US Regulators Look at Tightening Leverage Ratios for Overseas Customers
CFTC Chairman Timothy Massad on Wednesday told lawmakers at a House hearing that the regulatory commission is considering how much
US derivatives regulatory body the Commodity Futures Trading Commission is weighing more stringent legislation on retail currency brokers’ overseas affiliates after the Swiss franc fiasco brought FXCM Inc. to its knees in January.
CFTC Chairman Timothy Massad on Wednesday told lawmakers at a House hearing that the regulatory commission is considering how much firms can expose themselves to highly-leveraged trades made by clients outside the US. “We’re looking at our rules,” he said.
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Massad explained that a couple of the things the CFTC could do is to restrict firms’ transactions with their foreign affiliates and to require higher standards for assessing risk in overseas arms.
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The gap in regulation exists because the maximum leverage permitted in the US is 50-to-1. But brokerages can make trades through foreign affiliates well past that threshold. Taking FXCM as an example, during the Swiss franc meltdown, customers in some countries were trading with as much as 200-to-1 leverage.
Indeed, a person close to the regulators’ review of the brokerage last month confirmed that most of the client losses at FXCM were from overseas currency traders. Amid the volatility, FXCM wasn’t able to close out some client accounts before they lost more than they had on deposit (thanks to the sky-high leverage) leaving the brokerage with the tab.
FXCM is the largest US retail forex broker. It lost over $200 million after January 15. A $300 million lifeline from Leucadia National Corp. prevented the company from becoming insolvent.
The CFTC is working with the National Futures Association, an industry-funded front-line regulator, on the potential regulatory changes.
The CFTC should allow hedging as that is a good risk management tool for retail traders and investors when they desire to use it. Shame on the regulators always blaming leverage as the culprit. Shows how short sighted many of them are.
So basically the first CFTC response on this will only really affect the brokers with overseas entities offering above 1:50.
Of the better US names still registered and solvent, Oanda and MBT should both be unaffected by this since the former hasn’t offered more than 1:50 and the latter dropped their EU entity years ago.
FXCM may be the only one affected again. It’s the kind of move that’ll likely affect their ability to compete overseas and realistically won’t have any real affect on the nature of the next black swan (they don’t usually come in predictable packages packages.)
Targeting overseas leverage? Didn’t they already cap the leverage for fx firms WITHIN the USA at 1:50? Additionally, overseas fx brokers were barred from soliciting US residents? Oh dear.
Retail customers of the EU and US Regulated Brokers were well protected in this most extreme forex move in CHF, there is nothing the regulators need to do. Of course every market participant should review its procedures and conduct after such an event, regulators included.
FXCM shareholders, and Alpari UK owners, lost out due to their business model, that’s called capitalism. Customer equity was protected by segregation of customer funds, at both Alpari UK (as of previous close) and FXCM.
It's clear the US regulators agenda is to increase regulation to the point that retail FX trading is no longer a viable business in the US. Attempting to overreach it's boundaries into foreign markets will be a failed initiative.
It's more likely to see mandatory account minimums raised to $25,000 and leverage lowered to almost mimic the futures market.
Will US retail traders find a way to open accounts with overseas brokers? Your thoughts?
@Steven,
US Retail forex brokers are not required to segregate client funds. The NFA/CFTC will avoid discussing this rather adult elephant in the room.
Funny thing is that if FXCM wouldn’t have been able to get their bailout loan in time, we would have all been reminded of just how IMPORTANT and BASIC of a requirement that client funds be segregated from owner operating expenses and in such a way that if the firm becomes insolvent, then the [former] client can get access to their funds.
@Keith, there is already a ‘movement’ for USA residents looking for overseas brokers that started long ago when Frank-Dodd first began its foothold.
http://forums.babypips.com/forex-brokers/36221-going-offshore-escape-cftc-64.html
But it seems like establishing residency outside USA is a much more permanent solution.
http://forums.babypips.com/forex-brokers/36221-going-offshore-escape-cftc-62.html#post678260
Takes a little more work though; ultimately comes down to what do you really want?
With IG index and EUR/CHF they crate negative balaces on peopel accounts from thin air.
Now IG index is chasing negative balaces to rcover their $50 m loss.
Their robust dealing desk did big fat zero for first 10 min (sorry manualy aggregate the orders using abacus) geting fill on average at 0.9250.
FXCM for instance $225 m loss, get an average fill at 1.1100, and now they forgive 90% of clients their negative balace.
This is a contrast folks.