The FOREX Brokers Solution to the Anti-Hedging Regulation of the NFA

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I thought that the Hedging technique of the Forex traders will come to an end when the National Futures Association of the US released a new regulatory rule banning the use of hedging through the introduction of “First In, First Out (FIFO) basis”.

According to the rule;

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.

Hedging is when you have two Sell and Buy positions open at the same time. This is usually done to avoid excessive losses in the course of the trading. For example, you open a Buy position of 100,000 of GBP/USD but subsequently open a Sell position of the same amount and pair of FOREX when you see that the trade is moving against your open buy position. 

In the “First In, First Out” basis of the new rule, you have to close first the position that you opened first.

However, one of my brokers have just informed me of their ingenious solution, though I rather called this a “clever solution” – if the regulator don’t what you to have two opposite positions open at the same time in your account, then  why wouldn’t you do that in two separates accounts? That is, create two separate accounts - one account will be for buying position while the other one is for selling position.  With this, you can still do your hedging technique although using two separate accounts.

Technically, this solution of the broker looks legal but also looks like very clever.



Category Filed in: FOREX Trading
Local date: March, 2010

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