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Proposed NFA Capital Requirement
- Thread starter forexsavior
- Start date
Is there more to the Hedging Rule than meets the Eye?
Lots of news to cover with I Trade FX being fined, Crown Forex in a knock down drag out fight with clueless Swiss regulators and the next cap requirement set to kick in. More on these topics in the days to comeâ¦
But Iâve been doing a lot of reading about this hedging rule on the bulletin boards and it appears this rule could be far more consequential than originally thought.
First of all letâs look at the language in the NFA rule itself:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273
âFirst in, First outâ is not a concept that comes into play all that often in forex trading. Traders can hold multiple positions in the same currency pair and close any of those positions at any time in any order they like. Is NFA now saying that traders can no longer do this? Is the NFA rule not only intended to ban hedging, but to completely make over the manner in which traders can open and close their positions? If so thatâs pretty big news. I checked in with a couple brokers and they are tight lipped at the moment as they are still waiting for guidance from the NFA itself.
The deadline to convert to a no-hedging platform is June 12. Developingâ¦
Lots of news to cover with I Trade FX being fined, Crown Forex in a knock down drag out fight with clueless Swiss regulators and the next cap requirement set to kick in. More on these topics in the days to comeâ¦
But Iâve been doing a lot of reading about this hedging rule on the bulletin boards and it appears this rule could be far more consequential than originally thought.
First of all letâs look at the language in the NFA rule itself:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273
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."
âFirst in, First outâ is not a concept that comes into play all that often in forex trading. Traders can hold multiple positions in the same currency pair and close any of those positions at any time in any order they like. Is NFA now saying that traders can no longer do this? Is the NFA rule not only intended to ban hedging, but to completely make over the manner in which traders can open and close their positions? If so thatâs pretty big news. I checked in with a couple brokers and they are tight lipped at the moment as they are still waiting for guidance from the NFA itself.
The deadline to convert to a no-hedging platform is June 12. Developingâ¦
Quote from forexsavior:
âFirst in, First outâ is not a concept that comes into play all that often in forex trading.
I've traded with a couple of UK marketmakers (FSA regulated) and it's always been FIFO, all you see is an average price as opposed to individual positions. Something else I've noticed that is different is UK MM's all seem to Mark to Market at rollover.
It will be interesting to see how MM's handle losing the option to reverse trades without having to jump through hoops. It's been a long time coming but it's definitely a welcome change!
'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."'
It does sound ambiguous, and it worries me because although I dont hedge, I can't imagine I have to close all my positions on FIFO basis. Not much flexibility will be left.
I digged out a propsal submitted by NFA to CFTC regarding the change and it explained well about the motivation behind it.
Please take a look.
http://www.nfa.futures.org/news/PDF/CFTC/CR2_43_ForexPriceAdj_112408.pdf
I think the new rule was not intended to dictate how traders should close existing positions in any particular order, and I hope I'm right.
It does sound ambiguous, and it worries me because although I dont hedge, I can't imagine I have to close all my positions on FIFO basis. Not much flexibility will be left.
I digged out a propsal submitted by NFA to CFTC regarding the change and it explained well about the motivation behind it.
Please take a look.
http://www.nfa.futures.org/news/PDF/CFTC/CR2_43_ForexPriceAdj_112408.pdf
I think the new rule was not intended to dictate how traders should close existing positions in any particular order, and I hope I'm right.
So Long Stop & Limit Orders?
The new hedging rule, which is set to kick in on May 15, (the June 12 date is when grandfathered orders must be closed as well), is even more complicated than first thought.
First, Back Bay FX, an introducing broker to several of the big forex dealers, is confirming that FIFO will be the new order of the day:
http://www.forexfactory.com/showpost.php?p=2705617&postcount=5
Francesc at FX Street received the same information this morning from an executive at another fx dealer:
http://blogs.fxstreet.com/francesc/2009/04/30/nfa-not-allowing-stop-and-limit-orders/
This is bound to rock the U.S. retail industry and send customers packing in droves. How can the NFA ban this critical risk management tool? Trading without a stop is like driving in a demolition derby without a seat belt. Traders should follow this news very closely and if it turns out to be true start researching brokers that have offices in the U.K.
The new hedging rule, which is set to kick in on May 15, (the June 12 date is when grandfathered orders must be closed as well), is even more complicated than first thought.
First, Back Bay FX, an introducing broker to several of the big forex dealers, is confirming that FIFO will be the new order of the day:
http://www.forexfactory.com/showpost.php?p=2705617&postcount=5
Hi All,
As part of our due diligence on the NFA's "anti-hedging" rule from April 13 (NFA rule 2.43(b)), we have been informed of a follow up or clarification from the NFA. We have not been able to get the NFA to confirm or deny, but we have heard from multiple independent sources.
The NFA has informed the clearing firms that they will need to use First In-First Out (FIFO) accounting for retail traders. This has an important effect on all traders, but specifically MetaTrader4 users!!
FIFO accounting means that if a trader has a position in a currency pair that was formed by the combination of two orders, when the trader goes to close out a portion of that position, the first order in will have to be the first order closed. HUH? Here is an example of the new ruling:
Trader bought 100,000 EUR/USD this morning (call it the morning trade), and bought another 100,000 this afternoon (call it the afternoon trade). So the total position is 200,000 EUR/USD. When the trader chooses to close part of his position by selling 100,000 EUR/USD......the trader must close the morning trade. He/She can not close the afternoon trade before the morning trade. Sooooooo.....
This ruling will significantly affect the use of Stop Loss and Limit Orders on open positions. Think of it....in the above example, you would not be able to put a Take Profit order on your afternoon trade until/unless you had closed the morning trade; the closing order of the open trades must be FIFO! Without some complicated changes being made to the coding of the retail FX platforms, the clearing firms will have to eliminate the use of Stops and Limits.
This clarification (once confirmed) will effect almost all trading styles, but specifically effect the following strategies:
- Martingale
- Grid Trading
- One Cancels Other (OCO) orders
Please note that the above is in addition to the main part of rule 2.43(b) which eliminates hedging for retail traders.
Francesc at FX Street received the same information this morning from an executive at another fx dealer:
http://blogs.fxstreet.com/francesc/2009/04/30/nfa-not-allowing-stop-and-limit-orders/
An important executive of the Retail Forex industry just informed me that the NFA will not be allowing stop and limit orders on open positions either, as this conflicts with their FIFO - first-in, first-out - new policy. This goes into effect may 17th.
This is bound to rock the U.S. retail industry and send customers packing in droves. How can the NFA ban this critical risk management tool? Trading without a stop is like driving in a demolition derby without a seat belt. Traders should follow this news very closely and if it turns out to be true start researching brokers that have offices in the U.K.
Can't live in Forex without stop orders. But what is more critical is leverage. I hope they don't puny it to something laughable (such as 10:1)
i talk to broker about s/l and t/p on open positions, here's what they say.
Client Services 70: Hello, my name is Tyler. How can I help?
new: is it true the NFA will not be allowing stop and limit orders on open positions
Client Services 70: the NFA is just implementing no hedging starting May 15th -- so if you have a buy position open on a pair, you won't be able to enter a sell position on the same pair - you'll get a message like "no hedging allowed"
new: so we will be allowed to put s/l and t/p on open positions
Client Services 70: yes
new: ok thanks
Client Services 70: Hello, my name is Tyler. How can I help?
new: is it true the NFA will not be allowing stop and limit orders on open positions
Client Services 70: the NFA is just implementing no hedging starting May 15th -- so if you have a buy position open on a pair, you won't be able to enter a sell position on the same pair - you'll get a message like "no hedging allowed"
new: so we will be allowed to put s/l and t/p on open positions
Client Services 70: yes
new: ok thanks
Quote from forexsavior:
So Long Stop & Limit Orders?
Hang on, they're not suggesting stops and limts aren't allowed, look at it logically. (Why, apart from some gridding strategies, would anyone want to close a specific part of a trade anyway, in this instance it's swings and roundabouts whether the P/L is realized or not)
Although stops and limits may no longer be allowed on each trade individually, part/all of a position can still have a stop and limit, in effect it's just a pending order to Buy/Sell x amount at a preset price (or better). In theory the broker wouldn't know what the trade was for, it could be a new position, a stop loss, a take profit, and I guess that's what the NFA are trying to achieve with this idea. This would actually be better as orders would be used in the correct way instead of being linked to a particular part of a cummulative trade with a big label on saying 'Stop' or 'Limit', that's like waving a flag saying come and get me (or miss me by 1/10th of a pip!)
It's a while since I've traded FX at IB but isn't that the way they've always done it?
forexsavior, I didn't have you down as a sensationalist or scaremongerer!
Quote from cabletrader:
Hang on, they're not suggesting stops and limts aren't allowed, look at it logically. (Why, apart from some gridding strategies, would anyone want to close a specific part of a trade anyway, in this instance it's swings and roundabouts whether the P/L is realized or not)
Although stops and limits may no longer be allowed on each trade individually, part/all of a position can still have a stop and limit, in effect it's just a pending order to Buy/Sell x amount at a preset price (or better). In theory the broker wouldn't know what the trade was for, it could be a new position, a stop loss, a take profit, and I guess that's what the NFA are trying to achieve with this idea. This would actually be better as orders would be used in the correct way instead of being linked to a particular part of a cummulative trade with a big label on saying 'Stop' or 'Limit', that's like waving a flag saying come and get me (or miss me by 1/10th of a pip!)
It's a while since I've traded FX at IB but isn't that the way they've always done it?
forexsavior, I didn't have you down as a sensationalist or scaremongerer!
You are correct in your analysis cable guy. The problem is that most brokers don't consolidate individual orders for one currency pair. They are all ticket based. And NFA now appears to be saying that you can't put stops on individual tickets. This means brokers will have to completely redo their software and systems traders who work off the ticket system are in a huge bind. These are huge changes. Traders need to have a backup plan in case.
Quote from forexsavior:
You are correct in your analysis cable guy. The problem is that most brokers don't consolidate individual orders for one currency pair. They are all ticket based. And NFA now appears to be saying that you can't put stops on individual tickets. This means brokers will have to completely redo their software and systems traders who work off the ticket system are in a huge bind. These are huge changes. Traders need to have a backup plan in case.
My account managers, at different firms, all called me today, and told me they're sending everyone packing to their U.K variants...Yes it is true...no stop or limit orders... Everything will have to be either a market order or another entry order at what you're so called "stop" or "limit" is... I know FXCM is actually sending all their clients an email to give them the option to switch to the U.K. branch in one click. My account manager there sent me the paperwork to transfer my IB there, upon his suggestion. I'm certain it's because their affraid of business slowing while everyone would have to grow accustom to a new implemetation of their trading systems... I was on-boarding my FIX engine just now and it's going to be a real pain in the ass to fix things, just to trade in the states... Makes me wonder if Forex trading in the U.S. will die out soon.