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Proposed NFA Capital Requirement

  • #481
  • Nov 6, 2007 5:24pm Nov 6, 2007 5:24pm
Quoting turbokaos
Well if you have to I hope its the Blue Label 200th Anniversary

No way....JW has a 200th anv. Blue???? It's single malt green weather right now with an Arturo Feunte I must say. Hmmmm gonna have to check that out...and the damn broker minimum cap fiasco....
  • #482
  • Nov 6, 2007 6:54pm Nov 6, 2007 6:54pm
Quoting th_ngue21
So finally another great ECN firm stay in Forex!

I am very happy that MB Trading has the minimum capital.
Now... I am confused.. Do they really need the $10,000,000 for offering 1:100?

Justin is this true? Damn,, I really hope not
th_nguel21 -

I'm not sure if it's true or not....from what I read though, I understand it to say that brokers offering 100:1 on majors and 25:1 on non-majors are exempt from having to double the net cap requirements and those brokers offering 200:1 & 400:1 would have to meet the $10,000,000 requirement. I certainly could be wrong, but this makes a lot more sense.

Now please understand, I have not discussed this with our compliance department and this is not an official statement by MBTF or EFX, but rather an opinion from a trader just like anyone else here on the boards.

I will discuss this further with our compliance department and see what they have to say. Once I have a clear understanding, I'll come back and post what I have learned.
  • #483
  • Nov 6, 2007 7:39pm Nov 6, 2007 7:39pm
Quoting forexsavior
It seems like the NFA's position is that firms offering leverage of 100:1 or more are taking on more risk and thus should have more capital set aside.
That's a weak answer. This has already been discussed on these boards, and your comment is misleading. Firms that offer MORE than 100 to 1 leverage on the majors must maintain a $10 million net cap to follow the new rule. I believe that would apply to a firm like InterbankFX, which offers 400 to 1, but they have more than enough to meet the requirement. Firms that offer 100 to 1 only need $5 million. This is the NFA's way of protecting the consumer more from platforms that allow the consumer to do something that they never should...trade at 400 to 1.

So let's back pedal those comments that suddenly everyone needs $10 mil. And also, let's put away those comments that $20 mil is coming down the road. There are no discussions in serious circles about anything above the recently passed requirements. The NFA doesn't want to have 5 members.

We've been talking about this move to $5 million for the better part of a year, and we all knew it was coming and wanted it to happen. They aren't going to turn around and suddenly go for $10 or $20 million. The requirement is set, probably for at least 18 months, and then they will see how well protected the consumer is and make decisions about the future accordingly.
FXChant Singing the World of Forex
  • #484
  • Nov 6, 2007 7:42pm Nov 6, 2007 7:42pm
Quoting forexsavior
The New Cap Numbers are out! MB Trading (now at $5,190,000) Are your funds safe?
Guess so. Shocker.
FXChant Singing the World of Forex
  • #485
  • Nov 7, 2007 4:26pm Nov 7, 2007 4:26pm
Hey Guys ~

I received confirmation today that brokers offering 100:1 on majors and 25:1 on non-majors are only required to deposit $5,000,000 per rule section 12(b). Those brokers who choose to offer the higher leverage (200:1 & 400:1) will have to deposit at minimum $10,000,000 prior to Dec. 21st.

What does that tell you about the higher leverage?

Maybe somebody would like to list the brokers that will only offer 100:1 and those that will offer 400:1...I certainly know MBTF won't be required to put $10,000,000 up.
  • #486
  • Nov 7, 2007 4:52pm Nov 7, 2007 4:52pm
Quoting jleblang
Hey Guys ~

I received confirmation today that brokers offering 100:1 on majors and 25:1 on non-majors are only required to deposit $5,000,000 per rule section 12(b). Those brokers who choose to offer the higher leverage (200:1 & 400:1) will have to deposit at minimum $10,000,000 prior to Dec. 21st.

What does that tell you about the higher leverage?

Maybe somebody would like to list the brokers that will only offer 100:1 and those that will offer 400:1...I certainly know MBTF won't be required to put $10,000,000 up.
You are correct Justin. I misinterpreted this new $10 million capital requirement. The new $10 million capital requirement is for firms OVER 100:1 leverage. I'll make that correction elsewhere. And I agree with you regarding the NFA's assessment here. There is certainly far greater risk trading over the standard 1% margin level. The NFA made the right call here.
  • #487
  • Nov 7, 2007 10:54pm Nov 7, 2007 10:54pm
Quoting forexsavior
You are correct Justin. I misinterpreted this new $10 million capital requirement. The new $10 million capital requirement is for firms OVER 100:1 leverage. I'll make that correction elsewhere. And I agree with you regarding the NFA's assessment here. There is certainly far greater risk trading over the standard 1% margin level. The NFA made the right call here.
Nice save.
FXChant Singing the World of Forex
  • #488
  • Nov 7, 2007 11:14pm Nov 7, 2007 11:14pm
September 26, 2007

TESTIMONY OF DANIEL J. ROTH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NATIONAL FUTURES ASSOCIATION

BEFORE THE SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT COMMITTEE ON AGRICULTURE
U.S. HOUSE OF REPRESENTATIVES

SEPTEMBER 26, 2007

My name is Daniel Roth, and I am President and Chief Executive Officer of National Futures Association. Thank you Chairman Etheridge and members of the Subcommittee for this opportunity to appear here today to present our views on some of the issues facing Congress as it continues the reauthorization process. NFA is the industry-wide self-regulatory organization for the U.S. futures industry. As a regulator, NFA is first and foremost a customer protection organization.
I testified before this Subcommittee in 2003 and in 2005 about off-exchange forex futures that were being sold to retail customers. I stated then and believe now that certain provisions of the Commodity Futures Modernization Act of 2000 and subsequent case law had the unintended consequence of making unsophisticated, retail customers the prey of fly-by-night operators. Let me put these issues in some overall context, describe in detail the problems we have seen in the statute and share with you some proposed solutions.
In the CFMA Congress attempted to resolve the so-called Treasury Amendment issue once and for all by clarifying that the CFTC does, in fact, have jurisdiction to protect retail customers investing in foreign currency futures. The basic thrust of the CFMA in this area was that foreign currency futures with retail customers were covered by the Commodity Exchange Act ("Act") unless the counterparty was an "otherwise regulated entity," such as a bank, a broker-dealer or an FCM. When I testified here in 2003, I told you that NFA Member FCMs held $170 million in retail customer funds trading off-exchange forex. Four years later, that number is now over $1 billion. With this dramatic growth there have been some pretty dramatic problems.
Members acting as counterparties to retail forex transactions account for less that 1% of NFA's membership. Unfortunately, they also account for over 20% of the customer complaints filed with our arbitration program, over 50% of NFA's current enforcement docket and over 50% of the emergency enforcement actions NFA has taken over the last year.
There a number of problems in the current statute that have contributed to these problems. If you look at the firms that have caused virtually all of the customer protection problems in retail forex, they share a couple of traits. First of all, they are not really FCMs at all. Congress intended to allow FCMs, along with banks, broker-dealers and insurance companies, to act as counterparties to retail forex transactions because they are all "otherwise regulated entities." The wording of the statute, though, opened the door for firms that are not really FCMs to take advantage of the FCM exemption. Firms became registered as FCMs that are FCMs in name only-they do no exchange-traded futures. They are registered as FCMs solely to qualify to do retail forex business. To make matters worse, due to a further anomaly in the statute, the Act currently does not provide the CFTC with any rulemaking authority over these firms at all. Clearly, Congress did not intend to allow firms that are FCMs in name only to act as counterparties to retail forex futures. Congress should fix this problem by limiting the FCMs that can act as counterparties to those that are primarily and substantially engaged in the activities described in Section 1(a)(20) of the Act.
The second trait that marks the problem firms in retail forex is that most, though not all, have been thinly capitalized. Congress long ago recognized that acting as a dealer involves greater risk than acting as an agent in futures trading, the way a traditional FCM does. That is why Congress in 1978 imposed a $5 million net worth requirement for firms granting dealer options and why the CFTC created a $2.5 million capital requirement for leverage transaction merchants in 1984. Congress should amend Section 2(c) of the Act to require FCMs acting as counterparties to retail forex transactions to maintain minimum capital of at least $20 million. NFA has raised the capital requirements for forex dealers several times but this congressional action could ensure that firms can meet their obligations to their customers and have a significant financial stake in their business.
NFA is strongly supportive of both of these solutions to the customer protection problems we have experienced with retail forex. We are also strongly supportive of giving the CFTC rulemaking authority over FCM only firms (i.e. those that are not otherwise enumerated in Section 2(c) of the Act to act as retail forex counterparties). It is simply paradoxical to call these FCMs "otherwise regulated" when, other than anti-fraud jurisdiction, there is no federal regulatory oversight of these firms' activities.
There's one more forex problem I should mention that poses significant customer protection issues based upon the wording of the CFMA. Specifically, the wording of the statute currently only requires the counterparty to these transactions to be an otherwise regulated entity. This creates the possibility that an FCM, for example, might be the counterparty but the firm that actually does the telemarketing for these products is completely unregistered and unregulated. There are literally hundreds of these unregulated firms selling off-exchange forex transactions to retail customers and in some instances the people making the sales pitches have been barred from the futures industry for sales practice fraud. I do not think that's what Congress intended at all, and H.R. 4473 passed by the House in 2005 contained an amendment to Section 2(c) of the Act to make clear that not only the counterparties but also the persons actually selling these products to retail customers must be registered with the CFTC and subject to its jurisdiction. We, of course, support this amendment.
In the last few years we have also seen a growing number of firms acting as trading advisors and pool operators that trade exclusively off-exchange forex. Under the current statute, these firms are not required to be registered and their customers do not receive the same regulatory protections as customers of CPOs and CTAs that trade on-exchange. Some of these unregistered firms tout outlandish performance claims that cannot be substantiated. We believe that H.R. 4473's amendment should be extended to require those persons that manage accounts or pooled investment vehicles on behalf of retail customers to register and be subject to the CFTC's jurisdiction.
The last issue I wanted to discuss brings us back to the Zelener case. As you may recall, in the Zelener case the CFTC attempted to close down a boiler room selling off-exchange forex trades to retail customers. The District Court found that retail customers had, in fact, been defrauded but that the CFTC had no jurisdiction because the contracts at issue were not futures. The Seventh Circuit affirmed that decision. The "rolling spot" contracts in Zelener were marketed to retail customers for purposes of speculation; they were sold on margin; they were routinely rolled over and over and held for long periods of time; and they were regularly offset so that delivery rarely, if ever, occurred. In Zelener, though, the Seventh Circuit based its decision that these were not futures contracts exclusively on the terms of the written contract itself. Because the written contract in Zelener did not include a guaranteed right of offset, the Seventh Circuit ruled that the contracts at issue were not futures.
For a short period of time, Zelener was just a single case addressing this issue. However, time has proven that the CFTC cannot litigate itself out of the Zelener problem. Since 2004, various Courts have continued to follow the Seventh Circuit's approach in Zelener causing the CFTC to lose enforcement cases relating to forex fraud. Therefore, Zelener allows completely unregulated firms and individuals through clever draftsmanship to sell to retail customers contracts that look like futures and act like futures outside the CFTC's jurisdiction. The bottom line is that these Court decisions make it much harder for the Commission to prove that contracts sold to retail customers to speculate in commodity prices are futures, makes it easier for the unscrupulous to avoid CFTC regulation and creates a real, live customer protection issue. Unsophisticated retail customers are being victimized by high-pressured sales pitches for foreign currency futures look-alike products. These retail customers are the ones who most need regulatory protection, and that protection should not be stripped from them because a clever lawyer finds a loophole in the law.
NFA recognizes that H.R. 4473 addressed the Zelener problem with regard to retail forex. NFA applauds those efforts in addressing the current scam of choice-forex-among fraudsters and believes that any future reauthorization legislation should at the very least incorporate H.R. 4473's approach to this issue. However, NFA remains concerned that the rationale of the Zelener decision and its progeny is not limited to foreign currency products. Similar contracts for unleaded gas, heating oil, agricultural products or virtually any other commodity could be sold to the public in an unregulated environment.
NFA and the exchanges have developed a fix to Zelener that goes beyond forex and does not have unintended consequences. Our approach codifies the approach the Ninth Circuit took in CFTC v. Co Petro-which was the accepted and workable state of the law until Zelener-without changing the jurisdictional exemptions in Section 2(c) of the Act. In particular, our approach would create a statutory presumption that leveraged or margined transactions offered to retail customers are futures contracts if the retail customer does not have a commercial use for the commodity or the ability to make or take delivery. This presumption is flexible and could be overcome by showing that the transactions were not primarily marketed to retail customers or were not marketed to those customers as a way to speculate on price movements in the underlying commodity.
This statutory presumption would not affect either the interbank currency market or already regulated instruments like securities and banking products. It would, however, ensure that scammers cannot tailor their written agreements to sell leveraged commodity products to retail customers for speculative purposes in a completely unregulated environment. Moreover, it protects retail customers by giving the CFTC the power to shut down unregulated boiler rooms and freeze their funds.
While NFA continues to believe that the solution to Zelener should go beyond forex, we recognize that H.R. 4473's narrow Zelener fix would be a marked improvement over the current state of the law. If Congress adopts only a narrow Zelener fix and boiler rooms move to other commodities using Zelener-type contracts, then Congress must be willing to re-open the Act before the next reauthorization to consider resolving this issue completely.
In closing, let me state that NFA believes the industry and the public have benefited greatly from the enlightened regulatory approach that Congress adopted in the CFMA and from the CFTC's role in implementing the Act. We look forward to working with this Subcommittee, other Congressional committees, the CFTC, and the industry to address the important customer protection issues outlined above.
http://www.nfa.futures.org/printerFriendly.asp?tag=entireArticle
  • #489
  • Nov 8, 2007 5:48am Nov 8, 2007 5:48am
Thanks eliteeservices, but that testimony had been linked before.

I think that eventually, they *might* look to go to 20 mill, but I don't think it'll happen for a long while (a year at least). For one, the members of the NFA on the forex side probably wouldn't like their organization to keep lifting the bar on them month by month. For the second, he is appealing to Congress to do it - which means one of two things (IANAL, so I could be entirely off here) 1) he doesn't have the overall authority to do it 2) he doesn't want to be the hitman and do it if Congress will.

Since Congress isn't exactly the speediest of groups, I don't expect such a requirement will go through any time soon, and I certainly don't think they'd put it into place so rapidly after the 5 million.

Interesting times coming in December...
  • #490
  • Edited 9:13am Nov 8, 2007 6:52am | Edited 9:13am
Quoting forexfun
Thanks eliteeservices, but that testimony had been linked before.

I think that eventually, they *might* look to go to 20 mill, but I don't think it'll happen for a long while (a year at least). For one, the members of the NFA on the forex side probably wouldn't like their organization to keep lifting the bar on them month by month. For the second, he is appealing to Congress to do it - which means one of two things (IANAL, so I could be entirely off here) 1) he doesn't have the overall authority to do it 2) he doesn't want to be the hitman and do it if Congress will.

Since Congress isn't exactly the speediest of groups, I don't expect such a requirement will go through any time soon, and I certainly don't think they'd put it into place so rapidly after the 5 million.

Interesting times coming in December...
It will happen when FXCM and the other huge firms finish digesting this group of its competition. The NFA is the watchdog of these larger firms. It must be nice from a business standpoint to have a government agency backing you in shutting down your competition, only to allow you to swoop in and buyout your competition for pennies on the dollar.

You wouldn't have to outperform your competition, you wouldn't have to attract customers by being Better than your competition, you wouldn't even have to advertise that much.

It is interesting to watch how supportive some of the forex community is in watching the NFA take away the larger brokerages competition. Once the US market has only 3-4 large brokerages left and there can be no more IB's to go to battle for you at these brokerages. We will see how much these huge businesses have to care about the individual consumer.

Have a problem with execution? Need the dealing desk? What is the firms incentive to fix the problem now that there is very little competition you could take your business to?

Granted, there are firms that genuinely deserved to be shut down. Firms that trade against the client and are losing client money so have fallen below their watermark. If at any point a brokerage can stop doing business and not pay back 100% of the money to it's customers that is a serious problem. However "How much money the brokerage has laying around that they aren't putting back into their business" is not a judgment on how well the brokerage takes care of it's clients. The NFA should exist ONLY to seek out and shut down these brokerages.

A brokerage with 250k, 500k, 1million, 3million above and beyond the sum total of their client accounts combined and understands that as a "small brokerage" the only thing they have is their reputation will go above and beyond most of the time in their customer service interactions with a client. How many other industries require a company to have 5 million tied up that they cannot use to put back into their business. How much of that money could be used in upgrading service, more customer service ect... it's ridiculous.

You know what North Finance has to it's name being unregulated? It's reputation. Be it good or bad in your opinion, the firms only means of staying around is providing as much service to it's clients as possible. This is called free market, something the US used to be based on. Not big government. Let the market decide in the long run if the customers of North Finance are happy enough to stay with them, not some big government agency that forces the customers to stay with them because there is no longer any competition to run to.


Edit: North Finance is not my broker btw and I can't speak from experience of them. They are just an example.
The basis of a democratic state is liberty. ~ Aristotle
  • #491
  • Nov 8, 2007 9:30am Nov 8, 2007 9:30am
Quoting forexsavior
I'll make that correction elsewhere.
I feel sorry for you, that mean you'll have to update your post in 38 different forums!
  • #492
  • Nov 8, 2007 3:48pm Nov 8, 2007 3:48pm
So which firms in the Dead Pool are directly effected by this $10 million capital requirement rule? Well, not many. IG index would be affected if they actually solicited customers in the U.S. but it appears their U.S. registration is just a shell. GFS Futures & Forex offers 200:1 mini accounts on their website. Thus this rule could have a major impact on their business. But the firm that stands to lose the most is Money Garden. MG Forex is notorious for offering 400:1 "Flex" accounts and this new rule could turn the firm upside down. Here is a quick rundown after looking at each firm's website.

IG Financial Markets ($1,017,000) [700 to 1 leverage]
Advanced Markets ($1,216,000) [100 to 1 leverage]
Wall Street Derivatives ($1,231,000) [Unknown]
SNC Investments ($1,301,000) [100 to 1 leverage]
One World Capital ($1,408,000) [100 to 1 leverage]
Hamilton Williams ($1,453,000) [100 to 1 leverage]
CMC Markets ($2,001,000) [100 to 1 leverage]
Solid Gold Financial ($2,101,000) [100 to 1 leverage]
GFS Futures & Forex ($3,078,000) [200 to 1 leverage]
E FX Options ($3,752,000) [100 to 1 leverage]
Forex Club ($3,989,000) [100 to 1 leverage]
Easy Forex ($4,351,000) [50 to 1 leverage]
Money Garden ($5,507,000) [400 to 1 leverage]
Ikon ($7,562,000) [Unknown]
  • #493
  • Nov 9, 2007 12:11am Nov 9, 2007 12:11am
vensik is right, the NFA is simply shaking out the smaller firms. we do have a democracy 1 dollar 1 vote and the larger guys want to consolidate into 3-4 conglomorates. this is also supported by many in the industry, as it looks bad that there are 100 small firms (i tend to agree and so do many, because clients become confused, especially with less than ethical firms giving us all a bad name).

the fact that they are raising the net cap is a pointless argument, if they want to ensure a broker's stability, they should monitor their execution and clearing policies. you could run an FCM from your garage with 50 bucks if you knew what you were doing. does capitalization mean professionalism? look what happened to refco - one of the largest (in terms of funding) forex players gone caput due to bad management.

we should be worried about the POLICIES of brokers, not how much MONEY they have.
  • #494
  • Nov 9, 2007 5:57am Nov 9, 2007 5:57am
Quoting eliteeservices
vensik is right, the NFA is simply shaking out the smaller firms. we do have a democracy 1 dollar 1 vote and the larger guys want to consolidate into 3-4 conglomorates. this is also supported by many in the industry, as it looks bad that there are 100 small firms (i tend to agree and so do many, because clients become confused, especially with less than ethical firms giving us all a bad name).

the fact that they are raising the net cap is a pointless argument, if they want to ensure a broker's stability, they should monitor their execution and clearing policies. you could run an FCM from your garage with 50 bucks if you knew what you were doing. does capitalization mean professionalism? look what happened to refco - one of the largest (in terms of funding) forex players gone caput due to bad management.

we should be worried about the POLICIES of brokers, not how much MONEY they have.
Sooo.. True!!
Trainee at UBS Investment Banking
  • #495
  • Nov 9, 2007 7:59am Nov 9, 2007 7:59am
So now that MB is off the list, this thread is over right? Was that out loud? My bad... was supposed to be my inside of my head voice... heh
  • #496
  • Nov 9, 2007 3:03pm Nov 9, 2007 3:03pm
Quoting eliteeservices
vensik is right, the NFA is simply shaking out the smaller firms. we do have a democracy 1 dollar 1 vote and the larger guys want to consolidate into 3-4 conglomorates. this is also supported by many in the industry, as it looks bad that there are 100 small firms (i tend to agree and so do many, because clients become confused, especially with less than ethical firms giving us all a bad name).

the fact that they are raising the net cap is a pointless argument, if they want to ensure a broker's stability, they should monitor their execution and clearing policies. you could run an FCM from your garage with 50 bucks if you knew what you were doing. does capitalization mean professionalism? look what happened to refco - one of the largest (in terms of funding) forex players gone caput due to bad management.

we should be worried about the POLICIES of brokers, not how much MONEY they have.
Well said. That's been my point from the start.
FXChant Singing the World of Forex
  • #497
  • Nov 9, 2007 3:05pm Nov 9, 2007 3:05pm
Quoting Pip Hunter E
So now that MB is off the list, this thread is over right? Was that out loud? My bad... was supposed to be my inside of my head voice... heh
ROFLMAO.
FXChant Singing the World of Forex
  • #498
  • Nov 12, 2007 1:03pm Nov 12, 2007 1:03pm
Looks like the Savior missed this big development. Gain Capital bought out Direct Forex. So scratch them from the list. Here is the official Direct Forex Statement:

Dear Direct Forex Customer,

As you already know, Direct Forex LLC (“Direct Forex”) will be transferring the custody and clearing of all forex accounts to Gain Capital on Wednesday, August 29th 2007. Please keep in mind that it is important to liquidate any positions by the close of business, 4:00PM (CDT) on the aforementioned date. All open positions will be liquidated to facilitate the transfer of the accounts to Gain Capital.

For your convenience, we have attached a link that allows you access to Gain Capital’s two proprietary trading platforms. These platforms can be accessed through Direct Forex’ website (www.directforex.com) and by clicking on the link http://www.directforex.com/products/demo1.aspx. Please take time to familiarize yourself with these new trading platforms in order to minimize any disruption to your trading.

Please keep in mind that Gain Capital is in the process of integrating MetaTrader 4, and is confident that the system will be available on or around October 1st, 2007. Direct Forex appreciates your business and will keep you informed of any updates.

Sincerely,
Direct Forex
  • #499
  • Nov 12, 2007 3:02pm Nov 12, 2007 3:02pm
Quoting forexsavior
Please keep in mind that Gain Capital is in the process of integrating MetaTrader 4, and is confident that the system will be available on or around October 1st, 2007. Direct Forex appreciates your business and will keep you informed of any updates.
When was this email sent out?
The basis of a democratic state is liberty. ~ Aristotle
  • #500
  • Nov 13, 2007 6:45am Nov 13, 2007 6:45am
Quoting Vensik
When was this email sent out?
it's on their website
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