It has been more than three months since the latest edition of new rules prepared by the Commodities Futures Trading Commission, the “CFTC”, took effect in late 2010. Although there was a flood of articles declaring “Armageddon” in the forex industry, the near complete paucity of related articles in the press over the past few months has been palpable, if not deafening. After nearly a decade of regulation dismantlement that contributed to a financial meltdown of near global proportions, it is not unusual to expect a modicum of new rules. The Dodd-Frank Act was the result, just as Sarbanes-Oxley was the result after the Enron crisis in 2001, and the CFTC has been on the forefront of this new “tsunami” of rules and regulations.
The thrust of the new rules is clear if one were to believe the direct pronouncements of the CFTC. Upon the release of these final rules, the CFTC Chairman Gary Gensler stated, “These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange.” The intent appears simple enough, but it took eight months of wrangling over details and assimilating an avalanche of protests from worried participants in the industry to arrived at the “watered down” final version of the rules that went into effect last October 18, 2010.
The new rules deal with leverage limits, registration requirements, and jurisdictional matters, the former item having created a storm of protest when a “10:1” leverage limit was suggested last January 2010. Offshore brokerage firms, especially in London, offer leverage even beyond the existing CFTC rule of “100:1”. American traders have resorted to opening a foreign forex account to get around U.S. restrictions, and if forced to change by even tighter rules, then the industry might have to move offshore to survive, if the rhetoric were to be believed.
The leverage “compromise” of “50:1” for major currencies and “20:1” for exotics actually mirrors what banks offer today. Various deposits, 2% and 5% respectively, were also proposed in the new rules, but the agency also provided for a change mechanism to exist over time. The CFTC granted the National Futures Association, the NFA and a subsidiary of the CFTC, the power to revise leverage rules to a higher level than these new minimum percentages if it perceives that competitive impacts from offshore brokers are material.
The new registration rules ensure more protection for traders and the capital in their online forex accounts. Capital and education requirements can only benefit traders in the long run. One interesting result of these new rules is that brokers are required to post statistics regarding the ratio of losing to winning trades. While averages can be deceiving, the initial figures have proven to be enlightening. Losers have outpaced winners by a “3 to1” margin on average. Forex trading is all about managing losses to a minimum, and then riding a winner for all it is worth.
The most confusing area of the new regulations has yet to be fully resolved. The intent of the new jurisdictional thrust seems to force all American traders, regardless of where they trade, to adhere to operating and reporting rules in the United States. The IRS appears to be linking up with the CFTC to ferret out global tax evaders.
As with any new rules, fine-tuning may be in order. On a global front, most regulators tend to follow the U.S. model, but if tax reporting is the intent, then conformance may not be as forthcoming as expected.
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