Is U.S. Forex Trading Safe?

October 30, 2010 | By: Robert A. Green, CPA

Forbes

Is U.S. Forex Trading Safe?

Is forex trading safe in the U.S. even with RFED or FCM duly registered brokers with the NFA/CFTC? U.S. forex brokers don’t have “segregation of asset” money protection rules, whereas futures brokers are subject to those rules. The new CFTC forex rules call for higher minimum net capital requirements for RFED forex brokers vs. futures brokers, so that helps cushion the concern about money protection issues. 

For warnings about hidden problems with forex brokers, see Erskine vs. CFTC 06-3896. The CEO of Rockwell Trading brought up this court case and discussed his concerns about forex brokers and their platform markets on our Oct. 27 Webinar. The CEO focused in on this quote in the case: This forex market, which is central to this case, is not a public market, but is instead a “negotiated market,” in which–according to the parties–foreign currency prices (the prices used for the trades in this case) are “constructed” by the FCMs using “software to process and distill currency prices offered by numerous banks and come up with an indicative market price.”

As I said on that Webinar, keep in mind that this court case occurred before the new CFTC forex brokerage rules went into effect on Oct. 18, 2010. The retail forex industry should be run better with the new rules. Later in the call, we circle back on the “segregation of asset” rules; we will try to do more research on it for next week. 

We noticed a troubling NFA news release dated Oct. 28, 2010 “NFA orders $459,000 monetary sanction against New Jersey forex firm Gain Capital Group LLC.” Read the text of the entire Complaint included in the release. 

Here’s another similar NFA fine of $320,000 against New York forex firm IKON Global Markets. Per the NFA release, “The Complaint alleged that IKON engaged in certain price slippage practices on the MetaTrader platform that were favorable to IKON and caused disadvantageous trading conditions for certain customers. The Complaint also charged that IKON failed to supervise the MetaTrader platform used for their forex business, and failed to supervise the firm’s operations.” I wonder if “slippage practices” are what Rockwell Trading CEO is warning us about?

The CFTC and NFA are scrutinizing forex brokers more now after their Oct. 18, 2010 effective date for RFED registrations in accordance with their new CFTC rules for forex transactions, sanctioned by Dodd-Frank Fin Reg too. The NFA website has several good new guides including Forex Transactions: A Regulatory Guide.

American forex traders are being forced to trade with no more than 50:1 leverage on the major currencies (20:1 on minors), FIFO (no hedging rule) and without any form of money protection. Because leverage with currency futures is not far off 50:1 (30:1 on the CME, for example), hedging may be easier with futures, and futures brokers must segregate assets for some protection. We will compare tax treatment between forex and futures next week. More forex traders may want to consider trading currency futures too. 

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