With all the recent discussions about the CFTC proposal to limit retail Forex leverage to 10:1, it appears that Congress is taking a closer look at the reasoning behind the proposed legislation. The overwhelming responses from both brokers as well as retail traders has been decidedly negative. Regulatory bodies outside of the U.S. will continue to allow brokers to offer in excess of 100:1 effectively knocking U.S. rules out of alignment with the rest of the world. The CFTC says their intent with the proposal is to protect retail traders. Protect them from what? It seems that this rule would actually put retail traders at risk of losing more money because they will be required to deposit ten times more money in order to maintain the same trading strategy. Most Forex brokers already have automatic liquidation levels in place that protects an account from losing too much money or going negative. One possible solution to consider is expanding the know your customer ("KYC") rules in order to establish a range that customers can deposit based on information like income, net worth, trading experience and other relevant factors.
It goes without saying that Forex industry needs policing but it should be targeted and resolve previous issues in regards to brokers being under capitalized and filing false financial statements. Under current U.S. rules, client deposits are considered to be an investment (not a deposit) while a corresponding journal entry is made that lists these customer deposits as liabilities. The U.S. regulators should mandate that customer deposits are maintained in a segregated account thus minimizing the chance, or temptation, of misappropriating customer funds. They could also require insurance to protect customer funds from a broker default.
Another important step that can be taken by regulators is to standardize Forex pricing and trading rules. If this can be accomplished, it will force all brokers to play by the same rules with regards to execution and reporting. Broker pricing and execution is something that can be audited and is already happening with most financial markets.
These few simple changes could go along way in making the Forex market acceptable within to the financial services community without disrupting the entire U.S. retail Forex industry.
Disclosure: No Positions