Forex Leverage Limit is 50:1 – Will US Traders stop to use forex brokers ?

After a considerable time period the CFTC has finally issued its regulations for off exchange forex trade. The CFTC has finalized leverage limit for off exchange trade of foreign currency. According to CFTC issued regulations the leverage limit over major currencies would be 50:1, whereas for minor currencies the leverage limit will be 20:1. As a result of this release of regulations by CFTC, the US forex brokers would be able to offer a leverage of 50:1 for the popular currencies and 20:1 for less popular currencies. This should not be very surprising for traders and brokers because CFTC has been involved in reducing leverage limit in the past as well. May 2009 witnessed a reduction of leverage limit from 400:1 to a considerably low limit of 100:1. But this recent reduction has raised questions over the future operations of US brokers.

There was a proposal of reducing this leverage limit to 10:1, but though CFTC has limited it to 50:1 still forex market will experience great variations. The proposal of limiting leverage for off exchange foreign currency transactions by 10:1 was prevailing from very beginning of this year and its objective was to create barriers for introducing brokers.. Beside pressure from traders it was decided to handle the proposed limit of 10:1 through formulation of IB coalition. The proposal of 10:1 leverage limit on forex trade was opposed by obviously forex brokers and by US congressmen. This huge opposition from these two parties affected the decision by CFTC that is why the limit of 50:1 was introduced.

The pressure from brokers and congressmen abstain CFTC to reduce the leverage limit to very minimal limit i.e. 10:1. Finally new rules and regulations issued by CFTC stated that for US, on the transaction of all major currencies the broker will facilitate the trader by offering limited leverage of 50:1, whereas for minor currency the leverage limit is 20:1 as announced by CFTC. Japanese brokers are also operating by offering leverage limit of 50:1 on forex trade. In Japan the limit is expected to fall to 25:1 in next year. Prevailing leverage limit in US and Japan i.e. 50:1 is remarkably less than the common forex trading and NFA leverage limit of 100:1.

The leverage limit on retail foreign currency transactions released by CFTC will protect the US public against one of the largest retail fraud areas that are monitored by CFTC. In reality the leverage limit issued by CFTC will make forex industry more uncompetitive therefore it would not be able to protect the American traders. The reduction of leverage limit to 50:1 in Japan has witnessed reduced trading volumes. Therefore we can infer that US will experience same outcomes and the forex brokers will earn less and ultimately this may discourage traders and brokers to quit their businesses. The CFTC revised regulations over forex trading has raised challenging questions for the US traders and brokers. The coming time will reveal that whether US traders will flock out from US or will the US traders be able to accommodate themselves according to revised forex business conditions.