FCMs will be required to file daily (!!) segregation reports.

With thanks to Felix Shipkevich and the team at Shipkevich Law Firm.... The NFA has issued its new "safeguard recommendations" for registered Futures Commission Merchants (FCMs) which hold client funds. All U.S.-regulated retail Forex firms qualify as FCMs.

As we reported at the end of February, the CFTC held a two-day public roundtable to gather opinions on the issue of client fund safety, in the wake of more than $1 billion in missing client funds in the MF Global bankruptcy. And as it has taken less than two weeks since that roundtable for the NFA to come out with its detailed recommendations, it is quite clear that the issue was pre-decided by the NFA and CFTC.

The four recommendations include:

1. Filing of daily segregation reports.
2. Filing of bimonthly investment detail reports, showing how customer funds are invested and where those funds are held.
3. Periodic spot checks to monitor segregation requirements.
4. Requiring a principal of the firm to approve any disbursement of customer segregated funds not made for the benefit of customers, and that exceed 25% of the firm's excess segregated or secured funds.

The issue of client fund segregation is certainly an important one in the Forex sector, as well as in other areas where companies hold client money for extended periods of time. However the NFA's recommendations seem to be going from one extreme (i.e. under-supervision) to another extreme, and will, in our view, provide another death blow to all but the largest U.S. Forex firms, given the cost and complexity of abiding by the rules. 

The main issue is the filing of daily (!!) client fund reports. In our discussions with one of the U.S. regulated firms, they pointed out that about two-thirds of their in-house operations and accounting staff were there just to deal with regulatory reports and processes. If these recommendations are adopted as is, that number will now likely increase. The issue of cost-of-compliance is rapidly becoming a material one for US Forex firms, and will in our view cause an even further reduction in the number of US regulated Forex firms in the coming months, reducing choice and competition for US Forex traders.

For more on Forex regulation see the LeapRate-Dow Jones Forex Industry Report.