U.S. derivatives regulators are weighing tighter oversight of retail currency brokerages' overseas units after FXCM Inc. was hobbled by client losses last month.
The Commodity Futures Trading Commission (CFTC) is considering restricting how much firms can be exposed to highly-leveraged trades made by clients outside the U.S., Chairman Timothy Massad said in Washington on Wednesday.
“We're looking at our rules,” Massad told lawmakers at a House hearing. He said many U.S. brokerages wind up assuming risk from trades made through foreign affiliates, which permit higher leverage than the 50-to-1 ratio allowed in the U.S.
The CFTC could restrict firms' transactions with their foreign affiliates or require higher standards for assessing risk in overseas arms, Massad said. The CFTC is working with the National Futures Association, the industry-funded front-line regulator, on potential rule changes.
FXCM, the largest U.S. retail foreign-exchange broker, lost more than $200 million after the Swiss central bank's Jan. 15 decision to let the franc trade freely against the euro. A $300 million bailout from Leucadia National Corp., owner of investment bank Jefferies Group LLC, saved FXCM from violating capital requirements.
Most of the client losses at FXCM stemmed from overseas currency trades, a person with knowledge of regulators' review of the brokerage said last month.
Customers in some countries traded with as much as 200-to-1 leverage, meaning they could make big bets with little money down. Amid the volatility, FXCM wasn't able to close out some clients' accounts before they lost more than they had on deposit, leaving them with negative balances.
–With assistance from Zeke Faux in New York.
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