Thursday, September 2, 2010

New CFTC Rules : What They Mean and What They Try to Achieve

During the past few days one of the most important news in the forex market has been the introduction of some new regulations by the CFTC which will become effective before November the first. These new regulations include a lot of modifications to the way in which forex trading is currently done, particularly regarding leverage and broker regulations. On the next few paragraphs I will discuss with you what these new rules mean, the restrictions they pose on US traders and the potential effect they may have in the short and longer term for people trading from US territory.

So what is the CFTC ? The Commodity Futures Trading Commission is an agency which is responsible for the regulation of certain trading bodies within the US. The CFTC deals with the regulation of all non-bank foreign exchange trading entities, something which includes non-bank forex brokers such as FXCM, and IBFX. The CFTC had been thinking about restructuring regulations pertaining to these forex brokers for the past year, particularly because they considered the market to be extremely dangerous for retail traders as a very large number of them lose their investment, something which is evidently detrimental for the community in general. The CFTC was also worried about broker funding requirements and other such rules that were just too "loose" and showed a lack of protection for the safety of traders' capital.

Regarding brokers and the protection of retail traders, the CFTC decided to reduce leverage from the previous 1:100 level to a maximum level of 1:50 for majors and 1:20 for minors. This means that if you previously needed only 10 USD to open a 0.01 lot position now you will need 20 USD. Personally I believe that this level is sound and allows most people who use scalping or such other "fast positioning" trading techniques to remain profitable while it also protects new traders from taking extremely large positions and wiping their accounts. From my personal perspective this change in leverage is not that important as my systems can work with levels of leverage as low as 1:5 without having to increase capital requirements. This is due to the fact that small amounts of equity are risked over large movements so small lot sizes are always used.

Many people think this change in leverage is unfair and that it is unjustified as the government has "no business" in controlling how people wish to invest their money or how they handle those investments. The truth however is that when so many "little guys" are losing their money in a manner that is easily preventable it makes sense to change this so that these guys are protected more. Certainly the government does not try here to "protect people from their stupidity" but they just act according to the facts. If 90% of the cars on the street caused people serious injury the government would certainly do something about it, this is also true about forex trading.

There are also some other provisions of the CFTC rules that are good and some others that should cause warning to traders -especially US traders - who trade strategies that require these high levels of leverage or the use of other non-compliant features (such as hedging or lack of FIFO). The CFTC has increased the minimum necessary capital for brokers to start at 10 million dollars (a sound decision) but it has also left an ambiguous road related to whether or not US traders can open accounts in off-shore brokers. If you take the regulations literally - which is the only way to take them I guess - then US traders will not be able to open up accounts with brokers anywhere else except on US soil since the government only considers CFTC regulated brokers legal for US citizens from now on.

This means that if you are currently living in the US you will probably be restricted in the future to trade only on brokers that have no hedging, obey the FIFO rule and are restricted to a 1:50 leverage. This does not mean that profiting will become impossible, since certainly there are many strategies that can be successful using these rules but it will certainly mean that many traders who rely on strategies that do not obey these rules will have some trouble finding a way in which to get their profit. Traders using off-shore brokers (which would probably be the less-ideal brokers since the larger ones will probably stop receiving US citizens due to these regulations) will probably face account freezing and civil prosecution if they reach certain transaction volumes or if the rules are enforced very strongly.

To people trading Asirikuy systems or Watukushay FE, there is no need to worry, as I said before the systems currently trade with very small lot size relative to account size and for this reason they are safe to use under these new CFTC regulations. I personally believe that current CFTC regulations do have the larger amount of new retail traders in mind and that the people who will benefit from these changes are much larger than those that will be unable to profit or those who will lose their ability to live from trading. In the end - although these regulations may make trading harder for some - it is very achievable to profit under these rules (and probably mush harsher ones) using longer term systems as the ones we trade at Asirikuy.

Do you have any opinion about the new regulations ? How do they affect your trading ? Would you be concerned if you lost your ability to trade on non-NFA brokers ? Please leave a comment with your opinion so that we can further discuss this very important matter :o)

If you would like to learn more about mechanical trading and how you too can use likely long term profitable systems that need low leverage please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)


Andrea said...

i agree with you daniel.
thanks again for your posts.

Tcxmon said...


I agree that the 50:1 margin rule should not be a problem since i'm pretty conservative in terms position size.

I do have an issue with the no hedging requirement. For example with Atinalla #1, if one system goes long EUR/USD and the other goes short EUR/USD, that would not be permitted since its considered a hedging transaction. Am I correct about that?

If that's the case, I guess the only solution would be to trade a portfolio based different pairs such as Atinalla #2.

Let me know any thoughts. Thanks,


Daniel said...

Hello Chris and Andrea,

Thank you very much for your comments its always nice to have you guys around :o)

@Andrea : Thank you for your comment, I am glad you agree and like the posts :o)

@Chris : This hedging issue with portfolios is more of an implementation matter. As I wrote in a post once every hedging strategy can be implemented as a single position strategy. The MQL5 implementations of Asirikuy systems will take care of this so if for example system 1 takes a long and system 2 a short then the entry of 2 cancels part of 1's position and if system 2 has made an entry and then exits the position it adds to 1's, etc. Hedging is not a concern because of this.In the medium term when we move to MT5 (when brokers start offering live accounts for it) the systems will deal with this with no problem.

Thanks again for your comments :o)

Best Regards,


Hansen said...

Thanks for the informative article, Daniel -
I agree that the limitations will probably improve the situation for newbie traders lured into the potential trap of high leverage.
An added bonus might be that the most risky commercial systems will be less tempting to newbies seeking quick riches, as the simulated returns will be much lower...
Kind regards!

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