Proposed NFA Capital Requirement

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forexsavior
369
forexsavior  

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: UGM - United Global Markets GOING DOWN @ Forex Factory

Who has the Money & Who Doesn't

To find out how much money your broker has goto this link:

http://www.cftc.gov/files/tm/fcm/tmfcmdata0704.pdf

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)

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

20 Park Plaza, Suite 1000Boston, MA 02116

Tel # (617) 357-5122sleahy@ugmfx.com

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.

http://www.ugmfx.com/downloads/Withdrawal_funds.pdf

saintmo
164
saintmo  

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)

MB Futures ($3,080,000)

Money Garden ($3,399,844)

United Global Markets (Bankrupt)

Nothing in the info you provided shows that UGMFX is bankrupt. They clearly did not meet the minimum capital standard, but that is a far cry from being bankrupt.

Where did you get the idea they are bankrupt?

forexsavior
369
forexsavior  

Bankrupt?

They are as good as bankrupt. Right now the customers can't even get their money out.

Job M van Zuijlen
93
Job M van Zuijlen  

In all fairness, it's a proposal, so you can't designate firms that currently don't have $5,000,000 in the bank "Dead Firms Walking". Once the proposal has been adapted, firms will have time to meet the new requirements. Some will be able to, some will not. Also, whether a firm is sufficiently capitalized or not depends on the number of customers and trading volume.

The Refco example shows that non-Forex customers will get their money, but Forex customers will have problems in case of bankrupty. This does not change. The proposal seems noble, but does nothing structurally to improve the situation for the retail Forex trader. There is no segregated accounts requirement, as far as I know, or some other measure to make sure that a customers' funds simply can't be touched in case of a bankruptcy.

Although I'm all in favor of solvent Forex brokers, my impression is that the NFA doesn't like the Forex market, as it, other than with futures, does not directly profit from its transactions.

Maximus
44
Maximus  

What about Northfinance? Do they have enough capital, where do I find the info... thx Max

trevman
293
trevman  

should add refco to them too haha..... its been 3 years and i still ahvent seen signs of getting a penny back

rooky123
31
rooky123  

I thought NFA stands for National Future Associations, what does forex have to do with futures...wasn't Forex Run by the IMF-International Monetary Funds or Foreign Exchange and SEC., I don't pay much attention to the exchanges. Maybe the Broker you mention is bettting against client and they loses, never know, I have seen refco and other broker did it and they were broke because they bet against client and they lost. You have to know that there are some very good big client trader such as Warrent Buffet if they bet against this kind of client they will lose big time...How can a huge broker like refco and Neimex go broke all they have to do is sit back and collect commission. The only way they go broke is trade bet against clients and they lose they can't fullfill it.

Lee Bryant
1187
Lee Bryant  

Forex Saviour - where did you get your figures for FXDD from ? They are not listed in the doc and I believe them to be a very stable company. A bit of scaremongering going on here I think !

project1972
566
project1972  

After checking the NFA report, the best capitalized company who sopport MT4 platform is:

FOREX LIQUIDITY LLC $36,104,791 of capital at the day 04/30/2007

FXLQ - Forex Liquidity LLC

Linuxser
5921
Linuxser  
goldensight
287
goldensight  

additional point of view

Below is a copy/paste (from forexfactory) from a forex broker efgroup.com to provide additional food for thought for this thread. I've put it into 2 posts (copy/pastes) because it was too large to post in one post.

--------------------------------------------------------------------------------

Hi all-

Well, looks like someone started a situation in the last 24 hours and I want to talk everyone through exactly what is going on. Let’s start with the facts, then move to the reality, and then maybe a little opinion. As you know, I try not to spend time naming or talking about other brokers specifically. My job is to help you out with EFX and not try to answer questions about (or bad-mouth) another platform.

The story that started all of the boards talking this morning was a post that the NFA is about to move the minimum net capital requirement to $5 million, and that they are closing the doors on a bunch of companies over the last few weeks. Along with about 20 other platforms, we were listed by whomever wrote the post as being “at risk” because we currently show a net cap that is well above the minimum currently required, but we don’t show $5 million.

Now, the clever part of the post that was put out there (you’d have to look at the bigger firms that intentionally maintain a higher net cap to figure out who had the motivation to do this) is that it implies that because six brokers doors were “shuttered” (term used in the post), the other 20 or so are in danger and the NFA is out to kill. This is a fairly ridiculous link. The firms that were closed had problems with their net capital dropping under the CURRENT minimum. In some cases, they were basically out of money. Of course they were closed after the NFA did their due diligence per the guidelines and eventually determined that they were not going to get their net cap back up.

Folks, the NFA is a regulatory body. They want to protect the public, but they also exist because of forex platforms. If they shut them all down unnecessarily, they hurt themselves too. They come around, they charge fees, they do audits, etc. Let’s set some facts straight.

The way we understand it, the NFA is going to vote on July 1 whether to raise the minimum net capital requirement to $5 million, up from the current $1.5 million. If they do approve that (that’s the first IF, nothing changes in the world if they don’t), then member firms will have until January 1, 2008, to get their net capital to $5 million. Do we feel like this would be an issue for us, as we already hold much more than the current requirement and over half of what we need to the potential new requirement? No. So let’s just take the vote at face value, assume that it happens, and then address what it should mean for us in the easiest solution. Nothing. I should point out that it wasn’t long ago that the NFA raised the minimum net capital from a few hundred thousand to $1.5 million, and we met that without any issues even though we weren’t showing it before.

They aren’t going to walk into all of these firms on July 2 and shut them down. And, just so we’re clear, if the NFA moves the cap requirement up and a firm can’t get the money in to meet the requirement, that doesn’t mean that your money as a customer is affected. Some of the things that I’ve heard over the last 24 hours are so crazy. Here’s one: “If the NFA moves the net cap requirement up and a firm can’t comply, don’t we lose all of our money as the customers of the firm because they have to close?” Huh? No relation. The firm would first need to lose all of their assets and then yours for that to be the case.

Let me talk a little bit about other options for some of the smaller firms. There is nothing that says that any of these firms have to be NFA members. They can operate through the SEC or NASD.

Before I get to what this means in a practical sense, let me post two paragraphs from MB Trading Futures' (our FCM) compliance department dealing with the issue:

"First, the National Futures Association (NFA) has noticed its Forex Dealer Members (FDM) of a new proposal to increase the minimum net capital requirements of those members. The proposal is in the early stages of the approval process; it has not been approved by the NFA Board, which is the minimum requirement.

NFA is simply providing FDMs with an opportunity to respond to the proposal that recommends increasing the minimum net capital requirements of FDMs to $5 million from $1 million (or 5% of total customer liabilities, whichever is greater), which are due on July 6, 2007. NFA will draft a final version of the proposal based on comments received from FDMs. The final version of the proposal will be submitted to NFA’s Board for approval. NFA’s Board could approve the final version or a modified version of the final proposal. Once the proposal is finally approved by the NFA Board, it must be submitted to the CFTC for approval. CFTC could approve the finalized version of the proposal as submitted by the NFA Board or approve a modify version. It is anticipated that the final stage of the approval process will be December 2007 at the earliest."