CFTC Finalizes Regulation for US Retail Foreign Exchange

• faithmight
• September 2nd, 2010

First, a summary of the CFTC’s final ruling:

• Brokers must register with the CFTC/NFA in order to facilitate trading for individual forex traders
• Forex account managers must pass an exam to trade other people’s money
• Leverage has been reduced to 50:1 for the majors and 20:1 for exotic currency pairs. The required minimum security margin deposits will be 2% for positions taken in the major currencies and 5% for all others.
• This is all subject to change

Read the details for yourself.

The biggest complaint from the brokers has been that regulations will drive business out of the country. Yes, the cost of doing business now increases due to compliance requirements. Compliance costs money. But do I think actual demand will dry up? Unfortunately not. Many forex traders complain about their broker but never switch services. Americans have a hard time leaving banks and brokers seem to fall into that same class of headache that just leads to inertia regardless of dissatisfaction.

The biggest complaint from traders will be the leverage and minimum deposit. The different leverage allowances classifies our trading assets unnecessarily. Currency pairs are already differentiated by the spread and pip value and those can vary wildly depending on the cross. The fact that the payout as well as the risk have been handcuffed for the sake of the trader is an unexpected and prejudiced outcome. Only certain traders will be able to trade certain pairs. I don’t know that this is a good thing for traders or US brokers.

However, on the other hand, the reduced leverage and deposit requirements actually provide risk management. There are accounts available to open with only 25 USD. Yes, you can do it but is it a good idea? In my opinion, it’s the fastest way to divest $25. You can buy gas for your car and get a better ROI. Plus, if you have to pay to play you may as well set yourself up for longevity in this business. Do the math.

$25 micro account with 400:1 leverage (the current rules)

With $25, you control $10,000. Each pip is worth $0.10 on 1 lot. I can trade any pair I want and I have 10 lots to trade. However, the entire account can be lost if -25 pips on those 10 lots.

$1,000 mini account with 50:1 leverage (the new rules)

Micro accounts will no longer be profitable to offer alone. Back to minis! With $1,000, you control $50,000. Each pip is worth $1 on 1 lot. I can only trade the majors (as defined by my broker) but I have 5 lots to trade. Yet, the entire account can be lost if -200 pips on those 5 lots.

Big difference.

Research your brokers, fellow traders. Now is a great time and opportunity to change brokers, if necessary, and get positioned to maintain your trading style. Brokers and platforms do have an effect on our trading. Ensure that it is a positive one. Do your due diligence and take appropriate action. The new CFTC regulations take effect October 18, 2010.

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

Tickers: brokers, CFTC, forex, leverage, NFA, requirements, retail, traders

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