I admit that I tend to go back and forth about the regulation of something like forex, but I see your point. Too much regulation would stifle the traders. Plus, it is all built on risk, just like when you walk into a casino with the intent to play. You know going into it, you’re likely to lose at least something at some point, but there are no protections offered for gambling money at a casino as far as I am aware, so in that respect, why should there be for forex trading?
Regulators have spent a lot of time issuing very stringent rules for this industry. Too stringent for many in the industry. It isn’t too much to ask that basic customer protections be included with those rules. Every time the CFTC and NFA have passed tough rules in the past it has always been in “the trader’s interest.” Well nothing is more in the trader’s interest than that their money not be stolen by a rogue CEO like Russ Wassendorf. I could agree with your sentiment DH007 about “buyer beware” if regulators took a hands off approach to retail forex. But it has been the exact opposite. It therefore goes that regulators should now close the regulatory circle by providing customers with some decent funds protection rules.
[B]PFG’s Forex Customers told to Get In Line[/B]
Last week the Trustee of PFG’s estate announced a series of limited distributions to customers of the bankrupt firm. Of interest to retail forex traders is that the estate is not making any current distributions to PFG customers who were trading off-exchange forex:
http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf
Quote:
“The Forex Customers and the Metals Customers, however, do not hold claims against the Debtor on account of “commodity contracts” and therefore, are not “customers” under § 761(9) of the Bankruptcy Code and the Part 190 Rules. Accordingly, in accordance with subchapter IV and the Part 190 Rules, the distributions requested under the Motion, discussed below, will apply solely to the Futures Customers. Forex Customers and Metals Customers will not be included in such distributions and their claims will be addressed separately as part of the case."
The way the law is written the trustee is justified in putting futures customers first. This is why it has become urgent that regulators take additional steps to bring transparecy to the futures/forex industry so that customers can have a look at their broker’s finances in order to weigh the risks invovled before putting funds on deposit with them. Since the law is not designed to currently protect forex investors, then traders need to protect themselves. This starts with granting traders the ability to conduct greater due diligence. If regulators can mandate that brokers disclose profitability ratios surely they can also mandate greater financial disclosure.
CFTC to announce initial recommendations this week. Contact <[email protected]> with your thoughts.
Article —
Peregrine Financial CEO Wasendorf to plead guilty | Reuters
Excerpt —
“Last week, Peregrine’s bankruptcy trustee made public his plans to return $123 million to former
customers of the futures brokerage, amounting to 30 percent to 40 percent of their funds.
[B]The CFTC over the weekend asked the court to delay that payout[/B] pending further
examination of the company’s records, many of which the regulator says have been falsified.”
As regulators continue to investigate PFG news is coming out showing that the futures firm had been losing money for years:
QUOTE:
“Its financial statement submitted to the court, indicated that the business has been going down since 2010. The company suffered $2.7 million in gross income losses in 2010, $1.2 million in losses in 2011, and $259,000 losses during the six month period of the current fiscal year.”
PFG had recorded three straight years of losses. And yet they had just moved into an $18 million glass and steel office complex in Iowa boasting some of the most luxurious office amenities imaginable. But because PFG never had to disclose their losses they were able to give customers the impression that the firm was healthy and growing, when in fact it was sick and contracting. Customers should be aware of this before they open an account. Particularly since there is no insurance for futures or forex.
The CFTC postponed their vote on additional customer protections this week giving traders a little more time to comment.
The National Futures Association has added some additional public financial information on their BASIC search function effective September 1:
NFA’s BASIC System - Public Display of FCM Financial Information
At its August meeting, NFA’s Board of Directors determined that certain FCM financial data should be made publicly available on NFA’s website to assist customers in their due diligence review of an FCM.
The Board determined that the best way to display this information is on an FCM-by-FCM basis through NFA’s BASIC system. Therefore, NFA is adding new sections to each FCM’s BASIC page to disclose certain financial related information. Specifically, from each FCM’s BASIC page, the public will be able to access three separate FCM Reports - FCM Capital Report; FCM Customer Segregated Funds Report; and FCM Customer Secured Funds Report.
These actions are a step in the right direction. Clearly, regulators believe that public disclosure of FCM financial accounts are beneficial to customers as they conduct their due diligence. It therefore follows that additional financial disclosures (complete disclosure of a FCM’s balance sheet for example) would empower traders to an even greater degree.
The federal bankruptcy judge in the PFG case authorized a series of initial customer distributions today. PFG Customers to Get Money Back | Fox Business
The first wave of payouts will happen by October 8 and a second wave will occur before October 29, Fishman said.
The Commodity Futures Trading Commission initially raised concerns about the trustee’s plan because of uncertainty about the integrity of Peregrine’s books. The commission warned that some people could get money they were not entitled to without proper vetting of records.
The fate of PFG’s retail forex customers remains in doubt. The CFTC has yet to announce their proposed reforms. Retail forex needs to be a part of these reforms. We’re still encouraging traders to contact CFTC at <[email protected]> to voice their concern.
Reuters has just published an exhaustive two part special report on the fraud perpetrated by Russ Wassendorf. Wassendorf spent tens of millions of dollars on luxury items and in failed business ventures with money stolen from client accounts.
Part One: Special Report: Iowa broker built empire on a lie concealed in a postal box | Reuters
Part Two: Special Report: As Peregrine teetered, founder went on shopping binge | Reuters
One of the most distressing aspects of the fraud is that Wassendorf was nearly caught last year in a routine audit but managed to head off the NFA with a last second fax that allowed him to keep the fraud going for another year. The episode highlights the need for greater auditing and accounting standards, not to mention the need for more financial disclosures for brokers so as to prevent lone wolf CEO’s like Wassendorf from hiding the true state of their firm’s finances.
The CFTC has released a transcript from the public roundtable that was held in August.
While retail forex is absent from the discussion the issues pertaining to FCM’s is of importance to retail forex customers since FCM’s like PFG routinely offer retail forex as part of their suite of products.
One of the arguments against additional financial disclosures for FCM’s is that these disclosures may weaken the fragile, financial health of less profitable FCM’s. Warren Davis of Sutherland, Asbill & Brennan made the following point in response:
“In the case of a FCM, the money that the customer gives the FCM is not for the use of the FCM. It’s solely to protect the customer, so it seems to me that the run on the bank analogy is not altogether appropriate here. But what is appropriate is to ensure that customer money is, in fact, used for the only purpose for which it’s given which is to secure the customer’s obligations to the FCM and the clearinghouse. And therefore, if information is released which causes a customer to move its account from one FCM to another, that shouldn’t be viewed as a bad thing. That’s sort of the way the futures world is supposed to work.”
Unfortunately, that is not currently the way the futures world works. Because FCM’s are able to keep their financials hidden from the public there is no way of truly knowing if the firm traders are doing business with is healthy or unhealthy. The net result is that traders are left to play a guessing game about whether their funds are safe or not.
CFTC has yet to announce when they will unveil their reform proposals.
The PFG bankruptcy proceedings are turning into a tragedy for PFG’s retail forex customers who may now be forced to stand by and watch their funds be used to reimburse customers who traded on-exchange futures with PFG. In response, a group of traders have started a website to try and rally support amongst PFG’s forex customers: PFG Forex Metals Legal Account - Home
The Traders who have setup “Forex Metals Account LLC” have also sent out an email to PFG’s forex customers updating them on the bankruptcy proceedings: Forums - PFG - What happens if you have accounts with them??
Our Forex and Metals monies are currently intact at JPMorgan Chase Bank and Royal Bank of Scotland as confirmed by the Trustee. You may think that because our accounts are listed in the Trustee’s documents that our accounts are safe. Initially we believed this as well. In fact, if you carefully read thru all the Motions, schedules and documents submitted to the bankruptcy court, nothing could be farther from the truth. Our accounts are at risk of being completely emptied in the current legal proceedings - effectively stealing our money in the next few weeks - and converted to pay Futures account holders and the Trustee’s law firm. We view what may be about to take place as equivalent to criminal theft/larceny. We never in our wildest dreams thought that one man or a group of lawyers could put 100 percent of our accounts at risk, do it openly, publicly, and legally get away with it. The Trustee’s Motions are designed to distribute $123 million to Futures account holders – which was approved in court on 9/20/12 – and will deplete the funds available to Forex and Metals account holders. We need to immediately protect our accounts. If we let the Trustee and the dozens of lawyers representing non-Forex and non-Metals clients take our money without doing anything about it, then we don’t have anyone else to blame but ourselves. We cannot sit idly by and watch our hard earned money be divided between creditors and other customers.
FXCM has been lobbying Congress since 2005 to include retail forex in any bankrupcy prodeeding but we have not had much success due to the hesitancy of Washington to re-open the bankruptcy code on behalf of retail forex customers. In the meantime, the PFG bankruptcy should give retail forex traders pause in regards to opening a retail forex account with a Futures Commission Merchant instead of a Retail Forex Exchange Dealer due to the disparity in treatment the two class of customers are getting in this bankruptcy.
We are also still encouraging traders to contact CFTC at <[email protected]> to urge greater protections for retail forex traders.
The Wall Street Journal is reporting that PFG’s trustee is now going to address the status of PFG’s retail forex customers:
http://online.wsj.com/article/SB1000...googlenews_wsj
Ira Bodenstein, the trustee liquidating Peregrine, in a notice Wednesday told holders of currency and precious metals accounts with the firm that addressing their claims was his “next agenda item,” though no decisions have been made on how these will be handled or how much money these customers may get back.
“If the Bankruptcy Court concludes that payment in full to forex and metals customers is appropriate, there are sufficient funds to accomplish that outcome,” Mr. Bodenstein wrote. “If the Bankruptcy Court reaches a different conclusion, there are sufficient funds to address whatever treatment of these claims that the Bankruptcy Court orders.”
Of further interest to traders in the article is the NFA’s support for additional legal protections, although nothing was specified.
Your link didnt work
Worked that time thanks. Looks like it is starting to get somewhere as far as protections for the retail fx trader. Will be interesting to see what comes out of this all
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.
Given the current broad inclusion of retail forex within the scope of the CEA, CFTC Regulations and NFA Rules, as well as the CFTC‘s core mandate to protect the investing public, it defies logic to deny retail customers who trade such contracts the same statutory protections now afforded all other market participants, including institutional dealers in cleared currency swaps and options. It would be equally unjust and irrational, given the wide ranging regulatory controls to which retail forex is now subject, to attempt to exclude this most vulnerable class of customers from the single provision most directly protective of their economic interest.
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 <[email protected]> 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.
I also have a friend who had 2800$ account with them…hopefully he gets his money back…
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
In total, there are 7,000 clients with forex and metals accounts at PFG, but Medley says the impact of the case could be much broader. “We feel like this is a precedent-setting case with respect to the rights of forex and metals account holders, and how it relates to the CFTC regulations.”
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:
Roe says the CCC has not made a decision on how to argue this but says, “The important thing once this is all said and done is that we don’t have a precedent at PFG that once someone steals something out of segregation, it doesn’t matter. That would mean segregation protection is completely meaningless,” he says. “The NFA said in its brief in the MF Global case that the intent of Congress was not to have to trace funds when the music stopped. If they aren’t there and there is a hole, you have to replace those with substitute assets. In this case, the substitute asset is FX customers’ money.”
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.
I think the predent will have a guhe impact on the futures industry… we’ll see what will happen…
The CFTC has just announced they will be holding an open meeting to consider additional customer protections for the futures industry next Thursday.
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 <[email protected]>.
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:
This customer protection proposal incorporates these NFA rules into the Commission’s regulations so that the CFTC can directly enforce these important rules. Under this proposal, FCMs would be required to:
• Hold sufficient funds in Part 30 secured accounts (funds held for U.S. foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method. FCMs would no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures;
• Maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC; and
• Make additional reports available to the SRO and the CFTC, including daily computations of segregated and Part 30 secured amounts.
Beyond the NFA rules, additional reforms in this proposal benefited from the CFTC’s broad outreach and consultation with the SROs and market participants, as well as substantial feedback from CFTC Commissioners. They include:
• First, bringing the regulators’ view of customer accounts into the 21st century by giving the SROs and the CFTC direct electronic access to FCMs’ bank and custodial accounts for customer funds, without asking the FCMs’ permission. Further, acknowledgement letters and confirmation letters must come directly to regulators from banks and custodians.
• Second, increasing disclosures to customers regarding the risks associated with futures trading and using FCMs to invest their funds. Futures customers, if they wish, should have access to information about how their assets are held, similar to that which is available to mutual fund and securities customers. FCMs would be required to provide current and potential customers with specific information about the FCM’s risks.
• Third, enhancing controls at FCMs regarding how customer accounts are handled, including policies and procedures on supervision and risk management of customer funds.
• Fourth, setting standards for the SROs’ examinations and the annual certified financial statement audits, including raising minimum standards for independent public accountants who audit FCMs.
• Fifth, requiring FCMs to ensure they back up segregated customer accounts with funds to cover potential margin deficits.
• Sixth, implementing a more effective early warning system for the Commission and the SROs that alerts them to certain problems, including a) when an FCM’s funds are insufficient to meet the targeted residual interest in customer accounts b) when there is a material adverse impact to the FCM’s creditworthiness and c) when there is a material change to the FCM’s clearing or financial arrangements.
• And seventh, instituting a liquidity requirement for FCMs, in addition to the existing capital requirement, to better detect FCMs that have become distressed and may put customer funds at risk.
Prior to this proposal, the Commission already made some important improvements to protections for customer funds. They include:
• The completed amendments to rule 1.25 regarding the investment of funds that bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements;
• Clearinghouses will have to collect margin on a gross basis and FCMs will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse;
• The so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse; and
• The Commission included customer protection enhancements in the final rule for designated contract markets. These provisions codify into rules staff guidance on minimum requirements for SROs regarding their financial surveillance of FCMs.