Hi everybody,

Mr. Peter Wong, Vice President and Director of Marketing of MG Financial Group Inc., sent me  today the response to our open letter to FXstreet’s clients affected by NFA’s capital requirements changes from Mr. Tak S. Fung, CEO of the company as I  requested.

I want to thank Mr. Fung  for attending our request and I now hope the other firms affected will get back to me with their statement as soon as possible.

Thanks again Mr. Fung and thanks MG Financial

Francesc

note: The message from Mr. Fung posted below has neither been modified nor changed, so I just copied and pasted it into TypePad web site to upload to my blog. In fact, I´ve not even read it yet and I will do it once it is posted online.

1. NFA is expected to raise soon capital requirements to Forex brokers.

- How are you adapting to the new NFA requirements?
MG will have no difficulty accommodating this change if the proposal does pass. MG Financial as a group has ample capital to satisfy the new Net Capital requirement.  Retail FX is just one part of the group’s business and a reallocation of investments has already been initiated.  Already as of the end of July, MG has increased its Net Capital to be in excess of the new proposal. This proposal to increase the Net Capital Requirement came out in the middle of June; however, the basis of information that caused the panic is the two months old Financial Reports (as of April 2007) when MG had over 120% of the requirement at that time. MG has always been above the Net Capital Requirement as set by the NFA but there is no reason to have more cash tied up than 120% of Net Capital to satisfy regulatory requirements. One needs to understand that in running a multi-faceted company, it is not prudent business practice to tie up capital for regulatory reasons just for “show”.

MG is certainly not opposed to increased Net Capital Requirements but it seems that everyone is only concentrating on the first part of the NFA proposal (the new Net Capital Requirement), and completely overlooking the very important second part.  Along with a higher Net Capital, the new proposal also calls for the use of proper and uniform accounting methods. 

It has always been our position at MG that enforcement of proper financial accounting and internal controls is the most important means to verify and ensure the FCM’s ability to operate.  When you are dealing in a highly leveraged industry, no amount of money will ever ensure safety.  Many “big” firms have failed in the past and many more will fail in the future.  The reason for their failure was not necessarily a lack of adequate capital but the fact that they incurred more risk than their financial condition would allow.  Some of these firms misrepresented their financial condition to the public.

- Does your company hold more assets than those belonging exclusively to clients’ deposits?
Yes. Obviously MG has its own funds significantly in excess of client funds and which have nothing to do with client funds.  I think we are overlooking the definition of Net Capital here. 

- Are client’s funds segregated from the firm’s own capital? Are they used in any way by the firm? The NFA does not allow us the use of the term "segregated", so instead I will say that MG customers’ funds are "separated" and are being held in NFA-approved financial institutions, in separate accounts named “Customers’ Separated Accounts.”  Keeping clients’ funds in such separated accounts has always been MG’s policy.  Bear in mind that MG has been in business many years before the NFA began regulating the forex markets.  Similarly, MG currently uses and has always used its own capital for business operations and has never tapped into client funds.

2.   - In case that you don’t meet the new financial requirements, what are you planning to do?
MG has the ability to meet the new financial requirements.  We have been in business since 1992, so to us, this is just another chapter in a long history.  Over the last 15 years in the retail forex business, there have been many problems: embezzlements, unfair pricing techniques, even bankruptcies. This is the first time that the NFA has made a regulatory proposal that has been used to cause panic in the forex markets. I question if this is a scare tactic, proposed by a large entity to eliminate competition in the forex market. (In the original proposal from the NFA, the statement was made that “…at least one FDM (Forex Dealer Member) suggested imposing a higher capital requirement on FDMs…”)

- In case you had to fill for bankruptcy, are your customers aware of that possibility at this time? Will they be protected?
Yes, MG customers are aware of the risks. They are provided with a Risk Disclosure statement that explains the risks before they open their accounts. It has always been clear to all our customers irrespective of this event, that there are no empty promises or a false sense of security when dealing with MG.  There are always risks in this business and MG’s customers are all made aware of those risks before opening an account with us.  Even in the past, when our competitors were promising guaranteed stops and who knows what else, we refused to do the same, because such promises are misleading and impossible to keep. History has shown that we were right, and the firms that made those promises were eventually penalized (fined) by the NFA for their actions.  While some companies view fines as a mere “slap on the wrist” or a non-deterring cost of doing business, MG hopes that as the forex market matures, its participants will recognize that a firm’s reputation is one of its biggest assets.

Although this higher Net Capital will not adversely affect us, I still do not see how not meeting the new Net Capital Requirement is related to bankruptcy.  Just because a company does not meet the new Net Capital Requirement does not mean that it is anywhere near bankrupt. A company that can easily meet the new Net Capital Requirement can still go bankrupt as can be seen by reviewing the many bankruptcies that have occurred in the financial services industry, most recently in the case of Refco.  Sound business practices and internal controls are the decisive factors that are much more important than an increased net capital.

- Can you guarantee your customers that in case of bankruptcy each and every on of them will be able to withdraw all his/her funds?
Every possible step has been taken to ensure protection against bankruptcy including MG purchasing fidelity bond insurance for the past decade.  MG has numerous procedures in place to protect both the company and the customers’ funds.  Also, as I said in my previous answer, customers’ funds are "separated" and are not part of MG’s operating accounts. 

Can we give a 100% guarantee to everyone?  I think that an answer to this question would only insult people’s intelligence.  Clients should be looking at the firm’s internal controls and its reputation.  Clients should check the BASIC section of the NFA website as well as talk to the NFA, research the firm’s history and use their own best judgment in making decisions about any company.  As I said, many bigger firms and banks have failed in the past.  The only guarantee is that: There is NO GUARANTEE.  Customers must learn to do their own research and look deep within a firm instead of falling for unreliable guarantees, smoke and mirrors.

- How long could it take for a customer to withdraw the funds in his/her account in case you were filling for bankruptcy?
According to US bankruptcy laws, once a company files for bankruptcy, a judge appoints a receiver, so the truth of the matter is that the customers’ funds would be distributed by a court of law.  Once again, a good example of how clients can expect to withdraw funds in the event of a firm’s bankruptcy would be the recent Refco case.  And although this might sound alarming to some people, if a person wishes to ask such questions, I think that they should familiarize themselves with the realities of the official process.  It would be much easier for me to say , "don’t worry, your money will be wired to your bank account immediately", but I think that this would once again just be insulting people’s intelligence. 

3. For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading ‘against them’, which contradicts traders’ well-being. What is your company’s position on this? Is your firm currently taking the other side of customers’ position/trade?
Trading in the retail off-exchange foreign currency market, by definition, means that the market maker (in this case the forex FCM) takes the other side of the trade.  We are not talking about an exchange traded instrument where there is a "meeting of the minds".  How else can a customer enter or exit the market, if no one is on the other side of the trade?  Is it betting against the customer?  No.  A legitimate forex FCM operates no differently than a bank.  The profit is generated through risk management.  The customers’ business provides "flow" (volume) which allows the firm to maneuver in and out of the market to generate revenue for the firm.  MG’s management team is made up of ex-bankers and as a result, MG’s operation mirrors that of a bank.  This has been MG’s policy for many years now.  There is a big difference between a firm that bets 100% against the customers’ positions, and a firm that uses customers’ positions as flow for trading.  A firm that bets against the customer operates no differently from a casino, and thus becomes a casino. Gaming laws governing the activities of casinos are based on capital adequacy; however a firm that does the flow trading is managing risk and not operating as a casino.

Let me sum it all up, "retail FX" is a fast growing market.  Where there is money to be made, there will be unqualified people trying to enter the business.  Raising the net capital is not a comprehensive solution.  All it will do is raise the entry fee for the newcomers that are still either qualified to run a business or they aren’t.  Stringent and clear rules governing internal controls and vigilant enforcement of these rules are much more important.  As I mentioned, there is no amount of money that can be considered safe, when running a leveraged financial business.  Look back in history to companies like Enron, Barings Bank, Refco, Franklin National Bank, etc… They were all big firms, all much bigger than any of the existing Forex Dealer Members that are in operation today.  All those firms failed not because of lack of capital, but due to the lack of internal controls of risk and poor accounting practices.  From reading the second part of the NFA proposal on internal controls, it is alarming to learn that there are firms out there which lack any of the requirements that NFA is only now going to enforce.  Net capital is important, sure, but it is only a part of the bigger picture when looking at a company.  I think it is important to point out all the relevant issues at hands.  What about firms that cancel trades after the fact?  What about firms that have clearly violated the rules in what can easily be construed as FRAUD, and are still in business?   This new proposal by the NFA has been turned into a big marketing campaign by some firms as a scare tactic to lure customers from competitors.  That, in itself, should be a clear indication of the type of business environment we are in.

Tak S. Fung
CEO
MG Financial Group Inc.
www.mgforex.com
inquiry@mgforex.com

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