The Dodd-Act Law and Its Possible Effects on Forex

In July 21, 2010, President Barack Obama signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” into law in response to the widespread clamor for changes in the financial system. It was a historic event as it called for extensive reforms not seen since the Great Depression.

According to the act, its main goal is:

To promote financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

In response, financial institutions are preparing for the worst. They’re doing all that they can so that the way they operate things will be in accordance to the new rules. So over the next year or two, don’t be surprised when you see some game-altering changes in the Forex market as well.

I won’t scare you and say that the CFTC will go all Steve Jobs-strict on retail Forex trading. However, I have to warn you that there are a few suggested rules that may ruffle your feathers.

The act is primarily aimed at regulating over-the-counter derivatives such as forwards, futures, and options. In order to do this, lawmakers have proposed to set up clearing houses to promote transparency and ensure that trade transactions run smooth. A downside to this is that it will most probably mean that banks will have to spend extra for these middlemen. Consequently, additional expenses may be passed on to consumers and translate to retail traders paying higher spreads!

Another proposal that I have mentioned in the past is the idea that leverage should be capped to 50:1 for the major currency pairs and 20:1 for non-majors. What this means is that you will not be able to take advantage of 200:1 or 100:1 leverage limits, which could hinder your potential profitability.

On top of that, hotshots at the U.S. Congress also think that brokers should have capital requirements. This may cause some brokers to close or merge with other under-funded brokers. If your account happens to be under one of those brokers, you may have to go through the tedious process of signing paperwork, making sure you can withdraw funds, or worse, having to switch to a new broker.

The most important question to ask though is, will these changes be good or not for the Forex market?

The most glaring and obvious effect are the restrictions it will place on Forex traders. As we point out in the School of Pipsology, high liquidity, high leverage, and relatively looser regulation are part of the many reasons why traders choose to dive into the Forex markets. While the suggested restrictions are aimed to “protect consumers from themselves,” it severely hampers those who actually know what they’re doing and can handle the fast pace and know how to properly take advantage of high leverage available in the Forex market.

On the other hand, we have to take into account the bigger picture here. More regulation leads to a more transparent industry, which is good for newbies and the uninformed. We don’t want people getting scammed and talking smack about our beloved Forex community now, do we?

Lastly, the new rules are being implemented in hopes that they will lessen the chance of a financial crisis later down the road. There will always be people who are greedy and who will try to find loopholes to “beat” the system, but with tighter regulations in place, the damage that their actions may cause on the financial markets as a whole will be limited.


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  • Jess

    Ok this has gone too far I just recived an email from MIG that they are no longer letting current US customers trade forex as of the 15th of July and as far as I know they were the last swiss broker who had US customers. When did this country lose the ” Home of the free” from the title. I trained on demo accounts and studied for a year (Babypips was a huge help) to make the switch from stocks to forex and your telling me because of all the noobs and idiots that jump in and lose everything I have to trade on a 50:1 leverage. If these people are stupid enough to jump in to a situation without learning how to trade they arent going to make it on a 50:1 it will just make the suffering longer. Is the real reason to protect the noobs or so the gov can have thier hand in the cookie jar. When has the gov ever looked out for traders intrest was it when the CMKX crooks took billions of dollars no cause that lawsuit is still going on. Its sad when you hear a new law being passed and the first thing you think of is whats in it for them. One way around this stupid law is to provide proof of residency (ie house and bills in another country) and open a new account not saying thats what im going to do wink wink but if you have the capital and a strategy that this rule will hamper it is a good option. Greed the sword of all oppression. 

  • mskier

    I have worked in the real estate market for the last 8 years and have seen the biggest ups and biggest downs. The Frank Dodd bill, while good intentioned, has had a negative effect overall. I am not sure how the same bill that covers real estate brokers, FX brokers, pawn shop owners, and payday loan sharks all at once can be effective. I am currently paper trading and am feeling pretty good about starting a real account soon, but as a newbie as soon as I heard Frank-Dodd I had shivers go down my spine and had second thoughts about getting into the FX market until the real consequence of this bill are seen. The costs passed onto consumers in the real estate market was significant.

  • mskier

    I have worked in the real estate market for the last 8 years and have seen the biggest ups and biggest downs. The Frank Dodd bill, while good intentioned, has had a negative effect overall. I am not sure how the same bill that covers real estate brokers, FX brokers, pawn shop owners, and payday loan sharks all at once can be effective. I am currently paper trading and am feeling pretty good about starting a real account soon, but as a newbie as soon as I heard Frank-Dodd I had shivers go down my spine and had second thoughts about getting into the FX market until the real consequence of this bill are seen. The costs passed onto consumers in the real estate market was significant.