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.