On 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 the 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 with 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 clearinghouses 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 is 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.