2017 starting off with NFA implementing new Forex dealer transparency rule

Following my 2016 regulatory summary, the National Futures Association looks to add another protective measure for retail Forex traders.

What’s going on?

The NFA Compliance Rule 2-36 approved back on the 17th of November will come in effect March, 2017. Brokers will be obligated to provide clients with more detailed transaction execution data.

Brokers will be required to display 15 transactions of the same FX pair before and after the client’s transaction. There is also a time limitation of 15 minutes before and after the transaction.

Brokers will have 30 minutes to the customer will the full transaction data including the trade side, quantity of currency, currency pair, and execution price and any mark-ups. This data must also be displayed on the website and trading portals in a visible location. Account statements must also be sent to clients displaying the information accordingly.

Why this is important?

This implementation improves the confidence in which brokers act in the trader’s best interest. An example of how this rule could work is validating slippages. If you recall back in 2011, FXCM was fined by both the FCA and NFA for asymmetrical slippage practice where the broker retained positive slippages while passing on negative slippages to the client.

The Financial Conduct Authority (FCA) fined FXCM £4m and forced them to compensate UK clients with £6m in profits withheld. In the United States, the National Futures Association (NFA) levied a $2m monetary sanction on the same slippage practices.

Rule 2-36 makes transparent of how well a broker is processing its clients’ orders. Consistent negative slippages can be a huge red flag. If tiny volumes are causing erratic price movements, this may signal poor liquidity and execution practices as well.

The flaw?

One perceived flaw in this rule is how retail traders perceive “good” and “bad” brokers. Brokers now have the opportunity of promoting smaller price mark-ups than its competitors. This may not necessarily be a good thing as it could introduce unsuspecting costs the retail trader is not aware of.

Similarly, this would continue to place a negative image on market makers as opposed to ECN brokers that most likely do not even pass smaller orders to the actual market. Not to say one is better than the other, but my last post indicated that retail traders do fall to buzzwords such as “prime”.

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