Comment Text:
i0-001
COMMENT
CL-07635
From:
Sent:
To:
Subject:
[email protected]
Monday, March 15, 2010 1:11 PM
secretary
Regulation of Retail Forex - comment
RIN 3038-AC61
Dear Members of the CFTC,
In response to release 5772 -10 of Jan 13,2010 concerning the proposal to restrict retail forex customers to
leverage of 10:1, I wish to register my strong objection to the proposal.
I understand that the overall objective of the various measures proposed is to provide additional consumer
protection to users of retail forex services. However, whilst proposals to enhance the procedures, reporting and
risk capital required of retail forex providers themselves are welcome, the proposal to restrict retail customer
leverage so drastically from currently prevailing standards will cause harm to individual retail customers:-
1. Customers will have to increase the amount of capital placed at risk with their futures commission merchant
(FCM) or retail foreign exchange dealer (RFED), in order to maintain an existing level of business. In view of
the modest financial scale of many such retail forex providers, even with the capital enhancements envisaged
in these proposals, the risk to retail customers would be increased rather than decreased by requiring them to
place up to 10 times more capital on deposit with their provider.
2. It is likely that many retail forex customers would effectively be 'disenfranchised' by this proposal, as they
would be unable to meet the deposit requirements needed for the typical minimum forex transaction size if
leverage was to be increased to 10:1.
At the least, without substantially increasing their capital at risk, retail customers would be severely restricted in
the number of forex transactions they could have outstanding at any one time, which, given the nature of the
forex market, is likely to increase their risk of loss from market fluctuations.
3. If the purpose of the proposed reduction in retail forex leverage is to 'protect customers from themselves',
then,
i) that does not seem an appropriate matter for legislation/regulation - customers should take their own
responsibility;
ii) reduced leverage may well in practise increase rather than decrease the level of losses experienced by
retail customers, as they will be forced to put more risk capital on deposit and thus available for loss through
trading. A considerable merit of what may appear to be very high levels of leverage currently prevailing is
precisely that retail customers can gain experience of trading with only modest amounts of capital at risk - they
may lose their deposit, but it need not be a large amount under current leverage norms.
4. If the purpose of the proposed reduction in leverage is to protect retail forex providers themselves from
unexpected and unsustainable loss as a consequence of unhedged Iossmaking customer activity, then a sliding
scale of leverage requirements would seem appropriate, adjusted according to size of the customer transaction
and the capital resources of the FCM or RFED.
So, for example, a forex provider with net capital of $20m might be allowed to grant leverage of up to 100:1, as
currently, for a customer transaction size of say $100k, but be limited to granting leverage of only 10:1 for
customer deals of say $1 m. An FCM or RFED at a higher net capital band, say, $100m, would be allowed to
grant leverage at 100:1 for concomitantly larger customer deals, say $500k, but would be limited to 10:1
leverage for customer trades of $10m. Etc.
Such a sliding scale would help maintain service provider capital integrity in a way that would still allow small
providers to compete with larger, (since the present proposals are likely to see a migration of business towardsi0-001
COMMENT
CL-07635
bigger providers as customers seek to minimize their potentially 10 times increased deposit risk exposure by
moving away from small firms), and would ensure smaller retail customers would not be excluded form a
chosen investment activity simply by reason of not being able to afford proposed deposit requirements.
I hope these comments might be taken into consideration. Thank you.
Matthew Paine
129 Haverstock Hill
London,
NW3 4RU,
U.K.
(As background - I am a longstanding user of retail foreign exchange services, from both a US based FCM and
a large non-US commercial bank)
