Customer funds missing from PFG-Best

I suppose it’s not unreasonable to suspect that there must be many rotten apples inside the regulators’ circles. I wouldn’t be suprised if they were accomplishes rather than simply incompetent.

And it appears that diversifying between brokers is way way way more important than diversifying between assets.

Agreed on MB Trading as a good recommendation. I use them and two others. It’s scary how quickly this can happen to traders - talk about getting caught with your pants down? How can people (traders, specifically) have any idea that stuff like this is going on behind the scenes? MB and some of the others might be perfectly legitimate, but it sure makes to pause to consider what if any of the “good” brokers has some lunatic running the show like PFG did? Wow.

From what I understand, PFG being run the way it was, is somewhat an anomaly. Mr. Wasenmadoff was the sole owner, and had no one to answer to. Crazy way to run a railroad if you ask me. 3 years of compounded gains down the toilet. I won’t even bother to tell you how much.

As for that list Yuni posted, it’s really interesting to see the NFA/CFTC actions, and the arbitration rulings against the broker, the closer you get to the bottom. And PFG had plenty. Funny thing is, I never really had a problem withdrawing anything. I’ve withdrawn over 20k at a time. The only time I had a problem, my agent was sick, and she didn’t get the paperwork into the accounting office in time. But two days later, it was posted in my bank account.

And Clint, you’re spot on. Gensler, Corzine, Fuld, god… Why aren’t they doing time?

[Edit] As of my last email from the broker, they’ve now referred us to their main website to keep up on the info as it comes available.
Kinda cheezy to tell clients they can get their news where the rest of the world does now. My guess is there’s nobody left at PFG to keep up with personal emails.

That list needs to grow.

Time to CLEAN HOUSE.

The more I read about PFG and Wasendorf, the more unbelievable the whole thing really is. To go to the extremes he did for 20 years to maintain complete control over the company bank statements and such is just astonishing.

From what I’ve read elsewhere on this situation, it looks like the few Canadian traders who had accounts with PFG won’t lose out at all due to the more stringent regulations in Canada that ensure they will get their money back in full. The US regulators may have failed here, but score one for the neighbors to the north.

I’m sorry to hear that you are taking a (potentially large) loss on this PFG fallout, Master Tang. I hope you are able to find a better broker and make that loss back quickly.

Hi B2Spirit,

Looking at the CFTC FCM financial data, which the Atlas ranking is based off of, gives you a narrow view of FXCM’s finances since we are regulated in multiple jurisdictions each with their own capital requirements. Only approximately 10% of FXCM’s volume comes from the US; therefore, FXCM is only required to keep a small portion of its $221 million in capital, as of our last quarterly statement, within the US regulated entity. Recent events surrounding PFG have no doubt made traders think twice about the broker they are trading with.

As a publicly traded company on the NYSE, FXCM’s financial statements give our traders the transparency that many other brokers cannot offer as a privately held company or at best through the very limited CFTC financial data. So by all means, ask your broker for their financials. You can find our financial information on any financial portal by searching for ticker symbol FXCM such as on Marketwatch FXCM Inc., FXCM Stock Quote - (NYSE) FXCM, FXCM Inc. Stock Price . Here’s a screenshot of some of FXCM’s quarterly financial data as taken from our SEC filed financial statements listed on Yahoo Finance:


Source: FXCM Income Statement | FXCM Inc. Class A Common Stock Stock - Yahoo! Finance


Source: FXCM Balance Sheet | FXCM Inc. Class A Common Stock Stock - Yahoo! Finance

The cash and cash equivalents figure combines FXCM’s total capital with client equity. If you separate it out, then $221 million is FXCM capital and $1.135 billion is client equity. Again, these figures are as of our latest quarterly release from M

Unlike FXCM, most of our competitors are privately held so you don’t have the same level of transparency in terms of how much total capital they have, whether they generate a profit or a loss, who their auditor is, etc. While an independent ranking such as Atlas is a noble cause, they’re doing so without knowing the financial health of the companies and going by a very limited report.

Let me know if you have any questions.

Jason

This week the CFTC will be holding a public roundtable to address the concerns of traders in response to the bankruptcies of PFG and MF Global. FXCM would like to announce its own proposals to help restore confidence for futures and forex traders in the United States.

[U][/U][B]Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry [/B]

The collapse of PFG Best (following so closely after the collapse of MF Global) has sent shockwaves all across the United States. The trading public has serious concerns about the integrity of the futures market and many are questioning whether Futures Commission Merchants (FCM’s) can be trusted to hold client funds. There exists today a crisis of confidence amongst retail futures and forex traders that has never existed before. If not addressed immediately, these markets will be irreparably damaged for years to come.

The following proposals are intended to bring market transparency to the industry by restoring investor confidence in FCM’s.

[U]1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter:[/U]
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 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 a Futures Commission Merchant has.

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 effect the regulated FCM. 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 FCM’s 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 FCM’s 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.

[U]2) Require all FCM’s to Employ a Top Ten Accounting Firm:[/U]
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.

[U]The Public Trust[/U]
While no one proposal will guarantee that a future FCM will not fail, these proposals will help restore the confidence of traders by bringing greater market transparency and accountability into the world of futures/forex trading.

Traders can show their support for these proposals by leaving a comment at the CFTC’s webpage.

Charles Delano
Director of Government Affairs
FXCM, LLC

Canadian clients have much tighter client money rules and insurance currently lacking in the U.S. Unfortunately, I can tell you from our discussions in Washington that while insurance is a very popular idea with the trading public there is strong opposition to it with certain members of Congress. The CME has serious concerns about the costs involved and has repeatedly expressed their reservations about a SIPC style insurance plan for futures traders who are speculating in the market as opposed to those hedging physical commodities. We’d love to see insurance passed but to date it appears to be an uphill climb.

We believe giving traders the ability to look inside each FCM to judge the financial health of the firm they are doing business with will at least enhance the public’s due diligence capabilities. In the case of PFG, there was no way for the public to judge how unhealthy this company was because one CEO had the ability to completely hide all the key financial data.

Charles Delano
Director of Government Affairs
FXCM, LLC

Last Thursday the CFTC held a public hearing to determine what steps should be taken to repair the damage done by the bankruptcies of PFG and MF Global. I’d like to share with everyone some of the highlights of the hearing:

[B]Better Accounting Standards:[/B] There was much discussion of auditing standards for both Regulators of FCM’s and the CPA’s who audit FCM’s. There was general agreement these standards need to be raised. FXCM believes FCM’s should be required to use a top accounting firm to avoid the kind of accounting issues that plagued PFG.

[B]Additional Disclosure Requirements:[/B] An extensive discussion on FCM transparency was held and it is clear that FCM’s are going to have to make more disclosures of their books to regulators and to the public. The question is how much is to be disclosed? On the one hand there was testimony from FCM’s like Vision who publish their balance sheet on their website and on the other hand were those who were concerned that too much disclosure could lead to possible “bank runs” by investors. FXCM believes investors should be able to see a company’s audited financial statement once a quarter. Too many investors are forced to fly blind when they choose a Futures Commission Merchant or Forex Dealer. No trader should be subjected to this kind of risk post-PFG.

[B]Insurance:[/B] Commissioner Bart Chilton released his proposal for a futures insurance fund on the same day of the hearing. Towards the end of the Roundtable the topic turned to insurance and John Roe of the Commodity Customer Coalition once again made a forceful case for a fully insured fund for the futures industry. As of now, Commissioner Chilton’s proposal does not include retail forex, but there is no reason that it shouldn’t. FXCM supports insurance for the futures/forex industry.

The CFTC will now deliberate into October before announcing their proposals.

Just read a very interesting comment letter to the CFTC by James Gellert of Rapid Ratings. Mr. Gellert makes the following comment about the benefits of FCM’s being required to disclose their audited financials:

Would Mr. Wasendorf have been as ready to invent financials if his customers had demanded full, audited balance sheets and income statements all along? Would Mr. Wasendorf have been able to compose such reports with sufficient skill as to withstand rigorous third-party examination over twenty years? Rapid Ratings recalls that, by applying large numbers of interrelated calculations to the published reports of Enron, our firm was able to detect vivid inefficiencies entirely inconsistent with the investment grade ratings that Enron enjoyed from the…

Mr. Gellert’s point about the difficulty of forging financial documents using the kind of standards that publicly traded companies use is well taken. Had PFG been forced to use such standards Wasendorf’s scam would have likely been caught long before July of 2012. Furthermore, ratings agencies like Rapid could break down the data in a manner that average investors could more easily understand. Although, we disagree that only ratings agencies be allowed to see such data. We believe any trader who opens an account with a FCM or Forex Dealer should be able to judge for themselves a firm’s financial health.

Interesting points. I agree on MB Trading as well, and for some of the exact reasons that people have pointed out here about regulations. They have been regulated on the much tougher equity side by the SEC and FINRA for a long time. Their platform is awesome, and they give you a choice of commission models. The more I see about how insane the PFG situation was, the more I am convinced that picking an FX broker with a track record in the other asset classes is important.

[B]Post-PFG Reforms Gaining Momentum[/B]

Two new developments in the last few days indicate that regulators are trying to get out in front of the safety of funds crisis that has gripped the futures/forex industry. However, these reforms may not extend to the retail forex market.

On Friday the National Futures Association approved a new rule requiring all Futures Commission Merchants to grant real-time, online access to FCM bank accounts. This rule is in response to Russ Wasendorf’s bank statement forgeries which had fooled regulators for 20 years. The language specifically references FCM’s and we are currently checking to see if Retail Foreign Exchange Dealers (RFEDs) will have to comply with the rule as well. FXCM’s position is that RFEDs need to be more transparent, which is why we also support a rule requiring all FCMs/RFEDs to fully disclosure their financials to the trading public.

The second development came last Thursday at a meeting in Chicago, as reported by the WSJ, in which the CME was reportedly “softening” its opposition to an insurance fund for futures traders. Again, however, no mention of extending such protections to retail forex traders was made.

Futures Industry Leaders Discuss Insurance Fund - WSJ.com

While both of these development are positive, the negative aspect to them is that retail forex may very well be over looked. This is why we are strongly encouraging the trading public to contact the CFTC and leave comments about the need to further protect retail forex traders. Traders can leave comments using the link below:

http://comments.cftc.gov/PublicComments/CommentForm.aspx?id=1250

The governments idea of “protecting retail traders” is often limiting their ability to trade at all… No thanks

Reading through the comments at the CFTC a number of good points have been brought up regarding the need for additional protections.

Alex Winters made the following comment to the CFTC: View Comment - CFTC

Forex traders should be considered in these rulings. PFG and MF Global hurt both Forex and Futures traders during their collapse. I submit that any protections offered to futures traders also be extended to forex also. While insurance would be the best protection the emerging forex industry shares the same (and more) insecurities. For this industry to survive and prosper we must be able to trust that brokers that hold our funds are solvent especially since past CFTC rulings (50:1 leverage) require that we deposit even more of our money with brokers when we have no way auditing their financial health.

The CFTC’s requirement a few years ago that traders put up more margin to trade retail forex leads to the logical conclusion that regulators put in additional protections (disclosure of company financials, better accounting standards, insurance) since retail forex traders now have more capital at risk. This is a pretty powerful argument and I would encourage traders who leave comments with the CFTC to make it.

[B]CFTC Nearing A Decision Regarding FCM Reforms?[/B]

The CFTC has recently closed the comment period that was associated with the Public Roundtable on PFG:

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1250

This could mean that CFTC is nearing a decision and is about to announce their planned reforms. Comments and suggestions can still be sent to the CFTC however by emailing <[email protected]>.

FXCM is recommending that all FCM’s and forex dealers publicly publish their financials once a quarter and employ a top ten accounting firm. We encourage retail forex traders to share these and other suggestions with regulators by emailing them directly. Thousands of PFG customers traded retail forex with PFG and their voices should be included in any discussion designed to increase customer protections for NFA regulated firms. Furthermore, providing insurance to futures traders and not forex traders would be a further insult to injury for those currency traders at PFG and any future forex traders caught up in an insolvency. Make your voice heard today.

We’ve been told by the NFA that the instant “view only” bank account access that FCM’s must now grant to the NFA is not applicable to Forex Dealers. In short, NFA is not requiring forex dealers provide the same instant bank account access that Futures Commission Merchants provide. This is the clearest sign yet that regulators are not planning to extend any additional customer funds protections to the retail forex community.

The stated reason is that since retail forex funds are not legally required to be “segregated” they are not in the same category as the seg funds that FCM’s hold on deposit. This has long been an issue involving the Commodity Exchange Act which grants seg funds to on-exchange contracts but does not have a word to say about retail foreign exchange because nobody was trading forex online in the 1970’s when these laws were passed.

This logic will likely be used for additional proposals such as insurance where we can now expect retail forex to be excluded as well. This is why financial disclosure for retail forex firms becomes even more important. With retail forex dealers not being included in the safety of funds discussion currency traders are now solely left to their own due diligence when it comes to picking a broker.

We still encourage you to email <[email protected]> to let regulators know that retail forex should not be excluded. If no one speaks up then regulators can assume that retail forex need not be a priority.

I’ve been asked why retail forex does not have seg funds protection and so I wanted to pass along this brief regulatory history of the retail foreign exchange market:

In 2001 retail online currency trading was regulated for the first time with the passage of the Commodities Futures Modernization Act of 2000 (“CFMA”). This law provided that any non-bank firm making a market in retail FX transactions could be registered and licensed by the Commodities Futures Trading Commission (“CFTC”). This law was a step in the right direction but it did not in any way grant customers trading FX with these firms any funds protection in the event of bankruptcy as is common in exchange traded markets such as equities and futures.

In particular, the CFMA did not make any adjustments to the CFTC’s “segregation rule.” The segregation rule stipulates that all client funds deposited for trading domestic, on exchange futures or options on futuresbe kept segregated from all company funds and that in the event of bankruptcy the customer’s funds are legally segregated from creditors and must be returned to the clients.

In May 2008, Congress amended the Commodity Exchange Act (“CEA”) and created an entirely new registration category, the Retail Foreign Exchange Dealer (“RFED”), for forex dealers operating in the U.S. Neither at that time nor two years later when Congress enacted sweeping financial sector reform legislation with the Dodd-Frank Reform and Consumer Protection Act of 2010 were provisions included that could have provided for RFEDs to segregate funds for the protection of retail FX customers

The CFTC explained the reason for not including segregation of funds for retail FX as follows:

“… Several commenters maintained that the Commission should require segregation of customer funds by counterparties in order to provide some protection in the event of a counterparty insolvency. The Commission’s segregation requirements with regard to futures flow from Section 4d of the Act which, generally speaking, requires that customer property for trading commodity contracts be kept apart, or segregated, from the FCM’s own funds. However, as noted in the Commission’s proposing release, a segregated funds regime cannot be replicated in the context of off-exchange retail forex trading. Unlike segregation of customer funds deposited for futures trading, under the relevant provisions of the Bankruptcy Code, such amounts held in connection with retail forex trading would not receive any preferential treatment to unsecured creditors in bankruptcy.”

This hiccup with the bankruptcy code is what is currently holding up everything from seg funds protection to insurance. More in my next post.

Hello, Charles

I’ve been following your reports with great interest. Your perspective, as an insider in the retail forex brokerage business, is a valuable addition to this thread. Thanks for the time and effort that you have put into your posts.

As I understand the current situation (and please correct me, if I’m wrong), FXCM would not be able to act alone in segregating customer funds because, in the unlikely event that FXCM were to become insolvent, current bankruptcy law would not recognize the segregation.

In other words, in that scenario, the bankruptcy court would simply dump all the “segregated” funds back into the general pool of funds, and FXCM’s attempt to protect (segregate) customer funds would be circumvented.

Am I understanding this situation correctly?

Hi Clint, thank you for your comment. You summed it up well. The challenge with seg funds in the U.S. is that the bankruptcy code needs to be amended so that bankruptcy judges would be instructed by the law to direct client funds away from creditors and back to the customers. It will be interesting to see how PFG’s retail forex customers are treated in these bankruptcy proceedings since they have fewer protections by law than the futures customers.