Francesc Riverola,
Hi everyone
As you know, we are requesting top U.S Forex executives to give us their view about how new NFA requirements are changing - for good? - the US & Worldwide Retail Forex Industry.
After publishing the view of Gary Tilkin, President & CEO at GFT, today I want to welcome here one of the brightest person I’ve ever had the chance to know Drew Niv, CEO at FXCM.
Once again, thanks Drew for your collaboration
Francesc
Questionnaire
1. The new NFA rule eliminates the ability of traders to hedge open trades; there has been a lot of discussion about how retail traders may respond to the new rule. How much of your current business do you feel may be lost to off-shore retail brokers?
At FXCM we are lucky enough to have multiple regulated entities outside the United States. We have had some customers request to move from the US entity to the one in the UK or Australia. Or customers have a choice of where to open an account. US, UK, Dubai, Australia, Canada, Hong Kong, France, Germany, or Japan. The large Majority of clients still open accounts in the US entity so we have not seen a mass migration of users overseas.
2. Do you think properly educated clients regarding hedging could reduce losses to over-seas brokers?
I think clients primarily understand that if the regulator restricts something it is doing it for their own good on average, this keeps the clients motivated to stay in the United States.
3. Do you feel the FIFO rule could negatively affect other strategies or multiple strategies executed in the same account? What else would you caution your traders to be aware of with regards to the new rule?
As FIFO is new to most FX brokers including FXCM, it will definitely have an impact on many customer strategies, especially the automated ones. Like in all things clients will eventually adjust and thankfully regulators extended the deadline to July 31st to enable FXCM to more smoothly transition its clients to FIFO. it gives us a greater time to educate clients on the changes they need to start making.
4. The NFA stated hedging provides no direct economic benefit and may result in higher transactional impact; have you seen any evidence to contradict that? Have you seen any evidence that indicates removing the ability to hedge will actually reduce a traders risk profile over time?
I view hedging like I do option trading (writing options). its a very important tool in many traders tool box, that enables many people to carry out the trading style they intend on doing. Plenty of very sophisticated traders used the hedging function to replicate option like trading strategies with SPOT FX which is cheaper and more liquid. if you think of hedging as a directional strategy its silly and makes no sense, it you think about is as an anti volatility play in the same way as some option writing strategies seek to play low volatility then it makes lots of sense. Obviously just like options trading its an often misused tool that many inexperienced traders misapply and that may lead to losses. Regulators are simply playing the role of “big brother” protecting people from themselves, is that right for everybody, no its not, is it right for the majority maybe it is, maybe it isn’t. in 2008 FX volatility reached levels that have not been seen in decades, obviously use of hedging generally tended to have bad results as people bet against volatility and got it wrong. if trading conditions of 2005 and 2006 come back and market volatility flattens hedging functionality will be in very high demand as its success ratios will rise exponentially.
5. In their report the NFA noted that in a hedge, interest roll-over should wash but typically doesn’t; how do you account for the discrepancy?
Technically the discrepancy exists because there is a spread in the swap market just like there is one in every other financial instrument so when you both buy and sell you cross a spread. I think that is a red herring issue. with interest rates so low, revenues from overnight rolls are off by 90% from last year and play a nearly inconsequential part in FXCM’s revenues so certainly from a client point of view these costs are mostly inconsequential.
6. A simple work around to the current rule appears to be dual accounts at the same or even different brokers. Is there a downside to this approach traders should be aware of?
This is mostly unpopular from many clients perspectives because of the separate margin requirements and collateral that has to be split between two accounts.
7. Will your firm promote the dual-account strategy to keep clients and what can you do to help streamline the process for your current clients who implement hedging?
Clients that really want the hedging strategy at FXCM move to one of our foreign entities with out FSA regulated firm in the UK, being the top choice. we disclaim to most people that the NFA had good reasons to ban hedging as they felt most people misapplied it, and you should only continue using the strategy if you are confident in your ability to carry it out successfully. I don’t think most clients will miss hedging for now with the markets still volatile. This issue will pop up again for regulators as volatility decreases further, as I think you will see demand increase and many customers will complain to the regulators that not having it is interfering with their ability to make money. I don’t think this is the last we will hear of this issue.
