The post-2008 recession led to enhanced regulations in global financial markets as central banks and governments looked to curb the factors that resulted in the crisis. A similar notion is coming to light with the current CHF crisis of January 15 raising alarm bells among financial regulators. The Commissioner of the CFTC, Sharon Bowen, has issued a statement on the matter with specific reference to the retail forex market. More regulatory reforms on the agenda.

Banks suffered during the credit crunch and now forex brokers are suffering during the Swiss franc debacle which is creating shockwaves in an already governed marketplace. The latest issuance from the US watchdog, CFTC, is the first in what is expected to be many recommendations on how the retail forex market should be governed, with broker’s capital requirements and leverage on the agenda. Two matters that have already been altered in the United States on the back of the Dodd-Frank Act.

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Ms Bowen’s detailed statement examined the lightly regulated asset class in comparison to its peers, she opined: “It is ironic, that following the enactment of Dodd-Frank, the retail foreign exchange industry is the least regulated part of the derivatives industry. I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign exchange investors unnecessarily at risk.

These concerns were underscored by recent unsettling events involving financial difficulties at retail foreign exchange dealers following the Swiss National Bank’s policy change regarding the Swiss franc.”

Panic arose in the growing retail foreign exchange market after industry giants, IG, FXCM and Alpari UK reported strain after the SNB’s surprise move to alter the CHF currency’s affairs.

Ms Bowen added: “As I have said before, we have an obligation to prevent the establishment of “gaps” in our regulations. If we find that a part of the swaps or futures industry is so lightly regulated that investors, markets, and the public are being placed in undue risk, we have an obligation to fill that gap and establish a more efficient and effective regulatory regime. Even prior to these events, I raised the issue of whether enhanced regulation of retail foreign exchange would benefit consumers.

Therefore, in the wake of last week’s events, I believe the Commodity Futures Trading Commission has an obligation to seriously consider enhancing our regulations of retail foreign exchange dealers. Specifically, I believe we should consider establishing regulations on the retail foreign exchange industry that are at least as strong as the regulations on the rest of the derivatives industry.”

European Regulators

Authorities in the UK, Cyprus and Malta have all been actively monitoring the situation, with the UK watchdog, the FCA, taking the matter seriously and visiting firms to review their client money rules. The move comes on the back of Alpari UK’s administration after the firm failed to find a lifeline.

Mazhar Manzoor, a London-based compliance consultant, welcomes the proposed regulatory reforms, however believes the authorities need to liaise with industry practitioners to ensure that the best outcome is delivered for both consumers and providers.

Brokers faced a number of issues during the turmoil with liquidity risk being one of the severest threats and culprits of losses. The established e-trading forex space means brokers are working closely with technology and liquidity partners, Finn Jakobsen of FTT believes that the firms should assess their relationships and ensure they have recovery arrangements in place with each provider, furthermore, “the concept of one-stop-shop for technology and pricing is on fragile grounds which brokers should be cautious of.”