Some forex firms closing soon?!

Discussion in 'Forex Brokers' started by Peter35, Jul 26, 2007.

  1. Peter35


    The news about the NFA shaking up the forex industry by dramatically raising capital requirements has kicked off a lot of speculation. So I gathered everything I have learned about this new NFA proposal and am posting here for your review. As someone who has been burned by a bankrupted forex broker I can tell you it is not a pleasant feeling to watch your funds get sucked into some black hole. So my advice is to stay away from any firm that is not currently meeting the coming $5 million capital requirement. And if you already have money at such a firm, get it out, now. If you don't, you could end up like the poor souls at United Global Markets (UGMFX) who can't get their money out due to an NFA account freeze:

    Who has the Money & Who Doesn't
    To find out how much money your broker has goto the cftc's own website

    Healthy Forex Firms
    FXLQ ($36,000,000)
    Interbank ($7,000,000)
    FXCM ($51,000,000)
    GFT ($48,000,000)
    Oanda ($44,000,000)
    FX Solutions ($20,000,000)
    Gain Capital ($20,000,000)
    CMS ($10,000,000)

    Dead Firms Walking
    One World Capital ($1,105,000)
    Velocity4X ($1,587,000)
    Direct Forex LLC ($1,523,000)
    FiniFX ($1,464,000)
    Forex Club ($3,304,000)
    GFS Futures & Forex ($3,074,000)
    Nations Investments ($1,699,000)
    Royal Forex Trading ($1,102,000)
    SNC Investments ($1,565,000)
    FXDD ($781,000)
    I Trade FX (-$3,039,000!!!!! Close to Bankruptcy!!!!)
    MB Futures ($3,080,000)
    Money Garden ($3,399,844)
    United Global Markets (Bankrupt)

    Here is the actual NFA proposal to raise capital requirements (below that is the sad email from the CEO of UGMFX stating the firm is going under.) The CFTC is expected to sign off on it this summer. I'll comment further on the proposal in a future posting as it will actually require most firms to have upwards of $10 million in capital when you take into consideration such things as open customer positions and margin levels. In any case, this should be sober reading to anyone who is currently trading at one of the "Dead Firms Walking."

    NFA Proposal
    The proposals pertain to the minimum adjusted net capital requirement and the concentration charge and set certain requirements for FDMs' internal financial controls.

    Minimum Adjusted Net Capital and Concentration Charges

    In the past twenty years, there have been nine FCM insolvencies. Since 1990, there have been only two insolvencies by traditional FCMs trading on U.S. exchanges, and no funds in segregated customer accounts were lost in either of those two instances. This is from a population that averages around 250 (over the last 20 years). Even in the Refco matter, the FCM filed for bankruptcy not because customer funds were at risk but, rather, to facilitate the sale of its assets and the transfer of its accounts in connection with the parent company’s insolvency.

    The FCM insolvency rate becomes more troubling when FDMs are added to the mix. Of the three bankruptcy or receivership proceedings for insolvency occurring in the last four years, two have involved FDMs (Refco was the third), and they are drawn from the smaller FDM population (averaging around 40). Specifically, in late 2003, an FDM misappropriated almost $2 million of customer funds, which depleted the amount of assets necessary to meet the amounts owed to customers. The Commodity Futures Trading Commission ("CFTC") is still working to try to get back some of the customers’ funds. More recently, NFA took a Member Responsibility Action ("MRA") against an FDM whose liabilities exceeded its assets by over $1 million. The CFTC also brought an emergency action in U.S. District Court, and the Court immediately appointed a receiver who was subsequently able to sell the FDM’s customer accounts. Due to this sale, it appears that the customers were made whole.

    This discrepancy between FDMs and FCMs involved in on-exchange transactions is even greater when looking at the number of financial MRAs NFA has issued in the last ten years. During that period, NFA issued twelve MRAs to FCMs for failing to demonstrate compliance with NFA’s financial requirements. Three of these firms were traditional FCMs with an on-exchange business, one was a forex dealer registered as an FCM prior to the advent of the FDM category, and the remaining eight were FDMs.

    NFA's concern that one day an FDM might be unable to meet its financial obligations to its customers has heightened as the amount of retail customer funds held by FDMs has increased to over $1 billion. The above described FDM insolvencies have done nothing to abate this concern, particularly with the most recent occurring just months after the $1 million capital requirement became effective. If the receiver had not sold the FDM's accounts, then twice within less than four years customers of FDMs would have lost funds due to an FCM insolvency. Additionally, since March, eight different FDMs have fallen under the early warning requirement of $1.5 million.

    One of the reasons for the 2006 increase to the FDM capital requirements was that an FDM’s dealer activities create greater financial risks than the agency transactions involved in traditional exchange-traded futures and options. A second reason is that the need for adequate capital is particularly acute for FDMs since customers trading off-exchange forex have not received a priority under the Bankruptcy Code in the event of a firm’s insolvency. Both of these reasons still exist.

    NFA is not alone in recognizing the increased financial risk of acting as a dealer. Congress recognized that acting as a dealer increases financial risk and requires substantially higher capital on the part of the dealer. Pursuant to Section 4c(d)(2)(A) of the Commodity Exchange Act (the "Act") the grantor of a dealer option must maintain at all times a net worth of $5 million. The Commission has likewise recognized the increased financial risk resulting from being a dealer, imposing an adjusted net capital requirement of $2.5 million on leverage transaction merchants ("LTMs").[1]

    When the Commission adopted the financial requirements for LTMs in 1984, it noted that the leverage market is "essentially a principals' market" and that the "purchaser of a leverage contract is solely dependent on the LTM for performance on the contract."[2] This is the exact same situation that customers are in when they purchase or sell currencies with an FDM. Further, as with an LTM, an FDM "takes the other side of every [contract] entered into by a [customer]" and the FDM "is the sole guarantor of performance on the [contract]." When trading with an FDM "there is no clearing organization to take the other side of every trade, no FCM guaranty of variation margin to the clearing organization and no clearing organization guaranty fund and assessment power."[3] Due to these factors, the financial requirements for FDMs, like LTMs, must be substantially higher than those for FCMs engaging in agency transactions.

    As noted above, the Commission imposed the $2.5 million capital requirement for LTMs in 1984. Based upon the Consumer Price Index, $2.5 million in 1984 dollars would be worth approximately $5 million today. Accordingly, NFA is proposing to raise the minimum adjusted net capital for FDMs to $5 million. An increased capital requirement would result in an FDM having a larger buffer to meet its obligations to its customers. Additionally, an increase in capital requirements for FDMs would ensure that FDMs have a larger financial stake in their forex business.

    Mr. Stephen Leahy
    Chief Financial Officer
    United Global Markets, LLC

    Dear Valued Client:

    United Global Markets (UGMFX) has been notified that we are in violation of CFTC Regulation 1.17(a)(4) by our regulatory body, the National Futures Association. We have been notified that we fall below the minimum Adjusted Net Capital requirements of $1,000,000 and therefore may not allow clients to open new positions until we increase our own capital.

    To be clear, United Global Markets has more than enough cash assets as compared to our liabilities to our clients. But we do not have $1,000,000 of our own liquid assets which is the NFA’s required minimum.

    We are speaking to an institutional partner that has both more than the capital requirements AND shares our philosophy of treating clients fairly. However as with most large financial institutions, they have not been able to due their due diligence on United Global Markets in the short time period since the NFA’s proposed changes to Financial Requirements.

    Therefore, in compliance with the NFA-issued notice of violation of CFTC Regulation 1-17(a)(4), our clients may only close open positions and not initiate new positions until further notice. Additionally we may not accept new client accounts or further funds from existing clients.

    For those who wish to withdraw funds, please fax or e-mail a Withdrawal Request Form and we will process quickly.
  2. Rufawana


    Thanks for the news, do you have a url for this as I am having trouble finding it on th cftc's site. Cheers
  3. murfy_kl


    I googled the website and i i didn't find such info !
  4. This post is strangely familiar.
  5. inggscap


    Any more info on this? Anyone found the page that mentions these details?

    There's two brokers I'm interested in looking at which are on the "dead but walking" list...


    *edit* I just found this...

    Change the last digit ie. 04 to 05 etc for the latest months after.

    The figures though don't add up to the ones posted here.
  6. murfy_kl


    Thanks for the link :)
  7. inggscap


    My pleasure. The latest one is out for June I think. Some differences in capital numbers. Some higher and some lower, some really low.

    I asked the NFA about the goingons and they said to just keep an eye on their website for further news other than that, couldn't say anything else to me.

    There are some in the "look out" list that are very good though and I would be upset if they ended up closing as they have been excellent to me. The best thing I think is to just relax and wait and see what happens but keep a real close eye on NFA, your inbox and any other reliable sources.
  8. Mr. H

    Mr. H

  9. misha7


    I think ppl should just relax.. many of those companies will be able to step up the capital, it's just the question of how much money one wants to tie up... For example, I believe FXDD is part of Tradition Group, they can piss 5mil for breakfast...
  10. sim03



    It's also a moot point. FXDD is unregulated... not a member of the NFA and not registered with the CFTC. As relatively little as those things mean for traders' protection when your money is at stake, they are better than nothing. Tradition Group and FXDD apparently can't be bothered with that pesky US regulatory framework in OTC foreign exchange.

    That $786,000 ($784,791, to be exact, as of June 30, 2007 CFTC Report) in the OP reflects the capital of "Tradition Securities and Futures Inc.", the FCM; not FXDD, the FDM. That figure has nothing to do with FXDD capital, which is unknown, as it's always been. This has already been covered on ET in the "Proposed NFA Capital Requirement" thread.

    Don't hold your breath for FXDD either setting aside more capital (than what?) any time soon, in response to the forthcoming NFA (NFA who?) $5M capital requirements, or telling you how much capital they do have. That's a shame. With Tradition's huge financial muscle behind them, FXDD could bring far wider acceptance to the MT4 platform in the US and in the West, while capturing a bigger market share for themselves. Stupid mofos.
    #10     Sep 4, 2007