During his campaign, Donald Trump promised that he would limit or completely repeal the Dodd-Frank Wall Street Act of 2010.
Could Donald Trump Alter the US FX industry with a Dodd-Frank Repeal?
The Dodd-Frank Act played a significant role in changing the image of the largest financial markets.
The repealing of this law could have serious implications for the CFD and forex industry.
In early June, the House of Representatives voted to ease the piece of legislation but retail brokers can return to the US market, which is presently made up of four companies in the FX industry.
Prior to Barack Obama signing the Dodd-Frank Act, traders in the USA could access the services of 40 local online brokers and a host of foreign financial companies. Presently, the number of online providers traders can access has come down to 4. Brokers outside of the US are no longer allowed to provide services to US citizens.
It is unsurprising that there are such few brokerages in the US given the current requirements. Based on the Dodd Frank laws enforced by the CFTC, firms looking to provide retail trading in the forex market are required to maintain at least $20 million in capital.
This minimum capital requirement increases if a broker’s liabilities to traders are more than $10 million. As such, the licensed firm’s net capital requirements are increased by 5%.
For instance, if a company’s liabilities are equal $15 million, the broker would be required to increase it’s capital by 0.75 million.
Additionally, obtaining a license in the US often takes up to two years. Add to this the maximum leverage of 1:50, the ban on hedging and the need for the implementation of the first in-first out rule and the result is a really challenging market conditions.
In the US, operations for brokerages are exceedingly more difficult than in places such as Europe, where the Cyprus Securities Exchange Commission (CySEC) and the British Financial Conduct Authority have less stringent requirements.
Based on the history of supervision committees in Europe, several significant issues could change the retail forex industry in the US.
American traders should be given more choice: keeping them away from brokers outside the US only curtails their freedom but does not offer adequate protection. According to first quarter profit figures in 2017, the average profitability for a trader was 40%, which is impressive and shows that US traders know how to grow their funds.
It is important that regulators improve the market and simplify access—one way to attract new firms into the industry is through the introduction of PAMM and adjusting capital requirements as was the case in Europe.