NFA Forex Dealer Dead Pool

[forex scholar]

I have received some complaints from other forum users that my "Dead Forex Firms Walking Dead Pool" amounts to nothing more than scare tactics since the rule hasn't passed and since no one is yet required to meet the proposed $5 million capital requirement. In short, these little firms are being given a bum rap.

But those critics are missing the big picture. The Dead Pool is not meant to be fair. It is meant to single out those firms that have a low probability of meeting the proposed capital requirement (keep in mind Currency Trader Magazine said the proposal could possibly “wipe out 90% of the industry.”) The counter argument to that is some of those firms have additional capital they aren’t showing in the CFTC Capital Reports. That may be so but how is the average trader to know that absent firms showing us their company financials? My critics insist the onus of responsibility to find this out is on me because I am putting these firms on the Dead Pool list but I say the onus of responsibility is on the firms because it is they who are soliciting customers to trade at their firms.

Why the Dead Pool? Because traders should be aware of the very precarious state these firms may find themselves in should the rule pass. The time to know this information is BEFORE a firm goes under, not after it has gone under. That is why I have included so many stories in this thread detailing the demise of so many poorly capitalized firms. The CFG case in particular is an instructive one I encourage everyone to read.

True, CFG was undercapitalized while the firms in the Dead Pool are currently meeting their capital requirement. But the NFA was taken by surprise when they checked CFG’s books, who as late as January of this year showed they were meeting their capital requirement too. My point is “low capitalization” can quickly lead to “undercapitalization.” And while the firms on the dead pool are not undercapitalized (I take back any comments to the contrary regarding undercapitalized firms on the dead pool), they are poorly capitalized and thus a lot more likely to go out of business should this rule pass.

Finally, I want to make clear I'm not saying all these firms will be going out of business should the new capital requirement be adopted. Surely some will survive. And it should also be noted that a firm’s month to month Adjusted Net Capital on the CFTC’s website can change radically from one month to the next. While I joked about I Trade FX with the line “Run Forrest Run” after they posted negative capital for one month I never stated I Trade FX was bankrupt and their current Adjusted Net Capital figure shows them to have close to $4 million which means they are one of the most likely firms to survive the proposed capital increase. So the CFTC capital requirement figures are not the end all be all in this debate. That I will grant my critics.

But at the moment, that report is the only independent source for checking a firm’s financial health. As such it carries tremendous weight and needs to be closely followed by the trading public in addition to the many other things a trader should do when checking on a firm before they open an account.

[forex scholar]

Euro Money has just published an article on the rule proposal that backs up everything I have been saying. Furthermore we are now seeing a lot of other Industry players offering their comments. Here are some choice quotes from some industry titans: http://www.euromoney.com/article.as...ticleID=1398928

Todd Crosland, Interbank FX's founder chief executive, says: "The NFA has proposed to raise the minimum net capital requirement to $5 million. If you offer greater than 100:1 leverage, you would have to maintain two times that amount, or $10 million. We believe that by the end of the year the NFA will have fully implemented the new minimum net capital requirements. Our current net capital is [now] in excess of $25 million."

Gain chairman Mark Galant says: "Making sure all FDMs are well capitalized is a positive for the industry. The management at many of the smaller FDMs have no real FX market experience and have never managed a 24/5 trading operation. Besides being able to cover your financial obligations to your customers, you also need sufficient capital to post collateral with bank liquidity providers. An FDM that does not have good credit lines can get in trouble pretty quickly if they are unable to lay off their risk as needed.

The Euromoney article is also quoted as saying,

"If, as expected, US regulator the National Futures Association implements a proposal it has sent out to its 43 forex dealer members (FDMs), the result will be that many firms will have to attract fresh funding or close down. The proposal is due to be discussed by the NFA's board in August. If ratified, it will then go to the Commodity Futures Trading Commission, which effectively acts as the NFA's gatekeeper. The CFTC will almost certainly rubber stamp it."

"In its proposal, the NFA points out that the under-capitalization of many FDMs is the main cause of many of the problems that have plagued the sector, It is therefore looking to raise FDM's net capital requirements from $1 million to $5 million. Two other proposed changes to the NFA's concentration charges and its accounting requirements are likely to result in FDMs being obliged to have a minimum of $10 million in adjusted net capital to stay in business."

"The majority of FDMs do not have this much free capital available, so unless they receive fresh funding, they will almost certainly go out of business if the proposal is passed."

[forex scholar]

I Trade FX has officially come out in favor of the new proposed capital requirement with an impressive statement below. It is a statement no other firm has made to date. There was no equivocation or spin in their support for the rule. As such I will be removing them from the dead pool and request that the moderators delete them from the list. You have my congratulations I Trade.

I Trade FX Press Release
I-Trade FX experiences growth in excess of 700% for 2007.
Orlando, FL- August 15th 2007 – I-Trade FX, LLC, one of the nation’s leading Forex Brokers and provider of currency trading services for large and small institutional and individual investors, announced today that I-Trade FX has seen exceptional growth in 2007, with current revenues in excess of 700% year-to-date from 2006.

Mr. Martinez, Co-Founder and President stated, “I-Trade FX was founded by a very talented and experienced management team with over 75 years of experience in the investment banking arena. It is our mission to deliver a higher standard of dealing practices and customer service to the industry.” Mr. Martinez continued, “I clearly believe that after salvaging relationships with approximately 3,000 clients acquired from CFGTrader, the industry has no choice but to realize we are a major competitor.”

I-Trade FX welcomes and is in full support of the NFA’s most recent proposal to raise the minimum capital requirement from $1 million to $5 million for Forex Brokers. “Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client,” reported Mr. Martinez.

[forex scholar]

Originally Posted by forex scholar

I Trade FX has officially come out in favor of the new proposed capital requirement with an impressive statement below. It is a statement no other firm has made to date. There was no equivocation or spin in their support for the rule. As such I will be removing them from the dead pool and request that the moderators delete them from the list. You have my congratulations I Trade.

I Trade FX Press Release
I-Trade FX experiences growth in excess of 700% for 2007.
Orlando, FL- August 15th 2007 – I-Trade FX, LLC, one of the nation’s leading Forex Brokers and provider of currency trading services for large and small institutional and individual investors, announced today that I-Trade FX has seen exceptional growth in 2007, with current revenues in excess of 700% year-to-date from 2006.

Mr. Martinez, Co-Founder and President stated, “I-Trade FX was founded by a very talented and experienced management team with over 75 years of experience in the investment banking arena. It is our mission to deliver a higher standard of dealing practices and customer service to the industry.” Mr. Martinez continued, “I clearly believe that after salvaging relationships with approximately 3,000 clients acquired from CFGTrader, the industry has no choice but to realize we are a major competitor.”

I-Trade FX welcomes and is in full support of the NFA’s most recent proposal to raise the minimum capital requirement from $1 million to $5 million for Forex Brokers. “Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client,” reported Mr. Martinez.

Before moving on from I Trade FX I wanted to comment further on the Press Release (included below), which is so close to the points I have been making that quite frankly I could have written it myself.

What impresses me is that unlike other firms that have said "well should the rule pass we'll meet the new requirement" I Trade FX addressed the undercapitalization issue head on. I Trade FX's President said "Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client."

This goes to the heart of the proposed NFA capital requirement which is that firms that are poorly capitalized are at far greater risk than firms that are well capitalized. This makes it clear I Trade FX gets it and is now taking a position of leadership on this issue. And as a result the industry has no choice but concede that I Trade FX is indeed a major competitor.

[forex scholar]

What a wild ride it has been the last few days in the market. Sadly, some traders have missed out on all the action. Specifically, the traders of Tradex Swiss AG. Tradex is apparently under investigation and there is some kind of account freeze for customers. Next week I’ll talk more about the Tradex case and also discuss the perilous state of FX regulation in Switzerland.

Also, I’ve been getting a lot of tips and private messages about One World Capital. Something is afoot at One World and I’ll share with everyone what I have learned thus far.

[forex scholar]

Money Garden has gone public with a statement about the proposed capital requirement rule over at Forex News:
http://www.forexnews.com/fxforum/forum/forum_posts.asp?TID=1722&PN=1

Unfortunately, the response was rather underwhelming and for the most part brushed off the severity of the current capitalization problem in the industry. Of course, being poorly capitalized according to CFTC reports, that's exactly the kind of answer one would expect from MG. But to their credit they have indicated they will be upping their reported capital on the next CFTC report so let's wait and see what the next report has in store for them.

However, their initial response to the proposal indicates a firm that doesn't quite get what has been going on in the industry these past few years. MG states they are "not opposed to increased Net Capital Requirements..." That's not exactly a ringing endorsement for the proposal. MG then focuses in on accounting standards, which everyone agrees need to be tightened up. Indeed, I wholeheartedly agree with this MG statement, "From reading the second part of the NFA proposal on internal controls, it is alarming to learn that there are firms out there which lack any of the requirements that NFA is only now going to enforce."

But I find the following statement to be wholly revealing of MG's ignorance of the issue, "Sound business practices and internal controls are the decisive factors that are much more important than an increased net capital." Wrong. As the NFA has demonstrated sound business practices and internal controls are often directly related to net capital. Firms that are not well capitalized are far more likely to cut corners and not implement proper internal controls. That is the lesson from the demise of such firms as CFG. I find MG's obtuseness to these kinds of examples to be very disturbing.

All in all MG's statement is a dodge. Unlike I Trade FX, Gain Capital, Interbank FX and others there is no recognition of the seriousness of the capitalization problem the industry is currently facing. Certainly there are other issues that need to be addressed (in particular dealing practices which MG touched upon in their interview.) But none are more serious than capitalization. As such, MG's statement is a big disappointment.

[forex scholar]

One of the more interesting comments made about the proposed capital requirement was made by Todd Crosland of Interbank FX who said, "The NFA has proposed to raise the minimum net capital requirement to $5 million. If you offer greater than 100:1 leverage, you would have to maintain two times that amount, or $10 million." It's a point I have not stressed enough.

The minimum initial capital requirement is not the only capital requirement that firms have to make. There are other requirements as well and when they are added together they can quickly total $10 million. Let's do the math:

Should the proposal pass the following requirements will have to be met:

1) Minimum Initial Capital Requirement: $5 million
2) Requirement that firms offering 100:1 leverage set aside 10% of customer assets in additional capital. Assuming a firm has $30 million in customer assets: $3 million
3) CFTC concentration charges on outstanding open positions which can range from 6 to 20% of total net exposure. Assume a firm has $50 million in net exposure then 6% of 50 million would be: $3 million

As you can see when you add up all the various capital requirements most firms will need in excess of $10 million to be compliant. These cold, hard numbers are staring many of the poorly capitalized squarely in the face and no amount of spin can make them go away.

[forex scholar]

For all the problems that exist in the U.S. domestic retail forex market they still pale in comparison to the problems that exist in the unregulated retail forex market. And it is here on the periphery of the respectable forex world that a whole host of firms operate outside any kind of regulatory scrutiny providing their customers with scant funds protection or any means to conduct any form of due diligence. In short, these firms are the damned of retail fx and woe be to the trader who opens an account with one of them since they are merely playing a game of Russian Roulette.

In the last few years firms have set up shop in unregulated locales all over the world from the Cayman Islands to Cyprus. From the British Virgin Islands to the Philippines to Belize. Yet no part of the world has attracted more unregulated forex broker dealers than has Switzerland.
Ah, Switzerland. Land of fine watches, exhilarating ski slopes and tasty chocolate. Renowned for its banking prowess and for being a pillar of international finance. On the face of it seems like Switzerland would be an ideal place to open a forex business since the Swiss of all people should be very knowledgeable about this most complicated of financial instruments. But that facade is easily torn away once you do some further digging and discover that the vast majority of Swiss forex broker dealers are not in the least bit regulated and for the most part are completely ignored by the Swiss Regulatory Establishment.

"But I go to the websites of these Swiss brokers and see all sorts of regulatory Acronyms referenced. What is that all about?"

Good question Smithers. You see, while Switzerland is well known for being a haven for high finance they are also well known for being a haven for drug kingpins, terrorists, Ex-Nazis on the run, deposed third world dictators, former Refco/Enron Executives and other money launderers and money swindlers as well. So to counter the problem the Swiss government requires any firm that holds customer assets belong to a self-regulatory body which requires member firms to obey certain anti-money laundering guidelines. There are a whole host of these organizations from OAR-G to Polyreg and ARIF. Membership in these associations does not mean the association is checking in on how the firm runs it forex business. Nor can one go to any of these organizations to ask for background information on their member firm. And if the firm goes bankrupt these associations could care less about helping you get your money back. In short, these anti-money laundering organizations are useless to the average forex trader. Listing membership in such an organization is in my opinion patently offensive since membership in that organization is of no benefit to traders.

There is one government body however that does regulate forex trading in Switzerland: The Swiss Federal Banking Commission. True, they regulate banks but they also offer licenses to Securities Dealers as well. Synthesis Bank has just such a license. You can also verify that license by going to the SFBC's website directly: SFBC - Swiss Federal Banking Commission
Yet the majority of Swiss forex brokers are not licensed by the SFBC because as the SFBC states on its own website (SFBC - Frequently asked questions) "Foreign Exchange dealers, provided that they exclusively deal in foreign exchange, are not subject to supervision by the SFBC." That lack of "supervision" is on full display right now in the case of Tradex Swiss AG (Tradex Swiss AG).

Tradex Swiss AG
Earlier this year the NFA barred Tradex from soliciting clients in the United States due to the fact they were not properly registered (BASIC Details). As a side note the head of the Boston office of Tradex, Craig Karlis, is apparently trying to move on to bigger and better things. Several times this year Karlis tried to register a new firm by the name FX Nation Inc only to withdraw the FCM application with the NFA (BASIC Details.) The latest withdrawal being as recently as July 30, 2007. Considering people can't even get money out of the last firm he was involved with you would think Karlis would know when to call it quits. Talk about churn em and burn em.

Anyway getting back to the main actor, Tradex Swiss AG. It appears that Swiss authorities shut them down. Although since Tradex has been very tight lipped it is hard to tell what is going on: Handelsregister des Kantons Schwyz
But the bulletin boards have been flooded with angry customers (Tradex Swiss AG) who can't get their money out. And Tradex is not exactly going out of their way to provide their own traders with any information. One click on their website and all you get is this very disturbing message:

Dear Tradex Swiss AG Clients
Due to technical reasons, we wish to inform you that for the time being, we cannot accept any new account opening requests, or receive payments on existing accounts. For the same reason we also request all clients to close any open positions on their accounts, and to refrain from trading until further notice. We apologise for any inconvenience caused, and we expect to restore all operations in the near future.

Some inconvenience! Such is the peril of investing with an unregulated Swiss Broker. When things go wrong you are completely in the dark with no one to turn to. One day you are trading with such a firm, the next you go to the website and it is kaput while your funds are lost in purgatory.

The lesson? Avoid unregulated Swiss Brokers. The following Swiss brokers, like Tradex Swiss Ag, are not regulated:

WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk.

[WhipSawFX]

quote: Originally posted by forex scholar:

The lesson? Avoid unregulated Swiss Brokers. The following Swiss brokers, like Tradex Swiss Ag, are not regulated:

WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk.

Interesting, that you would recommend not to trade at these firms and highlite the fact that they are not regulated, since all of them bar DukasCopy currently advertise over at Francesc site, actually they account for just over a quarter of the brokerage firms that currently advertise at his site.

Would be interested to see whether you could start and maintain a thread over there, saying to stay away from these companies, and trade with regulated companies like OANDA.

[WhipSawFX]

Not that I'm saying that these companies should be avoided. Just because a company is regulated doesnt make it safe, Refco being a particular case in point. In anycase, I think its important to recognise that the forex market is only more recently recieving more regulatory intervention.

This article by Richard Olsen and Michael Stumm of Oanda, makes an interesting read :

Retail FX: the triumph of hope over experience

Retail FX: the triumph of hope over experience August FiX

I particularly like this quote on the result of the regulatory environment.


quote:
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If anything, regulatory action is working to limit inflows of new ideas and processes and the always necessary increased efficiencies.
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