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NFA Targets Brokers

The US National Futures Association is getting aggressive when it comes to enforcing the rule book. Colin Lambert reports. 

The US National Futures
Association stands accused of
forcing retail FX brokers out of
the US market as it seeks to reinforce
regulatory rules. The NFA has hit a
number of brokers with enforcement
notices, some of which come on the
back of what is claimed in some circles
as “an overnight change of direction” by
the regulator.

In a high profile move, the NFA
issued a member responsibility action
notice against retail broker FXDD,
which orders the company to pay $3.3
million into an escrow account
pending resolution of a complaint by
the NFA’s Business Conduct
Committee (BCC) that alleges it
engaged in price slippage practices that
were to the benefit of the firm and to
the detriment of its customers.

As well as targeting the alleged
slippage practices, the NFA says the
$3.3 million payment is to ensure
FXDD can pay restitution to its clients
– if necessary – and at the same time
stay within NFA rules which state it
has to have $20 million of adjusted net
capital, plus 5% of all liabilities owed
to customers over $10 million,
available at all times.

Aside from a rollover of existing
customer positions, FXDD will not be
able to execute customers’ orders; it
will have to liquidate all positions
held by principals, employees and
affiliates; and it will be barred from
distributing or transferring funds,
except to existing customers, without
the NFA’s approval.

The case against FXDD follows
similar cases against Gain Capital,
Forex Club and Ikon Global Markets.
The BCC complaint alleges that FXDD
did not pass on price improvements to
the customer when the market moved in
their favour. Instead, it refused the trade
and executed customer trades at the
original price if the market moved in
favour of FXDD – so-called
‘asymmetric slippage’.

Although the $3.3 million amount is
the NFA’s estimated restitution due to
clients – assuming the case against
FXDD is proved – it raised alarm bells
elsewhere within the NFA, which
claimed that the payment of such a
fine would see FXDD slip under the

$20 million net capital floor required
under NFA rules.

According to the NFA, FXDD’s
excess net capital was not $5.8 million,
as reported by the firm at the end of
October, but rather negative $3.6 million.
The discrepancy, the NFA says, was the
result of FXDD reporting its adjusted net
capital on a consolidated basis, including
that held by subsidiaries, when it was
obliged to hold $20 million on its own.

FXDD confirmed to NFA that $9
million of capital held by a subsidiary,
Avatar, was included in the October data
and transferred $6 million in capital to
the main account on 3 December. The
NFA claims, however, that even with the
$6 million transfer, the firm remains
$300,000 under the threshold.

The NFA also highlights what it
terms “additional concerns about the
firm’s ability to make restitutions to
customers”, claiming that since FXDD
became an NFA member in December
2009, it has “consistently made sizable
capital withdrawals over the last
several years”.

The NFA says FXDD has conducted
withdrawals totalling $14.6 million
between December 2009 and February
2012. “This activity, especially if
repeated again before the resolution of
the BCC case, raises further concerns
about FXDD’s financial condition, as
well as the firm’s ability to make
restitution to customers,” the NFA states
in the member responsibility action.

The $3.3 million in an escrow account
will not be allowed to count against
FXDD’s capital position. The NFA states
that while the company is currently in

accordance with capital regulations, the
$3.3 million has been ordered to ensure
the company can recompense customers.

Side Effects

A side effect of the NFA’s clampdown
has been the exiting from the US of
several retail FX businesses and a
scramble to sell client lists to those
happy to stay the course. Gain Capital
Group, the US arm of the global retail
and institutional FX broker, Gain Capital
Holdings, has acquired the retail
customer accounts held at GFT Forex’s
US subsidiary.

The transfer of GFT’s US-based
accounts to Gain’s retail unit,,
took place on Friday 7 December, after
the close of trading. In a notice to clients
on 10 December, GFT explained that
forex trading accounts have been
returned to normal status. Customers are
able to continue trading as normal on the
Dealbook or MetaTrader4 platform and
trading histories are still available. Open
positions and pending orders remained
intact through the transferral process.

Glenn Stevens, CEO of Gain Capital,
said, “We are pleased to be in a position
to offer GFT’s US-based retail customers
the ability to continue trading forex with
an established US regulated firm, with
no interruption in service. We will work
closely with the team at GFT to ensure a
smooth transition of their customer’s
accounts and assets to our retail division,”

Gary Tilkin, chairman of GFT, added,
“Gain is one of our industry’s oldest and
most respected companies and we’re
confident that our accounts will receive
the same high level of service and
trading execution that they’ve
experienced with GFT.”

GFT announced at the beginning of
December that it would cease supporting
US retail FX trading and focus on its
institutional relationships which exist in
the US and globally. It was widely
reported that GFT was also warned by
the NFA over its capital position.

Its departure from the US retail FX
market follows that of Advanced
Markets, which relinquished its US retail
broker registration at the end of
September in order to focus on its
institutional business (Profit & Loss,
November 2012).

GFT has also exited the retail market
in Japan and has reportedly struck a
deal with Planex Japan to transfer its
Japanese client accounts to it.
According to a statement on the Forex
Magnates website, Tilkin said: “Based
on the long-term economic trending
and leverage changes in the US and
Japanese markets we made the strategic
decision to stop offering retail forex
trading from the United States. These
coupled with the extremely low level of

market volatility drove the decision.
“We are moving to a far more focused

approach on our institutional
relationships in the US, Japan and our
other important operations around the
world,” he added.

“We are obviously disappointed to be
leaving any markets where we compete
and certainly are thankful for the time
and resources invested by our teams
globally to build them to this point. After
careful evaluation of the global markets
and the challenges our industry is facing
today, we made the strategic decision to
change how we compete in these two
retail markets. I want to assure everyone
around the world that GFT is focused on
growing an efficient sustainable
business, and committed to serving our
accounts at the highest level.

“For regions outside of the US and
Japan we maintain a ‘business as usual’
approach for retail and institutional
operations. We have aggressive growth
goals and look forward to growing
market share and expanding our
business,” he said.

Mixed Emotions

The more strident approach on the part
of the NFA has drawn a mixed response
from observers. While some believe it is
being over-aggressive and trying to
squeeze the life out of the US retail FX
market, others see its actions as being a
prudent move to protect end investors.

One user of retail FX platforms says
that while firms may complain about the
capital adequacy rules, for the end
investor, they provide a much needed
safety net in troubled times. “I can
understand where they [NFA] are
coming from,” the investor says. “A lot
of these firms are Hydras, with different
operations all over the world. If they [the
firms] want our business they should be
able to operate openly, transparently and
without the need to shift funds around
the world. I think the US retail market

has been lucky the NFA has caught some
of these firms under-provisioned, if this
continued it would have ended badly.”

This viewpoint gets support from the
head of a small Asian-based trading firm,
who notes, “We use retail platforms for
our FX trades because it’s easier from a
business perspective. The one thing we
are paranoid about, however, is our funds
with the broker. We have seen one too
many broker-dealers use customer funds
illegally to feel comfortable, so if the
NFA want to clamp down on this, all
power to them. People shouldn’t forget
that the man in the street is still waiting
– probably in vain – to get his money
from MF Global and Peregrine.”

While the NFA’s action would appear
to met with approval by many end
customers, others are less than happy,
seeing the move as squeezing
competition out of the market. “The
only thing that will result from this will
be wider spreads and worse service,”
grumbles a trader who professes to have
accounts with five brokers. “Prudent
investing and trading means you spread
your risk, and it’s just as prudent to
have a plan B in case the service at one
of your brokers is unacceptably poor –
you need some leverage over your
broker. If NFA squeezes too many firms
out of the market, we will be left with a
duopoly – and that is probably only
good for the regulator who doesn’t have
enough staff to cope with the current
size of the industry.”

Certainly it seems as those several
brokerage firms are voting with their
feet, and other firms spoken to
acknowledge that the stringent regime in
the US market means they are unlikely
to offer services there in the future. For
all that, if the NFA can get the balance
right it might, as the regional head of
one retail broker puts it, “deliver what
the US authorities have always wanted –
a well-functioning, safe, retail FX
market with just enough competition to
keep people on their toes.”

Paul Gogliormella

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