NFA toughens US Forex regulations

28 August,, Lagos – The US is well known as a tightly regulated region in terms of financial markets trading, with special emphasis on Forex dealer members. To further strengthen its stance in the protection of retail forex customers via the US Forex regulations, the U.S. Commodity Futures Trading Commission (Commission) today approved rule amendments and a new interpretive notice filed by the National Futures Association (NFA).

The NFA is a self-regulatory organization for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency transactions, as well as swap transactions. Under section 17 of the Commodity Exchange Act (Act), it is a registered futures association. The initial proposal for rule amendments and interpretive notice was submitted to the CFTC for review and approval pursuant to section 17(j) of the Act. These new rules are intended to heighten the protection rendered to retail customers of NFA Forex Dealer Members (FDMs) via the following means:

  • imposing additional capital requirements on FDMs;
  • requiring FDMs to collect security deposits for off-exchange foreign currency transactions from eligible contract participant counterparties in addition to retail counterparties;
  • requiring FDMs to adopt and implement rigorous risk management programs;
  • requiring FDMs to provide additional market disclosures and firm-specific information on their websites to permit current and potential counterparties to better assess the risks of engaging in off-exchange foreign currency transactions and with conducting business with a particular FDM.

The proposal made emphasis on risk management models to be applied. Some of which include:

  • Stress Testing: As part of the Risk Management Program, the FDM must conduct stress tests under extreme but plausible conditions of all positions in the proprietary account and in each counterparty account (both retail customers and ECPs) at least on a semi-monthly basis.
  • Affiliate Risk: The Risk Management Program must also consider all risks posed by the FDM’s affiliates, including the risks affiliates pose when the FDM functions as the primary risk manager and/or liquidity provider for affiliates, the FDM’s other business lines and any other trading activity engaged in by the FDM.
  • Risk tolerance limits
  • Supervision of the Risk Management Program
  • Review and Testing
  • Periodic Risk Exposure Reports

Retail FX traders in the US continue to enjoy some of the strongest protection from regulators against unfair rules and practices of Forex dealer members. It is no surprise then that US traders have been found to be more profitable than their European counterparts.

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