What is the NFA Compliance Rule 2-43b
The National Futures Association (NFA) Compliance Rule 2-43b as implemented by the U.S. forex (FX) industry's self-regulatory organization judges trading by companies regulated to trade in the U.S. It prohibits hedging by requiring the offset of multiple positions held in the same currency pair be on a first-in, first-out (FIFO) basis. It also bans price adjustments to executed customer orders, except to resolve a complaint, in the customer's favor. Also, the Rule limits changes to certain straight-through processing transactions. These changes must be reviewed, approved and documented by the NFA.
BREAKING DOWN NFA Compliance Rule 2-43b
The National Futures Association (NFA) implemented Compliance Rule 2-43b in 2009. Like other NFA regulations, it applies to all brokers and traders who fall under the reach of NFA jurisdiction. The NFA is a self-regulating organization, and mandatory membership is a critical element in making that structure work and allows the organization to enforce its rules and policies. Its membership requirement applies to virtually all registered forex (FX) professionals working in roles which include 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 Rule 2-43b. Under the amendment, price adjustment prohibition does not apply when a forex dealer member adjusts all orders in customers’ favor to rectify situations which are beyond the customer’s control. An example would include incidents where there are issues with third-party vendors.
It is possible to avoid the Rule 2-43b changes altogether by moving one's forex account to a firm in another country where forex trading rules are different.
Software Requirements for Compliance Rule 2-43b
Traders refer to Rule 2-43b as the FIFO rule. This first-in, first-out (FIFO) policy means that traders must close the earliest trades first in situations where several open trades-in-play involve the same currency pairs and are of the same position size.
The rule's supporters say it increases transparency for customers and brings forex trading practices in line with those of the equities and futures markets. However, one downside is that it involves some initial adjustments on a practical level for the affected firms. The adoption of this rule forced many forex firms to change their trading platforms because older software allowed users to choose which orders they wanted to close out. By empowering customers this ability, the older software did not comply with the FIFO rule. Under the new rules, it is still possible to place stop and limit orders, but they must now be input into the system differently.