NFA Issues Additional Increases in Required Minimum Security Deposit for Forex Transactions (Notice I-15-07)
Commentary by Bob Zwirb
In light of recent volatility in the currency markets, the NFA issued a Notice indicating an increase in the minimum security deposits required to be collected and maintained by forex dealer members under NFA Financial Requirements Section 12 for transactions involving a number of other currencies.
The NFA previously increased the minimum security deposits of the Swiss franc, Swedish krona, and Norwegian krone. It has also determined to increase the minimum security deposits for:
- Japanese yen to 3 percent;
- Australian dollar to 3 percent;
- Russian ruble to 20 percent;
- Brazilian real to 9 percent; and
- Mexican peso to 6 percent.
The increases become effective at 5 p.m. (EST) on January 26, 2015, and will remain effective until further notice.
See: NFA Notice I-15-07.
Related news: NFA Announces Increases to Minimum Security Deposits Required for FDMs (Notice I-15-04) (January 21, 2015).
Commentary
The NFA's increase of the minimum security deposit for the Swiss franc from two to five percent demonstrates that margin levels in the retail forex arena have been set by regulators (in contrast with margin levels for futures contracts, which are set by the exchanges), notwithstanding the perhaps widespread view that the problems in the retail forex market were due to low regulatory standards. Unfortunately, when extraordinary markets disruptions occur, as with respect to the Swiss Franc, bad results often follow, regardless of the degree of regulation.
Interestingly, the five percent margin level recently set by the NFA for trades in the Swiss franc contrasts with much higher margin levels imposed on some other currencies, e.g., the Russian ruble (20%) and the Brazilian real (9%). Whether that 5% level will suffice in light of the declaration by the Swiss that they may act again to weaken the franc is uncertain. (See statement by Swiss National Bank President Thomas Jordan, "Switzerland Could Act on Currency Again, Central Banker Says," The Wall Street Journal.) Certainly, it is not at all clear that a 5% margin level would have avoided the turmoil that befell the retail forex community from the recent devaluation by the Swiss.
The recent disruption in the Swiss currency market raises two questions about government regulation: (i) is it obvious that regulators are better at setting margin levels than are market participants? and (ii) is heavier market regulation the answer every time a financial firm fails in response to a market disruption? Implicitly, the response to both these questions is "no." But a "no" response is not an anti-regulatory response; rather, it is a response that does not assume that all failure resulting from market disruptions can be avoided by more regulation.