U.S. Forex Regulator (NFA) New Rule Proposals Finally Make Sense

Forex Regulations

Forex Regulations

Forex Brokers and Industry watchers have been waiting to see what new proposals would arrive after the SNB debacle. The NFA or National Futures Association has finally presented proposed changes, and for the most part, they do make sense, and they do address many of the problems from SNB.

In the past, the NFA as a Forex Regulator dealt with Forex in a curious way. The moves were more to limit the number of brokers operating and to make Retail Forex unattractive in the US. From the NFA’s perspective, they were looking at member firms that were using a Futures License without conducting any Futures business. For firms that were operating out of the US, there was a minimal incentive to offer clients futures trading as most of the revenue was from Retail Forex. Brokers providing Forex was cheaper and had less risk than providing Futures as well. This put the Futures Regulators and Retail Forex Brokers at odds. After raising net capital requirements to $20 million and taking away hedging, there were a handful of brokers left in the US.

Move forward a few years, and SNB happens. It nearly takes down one of the largest US brokers and interesting enough one that was hedging off risk. The counterparty risk is where FXCM and other brokers ran into trouble. The good thing about the new proposal is that the issue of counter-party risk is addressed. Under the new plan, there would be supervision of an affiliate company that is taking a risk. These affiliates would also be subject to NFA rules and guidelines. The affiliates that are mentioned are most likely non-bank liquidity providers that are more aggressive in their pricing models but currently not subject to the same regulations as banks and brokers.

Some of the proposals are long overdue. NFA would impose an alternative minimum net capital requirement that would be based on the notional value of open positions. The $20 million net cap didn’t help FXCM much when they were said to be hundreds of millions in the negative. As a firm’s risk exposure grows so too should its capital requirements. There is also a proposal to require a security deposit from Retail Forex Clients. This will be an exciting proposal to watch to see how this would be implemented.

While these proposals will probably not eliminate risks to Retail Forex Brokers, they do significantly reduce them. It will be interesting to see how both brokers and clients respond to these long overdue changes.