The SEC issued an investor bulletin Wednesday highlighting some of the most significant risks that foreign currency exchange (forex) transactions may pose for individual investors.
The forex market is a large and generally liquid financial market, according to the bulletin. Banks, insurance companies and other financial institutions, as well as large corporations use the forex markets to manage the risks associated with fluctuations in currency rates. However, the risk of loss for individual investors who trade forex contracts can be substantial. They include:
- Quoting conventions for currency values are not uniform.
- Transaction costs can turn profitable trades into losing transactions.
- Trading systems may not operate as intended.
- The use of high levels of leverage can produce big losses.
“Forex trading can be very risky and is not appropriate for all investors,” said Lori Schock, director of the SEC’s Office of Investor Education and Advocacy, in a news release. “Individual investors considering forex trading need to fully understand the unique characteristics of this market and consult their financial adviser before making any investment decisions.”
Last week, the SEC issued an interim final temporary rule to permit registered broker-dealers to continue to engage in retail forex transactions for up to one year under the existing regulatory framework that applies to them when conducting such transactions. Under Section 742(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, retail forex transactions would have been prohibited as of July 16, 2011, in the absence of SEC action. The interim rule provides the SEC with time to collect additional information regarding the retail forex activities of broker-dealers and take such regulatory action as may be appropriate to reduce forex risk for investors purchasing or selling foreign securities.
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