Account Opening, Customer Communications, and Margin/Capital Requirements
Opening the account
Before any trade, the dealer must complete know-your-customer and customer identification procedures, verify identity, and gather the information needed to judge suitability: financial condition, net worth and liquid assets, investment/trading experience, risk tolerance, and objectives. The file typically includes the customer agreement, the margin (security deposit) agreement, an arbitration agreement or notice, the acknowledged risk disclosure, and, where someone other than the customer trades, a written limited or full power of attorney. Discretionary trading without a written authorization is prohibited.
Communications with customers
Each transaction requires a confirmation showing the pair, amount, price, date and time, and the fact that the dealer is the counterparty. Statements must reflect accurately all activity, including closed positions, rollovers, and charges. Promotional and advertising material must be approved by a supervisor before use, must be fair and balanced, must not minimize risk, and must be retained.
Margin and capital mechanics
US retail forex does not use true margin calls. The customer posts a security deposit of 2% of notional for major pairs and 5% for others at the time of the trade. If equity falls below the required deposit, the dealer must promptly close out positions under a written, consistently applied liquidation policy; it may not let a customer carry a deficit indefinitely or waive the rule selectively. Offsetting is FIFO and hedging is not permitted. The dealer itself must maintain at least $20 million of adjusted net capital.
Worked example. A customer holds $5,000 equity with a position requiring a $4,000 deposit. A loss takes equity to $3,850. The dealer must liquidate enough of the position to restore compliance with its written policy; it cannot simply issue a demand for more cash.
Traps: treating forex deposit rules as ordinary margin calls; forgetting FIFO offset and the no-hedging rule; accepting a power of attorney after discretionary trading begins.