NFA Proposes New Layer of Monitoring of Client Funds for FX Firms

The NFA has presented amendments to a crucial ruling that affects client money for US regulated FX dealers. The financial watchdog that supervises derivatives trading in the country, is adding a new layer of reporting and monitoring for firms that hold clients funds for brokers. The move aims to remove time-delays in calculating liabilities of client funds.

In a letter sent to the CFTC’s Office of the Secretariat, Christopher Kirkpatrick, the NFA has proposed amendments to the NFA’s Financial Requirements Section 14, stating that regulated firms must adhere to five general requirements administered by the authority. Under section 14, the NFA would like FDMs to instruct Liquidity providers, prime brokers, banks and brokerage firms holding assets used to cover its liabilities to retail forex customers to give a daily report of the balances in these accounts to NFA or a third party designated by NFA.

Forex brokers use a number of third party firms which act as liquidity or price providers. The brokers commonly use the third party firm to pass on client order flow that cannot be managed in-house, known as the A-book.

The NFA's proposals also require the third party firms to report balances to the watchdog, details issued in the letter stating: “The proposed amendments also specify that in order to be an acceptable qualifying institution to hold assets covering an FDM's liabilities to retail forex customers, the qualifying institution must report the balances in the FDM's accounts to NFA or a third party designated by NFA."

The US operating environment has faced an influx of changes post 2008 recession. The economic slump was blamed on misrepresentations in OTC derivatives transactions, spot FX being classified as an OTC derivatives instrument. Furthermore, the country embraced new rulings in the form of the Dodd-Frank Act which changed the entire landscape.

The US retail FX broking arena has changed significantly over the last four years with several providers calling it quits on the region. The grim news of a contracting market has been coupled with misery for the derivatives sector after the mishaps of MF Global and PFG Best which forced the regulators to react.

The new NFA rules are expected to be welcomed by US firms already facing numerous regulatory screenings. The ruling will ensure potential miscalculations of client funds will be avoided, as both brokers and their counterparties will have reliable and adequate knowledge of the funds held in possession.