We had the pleasure of interviewing National Futures Association Director of Communications and Education, Larry Dyekman about the future of the forex market.  He has helped to clear any lingering questions about recent NFA regulatory changes as well as discussed the NFA’s role in retail foreign exchange.

How has the NFAs role in foreign exchange trading evolved over the last 10 years?

It has been only since Congress passed the Commodity Futures Modernization Act of 2000 that NFA has been actively involved in the regulation of retail off-exchange foreign currency trading. That legislation required any firm acting as a counterparty to retail forex trading to be an “otherwise regulated entity” (i.e., a bank, insurance company, broker-dealer or futures commission merchant). Many forex firms chose to register with the CFTC as FCMs and become Members of NFA. It was at that time that we developed a new category of membership – Forex Dealer Members. Since then, we have developed a series of rules and interpretive notices that govern many areas of a Forex Dealer Member’s business activities.

Can you explain new regulatory changes,particularly those surrounding stops and limits.

I think the best explanation for our recent rules regarding certain trading strategies (e.g., so-called “hedging”) is the rule submission letter we sent to the CFTC. Use this link to read it: http://www.nfa.futures.org/news/PDF/CFTC/CR2_43_ForexPriceAdj_112408.pdf

How have recent NFA changes impacted retail forex trading?

We receive data on a weekly basis from our Forex Dealer Members regarding the amount of customer funds they currently hold. Since our latest rules went into effect on August 1, we have seen a minimal (4%) decline in customer funds at our 17 Forex Dealer Members.

Are there any regulatory changes on the immediate or not so immediate horizon?

There are no major regulatory changes from NFA in the near future. However, it’s important to remember that the CFTC Reauthorization Bill of 2008 gave the CFTC anti-fraud authority over forex firms. That means that all forex fund managers, pool operators, introducing brokers and their associated persons will be required to register with the CFTC and, most likely, become Members of NFA. Because the CFTC has not published its forex rules yet, it’s difficult to say what the impact will be on the forex industry.

How do you suggest a perspective retail forex trader research potential firms to trade with?

Since most U.S. forex firms are registered with the CFTC and Members of NFA, one of the first things a prospective forex trader should do is visit NFA’s website (www.nfa.futures.org) and conduct a background check. By accessing NFA’s Background Affiliation Status Information Center (BASIC), you can find out how long the firm has been registered, who the principals of the firm are, whether the firm has been the subject of any NFA disciplinary actions and other pertinent information.

How important is net excel capital in regards to a potential FCM?

In 2007, NFA President Dan Roth testified at a hearing before the Subcommittee on General Farm Commodities and Risk Management Committee on Agriculture regarding the need for a higher minimum capital requirement for forex dealers. He stated, “The second trait that marks the problem firms in retail forex is that most, though not all, have been thinly capitalized. Congress long ago recognized that acting as a dealer involves greater risk than acting as an agent in futures trading, the way a traditional FCM does. That is why Congress in 1978 imposed a $5 million net worth requirement for firms granting dealer options and why the CFTC created a $2.5 million capital requirement for leverage transaction merchants in 1984. Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. NFA has raised the capital requirements for forex dealers several times but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business.” Subsequently, the CFTC Reauthorization Act of 2008 imposed a $20 million capital requirement on retail forex counterparties that are Retail Foreign Exchange Dealers or that are FCM-only firms primarily or substantially engaged in on-exchange futures activities. Following the requirements outlined in the legislation, NFA amended its Financial Requirements to increase Forex Dealer Member capital requirements to $20 million, on a gradual basis, by May 16, 2009.

Would you recommend spot fx through a registered FCM or fx options through an exchange like the CME to a new trader?

Pages 10-11 of NFA’s brochure, “Trading in the Retail Off-Exchange Foreign Currency Market – What Investors Need to Know,” explains the differences in trading off-exchange forex and on-exchange foreign currency futures and options contracts.

Are there any resources you can suggest to someone who is interested in learning more about retail foreign exchange trading?

NFA does not make specific recommendations regarding forex educational materials. However, we strongly encourage potential forex traders to get as much information and training as possible before actually opening an account.

What does it taking to become a registered FCM and an NFA approved member?

Our website has an extensive section related to the registration process. Click here for a summary of FCM registration issues.

What oversight is there for registered members?

Our Forex Dealer Members are subject to a set of rules that cover every aspect of their business, including sales practices, promotional material and anti-money laundering programs. They are subject to periodic audits and examinations. As mentioned earlier, our Forex Dealer Members are also required to submit weekly financial reports.

Is there anything else you would like to add?

I have nothing more to add other than reiterating that prospective forex traders should do as much research as they can into the firm they are considering opening an account with. They should also learn as much as they can about how the forex markets work and the risks involved in trading forex.

Larry Dyekman is the Director of Communications and Education for National Futures Association. He is responsible for all external and internal NFA communications as well as educational materials for NFA Members and the investing public. He has developed regulatory guides for NFA Members, educational brochures for futures investors, video programs describing NFA’s corporate mission and multimedia programs to help train NFA arbitrators. He is a graduate of Illinois State University and a member of the International Association of Business Communicators.

This entry was posted on Monday, October 19th, 2009 at 10:36 am and is filed under Currency Trading, Discussion, Feature Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.