Foreign exchange brokers are looking to tighten margin requirements, and may be facing heightened regulatory scrutiny, in the wake of sudden currency volatility last week that threatened to sink several firms.
The U.S. futures industry’s self-regulatory organization, the National Futures Association (NFA), is increasing margin requirements on several European currencies following the turmoil in the Swiss franc last week after the Swiss National Bank scrapped its currency floor against the Euro.
See: Currency move a further drag on Swiss bank profits: Fitch
The NFA announced that, “given the events of late last week involving the Swiss franc”, its executive committee has decided to increase the minimum security deposits required by futures firms from the standard to 2% to 5% for the Swiss franc, and to 3% for both the Swedish krona and the Norwegian krone.
The increases are effective as of 5 p.m. (CST) on Jan. 22 and will remain in effect until further notice. The NFA said that firms should be aware that its executive committee “may make additional increases in these currencies or other currencies as warranted by market conditions.”
Additionally, commissioner at the U.S. Commodity Futures Trading Commission (CFTC), Sharon Bowen, issued a statement arguing for tougher rules for forex dealers. “I am concerned that lower standards are putting this industry in a precarious position and placing retail foreign exchange investors unnecessarily at risk. These concerns were underscored by recent unsettling events involving financial difficulties at retail foreign exchange dealers following the Swiss National Bank’s policy change regarding the Swiss Franc,” she said.
Bowen stressed that the CFTC has an obligation to prevent gaps in industry regulation. “If we find that a part of the swaps or futures industry is so lightly regulated that investors, markets, and the public are being placed in undue risk, we have an obligation to fill that gap and establish a more efficient and effective regulatory regime,” she said, noting that she had raised the issue of enhancing regulation for retail forex dealers even before the recent turmoil.
“In the wake of last week’s events, I believe the Commodity Futures Trading Commission has an obligation to seriously consider enhancing our regulations of retail foreign exchange dealers,’ she concluded. “Specifically, I believe 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.”
One of the industry’s big firms that was damaged by the market turmoil, FXCM Inc., also announced that it is increasing its global margin requirements on forex instruments, and for gold trading in its overseas jurisdictions. “The new margin requirements for its overseas jurisdictions will be consistent with the firm’s more conservative margin requirements currently in place for clients of Forex Capital Markets, LLC, its U.S. entity,” it says.
The firm notes that there is ” a high level of uncertainty in the currency markets that could destabilize markets throughout 2015″; and, it says that it decided to increase margin requirements is in order to protect clients during extreme market volatility.
“FXCM would like to reiterate that trading on FXCM’s systems continues in the normal course of business,” said Drew Niv, CEO of FXCM. “It is important to stress that FXCM is not insolvent, has not filed for any form of bankruptcy, and is in compliance with all regulatory capital requirements in the jurisdictions in which it operates,” he added.