Are Your Funds Safe? NFA to Shut down small forex fcms

[forex savior]

So what happened at Nations? Why was the NFA forced to take an "emergency Action" and shut them down? Well, because it was basically one of the industry's worst nightmares come true. An undercapitalized firm suffered massive losses and was forced to cover them with customer funds. Here is what the emergency action states:

"On Saturday, July 21, 2007, Nations sent to NFA, via e-mail, notice that it had fallen under the minimum required adjusted net capital."

On Monday, July 23, 2007, NFA sent a letter to Nations notifying the firm that as it was unable to demonstrate compliance with the minimum requirements Nations was to cease doing business. That same day, NFA received another notice from Nations representing that the firm had fallen under the required minimum "due to losses in the forex markets." This letter also indicated that Nations was attempting to raise $5 million "to make customers whole." (YIKES! "make customers whole?!" Who on Earth is going to give Nations $5 million?! While nations has been successful at making a fool of their customers they certainly won't be making them whole.)

Nations also provided NFA with a Form 1-FR as of July 20, 2007, which indicates that Nations owes customers trading in on-exchange futures more than $3 million and customers trading Forex more than $5 million. (Wow. What an implosion. They are $8 million in the hole? What the hell were they doing over there going to Vegas and playing craps with customer funds?)

This looks like another messy court case. With financials like this I expect the creditors will be coming out of the woodwork laying claim to what's left of Nations. If they're lucky they might be able to seize a fax machine or two, but as for customer funds, well, looks like some stripper in Vegas got her hands on that money first...

[forex savior]

What about Refco? This is a common refrain I have been hearing from critics of the NFA Forex Dealer Dead Pool. Refco was massive and they went under in record time which proves that being adequately capitalized doesn't matter right? Wrong. While citing Refco is a good sound byte it in no way helps the case of the undercapitalized. Here's why:

First of all Refco was a gigantic octopus of a company that had various affiliates and subsidiaries that were both regulated and unregulated. The two main players in the Refco saga were Refco Capital Markets (the unregulated outfit in Bermuda that was doing all those shady off-exchange trades) and Refco LLC (which was the licensed futures brokerage most traders knew about.) Refco Capital Markets was where the scandal erupted. For years executives at RCM covered up huge trading losses with creative bookkeeping. But when the scandal became public it caused a bank run everywhere at Refco. The bank run occurred even though Refco had adequate capital to handle the huge trading loss RCM had incurred. But that didn't matter because Refco was a publically traded company. As the stock price tanked talk of lawsuits by shareholders accelerated the bank run and that's when Refco's creditors stepped in and pushed the firm into bankruptcy knowing the only assets the firm had were the customer funds on deposit.

Had Refco not been a public company the scandal would have been a one day hiccup and it would have been business as usual precisely because it had a lot of capital reserves. That is a huge distinction that needs to be made. But when undercapitalized firms such as Nations Investments take huge trading losses there is no room for error. It's one and done because they have no capital in reserve. Again, this is why the NFA has issued this proposal. Undercapitalized firms do not have the luxury of taking the kinds of hits that large firms can take. This is also why there hasn't been a single case of a registered forex dealer member with over $10 million ever going bankrupt. So to the critics I say cite Refco all you want but it has no place in this debate unless you want to discuss the perils of being unregulated.

[tymen1]

Well, all this will not affect me, I am with FXS Forex in Australia!

Regards, Tymen Wortel, Perth, Western Australia.

[forex savior]

Looks like the media is starting to pick up on the undercapitalization story. Both FX Week and Euromoney did recent stories on what I have been saying for several weeks now:

Proposed NFA rules seen as catalyst for consolidation in US retail
http://www.euromoneyfix.com/

US regulators clamp down on retail FX dealers
FX Week - The Global business of foreign exchange lic%2FshowPage.html%3Fpage%3D459830

Subscriptions are required for both but here is the money quote from the FX Week:

The NFA said it has been concerned about the lack of protection for FX customers. "From what we've been seeing and the enforcement actions we've been taking recently, for the protection of the customer in the markets, we really need to raise the minimum capital requirement for these firms," said a Chicago-based NFA spokesman.

Since March, eight FDMs have fallen under the NFA's early warning requirement of $1.5 million, and the regulator's worries have been heightened as the amount of retail customer funds held by FDMs has increased to more than $1 billion as of May 22.

The largest FX dealer firms are well clear of the proposed $5 million requirement, according to the CFTC's May 31 report of adjusted net capital holdings, which showed CMS holding $11,512,421, FXCM $55,668,469, FX Solutions $12,650,227, Gain Capital $18,694,143, GFT $47,681,883, and Oanda $35,361,139.

Once again if regulators are going on the record as saying they don't have any confidence in the manner in which undercapitalized firms operate why should retail fx traders have any?

[forex savior]

It's been close to two months since I started reporting on Dead Forex Firms Walking. Since my first post much has changed and the list is in need of an update. So here it is, Introducing:

NFA Dead Forex Firms Walking, version 2.0: (Adjusted Net Capital as of May, 2007, direct from the CFTC: http://www.cftc.gov/files/tm/fcm/tmfcmdata0705.xls)

Advanced Markets ($1,021,000)
American National Trading Corp ($1,985,000)
Bacera Corporation (Shutdown!)
Cal Finanical Corporation (Shutdown!)
Direct Forex ($1,406,000)
E FX Options ($2,631,000)
Forex Club ($2,873,000)
FiniFX ($1,314,000)
Forward Forex (Shutdown!)
FX Option1 Inc (Shutdown!)
GFS Futures & Forex ($2,223,000)
Hamilton Williams ($1,202,000)
MB Trading ($3,952,000)
Money Garden ($3,627,000)
Nations Investments (Shutdown!)
One World Capital ($1,502,000)
Performance Capital International ($483,000)
Royal Forex Trading ($1,088,000)
SNC Investments ($1,510,000)
Solid Gold Financial ($2,039,000)
Spencer Financial (Shutdown!)
Trend Commodities (Shutdown!)
United Global Markets (Shutdown!)
Worldwide Clearing (Shutdown!)
Wall Street Derivatives ($936,000)

Unregulated Firms (Buyer Beware)
FXDD (?)
GCI (?)
Cletus' Fishing & Forex (?)

So there you have it. A total of NINE licensed forex dealer members have recently been closed by the NFA. Anyone still doubt this new $5 million cap requirement rule will be passed soon? I didn't think so. Certainly more closures await the dead forex firms walking in the days ahead. Hopefully you won't have money in one of them when they go under. In any case, I'll be here to report all the gory details.

[forex savior]

As of August 2, 2007, this is where we stand in regards to the NFA proposal to raise capital requirements to $5 million:

FX Week states, "Following redrafting to include industry feedback, the proposals will be presented to the NFA board in August and then to the CFTC, and are not expected to be effective until the end of the year, the NFA explained."
http://www.fxweek.com/public/showPa....age %3D459830

So if the proposal passes all the firms in the forex dealer dead pool, which from all appearances are currently meeting their capital requirement, will have several months to meet the new one. The big question is should this pass which will meet it and which ones won't? And for those that cannot meet the new requirement what will happen to the firms, and more importantly the customers of these firms? You could have a situation where one of the proprietors of these firms runs off with customer funds in the last hours. You could also see a situation where the NFA goes in to close a firm only to discover they have no money left and the firm then gets forced into bankruptcy.

Now, the likelihood of this happening to firms with $3 or $4 million in capital is a lot less than with firms with only $1.5 million in capital. But the whole point of this thread is to point these dangers out to the trading public and then let them draw their own conclusions.

[forex savior]

Page 42 of the current issue of Currency Trader Magazine (Free Subscription) has an article about the new NFA proposal. It reports on exactly what I have been saying these last few weeks. (Currency Trader Magazine -- July 2007)

Here are some key quotes from the article:

“The NFA wants to raise capital requirements for registered Forex Dealer Members (FDM) to $5 million, plus it wants improved accounting standards.”

“The proposal could potentially wipe out 90 percent of existing forex brokerages, although it’s likely major consolidation would occur if the rule passes.”

“Since 2000, the NFA has authorized Forex Dealing licenses to more than 50 firms. However, many of these firms went out of business because they were undercapitalized, and fraud continues to be a problem in the forex brokerage arena.”

“The NFA estimates the new rules, combined with existing rules, will force firms to have at least $10 million in adjusted net capital to remain in business.”

“The NFA listed four specific reasons for the rule change:

1) Trading Spot Forex, which FDMs do, creates more risk than trading futures and options listed on an exchange.
2) Since spot forex is not a priority under the NFA’s Bankruptcy Code, it’s particularly important for FDMs to have adequate capital.
3) Two of the three bankruptcy proceedings in which the NFA has taken part in the past four years have involved smaller FDMS…
4) The Case of CFG Trader which was shut down by the NFA and forced to liquidate all open positions because it was undercapitalized.”

So this is the third independent media source to confirm what I have been saying. Again, this doesn’t mean that all the firms in the Dead Pool are going under or that they are not currently meeting their requirements. But they are in a very precarious position. When the media is saying that the proposal “could potentially wipe out 90% percent of existing forex brokerages” than traders should sit up and take notice.

[forex savior]

Breaking News:

Both the National Futures Association and the CFTC have apparently de-listed Performance Capital International Inc. The NFA says on its website their membership was withdrawn on July 26, 2007. The most recent CFTC report also shows Performance as a member of its "deletions" category right next to FX Option1 Inc and the Cal Financial Corporation.
http://www.cftc.gov/files/tm/fcm/tmfcmdata0706.pdf

It could be that Performance was rolled into the Solid Gold Group as it says it is a member of the "SolidGold Group" on the front page of its website which is still functioning. In any case that is one less firm to report on.
Welcome to PFEC - Online Forex FX Currency Trading - Performance Forex - www.eforex-asia.com

Another firm that no longer has a functioning website is FiniFX: FINI FX - Forex International Investments, Inc.

The website says they are "under construction" and the word on the street is that they are no longer accepting new customers. However, they are still a member in good standing with the NFA according to the NFA's website so I won't pronounce them dead quite yet. But it looks like they have one foot in the grave.

Coming up Next Week:
1) New CFTC Capital Numbers - Some of the numbers will surprise you
2) A Three part Series on the Demise of the Concorde Forex Group
3) The Sordid Saga of Crooklyn native Udo Rotmistrenko

Enjoy the Weekend!

[forex savior]

Originally Posted by nancypants

I don't see any reports on the CFTC website on any broker shutdowns. Can you please provide a link to the report?? thanks

The CFTC only steps in for enforcement actions. You need to go to the NFA's website for details on brokerage closings.

[forex savior]

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:
(CFG Trader/Snellgrove) 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:

CFG got its license in November of 2003. But its owner, Don Snellgrove, founded the company in 1998. (Concorde Forex Group, Inc. : Henrico County, Virginia)

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 (Rip Off Report: CFG - Concorde - Concorde Forex Group - Concorde Financial Group - Don Snellgrove Absolute GARBAGE Total failure of me and many others Richmond Virginia) 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.” (CFGNews - Page: 8 of 11)

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…

Tomorrow- Part II “The Collapse of CFG”