Forex Trading Headlines: The CFTC Has Stirred Up a Border War of Sorts

The Commodity Futures Trading Commission, or CFTC, has recently been generating headlines and, in the process, has stirred up controversy in the forex industry.  The CFTC, our friendly forex trading federal regulator, released proposed guidelines for new rules for the industry back in January and was met with an avalanche of complaints from consumers that came at them "like a winter blizzard", according to officials at the agency.

The forex proposal covered the following main topics:

·         Mandatory registration with the CFTC through the National Futures Association (NFA) for retail foreign exchange dealers (RFEDs), futures commission merchants (FCMs), and forex commodity pool operators (CPOs), commodity trade advisors (CTAs), introducing brokers (IBs), and associated persons (APs) of the above entities;

·         Requirement of RFEDs and FCMs to maintain a minimum net capital of $20 million plus 5% of the amount by which liabilities to forex customers exceed $10 million;

·         Requirement of introducing brokers (IBs) to be guaranteed by an FCM;

·         Leverage restriction of 10:1 for all forex transactions.

No one had any particular problems with the first three items, but the fourth item that placed a 10:1 restriction on leverage created a firestorm of protest.  A consortium of forex brokers quickly registered the following complaints publicly on their website:

·         The leverage limit will force 90% of retail forex traders to move their accounts to offshore brokers;

·         That shift will eliminate thousands of U.S. jobs in the retail forex industry;

·         The U.S. will lose billions in forex trade and potential tax revenues;

·         Efforts to curb forex fraud will have to increase since offshore activities have proven to be more suspect by their nature;

·         Offshore brokers will not be regulated regarding capital requirements or operating procedures and will thrive under these circumstances, thereby increasing the potential for fraud in the process.

"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 CFTC had already capped leverage in the U.S. at 100:1, but it is well know that London brokerages offer unlimited leverage to their customers.

The agency, influenced to a degree by the heavy bias of negative comments, recanted its January proposal and released final rules on August 30.  These new rules among other things will limit leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others. 

One would expect that the turbulent waters would have been calmed by these actions, but a new firestorm has broken out over the seemingly mundane issue of broker registration.  What had been believed to be a straightforward domestic registration process has now taken on the appearance of a full-court press against offshore brokers and potential tax havens by the federal government.

The current interpretation of new rules is that foreign-based affiliates now must register in the United States, conform to the law and report their activity for U.S. customers.  The law has provided a 360-day extension for foreign affiliates to comply for obvious diplomatic reasons, but this latest “curve ball” is seen as offensive and overreaching, even for the U.S. Government.  There are all manner of tax reasons why foreign entities want no “effective connection” with the United States.  A presence in the U.S. would subject their revenues to our tax code and to IRS supervision.

This border war is not only confined to currency trading.  New EU rules have also infuriated our investment industry.  These rules would force U.S. investment advisers and companies to register in the EU in order to raise capital in their domain.  At the same time, EU banks resent the pressure from the IRS to produce names of their U.S. customers.  The new forex rules play right into this ongoing battle, and at a minimum, would require U.S. companies to repatriate accounts belonging to U.S. domiciled clients.

Multinational firms are caught in a quandary.  Nearly every piece of software would require modification, right down to a forex demo account.  Thousands of Americans have offshore retail forex trading accounts, and clarification of how they will be serviced going forward requires immediate attention.

The CFTC has always been hampered by manpower and budget constraints, but it has managed to police fraud in the forex industry and recover hundreds of millions of dollars for thousands of defrauded customers.  However, at this moment, it has created a border war of sorts that has no apparent compromise solution in sight.