Hi everyone,
It seems today is the starting date for a new FX industry in the U.S as the Senate has passed Farm Bill with a strong majority that overrides any intent of veto by president Bush.
The full bill is available at the House of Representatives website:
http://agriculture.house.gov/inside/FarmBill.html
Title 12th (page 548) is the part of interest for all of us:
http://agriculture.house.gov/inside/...onf/CRlang.pdf
Francesc
Hi everyone,
Yesterday FXDD announced its applications for becoming a National Futures Association (NFA) member and for registration as a Futures Commission Merchant (FCM) with the CFTC are pending approval.
I was already aware of that as Mr. James E. Green, Managing Director & General Counsel at FXDD informed about it a few months ago.
That´s definetly good news!
Francesc
Here you have oficial presse release from FXDD
FXDD Announces Pending NFA Approval
NEW YORK, May 8, 2008 - FXDD, a global leader in online foreign exchange trading, today announced its applications for becoming a National Futures Association (NFA) member and for registration as a Futures Commission Merchant (FCM) with the CFTC are pending approval. Clients may follow FXDD progress through the registration process by logging on to the NFA’s website (www.nfa.futures.org) and searching the BASIC system under its NFA ID number 0397435.
“The pending reauthorization legislation for the CFTC will fill the gaps left by previous legislation and narrow the playing field for entities in the Forex space. The value of companies as registered entities and non-registered entities is driven by many factors; registration is certainly one of those factors,” commented James E. Green, FXDD’s chief legal counsel. “FXDD is always interested in increasing its business under the appropriate circumstances by providing professional service and promoting certainty and clarity as to the government and private agencies responsible for regulating Forex dealers.”
Inquiries
James Green, Chief Legal Counsel +1.212.791.6475
Jennifer Van Hofwegen, Head of Marketing and Communications +1.212.791.6491
About FXDD
FXDD, headquartered in New York City, is a leading online foreign exchange trading firm dedicated to providing superior customer service and powerful technology to retail traders, hedge funds and money managers. FXDD is also a reliable liquidity provider for brokerage companies and institutional investors. The Company offers 24-hour forex trading via its trading platforms: FXDD Trader and Meta Trader (retail), Power Trader (institutional) and FXDD Auto (automated). FXDD provides true interbank pricing; no-interest accounts; fully-automated execution; 100:1 leverage for regular accounts and 200:1 leverage for mini accounts; and narrow bid-to-ask spreads (2-3-wide on most majors. For a free demo, please visit www.fxdd.com, or call toll-free in the U.S. at 1.866.FOR.FXDD or +1.212.791.3933.
Hi everyone
My friend Samuel Araki , VP, Marketing Communications at Trading Post Financial Services Inc. sent me a nice article about new NFA requirements.
The article is titled "Regulating Off-Exchange FX Broker Dealers", authored by Russell Wasendorf Sr., publisher at SFO Magazine and president and CEO at PFGBEST.com.
It does not add anything we have not discussed already here, but it is well written and easy to read.
Thanks Samuel!
Francesc
Hi everyone
I wanted to share with all of you an article I just got from Felix Shipkevich, V.P. & General Counsel at Capital Market Services, LLC, a FX FDM from the U.S.
The article highlights the risks of the new requirements the NFA wishes to implement in the U.S. FX industry in order to better control such teenager industry.
The article does not add much new information about the whole situation but I found it interesting though.
Enjoy it
Francesc
Are regulators creating a monopoly of the Forex industry?
In his recent speech regarding the re-authorization of the Commodity Futures Trading Commission (CFTC), Dan Roth, president of the National Futures Association (NFA), announced a proposal for new rules and regulatory measures to its two dozen Forex Dealer Members (FDMs). The NFA regulates the retail Over-the-Counter Foreign Exchange (Forex) industry under the jurisdiction of the CFTC. The proposal outlines rule changes designed to better protect investors’ funds. However, it will have a drastic effect on the industry as it undermines the ability of some FDMs to continue their business or properly protect their financial exposure.
The regulators are seeking to ensure that FDMs carry enough capital to cover customer funds. In an attempt to achieve that goal, in the past 2 years alone, the NFA has raised the minimum adjusted net capital (ANC) of the financial requirements to $1 million, then to $5 million effective December 21st, 2007. Without seeing the effects of these newly established thresholds, the proposed requirement is now $20 million. If the new requirements go into effect, it may cause a major overhaul of the Forex industry. FDMs which offer the option of leverage higher than 1:100 would be required to maintain an amount double the ANC. This additional requirement raises the threshold as high as $40 million. This means that an FDM would be required to have $40 million dollars safely stowed away and sitting in a bank account.
The new threshold may force some existing dealers to consolidate and would make it undeniably harder for new and prospective FDMs to form in this relatively new industry, only a decade or so in existence. The industry is already small, with only about two dozen firms operating at this time, and the proposed regulation will make it that much more anti-competitive. At this time, only a handful of the FDMs have the resources to independently withstand such a drastic increase in capital requirements. All but the largest FDMs, are alarmed that adoption of the proposed rules will put them in the position of considering two unappealing possibilities; merging or liquidating. NFA’s proposal would potentially weed out the smaller firms, less capable of holding the necessary capital, and would put hundreds of jobs in jeopardy. At the same time it would reward the larger, more capable companies with a bigger market share, potentially monopolizing the industry.
What the regulators fail to address is that the majority of the actions brought against entities for illegal Forex activities have involved unregistered solicitors. It is these dealers that pose one of the biggest threats to the industry. The industry seems to be helpless in an effort to protect customers’ funds handled by unregistered parties. Limiting the types of firms with which an FDM may do business with should be an efficient, justifiable and reasonable solution. It could include entities that are regulated by the NFA, or other foreign equivalent self-regulatory or government agency of the jurisdiction in which the affiliate is registered.
Forex is not new on the international arena with two thirds of the customers coming from abroad and generating well over $1 billion in customer funds, bringing money into the US even at the time of recession. Foreign jurisdictions such as the UK, Japan and Hong Kong have an established Forex industry, without the same problems faced by the US due to the fraudulent activities brought on by unregistered solicitors. The capital requirements in these jurisdictions allow for the assessment of the particular risks and needs of the firm member. For example, the largest base capital requirement in UK is €730,000 with additional risk-assessment based formulas. Japan’s capital requirements are entirely formula based.
It is understandable that the intent behind raising the ANC is to provide some form of a safety net for existing customers and potential investors. The lack of bankruptcy protection for US customers’ funds in Forex is one of the primary concerns of the regulators and so the proposal is a step in the NFA’s broader effort to fill that gap. The effect however, would go well beyond merely bumping up an already existing regulation to practically wiping out most members of the industry. The new financial requirements as they are proposed with the $20M adjusted net capital requirement, would make the industry anti-competitive and would seem to have the opposite effect of the intent of the regulators by putting Customers’ funds at risk by virtue of greater financial exposure and risk of insolvency for its members.
Felix Shipkevich
V.P. & General Counsel
Capital Market Services, LLC
Hi everyone
X IBFX Clint sent me a great article on the new CFTC bill at euromoney
He also said: "Francesc would love to see a story from you, if you decide to blog a story please remember to get all sides NFA, CFTC, current off-exchange retail FX brokers and on-exchange futures FX brokers’ point of view as any unbiased reports should."
Well, I´m going to try:
What Euromoney's article says goes very much in line with what I´ve been saying here in posts about this issue - look for NFA cathegory in this blog (right column).
NFA: NFA did a very bad job ruling the retail FX business when it started in the early nineties. They let too many scammers unbehave for too long.
Now, upset by this situation, they are passing from a very lax regulation to a too restrictive one.
Goal: to take out of business small and troublemaking companies.
Finally, the NFA is trying to move the business to themselves. I don't know if it's because of their own thinking or because they receive pressure from incumbents (on-exchange futures FX brokers).
CFTC: As far as I know CFTC is in the same boat as NFA since CFTC outsourced jurisdiction of the off-exchange business to the NFA. That´s my personal feeling but I´m lacking of sufficient data here so I could be wrong.
On-exchange brokers: They are prepared to jump into a very big, growing and profitable market they were not able to get by themselves. They are expecting that regulators will do the job for them as they lost their part of the cake - that could have been entirely theirs if they had reacted when they should.
Off-exchange brokers: Well, they are fighting to keep what they have built for the last decade. They are competitive, their business is growing - remember that mergers and acquisitions has started not because of the market maturity but because of regulators - so they want to keep staying on the top of the business.
They know that playing with the same cards, they are much more competitive than on-exchange brokers. They have the battle won, and now they don't want to lose the war.
That´s my opinion
Francesc
Francesc:
Interbank FX has no operating relationship with FXLQ.
FXLQ was in the past one of six of Interbank FX’s counterparty liquidity providers.
Interbank FX has not worked with FXLQ for several months. Interbank FX currently executes customer transactions and maintains all of its customer funds on deposit exclusively with top tier financial institutions such as Bank of America, Barclays Bank, Citi, Goldman Sachs, among others.
Interbank FX. , had at January 31, 2008, over $37,000,000 in Stock Holders Equity and currently has net capital of over $23,000,000.
No customer funds are held at FXLQ. Interbank FX does have a receivable from FXLQ that we fully intend on collecting. Until that receivable is collected, we have classified this as a long term asset and therefore not counted as current assets in the net capital calculation.
Please let me know if this helps.
Regards,
Todd B. Crosland
Chairman and President
Interbank FX
Hi Todd,
On December 6 th 2007 I published a post “InterbankFX related to FXLQ?.... I do not think so” after recaiving several e-mails from visitors claiming that InterbankFX was a white label of FXLQ, a company by then under NFA's investigation.
I decided that the best way to find out what was going on was to contact you and ask you directly... and I did so.
To my question about InterbankFX being a white label of FXLQ, you said: “Interbank FX was founded in 2001. We were the first company to purchase the MetaTrader software from Metaquotes. FXLQ was formed in 2006. Our prime broker for clearing our trades is Citi Bank. Our executing banks include: Citi Bank, Deutsche Bank, Bank of America, Goldman Sachs, Barclays Bank and Lava Trading. Let me know if you have any more questions…”
My answer to some comments posted after that post was “So far, Todd Crosland's response is fine for me.”
On February, X IBFX Clint and Scott Kuehne sent me the following document:
http://www.robbevans.com/pdf/forexlqreport01.pdf
This report has been produced by the law firm that took over FXLQ once they went out of business. If you take a look at page 7 institutional clients, you’ll see that InterbankFX was using FXLQ as a clearing house.
So from this document I can see that you forgot to mention FXLQ as a clearing/executing bank/entity for your trades when you answered my question. That omission has damaged my credibility as I trusted your word and now I´m being accused of not saying the truth.... and the truth is that they are right, I did not say the truth by then.
Also, from Robb Evans' document I found confusing two paragraphs you can find on page 8.
First paragraph is: “ The January 23, 2008 letter stated that Interbank FX was not an Introducing Broker of FXLQ, instead, Interbank FX and FXLQ each acted as an arm’s-length, independent couterparty at all times; therefore, FXLQ had no direct relationships to Interbank FX’s customers and consequently, it was the responsibility of Interbank FX , the entity that carried its own customer accounts and funds, not FXLQ, to make payments for those interest rate swap charges in favor of Interbank FX’s customers arose in 2007.”
So this seems to prove that the only relationship between InterbankFX and FXLQ was a broker/clearing house.
But a few lines below, second paragraph states: “… The Receiver received from Interbank FX an Interbank FX Rebate Schedule prepared by FXLQ and an FXLQ boilerplate Authorized Introducing Broker Agreement. The agreement was signed by Interbank FX but not signed by FXLQ. Also, FXLQ’s books show that in addition to the undisputed accrued rebate expense of $1,399,987 at December 14, 2007 as shown in the table above, it made rebate payments to Interbank FX totaling approximately $5.9 million and $25.9 million in 2006 and 2007, respectively. These payments seem to contradict Mr. Gray’s representation that Interbank FX was not an Introducing Broker of FXLQ.”
My readers and FXstreet.com would like to know the truth. I do not see the harm that saying that IBFX had a clearing or IB relationship with FXLQ could cause you as long as IBFX didn´t incurred in bad practices. As far as I know, only FXLQ were incurring in bad practices and that's why the NFA intervened and put them out of business.
But I think that not telling the truth either by denying or sidestepping it is a bad behaviour.
I would be very thankful to hear from you. Your answer will be fully published in my blog
Francesc
Sam Araki, that runs the blog http://www.tradingpostfinancial.com/blog/, contacted me a few days ago thanking me for the following I was giving to FX Solutions acquisition and the new developments occurring in the US with the NFA (National Futures Association) and in Switzerland with the SFBC (Swiss Federal Banking Commission).
He also wanted to hear my opinion.
Even though I’m quite reluctant to give my opinion on issues related to FDM’s as I can easily be accused of being biased, I’ll dare to give you all my opinion... which will probably be exactly the same than yours.
Retail FX has been an unregulated market since its inception except in the UK and Australia. They both got very serious with it from the beginning.
In the US, the NFA did something but we all have seen that it was not enough. The list is long: Refco, FXLQ, One World...
Now the NFA is upset at the retail FX and is going to go from a very soft regulation to a probably too restrictive one as it could put some good firms out of business or in a critical situation. Besides, it seems the NFA is about to give a very appealing piece of cake to futures firms that entered the market later.
In Switzerland, SFBC has been totally absent from ruling the FX market and has now realized that this situation can no longer continue. So they are starting to work on it.
From FXstreet’s point of view, that is like spring showers as we unfortunately have been too many times led up to take decisions that don't belong to us – we are an informative FX portal – but to the regulators…. Otherwise I’ll be delighted to be a regulator but of course I’d require to be paid for it :)
Now seriously, who am I to not accept firms of some countries as Eastern Europe for instance, Middle East or Asia that want to be part of our list of brokers?
Shouldn’t be their local authorities the responsible of those firms’ acts? If you can’t trust them as regulators, then what are they doing in business? Just get out and do not waste people’s time.
The criterion we are using at FXstreet.com is that your firm has to be regulated in the US, UK, Switzerland, Australia, Nordic countries and Japan…. Is this a serious criterion if the list of bankruptcies in the US never ends or if in Switzerland there is no public action yet? Then, what should we do? Forget about two out of three main plazas in the FX arena?
Very tough situation indeed here for us…. So I’m very happy that regulators are finally doing their job.
To finish, I’m also very in line with what Lars Christensen and Drew Niv said last Friday. FX is an asset class and it is time to be dealt and ruled as it deserves.
Also, FX consolidation through merger and acquisitions has been triggered by regulators, not by market natural behaviour. And FX Solutions acquisition proves it.
I think FX Solutions has proved to be a reliable firm in this shaky world of retail FX business so I´m very glad that this acquisition will help them to keep being at the top of the market.
Francesc
Hi everyone
FranFX was so kind to send us all the link to the passed bill at the House Committee of Agriculture
http://agriculture.house.gov/inside/Legislation/110/sbsCFTC.pdf
A quick and very interesting read
Francesc
Hi everyone
This won´t be anything new to you but I just got a list of registered FDM's as of December 2007 and a list of FDM's who have ceased operations since September 1, 2007.
The value of the list is that it has been sent to me by a member of the NFA.
Francesc
Registered Forex Dealer Members (as of December 21, 2007)
Advanced Markets Inc.
Bacera Corporation
Capital Market Services
CMC Markets US LLC
E FX Options LLC
Easy Forex US Ltd.
Forex Capital Markets
Forex Club Financial Company LLC
Friedberg Mercantile Group, Inc.
FX Solutions LLC
Gain Capital Group Inc.
GFS Securities and Futures, Inc.
Global Futures & Forex Ltd.
Hotspot FXr, Inc.
I Trade FX LLC
IFSCL USA, Inc.
IFX Markets, Inc.
Interbank FX, LLC
MB Trading Futures
Money Garden Corporation
Oanda Corporation
ODL Securities Inc.
Peregrine Financial Group, Inc.
RJ O'Brien Associates Inc.
Forex Dealer Members Who Have Ceased Operations Since September 1, 2007
American National Trading Corp.
Direct Forex FX
Farr Financial Group
Forex Liquidity
Hamilton Williams LLC
One World Capital Group LLC
Royal Forex Trading LLC (Freedom FX LLC)
SNC Investments, Inc.
Solid Gold Financial Services, Inc.
XpressTrade LLC
Tough times ahead....
I´m reproducing here an e-mail I just got from one of my sources.
Things are moving and things won´t ever be the same... I think changes will be for good, but the path will be tough for everybody.
I´ll keep you posted
Francesc
"Francesc,
Both U.S. house and senate have passed the CFTC reauthorization act as an attachment to the farm bill. It should take a few weeks to reconcile the two versions of the farm bill and be sent to the president of the United States to sign.
Even though it could die in one of these steps, odds are greater then 50% that it will pass.
The two biggest changes impacting the U.S. Forex industry will be:
1. All IBs will be required to register with NFA and CFTC.
2. Minimum capital requirements will jump to 20m for FDMs or any FCM offering Forex.
Once the bill is passed the CFTC and NFA will have wide lattitude in implementing the specifics and we expect them to make it even tougher for the industry.
The industry is now under the gun publicity wise due to the collapse of One World and FXLQ - Forex Liquidity - with customers there ending up with less then total balances.
We expect more bad news in coming months with many of the still living marginal FCMs expected to fold and its fairly certain there are more disasters looming within the small FCM community as many share the same traits with failed FCMs of having little money for proper accounting, compliance and other essential functions."
Hi everyone
Things are starting to move.... I´ll try to find out names and details, but here you have the latest presse release from NFA
NFA reports four forex firms have ceased operations in light of increased capital requirements
January 11, Chicago - National Futures Association (NFA) announced today that four of its Forex Dealer Members (FDMs) have ceased operations as a result of NFA's new $5 million capital requirement, which became effective on December 21. In addition, six additional FDMs have ceased operating since September 1, 2007.
"When NFA's Board of Directors adopted the increased capital requirement on August 15, 2007, NFA had 34 registered FDMs," said Regina Thoele, vice-president of Compliance. "As of December 31, 2007, that number has decreased to 24."
The four firms that were unable to meet the new capital requirement and ceased operating transferred their customer accounts to other FDMs.
"We closely monitored each of the firms to ensure that customer funds were transferred to another, fully-capitalized firm," says Thoele.
NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the derivatives markets.
Hi everyone,
I´m very happy to let you all know that Monday December 17th at 14:30GMT/9:30EST I´ll be interviewing Drew Niv, CEO at FXCM in a short webinar that will last until 10:00 EST(AM of course). We will only have 30 minutes as there is another webinar starting at 10:00 EST.
We will discuss the auction of the 35% Stake in FXCM and the NFA capital requirements deadline as well as other general topics of interest as the whole picture of the FX market and the entrance of incumbents in the FX retail business.
As always, your help is welcomed and desired, so if you have any question for Drew Niv, please leave them here.
Thanks
Francesc
Hi everyone,
I just thought I should brought up this issue again here as the previous post I made about this it is generating some strongs responses.
Last December 6th I published a post titled "InterbankFX related to FXLQ?.... I do not think so"
There I was publishing an e-mail from Mr. Crossland, CEO and President at InterbankFX, dennying any relationship between his company and FXLQ, a FDM under investigation by the NFA. I also said that Mr. Crossland's words were more than fine to me to close this issue unless I receive solid proves that accussations were true.
Two guys answered the post insisting that there is a relationship between Mr. Crossland and FXLQ's Mr. Gray, so this relationship should put us on guard against IBFX.
Well, I do not know what relationship this guys had in the past if any. No clue.
I do not know either if it is really relevant that this relationship existed or not. Under my point of view what is relevant here is that US FDM's meet with NFA's requirements and we stop seeing them being fined or investigated day in day out by the NFA. Cases like Refco or FXLQ really hurt us all.
In my country Spain, everyone is innocent unless proves shows that he is guilty. I´m 100% agree with that.
So unless I receive proves of any accusation, I´ll believe in the innocence of the person/company being accused.
Francesc
Hi everybody,
Yesterday at a site called forexpeacearmy.com a guy published a post saying that InterbankFX was a white label of FXLQ, a company under NFA's investigation and not allowed to take customers nor to operate in the market.
Some of our visitors came to me regarding this issue and also we at FXstreet.com have a close relationship with InterbankFX as they participate as FDM and investor in our MAP program.
So I decided that the best way to find out what was going on here was to contact InterbankFX's CEO Todd Crosland... so I did.
You can see below the post published at forexpeacearmy.com, my e-mail to Todd and at the top Todd's answer.
For me and my company, Todd's answer is more than fine
Francesc
From: "Todd Crosland" <todd.crosland@interbankfx.com>
To: "Francesc Riverola [FXstreet.com]" <francesc@fxstreet.com>
Sent: 06 December 2007 17:24:10 o'clock (GMT+0100) Europe/Berlin
Subject: RE: FXLQ and NFA
Interbank FX was founded in 2001. We were the first company to purchase the MetaTrader software from Metaquotes. FXLQ was formed in 2006. Our prime broker for clearing our trades is Citi Bank. Our executing banks include: Citi Bank, Deutsche Bank, Bank of America, Goldman Sachs, Barclays Bank and Lava Trading. Let me know if you have any more questions. Also attached is a release of a recent award IBFX has won. Can we post this on FX Street?
Todd B. Crosland
Chairman and President
Interbank FX
www.interbankfx.com
From: Francesc Riverola [FXstreet.com] [mailto:francesc@fxstreet.com]
Sent: Thursday, December 06, 2007 8:47 AM
To: Todd Crosland
Cc: Dale Brown; toni
Subject: FXLQ and NFA
Hi Todd
I´m following very closelly the NFA's action against FXLQ.
I´ve been approached by several people claiming that InterbankFX is a white label of FXLQ.
I didn´t give any credibility to it but before saying anything regarding it in my blog I wanted to get your feed-back.
Can you please give me some info about this?
Thanks
Francesc
Francesc Riverola
CEO & Founder
FXstreet.com
FOREXSTREET S.L
Portaferrissa 7, 1er 2ona
Barcelona, 08002
Tel. +34 93 3040495
Fax +34 93 3040496
From: Dan Campbell, Pipland, USA
Date of Post: 2007-12-05
Review: I've been trying to warn folks for over 2 years now (read my threads below, I used to work there), but justice is finally being servered, "to some degree". Forex Liquidity (FXLQ) is finally under investigation from the NFA. To recap: InterbankFX (IBFX) is a white label of FXLQ. Hense they are able to say "no dealing desk". Because in fact "IBFX" does not have a dealing, but rather it's at FXLQ where all IBFX customers clear their trades...
Sadly, as with most NFA "investigations", nothing will be done, but this should be a hugh warning bell for everyone using IBFX. Following the bread crumbs folks...
http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0362216&rn=Y
http://www.nfa.futures.org/basicnet/Case.aspx?entityid=0362216&case=07MRA00013&contrib=NFA
http://www.fxlq.com/
Tuesday, December 04, 2007 The National Futures Association issued a Member Responsibility Action against FXLQ. You can find the notice on the NFA’s website:
http://www.nfa.futures.org/basicnet/Details.aspx?entityid=0362216&rn=Y.
Effective immediately, FXLQ is not allowed to take on any new customer positions.
We will follow this further
Francesc
I got an e-mail this week-end that I wanted to share with all of you.
As you already know, I sent an e-mail to all U.S. FDM's that were affected by new net capital requirements from NFA and that were clients of FXstreet.com. All them answered our questionnaire except I-TradeFX.
MG from Florida was asking me about this, so I´m deeply sorry to say that I-TradeFX has not answered yet our questionnaire.
Francesc:
I'm curious... Have you still not yet received a response to your questionairre request from I-Trade-FX top boss? I just had a spirited e-mail response,... a lot of adolescent bluster and angst, with one of their 'bright young men.' thanks, M
Hi everyone
A few weeks ago I published here an interview with Dan Roth, President and CEO for the NFA.
At the end of last week I got an e-mail from one of the leading retail FX firms in the U.S. saying that in the interview with Dan Roth it was not mentioned what is a major threat to all FDM's in the U.S.
This major threat is that Dan Roth is proposing that only companies that are mainly engaged in Futures business (IE. FCMs) could be allowed to offer Forex. This means that NFA is effectively trying to put U.S. FDM’s out of business.
Also this menace is approaching fast as the NFA is going through its semi-annual Re-authorization soon. As part of this, the government has to approve their regulatory status as well as any changes that the NFA recommends.
You can read Mr. Roth’s statement before the Subcommittee on General Farm Commodities and Risk Management Committee on Agricultur U.S. House of Representatives on September 26, 2007 by clicking below.
As you can imagine, this is a very important issue for FXstreet.com as it could turn the FX industry upside down, not only in the U.S. but worldwide.
To check the situation with other key players in the US industry, I contacted one of the most important CEO’s in the industry to get his feed-back.
He told me that he didn’t think all FDM’s in the U.S. will be out of business. He considers that what congressional testimony by the NFA president said was that the original intention of the CFMA was not to create the class of FDM’s. Now that they exist though the remedy for this "illness" is to raise the initial capital requirement to $20M instead of $5m which essentially will mandate most firms which would need $40M just as a starting point to stay in business and currently only OANDA, FXCM and GFT have this money.
He also told me that that top U.S. FDM’s are joining efforts to fight against such menace as the lobby against them is very strong.
I’ll keep you all posted.
Francesc
Hi everyone
When covering new capital requirements for FDM’s from NFA, I forgot to mention that they didn’t only raise capital requirement to $5 million to all FDM’s registered and approved by the NFA to perform business in the US but that the new capital requirement was $10 million for firms that offer more than 50:1 leverage.
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=1973
Also, remember that as pointed out at Dan Roth’s, NFA’s president and CEO, NFA is considering raising net capital to $20 million soon.
Francesc
Hi everyone
Mr. Dan Roth, CEO and President for the NFA sent me his answers to the questionnaire we sent to the NFA last October 18th.
I got Mr. Roth's feed-back through NFA's Director, Communications and Education Mr. Larry Dyekman.
As you probably already know, we are interviewing top Forex CEO's to get their opinion about the impact new NFA’s requirements could have on the FX industry. Some of the most important CEO's as Drew Niv, CEO at FXCM, Gary Tilking, President & CEO at GFT, or Glenn Stevens, CEO at Gain Capital, have already answered our questions.
We thought we should also contact the NFA itself to get their opinion about such important issue. To hear the voice of the main regulator of this industry along UK's FSA is always welcome and I just hope this has been the first of many communications between FXstreet.com and the NFA.
Thank you very much Mr. Roth and Mr. Dyekman for your collaboration
Francesc
Questionnaire from FXStreet:
1. Which is the expected impact of the new NFA's requirements in the FX business?
NFA's new capital requirements for Forex Dealer Members ($5 million) become effective on December 21, 2007. We have been contacting our Forex Dealer Members that currently do not have $5 million in capital to determine what actions they will be taking within the next two months to meet their new requirements. Most firms have indicated they will infuse additional capital in their business. At this point, it is unclear whether or not the new financial requirements will impact the number of forex firms in operation.
2. In September 26th, you testified before a Congressional sub-committee regarding the reauthorization of the CFTC. Highlights of your testimony included a request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA. Do you think these additional measures would be enough to grant transparency and competition in the retail FX industry?
The purpose of the proposal is to improve customer protection. Acting as an off-exchange forex dealer involves greater risk than acting as an agent in on-exchange futures trading. The increase of minimum capital to at least $20 million will help ensure that forex firms can meet their obligations to their customers. Likewise, it's difficult to protect forex customers when forex solicitors, trading advisors and pool operators are not subject to any registration and regulatory requirements.
3. Will the NFA find positive if there are some corporate moves, such as M&A's or acquisitions? How does the NFA view the possibility of having fewer participants in the business?
The number of forex firms is not the issue for us. It's the business practices of forex firms that we are primarily concerned with. Are they properly capitalized? Do they meet their regulatory obligations?
4. Apart from a strong vigilance on the accounting practices, will the NFA perform a strong vigilance on trading practices?
A new NFA Interpretive Notice governing electronic trading systems used for forex transactions was recently approved by the CFTC and became effective on July 1, 2007. The Notice details how NFA Forex Dealer Members can fulfill their supervisory responsibilities over the security, capacity, credit and risk management controls, recordkeeping and trade integrity of forex trading systems. We are currently monitoring our FDMs for compliance with this new Interpretive Notice.
5. Switzerland has recently started a similar process, is this process being coordinated with NFA?
We have been contacted by Swiss officials. Communication among regulatory agencies is essential as the markets become increasingly global in scope.
6. 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. How does NFA deal with this issue? Is there any regulation in this matter that customers should know? Will the NFA regulate somehow if a FDM has the ability to act as a broker/dealer and clearer at the same time, which means in most cases taking opposite trades to their customers?
NFA is concerned that retail customers do not fully appreciate the nature of their transactions with Forex Dealer Members and the inherent conflict that exists between the FCM's interests and those of its customers. That's why we are proposing an amendment to our "Forex Transactions" Interpretive Notice to require Forex Dealer Members to provide disclosure language that should make clear to customers that the FDM is acting as a principal in these transactions and may profit from the market moving against the customer. We will present this amendment to our Board of Directors in November and, if approved, will submit the amendment to the CFTC for approval.
7. Customers believe the liquidity sources of a firm should be disclosed. What does the NFA say to that? Is there a way to have more transparency in pricing?
NFA is committed to ensuring that investors have the information they need to make informed investment decisions. We want to make sure that customers know what they are buying and how much they are paying for it.
Hi everybody,
I´ve just sent a few minutes ago an e-mail to Ms. Sharon Pendleton, compliance director for the NFA, with a small questionnaire we would like Mr. Dan Roth, CEO and President for the NFA, would gently answer.
I hope I´ll hear from NFA soon
I´ll keep you posted
Francesc
Hi Ms. Pendleton,
I would be very thankfull if you could pass along this questionns to Mr. Dan Roth, CEO and President for the NFA
If he could answer questions below, we will publish it along the feed-back we have received from CEO's of the most important retail FX brokerage firms as FXCM, GFT, Gain Capital, Saxo Bank, InterbankFX....
Answers will be published at my blog
http://weblog.fxstreet.com/
Thanks
Francesc
Questionnaire:
1. Which is the expected impact of the new NFA’s requirements in the FX business?
In September 26th you testified before a Congressional sub-committee regarding the reauthorization of the CFTC. Highlights of your testimony included a request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA.
Do you think this additional measures would be enough to grant transparency and competition in the retail FX industry?
2. Will the NFA find positive if there are some corporate moves, such as M&A's or acquisitions?
How does the NFA view the possibility of having fewer participants in the business?
3. Apart from a stronger vigilance on the accounting practices, will the NFA perform a stronger vigilance on trading practices?
4. Switzerland has recently started a similar process, is this process being coordinated with NFA?
5. 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. How NFA deals with this issue? Is there any regulation in this matter that customers should know?
Will the NFA regulate somehow if a FDM has the ability to act as a broker/dealer and clearer at the same time, which means in most cases taking opposite trades to their customers?
6. Customers believe the liquidity sources of a firm should be disclosed. What does the NFA say to that? Is there a way to have more transparency in pricing?
Francesc Riverola
CEO & Founder
FXstreet.com
FOREXSTREET S.L
Portaferrissa 7, 1er 2ona
Barcelona, 08002
Tel. +34 93 3040495
Fax +34 93 3040496
Hi everybody,
Glenn Stevens, CEO at GAIN Capital Group, has become the 7th top FX industry's CEO to answer FXstreet's questionnaire about new requirements proposed by NFA and recently approved by CFTC, requirements that could dramatically change the face of our industry in the coming years.
The questionnaire was sent to top20 FX retail industry CEO's, so even though we have already received feed-back from the most important firms in the market as GFT, FXCM, Gain Capital (Forex.com) or Saxo Bank, we haven´t heard yet from too many, maybe not big companies but I´m sure companies that have much to say and interesting things to say about all this.
I want to thank Mr. Stevens and GAIN Capital Group - owner of www.forex.com one of the most visited FX sites on the web - for collaborating with FXstreet.com.
Thank you very much
Francesc
Questionnaire:
1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
We support the new $5MM minimum net capital requirement, as it helps to ensure that all FDMs are better capitalized. In fact, we support Daniel Roth’s recommendation of an even higher $20MM minimum capital requirement. At the rate retail investors are coming into the markets and with the volatility we’ve seen lately, it’s critical that FDMs are on solid financial footing. A $20MM requirement would go even further in protecting retail clients and helping to avoid any further insolvencies.
2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?
Our current accounting practices are already in line with the proposal. Deloitte is our long standing auditor and our books and records are GAAP compliant. Our shareholders include several large venture capital and private equity firms; our financial statements and internal procedures are audited every year. Although this methodology may be more burdensome and costly, it reflects a firm’s ability to accommodate a higher level of independent scrutiny.
3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?
The new standards being considered will create a broader base of potential investors as our member firms achieve higher levels of financial reporting standards.
4 - Switzerland has recently started a similar process, what is your opinion about it?
Currently, regulation can vary pretty dramatically from country to country and there is no reciprocity among the major regulatory bodies. It’s a pretty confusing landscape for retail investors as they don’t understand the regulatory framework in each country. Ideally, in the future there will be more reciprocity between the major regulatory agencies around the world -- but we’re not there yet.
5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?
We’ve already assumed the customer accounts from some of the smaller FDMs that would not have been able to meet the new capital requirements. We are in active discussions with several others.
6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
With regard to M&A activities, I differ from some of my colleagues on this topic. I do believe there will be some M&A activity over the next few couple of years. We’ve seen some pretty significant private equity investments in the space recently. I expect that we’ll see a few more of those over the next year. Also, the bank white label deals that have been announced over the past year are almost certainly a precursor to the banks entering the space. It’s clear that banks are now starting to realize the potential of this market. I would not rule out a few banks taking strategic equity stakes in retail FX firms within the next year.
7 - 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 position on this? How do you hedge your customers' trades?
This question highlights the fact that most retail investors do not fully understand how Over the Counter (OTC) markets operate. In any OTC market (equities, derivatives, etc.), each trade is a contract between two parties – there is no exchange through which trades are routed. Wholesale FX desks at banks run a “book” (the net of their customer trades), laying off risk as needed by trading with their own counterparties. Retail dealing desks are designed in the same manner. There is no inherent conflict of interest or degradation in price/ execution quality in a dealing desk model.
However, all you need to do is spend a few minutes on the forums to realize that some retail firms have clearly taken advantage of their customers to boost their own profits, most often by stop hunting or re-quoting during news events. Customers quickly caught onto which firms were operating in that manner, and out of the backlash came the non-dealing desk firms.
In the end, what should matter most to retail traders is their ability to get into a trade quickly and at the price they request, and where their resting orders are filled. Where the order is ultimately routed to a retail dealing desk or a bank dealing desk is inconsequential - as long as the execution is solid. That’s why GAIN has always employed experienced bank traders - their job is to make tight markets 24 hours a day, ensure quality fills for our customers, and manage our risk effectively. We’ve had the same model since we started back in 2000 and have maintained steady growth each year. Our customer satisfaction is very high – in a recent FOREX.com customer survey over 90% of our customers told us they would recommend FOREX.com to a friend or relative. I think our track record speaks for itself.
8 - Would you like to add something else?
Thank you, Francesc, for offering this opportunity to comment on the important issues facing our industry.
Glenn Stevens
CEO
GAIN Capital Group
Hi everybody,
Today Jean Meneveau, Head of Marketing at Synthesis Bank, sent me the answers of Charles-Henri Sabet, CEO at Synthesis Bank, to our questionnaire we sent to top20 FX retail industry CEO's.
I want to thank Mr. Sabet and Synthesis Bank for collaborating with FXstreet.com to bring some light to what the future will bring us in the FX business.
Thank you very much
Francesc
Questionnaire:
1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
It ensures a more professional service offering in margin FX and strengthens the credibility of our industry.
2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?
No, it will not affect our business in particular. Synthesis operates under strict internal controls and regulatory requirements. This is how we have always done business.
3 - Do you think these measures could be a breath of fresh air that may result in more investors joining the FX Market?
It is always a balance but in this case, yes, they are a breath of fresh air. We all have an interest in FX becoming a true asset class and these new measures will strengthen the credibility of our industry.
4 - Switzerland has recently started a similar process, what is your opinion on this?
Our opinion is on line with the of the Swiss Federal Banking Commission recommendations resulting from the observation of several abuses in the field. Synthesis is supporting the SFBC initiative, that recommends, amongst other things a regulated business model for professional FX traders, clear practice policies and compliance applications. In fact, at Synthesis, all the recommendations are already applied and we would have no issues in meeting the SFBC requirements.
5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on the acquisition of smaller firms?
Following Saxo Bank’s acquisition of Synthesis in September, it is not a question for me to answer alone. I believe, however, that Saxo Bank will evaluate this like any business venture we undertake.
6 - How do you see the M&A market in the FX industry? Do you expect important corporative movements in the next months?
M&A does have a significant impact on the industry. However, I do not believe M&A will be able to top the more strategic partnerships.
Take for example Saxo Bank. The bank provides the full technological, trading and risk management application to its partners, including the award-winning trading platform in their own branding. This business has made Saxo Bank the world's leading provider of White Label Services with over 100 partners globally. Synthesis was actually Saxo Bank’s biggest White Label Partner prior to the acquisition and it is these kinds of strategic partnerships that are more likely to change the industry.
7 - For many, the very business model of FX brokerage firms needs to be debated in terms of whether or not such brokerage houses can take opposite trading positions to those held by their customers; i.e., trading 'against them', something which contradicts traders' well-being. What is your company’s position on this? How do you hedge your customers' trades?
Our business case has always been to grow our customer base and you can only do that if your clients are satisfied and profitable.
8 - Would you like to add something else?
I would like to end on a positive note. The 2007 BIS survey came out last week and it showed that the FX marketplace is growing like never before. The 70% jump since the last survey in 2004 is the largest ever jump since the survey began. FX is becoming a true asset class.
Hi everybody
In September 19th we sent an Open Letter to twenty of the most important CEO’s of the retail FX industry and all of them clients of FXstreet.com.
We have only received answers from FXCM, GFT, Forex.ch, Saxo Bank and InterbankFX so far.
Forex.com, Synthesis Bank and dbFX told me they were interested in answering and they will do so soon. No answer yet from ODL, CMC, MF Global, FX Solutions, MIG Investments, Crown Forex, ACM, Swedish Forex and WestcapFX.
Also, in August 14th I sent another Open Letter to FXstreet's clients affected by NFA capital requirement changes. I sent such letter to:
ITradeFX, FXDD, FXClub and MG Financial
ITradeFX hasn't replied so far.
All the best
Francesc
Hi everybody,
I asked our FX experts Toni Juste and Alberto Muñoz to give me a hand to prepare a battery of questions to send to NFA’s president and CEO Mr. Dan Roth.
We want to know NFA’s position regarding the impact their new requirements just approved by the CFTC could have in the retail FX market.
As follows you can find the questions we have put together. As always, any help from you will be much appreciated:
1. Which is the expected impact of the new NFA’s requirements in the FX business?
In September 26th you testified before a Congressional sub-committee regarding the reauthorization of the CFTC. Highlights of your testimony included a request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA.
Do you think this measure really benefit transparency and competition in the retail FX industry?
2. Will the NFA find positive if there are some corporate moves, such as M&A's or acquisitions?
How does the NFA view the possibility of having fewer participants in the business?
3. Apart from a stronger vigilance on the accounting practices, will the NFA perform a stronger vigilance on trading practices?
4. Switzerland has recently started a similar process, is this process being coordinated with NFA?
5. 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. How NFA deals with this issue? Is there any regulation in this matter that customers should know?
Will the NFA regulate somehow if a FDM has the ability to act as a broker/dealer and clearer at the same time, which means in most cases taking opposite trades to their customers?
6. Customers believe the liquidity sources of a firm should be disclosed. What does the NFA say to that? Is there a way to have more transparency in pricing?
Francesc
Hi everybody,
As you may already know, we are interviewing top Forex CEO's to get their opinion about the impact new NFA’s requirements could have in the FX industry.
Some of the most important CEO's as Drew Niv CEO at FXCM or Gary Tilking President & CEO at GFT have already answered our questions.
We thought we should also contact the NFA itself to get their opinion about such important issue.
At the end of last week I contacted NFA’s compliance director and she gently came back to me showing her interest about our initiative.
Now we are in the process of preparing the best questionnaire possible for Mr. Dan Roth the President and CEO of the NFA.
We would need your help here again... Do you have a question for the NFA?
Place your questions here at this post
Thanks
Francesc
Hi everybody
Mr. Christian Frahm, Senior Executive Director at Saxo Bank, has just sent me Saxo Bank’s view about new NFA’s requirement that as we all know where this weekend approved by CFTC.
I want to thanks Mr. Frahm and Saxo Bank for participating in FXstreet’s questionnaire.
Saxo Bank is joining InterbankFX, FXCM, GFT and Forex.ch in answering our questionnaire. I’m sure we still have many to come.
Francesc
Questionnaire:
1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
I think it strengthens the credibility of our industry and we view it as a positive move.
We have been through regulations in Europe over 10 years ago and a couple of years ago in Japan.
If you look at Japan as an example - before the regulatory changes they had over 600 brokerage companies offering margin FX - a lot of them very small and some of them not necessarily offering a professional service to their clients. As soon as regulations kicked in, the market space changed from 600 unlicensed brokers to less than 100 licensed brokers.
The clients benefited from the comfort of being serviced by a licensed counterpart and as a whole the industry benefited from a more professional service offering in margin FX.
We see the same dynamics coming into play in the US – a lot fewer brokers offering margin FX - but as a whole a more professional industry.
2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?
No, we do not think it will have a direct impact for our business.
Saxo Bank, as a fully EU licensed bank, is already under very stringent internal controls and regulatory requirements. Our award-winning platform, the SaxoTrader, is already industry leading in terms of back office reporting, audit trails and transparency and availability of account information for the clients.
We remain committed to satisfy the reporting requirements for areas where we do business and keep an open dialogue with local regulators.
3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?
In general, yes. The FX industry in the US has had a mixed reputation over the years, however in recent years this has improved. More stringent regulations with higher capital requirements and better reporting for the clients, will only validate the FX business as an asset class in my mind and attract more people to invest in FX.
4 - Switzerland has recently started a similar process, what is your opinion about it?
Similar thoughts. I think. The industry benefits, the clients benefit and ultimately as clients go for quality, names like Saxo Bank benefit.
5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?
Sure, that is a possibility that we cannot rule out. Clearly, there will be good companies which will not meet the new requirements and if the opportunity is right, we will evaluate like any business venture we undertake.
6 - How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
I think we will see some M&A activity in the industry, but more of strategic nature like Saxo Bank's purchase of Synthesis Bank. We are still in a very healthy growth stage and fairly early in the maturity stage of the margin FX business. So I think we are some years away from an actual consolidation for market share.
However, on the partnership side, we see a lot of things happening. Saxo Bank, as the world's leading provider of White Label Services with over 100 partners globally, made a very early bet on providing other financial institutions with infrastructure and a trading platform in their own branding. Synthesis which Saxo Bank acquired in September actually started out as a white label partner. White Labeling is a major part of the business and we see this business growing rapidly as more and more financial institutions recognize their roles as local distributors to their client base focusing on servicing their client with the best products provided by leading facilitators like Saxo Bank.
Many are asking themselves: why try and built your own trading platform when you can get an award winning platform like SaxoTrader with your own branding - and benefit from 15 years of expertise and development in this business?
7 - 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 position on this? How do you hedge your customers' trades?
I think the question to ask is whether the broker you are trading with is growing customer assets under management? What is the company doing in terms of advice, education and tools on the platform to ensure the client has the best possible information and analytics to make a profitable trade.
In the end, you only grow your customer's asset under management significantly if you are able to facilitate happy and profitable clients.
If you look at Saxo Bank, we, year after year, have a significant increase in our customer assets under management. In addition, we have a strong focus on developing tools to help the investor. Moreover, Saxo Bank has a world class track record from our own Strategy Team. The Strategy Team shares with our clients which trades they are doing and why.
Notice I-07-39
September 28, 2007
Effective Date of Amendments to NFA Financial Requirements Section 11 and the Interpretive Notice Entitled "Forex Transactions"
NFA has received notice that the Commodity Futures Trading Commission has approved changes to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions." The amendments increase the minimum net capital requirement for Forex Dealer Members (FDMs) to $5,000,000. They also eliminate the concentration charge and replace it with restrictions on the types of firms with which an FDM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17. These changes will become effective on December 21, 2007.
A Forex Dealer Member must have $5 million in adjusted net capital as of December 21, 2007. This increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). Since this is a significant change to the qualifications for the exemption, Members that are currently operating under Section 12(b) should notify NFA's Compliance Department whether they intend to continue using the exemption.
As noted above, the changes eliminate the concentration charge and replace it with restrictions on the types of firms with which an FDM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17. In particular, an FDM may not include assets held by an unregulated person or an affiliate in its current assets for purposes of determining its adjusted net capital, and it may not use positions entered into with an unregulated person or an affiliate to cover its exposure for purposes of avoiding the haircuts imposed by CFTC Regulation 1.17. In general, a firm is unregulated unless it is a U.S. bank; a FINRA-member broker-dealer; an NFA-Member FCM; a state regulated insurance company; or a bank, broker-dealer, FCM, or insurance company regulated in certain foreign jurisdictions. NFA can, however, grant exemptions authorizing the use of unregulated entities or of particular affiliates.
NFA's August 17, 2007 submission letter to the Commodity Futures Trading Commission includes a copy of the revised language as well as a more detailed description of the changes. You can access an electronic copy of the submission letter at National Futures Association | News Center.
Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance, (spendleton@nfa.futures.org or 312-658-6540) or Valerie Kretschmer, Field Supervisor, Compliance (vkretschmer@nfa.futures.org or 312-658-6588).
©2003-2007 National Futures Association
Dan Roth the President and CEO of the NFA testified before a Congressional sub-committee yesterday regarding the reauthorization of the CFTC. Highlights of his testimony included his request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA.
An interesting reading indeed!
Good night everyone
Francesc
Hi everybody,
Mr. James E. Green, Managing Director at FX Direct Dealer, LLC (“FXDD”), sent me a few days ago his response to our open letter to FXstreet's clients affected by NFA's capital requirements changes. I do not know why the e-mail entered in a wrong foulder and I´ve not discover it till five days later, so please Mr. Green accept my apologies for this unfortunated delay.
I want to thank Mr. Green for attending my request and I just hope that the last FXstreet's client affected - ITradeFX - will get back to me with their statement as soon as possible.
Francesc
Francesc:
I am providing this memorandum in response to your email enquiry and further to our discussion of the issues you raised in your email. I believe our telephone conversation clarified some of the questions you raised, particularly as they relate to the form of some the questions and terms that are, at least in the United States, what I terms of art. I appreciated your candor during our discussion and I trust you appreciated mine.
The internet, like any anonymous means of publicly available communication, is a two edged sword and anonymous self censorship is not one of the internet’s strengths. There is nothing to prevent one person’s comments from being taken out of context while providing anonymity to the person who republishes the comments in chat rooms and on bulletin boards. I know that many firms have been on the receiving end of comments they believe were unfair, half truths or simply wrong. You have the unenviable task of trying to strike the right balance in publishing comments made on FXStreet. Like most forums, FXStreet has allowed people to openly express their views anonymously. There are always instances, as you and I discussed, where unhappy, unlucky and/or unskilled “traders” use the internet to vent their anger at one or multiple firms for both real and imagined slights. As we noted, perhaps time could be better spent learning their craft, developing an understanding of how the OTC spot foreign exchange market actually works (rather than wishing it worked differently) and taking advantage of the services offered by the many excellent firms that appear on your site.
There has been much made of the NFA’s decision to increase capital requirements and we, like many firms, have fielded telephone calls from traders wanting to know how this increase in capital will impact the firm. It seems as though these traders have all been reading each other’s mail or reading the same chats because they all refer to the companies that “the NFA put out of business.” We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA. We also note, however, that we do not believe that increasing capital requirements to $5,000,000 is sufficient. If $5,000,000 is the miinimum threshold entry to the foreign exchange business, it is only a slightly higher barrier to entry than the previous $1,000,000 minimum capital requirement. While it is true that the companies against whom the NFA took action were undercapitalized, their management’s lack of experience and expertise surely contributed to the failures. Perhaps a “minimum net experience” threshold should also be a requirement. We advise our clients that FXDD is well capitalized and holds substantially more capital than that belonging exclusively to its clients. FXDD does not publish its capital or the amount of customer equity it holds. Those prospects who demand to see our confidential financial information are advised that we do not release that information.
As I suggested to you during our conversation, customer funds held for off exchange OTC transactions may not be deemed to be “segregated” as that term is understood in the context of the Commodity Exchange Act and the NFA’s regulations. Thus it is unclear whether funds held for such transaction are protected in the event of a bankruptcy. To the best of my knowledge, only funds held for regulated activity in the futures markets will receive segregated protection. Most firms, FXDD included, manage their own firm capital separate and apart from the margin capital posted with their liquidity providers. Thus, firms who imply to clients that client funds are “segregated” are by reference seeking to assure the client that somehow their funds are secured and are protected. This issue struck home with the Refco fiasco. Perhaps the U.S. Congress will, at some point, extend the benefits of true segregation to client funds held by all foreign exchange dealers. Currently, however, that option does not appear to be available to any dealer regardless of its registration status. Thus it appears that once a firm files for bankruptcy protection, clients would not be able to withdraw their funds. Those clients would become unsecured creditors of the firm. FXDD carries a blanket bond that covers theft, fraud and criminal activity by its officers and employees, but even that does not cover bankruptcy.. I do not know whether other firms carry such a bond.
The company listed on the CFTC’s website, Tradition Securities and Futures, Inc. (TSF) is not FX Direct Dealer. Tradition Securities and Futures, Inc. is a registered futures commission merchant that does not deal in spot foreign exchange. TSF is owned by Tradition North America, Inc. which is also a minority shareholder of FXDD. Tradition North America, Inc. is one of the largest interdealer brokers and provided financial and professional assistance to FXDD when it was a startup company. Tradition North America, Inc. is part of the Tradition Group which has a forty plus year history in the financial markets (www.traditiongroup.com). FXDD has maintained the policies, procedures and protocols established when it was a subsidiary of Tradition.
Regarding the business model that foreign exchange dealers follow. Some firms accumulate customer positions; others pass those positions through to the dealer’s liquidity provider (STP); while others use a combination of accumulation and STP. As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question. From the client’s perspective (at least our clients’ perspective), the issue is not whether there is a perceived or actual inherent conflict of interest on the part of firms who may accumulate positions. Our clients want to know that our desk manages client positions with integrity based on honest pricing and fair dealing practices. Some firms have, rightly or wrongly, developed a reputation as “stop hunters,” and “boosters.” Since the dealing firm knows all customer positions, it might be tempted to widen the market or boost the bid or offer just so that it can hit client stops. Later they justify the price change based on a set of objective or subjective parameters. Those firms, to our way of thinking, are not credible dealers and abuse their clients’ trust. And firms who are strictly providing liquidity on an STP basis (no dealing desk interference) have the same ability to manipulate the price should they choose to. Professional dealing desks like FXDD’s manage risk, execute customer trades when needed and provide constant liquidity to the firm’s clients. The bottom line is that clients must always demand credible pricing and honest dealing from their firm whether it is FXDD or one of the other excellent firms on your site.
I hope I have answered your questions Francesc. FXDD prides itself on providing honest pricing, credible dealing practices, good client support and competent assistance with all matters relating to our clients’ accounts. There are many good firms on your site and we, like them, would like to see the foreign exchange market grow. The really good firms do not tolerate abusive activities or remarks aimed at their competitors and are content to let their services speak for themselves.
Gary Tilkin, President & CEO at Global Forex Trading (GFT), has been the 4th top executive of the selected 20 FX Brokerage firms to answer FXstreet's questionnaire regarding new NFA requirements and their potential impact on the FX industry.
I want to thank Gary for attending my request and wish him and his company GFT all the best of luck.
Francesc
Questionnaire:
1- What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
In general, we view the NFA's new changes as a positive for the forex industry. GFT has always operated with integrity and acted as though far tougher regulations existed in the retail forex industry, even prior to the Commodity Futures Modernization Act of 2000. More recently, GFT has been working with the NFA on many of the new regulations you refer to, and in fact, GFT has suggested to the NFA some of the regulations that are being implemented. GFT continues to speak with both the NFA and the CFTC in the U.S. to help work for a stronger retail forex industry.
2- The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?
Most, if not all, of the proposed changes will affect GFT as they will affect all FDMs, but we view these as positive changes. GFT practices proper accounting methods, and employs one of the world's big three accounting firms to do our annual audit as well as separate internal control-auditing.
Currently, GFT ranks as the #1 Forex Dealer Member, in terms of Adjusted Net Capital (according to the CFTC website, which lists Adjusted Net Capital figures for FCMs, including FDMs). We have far more capital than the majority of FDMs and we strongly believe that our dominant position will continue, and in fact, grow with sensible regulations not only in the United States but around the world.
3- Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?
The number of customers moving to the forex market is very impressive and we see this strong growth curve continuing for many years to come. A properly regulated forex industry by well-informed regulators can only benefit everyone involved.
4- Switzerland has recently started a similar process, what is your opinion about it?
We would like to see similar regulations in most, if not all, developed nations of the world. GFT has customers worldwide supported by three offices in the U.S. and outside of the U.S. in London, Tokyo and Sydney with more offices planned for 2008 and beyond, so we are in favor of consistent regulations globally.
5- Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?
GFT has the capital, service levels and depth of products to be able to greatly benefit some of the smaller forex firms that find they cannot meet the new capital requirements. With our three versions of order entry and analysis software (DealBook 360, DealBook Web, and DealBook Mobile) as well as our training and analysis products, we are uniquely qualified to give substantial upgrades in service to customers of smaller firms. We currently have near perfect uptime statistics for our dealing platforms and substantial additional capacity, so we are always in a position to immediately add a significant amount of new trading volume.
GFT is currently speaking with some of the smaller players in the industry who could benefit from our capital base and capabilities, and we are interested in speaking with any firm or customer who would like to partner with GFT.
6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
There will probably be some mergers and acquisitions, but we don't expect many.
7- 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 position on this? How do you hedge your customers' trades?
This question assumes something to be a fact where there is none. The assumed fact is that forex dealers who "book" the trades of at least some of their customers are somehow working against those customers. Perhaps in the old days of the true bucket shops or even in the more modern world of some smaller forex firms, there were or are those who may have wished their customer's ill. But to assume that the practice of booking trades of customers is working against those customers is a very naive and simplistic view of what is really happening.
Many firms that own and operate their own software and are true forex dealers (as opposed to simple brokers--shifting the trades to someone else), often by virtue of filling orders instantly have to take those customer orders into their own book, at least temporarily. This is often done to facilitate very quick executions of orders. As these counter positions build up, the dealer often seeks to offset the risk of these positions with their various banks. Depending on the size of the forex dealer's capital, the dealer may or may not offset certain levels of these counter positions. To assume, however, that the dealer is then "working against" the customers with whom they hold non-offset positions is totally ridiculous. Well-established, reputable forex dealers need never do anything to harm any of their customers to make good profits.
At GFT, we profit by our customers becoming more successful and growing their accounts larger and larger and bringing more people into the business. This is why we've developed a high-quality series of training courses for our customers, so they can become more knowledgeable and informed traders.
8- Would you like to add something else?
A closely related topic that has been promoted lately by some forex dealers is the notion that they have "no dealing desk." While it may be true that the firm running such a promotion has no dealing desk itself, it borders on fraud to suggest that no dealing desk is involved in the forex transaction. Those forex dealers who have no dealing desk are simply passing on the trades to one of the banks they deal with. That bank, of course, has a dealing desk and handles that transaction the same as any other forex dealer would. The biggest difference is that when a customer deals with a forex dealer who operates a dealing desk, the customer has the luxury of being able to call that dealing desk to discuss any problems or questions they may have on any of their trades. They can get a quick, informed answer as opposed to attempting to deal with a large bank that is shielded by a forex dealer that has no dealing desk and no intention of letting the customer talk to that bank's dealing desk. The main point that customers must understand is that there is always a dealing desk involved in a forex transaction, and any attempt to confuse customers into thinking that there is not is highly dishonest.
Those firms that used to operate as forex dealers and are now operating as forex "brokers" (operating no dealing desk of their own but simply passing on trades to banks) are using a tried and true method of processing orders but may be short-changing their customers as they become a "middle man" for the transaction, placing the customer further away from the dealing desk that actually fills their order. For small "hit and run" type of trades this may not be much of a problem, but for serious customers doing substantial forex trades and looking for the best in service, dealing with a firm operating a dealing desk staffed by helpful, experienced dealers is a huge advantage.
Firms such as GFT who operate dealing desks properly can fill thousands and thousands of orders virtually instantly, but also have trained individuals monitoring orders to help customers with any situation. Properly run dealing desks are simply a higher level of customer service as opposed to an impediment to execution speeds.
Contrary to popular opinion, when dealing with forex dealer members acting as brokers, customers must realize that their broker makes a portion of the spread that is added on to the dealer spread. And as they are a degree separated from the actual dealing desk where the trade occurs, there is less discretion that the market maker/dealer can have in order acceptance, especially since there are additional revenue streams for each order (orders introduced by introducing brokers may also have additional mark-ups applied). Common side effects experienced by the trader include more trade rejections and generally higher rates of slippage.
At GFT, customers see and can execute their trades on streaming prices 24 hours a day, almost 6 days a week, directly with a market maker. On liquid markets, GFT customers have access to trade up to 20 million in notional volume with a single click of a mouse. Unlike most of our competitors, GFT does not widen spreads during market volatility, due to its interbank dealing relationships and the liquidity that GFT has available during even the most turbulent market conditions.
Gary Tilkin, President & CEO at Global Forex Trading
Drew Niv, CEO at FXCM, has been the second top executive of the selected 20 FX Brokerage firms to answer the questionnaire we sent yesterday morning regarding new NFA requirements and their potential impact on the FX industry.
I want to thank Drew for attending my request so quickly and wish him and his company FXCM all the best of luck.
Francesc
Questionnaire:
1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
We believe the new NFA regulatory changes will lead to a consolidation of the retail forex industry. The consolidation will benefit FXCM, since we easily meet the new proposed regulations.
The proposed regulations will require that firms have at least $5 million in net capital. However, the requirement for brokers with large amounts of customer capital could be substantially higher. We estimate that as many as 20 firms would not be able to meet this requirement if enforced today.
The forex industry in the long term will benefit from having a smaller number of better capitalized brokers. In essence, a broker with more firm capital is less likely to make imprudent decisions that would put its funds and its customer funds at risk.
Although these new regulations are good for the industry, the resulting short-term changes may be difficult for clients whose brokers do not meet the new requirements. We hope that the NFA will make every effort to facilitate an orderly transition as brokers make new arrangements to enable their clients to trade through firms that meet the new requirements.
2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?
No. FXCM’s accounting practices will not be affected by the new proposed regulations. Our own business standards led us several years ago to adopt the practices specified in the new proposed regulation.
For the last six years, FXCM has been audited by major accounting firms which audit public traded companies. Our financial statements comply with international GAAP standards.
To live up to these higher standards, we have had to maintain a highly trained and professional staff of accountants and internal auditors. We believe only a large firm, such as FXCM, can make the type of investment in financial integrity which will now be required of all FDMs by the new proposed standards.
3 - Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?
Yes. The FX market has been growing at an incredibly fast pace. However, its momentum could be slowed if one or more brokers became insolvent. These new proposed rules significantly reduce the probability of that happening. Thus, the proposed new rules help protect the future of the industry.
My personal opinion is that the emerging credit crisis will have a major impact on equity markets. As profitability in trading stocks becomes more difficult, there will be a mass of traders into forex. We do not want those traders’ first opinion of forex trading to be of an industry in need of regulation.
4 - Switzerland has recently started a similar process, what is your opinion about it?
Switzerland’s regulation of the forex market has lagged years behind the world’s other major financial centers. The recent insolvency of a Swiss trading firm, TradeX, highlights the dangers of dealing with a broker based out of Switzerland, where there is currently minimal regulatory oversight. As Switzerland moves to correct these problems, it will help the world-wide forex industry.
Every time a major country embraces regulation of retail forex trading, such as Japan in 2005 and the United States in 2000, the industry has grown.
5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?
FXCM is in discussions with several small and mid-sized FDMs who are concerned about their ability to meet the new proposed requirements. We are interested in purchasing the client accounts of these firms, or finding a mutually beneficial relationship with them.
The FXCM Group is uniquely positioned to accept and service the books from other brokers. We have 1) A global footprint with offices in the Americas, Asia and Europe; 2) A staff of over 500 capable of handling the migration of a large numbers of client; 3) over $100 million in group capital to fulfill th