Forex News – Leveraging Power Gone?

On January 13th, 2010 the Commodity Futures Trading Commission (“CFTC”) issued a press release regarding its latest rule proposal for the regulation of retail forex transactions. The proposal seeks to adopt a new regulatory scheme to implement the CFTC Reauthorization Act of 2008 and limit leverage to 10:1.

This has been met with outrage from all quarters. Some are predicting the end of the retail forex industry (in the USA at least), others describe it as lunacy. If the stats are anything to go by, most retail forex traders are united in their opposition to the proposed CFTC lowering of leverage to 10:1 from 100:1 (which more or less supports the statistics -and my contention- that 90% of retail forex traders don’t know what they are doing most of the time).

My reaction to all the above? Yawn.

Listen fellow traders, let me tell you why CFTC is going to “win” and why it doesn’t matter.

It may not be 10:1 but the regulator will lower it. Remember November 2009 when our friendly forex broker was told to reduce leverage from 200:1 to 100:1. (Remember also what that meant? – how you now had the right to wipe out your account in six weeks in instead of the three weeks it was usually taking you). Did any protesting help then? It went from 200:1 to 100:1 (for major pairs) and 50:1 (for minor pairs). Did protesting help when they enforced FIFO execution thereby snuffing out same currency hedging? It is going to happen, nothing you and I can do about it.

Frankly, who cares, I don’t. And you shouldn’t either. forex broker

When everything goes belly-up in the markets, as it has of late, regulators need to do something or they’ll lose their jobs. The fact that the forex retail trader had nothing to do with sub-prime loans is irrelevant. Someone (the regulator) has to be seen to be doing something (lowering leverage in the retail forex industry) – as though that has anything to do with Bear Stearns and it’s ultimate bear run (brought on by 30:1 leverage) or the embarrassment of ‘Government’ Sachs.

Regulators are there to regulate, and they will regulate, and if you care to cast your mind back over the last 10 years of the forex industry, it is pretty much unrecognisable from what it was. Since an initial bout of regulation hit retail forex in 2002 with the “Futures Modernization Act” (in the US) the regulator has pushed through every regulation proposal he has announced for discussion.

I’ve got a little conspiracy theory I am going to share with you soon (rubbing his hands). There are a lot of people in the futures industry whose business has been hurt by the new forex kids on the block. It is actually a far more interesting story, but the most interesting for me with this whole brouhaha remains why people think it matters so much.

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