Sometime in 2010, the Commodities and Futures Trading Commission (CFTC), which is the arm of the US government charged with regulation of the futures, commodities and currency derivatives markets in the United States, issued new margin trading requirements for all traders conducting forex business in the US. These forex margin requirements have definitely altered the forex trading landscape as far as retail forex trading in the US.

For us to properly understand the new requirements for forex margin in the US, it is pertinent to explain what the concept of margin is all about. Margin is minimum amount of money a broker requires a trader to deposit with it in order to trade in the financial markets. The forex market, just like other derivatives markets, is a highly leveraged market, where brokers give loans to traders so that traders are able to control larger positions with a smaller amount of money. This “smaller amount of money” referred to in the previous sentence, is the margin. The essence of the margin is to cover the losses that a trader sustains in the course of trading. When the loss has depleted the value of the trade to the point where the margin provided by the trader is depleted, the trade is automatically liquidated by the broker.

In other parts of the world, forex brokers provide margins that are up to 1: 500. This means that for every $100,000 position, a trader is only required to provide $200. Brokers in the US also provided traders with margins of up to 1:200 and 1:400. However under the new CFTC rules regarding margin, forex margin in the US has been increased to 1:50 for major currencies, and 1: 20 for exotic currency pairs. The CFTC statement went ahead to define forex majors as any currency pair containing the following currencies:

– US Dollar (USD)

– Euro (EUR)

– British Pound (GBP)

–  Japanese Yen (JPY)

– Canadian Dollar (CAD)

– Australian Dollar (AUD)

– New Zealand Dollar (NZD)

– Swiss Franc (CHF)

– Norwegian Krone (NOK)

– Swedish Krona (SEK)

– Danish Krone (DKK)

The definition of the forex majors with respect to the new requirements for forex margin in the US obviously exceed the traditional definition of the first 4 currencies listed in this list. The currencies listed above have more liquidity than other currencies, and this informed the decision to make the margin requirement for these currencies 1:50, as opposed to 1:20 for the illiquid currency pairs.

Higher margin requirements such as the one set out by the CFTC and which took effect on October 27th, 2010, will translate into higher trading costs for retail traders. For instance, in order to control a Standard Lot or $100,000 worth of a currency, traders are now required to put up at least $2,000 for that trade. If a trader is to follow the universally accepted risk exposure of not more than 5% of account exposure to the market at any point in time, this would require that a trader must have at least $40,000 in his trading account. If he were to limit his trading to mini-lots, then the trader must have at least $4,000 to be able to trade 0.1 lots in the market.

US retail traders may try to open forex accounts overseas, but FATCA, which is a US law that requires foreign financial institutions to report to the IRS the financial holdings of US clients or face 30% withholding tax on any assets held by these institutions, has driven many foreign forex brokers to shut their doors on US clients. The implications are obvious. Forex margin in the US has shut out many retail traders in the US.