Major new NFA (National Futures Association) ruling cranks up on 1th August 2009
It’s been out for a while now, but some folks might have missed this critical bit of news, so what is it and how will it affect your Forex Trading?
Firstly, you will only need to be concerned if you use a US regulated Forex Dealer, if your Dealer is off shore regulated, there is no need to lose any sleep. That said, a number of US regulated Forex Dealers have overseas operations and will more than likely offer you the chance to transfer your account off-shore to overcome this new regulatory umbrella.
So what is the new ruling? To see the whole notice and other related document links, go here:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273
‘Effective Date of NFA Requirements Regarding Forex Orders
NFA has received notice that the Commodity Futures Trading Commission has approved new NFA Compliance Rule 2-43 regarding Forex orders. The prohibition on carrying offsetting transactions will be effective for any positions established after May 15, 2009. The requirements regarding price adjustments will become effective as to all customer orders executed after June 12, 2009.
Offsetting Transactions
New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.” A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be re-established as a hedge.
Price Adjustments
For orders executed after June 12, 2009, Compliance Rule 2-43(a) will prohibit an FDM from adjusting executed customer orders, with two exceptions. The first exception is where the adjustment is done to settle a customer complaint in favor of the customer. The second exception is where an FDM exclusively operates a “straight-through processing” model and the liquidity provider with which it entered into the automatic offsetting position changes the price of an executed order with the FDM.
Pursuant to the new rule, an FDM that adjusts an executed customer order based on an adjustment by a liquidity provider must provide notice to the affected customer within fifteen minutes of the customer order being executed. The notice must state that the FDM intends to cancel or adjust the order and must include documentation of the price adjustment from the liquidity provider. The FDM must either cancel or adjust all customer orders executed during the same time period and in the same currency pair or option regardless of whether they were buy or sell orders. All cancellations or adjustments of executed customer orders must be reviewed and approved by a listed principal of the FDM who is also an associated person. Such review must be in writing and include the documentation from the liquidity provider, and the written review and documentation must be provided to NFA at forex@nfa.futures.org. Finally, any FDM that may elect to cancel or adjust executed customer orders based upon liquidity provider price changes must provide customers with written notice of that fact prior to the time they first engage in Forex transactions.’
Brokers using MT4 platforms are going to have problems as Metatrader does not function in a way that complies with the new ‘First In First Out’ (FIFO) regulations, so if you are using Metatrader as your platform and have EAs attached, your could be in trouble and need to discuss your trading with your Broker in case you have to make alternative arrangements.
So far the comments from the major Broking houses seems to vary depending on their regulatory body, if they are not an NFA member – no issue. Certainly the implementation of the ‘No-Hedging’ rule, which came into effect on 15th May, does not appear to have suffered from the devastating impact predicted by the ‘Doom and Gloom’ merchants in a multitude of blogs and articles.
On the other hand, some Brokers have used the aura of alarm as a tool to promote their offshore operations.
All said and done, it’s a thorn in the system, but the Forex market is too big and dynamic to allow this to have a long term impact. Yes there will be changes, but there are still plenty of Broking houses that are well regulated and support MT4, so talk to your Broker before making rash and un-necessary decisions.
