US Regulators Look at Tightening Leverage Ratios for Overseas Customers

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.

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.

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.