NFA’s new regulation demands – A blow against traders, brokers or both? Part 1 (Anti-Hedging)
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On April 13th, 2009 the NFA has received notice that the Commodity Futures Trading Commission has approved new NFA Compliance Rule 2-43 (regarding forex orders http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273. 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.
Beginning of a nightmare both for Traders and Brokers?
Hedging is no longer possible for Forex traders because the NFA is concerned that customers employing this strategy do not understand the lack of economic benefit or the financial costs involved.
What the NFA fails to understand is that these positions are often a result of Expert Advisors (EA) scalping techniques or sometimes results of various sophisticated trading strategies involving different orders and stop losses/take profits.
Sure some traders often use these techniques without taking the expense into account but most use it rather as a strategy.
The result?
The end of EA’s as we know them (which is not that bad considering 99% of them blow out losing all their clients’ money anyway), a hefty compliance burden upon brokers who probably don’t really know how to handle this and don’t have the time to ‘re-program’ their software and furthermore it’s a blow against sophisticated traders and their strategies.
Some traders might eventually shift their funds to non NFA regulated brokers or completely non-regulated brokers, so what kind of result is that?
On the other hand, NFA has few good points regarding malpractice techniques used by several FDMs like: creating a potential for abuse by the broker, money laundering by using the carrying charge to take intentional losses. For a managed account, the practice could be used to disguise losses and inflate the manager’s performance.
To sum this up: it looks like another good intention by NFA that is incorrectly implemented. Instead of finding ways to preserve the simple traders’ interests and keeping sophisticated traders and software developers happy, the NFA just ran them all over in one pass.
Michael
9 Comments on this post
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Tom Herod said:
I read Thomas Sexton’s letter to CFTC on December 9, 2008 explaining NFA’s rationale for the Compliance Rule 2-43(b): Offsetting Transactions. In it he stated, “Ten of 17 FDMs surveyed offer the strategy to their customers, although for most it is a very small part of their business. Of these ten, six actively promote it on their web sites, while another one merely indicates it is available.
Several of the FDMs told NFA that they had not offered the “hedging” strategy until their customers requested it. Although many of the FDMs admit that customers receive no financial benefit by carrying opposite positions, some FDMs believe that if they do not offer the strategy they will lose business to domestic and foreign firms that do.”
If the FDMs polled by NFA thought that hedging was important to either their self interests or their customers, I think they would have taken a more vigorous position opposing NFA’s proposed changes. I really think the horse has left the barn and that the faint public outcry I am hearing is striving after wind. If CFTC’s policies are going to be changed, the objections need to come from the FDMs, whose opinions carry more weight than the retail trading public.
In light of the current economic climate there is mounting pressure on CFTC to tighten its regulatory reins. I think we can expect more of the same domestically and (if you’re paying attention) also abroad.
May 2nd, 2009 at 10:59 am -
Forexbody said:
It is not hard to go back to the good old says of trading feedom, If your broker already offered you to move your account to their UK branch then great, take the offer..if not find another broker who can do it for you.
July 13th, 2009 at 3:21 pm -
Forexbody said:
I believe that one day the NFA will wake up to find all US account have migratd to the UK or offshore, but do they realy care?
July 13th, 2009 at 3:23 pm
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