CFTC about to change the US Forex industry,brokers – it’s worse than you expected

Few days ago Commissioner Jill E. Sommers from the CFTC gave a speech at the FIA/FOA International Derivatives Expo in London and besides thanking and flattering half of the world’s regulators he also managed to outline the regulatory roadmap and mentioned a few of the most critical issues that the CFTC is going to handle in the near future.

The topics mentioned by Sommers might prove what I’ve been suspecting for a quite a while: Forex trading in the US is on the road to become an exchange just like the equities and futures are centrally traded. This would probably take a while to materialize and several steps would need to happen first, but it seems that more regulation is the likely outcome of the steps CFTC is aiming to undertake.

However there are also several good things that this will create: a big emphasis on STP processing of orders meaning traders will trade with other traders big or small and not against its own broker, which clearly has other interests. OTC products (Forex is probably one of them) are also going to be much more transparent and reporting will become a bigger issue than what it is now.

Michael
Forex Magnates

miko432 said:

Few days ago Commissioner Jill E. Sommers from the CFTC gave a speech at the FIA/FOA International Derivatives Expo in London and besides thanking and flattering half of the world’s regulators he also managed to outline the regulatory roadmap and mentioned a few of the most critical issues that the CFTC is going to handle in the near future.

The topics mentioned by Sommers might prove what I’ve been suspecting for a quite a while: Forex trading in the US is on the road to become an exchange just like the equities and futures are centrally traded. This would probably take a while to materialize and several steps would need to happen first, but it seems that more regulation is the likely outcome of the steps CFTC is aiming to undertake.

However there are also several good things that this will create: a big emphasis on STP processing of orders meaning traders will trade with other traders big or small and not against its own broker, which clearly has other interests. OTC products (Forex is probably one of them) are also going to be much more transparent and reporting will become a bigger issue than what it is now.

Michael
Forex Magnates

Click to expand...

Hmmm.

Stage II about to be implemented - leverage restricted to no more than 10:1

Stage I was about limiting the USA client's ability to be both long and short simultaneously, plus a few other things ... in short: Anti-hedging strategy removed!

Now ... striking a blow at Professional Traders, while purporting to "protect" newbies:

http://forexmagnates.com/
http://tinyurl.com/y9nx2f4
http://www.forexpeacearmy.com/forex...f-cftc-does-say-goodbye-retail-forex-usa.html

While this may affect USA clients of the market, it may well be the tip of the iceberg for the rest of the world.

Ultimately the rest of us watch the evolution of the USA model.

We maintain our "rage" against change, but if the changes just happen to bring about useful benefits, increased safety and repatriation of funds, better managed trading by participants and so on, you can bet your Uncle Bob's undies that eventually the changes will be embraced by the wider Forex Community world-wide.

Is this what we want ... need ... deserve ...

Or is there something else behind this?

I recommend my US clients to use overseas brokers such as Prime4x.com and WindsorBrokers.biz who have lower margin requirements, tight spreads and are EU regulated (the later by the UKs FSA).

£10kLoser said:

I recommend my US clients to use overseas brokers such as Prime4x.com and WindsorBrokers.biz who have lower margin requirements, tight spreads and are EU regulated (the later by the UKs FSA).

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While the CFTC issued the proposal for the benefit of traders, this is one of the consequences. Traders will be driven to overseas brokers where the CFTC has no oversight or legal jurisdiction to protect traders.

If you would like to voice your concern for or against the proposal you can submit your comment to the CFTC by sending an email to [email protected] with “Regulation of Retail Forex” in the subject line.

There seems to be a naive belief among US traders that their regulation is safer that that of the UK and EU. I don't see any evidence for this...

£10kLoser said:

There seems to be a naive belief among US traders that their regulation is safer that that of the UK and EU. I don't see any evidence for this...

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I would agree in the sense of the UK. Forex accounts are segregated in accordance with FSA client money rules. The US does not have the same, and traders become unsecured creditors in the event of bankruptcy. One would think a more prudent response would be to start by creating a path to this same protection for forex accounts.

Unfortunately, the 10 to 1 leverage rules will have the unintended consequence of forcing traders to non-US brokers whether they be regulated or unregulated.

I think regulations like these are barriers to entry for younger and smaller traders who want to learn and experiment, but don't have 10k to throw away.

Regulations such as these only add to further financial segregation between the consumers and the investors.. The poor stay poor because they are further seperated from the investment culture and perpetuate the widespread amnesia that money cannot buy more money.

This seperation leads inevitably to a consumer market for financial products. The problem is that these professionals marketing their products don't share the same incentive profile that a private investor does. Consequenty, with apathetic professionals who lack proper oversight from their patrons (the retail investor), the chances of an information cascade occurring exponentiate. Lord knows we don't want another one of those. The subprime meltdown was enough for one lifetime.

sark_anZas said:

I think regulations like these are barriers to entry for younger and smaller traders who want to learn and experiment, but don't have 10k to throw away.

Regulations such as these only add to further financial segregation between the consumers and the investors.. The poor stay poor because they are further seperated from the investment culture and perpetuate the widespread amnesia that money cannot buy more money.

This seperation leads inevitably to a consumer market for financial products. The problem is that these professionals marketing their products don't share the same incentive profile that a private investor does. Consequenty, with apathetic professionals who lack proper oversight from their patrons (the retail investor), the chances of an information cascade occurring exponentiate. Lord knows we don't want another one of those. The subprime meltdown was enough for one lifetime.

Click to expand...

I liked your email Sark_anZas. We should all state our case in clear language, in terms that are not abusive, but at the same time implore the CFTC to reconsider this idea.

Ostensibly they may be attempting to protect traders from their own folly, but I think it is more an attempt to reduce the exposure markets have to derivatives.

While I do agree that new traders should not be let out of the cage into the 100:1 and up to 500:1 arena - and I have held this view for years now - I think traders need to be given the freedom to choose what is best for them.

If you understand my email to the CFTC, sent yesterday (below) I am asking them to consider putting the onus on the Retail Forex houses to ensure they provide TRUE training, complete with an examination test, so that traders must prove their competence to handle leverage prior to gaining access to the keys to the executive washroom.

So many new traders, and many semi-experienced ones crank up their small accounts with massive leverage, and haven't a clue why they blew up.

But removing the leverage is NOT the answer.

Training traders to understand it is the way ahead in this.

Regulating to "fix" the problem of compulsive gamblers and incompetent traders "blowing up", spreads a net wide - too wide - and catches professional traders who choose to manage small accounts using leverage wisely.

Proper, regulated training is the way.

But by the way - it is possible to turn a good profit using just 10:1 leverage. It just means you have smaller SL. At the same time, it forces traders to be more careful, wiser, and select trades for a good reason, rather than playing markets on a hunch, or taking risks with small margins and huge leverage. It is just a slower game.

Read this thread (an unfinished work) from post #12 to post #20 where I touch on leverage issues. Trading 10:1 leverage can work just as well as 100:1 and I would expect many traders to be limiting their use of leverage to around 10:1 to 25:1 ... no more than that.

http://www.trade2win.com/boards/for...ife-position-trading-higher-time-frame-2.html

I have done a post or two on this elsewhere. However, regardless of that, I think the CFTC should not be reducing the freedom to choose in this way.

Here is my note to the CFTC:

Dear CFTC Secretary,

I am concerned that the proposal to limit the use of leverage to 10:1 will severely reduce the ability to continue to profit from Retail Currency Trading.

I would rather see Retail Forex companies commit a portion of their assets to ensure potential traders can prove they have the understanding required to trade using leverage of 100:1 and so on.

I think the onus should be on the trader, not the Regulator, to show that they are competent to handle the risks.

Here in Australia, the Commonwealth Bank Trading Arm, "Commsec" requires traders to prove that they understand the terminology and the mechanisms of trading before using their trading platform. The test is rigid, and requires traders to do research before answering the questionnaire.

Further, Commsec requires another test before it allows traders to use and set Stop Loss orders.

That is not difficult, and it works.

The onus is on the traders, and the benefit of this is that traders actually become better traders through studying for the test.

Rather than pursue an expensive regulatory pathway, which would require policing, why nor help traders to improve their skills, and require Retail Forex companies to require proof of traders ability to handle the risk involved in the use of higher leverage?

This would protect the new traders who jump into these markets to get rich quickly, as well as preserve the ability of more experienced traders to continue to profit as they currently do.

I think my suggestion may put the responsibility back onto Retail Forex Companies as well as clients, and allow the Regulator to continue in the role of overseeing fair trading.

Yours faithfully

XXXX XXXXX


EDIT: I thought my post got lost, but I posted in the other thread - apologies for the duplication.

Paul (Trader333)

You obviously removed your post, but maybe the lights came on.

Where I come from, instead of revealing our names at the end of a letter that goes onto the public record, we simply replace the actual name with an "X".

I didn't want my full name slathered all over the Internet - do you?

If not, be happy with the "love and kisses"