One of our contacts in the forex industry forwarded me a note with a link to the comment letters on the Commodity Futures Trading Commission rule proposal limiting leverage for retail forex traders to 10-1. There are nearly 5,000 comments and from the couple of dozen I saw, people are hopping mad.
No one likes being preached to and the rule has a sense of the CFTC protecting the retail masses from themselves. Many letters were from individual traders who noted that they were trading for years and could take care of themselves.
While many of the letters were prompted by the Forex Dealers Coalition (FXDC), a group of forex dealers opposed to the rule, that provided traders a link to post comments and suggested talking points, 5,000 is still a huge number. The Commission received a total of 4,659 comments in 2006 when it was looking at potential changes in its Commitment of Traders report. Prior to that the most comments received on a particular issue was slightly more than 1,000.
It got me thinking about the Refco bankruptcy and how the customers of the unregulated Refco FX affiliate ended up taking a bath. They shouldn’t have because there was a buyer for those accounts but the Creditors Committee did not approve it. Why a judge didn’t force the matter, I never could understand but customers ended up getting a fraction of their money back when they could have been made whole.
What I was thinking about is that if this rule was in affect back then — as least theoretically — those customers would have had to fund their account at a much higher level and hence would have lost much more money. It is theoretical because they probably would have transferred the account to an overseas broker that offered the leverage level they wanted but if it was the only game in town, they would have had to put more money in their account, trade less or simply get out.
While lower leverage may be prudent, requiring traders to use prudence is not the role of the regulator. That is what margin calls are for. The main role of the regulator is to ensure fair markets. The retail public does not need a regulator to be a nag, protecting them from risky behavior — people will select the risk level appropriate to them — they need a regulator to ensure a fair market place. Perhaps requiring segregation like in futures would be an appropriate step. At least one of the comment letters mentioned that.
It has nearly been one and half years since the Congress passed the Troubled Asset Relief Program (TARP), which allocated $700 billion to bail out our banking industry. In addition to that the Federal Reserve has made available around $2 trillion in various special auction facilities to help keep the banking industry afloat yet Congress and the regulators are still trying to put together regulatory reform. Firms that were the beneficiaries of TARP money are now spending millions to lobby against greater reform.
Remember the problem of “too big too fail”?
When a retail trader opens up a forex account for a few thousands dollars, over trades and blows up, the rest of us are not required to bail him out. Large investment banks were bailed out and now are passing out bonuses and spending money lobbying Congress. Regulators need to keep their eye on the ball. The retail public does not need to be protected from themselves, they need to be protected from once again being on the hook for someone else’s losses.
Tags: bailout, CFTC, Federal Reserve, TARP
Once again the little guy gets screwed. Your analysis says it all. thx
If this rule is implemented I will move my account out of country and the US brockerage houses will lose my business. One more unintelligent regulatory decision that will cause US businesses to lose customers and business. How dare the government make changes which directly effect my livlelyhood.
I have to agree…BIG BROTHER…is sticking it’s nose into finacial markets they have no business getting into. The political whores (Republican & Democrats) want to controll every aspect of your life. The invisible guiding hand will be moving my nonet right out of the country (more loss of jobs in the U.S.) That…that…that…is all folks!!! LOL.
This is just an incredibly x%#@*& ruling by the CFTC. This only creates a negative to the CFTC and USA leadership in the financial sectors and a hassle to trade for anyone dumb enough to want to trade with a US account. There are so many ways around this, in fact virtually all important brokers have set plans around this with backroom London and European, etc. accounts. Absolutely nothing will be achieved with this ridiculus ruling other than a backlash on the questionable thinking of the CFTC and any future support.
Here’s the comment I sent to the ctfc:
I live in Kansas City, Missouri – in the heartland of the USA. I’m one of the ‘silent majority’, ‘the little people’, the middle class, and I trade a small Forex account – to buy groceries. My reaction to RIN 3038-AC61 is pretty much what it would be if one of my sons or grandsons did something really stupid. I’d slap them upside the head and say “What WERE you thinking?” Why do you think it is a bad thing for retail traders to trade on the Forex market? Why do you want to drive retail traders from the market? That is exactly what you are saying and doing and what you would accomplish – because I sure don’t know many folks who could put up $10,000 for a 1 lot position in the USD/JPY. $1,000 is hard enough to handle.
If this is part of the new regulations following abuses by the big banks, my question to you is “Why do you think small traders in any way contributed to those problems?” I really don’t get it and would like an explanation. This regulation is aimed directly at the small trader, not the big boys who can afford it.
Now that I think on it, this is taxation without representation. By raising the margin requirement, you are essentially taxing me out of the market. I really want to see where my legislative folks voted for this. If they didn’t vote for it, then I want to know what right you have to tax me. If they did vote for it, I’ll be out with a picket sign.
There are entirely too many regulations by people who don’t understand the industry. There is yet another agency that wants to limit the forex leverage to 4:1! How many agencies regulate US Forex? One is enough and frankly too much with their outright ignorance of the Forex markets.
The leverage part of the CFTC proposal is absurd and will only kill the retail Forex industry in the US if it is adopted. I have already set up an overseas account just in case. I don’t like having all my eggs in one basket anyway.
I am adult enough to make my own decisions. I, nor any other trader needs Big Brother with Small Minds looking out for what they believe is in my “best interest”. Enough is enough.
I have written the CFTC about the leverage proposal and have written my State Representatives and The President. I know it usually goes on deaf ears but my belief is if I don’t speak out against bad rules or proposals from my leaders than I don’t have a right to complain.
I strongly encourage those who have not written at least the CFTC to do so and do so soon. If you don’t you don’t have a right to complain on any chat boards.
Brain, Otto:
That great sucking sound of money going to out-of-country accounts was my first thought as well. However, upon looking for a broker not under the thumb of the Washington Knuckleheads, I’m finding that many won’t even take US citizens as clients! Alpari-UK for one.
Anybody know of a cost effective workaround for this??
Have a good wkend and God bless.
oops. B-r-i-a-n. sorry man.
[...] 10:1 forex leverage proposal is still in limbo, and forex dealers and traders (including many Futures readers) are still busy hurling their wrath at the agency until the comment period closes on March 22. But [...]