The CFTC's new and revised - reduced leverage in forex will be in place this month.
The impact of reduced leverage in the forex markets has been received as less of a thud and more of a sigh. The new rules have been met with mixed reactions, but are a bit less of a blow to the foreign exchange futures industry than initially expected.
On August 30, the Commodity Futures Trading Commission (CFTC) released its final regulations concerning off-exchange retail foreign currency transactions. Going into effect on October 18, the rules provide the CFTC with broad authority to register and regulate entities wishing to serve as counterparties to, or to intermediate, retail foreign exchange (forex) transactions.
Most importantly, the rules will limit leverage available to retail forex traders to 50-1 on major currency pairs and 20-1 for all others. The final rules will go into effect on Oct. 18 as proscribed by the Dodd-Frank Act, Consumer Protection Act and the Food, Conservation, and Energy Act of 2008.
Proposed Rules vs. Reality
The CFTC alarmed the forex community in January when their rule proposal for retail forex transactions included limiting leverage to 10-1. This incited a flood of letters of protest as retail brokerages and traders said limiting leverage to 10-1 would kill the market, or send it overseas. The new rule by the CFTC allows a leverage of up to 50:1 on major pairs, and 20:1 on minors. Also in Japan, the limit is 50:1, and will be reduced to 25:1 next year. This is less than the classic 100:1 leverage that is common to forex trading, and less than the NFA limit of 100:1.
The new rules also require the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), and sets requirements for registration, disclosure, recordkeeping, financial reporting, minimum capital and other business conduct and operational standards.
"These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange," CFTC Chairman Gary Gensler said in a press release on the organization's website. "All CFTC registrants involved in soliciting and selling retail forex contracts to consumers will now have to comply with rules to protect the investing public. This is also the first final rule that the Commission has published to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. We look forward to publishing additional rules to protect the American public."
In reaction to Gensler's statements, one forex broker in an online community commented, "If Mr. Gensler thinks that making the US forex industry uncompetitive is making the American public safer then let's see where the US money will be deposited from now on," commented one forex broker online. "I bet that most of it will go offshore."