BarroMetrics Views: NFA Rule 2-43 (b): “first-in, first-out” (FIFO) II

The story so far:

  1. The NFA wanted to abolish the practice of  hedging.
  2. It did so using the ‘First-in, first-out’ rule.But this had an intended consequence for  brokers using a position-based system of accounting.

Faced with  their clients being unable to place stops, limit orders etc, the affected brokers where possible swung their clients to their offices outside the USA. The response to this maneuver was in some quarters particularly vehement.

But before I get into that, let me acknowledge that the NFA Regulations have been used as scare tactics to sell anything from software to by-pass the regulations to moving accounts overseas. Traders should be aware of the facts and not be stampeded into hasty decisions.

Now let’s turn to those responses.

Firstly, there is the suggestion by asking a client to move an account ex-USA, we are ignoring the fact that the NFA is there to protect traders’ interests against ’shonky’ brokers.

But in respect of this regulation, the intent was fine but the execution was not. By equating FX positions with Futures, the NFA asked a whole section of the FX broking community to change their entire accounting structure or to find an alternative to the regulations. If I were an affected broker, I’d know what route I would choose.

Secondly there is the implied suggestion that by shifting an account ex-USA, we are moving accounts from a safe, well regulated environment to Wild West neighbourhood.

But this is just not so. In my view the US FX regulatory regime is merely adequate, at best. There are a number of alternative locations which offer far better protection - to name but two:

  • In Singapore, the Monetary Authority of Singapore is far more stringent and does a far better job protecting FX traders than the NFA. Take a look at the Refco FX affair. In Singapore not a single FX client lost his funds. In the USA, due to Refco’s failure to keep segregated accounts, (I understand) US clients received $0.20 - $0.40 in the dollar.
  • In Switzerland, FX brokers have to obtain a banking license. As a result, all accounts up to $SF100K are guaranteed by the Swiss Government against broker malfeasance.

The effect of the NFA regulations will probably  drive some clients overseas. At some point, US brokers using a net-positions will have to decide whether to change their accounting process or abandon the US.

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