Welcome to the first Espipionage post! Since the onset of the global financial crisis, there has been a few new regulations imposed by the National Futures Association (NFA) on US forex brokers. I decided to do a bit of Forex recon and these are the changes that you should know:
Traders are no longer allowed to open long and short positions on the same currency pair on the same account. This strategy was termed as “hedging.” According to the NFA, the economic benefit of such strategy is minimal at best since hedging effectively cancels out both transactions. This “strategy” makes it impossible to profit while letting you pay more in terms of spreads, roll-over interests, and other carrying charges.
II. First-in First-out
Compliance Rule 2-43(b) now requires Forex Dealer Members (FDMs or brokers) to close out offsetting positions on a first-in, first-out basis (FIFO). The new rule basically bans FDMs to open opposing positions at the same time in the same account. The rule says that a trader has to close the positions that he opened first. Hence, placing an offsetting order would and should close the ones made the earliest.
Come November 30 this year, the NFA will be implementing a new rule regarding leverage. According to the rule, US-based retail forex brokers are only allowed to offer a maximum leverage of 100:1 for major currency pairs and a maximum leverage of 25:1 for exotic currency pairs.
Major pairs are pairs that has any of the two following currencies: the British pound (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), the Japanese yen (JPY), the Euro (EUR), the Australian dollar (AUD), the New Zealand dollar (NZD), the Swedish krona (SEK), the Norwegian krone (NOK), and the Danish krone (DKK) and of course, the US dollar (USD). All other currency pairs are considered exotic.
Big changes as the industry continues to mature, lose it’s “wild west” image, and gets more in line with how stock and futures brokers operate. The new FIFO rules probably do not have much of an impact as many brokers already apply that process before the imposed regulation. The biggest impact will come to traders who employ “hedging” and ” high leverage” as a part of their strategy, as they will have to adjust one way or another if they use a US broker.
Current forex clients should have already been alerted to these changes, and if you are new to trading, be sure explore different brokers as it is more important than ever to find one that fits your criteria of safety, trading style, and the extra features you need.
For more information on finding the right broker for you, please visit our Forex broker guide. Good luck!