NFANotice to Members – Supervision of Forex Promotional Materials (Notice I-08-15; March 27, 2008) - there are three main parts to this notice.
Supervisory employee responsible for reviewing FDM promotional materials must be under the ultimate supervision of a principal of the FDM who is also an AP (means that an individual principal of a FDM [...]
Author Archives: vbala
NFA Notice to Members: Supervision of Forex Promotional Materials
June 4, 2009 – 4:16 pm
NFA Interpretive Notice Regarding Forex Transactions
June 4, 2009 – 4:10 pm
NFA Interpretive Notice Regarding Forex Transactions
→ See NFA Bylaw 306 at: www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=BYLAW%20306&Section=3
Forex Dealer Member (FDM) is an NFA member who acts a counterparty to forex transaction. It is a self-executing title, meaning that an NFA member is an FDM solely by nature of acting as a counterparty to forex transactions. No applications or approvals are required [...]
Promotional Material & Solicitation
June 4, 2009 – 3:49 pm
Promotional Material
This is quite a nebulous topic which is explored in greater depth elsewhere in the materials. I provide an overview below.
See generally NFA rule 2-36(h) Filing Promotional Materials with NFA:
The Compliance Director may require any Forex Dealer Member for any specified period to file copies of all promotional material with NFA for its review [...]
Reports to Customers/Confirmations/Monthly Summaries
June 4, 2009 – 3:45 pm
Reports to Customers/Confirmations/Monthly Summaries
See generally Rule 2-44 Forex Customer statements here: www.nfa.futures.org/nfamanual/NFAManual.aspx?RuleID=RULE%202-44&Section=4.
Written confirmation provided to customers within one business day of activity.
Written confirmation must include the following information:
Date;
Transaction type (e.g., new position, offsetting position, rollover, adjustment);
Currency pair;
Buy or sell (if a new or offsetting position);
Size;
Price or premium (for new or offsetting positions or price adjustments);
Price or [...]
Security Deposit Rules
June 4, 2009 – 3:43 pm
Security Deposit Rules
The following is the text of Section 12 of NFA’s Financial Requirements from NFA’s Rules Manual:
[Adopted Effective December 1, 2003. Effective dates of amendments: June 6, 2004; September 15, 2005; February 13, 2007; May 14, 2008; October 31, 2008; and November 30, 2009.]
(a) Each Forex Dealer Member shall collect and maintain the following [...]
Security of Customer Funds, No Segregation
June 4, 2009 – 3:40 pm
Security of Customer Funds, No Segregation
Generally customer funds are not held in segregated customer accounts separate from the FDM. Accordingly, in the event of a bankruptcy at a FDM, the customer funds would be administered by a trustee according to the US bankruptcy laws (if based in the US). Customers would be entitled to a [...]
Registration Requirements
June 4, 2009 – 3:38 pm
Registration Requirements
Forex managers and solicitors generally will need to make sure that both the firm and the individual (associated person or AP) are registered with the CFTC. The firm will also need to be a member of the NFA.
Firms must complete and submit Form 7R through the NFA’s online registration system. The cost for firm [...]
Know Your Customer
June 4, 2009 – 3:29 pm
Know Your Customer
Members and Associates have a duty to acquaint themselves sufficiently with the personal and financial circumstances of each forex customer to determine what further facts, explanations and disclosures are needed in order for the customer to make an informed decision on whether to enter into forex transactions.
Every Member should determine what information it [...]
NFA Interpretive Notice Compliance Rule 2-36(e): Supervision of the use of Electronic Trading Systems
June 4, 2009 – 3:24 pm
NFA Interpretive Notice Compliance Rule 2-36(e): Supervision of the use of Electronic Trading Systems
General: this part of the rule applies generally to FDMs and, inc certain instances, the APs of the FDM. It will also apply to Members which solicit, introduce, or manage customer accounts (those parts applicable to FDMs will also apply to these [...]
Disclosures to Customers
June 4, 2009 – 3:21 pm
Disclosures to Customers
[Need to include] See NFA Interpretive Notice on Rule 2-36(e).
Study Guide >>Forex Regulations >> Disclosures to Customers
Conflicts of Interest
June 4, 2009 – 3:19 pm
Conflicts of Interest
I am not sure what they are getting at here. In general, all conflicts of interest would need to be disclosed. The interpretive notices to Rule 2-29 and Rule 2-9 give us some insight into this general principal.
Interpretive notice to Rule 2-29: Disclosing conflicts of interest for securities futures products.
Firms must make sure [...]
CFTC Jurisdiction and Jurisdictional limitations
June 3, 2009 – 8:28 pm
CFTC Jurisdiction and Jurisdictional Limitations
CFTC:
The Commodities Futures Trading Commission (CFTC) is a government agency which is charged with enforcing the laws under the Commodities Exchange Act, as amended (CEA). The CFTC, with regard to the CEA, is functionally equivalent to the SEC. With regard to off-exchange foreign currency transactions, Congress has provided a mandate to [...]
Settlement Risk/Herstaat Risk
June 3, 2009 – 8:08 pm
Settlement Risk/Herstaat Risk
Because of the time differences involved in the forex trading markets, there was the possibility that there would be differences in the time of the settlement of the forex contracts. This meant that it was possible that the counter party would not pay the trader (i.e. you would send them your currency and [...]
Operational Risk
June 3, 2009 – 8:07 pm
Operational risk
Risk inherent in the trader’s operational structure. For instance if a trader’s decision making skills are spread out and decisions are dependant on a number of different systems, any thing that happens to one part of the system could affect the whole. This may affect the trader’s ability to enter and exit trades as [...]
Market Risk
June 3, 2009 – 8:06 pm
Market Risk
Risk that the general forex market may cause the value of a position to change.
Study Guide >> Forex Trading Risks >> Market Risk
Forex Exotic Options
June 3, 2009 – 7:47 pm
Forex Options and Exotic Options
Options are a great tool for traders during anticipated periods of market volatility. During these periods of volatility it is expected that huge drawdowns could occur. It is also during this time that prices can gap up or down so slippage during these times is expected to increase.
Forex options are not [...]
Liquidity Risk
June 3, 2009 – 7:29 pm
Liquidity Risk
There is a risk that it may be impossible to liquidate a position. This can happen when a currency is deregulated or fixed trading bands are widened. Some potential currencies include (but are not limited to): Thai Baht, South Korean Won, Malaysian Ringitt, Brazilian Real, Hong Kong Dollar.
Study Guide >> Forex Trading Risks >> Liquidity [...]
Interest Rate Risk
June 3, 2009 – 7:28 pm
Interest Rate Risk
The value of a foreign currency investment can be affected negatively by a number of factors related to the interest rate or one or other of the currencies traded.
Study Guide >> Forex Trading Risks >> Interest Rate Risk
Exchange Rate Risk
June 3, 2009 – 7:27 pm
Exchange Rate Risk
Exchange rate risk is the currency fluctuations on the worldwide currency market, fluctuation of demand and supply for a particular currency. The most effective way to control the risk of exchange rate is to get rid of the positions that lose too much, and to increase the number of those who keeps the [...]
Credit Risk
June 3, 2009 – 7:26 pm
Credit Risk
The risk that the counterparty defaults. The counterparty to an off-exchange transaction may not, for a variety of reasons, be able to complete a transaction. Such non completion of any portion of a transaction may be to the detriment to the other party. In such cases, the other party will be subject to all [...]
Country Risk/Sovereign Risk
June 3, 2009 – 7:25 pm
Country Risk/Sovereign Risk
Some countries still interfere (i.e. limit supply of currency available) with the natural market mechanisms of the forex markets. Such interference could affect a currency in a number of different ways including the liquidity of the currency. If significant enough the trader may not be able to receive a rightful payment. Country risk [...]
Transaction Costs
June 3, 2009 – 7:22 pm
Transaction Costs
Most FDMs do not have separate commissions or other fees per transaction, but this will be decided at each FDM. Instead FDMs make money through the spread that they make on each side of the transaction (i.e. they buy the currency for less than they sell it to you). The pip spread actually works [...]
Return on Collateral/Security Deposit/Margin
June 3, 2009 – 7:19 pm
Return on Collateral/Security Deposit/Margin
Leverage allows the trader to increase the possible ROI on an investment. The amount of the ROI is expressed as a percentage of the margin amount. For instance, if you gain $200 on a trade which was initiated with $1,000 on margin, your return on margin is 20%.
Example:
The Trader buys 100,000 GBP [...]
Option & Exotic Option P&L Calculation
June 3, 2009 – 7:17 pm
Option & Exotic Option P&L Calculation
Buying an Option
You pay the premium (quoted in pips). If at expiration the option is in the money then the profit equals the difference between the strike price and the current market price (closing spot price) less the amount of the premium paid. Profit potential is unlimited and the potential [...]
Pip Values & Price After Pips
June 3, 2009 – 7:16 pm
Pip Values
Forex pip value refers to the amount of money gained/lost for each pip that is gained/lost in currency trading. The easiest way to find out pip value of a currency pair is by observing how much money you gain/lose for each pip you gain/lose when you are in-trading. To do the manual calculation, you [...]
Profit and Loss Calculations
June 3, 2009 – 7:14 pm
Profit and Loss calculations – []
Example:
USD is base currency
Profit = Price Change in Pips x Units Traded
USD is secondary currency
Profit = Price Change in Pips x Units Traded / Exit Price
Good Websites:
http://www.forex.com/calculating_forex_pl.html
http://www.streetdirectory.com/travel_guide/148460/foreign_exchange/forex_trading___profit_and_loss_calculations.html
Study Guide >> Forex Trading Calculations >> Profit and Loss Calculations
Open Trade Variation
June 3, 2009 – 7:12 pm
Open Trade Variation
[Need to include]
Study Guide >> Forex Trading Calculations >> Open Trade Variation
Netting of Positions
June 3, 2009 – 7:11 pm
Netting of Positions
At the end of the day institutions will net their long and short positions between one another so that they do not have to settle every single transaction – only the net positions are settled. This can save on fees and commissions.
Study Guide >> Forex Trading Calculations >> Netting of Positions
Effects of Leverage Calculations
June 3, 2009 – 7:10 pm
Effects of Leverage Calculations
Leverage calculations allow you to see basically how much equity is in your account so you will not be subject to a margin call. Most forex brokers allow a very high leverage ratio, or, to put it differently, have very low margin requirements. The margin in a forex account is a performance [...]
Cross Rate Transactions
June 3, 2009 – 7:08 pm
Cross Rate Transactions
Cross-rate transactions occur when two currencies are equal which follows from their forex currency exchange rate according to a forex rate of the third currency. There are a couple of ways that cross rate transactions can be executed. First, some FDMs will actually offer these pairs. Second you can buy EUR/USD and then [...]
Forex Trading Calculations
June 3, 2009 – 7:03 pm
Forex Trading Calculations:
Cross rate transactions
Effects of leverage calculations
Netting of positions
Open trade variation
Profit & loss calculations
Pip values, price after pips
Option and exotic option profit & loss calculations
Return on collateral, security deposit, margin
Transaction costs
Study Guide >> Definitions and Terminology >> Forex Trading Calculations
Theory of Purchasing Power Parity (PPP)
June 3, 2009 – 7:00 pm
Theory of Purchasing Power Parity (PPP)
Also called the law of one price, the theory that the price of a currency (as defined by the exchange rate with another currency) is determined by the relative level of prices of the two countries. Basically the theory says that the price of a basket of goods should be [...]
Inflation
June 1, 2009 – 6:35 pm
Inflation
The rise in level of prices of goods and services in an economy over time (the decline in the real value of money over time). The supply of money and inflation are linked. Inflation has a large effect on interest rates, which in turn effect exchange rates. Over the long term inflation means that the [...]
Gross Domestic Product (GDP)
June 1, 2009 – 6:32 pm
Gross Domestic Product (GDP)
The market value of goods and services produced in the US by US residents or non residents over a period of time (typically a year). Increasing GDP is better than decreasing GDP.
Study Guide >> Forex Market Concepts >> GNP and GDP
Fisher Effect
June 1, 2009 – 6:31 pm
Fisher Effect
The effect proposes that if the real interest rate is equal to the nominal interest rate minus the expected inflation rate, and if the real interest rate were to be held constant, that the nominal rate and the inflation rate have to be adjusted on a one-for-one basis.
→ NOTE: Real interest rate = nominal interest [...]
Fiscal Policy
June 1, 2009 – 6:31 pm
Fiscal Policy
A government’s decisions regarding spending and revenue collection (taxation). Fiscal policy influences the economy. It is to be contrasted with monetary polcy which focuses centrally on the supply of money. the following are types of fiscal policy:
Neutral: spending equals taxation
Expansionary: spending is greater than tax revenue; usually associated with budget deficit
Contractionary: tax [...]
Federal Reserve Board/Fedwire
June 1, 2009 – 6:30 pm
Federal Reserve Board
The Federal Reserve, the central bank of the United States, was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. In addition to its role in monetary policy and banking supervision, each Federal Reserve Bank acts as a bank for banks [...]
Exchange Rate Volatility
June 1, 2009 – 6:28 pm
Exchange Rate Volatility
Probably the most important characteristic of alternative exchange rate systems is the feature used to describe them, namely fixed or floating. Fixed exchange rates, by definition, are not supposed to change. They are meant to remain fixed for, ideally, a permanent period of time. Floating rates do just that—they float up and down, [...]
Exchange Rate Intervention
June 1, 2009 – 6:27 pm
Exchange Rate Intervention
The monetary authority of a country (usually the country’s central bank) will intervene in the forex markets in order to counter disorderly market conditions. The authority will buy or sell its currency in order to bring the exchange rates up or down. Interventions can be coordinated with the central banks of other countries. [...]
Exchange Rate Elasticity
June 1, 2009 – 6:26 pm
Exchange Rate Elasticity
Price transmission elasticity and exchange rate elasticity define the mechanism of international export market and changing market positions of exporting countries.
Study Guide >> Forex Market Concepts >> Exchange Rate Elasticity
Discount Rate
June 1, 2009 – 6:25 pm
Discount Rate
The rate set by the Federal Reserve Bank for short term lending to eligible depository institutions. This interest rate is used to determine the present value of futures cash flows. The discount rate can influence currency exchange rates. Most lending is not done through this system and it seems to be more of a [...]
Clearing House Interbank Payment System (CHIPS)
June 1, 2009 – 6:24 pm
Clearing House Interbank Payment System (CHIPS)
The aggregated (netted) transactions between counterparties are settled at the end of the trading day and then debited/credited through Fedwire. The netting allows banks to hold onto their capital during the day (instead of being debited instantly through Fedwire) allowing the transferring bank to earn interest. CHIPS is run by [...]
Current Account
June 1, 2009 – 6:23 pm
Current Account
Current account measures money flowing into and out of a country as a result of trade flows. It can be measured through the following formula:
→ FORMULA:
[Exports – Imports = BOT] + Net Factor Income From Abroad (interest, dividends) + Net Transfer Payments (aid to other countries)
Surplus: generally strengthens currency
Deficit: generally weakens [...]
Capital Account
June 1, 2009 – 6:22 pm
Capital Account
Increase in foreign ownership of domestic assets – increase in domestic ownership of foreign assets + portfolio investment (stocks, bongs) + other investment (loans, bank accounts). This measures money flowing into and out of a country because of capital flows. If a country is doing well, then money will flow into that country, and [...]
Bank for International Settlements (BIS)
June 1, 2009 – 6:20 pm
Bank for International Settlements (BIS)
International organization which fosters international monetary and financial cooperation and serves as a bank for central banks. Importantly, it acts as a prime counterparty for central banks in their financial transactions and also acts as an agent or trustee in connection with international financial operations. The BIS is involved with the [...]
Balance of Payments (BOP)
June 1, 2009 – 6:20 pm
Balance of Payments (BOP)
An economic indicator that takes the following factors into account over a certain time period: (i) trade balance (balance of trade), (ii) foreign investments and (iii) investments by foreigners. If there is a positive BOP then money is flowing into the country; if there is a negative BOP then then money is [...]
Forex Swaps
June 1, 2009 – 6:14 pm
Forex Swaps
A forex swap consists of two legs: (i) current spot transaction and (ii) a forward contract. The effect of this is to exchange your currency and then get the currency back in the future. Spot and forward trades are rolled into one. This is generally done for businesses for various reasons.
Swap is a forex [...]
Trade Date & Settlement Date
June 1, 2009 – 6:13 pm
Trade Date (Entry Date)
The day that a currency trade is initiated; the day on which you “buy” a currency pair.
Settlement Date
The business day which the base currency in a transaction is to be delivered. For spot transactions, the settlement date is two business days from the trade date (T+2).
→ NOTE:
For USD/CDN trades, the settlement [...]
Spot Rate/Spot Price
June 1, 2009 – 6:12 pm
Spot Rate/Spot Price
This is basically the current exchange rate of the currency pair. The spot price is different from the price of a futures or forward contract on the currency pair.
Study Guide >> Definitions and Terminology >> Spot Rate or Spot Price
Tomorrow Next Day & Spot Next
June 1, 2009 – 6:11 pm
Tomorrow Next Day (Tom Next)
The act of rolling over the currency is known as “tom next”, which stands for tomorrow next day, and is basically part of the forex rollover process. Off-exchange foreign currency trades typically settle two days after the transaction is initiated. However, traders typically do not want to do this (avoiding actual [...]