The turn of the 21st century ushered in many changes that over the next decade would alter the US forex trading industry forever. These new regulations were part and parcel of the; 2008 US Farm Bill and the Dodd-Frank Wall Street Reform Act of 2010. Prior to these bills, US forex brokerages did not need to be regulated by any agency.
A number of regulations were initiated which guaranteed that financial intermediaries, such as forex brokers, follow the required guidelines to provide loss protection and controlled risk exposure to individual traders.
All US forex brokers, including introducing brokers (IB), must be registered with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), an organization that provides a self-governing regulatory agenda to safeguard; truthfulness, transparency and protection from numerous market participants while making sure all regulatory responsibilities are adhered to. The NFA also provides a verification system called BASIC (Background Affiliate Status Information Center); that verifies forex brokerage firms as having necessary regulatory compliance and approval.
2008 Farm Bill
The 2008 Farm Bill began the overhaul of the US forex industry. The principal change was the $20 million minimum capital requirement for forex brokerages. In addition to the capital requirements, each broker and introducing broker needed to be regulated; all within 1 year.
Dodd-Frank Wall Street Reform Act of 2010
In 2010 the Dodd-Frank Wall Street Reform Act was signed into law which introduced countless new regulations; many of them affecting foreign currency transactions for US citizens. Included in the reforms; no over-the-counter foreign currency transactions, unless it is through a government approved agency. In other words; US citizens are able to change currencies for traveling however they are restricted when it comes to trading forex. In addition, the act limits the leverage offered by US forex brokers to 50:1, prohibited hedging as well as prohibiting foreign forex brokers from accepting US clients.
Dodd-Frank in Brief:
• All OTC (over-the-counter) foreign transactions must go through an approved government agency (NFA and CFTC).
• No spot metal (gold and silver) transactions, unless you plan to take delivery of them within 28 days. In plain English, US traders are unable to trade gold (XAU/USD) or silver (XAG/USD) with US forex brokers.
• Foreign brokers, not registered/regulated in the United States must terminate any and all relationships they may have with US traders. This prevents US traders from moving their business outside of the United States.
• The removal of the “under 15 clients” exemption for investment advisers. Before Dodd-Frank, most private fund managers used the exemption contained in Section 203(b)(3) of the Investment Advisers Act, which freed any investment adviser with under 15 clients from registration (the “under 15 clients” exemption).
More Restrictions = Less Advantages
Government agencies state that regulation helps to protect traders (maybe uneducated traders from themselves); however by removing the powerful advantages that forex offers; the educated investor loses.
Requiring all brokers to register and be regulated does work toward the goal of eliminating fraud; nonetheless the large capital requirements make certain that only the largest forex brokers are able to legally operate in the new regulatory climate. With such a high barrier to entry; the smaller startup US forex brokerages are no more which drastically cuts down on new innovative platform features since there is no more competition.
Initially the CFTC and the NFA planned to reduce the leverage to 10:1 from the original 100:1. The 100:1 leverage was a huge benefit over other markets; traders were able to take advantage of a number of situations with minimal capital. The industry responded and the leverage restriction was set at 50:1 for the majors and 20:1 for the minors. If the CFTC and the NFA had originally gotten their wishes; trading currency futures would have had greater advantages versus trading spot forex. With this being said, a professional investor should not be hugely affected by a decrease of leverage to 50:1.
Anti-Hedging (FIFO) Restriction
The NFA enacted a rule with the overall goal of eliminating hedging. The restriction called FIFO (First In, First Out); forces brokers to close the first trade before closing the second one. The NFA insists that hedging affords no economic benefit but, traders are now unable to have multiple strategies on the same currency pair within the same account.
The FIFO anti-hedging restriction affects traders that have more than one position on a certain currency in addition to traders that use any hedging techniques in their strategy. A number of forex traders hedge while even more have multiple positions on a specific currency.
Along with the new regulations there are several benefits designed to protect traders when they deal with NFA regulated brokers.
NFA regulated brokers:
• Must have a knowledgeable and licensed staff
• Must submit their account balances to the NFA weekly and are subject to yearly audits
• Must abide by strict standards and measures to guarantee the safety of their client’s assets
• Need to be large; with a minimum of $20 million in capital. Brokers are unable to use client accounts to pay for their brokerage’s operations. They must backup all positions with their own capital or transfer them over to the interbank market.
This increased regulation by the CFTC and the NFA has led to many large forex brokers leaving the US market. However, several foreign brokerages still accept US traders while offering a complete trading account with high leverage and hedging.
Below you will find our recommended broker(s) offering US traders fully-functional forex trading accounts. Our recommended brokers are well capitalized and offer US clients access to multiple trading products.