Series 34 key terms

An agreement to buy one currency and sell another at an agreed price for settlement typically two business days later. Retail customers generally do not take delivery; positions are rolled over or offset before settlement.

The two currencies quoted together in a forex price, showing how much of the second currency is needed to buy one unit of the first. The first currency listed is the base currency.

The first currency listed in a currency pair. It is the currency being bought or sold, and its value is expressed in units of the second, or quote, currency.

The second currency listed in a pair. It states the price of one unit of the base currency, telling the reader how many units of the quote currency equal one base unit.

The difference between the price at which a dealer will buy a currency pair (the bid) and the price at which it will sell (the ask). The spread is a main trading cost and a source of dealer revenue.

The smallest standard price increment for most currency pairs, usually 0.0001 for pairs quoted to four decimals and 0.01 for yen pairs. Traders measure profit and loss in pips.

The use of a relatively small deposit to control a much larger forex position. Leverage magnifies both gains and losses and can produce losses greater than the amount the customer deposited.

A transaction to buy or sell a currency at a fixed price on a specified future date beyond normal spot settlement. The parties agree in advance on a definite maturity date.

A forex transaction that does not settle on a fixed future date but is automatically rolled forward each day until the customer closes it. Retail off-exchange forex is typically traded in this form.

The daily credit or debit applied to an open position for the interest rate difference between the two currencies involved, often plus a dealer markup. It is applied when a position is rolled forward.

A pair combining the U.S. dollar with one of the most heavily traded currencies, such as the euro, yen, pound, Swiss franc, Canadian dollar, or Australian dollar. Majors carry the lowest margin requirements.

A firm that offers to act as counterparty to retail forex transactions and must register with the CFTC and join the NFA. Such firms face minimum net capital, disclosure, and recordkeeping requirements.

The NFA membership category for firms that act as counterparty to retail off-exchange forex customers. FDMs must follow NFA forex rules on capital, security deposits, pricing, and sales conduct.

A person or firm that solicits or accepts retail forex orders but does not hold customer funds. It must be registered and must have a guarantee agreement with a registered dealer or futures commission merchant.

An individual who solicits forex customers, takes orders, or supervises those activities for a registered firm. Associated persons must be registered with the NFA and are bound by its conduct rules.

A written notice in prescribed form that must be given to a prospective retail forex customer, explaining the risks of off-exchange forex trading, and acknowledged before the account is opened.

The regulatory capital floor a retail forex dealer must maintain, set at $20 million of adjusted net capital under CFTC rules, so that the firm can meet its obligations to customers.

The filing process by which a firm or individual becomes authorized to conduct retail forex business, submitted through the NFA's system with disciplinary history, fingerprints, and proficiency information.

The requirement that retail forex customer money be kept in accounts separate from the dealer's own funds and not commingled, so customer assets remain protected if the firm fails.

Rules obliging forex firms to create and retain books, records, and account documents, generally for five years with the most recent two years readily accessible, and to furnish them to regulators on request.

The minimum margin a retail forex customer must post and maintain for an open position, set by regulation at 2% of notional value for major currencies and 5% for other currencies.

A dealer's demand that a customer deposit additional funds or reduce positions because account equity has fallen below the required security deposit level for open positions.

The signed contract between a retail forex customer and the dealer covering trading terms, margin requirements, liquidation rights, and dispute resolution. It must be provided together with required disclosures.

An account for which the customer gives written authority allowing another person, such as an associated person or adviser, to place orders without obtaining approval for each individual trade.

A written power of attorney permitting someone other than the account holder to trade the account. Firms must verify, approve, and supervise any such authorization before orders are accepted.

A periodic report of open positions, transactions, profit and loss, and account equity. Retail forex dealers must send statements to customers at least monthly, and more often in specified circumstances.

A notice, generally delivered promptly after execution, identifying the currency pair, price, quantity, trade date, and whether the customer bought or sold. It documents each transaction for the customer and the firm.

The dealer's procedures for verifying each account holder's identity as part of its anti-money-laundering program, typically collecting name, address, date of birth, and an identification number.

The practice of gathering and documenting a customer's financial condition, trading experience, and objectives so that account approvals, margin settings, and recommendations fit that particular customer.

The obligation to have reasonable grounds to believe a recommended forex account, strategy, or transaction is appropriate for a customer given the customer's finances, experience, and stated objectives.

Sales literature, websites, seminar materials, and similar communications used to solicit forex business. It must be fair, balanced, free of misleading claims, and subject to NFA review and filing rules.

Simulated, model, or back-tested trading results that were not actually achieved in a customer account. Presenting them requires prominent cautionary language about the limitations of such results.

Excessive trading in an account controlled by another person in order to generate commissions, markups, or other revenue rather than to serve the customer's interests. The practice is prohibited.

Entering orders in a customer's account without the customer's prior consent or valid written discretionary authority. It is a prohibited practice and a frequent basis for customer arbitration claims.

Statutory and rule prohibitions on cheating, defrauding, or deceiving customers in forex transactions, covering false statements, material omissions, and manipulative or deceptive schemes and devices.

A person the firm assigns to review and supervise forex activities of associated persons, including their sales communications, recommendations, order handling, and treatment of customer accounts.

A promise by a dealer or its personnel to cover a customer's trading losses. Such guarantees are prohibited in retail forex because they misrepresent the risk that customers actually bear.

A practice where a dealer passes unfavorable price slippage through to the customer but keeps favorable slippage for itself. NFA rules restrict this by generally requiring execution at the best available price.

An NFA requirement that offsetting orders close open positions in the order they were opened rather than letting the dealer choose which position to close, preventing treatment that disadvantages the customer.