FXCM Makes Margin Changes to Hedged Positions

I assume this post will start a debate on whether hedging positions even makes sense as you in essence pay the spread twice to flatten your position. But for those traders outside of the US, being able to have a hedged (simultaneous short & long positions) is often a big deal.

FXCM announced that it is updating its margin requirements for hedged positions starting December 2, 2012. Under the new rules margin will be acquired for one of the sides of the hedged position, or 50% of the overall trade. Previously, hedged positions were deemed flat with no margin required. When asked about the reasoning behind the policy change, Jaclyn Klein, Vice President of Corporate Communications at FXCM, answered “Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side).”

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Apparently, too many clients were getting their accounts liquidated after hedging their losers, losing money on other positions, and then closing the profitable side of the hedged position.

While FXCM’s margin change isn’t ‘big’ news, and most brokers will tinker with their requirements at one time or another, it does point out the importance of devoting time to margin and understanding how it affects trader behavior. Unlike other back office aspects, margin settings are often implemented on an instrument by instrument level or through smaller subset groups. Therefore, mistakes can occur with brokers implementing the correct margin rates to one symbol but not to another.