Going offshore to escape the CFTC

[Clint]

As this subject has my interest I decided to have a look around at some stuff.

Very interesting (once again) that the CFTC does not protect client funds nor compensate clients. And I will be honest: I for one was under the impression that this was but one of their functions.

I suppose my point really is: in the US is there not another regulatory body or organization responsible for client fund compensation that a broker could/should be registered with e.g. the FDIC???

Hello Dale,

Regarding the protection of customer funds on deposit with U.S. retail forex brokers, there are two separate, but related, issues.

First, U.S. customer funds cannot be segregated (in the legal sense) from the corporate funds of the broker, because of some quirk or other in the bankruptcy laws of the U.S. This means that an insolvent U.S. broker can lose its customers’ funds along with its own funds.

I’m not a lawyer, so I can’t explain why the U.S. bankruptcy law is what it is. The little I know about it, I learned from Jason Rogers, the FXCM representative on this forum (and other forums). Here is one of Jason’s posts — CFTC - “Customer Funds in Segregation”

Second, in the case of lost customer funds, there is no U.S. government agency charged with restoring those losses.

All of this stands in sharp contrast to the situation in the U.K., for example, where customer funds are legally segregated from broker funds, making it unlikely that those customer funds will be lost, in whole or in part, even in the case of a broker bankruptcy. And further, in any case of broker bankruptcy or fraud in which customer funds are lost, U.K. government insurance stands ready to make good, up to a fairly sizable maximum amount.

All of the above definitely something for (new) traders to investigate i.e. before making the assumption that the regulatory authority/body itself will protect and compensate (easy mistake/assumption to make though).

In my opinion, a new trader in the U.S. should initially consider only a U.S.-based forex broker, leaving the consideration of an offshore broker for a time later in his career when he is better qualified to evaluate the special challenges of trading offshore. This means that a new trader in the U.S. has pitifully few choices starting out.

Currently, there are only three U.S. brokers available to a beginner with limited funds: Forex•com, Oanda, and IG Markets US. All three are required by CFTC regulations to offer no more than 50:1 leverage, to prohibit hedging, and to conform to the FIFO rule. And all three essentially commingle corporate and customer funds, with no provision for insurance in the case of loss.

U.S. traders can find better trading conditions offshore, which explains the interest in this thread.

But, U.S. traders can also find rip-offs and scams offshore, which makes extreme due diligence one of the essential survival skills for offshore traders. That’s why I recommend that newbies not make their first forex broker an offshore broker.