Leverage plays a crucial role in trading, allowing investors to control larger positions with smaller capital outlays. In the United States, strict regulatory frameworks determine how much leverage traders can use across different asset classes. This article explores the maximum leverage limits imposed in the USA, explains how leverage works, and outlines the reasons for these restrictions. It also highlights the implications for traders, including potential benefits, risks, and the importance of compliance when trading with US-regulated brokers.
Regulatory Framework
Regulators create trading leverage restrictions and enforce them. Therefore, the maximum leverage ratio in the US depends on the regulator regulating the asset. For example, Commodity Futures Trading Commission (CFTC) leverage rules apply to markets under the CFTC jurisdictions, including Forex trading. Forex brokers in the US must also ensure National Futures Association (NFA) compliance and US-resident traders should never trade with a broker that fails to comply. Crypto leverage in the US falls under the NFA rules and regulations, but crypto exchanges can provide less maximum leverage. The SEC oversees equity trading, where the strictest leverage rules apply.
Leverage Limits by Asset Class
While the maximum leverage ratio in the US is 1:50, it only applies to Forex. Please note that not all assets within an asset group qualify for the maximum leverage limit. For example, major Forex pairs receive 1:50 leverage, but minor Forex pairs may have a 1:20 limit, while exotic pairs may have a 1:10 limit. The liquidity impacts the maximum leverage.
Here is a list of maximum leverage ratios in the US for the most-traded assets and their respective regulators enforcing leverage limits:
Asset | Maximum Leverage | Regulator |
Forex | 1:50 | CFTC/NFA |
Stocks | 1:4 (day margin), 1:2 (overnight margin) | SEC |
Cryptocurrencies | 1:5 | NFA |
Futures (non-Forex) | 1:30 | CME |
Please note:
- Forex trading in the US is primarily available via Forex futures and Forex indices
How Leverage Works
Leverage provides traders with a capital injection, decreasing the margin requirement to open and hold positions. For example, 1:50 leverage means that for each $1, traders can control a $50 position. Therefore, traders can achieve greater diversification with smaller portfolios or increase their earnings potential by borrowing capital from their broker.
Please note that leverage also magnifies downside moves and requires traders to adjust their risk management accordingly. Swap rates on leveraged overnight positions apply, increasing final trading fees per trade.
Here is an example of taking a 1.0 lot and a 0.10 lot EUR/USD position without leverage:
- The EUR/USD trades at 1.1250
- Without leverage, a trader must pay $112,500 to open a 1.0 lot position and $11,250 for a 0.10 lot position
Here is an example of taking a 1.0 lot and a 0.10 lot EUR/USD position with 1:50 leverage in the US:
- The EUR/USD trades at 1.1250
- With leverage, a trader must pay $2,250 to open a 1.0 lot position and $225 for a 0.10 lot position
Here is an example of taking a 1.0 lot and a 0.10 lot EUR/USD position with 1:500 leverage with a well-regulated offshore Forex broker:
- The EUR/USD trades at 1.1250
- With leverage, a trader must pay $225 to open a 1.0 lot position and $22.50 for a 0.10 lot position
Therefore:
- A trader can purchase more with the same amount or the same amount with a smaller portfolio
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Why Leverage Limits Exist
Leverage limits exist because regulators see it as a tool which can protect retail traders, especially inexperienced traders with poor risk management, from catastrophic losses.
Regulators understand that the major risk tool – hard stop losses – will sometimes not work due to slippage. Slippage is when the price is moving so fast that a broker cannot or will not execute a stop loss order at the price at which it has been given. If the slippage is small, the impact will not be very great. However, if there is a very big news event which is completely unexpected, the slippage can be big enough to completely wipe out a trader’s account.
A good example of this is the Swiss Franc “crash” of 2014. At the time, the Swiss Franc was pegged to the Euro by the central bank of Switzerland, the Swiss National Bank (SNB). When the rate deviated too far from the peg, traders would bet that the Bank would act to restore the price to a narrow zone around the peg value. This went on for a while, until suddenly, the SNB announced it was abandoning the peg. The value of the Swiss Franc began to soar uncontrollably, and within a minute, almost every broker took Swiss Franc pairs or crosses offline. Every retail trader with a position in the Swiss Franc was effectively unable to execute an exit. Even the SNB went offline for about an hour. When the SNB came back online and started to provide Swiss Franc liquidity, the Swiss Franc had increased in value by most currencies by about 20% - an enormous fluctuation in Forex terms. When retail Forex brokers brought the Swiss Franc back online, they executed stop loss orders at a vast slippage – usually at something like 15% or even 20% beyond the stop loss price which had been given. The effect of this was that every trader with a position short of the Swiss Franc who was leveraged at more than 5 to 1 lost their entire account, with many even been held technically liable for further funds. Some brokers even pursued these traders in court, some for hundreds of thousands of Dollars.
This event not only encouraged more regulators to tighten maximum leverage limits, it also brought about a big increase in regulators mandating negative balance protection, which means a broker can never hold a client liable for more money than they deposited.
Another reason leverage limits exist is because regulators or brokers cannot force traders to use good risk management practices, so the limits should in theory prevent traders from losing (or gaining) too much too quickly.
Broker Compliance
US-regulated brokers must comply with all rules and regulations or face fines and a potential loss of their license. These include the maximum leverage ratio in the US, which is not limited by brokers but set by their respective regulators. Traders should avoid any broker catering to US residents offering greater leverage than the maximum allowed in the US.
Maximum Leverage in the US – Pros and Cons
Before using the maximum available leverage in the US, traders should consider the pros and cons. I also urge them to comprehend the importance of risk management, trade size management, and how leverage impacts them.
The Pros of the Maximum Leverage Limit in the US
- Decreased margin requirements
- Increased capital efficiency
- Greater portfolio flexibility
The Cons of the Maximum Leverage Limit in the US
- Restrictive maximum leverage
- Increased trading fees for leveraged overnight positions
- High financing fees at most US brokers
Bottom Line
Regulators set the maximum leverage ratio in the US, which is the highest for Forex traders. The US maximum available leverage is uncompetitive when compared to that offered in offshore jurisdictions.
