Just recently the Commodity Futures Exchange Commission (CFEC) published their proposal for new rules in the spot FX trading for USA parties. According to the document, Forex operators will be required to register with the CFEC as one of a few types of participants – retail foreign exchange dealers (“RFEDs”), introducing brokers (“IBs”), commodity trading advisers (“CTAs”), commodity pool operators (“CPOs”), or associated persons (“APs”).

Registered futures commission merchants (“FCMs”) that are “primarily or substantially” (as defined in the Proposal) engaged in the activities set forth in the Act’s definition of an FCM would be permitted to engage in retail forex transactions without also registering as RFEDs.

Nothing surprising so far since the voluntary National Futures Association (NFA) already requires membership. But the document goes on …

The Proposal would also implement the $20 million minimum net capital standard established in the CRA for registering as an RFED or offering retail forex transactions as an FCM; propose an additional volume-based minimum capital threshold calculated on the amount an FCM or RFED owes as counterparty to retail forex transactions; and require RFEDs or FCMs engaging in retail forex transactions to collect security deposits in a minimum amount in order to prudentially limit the leverage available to their retail customers on such transactions at 10 to 1.

That means a reduction of the maximum leverage allowed to customers to 1:10 (as opposed to the current standard of 1:100 and even 1:200) and a capital requirement for all registered entities of a minimum of $20 ml. The industry’s response was quick in rejecting that last part. According to the Foreign Exchange Dealers Coalition (FXDC – an alliance of the top 9 largest forex players) that would mean a flight of their customers to accounts and operators in other countries and huge losses to the American companies. Moreover, the industry representatives argue that such regulations will in fact increase the possibility for fraud in stead of reducing it, because customers will have to open accounts with unpopular (and unregulated) foreign brokers that might take advantage of their new clients. The primary suspect for accomodating that risk searching capital would be the City of London where no such rules exist. FXCD estimates that no less then 90% of their retail client base will abandon their US accounts if the regulations are implemented. The proposal is in a 60-day discussions period.