Now that the dust has settled a month after the SNB shocker rocked the markets and authorities have had the chance to assess the damage, U.S. financial industry watchdog CFTC (Commodity Futures and Trading Commission) is currently exploring ways to tighten regulations on the retail forex sector.
In his testimony at Capitol Hill last week, newly-appointed CFTC Chairman Timothy Massad explained that some of the industry risks are stemming from trades made by overseas parties who aren’t subject to U.S. regulation. “Many of these firms are actually taking risk from their foreign affiliates, and the foreign-affiliate risk isn’t subject to the same standards as ours,” he said. “We’re looking at whether we can do something about that.”
For instance, the CFTC limits leverage on retail or individual transactions to 50:1 while regulatory agencies in other parts of the globe allow larger leverage of as much as 200:1. Even if U.S. regulators are able to enforce their rules strictly, they still can’t be able to fully protect clients or limit industry losses on transactions. Massad suggested that they might work with the NFA in monitoring how U.S. forex brokers handle transactions from overseas affiliates but refrained from providing the specifics.
FXCM, which has come under scrutiny after suffering million-dollar losses when the SNB decided to scrap the franc peg, came close to violating capital requirements and had no choice but to take a $300 million loan from Leucadia National Corp. to stay afloat. As it turns out, a huge chunk of the firm’s losses came from clients at FXCM’s overseas affiliates in London and Singapore.
With the forex industry still facing unchartered waters and the prospect of more unprecedented moves (Grexit, anyone?), regulators must really step up their game to prevent another “black swan” event from wreaking havoc again. Some traders might not be too happy with these tighter restrictions which could wind up limiting profitability, but it’s important to remember that these regulatory agencies are just watching out for the clients’ best interests.
Are you in favor of stricter controls on the forex industry? All kinds of opinions are welcome in our comments section below!