NFA Compliance Rule 2-43b

What Is NFA Compliance Rule 2-43b?

NFA Compliance Rule 2-43b, implemented in 2009 by the National Futures Association (NFA), states that forex dealer members (FDM) and retail foreign exchange dealers (RFED) can't allow clients to hedge and must offset positions on a first-in-first-out (FIFO) basis.

Understanding NFA Compliance Rule 2-43b

Rule 2-43b was implemented by the U.S. forex (FX) industry's self-regulatory organization, the National Futures Association (NFA). It's known as the "FIFO rule" and, essentially, eliminates hedging. Hedging in forex trading is where a trader will have both a long and a short position in a single currency pair at the same time, offsetting each other.

Rule 2-43b prohibits the dealers from allowing this practice by requiring that multiple positions held in the same currency pair be offset on a first-in, first-out (FIFO) basis. It also bans price adjustments to executed customer orders, except to resolve a complaint that is in the customer's favor. The rule also limits changes to certain straight-through processing transactions. These changes must be reviewed, approved, and documented by the NFA.

The National Futures Association (NFA) implemented the rule in 2009. It applies to all brokers and traders who fall under the NFAs jurisdiction. The NFA is a self-regulating organization, and mandatory membership is critical to allowing the organization to enforce its rules and policies. Its membership requirement applies to virtually all registered forex professionals working in roles which include all registered:

In Dec. 2017, the NFA approved an amendment to Rule 2-43b. Under the amendment, price adjustment prohibition doesn't apply when a forex dealer member adjusts all orders in customers’ favor to rectify situations that are beyond the customers' control. An example would include incidents where there are issues with third-party vendors.

The passage of 2-43b saw a mass exodus of trading capital to offshore forex dealers that still allowed "hedging." While this might be a viewed as a boon by the forex customers that utilize this as part of their trading strategies, they run the risk of being more susceptible to fraudulent practices at the brokerage level, given that the offshore firms aren't held to the same regulatory requirements as their U.S.-based counterparts.

Traders refer to 2-43b as the FIFO rule. This first-in, first-out policy means that traders must close the earliest trades first in situations where several open trades-in-play involve the same currency pairs and are of the same position size. The rule's supporters say it increases transparency for customers and brings forex trading practices in line with those of the equities and futures markets.

This involved some initial adjustments on a practical level for the affected firms. The forced many forex firms to change their trading platforms because older software allowed users to choose which orders they wanted to close out. By empowering customers, the older software didn't comply with the FIFO rule. Under the new rules, stop and limit orders can be placed, but they must now be input differently.