SPEECHES & TESTIMONY

Statement of Commissioner Sharon Y. Bowen on Enhancing Protections for Retail Forex Customers

August 27, 2015

I concur with the Commission’s approval of the National Futures Association’s (“NFA”) proposed amendments to NFA Compliance Rule 2-36, proposed amendments to NFA Financial Requirements Sections 11 and 12, and proposed Interpretive Notice to NFA Compliance Rule 2-36. Consumers deserve full protection when investing their money in commodities. I am pleased that the NFA is working to address the fact that retail foreign exchange trading is the least regulated retail derivatives market that exists in the United States and, in fact, is subject to less regulation than most derivatives traded by sophisticated, wealthy investors. Having less protection for retail investors than that for financial firms turns consumer protection on its head.

I am particularly pleased that the proposals include a requirement that each retail forex dealer (“RFED”) member must establish, maintain and enforce a risk management program that takes into account not only market risks, credit risks and legal risks, but also operational risks, capital risk, and risks attendant to liabilities to retail foreign exchange customers.1 Such a broad risk management program which explicitly requires each dealer member to also take into account “any other applicable risks” is a start towards ensuring that retail foreign exchange dealers are engaging in basic risk management.2 I hope and expect that this program will be implemented swiftly and that the new regulations being adopted will be aggressively enforced.

However, these proposals are not, by themselves, enough to provide retail commodity investors the basic protections they enjoy for every other commodity except foreign exchange. I understand there are limits on how far the NFA can go in addressing this on their own. The CFTC itself needs to adopt more rigorous regulations on retail foreign exchange dealers.

Retail customers invest in these markets on a highly leveraged or margined basis, which is a recipe for financial disaster if you cannot afford to lose that money. Investors only have to put down $2 for every $100 they invest in major currency pairs, including transactions involving the yen and Swiss franc. As a result, price moves can still quickly lead to large profits or losses. Although NFA has placed temporary restrictions on leverage this year on a number of major currencies, including the Swiss franc and yen, there is no guarantee that these restrictions will be permanent. In the proposal that the Commission is voting to adopt today, Section 12 of the Financial Requirements continues to state that dealers are only required to collect as a minimum deposit for each transaction “2% of the notional value of transactions in the British pound, the Swiss franc, the Canadian dollar, the Japanese yen, the Euro, the Australian dollar, the New Zealand dollar, the Swedish krona, the Norwegian krone, and the Danish krone.”3

Even worse, as I noted before, investors in these products enjoy few of the protections they would have if they were investing in other commodities such as gold, oil, or day-trading stocks. In fact, they have less protection than giant financial firms have when they are trading millions of dollars in currencies. Meanwhile, companies are aggressively marketing these products to investors. Commercials all over cable, the internet, and in print trumpet the money retail investors can make trading foreign currencies but make little obvious admission of the risks involved. Yet, statistics show that, just like casino gambling, these investors are most likely going to lose their money. Bloomberg Markets reported in December 2014 that “the two biggest publicly traded over-the-counter forex companies … -- show that, on average, 68 percent of investors had a net loss from trading in each of the past four quarters.” Too much retail foreign exchange trading currently occurs "over-the-counter" where customers are betting against the house instead of on supervised, fully-regulated exchanges. Considering the risks, retail foreign exchange derivatives transactions should really be occurring on regulated exchanges.

I think there are a few steps the Commission can and should take that would both provide greater protections to investors and increase the safety and soundness of the overall market. We should ensure that retail foreign currency dealers are subject to the same strict regulations that other commodities dealers face, such as keeping customer funds in protected accounts, ensuring fair dealing, appropriate disclosures, system safeguards, and appropriate restrictions on leverage. The leverage ratios are woefully inappropriate given the risks posed.

We should consider what levels would be more reasonable (e.g., 25:1 instead of 50:1 for major currency pairs). The dealers should also be subject to concentration charges if they are overly exposed to a particular currency pair or liquidity provider. These charges would incentivize the RFEDs to balance their, and their retail counterparties’, positions, making them less susceptible to swings in the market. Moreover, we should require that retail foreign exchange dealers get the best possible prices for their retail counterparties. As RFEDs often use liquidity providers to obtain prices for transactions with retail customers, they should have a responsibility to get the best possible price for their retail customers. Further, requiring or incentivizing RFEDs to clear may be an effective way to lower the credit risks that retail foreign exchange investors face.

I am sure there is more we can do and I welcome thoughts on how we can best enhance retail investor protection. The greatest lesson of the last decade in finance is that we need to address financial risk when we see it. We are better served establishing sensible, cost-effective regulations before consumers suffer losses rather than relying on a slim hope that the pieces can be picked up when the money is gone. It is my hope that the Commission will move forward to provide retail investors the protections they deserve soon.

1 Proposal at 6-8.

2 Proposal at 9.

3 Proposal at 13.

Last Updated: August 27, 2015