By Gertrude Chavez-Dreyfuss and Dion Rabouin
NEW YORK (Reuters) - Retail currency brokers are considering operating in the United States after a nearly seven-year absence, if President Donald Trump is able to carry through on his pledge to deregulate financial markets.
The prospect of lighter regulations has revived interest in the country among foreign exchange brokers such as UFX and Alpari, which cater to small and individual investors. It has also brightened the outlook for an industry that has struggled and lost market share to places with looser regulations in Asia and Europe.
"Key players in the vast retail FX market are gearing up for a hopeful re-entry," said Paul Sirani, chief market analyst, at online currency broker Xtrade in Limassol Cyprus. He declined to identify those retail FX players.
Sirani's observation is shared by many market participants such as Javier Paz, senior analyst at research firm Aite Group, and Meir Velenski, a long-time FX practitioner who set up his own financial consulting group.
A return to the United States could mean physically setting up an office in the country as a U.S. entity, or in some cases maintaining an overseas headquarters while soliciting business in the United States.
At the heart of the forex brokers' optimism is the possible repeal of the Dodd-Frank Act.
Signed into law in 2010 in response to the global financial crisis, the Dodd-Frank financial reform legislation aims to overhaul business practices on Wall Street and protect consumers. But its passage caused the demise of many U.S. retail FX businesses.
In 2006, there were 40 companies operating in the United States offering FX trading to retail customers. After Dodd-Frank, that number has shrunk to three -- GAIN Capital Holdings, Inc. <GCAP.O>; Canada-based Oanda, and TD Ameritrade <AMTD.O>.
Under Dodd-Frank rules, enforced by the CFTC, firms offering retail forex trading in the United States must maintain minimum capital of at least $20 million, plus 5 percent of the amount by which liabilities to retail forex customers exceed $10 million.
By comparison, the minimum capital requirement in Cyprus, where many FX brokers have moved, range from 40,000 euros ($42,680) to one million euros ($1.067 million). Cyprus, with many FX brokers under its jurisdiction, has become popular with market participants because its European Union membership allows companies based in that country to provide FX services to other EU members.
Dennis de Jong, managing director of retail forex trading firm UFX in Limassol, Cyprus, said he would "absolutely" be in favor of a move to the United States if the minimum capital requirement is reduced.
"Obviously the regulators need to be very strict in terms of how you protect the client...but in general lowering the (capital) threshold would be good," he added.
The Trump administration has not said anything specific about FX regulation under Dodd-Frank. But House Financial Services Committee Chairman Jeb Hensarling said in a CNBC interview this week that much of the law could be undone through a number of ways.
"The $20-million bond required of U.S. retail FX business pretty much precludes anyone from founding a start-up in this business," said Joe Trevisani, chief market strategist, at WorldWide Markets, an online multi-asset trading platform in Woodcliff, New Jersey.
WorldWide Markets, regulated by the Financial Conduct Authority in Britain, does not take U.S. clients.
Trevisani was a partner at currency broker FX Solutions, which exited the U.S. market in 2013, a Dodd-Frank casualty.
Dodd-Frank also prohibited FX overseas firms from soliciting U.S. business.
Russian currency broker Alpari, which left the United States in 2011 due to onerous regulations, is keen to see what happens with the new Trump administration.
"We are in standby position. Everybody is looking at the U.S. right now for business and we're curious to see how things change," said Roberto d'Ambrosio, chief executive officer at Alpari Research and Analysis Limited in London.
D'Ambrosio said Alpari's decision to return to the United States would hinge partly on easing regulations such as rules on forex reporting.
"The reporting requirement is really, really heavy," said the Alpari official. If the costs of reporting could be eased somewhat, then this would help, he added.
SHRINKING U.S. MARKET U.S. retail FX trading volume has shrunk since Dodd-Frank, data showed.
In 2016, the U.S. share of the $374 billion daily global retail currency trading volume has been cut in half to just 3 percent, or $11 billion, according to estimates from research firm Aite Group. Prior to Dodd-Frank or in 2009, the U.S. share was 6 percent, or $17 billion, of what was then a global daily retail market of $276 billion.
Some market participants have pointed to the CFTC, Dodd-Frank's regulator, as the culprit. Dodd-Frank gave the CFTC regulatory powers to oversee the U.S. retail FX sector.
"The CFTC could have created a safe environment in U.S. retail FX by working more closely with the industry," said Aite's Paz in Salt Lake City, Utah.