FOREX HOUSE
More strict requirements from NFA and CFTC have changed the playing field in forex. Here's a look at the changes and how to get started in currency markets.
U.S. regulatory agencies have noted for years that an inordi- nate number of their fraud cases have been centered around over-the-counter forex markets. Those agencies finally dropped the hammer on forex firms in 2008. The Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) released new regulations on forex trading that will impact all traders. If you're getting started in forex, the new rules are bound to influence your trading, but understanding the basics is a big part of the battle.
The Farm Bill passed by Congress in May 2008 included several amendments to the Commodity Exchange Act. The bill made the CFTCs anti-fraud authority apply to certain retail off-exchange foreign currency transactions, created a new registration category for retail foreign exchange dealers, and required registration for those who solicit orders, exercise discretionary trading authority and operate pools for retail off-exchange foreign currency transactions. It also imposed minimum capital requirements for futures commission merchants and retail forex dealers. The parts of the leg- islation regarding the CFTCs anti-fraud authority were effective upon passage of the bill. However, other parts of the legislation, including the registration of parties engaged in these transactions and minimum capital requirements, will only be effective upon the CFTCs issuance of final regulations. According to a CFTC spokesperson, the CFTC hopes to release a notice of proposed rulemaking soon.
More mies were proposed by NFA's board of directors and are awaiting approval by the CFTC. These mies include forex customer protection issues, such as the information to be included in a customer's confirmations and account statements and the use of hypothetical performance data and discretionary trading authority, according to Larry Dyekman, director of communications and education at NFA.
"Later this year NFA anticipates the CFTC will publish its new forex rules related to forex trading advisors, pool operators and introducing brokers," Dyekman says. Once the final rules are published, all of these forex entities will be required to register with the CFTC and become members of NFA and will be subject to NFA rules and CFTC regulations. "All of NFA's new and proposed forex rules have one goal: to bring greater transparency, stability and customer protection to the retail forex markets,'' he says.
Many experts say that the new rules represent an evolution of the forex market - that the new rules can "weed out" bad firms and clean up the industry, helping traders in the long run.
"For the industry, it's a good thing. (The new rules] require [forex firms] to be more solid. This is the right direction," says Yossi Beinart, CEO of HedgeStreet.
Others say the new rules are biased in favor of larger firms by including higher capital requirements, which may not be the right approach given the performance of the investment banking community.
"Many of the regulations we feel very good about. The toughest one is the capital requirement. Many firms don't necessarily understand the impact. By June of '09 the majority of forex dealer members are going to be gone. Any time you eliminate competition that broadly, in the end, the client's going to get hurt," says Bruce Pollack, head of the forex division at PFG Best.
READY, SET, TRADE
Getting started in forex is similar to getting started in trading in other asset classes. As with other products, it's important to educate yourself and develop a trading plan. "It's key to have a trading plan and stick with that plan. If you are a futures trader or an active trader in other markets, and you've been successful, you've probably done it through being disciplined. You can take discipline from other markets and easily bring it to forex," says Betsy Waters, global director of dbFX.
Dyekman advises studying the forex markets, how they operate and the risks involved. "The first steps a forex trader needs to take are the same steps that a trader in any other market needs to take. Ask yourself what your investment goals [are] and what products will help you reach those goals," he says.
Dyekman says you should carefully read and understand your customer account agreement before signing it, and ask your firm to clarify any elements of the agreement you don't understand.
As with all trading, practice makes perfect. Experts advise you to open a practice account, or even open multiple accounts at multiple firms to see which one's a fit for you. "Get a demo account, use the platform. Follow the charts. Try to get a feel for the market and how the different markets move and the dayto-day volatility. [Don't] open a demo account with one broker and open a live account with another," Waters says.
It's important to keep your emotions in check during the transition from practice account to live account. "When you go from demo to live, the emotions come in," so you don't want to be confused about how the platform works, Waters says.
