CFTC Rules Effective October 18, 2010

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1

The U.S. Commodity and Futures Trading Commission (CFTC) recently announced final rules regarding off-exchange retail forex trading which will take effect October 18th 2010, and FXCM would like to address some questions concerning the new rules.

FXCM has reviewed the new rules and has already been in correspondence with both the CFTC and the NFA in order to obtain interpretive guidance on some of the provisions. Our goal is to provide our clients and the forex community with clear and correct information as to how accounts with FXCM LLC will be impacted. At present, we are still awaiting clarification regarding a particular a provision of the Dodd-Frank financial reform statute enacted on July 21, 2010 and the impact it could have on certain accounts held at overseas affiliates.

However, below is the information we can share.

[B]1. Leverage will be reduced as of October 18, 2010

Starting October 18, 2010, the maximum leverage available with FXCM LLC for trading will be 50:1 for major currency pairs and 20:1 for non-major currency pairs.
[/B]
We believe that the reduction in leverage is a reasonable compromise from the initial CFTC proposal of 10:1 leverage. FXCM does believe lower leverage will be to the benefit of traders as higher leverage can often times result in a few losing trades offsetting many winning trades. FXCM has already implemented 50:1 as the default margin setting on FXCM LLC standard accounts, although traders still have the option to change margin levels upon request to 100:1 leverage with FXCM LLC. As of Oct 18th 2010, FXCM will comply with the new maximum leverage requirements.

[B]Please note: The change in maximum leverage allowed only pertains to accounts held with the FXCM LLC (U.S.) entity. [/B]

[B]2. As of October 18, 2010 all referring brokers introducing business to registered FCMs or Retail Foreign Exchange Dealers will be required to formally register with the CFTC as introducing brokers and become NFA members.[/B]

In anticipation of this rule, FXCM has already initiated procedures to be in compliance as of October 18th. At present, all Introducing Brokers to FXCM LLC are either registered with the CFTC as IBs or pending registration.

FXCM will continue to follow up with the CFTC and NFA regarding developments related to the implementation of the CFTC’s new rules and provide you with advance notice of future changes.

If you have any additional questions, please do not hesitate to post your question or contact FXCM client services staff 24 hours a day.

2

Hello, Jason

Please give us an update on this issue, specifically as it relates to FXCM-UK customers.

On another thread, this was posted — 301 Moved Permanently

(I can’t vouch for the accuracy of the info in that post.)

Do you have more recent information?

Thanks.

3

Will you be able to continue offering the 1:100 leverage accounts to US customers with FXCM-UK after October 18, 2010? If so, how? From that date on, all CFTC-compliant brokers (both domestic and foreign) will be restricted to the 1:50 maximal leverage and US customers will also be disallowed to use those overseas brokers that are not compliant with the new CFTC regulations.

4

Hello Clint and bravehoststamps,

I can confirm that the passage of the Dodd-Frank Bill and CFTC rules means that US residents will be required to repatriate their UK accounts back to the US. Exactly when we are required to do this is very unclear at this point, and we are waiting for clarification from the CFTC as to the timeframe (ie October 18th, 360 days from the signing of Dodd-Frank, or some other date). Regardless of the outcome, we will ensure there is a smooth transition from the UK to the US for US residents. I will share more details on a timeframe as soon as we receive clarification.

There have also been some questions about what the CFTC/NFA will classify as a major currency (with 50:1 leverage) and a non-major or exotic currency (with 20:1 leverage). The classification will follow the pre-existing list issued by the NFA here NFA Manual / Rules .

[B]For non-US residents,[/B] FXCM UK will continue to offer hedging, 200:1 leverage and non-FIFO position trading.

Please let me know if you have any additional questions. I’ll do my best to help with the information we have available.

-Jason

5

Jason,

In his response to my friend’s inquiry regarding this matter, William Penner of the CFTC states: “[B]as of October 18th[/B], foreign affiliates of US FCMs will no longer be able to offer to serve as counterparties to US retail customers unless they become registered with the CFTC as FCMs or RFEDs”.

It looks like the only way for you (FXCM) to offer US customers personal trading accounts with leverages greater than 1:50 is by forming an offshore trust whereby all trading accounts would be on its name, and the customers would only be purchasing a right to manage them, along with an entitlement to any potential profits from their trading (sort of like purchasing a stake in an offshore trust and then managing it yourself) for an amount equal to the amount of their deposit. You can even charge a small fee for it and therefore make some additional profits. Just let me know what your legal department thinks of such a way.

6

Jason,

You’re an STP, right? My friend emailed William Penner from the CFTC again and asked him for a definition of the term “counterparty” to which the new regulations apply. Here’s what the CFTC says about it:

Dear Mr. XXXXXXX –

In a traditional futures transaction, a customer places a trade through an FCM, which then executes the trade on a contract market (i.e. a futures exchange) where prices are determined through trading on the floor. The trade is then cleared through a clearing house that stands as the counterparty to both the buyer and seller. In very general terms, in the off-exchange retail forex markets, there is no clearing house. Rather, counterparties offer to enter transactions at prices they set. When a customer places a trade, the broker, not a clearinghouse, is his counterparty. In order to exit the trade, the retail customer must enter an offsetting transaction with the counterparty, at the price offered by the counterparty. Unless you are trading through and FCM in order to obtain futures positions on a contract market, then your broker is in all likelihood your counterparty.

From: XXXXX XXXXXXX [mailto:[email protected]]
Sent: Friday, September 10, 2010 7:51 AM
To: Penner, William
Subject: RE: Questions on the new Forex regulations

Dear Mr. Penner,

Thank you for your prompt and insightful response. What is the legal definition of the term “counterparty” in this case? How does one know if a brokerage can or cannot be regarded as a counterparty to a retail off-exchange forex transaction?

Kind regards,
XXXXX XXXXXXX

7

I’m not sure if our legal department would be able to give advice on this type of setup, and I’m not able to hypothesize on this myself. This is beyond the limit of what I can discuss and probably better sent to compliance[at]fxcm.com to see if they have any comment.

That is correct, forex transactions through FXCM US (LLC) are executed by STP or No-Dealing Desk (NDD) execution (as it is referred to on our website.)

Going a little deeper into discussing counterparties in the forex market… Regardless of whether you trade with a broker acting as a market maker (dealing desk) or a broker using STP/NDD execution, your broker in both cases is the counterparty to that transaction. What differentiates each broker is how they in turn offset (if at all) the risk of your trade.

In the case of a dealing desk or market maker, the broker has the ability to hold onto the transaction. They are making the market, entering into transactions at prices they set (borrowing some wording from the email you posted). The broker is determining the amount of liquidity at each price point, the spreads available, what prices are quoted, etc. If the broker chooses not to offset the trade, then they take on the risk of losing on the trade if you profit or profiting if you lose.

In the case of an STP/NDD broker, the broker is still the counterparty; however, each transaction is offset immediately with another bank or financial institution so that the broker is not taking on that risk. Instead a commission or pip mark-up is added to the spread as the brokers compensation for acting as the intermediary so to speak. With STP/NDD, the broker is not the source of liquidity at each price point and not setting prices. The best bid/ask price is being streamed onto the platform which is why the spreads are variable. The reason why the broker is still the counterparty is because the bank will not recognize you directly on the other end of the trade because you don’t have credit lines setup with the bank. The broker has the credit lines and therefore acts as the counterparty with you and hedges each order immediately and directly with the bank.

Here’s a detailed post on NDD execution with FXCM and how it works on the back-end. http://forums.babypips.com/fxcm/33022-no-dealing-desk-q-2.html#post177982

-Jason

8

Jason,

So what is FXCM’s plan for US customers after the new CFTC rules become effective immediately on October 18, 2010? Make them stick to the 1:50 leverage accounts?

9

Please see the original post:

Starting October 18, 2010, the maximum leverage available with FXCM LLC for trading will be 50:1 for major currency pairs and 20:1 for non-major currency pairs.

So all traders with FXCM US (LLC) will have a maximum margin of 50:1 for the major currency pairs. The CFTC rule going into effect on October 18, 2010 requires this.

10

What about FXCM UK? Will you stop servicing US customers there starting on October 18, 2010 per the new CFTC rules?

11

I don’t have an answer for this one since we are still waiting for clarification from the CFTC on a timeframe as mentioned from the post this morning:

12

Below is FXCM’s latest statement which goes into more detail about the new margin amounts once leverage is reduced to 50:1 for majors and 20:1 for non-majors. At this time we are still waiting for clarification on when US residents will be required to repatriate their UK accounts back to the US. The goal is to give you advance notice about when this will take place without any impact on your trading. Here’s the statement:

[B]By October 18, 2010, the maximum leverage available with FXCM LLC for trading will be 50:1 for major currency pairs and 20:1 for exotic currency pairs.[/B]

“We believe that the reduction in leverage is a reasonable compromise from the initial CFTC proposal of 10:1 leverage. FXCM does believe lower leverage will be to the benefit of traders as higher leverage can often times result in a few losing trades offsetting many winning trades,” commented Drew Niv, CEO of FXCM. “FXCM has already implemented 50:1 as the default margin setting on FXCM LLC standard accounts and, as a result, the new leverage requirements will have a minimal impact on our Standard 10k LLC accounts.”

Additionally, as of October 18, 2010, all referring brokers introducing business to registered Futures Commission Merchants or Retail Foreign Exchange Dealers will be required to formally register with the CFTC as Introducing Brokers and become National Futures Association members.

In anticipation of this rule, FXCM has already initiated procedures to be in compliance as of October 18, 2010. In fact, FXCM began encouraging all referring brokers to seek registration as Introducing Brokers months before the CFTC published its final rules.

13

Hello, Jason

I trade GBP/USD in my FXCM-UK micro account.

As I understand the table you posted, the MARGIN on my trades will increase from 1% to 3.4%, if I remain with FXCM.
Is that correct?

Regards,

Clint

14

You’re not doing your math Clint. The $340 on a mini GBP/USD contract at current rates (1.5500) is only about 2.1%. I recall you mentioning that your margin on a mini lot of anything was $100, but that’s actually less than 1% for the likes of GBP/USD, where the current mini contract value is $15,500.

15

Hi Clint,

Rhodytrader is on the right track with this one.

Up until last year, we used to base the margin off of the contract size. So if you traded 10,000 (10k), then a 2% margin percentage would indicate a $200 margin requirement. Therefore the margin requirements were $200 across the board regardless of the currency pair being traded.

The margins are now based off of the actual base amount being traded. So if you traded 10,000 (10k) GBP/USD that would be 10,000 GBP which is about $15,500 at current exchange rates. As the value of GBP/USD fluctuates, so too can the margin requirement. Remember back to when GBP/USD was trading around 2.10. If GBP/USD went back up to those levels, the margin requirement would increase to about $420 (Math: $21,000 X 0.02).

If you reverse the math using the $340 margin requirement, the margin % comes out to a little above 2%, as mentioned by rhodytrader. The reason for this is because there’s a cushion built into the margin requirement. Our goal is to keep margin requirements as stable as possible. By building in a cushion, we anticipate margin requirements will not have to change more than once per month if at all. This way you won’t see you’re Used Margin fluctuating on a daily basis as exchange rates change, but rather only when there are large movements in the exchange rate.

-Jason

16

Hi bravehoststamps,

Here’s the latest information I can share:

All forex accounts for US residents trading overseas will be repatriated back to the US by October 18, 2010.

For US residents with FXCM UK, the switch back to FXCM US will most likely occur the weekend of October 15. The switch will occur over the weekend so that there is no disruption to your trading. The existing username and password you use to login to your account will also remain the same. US residents will receive information very early next week by email confirming the timeline.

Please let me know if you have any additional questions.

-Jason

17

Jason,

What is the official position (if any) of FXCM in regard to the new CFTC regulations and the way they are being implemented? Do you support the CFTC like your competitor IBFX does?

18

Hi bravehoststamps,

Our official position was posted to this thread on September 14th. Here’s the link quote with permalink:

[B]
301 Moved Permanently
“We’ve been ready for this.”[/B]

“We believe that the reduction in leverage is a reasonable compromise from the initial CFTC proposal of 10:1 leverage. FXCM does believe lower leverage will be to the benefit of traders as higher leverage can often times result in a few losing trades offsetting many winning trades,” commented Drew Niv, CEO of FXCM. “FXCM has already implemented 50:1 as the default margin setting on FXCM LLC standard accounts and, as a result, the new leverage requirements will have a minimal impact on our Standard 10k LLC accounts.”

19

Great. And what will the CFTC and the US government in general be able to do to those foreign brokers that will continue servicing US customers despite the new regulations (provided that they do not hold any assets in the United States)?

20

That’s a good question, and one that will play out after October 18th. I’m sure there will be lots of different versions of what the regulations mean and the question has been asked by traders concerning what authority does the US government have restricting US residents from trading overseas. I can’t discuss the legal merits of these questions and I’m sure some traders may test this in the courts. There are countless examples of the US government going after offshore entities whether it be for offshore gambling operations or the impact of the [US government laws affecting Swiss banking](US government laws affecting Swiss banking). And for another example, British Columbia Securities Commission already restricts foreign entities not registered with the BCSC from soliciting and accepting BC residents (which they have enforced succesfully). Plus why do you think UK brokers won’t allow US residents to trade CFD contracts even though they don’t have a presence in the US? If other brokers want to take the risk of allowing US residents to trade through offshore entities after October 18th then that’s a risk they’re willing to take despite possible legal action and speaks to their own business practices.

Considering the reach of US law and disputes, we are not about to illegally accept US residents in violation of CFTC rules going into effect October 18th. We are going by what the CFTC has outlined and clarified as the rules for operating as a forex broker and accepting US residents, and we will be in compliance with US law and regulations.