NFA foreclosing Forex Dealers

I've just received the following from Alex Benjamin ([email protected]) at www.tradingclinic.com and am reposting it with his go ahead - thanks Alex.

Heads up for anybody with accounts with these dealers.

The last few weeks has seen the NFA foreclosing on a lot of forex dealers who are undercapitalized. The following firms have been shut down as a result:

1) United Global Markets, LLC
Today the CEO just sent an email out to clients saying they were going out of business because they could not meet their capital requirements.

2) Trend Commodities Limited
On June 19 the NFA shuttered Trend Commodities due to fraud and for failing to meet their capital requirements.

3) Spot FX Clearing Corp
On June 14 the NFA shuttered SpotFX due to fraud and for failing to meet their capital requirements.

4) FX Option1 Inc.
On June 7 the NFA shuttered FX Option1 due to fraud and for failing to have adequate security deposits for customers.

5) Spencer Financial LLC
On May 17 the NFA shuttered Spencer Financial due to fraud and for failing to meet their capital requirements.

6) Alpha Forex
On May 14 the NFA shuttered Alpha due to fraud and for failing to meet their capital requirements.

Do you have money with the following? their current capital - IF SO GET OUT NOW
One World Capital $1,105,000
Open E Cry LLC $1,062,810
Velocity4X $1,587,000
Direct Forex LLC $1,523,000
Easy Forex US Ltd $5,011,644 - they are above the 5 mio threshold but only just and with a name like that - get out.
3D Forx LLC $ 2,525,372
E FX Optioons LLC $1,709,752
FiniFX $1,464,000
Forex Club $3,304,000
Forex International Investments Inc $1,464,620
Forward Forex $1,793,767
FXCM LLC $759,689
GFS Futures & Forex $3,074,000
Nations Investments $1,699,000
Royal Forex Trading $1,102,000
SNC Investments $1,565,000
Tradition Securities $781,869
I Trade FX -$3,039,000 Note these guys are already bankrupt --- negative capital.!!!!!
MB Futures $3,080,000
Money Garden Corp $3,399,844

the current requirement is that 5 mio should be the threshold limit of capital

alleyb,

I'm curious how you chose one (actually more than one) of the names above. Open E Cry doesn't trade FX at all, and isn't subject to the 5 mil minimum. They have had rather consistent excess capital (I follow this on the CFTC website at: http://www.cftc.gov/tm/tmfcm.htm). They are small, but is that the issue? Do you recommend not maintaining an account with any small FCMs that have been very reliable up to this point? Do you have a minimum size you feel a firm needs to have before you would trust them? I am referring here only to FCMs that do not trade FX at all, like OEC. As far as the research I have conducted since you (well, DT with your permission) posted this, OEC is not at all likely to be shuttered, and are in good standing with no ongoing issues with them at all. If this is not the case, or you are privy to info that I couldn't find, could you please let me know? Thanks in advance.

MB Futures $3,080,000

That isn't MB Trading is it? They have been around a long long time if it is and they are very reputable.

Yes, that was actually the second one I was thinking of in my post, but didn't mention. The do trade FX, though, so they are in a different category from OEC, as far as my question to alleyb. I've never heard anything bad about MB from anyone I have known who actually had an account with them.

There is no suggestion nor inferrance as to whether any one broker is bad or better.
In the FX world the degree of regulation frankly is lacking compared with Futures FCMs and therefore you are behoven on doing a much deeper compliance / due diligance on them much in the same way that they do on you.
Ask your FX broker for example will they accept anything other than cash, for example T.Bills as collatoral. Ask them if they will pay you interest on your excess margin. Ask them whether they offer segregated accounts. 3 very basic questions to my mind.
If one takes the recent demise of Refco then you will find that the futures side was not a problem and I believe that I am right in saying that no futures broker has ever defaulted due to the very nature of the exchanges and especially their clearing organizations standing behind and offering performance on the contracts traded. The world of FX is frankly mainly at the retail level a bet between you and them where they make a lot of money from the unsuccessful accounts.
As to the list I merely extracted from the CFTC files a list of firms that had less than 5 mio capital for that is the proposal in terms of the new rules. What one can say is that small firms tend to weather storms much less well than the larger ones and at the least I am pleased to have sparked a debate and awareness.

alleyb,

Thanks for the response. I am following all that you are saying, I guess I was wondering why OEC was on an FX list/topic at all? I understand they are under the 5 mil, but that is for FX, not futures only FCMs. I am just trying to understand if it was an oversight of sorts (not trying to put you on the spot :-) that you didn't realize they do no FX. I just know people who love OEC and I forwarded this link to them and it started a mild panic and some very nervous calls and e-mails to OEC (from what I heard), and now I realize maybe they got on the list accidentally. Understand, I have no affiliation with OEC, I just know of people, some students of mine, who have OEC accounts or who are considering them, and I wanted to pass on what I had seen here.

I hope those that have forwarded me copies of replies from various entities forgive me for copying the replies here

First I want to thank you for taking the time to convey your concerns. We have read your email very thoroughly and we were very impressed by the high degree of professionalism and the realistic approach to the FX market and firms in General. I have emailed Daniel a letter a few hours ago that outlines RFXT#146;s thoughts on this matter. Please read the following:

I noticed your main concern regarding Net Capital requirements and I want to address this issue right away. Yes, the NFA released a proposal last week to all FCM#146;s asking about any ideas or opinions for a raise of the Net Capital from $1M to $5M. Honestly, we agree that the NFA should take such a step even though $5M as net capital is a lot of money. But the problem we are facing is that there are many FCM#146;s operating as Forex Dealer Members and they do not really know the business very well and giving everyone a bad reputation. For example, One World Forex received a complaint from the NFA a few days ago for many issues such as:

1- Reports

2- Marketing Material

3- Fraud

We would rather see all these firms merge together and form one big firm, or at least get eliminated and leave the firms that are big enough and capable of understanding the day to day procedures of running a FCM.

The NFA just put out this proposal and I believe it will pass and the net capital requirement will be increased to $5M. I do not believe it will happen in the next 3 months. The NFA still has to review it, then it goes to the board and then to the CFTC and then back to the NFA and it gets passed. After it passes, they will give FCM#146;s that do not meet the new capital requirements some time to either merge or liquidate and send clients#146; funds back home.

RFXT will be increasing its minimum capital requirement in the next few weeks. We believe this is an excellent opportunity for us to maintain the standards we currently have in the FX industry, and at the same time be a very determinant player in such a way where we do not allow huge firms to impose any kind of monopoly in the business. We still commit ourselves to providing our clients with the best possible service and execution.

As I have told you before, this business is changing a lot and the ones that truly understand this business will last and the rest will fall off the edge of the planet.

Subject: Response from EFX (MB Trading)

From Justin...

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."

Now, those are the facts. Let's talk about what this means in the real world. Why do firms need a net capital in the first place? I find it disturbing the number of people that trade forex and don't understand how it works. 99% of firms out there are deal desks, including several that are pretending not to be. It doesn't have anything to do with the size of their spreads or their software. It means ONE thing. They make their income by trading against YOU. You buy, they sell to you. You sell, they buy from you. At the end of the day, it's very simple. They make money when their customers collectively lose money. Now, stop and think about it for a second. You're a firm. You have hundreds or even thousands of customers, and you have to provide them with a quote (which you have complete control to move around REGARDLESS of what the real banks are showing on the interbank system). What happens if all of your customers want to buy the EURUSD one day? You're selling it to them.

Forex is a highly leveraged deal. What if the EURUSD keeps going up? The firm is short and selling more if the customers are buying. While obviously most deal desks make a ton of money, the RISK of being the platform is huge. If you get caught heavy in the wrong direction and the market goes hard against you, you can eat up everything that your firm is worth quickly. And, just so we are clear, if a firm has a $5,000,000 capitalization and then all of their customer money, if they lose $8,000,000 on an "event," meaning a big loss against their customers, they have no capital, and the customer assets are seized next. That's the same in any financial business, brokerages and banks included. Whatever capital is required, and then potentially some insurance level for the company or the customers, and then any event that creates a loss that exceeds that and the customer money is at risk. This isn't just forex. There was a major national stock brokerage firm in the last couple of

weeks that went from having millions and millions of dollars to negative $18 million or so due to a bad trade/investment in the bond market. Firm is gone, customers are scrambling. It can happen.

And of course, in reality, just because a firm/brokerage/ bank has a huge net capital doesn't mean that things are safer. They tend to take bigger risks with that money because they need a return on that money. They don't just leave it sitting in cash. So a firm with a $50,000,000 net capital is probably showing a risk level that is more in line with having that sort of valuation, which means they can get hit just as hard and fast if they don't know what they are doing as a smaller operation.

Now, what is the situation with us here at EFX? We are, as has been discussed forever on these boards, NOT a deal desk. At all. Remotely. I challenge anyone to suggest differently. We'll get on a webinar and walk you through it. Your order sits on a server that no one sees and when that order becomes marketable, it hits a bank in the interbank system. We don't take the other side of your trade. Ever. Therefore, we aren't at the same level of risk that all of these deal desks are on a daily basis. We pass your order through and settle your exchange of currency at the end of the day between ourselves and the bank that took the trade at the price that your order executed against the bank. We charge you a fee for making that transaction possible. Obviously, it's working. We have so many banks now in the system that our EURUSD quote spends much of the day under 1 pip. So does the GBPUSD. Ever heard the phrase "When banks compete, you win"? Maybe we should have had that motto first.

So where is our risk of having financial troubles? The biggest risk lies in overseeing our customer accounts. If someone has $1000 in their account and buys 5 GBPUSD and the GBPUSD goes down 180 pips, the account is down to $100. That's where the customer is at risk, because a news spike could then drop it a quick 40 more pips, and now the customer account has gone negative. We wish that everyone traded with a stop in the system to prevent this situation from arising, but they don't. So, we have extensive systems in place that includes human and computer monitoring to make sure that accounts that get near zero are watched appropriately. We don't want to close out a position for a customer, but when people trade without stops and get themselves into that type of situation, of course we have to. We have to protect ourselves and all of our other customers. Beyond that, our risk is really just our operations, the cost of having a back office that does what we do. That is not significant compared to the risk that most deal desks have to show daily.

Now, here's my opinion. What you are seeing is exactly what we have wanted to see from this industry. It is regulating itself better to protect the consumer (trader). Doing so requires raising the amount of money necessary to do business. This keeps the smaller, less-capitalized players out, which is good for the consumer. We believe that LOWER leverage levels are going to be mandated eventually. No one makes money trading at 400 to 1. They get crushed. 100 to 1 or 50 to 1 as a maximum would be sufficient. The professional traders who make money in this business don't trade anywhere near that level anyway. The industry needs to enforce better "truth in advertising" laws, and we're seeing that more and more. You can't pretend that you aren't a dealing desk just because people like to hear you say that, but then make your money in the spread. If you aren't charging a fee for providing a customer with an execution, then by definition, you are a dealing desk. Period. I have no idea if the NFA is actually going to raise the net capital requirement, but we see all of this as a positive as we continue to develop and prepare to deploy Project Omega, and we look forward to further improvements in the industry that help protect the consumer. And of course, we will comply with the guidelines of a regulatory body, as we always have.

Hope this answers everyone's questions. Maybe after the week of Fourth of July, we will do a special webinar event to talk openly and answer direct questions. I'll try to set it up with one of our VPs. Trade well.

Justin LeBlang
EFX Group

From a source who wished to rename annonymous and I have also edited the mail to omit various identifying items:

re MBTrading:
here is the skinny from 3 sources, one NFA.

all the current closings are and have been investigated for the last year, no surprises.

NFA are going to strongly regulate the IB's. and are pushing them.

there will be additional requirements on brokers by the end of the year, but plenty of time to get up the requirements.

I know Steve Demarest (MBT) personally, and have talked to him, he already has the backing and the funds, so lets not get hasty

the REST of the list you have published, also are not alone, Velocity 4x, and Hamilton Williams LLC are the same group 4.5 mill together (I believe).

and they are the only ones that passed the last NFA review(they have a NFA ex-employee on the staff).

Thanks for following this up and educating us alleyb - much appreciated.