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Foreign Exchange

CFTC stokes a retail rumpus

Last week’s news that the US Commodity Futures Trading Commission (CFTC) wants feedback on proposed restrictions on retail FX seems to have prompted fury from both service providers and their clients.

A group of the sector’s leading platforms have already formed a lobby group – the Foreign Exchange Dealers’ Coalition (FXDC) – to contest the CFTC’s proposals. The speed with which they have moved should be a lesson to the wholesale market, which has still to speak with one voice over potential legislative clampdowns.

What is really irking the FXDC in particular is the CFTC’s suggestion that retail traders should be limited to 10:1 leverage. Obviously there is danger or even stupidity in trading on margins as high as 200:1, but it could be easily argued that it is not the CFTC’s job to legislate on this. It may as well try and legislate against stupidity.

And it seems that the CFTC is proposing one rule for some and another rule for others.

Retail players are asking why the CME is allowed 50:1 leverage on its EUR/USD futures. Presumably this is because it is supposed to be safer to trade on a regulated exchange. Nonsense. The main risk of trading on an over-leveraged basis is the vulnerability to being stopped out, which is purely about price action. Of course, there have always been claims about some of the retail platforms triggering stops, but that is unsustainable long term because of the existing competition in the sector.

And even though the CME’s main futures products are thriving, their micro FX contracts, which are aimed at the retail audience, have yet to set the world on fire. The CME says it is happy with the progress the contracts have shown, but to me they look niche, trading an average of just $56 million each day; though that some retail players will use the CME’s full-blown contracts.

The bulletin boards have been swamped with comments. One on the All Forex community on LinkedIn says: “Even taking the highest required margin you can trade the Euro future at nearly a 50:1 level of leverage. So, I must ask, is the suggestion that retail forex customers have only a 10:1 level of leverage a joke? Or are the members of the CFTC staff who suggested such an idea so disconnected from actual trading and the market that they were just ignorant of that fact [that greater leverage is available on the CME].”

Another says: “This is over regulation at its finest. Whatever happened to: A government is best which governs least? This is anti-capitalism in my opinion and this is the modern day view of governing people to ‘protect’ us from ourselves. What’s next? This is extremely detrimental to society and is taking away from our freedom to take responsibilities and make choices for ourselves.”

Is it too harsh to say that the CME is being put in what looks like a winning position because of its skill at lobbying the CFTC? It is worth pointing out that banks offering retail FX will not be subject to the CFTC’s proposals either. However, it still looks like this is more discrimination than regulation. No doubt the FXDC will devise a solution, the most likely of which is to move offshore. Many members have already started their preparations.

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