Proposed CFTC Leverage Change to 10-1 for all US Brokers

Beginner Questions
152

Was the 10:1 leverage rule approved or not? Is the final word out?

I remember that the regulations stipulated a whole lot of various conditions, including the leverage restriction, but there is still no word (as far as I am aware) about the finalization of these rules.

If they do hit, I think entrepreneurial forces will pop up that will solve the problem. There are people out there who see an excellent opportunity for stealing the other brokerages’ businesses.

I don’t seriously think the CTFC will be able or willing to penalize retail FX investors for going offshore. Retail FX traders are not going to cause a collapse of the financial system by overleveraging. Also, how are they going to enforce these laws? Are they going to send some creep in a trench coat to sit in a car next to your house and scan your WIFI for connections to a Bermuda brokerage? Are they going to petition Verizon to block access to offshore brokerages? Not a chance. The only way they can shake you up is by classifying offshore FX brokerages as online casinos. As far as I am concerned, that hasn’t happened. It would take a court precedent to establish that.

The only entity that will get you into trouble is the IRS (remember, these are the guys that took down Al Capone), IF you forget to pay your taxes. If you send the IRS a check for taxes due and show them your trading records, they are NOT going to call up the CTFC and make sure you’re doing business with a registered FX broker. They have better things to do.

Its important to keep perspective and remember that the global world we live in offers alternatives. Offshore brokerages will have to become more honest to be competitive, because with greater demand comes greater competition. Economics 101…

153

Have you read the thread?

154

Sorry, I missed Clint’s post…

So it appears they’ve settled for 50:1 on majors and 20:1 on minors. What disturbs me is this line:

“the definition of “major pair” and “minor pair” is left up to the National Futures Association (NFA), and can be changed by them at any time”

Basically, this is a gradual legislative squeeze. Back when there was no regulation, some brokers offered 500:1. Then the FINRA proposal for 1.5 leverage came out, which caused havoc, after which the 100:1 rule came into effect. Now we’re down to 50:1, and 20:1 for minors, with the NFA having the authority to recategorize as they please (much as they set margin for the individual futures contracts). This makes it easy to shift to 20:1, and that is likely their target rate.

This is all classic negotiations strategy. Start very low (1.5:1 as per the initial FINRA proposal) to arrive at your target (20:1). None of these people were serious about 1.5:1 or even 10:1, they were just gambits in the negotiations game. Had the outcry against leverage not been serious, you would have likely had 20:1 for ALL pairs.

I think this is still very unfortunate news, the spreads on the crosses are going to go up because the speculative volume will decrease.

155

Not likely. First, remember that the vast bulk of forex trading is outside the retail arena. That’s where spreads are determined. Second, consider the case of Oanda, who has never allowed leverage higher than 50:1 and yet is among the top 3 biggest brokers out there. Third, consider that last year the NFA put a limit of 100:1 on leverage, and before that implemented the FIFO and no “hedging” rules and that none of them has seemed to have any impact at all on retail trading volumes.

156

Spreads in the interbank market are determined that way, however dealing desks are also involved here, and dealing desks are what the retail crowd must deal with. I hope either way that you’re right.

The 50:1 is not what I am concerned with, its the fact that 20:1 seems to be the next step. The hedging rule forced some people to readopt their strategies, but that wasn’t serious enough to cause people to switch products.

My concern is that with all this regulation, people will be encouraged to switch products. You’re going to see more gravitation to E minis, for example.

I’m seriously considering opening up an offshore account, I’ve had it with this regulation.

157

The retail spreads are based on the inter-bank market spreads.

The 50:1 is not what I am concerned with, its the fact that 20:1 seems to be the next step. The hedging rule forced some people to readopt their strategies, but that wasn’t serious enough to cause people to switch products.

I could say that forced strategy adjustment was almost certainly for the best, but that’s a whole other discussion! :wink:

My concern is that with all this regulation, people will be encouraged to switch products. You’re going to see more gravitation to E minis, for example.

Why does that concern you?

I’m seriously considering opening up an offshore account, I’ve had it with this regulation.

You won’t be able to do it if you’re a US citizen. The new regulations between the CFTC and the Dodd-Frank bill, from what I’ve been seeing, will effectively mean US traders cannot have accounts with un-registered foreign brokers or affiliates of US ones, and to be a registered one you have to abide by the CFTC rules.

158

When liquidity moves to another market, it goes from one place to another. Perhaps I’m overplaying my concerns, but when you consider that some estimate that up to 80-90% of Forex volume is speculative, its not unlikely to have some impact. The big banks and hedge funds won’t care as much, but the short-short term traders will.

You won’t be able to do it if you’re a US citizen. The new regulations between the CFTC and the Dodd-Frank bill, from what I’ve been seeing, will effectively mean US traders cannot have accounts with un-registered foreign brokers or affiliates of US ones, and to be a registered one you have to abide by the CFTC rules.

I have a hard time imagining that the CTFC will go on a hunt for retail FX traders who open off shore accounts with brokers who are not incorporated in the USA. There will be, for sure, some brokers who will open shop in areas where the US has no jurisdiction. What are they going to do, start an economic embargo over FX traders? Fly NATO planes over there? They may not like offshore brokerages, but from a realistic functional perspective what are they going to do about it?

As long as I make out my checks to the US treasury every single year, I don’t think there’s anything to worry about. The IRS is certainly not going to be phoning the CTFC every time they get a tax return. As a matter of fact, if you wanted to you could be a drug dealer and file a tax return on your income. They’ll accept it.

159

And if I MAY ask:

Where in the ‘Heaven and Hell’ have YOU been???

Regards,

Dale.

160

Riffing it up, man!

161

Missed ya man!!!

I’ve been ‘discovering’ some new music (I made a FACEBOOK ‘Friend’ that lives in NEW YORK of all places and she’s promised to ‘rub the bull’ for me next week)!!! No kidding neither!!! LOL!!!

On a SERIOUS note though: it’s funny that everyone is talking about this (the subject of the thread). ONLY A FEW HOURS ago I received a ‘promotional e-mail’ from a VERY well known US FOREX broker and the way I ‘read it’: it was an ENCOURAGEMENT for traders to move their accounts to another ‘place’ where leverage is NOT ‘capped’ and ‘hedging’ is encouraged!!! Sorry: I’m the ‘numero uno’ USA ‘supporter’ but this whole thing ‘smacks’ of the prohibition era!!! And we ALL know how THAT turned out!!!

Regards,

Dale.

162

Thanks Dale, it has been a while. I try to trade more and spend less time on forums these days, lol.

I think the main prohibition will be in having foreign brokers SOLICIT American clients. There was one brokerage that has 500:1 leverage which already has a note saying “we are not soliciting”. If that broker doesn’t have a parent company in the US, there is no realistic way for the US to enforce such a regulation.

Besides, if we think about it realistically, people who benefit most from high leverage are those with small accounts (as in $10,000 and less). This should be the least of the CTFC’s concern.

163

Swaps are the single biggest share of the forex market, and they aren’t speculative, generally speaking, so you can throw the 80-90% figure out. Now factor in that retail forex remains a very small fraction of the $1.5 trillion daily spot market volume, and that the CFTC regs only apply to that small fraction, and you get basically zero impact on the market from these rules. On top of that, the big players don’t lever up like retail does (which should tell everyone something), so the leverage cap wouldn’t impact them anyway.

I have a hard time imagining that the CTFC will go on a hunt for retail FX traders who open off shore accounts with brokers who are not incorporated in the USA. There will be, for sure, some brokers who will open shop in areas where the US has no jurisdiction. What are they going to do, start an economic embargo over FX traders? Fly NATO planes over there? They may not like offshore brokerages, but from a realistic functional perspective what are they going to do about it?

True enough, but I’d make two points there. First, the pattern among the major financial economies is in the direction we’ve gone (witness Japan), so it may not be all that long before everyone is in a similar state of regulation. Second, if you move “off shore” I can’t imagine you’ll have the same protections against broker malfeasance and whatnot.

Besides, if we think about it realistically, people who benefit most from high leverage are those with small accounts (as in $10,000 and less). This should be the least of the CTFC’s concern.

I’m not sure being able to blow your account at a very rapid pace thanks to high leverage is a benefit. And keep in mind that the CFTC, like the SEC, is at it’s core a consumer protection agency. Whether we like it or not, being concerned about small account traders is exactly why they exist.

Check out the comments from the boss at Oanda: FT Alphaville

164

The big players are perfectly fine without serious leverage because their target annual rate of return is 20-30%. They also can’t leverage too much or else they start moving the market. As for determining FX volume, that is something that nobody has effectively done because unlike with exchange traded products, it is all in a ‘dark pool of liquidity’. So estimates remain estimates.

True enough, but I’d make two points there. First, the pattern among the major financial economies is in the direction we’ve gone (witness Japan), so it may not be all that long before everyone is in a similar state of regulation. Second, if you move “off shore” I can’t imagine you’ll have the same protections against broker malfeasance and whatnot.

Limiting retail FX traders’ leverage will have zero effect on the financial system. The CTFC is doing this because its worried that FX traders are stupid and irresponsible. Some perhaps are, but they sign about 5 or 6 disclosures when they open up a trading account, so if after that they don’t understand they can flush their money down the toilet, its their problem clearly. I can get a drivers license, buy a safe car, then drive it down the expressway and crash into dozens of people. There are no guarantees.

There are so many countries in this world, with different ways of thinking and doing business. Some of them are immune to the arsinine ways of agencies like the CTFC.

As for ‘protections’, it is in the self interest of brokerages to be honest and reputable if they want repeat business. As more business moves off shore, the brokerages who are smart will maintain a reputation and attract customers that way.

I’m not sure being able to blow your account at a very rapid pace thanks to high leverage is a benefit.

With lower leverage you’re not going to prevent anyone from blowing out their account. They’re just going to do it more slowly. That’s the whole stupidity of this rule. So they blow up in 10 trades and not 5, big deal. That doesn’t make it any better, the money is gone anyway.

And keep in mind that the CFTC, like the SEC, is at it’s core a consumer protection agency. Whether we like it or not, being concerned about small account traders is exactly why they exist.

As a person who grew up in America, I was raised to believe in opportunity. That is what this country stands for. I don’t need some agency that is not even composed of retail traders to dictate to me how much leverage I can use, or where I can start up my own account. What the hell is it their business? They’ve provided disclosure requirements, I think that is sufficient. Otherwise, lets set the national speed limit to 35 miles per hour and mechanically limit the speed to 35 mph on all US bought cars to ensure that there are no high speed collisions ever again.

I bet you anything that this leverage requirement will do NOTHING to reduce the amount of money that people lose in the Forex market. Milton Friedman must be spinning in his grave from all this…

166

All this will do is make people trade larger lot sizes to regain the pip value they were used to getting when trading at 100:1 leverage.

167

SDC, I believe that if you really think about what you’ve written here you will come to realize how silly it is. :smiley:

169

This isnt going to happen. BTW margin has nothing to do with lot size and doesnt affect it whatsoever.

Learn what you are talking about before you post such nonsense

double BTW, if you move your account offshore you will still have to follow the 50:1 leverage laws for americans because it goes based on YOUR PERSONAL residency… alot of you need to be reading my topic and really learn what you are doing. This forum is like the blind leading the blind.

170

This can only apply if the offshore broker in question has a U.S. branch. This was done to stop U.S. brokers (like FXCM) from creating an offshore branch to circumvent the new rules. If the broker has no U.S. presence, they can do what they want.

171

The rules require any broker or entity serving as a counterparty to US retail customers be registered with the CFTC. This doesn’t mean that it only applies to US brokers who had an offshore entity as it also affects foreign banks if you read the rules. We will have to see what route the CFTC takes after the Oct. 18th deadline as far as enforcing this.

Plus, there are numerous examples of overseas brokers who no longer accept US residents even though they do not have a US office, and British Columbia is another case of non-BC brokers being prohibited from accepting BC residents without BC registration even though they don’t have an office within BC.

172

This post from the “Going offshore to escape the CFTC” thread highlights the brokers currently confirmed to both accept US residents and not be under CFTC jurisdiction.

http://forums.babypips.com/rate-my-broker/36221-going-offshore-escape-cftc-7.html#post221766

The CFTC can either put pressure on the broker’s government forcing them to comply, or go after the individuals who have accounts with these brokers. They cannot, however, directly force the brokers to release this information (their client list).

Edit: And under current law, the CFTC has no authority over individual traders who trade through those foreign brokers that are not subject to CFTC regulation.

Considering the large number of pirate websites the RIAA and MPAA are unable to take down, I don’t think this will be as easy as they think.

The government can try to prohibit these brokers from accepting credit card transactions from US Banks (similar to how they try to regulate offshore gambling sites), but there are numerous ways around this, evidenced by the wide variety of offshore gambling sites currently used by US clients.

In short, regulation of a global market won’t work without 100% compliance from all parties. I don’t think they have that here.

173

Do you really have 600+ posts on a forex education site and don’t understand margin requirment and leverage? That’s an honest question, because I’m hoping you just phrased your statement in a bad way.

For anyone else who may have read that statement and also not understand why it’s incorrect heres why…

  1. less leverage, 50:1 as compared to 100:1 means that you have to have a larger account balance to cover any one trade.

  2. This means that if anything you’ll be forced to trade smaller lot sizes so that you are not in danger of a margin call.

  3. Regardless of available leverage, (the leverage ratio the broker allows you to lever your account balance NOT real leverage which is your lot size for one trade compared to your entire account) you’ll still be able to trade any lot size your broker offers, you just have to have enough in your trading account to cover the trade.

The reason less leverage pisses retail traders off is because if you have an repeatable edge then you can use your available leverage as much as your feel comfortable and really make some money.

Less leverage means it takes even more money to make money trading.

As in the visual reference to leverage with a real physical lever, under a boulder, what the cftc has done is drastically shoretened the length of a traders lever. So, a trader needs to use more of their own muscle (account balance) with less help from the lever ( a good leverage ratio), to move the boulder (cover and open trade)

This has in no way taken ANY risk away from trading for retail traders. At best it will force them to trade with smaller lot sizes and lose (or gain) account size.

So, with much less leverage it becomes even more important to have a consistent edge and have good moneymanagment and compound to grow your account. So, really all they have done is make retail trading even more risky and easier to become a loser at.