Comment Text:
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COMMENT
CL-01060
From:
Sent:
To:
Cc:
Subject:
Edison P~rez
Wednesday, January 20, 2010 5:16 PM
secretary
[email protected]; [email protected]
Regulation of Retail Forex
RIN 3038-AC61
Dear Secretary of the CFTC,
I am writing to express my dismay at the proposed regulation contained in the Food,
Conservation, and Energy Act of 2008, also know as the "Farm Bill" to limit leverage on retail
forex accounts to a 10:1 maximum level. I strongly urge you not to impose these new
stringent regulations on currency futures brokers located in the United States.
I understand that the intent of the new regulations is to protect the average retail forex trader
from themselves as well as to send a strong message to Forex brokers that unscrupulous and
unfair practices will not be tolerated. I applaud the spirit in which these regulations were
written. The small, individual retail trader is at the mercy of the broker. There have been
many documented instances of fraud and abuse. I applaud and support the proposed new
rules by the CFTC:
o To clarify the scope of the CFTC's anti-fraud authority with respect to retail off-
exchange foreign currency transactions;
o To provide the CFTC with the authority to register entities wishing to serve as
counterparties to retail forex transactions as well as those who solicit orders, exercise
discretionary trading authority and operate pools with respect to retail off-exchange foreign
currency transactions; and
o To mandate minimum capital requirements for entities serving as counterparties to
such transactions.
The new rule that requires FCMs (Futures Commodity Merchants) and RFEDs (Retail Foreign
Exchange Dealers) to maintain a net capital of $20 million plus 5% of outstanding trade
liabilities is, on the surface a good thing. This rule will have the effect though of limiting open
competition by requiring new brokers to raise $20 million to begin to solicit new customers.
Many innovations toward clarity and openness by some of the newest brokers would be
stifled. As an example, tight spreads and straight through order processing would not be
allowed to come to market. I would propose instead a form of scaling in of the capital
requirements as a new firm's client base expands.
The proposed new leverage rule of 10:1 is misguided and very damaging to the average smalli0-001
COMMENT
CL-01060
trader, however. In now maxing out 10:1 on the broker side will, I worry, subject me to
margin calls much more readily. The prudent trader should only risk 1% -2% on any given
position of their net capital. On a $10,000 trading account, assuming a generous 50 pip stop
loss and 2% risk, a trader should not prudently risk more than 4 mini-lots. As the trade
continues in one's favor, additional positions are then taken as "scale-ins" in order to squeeze
more out of a given move. A 10:1 leverage limit will not allow additional scale-ins beyond 1
additional position of 4 mini lots before the trader is subject to a margin call should the trade
begin to move against the trader, even slightly. A more generous 100:1 leverage limit allows
for temporary draw downs necessary to see a trade through to its successful conclusion.
The likely effect of this new regulation will be that U.S. traders will find offshore brokers to
trade with that are not subject to these regulations. We have already seen this happening
with the NFA's anti-hedging rule and FIFO rules implemented last summer. Moving capital
away from our shores surely has the effect of costing jobs in the U.S. as well as adding to the
current destructive trade imbalance.
Sincerely,
Jhon Edison Perez Agudelo
Medellin, Colombia
