The Commodity Futures Trading Commission (CFTC) scrapped a proposal to reduce the amount of borrowed funds that currency traders can use to trade forex contracts to 10-to-1.
In retail forex market people can open an account with any of the forex brokers and invest on speculation of price movements of one currency agaist another. The use of leverage allows the traders to speculate on mutiple times the actual deposit to greatly increase profits, but this can also result in magnified losses. At present the existing allowed leverage is 100-to-1 for major currencies. That means you could invest $5000 in your forex account and trade a notional amount of $500,000. This was also a cause of many forex scams and the CFTC proposal was to reduce this to 10:1 leverage.
However the CFTC proposal was opposed by most of the forex brokerage firms as well as traders. The reaction resulted in massive number of comments and feeback. As a result the CFTC scrapped the earlier proposal and decided to go ahead with a new rules where the firms can’t offer a ratio of more than 50-to-1 for major currencies or 20-to-1 leverage for the more exotic variety.
The new rule seems to be a more balanced option to give traders enough opportunity to gain profits yet protect them from fraud.
Accroding to the CFTC Commissioner Bart Chilton the final rule represents a compromise on the leverage issue. On Tuesday he said, “I think we did a good balancing act in the final rule,” he said. “It protects investors from fraud and abuse yet allows legitimate business activity to continue.”
The new proposal should be a happy new for traders, brokers as well as those who are releasing new forex tools (see Forex Bulletproof ) especially because forex market is booming. Wall Street Journal reported that during April the foreign exchange market hit the average turnover of $4 Trillion on a single day.