Forex Questions and Answers - FXAnswer

The effect of the CFTC new rules to traders is that the traders will be exposure to lesser risk in forex market with more restrictions.

by

Kingpin

1 year ago

"Two biggest and most concerning issues proposed by the CFTC are the 1:10 leverage forced on traders and severe limitations placed on IBs.

Regarding leverage the implications are these:

Forex brokers and traders will now be able to place deals with maximum 1:10 leverage, meaning that from now on they will have to hold at least 10% of the deal as collateral (margin). This significantly reduces the size of deals that the traders will be able to operate from now on which in turn will reduce their potential gains and losses. CFTC gives exactly this explanation as the reasoning for this new requirements however there is a significant downside to this rule as well: reduced leverage means less profits for more advanced traders who actually CAN handle high leverages and can’t trade otherwise. Additional impact this rule would have on the US industry is that brokers will have their profits slashed as lower size deals mean much lower commission from spread. 2 pip on $100,000 USD worth deal is $20 to the broker, however with 1:10 leverage and same balance the deal size is $10,000 which means only $2 to the broker (how will they pay IBs with such low income is a mystery to me). This will also obviously limit the hedging opportunity for people who actually use these brokers in order to hedge their exposures elsewhere.

Furthermore, this new rule will seriously harm all US brokers and in turn will cause the loss of thousand of US jobs and millions in tax dollars because most of the forex business will either go offshore or will simply disappear or move to other industries such as futures or options (who knowns perhaps this is the real reason behind these new rules). By the way, this is why offshore brokers shouldn’t gloat too much: not ALL the US business will go to them, some of it will simply go to other industries in the US.

And one last thing, the new rule will also potentially halt the Forex industry’s gradual shifting to the ECN/STP execution. Clearing houses are not big fans of small deals and typically won’t accept orders of less than 100,000 USD. So it’s a big question how exactly, and if at all, US brokers will now be clearing trades. My immediate guess is that they will stop doing that, as their risk from smaller sized deals is significantly lower therefore it’s worth keeping the deals in house and profitting from losses. Market Making is about to make a huge comeback."

Source: forexmagnates.com/cftcs-new-requirements-lets- stop-this-madness/

by

fxpie

1 year ago