Open letter to the NFA asking for clarifications regarding the latest regulatory requirements (will appreciate your comment):

I’m going to send this tomorrow to Edward Dasso, Managing Director, Compliance and Lauren Brinati, Senior Manager, Compliance.

Will appreciate anyone’s feed back or comments.

Thanks,
Michael

Dear Edward,

My name is Michael Greenberg and I work for Forex software provider ParagonEX (www.paragonex.com).

Having read the new regulation requirements and the attached explanation we, as well as several brokers, software developers and traders, encountered a few points which require further clarification in order for us to adequately program our software and trading modules.

Specifically we are concerned with the Offsetting Transactions wording: “New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.” A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size.”

First of all, we are concerned whether the first-in, first-out basis relates only to the hedging activity (simple buy/sell orders) or does it relate to other types of orders, for instance Trailing Stop Loss/Buy Orders or Limit Orders? These orders typically serve as a protection for the traders against volatile market moves and therefore should remain as an option for client to use them.

Secondly, we are concerned whether when “simple” buy/sell orders are executed together with more “sophisticated” Trailing or Limit orders, whether the offset of these orders has to happen on the first-in, first-out basis as well?
For instance, if a trader bought 1 lot of EURUSD with simple stop loss order and then bought another lot with trailing stop order – when the market triggers the trailing stop loss will the client need to offset the “simple” order first and then the more sophisticated one or can he offset the second one first because it’s a different type of order and has nothing to do with hedging?

Thirdly, could please clarify what does “allow customers to direct the FDM offset same-size transactions” mean in the following sentence: “NFA believes that the potential for misuse outweighs any perceived benefits from allowing customers to carry long and short positions in the same currency in the same account. Therefore, Compliance Rule 2-43(b) bans the practice and requires FDMs to offset positions on a first-in, first-out basis (FIFO). It does, however, allow customers to direct the FDM to offset same-size transactions.”
Does that allow customers to close their open positions or does that allow individual offsetting of positions of different sizes regardless of the date the position was taken? Does that mean that if a customer opens a 1 lot position and then an additional 1.1 lot position in the same currency pair and in the same direction (long/short) they are able to close the 1.1 lot first?

We look forward to your reply.

Best Regards,
Michael