Dodd-Frank Wall Street Reform and Consumer Protection Act enters into its second year today. The law touches every corner of the financial services industry, including retail forex.
On the eve of the bill’s first birthday, the U.S. Securities and Exchange Commission (SEC) issued an investor bulletin laying out the various risks that ordinary investors should know before deciding to enter the off-exchange forex market, including the lack of a central clearinghouse to protect against default, less transparent pricing and the risks of suffering major losses through the use of leverage.
The SEC’s investor bulletin comes roughly one week after the agency approved temporary new rules that would allow brokers to continue offering retail forex trading to investors until the agency can consider whether to implement more robust investor protection rules prescribed by the Dodd-Frank Act.
Unfortunately over the years, the retail forex industry also has been flooded by fraudsters and rogue brokers, which SEC regulators are trying to weed out of the system with the Dodd Frank Act.
Regulators also have been concerned about the risks posed by the use of leverage, which allows traders to deploy a smaller amount of money to buy currency that is worth more than an investor’s capital. The use of leverage, however, can also magnify losses.
A year ago, the CFTC finalized their ruling for US forex brokers, limiting leverage to 50:1 on major currencies, and 20:1 on minors.
The law does not apply to non-US brokers. Most forex brokers in Europe have a leverage as high as 500:1.