The CFTC’s foreign exchange crackdown
Tuesday March 01 2011 | 10:25 AM

Tom Cleveland from Forex Traders analyses the CFTC's new foreign exchange trading regulations which initially prompted outcry. Now that the dust has settled, where does the industry stand?

The last decade will go down in the financial history books as a "case study" of the worst kind, where the lack of adequate financial controls to curb unbridled greed contributed to a near collapse of our global financial infrastructure.

With the Enron crisis of 2001 and the Sarbanes-Oxley law that followed as a template, government officials went into their own version of a full court press.

Congressional hearings, scathing public rebuttals, and a 2,000 page Dodd-Frank Act quickly ensued. A "perfect storm" of events made regulatory reform actually a welcomed event, although constant whining from Wall Street was background noise along the entire path.

All impacted government agencies soon kicked into high gear to publish a plethora of regulations based on the new law.

Not perceived as one of the "majors", the Commodities Futures Trading Commission, quickly grabbed the mantle and published new regulations as required by the act.

Generally known as a small agency with constrained manpower and budget allotments, the CFTC was a little ahead of the game since it had proposed new rules back in January of 2010.

The torrent of mail and comments that erupted surprised the small agency. Even they had underestimated the popularity and breath of growth in the currency trading industry.

Gary Gensler, the CFTC Chairman, was quick to announce when final rules were released in October that, "These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange."

Every forex broker in the nation had been actively complaining for eight months about a new set of rules that threatened the very foundation of their commercial business model in the States.

The "cry" heard loud and clear was that the new rules, especially ones regarding leverage, would force business and clients overseas where risks are higher and where the CFTC has no jurisdiction.

As is always the case with new legislation enacted by Congress, the devil is in the details of the published regulations that follow.

Occasionally, lengthy "comment periods" allow for debate before too many absurdities are foisted on the public at large.

From the look of the new CFTC rules and the lack of outcry over the past few months, it appears that the regulatory officials listened and made appropriate revisions.

Certainly the "nasty gorilla" in the room, the 10:1 leverage proposal was ratcheted back to 50:1 for major currencies and 20:1 for exotics.

Major domestic banks that offer retail forex trading and are regulated by other agencies have already applied this limitation to their present services, so the CFTC went with a norm of sorts in the marketplace.

New deposit rules, 2 per cent and 5 per cent respectively, were also designated. The CFTC also delegated oversight to the NFA, the National Futures Association and a subsidiary of the CFTC.

They are to review the impact of these new rules and revise accordingly if offshore brokers seem to be gaining a competitive advantage over domestic ones.

A host of new rules apply to brokers related to their registration, educational, and capital requirements, all "good things" when it comes to protecting consumers.

The "tricky" part of the rules relates to reporting.