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PFGBest Warns New Forex Rules May Hurt Industry

CHICAGO, January 15, 2010

By Jacob Bunge

Foreign Exchange Dealers to Oppose CFTC Forex Rules

By Sarah N. Lynch

WASHINGTON (Dow Jones)--A coalition of retail foreign currency dealers is gearing up to fight a new proposal from U.S. regulators that they say could destroy the retail foreign exchange market by forcing traders to provide more security against potential losses.

The Foreign Exchange Dealers Coalition released a letter late last week expressing opposition to a key part of a sweeping proposal by the U.S. Commodity Futures Trading Commission that would bring extensive oversight to the retail foreign currency market.

At issue for the dealers is one aspect that would restrict the leverage that a foreign currency dealer can extend to customers to a 10-to-1 ratio. Dealers said in their letter this new rule would drive business overseas and potentially subject more customers to fraud by forcing them to do business with less-regulated foreign firms.

The CFTC's proposal "would be a crippling blow to the industry and drive it offshore into the hands of foreign competitors," the coalition's letter said, noting that traders will "simply not accept 10-to-1 leverage."

"The first place they'll go is to the United Kingdom where customers can trade with leverage as high as 200 to 1," the letter continued.

The CFTC's proposal aims to protect retail investors from fraud by requiring brokerage firms and their sales teams, those offering off-exchange forex contracts, to register with regulators and abide by new reporting, capital and leverage standards. Brokers under the rules would be subject to a $20 million capital requirement, and they would be required to disclose profitability statistics to their customers and also warn them of any risks posed by speculative forex trading.

The CFTC said the rules are coming in response to "a number of improper practices that have raised concern, among them solicitation fraud, a lack of transparency in the pricing and execution of transactions, unresponsiveness to customer complaints and the targeting of unsophisticated, elderly, low-net-worth and other vulnerable individuals."

The Foreign Exchange Dealers Coalition, comprising nine retail forex dealers, including PFGBest and FXCM Holdings LLC, said it supports the rule's goal of reducing fraud by requiring brokers to be licensed. But the 10-to-1 leverage limit would wipe out the benefits of new registration requirements by bolstering the business of unregulated foreign firms, the group said.

It also greatly exceeds the leverage requirements approved by the National Futures Association, the self-regulatory group for the futures industry. Those rules limit leverage to a 100-to-1 ratio on major currencies.

The foreign currency market is primarily dominated by such large, institutional investors as banks and corporations, but in the past decade it has expanded to include ordinary investors.

The CFTC's rule will not cover over-the-counter foreign currency trading between big banks and other sophisticated investors because the CFTC does not have authority in this area. Last year, however, CFTC Chairman Gary Gensler urged Congress to expand the agency's turf to include all foreign currency swap trading.

A U.S. House bill approved in December gave the CFTC new authority to collect data on foreign currency swap trades, but it is still unclear if a similar provision will be included in a financial regulatory package to be considered by the U.S. Senate later this year.