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MadMarketScientist

What Do We All Think About the New Forex Rules?

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Now that the CFTC has finally weighed in on the proposal to reduce the leverage allowed in forex I'm curious what you all think?

 

Here is a summary from them:

 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/forexfinalrule_qa.pdf

 

These go into effect on October 18, 2010 so about 6 week or so.

 

My interpretation is the leverage will be 50:1 on "major pairs" and 20:1 on exotics. It's unclear what is what - but I would assume the usual's like EURUSD, GBPUSD, USDJPY are major - though you have to wonder what the GBPJPY will be considered, etc... That part is unclear plus it appears they are keeping open the ability to move pairs between these two leverages.

 

It does appear that anyone who introduces forex accounts now must be registered though they do not have to be guaranteed by the broker if they meet capital requirements. That doesn't impact the retail trader but gives an indication of the regulations being required.

 

There has been some debate I've seen elsewhere that this somehow removes the ability for US traders to have overseas accounts, which is what many did to avoid the hedging and FIFO rules when those came into effect a year ago. However, I don't see where that is clearly spelled out one way or the other.

 

Obviously there was a fear they could rule and make it 10:1 so this is probably a good development from the worst possible.

 

Thoughts?

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My guess is regards what gets classed as a major they will say something like

"USD, GBP, JPY, EUR, AUD (etc:)" and that ANY combinations between these will be classed as majors, the rest and any combinations of those will be considered not major.

 

regards the leverage 50 or 20 to 1 seems about right.

All it will mean is that anyone who is using even more leverage will have to reduce their size.

It may be interesting how it affects spread betting accounts (mainly relevant in the UK)

 

I feel its all about ultimately forcing everything onto a regulated exchange

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10:1 would have been too far IMHO...of course the old 500:1, 1000:1, etc. was truly ridiculous (before the last reform)...I don't know that they necessarily needed to push it further...100:1 was ok. I generally just don't like laws that are put in place to protect people from themselves who aren't hurting anyone but themselves (if they're not infringing on anyone else's rights).

 

Like seatbelt laws...

 

Laws like that make the statistics better, but at the cost of freedom/rights.

 

I dunno...lol

Edited by Cory2679

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Like seatbelt laws...

 

Laws like that make the statistics better, but at the cost of freedom/rights.

l

 

Off thread a little (or maybe not) but seatbelt laws and similar laws in many places are nothing to do with freedoms. They are put in place because of the costs to society of not having them. Same as the no smoking bans. You can always choose to ignore them, but then in the great freedoms go the costs..... are you going to cover the costs if something goes wrong? or will society?

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Off thread a little (or maybe not) but seatbelt laws and similar laws in many places are nothing to do with freedoms. They are put in place because of the costs to society of not having them. Same as the no smoking bans. You can always choose to ignore them, but then in the great freedoms go the costs..... are you going to cover the costs if something goes wrong? or will society?

 

Then perhaps activities that are a burden on society should be taxed...not outlawed (which is, indeed, often the case). Smoking tax, obesity tax, whatever.

 

I guess the seatbelt laws are practically a tax, anyway...I don't know of people being taken away to prison for not wearing a seatbelt...just fined (taxed, in a way).

 

So, perhaps the seatbelt laws aren't so bad if you look at it as a tax rather than a law against having your seatbelt undone (to me, anyway).

 

I don't know of smoking being outlawed (I could certainly be wrong)...smoking bans in public places, restaurants, etc. have to do with smokers infringing on the rights of other people (who presumably have the right to breath smoke-free air).

 

This isn't really even something I have strong opinions about. lol Just some thoughts.

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Smoking is a cool one Cory because it is absolutely not victimless and because it is slipping towards "outlawed." Its not as though you even really get high!

 

In New Zealand it will be outlawed in prisons from mid next year. Outlawed.

 

Why? Because prison officers can sue the state for the damage that passive smoking is doing to them in an environment they can't get away from. So, if you think prison is a deterrent now, imagine if you have to give up smoking when you arrive! I guess they'll put them all on tranqs to get through the grumpy phase!

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Interesting given the similarities between anti smoking, seat belt, laws etc and Forex rules.

These are all marketed that they protect us from ourselves.

When in reality, they are usually enacted as a result of a cost benefit analysis.

eg; smoking - as I understand it - it was the US states heath care systems in particular, and court cases in Australia that sued the places whereby passive smoking could cause cancer. The people sued were employers, public places etc.

So it became cheaper to ban smoking.

There are some interesting calls around the world to re-asses the current failed war on drugs, via the exact same approach. Are they better pumping the money into health and rehabilitation rather than fighting what has clearly been a failed attempt to stop supply?

 

So apart from trying to force most people onto exchanges for better, centralised regulation and monitoring, and by reducing excessive leverage (probably not such a bad thing) what other cost benefit analysis would there be in FX? Maybe they should protect us from the banks..... it certainly might be cheaper for us as individuals at least :),

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I think the benefit is "I did something so you should vote me in"

 

and the second one is that it doesn't impact on campaign contributors who generated the real problems. Fix the little guy to protect political scum. Warms the heart.

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While this regulation has no impact on me as I only leverage up within the 2-5 : 1 area, I think the overall idea is dumb. People can self govern their finances without restriction and also wear the responsibility of the results. What actual benefit does this regulation have? (non-rhetorical).

 

With kind regards,

MK

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Have been a while since my last post, i just want to say... this is sucks(since my money management work best on 100:1) we should have an options on our own we deserve to choose what ever leverage we need 100:1 400:1 10:1 any leverage we need!

 

BTW if someone can't do their own money management they should not be trading. no matter how big the leverage is if you have good money management will not be a matter.

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What about the guy who uses the maximum available trading leverage (short of being at risk of margin calls) in order to reduce the 'fiscal risk' (ie of his broker going bust) by parking the majority of his trading fund in a safe regulated bank account? In UK, bank accounts are government guaranteed to £50K per institution - so If I were (hypothetical example with flaws, but it'll do for illustration) to trade £1K on leverage with an unregulated FX or spread betting company based in say Malta, and leave £49K in a UK bank, only £1K is at 'fiscal risk'. By doing so I'd almost certainly decrease my overall risk (particularly at the moment) compared to placing my entire trading fund with that broker, then trading low leverage in my account.

 

Max

Edited by maxr

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...I only leverage up within the 2-5 : 1 area, I think the overall idea is dumb.

 

Do you day-trade or only swing/position trade? That seems like fairly low leverage to me for daytrading. If you risk 2% on a position on the EUR/USD with 25 ticks of risk, that means a position that currently requires over 10:1 (and that's if you only have one position on at a time). Just curious.

 

People can self govern their finances without restriction and also wear the responsibility of the results.

 

Absolutely, but that's unfortunately just not the reality...people don't take responsibility for their actions...they want to make excuses and blaim someone else.

 

What actual benefit does this regulation have? (non-rhetorical).

 

Maybe traders who blow up their accounts whine about how their brokers are just out to get them and it's the big bad broker's fault that they're bankrupt. I've seen it many times throughout discussion boards/broker reviews...people 100% blaming their broker for their failure. :doh:

 

I guess the regulation shuts those people up...because maybe those people go spread the word to people who will believe them about how bad brokers/Wall Street/markets are and it's bad press.

 

Also, one might speculate that the CFTC has an agenda to push people toward trading currency futures...where, with some brokers, the day-trading margins to trade the major pairs is much much higher than 50:1.

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All interesting/good points above.

 

I would agree that much of this comes from those who lose money, then play the blame game. And have complained endlessly to regulators who then feel they need to step in to protect the innocent. Of course those innocent were really just super greedy and didn't want to face the reality of their stupidity.

 

When I lose I have learned that ultimately the buck stops here. Sure, if a broker pulls some shenanigans, or doesn't execute right that's a different story. And, I'm all for the regulators to require these brokers to be registered and put up capital because the reality is when that wasn't the case there were truly brokers simply stealing funds.

 

As to whether we need 100:1 or 200:1, etc... I would say no if we weren't talking about parking funds somewhere else like one of the replies above. Strictly from a trading standpoint I don't see how someone can really utilize 100:1 and make money. If you do, let's say put $1,000 into forex and use the full 100:1 to buy a standard and lose a small amount like 25 pips you are down 25% in one trade. Totally unsustainable and only luck will make this work.

 

I am already getting emails from brokers like FXDD who make it super easy anyway to get around these rules - like using FXDD Malta and I'm sure all the other majors like FXCM have their own alternatives.

 

This is what happens though when there's no personal accountability - we get lots of regulations.

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There are strategies that are less simple than ours MMS that can make use of the extra margin. Some of them are quite good. Its applying 200:1 to straight out single bets without good money management that offers the potential to clean out the account quickly.

 

In response to Malta etc won't you just get the (protectionist?) legislation in the US that stops you using overseas purveyors of extra margin similar to the stuff that stops you using spread-betters.

 

On the other hand, if its primarily the industry and politicians protecting their re-elections by being seen to be doing something they'll probably be satisfied with their current effort.

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That part I'm not clear on - whether regulation prevents you from taking advantage of what's offered overseas - like you mention with spread betting (or online gambling for example)

 

I know that up to this point, I know a number of people who have had no problem opening accounts overseas and in many/most cases the funds are still being deposited held in segregated accounts in the U.S. -- I believe FXDD is holding them with Chase in New York.

 

Not sure if this new regulation somehow prevents this -- or how it could be enforced. I'm sure they would lead you to believe it is not allowed but whether in actuality not sure.

 

MMS

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Guest Tresor
Then perhaps activities that are a burden on society should be taxed...not outlawed (which is, indeed, often the case). Smoking tax, obesity tax, whatever.

 

Please remember that whatever you consider a burden for society may not necessarily be perceived a burden by other members of society.

 

Please remember that whenever a government imposes any tax it does so by initiating violence against YOU and other members of the society, i.e. if you do not pay taxes, you get a court notice, if you fail to show up in a court room, the police will come to arrest you.

 

If - in a hope of being a free human being - you resisit the arrest (which is a violent act of depriving you of your freedoms) you will be shot dead.

 

If you don't have a gun to resist the arrest you will be put in prison. If you decide to escape from the prison and enjoy ''freedom'', you will be shot dead by the guards.

 

Okay, you are enslaved by having to pay taxes. And you want to further enslave members of your community by proposing another tax, and you want to increase violence within your society (taxation is a form of violence initiated by governments).

 

Why at least the hell not let the people trade the leverage they want?

Edited by Tresor

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What about the guy who uses the maximum available trading leverage (short of being at risk of margin calls) in order to reduce the 'fiscal risk' (ie of his broker going bust) by parking the majority of his trading fund in a safe regulated bank account? In UK, bank accounts are government guaranteed to £50K per institution - so If I were (hypothetical example with flaws, but it'll do for illustration) to trade £1K on leverage with an unregulated FX or spread betting company based in say Malta, and leave £49K in a UK bank, only £1K is at 'fiscal risk'. By doing so I'd almost certainly decrease my overall risk (particularly at the moment) compared to placing my entire trading fund with that broker, then trading low leverage in my account.

 

Max

 

 

You're wrong! You say you're hypothetical argument has flaws. It doesn't at all. It is spot on and well made.

 

This is what REAL money management is about, and exactly how professionals view the situation. brokerage accounts dont pay out interest, so why should anyone want to leave anymore than necessary to manage positions? this is why funds will deposit interest bearing paper as margin with their clearing firm/broker so they are earning interest on their margin as well. The risk concept which you intelligently put forward is another facet of shrewd risk management and money management.

 

Afterall, when you deposit your money with a broker, does anyone really think he keeps it nice and safe under lock and key? Nope. It goes straight into the overnight or bond market to earn the broker free money. This is where a lot of brokers make a good % of their income.

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That part I'm not clear on - whether regulation prevents you from taking advantage of what's offered overseas - like you mention with spread betting (or online gambling for example)

 

I know that up to this point, I know a number of people who have had no problem opening accounts overseas and in many/most cases the funds are still being deposited held in segregated accounts in the U.S. -- I believe FXDD is holding them with Chase in New York.

 

Not sure if this new regulation somehow prevents this -- or how it could be enforced. I'm sure they would lead you to believe it is not allowed but whether in actuality not sure.

 

MMS

 

 

You do tend to get surprising levels of cooperation. Maybe pressure is involved but they also don't want the hassle of customer problems when it goes wrong.

 

The spreadbetters (fx buckets by another name) are the most obvious one (try to open an account from the us).

 

Online pharmacies and Amazon is another one ... try to order drugs that are legal in the US but not approved in Australia for Aus and they won't take your order.

 

So, if you get draconian laws in the US you might be surprised, given the linkages in these organizations at their willingness to exclude you guys from overseas operations.

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