FCM-Reform

The comment period for the CFTC’s additional customer funds protection proposal is now closed. But there will be additional opportunities to advance the cause of greater retail forex protections this summer. Yesterday, Senate Agriculture Committee Chairwoman Debbie Stabenow announced that she and Ranking Member Thad Cochran are soliciting comments from the general public in the run up to this year’s CFTC Reauthorization: Sen. Stabenow Announces CFTC Reauthorization Plan - Farm Futures Retail foreign exchange has long been in need of additional customer protections, in particular segregation of customer funds and account insurance. We expect these issues to be front and center this summer and customer backing will be necessary if we are to have any success convincing Capitol Hill to support these necessary reforms. More to come in the weeks and months ahead.

The CFTC held another public roundtable on the PFG/MF Global customer protection proposals that are now open for comment: MF Global Customer Funds Rules Get Another CFTC Hearing - Bloomberg FXCM continues to advocate for greater FCM/RFED transparency as detailed below. The CFTC will keep its comment period open for one more week. Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry 1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter: Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s and RFED’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have. Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence. Too often, those firms that are teetering on the edge of bankruptcy lure customers in by offering unsustainable gimmicks (dirt cheap commissions, account opening bonuses) that temporarily puts off the inevitable. Customers should be aware of the perilous finances of those firms that would offer these kinds of gimmicks before opening an account with such a firm. PFG Best was a classic example of a firm that used such gimmicks as they routinely low balled their competitors with uneconomical discounts that no reputable, legally compliant firm could match. 2) Require all FCM’s to Employ a Top Ten Accounting Firm: There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet. While no one proposal will guarantee that a future FCM will not fail, these proposals will enhance the public’s due diligence capabilities by bringing greater market transparency and accountability to the world of futures/forex trading.

The bankruptcy judge for the PFG Best case is expected to decide on the complaint filed by the forex/metals account holders at PFG. AP has an article out detailing the conflict between futures and forex customers: http://www.boston.com/business/marke...5VM/story.html Retail forex traders still have an opportunity to tell Washington that this kind of disparate treatment of retail forex customers needs to end. The CFTC comment period on additional customer reforms remains open: http://comments.cftc.gov/PublicComme...m.aspx?id=1320

The CFTC has now extended its open comment period: CFTC Extends Public Comment Period on Rulemaking Enhancing Protections Afforded Customers and Customer Funds Held by Future Commission Merchants and Derivatives Clearing Organizations

The Futures Industry Association has submitted a comment letter to CFTC requesting the comment period be extended for one month due its concern that "increased costs imposed on FCMs will adversely affect the ability of many FCMs to compete effectively." View Comment - CFTC CFTC has received over 30 comment letters regarding their proposals to date. Most of the letters are coming from retail forex/metals traders (many inspired by the events taking place at PFG) asking for additional customer protections for retail forex. You can leave your comments below: Public Comment Form - CFTC

The National Futures Association has put forth some additional customer "safeguard" rules in light of the of the bankruptcies of MF Global and PFG. Again, these are steps in the right direction but we believe requiring firms to publish a quarterly, audited financial statement to be a more effective and comprehensive public safeguard. Member Newsletter NFA enhances monitoring of FCMs, amends forex capital requirements At its November 15 meeting, National Futures Association's (NFA) Board of Directors approved two measures that will further enhance customer protection safeguards. The first measure will enable NFA to make better use of technology in order to better monitor futures commission merchant (FCM) segregation compliance. Secondly, NFA's Board approved rule amendments to increase the capital requirement for FCMs acting as counterparties in off-exchange foreign currency (forex) transactions with eligible contract participants (ECP). FCM daily confirmation system Earlier this year, as part of NFA's ongoing effort to further safeguard customer funds, NFA's Board approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated and secured amount funds-including banks, clearing FCMs, broker-dealers and money market accounts-to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCM's designated self-regulatory organization (DSRO). The DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to identify any material discrepancies. In November, NFA's Board approved amendments to Financial Requirements Section 4 in order to implement this new daily confirmation system. The new amendments will require an FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances to a third party designated by NFA. The amended rule also states that in order for a depository to be deemed acceptable, it must report the FCM's customer segregated and secured amount balances and cleared swaps customer collateral balances to a third party designated by NFA. The daily conformation system is still under implementation, but the first phase, beginning with banks, is expected to be implemented by December 31. Other categories of depositories will be added in 2013. Increase in capital requirements for FCMs acting as counterparties in forex transactions with ECPs Over the past year, NFA has observed that several NFA Member FCMs are almost exclusively acting as counterparties to forex transactions with ECPs. Specifically, three FCM Members have ceased to act as forex dealer members (FDM) but continue to act as counterparties to forex transactions with ECPs. Because these firms do not act as a counterparty to retail forex transactions, their minimum adjusted net capital requirement is only $1 million pursuant to NFA Financial Requirements Section 1. Given the counterparty nature of these FCMs' forex activities, NFA is concerned that these firms are currently subject to inadequate capital requirements. Specifically, NFA believes there is no sense from a financial safeguard perspective that an FDM that acts as counterparty to a retail forex transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type transaction with an ECP must only maintain a minimum $1 million in capital. Therefore, NFA's Board approved an amendment to Section 1 that includes a provision requiring an FCM that acts as counterparty to a forex transaction with an ECP to maintain adjusted net capital of at least $20 million. This amendment was submitted to the Commodity Futures Trading Commission for approval on November 20.

FXCM has formally submitted its reform proposals to the CFTC for comment. We encourage everyone to contact CFTC as well to urge greater protections for the retail forex industry: http://comments.cftc.gov/PublicComme...m.aspx?id=1291 December 14, 2012 Via Mail and Electronic Submission Mr. David Stawick Secretary Commodity Futures Trading Commission 1155 21st Street, N.W. Washington, D.C. 20581 Re: Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations: (RIN3038-AD88) Dear Mr. Stawick: Forex Capital Markets LLC (“FXCM”) is a retail foreign exchange dealer (“RFED”) and Forex Dealer Member of the National Futures Association (“NFA”). FXCM has been registered with the Commodity Futures Trading Commission (“CFTC”) as a Futures Commission Merchant (“FCM”) since 2001 and is one of the leading U.S. firms offering off-exchange forex trading to retail clients around the world. FXCM is proud of its position as an industry leader in retail FX both in the United States and globally. FXCM has been a staunch advocate for increased regulation for the U.S. forex industry and the protection of retail forex customers. FXCM submits these comments in response to the Commission’s November 14, 2012 rulemaking proposal (the “November 14th Proposal”) concerning “Enhancing Protections Afforded Customers and Customer Funds held by Futures Commission Merchants and Derivatives Clearing Organizations.” FXCM believes that in light of the bankruptcies of MF Global and PFG Best the regulations contained in the November 14th Proposal are necessary. However, we are concerned they do not go far enough in protecting the trading public and would therefore like to propose additional protections. Since the financial crisis of 2008, many FCMs and RFEDs have been struggling financially as the traditional business model for FCMs and RFEDs has come under enormous pressure. FCMs earn commissions on each trade their customers make; however, electronic trading has caused a price competition among FCMs that has resulted in falling commissions throughout the industry. RFEDs earn revenue on the bid/ask spread but tightening spreads in the industry have pressured RFED bottom lines as well. Additionally, interest rates have plummeted depriving FCMs and RFEDs of a large portion of revenue derived from the interest collected on customer deposits. Furthermore, decreased volatility throughout all financial markets has lowered the amount of trading in general. This constant pressure on revenues can result in a firm making aggressive, losing bets with client funds (MF Global) or in outright fraud (PFG Best). It is precisely because of this challenging business climate that we believe the following two proposals be given serious consideration. Require all FCMs and RFEDs to employ a Top Ten Accounting Firm One of the many reasons that Russ Wasendorf Sr. was able to get away with his Ponzi scheme for so long was that PFG Best had very poor internal accounting procedures. While no accounting firm is perfect, there should be much higher accounting standards for FCMs and RFEDs. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCMs and RFEDs. Whether it is top 10 or top 25, FCMs and RFEDs should use a nationally recognized and respected accounting firm that will apply the same accounting standards that publicly traded companies must meet. Require All FCMs and RFEDs to Publish a Consolidated Balance Sheet and Income Statement Once a Quarter Futures Commission Merchants are very unique in the world of finance. They hold customer funds that are supposed to be in segregated accounts but they have no insurance in the event the firm goes bankrupt. The entire system revolves around trust. But with that trust violated something more must be offered to ease the investing public’s mind, specifically, a complete, fully audited, and publicly disclosed consolidated balance sheet and income statement. Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a FCM or RFED has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCMs and RFEDs to publish a quarterly, consolidated balance sheet and income statement the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that a firm has. Furthermore, the published balance sheet and income statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily effect the regulated entity. Each company should be required to provide a link to these financial statements on its own homepage so that the public can conduct proper due diligence. Too often, those FCMs and RFEDs that are on the edge of insolvency lure customers in by marketing unsustainable offers (low commissions, account opening bonuses) that temporarily puts off the inevitable. If traders have access to such a firm’s income statement they will be able to see for themselves that these kinds of marketing gimmicks may not be producing revenue for the firm (or even leading to losses) and this will allow the trader to make a safer choice and also discourage firms from engaging in uneconomical business practices. One customer found this out the hard way: Peregrine Financial Collapse Cost Farhan Khan His Life Savings “But Khan was not worried about risk or diversification when he moved his money to PFG Best, he said. He had been aggressively saving for years and wanted to venture into commodities, which can produce high returns though with increased risk, to further grow his $380,000 nest egg. In December, Khan transferred all his money from a Charles Schwab account to PFG Best, attracted by low fees that were half the cost of Schwab's and the faster trading platform.” Had customers like Khan known the poor state of the finances of firms like PFG (who routinely hard sell these illusory discounts) then such a tragedy could have been avoided. In addition, by requiring this additional disclosure customers will be able to watch out for firms who take excessive risks and have abnormally high volatility in their earnings, and other warning signs they may not be aware of. This would require firms to be more vigilant with the risks they are taking. PFG Best highlights the need for putting the public interest ahead of the desire of many FCMs and RFEDs to keep their financials private. FCMs and RFEDs hold customer funds in trust. If a FCM or RFED goes out of business the collateral damage to the firm’s customers and to the confidence of market participants is far worse than with your average business, which is why the standards need to be much higher. In short, any FCM or RFED that holds customer funds in trust needs to accept the costs that come along with that trust. FXCM appreciates the opportunity to offer these comments to the Commission on the November 14th Proposal. Sincerely, Drew Niv Chief Executive Officer Forex Capital Markets LLC 55 Water Street, 50th floor New York, NY 10041

The CFTC has published some early comments regarding their additional customer funds protection proposals. Here is a sampling below: http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1291 · From: Brandon Shoemaker Comment No: 58945 Date: 11/19/2012 Comment Text: Here are my recommendations which are a result of a consensus in the trading groups i participate. 1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter: Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s and RFED’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have. Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence. · From: William Allen Comment No: 58946 Date: 11/19/2012 Comment Text: Do we really need this regulations for companies to do what they know they should do anyway. Why is it that government regulate everything in our lives. What the hell is wrong with all you people in D.C.. Do you really feel the need to try to control everybody. Why don't we just enforce the laws already on the books and not create more regulation that doesn't do anything but make more rules that nobody understands or knows about. As far as I'm concerned, welcome to the USSA United Socialist States of Americka. · From: Anthony Ingrassia Comment No: 58947 Date: 11/19/2012 Comment Text: Honorable Members of the Commission, As an independent CTA active in the forex markets, I find it unconscionable that forex account holders with FCMs that deal in both futures and forex (such as was the case with PFG Best) are omitted from or considered subordinate to those who hold futures accounts. Neither should RFEDs be exempted from these proposed changes to increase transparency. Thank you for the opportunity to comment. You can also leave your own comments with CFTC by clicking the following link: http://comments.cftc.gov/PublicComments/CommentForm.aspx?id=1291

Last week the CFTC released their latest rule proposal to the public regarding customer funds protection for the futures industry. Once again the CFTC is accepting comments from the public: http://comments.cftc.gov/PublicComments/CommentForm.aspx?id=1291 The comment period is slated to be open until January 14. FXCM continues to encourage forex traders to leave comments with the regulators on this matter. Retail forex has not been included in these reforms despite the thousands of customers at PFG who traded retail forex. In addition to supporting segregation of funds protection and insurance for the industry FXCM is also proposing the following: Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry 1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter: Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s and RFED’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have. Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence. Too often, those firms that are teetering on the edge of bankruptcy lure customers in by offering unsustainable gimmicks (dirt cheap commissions, account opening bonuses) that temporarily puts off the inevitable. Customers should be aware of the perilous finances of those firms that would offer these kinds of gimmicks before opening an account with such a firm. PFG Best was a classic example of a firm that used such gimmicks as they routinely low balled their competitors with uneconomical discounts that no reputable, legally compliant firm could match. 2) Require all FCM’s to Employ a Top Ten Accounting Firm: There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet. While no one proposal will guarantee that a future FCM will not fail, these proposals will enhance the public’s due diligence capabilities by bringing greater market transparency and accountability to the world of futures/forex trading.

The NFA has debuted its new financial reporting section on the BASIC search part of their website: NFA provides public online access to FCM financial information While this is a step in the right direction it still does not provide the kind of hard data that would provide traders (particularly retail forex traders) with the kind of financial numbers one gets to see in a quarterly earnings report from publically traded companies. Such a disclosure would give traders a much better insight into the health of a FCM or RFED then currently exists.

The CFTC is expected to formally submit their reform proposals to the federal register, which will once again give customers a chance to make comments. I’ll post a link once it is available. In the meantime, Futures Magazine has published an interesting article on conducting your due diligence: Spotting broker red flags The article partly highlights the importance of good auditing and the benefits to traders of being able to look at the many reports that publicly traded companies have to file. Traders should not have to do go searching for expensive accountants to conduct due diligence. They should be able to easily review a firm’s financial statements at a public website so that they can determine how healthy a firm actually is. This is a far better way to conduct due diligence than the current system which merely relies on the public statements of individuals like Russ Wassendorf. Marketing promises are no substitute for hard data. There is still time to get the CFTC to adopt such safeguards. Email secretary@cftc.gov to make your own recommendations regarding customer insurance, these proposals, or any others.

Chairman Gary Gensler put out a press release today announcing a series of reforms designed to afford customers greater protections in the futures industry. It does not appear retail forex has been included in these reforms but we'll learn more in the days ahead. Here are the highlights: Statement by Chairman Gary Gensler of Support: Enhancements for the Protection of Customers and Customer Funds

The CFTC has just announced they will be holding an open meeting to consider additional customer protections for the futures industry next Thursday. CFTC to Hold Open Meeting to Consider a Notice of Proposed Rulemaking on Enhancing Customer Protections FXCM has been lobbying in Washington to extend such protections to retail forex traders as well. FXCM supports tougher accounting standards, customer insurance and a requirement that all FCM's disclose their fully audited financials to the public. We are encouraging traders to submit their comments to the CFTC at secretary@cftc.gov.

In yesterday's hearing on Drohan Lee LLP's motion on behalf of PFG's retail forex customers Judge Carol Doyle advised the plaintiffs to file an "adversary" suit against the Trustee to force him to return the funds of PFG's forex customers. Peregrine Forex, Metals Clients To Sue Over Funds, Atty Says - Law360 That is exactly what they are about to do. Futures Magazine has a good article regarding the new motion: PFG forex, metals customers want justice A victory for Drohan Lee would indeed be a huge precedent for all retail forex traders in the United States, and a welcome one at that. However, the precedent may not be to the liking of many in the futures industry. This quote from John Roe of the Commodity Customer Coalition is very telling: If FX customer assets are no more than a backstop for futures customers in the event of bankruptcy then retail forex traders need to think long and hard before opening an account with a FCM whose primary business is futures. That is what is at stake in the adversary suit that is about to be filed.

The lawyers for PFG's Forex/Metals customers have just filed a motion designed to prevent creditors from laying claim to the funds of forex traders. The hearing for this motion is set for Thursday morning. Hearing for Motion scheduled for Thursday, October 11, 2012 at 10:00a.m. - PFG Forex Metals Legal Account It is a noble sentiment and one that FXCM wholeheartedly supports. We have been hammering away in Washington on this issue for seven years now. Here’s hoping the judge surprises on Thursday with a ruling supportive of retail forex traders everywhere. But clearly, the status quo cannot be tolerated. You can let the CFTC know by emailing secretary@cftc.gov and by contacting your local Congressional Representatives and passing along your concerns. In the meantime, we will continue to advocate for Segregation of Funds, Customer Insurance, and Public Disclosure of Financials for all FCM’s and RFED’s.