How the CFTC became U.S. retail forex's #1 enemy

Trading Discussion
1

I posted this on my website forex-nation.com and also wanted to include it here just to keep the debate going. Remember this is not just a U.S. problem as the NFA has decided to start trying to legislate across borders and whatever the big political nut jobs want, they will get, unless the silent majority gets louder!

How did we get to this point?

I feel it is important to give some context to the situation we are currently in here, but the history of regulation in the U.S. foreign exchange market is a long and complex one, so I will be brief. In 2004 the federal court in the U.S. ruled that the CFTC (Commodity Trading Futures Commission) could not target fraud cases in the OTC forex markets because they were outside its remit. Then in 2008 the U.S. Congress passed legislation that returned regulatory authority of the forex markets back to the CFTC after a flood of cases involving fraudulent foreign exchange dealers targeting retail investors.

That’s when the NFA (National Futures Association) came into being. Andrei Pehar, Chief Currency Strategist at fxKnight.com says “What happens is the NFA suggests these rules, and the CFTC accepts and enacts them (the CFTC fully admits forex is not their area of expertise, which is why they originally empowered the NFA to take this area over). The problem is that the NFA is NOT a consumer protection agency (their website is .org, not .gov) - they are a trade organization made up of, funded by, and created to further the interests of… futures brokers. National Futures Association. And there’s no denying that retail forex competes directly with their members’ business interests… It gets worse! Starting April 1st, the NFA intends to try and start legislating across borders, by forcing offshore brokers and IBs to register with them as well.”

What CFTC proposes

To achieve regulation and crack down on the tremendous amount of scams, the CFTC wants to include the ruling passed by the NFA last year that all foreign exchange dealers are registered with a regulator. This has been welcomed by dealers, so too has the proposal to impose a minimum capital requirement of $20 million dollars in order to be a registered broker in the U.S. which acts as a capital cushion to protect consumers and is an important step towards regulating the industry. Also in November of last year the NFA already reduced the leverage ratio for foreign exchange trades from 400:1 to 100:1. But now the proposal to slash the amount of leverage from 100:1 to 10:1 has unleashed an outcry from brokers and dealers alike.

This new CFTC ruling , if enacted, would mean that a client would need to increase the amount of money they post in a security deposit account held with their dealer to 10 percent of the value of each trade from the current level of about one percent. This would mean that for every $10 you want to trade on foreign exchange you have to post $1 as a security. This move was unexpected because leverage limits were dramatically reduced six months ago by the NFA, the CFTC’s little stooge to the forex industry in the U.S. .

On January 20th, an FXCM client wrote: FXCM sent a letter out to all their clients actually stating they oppose this and asking them to write to the CTFC. I’m amazed… I’ve heard individual people who work there grumble about the rules (off the record), but I have never seen a big company like this take such a public stance on an issue.

I’m still waiting on FXDD to do the same, especially since just 2 months ago they received their licensing with the NFA. Must be great to get a license with the same group that’s going to put you out of business in just a few more months!

So what’s being done about this?

The Foreign Exchange Dealers Coalition (FXDC), which is made up of nine major firms, is working on a unified response to the CFTC’s proposals. The coalition is trying to ensure a balance between protecting the consumer whilst not stifling business. The FXDC affirms on its statement that the U.S. $1 billion industry is in danger if CFTC proposal passes. “This revenue is money generated from a product that is in many ways an export. Furthermore, as capital markets open in the BRIC countries the number of new accounts that will flow out of places like China and India will lead to huge job and revenue gains in the United States.” Says the Foreign Exchange Dealers Coalition. “Trillions of dollars of trade volume are at stake. This is money that could (and should) be booked in the United States as taxable revenue. But if this rule passes the United States could well be costing itself billions of dollars in taxes down the road.”

Also from the FXDC letter last week:
“The case against the 10 to 1 leverage rule is clear. The rule will be a boon to foreign forex dealers (both regulated and unregulated) who will grow entirely at the expense of retail forex dealers in the United States. Thousands of high paying jobs will be lost and the potential for tens of thousands of more jobs will forever vanish as well. Consumers will be hurt and more vulnerable to fraud. And the United States will toss away one of the most promising export industries that it has, all in the midst of 10% unemployment. There is no good reason that this should be so.”

In Summary

Basically, if implemented, the proposed changes could have the opposite effect from what the CFTC is trying to achieve. All you do is drive legitimate traders like myself off shore, and what you still have left in the U.S. are the fraudulent dealers who don’t operate within the law anyway. It will cost US jobs, US tax revenue (like I give a rat’s ass, but it’s true) and more traders will get ripped off by brokers outside of US jurisdiction where there is less regulation, so it does more harm than good!

In my opinion, the cure is EDUCATION, not restricting what people can and cannot do with their investment decisions. As with any investment strategy, you are responsible for what you do with your money and that includes investigating those you will have to ultimately partner with and trust in the process. Government was invented to protect people and their property, not to limit their potential! This is a classic example of government over regulation. The United States of America is the land of the free, where each forex trader should be able to make their own EDUCATED decisions about their money and sites like this one are here to help.

Please send an email to: <[email protected]>

Include “Regulation of Retail Forex” in your subject heading as well as the identification number RIN 3038-AC61 in the body of the message.

2

10:1? That’ pretty radical. I can’t imagine making any money with that.

3

Well said Forexwatchmam and a great post that everyone should read. FXDD is a part of the Forex Dealers Coalition in opposing the leverage limit proposal. The FXDC is comprised of the following brokers: GFT, Oanda, IBFX, Gain Capital, FXCM, FX Solutions, FXDD, PFG Best, CMS Forex.

Getting that many brokers to agree with each other in normal times is like trying to herd cats, so goes to show how important this issue is.

4

Thanks for this excellent summary and analysis, Forexwatchman.

Clint

5

Forexwatchman, how the heck does the NFA plan to force overseas brokers to register with it?

This is getting more insane everyday. This will be a world wide issue if that should happen.

6

Their argument is that if you have US clients, you fall under their jurisdiction. Offshore brokers will soon have to decide whether to dump US clients or adopt US rules.

FxPro is already dumping US accounts. FXCM UK has already issued notice that foreign IBs will lose commissions from their US clients unless they register with the NFA by March 31st.

NFA themselves have no jurisdiction outside US borders, yes - except upon their broker members, who will then in turn enforce for them (not doing so is violating their compliance requirements).

Far from “can’t happen”… it IS happening.

Have a peek at this article:
CFTC Forex Proposal; US Retail Market to Disappear?

There are far worse things in this proposal than just 10:1, but at least 10:1 got everyone’s attention enough get off their butts and start taking action.
Reply With Quote

7

Great job for those that have already sent in their emails and letters, these guys have removed their online version of the proposal already! I guess real work intimidates them, or maybe the real threat of this many traders rising up against them is sobering. Who cares, here’s the original proposal just in case you haven’t read it yet: Connection Problems"

Keep fighting this proposal guys, we are making history happen now! Go to Forex-Nation to learn more!

8

The real question is whether or not you would be willing to take up arms, fight and die for your freedom to trade at 100:1 margin. All the posting, letter writing and phone calls means nothing unless it is backed up by force. CFTC is thinking traders won’t do anything if we reduce their margin to 10:1, they’re a bunch of pansies. We took away hedging and they did nothing. Let’s see what else we can take from them.

How does a small group keep a large group in check? The threat of force. How does a large group keep a small group in check? The threat of force. Gangs know this and so does your government. The only way to stop a bully is to stand up to him and be willing to fight. CFTC is the bully. Are you going to stand up when the time comes or are you going to take it lying down?

9

I’m going to write to my broker today and tell them not to give in to these demands. Something is going to be done if they think they are going to get away with this.

10

for every one or two writing in to CFTC about these proposals, there have been 3 or 4 people writing in to CFTC or NFA about losing there money to forex scams - thats the reality.

This Court Document is typical of what CFTC is fed up with:
http://www.mnd.uscourts.gov/SEC-CFTC/091230-FirstStatusRptOfReceiver-CFTC-v-Cook.pdf
30/12/2009

these scammers have single handely brought this on the whole industry and CFTC is sick and tired of hearing from investors who have lost life savings to these crooks. Some people have invested signigicant sums with these ponzi forex pools and are left with nothing - were talking $500,000 to $1,000,000 dollars in some cases. These 2, Cook and Kiley are responsible for $193million disappearing and for Crown forex being shut down and traders funds frozen with little chance of seeing any money returned - and this is just one case of many.
And it takes years for a resolutions to be reached and investors or traders funds are virtually lost in all the process.
If further regulation reduces or removes these massive problems, than CFTC and NFA will be happy, truly they have no intention, obligation or commitment to regulate for individual retail $200-$5000 micro accounts - if truth were CFTC would prefer that these accounts not exist at all. Micro and mini accounts is a typical scam by the regulated brokers who are only too willing to accept these deposits form uneducated and novice traders knowing full well the money will be lost - dont be fooled. Learn forex and realise forex regulation is for protection, of course ‘regulated brokers’ are upset with reduction in leverage - as this will result in a reduction in there profits and may help the retail trader. - dont be fooled!

11

You make a good argument. The point missed is that those who give up freedom for security will soon have neither.

If the prevailing attitude was “let the buyer beware” rather than regulate everything to the nth degree, people may learn something called PERSONAL RESPONSIBILITY. This does not mean scam artists shouldn’t be thwarted. It means that there are alternatives to taking away freedom. Some pretty smart and/or rich people got snookered by Madoff. They didn’t do their homework and, of course, the same government that wants to take away your and my freedom is the same government that ignored the whistle blower for years.

You are right, DO NOT BE FOOLED BY THE GOVERNMENT.

12

The reality is that our freedom will be taken from us and this should not be allowed to happen! If they want to kill the scammers, then there are far better ways to do this. I do not agree that mini and micro accounts are scams- this is far from the truth. Many brokers, however, will offer such accounts and scam the individual trader.

These regulations against our freedom will happen slowly and eventually even more regulations will be enacted until we can’t take a piss without someone holding our pecker.

13

So I agree completely with you that the scammers have been the driving force in the need for more regulation, but I think it’s you that’s “fooled” on the other points you are making. First of all 90% of the scams that were created and pulled off were apparent ones; they were too good to be true and not transparent enough to trust and the investers trusted them without knowing more about them. They got swept up into it because a family member recommended them or their greed took over when they were offered ridiculous annual returns. That’s never going away, the world is a vicious place to make a honest living in. But imposing such strict leverage that all retail forex traders must relocate their broker accounts to some off shore brokerage that’s NOT under the CFTC’s jurisdiction in order to protect us from ourselves is lunacy. Don’t be fooled, it’s easy to see what will happen instead, now they won’t have the headache of doing their job collecting the facts and prosecuting the scammers, and instead it’s some other country’s problem. Traders will be led back into the futures and commodities industry where these kinds of leverages still exist in America. What part of that “may help the retail trader” as you said? These guys are here to protect the Futures industry and see forex as a competitor. They don’t care about protecting us, they are forcing us to leave the U.S. by passing this law. And it doesn’t end there, there has been a huge job pool created to train and invest back into the thriving U.S. retail forex industry that this will render useless.
Bottom line its about education, poor decisions by people on both sides of the scams (investor and scammer) played a part in each situation, but that has no relevance on me or you or the next guy who thinks he wants to trade forex. Should we ban fast cars since some people drive way too fast and have traffic accidents in them? Isn’t it ultimatley up to the consumer as to what car to buy and how fast to drive it? Dumb questions I know, but substitute forex trading for fast cars and that’s the same point the CFTC ois making when they say this rule is for our protection. 100:1 is great, its fair, its enough to make a living on without being a millionaire already, and the rest (risk of scam, margin calls, etc.) is part of the game. Its life, we can’t save everyone from their greed and fear and entitlement without severely restricting the good guys like me who slave over a website that offers FREE information to traders who might want to study how I trade. Just like this forum, we should be more willing to help newbies out and guide their journey along, the CFTC will cause all of that to just end and go away.

14

Fast cars. I like the analogy. The regulation should be that the trader should be allowed to determine their leverage. It could be fixed when you open the account or a parameter on each trade entry. Brokers could earn their leverage levels by proving they are not scammers or by putting up a bond. The real issue is government’s knee jerk reaction is always more regulation and less freedom.

15

100:1 is great, but you can still be successful, if not more so with 10:1 leverage.
Trading for $1 pips, ie $10000 contract size, with a $1200-$1500 account is very visible and if your a competent trader you should be able to compound your account, even to millionare status from there.
Even with a $250-$500 account it would be quite reasonable to open up $1000 or $2000 position sizes - the deposit with the broker would only be $100 or $200 with 10:1 leverage, and your trade would have to go against you 1500pips for a margin call with $250 account a $1000 contract.
Show me a successful trader who uses more than 10:1 account leverage you will find most will use lower leverage than that on there account to reduce there risk.
I can show you plenty of people who use higher leverage - but they arent trading anymore.
Personally i am more worried about Obama’s proposal on Banks to limit proprietary trading which will greatly reduce liquidity and volatility making it harder to find pip earning opportunities IMO

The reduction in leverage is concerning our brokers cause it will greatly reduce there profits.
I think educating traders that 10:1 leverage is something that can be work with then you will find more traders will stay with the US fx brokers - in there own interests.

16

The difference between Obama’s push for new regulations on Wall Street and the CFTC’s proposal to push regulations on retail FX traders is obvious. We are small traders who are NOT trading other people’s money. Thus, we pose no real danger on the economy with our risk-taking. The CFTC imposing on private citizens in a manner not stated in the Constitution is unconstitutional and defeats the purpose completely.

However, you make a valid point. Unhealthy speculation is what led to the near-total financial meltdown. Contrarily, unhealthy speculation is also what props up the financial markets by providing liquidity. I assume this situation is providing a healthy dose of cognitive dissonance to many traders.

17

The similarity is the real concern and that is government taking away our freedom. Laws made by man are enforced by (the threat of) force, make no mistake about that. Sometimes the only way to get the law to change is by force and make no mistake about that. U.S. citizens have become sheep that are fleeced by their government to the tune of over 50% of their wages through federal, state, local, sales, excise and other taxes and fees. The U.S. government has been ignoring the Constitution for decades. It is obvious that voting them out does not work because taxes keep going up. There is only one thing left - REVOLUTION!

18

Tell me how that works out for you.

19

The issue with the CFTC proposal is the reduction in leverage and the unintended consequence of traders moving to non-US brokers where there may be little to no oversight.

Just look at the ponzi scheme you referenced. They weren’t trading with a regulated US broker which is subject to NFA and CFTC oversight. Plus the person running the scam was part owner in a Swiss forex broker that later went bankrupt. The reason why regulated US brokers are upset is because a reduction in leverage doesn’t have relevance in preventing forex fraud or ponzi schemes referenced by the link. Instead traders looking for more flexible leverage will be forced overseas to a broker which may not have any capital requirements, registration requirements, or oversight by the CFTC and NFA.

20

The CFTC & NFA are given their oversight powers by congress correct?

[B]What’s to prevent U.S. brokers from just saying screw you we won’t bend to your regulations and you can stick your licence up your but[/B], and maybe just move their offices that serve U.S. traders to the U.K.?

What kind of punishment and enforcement can they dish out? The brokers accept the regs because they want to say they are compliant and legit right? Well, if the oversight agency is full of crap and just trying to ruin the Forex industry it regulates, their licencing should be challenged by the brokers.

The CFTC /NFA should be brought before congress and possibly jailed for conflict of interest and engaging in monoplizing practices.