Regulation Comes to The Forex Market

faithmight

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law today by President Barack Obama. Now, financial regulation is supposed to be a good thing. We, individual traders, should want those nasty market makers to be regulated and held to ethical standards when taking the other side of our trades. The problem with regulation is that those doing the regulating are very often little versed in the industry they are saving us from.

Here is an excpert of the law from Euodoo Trading:

“…A person [which includes companies] shall not offer to, or enter into with, a person that is not an eligible contract participant, any agreement, contract, or transaction in foreign currency except pursuant to a rule or regulation of a Federal regulatory agency allowing the agreement, contract, or transaction under such terms and conditions as the Federal regulatory agency shall prescribe…”

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This law, on the surface, seems to regulate the brokers but my problem is with the definition of an eligible contract participant. This loophole can possibly allow brokers, or worse, some Federal agency, to mandate certain rules for one type of trader and another set of rules for other types of traders. How will we be sure that brokers treat our orders as they treat any other order that comes across their desk? What will be the basis for making a trader eligible to trade in the forex market to begin with? Who will create these criterion and how do they know what’s best for my financial management anyway?

Now the Commodity Futures Trading Commission (CFTC) has been drafting forex regulations that have yet to be finalized. I attended a presentation of the CFTC proposed regulations for the forex trading in the United States at the Los Angeles Traders Expo back in June. While the intentions are good (protect traders from scam brokers), I feel like it is regulation for the sake of regulation. Since the equities and futures markets have regulation, of course, the forex market must be regulated as well, right? Call me biased but the forex market is a tremendously different market with no central exchange on which to impose a regulation. I fear for that reason that this new law gives too much power to the brokers and not enough to the individual trader that it should intend to protect.

The Act is now law (with little media fanfare but that’s another article) and it looks like it will be the role of the CFTC to come up with the finalized regulations since they have already been working on it. I hope that traders will continue to give the CFTC feedback about their proposed regulations to require retail forex brokers to be registered, managers within those firms to pass an exam and limit the leverage available for a retail forex transaction. Let’s see how this all pans out. And, again, email the CFTC Secretary. Happy trading….. for as long as possible.

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Image courtesy of Heather Willems on Flickr


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.

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