the first place they’ll go is to the United Kingdom where customers can trade with leverage as high as 200-to-1.”
The FXDC concludes: “The case against the 10 to 1 leverage rule is clear. The rule will be a boon to foreign forex dealers (both regulated and unregulated) who will grow entirely at the expense of retail forex dealers in the United States. Thousands of high paying jobs will be lost and the potential for tens of thousands of more jobs will forever vanish as well. Consumers will be hurt and more vulnerable to fraud. And the United States will toss away one of the most promising export industries that it has, all in the midst of 10% unemployment. There is no good reason that this should be so.”