Congressmen Question CFTC 10 to 1 Leverage Reduction

Is sounds as though some US congressmen have been reading some of the thousands of complaints the CFTC has received about its proposals to reduce leverage on spot forex from 100 to 1 down to 10 to 1.

Yesterday CFTC chairman Gary Gensler was testifying before the House Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management. The CFTC website has a transcript of that testimony, according to which Mr. Gensler informed the subcommittee that:

As directed by the 2008 Farm Bill, the CFTC in January proposed regulations concerning off-exchange retail foreign currency transactions. Pursuant to this authority, the Commission released for public comment a comprehensive scheme that would put in place requirements for, among other things, registration, disclosure, recordkeeping, financial reporting, minimum capital and other operational standards.

So far, the Commission has received more than 5,600 public comment submissions related to the forex proposal.

Notice that he neglected to mention the 10 to 1 leverage reduction, or the fact that most of those 5,600 plus comments were complaining about that very issue.  Now the CFTC website doesn't mention this, but according to the NASDAQ website some congressmen put some questions to Mr. Gensler about the leverage proposals following his testimony. House Agriculture Chairman Collin Peterson asked:

I don't get what we are trying to accomplish here by lowering this to 10 to 1. Who are you trying to protect here?

and House Agriculture member Jim Marshall said that:

If our leverage rules are 10-to-1 and leverage rules elsewhere are 100-to-1, the business is going to move elsewhere.

Congressman Peterson said to reporters later that he hopes the CFTC will address the leverage concerns before it finalizes the rule:

I don't think it's well thought out, I think they are trying to fix a problem that doesn't really exist.

It sounds as though the 10 to 1 leverage reduction is not a done deal just yet. It also sounds as if the CFTC thinks it is understaffed. Here's something else Gary Gensler had to say yesterday:

Despite rapid advances in technology and the increased size and number of regulated futures markets, funding for the agency has lagged behind the growth of the markets, and the CFTC has struggled to keep pace with the markets. While market participants have the technology to automate their trading, we’ve yet to have the resources to employ modern technology to automate our surveillance and oversight of compliance. Further, the CFTC does not have the staffing levels or the resources to conduct regular annual examinations of exchanges and clearinghouses. Instead, we can conduct those examinations only periodically and have no choice but to leave routine examinations of intermediaries to self-regulatory organizations.

A worrying message for those of us who prefer to rely on regulators rather than "self-regulatory organizations" to ensure that the money in our own trading accounts is safe from financial mismanagement, fraud and theft.