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PFGBest Warns New Forex Rules May Hurt Industry

CHICAGO, January 15, 2010

By Jacob Bunge

CHICAGO (Dow Jones)--The head of a leading U.S. brokerage on Friday warned that new rules aimed at protecting retail currency traders could drive business overseas.

Russ Wasendorf, chief executive of Chicago-based PFGBest, said while he broadly welcomed the plan, one "unintended consequence" of margin changes could push "a great majority" of forex trading to more lightly regulated venues.

Improved oversight of the retail forex sector has been a key part of the U.S. administration's efforts to boost consumer protection in the financial services sector.

The U.S. Commodity Futures Trading Commission, which battled to secure authority over the segment, last week outlined plans that would require retail forex dealers to register with regulators and boost minimum capital requirements to $20 million from $5 million.

Wasendorf expressed particular concern about leverage levels would be capped at 10 to 1 rather than 100 to 1.

"It was clearly not the intent of the Congress to destroy the U.S. retail forex industry when the CFTC was given the authority to create rules for retail foreign exchange," Wasendorf said in the statement. "Congress made it clear that the industry was to be policed, not abolished."

The forex markets are mostly used by major institutional investors to hedge against fluctuations between global currencies, but the business has in recent years drawn in growing numbers of retail investors.

Regulators like the CFTC and the National Futures Association are scrutinizing the business following a rash of fraud cases and issues around undercapitalized firms.

The CFTC this week proposed to implement in forex the provisions of the 2008 farm bill, which broadened the CFTC's authority to regulate off-exchange currency products used by retail investors. New rules have been delayed, however, due to budget constraints at the agency and the task of creating a new registration category for retail forex operators.

In 2009, the National Futures Association, a self-regulatory group for the industry, made a pre-emptive move to raise capital standards for firms ahead of any new regulations from the CFTC.

Wasendorf said that the NFA already lowered the leverage structure to 100 to 1 from 400 to 1 earlier this year, a move he said was sufficient to protect investors while keeping the U.S. competitive with offshore venues.

"A leverage structure change in retail forex margining from 100 to 1 to 10 to 1 will force a great majority of forex business to be done offshore and thousands of U.S. jobs would be lost in the derivatives industry to European and other foreign competitors," Wasendorf said. "Worse, U.S. forex customers would not be protected by the CFTC."

PFGBest handles an estimated $20 million per month in forex trade, according to a spokeswoman.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

(Sarah N. Lynch contributed to this article.)