After all the dust settled following two weeks of cross-industry rage regarding the new CFTC requirements it’s now time to take a more sane review at the upcoming regulations. Two biggest and most concerning issues proposed by the CFTC are the 1:10 leverage forced on traders and severe limitations placed on IBs.
Regarding leverage the implications are these:
Forex brokers and traders will now be able to place deals with maximum 1:10 leverage, meaning that from now on they will have to hold at least 10% of the deal as collateral (margin). This significantly reduces the size of deals that the traders will be able to operate from now on which in turn will reduce their potential gains and losses. CFTC gives exactly this explanation as the reasoning for this new requirements however there is a significant downside to this rule as well: reduced leverage means less profits for more advanced traders who actually CAN handle high leverages and can’t trade otherwise. Additional impact this rule would have on the US industry is that brokers will have their profits slashed as lower size deals mean much lower commission from spread. 2 pip on $100,000 USD worth deal is $20 to the broker, however with 1:10 leverage and same balance the deal size is $10,000 which means only $2 to the broker (how will they pay IBs with such low income is a mystery to me). This will also obviously limit the hedging opportunity for people who actually use these brokers in order to hedge their exposures elsewhere.
Furthermore, this new rule will seriously harm all US brokers and in turn will cause the loss of thousand of US jobs and millions in tax dollars because most of the forex business will either go offshore or will simply disappear or move to other industries such as futures or options (who knowns perhaps this is the real reason behind these new rules). By the way, this is why offshore brokers shouldn’t gloat too much: not ALL the US business will go to them, some of it will simply go to other industries in the US.
And one last thing, the new rule will also potentially halt the Forex industry’s gradual shifting to the ECN/STP execution. Clearing houses are not big fans of small deals and typically won’t accept orders of less than 100,000 USD. So it’s a big question how exactly, and if at all, US brokers will now be clearing trades. My immediate guess is that they will stop doing that, as their risk from smaller sized deals is significantly lower therefore it’s worth keeping the deals in house and profitting from losses. Market Making is about to make a huge comeback.
Regarding Introducing Brokers the blow is even more serious:
Registered Introducing Brokers (IBs) will be able to work with only one (!) broker and will also have to be guaranteed by it. This will reduce the number of IBs to absolute minimum, as Forex brokers won’t be able to guarantee ALL IBs out there, and will only leave a few large powerhouses – this is like your cell network operator will be offering you only one version of a mobile phone. Significantly limiting the competition is never a good thing for the consumer. Most of the IBs will close their business and those remaining will be forced to offer sometimes inadequate solutions to their customers simply because they won’t be able to offer anything else.
I had an interesting conversation with one of my Forex contacts and he suggested that if we all combine forces perhaps we will be able to fight these rules and perhaps change CFTC’s mind on several issues. He suggested to do the following, and I’m joining his effort here asking all of you to do the same:
3 QUICK, EASY STEPS YOU CAN TAKE TO COMBAT THE CFTC PROPOSAL RIGHT NOW !!!!
1.) USE THIS PRE-WRITTEN FORM TO SEND YOUR OBJECTIONS TO THE CFTC RIGHT NOW! JUST COPY AND PASTE INTO YOUR EMAIL THE FOLLOWING:
SEND TO: firstname.lastname@example.org
CC TO : email@example.com
SUBJECT HEADLINE : STRONGLY OBJECT TO 10-1 LEVERAGE LIMIT IN REGULATION OF RETAIL FOREX PROPOSAL RIN 3038-AC61
BODY OF EMAIL:
Attn : David Stawick, Secretary, CFTC and ALL CFTC policymakers:
As a non-affiliated US-based Retail FX trader, please note for the record that I am STRONGLY OPPOSED to the 10-1 leverage limit as proposed in RIN 3038-AC61 relating to the Regulation of Retail Forex.
This senseless limit would in NO way protect, aid or benefit me but rather would greatly harm me since this restriction, if passed,
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- would require that I submit substantially more margin-funds into non-protected, non-FDIC insured, non-SIPC eligible accounts, actually exposing me to increased risk in the event of bankruptcy of my Forex Broker.
- would NOT divert my business into regulated-Futures trading (as the CFTC is probably hoping), but rather would cause me to seek an unreliable, higher-risk offshore FX broker to trade through, whose practices might be questionable.
- would eliminate one of the greatest benefits of trading Forex : My ability to efficiently deploy my own trading capital in the way that I choose.
Lower FX vols require far greater leverage
FX volatilities are generally substantially lower than in the Equities or Futures market. Therefore, significantly more leverage is required simply to capture equivalent trading opportunities.
Nanny not needed
I do not want the CFTC to treat me like a child and dictate how I should trade. While 100-1 leverage is available to me – should I choose it – I am never forced to use it. The bottom line is that OTC Retail Forex trading is NOT Futures trading. Please do not try to treat it as such!
PLEASE IMMEDIATELY STRIKE YOUR PROPOSED 10-1 LEVERAGE LIMITATIONS.
Don’t let proposal RIN 3038-AC61 become an expensive lesson in unintended consequences….
2.) WHEN YOU’RE DONE SENDING YOUR EMAIL, PRINT IT, THEN ALSO FAX IT TO
· CFTC FAX NUMBER 1 Fax: (202) 418-5521
· AND ALSO to CFTC FAX # 2 Fax (202) 418-5547
ATTN: CFTC SECRETARY AND POLICY MAKERS
RE: STRONGLY OBJECT TO 10-1 LEVERAGE LIMIT IN REGULATION OF
RETAIL FOREX PROPOSAL RIN 3038-AC61
3.) WHEN YOU‘RE DONE SENDING YOUR FAXES, PICK UP THE PHONE AND PHYSICALLY CALL THE FOLLWING SIX (6) PEOPLE. LET’S FLOOD THEM WITH PHONE CALLS! IF THEY’RE NOT THERE, LEAVE THEM A VOICEMAIL!!!
LIST OF CFTC ACTORS:
- David Stawick, Secretary, CFTC, 1155 21st Street, NW, Washington, DC 20581.
Tel: 202-418-5495, FAX: 202-418-5547, e-mail: firstname.lastname@example.org
- Thomas Smith, Chief Accountant and Deputy Director, Division of Clearing and Intermediary Oversight, CFTC, 1155 21st Street, NW, Washington, DC 20581.
Telephone : 202-418-5495; FAX : 202-418-5547; email@example.com.
- Jennifer Bauer, Special Counsel, Division of Clearing and Intermediary Oversight, Division of Clearing and Intermediary Oversight, CFTC, 1155 21st Street, NW, Washington, DC 20581.
Telephone : 202-418-5472; FAX : 202-418-5547; and email: firstname.lastname@example.org
- William Penner, Deputy Director, Division of Clearing and Intermediary Oversight, CFTC, 1155 21st Street, NW, Washington, DC 20581.
Telephone : 202-418-5450; FAX : 202-418-5547; email: email@example.com.
- Christopher Cummings, Special Counsel, Division of Clearing and Intermediary, CFTC, Oversight, 1155 21st Street, NW, Washington, DC 20581.
Telephone (202) 418-5450; FAX : 202-418-5547 email: firstname.lastname@example.org
- Peter Sanchez, Special Counsel, Division of Clearing and Intermediary Oversight, CFTC, 1155 21st Street, NW, Washington, DC 20581.
Telephone (202) 418-5450; FAX : 202-418-5547 email: email@example.com