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Trading News

New CFTC Rules for Retail Forex Trading

Can I say I told you so? 🙂

The CFTC has finally come through with its new rules on retail foreign exchange, which come into effect on October 18th, 2010 (Q&A about the new rules can be found here). Despite fears to the contrary, the CFTC will not be cutting permissible leverage in retail forex trading down to 10:1. The people have been heard! There was so much contrary opinion against that move from traders and brokers that the regulators were forced to rethink the plan.

That said, the CFTC will, however, be restricting leverage to no more than 50:1 (2% margin requirement) on the major currencies (5% on regional currencies). This is basically taking the NFA restriction put in place last year for 100:1 max leverage and tightening it up. I’m sure that’s going to have some folks up in arms, but the reality is that most of your better traders never go much beyond 10:1 actual leverage. Further, one of the biggest forex brokers out there, Oanda, has never permitted more than 50:1 leverage.

I know this won’t have any impact on my trading, nor encourage me to move my account outside the US. What about you?

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Trading News

CFTC expanding its COT reporting this week

I’ve posted on the subject of the Commitment of Traders report a few times on this blog as being a useful tool (Commitment of Traders: A Weekly Report Worth Viewing). As part of a general move toward more market transparency, the CFTC, which produces the weekly report, has been working on making it more useful. To that end, they are coming out with a more detailed report for the financials starting this week. Here’s the story from Reuters.

 By Nick Olivari and Christopher Doering
NEW YORK/WASHINGTON, July 22 (Reuters) – The U.S. Commodity Futures Trading Commission said on Thursday it will provide more information on positions held by large traders in financial futures markets, part of its push to boost transparency.

The new data, to be released weekly starting on Friday, “will provide the public with a better view into the financial futures marketplace,” said CFTC Chairman Gary Gensler.

The report will cover about 30 markets, a CFTC official said, including interest rates, foreign currency and debt.

Nearly all U.S. financial futures are traded at the CME Group <CME.O>. In the second quarter, CME handled 12.16 million contracts a day, 9.2 million of which were financial futures.

The new data will be a companion to the CFTC’s weekly commitment of traders report, published each Friday, which breaks down open interest by broad commercial and noncommercial categories.
The new report will show open interest by held by four categories of large traders:
– sell-side dealers, including large banks
– buy-side asset managers and institutional investors, including pension funds, endowments, insurance companies, mutual funds
– leveraged funds, including hedge funds and other money managers
– other traders who mainly use market to hedge risk, such as corporate treasuries, central banks, smaller banks and mortgage originators

The CFTC began issuing similar expanded trader reports for commodity and energy futures last September.
CFTC said similar to this report, the new data will provide a breakdown of each Tuesday’s open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC.

A CFTC official said the agency analyzed almost 4,000 traders across the markets using its “Form 40” and other data to determine which of the four categories a trader belongs to, and will soon upgrade its form to provide better data.

The CFTC said it also will make available four years of historical data dating back to June 13, 2006 in a couple of weeks.

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Trading News

Take a Breath Folks. Forex Leverage Won’t Be Cut to 10:1

The other day I posted Increasing Regulation of Retail Forex Trading discussing the continued efforts of the CFTC and NFA in terms of regulating retail foreign exchange trading in the US. I came across a discussion on Trade2Win today which made me want come back to the subject, though.

The thread starter asked the question “10:1 could this be the new leverage in the US ?”. This came from a single line in the CFTC’s communique: CFTC Seeks Public Comment on Proposed Regulations Regarding Retail FOREX Transactions, dated January 13, 2009. The line in question comes in the second to last paragraph and says “Leverage in retail forex customer accounts would be subject to a 10-to-1 limitation.” Folks are jumping all over that as meaning the CFTC is going to cut trading leverage to a maximum of 10:1. I disagree.

Firstly, the one line is in a write-up which otherwise focused entirely on requirements of brokers in terms of capitalization, compliance, transparency, and communication. As such, I think it relates to the leverage brokers will be permitted vis-a-vis the balance of customer accounts, not what the customers can actually trade.

Secondly, the NFA only a short while back set a new 100:1 cap on the leverage brokers can offer retail traders (see New NFA Retail Forex Leverage Restrictions). Why in the world would they be coming through with another change at this point? They haven’t had much time to gauge the impact of that adjustment.

Thirdly, this is only a “public comment” thing. Even if the CFTC was contemplating cutting trader leverage to 10:1, there is absolutely no doubt in my mind that there would be way too much negative reaction to that kind of move for them to actually go through with it.

So, in my opinion, all those who are calling for the end of forex trading in the US are seriously over-reacting.

By the way, if you’re interested in see how the various US brokers compare in terms of size, here is the CFTC’s latest financial report including all Forex and Futures brokers. BabyPips member Clint has posted a listing of just the forex brokers, by rank, here.

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Trading News

Increasing Regulation of Retail Forex Trading

There is an article on the Financial Times website on the subject of increased regulation in the US of retail forex trading. For those who have been following along with developments over the last year (No More “Hedging” for Forex Traders, New NFA Rule Impacts More Than Just Forex Hedging, New NFA Retail Forex Leverage Restrictions) there won’t be much new information.

Here’s an interesting point of reference from the article, though.

The rules bring fresh oversight to a small but expanding portion of the $3,700bn-a-day global foreign exchange market, ….

Retail traders make up more than $125bn of that volume, up from $10bn in 2001, it estimates.

There are always a lot of questions about  the influence of pricing and trading within the retail forex trading complex as it relates to the forex market as a whole. These figures – showing that retail trade accounts for only about 3% of daily volume – make it very clear that retail is effectively a non-factor in the movement and determination of forex prices.

The final thrust of the article is that movement is happening to further tighten things up.

The latest proposed rules will strengthen the CFTC’s authority over companies selling currency trading to retail traders, forcing them to register with regulators and disclose more to potential customers, according to a government official familiar with the proposal.

The CFTC would also get clear jurisdiction over most spot currency trades.

“All salespeople and everybody that deals with retail forex have to be registered with the CFTC,” said Larry Dyekman of the NFA.

“That’s going to be a big change to the forex industry.”

Since folks in the rest of the securities markets (stocks, futures, etc.) have to be registered to deal with individual customers, this is basically just bringing retail forex in-line with everything else.

Update: My own employer (Reuters) posted a similar story.