Many will have noticed that the majority of brokers do not accept customers from the United States of America. This is due to a number of regulations that prevent non-US regulated brokers from accepting American citizens as clients.
The Dodd-Frank Wall Street Reform and Consumer Act of 2010 which was signed by President Barrack Obama led to the CTFC releasing a number of new rules regarding retail foreign exchange. These rules were designed implement some of the provisions laid out in the Dodd-Frank Act, which were aimed at protecting retail customers from financial fraud.
- Firstly, every Foreign Exchange Brokership who undertakes business with US Citizens, must be regulated by CTFC as either Retail Foreign Exchange Dealers (RFED) or Futures Commission Merchants (FCM).
- Secondly, the maximum leverage these companies may offer to retail customers is 50:1 on major pairs with leverage being limited 20:1 on exotic pairs. This is much stricter than European regulation were no upper leverage limit is set.
- Thirdly, the minimum security margin deposits will be 2% for positions taken in the major currencies and 5% for all others.
As you can see the CTFC’s rules prevent US Citizens from trading with regulated European Foreign exchange broker’s, as the vast majority of European brokers do not have the adequate US regulation in order to be able to accept US Customers. Acquiring a licence in order to operate under the said regulation is costly and many will have decided to try and concentrate on other non-US Markets instead. These regulations are certainly responsible for their only being a small number of brokers who operate both European and US arms of their company (despite their being several notable exceptions).
The legislation was quite controversial a number of Forex brokers claimed that the legislation would drive business out of the country. Both from the increased costs of regulation and the fact that many believed the extra constraints would put off a number of customers. The leverage constraints do seem pretty restrictive in comparison with other competing regulatory jurisdictions and requires that the individual has a significant amount of capital in order to be able to trade the Foreign exchange markets. This has frustrated a number of American traders who wish to open accounts with European brokerages who are able to offer much greater amounts of leverage.
American citizen’s should avoid brokerages that will accept them despite the fact they are American (unless of course they are CTFC and NFA regulated) as it is almost certain that the said brokership is operating illegally. No reputable brokership wants to face possible legal action from the CTFC (In 2011, the CTFC sued 14 separate companies for flouting regulation). Lists of regulated American brokers can be found on the relevant regulatory bodies websites. While these regulations have certainly helped protect the US Consumer from Forex fraud many also feel that this has stunted the growth of retail foreign exchange in the USA.