CFTC passes NFA’s ban on hedging

I am not sure how many of you will be actually affected by this but i know of many professional traders and trading systems that make use of hedging primarily as their engine behind their trading systems. All is not dead with hedging though. You would need a non-NFA regulated(probably non-US based) broker to keep you going if you require hedging actively.

Here is the article from NFA’s site;

Notice I-09-10

April 13, 2009

Effective Date of NFA Requirements Regarding Forex Orders

NFA has received notice that the Commodity Futures Trading Commission has approved new NFA Compliance Rule 2-43 regarding forex orders. The prohibition on carrying offsetting transactions will be effective for any positions established after May 15, 2009. The requirements regarding price adjustments will become effective as to all customer orders executed after June 12, 2009.

Offsetting Transactions

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.

Price Adjustments

For orders executed after June 12, 2009, Compliance Rule 2-43(a) will prohibit an FDM from adjusting executed customer orders, with two exceptions. The first exception is where the adjustment is done to settle a customer complaint in favor of the customer. The second exception is where an FDM exclusively operates a “straight-through processing” model and the liquidity provider with which it entered into the automatic offsetting position changes the price of an executed order with the FDM.

Pursuant to the new rule, an FDM that adjusts an executed customer order based on an adjustment by a liquidity provider must provide notice to the affected customer within fifteen minutes of the customer order being executed. The notice must state that the FDM intends to cancel or adjust the order and must include documentation of the price adjustment from the liquidity provider. The FDM must either cancel or adjust all customer orders executed during the same time period and in the same currency pair or option regardless of whether they were buy or sell orders. All cancellations or adjustments of executed customer orders must be reviewed and approved by a listed principal of the FDM who is also an associated person. Such review must be in writing and include the documentation from the liquidity provider, and the written review and documentation must be provided to NFA at forex@nfa.futures.org. Finally, any FDM that may elect to cancel or adjust executed customer orders based upon liquidity provider price changes must provide customers with written notice of that fact prior to the time they first engage in forex transactions.

A copy of new Compliance Rule 2-43 is attached for your convenience. NFA’s submission letter to the CFTC contains more detailed explanations of the changes, and you can access an electronic copy of the letter at:

http://www.nfa.futures.org/news/PDF/CFTC/CR2_43_ForexPriceAdj_112408.pdf

Questions concerning these changes should be directed to Edward Dasso, Managing Director, Compliance (edasso@nfa.futures.org or 312-781-1551) or Lauren Brinati, Senior Manager, Compliance (lbrinati@nfa.futures.org or 312-781-1215).

source: http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273

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