Jeff Langin - Addressing the CFTC Proposal Issue With A Sound Solution

Dear Fellow Traders,

Hereto below is a copy of a letter I sent to the Forex Dealers Coalition yesterday.

As you all are by now aware, the CFTC along with the NFA is attempting to impose leverage restrictions on U.S. traders. The change is from 1:100 to 1:10.

What this does is increase risk by ten times.

The equation is relatively simple to understand.

At the current leverage of 1:100, $1,000.00 of account funds controls $100,000.00 of currency.

At the CFTC proposed 1:10 leverage $10,000.00 of account funds would be required to control $100,000.00 of currency.

In order to control the same amount of currency an increase of account funding of ten times would be required.

That is a 1000% increase in Forex trader capital risk.

Make No Mistake. I have seen a tremendous amount of misunderstanding on forums across the Internet. Some people are confusing Leverage with Margin.

Again there seems to be a relative degree of apathy out there because many U.S. traders feel that, if this becomes law, he or she will just move their trading account to an offshore broker.

If passed there is every likelihood that the CFTC will dissuade any off shore broker against allowing any U.S. citizens to trade with any more than 1:10 leverage. The CFTC has done this before with what is known as the 'Close the London Loophole Act' introduced by Senator Carl Levin in 2008.


There is talk (whether factual or not) that the NFA (National Futures Association) is pushing an agenda to bring Forex trading under the commodities wing and make Forex trading the same as Commodities and Futures trading. If this is so, what we have occurring is a power struggle with Forex traders and Forex Brokers being caught in the middle.

There is an answer to all of this that I have put forth in my letter.

If there is indeed anything nefarious going on, I would hope that the FXDC could use this to stick an iron bar in the spokes of the CFTC-NFA wheels because there already exists a model for regulation in Canada.

If the CFTC truly has the best interests of traders at heart they will look at regulations in Canada and see that what is needed is a simple list of regulated brokers in addition to an investor insurance plan with the Securities Investor Protection Corporation (SIPC) similar to the Canadian Investor Protection Fund (CIPF) that we have here in Canada.

What this will allow the CFTC to do is to create a list CFTC regulated brokers along with a list of SIPC brokers. The Forex trader will then be able to choose from that list.
Should the Forex trader chose an unregulated/uninsured broker he or she will be on their own should a worse case scenario occur (i.e. non-regulated/non-uninsured broker goes under).

The following is my letter:

CFTC Proposal - Letter to the FXCD from Jeff Langin

February 4, 2010

Foreign Exchange Dealers Coalition (FXDC)

Re: CFTC Proposed Retail Forex Regulatory Changes

To Whom It May Concern.

My letter to you addresses both your concerns as well as the concerns of the CFTC.

I have read the complete script of the CFTC proposal and find a distinct lack of positive direction within its contents.

Clearly, investor protection and integrity in the Forex Industry is of utmost concern to all of us.

The CFTC has stated the need to protect Forex investors and has complained of the numerous occasions in which fraudulent actions by unscrupulous/unregulated brokers have caused massive losses by retail traders.

We all favor a cleaner industry but as it stands the good intentions of the CFTC proposal, rather than making the Forex less hazardous, would likely cause irreparable harm.

As you are aware, the first rule of risk in the Forex market is that a trader should never trade with any more capital than he/she can afford to lose. Contrary to its objectives, the principle flaw of the CFTC 1:10 leverage proposal is that of seeking to ward off risk by blatantly disregarding the industry’s first rule of risk!I live in Canada.

I’m a Canadian by birth and as such I have little to gain or lose as a trader by the CFTC proposal. However, I also have many friend and colleague traders who are Americans. Many of them look to me for leadership regardless of their citizenship or mine.

What is the answer to the CFTC proposal? Where is the solution that will help the CFTC, Brokers/Dealers and Investors alike?

I respectfully suggest the answer may be closer than you think. In fact the answer may be right next door to you, in Canada. Please consider in your thinking that Canada has an organization called IIROC (Investment Industry Regulatory Organization of Canada). IIROC is a model which you can use to counter the CFTC proposal and stave off what could be a catastrophe in the making!

I urge you to read about IIROC and Forex regulations in Canada and/or Contact Mr. Bob Wong, Vice President of MF Global Canada at 1-800-268-9294.

Sincerely,

Jeff Langin
Forex Trader and Educator

 

Very well put sir! I agree that many traders are in apathy right now, and I'm encouraged to see new faces posting their ideas.