Proposed new regulations: some good, one questionable, one fatal.
The post below is by Pharoah, posted on FPA. Make sure you read the last part!
I’ve always had mixed feelings about government regulation. A certain amount is necessary for the safety and well being of the people, but too much can damage whole sections of business, the economy, and even personal freedoms. Sometimes, too much safety is a bad thing. People need to be free to take some risks and make a few mistakes without Big Brother hovering over their shoulders.
These new regulations proposed are a mixed bag. Some are very good, one is open to question, and one will do an absolutely huge amount of damage to retail trading in the USA.
The good parts
Currently, the regulations clearly state that forex account managers need to be registered except when they don’t. They state that IBs need to be registered except when they don’t. These types need to be registered with the SEC (or not) and/or the NFA (or not). There are even brokers that claim to be based in the USA that are finding excuse after excuse for not being registered anywhere. The current rules have a lot of holes in them and the growing number of forex Ponzi scams and other forex frauds in the USA clearly shows the need for making sure that these people are all registered somewhere.
The new rules proposed will require registration of all FCMs (Futures Commodity Merchants) and RFEDs (Retail Foreign Exchange Dealers). Additionally, IBs (Introducing Brokers), CTAs (Commodity Trading Advisors), CPOs (Commodity Pool Operators), and APs (Associated Persons) would need to register. If I’m reading the proposal correctly, APs would include those who solicit orders – pretty much anyone not involved with people or companies in any of the other categories who is more than a clerk or secretary. As an added bonus, an IB that introduces forex transactions to an RFED or FCM must be guaranteed by the RFED or FCM.
Another excellent feature of these proposed regulations is that they clarify that the CFTC does have proper jurisdiction to pursue forex fraud cases. Some scammers with bright lawyers were exploiting vaguely worded laws regarding whether or not the CFTC had jurisdiction on forex transactions that rolled over rather than only for cases involving delivery of currency may actually take place. The new rules clarify the scope of the CFTC’s power and will enhance the CFTC’s ability to bring these people to justice.
There is only one real exception to the registration requirements. Entities that are “otherwise regulated” such as those registered with the SEC and properly licensed financial institutions can continue to offer forex trading accounts under their existing registrations.
So, once this part becomes law and goes into effect, all forex brokerages in the USA will have to be registered somewhere. All forex account managers in the USA will have to be registered. All US based investment pools claiming to be trading forex will have to be registered. All IBs to registered brokerages will have to be registered. At that point, not being registered will be the quickest way to spot many scammers.
This won’t stop scams, but it will make life harder for scammers. If they try to fly under the radar and don’t register, it will be simpler to report them and there won’t be so many questions about which agency has jurisdiction to drop the hammer on them. Only more elaborate scams like the one run by Bernie Madoff will be able register and thus to survive undetected for extended periods. Some will move offshore, but many US investors are wary of offshore investments, so that should reduce the number of potential victims.
I wholeheartedly endorse this part of the proposed rules. These companies and people have access to other people’s money. Those with such access need to be licensed, registered, and regulated.
The questionable part
If you’ve ever thought about starting up your own brokerage in the USA, I hope you’ve got a pile of money. The NFA already imposed minimum capital requirements, but there are some brokerages in the US who have managed to find ways around NFA registration and thus have avoided NFA requirements. The CFTC wants to impose some new minimum capital requirements. FCMs and RFEDs would need to maintain a net capital of at least $20 million, plus 5% of any amount of retail customer liabilities that exceed $10 million.
I see two potential problems here. The first is that getting $20 million for a startup brokerage would not be a simple task. Setting the minimum capital requirement that high helps the biggest brokerages by reducing the number of new companies could form and compete with them. The second problem is that this could easily make smaller and otherwise well regulated companies move offshore. Some of these will set up shop in places with little or no regulation. This moves both jobs and money out of the USA.
I’d prefer to see a scaled in capital requirement for startup brokerages while having those below the final minimum be under higher levels of scrutiny. This would give startups more of a chance while providing safeguards against brokerages closing up shop in the middle of the night and running off with client funds.
And now, the worst part
Above, I said that too much safety is a bad thing. Hidden away amongst some wonderful regulations to help protect people against many of the more common scams is a little surprise that could spell the end of much retail forex trading at US brokerages.
The plan is to set the maximum leverage for US retail forex to 10:1. Just so that we are clear that this is not me slipping a digit, that’s Ten to One.
I love risk management. I can take make the worst trading decisions in the world and only lose money at an incredibly slow pace. Risk management is a good thing, but this is ridiculous.
Just like NFA’s anti-hedging and FIFO rules that interfere with stops, this is stripping away the right to make one’s own informed (or uninformed) decisions. Some brokers who know that their customers will take all their money out of the USA have found limited ways around the Hedging and FIFO restrictions, but there won’t be a way around this. Once again, in order to protect us, the government is taking away all the sharp tools in the shop so that children can play safely around the power equipment.
This will provide some limited protection foolish newbies who have been known to instantly wipe out their life savings with a mouseclick, but the world can’t be designed to protect every person from every possible mistake. The government’s regulatory role in the forex market should be to protect us from fiscal fraud, not from being able to click buy or sell with some leverage.
Let’s do some math. Suppose you have just over $10,000 in your account. Let’s ignore spread for a moment to simplify the math. Under 10:1, you can open only 1 lot. That’s $100,000 of an xxxUSD pair. If it goes a few pips against you, then there’s not enough money in your account and your broker could give you a margin call. If it goes 50 pips in your favor and you move your SL to breakeven (thus, your current risk is only your profit and nothing else assuming your broker is good at honoring stops) or even to +10 pips (thus locking in $100 profit and having your only risk be $400 of your profit), you won’t have enough money to open a second lot (or even a single minilot) if you want to scale into a good position.
Using tight risk management as I’ve described elsewhere (1% of account balance) and a 20 pip stop, you should be able to place a single trade for 5 minilots in a $10,000 account. Under 10:1, you would be able to open (at most) a second position. Even if you have profit locked in, you wouldn’t be able to open a third position for this amount.
In my opinion, this restriction is both stupid and insane. I wonder what those big brokers that will have less local competition due to the capital requirements will think when even more forex traders move their money offshore. How many US jobs will this cost if it is implemented?
What’s next? 10:1 leverage on all other commodities?
What to do
It’s not a law yet. There’s still time to complaint and try to stop this.
Before I tell you where to complain, be aware: All comments sent to the CFTC on this topic will be very public. Ranting about government conspiracies won’t help. Typing profanity IN ALL CAPS is very tempting in this case, but it won’t help. Ten well worded individual letters will carry more weight than 100 copied and pasted letters or even a single petition with hundreds of signatures. I would be honored if you do quote some of this article and/or include a link to it in your complaint, but please also express your feelings in your own words too.
According to the rather lengthy (193 pages) document detailing these proposed rules, this is how to complain:
You may submit comments, identified by RIN 3038-AC61, by any of the following methods:
• Federal eRulemaking Portal: http://www.regulations.gov/search/index.jsp. Follow the instructions for submitting comments.
• E-mail: email@example.com. Include “Regulation of Retail Forex” in the subject line of the message.
• Fax: (202) 418-5521.
• Mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, DC 20581.
• Courier: Same as Mail above.
All comments received will be posted without change to U.S. Commodity Futures Trading Commission, including any personal information provided.
Please, write something and submit it. Even a few sentences. Focus on what that 10:1 rule will do to your trading. Tell them how much money you may move to an offshore broker. Tell them they are costing jobs. Tell them the really good rules closing registration loopholes won’t matter so much if there aren’t any US forex businesses left to register.
Don’t wait. Get started writing now.