Opposition Mounts to Lowering of Leverage in ForEx Trading

By   •  March 19, 2010  •  Securities Industry News  •  435 words

Opposition appears to be mounting against new rules that would reduce the amount of leverage required in retail foreign exchange trading from the current 400:1 to just 10:1.

Opponents of the rules proposed by the Commodities Futures Trading Commission claim that it will  cause investors to switch to overseas trading venues.

The public comment period for the proposed rules ends March 22.

In addition to the leverage requirements, the proposed plan also includes registration and reporting requirements for dealers and brokers.

As of Friday afternoon, approximately 8,700 comments were filed with the CFTC, almost all opposed to the proposed rules.

“Such a regulation will likely drive traders to overseas accounts which will not be party to such encumbrances, siphoning money out of our economy,” wrote Jeff Levi, a retail foreign exchange trader from Santa Monica, Calif.

Foreign exchange dealers have been weighing in as well.

“The feedback I’ve heard from our clients is that they are almost uniformly opposed to this provision,” said Michael Stumm, CEO of New York-based OANDA, one of the three largest forex trading, technology and information providers in the U.S. by client funds on deposit.

Most international jurisdictions have looser requirements for leverage, he said. Singapore is 50:1, he said. Japan just switched to 50:1. The U.K,. has no limits, with individual companies offering 200:1 or 400:1. Canada bases leverage requirements on the level of risk, with 33:1 for the most liquid currency pairs, topping out at 10:1 for the most illiquid pairs, he added.

Switching to an overseas broker takes about 24 hours for the account registration, he said, and a $30 wire transfer fee – not a significant obstacle at all.

“Foreign exchange is the most liquid market in the world, and the largest market in the world,” he said. “It cannot be controlled by any one country.”

He added that while other countries may also tighten up their requirements to some extent, it’s unlikely that they will follow the U.S. all the way down to 10:1.

“London got hit recently by the financial crisis, and a lot of jobs were lost as firms moved overseas,” he said. “If London follows suit [and tightens up the leverage requirements] a lot of funds will follow their lead out of London. I don’t know how politically feasible that is.”

According to OANDA, the proposed CFTC rules also unfairly discriminate against Forex Dealer Members since the Chicago Mercantile Exchange allows leverage of 50:1 for forex futures, and NASDAQ offers forex contracts at 100:1.


Tagged as: