Comment Text:
i0-001
COMMENT
CL-05067
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Subject:
michael redman
Friday, February 5, 2010 4:39 PM
secretary
Regulation of Retail Forex
RIN 3038-AC61
On 2010-01-25 I briefly commented that 10% margin on retail forex
positions is excessive for the risk characteristics of the currencies
markets. Both history and theory demonstrate the correctness of my
view.
Empirically, the forex markets have proven, during the crash of 2008
and at other trying times, that they can maintain their systemic
integrity despite enormous volatility, and do so even on the scant
margins that have prevailed heretofore. It was in mortgage-backed
bonds, credit default swaps, and other esoteric instruments - not
currencies (or even futures or stocks) - where capital reserves proved
insufficient to contain the spread of losses, creating a domino-effect
of insolvency. Currency prices experienced great volatility, but the
currencies markets did not exhibit the same propagation of deficits
contributing to the systemic collapse.
Theoretically, the currencies markets exhibit such excellent
"containment" because of the relationship between margin requirements
and market liquidity. The amount of margin a market needs to ensure
its integrity is not determined by how much the market moves in a big
day or in any other fixed time, nor by the notional size of a unit of
position. Instead the necessary margin is determined by how much the
position might lose before it can be liquidated. That amount depends
on the economic characteristics of what is being traded, and on the
breadth and depth of the pool of market participants. Because the
markets for credit default swaps, for example, consisted of a
relatively small number of interrelated participants, it was easy for
liquidity to dry up in those markets. By contrast, the enormous size
and liquidity of the currencies markets - to which no other market
bears any comparison, and which necessarily results from currencies'
ubiquitous economic role as a medium of exchange and liquid store of
value - has allowed the forex markets to succeed on margin
requirements that would cause other markets to fail.
In light of these considerations, and our successful experience with
forex margins on the order of 1%, a tenfold increase in margin
requirements is both unreasonable and unjustified by any experience or
any expectation.
michael redman
[email protected]
http ://www.romansinformationalconstructors. com/-michael
