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The forex market has long been known as the Wild West of Finance due to its unregulated nature. But the frontier is being tamed and it now appears the day of the unregulated Introducing Broker is drawing to a close. While the CFTC has not yet released its new Forex Dealer rules to the public the NFA just issued a preliminary set of guidelines for all introducing brokers who are now required by law to be licensed: http://www.nfa.futures.org/complianc...n_overview.asp
Among the rules, IBs must maintain net capital of $45,000. Aside from other requirements like proficiency exams and disclosure documents the NFA is doing background checks which require finger printing:
Quote:
NFA requires all individual applicants to submit fingerprint cards, which are sent to the Federal Bureau of Investigation (FBI) to determine if the applicant has a criminal record.
This should help drive some of the industry’s worst cattle rustlers out of the market and into a new line of work, like holding up banks instead...
It remains to be seen just how onerous the new rules from the CFTC will be but with the NFA releasing this guide now the CFTC shouldn’t be too far behind.
A british based broker would be more secure than any NFA based broker. As the regulators in england are very tough.. Licencing is very hard to come by. Its a tough industry. Singapore.. Well, not regulated very well, but that particular broker is supposedly extremely good.
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Fx social network - www.currensee.com?lead=ev-mod Sign up, make friends, find out who is trading what when.
Currently accepting managed accounts. 1k micro 15k standard 50k ECN only at fxopen http://takimanaged.blogspot.com for details.
A british based broker would be more secure than any NFA based broker. As the regulators in england are very tough.. Licencing is very hard to come by. Its a tough industry. Singapore.. Well, not regulated very well, but that particular broker is supposedly extremely good.
Do you know any british brokers who offer GBPUSD at 2 or 3 pips spreads? Thanks.
No I don't..I stopped trading as of 31 july. And I was at an american broker and a swiss broker... But ODL i believe is british currenex etc... You might want to check them out. BUt its hard to open an account with them.
__________________
Fx social network - www.currensee.com?lead=ev-mod Sign up, make friends, find out who is trading what when.
Currently accepting managed accounts. 1k micro 15k standard 50k ECN only at fxopen http://takimanaged.blogspot.com for details.
I have spent a lot of time discussing the issue of forex fraud and how this has been one of the motivating factors driving the regulators' desire to raise capital requirements. But the issue of broker dealer insolvency is in many respects more pressing. The failure rate for firms with capital below $5 million is shockingly high. And why is that? Because too many people think running a forex broker dealer is as easy as running a bagel shop. But this next three part series on the demise of Forefront Investments (aka CFG) is evidence of how difficult it is to run a forex brokerage and why as a result of CFG’s collapse the NFA has an even stronger case to raise capital requirements.
I first became interested in the CFG case when an attorney posted this thread at Forex Factory:
(http://www.forexfactory.com/showthread.php?t=40618) asking former customers of CFG to contact him if they were still owed money. Still owed money? That piqued my curiosity. And so I began digging through the wreckage of CFG. Here is what I discovered:
Originally the firm was in the forex training business. Essentially, for a fee, CFG would assign traders a mentor whose job it would be to teach “the forex” to rookie traders. While some customers complained about the ineffectiveness of the training (http://www.ripoffreport.com/reports/...off0087932.htm) there are no indications that CFG was involved in any fraudulent activities. Indeed, Snellgrove had a reputation for being a very religious man and is quoted on his own website as saying, “We sincerely want people to succeed! Galatians 5:1 in the Bible, states that one should not be under bondage. 99% of the people who talk with me are under the bondage of debt. The Forex market is the largest legal cash flow industry in the world and a potential vehicle to achieve success by just about anyone and thus move out of bondage.” (http://www.cfgtrading.com/newsletter...fgnews_008.htm)
Unfortunately, Snellgrove’s decision to turn his training business into a full fledged forex broker dealer would not only leave his customers still under the bondage of debt, but transform them into the Gimp from Pulp Fiction after the firm went under and their accounts were frozen.
But before going there it is important to review Snellgrove’s career to date. He was a good and moral man, he had a clean regulatory record, his company was fairly transparent as he had an open door policy with all his customers at his rather large office in Virginia, and he had been in the business since the late nineties. But there was one missing ingredient in this forex broker dealer cake: Snellgrove was poorly capitalized. And that’s why the firm went under. More to come…
In January of 2007 CFTC reports showed that CFG Trader had $1,790,000 in Adjusted Net Capital. That means they were $800,000 over their required amount. So for the average trader checking in on CFG everything looked good right? Suppose you also checked the NFA website and saw they had a clean regulatory record. Looks good right? You spoke with a smooth talking sales rep and saw they had been in business since the nineties. Looks good right? Boy would you have been wrong. For it was at this time that CFG began to unravel.
According to the NFA in its 2007 audit NFA noted that, “the balances on Forefront’s Form 1-FR dated January 31, 2007, which had been previously filed with NFA, were inconsistent with the general ledger the firm provided to NFA as part of the audit.” Furthermore, “Forefront had failed to include all customer liabilities when preparing its financial statements. As a result, it appears that Forefront was under the required minimum ANC by at least $850,000.”
The next blow came on March 15th http://www.nfa.futures.org/BasicNet/...03&contrib=NFA …still not having received the updated financial statements, NFA spoke with Snellgrove, Conn, Lani and representatives of the firm’s accounting firm. NFA asked whether Forefront currently had the required minimum ANC. Snellgrove referred the question to Lani who responded that the firm did “not have accurate numbers to work with.” Additionally, Lani indicated that it would be “a fair statement to say that the firm does not know its financial status.”
With CFG’s financials in chaos the NFA notified the CFTC who then went to court to get an injunction to halt the transfer of any money out of the firm. The CFTC injunctive action states the following: http://www.cftc.gov/opa/enf07/opa5310-07.htm
According to the CFTC complaint, as of January 31, 2007, and perhaps earlier, Forefront’s net capitalization was below the adjusted net capital required by the Act and a Commission regulation. As of March 19, 2007, the complaint charges, Forefront’s adjusted net capitalization remained below the required adjusted net capital with Forefront’s total liabilities equaling $8,000,000 while its assets were only $6,760,000. Furthermore, the complaint charges Forefront with failing to maintain books and records that it is required to maintain pursuant to a Commission regulation.
While the CFTC was dragging CFG through the courts the NFA decided to give CFG one final kick in the ribs while they lay curled up in the fetal position by hitting them with a formal complaint regarding their marketing practices on April 4, 2007: http://www.nfa.futures.org/BasicNet/...11&contrib=NFA
At this point the court approved a receiver to preside over the dissolution of CFG and arrange for a customer buyout. I Trade FX put in the highest bid and then proceeded to take over CFG’s customer accounts. http://www.cftc.gov/opa/enf07/opa5311-07.htm
The swift and stunning collapse of CFG ended happily enough with customers getting their money back. But it could have been much worse. What would have happened if a creditor had interceded to lay claim to customer funds as happened with the customers of RefcoFX? In such a drawn out situation a potential buyer would have been scared off and by the time the estate was settled (minus the huge legal fees of course) customers would have been lucky to get back a fraction of their investment.
This is just one of the lessons to be learned from the Collapse of CFG. I will review the others tomorrow in “Part III – Lessons from the Collapse of CFG.”
Why does the NFA want to raise capital requirements? Precisely because of firms like CFG. Of course, many of the fraudsters will be driven out of the business which is certainly a good thing and one of the reasons for the NFA to take action. But there will always be con-men in the financial markets. I believe the real reason the NFA is pushing so hard to raise capital requirements is its concern that there are many more potential CFG’s out there.
The fact is you need more than $1,000,000 to run this kind of business today. Ten years ago when there was no regulation you could a run a forex broker dealer on the cheap. Not now. After all a good compliance officer alone can run you upwards of $200,000 a year never mind all the accountants and book keepers and legal staff needed to run a fully functional compliance/accounting department. But guys like Don Snellgrove couldn’t afford that kind of staff. And neither can many of these poorly capitalized firms. When you are a small forex broker dealer start up you have one goal: GET CUSTOMERS. To do that you need a fully functional platform and an aggressive sales force. That costs money. Compliance can come second after that, if at all…
With this in mind I have outlined a checklist for the average trader looking to find a broker:
1) Make sure they are registered with the NFA (or appropriate regulatory body such as the FSA in the United Kingdom). Avoid unlicensed firms at all costs.
2) Check the firm’s regulatory background on the NFA’s website. (http://www.nfa.futures.org/BasicNet/) Be sure to also examine the background of the principals of the firm. This is extremely important because if you see that a principal has a record of working for a bunch of firms with dodgy backgrounds then you need to seriously reconsider that firm.
3) Check the firm’s financials. (http://www.cftc.gov/tm/tmfcm.htm) Make sure the firm you are dealing with is well capitalized. This should be one of the most important criteria used in deciding on a forex broker. As I have demonstrated meeting the minimum capital requirement should not be an ending point when considering a firm since at one time or another even the most crooked outfits are reporting they are in compliance with the cap laws. Furthermore, beware investing with firms below $5 million net capital right now until the situation with the NFA proposal is sorted out. No, the rule has not passed yet but it most likely will and should that time come it is very likely that some of the firms on the dead pool list wil go under. Why put yourself through the stress of wondering whether or not your firm will be able to make the cut?
4) Test a firm’s customer service in advance. Are they open on the weekends? Do they respond quickly to emails? Do they have actual customer service 24 hours a day or just a surly dealer outside business hours who doesn’t like talking to people? Customer service with a forex firm is a lot more important than customer service with your bank as it can often times have a direct impact on your p/l.
5) Avoid “get rich quick” scams. Easily said but even though everyone knows it people still fall for them, especially in forex. Whether those scams involve some broker promising software guaranteed to make you a millionaire or some money manager saying his fund always has a positive return don’t fall for the hype. Remember, if what they said were true they would be millionaires sitting on a beach in Bermuda not sweating it out trying to get you to buy in on their scheme.
6) Experience means nothing in forex. Keep in mind this industry is only 10 years old. This isn’t the equity market where you have brokerage firms that have been around for decades. Everyone is new to forex including the brokers selling themselves to you. Don Snellgrove had more experience in this industry than almost anyone but his firm was not the better for it. Stability is what matters. And larger firms tend to be more stable because they have the capital to ride out the storms in this industry. Furthermore, many of them are backed by well established corporate partners or investors while smaller firms are mainly on their own with limited resources at their disposal.
So there you have it. Those are the lessons from the Collapse of CFG. Take them to heart and trade wisely.
There is this myth going around that NDD firms have no risk because they are "not market makers." It's time to put this myth to rest once and for all.
First, all firms, whether they have dealing desks or not, are required to set aside 10% of all customer assets if they offer 100 to 1 leverage. So a firm with $50 million in customer assets is required by law to already set aside $5 million just to meet that simple requirement. When added to the probable NFA rule change that firms set aside an additional $5 million in capital that means firms will need $10 million in capital as Currency Trader Magazine reported.
But getting back to the NDD 'no risk' myth. Here are just some of the risks NDD firms have to cope with.
1)Business Risk. All businesses have the simple risk of not having enough revenue to cover their expenses. Forex firms are no different. But since forex firms are holding customer funds the temptation of creditors to lay claim to those funds should a forex firm go out of business is too tempting. That is one reason the NFA wants forex firms to have more capital on hand than the average business in America. If a restaurant goes under the customers of the restaurant don’t feel the pinch since they just go to another restaurant. But customers of forex firms could lose their money on deposit if the firm they do business with goes under. Thus the risk is far greater to the general public.
2)Credit Risk. The reason behind Regulator's customer asset requirement rule (firms must set aside 10% of all customer assets) is because of the risk of customers defaulting on their credit obligation. This happens in futures all the time when accounts go negative. While forex firms like to brag about their platforms preventing customers from going negative the fact is it does happen. If the market drops 100 points in one tick it can easily happen. And if the firm can’t collect on that customer they have to eat that loss. That is a big risk. And with customers trading at 400 to 1 leverage in some cases the NFA is well justified in demanding firms have more capital on hand to offset that risk.
3)Market Making Risk. As much as NDD firms like to say they have no market risk because they pass along their trades to banks the fact is they still do have market risk. While that risk is not as large as non-NDD firms the fact is if the banks who execute each trade suddenly decide NOT TO execute a trade it is the NDD firm that has to take over pricing. Banks are not obligated by law to make prices the way exchanges are. If the market gets wild and the NDD firm’s bank decides not to make any prices who do you think is stuck with that responsibility? The NDD firm is. Either that or they don’t offer prices at all and basically cease operations. I would say that is quite a risk and certainly justifies a higher capital requirement as a result.
4)Market Discrepancy Risk. Trade discrepancies happen. There will always be cases where a bank says it executed a trade at one price while the counterparty says that trade was executed at another price. Since banks are loathe to admit guilt the onus of responsibility almost always falls on the counter party. And with high leverage those discrepancies can be very costly. Again, this justifies a higher capital requirement to help offset that risk.
So as you can see NDD firms have plenty of risk as well. They are not immune to the laws of economics. And as such are just as much in need of higher capital requirements as every other forex dealer.
As a result it is time for another Dead Pool Update:
Poorly Capitalized Firms
Advanced Markets ($1,039,000)
American National Trading Corp ($2,159,000)
Bacera Corporation (Shutdown!)
Cal Finanical Corporation (Shutdown!)
Direct Forex ($1,458,000)
E FX Options ($3,158,000)
Forex Club ($2,873,000)
FiniFX (Not Accepting New Customers)
Forward Forex (Shutdown!)
FX Option1 Inc (Shutdown!)
GFS Futures & Forex ($2,995,000)
Hamilton Williams ($1,130,000)
I Trade FX ($3,957,000)
MB Trading ($1,170,000)
Money Garden ($3,584,000)
Nations Investments (Shutdown!)
One World Capital ($2,308,000)
Performance Capital International (Vanished)
Royal Forex Trading ($1,171,000)
SNC Investments ($1,524,000)
Solid Gold Financial ($2,239,000)
Spencer Financial (Shutdown!)
Trend Commodities (Shutdown!)
United Global Markets (Shutdown!)
Worldwide Clearing (Shutdown!)
Wall Street Derivatives ($936,000)
So far not a single firm in the dead pool has shown any signs they have the capital to potentially meet the proposed requirements. Of course, they are not required to put forth any additional capital yet since the rule has not passed but you would think that at least one or two of them would take the initiative and pony up the dough now to show the world they are in it for the long haul.
Although I must doff my cap to I Trade FX for their near $4 million in reported capital. Contrary to my earlier ribbing they are getting closer to making the $5 million barrier to entry and just may stick it to the scholar in the end. They have replaced the firm that was, prior to the most recent report, the most likely firm to make it off the Dead Pool List- MB Trading. The month before MB Trading was showing $3,952,000 in adjusted net capital but now they are only showing $1,170,000 in adjusted net capital. That is quite a drop for MB Trading. It leaves them with only $171,000 in excess net capital. Of course, it could be a one month anomaly so I won't jump to any conclusions. But in light of the new NFA proposal and the increasing drumbeat from the media about the likelihood of this rule becoming law it seems to me MB Trading should be INCREASING their net capital, not decreasing it. It leaves one to wonder just what's going on over in El Sugundo...
The Taming of the Wild West
Hybrid Mode
