As many of you will already know, the National Futures Authority (NFA), the US reulatory body which regulates forex brokers based or operating in the US, have recently introduced new rules governing the operation of retail forex brokers. These are set out below.  For more detailed information, ygou can go to the NFA website at www.nfa.futures.org

A. Ban on Hedging

Traders are no longer allowed to hedge their positions – ie to open long and short positions on the same currency pair on the same trading account. According to the NFA, the rationale for the ban is that the economic benefit of such strategy is minimal at best since hedging effectively cancels out both transactions. In other words, only the broker was benefiting from this practice, in the form of getting 2 lots of spreads.

B. First-in First-out

Compliance Rule 2-43(b) now requires brokers to close out offsetting positions on a first-in, first-out basis (FIFO). The new rule basically bans FDMs to open opposing positions at the same time in the same account. The rule says that a trader has to close the positions that he opened first. Hence, placing an offsetting order would and should close the ones made the earliest.

C. New Leverage Restrictions

In the future, US-based retail forex brokers will only be allowed to offer a leverage of 100:1 for major currency pairs and a maximum leverage of 25:1 for exotic currency pairs.

Major pairs are pairs consisting of the following currencies: the British pound (GBP), the Swiss franc (CHF), the Canadian dollar (CAD), the Japanese yen (JPY), the Euro (EUR), the Australian dollar (AUD), the New Zealand dollar (NZD), the Swedish krona (SEK), the Norwegian krone (NOK), and the Danish krone (DKK) and of course, the US dollar (USD). All other currency pairs are considered exotic, and thus the leverage is reduced to 25:1.

In my opinion, these changes are for the best.  The retail forex industry needs to clean up its image, and a steady but firm hand of regulation will assist this process greatly.  Traders can be increasingly confident that their brokers are operating ethicly and within a strcit set of rules and principles laid down by government authorities.  For more information about forex brokers, and comprehensive forex broker reviews,  head over to our sister site, The Forex Village.