NEW YORK, Feb 09 (Reuters) – Rules proposed by the regulator of U.S. futures markets to fight fraud in foreign currency trades are too restrictive for retail trading firms and could dramatically cut into the growing business, dealers said.

The Commodity Futures Trading Commission was given clearer authority last month, in farm legislation passed by Congress in 2008, to go after foreign currency (forex) trading scams being pulled off in the unregulated over-the-counter market.

Thousands of small retail investors have flocked to the forex markets after the credit boom, lured by the potential of better returns than offered by stocks and bonds. But many retail investors are unaware of a growing number of scams in the industry and of the high risk of trading currencies on margin — a key feature in forex trading.

“It’s a prudential measure to avoid a particular section of the client base from over-leveraging itself,” said Steven Pearson, senior director of currency strategy at Bank of America Merrill Lynch.

Pearson added that the regulation is “somewhat consistent” with similar measures taken in Japan.

But to retail forex dealers, some of the proposed rulings are too restrictive and may jeopardize growth in the industry. As a result, they said, they may have to scale back operations in the United States, sending millions of dollars in trades and hundreds of jobs abroad.

“It’s a real issue here — we are talking of losses in jobs, tax revenues and competitiveness,” said Joseph Trevisani, chief market analyst at FX Solutions, a forex dealer, in Saddle River, New Jersey.