On July 3rd, GFT announced that their platform was fully compliant with all NFA regulations and, as such, customers trading with GFT would not be affected by National Futures Association (NFA) rule forcing Forex dealers to discontinue the use of stop and limit orders to protect positions.

Today we got Gain Capital - Forex.com -announcing that FIFO rule will not affect their customers so they will be able to keep using stops and limit orders when trading with Forex.com.

Let’s see who will be the next to move

Francesc

Dear Partner:

As you are probably aware, beginning on August 1, 2009, a new NFA compliance rule will go into effect for US regulated firms. This rule will require customer orders to be executed on a first-in, first-out (FIFO) basis. However, FOREX.com customers will not be affected by this new rule, as our proprietary trading platform FOREXTrader already uses the FIFO method and is fully capable of supporting this change.

Below is an email that was sent to all FOREX.com customers today. If you should have any questions, please do not hesitate to contact GAIN Capital Partner Services at +1.908.731.0724, or at partnerservices@gaincapital.com.

Regards,

GAIN Capital Partner Services

IMPORTANT ACCOUNT NOTICE: First in First out (FIFO) Order Execution Policy

Dear FOREX.com customer:

On August 1, 2009, a new NFA compliance will go into effect for US regulated firms. NFA Rule 2-43(b) requires that customer orders be executed on a first-in, first-out (FIFO) basis.

As a FOREX.com customer, you WILL NOT be affected by this new rule.

Our proprietary trading platform, FOREXTrader, uses the FIFO method and is fully capable of supporting this change. You can continue to enter stop and limit orders, modify existing orders, as well as utilize all other advanced order types available on the FOREXTrader platform, including One Cancels Other (OCOs) and Trailing Stops.

FIFO Example
With the first-in, first-out (FIFO) method, when multiple trades are executed in the same currency pair to establish a position, the trade which was first opened is the first closed.

Trade Date Trade Time Position
29-Jul 10AM Buy 10,000 EUR/USD @ 1.4000
30-Jul 12PM Buy 50,000 EUR/USD @ 1.4050
30-Jul 2PM Buy 20,000 EUR/USD @ 1.4100
31-Jul 11AM Buy 10,000 EUR/USD @ 1.4150
Total Buy 90,000 EUR/USD @ Average Price

With FIFO order execution, if you are long 90,000 EUR/USD and sell 10,000, the earliest trade (from 29 Jul) is closed.

Should you have any questions about this notice, please don’t hesitate to call us at 1.877.FOREXGO or 1.908.731.0750 or email support@forex.com

Thank you for your continued business.

Member, National Futures Association (NFA # 0339826). Forex trading involves significant risk of loss and is not suitable for all investors.

Trading forex carries a high level of risk and is not suitable for all investors. Spot Gold contracts are not subject to regulation under the U.S. Commodity Exchange Act.

This e-mail contains confidential information belonging to FOREX.com and is intended solely for the addressee. The unauthorized disclosure, use, dissemination or copying (either whole or partial) of this e-mail is strictly prohibited. If you have received this communication in error, please notify us immediately by email and delete the original message and attachments. FOREX.com does not warrant the accuracy or completeness of the information contained within this communication.

You are receiving this email because you registered for a FOREX.com trading account.

FOREX.com is a registered Futures Commission Merchant (FCM) (NFA ID #0339826) and a division of GAIN Capital Group, LLC. FOREX.com, 44 Wall Street, New York, NY 10005. Copyright ©2009 FOREX.com. All Rights Reserved.

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, Drew Niv, CEO at FXCM, Glenn Stevens, CEO at GAIN Capital (Forex.com), and Peter Wong, Chairman and CEO at MG Financial LLC, today I have the pleasure to welcome Vera Hawkin, CEO at CMS Forex.

Thanks Vera.

Francesc

FX Street Questionnaire Regarding Removal of the Hedging Feature

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?

We don’t feel that our business will be lost to brokers overseas. CMS Forex and its affiliates have multiple offices outside of the United States, located in Bermuda, Tokyo, Saint Petersburg, and Shanghai, with a planned office opening in the United Kingdom. Different rules and regulations apply to the various locations and clients can decide which branch to hold an account with. Recently we’ve had several inquiries about our other offices, but most new clients continue to open accounts with our US branches.

2. Do you think properly educated clients regarding hedging could reduce losses to over-seas brokers?

We think clients are aware that the NFA is only looking out for the clients’ best interest. Regulations passed by the NFA are in place to ensure fair dealing practices. In this case, the NFA had uncovered certain instances where money managers and others have abused the “hedging” feature and also found that traders who are unaware of how to effectively use the feature can incur additional costs without added benefit. However, if a client really wants to use the hedging feature, he/she will find a way to do so, either with multiple accounts or via our offices outside of the US.

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?

Since it is a new rule, we think it will take traders, especially those who rely on auto-trading programs for offsetting their positions, a little while to get used to FIFO. Clients will need to come up with more sophisticated trading strategies when holding multiple positions of the same size for the same currency pair. Since FIFO doesn’t go into effect until July 31, CMS Forex is working on educating clients to ensure that the transition will be a smooth one.

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?

We originally offered hedging as an added flexible trading tool due to high demand from our clients. When hedging a position, traders are essentially opening a new position, requiring them to pay a spread on that position as well. Beginners who do not really know how to use the hedging feature, can misuse the tool and, as a result, incur higher costs. For more experienced traders, however, hedging can be an integral tool during times of low market volatility.

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?

There are costs associated with hedging positions, whether it is paying the spread or the difference in roll-over interest. Though clients will not incur any gains or losses on hedged positions due to market fluctuation, clients may incur minor losses on hedged positions due to rollover interest charges. The amount of interest credited for the pair is less than the amount charged to hold the pair. Such losses are usually limited to a few cents per day or a few dollars or cents per standard lot.

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?

Hedging can be simulated by using two separate accounts. However, this method presents a greater risk of being margin-called, as the positions do not offset each other in the same account.

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?

We will not promote the dual-account strategy; however, having two accounts with CMS Forex may work as a solution for your hedging needs. An alternate option for our non-US clients is to open an account with CMS Forex International.

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, Drew Niv, CEO at FXCM, and Glenn Stevens, CEO at GAIN Capital (Forex.com), today I have the pleasure to welcome Peter Wong, Chairman and CEO at MG Financial LLC.

Thanks a lot Peter for your collaboration.

Francesc

Dear Francesc,

As you and the general retail forex community may be aware, MG is one of the few companies in the industry that has adopted the FIFO model in our proprietary on-line trading platform almost a decade ago, when the Dealstation 2000 platform was launched. It has always been our goal, to provide the best professional practice and education to our clients, and MG has never compromised its standards by allowing illogical functions such as “hedging” even in the face of their popularity and appeal, and even knowing that not implementing them would cost MG a market share of those customers who believed, or were convinced to believe that such practice is to their best benefits. In our view, this practice only benefits those money managers who would like to have an impressive “report card” for their show of performance. Instead, customers should know there is no perfect hedge in any financial markets, and certainly not in contra positions of the same currency pairs under one account.

We are in general agreement with Mr. Gary Tilkin, President & CEO at GFT as he has covered most of the ethical issues in his answers.

Last but not least, despite the relentless efforts of the regulators, MG believes that in order to truly benefit the foreign exchange industry in the long term, it is all of our industry peers that should uphold their own self discipline and ethical practices as well as put in the effort necessary to educated the customers. The customers should in turn exercise their best due diligence in choosing the right counterparties.

Peter Wong
Chairman and CEO
MG Financial LLC
Tel: 1-212-835-0100
Fax: 1-212-835-0101
www.mgforex.com

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 and Drew Niv, CEO at FXCM, today I have the pleasure to welcome here to Glenn Stevens, CEO at GAIN Capital (Forex.com).

Glenn has been recently named as a finalist for the Ernst & Young Entrepreneur Of The Year(R) 2009 Award. The awards ceremony will take place on June 23 in Teaneck, N.J.

Thanks a lot Glenn for your collaboration and I wish you all the luck in the world to win Ernst & Young Award June 23rd.

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?

Our proprietary trading platform, FOREXTrader, has always used the FIFO method. Having said that, we do believe there is a legitimate need for this type of functionality. Automated trading is becoming more popular as some traders are building portfolios using several different strategies and running them simultaneously. Our FOREX.com division supports trading via MetaTrader, Ninja Trader and other third party systems that heavily focus on automated trading. This approach sometimes means being long and short on a specific currency pair at the same time, in order to accommodate different trading strategies with different time horizons, etc.
In light of the new NFA regulation, we decided to offer our customers a choice - if they require hedging capabilities they may trade through our FSA registered entity, FOREX.com UK.

2. Do you think properly educated clients regarding hedging could reduce losses to over-seas brokers?

Most traders won’t miss hedging. But the ones who want hedging will seek out it and go overseas – hopefully to a regulated entity rather than an unregulated one.

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?

This is a non-issue for us as we offer both types of accounts – FIFO accounts and hedging enabled accounts.

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?

NFA was mostly right. For most traders, hedging provides no benefit and may cost more. But, clearly, they did not understand all the possible uses of hedging and this created the unintended consequence of the new rule - some US traders have moved their accounts overseas.

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?

When you are both long and short a pair, you are essentially engaged in two transactions and each of them does and should have a spread associated with it. This is true whether we are talking about the price or the interest roll over.

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?

Having two accounts is a potential work around, but definitely more cumbersome and complicated than one account, as there are two separate collateral amounts and two margin requirements to manage.

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?

The dual account approach is not an ideal solution and we don’t think it will prove popular with many traders. Our customers have a choice – they can opt to either trade with our UK entity with hedging or with our US entity with no hedging. The transfer of existing customers to our UK entity has been well integrated into our processes and there was no disruption to their trading.

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.

Hi everyone

As you already know, new NFA requirements are changing - for good? - the US Retail Forex Industry. First it was the higher capital requirements that lead to a quick concentration process. Now it is the already famous Rule 2-43(b) that does not allow hedging and puts in danger stop and limit orders on open positions as this conflicts with their FIFO - first-in, first-out - new policy.

Our compliance officer Mr. John Putman put together a questionnaire that I sent to the top US executives of our industry.

Here you have the view of Gary Tilkin, president & CEO, GFT.

I want to thank Gary for his great collaboration and quick response as the questionnaire was sent out just yesterday

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?

GFT has never offered its customers the option to “hedge” open positions with a counter position in the same currency pair.  This is not logical or the standard in the way that FX or any market is traded.  To have two counter positions in a financial product is really no position, and there really is zero financial benefit in allowing a retail customer to engage in this type of trading behavior.

2. Do you think properly educated clients regarding hedging could reduce losses to over-seas brokers?

GFT has for years explained to customers the reasons why “hedging” as it is mislabeled in FX makes no financial sense and why customers should be concerned about how their accounts can be affected negatively by using this trading method.  Unfortunately, we do not feel that education is a solution, especially since some customers will simply not want to come to terms with a financial loss or are unable to mathematically grasp the profits and losses associated with trading multiple strategies in the same account.  As such, we believe there will still be a strong demand for this functionality.

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?

The FIFO system has been used in many markets for decades and trading strategies also have been deployed in these markets for just as long.  We do not see any negative impact on trading via automated trading strategies by having to follow FIFO guidelines.

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?

GFT would agree with this assessment.  By and large traders pay twice the spread and twice the swaps for their transactions.  There are exceptions, but in general customers are not aware of these costs and are more enthralled with the concept of postponing the realization of the financial loss of a position, which of course they are not, and continue to endorse the hedging methods.

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?

GFT does not offer this system of trading and as such cannot comment on this matter.

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?

The downside is that if the trader is simply looking to negate a floating loss temporarily then this dual account method still defies common sense and logic.  Until the trader can understand the concept of why this makes no sense this dual account is still a problem.  If the trader is simply looking to trade long term and short term strategies and track them in separate accounts this makes sense to offer this feature.  GFT leaves this up to the customer to determine and as such customers are able to open more than one account if they like.

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?

At this type we do not plan to promote any account setup option to encourage “hedging”.