Comment Text:
i0-001
COMMENT
CL-00642
From:
Sent:
To:
Subject:
Jerry Nevins
Tuesday, January 19, 2010 2:19 PM
secretary
Regulation of Retail Forex
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:
¯ To clarify the scope of the CFTC's anti-fraud authority with
respect to retail off-exchange foreign currency
transactions;
¯ 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
¯ 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. This capital requirement would stifle
innovation by start ups. 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 small 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 minilots. 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 drawdowns necessary to see a trade through to itsi0-001
COMMENT
CL-00642
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,
Jerome Nevins
Redding, CT
