Dodd-Frank Repeal? Will Donald Trump Change the Face of the US FX Industry?

Among Donald Trump's many electoral promises was one which caught the attention of the Forex and CFD industry.

The new President of the United States announced his intention to limit or completely eliminate the 2010 law known as the Dodd-Frank Wall Street Act, which drastically changed the image of one of the largest financial markets.

Although the House of Representatives voted in early June to ease the old legislation, it is still impossible for retail brokers to return to the US market, which currently consists of only four FX industry companies.

Finance Magnates takes a closer look at Donald Trump's promise in the latest edition of the Quarterly Industry Report, seeking answers to the question of what the implications are for the derivatives industry, which has changed enormously in the United States since the 2008 crisis.

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A market where no one can survive?

Before Barack Obama signed the Dodd-Frank act, American traders could avail themselves of the services of 40 local online providers and a whole set of foreign financial firms. Currently, this number has been reduced to just 4, and brokers outside the US cannot offer their services to US citizens.

However, when analyzing the current requirements for setting up a brokerage in the US, no one should be surprised that the number is so low. According to Dodd-Frank rules enforced by the CFTC, companies wishing to offer retail trading in the forex market must maintain a minimum capital of $20 million. What’s more, this amount increases if a broker’s liabilities to retail forex traders are higher than $10 million. In such a case, the licensed company's net capital requirements are raised by 5% of that sum. For example, if financial obligations equal $15 million, the broker needs to increase its available funds by $0.75 million.

In addition to this, obtaining a license in the US can take as long as two years.

Add to the mix the maximum leverage of 1:50, the hedging ban and the need to implement the FIFO (first in first out) rule, and you get a recipe for really difficult market conditions. Brokerage operations are far more difficult than for example in Europe, where the Cyprus Securities Exchange Commission (CySEC ) and the British Financial Conduct Authority (FCA) impose significantly lower requirements.

Trump's administration should adjust the rules to limit market consolidation

Using the experience of European supervision committees, there are several important issues that could change the face of the retail forex market in the United States.

First and foremost, American customers should have the choice - cutting them off from non-US brokers only limits freedom and does not provide proper protection. Profitability statistics from the first quarter of 2017 show that average trader profitability stood at 40%, which is a very good result, showing that US investors know how to multiply their funds.

It is necessary for the regulators themselves to make the market more attractive and to simplify access - the return of PAMM accounts and adjustment of capital requirements to those in Europe would undoubtedly attract new industry players. Cyprus has a license waiting period of 3 to 6 months, and in the UK it lasts a maximum of 15 months. In the US, however, it may take up to two years to obtain final authorization - simplifying the regulatory machine and reducing the complexity of the whole process also seems to be an indispensable step.