CFTC proposal to cut Forex leverage to 10:1

Update (September 1st, 2010):
CFTC has reached a compromise with the Forex Dealer Coalition (FXDC) regarding leverage requirements:
instead of 10:1 leverage cut in the proposed earlier rules, the new 50:1 leverage will be introduced on October 18th, 2010 for all U.S. customers.

Traders as well as US-based brokers are in a light shock as in mid January 2010 CFTC has proposed to cut the leverage in currency trading to 10:1.

The proposal hasn’t become a rule yet, but already has spread with the lightning speed across the trading public in US and worldwide. CFTC proposal is to affect all NFA regulated brokers, who, should the rule pass, would be limited to offer 10:1 leverage on all Forex accounts.

The text of the official CFTC proposal can be read here: RIN 3038-AC61

As the news spread, the largest Forex brokers in US has felt a headache knowing what results it can bring.
They have formed a Forex Dealer Coalition (FXDC) to fight against the new 10:1 leverage proposal.

Foreign Exchange Dealers Coalition warns that:

“CFTC’s recent rule proposal, which would limit customer trading leverage to 10
to 1, would be a crippling blow to the industry…”

Namely:
– 90% of those accounts can be expected to go offshore;
– thousands of high-tech jobs involved in the industry will be lost;
– United States could well be costing itself billions of dollars in taxes;
– the problem of Forex fraud will get worse absent legitimate dealers offering retail Forex, while worldwide unregulated dealers which are out of reach of the CFTC will thrive;
– and finally, the most obvious fact: traders will simply not accept 10 to 1 leverage.
All Forex market participants, including individual traders are encouraged to provide their feedback on the new CFTC 10:1 leverage proposal. There are several methods to be heard:
• E-mail: [email protected]. Include “Regulation of Retail Forex” in the subject line of the message.
• Fax: (202) 418-5521.
• Mail: Send to David Stawick, Secretary, Commodity Futures Trading Commission, 1155 21st Street, N.W., Washington, DC 20581.

From the latest on CFTC 10:1 leverage proposal

1. FXDC Coalition has opened a new website http://www.fxdc.org/ where they continue talking about the issues of 10 to 1 leverage rule proposed by the CFTC.
2. The official CFTC site has released a list of some January letters received about the 10:1 leverage cut.
You can read them at CFTC website: Federal Register Comment File 10-001
In general, Forex traders continue to express their disappointment and an overall concern about the proposed leverage cut. The letters contain requests about reviewing and canceling the potentially damaging rule about a new leverage.
Comments on the proposal are accepted till March 22nd, 2010.
3. The CFTC arguments remain that:
“The extreme volatility of the foreign currency markets exposes retail forex customers to substantial risk. Forex dealers currently
extend leverage to their customers at ratios of between 25:1 to 400:1 or higher, which allows customers to control contracts worth significantly more than their cash investment. Given these high leverage ratios, even minor fluctuations in currency rates can exponentially increase a customer’s losses and gains. Even a small move against a customer’s position can result in a significant loss. Under current practices, customer positions are usually closed out once the losses in an account exceed the initial investment. However, if, for any reason, the positions are not closed out at a zero balance, the customer could be liable for additional losses.”

 


New rules like this is all a part of regulating the Forex market in order to ensure fair and ethical business between parties. It makes trading less one-sided, and forces risk management to be put in the forefront of clients minds to help protect them. We would always recommend that you choose a broker that is certified by a regulatory body.

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