Scary PDS

Beginner Questions
1

This is from GFT Australia, I think I have an idea what it means, but would like some commentary on it.

  1. USE OF MONIES. Client hereby also grants to GFT the right to pledge, re-pledge, hypothecate, invest or loan, either separately or with the property of other customers, to itself or to others, any funds, securities, currencies, and options transactions of Client held by GFT as margin or security. GFT shall at no time be required to deliver to Client the identical property delivered to or purchased by GFT for any account of Client.

next one,is this a common clause in other brokers PDS’s ?

GFT will not be responsible for the operation or performance of any automated trading system developed with Technology or for any malfunctions of Technology or for any delays or interruptions in transmission of orders due to breakdown, excessive call volume or failure of transmission or communication equipment on the Internet or otherwise, including, but not limited to, communications problems, computer sofftware or hardware breakdowns, malfunctioning errors, any and all problems or glitches associated with computer problems or any other technical cause or causes.

Thanks looking forward to comments

2

justlearning,

Your paragraph #6 basically says that customer funds are not segregated — the money in your account is co-mingled, as they say, with the operating capital of the broker. Here in the U.S., stock and commodity brokers can’t operate that way, but forex brokers can and do. I gather you’re faced with the same situation in Australia.

Three or four years ago, Refco (a big forex broker) went bankrupt after graft and corruption by one of the principals was discovered, and most of Refco’s retail customers got burned. It was a forensic accounting nightmare for auditors to try to figure out who was entitled to what part of the paltry funds left after the bankruptcy, because everyone’s money initially went into one big pot, and then got transferred/spent/invested/embezzled by Refco in a blizzard of paper-trails.

Beginning in October 2008 here in the U.S., the Commodity Futures Trading Commission (CFTC), which now has regulatory authority over forex brokers as well as commodity brokers, began raising the Net Capital Requirement for forex brokers. The 3-step program raised the $5 million (minimum) Net Capital Requirement to $10 million in October 2008, $15 million in January 2009, and $20 million by May 2009. This is probably only the first step in an overall tightening up of forex broker practices by the CFTC. Segregated customer funds may come next.

You should look into the regulatory situation in Australia; maybe a similar tightening up of the forex brokerage industry is underway there, as well.

In the meantime, funds in your account are only as safe and sound as the broker holding them.

The second paragraph you asked about is very similar to wording in my account agreement with FXCM. I can’t speak about other brokers. It basically says that internet interruptions, broker server malfunctions, or other glitches in normal order handling and execution are YOUR problem, not the broker’s. If they can’t keep up with a fast-moving market, and you get a lousy fill, well, that’s just tough. This paragraph essentially exempts the broker from any blame for anything, if a technology break-down can be blamed instead.

Scary? You bet. Do you have a choice? Probably not, if you want to trade forex. But, again, do your due diligence. Talk to GFT. Talk to several brokers, in fact. Express you concerns, and make your best judgement based on the answers you get. Even after all that, you’ll be confronted with signing a very one-sided contract. Just hold your nose and sign it.

Good luck,

Clint

3

Thanks…well I bit the bullet and signed it anyhow…I questioned the GFT rep. on the phone, and his response was “at least we tell you that!” HaHa…It’s GREAT being the little guy…