Proposed NFA Capital Requirement

Quoting fxchant

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It's a huge company. What they choose to show on the books for their forex arm might not have anything to do with what they really have total in reserves.

3) I'd rather trade with them that an bucketshop out there whose higher net cap is a result of the money that they have stolen from their customers.

Those are my opinions, and I'm quite comfortable with them. Now tell me I am wrong. Please.

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Quoting forexfun

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According to the current month month, I Trade FX has positive 3 million+ in capital. Was the previous month a misprint?

http://www.cftc.gov/files/tm/fcm/tmfcmdata0705.pdf

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Quoting merlin

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forexsavior, do you have an answer to this?

maybe this has to do with thier recent acquisition?

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Quoting merlin

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it must have something to do with the acquisition, a one month swing like that is not normal. you are the NFA expert, right? go figure this out for us!!

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Quoting forexfun

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p.p.s "I don't have an answer. And that's what so disturbing." - you don't have an answer, yet you said they're bankrupt in post 1? You're still uneasy, even if you don't know why? i thought you were informing people like some sort of expert. i don't know what you're trying to say, but you don't come across as honest o.O

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Quoting forexsavior

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Use your common sense forexfun. If a firm is reporting NEGATIVE capital for one month obviously that tells you they are not the most stable company in the world. Reporting negative capital for any month is a violation of the most basic capital requirements required by the NFA. If that doesn't concern you then I guess nothing ever will...

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Quoting forexfun

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i'm on hold with the NFA rght now , but i've been told that if a company had issues of that type, they would have been shut down. they're still in business as of yesterday with 3 million on the last report. i'm not investing with them right now and i might never do so. but i'm starting to see these things arent exactly as you say. i'm starting to see what other people in this forum are saying about you is true.

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Quoting forexsavior

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Use your common sense forexfun. If a firm is reporting NEGATIVE capital for one month obviously that tells you they are not the most stable company in the world. Reporting negative capital for any month is a violation of the most basic capital requirements required by the NFA. If that doesn't concern you then I guess nothing ever will...

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Quoting merlin

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when itrade acquired CFG (who had something like 10k clients), that had to have an effect on their requirements. how can you be so sure about them when you have no facts on the situation?

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Quoting merlin

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come on savior, i expected more from you on this. you claim to have a grip on this NFA situation, but your not really doing your homework as i expected. you said itradefx is going backrupt, you said you are worried about them, yet you dont understand where this flucuation came from. when itrade acquired CFG (who had something like 10k clients), that had to have an effect on their requirements. how can you be so sure about them when you have no facts on the situation?

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Quoting Clubber Lang

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You're on the phone with the NFA right now? Ya and I'm on the phone with the Pope. From what I have read thus far (and I must say this is the most entertaining thread I've read on a bulletin board in a LONG time) everything this savior guy has been saying is at the CFTC's and NFA's website. Is savior flacking for some firm? Probably. But I could care less. Why are some people so terrified of talking about this issue?

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Quoting forexsavior

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if this was a misprint I Trade FX would have been all over it. They have never disputed that figure.

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Quoting forexsavior

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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: http://www.forexfactory.com/showthread.php?t=35197

I read an earlier post from MB Trading and was very disturbed by the blase attitude of the firm (understandable since it is becoming very clear they don't have the capital, else they would have already put it up.) When the NFA makes a proposal like this it has, for the most part, already been decided. The submission for comments is merely a formality. And the CFTC is sure to approve this rule because it is fed up with the fraud rampant amongst smaller, undercapitalized firms. Don't believe me? Read the NFA proposal for yourself and listen to the NFA's reasoning for raising the capital requirement in the first place. It is ALL ABOUT FRAUD. That's why this is a done deal. Use your common sense and remember RefcoFX who right up until their bankruptcy (when all customer accounts were frozen) were telling customers their funds were safe. Do you really want to take that chance?

Who has the Money & Who Doesn't
To find out how much money your broker has goto this link:
http://www.cftc.gov/files/tm/fcm/tmfcmdata0704.pdf

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)
FXDD ($781,000)
I Trade FX (-$3,039,000!!!!! Close to Bankruptcy!!!!)
MB Futures ($3,080,000)
Money Garden ($3,399,844)
United Global Markets (Bankrupt)

Here is the actual NFA proposal to raise capital requirements (below that is the sad email from the CEO of UGMFX stating the firm is going under.) 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.

Along with the increased capital requirement, NFA is proposing to eliminate the concentration charge on significant positions with unregulated counterparties, including customers. The charge is designed, in part, to ensure that an FDM has sufficient capital to pay any losses even if it cannot collect profits due to counterparty defaults. As you know, NFA has been reviewing this concentration charge over the past several months. As part of its comments, at least one FDM suggested imposing a higher capital requirement on FDMs and eliminating the concentration charge. For some firms, eliminating the charge will free up additional capital to meet the increased net capital requirement.

NFA agrees that a higher capital requirement may obviate the necessity for applying the concentration charge. The increased capital requirement provides a greater buffer against counterparty credit risk. NFA would, however, replace the concentration charge with a limitation on the types of firms with which an FDM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17.

Under this proposal, an FDM may not include assets held by an unregulated person or affiliate in its current assets for purposes of determining its adjusted net capital, unless the unregulated person or affiliate qualifies for an exemption under current NFA Financial Requirements Section 11(b) and 11(c), respectively.[4] Similarly, positions entered into to cover an FDM’s exposure could not be counted for purposes of avoiding the haircuts imposed by CFTC Regulation 1.17 unless the counterparty is an entity that qualifies for an exemption under current NFA Financial Requirements Section 11(b). Under that provision, entities that qualify for an exemption include U.S. banks; NASD-member broker-dealers; NFA-Member FCMs; state-regulated insurance companies; banks, broker-dealers, FCMs, and insurance companies regulated in certain foreign jurisdictions; and other entities approved by NFA. Positions entered into with an affiliate to cover an FDM's exposure could not be counted for purposes of avoiding the CFTC haircut unless NFA has issued an exemption for the affiliate under the more limited circumstances that currently qualify for an affiliate exemption under NFA Financial Requirements Section 11(c). Customer positions on the FDM’s platform could be netted against each other, but this netting could not include positions with affiliates.

Internal Financial Controls

NFA also has concerns over the lack of adequate internal controls some FDMs have over their financial books and records. In the past year alone, NFA took two MRAs against FDMs that were under their minimum capital requirements. In both cases, the firms had inadequate internal controls over their financial books and records. In NFA’s experience, over the past few years many firms have entered the retail forex business with limited business and financial expertise. Some of these firms also use unknowledgeable personnel to handle their day-to-day bookkeeping. Furthermore, the fact that these are dealer markets makes the financial recordkeeping more complex than it is for a firm that is strictly an intermediary. Our experience also shows that the financial problems at these firms are compounded by the fact that many of the new FDMs—and even some of the more established ones—use relatively unknown accounting firms that may not have experience auditing companies with more complex financial requirements. As a result, FDMs have a much higher incidence of financial problems than traditional FCMs.

This situation concerns staff, and we recommend adopting a new rule to ensure that FDMs have proper internal controls and a means to evaluate those controls. Proposed Financial Requirements Section 15 has three prongs.

· It requires new FDMs to provide NFA with an internal control report prepared and certified by an independent public accountant qualified to certify financial statements for public companies (i.e., a firm registered and in good standing with the Public Company Accounting Oversight Board). The Member would be required to provide this report before commencing its retail forex business. The rule would also authorize NFA staff to require an FDM to provide subsequent internal control reports if circumstances warranted.

· The rule would authorize NFA staff -- in appropriate circumstances -- to require an FDM's annual financial statements to be certified by an independent public accountant qualified to certify financial statements for public companies. This requirement will give FDMs the freedom to choose other auditors unless NFA has reason to be concerned about the firm's financial statements.

· Each FDM would be required to have an AP/principal who is responsible for supervising the firm’s financial functions. This individual would be subject to discipline if the firm’s internal controls are inadequate in their design or because they are not followed. Staff also proposes to amend the forex interpretive notice to clarify that part of this supervisory responsibility includes hiring and retaining qualified accounting staff and, unless the firm is a public company with an independent audit committee, to research and recommend the firm's independent auditor.

Mr. Stephen Leahy

Chief Financial Officer
United Global Markets, LLC
20 Park Plaza, Suite 1000
Boston, MA 02116
Tel # (617) 357-5122
[email protected]

Dear Valued Client:

United Global Markets (UGMFX) has been notified that we are in violation of CFTC Regulation 1.17(a)(4) by our regulatory body, the National Futures Association. We have been notified that we fall below the minimum Adjusted Net Capital requirements of $1,000,000 and therefore may not allow clients to open new positions until we increase our own capital.

To be clear, United Global Markets has more than enough cash assets as compared to our liabilities to our clients. But we do not have $1,000,000 of our own liquid assets which is the NFA’s required minimum.

We are speaking to an institutional partner that has both more than the capital requirements AND shares our philosophy of treating clients fairly. However as with most large financial institutions, they have not been able to due their due diligence on United Global Markets in the short time period since the NFA’s proposed changes to Financial Requirements.

Therefore, in compliance with the NFA-issued notice of violation of CFTC Regulation 1-17(a)(4), our clients may only close open positions and not initiate new positions until further notice. Additionally we may not accept new client accounts or further funds from existing clients.

For those who wish to withdraw funds, please fax or e-mail a Withdrawal Request Form and we will process quickly.

http://www.ugmfx.com/downloads/Withdrawal_funds.pdf

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