Foreign exchange: Retail players await CFTC decision

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By:
Trevor Carr
Published on:

The deadline for comments on the proposals of the US Commodity Futures Trading Commission about retail foreign exchange passed on March 22. However a date for a decision on the proposals has not yet been announced.

The proposal to cap leverage at 10:1 is only one of the suggested new regulations that also include stricter rules for the capitalization of the platforms, or Forex Dealer Members.

"The CFTC has received almost 10,000 submissions to date, almost uniformly opposed to the 10:1 proposal," wrote online FX provider Oanda in a statement.

The CFTC’s unstated purpose in the proposals is to protect investors, particularly from fraud. Scarcely a week goes by without CFTC proceedings being announced against an FX fund (which is never any such thing of course – just a grab-it-and-run scam masquerading as an FX fund). It has been said that more stringent capital requirements will go some way to preventing such abuses. This is largely nonsense of course – most of the scams have no registration with the National Futures Association or the CFTC to begin with – but the raising of the capitalization bar is not the proposal being most fiercely opposed.

Ten-to-one

The 10:1 leverage proposal is being contested from a variety of angles: that it "puts retail clients at a disadvantage", in that larger margin requirements will exclude smaller investors from the US market; that the 10:1 figure is arbitrary – no analysis has been provided by the CFTC as to why this is the optimum figure; that it discriminates against the FDMs in favour of the CME and Nasdaq (sanctioned by the CFTC to provide FX products at leverage of 50:1 and 100:1); and that it compares unfavourably with margin requirements set by other national regulatory bodies.

Established retail players say it is undeniable that there are people who need protecting from the predations of the unscrupulous. But whether or not regulatory bodies should seek to override the concept of caveat emptor is a different question. To many, the case for restricting that leverage to 10:1 has not been made.

For all the rhetoric, the story is of a regulatory body wanting to be seen to take action – whether or not that action is necessary or logical – and an industry attempting to preserve its US business model.