Goodbye US Forex industry: Part 2

Continuing my post from last Friday about the CFTC’s anti-Forex regulations (I dare you to fathom this 193 pages document) there are couple more points we should discuss:

1. First one is the “Foreign Exchange Dealers Coalition” manifest first published by fxstreet’s Francesc. It’s an interesting piece of paper, not solely because of its content, but also by the first ever appearance of a US retail forex brokers’ alliance – and this is a revolution, no less. It seems that in fear of the worst even forex brokers can unite. This is highly important because brokers unity is perhaps US industry’s last chance and because for the first time the brokers collectively realized the danger. This however is probably too late.

CFTC is all but done introducing the new requirements, and this Comment Period is just a bureaucratic procedure. US brokers should realize that the window to fend off this attack is long gone, and it’s time to adapt to a whole new reality – the US government doesn’t want you there, it prefers you to move to offshore locations. Unfortunately for you, these offshore locations are already pretty well inhabited by other brokers so the rules of game are much more different now.

The Foreign Exchange Dealers Coalition summarizes their stand with the following:

“The case against the 10 to 1 leverage rule is clear. The rule will be a boon to foreign forex dealers (both regulated and unregulated) who will grow entirely at the expense of retail forex dealers in the United States. Thousands of high paying jobs will be lost and the potential for tens of thousands of more jobs will forever vanish as well. Consumers will be hurt and more vulnerable to fraud. And the United States will toss away one of the most promising export industries that it has, all in the midst of 10% unemployment. There is no good reason that this should be so.”

They are spot on, but nobody in the CFTC cares.

2. The second point that most is overlooked while focusing on the 10-to-1 leverage requirement (which is crucial by itself) is that CFTC ‘proposed’ not only the reduction in leverage but also 193 pages of other requirements. In fact, it’s a whole new book of how the retail forex industry should look like. For instance:

Subject to certain exceptions (e.g., for certain regulated financial intermediaries not under the Commission’s jurisdiction as established in the CRA), the Proposal would require persons offering to be or acting as counterparties to retail forex transactions but not primarily or substantially engaged in the exchange traded futures business, to register as retail foreign exchange dealers (“RFEDs”) with the CFTC. Registered futures commission merchants (“FCMs”) that are “primarily or substantially” (as defined in the Proposal) engaged in the activities set forth in the Act’s definition of an FCM would be permitted to engage in retail forex transactions without also registering as RFEDs.

Do they mean SEC registered retail forex brokers (there are a few which are not primarily futures brokers summerstreetfx.com for instance)?

The Proposal would further require certain entities other than RFEDs and FCMs that intermediate retail forex transactions to register with the Commission as introducing brokers (“IBs”), commodity trading advisors (“CTAs”), commodity pool operators (“CPOs”), or associated persons (“APs”) of such entities, as appropriate, and to be subject to the Act and regulations applicable to that registrant category. In addition, the Proposal would require any IB that introduces retail forex transactions to an RFED or FCM to be guaranteed by that RFED or FCM.

Ouch.

The Proposal would also implement the $20 million minimum net capital standard established in the CRA for registering as an RFED or offering retail forex transactions as an FCM; propose an additional volume-based minimum capital threshold calculated on the amount an FCM or RFED owes as counterparty to retail forex transactions.

So where do US brokers go from here? Offshore.