NFA’s Proposed Forex Industry Changes: Yay or Nay?

It has been almost half a year since the SNB shocker rocked the forex market, yet U.S. financial regulators are still busy coming up with ways to ensure that another black swan event doesn’t wind up wreaking havoc in the industry again.

What did the SNB do and how much damage did they cause?

market crashFor the newbies just tuning in, here’s a quick recap of that infamous SNB announcement early this year. One fateful day in January, SNB Chairman Thomas Jordan was feeling bored because there was no central bank event lined up so he decided to grab the mic and announce that they would be dropping the franc peg. Now this currency peg was the only thing holding up the EUR/CHF floor so removing it sparked a free-fall for most franc pairs.

This free-fall was one for the books, not just because it lasted by nearly a couple thousand pips, but also since it led to so many stops getting triggered on forex traders’ accounts overnight. Some losses were so huge, especially on accounts that were over-leveraged, that they were enough to yield negative balances, which clients refused to pay. With that, most forex brokers had no choice but to shoulder these losses, forcing some to declare bankruptcy and close shop.

Yikes. So what are the regulators gonna do about it?

Following this event, financial industry watchdogs acknowledged the need to impose stricter controls. The National Futures Association (NFA), which is one of the regulatory agencies tasked with overseeing forex industry activity, recently published a set of proposed rule changes for its forex dealer members (FDMs).

Under the current rules, the NFA requires FDMs to hold an adjusted net capital of $20 million plus 5% of all liabilities owed to U.S. customers that exceed $10 million. The NFA proposed adding an extra 10% charge for amounts owed to their subsidiaries outside the United States.

In addition, the NFA pointed out that the risks associated with transactions by the forex brokers’ offshore branches could also have a direct impact on the their U.S. retail customers, which means that the forex broker should be able to collect security deposits from their foreign subsidiaries as well.

Lastly, the NFA wants to require FDMs to implement risk management procedures similar to those used by Futures Commission Merchants and Swap Dealers. This includes conducting regular stress tests and publishing details of the company’s market exposure on their corporate website.

Sounds reasonable enough. When will these be implemented?

These proposals have yet to be reviewed and possibly revised before the Commodity Futures Trading Commission (CFTC), another U.S. financial watchdog, gives its stamp of approval. Industry experts say that this is just a formality, which means that these rule changes are pretty much done and done.

What’s your take on these proposed rule changes by the NFA? Do you think these would be enough to protect U.S. forex customers?

  • ForExchange

    “One fateful day in January, SNB Chairman Thomas Jordan was feeling bored because there was no central bank event lined up so he decided to grab the mic and announce that they would be dropping the franc peg.” – sentence of the day! 🙂

    • Bahaha! That’s how I imagined his day was going! “Hmm, why don’t we wreak some havoc in the forex market today…”