The Commodity Futures Trading Commission (CFTC) has finally released its final regulations concerning off-exchange retail foreign currency transactions. The rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008, which, together, provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions. The final rules become effective October 18, 2010.
Most importantly these rules further reduce the leverage which can be offered by US forex brokers to 1:50 and 1:20 on majors and minors respectively. To those with short memory – it’s not the first time CFTC reduces forex leverage as back in May 2009 the leverage was reduced from 1:400 to 1:100.
IBs however were saved, at least for now, as IBs can be guaranteed by a certain broker or remain independent. This however goes to show you that with time CFTC will probably require all IBs to become guaranteed as CFTC seem to deliver its blows in small portions.
An interesting aspect that I think went unnoticed is that SEC/FINRA brokers (like Citi, Deutsche, etc) can keep offering retail forex trading regardless of these regulations, therefore keeping the 1:100 leverage and become more attractive to forex traders than CFTC forex brokers (like FXCM, IBFX, etc).
“These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange,” CFTC Chairman Gary Gensler said. “All CFTC registrants involved in soliciting and selling retail forex contracts to consumers will now have to comply with rules to protect the investing public. This is also the first final rule that the Commission has published to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. We look forward to publishing additional rules to protect the American public.”
If Mr. Gensler thinks that making the US forex industry uncompetitive is making the American public safer then let’s see where the US money will be deposited from now on. I bet that most of it will go offshore. In Japan the leverage was reduced to 1:50 exactly a month ago and there are reports of a huge drop in volumes (nothing not expected) meaning that brokers are now making less from same number of transactions/traders which will necessarily lead some of them to go out of business.