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

[forex savior]

I have received some interesting feedback regarding the regulatory status of FXDD. As you know FXDD is listed in the Dead Forex Firms Walking list with a net capital of $786,000. Where did that figure come from? Well, it came from the futures affiliate (Tradition Securities and Futures Inc) of FXDD's parent company. So why is FXDD listed as a result?

It's a fair question. And the fair answer is that because FXDD is unregulated and because the average forex trader knows absolutely nothing about their financial status FXDD deserves to be judged on the closest data available. Forex traders conducting their due diligance are truly groping in the dark when trying to evaluate FXDD since they are not licensed by the NFA and do not directly report any financial data to the CFTC. That means that no one is checking in on FXDD to look at their books and make sure they are solvent. No one is checking in on their sales and marketing practices (notice that FXDD is one of the only major forex brokers that states on its website that they offer "Commission Free Trading" with no disclaimer about how they make their money on the spread.) Got a complaint about FXDD and want to file a claim or go to arbitration? Good luck. The NFA or CFTC won't hear your case because they have no jurisdiction so you'll pretty much have to rely on Judge Wapner. In the age of forex fraud I can't see how anyone would allow themselves to roll the dice and take a risk by opening an account with a firm that is completely unaccountable to any government regulators. Doesn't anyone remember RefcoFX? RefcoFX was the unregulated arm of Refco and when Refco went under and Refco's creditors looted RefcoFX's customer accounts the NFA and CFTC sat on their hands and stated they could do nothing because RefcoFX was unregulated.

But in the interest of fairness I'm going to relocate FXDD off the Dead Forex Firms walking list and onto a new list. Call it the "Unknown Unknowns" list becaue no one has any idea when or if FXDD might explode. Now I'm not saying FXDD is a bucketshop or that they are in immediate danger of collapse. In all likelihood the NFA capital requirement increase will have no effect on them (although it remains to be seen how it will effect Tradition.) But since they are unregulated and answer to no one how the hell is anyone to know exactly who or what they are?

[ncourey]

Forex Savior, good work. I back up your statement with my research. FXDD is not registered with the CFTC/NFA.
Unless regulated with them, or a foreign equivalent, everyone here has no business talking to a broker. I spoke with them, and one of their IBs, at great length. Not registered, they are not required to report much information.
why work with someone who is (essentially) hidding their business?

[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?

[Tess]

Originally Posted by forex savior

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?

How very noble of the regulators to come over all authoratative LOLOL

Any chance they'll also begin thoroughly investigating the reams of complaints & concerns of customers regards all the dirty tricks from the so-called heavyweight & shiny, smiley brokers??

I think not.

The poor saps who will presumably begin fleeing into the arms of the "other" larger capped thieves will merely be hopping from the filthy frying pan to the greasy fire.

[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.