By Andy Traveller
Following the Global Financial Crisis, OTC (over the counter) markets have been subject to greater oversight and tighter rules from regulators. Protection of individual, retail investors is one of the underlying motives.
Accordingly, an announcement today from the U.S. Commodity Futures Trading Commission (CFTC) seeks to further protect retail foreign exchange (forex) traders. The U.S. watchdog that oversees futures and option markets has approved rule amendments and a new interpretive notice filed by the National Futures Association (NFA).
The rule amendments and interpretive notice stipulate enhanced requirements for those forex dealers (referred to as FDMs) that are members of the NFA, an organization for the U.S. derivatives industry, including on-exchange traded futures, retail off-exchange foreign currency transactions, and swap transactions.
The rules include: imposing additional capital requirements on FDMs; requiring FDMs to collect security deposits for off-exchange foreign currency transactions from eligible contract participant counterparties in addition to retail counterparties; requiring FDMs to adopt and implement rigorous risk management programs; and requiring FDMs to provide additional market disclosures and firm-specific information on their websites to permit current and potential counterparties to better assess the risks of engaging in off-exchange foreign currency transactions and with conducting business with a particular FDM. Under the new rules, forex dealers will be required to maintain adjusted net capital equal to or in excess of $20 million plus certain percentages of the member’s various liabilities.
As mentioned, the new rules follow a raft of new regulation surrounding OTC derivative trades across multiple jurisdictions. Indeed, Finance Magnates reported today that Australia is set to roll out new rules for margin forex and CFD trading, which will be supervised by the Australian Securities and Investments Commission.