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Heads up - you may not be able to same-currency hedge any more. IBFX is sending this email to clients:

Dear Customers:

Interbank FX, along with all FCM's, has received information from the NFA that we wanted to pass along to our customers. All registered FCM's have received a new Compliance Rule 2-43 regarding forex trading. On May 15, 2009, forex customers will no longer be allowed open "hedged" positions in their accounts. Please see an excerpt from the new NFA rule below. If you are currently using Hedging as a trading strategy, we would encourage you to use the Interbank FX Demo accounts over the next month to help modify your trading strategy. Also, for those of you who utilize hedging strategy with your "Expert Advisors", we would encourage you modify your code and test your advisor on the Interbank FX Demo servers as well. In order to assure a smooth transition for our customers to the new NFA Compliance Rule, Interbank FX has set May 8, 2009 as the last date that customers will be able to Hedge open positions.

Interbank FX is committed to providing our customers with superb tools, real time news and analytics to help you to be a successful trader. Please do not hesitate to contact one of our customer service professionals if you have any questions.

Best regards,

Todd B. Crosland
Chairman and President

The text of the ruling is as follows:

Forex Dealer Members may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis. At the customer’s request, an FDM may offset same-size transactions even if there are older transactions of a different size but must offset the transaction against the oldest transaction of that size.

Taken from http://www.nfa.futures.org/news/news...ArticleID=2273

The reasons are:

Compliance Rule 2-43(b): Offsetting Transactions

The other trading practice NFA believes must be addressed involves a
strategy that FDMs refer to as “hedging,” where customers take long and short positions
in the same currency pair in the same account. NFA is concerned that customers
employing this strategy do not understand either the lack of economic benefit or the
financial costs involved.

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 that 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.

NFA has two major concerns about this strategy. First, it essentially
eliminates any opportunity to profit on the transaction. Second, it increases the
customer’s financial costs in several ways. One way it increases costs is by doubling
the expense of entering and exiting the transactions. In the on-exchange markets, a
customer who carries opposite positions will normally pay twice the commissions.
Similarly, 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.
Additionally, the customer pays carrying charges that always exceed the funds it
receives. In a normal transaction, a customer receives “interest” on the long position
and pays “interest” on the short position. Since the two transactions are mirror images,
you would expect the receipts and payments to zero out. In practice, however, the
amount a customer receives on a long position is always less than the amount a
customer pays on a short position. Since these transfers occur daily when the positions
roll over, the loss increases continually over time.


The costs described above are integral to the strategy, but there is an
additional cost that could occur in certain circumstances. FDMs typically determine the
equity balance in the account by calculating the liquidation price of the individual
positions using the bid rate for long positions and the offer rate for short positions. If the customer holds contemporaneous positions long enough, the carrying charges will bring the equity below the required security deposit. Furthermore, if the bid-ask spread on the currency pair widens, as may happen when volatility increases or the FDM
anticipates major market events, the customer’s account equity may fall even faster. If
the account falls below its security deposit requirement while the spread is wider than
normal, the account could be liquidated at unfavorable prices even though the customer
has no currency exposure risk.

The strategy also creates significant potential for abuse. An FDM could
promote the strategy to unwitting customers with an eye to collecting the additional
spread and carrying costs. A knowledgeable customer could use it to launder money 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 by, for
example, directing the FDM to offset a winning position and then entering into a new
transaction in the same direction while letting the losing position run.

NFA solicited comments on banning the practice, and two commenters
agreed with the proposal, stating that the practice serves no economic purpose. A third
supported the ban without discussing the reasons behind it. One commenter that
operates an institutional forex platform as well as a retail one indicated that institutional
investors never use this strategy. Most commenters stated that the practice results
from customer demand and generally felt that NFA should not dictate what strategies
customers choose to use. Some were also concerned that customers will simply take
their business to foreign counterparties who can accommodate them.

A number of commenters argued that the practice provides a trading
strategy benefit. Specifically, they argued that it allows customers to pursue both a
long-term and a short-term trading strategy in the same currency. Some commenters
also stated that the practice provides an economic benefit because it allows customers
to maintain a directional position by lowering their margin requirements when the
position goes against them. The proposed rule would not prohibit customers from
pursuing long and short-term strategies in separately margined accounts, and it is not
clear that the benefits of maintaining a directional position justify the costs.

Several commenters also recognize the financial costs of maintaining two
positions but noted that these costs could be alleviated if FDMs treat them as a single
position for calculating interest charges and allow customers to offset positions against
each other when exiting both at the same time. In fact, at least one commenter seems
to suggest that NFA should require this treatment. None of these FDMs have chosen to
do so voluntarily, however. Furthermore, this approach would be equivalent to dictating
how or how much Members can be compensated.


NFA believes that the potential for misuse outweighs any perceived
benefits from allowing customers to carry long and short positions in the same currency
in the same account. Therefore, Compliance Rule 2-43(b) bans the practice and
requires FDMs to offset positions on a first-in, first-out basis (FIFO). It does, however,
allow customers to direct the FDM to offset same-size transactions.

One commenter who supported Compliance Rule 2-43(b) said that NFA
should provide sufficient lead time so that firms now offering the “hedging” strategy
could change their systems. NFA agrees with this comment and will consider systems
issues when setting an effective date.

NFA respectfully requests that the Commission review and approve
proposed Compliance Rule 2-43 regarding forex orders.

Taken from A PDF with complete details here:
http://www.nfa.futures.org/news/PDF/...Adj_112408.pdf

The only thing I notice is that it appears you cannot hedge on the same currency. You can still hedge cross-currency pairs.

Someone correct me if I am wrong, of course.