Major Forex Regulation Proposed

[Eric Johnson 10]

The CFTC is trying to change leverage requirements and control all US forex transactions. This will result in maximum leverage of 10 to 1 leverage on all accounts.

The action is open to comment for a time, and I hope it is stopped. I do not want 10 times more of my money deposited to trade the same size lots. For one thing that money is already subject to plenty of regulations. It also makes it subject to loss if there is more large financial problems. I will probably only trade with foreign brokers, and that is so much extra paperwork and expense to make transactions.

 

Here is a link to learn more, sorry it has a pop up, but it was one of the best articles,

 

http://www.fxstreet.com/education/forex-basics/cftc-forex-proposal-us-retail-market-to-disappear/2010-01-19.html

 

here is where to write to send comments

 

http://www.forexcrunch.com/act-against-the-cftc-110-leverage-proposal/

 

I guess this is an active email secretary@cftc.gov

Edited January 21, 2010 by Eric Johnson

[tradersky 10]

its the cme influences

[thalestrader 14]

As long as it doesn't effect an American's ability to open, fund, and trade an off shore account, let them do whatever they wish. Personally, I would welcome more liquidity flowing to the CME futures. There actually is an EURJPY listed future, but no one trades it. What a shame!

 

As a friend of mine stated, however, I doubt very many bucket shop customers have the funds to trade futures, so any hoped for increase in trade flows to the listed futures is likely mere misguided wishful thinking.

 

Best Wishes,

 

Thales

[Eric Johnson 10]

Hi,

This is a timely discussion as Obama announces plans to "regulate" the financial sector, and we see stocks go down. It is my bias, but the big funds always seem to have a way around the regulations, and the smaller trader just gets more run arounds. Also they step up their "security anti terrorism " paperwork, that means they freeze your assets and ask questions later if you have anything unusual. It sounds harmless until you are overseas citizen trying to get a bank account without visiting a branch in the USA, (no personal account=no withdrawal) and so on. My point is that these regulatory commissions need to be kept in check. The US regulatory and anti terrorism agenda has a way of forcing it's way around the globe.

As for futures and the CFTC (commodity futures trading commission ), I enjoyed trading futures for years but, the quote prices for futures are high, trades expensive, and ability to vary lot size is less. I don't really want that kind of direction for forex. They would be placing liability demands on brokers that may lead to higher fees. We may see the decrease in volume in FX if regulation goes too far. Also early 2011 the capital gains may be dramatically increased, if the tax cuts are let to expire.

Anyhow, as they say, love it or leave it, I guess I left a long time ago.

Edited January 22, 2010 by Eric Johnson

[MidKnight 12]

Also they step up their "security anti terrorism " paperwork, that means they freeze your assets and ask questions later if you have anything unusual.

 

Hiya,

 

This 'security' has been active for a couple years already. I had this happen with an IB account about 2 years ago. What annoyed me about the whole thing was that they freeze it automatically and didn't bother to tell me about it. It took me well over 6 hours and 4 separate phone calls until I could actually speak to someone that was able to address the problem. I was livid. Someone outside the USA and outside the EU could really garner some solid business if they setup a quality brokerage firm in locations with less absurd regulation.

 

Oh yeah, I also think this forex regulation is dumb. Reduce leverage on FX but you can go right ahead and trade the ES with only $500 day trade margin at some brokers. All the leverage reduction does is reduce the small players, and they are not the ones moving the market anyhow, so what is the point? It's not going to stabilize anything.

[Kiwi 16]

Doesn't it just reduce US based forex companies.

 

Its like all the anti-corruption legislation. US businesses in the gulf, india or indonesia become uncompetitive unless they add a middle man who pays the bribes ... and if they do they'd better be able to "prove" they didn't know.

 

The holier than thou ... and can impose it on others ... didn't stop the french and it sure won't stop the chinese. Goodbye US competitiveness.

[DugDug 10]

There is a big difference between trading/leverage regulation and anti-money laundering (AML) anti terrorism regulation and the tax man. The AML and tax man are going to increase regulations regardless - this is what makes opening accounts, closing accounts, freezing accounts a pain. This is different to the leverage regulation -the main killer for a lot of retail traders. (larger retail traders will get around this most likely as they can be registered as companies or have enough money to qualify as non retail, or will have no problems shifting to offshore)

AML and tax are not going to go away - and are a different animal. This is always moving to a more globally focused coverage.

 

My first thoughts are that it will generally only hurt those companies that are operating on the edge which will then lead to more concentration into the existing bigger brokers, which means less competition which generally leads to higher costs..... never good for anyone.

 

Most of the bigger more established companies already properly focus on the regulations and any costs to them will be marginal - it will hurt the smaller or more lax firms (might be a good thing). Clearly however the growth of the retail FX broking firms in recent years have been the driving force of reducing costs and spreads.....getting rid of competition is never good.

 

However - If it pushes people onto the exchange futures... I am with Thalestrader....that works for me, and I dont necessarily see it as such a bad thing. (I find it hard to sympathise when people complain about the costs and the spreads as they are pretty good.) They will probably introduce minis.They have said previously they are worried about the growth of the largely unregulated retail FX market and at least they may head off possible future problems.

Most retail people probably play with too much leverage. But a 10:1 restriction is probably too harsh.

 

NET RESULT: regulators are missing the point (but are at least trying to head off an issue in the future), regulation is here to stay and going to increase, competition decreases, costs increase (after massive improvements in recent years), US continues to decline in world dominance of markets and trading.

hmmmm.......not much really changing then.

 

(I actually don't think the exchanges should ever have been left to run at a profit as private companies - but thats a whole other issue. )

The bigger worry is Wall street not being able to run prop desks.... that is more likely to push up costs and reduce leverage and move people off shore of the US.

Edited January 22, 2010 by DugDug

[thalestrader 14]

(I actually don't think the exchanges should ever have been left to run at a profit as private companies - but thats a whole other issue. )

 

I fully agree - exchanges serve a public utility and as such ought to have as a goal to generate revenue enough to cover the costs of operations, and not have the added incentive to increase costs to the public in order to attain a profit over and above the cost of operations..

 

 

Best Wishes,

 

Thales

[DugDug 10]

thanks thalestrader - the exact reason why I don't think they should be privately owned. I believe they actually do very little for what amounts to a virtual monopoly (it is slightly different these days as they have opened themselves up to being public and hence competition) but I have always believed that its a paradoxical situation where by we have the best people to regulate the markets ie; the exchanges, also under an obligation to maximise their shareholders profits - hellloooo - potential for conflicts. They take no risk as they are not a market maker, the members and insurance companies are the ones who bail out defaults and are largely protected by government regulation and barriers to entry (as the dark pools and FX are now finding out)....what better type of institution to be operated by the government - yet administered by private enterprise under a different compensation scheme to profit in order to work as a public utility for the good of the participants. Funny - just like the old days when brokers collectively owned it.

I apologise for the rant.....its a bug bear of mine, and its Friday afternoon. I took my own advice from another thread - made some money and then went to a good old fashioned long lunch.

[i trade 10]

Been trading for a long time and I've never stopped to actually think about this.

 

Please correct me if I am wrong.

 

So in comparing margin power of ES to that of spot currencies:

 

Roughly speaking,

ES - $500 in margin allows you to control ($50 x index value of 1100 =) $55,000 in trading power.

 

Eur/Usd - $1600 in margin allows you to control $100,000 in trading power.

 

So $1600 in ES margin gives you $176,000 of trading power vs FX giving you $141,000 basis the Euro/usd.

 

So as margin levels stand presently ES actually offers more leverage the FX does.

 

I don't get it, why are they picking on FX? I agree 100% with regulating the industry to get rid of the fraudsters but why do they think they have to treat traders like a bunch of kids and tell them what is the correct level to speculate (or gamble as some do) with?

[DugDug 10]

From the CME website

INITIAL MAINTENENCE

S&P 500 (SP)-S&P 500 FUTURES (SP) Spec $28,125 $22,500

Hedge/Member $22,500 $22,500

S&P 500 (SP)-E-MINI S&P 500 FUTURES (ES) Spec $5,625 $4,500

Hedge/Member $4,500 $4,500

 

So I am not sure where smaller margins of $500 comes from.

 

Also I think they are largely looking to pick on FX for a few reasons ....

1) there has been phenomenal growth in the retail FX market in recent years - this always worries people due to bubbles, regulation not keeping up with progress and companies being able to over things like 500 x leverage.

2) its not on an exchange - one of the key ideas is that they are trying to push a lot of OTC business onto exchanges including the things that a lot of the institutions do.

3) FX retail is an easy target. However I would not forget that some of the big banks and institutions are getting close to being massively overhauled as well - its just they have better lobbyists to fight or at least delay and better influence the politicians.

[Eric Johnson 10]

I have traded with many brokerages, companies like JR futures have small S+P mini margin levels, and forex brokers offer varied leverage. Basically I hope that those who are concerned do send an email, and we can hope these regulators can understand things like decreased tax revenues, brokerages losing money, investment going overseas, and so on. I think I read that there will be a restructuring of brokerage liability, and that may include excess cash reserve, or insurance for them, aka higher fees.

[thalestrader 14]

So I am not sure where smaller margins of $500 comes from..

 

Hi Dug Dug,

 

Many futures brokers allow special "day trade"margin for the e-mini's, with $500/contract having become fairly common. Funny that the CFTC is coming after FX margin, but no one seems to mind the e-mini futures margin. That is why I suspect this has everything to do with Obama & Chicago and nothing to do with a saving retail traders and there $500 bucket shop accounts. The motive is not consumer protection - it is to move more trade flow to the CME. If the government were smart, they'd treat bucket shop bets like table gaming bets, and collect a 1/10th of a pip "tax" on every bucket shop bet. As far as I know, there is no limit on how much someone can bet at a casino. Why is the governent worried I might lose some chicken scratch with a bucket shop but allows me to ose my house to the Sands? Why else would the government suddenly become interested in the "well being" of three figure accounts? It is hard for me to see how this is not related to directing trade flows to the exchanges.

 

Best Wishes,

 

Thales

Best Wishes,

 

Thales

[DugDug 10]

I agree thalestrader, thats why in the other parts of my post points I think that the retail FX due to their growth and the fact they are off market are an easy target. Ideally by the better lobbyists to push things onto exchanges. How better to save retail traders!

 

I thought if you were actually trading via the exchange there was a minimum requirement of the margin set by the exchange as a client, unless the broker amalgamates everyone's trades via the day and acted as the one client. - you learn something new every day. thanks.

Maybe that will be the next easy target.

 

My view is that if firms are offering excessive leverage to retail clients who cant prove themselves as competent traders first. ie; they start off with lower levels first, then its much the same as a bank continually sending out credit cards to people who can least afford it, casinos who encourage the poor to gamble knowing the odds are against them and such similar often frowned upon practices. (even if you or I don't necessarily frown upon them)

Ultimately it is up to/or should be up to the individual to police themselves.

 

Did you notice Goldmans CEO Lloyd Blankfein distance himself from being a bank in the recent hearings..... in summary I heard the gist being - we are a market maker, we are not there to act in the best interests of our clients, they were big enough and professional enough to know what they were getting themselves into. PYA seems the name of the game.... always has. Always will be.

[thalestrader 14]

Ultimately it is up to/or should be up to the individual to police themselves.

 

With respect to financial risk taking, I agree (I would not presume murderers and rapists could be expected to "police themselves," for example).

 

I also would have let the banks fail. The real kick will come if these corporations which were saved only by government aid ultimately fail anyway.

 

Capitalism is dead! Long live Capitalism!

 

Best Wishes,

 

Thales

[robertm 10]

 

Capitalism is dead! Long live Capitalism!

 

Thales

 

:rofl: :rofl: :rofl: :rofl:

[robertm 10]

I don't get it, why are they picking on FX? I agree 100% with regulating the industry to get rid of the fraudsters but why do they think they have to treat traders like a bunch of kids and tell them what is the correct level to speculate (or gamble as some do) with?

 

Because there's money to be made in regulation, which is why an unregulated CFD market operating in the US just isn't allowed

 

Obama is a nice guy but he's looking pretty shaky on the second term if a half decent candidate steps up.