FINRA Forex Regulation

FINRA Forex Regulation
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The retail forex market has long had large leveraging allowances, but this has now come under threat by FINRA, the largest independent securities regulating body in the United States. Since the Internet retail fx growth, many forex brokers have been allowing their customers anywhere from 50/1 to 400/1 leveraging capabilities on their capital. FINRA is stating that the proposed amendment would serve to protect traders from excessive trading risk.

This proposal, though, assumes that traders are not utilizing leverage in a responsible way. Having leveraging capabilities isn’t the same as over-leveraging your positions, and this is what the FINRA proposal is unable to recognize; instead, margin merely allows a trader to use precise trade management in relation to the size of their positions. For example, if an investor wanted to risk only 2% of their total capital for each position, they would use leverage to figure out the amount that they want to risk per pip, based on the size of their stop loss. Having leveraging capabilities enables a trader to dynamically adjust the amount of their stop, so as to adapt to the current volatility levels of the market, while still keeping a constant position risk, regardless of whether they are risking 50 pips or 5000 pips.


Conversely, not having such leverage available will likely negatively impact investors who are practicing responsible risk management. Reducing the leverage means that you will have not as much available margin for current positions, even if one is wagering the same amount in both situations. This means that these traders are more likely to have a margin call, factoring in a constant investment risk, if the leverage was to be scaled down.

The most unacceptable part is that FINRA not only wants to limit the leverage – they seeming intend to almost completely eliminate it. If FINRA merely wanted to bring fx leveraging amounts to the levels of commodity futures it would be far more acceptable. Under the proposal, though, forex FCMs would only be allowed to provide leverage of 1.5:1. Anyone who is active in the fx markets realizes that this would effectively wipe out American-based retail fx investing, since hardly any people would be able to adequately invest under such a mandate. US-based FCMs wouldn’t be able to survive, and US-based speculators would trade their accounts with foreign FCMs.

The FINRA proposal sadly is written for the the failed trader: the people who over-leverage trades with incorrect stop-losses. As a result, they consequently punish all of the traders who invest with correct risk control, and simply use leverage as a needed and responsible tool.

For anyone that is concerned about this, you can put it out of your mind for the time being. As it thankfully turns out, FINRA doesn’t have specific regulatory authority over the forex markets; that would nowadays be the responsibility of both the NFA and the CFTC, whose regulatory oversight is significantly expanding in currency. Finally, it wouldn’t make sense for the CFTC and NFA to support this proposed amendment, not to mention the flagrant disparity it would create with fx futures: they have been working for years to exact greater authority over the US currency industry. If it were to increasingly move abroad, they would no longer have the ability to effectively regulate such activities (not to mention the membership fees that they would be paid from currency investment funds).

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