The Forex Hedging Ban – A UK Perspective

I've just put the phone down after a long conversation with George Tchetvertakov, head of market research at Alpari UK.  We started off talking about the new NFA "hedging" regulations and their effects on the retail foreign exchange business. Eventually we moved on to discuss some other topics, including using hedging as a means of reducing risk, and George's opinions about markets in general.

I asked whether Alpari UK had noticed an influx of funds from the United States following the introduction by the National Futures Association of compliance rule 2-43(b). George said categorically no.  Alpari US, Alpari UK and Alpari Russia are three separate companies, with different offices, different staff, and different servers. The 3 companies have some shareholders in common, but were otherwise completely unrelated.  Alpari had sought advice from the regulators and on the basis of that advice Alpari UK did not accept US residents as customers.  Whilst he couldn't quantify it, he felt that they had, however, received some new business from UK residents moving their accounts to Alpari UK from US brokers.

George thought the new regulations were "slightly over the top", but rules are rules and have to be abided by. George did know some people personally (who are not Alpari UK customers) who had recently suffered major inconvenience, and had been effectively forced to modify their trading systems and/or to move brokers as a result of the changes necessitated by the new rules.

When I asked George to describe to me a situation in which hedging really would reduce risk he brought up the thorny topic of weekends.  It's late on Friday and the forex markets are about to close down for the weekend.  You have some positions open, and you have no idea how far the market will have moved by the time the sun rises in Australia and then Japan on Monday morning. What to do to mitigate that risk?  One solution is simply to close all your orders. Another is to partly or completely hedge your overall position over the weekend.  Why not just do the former? Because you might not want to realise a profit or a loss at that moment in time, because your EAs simply can't cope with orders coming and going over the weekend, or because hedging makes the accounting and performance measurement of your trading systems easier.

Finally I wondered if George was prepared to share his views about world markets. He said that in his opinion the much touted "green shoots of recovery" were not justified by the fundamentals, which were still deteriorating.  When I asked about the effects of all this on volatility in the foreign exchange markets he said that currently volatility had fallen somewhat, but it was still above pre-crunch peak levels.  It was certainly possible that another shock could cause volatility to rise again.

I thanked George for his time and put the phone down. Then I pondered one of the points he had raised.  If Alpari UK feel that taking on US residents as customers will offend the regulators in some way, why do FXCM and Forex.com apparently disagree?