The retail forex industry is still in its infancy. It’s only been open to the public since 1998. Many of the largest foreign-exchange firms just opened their doors around 2001.

In the early days, you didn’t need much capital to set up a forex shop and become a forex dealer. However, those days are quickly changing.

Starting this month, U.S. forex dealers will have to meet certain requirements to stay in business. The NFA (National Futures Association) is raising the capital requirements for these U.S.- based firms. According to the new rules, all forex dealers must have US$5 million in “net excess capital” to keep their firms open.

Now, for large forex firms, this won’t be an issue. However, only about 1/3 of the 30 forex dealers in the U.S. are expected to make the cut. In other words, roughly 66% of forex brokers will be forced to close their doors when these rules go into effect later this month.

With these new regulations, many brokers will be scrambling to get more capital on their books so they can remain open. If they can’t meet the newest capital reserves required by their regulators, then they’ll have to close their doors. Many are so small that this will be the case. These new regulatory requirements go into effect Dec. 21st!

So What Can You Do if You Already Have an Account?

1. Check out your broker on this public site to see how much they have in “net excess.” Don’t rely on them to tell you. See for yourself by visiting www.cftc.gov/marketreports/financialdataforfcms/index.htm. While the minimum requirement is going up to US$5 million, you really want a firm with US$20-30 million set aside. The more padding they have, the more your forex accounts are protected.

2. See if your forex broker is regulated elsewhere. Check if your broker is regulated in Europe, Canada, Hong Kong, etc. If so, that’s even better because more regulators are watching over their shoulders. Also, they’ll have to meet capital requirements in those countries, too. So if they’re regulated in several places that’s good news for you. Canada, the U.K., Hong Kong and the U.S. offer some of the best regulation out there. Believe it or not, the regulation in Switzerland really isn’t that great. If a firm is regulated outside of these areas, it’s a red flag that your broker doesn’t measure up.

Why are they dodging the most credible sources of regulation? For instance, those that run to Belize are dodging the strict regulators for loose regulation.

3. Look at a firm’s size and regulation first. Pick a well-capitalized firm (the bigger the better). Their size and regulation are the most important, and then you can look for a broker’s pip spreads and slippage, etc., after that.

4. If you choose a “no dealing desk” type of broker then you’re not going to have them trading against you. The biggest firms will even have multiple inter-banks competing in their quotes to win your business. A dealing desk is taking the other side of your trade and you’ll find that slippage is much worse especially around news events.

5. Ask how many employees they have. This will give you an idea of how many accounts they may have to service and how much customer service means to them. Believe it or not, some firms only have 20-30 employees. They also can’t even be reached 24 hours a day (in a 24-hour tradable market).

You want a firm with 100-500 employees. Then you know they’re accessible when you need them. It is also “proof” of their size and capitalization. After all, a firm isn’t going to have US$5 million to their name and 500 employees too.

6. If they will tell you, ask them approximately how many accounts they service. Some only have 2,000-10,000 accounts while others have 90,000+accounts.

What To Do if Your Broker Doesn’t Measure Up

If you find that your broker doesn’t make the cut after you ask them these questions, you should promptly move your money over to one of the bigger firms. Be sure to “interview” them with these same questions before going with them also. Be comfortable with your choice.

So what happens if you just stick it out with a small firm that has to fold and close up shop? You may be delayed in getting your money back if they’re forced to close. Worse case scenario: You won’t get your money back. Some firms could have your assets tied up in bankruptcy court for quite some time.

Either way, it spells disaster, so choose a well-capitalized, well-regulated firm so you can avoid any of these headaches this holiday season.

Which Forex Brokers Will Survive This Month’s Cut

1. FXCM (www.fxcm.com & www.fxcmtr.com) - Forex Capital Markets is one of the largest retail market makers in the world. They’ve got over US$120 million in firm capital. Over US$47 million of it is held with the NFA/CFTC. However, they are also regulated in Hong Kong, the U.K. and Canada. So they have to meet capital requirements in all of those places. They have over 500 employees with a seamless research team (www.dailyfx.com). So they are the “Goldman Sachs” of forex brokers in my opinion.

2. Oanda (www.oanda.com) - They have over US$148 million dollars in net excess capital. So while FXCM’s capital is spread between many regulators, Oanda just has to meet the capital requirements in the U.S by the NFA and CFTC. They are sufficiently regulated and capitalized with loads of cash on hand also.

3. GFT Forex (www.gftforex.com) - They are registered as Global Futures and Forex and they are regulated in the U.S. by the NFA/CFTC. They have over US$40 million dollars in net excess capital.

4. Gain Capital (www.gaincapital.com & www.forex.com) - They are regulated in the U.S. by the NFA/CFTC. They have over US$32 million in net excess capital.

As the Dollar Sinks, Our Currency ETF Picks Continue to Soar

The DB G-10 Currency Harvest Fund is the newest addition to the TSI currency ETF portfolio. When I recommended this ETF in the October issue, it was trading around 28.60 at the time. Now it’s at 29.00.

This ETF tracks the world’s largest 10 economies. The ETF buys the top three highest interest yielding countries and sells the bottom three countries in the pack. As interest rates change, this ETF rotates currency positions, so it’s always diversified in the top three highest yielding countries, and out of the three lowest countries.

In other ETF News: Our short British pound ETF climbed higher than the projected stop-loss. So you should have already been stopped out on the position. However, if for some reason you did not exit the position already, the pound has gone from over 211 back down to the 207 area. So if you’ve not exited yet, now is the time.

On a good note: Recently the Swiss franc climbed from around 85 to over 86 (that’s a leap in currency terms). And it’s all thanks to Swiss central banker Roth. In November, he announced that Switzerland may raise rates further.

In fact, the Swiss franc has gone somewhat parabolic in such a short time. It’s rare to see these currency ETFs move that much in such a short time. So let’s capture profits on that one. Sell all your Swiss franc ETF (FXF) holdings now.

Meanwhile the Japanese yen ETF (FXY) is up about 35 cents from last month. Every time markets correct, the yen gets a boost. Since stocks have had such a “wall of worry” lately, the yen has been a huge beneficiary of those emotions.

We’ll let the Japanese yen ETF stay in the portfolio as well as the Currency Harvest Fund ETF (DBV) also.

I’m watching another ETF. If it pulls back for a favorable entry, we may go into it at that time.

Sean Hyman now serves as The Sovereign Society’s Currency Director. Over the last 15 years, Sean has worked as a stockbroker, manager, trader and writer. He’s also worked as one of FXCM’s Power Course Instructors, teaching retail traders about currency trading.