CFTC Review: More Restrictions on Retail Forex Industry?

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.

cftc regulationFXCM, 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!

 

  • ForExchange

    Hi Ninja,

    I think the problem is that many retail traders do not realize the dangers and they think regulators are against them. Most of them are dreaming about becoming millionaires and regulators want them to stop.

    It is important to see and realize however that most people lose their money and with a lower leverage they would lose less.

    I hope regulators step up everywhere and even maybe restrict the aggressive broker marketing where no one ever talks about losses.

    Nice article of course, but after such a while I also expect that 🙂

    FE

    • john awe

      You are missing the point.

      • ForExchange

        I might be missing the picture but I am not crying in 6 different posts about all mean people. If you cant win do not blame the whole world for it. Regulators have of course their limitations but it is a fact that most people are not aware with all the risks and regulators want to protect them.

        So if you are not missing the point then make money instead of crying.

        FE

        • john awe

          You seem to be crying. No worries here. I tell the truth. The regulators are idiots. If you fall for their nonsense then have fun with your limited account. I am covered all the way around. I don’t let American regulators dictate to me.

        • john awe

          Do you need mommy and daddy to protect you? Just give me the $%^& hammer and I’ll do the rest. Is that clear enough for you? The regulators seem to be your mommy and daddy and you seem to be okay with that. Just weak on your part. If you were a good trader or investor you would want the regulators to monitor the firms the clients do business with and you would want the tools to maximize your business. Seem like you are into being treated like a child if you need the regulators to restrict your freedom of choice. I suggest you buy a little perspective.

    • Thanks for the positive feedback!

  • Peter Griffin

    I believe that control is never good. Rather than restricting leverage, it’s more important to educate people correctly on leverage and the possible effects then let them decide on their own. In addition, nobody could have expected a move like the one from the SNB. Usually, leverage is a good thing and gives people with talent and hard working abilities the chance to score quickly.

    Basically, too much control by the state is never a good thing.

    • john awe

      The regulators failed when they took away the ability to hedge from many market participants. Hedging is a risk management tool so shame on the regulators for missing the mark.

    • Yep good point! Thanks for sharing your thoughts.

      • john awe

        You are welcome.

  • john awe

    I blame the regulators for taking away hedging and other risk management tools under the “ruse” of looking out for the investors. The regulators are focusing on the wrong area.

    • What area do you think should they focus on?

      • john awe

        Look back at retail forex 5 years ago. Hedging was a key risk management tool for risk aversion strategies. Shame on the NFA and the CFTC for making forex more risky. Leverage focus is not the main issue like they try to promote. Good thing many of us have overseas accounts so we don’t have to be held hostage to the US regulators.

  • john awe

    Martha Steward, Enron and many others go to prison over lying in the financial markets but the central bank officers from the SNB and others get a free pass for lying to the world about their intentions??? Go figure.

  • Thanks for checking out my blog and sharing your thoughts. Yeah I do agree that this misleading advertisement tends to make traders think that forex is a get-rich-quick scheme instead of focusing on proper education and the risks involved. You’re right, a little more responsibility is needed in this aspect.

  • Unfortunately not all traders are aware of the risks involved and are overleveraging in order to make more money. Regulators are probably just making sure that proper risk management is practiced by both traders and brokers.

    • john awe

      Traders and investors should have every right to lose their money if they happen to. In no way should regulators make trading more difficult. Regulators should be focusing on protecting clients assets and monitoring the firms in the business not hindering the traders and investors who feed the industry.

  • dsrtradefx

    In my experience, enough damage to the industry has already been done thru regulations. Raising leverage requirements was designed to removed the lower level investor. You now need $50k or more to trade in a US account. Any less and you risk liquidation unless you’re very conservative. They said they were protecting the investor, when they were really just removing a large segment of traders losing small accounts. The only difference now is the accounts getting eaten up are $50k plus, instead of $5k or less. The ratio of successful trader to unsuccessful was unchanged. Regulators regulate. They are the hammer that thinks everything is a nail. Regulation doesn’t help educate about risk, or leverage and margin. Frankly, any investor or trader who is “unaware” of these components and what the effect is should get eaten in the market. There’s no excuse for not doing your homework. You can’t just jump in a car or plane and operate it without understanding the risks. If you do, you will pay the consequences. So from a trader standpoint, hiding behind the idea that the advertising is geared towards success and doesn’t talk about failure is ridiculous. The question everybody thinks about before investing is how and when they will get a return. Inevitably, the answer to that question leads to a discussion about the risk of capital loss. The web is filled with information, and brokers provide information as well regarding the risks. So, due diligence is thebanswer, not regulation. With a shocker like the SNB announcement, there is no regulation for individual investors that will reduce that risk. Maybe on the broker side there is room for a larger capital requirement, but FXCM needed $300 million. What are brokers going to need – a half billion dollars in reserve?

    • john awe

      Well said.

  • john awe

    I blame the regulators for taking the good things away from retail forex for no reason. Dodd-Frank was made by idiots.

  • john awe

    Well said. I agree completely.