Are the Days of High Leverage Over for Forex Brokers?



We are nearly nine months after the fated black swan event, and we still are seeing its effects on brokers. Over these past months, regulators have been revisiting the high leverage levels that brokers are allowed to offer their clients. The NFA and CFTC have already completed their additional regulations, but they had already reduced leverage to 50:1 max. For added measure, they have now banned the use of credit cards as a funding method instead and added. They have also implemented stricter risk management guidelines for brokers to follow.

For the most part, most Forex Brokers have done an excellent job of policing themselves when it comes to leverage. As soon as market volatility increases many brokers have been announcing the reduction of leverage on their own as a precautionary measure. Some Forex Brokers have even made leverage reductions on specific pairs when markets in those pairs warrant such an action. The events of January 15 have taught these brokers that it is best to be cautious during times of volatility and not only look at revenues as a deciding factor.

The ability to offer high leverage also comes from the ability to secure credit lines from liquidity sources and the Forex Broker’s own Prime Broker. As the leverage allotted decreases, the broker must also respond in kind with regards to their respective customers.  Even without the much-expected change from regulators, the cost of risk has already changed the behavior of these brokers. Nonetheless, we will most likely see changes from ASIC on leverage offered from ASIC regulated brokers. Currently, ASIC allows Forex Brokers to provide clients with 500:1, but there have been rumblings about lowering this amount.

It is never in any one’s interest when these rules rea driven by the regulators solely. Forex Brokers should also take an approach that looks at business continuity which means being careful with the amount of leverage given to clients. Forex Brokers should see that a balanced approach to leverage is what is in everyone’s best interest.