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Forex Regulation — Your Opinion

December 20, 2010 by

In the light of the recent regulatory actions by CFTC (mandatory FIFO order processing and the leverage limit of 1:50 for the major currency pairs), I’ve decided to find out the traders’ opinion on the whole situation with the regulation in the market. From one point of view, it’s very important to have some authority in the market to prevent scams, warn newbies and protect customers. But from the other point of view, restricting regulatory actions limit competition and prevent normal development of the industry. And what’s your opinion on the current situation with the regulation of the retail foreign exchange trading?

What's your opinion on Forex regulation?

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If you want to share your thoughts on the regulatory environment of the Forex market, please, feel free to reply using the form below.

13 Responses to “Forex Regulation — Your Opinion”

  1. Big

    Let’s take the example of the United States Retail Foreign Exchange Dealer (RFED) regulated by the NFA and CFTC they have a minimum regulatory capital requirement of $20,000,000.00 now this money is relatively safe and still belongs to the RFED so its cost is the value of money over time, inflation is typically 3% per year so I will use that figure as the annual loss of the regulatory capital however it would be very easy to argue that the real cost is 6% or more.
    $600,000.00 Cost of regulatory capital
    $350,000.00 Chief Compliance officer
    $200,000.00 Compliance person to review promotional materials
    $150,000.00 Compliance person to enforce policies procedures and liaise with regulators
    $300,000.00 outside legal counsel
    $150,000.00 Auditors
    $75,000.00 Third party verification software (TPV)
    $125,000.00 Full time tech person to implement the TPV and required regulatory reports
    $50,000.00 Annual review of Bank Secrecy Act, AML, PATRIOT Act and other required programs

    That’s an extremely conservative $2,000,000.00 per year, before fees, cost burden imposed by over regulation, and the really crazy thing is not one of the costs above actually produce any value they are simply a drain on productivity, a drain on the FX market and a drain on society as a whole.

    Regulation should be imposed by educating the investors/public at large not by usurping value from enlightened and driven individuals.

    Reply

    admin Reply:

    It’s hard not to agree with you, Big. Some questions though:

    1. Can’t the broker’s regulatory $20M be deposited somewhere with an interest rate to compensate for inflation?

    2. Where did you get those numbers for CCO and other compliance persons’ salaries? And spending on auditors isn’t really connected with regulation, even some unregulated brokers prefer to be audited and use that as a competitive advantage.

    But overall I agree with you. And I think Forex traders should understand that those $2M/yearly are being drained from them, not from the broker’s pockets.

    Reply

  2. Big

    Admin,

    Thanks for your questions.

    1. There are a few limited interest bearing vehicles allowed by the NFA however they come with a substantial Haircut (increase in required net cap) so much so that they are not worth utilizing.

    2. Numbers for the CCO and other compliance persons are gross annual salary + 1/3 to cover the costs of additional real estate, travel expense, employment tax, computers, phones and office supplies.

    3. The NFA requires an RFED to submit two independent audits per year.

    I RSS and read your sight often, I have found it to be an excellent source of industry information as well as an engaging platform for the free flow of ideas, thanks for providing this service.

    Big,

    Reply

    admin Reply:

    Looks like you have a first-hand experience dealing with Forex regulation ;-).

    Reply

  3. little

    As far as the two audits is one the annual financial audit and the other the AML audit? There is also the requirement to have an independent third party to review the electronic trading platform(s) annually and a report to management and if there are deficiencies corrective actions taken must be documented.

    Reply

    admin Reply:

    Thanks for your correction. It looks like being regulated in US isn’t a piece of cake at all.

    Reply

  4. Forex Scalper

    Hi, in my point of view i dont agree with this regulation. Exist many intraday traders, who need leverage to make profits from their short term trading. I like business without lot of regulation. The industry will find its own way and when lot of traders want leverage, so they should get it :) And the argument, that leverage broke deposit of many new traders is bad, because they should learn at first and after that trade. I think that they loose their money with or without the leverage, because they dont know what they are doing and thats fail.

    Reply

  5. Genesis

    Is there any Beneficiary clause in the trading agreement with any forex broker stating the rights of a trader and his beneficiaries in case of sudden trader’s death? What will happened to his account?

    Reply

    admin Reply:

    I believe that Forex trading account is an asset and it will be inherited as any other asset of the deceased person in accordance with the local laws.

    Reply

  6. Miles Bucannon

    Do we need regulation? In my opinion – Yes of course we do! But here is the problem. What is it that we require the regulations to achieve?

    So many times, in an attempt by regulators to protect us from the less scrupulous we actually become separated from the activity that we wish to partake of.

    Let me explain.

    Retail forex traders wish to be able to trade in an environment where their money is “safe” from misappropriation (or opportunism) by the broker.

    They do not wish to be excluded from being able to trade by legislation – which is ostensibly for their own safety – or dictated to in regard to leverage (even though high leverage is extremely risky).

    What retail traders want is an environment where their money is held in a segregated account and only applied to their trading account as necessary, and that the broker be regulated in such a way as to ensure that when a retail trader places a trade it is executed in a correct and proper way and that win or lose, the trade is not subjected to any form of underhanded practices.

    Let us make sure that in their attempt to protect us retail traders from ourselves, that we do not allow ourselves to become excluded from being able to trade as and when we wish, with what ever funds we deem appropriate to our own particular circumstances.

    The FSA in the UK goes a long way towards this at present. I hope that it stays that way – at least here in the UK.

    Reply

    admin Reply:

    The situation in US is opposite – traders are left with little choice, while the benefits of the regulation are missing.

    Reply

  7. Ralph

    Do we need regulation? In my opinion,we aren’t given much choice. How does Frank-Dodd change everything. Can I have a Foreign broker or do I have to have one from the USA?

    Reply

    admin Reply:

    You can trade with a foreign broker, but it needs to have a banking license.

    Reply

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