FYI - New NFA rule - no more hedging as of May 15th, 2009

[PipCop]

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.

[jsp]

Thanks, but no thanks, NFA for "looking out for us." If I understand this correctly, it means we better not trade two EAs in the same account unless they trade different pairs?

For example, suppose I have both FAPTurbo and Xtreme EURGBP running in the same account. FAP shorts the EURGBP for 1.0 lot. A little later, Xtreme tries to go long 0.5 lots. Instead of being two separate trades, 0.5 lots of my FAP short is suddenly covered...right? That's what happens now with many non-MT brokers like Oanda.

[reinerh]

Originally Posted by jsp

Thanks, but no thanks, NFA for "looking out for us." If I understand this correctly, it means we better not trade two EAs in the same account unless they trade different pairs?

For example, suppose I have both FAPTurbo and Xtreme EURGBP running in the same account. FAP shorts the EURGBP for 1.0 lot. A little later, Xtreme tries to go long 0.5 lots. Instead of being two separate trades, 0.5 lots of my FAP short is suddenly covered...right? That's what happens now with many non-MT brokers like Oanda.

neh, you cant go long and short in one pair =hedging.

mainly martingale eas are effected.

[PipCop]

That's the dumbest thing I have ever heard of!

[adubasu]

Sorry I already posted this in another thread, but am so infuriated that I need to vent in another.

The NFA is not looking out for the investor they are looking out for the brokers that our part of their association. Read this little bit about the NFA it makes sense:

http://nondealingdesk.com/showthread.php?t=2529

We shouldn't need "big brother"(NFA) telling us how to trade, we are all big kids and know the risk when we enter into the forex jungle, just like gambling. The only reason big brother would need to say something is if we were beating the broker (the ones who write their pay checks). The point is hedging works when used the right way, if they are so worried why don't they protect us from the martingale systems, or using fibonacci?!? HMMM.. bc/ hedging works and the brokers don't like it.

Here is a quote from the compliance rule
“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…”

This is the hugest B.S. that I have read on paper!! Yes, you do get charged more on the carry then you get paid but thats common sense. If taking an opposite position is going to make or protect you money then you’ll take it and that WILLLL EXCEED the charges. AND you don’t always pay swap unless you carry the trade to the next day, SO this concern is not valid. If I am willing to pay what like about a pip worth of swap to protect my profit then so be it thats part of the strategy!!

[Ken Long]

Please correct me if I'm wrong, but this only seems to affect a trade based platfrom such as MetaTrader. Most manual trading platforms are position based and a counter trade would automaticaly be applied to the main position. This is an interesting feature of MetaTrader, which appears to be designed to benefit the brokers and promote single trade based transactions.

Under normal circumstances every Forex transaction should be applied to a central position, therebye building or reducing the overall exposure. This ruling seems targeted towards MetaTraders proliferation in the marketplace, and its trade based platform. It should in no way affect us as traders or our ability to open counter trades. We just have to acknowlege that every trade opened on an individual platform affects the position we are holding on that pair. Intentional hedges being no different. They mearly subtract from, or add to, a central position.

This is not necessarily a bad ruling. It simply states that the MetaTrader platform does not conform to NFA standards. It decieves its users, especialy novice users, into holding larger positons than they realize and holding useless positons. With the intention of driving up broker revenues through unnecessary and duplicate transactions.

For example:
If I have a position in a currency pair and wish to sell a partial positon. On MetaTrader I cant do that. I would have to open a new position, counter to the original, thereby creating an entire round trip charge.

Hedging, as I see it, is a redundant procedure in the Forex market. Unlike the stock or derivatives markets where you have a legitamate financial reason to want to hold an open position and simultaneously hedge it, in the Forex market it is a redundant or duplicate procedure, only creating round trip revenue for the brokers. Any Forex hedge position could be applied directly to the core position, with no difference in the outcome and an overall lower transaction cost .

It is not US this ruling is fighting against, it is the MetaTrader platform, and with good reason.

[Ken Long]

One more note on hedging:

Its imposible to hedge a trade, using the initial position or entity as the hedge . Its just not there, one cancels out the other. If you have a long term forex trade and wish to make short term trades, you can, but it all works off of the same position, if you wish to hedge your long trade with short trades you can, but it is all part of the same positon, using the same underlying equity. And it is not a hedge , it is a trade.

A hedge requires using a different vehicle to hedge an existing trade, such as using gold to hedge the dollar, or using put options to hedge a large or long term stock position. Its imposible to truely hedge a position using the same equity, this is a misnomer, created by robot developers using MT4. All you are really doing is adding to or reducing your position, and creating trade revenue for the brokers.

[jsp]

Originally Posted by Ken Long

Please correct me if I'm wrong, but this only seems to affect a trade based platfrom such as MetaTrader. Most manual trading platforms are position based and a counter trade would automaticaly be applied to the main position. This is an interesting feature of MetaTrader, which appears to be designed to benefit the brokers and promote single trade based transactions.

Under normal circumstances every Forex transaction should be applied to a central position, therebye building or reducing the overall exposure. This ruling seems targeted towards MetaTraders proliferation in the marketplace, and its trade based platform. It should in no way affect us as traders or our ability to open counter trades. We just have to acknowlege that every trade opened on an individual platform affects the position we are holding on that pair. Intentional hedges being no different. They mearly subtract from, or add to, a central position.

This is not necessarily a bad ruling. It simply states that the MetaTrader platform does not conform to NFA standards. It decieves its users, especialy novice users, into holding larger positons than they realize and holding useless positons. With the intention of driving up broker revenues through unnecessary and duplicate transactions.

For example:
If I have a position in a currency pair and wish to sell a partial positon. On MetaTrader I cant do that. I would have to open a new position, counter to the original, thereby creating an entire round trip charge.

Hedging, as I see it, is a redundant procedure in the Forex market. Unlike the stock or derivatives markets where you have a legitamate financial reason to want to hold an open position and simultaneously hedge it, in the Forex market it is a redundant or duplicate procedure, only creating round trip revenue for the brokers. Any Forex hedge position could be applied directly to the core position, with no difference in the outcome and an overall lower transaction cost .

It is not US this ruling is fighting against, it is the MetaTrader platform, and with good reason.

I completely disagree. See my other post. What happens if you have 2 or 3 good systems that trade the EURUSD? Guess what...you won't be able to trade them on the same account any more. Long and short trades from different systems offset each other--or some just won't execute at all. (I'm not clear on that part yet).

This removes one of the biggest edges we have in FX: strategic diversification. An example would be trading a scalping EA along with a long-term trend -followingsystem on the same pair. This is just as advantegeous as diversifying assets in a long-term portfolio (stocks, bonds, gold, etc.) and we're about to lose it.

[Ken Long]

Good point , real good, I wasnt thinking about running multiple EA's. This would be a real problem, and is probably the reason this platform is trade based. As well I've run plenty of EA's that open multiple positions in different directions at the same time. This is all a bit different from my concept of hedging, but problematic just the same.

Thanks, I just wasnt looking at things that way.

[bob1234]

Apparently this NFA ruling only applies to US NFA regulated MT4
platforms. Why not just boycott and go offshore. There are plenty of MT4 platforms in other countries. Gomarkets AUS , FxPro Cyprus, Alpari UK, come to mind.
I agree, we should be able to make up our own minds whether to hedge or not. Hedging is a valid alternative in some instances, and we should have the option of using this tool, not be dictated to by NFA, covering for brokers.