Broker Net Capitalization --- a year-over-year comparison

Between December 2007 and May 2009, the CFTC embarked on a program of tightening the required minimum net captalization of U.S.-domiciled retail forex brokers. Over this period, the capitalization required of each broker was raised, in four steps, from $1 million to $20 million. One of the stated objectives of this tightening was to drive out of the business those firms which were too weak to attract substantial additional working capital. The CFTC achieved this objective. Many brokerage firms went out of business, moved their U.S. operations offshore, or allowed themselves to be acquired by stronger firms.

The CFTC’s monthly report, Selected FCM Financial Data, showing figures as of 5/31/09 was released in early July 2009; and was the first report to show the financial status of retail forex brokers after the final increase (from $15 million to $20 million) in required minimum net capitalization.

It is now one year later, and the CFTC has recently released Selected FCM Financial Data as of 5/31/10. I thought it would be useful to compare the financial strength of U.S. brokers now, vs. one year ago.

The table below compares broker capitalization as of May 31, 2010, to broker capitalization as of May 31, 2009, for 22 U.S. forex brokers. The grouping of brokers into 3 categories is explained in the Notes which follow the table.

The column headed % Change shows the change in Adjusted Net Capital for each broker over the 12-month period. The big gainers were Interactive Brokers, FXCM and MB Trading. The big losers were IG Markets, FX Solutions, Forex Club and IBFX.

The top 8 independent brokers as of 12 months ago are still the top 8. A newcomer, FXDD, is now #9 in the current ranking. In the lower third of the rankings, there has been some shuffling of the order.

When the CFTC’s Proposed Regulations for Retail Forex become law, probably before the end of this year, there will be some changes in terminology in retail forex in the U.S.: retail forex brokers, who are currently designated as Futures Commission Merchants (FCM’s) will be designated as Retail Foreign Exchange Dealers (RFED’s).

The CFTC has never referred to forex brokers as “brokers”, and the CFTC’s Proposed Regulations emphasize the fact that these firms are “dealers”, not “brokers”. In the future, we all should adopt the “dealer” terminology, as well. But, for now at least, I’m referring to them as “brokers”, just as we’ve done for years.

NOTES:

B[/B] Brokers indicated with an asterisk (*) handle retail forex ONLY. Other listed brokers handle other financial instruments in addition to retail forex, including one or more of the following: institutional forex trading, commodity futures, options, equities, and/or commercial banking.

B[/B] The CFTC report, Selected FCM Financial Data, is the source for the figures shown above. Here are links to the May 2009 and May 2010 reports:

* May 2010 - http://www.cftc.gov/ucm/groups/public/@financialdataforfcms/documents/file/fcmdata0510.pdf

These reports list financial data for commodity futures brokers, certain futures clearing firms, institutional forex brokers, and retail forex brokers — all in one alphabetical listing.

I have pulled the U.S. retail forex brokers from these reports and listed them in the table, above. All of the retail forex brokers listed (except IG Markets and Deutsche Bank) are considered to be domiciled in the U.S., and are regulated by the CFTC and by the NFA (or other industry self-regulatory authority). See Note 6 for details on IG Markets, and Note 7 for details on Deutsche Bank.

Foreign brokers, not regulated by the CFTC and not appearing in this table, include: Saxo Bank (Denmark), ACM (Switzerland), Dukascopy (Switzerland), NordMarkets (Sweden), and many others.

B[/B] Regarding Adjusted Net Capital figures: In each case, these numbers represent the broker’s own funds AND the funds of all their customers, combined in one total. Unlike commodity futures brokers and stock brokers, U.S. forex brokers are NOT required to segregate customer funds. This should (and probably will) change in the future. In the meantime, there is no way to tell from the figures in the CFTC report how much customer money each broker has on deposit.

B[/B] INDEPENDENT RETAIL FX BROKERS (the first 18 brokers listed above) are NOT subsidiaries of larger firms, and DO NOT rely on the capitalization of a parent firm to meet regulatory requirements.

These independent FX brokers (if they deal in forex only) must meet the CFTC minimum Net Capital Requirement of $20 million. For brokers holding very large amounts of customer money, higher minimums apply.

Independent FX brokers which also deal in commodity futures, or other securities, must meet higher capital requirements.

In the table, these independent FX brokers are ranked numerically according to Adjusted Net Capital. Subsidiary brokers and banks (see below) are not ranked.

B[/B] SUBSIDIARY RETAIL FX BROKERS (2 are listed in the table) are subsidiaries of parent firms, and rely on those parent firms to meet CFTC Net Capital Requirements. These brokers must have Net Capital of $500,000 in addition to the capital of their parent firms. Subsidiary relationships are as follows:

* IG Markets Inc - subsidiary of IG Group Holdings plc (UK)

* MG Financial LLC - subsidiary of Rosenthal Collins Group LLC (Chicago)

Several subsidiary retail FX brokers have disappeared from this list over the past 12 months, including: Hotspot FX LLC, GFS Forex and Futures Inc, I Trade FX LLC, ODL Securities (US) Inc, and ACM USA LLC. These brokers have been acquired by other firms, have ceased U.S. operations, or have gone out of business.

B[/B] IG Markets Inc is unique among the brokers in this table. This is a U.S. firm offering currency trading on the North American Derivatives Exchange (NADEX). They do not offer retail (spot) forex trading directly. If a client of IG Markets Inc wants to trade spot forex, IG Markets Inc acts as an introducing broker (IB), and refers that client to IG Markets Ltd (UK). Both IG Markets Inc (US) and IG Markets Ltd (UK) are subsidiaries of IG Group Holdings plc (UK).

B[/B] Two BANKS (Citigroup and Deutsche Bank), operating as retail FX brokers, are listed separately from the rest of the brokers, because their very large capitalization, as banks, cannot be readily compared to the capitalization of non-bank brokers.

Deutsche Bank is included in this table as a special case. Deutsche Bank’s various securities activities are regulated by the CFTC and by several other U.S. regulatory agencies; however, this regulation does not include the retail forex business of dbFX, a Deutsche Bank subsidiary.

dbFX is domiciled in the United Kingdom, and is regulated by the British Financial Services Authority.

Deutsche Bank is included in this table only for comparison to its competitor, Citigroup. It is interesting to note that, while Deutsche Bank and Citigroup are comparable in net capitalization, Deutsche Bank handles far more foreign currency transaction volume than Citigroup (or any other bank in the worldwide interbank network).

B[/B] For a list of more than 300 forex brokers worldwide, see:

Forex Brokers | Rate, Review & Compare | Best Forex Broker Reviews | Forex Broker Guide

Brokers on this site are listed 10 per page, in non-alphabetical order. To make the list easier to use, put the brokers in alphabetical order. To do this, find the drop-down menu marked “Ordering” at the top of the list, and select “Title”.