Magazine article Modern Trader

Leveraging Free Speech

Magazine article Modern Trader

Leveraging Free Speech

Article excerpt

When the proposed rule release hit the airwaves back in January, the shock was deafening. This would be the Commodity Futures Trading Commission's (CFTC) proposal: Regulation of Off-Exchange Retail Foreign Exchange Transactions. The industry was well aware new regulations were in the works, it just wasn't so sure of the details. And as they say, the devil's in the details.

Of course there was the increase in financial requirements for futures commission merchants (FCM) and retail forex exchange dealers (RFED), which was upped to $20 million, plus 5% of the amount, "if any, by which liabilities to retail forex customers exceed $10 million." There was the new boilerplate disclosure rules, as well as the new required registration of FCMs and RFEDs and their associated persons. These were all expected and huffed about, but accepted as a way to keep OTC forex for retail open in a period where on-exchange has become the new black. What wasn't expected was the leverage rule, that is, leverage in retail forex customer accounts would be subject to a 10-to-1 limitation. This would be far different than the current 100-1 level that just went into effect last year.

To put this in perspective, if you wanted to trade a contract of $100,000, today you need only $1,000 in your account. With the 10-1 rules, you would need $10,000. This basically raises the margin level from 1% to 10%. In comparison, the National Futures Association (NFA) required a 100-1 limit. A futures exchange contract can vary in leverage from 20-1 to 50-1 per contract, depending on currency and volatility (see Trendlines, page 10).

The anger from the RFEDs and FCMs was loud and clear: they will be out of business or have to flee to kinder regulatory shores if this proposal passes. Their customers were more blunt: try prying 100-1 leverage from their cold, dead hands. …

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