The Commodity Futures Trading Commission, or CFTC, has been making news headlines of late due to financial reform legislation that increased their responsibilities and preserved their independence from the SEC. The new law appointed the CFTC as the oversight regulator for derivatives and commissioned it to work closely with the SEC in those efforts. The commission’s chairman, Gary Gensler, said yesterday that, “U.S. Regulators won’t succumb to Wall Street efforts to weaken financial-market oversight as they implement the biggest rules overhaul since the Great Depression. Wall Street would like to keep these markets dark, and Congress has said there has to be transparency.”
Put a limit on forex leverage of 10:1?
CFTC and Securities and Exchange Commission staff members will convene in Washington today to discuss derivatives regulation. These new responsibilities may distract the agency from picking on the retail forex trading market, their duty that is nearer and dearer to our hearts. Proposals made back in January have created a furor in the industry. Comments were accepted up until late March, but little in the way of response has been forthcoming. The most controversial of the new proposals was to put a limit on forex leverage of 10:1. Many forex brokers banded together to register their complaints and claimed that this rule would be the ruin of retail forex trading in the U.S., as we know it.
What is the CFTC?
Congress created the Commodity Futures Trading Commission in 1974. The CFTC is an independent agency of the U.S. government, charged with regulating commodity, currency, derivatives, and financial futures and options. The stated mission of the CFTC is “to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.” The CFTC’s role in forex trading oversight was clarified and expanded in 2008.
Since that time and before, the CFTC has been a major partner in the fight to eliminate fraud in the forex trading industry by policing fraudulent forex brokers, arresting criminal fund managers, and advising consumers of common forex scams. From December 2000 through September 2009, more than 26,000 customers have benefited to the tune of $476 million in 114 forex fraud cases conducted by the CFTC.
However, from the outset, the CFTC has been plagued by limited budgets and manpower, and has been beset by numerous attempts by the SEC to absorb it within its massive organization. The recent debacle in our financial markets has only served to increase the pressure and public exposure of our various regulatory bodies to produce results and signal a willingness to act proactively on behalf of consumers to fulfill their missions to protect the public trust.
The bombshell released by the CFTC
The CFTC did act in 2009 to clarify a number forex concerns related to order processing, leverage and hedging, but it released a bombshell in January of this year. The proposal covered the following topics:
- Mandatory registration with the CFTC through the National Futures Association (NFA) for retail foreign exchange dealers (RFEDs), futures commission merchants (FCMs), and forex commodity pool operators (CPOs), commodity trade advisors (CTAs), introducing brokers (IBs), and associated persons (APs) of the above entities;
- Requirement of RFEDs and FCMs to maintain a minimum net capital of $20 million plus 5% of the amount by which liabilities to forex customers exceed $10 million;
- Requirement of introducing brokers (IBs) to be guaranteed by an FCM;
- Leverage restriction of 10:1 for all forex transactions.
The last point above created an industry tirade. Major brokers in the Foreign Exchange Dealers Coalition, or FXDC, immediately launched a website to focus on these new proposals by the CFTC. Formed in 2007, the mission of the coalition is to “pool together industry resources to create awareness and recognition that forex dealers are a powerful choice for individuals who choose to speculate in financial markets”. The broker group consists of GFT, Oanda, IBFX, Gain Capital, FXCM, FX Solutions, FXDD, PFG Best, and CMS Forex.
Traders were encouraged to voice their opinions directly to the CFTC. Prior to the March cut-off date for comments, the agency had already received an avalanche of complaints from traders and brokers alike, exceeding 6,000 replies and counting. CFTC officials say that the torrent of complaints from consumers came at them “like a winter blizzard,” noting that it was the greatest response to a proposal in the agency’s history.
The leverage proposal was the primary irritant. No one has argued against registration or capital requirements, although the latter issue is a follow on to previous directives to bolster the safety and soundness of the broker community. According to the National Futures Association, a CFTC subsidiary, the number of CFTC-regulated retail foreign-exchange businesses has dropped from 40 to 18, as companies consolidated to meet the new capital standards.
The FXDC announced opposition against the 10:1 leverage
The FXDC has publicly announced its opposition to the “10:1 leverage” restriction by arguing that it will be detrimental to both forex trading and the American economy. Their arguments focus on five key areas:
- The leverage limit will force 90% of retail forex traders to move their accounts to offshore brokers;
- That shift will eliminate thousands of U.S. jobs in the retail forex industry;
- The U.S. will lose billions in forex trade and potential tax revenues;
- Efforts to curb forex fraud will have to increase since offshore activities have proven to be more suspect by their nature;
- Offshore brokers will not be regulated regarding capital requirements or operating procedures and will thrive under these circumstances, thereby increasing the potential for fraud in the process.
“If the rule goes through, firms will close their U.S. offices and move their operations overseas, because they will be put out of business,” said Muhammad Rasoul, chief operating officer at GFT, a division of Global Futures & Forex Ltd. As many already know, there are no leverage restrictions in the U.K., the acknowledged center for global foreign exchange trading.
The CFTC has been both a friend and now a foe of the retail forex trading industry. As it now pursues Wall Street rabbits down the derivative rabbit hole, the hope is that earlier forex initiatives to limit leverage will get bypassed during its latest chase for fame and public adulation. Anticipation is sometimes 95% of success. Forex traders would be wise to explore their options and keep their powder dry.