NFA and CFTS now turn their focus to reducing leverage

After the furor that was raised by retail traders when CFTC enacted the new anti-hedging policy, I am surprised that online forums have not been inundated with protests in anticipation of NFA’s new proposal to limit the leverage FDMs will be allowed to offer their clients.

When brokers offer higher leverage it generally encourages traders to trade larger positions, thus increasing the market maker’s trading volume and profits but also increasing the risk of a margin call for the trader. The NFA proposal would limit leverage to 100:1 on ten major currencies and 25:1 on all others.

I understand why some novice traders would assume that decreased leverage would inhibit their opportunity to make profits, but most don’t realize that leverage is a double-edged sword that can cut their trading lives short if not managed judiciously. While professional currency dealers use 1:1 to perhaps 10:1 leverage, it is not uncommon for inexperienced retail clients to use leverage from 50:1 to 400:1 and, if they happen to trade with IG Markets, 700:1.

The intent of the proposed regulation is to protect over-leveraged traders and brokers alike. However, some Forex brokers are concerned it may make them uncompetitive in the global market. So, are the NFA and CFTC over-reacting to the current administration’s call for more transparency and tighter regulation? The Foreign Exchange Committee (FXC) obviously thinks so. In a letter dated three days before Thomas Sexton (NFA Vice President and General Counsel) sent his proposed amendments to the CFTC, FXC transmitted their comments on a proposed rule establishing a leverage limitation to FINRA. The FXC letter stated, “The FXC believes that the protections currently in place with respect to retail forex transactions are adequate to protect retail market participants and that the proposed Rule is unnecessary and potentially counterproductive.”

Earlier this week, when CMS Forex reduced their leverage offer from 400:1 to 100:1, it may have been done in anticipation of the proposed regulation. The company’s press release used almost the exact language used in the NFA’s letter to the CFTC. It stated, “We will be requiring 1% margin on the notional value of clients’ positions on the major currency pairs and 4% on the minor currency pairs.”

So who is going to win this battle?

NFA Proposed Leverage Limit of 100:1 - ForexForums.org wrote:

[...] it would limit leverage to 100:1 on major currencies and 25:1 on all the others. The post is at Who Has More Leverage? | Forex Magnates. I don’t care if they limit leverage to 100:1. I never use it anyway but I can already hear some [...]

May 13th, 2009 at 10:38 pm

» Who Has More Leverage? | Forex Magnates » Forex Currency Trading wrote:

[...] news by Tom Herod « U.S. Dollar Set For Further Lows As Yen Continues To Take … ECB Bulletin [...]

May 14th, 2009 at 7:31 am

» NFA and CFTS now turn their focus to reducing leverage | Forex … » Forex Trading Experts wrote:

[...] news by Tom Herod « XE.com – XE Forex Rates at 2009-05-14 02:00 UTC ECB Bulletin Analysis – Forex [...]

May 19th, 2009 at 6:03 pm

Michael Greenberg said:

It’s much more clear to me now why did CMS cut down its proposed leverage on its own initiative.

CMS were first to understand the regulation game: when NFA “proposes” something what it really means is – start preparing because it’ll hit you with the final decision and with very short notice. Just like NFA did with FIFO and Anti-Hedging requirements.

In my opinion reducing leverage is blessed move as only little number of traders actually know how to enjoy high leverages while the rest end up blowing their accounts.
Finally the NFA makes the right decision.

Michael

May 14th, 2009 at 3:07 am

Sir Tradealot said:

That is a joke. Looks like I will be trading offshore. The US brokers have their hands tied.

I know how to use leverage in my favor, and without it, I will lose heaps of trades based on my very profitable trading style. I am not wondering why they are stopping it, because if you know what you are doing, it’s a blessing.

If you don’t know, then it should not matter much to the average trader. This is a great way to stop real forex day traders making a living. Let’s put a tax on each trade too.

Just push me out of the country why don’t you?

June 23rd, 2009 at 2:35 am