Recently I received several emails about a proposal to limit the leverage available to U.S. Forex traders to 1.5 to 1. One of the main reasons that Forex trading is so popular today is because of the high leverage with 100:1 being standard and 200:1 or even 400:1 available through some brokers. This enables traders to open accounts with a small amount of capital and realize profit on trades that control a much larger amount of capital. For instance a Forex trader can open an account with $5000 and enter a trade with only 5% of the capital at risk and if the trade is profitable by 100 PIPS, $500 could be earned in one day which is, of course, a 10% return on capital in one day. Many Forex traders are willing to accept the risk of loss in order to learn to realize this kind of profit consitently over time.
Some Forex traders were a little nervous when they heard that the FINRA, Financial Industry Regulatory Authority, proposed to virtually eliminate high leverage for Forex trading accounts. Well, that is how some misinformed traders were interpreting this proposal. As it turns out, there is more to the story.
Last year Rosenthal Collins bought MG Forex just as the first capital requirement was set to kick in. RCG then announced that MG Forex was a subsidiary of Rosenthal Collins Securities, which is regulated by FINRA, not the NFA. Thus MG Forex was able to avoid the $20 million capital requirement since FINRA members need only $250,000 in capital. That was then.
Last week FINRA released a proposal capping the margin level that forex brokers can offer at 1.5 to 1. Essentially, FINRA is saying you can’t trade Forex on margin.
FINRA – Regulatory Notice 09-06:
The rule will not effect NFA registered forex brokers. But for those Forex brokers with FINRA licenses the party appears to be over. Why is FINRA doing this?
Quote:
“FINRA has observed a potential migration of retail forex activity from the FCM channel to Broker Dealers…”
Hmmm, couldn’t be that forex dealers who didn’t have the capital to keep their NFA licenses were suddenly showing up to get a broker dealer license on the cheap? Well, if that was the case consider that escape hatch to be boarded up. My take is that FINRA does not want to regulate forex brokers. So what they are saying is “sure you can offer forex trading. But you can’t offer any leverage so why bother to offer Forex trading at all?”
A lot of forex brokers were trying to get licenses with FINRA because of the low capital requirement. FINRA basically put this rule in place to keep forex brokers out of their club. So the Forex trading industry is still going strong and still providing one of the best recession proof business opportunities available. I believe it will continue to be one of the best businesses in the world for a long time into the future.
