Proposed NFA Capital Requirement

Discussion in 'Forex Brokers' started by forexsavior, Jun 28, 2007.

  1. The news about the NFA shaking up the forex industry by dramatically raising capital requirements has kicked off a lot of speculation. So I gathered everything I have learned about this new NFA proposal and am posting here for your review. As someone who has been burned by a bankrupted forex broker I can tell you it is not a pleasant feeling to watch your funds get sucked into some black hole. So my advice is to stay away from any firm that is not currently meeting the coming $5 million capital requirement. And if you already have money at such a firm, get it out, now. If you don't, you could end up like the poor souls at United Global Markets (UGMFX) who can't get their money out due to an NFA account freeze:

    Who has the Money & Who Doesn't
    To find out how much money your broker has goto this link:

    Healthy Forex Firms
    FXCM ($51,000,000)
    GFT ($48,000,000)
    Oanda ($44,000,000)
    FX Solutions ($20,000,000)
    Gain Capital ($20,000,000)
    CMS ($10,000,000)

    Dead Firms Walking
    One World Capital ($1,105,000)
    Velocity4X ($1,587,000)
    Direct Forex LLC ($1,523,000)
    FiniFX ($1,464,000)
    Forex Club ($3,304,000)
    GFS Futures & Forex ($3,074,000)
    Nations Investments ($1,699,000)
    Royal Forex Trading ($1,102,000)
    SNC Investments ($1,565,000)
    MB Futures ($3,080,000)
    Money Garden ($3,399,844)
    United Global Markets (Bankrupt)

    Here is the actual NFA proposal to raise capital requirements. The CFTC is expected to sign off on it this summer. I'll comment further on the proposal in a future posting as it will actually require most firms to have upwards of $10 million in capital when you take into consideration such things as open customer positions and margin levels. In any case, this should be sober reading to anyone who is currently trading at one of the "Dead Firms Walking."

    NFA Proposal
    The proposals pertain to the minimum adjusted net capital requirement and the concentration charge and set certain requirements for FDMs' internal financial controls.

    Minimum Adjusted Net Capital and Concentration Charges

    In the past twenty years, there have been nine FCM insolvencies. Since 1990, there have been only two insolvencies by traditional FCMs trading on U.S. exchanges, and no funds in segregated customer accounts were lost in either of those two instances. This is from a population that averages around 250 (over the last 20 years). Even in the Refco matter, the FCM filed for bankruptcy not because customer funds were at risk but, rather, to facilitate the sale of its assets and the transfer of its accounts in connection with the parent company’s insolvency.

    The FCM insolvency rate becomes more troubling when FDMs are added to the mix. Of the three bankruptcy or receivership proceedings for insolvency occurring in the last four years, two have involved FDMs (Refco was the third), and they are drawn from the smaller FDM population (averaging around 40). Specifically, in late 2003, an FDM misappropriated almost $2 million of customer funds, which depleted the amount of assets necessary to meet the amounts owed to customers. The Commodity Futures Trading Commission ("CFTC") is still working to try to get back some of the customers’ funds. More recently, NFA took a Member Responsibility Action ("MRA") against an FDM whose liabilities exceeded its assets by over $1 million. The CFTC also brought an emergency action in U.S. District Court, and the Court immediately appointed a receiver who was subsequently able to sell the FDM’s customer accounts. Due to this sale, it appears that the customers were made whole.

    This discrepancy between FDMs and FCMs involved in on-exchange transactions is even greater when looking at the number of financial MRAs NFA has issued in the last ten years. During that period, NFA issued twelve MRAs to FCMs for failing to demonstrate compliance with NFA’s financial requirements. Three of these firms were traditional FCMs with an on-exchange business, one was a forex dealer registered as an FCM prior to the advent of the FDM category, and the remaining eight were FDMs.

    NFA's concern that one day an FDM might be unable to meet its financial obligations to its customers has heightened as the amount of retail customer funds held by FDMs has increased to over $1 billion. The above described FDM insolvencies have done nothing to abate this concern, particularly with the most recent occurring just months after the $1 million capital requirement became effective. If the receiver had not sold the FDM's accounts, then twice within less than four years customers of FDMs would have lost funds due to an FCM insolvency. Additionally, since March, eight different FDMs have fallen under the early warning requirement of $1.5 million.

    One of the reasons for the 2006 increase to the FDM capital requirements was that an FDM’s dealer activities create greater financial risks than the agency transactions involved in traditional exchange-traded futures and options. A second reason is that the need for adequate capital is particularly acute for FDMs since customers trading off-exchange forex have not received a priority under the Bankruptcy Code in the event of a firm’s insolvency. Both of these reasons still exist.

    NFA is not alone in recognizing the increased financial risk of acting as a dealer. Congress recognized that acting as a dealer increases financial risk and requires substantially higher capital on the part of the dealer. Pursuant to Section 4c(d)(2)(A) of the Commodity Exchange Act (the "Act") the grantor of a dealer option must maintain at all times a net worth of $5 million. The Commission has likewise recognized the increased financial risk resulting from being a dealer, imposing an adjusted net capital requirement of $2.5 million on leverage transaction merchants ("LTMs").[1]

    When the Commission adopted the financial requirements for LTMs in 1984, it noted that the leverage market is "essentially a principals' market" and that the "purchaser of a leverage contract is solely dependent on the LTM for performance on the contract."[2] This is the exact same situation that customers are in when they purchase or sell currencies with an FDM. Further, as with an LTM, an FDM "takes the other side of every [contract] entered into by a [customer]" and the FDM "is the sole guarantor of performance on the [contract]." When trading with an FDM "there is no clearing organization to take the other side of every trade, no FCM guaranty of variation margin to the clearing organization and no clearing organization guaranty fund and assessment power."[3] Due to these factors, the financial requirements for FDMs, like LTMs, must be substantially higher than those for FCMs engaging in agency transactions.

    As noted above, the Commission imposed the $2.5 million capital requirement for LTMs in 1984. Based upon the Consumer Price Index, $2.5 million in 1984 dollars would be worth approximately $5 million today. Accordingly, NFA is proposing to raise the minimum adjusted net capital for FDMs to $5 million. An increased capital requirement would result in an FDM having a larger buffer to meet its obligations to its customers. Additionally, an increase in capital requirements for FDMs would ensure that FDMs have a larger financial stake in their forex business.
  2. MBT-Steve

    MBT-Steve Sponsor

    Hi Forexsavior,

    I see this is your first post. Welcome to ET.

    For point of clarification………….

    First, the National Futures Association (NFA) has noticed its Forex Dealer Members (FDM) of a new proposal to increase the minimum net capital requirements of those members. The proposal is in the early stages of the approval process; it has not been approved by the NFA Board, which is the minimum requirement.

    NFA is simply providing FDMs with an opportunity to respond to the proposal that recommends increasing the minimum net capital requirements of FDMs to $5 million from $1 million (or 5% of total customer liabilities, whichever is greater), which are due on July 6, 2007. NFA will draft a final version of the proposal based on comments received from FDMs. The final version of the proposal will be submitted to NFA’s Board for approval. NFA’s Board could approve the final version or a modified version of the final proposal. Once the proposal is finally approved by the NFA Board, it must be submitted to the CFTC for approval. CFTC could approve the finalized version of the proposal as submitted by the NFA Board or approve a modify version. It is anticipated that the final stage of the approval process will be December 2007 at the earliest.

    Secondly, on the subject of insolvency, NFA has taken formal action against some FDMs for their failure to maintain compliance with current minimum net capital requirements. The proposed increase in net capital does not affect the current financial situation of any FDMs.

    Finally, MB Trading Futures (MBTF) is in compliance with its minimum net capital requirements, and as such, if the proposal is approved, in one form or another, MBTF will meet the new net capital requirements as well.


  3. "Finally, MB Trading Futures (MBTF) is in compliance with its minimum net capital requirements, and as such, if the proposal is approved, in one form or another, MBTF will meet the new net capital requirements as well. "

    Doing the bare minimum, that is not saying a lot, frankly...
  4. Thank you for the reply Steve. You are correct in stating the NFA And CFTC must first approve these proposals before they go into effect. But it is well known inside the industry that the NFA is going to easily approve this and the CFTC will rubber stamp that decision. The NFA's reasoning is very powerful and I can't see any argument that will dissuade them from imposing the new capital requirement. So let's be honest, this is going to happen.

    While MB Trading is currently in full compliance with its capital requirements the new $5 million requirement is a very steep hill for your firm to climb. Will you be able to meet the new requirement? Maybe. Maybe not. If not what happens to the traders? Nobody knows the answer to that. And if you look at the wreckage in the industry whenever a small firm such as yours goes under it leaves cause for serious concern.

    My advice to MB Trading is to put up the capital now and leave no doubt as to the future viability of MB Trading. Failing to do that means traders have to rely solely on your word. And in this industry, the word of small forex broker dealers isn't worth a bucket of spit.
  5. squall


    I agree.
  6. MBT-Steve

    MBT-Steve Sponsor

    Please keep in mind since we do not operate a deal desk there is not much need to for trading risk excess. MBT utilizes an ECN and agency model.
  7. MBT-Steve

    MBT-Steve Sponsor


    You make a good point. I will certianly take the suggestion under consideration.


  8. Forgive me Steve for adding my thoughts and feel free to correct me if I'm wrong ...

    I gave this much thought since Felix/Felix wannabe AKA ForexSavior starting circulating this all over the internet. Hopefully others will think about this from a business standpoint as well but I somehow doubt it.

    A dealing desk type "broker", also know as a bucket shop, needs vast amounts on cash reserves because it is thier business model to trade against it's clients by taking the other side of the trade. They act as the "bank". If all thier clients were to ... say ... call the cable at a top at 2.0072 today and go short by some chance were correct and there was a massive slide down to 1.8500 over the weekend the "broker" would be massively long and bleeding money. Should these same traders close thier shorts @ 1.8500 on Sunday night and withdrawn funds Monday morning what is the outcome? Hence the need for very large reserves. If a "broker", especially all the tiny IBs that are popping up, is playing bank on it's clients trades with only 3M in reserves it's just a matter of time before they blow up.

    On the other hand, an ECN type broker, who is getting paid via commish and does not take the other side of a trade needs only it's operational budget in place which is likely far less than any minimum 3M or 5M requirement although the money is there to meet the requirement. What an ECN type broker is concerned about is traders blowing up and ending up with thier account in red figures. That would be a very large problem if an ECN allowed it to happen to vast numbers of traders. I'm sure there are checks and balances in place to prevent that but you'd have to contact your ECN broker to confirm.

    This is not to say an ECN could not go bust but this propoganda thread is concerning business viability and cash reserves. And while we're at it ... does anyone really think that posting a couple million more to meet the minimum for a succesful ECN broker like MB is alot? I know traders who can write a personal check bigger than that.
  9. squall


    Hell I could write a personal check for that much too.....

    Having it clear is a diffrerent story lol...not to mention I'd like to see you get someone to cash a personal check for a couple million dollars too....

    That's what bank wires are for.

    - why would someone have that much money in a checking account?

    Regardless, my point is simply that I don't consider it admirable to do the bare minimum in anything. There was something always said in the military about 70/20/ doesn't pay to be 70 or 20.


    70 percent of people in the world aren't worth a damn, won't do jack.

    20 percent of people will only step up and do something if it will make them look good or benefit them in some way

    10 percent of people in the world will actually be outstanding and strive to be a hard charger in everything they do.

    In any case it doesn't thrill me to associate with anyone ( a company or a person) that is only concerned with meeting minimums.
  10. For of all, thankyou for your research and sharing it with this forum, its much appreciated. I think it is a positive step that forex clients are stepping up to the plate and really looking under the hood of the firm they are placing their hard-earned with.

    I also think the industry and in particular the regulators NFA, CTFC are starting to realise that off-market forex trading is growing rapidly and is here to stay and therefore FDM's must meet minium financial requirements to maintain integrity. I also think the regulators should show no mercy to FDM's who cannot provide minium security levels for customer funds and should be punished accordingly.

    I encourgage everyone to strongly consider making the financial strength of a forex dealer their number 1 priority when choosing a broker. There is no point in trading for a profit when there is a significant chance of losing your whole a/c plus the stress involved.

    This industry is seen by snake-oil operator's as having lot's of low-hanging fruit ready to pick from ignorant retail consumers. Well good on the NFA, CTFC for raising financial requirements & monitoring and encourging the industry to become more fair & trusted.

    This progress in regulations and minium requirements will filter out the crap (which there is a lot of, 100+ 'forex' dealers) and leave 3-4 robust operator's with 80% market share and 6-7 more operator's with the remaing 20% like most other industry's.

    If your going to trade off-market forex stick with the strongest providers, which atm are;

    FXCM ($51,000,000)
    GFT ($48,000,000)
    Oanda ($44,000,000)
    FX Solutions ($20,000,000)
    Gain Capital ($20,000,000)
    CMS ($10,000,000)

    and continually monitor their excess capital at and immediately remove your funds if your broker's excess capital has a significant drop or start's downtrending.

    Survial of the fittest.
    #10     Jun 29, 2007