The National Futures Association (NFA) has a new ruling which goes into effect on May 15, 2009. It addresses the practice of “hedging” in forex trading, which is the act of holding both long and short positions in the same currency pair at the same time. Here is what the NFA had decided:
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.” A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge.
From the NFA’s April 13 press release.
Basically, what this means if you attempt to go long and short the same pair at the same time you will be end up with no position – your broker will offset them against each other and you’ll have no trade left open. For those who trade with brokers like Oanda, this is no change at all as that’s always been the case. Traders with other brokers who have allowed “hedging” will see that change shortly.
If you’re not aware, NFA is the industry organization to which forex brokers in the U.S. belong now that the CFTC has been given regulatory authority over forex trading (FDM stands for Forex Dealer Merchant). It does things like setting the minimum capital requirements for the brokers. The bottom line is that between the CFTC and NFA forex brokers are no longer unregulated in the U.S.
I have long made my feelings about this so-called “hedging” known (see How do you hedge in the forex market?). It probably goes without saying that I am quite happy to see this rule put in place because I have always considered the allowing of this “hedging” by brokers to be nothing more than a way to bilk their customers out of extra pips with zero benefit to the traders.
A forex (and futures) broker contact of mine says he made the following comment about the new rule:
Regarding hedging it is my understanding now that day traders can still hedge but cannot hold overnight yet if one opens a new position after the beginning of a new session that just happens to hedge an open position from the previous session…
Even so I don’t really care, what I do care about is the NFA wanting to convert spot to futures with their FIFO rule for getting out of orders – I have a huge problem with that.
I don’t know if the overnight thing is true or not.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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- New NFA Rule Impacts More Than Just Forex Hedging