I’ve been watching the latest developments in Cyprus as I’m sure many other traders have been. Over the past year, you have seen FXCM’s director of government affairs Charles Delano and I talk at length about safety of funds after the MF Global and PFG Best situations, and events in Cyprus continue to highlight how important it is. There have been reassurances from brokers about the safety of client funds but a true test would be to request a withdrawal to ensure the bank account holding client funds truly is outside of Cyprus. I hope everything works out in the end for customers to retain their full funds.
The transparency of a broker’s finances, particularly how much excess capital they have on hand, is important to know in events like this to see if they can sustain the type of hit they will take as a result of the bank levy and continue normal business operations. FXCM is a publicly traded company on the NYSE and our financial information is listed on our website. As of September 30, 2012, FXCM had $230 million in our own net cash available.
I’m glad to read posts on the forum from traders saying that so far they have been able to withdraw funds from their trading accounts in Cyprus. One concern is that the new bailout terms might end up hurting traders even more than what was originally proposed. The new terms state that while bank accounts with balances below 100k EUR will now remain intact, accounts with balances above 100k Euros including corporate accounts could face a “haircut” of around 30% instead of the 10% that was originally proposed. That’s a big hit for any business to take: Foreign Businesses in Cyprus Grind to a Standstill
We have spoken at length about financial transparency needed within the forex industry so that traders can have a better idea of how much capital their broker has on hand, debt outlook, etc so traders can be better informed about the broker they are trading with. It would do a great deal to put traders at ease if companies would publish exactly how much exposure they have. How much money do they have in the affected Cyprus banks and how much is with banks outside? Do they have enough money to keep their business running even with a 30% hit to their funds in Cyprus?
Another concern we are hearing from traders is the possibility of capital controls which could restrict how much money you can withdraw especially for money leaving the country. This may be the second major topic of the crisis: Cyprus Capital-Controls Q&A - The Euro Crisis - WSJ
We’ve recently received reports of traders with other brokers being prohibited from using certain trading strategies like BTN Lightning. Apparently these brokers have gone as far as to freeze the accounts of their clients suspected of using these strategies and even removed past profits from client accounts.
Strategies that involve scalping or trading during news can present challenges for brokers in managing their risk if they operate a dealing desk or if they use STP/NDD but have only one liquidity provider. A sudden influx of buying or selling by many clients all at once can create great difficulty for such a broker, especially during illiquid market events. Not managing this risk effectively can result in the broker taking losses when their clients are profitable. Since these brokers are taking the market risk on the other side of their clients’ trades, a profit for the client can mean a loss for the broker. In the end, the broker’s interest in remaining in business will often be a deciding factor in how they operate.
At FXCM, we welcome all trading strategies on our No Dealing Desk (NDD) forex execution (scalp, trade the news, use any EA). On our NDD model, we offset client orders with 10+ liquidity providers which include some of the largest banks in the world. We make our money from client trading volume, not client losses. If you have a profitable strategy that is no longer welcome at your current broker, I encourage you to try FXCM’s No Dealing Desk forex execution for yourself.
You’ve heard FXCM speak at length over the past year about the importance of taking caution in choosing a broker especially in light of recent events with MF Global, PFG, Worldspreads, and Cyprus. You need to make sure you know who you’re trading with.