Foes Take On Debt Curbs From CFTC
By CAROLYN CUI And SARAH N. LYNCH
An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.
The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.
Under current rules, a customer putting up a security deposit of $1,000 in cash will be able to trade a notional amount of $100,000, a common contract size for currencies such as the dollar and the Japanese yen. The new rule would cap that amount at $10,000.
The rules also would require dealers to abide by new capital and disclosure requirements.
If the rules come into force, investors would be required to either put more capital in their accounts or pare their positions.
Since the proposal was posted on the agency's Web site in mid-January, the CFTC has received an avalanche of comments—more than 6,000 and counting—from individual traders and brokers. By comparison, the Securities and Exchange Commission last year received 4,000 comments to its proposal to restrict short selling.
Lawmakers grilled CFTC Chairman Gary Gensler over the plan at a hearing this past week.
"If our leverage rules are 10-to-1 and leverage rules elsewhere are 100-to-1, the business is going to move elsewhere," House Agriculture committee member Jim Marshall (D., Ga.) said. He said investors could be even less protected if trading moves to a country with lax rules.
In the U.K., the powerhouse of global currency trading, there are no leverage restrictions for retail investors. U.S. laws prescribe uneven oversight for the retail foreign-exchange market, leaving the CFTC able to regulate only businesses under its jurisdiction, such as commodity brokers. U.S. banks and securities brokers that offer retail currency trading wouldn't be covered by the CFTC's regulations.
Mr. Gensler said the intent is to "protect the public" and that the agency is reviewing the comments it has received.
The use of leverage by retail currency investors has long been a cause for concern among regulators. In what is by far the largest global financial market, with average daily turnover of about $3.2 trillion, currencies can move on an array of forces ranging from minor changes in interest-rate expectations to swings in economic data to cross-border corporate takeovers.
Moves in major currencies often are small and the use of leverage can greatly ramp up the potential return, though the risk of being wiped out also is greatly enhanced.
The huge risk-reward potential makes the market a hotbed for scams. From December 2000 through September 2009, more than 26,000 customers received $476 million in restitution in 114 foreign-exchange fraud cases pursued by the CFTC.
"The proposal in its entirety is intended to allow us to get on with our job of protecting customers and ensuring the financial integrity of firms engaging in retail forex transactions," said Bart Chilton, a CFTC commissioner. He said the comments from the public—largely centering on the leverage proposal—have come down on the agency "like a winter blizzard," noting that it was more than at any time in the agency's history.
In recent years, an increasing number of individual investors have joined the hedge funds and Wall Street banks that trade foreign exchange. At GAIN Capital, a large broker, new accounts have increased 35% annually, mostly from retail investors.
"If the rule goes through, firms will close their U.S. offices and move their operations overseas, because they will be put out of business," said Muhammad Rasoul, chief operating officer at GFT, a division of Global Futures & Forex Ltd.
The National Futures Association, which self-regulates the futures industry, already has sought to implement some of the rules in the CFTC's proposal. In 2008 and 2009, the NFA phased in regulations requiring dealers to have substantially higher amounts of capital. Since that time, the number of CFTC-regulated retail foreign-exchange businesses has shrunk to 18 from about 40, as companies consolidated to meet the new standards, an NFA spokesman said.
Todd Lambrix, a currency day trader in Flint, Mich., is one of the many small investors opposing the CFTC plan. Mr. Lambrix has $5,000 in his currency account and often uses 100-to-1 leverage to trade currencies. Three years into trading foreign exchange, he said, he has learned how to control risk by setting enough technical limits that automatically close out trades. Last year, he broke even. "What right do you have to tell me that I can't spend my money on things I choose?" he said. |
