On August 30, 2010, the CFTC released its final ruling on retail Forex transactions. Let’s take a quick look at a few of these new rules and how they may affect you or your broker when they become effective October 18, 2010.
We’ll hit you with quick bullet points on some of the biggest issues that may affect your trading and/or your broker, but we highly suggest that you visit the CFTC website (specific document links provided below) to read the complete details of the Final Retail Foreign Exchange Rules and Regulations and their Q&A document.
Major decisions that may affect the individual retail forex trader:
- Reduced leverage. Initially, the proposed rules called for a maximum 10:1 leverage on all retail Forex transactions. The final ruling is a maximum 50:1 leverage (or 2% margin requirement) on major currency pairs and 20:1 maximum leverage (5% margin requirement) for all other retail Forex transactions.
- Requirement to close out offsetting positions. This means no more “hedging“(in this case having both “long” and “short” positions open of the same size on the same currency pair) as the CFTC feels this practice “removes the opportunity for the customer to profit on the transaction, increases the fees paid by the customer, and invites abuse.”
Essentially, if you use high leverage or hedging strategies, you may want to re-evaluate whether or not you wish to keep on pippin’ with a US broker.
Major decisions to those who wish to serve as counterparties to, or to intermediate, retail foreign exchange (Forex) transactions:
- Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex will be require to register as such with the CFTC and become a member of the NFA. “Otherwise regulated” entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators.
- Also, all individuals who solicit retail off-exchange forex business or who supervise that activity must take and pass two exams: the National Commodity Futures Examination (Series 3) and the Retail Off-Exchange Forex Examination (Series 34).
- Futures commissions merchants (FCMs) or retail foreign exchange dealers (RFEDs) are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million.
If you trade in the US with a US based broker, Forex account manager, or introducing broker that does not meet the requirements applicable to them by October 18, 2010, they will be no longer able to operate or conduct business with you. It is best to contact these entities to see if they will meet these new requirements on time, and if not, then you should make the appropriate plans to protect your cash money yo!
The final CFTC regulations on retail Forex does touch upon final decisions on many other proposals (i.e. risk disclosure, record keeping, IB guarantees, re-quoting, etc.), but we feel these bullet points may be the most important to the individual trader. If you are interested in reading all 44 pages of the final details, and if you’re serious about this business we HIGHLY suggest you do, then please check out the full CFTC regulations document on Retail Forex and their Questions and Answers document.
Good luck and good reading!