There used to be a time when you could pick a forex broker in the United States, open an account and start trading from any part of the world, without hitches. Nobody cared where you came from or how much money you had to trade with. It was a seamless process. But in a space of 15 years, FX trading in the US has moved from being a very easy process to a very complicated venture. The question is: why is FX trading now so challenging in the US, and how did we get to this point?
There are basically two reasons for this.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (simply known as the Dodd-Frank Act), is a law that was enacted in the United States in 2010 as a direct response to the fallouts from the 2008 global financial crisis. This economic meltdown had been triggered by the collapse of the US subprime mortgage market. What had happened was that many unqualified investors had been sold risky mortgage-based products, which ultimately overwhelmed the capacity of such investors to handle these risks. This led to massive defaults when subprime mortgage prices collapsed in 2007 and 2008. The impact was felt globally well into 2009 with the collapse of many banks such as Lehman Brothers and massive bailouts all over the world by governments, all at the expense of taxpayers.
In order to reign in banks and other mortgage institutions from taking undue advantage of these unqualified investors, US lawmakers Chris Dodd and Barney Frank made significant contributions to a new bill to this effect, which was later signed into law as the Dodd-Frank Act in 2010. The law placed significant restrictions on what kind of investments banks and other financial institutions could offer to retail clients. The Commodities and Futures Trading Commission (CFTC), the regulator of the financial markets in the US, acted on the provisions of this law and directed all forex brokers for US traders to curtail the leverage provided to their clients as a way of protecting these clients from undue exposure to market risk. CFTC asked brokers to cut leverage to 50:1 for FX instruments, 20:1 for options and futures assets. Presently, proposals are underway to cut leverage even further to 10:1 for FX assets.
This has had unintended consequences. Reducing leverage means that traders have to come up with more money as capital for their trading activity. Presently, a trader will have to come up with at least $25,000 as initial capital to open a trading account with an FX broker. A 2018 survey by Bankrate.com showed that a fifth of Americans have no savings whatsoever, and another 47% only save 1-10% of their income. What this means is that it will be a big ask for many unsophisticated investors to come up with such large funds as a minimum deposit for an FX trading account. This presents a challenging situation.
Then there is the issue of the reporting requirements of the Foreign Accounts Tax Compliance Act, which mandate foreign financial institutions (FFIs) to report to the US Treasury Department, the identities and assets of all “US persons” in their database. Also passed in 2010, FATCA also prescribes strict penalties on non-compliant FFIs.
The US government imposes taxes on worldwide income of resident and non-resident US citizens. Ordinarily, this should not be a problem. The problem here is the penalties which are to be applied to FFIs that fail to file the required reports with the Treasury Department. Many FFIs have therefore opted to stop accepting new account registrations from US citizens, as well as closing down accounts of existing account holders of US origin. It is not unusual to see the statement “US traders not accepted” on the websites of UK, EU and international brokers. This has put many US citizens who intend to trade FX freely in a difficult position.
Consequences on Trading Activity
These two factors have had several unintended negative consequences on trading activity in the FX market by US citizens. The two major effects which have made forex trading in the US very challenging are:
- Many brokerages have complained that the leverage restrictions imposed by the CFTC in 2010 has caused them to lose many clients. Faced with declining revenues, the forex brokerage segment of the US financial markets has experienced a massive exodus of brokers. FXSol, FXCM, and many other brokers that operated in the US at the start of the Millennium have all left the US market. Presently, only two brokerages, GAIN Capital and Oanda operate in the retail segment of the FX brokerage market.
- Many non-US brokerages do not accept US traders.
So with less choice in terms of US based brokerages, perhaps the only hope for US traders is to open accounts with a selected list of forex brokers for US traders. This new list presents brokers that have trading condition which are suitable for many retail traders of US origin. Perhaps, the brokers on this list will take away some of the challenges currently being faced by some of these traders.