Following the unexpected decoupling by the Swiss National Bank (SNB) of the Swiss franc-Euro exchange rate on January 15; the subsequent meteroic rise of the Swiss franc against the euro and, to a lesser extent, the US dollar; and the financial difficulty experienced by at least two international retail foreign exchange dealers, several exchanges and at least one regulator instituted a number of interim measures and promised more.

Among measures taken by exchanges and one regulator:

  • the National Futures Association increased the minimum security deposit required to be collected by Forex Dealer Members for trading in eight foreign currencies by retail clients—including from two to five percent for transactions involving Swiss francs (reducing the maximum leverage from 50:1 to 20:1); ​
  • a panel of the Chicago Mercantile Exchange’s Business Conduct Committee, on an emergency basis, granted additional authority to the CME Group Global Command Center regarding price fluctuation limits on certain CME products—including CME foreign exchange futures and options. The emergency action permits the GCC to modify the amount of price limit expansions; remove price limits at any time; and determine whether a specified trading halt will be instituted, among other authority. (Price fluctuation limits are designed to deter extraordinary price movements in markets and can result in trading halts under certain circumstances. Rules authorizing such limits for foreign exchange futures and options were just enacted in December 2014. Click here for more information.) The CME Group also proposed to amend its rules to grant the GCC the permanent authority “in its absolute and sole discretion, [to] take any action it determines necessary to protect market integrity” in the context of price fluctuation limits, including the type of actions accorded the GCC through the emergency action; and  
  • ICE Futures U.S. increased reasonability limits for all currency pair futures contracts. (Reasonability limits are hard limits maintained by ICE Futures U.S. for its electronic trading system to avoid fat-finger type errors. Among other effects, orders with bids above or offers below a reasonability limit are not accepted.)

Because of the SNB’s decoupling, at least two firms maintaining substantial retail clientele trading foreign exchange experienced significant losses and capital issues as a result of their clients’ trading losses. This prompted one of the firms (based in the United Kingdom)—Alpari (UK) Limited—to initiate an insolvency proceeding last week. The other firm, Forex Capital Markets LLC—commonly known as FXCM—a CFTC-registered retail forex exchange dealer, futures commission merchant and provisionally registered swap dealer—received a US $300 million infusion from Leucadia National Corporation “to meet its regulatory-capital requirements and continue normal operations” after losing US $225 million.

In response, Commissioner Sharon Bowen of the Commodity Futures Trading Commission suggested that the CFTC should look into greater regulation of retail foreign exchange dealers:

As I have said before, we have an obligation to prevent the establishment of “gaps” in our regulations. If we find that a part of the swaps or futures industry is so lightly regulated that investors, markets, and the public are being placed in undue risk, we have an obligation to fill that gap and establish a more efficient and effective regulatory regime…. Specifically, I believe we should consider establishing regulations on the retail foreign exchange industry that are at least as strong as the regulations on the rest of the derivatives industry.