http://online.wsj.com/article/BT-CO-20100323-711436.html?mod=WSJ_latestheadlines
WASHINGTON (Dow Jones)--The self-regulatory group for the futures industry is urging the U.S. Commodity Futures Trading Commission to rethink its controversial proposal to reduce the amount of borrowed funds retail investors can use for trading foreign exchange contracts.
In a letter sent this week to the CFTC, the National Futures Association said the CFTC should "reject a 'one size fits all' approach to establishing security deposit requirements." The NFA's own rules currently permit leverage of 100 to 1 for major currencies and 25 to 1 for the more exotic variety, but the CFTC is proposing a leverage cap at 10 to 1 for all currencies.
Under such a drastic shift in the rules, a customer who normally puts up a security deposit of $1,000 cash to trade a notional amount of $100,000 would now only be able to control a contract size of $10,000.
"Based upon currency risk and volatility factors, NFA believes that security deposit requirements should recognize differences between certain currencies," National Futures Association Senior Vice President Thomas Sexton wrote to the CFTC. "Therefore, NFA recommends that the Commission adopt an approach similar to NFA's current requirements that applies a different percentage to separate currency categories or groupings based on currency risk and volatility factors."
The NFA is one of thousands of groups and individuals who have raised major questions about the CFTC's retail foreign exchange regulatory proposal in the past few months.
The proposed new rules on leverage for retail forex traders is part of a broader plan to bring sweeping new regulations to the industry, including enhanced capital requirements and disclosure rules.
If the new rules on leverage were approved by a majority vote of commissioners at the CFTC, investors would be required to put up more capital in their accounts or scale back their positions.
The NFA in its letter was careful not to outright bash the CFTC's leverage proposal as many others have done.
In fact, the NFA acknowledged that there are legitimate public policy concerns to justify rules governing security deposit requirements and those concerns also led the NFA last February to tighten its own rules on retail forex leverage.
The 2009 rule changes came, the NFA said, after experience suggested that firms offering higher leverage were more often the subject of complaints, while two other firms offering leverage at 50 to 1 were never the subject of any enforcement actions.
Such statistics indicate that "higher leverage ratios can lead to abuses," the NFA wrote, but that capping leverage at 100 to 1 or less also still allows firms to compete internationally.
The leverage section of the CFTC's proposed rule has been vigorously opposed by everyone from lawmakers on Capitol Hill and major foreign exchange dealers to individual investors who have sent thousands of letters of protest to the CFTC. Most have argued that such a strict leverage rule will kill the U.S. market and force traders overseas where some markets may be less regulated.
The comment period on the proposal expired on Monday, and now the CFTC must decide how to proceed.
The NFA encouraged the CFTC to craft a policy on leverage that is flexible and would allow regulators to periodically review and adjust the requirements based on market developments.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com
