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U.S. Seeks to Curtail OTC Highly Leveraged Trading in Paper Commodities and Currencies

Stock-Markets / Market Regulation Jun 19, 2011 - 06:00 PM GMT

By: Jesse

Stock-Markets

Best Financial Markets Analysis ArticleAs part of the reform of derivatives, Dodd-Frank is seeking to prohibit Over the Counter (meaning non-exchange) trading of commodities at leverage of greater than 10:1.

The off exchange traders, particularly those trading in currencies, had expanded their markets into various commodities, offering non-product backed paper trading at very high rates of leverage.


The Congress and CFTC started taking a dim view of this sort of activity, and has tentative prohibited it as of July 15.

This does not curtail any on-exchange trading, such as the CME, or any ETFs, or any other product with a leverage of less than 10:1 or actually involving substantial physical backing or intended delivery of product within 28 days.

I have not quite gotten the time to assess the impact if any this might have on retail trading in forex itself. I have included a few forex related documents below. My initial take was that this is targeted at retail currency speculation, and gold and oil fall into it as a secondary effect. I have relatives visiting this weekend to celebrate my wife's recovery from her recent illness so I have not had time to inquire further.

This is my reading of the situation, subject to additional information. I am trying to obtain the forex type contracts detail to understand customer rights, if any, in obtaining delivery of spot commodities.

There *could* be something to this if there is in fact a means to obtain delivery in some reasonable way. But otherwise it looks like a crackdown on speculation by smaller specs in off exchange products and push to move them to exchanges for all but the larger 'exempt few' who enjoy privileged access to almost everything.

I am a little surprised that people were not screaming about 'currency controls' which might be a little more to the point that talk about prohibiting the trading in gold, oil, and silver.

For the most part it seems like much ado about nothing with regard to gold and silver and oil etc., but its good for clicks, and it helps to cheer up those sitting in depreciating paper on the sidelines who have missed the commodity bull markets.

Gold money was not private property in the 1930's, it was an instrument of the state, and subject to the state's disposal. That is not the case now.

Forex.com reportedly sent out this notice to customers on Friday.
Date: Fri, Jun 17, 2011 at 6:11 PM
Subject: Important Account Notice Re: Metals Trading
To: xxx

Important Account Notice Re: Metals Trading

We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.

In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.

We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.

We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.

Sincerely,
The Team at FOREX.com

Here is one of the relevant products offered by Forex.com:

How Leverage for Spot Gold Works

Leverage for spot gold trading is set at 100:1. This means that for every $1 you have in your account balance, you have $100 in buying and selling power for gold trading. As a result, leverage increase a client's buying and selling power and enables clients to participate in a market that may otherwise be cost prohibitive. Keep in mind that increasing leverage increases risk.


This is the long and short of it. If you want to trade paper, there are still plenty of ways to do it. But you might not be able to do it in the US unless you are using an exchange with structured counter party risk and contracts, and regulated leverage.

By Jesse

http://jessescrossroadscafe.blogspot.com

Welcome to Jesse's Café Américain - These are personal observations about the economy and the markets. In providing information, we hope this allows you to make your own decisions in an informed manner, even if it is from learning by our mistakes, which are many.

© 2011 Copyright  Jesse's Café Américain - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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