Back Bay FX, one of US largest Introducing Brokers, just sent the following message to its customers explaining the new rules and how they may affect forex traders. It mostly contains information which was extensively discussed on this blog, and others, however it does set everything in a well :
July 21 – Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. Some of the effects of the bill, specifically the CFTC components with regard to off-exchange Foreign Currency trading (“Retail FX”), are to be put into effect as of 10/18/2010. This bill has repercussions that will affect all US Citizens involved in Forex. The goal of this memo is to break down how the recent changes by Congress, the CFTC, and the NFA will affect US retail FX clients, and how you can prepare for them.
WHO DOES THIS BILL EFFECT?
US Citizens and Natural Citizens- The most important changes of the new rulings affect regulated brokerage/ financial institutions, leverage, and the ability to work with unregistered IB’s and Money Managers.
Effectively, US citizens are now required to trade or work with (in respect to the services offered) an entity registered in the United States. The following list comprises the legal choices:
CFTC-registered Futures Clearing Firms or CFTC-registered Retail Foreign Exchange Dealers (“RFED”)
A United States Financial Institution (a US-chartered bank), or bank holding companies
SEC-registered brokers or dealers
Investment banks, or Investment Bank holding companies
NFA registered IB’s and CTA’s
The most significant rule for US citizens and natural citizens is that leverage has changed. The rule states that as of October 18, 2010, US counterparties can offer a maximum of 50:1 leverage on the major currencies and just 5:1 on the minor currencies. The effects of this change are more psychological than actual. At Back Bay FX, we have seen few clients ever come close to using 50:1 leverage on any given trade or even a combination of trades. The difference will be in how much of your equity is put into the “Used Margin” field to support an open trade. This will therefore change how much room you have if a trade goes against you.
Here is an example of present vs. future leverage:
Present: Account Balance $10,000. Client buys $100,000 USD/JPY. Used Margin is $1,000 (remember this is the present 100:1 leverage) and the Available Margin is therefore $9,000.
In this case, your clearing firm has allocated $1,000 to hold open your position of $100,000 USD/JPY. If the trade were to go against you, the trade could cost you $9,000 (approx 900 pips) before you should be stopped out on a margin call. (Note, Back Bay FX would never suggest allowing you to lose so much on one trade. Please do not overleverage yourself and use caution when trading leveraged financial products such as spot FX.) If a margin call occurred, your account should have approx $1,000 (the Used Equity) remaining.
Future Scenario: the same account with the same trade will have $2,000 allocated to Used Margin and you will have $8,000 as your Available Balance as you first open your position.
In practice, the leverage change will probably effect how many open positions a client has on more so than it will effect the size of their trading.
Unregulated IB’s and Money Managers:
What was included in the new laws is something that was missing last time around….a specific notation that the CTFC has jurisdiction over FCM’s RFED’s, or entities that are not otherwise regulated. That last section is important. The firms that use “We have a clever set-up so that the rules do not apply to me” as their sales pitch are incorrect. Everyone operating in the US or operating a US-registered company, or soliciting and working with US clients will now fall under the CFTC’s rule-making authority. If you are acting as a sales agent, introducer and/or clearing firm and are not registered as one of the above-listed entities, then by default (and now by law) you are subject to CFTC oversight.
Foreign Citizens– will remain virtually unaffected because the majority of US brokers have foreign registered firms. Non-US clients will be allowed to trade with the same settings and parameters they currently trade with at those non US firms. For foreign clients who have been working with a US registered firm, they will have to make a decision based on the changes detailed in memo.
FREQUENTLY ASKED QUESTIONS:
Q: I plan on just staying with GAIN UK; they are regulated by the FSA, will I be ok?
A: GAIN or any other US affiliated broker (FXCM, ALPARI, FXDD, FX SOL, CMS, etc) are all forced to send US citizens back to their US offices by 10/18/10. Because they are regulated in the US then they are forced to abide by all rules associated with its regulators.
Q: Can I work with an Off-Shore broker who is not affiliated with a US entity (e.g. ForexPro)?
A: As far as we are aware, NO. Under the new rules, firms accepting US clients must be registered with the CFTC. If you look at the example of CFD’s, and/or spot Oil – US clients are not allowed to open CFD accounts with non-US brokers because the CFTC rules state that CFD’s are not available to US clients. No respectable counterparty wants to potentially incur the wrath of the CFTC by allowing US clients to trade CFD’s.
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Q: When will all of this happen??
A: The official date is 10/18 but we feel that the brokers will move your accounts by 10/15. It is difficult to say when you will be notified, because each broker has their own timeline, but we believe it will be around October 5th or 6th for notice and 10/15 for the brokers to repatriate funds.
Q: What if I have open positions?
A: Once again this is an individual broker position, but we believe that accounts will be moved as is, without clients having to close positions.
Q: Will I get a Margin call when it is transferred to 50:1 and I am in a draw down?
A: The answer is most likely YES. This is very important as there are a few ways to work with this, and it WILL affect your account. The most important contact is your specific broker (or BBFX). Ask what their policy is on this and how they can help. You can also close out some positions to avoid a total sweep of positions and massive equity hit. Contact us for additional solutions.
Q: I am an Irish Citizen living in the United States; do the rules apply to me?
A: In our interpretation of the rules, YES. We believe that the rules affect those people domiciled in the United States, not just US citizens. If you are living and working in the US as residents than you have to play by the US rules, this is our opinion and not known as a fact yet. Additionally we believe that US citizens living outside the US will be able to trade as foreign citizens (under the jurisdiction they currently abide by).
Q: I am a US client and work with a Money Manager who is not registered. If he works at an off – shore broker can I still work with him
A: Good question; if the manager is a US citizen, NO. There are no US citizens that can work with other US Citizens unless they are registered by one of the entities mentioned above. Do not believe anyone who tells you differently.
Q: The leverage change will be the end of FX in the US. I am taking my money elsewhere, don’t care about the consequences.
A: Our opinion is that few clients we have seen use anywhere near the 100:1 leverage that had been available. We believe that 50:1 leverage will have little effect on client’s ability to trade as they have been trading. Clients that were using 100:1 or close to it are taking large risks in a volatile market and should not be expecting to be profitable.
Q: “I need hedging” for my EA’s to work!
A: There are some firms who have found an effective way to allow netted positions to show up as hedged positions on an intra-day basis. BBFX notes and advises that “hedged” positions do not properly show true market exposure and have been used in the past to mask client losses. If you choose to use the “hedging” features available at some of our partner firms, please ensure you ask a registered representative about the pros and cons of “hedging”.
WHAT ARE MY OPTIONS?
Since the inception of the retail Forex market, choosing a Forex broker has never been an easy task. It has always been a general rule of thumb to go with a U.S. based, NFA regulated firm; but that all changed (specifically because of hedging rules in the US – May 2009) when registered firms began opening in the UK and other countries (AUD, CHF, etc..). So what is a trader to think when industry regulators seem like they are deterring traders from trading the way they want? Unfortunately that is not an easy question, but one that the industry is now facing…
As an established introducing broker, Back Bay FX has been consulting with clients for years. We aim to custom fit our clients with the best clearing firm/s to suit their specific trading needs. At Back Bay FX, we’ve already done the due diligence necessary for recommending brokers to traders depending on a number of different variables. These variables include, but are not limited to: trading style, trade frequency, explanation of the new changes including leverage, account size, funding options, platform type, and account type. Regardless of what trading style you have or platform you need (MetaTrader 4, Currenex, etc.), Back Bay FX has options for you that will allow you to continue trading under the conditions that you choose.
If you would like more information about these changes, to open an account and learn about the 10+ brokers we offer for both US and Foreign citizens, or just ask some questions, please do not hesitate to contact us at:
Back Bay FX Services
+1.617.357.6100 (office) / 617.357.5100 (fax)
The team at Back Bay FX
The legal details of the actual bill and rulings are found on the CFTC’s website (www.cftc.gov). The section titled Q&A gives a good summary of the changes and how the effect all participants. (http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexfinalrule_qa.pdf). The opinions in this memo are based on descriptions and details identified in the previously stated CFTC bill and NFA rulings.
Trading in the Foreign Exchange market is a challenging opportunity where above average returns are available for educated and experienced investors who are willing to take above average risk. However, before deciding to participate in Foreign Exchange (FX) trading, you should carefully consider your investment objectives, level of experience and risk appetite. Do not invest money you cannot afford to lose. Back Bay FX Services, LLC is a registered NFA member (0388617)
The risk of loss in trading Futures or Forex can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in Futures or Forex trading can work against you as well as for you; the use of leverage can lead to large losses as well as gains. Please read and understand the disclosure document associated with any potential managed futures investment. Forex refers to OTC foreign exchange. Over-the-counter trading means that the trades do not take place on an exchange. Your clearing firm is the counterparty to your trade.