Broker Leverage Revisions, New NFA BrainJuice

NFA is at it once again, and this is putting me off. Under the new Obama Administration, CFTC and the NFA is having lots of brain juice lately.

Well, in my opinion, the NFA is a bunch of regulatory bureaucratic crap that creates more confusion and regulations based impedance to an otherwise already messy and complicated industry. By bringing more regulations and requirements into this foray, they are clearly causing more confusion amongst many of the unregulated players. One may argue that this brings more structure and elimination of ambiguity amongst the various players in the market.

However, without these, most smaller players, especially retail traders, are enjoying flexibility and greater consumer advantage as the market goes pretty aggressive/competitive in wanting the consumer’s buck.

Well, what is this change and why am i complaining about it so much?

As most of you would know, Forex brokerages can offer leverage of up to 500 times your capital invested. NFA would like to clamp all US regulated brokers to offer only up to 1oo for most majors and up to only 25 for minors! Which literally means, your contract on Gbp/Jpy will now cost 8 times more if you were enjoying leverage margin of 1:200 or it will cost 1/4th of the actual original contract value!

We can easily circumvent this newly implemented genius of an idea by moving our funds offshore to a UK or Swiss based broker. However, if the rest of the world is to take the baton and follow the “leader”, this could and pretty much kill retail forex trading as the little guy can no longer afford the same contracts as he used to with the fantastic margins we are enjoying now.

Here is the actual statement issued from NFA/CFTC: Oh by the way, this is not very far off and it would be effective at the end of this year, November 30, 2009!

Leave me a comment! Do you think this is a good change or bad change?

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The NFA is meddling with broker leverage requirements – which have DIRECT impact on all individual traders, retail or institutional. The proposal would be to limit leverage to 100:1 on majors and 25:1 on minors. Following is a link to their report:

Effective Date of Amendments to NFA Financial Requirements Sections 11 and 12 and the Interpretive Notice Regarding Forex Transactions

NFA has received notice that the Commodity Futures Trading Commission has approved changes to NFA Financial Requirements Sections 11 and 12 and related changes to the Interpretive Notice titled “Forex Transactions.” The amendments adopt an alternative net capital requirement for Forex Dealer Members (FDMs) and eliminate the existing exemption from the security deposit requirement. These changes will become effective on November 30, 2009.

The amendments to Section 11 revise the existing alternative net capital requirement that is based on an FDM’s liabilities to customers.1 As of November 30, 2009, the alternative requirement is $20 million plus 5% of the amount of customer liabilities over $10 million. FDMs that exclusively use straight-through-processing for their customer transactions are exempt from this alternative requirement and need only maintain the $20 million minimum (unless the firm is subject to a higher requirement under FR Section 1).
The amendments to Section 12 eliminate the existing security deposit exemption for FDMs that maintain 150% of their required net capital. This means that, beginning on November 30, 2009, all FDMs must collect a customer security deposit of at least 1% for the currencies listed in Section 12 and at least 4% for all other currencies.2

NFA’s submission letters to the Commodity Futures Trading Commission include of the revised language and more detailed descriptions of the changes. You can access electronic copies of the February 23, 2009 submission letters athttp://www.nfa.futures.org/news/PDF/…Notc021909.pdf (for the changes to Section 11) and http://www.nfa.futures.org/news/PDF/…Notc021909.pdf (for the changes to Section 12).

Questions concerning these requirements should be directed to Valerie Kretschmer, Manager, Compliance (vkretschmer@nfa.futures.org or 312-781-1290) or to Sharon Pendleton, Director, Compliance, (spendleton@nfa.futures.org or 312-781-1401).

1 The term “customer” does not include eligible contract participants.
2 The currencies that qualify for the 1% security deposit are the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone.

If you would like to send Mr. Stawick at the CFTC comments with regards to this proposal, you can send an email tonstowe@cftc.gov. Reference “Proposed amendments to NFA Financial Requirements Section 12 and the Interpretive Notice regarding Forex Transactions”

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