Forex leverage regulation

The retail forex market has long had significant leverage concessions, but FINRA, the largest independent securities regulator in the United States, has recently threatened it. Since the rise of retail forex on the internet, many forex brokers have been offering their clients 50/1 to 400/1 leverage on their accounts. FINRA states that the proposed change would serve to protect investors from excessive market risk.

This proposal, however, assumes that traders are not using leverage correctly. Having leverage capabilities is not the same as over-leveraging one’s own positions, and this is what the FINRA proposal does not recognize; Instead, leverage simply allows a trader to exercise accurate risk management in relation to the size of their positions. For example, if a trader wants to risk only 1% of his total capital per position, he would use leverage to determine how much he is willing to risk per pip, based on the size of his stop loss. Having leverage capabilities allows a trader to dynamically adjust the size of their stop, to adapt to current market volatility levels, while maintaining a fixed position risk, regardless of whether they are risking 10 pips or 1000 pips.

On the contrary, not having such leverage available will likely have a negative impact on traders who are using proper risk management. Reducing leverage means that you will have less margin available for active positions, even if you are risking the same amount in both scenarios. This means that such traders are more likely to experience a margin call, assuming constant position risk, if the leverage allocations were reduced.

The nastiest part is that FINRA not only wants to limit leverage, it clearly intends to virtually eliminate it. If FINRA simply wanted to bring currency leverage limits down to commodity futures levels, it would be much more understandable. However, under the proposal, forex brokers could only offer 1.5: 1 leverage. Anyone trading the forex markets knows that this would effectively end US-based retail forex trading. ., Since very few people could properly negotiate under such a mandate. US-based FCMs would close, and US-based traders would invest their money in supervisory brokers.

FINRA’s proposal sadly appeals to the lowest common denominator: people who overleverage positions with inappropriate stop losses. By doing so they consequently harm all traders who operate with proper risk management and simply use leverage as a necessary and responsible tool.

For anyone who is concerned about this, you can rest easy for the moment. As fortunately, FINRA does not have a specific regulatory authority over currency markets; that would increasingly be the domain of both the NFA and the CFTA, whose regulatory capacity is expanding significantly in forex. Furthermore, it would not be in the interest of the NFA and CFTA to support this proposal, not to mention the glaring inconsistency it would create with currency futures: they have been working long and hard to gain greater control over the national currency market. If you had to predominantly move supervisors, they would have lost the ability to effectively regulate such activities (not to mention the membership fee income they would receive from Forex CTAs).