My response to the rule
Proposed FINRA Rule 2380.
As an FX trader, I fail to see how reducing FX leverage limits by such a degree provides any investor protection. As the environment now stands, the leverage limits allow customers to risk a very small amount of capital on each trade and makes things like mini and micro contracts a possiblity, risking as little as 10 cents or 1/10th of a dollar per pip, with the automatic margin calls acting as an additional margin of safety, preventing small investors from getting further underwater when the market turns against them
The example you give in your proposed rule of an investor who ?wishes to purchase $1 million worth of a foreign currency offered with a 100 to 1 leverage, the investor would only need a good faith deposit of $10,000. If the investor deposits only the minimum funds required, and if the value of the foreign currency contract dropped by 1 percent (to $990,000), the account equity would be depleted entirely and the investor?s position would be closed out. The investor would lose the entire $10,000 deposit. In the retail forex market, there is neither any margin call nor any notice for an investor to deposit additional funds to maintain his or her position. As a result, even small intra-day swings in currency rates have the potential to close out investors on either side of the market.? is totally inappropriate for the following reasons:
1.The liquidation rules and lack of margin calls should be known to all who deal with the retail FX market. In fact, this situation keeps investors safe ? you can't get over extended beyond your initial capital.
2.The situation you describe, of an investor putting up a 10,000 dollar deposit to control a million dollar position, is just not applicable to a novice or typical investor. No reasonable person would or should take that chance without some experience in the market place. The high leverage offered in retail FX allows smaller investors to gain experience without placing large amounts of capital at risk. Anyone who puts all of their trading capital into one trade, as your example suggests, should not be trading.
The high leverage of retail FX allows for exactly the opposite of what you describe ? it provides investors with an opportunity to better manage their risk. For example, take a retail investor with $1000 of trading capital:
1.At 100:1 leverage while playing micro contracts ($1000 units)? $1000 of capital can be used to assume $100,000 of total leverage, risk can be spread out across 100 total positions with $10 of capital at risk in each trade (1% of the initial capital base). If you have a PIP value of 10 cents, price would have to move against you by 100 pips (1% of the value of the currency) to wipe out the $10 of capital at risk. Most traders would have either closed the position or hedged way before price moved to this point
2.At 1.5:1 leverage while playing micro contracts ($1000 units) - $666 of capital will now be required to assume $1000 of total leverage, so essentially that $1000 of capital is now concentrated in one position, which the investor will be forced to maintain if he wish to stay in the market, they can no longer take smaller positions spread across various prices. This flies in the face of the idea of taking small losses quickly and risk manage, which are pillars of any sound approach to trading.
In essence, you are trying to use regulatory control to eliminate the need for people to practice sound risk management. The situation you refer to in your proposed rules is pure gambling, not investing and for those who want to continue to gamble, they can go to a casino or play the lottery, your proposed rule will not protect them and it will prevent many small investors from learning the benefits of risk management, the lack of which contributed to the current credit crisis. The proposed rule reads as if it was crafted by someone who has very little experience or exposure to trade management and equates retail FX trading to gambling.