CFTC 1:10 Leverage Proposal...Look Out!

This law just passed… 10 to 1 leverage is ridiculous and just another way of manipulating the markets

Damn 1:10, and I thought that my province of BC was strict.

I’m actually having a tough time seeing how these leverage limits make trading “safer” (or whatever the heck their reasoning for this is).

Assuming that you don’t trade a big chunk of your account, doesn’t higher leverage make things “SAFER”, not more dangerous, in the sense that you have more of a buffer before a margin call?

Plus, with Forex you cannot lose more than your account balance (unless you put more funds in), so how does it “help” me if I need more funds to make the same old trades?

Granted, I’m no Forex expert (yet :)). These are genuine questions; I’m not trying to be smart here, though I am generally adverse to regulations (especially of this sort).

On February 16 IBFX submitted an encouraging argument on this topic to the CFTC:

cftc.gov/ucm/groups/public/@lrfederalregister/documents/frcomment/10-001c095.pdf

This is what NFA and CFTC want total newbies to believe.
And as I see everywhere, most newbies are eating it up.

1:10 leverage has nothing to do with making anything
safe or safer. It is still trading and still leveraging is
involved. Except now you have to put down a lot more
in margin to do the exact same amount of trade you
were able to do before.

What this will effectively do is keep small retail
players out of the market. Those who typically
have less than $5,000 to deposit. It will now be
incredibly difficult unless you risk the farm to
earn what you were able to earn using 1:100 or
1:200 leverage.

Leveraging should not be regulated and forced
upon traders. If you start to think that trading
will become safer, you really don’t belong here.

Just look at this example:

1:100 USD/JPY Margin Required $1,000
1:200 USD/JPY Margin Required $500
1:10 USD/JPY Margin Required $10,000

This has nothing to do with making anything
safer. On the contrary… this is designed to
kick your average $500-$1000 deposit traders
completely out of the market. If you want
to make pennies on your trades, they will
welcome you wasting your time. What they
do not want is mass of retail traders making
decent income using 1:200 or 1:100 leverage.

Below is the email I sent to CFTC on this matter:

Dear Sirs,

I would like to hereby express my deep concern with the intentions of CFTC to limit the maximal leverage for retail Forex brokers from the current 1:100 to 1:10. In my opinion, the following scenario is likely in that event:

  1. The maximal leverage reguirement will be increased for all US-regulated brokers from the current 1:100 to 1:10. This will clearly demonstrate a complete dismissal of a regular Forex trader’s interests if they happen to be conflicting with the interests of the “big wallets” - banks and non-retail futures brokers. We do not wish to be “protected” till we go broke just to make them even richer.

  2. US-based retail Forex brokers will sure be unwilling to lose their business completely. They’ve already got burned with the recent self-imposed regulations of the NFA (which is not even a government agency, although many traders are made to believe it is) and now clearly realize the 1:10 leverage will be the last nail into their coffin. These retail brokers will therefore start moving their businesses to other countries and servicing US customers from there, successful examples of which already exist: Dukascopy in Switzerland (which has recently introduced MT4 in addition to their custom platform), ATCBrokers and FXCM in the UK, FXDD in Malta, FXPro in Cyprus etc.

  3. The US government in response will do everything possible to prevent US traders from enjoying the benefits of being serviced in other countries by making overseas transactions to personal bank accounts even more controlled and restricted.

  4. Those traders who make a living from their trading will then have no other choice but to set up offshore companies for themselves through the Internet (contrary to a popular belief, this doesn’t cost much - one can get an offshore company with an overseas bank account for as low as $1,500).

  5. As all (or most) trading accounts will be on the companies’ names, the US government may heavily lose on the income tax they collect from US Forex traders. Thus, trying to harm the average Joe trader and make the banks and futures brokers richer at his expense, the government is harming themselves in the end.

Since recently, America (which I really love) has been turning from a land of opportunities to a land of restrictions. Very sad to see this, indeed.

Yours sincerely,