This article was written in partnership with IG, the world’s No.1 CFD provider (by revenue excluding FX, June 2019). All views expressed in the article are the independent opinion of DollarsAndSense.sg
With effect from 8 October 2019, the Monetary Authority of Singapore (MAS) will increase the minimum margin requirements for Foreign Exchange (Forex) trading from 2% to 5%. This will mainly impact retail traders, while accredited investors, expert investors and institutional investors can continue to trade at the existing 2% minimum margin requirement.
Primarily tackling two concerns – 1) enhancing credit risk management by brokers, and 2) ensuring retail investors have sufficient financial buffer to cope with losses – the increase in the minimum margin requirements comes on the back of an extensive study and industry consultation on the subject by MAS since as far back as 2012.
To better understand how this may impact forex traders, we caught up with Rayner Teo, one of Singapore’s most followed trader on social media.
You can keep up-to-date on his videos and education materials on his website, TradingWithRayner.com, which garners over 100,000 page views a month, as well as join his social media channels. Rayner also let the cat out of the bag on an interesting project that he will be working on in the coming weeks, a brand new podcast show. We’re looking forward to it!
DollarsAndSense (DNS): Time is literally money as you trade diverse international markets and also run one of the most followed trading education platforms in Singapore. Thanks for taking some time out of your busy schedule to meet with us.
Can you explain to us how the increase in minimum margin requirements actually impacts traders?
Rayner Teo (RT): A minimum margin requirement sets the maximum level of exposure you can take on with your trading account balance. In the past, with a trading account balance of $1,000, you could enter into a trade position of up to $50,000.
After the increase in minimum margin requirements, the same $1,000 trading account balance will only allow you to take on a trading position of up to $20,000.
DNS: How will this impact forex traders?
RT: Different forex traders will be affected differently.
The base scenario is that an increase in minimum margin requirements will force forex traders to either put up more capital to achieve the same level of exposure or be forced to accept a lower trading position for the same amount of capital in their trading account.
For experienced traders, they have to incur higher risks as they now have to put up more capital for the same trades they used to make. This means if the broker gets into financial difficulties, more of their capital is at risk.
Some traders will also not be able to gain the same exposure with their capital, which leads to lower profitability.
For many retail traders, this move may curb a “gambling” effect, as the same initial capital will not allow them to gain as large an exposure as they could in the past. This helps the less experienced traders limit their exposure to their trades, which helps reduce potential losses and ensure they don’t lose as fast.
DNS: Will this impact the way you trade? Or how you educate people to trade?
RT: There is one particular system where I am trading 20-30 markets that will require me to cough up more cash for the same exposure. Generally though, the change does not impact majority of my systems and strategies.
I am not as aggressive as to trade at the minimum trading requirements. I also implement many other risk management techniques for my trades, including risking just 1% of my trading account on any trade as well as trading diverse markets globally.
These are the same principles I developed my education materials with as well, in particular to not risk 1% to 2% of your trading account on any one trade.
DNS: Do many people on your social media platforms ask about this?
RT: Actually, I have not received a lot of questions on this topic. The one question I do tend to get from retail traders is how the brokers will be adjusting to the new regulation, and whether they will be shifting their accounts to another jurisdiction.
I believe Singapore isn’t the only country to implement this level of minimum margin requirement, and would likely have followed suit from other reputable financial systems as well.
DNS: How will brokers be affected by this?
RT: In the short-term, this will likely be bad for business because brokers earn based on volume and size. While volumes may stay the same, an increase in the minimum trading margin requirements potentially restricts the size of many traders’ positions.
At the end of the day, brokers have to adhere to the regulations. Brokers will also continue to support traders in other ways.
In the long-term, what could happen is that more traders survive, stay in the industry and become good profitable traders. This will be positive for brokers as there will be a larger pool of good traders, “gambling” less and trading more consistently.
DNS: Will other asset classes become more attractive to traders?
RT: This may or may not be the case.
Firstly, for those who only trade forex, they would have to pick up new knowledge to trade another product altogether.
Even for experienced traders who already trade other products, they will likely continue to trade forex as it would likely be part of their risk management strategy. Also, the minimum margin requirement would likely be at a similar level or higher for other products.
Transaction costs are also typically higher for other products such as Contracts For Difference (CFDs) or commodities compared to forex.
Even with the higher minimum margin requirement, forex trading would likely still have a low barrier to entry and offer ease of transactions with many readily available international currency pairs.
Less Experienced Traders Will Benefit The Most From The Increase In Minimum Margin Requirements
As Rayner explained, a higher minimum margin will curb the “gambling” effect from less experienced traders. This is because a higher minimum margin requirement limits the exposure and increases the margin of safetyon each trade.
Traders may no longer see the benefit of risking their capital for a lower exposure (and potential return) in the forex markets. This means they will not simply go in trying to swing for the fences, only to end up striking out in their first few trades.
Instead, they may exercise greater prudence in their trading decisions. Those with less experience but great interest in trading can lean on leading global trading platforms such as IG for a wide range of educational and trading resources to learn to trade or brush up your skills. IG has also recently launched a limited risk product called Knock-Outs, a type of derivatives that investors and traders manage their own margins and choose their maximum risk for each trade.
Apart from leading trading platforms, traders can also turn to the educational materials from reputable trading educators such as Rayner.
While this may lead to some short-term pain for brokers, in the longer-term, brokers who are able to help retail traders in their journey to gain more knowledge and improved trading outcomes will also benefit from cornering market share, having a large pool of successful traders, and growing revenue.
As you gain more knowledge and understand the need to deploy your capital in the forex markets more carefully, you can start your journey with a demo account, with $200,000 in virtual funds. You can learn how to go beyond trading FX with this free eBook about trading published by Bloomberg here.
Once you become more familiar and confident of your trading strategies, you can then open a live account. In celebration of IG’s 45th anniversary, you can receive $288 and up to 45,000 KrisFlyer miles when you open an account with IG from now till 31 October 2019.