Friday, January 07, 2011

Does This Sound Familiar?

The US Commodity Futures Trading Commission recently reduced the cap on retail leverage from 100:1 to 50:1 for major currencies (and 20:1 for other currencies). Japan’s Financial Services Authority also reduced leverage to 50:1, with plans to reach 25:1 by 2011. Greater regulation has led to consolidation in this industry, with the number of retail aggregators in the United States declining from 47 in 2007 to 11 today and in Japan from over 500 in 2005 to around 70 today. In the United Kingdom and continental Europe, however, there are currently no limits on leverage and limited regulation, creating the potential for regulatory arbitrage.

If you want to make your head hurt, read the whole report. As my friend Juan Enriquez said in an email, with that kind of leverage turbo-charging the market, one deadbeat counter-party can bring down the whole casino. Just like that.

It's as if we have learned nothing from what just transpired.