NFA finalizes the Price Slippage and Price Requoting rules

Although this was known as a requirement for a while now especially after NFA fined FXCM in 2011 and Gain

Although this was known as a requirement for a while now especially after NFA fined FXCM in 2011 and Gain Capital in 2010 now this rule has become formal. NFA is currently busy auditing most of forex brokers trying to find similar unfavorable slippage (and other) practices.

The rule is pretty straightforward and unusually for NFA is actually fair: if you allow slippage in your favor you must allow it in the client’s favor as well. This eliminates the very known practice by all forex brokers – once the price moves against the client they execute client’s order at the poorer price (between the time client placed a trade and the time it was accepted by dealer/plugin) however if the price moves in favor of the trader they execute the order at the price he requested, not the better one now in the market.

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Effective Date of NFA Interpretive Notice to NFA Compliance Rule 2-36 regarding Price Slippage and Price Requoting

The Commodity Futures Trading Commission (CFTC) recently approved NFA’s Interpretive Notice entitled NFA Compliance Rule 2-36: Requirements for Forex Transactions. NFA Compliance Rule 2-36 imposes a number of requirements on Forex Dealer Members (FDMs) regarding the manner in which they handle customer forex transactions, which are designed to ensure that an FDM acts honestly, fairly and in the best interests of its customers. NFA’s Business Conduct Committee has recently taken a number of disciplinary actions against FDMs for violations of this Rule based on practices they employ in handling price changes that occur from the time a customer enters an order until the time it reaches the FDM’s trading system. This Interpretive Notice provides guidance to FDMs on how to deal with these circumstances in a manner that does not violate NFA Compliance Rule 2-36. The Interpretive Notice becomes effective March 26, 2012.

The Interpretive Notice provides examples of asymmetrical price slippage settings that have been used by FDMs that clearly violate NFA Compliance Rule 2-36 because the settings allow the FDM to manipulate the prices that the forex customer receives and allows the FDM to benefit from the price slippage to the detriment of the customer. The Interpretive Notice also makes it clear that any asymmetrical slippage settings or requoting practices that provide an advantage to the FDM to the detriment of the forex customer violate NFA Compliance Rule 2-36. In order to avoid violating NFA Compliance Rule 2-36 when addressing these price changes, FDMs must adhere to the following:

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FDMs must apply the slippage setting uniformly regardless of the direction the market has moved;

If the FDM requotes prices when the market moves against it, it must requote prices when the market moves in its favor; and

FDMs must ensure that the customer is aware of how the FDM handles these price change circumstances prior to trading with the FDM by providing full written disclosure of its policy, including the information outlined in the Interpretive Notice. For existing customers, FDMs must provide written disclosure prior to the effective date of this Interpretive Notice.

FDMs must also have written procedures that outline the manner it handles price changes, including information on the application of any slippage parameters and requoting practices. Finally, FDMs must ensure that any of its promotional material that discusses the mechanics of its trading system does not include information that misrepresents or is misleading with respect to its price slippage and requoting practices.

FDMs should be aware that although the Interpretive Notice becomes effective on March 26, 2012, the practices described in the Notice are already violations of Compliance Rule 2-36.

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