DailyMarkets.com Co-Founder
CFTC Proposal On Forex Leverage Could Put US-Based Forex Brokers Out Of Business
If you trade forex with a US regulated forex broker, this will concern you.
On January 13 2010, the Commodity Futures Trading Commission (CFTC) proposed a set of rules governing the off-exchange retail forex brokers. The rules include change in minimum capital, record keeping, financial reporting, the amount of leverage allowed, among other operational standards.
The CFTC is considering limiting the leverage offered by forex brokers to retail customers at 10:1. Yes, 10 times leverage. Forex brokers currently extend leverage to their customers at ratios of between 25:1 to 400:1 or higher, depending on the currency pairs being traded and the size of their accounts.
Their reason for limiting forex leverage to 10 times is that “the extreme volatility of the foreign currency markets exposes retail customers to substantial risk.”
I am of the opinion that should this leverage rule be imposed or drastically reduced, the billion-dollar forex industry in the US will suffer greatly. First of all, the moves in currencies are very small, ranging from tens of pips to 100-200 pips a day for major currency pairs. I’ll use the example of EUR/USD, the most traded currency pair in the world.
For a 100 pip move on the EUR/USD, that translates to only a move of 1 cent. With $1000 margin, at 100 times leverage, you would make $1000 on a 100-pip profit in EUR/USD. For 10:1 leverage, you would only make a paltry $100. This still seems like a lot since it’s 10% of your invested capital, but many forex traders go for much smaller moves like tens of pips, which would make your profit in the tens of dollars, and will no longer be worth your while unless you have a lot of capital.
Also remember that apart from the margin in your account, you always need more capital in case the trade goes against you or in case you have a string of losses. So when you’re trading with $1,000 margin, you usually want at least $5,000 in your account, so a profit of $20 on a 20 pip move at 10 times leverage would only be 0.4% on your capital!
The reason why the CFTC wishes to limit leverage is understandable if you think of forex trading as a long-term investment like stocks. However, most forex traders trade very short term and need the leverage to give them meaningful profits. If forex traders were looking at a long-term currency investment, they would be putting their money in a foreign exchange bank deposit instead of with a forex broker.
If the CFTC does succeed in limiting leverage to such restrictive levels, then most forex traders in the US would be forced to either shut down their account because profits are no longer meaningful for the money they are willing to risk, or move to a foreign-based forex broker.
This would devastate the US forex industry.
You can read the CFTC forex proposal here. This is just a proposal, not yet a rule. The CFTC will now receive comments from the public and the industry. If you would like to voice your concern for or against the proposal you can submit your comment to the CFTC by sending an email to secretary@cftc.gov with “Regulation of Retail Forex” in the subject line.
For real and actionable techniques for profiting from the forex markets, read my book “7 Winning Strategies For Trading Forex” (Harriman House, UK, 2007).
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Broker Reviews
to Grace Cheng
This article is of extreme importance to those of us who have made forex our primary occupation. The problem is that your links to the CFTC are not conducive to getting comments sent by a great number of people. People are lazy, accustomed to convenience. If you don’t go a bit out of your way to provide the date of this proposal and other information that is required to file comments, many people will not bother to research them, in this busy world of ours. So, to ensure that your articles produce results, give us the quick path to filling out the forms. Otherwise, what you write will be dismissed. I am going to the required length of finding all that information to send to my list.
Peter
Hi Peter,
Thanks for your comments.
If you see the second paragraph of my article, you’d notice that the CFTC announced this proposal on January 13, 2010.
For the contact details of the CFTC, please refer to the second last paragraph which says: “If you would like to voice your concern for or against the proposal you can submit your comment to the CFTC by sending an email to secretary@cftc.gov with “Regulation of Retail Forex” in the subject line.”
The public and the industry have 60 days to reply to the CFTC with comments regarding their proposal. In the end though, it will be down to the forex brokers to do the lobbying (which they are doing now). The public’s opinion will most likely count for very little. The financial bailout is one example.
If you want to zoom in to read more about the leverage rule part in the 193-page proposal, go to page 4, 5, 36 and 37.
Hope this helps.
” I think it is the responsibility of every trader to understand the concept of leverage before starting to live trade. For many retail traders who have worked arduously to acquire the skills of forex trading, leverage gives them the possibility to access and profit from the forex market. It would be a terrible injustice to impose this new CFTC rule as this would kill the hard work and passion of these traders.”
Amit from Mauritius.
Forex dealers routinely cheat the customers in ways the customers seldom understand. These regulations will not help – they only create an environment in which customers will lose money less quickly.
The real solution is to eliminate over the counter trading of retail Forex, and go to an exchange-traded system. This would level the playing field for all. The way it stands now, trading retail forex is more like a casino than a true marketplace.
If traders are being “routinely” cheated by forex dealers, they ought to find a dealer and a system that works better for them. I trade my own account, by my own method, and make money consistently. I have no complaints against Oanda, my forex dealer, regarding matters of integrity. If anyone is prepared to take on the risk of currency trading, that person ought to also find an adequate provider of services and stop asking for regulators to perpetually stifle the playing field with a list of registrations, fees, taxes, and fat cats to manage those regulatory agencies. My suggestion: write the CFTC, as I and my group have done, and object to more regulations. Prosecute the cheats according to existing laws.