What is 'NFA Compliance Rule 2-43b'

NFA Compliance Rule 2-43b is a rule implemented by the U.S. forex industry's self-regulatory organization, the National Futures Association (NFA), regarding forex trading by U.S. regulated forex companies. It prohibits hedging by requiring multiple positions held in the same currency pair to be offset on a first-in, first-out basis. It also prohibits price adjustments to executed customer orders except to resolve a complaint in the customer's favor or in the case of certain straight-through processing transactions, and these changes must be reviewed, approved and documented by the NFA.

BREAKING DOWN 'NFA Compliance Rule 2-43b'

NFA Compliance Rule 2-43b was implemented in 2009. Like other NFA regulations, it would apply to all brokers and traders who fall under the reach of NFA jurisdiction. The NFA is self-regulating organization, and mandatory membership is a critical element to making that structure work and allowing the organization to enforce its rules and policies. Its required membership applies to virtually all registered professionals working in this role, which includes all registered FCMs, RFEDs, IBs, SDs, MSPs, CPOs and those registered CTAs who direct client accounts or provide tailored investment advice.

In December 2017, the NFA approved an amendment to this rule. That amendment clarified that the price adjustment prohibition does not apply when a forex dealer member adjusts all orders in customers’ favor to rectify situations that were beyond the customer’s control, such as when there are issues with third-party vendors.

Pros and cons of NFA Compliance Rule 2-43b

Traders refer to Rule 2-43b as the FIFO rule. This first-in, first-out policy is just what it sounds like. That means that traders must close the earliest trades first in situations where there are several open trades in play that involve the same currency pair and are of the same position size.  

The rule's supporters say it increases transparency for customers and brings forex trading practices more in line with those of the equities and futures markets. One downside was that it involved some initial adjustments on a practical level. The adoption of this rule forced many forex firms to change their trading platforms because the old software allowed users to choose which orders they want to close out, thus not complying with the FIFO rule. Under the new rules, it is still possible to place stop and limit orders, but they must now be entered into the system differently. It was also possible to avoid the changes altogether by moving one's forex account to a firm in another country where forex trading rules are different.

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