CFTC/NFA rules and regulations

I am a new trader about to start out; I’ve only been trading demos up to this point. I have frequented this forum a lot, and am learning a great deal from ICT and others!

For now, I’ve a few concerns, which I believe can be answered easily by veterans of Forex. So here they are… and I hope they don’t violate any policies of this forum; for as much as I’ve studied this site, they shouldn’t.

[B]First, its technical…sort of.[/B]
I learned in the demo that if the market moved against me, and was to hit my stop, I could potentially mitigate my losses by opening a counter position before my stop is executed and closing that position also close to that stop. This method, depending on the number of lots traded and its statistical probability of execution, could cut my losses. This, while being in the US, I was able to do on a fxcm demo mt4 account - which I now presume must be non-US. I then downloaded another firm’s (US-based) mt4 and created a demo account. There this strategy was prohibited with the words ‘Hedging is prohibited’ stated when trying to generate an order. I investigated what that meant and it turns out that I can’t simultaneously go long and short on the same currency pair. NFA - the self-regulating US agency - came up with this rule in around May 2009. CFTC backed them up and so, this is now the general rule for all US brokers registered with NFA and CFTC.

With that background that may not be news to most here, kindly indicate if my reasoning has erred. For the most part, I think I have it right.

So then…is it possible to open 2 accounts with a single US broker, and then hedge my original position in one account by countering that position in the second account. This may require thorough monitoring of the two accounts on my part, but seems like it can be achieved without much confusion. I am pretty sure that I can open two accounts at 2 brokers and do this, but would prefer to do this at one place. One more thing, should I be able to short lets say…Eur/USD and long Eur/GBP at the same time? I hope that that’s not considered hedging. :19:

[B]Second point[/B]
Once again - this time though originating at CFTC - limiting leverage to a maximum of 50:1 was implemented for all US brokers … I think somewhere around October 2010. This is not so much of a concern as I don’t think I’ll be using high leverage - after learning from veterans. However, I wouldn’t want to be strictly rendered powerless in doing so either - as is the case here. So I was thinking that why not open an account with a foreign broker. They don’t limit leverage or disallow hedging. This would solve both of my mild concerns. But then - another shocker! All foreign brokers accepting US clients must now register with CFTC/NSA and thus follow their regulations for US accounts. Otherwise, their legitimacy is hanging in mid-air. This I believe was implemented in around October 2010 as well; once again, I could be wrong here; please correct me in that case.

What concerns me greatly here as opposed to my previously stated concerns of hedging and leveraging is as follows:
So many well-known foreign brokers seem to accept US clients, as I gleaned from their websites. It doesn’t seem that they restrict leveraging or hedging for US clients - exception being Alpari US - as I learned (and probably few others). So if I still open an account with a foreign broker, I know I can trade unhindered. But I’m afraid that one day I may wake up to discover that that broker’s website is made unavailable to all US citizens. CFTC may ban that broker from doing business here, as the broker openly defied CFTC regulations. In that scenario, all my equity would be frozen, and I would have to go to great lengths to acquire it back - if at all. Does this worry others here who are trading with foreign brokers from UK, or Switzerland, or Australia, or elsewhere? I suppose you wouldn’t be worried if they follow US regulations for US-based accounts. But - as I have studied - many, if not most, don’t. So is it just an accident waiting to happen? How do US citizens here at [I]babypips[/I] with accounts at …lets say dukascopy, feel about it?

Well, that’s all for now; hope its not too much. I have more very basic questions for later though.:slight_smile:

Your description of the hedging restriction is correct.

Check with the broker in question. There are no CFTC or NFA rules against that arrangement. But, your broker may restrict or limit what you can do.

I won’t get into a debate with you on the wisdom of hedging as a way of preventing a stop-loss from being hit. But, there are other members of this Forum who have written extensively on the futility of such a strategy. You might hear from them. Or, if you’re interested, you can go looking for their opinions by using the SEARCH feature on this site.

Hedging is defined the way you described it in your first paragraph: It’s being LONG and SHORT simultaneously in the same currency pair. Hedging does not apply to positions in [B]different[/B] pairs (for example, EUR/USD and EUR/GBP) which may tend to cancel each other (depending on the degree of correlation), and therefore act as a pseudo-hedge.

However, this strategy, like pure hedging, is seen by many traders as essentially futile.

A foreign broker accepting U.S. clients must register with — and comply with the regulations of — the CFTC and the NFA, [B]if[/B] the country in which they are domiciled has an agreement with the CFTC (generally contained in a document called a [B]Memorandum of Understanding[/B]) whereby the foreign country agrees to enforce certain CFTC regulations.

Most western nations have entered into these agreements. But, enforcement seems to vary considerably, from one country to another. Switzerland has essentially been closed off to U.S. forex clients. Finland has not. Consequently, you can’t open an account with Dukascopy in Switzerland, but you can open an account with FinFX in Finland.

As for the legitimacy of a client arrangement with a broker such as FinFX, it [B]could[/B] be challenged by the CFTC at some time in the future. However, several members of this Forum who are U.S. residents trade through FinFX, without difficulty, and some of them have done so for a year, or longer. Most of them praise the service that FinFX renders to U.S. clients.

If you are serious about investigating offshore brokers who welcome U.S. clients, study this thread.

Depending on the regulatory regime in the offshore broker’s country of domicile, getting all your money back might not be such a hassle, after all. Some countries have very good customer protection laws, and those laws would protect you, just as they would protect residents of the broker’s country.

But, here’s where due diligence on your part is especially required. In addition to all the things you need to check out before actually funding a U.S. account, there are many more things which you must check carefully in the case of an offshore broker.

If there is an offshore broker that you are seriously considering, have a heart-to-heart talk with a competent representative of that broker, and ask all of your questions directly. If you don’t get complete answers which satisfy your concerns, that should raise a big, red flag in your mind.

As for Dukascopy, see above.

Clint wouldn’t touch this one, but I will. :slight_smile:

Putting on a “hedge” is EXACTLY the same as closing out the position. Having matching long and short positions showing as being open rather than being offset to show no position is nothing more than an accounting trick. It has zero impact on profits and losses (leaving carry and spread costs aside for moment).

If you’re putting on a “hedge” before your stop is hit then of course you’re losses will be smaller. It’s functionally the same as closing the position out before being stopped or moving your stop closer to your entry point.

Hi Trd1Str,

Congrats on your first post to the forums!

You could open 2 accounts with FXCM to take opposing positions in each account. This would not be considered hedging (per regulations) and is a way to get around being unable to take opposing positions within the same account.

Now back to Clint and rhodytrader to discuss the merits of hedging :smiley:


Thanks for all the great info. I agree that hedging is inherently faulty, but it may still bear positive applicability in a very few category of cases. However, that’s not really important.

Jason, I was surprised when I read somewhere that FXCM is an STP broker. The surprising part was that it had a very regular spread size characteristic of desk dealers. What do you say about that? :15:

As I said, “hedging” is only a method of accounting. As such, it cannot “bear positive applicability” in any fashion. At best it is entirely neutral in its influence on one’s P&L. At worst it means added cost in terms of spread and carry and ties up margin to no purpose.

Hi Trd1Str,

FXCM uses NDD forex execution, also known as STP. The price you see on the platform is the best bid/ask price from 10+ liquidity providers, and FXCM adds a pip mark-up to the spread which acts as our compensation. Our spreads will vary based on price competition from the liquidity providers. We also have the active trader program through which you can trade with a separate commission+reduced spread. I have a post in the FXCM section which goes into much more detail about NDD forex execution and how pricing and execution works. 301 Moved Permanently