New Forex Rules Could Damage Forex Industry
The US Commodity Futures Trading Commission (CFTC) has proposed some very restrictive rules that could adversely affect the thriving forex market. Thousands of traders have flocked to retail forex markets in search of profits greater than those offered by stocks and commodities. Although most of the new rules proposed by the CFTC are meant to reduce investor exposure to scams many forex brokers say the rules go too far and could damage the thriving forex market. Many brokers say that the rules may force them to cut back on US operations sending billions in trades abroad. They also point out that thousands of jobs may be lost due to the restrictive rules. Joseph Trevisani of FX Solutions based in New Jersey stated, “It’s a real issue here — we are talking of losses in jobs, tax revenues and competitiveness.”
Limits on Leverage
What worries traders most are the new rules that would limit the amount of leverage traders could use. Currently leverages of 100:1 are common and the CFTC has proposed limiting leverage to 10:1. Should the new leverage rules be imposed traders would have to invest larger amounts to make trades of the same size limiting both profits and losses. Brokers are adamantly opposed to the new leverage rules. Trevisani at FX Solutions said, “Efforts to promote transparency and prevent fraud are more than welcome, but I can’t really see the connection between fraud and customers’ leverage.” One of the most attractive features of forex trading is the large amount of leverage available to investors. Although a 10:1 margin is much larger than the 2:1 average leverage for stocks a reduction in leverage allowed will send many investors overseas where larger amounts of leverage are allowed. Currently the UK allows leverage of as much as 500:1. Most brokers say that the new leverage rules are out of step with international industry averages.
The Industry Fights Back
A group of currency dealers have formed a Foreign Exchange Dealers Coalition (FEDC) to fight the proposed rules. In a letter the group said that the new hedging rules would be a “crippling blow” to the thriving forex industry. The letter also stated, “Should the 10 to 1 leverage rule be adopted the vast majority of those accounts can be expected to go offshore.” They say the new rules would force investors to go offshore in search looser leverage rules. They also point out that investors who are forced to go offshore will be at the mercy of dealers with no capital requirements or regulations designed to protect investors. The FEDC stated, “These unregulated forex dealers don’t have to worry about capital requirements, risk management models, marketing ethics, dealing practices or even returning a customer’s funds.” Hopefully the FEDC will be heard in Washington and leave the leverage rules alone.
Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.
