Leverage Limitation for Retail Forex

If what the article says is true, is the end of the forex to retail investors. And for market makers. A disaster. This is the refoundation of capitalism? Everything for the rich and the small investors out of combat.

http://www.finra.org/Industry/Regulation/Notices/2009/P117744

If you really do this, market makers will have to migrate from the USA to other countries. I feel crazy.

Wow "1.5 to 1", that's worse than margin on stocks, I can't see the purpose in lowering it to such draconian lows. All this would do is cause an exodus from US registered brokers to overseas unregistered brokers and FX futures.

Take a look at the membership list. The only major broker I found was MB Trading. The other major forex brokers don't appear to be members of FINRA.

Right. All that does is encourage us to trade w/ non-FINRA organizations.

Hey Guys - I think there might be some confusion about MBT and FINRA. Our Forex business is regulated by NFA, not FINRA as such for most Forex brokers. MB just happens to be registered with FINRA for the securities products we offer as well.

Justin,

Thanks for clearing that up. Still looking forward to you guys going live with MT4.

Barry

This brings an interesting point. What Forex organizations are regulated thru FINRA? Are there many?

Then there's a 2nd consideration... the new laws that were passed require US-based forex dealers to be registered w/ an organization like the NFA. If FINRA is considering these restrictions, how long until the NFA considers them as well?

Normally I laugh at slippery-slope logic, but there seems to be a concerted effort over the last few years to intentionally tie down forex trading, with a specific aim towards limiting leverage. This seems like the next shot. I don't see it stopping here, however.

I recommend that people submit a comment to the RFC process. Be polite, concise and articulate. If enough people did this I suspect the proposal would be tabled for later.

This could kill the carry trade (bubble) or better said, prevent another one from developing. Scary stuff. Then again, there are always fx futures.

Personally, I like large nominal sizes floating around fx, it provides extraordinary liquidity and smoothes out those retracements.

Read the wording on the proposal.

"(1) The term forex means foreign currency futures and options and any other agreement, contract, or transaction in foreign currency that is:
(A) offered or entered into on a leveraged basis, or financed by the offeror,
the counterparty, or a person acting in concert with the offeror or counterparty on a similar basis;"

Any futures trading regulated by FINRA would be affected by this.

The only exception:
"(C) not executed on or subject to the rules of a contract market registered pursuant to Section 5 of the Commodity Exchange Act, a derivatives transaction execution facility registered pursuant to Section 5a of the Commodity Exchange Act, a national securities exchange registered pursuant to Section 6(a) of the Securities Exchange Act of 1934, or a foreign board of trade."

So contracts on a registered exchange would be exempt. They already impose their own limits tho.

"FINRA has observed a potential migration of retail forex activity from the FCM channel to broker-dealers. To protect investors, FINRA proposes to limit the leverage ratio a broker-dealer can offer to a retail forex customer."

That line gets me. It's basically saying "People might move to forex brokers! Quick, squish it!"

Laff.

With a $1000 capital and a position of 0,01 lots (microlot)= we would need $1000 (in reality, for example today at this moment on EUR/USD = $1290,60) margin required (pip 0,10) at 1:1
That would be $860 margin, at 1,5:1
Free margin: $140
Pip value: $0,10
Spread (2 pips) $0,20
We're left with $139,80 which means 1398 pips room for price fluctuation.

So, for taking a single $1-a-pip position we should have at least a $10000 capital at 1,5:1, or $20000 at 1:1

Which is 1/10th or less of what I tend to use.

Now that we see the potential problem, let's talk about the potential solutions.

What are the good brokers outside the U.S. of A.?

Problem is a lot of them won't allow US citizens because of regulation. You'd pretty much have to setup a foreign corporation and set it up w/ a trade account, and hope they allow it.

Small price to pay if you ask me.

would we just be able to open a swiss account and then just use that to open a forex account with a overseas broker?

Yes

so then in the long run its just taking money away form the American government and giving it overseas. not to mention the millions lost when brokers shutdown due to revenue.

Yes yes and yes.

It's a pain in the ass, it's unfair, it's immoral, it's all sort of things.

Now that this has been said, two things to remember

- It's not an actual rule yet

-Prepare so if it does become a rule, you're not caught with your pants down.

Wouldn't it just make sense to figure out the solutions instead of mourning over the problem?

Well, FINRA brokers. NFA hasn't made it a rule yet, and might not. But yes, all it does is effectively deal out US-based brokers and give their edge to foreign brokers. Infact I said that exact thing in my comment to the proposal. Comments will be posted on their website, so when mine does... you'll be able to read it.

Nope, and there's ways to influence the process, and even if it becomes an actual rule it won't matter for the vast majority of forex dealers that aren't FINRA regulated. My concern is that it might spread to other regulators.

Absolutely. And that's the humor here. We're already looking for ways around the problem and they're not even done making the rule yet. These guys are first rate idiots. Kindof explains the credit crisis doesn't it?

I've been thinking of this for a while now, ever since I started wondering about day trading and the whole "pattern day trader rule" nonsense. US regulators have decided to make it harder for people to break into the business, it smacks of anti-competitive behavior. It's getting harder and harder to trade w/ US-regulated entities.

I suspect the intelligent thing to do would be to setup a corporation in a place with little to no corporate taxes. You'd still have to claim income paid out, obviously, but there's no sense in getting double or triple taxed. There are places that will setup a mailbox for you, which you could use to register an account w/ a non-US broker.

At that point it'd be a matter of shopping for a broker that will accept the arrangement and that isn't completely fly-by-night. I would suspect an ECN or a bank, probably some place in Europe or Japan.

Edit: On second thought, perhaps it'd better to approach it in the opposite direction. Start with a broker you plan to stay with, perhaps in a region that has competition, and find out what you'd have to do. That way you don't set everything up and find yourself stuck.

Clearly, if this proposal becomes reality, 99% of Americans brokers will have to close due to the leakage of foreign brokers to their clients or move their headquarters to countries where there is a coherent approach to regulating financial markets. I do not understand anything, USA is the country of freedom and rules like this seem to cease to be free to become intrusive.