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

The Lobby
1

Re: CFTC 1:10 Forex Leverage Proposal.

First I want to state that I have been to so many Forex boards and Forums over the past weekend and the buzz about the CFTC proposal is amazing!!

Yet, there is just an incredible amount of misinformation out there.

Is the CFTC trying to put the screws to us all?

Well, it could be but then again…Maybe They Just Don’t Understand What They’re Talking About!

On the question of leadership on all of the boards and forums I’ve visited this past weekend, I find astounding that people who are supposed to know these things aren’t even addressing what the real issue here. FOR GOD’S SAKE WOULD EVERYONE WAKE UP??

As I read it, the CFTC 1:10 Forex Leverage Proposal in somewhere between MISGUIDED and outright LUDICROUS. It appears to me that the CFCT does NOT understand Retail Forex market trading and where money management ‘Risk’ can become hazardous to Retail Forex trading. If they DO understand the forex market then the proposal is disingenuous at best.

The stated intent of the CFTC proposal is to protect retail traders from RISK.
However, what the CFTC is proposing ‘INCREASES’ the retail traders ‘RISK’ by a factor of ‘10 TIMES’.

The math goes this way:

At the current 1:100 leverage, for each $100.00 of his/her out of pocket Capital Investment RISK
EXPOSURE the trader is entitled to trade $10,000.00 worth of currencies.

At the proposed 1:10 leverage, the trader is entitled to trade THE SAME $10,000.00 worth of currencies but his/her out of pocket Capital Investment RISK EXPOSURE is $1,000.00 as opposed to $100.00.
The CRTC proposal ‘INCREASES’ out of pocket Capital Investment RISK EXPOSURE by '10 TIMES MORE RISK’
Clearly something is wrong with the proposal; it is either terribly misguided or worse.

How would the retail trader’s EXPOSURE TO RISK be REDUCED?

What is the common sense answer that is being overlooked?

Reducing LEVERAGE from 1:100 to 1:10 is NOT the answer. The proposal as it stands as a disaster-in- waiting for retail traders.

In order to protect the new/naive/self destructive and or otherwise uneducated trader from him or herself, ACCOUNT MARGIN LIMITATIONS should be Revised so that the trader’s out of pocket Capital
Investment RISK EXPOSURE is never any greater than 5% or 10% or his/her trading account at any time.

Leave leverage alone. ‘LEVERAGE IS NEITHER THE PROBLEM NOR THE SOLUTION.’

The answer to RISK EXPOSURE is NOT LEVERAGE CONTROL. In fact LEVERAGE CONTROL would have the exact

OPPOSITE Effect by INCREASING RISK - ‘TEN FOLD’…

The answer is ‘MARGIN CONTROL’.

Apart from that, I would call on the CFTC to use whatever pro-active and aggressive steps necessary to keep unscrupulous brokers/operators and get-rich-quick-and-easy ‘fantasy’ educational scams OUT OF BUSINESS.

I urge all Retail Forex traders to write to the CFTC regarding the proposal and use this sort of tact.
You can feel free to use the body of this message as an outline for your message.

Don’t only ***** and complain; give them a solution as well. Tell the CFTC to police RISK through Margin and Not Through Leverage.

Send your comments directly to the CFTC at: <[email protected]>.

Please include ‘Regulation of Retail Forex’ in the subject line of your message and the identification number RIN 3038-AC61 in the body of the message.

You can also submit your comments by any of the following methods (include above ID number):

Fax: (202) 418-5521
Mail: David Stawick, Secretary Commodity
Futures Trading Commision 1155 21st Street, N.W.,
Washington, DC 20581
Courier: Use the same as mail above.

In addition to this I suggest you C/C a copy to your area Congressman/Congresswoman…to impress upon the CFTC that you are willing to take your opposition to the CFTC proposal to a higher level.

One more thing is this…don’t just Do Nothing because you think that in the worst case scenario you can get an account abroad…the CFTC wants to get it’s grubby little fingersinto Europe too so…STOP THEM NOW BY TELLING THEM THAT THE PROBLEM IS NOT LEVERAGE!!

Regards,

Jeff

2

You appear to have a partial understanding of leverage.

You clearly DO NOT understand (1) margin, or (2) risk.

Maybe this will help.

B[/B] There are two types of leverage: the MAXIMUM leverage allowed by your broker, and the leverage you actually use when trading. The CFTC Proposal has to do with the MAXIMUM leverage allowed by brokers. So, the following numbers refer to that type of leverage.

Margin is the inverse of the maximum leverage allowed by your broker:
[ul]
[li]100:1 leverage = 1% margin
[/li]

[li]50:1 leverage = 2% margin
[/li]

[li]25:1 leverage = 4% margin
[/li]

[li]10:1 leverage = 10% margin
[/li]

[li]1:1 leverage = 100% margin
[/li][/ul]
You can’t change maximum allowable leverage without changing margin, and vice versa.

You stated that “Leverage is neither the problem nor the solution”, and “The answer is margin control”. These two statements, taken together, make no sense, because leverage and margin are two sides of the same coin.

B[/B] Risk is a function of two variables: stop-loss and position size. And EXCESSIVE POSITION SIZE is facilitated by the use of EXCESSIVE LEVERAGE. A trader who is allowed (by his broker) to use UP TO 10:1 leverage can put on a certain maximum size position. That same trader, if allowed 100:1 leverage, could put on a position that is 10 TIMES as large. The foolish use of available leverage most certainly creates RISK for any trader.

You stated that “…what the CFTC is proposing ‘INCREASES’ the retail traders ‘RISK’ by a factor of 10 TIMES”. This statement makes no sense, and shows your lack of understanding of risk. Requiring a trader to increase the size of his account by a factor of 10, in order to continue trading in his usual way, DOES NOT increase his RISK in any way.

[B]There are many relatively new traders here, on this Forum. And your post has created a lot of confusion for them, by giving them erroneous information about leverage, margin and risk.[/B]

We have serious issues with the CFTC’s attempt to over-regulate the forex industry in the U.S. These issues are being actively discussed on several threads elsewhere on this Forum. Your post has not contributed anything useful to that discussion.

Clint

3

Clint, perhaps you don’t know me. I teach the Forex from a perspective of risk management (risk to both trading account as well as the trader’s physiological well being) and take that down through an essential understanding of fundamentals and an intense understanding of chart reading which allows precision 20 pip-stop-loss trade execution for gains of anywhere from 500 to 1000 (and above) pips per trade. The focus of my trading and training is Risk Reduction and Maximization of Reward (20 to 50 reward vs. 1 risk), so…I may know just a little bit more about risk than you think I do!

The main attraction to Forex trading is leverage. At 1:100 leverage we as Forex traders can ‘leverage’ $100,000.00 worth of currencies with $1,000.00 of our money (1/100th is our risk investment, thus 1:100 leverage).

The CFTC proposes rolling back and capping Forex leverage so that Forex traders can still ‘leverage’ $100,000.00 worth of currencies but instead of a $1,000.00 capital risk requirement (1/100th risk investment 1:100) we would require $10,000.00 capital risk requirement or ten times $1,000.00 (1/10th risk investment 1:10)

[I]10 times is a 1000% increase in our capital risk exposure.[/I]

[I][B]Here is a brief outline straight from an Interbankfx client info release that will help you and others understand more of what is at stake and why Forex brokers are going bananas over this for fear of losing massive U.S. account business:[/B][/I]

[B]From Interbankfx:[/B]

[I]Quote:[/I]

[B]Maximum Leverage under Current Regulations
USD/CHF
100:1 leverage (one percent)
1 lot (100,000)
Margin requirement: $1,000

Maximum Leverage under Proposed CFTC Changes
USD/CHF
10:1 leverage (10 percent)
1 lot (100,000)
Margin requirement: $10,000 [/B]

[I]Unquote.[/I]

4

Let me address your latest post from the bottom up, starting with the section you placed in [B]bold type.[/B]

In big, bold type, you have stated the obvious.

As I have pointed out, allowable leverage and margin are inversely related. So, if you divide one of those parameters by 10, obviously you automatically multiply the other one by 10.

From reading your posts, I still wonder whether you know what margin is.

Back to the top of your second post.

You continue to refer to a fictitious “risk” which you call:
[ul]
[li]“risk investment”
[/li]

[li]“capital risk exposure”, and
[/li]

[li]“out of pocket Capital Investment RISK EXPOSURE”
[/li][/ul]
There is no such “risk” in forex trading. As I explained to you in my previous post, risk is a function of stop-loss and position size. It is not a function of account size. You continue to confuse these two things.

If I enter a GBP/USD position with a 65-pip stop-loss and 5 standard lots, my risk is $3,250 regardless of how much money my broker requires me to have in my account in order to do this trade.

At present, my broker says that I must have at least $5,000 margin in my account in order to trade 5 standard lots at 100:1 leverage (which is 1% margin). Clearly, I need to have at least $3,250 more than that in my account, in order to cover my risk. The $5,000 required margin, and my $3,250 risk, are two different things.

If the maximum allowable leverage is reduced to 10:1, my broker will require me to have at least $50,000 margin in my account in order to trade those same 5 standard lots. Again, I need to have at least $3,250 more than that in my account, in order to cover my risk. The $50,000 required margin, and my $3,250 risk, are two different things.

This change in margin — which necessitates a change in minimum required account size — IN NO WAY affects my risk.

[B]I hope that every new trader reading this thread will disregard everything you have said
about your fictitious “capital investment risk”.[/B]

As for you statement, “…I may know just a little bit more about risk than you think I do!” ------- no, I don’t think you do.

Clint

5

Sorry Clint, I don’t take your replys seriously.

If you think there’s no capital risk investment or personal capital risk exposure when trading the Forex, then you must be trading a different Forex market than I do.

If you have no capital risk when trading then don’t worry, the CFTC proposal shouldn’t effect you.

Once again, sorry but I’m not getting dragged into any peeing contest with you.

Regards,

Jeff Langin

6

No, I suggest you stay out of any peeing contests with Clint, for your own sake.

Everything he has written here is correct and I too wonder if you really understand what risk, leverage and margin is?

Depositing 1.000$ or 10.000$ to open a standard lot makes no difference whatsoever to your risk. You do understand that, right?

Having clarified that, of course the new CFTC proposal is bad in all its well meaning.

7

If you don’t think there’s a 1000% difference between risking $1K of your money to trade $100K worth of currencies under the current regulation and risking $10K of your money to trade $100K worth of currencies under the CFTC proposed regulation, sorry I can’t help you.

For everyone else here who wants to understand this, an example of the difference, as explained by Interbankfx, is here below.

From Interbankfx:

[I]Quote:[/I]

[B]Maximum Leverage under Current Regulations
USD/CHF
100:1 leverage (one percent)
1 lot (100,000)
Margin requirement: $1,000

Maximum Leverage under Proposed CFTC Changes
USD/CHF
10:1 leverage (10 percent)
1 lot (100,000)
Margin requirement: $10,000 [/B]
[I]Unquote.[/I]

8

stop loss vs. lot size is how much you risk per trade. Account size is how much you are willing to risk in total if you wipe out your account. Which I personally am not going to do regardless of leverage. :smiley:

9

Thanks, but you obviously can’t help anyone at all since you don’t understand what risk is.

Used margin is NOT risk. Try to understand that.

Risk is pip value x stop loss size. Nothing else. Period.

If YOU don’t understand that, then sorry, nobody can help you.

10

Precisely! Thank god for someone who understands things before they start trying to lead others.

This forum is jam packed with blind people leading around other blind people. It’s sad really. 4XRAT is just the latest in a long line.

And the favourite is the typical newbie comment: we don’t need protection from scammers/morons by you seniors, we can manage on our own. :rolleyes: Yeah right… well, I’ll let them do that then - not wasting more time on this.

11

For everyone else here who wants to understand this, an example of the difference, as explained by Interbankfx, is here below.

[B]From Interbankfx:[/B]

[I]Quote:[/I]

[B]Maximum Leverage under Current Regulations
USD/CHF
100:1 leverage (one percent)
1 lot (100,000)
Margin requirement: $1,000 [/B]

[B]Maximum Leverage under Proposed CFTC Changes
USD/CHF
10:1 leverage (10 percent)
1 lot (100,000)
Margin requirement: $10,000 [/B]

[I]Unquote. [/I]

12

This topic is at the forefront of Forex discussions all over the U.S.

This is very, very serious folks!

The CFTC 1:10 Leverage Proposal could destroy retail Forex trading in the U.S.!!

For more information from the FXDC go here:

fxdc.org

Who is the FXDC?

The Foreign Exchange Dealers Coalition (FXDC) is an alliance of the largest U.S. foreign exchange market dealers.

Be Properly Informed!

[B]Misinformation plays directly into the hands of the CFTC.

Fight this proposal to save Forex trading in the U.S. by saying NO to the CFTC Proposal![/B]

13

If the CFTC Proposal is passed into law…most ordinary people will never have enough risk investment capital (money you can afford to lose) to earn any more than $10.00 to $15.00 per day trading the Forex…and that’s if they are very, very good traders which of course, most are not.

People out there have to decide who knows what. If other voices in here are distracting you…call a Forex broker to get the real information on what 1:10 leverage would mean to your chances of ever making a decent amount of money trading the Forex market…and how much More Risk Investment Capital you would require in order to open the size of account that you would like to trade to make the amount of money that you would like to earn.

[I][B]Don’t be surprised to learn that it will be 1000% more than you had intended…Ten Times More Of Your Hard Earned Dollars! Can you afford that?[/B][/I]

[I]Here is the answer, you can’t because it’s a catch-22: [/I]

Your Risk Investment Capital will have to be 10 times More than you can currently afford to lose…and that is what the CFTC proposal, if passed, means to you!

If you can afford to lose $1,000.00 you are out of luck because you will need $10,000.00 (minimum) to fund your trading account.

If you can afford lose $10,000.00 you too are out of luck because you will need $100,000.00 (minimum) to find your trading account

…and so on.

[I]That is the noose around you neck that the CFTC is proposing. [/I]

[I][U]Only You can fight this and you have only one chance to do so… [/U][/I]

[B]Please Do Not Allow misinformed people to dissuade you from speaking out against this proposal.

Say NO to the CFTC Proposal by returning to may original post in this thread and writing to them as per the instruction in that post.[/B]

14

Agree that I don’t like the changes. It reduces the margin available in an account. Don’t much care for the NFA either. But even so, it only effects those who overleverage anyway. I use Oanda and my account is fixed at 20:1 leverage and I’ve never been anywhere close to a margin call. It ain’t exactly rocket surgery.
Well that wraps it up for me. Ciao yall

15

Originally Posted by Jason Rogers of FXCM…

[I]Quote[/I]

Hi xxxx,

And that’s exactly what we believe will happen if the proposal reducing leverage to 10 to 1 goes through. Traders will look offshore for more flexible leverage when faced with the choice of depositing 10 times more money to trade the same position or looking for an offshore alternative.

Please write the CFTC sharing your sentiment on this.

Regards,

Jason

[I]Unquote[/I]

[I][U] -There are more bad apple dealer/brokers off shore than you can imagine …and there is no insurance for your money abroad. [/U]

[U] -If this becomes law in the U.S. it could become a contagion world wide. [/U][/I]

[B]

Don’t let the power mongering bureaucrats at the CFTC get away with this madness![/B]

17

Rocket surgery???..lol :smiley:

18

One of the best explanations I’ve read. Thanks!

19

…similar to brain science.

20

If you trade to [I]make real money [/I]you need to invest [I]real money.[/I]

[I]"At present, my broker says that I must have at least $5,000 margin in my account in order to trade 5 standard lots at 100:1 leverage (which is 1% margin). Clearly, I need to have at least $3,250 more than that in my account, in order to cover my risk. The $5,000 required margin, and my $3,250 risk, are two different things.

If the maximum allowable leverage is reduced to 10:1, my broker will require me to have at least $50,000 margin in my account in order to trade those same 5 standard lots. Again, I need to have at least $3,250 more than that in my account, in order to cover my risk. The $50,000 required margin, and my $3,250 risk, are two different things."[/I]

Your risk investment capital is now $50,000.00 and no longer $5,000.00[I]…you have that right.[/I]

When you hand a broker money to trade a Forex account that is your risk capital.

In order to make the same profit [B][U]your risk capital is now ten times greater.[/U][/B]

[I]Quote[/I]
"I hope that every new trader reading this thread will disregard everything you have said about your fictitious “capital investment risk”. [I]Unquote[/I]

When you trade with real money that is your [I]capital risk investment [/I]whether $500.00, $5,000.00 or $50,000.00[I][B]…neither fictitious money [U]nor [/U] fictitious risk.[/B][/I]

Make no Mistake…The CFTC Proposal as it stands is telling U.S. traders to either [B][I]Risk Ten Times More Money [/I]or [I]Stop Trading Altogether[/I] [/B] and…there is every possibility that the CFTC will not allow you to trade offshore with greater than 1:10 leverage as well.

If you ask anyone who has lost money in the Forex whether through poor trading, a shoddy broker or both, they will tell you that every dime you invest [B][I][U]is at risk[/U].[/I][/B]

I hope that everyone who reads this post will recognize what it at stake.
[B][I]Please do not think for one moment that this is No Big Deal.[/I][/B]

The amount of real money that you previously would have had to invest to make ‘X’ profit will become [B][I] 10 times greater…1000% more [/I][/B]if the CFTC proposal is passed. This is not a matter that should taken lightly [I]or [/I]misunderstood.

[B]If you are opposed, March 22nd is the deadline to write to the CFTC and Tell Them No.[/B] [B][U]There’s enough Risk in the Forex…Traders Do Not Need More from the CFTC.[/U][/B]

21

lol
Y’all discovered my sense of humor I see! :smiley: