By: Charley Warady
In a move that will certainly benefit the Forex trader, and certainly the legitimate Forex brokers, The Commodities Futures Trading Commission (CFTC) on October 18, 2010 now requires what amounts to all Forex brokers to register with the CFTC. The CFTC new rule should further legitimize this estimated 600 trillion dollar industry.
The requirements affect CFTC Forex rules, but may in fact not affect CFTC Forex swaps. The swaps may be exempt from the new rules and the US Treasury wants a clarification on this issue by the end of November.
Why not swaps
The reason for the leniency by the government agency concerning CFTC Forex swaps is because of the nature of the financial instrument. Put into one sentence, a Forex swap is the simultaneous purchase and sale of the same amount of a given currency for two different dates, against the sale and purchase of another. You can see why this might not be attractive to the newbie Forex trader. Basically what you're doing is borrowing one currency while lending another for a specified amount of time. You're locking in two rates.
The concern is not then necessarily one of speculation and the CFTC may not be as concerned with the practice concerning the Forex swap. Also, past problems involving the Forex market never had anything to do with this method of trading and the brokers that offer it and allow it have been legitimate.
However, as it turns out, the Treasury doesn't want any possible loopholes and needs the issue of the CFTC Forex swaps resolved.
Protecting the trader
First and foremost the CFTC new rule protects the Forex trader. It took a long time for the Forex market to lose its reputation as a scam filled playground. Many Forex traders lost considerable amounts of money due to shady and dishonest practices by so-called “Forex brokers” who were nothing more than the same kind of people that run email scams.
With CFTC oversight the Forex trader doesn't have to be concerned as to the legitimacy of the broker he chooses. The Forex broker will have the same kind of guidelines and parameters as any commodities firm in New York and Chicago. They are required to have certification and it is up to the Forex trader to make sure the Forex broker he's dealing with has that certification.
Possibly the most important factor concerning the CFTC new rule is that anyone soliciting retail Forex accounts will be required to register with the CFTC. That includes brokers, advisors, and money managers dealing with the Forex market.
Another significant change concerning CFTC Forex rules is that CFTC's new rules require Forex dealers/brokers to cap leverage at 50:1 on major currency pairs and 20:1 on exotics. This not only makes the market more tenable, but also levels the playing field making it more realistic.
A Forex broker can no longer make outlandish promises to bait potential traders. They are now being regulated. Something that probably should have happened a while ago, but certainly a move that is welcomed by a market that has yet to reach its maturity.
Only the beginning
Although the CFTC has started the ball rolling, it is only a start. Hopefully, Europe will follow suit with similar regulations. These kinds of regulations are necessary to nurture the Forex market and increase the liquidity. Without the necessary regulation, it was doomed to become worse than a typical gambling website.
The Forex market deserves to have its place established in the world markets alongside commodities, stocks, and futures. To gain the CFTC's stamp of approval is huge for Forex traders around the world and should be a welcomed change. The effects will be immediate, and the market will benefit.