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Margins on forex hedges

There’s a story on Forex Magnates about how FXCM has decided to require margin for forex “hedge” positions.

That’s right. Even though these positions have no directional risk whatsoever (in as much as they represent complete offsets), the broker is going to require that margin be posted. Specifically, they will require the margin that would be needed if only one leg of the trade was open. So basically, the margin requirement will be the same as if you there was no “hedge” at all.

Why is FXCM doing this? Here’s what their representative had to say:

Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side).

So basically, what is happening is that some traders are building up “hedges” which are much too large, then getting burned by margin calls when they unwind them (the Forex Magnates author suggest they are closing out the profitable legs and leaving the losing legs open, not realizing the losing position’s margin requirement). This whole thing, to my mind, is just another example of how traders can get themselves totally deluded by doing these “hedges”, and why I have long argued against the practice (the No More “Hedging” for Forex Traders article is the single most commented on post in this blog).

The “inadvertently” part of the above statement, to my mind, really speaks volumes to the whole hedging discussion. It implies either these traders are clueless about trade sizes, or they are horribly off-base in terms of risk management and/or margin requirements. Hedging is thus masking serious trading deficiencies.

FXCM is actually doing traders a favor by putting these margin requirements in place, helping the foolish avoid blowing themselves up. It would be better if they just scrapped “hedge” accounting (and really “hedging” is just about a different way of accounting for gains and losses).

By John

Author of The Essentials of Trading

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