Comment Text:
i0-001
COMMENT
CL-05451
From:
Sent:
To:
Subject:
Pradyumna Upadrashta
Thursday, February 18, 2010 7:13 PM
secretary
Regulation of Retail Forex ] 10:1 leverage is a VERY bad idea
To:
Mr. David Stawick, Secretary Commodity Futures Trading Commision
1155 21st Street, N.W., Washington, DC 20581
Dear Mr. Stawick:
The proposed CFTC legislation to limit leverage limits to 1:10 in the forex markets will be disastrous for
the US forex market. Currently, a minimum leverage of 100:1 is required to be marginally profitable on
currency trades. A typical currency does not fluctuate more than 100 pips (basis points) over the course
of a day of trading. By constraining leverage further, this movement is constrained to about 10 pips - it
is guaranteed that traders will be barely able to break even at this level. I believe strongly that this will
not only stifle the US forex market, but will cause an exodus of larger traders to foreign brokerages,
while simultanesouly restricting access for smaller traders that will not have the ability to migrate.
The concept of leverage has been much maligned in the public eye of late due to the widespread
misconception that it was leverage that caused the recent financial crisis. It was never the leverage
which caused the crisis - but rather, an inability to price illiquid securities in a relatively insulated
OTC market place. In a highly liquid and well capitalized global market such as forex, where over $1.4
trillion dollars change hands on a daily basis, a trader's account is marked-to-market
virtually instantaneously as market prices are constantly updated to reflect prevailing supply/demand.
There is absolutely ZERO risk of a systemic credit failure or a "run on margin" as a trader's account is
automatically closed out (margin called) when a broker-dealer determines that there are insufficient
funds. All forex trading accounts are settled continuously (or at least at the end of a market "day"),
preventing an account from imploding beyond the original margin requirement - this precludes the
ability of traders to "break the bank" ever. In the highly illiquid derivatives market this is not the case,
since often the market value of a derivative security cannot be readily determined. In forex, all quoted
prices are highly responsive to supply/demand in the broader market.
This new 10:1 leveraging rule is pure political posturing and does not have any basis from a risk
management or regulatory point of view.
I do hope that such an unfair legislation will never come to pass, or you can be absolutely certain that
the US forex market will come to a grinding halt. It was bad enough when they reduced leverage from
400:1 to 100:1, but reduction to 10:1 is unsustainable and no trader will be able to make a profit, and no
market maker will be able to offer a sufficiently attractive commission structure to entice traders to deal
with US brokers - it is mathematically impossible to operate profitably at those levels. By reducing
leverage down to 10:1, the CFTC is effectively amplifying the cost of a trade by 10x, making any and all
forex trading in the US impossible. On top of that, this new leverage increases the risk of a trade 10x as
well. Consider that whereas at 100:1 leverage, I risk $1000 for every $100K of currencies traded, that
now I have to risk $10,000 for every $100K of currencies traded. This new rule has effectively placed
10x more of my personal capital at risk. There will be (should be !) a mass exodus to foreign markets if
this legislation passes.
I would like to stress the point that the practical impact of leverage in a forex account is NOT the samei0-001
COMMENT
CL-05451
as leverage in other markets. It is absolutely unfair to treat them in the same manner - it is not only
irresponsible, but it draws serious concern as to whether the regulators understand what it is they are
regulating, when they "throw the baby out with the bath water". It is even more unfair to punish the
entire trading community for the acts of a few large irresponsible banks. It was stupid to have repealed
glass-steagal to begin with, and this new piece of legislation is nothing but politically self-serving The
volcker rule of re-instating a separation between banking and proprietary trading is a step in the right
direction. Reducing forex leverage is undeniably a step in the wrong direction.
These illogical and irrational developments in regulation are deeply concerning to everyone in this
industry; instead of bringing stability, this may wipe out the industry altogether. I am writing this letter
to URGE the CFTC and other concerned regulatory bodies to reject this nonsensical piece of
reactionist/populist legislation outright.
As a small trader, I know that I cannot afford to trade under these new regulations, and am seriously
thinking about finding a broker elsewhere that can give me better options. I'm very concerned with the
bludgeoning approach to regulatory reform that is being practiced right now, when a scalpel is what is
required.
I'm not certain how much my input is valued, but there it is, for what its worth. I am certain that there is
an entire community that feels the same way. I am guessing that asking CFTC to re-instate the 400:1
leverage allowance is too much.
Respectfully,
A very concerned citizen/trader/investor.
Pradyumna ("Prad") S. Upadrashta, BChE PhD
+001 402 598 9398 ] pradsu@gmaihcom ] http://www.linkedin.com/pradsu
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