What is NFA Compliance Rule 2-43b?
NFA Compliance Rule 2-43b, implemented in 2009 by the National Futures Association (NFA), states that "forex dealer members (FDM)" and retail foreign exchange dealers (RFED) cannot allow clients to hedge and must offset positions on a first-in-first-out (FIFO) basis.
- NFA Compliance Rule 2-43b, implemented in 2009 by the National Futures Association (NFA), states that "forex dealer members (FDM)" and retail foreign exchange dealers (RFED) cannot allow clients to hedge and must offset positions on a first-in-first-out (FIFO) basis.
- NFA Compliance Rule 2-43b bans price adjustments to executed customer orders, except to resolve a complaint that is in the customer's favor.
- NFA Compliance Rule 2-43b supporters say it increases transparency for customers and brings forex trading practices in line with those of the equities and futures markets.
Understanding 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, the NFA, is commonly known as the "FIFO rule" and, essentially, eliminates hedging. Hedging, as understood by the retail forex trading crowd, is where a trader will have both a long and a short position in a single currency pair at the same time, which is, in and of itself, offsetting.
Rule 2-43b prohibits the dealers from allowing this practice by requiring that multiple positions held in the same currency pair be offset on a first-in, first-out (FIFO) basis. Additionally, it also bans price adjustments to executed customer orders, except to resolve a complaint that is in the customer's favor. Also, NFA Compliance Rule 2-43b limits changes to certain straight-through processing transactions. These changes must be reviewed, approved, and documented by the NFA.
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 jurisdiction of the NFA. The NFA is a self-regulating organization, and mandatory membership is a critical element in making that structure work, thus allowing 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:
- Futures Commission Merchants (FCM)
- Retail Foreign Exchange Dealers (RFED)
- Introducing Brokers (IB)
- Swap Dealers (SD)
- Major Swap Participants (MSP)
- Commodity Pool Operators (CPO)
- Commodity Trading Advisors (CTA) who direct client accounts or provide tailored investment advice.
In Dec. 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 that are beyond the customer’s control. An example would include incidents where there are issues with third-party vendors.
The passage of NFA Compliance Rule 2-43b saw a mass exodus of trading capital to offshore forex dealers that still allowed "hedging." While this might be a viewed as a boon by the forex customers that utilize this as part of their trading strategies, they run the risk of being more susceptible to fraudulent practices at the brokerage level, given that these firms are not held to the same regulatory requirements as their U.S.-based counterparts.
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, 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.