On May 15 the National Futures Association (NFA)
will implement a new rule, approved by the CFTC
in April, banning forex traders from holding opposing positions
in the same currency.
For traders using most U.S.-based forex dealers, this
means they will no longer be able to use a technique known
as “hedging,” or taking an equal but opposite position in a
currency when price moves against your initial trade,
instead of exiting the position and taking the loss. After
May 15, offsetting trades will cancel each other out on a
first-in, first-out (FIFO) basis.
In its letter to the CFTC proposing the change, the NFA
said there are two reasons it proposed the rule. “First, [carrying
offsetting positions in an account] essentially eliminates
any opportunity to profit on the transaction.”
However, the hedge is often used because it also eliminates
the opportunity for further losses. The NFA’s second reason
is holding two opposite positions increases the cost to the
customer. With this type of hedge position, a customer pays
twice the commissions because of the two separate trades.
Also, according to the NFA’s letter, “a forex customer will
pay the entire spread twice (buying at the high end of the
spread and selling at the low end) rather than paying half
on entry and half on exit.” Increased carrying charges when
a position rolls over when held overnight add to the cost as
well.
All of these costs are to the benefit of the dealer and the
detriment of the customer. Part of the NFA’s defense for the
rule is it feels dealers could promote it to unwitting customers
in an attempt to make additional profits of the
increased costs. The NFA also claims the practice could be
used to launder money by using the carrying charge to
accept intentional losses.
The NFA’s letter cited pros and cons presented to them
through comments received on the proposed ban before it
was approved.
However, as acknowledged by the NFA, forex brokers
initially began offering the option of holding two opposite
positions, and in some cases advertising its availability,
because of customer demand. Many of the dissenting voices
have said the NFA has no business dictating what strategies
a trader can use.
Some commenters acknowledged the fact that the technique
incurred greater costs, but said this could be taken
care of if dealers counted the trade as a single position when
calculating interest charges. According to the NFA’s letter,
“In fact, at least one commenter seems to suggest that NFA
should require this treatment.”
One major forex dealer said the change has much larger
implications regarding order-handling technology, and will
require the alteration of the firm’s entire trading platform.
“I don’t think they realized how long it will take dealers to
fix their platforms to comply, along with educating our
clients on the new ways of managing their risk,” said the
spokesperson.
Other issues
Aside from the change regarding offsetting positions, the
NFAhas also set stricter limitations on how and when dealers
are allowed to change order prices after they have been
executed and reported to the customer.
Changes are usually attributed to Internet errors, incorrect
data feeds, and other technical errors. However, the
NFA found that most of the errors were directly related to
systems under the dealer’s control. The NFA decided dealers
should “bear the burden” of these price changes, and are
only allowed to make changes when it is to the benefit of
the customer, or when the dealer operates a “straight
through” service (one that is completely electronic and
offers direct access to a counterparty), and the straightthrough
dealer receives bad data from the counterparty. In
this case, the dealer has 15 minutes to notify the customer of
the change in case they decide to cancel or adjust the order.
This change takes effect on June 12.
will implement a new rule, approved by the CFTC
in April, banning forex traders from holding opposing positions
in the same currency.
For traders using most U.S.-based forex dealers, this
means they will no longer be able to use a technique known
as “hedging,” or taking an equal but opposite position in a
currency when price moves against your initial trade,
instead of exiting the position and taking the loss. After
May 15, offsetting trades will cancel each other out on a
first-in, first-out (FIFO) basis.
In its letter to the CFTC proposing the change, the NFA
said there are two reasons it proposed the rule. “First, [carrying
offsetting positions in an account] essentially eliminates
any opportunity to profit on the transaction.”
However, the hedge is often used because it also eliminates
the opportunity for further losses. The NFA’s second reason
is holding two opposite positions increases the cost to the
customer. With this type of hedge position, a customer pays
twice the commissions because of the two separate trades.
Also, according to the NFA’s letter, “a forex customer will
pay the entire spread twice (buying at the high end of the
spread and selling at the low end) rather than paying half
on entry and half on exit.” Increased carrying charges when
a position rolls over when held overnight add to the cost as
well.
All of these costs are to the benefit of the dealer and the
detriment of the customer. Part of the NFA’s defense for the
rule is it feels dealers could promote it to unwitting customers
in an attempt to make additional profits of the
increased costs. The NFA also claims the practice could be
used to launder money by using the carrying charge to
accept intentional losses.
The NFA’s letter cited pros and cons presented to them
through comments received on the proposed ban before it
was approved.
However, as acknowledged by the NFA, forex brokers
initially began offering the option of holding two opposite
positions, and in some cases advertising its availability,
because of customer demand. Many of the dissenting voices
have said the NFA has no business dictating what strategies
a trader can use.
Some commenters acknowledged the fact that the technique
incurred greater costs, but said this could be taken
care of if dealers counted the trade as a single position when
calculating interest charges. According to the NFA’s letter,
“In fact, at least one commenter seems to suggest that NFA
should require this treatment.”
One major forex dealer said the change has much larger
implications regarding order-handling technology, and will
require the alteration of the firm’s entire trading platform.
“I don’t think they realized how long it will take dealers to
fix their platforms to comply, along with educating our
clients on the new ways of managing their risk,” said the
spokesperson.
Other issues
Aside from the change regarding offsetting positions, the
NFAhas also set stricter limitations on how and when dealers
are allowed to change order prices after they have been
executed and reported to the customer.
Changes are usually attributed to Internet errors, incorrect
data feeds, and other technical errors. However, the
NFA found that most of the errors were directly related to
systems under the dealer’s control. The NFA decided dealers
should “bear the burden” of these price changes, and are
only allowed to make changes when it is to the benefit of
the customer, or when the dealer operates a “straight
through” service (one that is completely electronic and
offers direct access to a counterparty), and the straightthrough
dealer receives bad data from the counterparty. In
this case, the dealer has 15 minutes to notify the customer of
the change in case they decide to cancel or adjust the order.
This change takes effect on June 12.
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