CFTC's Bowen Calls for Review of Retail FX Rules

By Andrew Ackerman 

        WASHINGTON--Regulators took steps to address steep losses suffered by traders and brokers in the wake of last week's unexpected surge in the Swiss franc, moving to temporarily restrict the amount of borrowed money, or leverage, used by foreign-currency traders.
        The National Futures Association, the agency responsible for policing the futures industry, said it would temporarily require investors to put down additional cash when they enter into currency trades involving the Swiss franc. The move will require investors to post a "minimum security deposit" of 5% of their overall bet, up from 2%. The self-regulator also said traders would have to post 3% of their bets in the Swedish krona and Norwegian krone.
        An NFA spokeswoman said the executive committee can temporarily boost security deposits--a move that limits leverage--during period of "extraordinary market conditions."
        The move came hours after Sharon Bowen, a Democrat on the four-member Commodity Futures Trading Commission, warned that lax standards in the $5 trillion-a-day foreign exchange market could be harming the industry and placing mom-and-pop investors at undue risk.
        Ms. Bowen, in a statement, called on the CFTC, which oversees the NFA, to "seriously consider" enhancing the regulation of the retail foreign-exchange industry after last week's Swiss currency move. The Swiss National Bank moved Thursday to stop reining in the franc against the euro.
        The 2010 Dodd-Frank financial law subjected retail currency dealers like FXCM Inc. to regulation for the first time but the Treasury Department has exempted many of the instruments they trade from postcrisis mandates aimed at dampening derivatives risks, including a requirement that trades be routed through central clearinghouses.
        "I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign exchange investors unnecessarily at risk," Ms. Bowen said in a statement. "We should consider establishing regulations on the retail foreign exchange industry that are at least as strong as the regulations on the rest of the derivatives industry." She stopped short of embracing specific regulatory changes.
        The CFTC and NFA oversee foreign-currency firms, which are subject to capital requirements and reporting rules. The regulators also set requirements for how much borrowed money, or leverage, the firms' clients can use on currency bets. The CFTC and the NFA rules require investors to post margin of only 2% when they enter into trades involving major currencies, meaning an investor putting up $1,000 could borrow as much as $50,000. The NFA's move on Wednesday will temporarily boost those margin requirements.
        The use of leverage on foreign-currency trades exacerbated losses after the Swiss move, resulting in firms being owed money by investors. FXCM--which was owed $225 million by its clients--had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp. FXCM said Wednesday it would increase the amount of money investors must provide up front as a percentage of any trade on foreign currency instruments, known as collateral.
        Ms. Bowen is the first CFTC official to publicly call for the agency to examine its own rules, which mirror the NFA's. She said her concerns predate last week's market tumult.
        "Even prior to these events, I raised the issue of whether enhanced regulation of retail foreign exchange would benefit consumers," she said, adding it is "ironic" that, following Dodd-Frank, the retail foreign exchange space "is the least regulated part of the derivatives industry."
        A spokesman for CFTC Chairman Timothy Massad, who was traveling in Asia and sets the agency's agenda, didn't respond to requests for comment. CFTC officials have said they are monitoring the fallout from the Swiss move.
        In 2012, Treasury exempted certain foreign-exchange products from requirements that routine derivatives be traded on exchanges or similar electronic systems, and routed through clearinghouses, which are financial cooperatives that collect money and collateral from members to cover shortfalls if a member defaults on an obligation.
        Treasury officials said at the time imposing clearing requirements on foreign-exchange instruments could jeopardize the stability of the market.
        Write to Andrew Ackerman at andrew.ackerman@wsj.com
        Access Investor Kit for FXCM, Inc.
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        (END) Dow Jones Newswires

        January 21, 2015 18:40 ET (23:40 GMT)

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