Client agreement and PDS issues

To all fellow traders and brokers.


In the GoMarket discussion I tackled an issue regarding a frase in the PDS that GoMarkets uses which refers to their client agreement.

For those who have not read that thread, I hereby recall that frase again.


" One of the terms of the Client Agreement is that
we may use the money in the client trust account
for the purposes of meeting obligations incurred
by us in connection with margining, guaranteeing,
securing, transferring, adjusting or settling
dealings in derivatives by us (This includes
withdrawing money from your account(s) to
satisfy our margin arrangements with our OTC
Derivatives Provider), including dealings on
behalf of other clients. In the event of our
insolvency or default you may lose any
entitlement to money due from us. See section 3
for further information about the credit risk
associated with dealing with us. "

As it is clear that this frase in not only used by GoMarkets, but by nearly all Financial institutes and as it seems their are many more among us that feel, these issues should be discussed about in an open and tolerant way, I started this new thread.

I hope many of you will join this discussion in order to, not only, come to a better understanding about the DEAL WE GET INTO when starting trading, but also to find a way to come to more secured rules for traders.

Don't get me wrong here !!

I am not trying to point my finger at any broker or financial for trying to hustle their clients.

My objective is versatile

at first I hope to make clear for anybody involved - or wanting to get - in this business is aware of what he is getting into, as long as these terms are standard in the branch.

secondly, I hope that we as a - steady growing - group of small but serious clients will get more security regarding the funds we trust our businesspartner with, in order to trade (for our own risk).

as far as anyony of the FF administrators is reading this post, I would ask them, to copy the related posts in the GoMarket discussion into this thread.

I hope a lively disussion will arise.

Pauljr

Does Oanda have such a clause ?

Hi Intensity,

I don't know. But they are obliged to have the client agreement and a PDS available on their site.

You will have to download it and READ the whole agreement to find out.

This ofcource takes time, but it is for your own intrest.

On the other hand, when you are lucky, someone that is client with Oanda has read the C.A. already and will answer the question for you.

I do hope you will understand, that I am not going to read all the C.A.'s of all the brokers and financials. That is why I started this thread. So we can benefit from the knowledge every single trader has.

And of course, the last option is, that you ask Oanda directly.

Anyway I am glad you for your reaction.
Don't let it stop you for doing business, but be aware, as the policesergent in Hill Sreet Blues used to say:

"Remember, it's a dangerous world outside there"

To erikte

I cannot say there is or not.
Therefore you would have to read all of the C.A. of all of them.

But as far as it looks, and I hope someone proves me wrong, most of them use the same terms in their contracts. This logical, for they are all in the same business.

It also is NOT a matter of distrust, for they all inform you about their terms, nor is it illegal.

The question is: Is it accepable for the small trader for being forced to accept these kind of terms, if one wants to do business on the forex.

Many will say now. we have to accept their terms in order to play the game.

BUt I disagree on that as far as these terms are contrary to a businessdeal that should give garantees to both parties.

You see, you are obliged to put in all the money that you put out to risk.
there is no way around that. So you do.

But what garantee do you have, that - as long as you stick to your side of the deal - you still will get your money back. In case a screw up by the broker on one of his own deals, or even a screw of one of his clients, you will lose all your money.

That was not what you intended when you wanted to go into this business. You are willing to take the risk for your own deals and accept that, like a PRO, but not for screw ups by others. That you are even not aware of!!!!

I suggest, to read the terms really meticulously, so you are aware of ALL the consequences.

But still I hope you will have fun and Trade well, don't let it stop you.

I just re-read most of Oanda's legal papers and I didn't find such a clause. In fact, there was the opposite :

OANDA keeps customer funds in accounts at top tier banks such as JPMorgan Chase, Deutsche Bank, and the Royal Bank of Canada. These accounts are kept separate from OANDA's operating accounts. Funds are withdrawn from these accounts only as a direct result of customers' trading-related activities or withdrawal requests.

to Nubcake,


Yes you are very right. In all branches businesses stop. Forced or unforced. But that is not the question here.

It is whether the basic terms of the deal we make with our contractpartner are supplying both sides the same amount of guaranty compared to the responsabilities and the risks they are willing to take.

When you read my previous post (to erikte) I guess you will see my point.

In many of the examples you bring up, their is mostly a back-up, based on a contract or a general ruling. That at least gives you a sort of safeguard in case things go wrong.

In this situation, you are not even entitled to any guaranty.

That is a whole different situation.

Why are you replying to people who didn't post on this thread ? Am I missing something ? Did they block me and as a consequence I can't read them ? Is there another similar discussion going somewhere else ?

You make a very clear and important point that I hadnt really given as much forethought to previously.

Essentially it's a risk you take and as my capitilization increases, as with any "investment", I'll be looking to diversify my risk (brokers). I also think that by taking a closer look at there business practices and financial statements one could have a better chance at identifying a potential flop.

Also, since we "the clients" are the bloodline to the business, if someone where to spot an unsafe business practice and make it know to them and others it might keep them in check, possibly?

What aggravates me is that we can be held accountable if THEY make silly trading decisions, I wasnt aware of this.

Pauljr,
(Note: This looks long, but it will be worth it) (Additional note: Yes this did appear in another thread. Too lazy to type it all over again, so this is a copy)

I see your point exactly and I concur with your stated concern wholeheartedly.

The difficulty for us of course is that, individually, we are very small fry. Which is why when there is a financial fire, we are the ones who usually get fried (and eaten).

The only clout we have is by gathering our respective concerns (perhaps in forums such as this one) and bringing pressure to bear on those in the regulatory agencies to effect the kind of rules revisions that you are suggesting.

That is, my money which has been tendered to a broker/dealer such as Go Markets, should be in a segregated account accessible only by me, or as authorized by me as a result of an order I have placed in the markets and supported by logs and confirmed data entries made by me. If I agreed to place the trade and my funds in that segregated account can be shown to be needed to cover the risk I authorized, well and good.

Specifically it should NOT be available to them for use in the manner you have suggested - that is to cover their arse when they make an error in judgement in their own risk taking. After all, I don't get to participate in the rewards that may come from that risk taking or from the results of them paying excessive salaries to themselves or any other lousy business decision they may make. Thus why should my investment dollars be at risk to cover such behavior?

Answer - it shouldn't. Right is right and wrong is wrong.

None of this is to suggest that Go Markets should be singled out for this kind of policy because it apparently is condoned by regulatory bodies everywhere. They are just doing what they need to do to be competitive in a market environment that they are subject to. But it is still immoral, and therefore wrong, and the practice needs to be terminated.

However until that golden day arrives you might want to do what I do. Let's say that a given trader has USD$10,000 to run his business trading the forex markets.

Instead of turning that entire amount over to Shade Tree Broker for his trading account and placing trades that put 2% of that at risk in any given position, why not only put the amount with the broker/dealer that you will actually need for the actual trades. Let us say that amount would be USD$2000 for the moment.

The other USD$8,000 (which is the balance of your actual trading account balance would be in an interest bearing account in an entirely different financial institution unrelated or controlled by the subject broker/dealer. It would be just a short phone call away, capable of being wired or EFTed over to Shade Tree Broker, should it be needed.

Conversely, as you earn profits from your successful trades, you would siphon off excess funds not currently immediately needed for current trades by moving them in the other direction. This would keep those funds from being an attractive nuisance to tempt the broker/dealer in being less than prudent.

This approach, of course, makes it look like you are being reckless and placing too much at risk on any given trade or group of trades. But you will know the truth - that your actual risk is related to your total combined bank account size - not to the amount visible at your broker/dealer.

Thus your total risk capital would still be available to cover the positions you were taking in the market but you would be compartmentalizing your risk much the same way that the designer of submarines provide watertight bulkheads to keep the boat from sinking should it take a torpedo in one of the other compartments.

Another way of saying this is to not put all your eggs in one or even two baskets.

Anyway, that's the way it looks from here.

Rich

I think that since our money is at risk, there business practices should be completely transparent, down to the risk per trade. Thats only fair, right?

That was one of my points exactly, and well stated, billflet. I neglected to sum it up that way, but giving all of your trading money to one of the people in the crowd while you're fighting your current position out is less than total wisdom.

And who needs yet another "layer of risk" in this game, much less an invisible one when you're in such a tough fight?

At least have the money held by someone who has sworn allegiance to just you. That's not totally safe, for sure, but far safer than having those temporarily excess funds in the hands of the same guy who has a "dog in the fight", as it were.

I wrote a post in the thread GoMarkets discussion.
you can find some previous related post to this issue in there.

but as an other trader pointed out that this is a separate issue from the GoMarket discussion, I started it as a separate thread.

feel free to read some of the post in there and you will see what you missed.
You are NOT blocked out, don't worry.

I am very pleased to see your reaction here.
It only proves that there is a sincere (double meaning) difference in business etikets between financials. (banks, brokers, MM etc.)

so it also means, it is very important to read the C.A. of the partner you want to deal with carefully, before you start your business.

Thanks al lot for this info.

I only can ask you, whether all of the C.A. is as clear and safe. If so please advice us on that. It works both ways.

The (rookie) Traders will know were they can start with a limited risk and the broker will be happy for a good reference.

keep up the good work.

thanks.

As you can see (in other reactions here) there are different ways to operate in this business.

But let us not be to joyful at once. I am sure there will follow much more reactions and in some time we will see how thing are and were we all stand.

In the mean time lets be clever and do only those things we are willing to take the risk for. But let us put out the signals to others, traders as well as financials that we are willing to do business, aslong as it is in a FAIR way to both parties.

You are quiet right here.

Unfortunatly, there is a small snake under the grass.

Legaly all financials are obliged to give this transparancy, so all of them do. But Who is going to read all of these legal paperwork that they provide their clients with, to fullfill the regulations.

Many of us will read 1 or 2 C.A. or other documents. And many of us will not completly understand what is in it. But in the exitement of wanting to start, one glances over it, and expect it all to be "okay". Why wouldn't it be, so many others have done it before.

So one goes ahead, only to find out after some time that there was something they missed. Mostly at times when things went wrong.

Then the fire is started, bad reviews are posted and accusations of wrong doing are outed. But all because one did not really understood what he was getting into, regardless of the transparancy that was offered to one.

What I want to say is this:

It is not only the fact that financials give opening to their terms of contract, but are the terms really benificiary to both sides. So even if we - the small traders - know, will we still have the supposed guarantee that the contract should give us and not only our adversary contractpartner.

I know this can end up in a big legal discussion. But let us be fair, isn't it better to know in advance and have both sides agree on the same reasonable terms for both, than fight afterwards because one of the terms was not clear to one of the partners involved.

transparancy does go further than only publishing the terms of an agreement. Transparancy means, it must be clear to both sides what is meant by the terms.

Hi Pauljr, here is the main text :


Your trading account is not insured under any state or Federal insurance program or by any other entity.
You should therefore familiarize yourself with the protections accorded money or other property you
deposit for foreign currency contracts. The extent to which you may recover your money or property may
be governed by specific legislation or trading rules. Under the U.S. Bankruptcy Code, your funds may not
receive the same protections as funds used to margin or guarantee exchange-traded futures and options
contracts, which receive a priority in bankruptcy. Since that same priority has not been given to funds used
for off-exchange forex trading, in the unlikely event OANDA were to become insolvent and you have a
claim for amounts deposited or profits earned on transactions with OANDA, your claim may not receive a
priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of
other general creditors, from any monies still available after priority claims are paid. Even customer funds
that OANDA keeps separate from its own operating funds may not be safe from the claims of other general
and priority creditors.


It's all legalese but it seems like your funds would be in jeopardy only if there is a bankruptcy. Contrary to the broker in your first post, it seems that Oanda won't play around with your money. What's more, they are NFA regulated

This issue is quite worrying and if you notice any red flag about Oanda, do not hesitate to let me know.

From the Customer Agreement of FXDD Malta:

9. CUSTOMERS’ MONIES
When a Customer deposits money with FXDD this will generally be segregated from FXDD’s
money in accordance with applicable MFSA rules and regulations on protection of Customers’
money, except when such money is held by FXDD in respect of margin requirements. Customer
acknowledges that the holding of money in a segregated Customer account may not provide
complete protection.

All Customer monies will be held in a Clients’ account held with an authorized credit institution or
bank situated in Malta or the United States. The Customer’s rights may be affected, or even
prejudiced, depending on the jurisdiction in which such Customers’ monies are held.

Customer acknowledges and agrees that no interest shall accrue in favour of Customer on any
deposit/s and/or any other asset/s that Customer may hold with FXDD.

When a Customer undertakes one or more Contract/s with FXDD at any particular time, any
money held by FXDD will be transferred to FXDD to secure Customer’s actual or potential
obligations towards FXDD as counter-party in respect of such Contract/s, at which stage and for
the duration of any pending Contract/s that the particular Customer may have with FXDD such
money will not be segregated from FXDD’s money and the particular Customer will rank as a
general creditor of FXDD.

The Customer accepts and hereby authorises FXDD to effect withdrawals from the Customer’s
Account with FXDD as may be required in order to settle any charges and/or fees that may
become due by the Customer to FXDD from time to time.

It looks like Interactive Brokers has multiple levels of funds safety:

How Does IB Protect My Money?
IB protects your money by following a variety of regulatory requirements and then taking a number of other steps that are well beyond the basic requirements. Here are the basics:

1. First, for cash in your IB account, IB is subject to strict “reserve” and “segregation” requirements imposed by the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”), under which cash in IB customer accounts is kept in segregated accounts that are separate from the proprietary assets of IB. IB is required to perform daily (CFTC) and weekly (SEC) calculations to ensure that the proper amount of customer funds is set aside in these separate accounts.
2. As of mid-2009, IB customer cash is held to a large extent in deposits with multiple large banks, U.S. Treasury bills, FDIC-backed corporate bonds and federally-approved AAA rated money market funds (less than 2% of customer assets) -- all subject to continual review by IB's senior management. The majority of the bank deposits are held with JP Morgan, Deutsche Bank and Bank of America, and to a lesser extent with Citibank, HSBC, Royal Bank of Canada and U.S. Bank.
3. 100% of customer stock not held on margin is held in segregated depository accounts at The Depository Trust Company in the U.S. or, outside the U.S., in equivalent “good control locations” under SEC rules. Again, this stock is separate from the proprietary stock positions of IB or its affiliates and cannot be used for any purpose other than for customers, and is not subject to any liens.
4. Under SEC regulations, stock that customers hold on margin can be lent to other financial institutions (for example, to facilitate short selling). These stock loans are at least 100% collateralized by cash from those institutions that is received by IB and then placed in the same segregated customer-benefit reserve accounts discussed above.
5. Margin funds given to IB by customers to margin futures trades or option trades are deposited by IB in segregated customer-benefit accounts with the relevant clearinghouses (e.g., The Options Clearing Corporation or the CME Clearing House), or, for non-U.S. contracts, with an approved foreign clearinghouse or clearinghouse member. Clearinghouses eliminate direct counterparty risk in futures and options contracts by centralizing clearing and settlement of the contracts so that the clearinghouses (and not the exchange members) guarantee performance on the winning contracts. The clearinghouses are the lynchpin of the options and futures markets and are heavily regulated and well capitalized.
6. The above system of protections and checks and balances is monitored on a daily, weekly and monthly basis by IB systems and senior management. In addition, IB is audited by its own Internal Audit Department, its outside auditors Deloitte and Touche, and at least annually by the Financial Industry Regulatory Authority, Inc. (“FINRA”), the National Futures Association and other self-regulatory organizations.
7. Beyond all of the above, cash and securities held in IB customer securities accounts are protected by SIPC (Securities Investor Protection Corporation) coverage of up to $500,000 ($100,000 for cash) per customer. Funds that customers deposit for futures trading are not covered by SIPC, but IB addresses this by sweeping excess margin funds daily from the customer’s futures trading account into the customer’s securities account, where the funds are eligible for SIPC coverage
8. In addition to the standard SIPC coverage, IB has purchased excess SIPC coverage from Lloyd’s of London insurers. For customers who have received the full SIPC protection, the Lloyd’s policy provides up to an additional $29.5 million (including $900,000 for cash), subject to an aggregate limit of $150 million across all customer accounts.

Read more here: How Interactive Brokers Protects Its Customers' Assets

From Alpari UK's Customer Agreement:

Insolvency
2.13. The Company’s insolvency or default, may lead to positions being liquidated or closed out without your consent. In certain circumstances, you may not get back the actual assets which you lodged as collateral and you may have to accept any available payments in cash.

2.14. Segregated Funds will be subject to the protections conferred by the FSA's Client Money Rules.

2.15. Non-segregated Funds will not be subject to the protections conferred by the FSA's Client Money Rules. Non-segregated Funds will not be segregated from the Company’s money and will be used in the course of the Company’s business, and in the event of the Company’s insolvency you will rank as a general creditor.


6. Customer money
6.1. Relevant Amounts held on the Trading Account (“Segregated Funds”) will be segregated by the Company and held in accordance with FSA client money rules..

6.2. All other amounts will not be segregated and , the Customer has agreed that full title to, and ownership of, Non-segregated Funds has been transferred by the Customer to the Company or otherwise passed to the Company for the purpose of securing or otherwise covering the Customer’s present or future, actual or contingent or prospective obligations: such amounts do not constitute and shall not at any time be deemed to constitute client money for purposes of the FSA Rules and the Customer agrees that the Company can deal with this money on its own right and the Customer will no longer have a proprietary claim over this money until an equivalent transfer is made back to the Customer or if the provision of collateral by the Customer is no longer necessary.
Non-segregated Funds will not be segregated from the Company’s money and in the event of the Company’s insolvency the Customer will rank as a general creditor of the Company.

6.3. The Company shall not be obliged to pay interest to the Customer on any funds which the Company holds. The Customer waives all rights to interest.

6.4. The Company will promptly place any Segregated Funds held on the Customer’s behalf and not transferred to or held for the Company, into a Segregated Account (subject to FSA Rules and Permissions).

6.5. Unless the Customer has notified the Company in writing to the contrary, the Company may hold Segregated Funds on the Customer’s behalf in a Segregated Account located outside the United Kingdom or pass money held on the Customer’s behalf to an intermediate broker, settlement agent or OTC counterparty located outside the United Kingdom. The legal and regulatory regime applying to any such person will be different from that of the United Kingdom and in the event of the insolvency or any other equivalent failure of that person, the Customer’s money may be treated differently from the treatment which would apply if the money was held in a Segregated Account in the United Kingdom. The Company will not be liable for the solvency, acts or omissions of any third party referred to in this clause.

6.6. The Customer agrees that, in the event that there has been no movement on the Customer’s Trading Account Balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items) and the Company is unable to trace the Customer despite having taken reasonable steps to do so, the Company may release any Customer’s money balances from the Segregated Account.

6.7. The Company is covered by the Financial Services Compensation Scheme (FSCS). The Customer may be entitled to compensation from the scheme if the Company cannot meet its obligations. The Financial Services Compensation Scheme may be contacted by writing to the Financial Services Compensation Scheme, 5th Floor, Lloyds Chambers, Portsoken Street, London, E1
Customer Agreement Copyright 2004-2010 Alpari (UK) Limited Page 4/32
Version May 2010
8BN, or by emailing them at the email address provided on the Financial Services Compensation Scheme website at www.fscs.org.uk.

6.8. The Company will carry out reconciliations of records and Segregated Funds with the records and accounts of the money the Company holds in Segregated Accounts on a daily basis, and any required transfer to or from the Segregated Account will take place by the close of business on the day that the reconciliation is performed. The Company reserves the right to carry out such reconciliations and transfers more frequently, should the Company reasonably consider that this is necessary to protect the Company’s or a Customer’s interests.

From the Alpari.co.uk Discussion thread post #264:

We would like to take this opportunity to announce that from 18th March 2009, we began to offer 100% segregation for all clients. The only condition is that only free margin will be segregated. Essentially this means that if you are not in a trade, 100% of your capital will be segregated as client funds making it completely safe in case of Alpari’s bankruptcy.

In addition to this, our clients are free to apply for the Financial Services Compensation Scheme (FSCS) which is an independent scheme designed to pay back clients of FSA regulated firms up to £48,000 in case of financial difficulties.

[color=red]
Your trading account is not insured under any state or Federal insurance program or by any other entity.
You should therefore familiarize yourself with the protections accorded money or other property you
deposit for foreign currency contracts. The extent to which you may recover your money or property may
be governed by specific legislation or trading rules. Under the U.S. Bankruptcy Code, your funds may not
receive the same protections as funds used to margin or guarantee exchange-traded futures and options
contracts, which receive a priority in bankruptcy. Since that same priority has not been given to funds used
for off-exchange forex trading, in the unlikely event OANDA were to become insolvent and you have a
claim for amounts deposited or profits earned on transactions with OANDA, your claim may not receive a
priority. Without a priority, you are a general creditor and your claim will be paid, along with the claims of
other general creditors, from any monies still available after priority claims are paid. Even customer funds
that OANDA keeps separate from its own operating funds may not be safe from the claims of other general
and priority creditors.

Hello intesity,

I highlighted the frases that are of extreme importance in this statement.

As you can see, in the regulated OPTION- and FUTURE-trading where depositaccount are obliged to secure margincalls, clientfunds have a guaranty, to be handled prior to other claims in case of a bankruptcy.

This does not go for any funds in accounts for margincalls in forex trading.

The reason for that is clear.

The forex is OTC. It is not the same as the regulated trading on the NYSE
so these regulation do not apply here.

On the other hand, one could start asking; WHY NOT?

The good part in this clause is, that you have a claim , however only as a creditor.
Bad however is again, the last frase, stating that even separate accounts may not be safe.

What do thy mean by seperate accounts? does this include the "separate accounts" they hold at other banks, like they say previously.

That would mean that the previous statement, that your funds are held at RBS JPMorgan etc. doesn't mean that they are safe there. !!!