On October 18th of 2010, the US government’s commodities arm implemented the third in a series of new laws raising the margin requirements on forex accounts – or foreign exchange trading accounts. These accounts are where investors speculate or hedge against rises or declines in the US Dollar and other major currencies. This is deemed to be a very risky type of investment. However, at its very core it is one of the safest, because it’s the only investment where you can pre-define your risk – to the penny. If you buy a Euro/USD lot and set a stop-loss of $75, then you cannot lose more than $75…. guaranteed. No such guarantee exists with stocks. If you set a limit for Bank of America stock and it plummets 10 points on bad news, then there is no way to guarantee your stop loss. You might lose 20 times the amount you planned. That’s because there is not enough liquidity in stocks. Forex has the most liquidity of any investment vehicle.
The new laws explained.
The new laws set by the CFTC, Commodities Futures Trading Commission, in 2009 raised the leverage in US forex accounts from 400:1 and 200:1 down to 100:1. Now, in 2010 they have been raised again to 50:1, which means investors now need a lot more money in their accounts to participate in the market. Gone are the days when small investors could play in this lucrative market for $200 or $300. Now only $2000 will allow you to play even to a small degree. Even with a stop loss that limits your loss to $25, you will need $340 to buy just 1 mini lot of GBP/USD. Makes sense? It doesn’t to anyone else, either.
The Near Term Solution.
You can move your account to the UK or a brokerage firm in any other country. Many Americans have already done this, and it’s not as hard as you might think. Just ask your brokerage firm if it has a foreign branch. If not, then consider moving to one of the many foreign forex brokerage houses.
Already the US forex market is seeing millions of dollars flowing out of the US and into foreign accounts. Many US brokers with offices in London are even promoting the switch. At least 2 major US houses have indicated they will close their US offices next year, and only operate from their foreign branches. That means more jobs lost in the United States. Good job, CFTC Chairman! Well done.
If you move your account to another country, your funds may still be safe. Just make sure it’s in a country that has proper legislation protecting investors, such as the UK, Canada, Switzerland or most European nations.
Will this move hamper the US Forex industry? Only time will tell. Perhaps the next generation of investors will accept the change the keep their accounts at home in the US. Meanwhile you can explore foreign accounts, and also let your Congressman or representatives know of your displeasure with the new laws. The CFTC is generally untouchable, but it doesn’t hurt to try.
This new law is akin to telling a small business there is a cap on how much money it can risk to expand its business. Can you imagine planning to risk $2000 of your own money to expand your store, and the government tells you, “sorry, you can’t use your own money at that level. We limit you to $1000.” Of course that’s a ridiculous notion, but it’s the same thing they’re doing in the US Forex market.
New Legislation in 2011
Now there is a proposal to further reduce the margin to 10:1 in the new year. If this happens, the goals of the CFTC will not have been reached. If indeed their goal is to protect American investors, this move will only drive more American investors away from protected US Markets. Americans will continue to move their accounts even to less protected markets, such as Cyprus and Malta, where the leverage is very high, but there is no US protection. The CFTC is working against their own supposed goals. The web is rich with videos on the subject.
Education instead of over-regulation.
If US Regulators wish to protect American investors, they need to keep them here in the US. This means treating investors like adults, and not children. Educate the American investors; do not hamper them or over-regulate them. Governments often restrict their people under the guise of “protecting” them, and it usually ends badly. China censors which sites their people can visit on the web, under the guise of “protecting” them against bad information. Now do we need protection from our own investments? American investors are smart and very savvy, and can make their own investment decisions. They don’t need their big brothers to stand in the way of profits. Is the CFTC implying we are too stupid to handle our own money? I would disagree: I find that most Americans are smart enough to invest based on individual goals.
Educate yourself, and find the right account and the right country of account for your own needs.