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CFTC Comment Period on Additional Customer Protections

  • #61
  • Oct 5, 2012 10:33am Oct 5, 2012 10:33am
The Wall Street Journal is reporting that PFG's trustee is now going to address the status of PFG's retail forex customers:

http://online.wsj.com/article/SB1000...googlenews_wsj


Quote
Ira Bodenstein, the trustee liquidating Peregrine, in a notice Wednesday told holders of currency and precious metals accounts with the firm that addressing their claims was his "next agenda item," though no decisions have been made on how these will be handled or how much money these customers may get back.


"If the Bankruptcy Court concludes that payment in full to forex and metals customers is appropriate, there are sufficient funds to accomplish that outcome," Mr. Bodenstein wrote. "If the Bankruptcy Court reaches a different conclusion, there are sufficient funds to address whatever treatment of these claims that the Bankruptcy Court orders."


Of further interest to traders in the article is the NFA's support for additional legal protections, although nothing was specified.
  • #62
  • Oct 9, 2012 3:36pm Oct 9, 2012 3:36pm
The lawyers for PFG's Forex/Metals customers have just filed a motion designed to prevent creditors from laying claim to the funds of forex traders. The hearing for this motion is set for Thursday morning.

http://www.pfgforexmetalslegalaccoun...at-1000am.html

Quote
Given the current broad inclusion of retail forex within the scope of the CEA, CFTC Regulations and NFA Rules, as well as the CFTC‘s core mandate to protect the investing public, it defies logic to deny retail customers who trade such contracts the same statutory protections now afforded all other market participants, including institutional dealers in cleared currency swaps and options. It would be equally unjust and irrational, given the wide ranging regulatory controls to which retail forex is now subject, to attempt to exclude this most vulnerable class of customers from the single provision most directly protective of their economic interest.


It is a noble sentiment and one that FXCM wholeheartedly supports. We have been hammering away in Washington on this issue for seven years now. Here’s hoping the judge surprises on Thursday with a ruling supportive of retail forex traders everywhere. But clearly, the status quo cannot be tolerated. You can let the CFTC know by emailing [color=#0000ff][email protected] and by contacting your local Congressional Representatives and passing along your concerns. In the meantime, we will continue to advocate for Segregation of Funds, Customer Insurance, and Public Disclosure of Financials for all FCM’s and RFED’s. [/color]
  • #63
  • Oct 10, 2012 5:30am Oct 10, 2012 5:30am
Quoting FCM-Reform
The lawyers for PFG's Forex/Metals customers have just filed a motion designed to prevent creditors from laying claim to the funds of forex traders. The hearing for this motion is set for Thursday morning.

http://www.pfgforexmetalslegalaccoun...at-1000am.html...
At this point I think it is worth saying "write your congressperson and CC: [email protected]" as it appears the CFTC will not offer segregation without congressional approval.
Measure trends automatically with zero lag
  • #64
  • Edited 9:19pm Oct 10, 2012 8:25pm | Edited 9:19pm
"The accounts of the Moving Group should be afforded preferential treatment as "customer property" persuant to the plain language of Subchapter IV of the Bankruptcy Code, and in consideration of its place in the overall statutory scheme."


That's really cool. I read the motion, and for once, someone writes a forex legal argument with an really good understanding of the regulation. Forex/metal margin accounts should be protected, perhaps by law already in the books.


I hope that PFG forex/metal speculators get every penny back, with the same preferential treatment of a futures speculator, or a farmer. Nice update, and good to hear.
  • #65
  • Edited 11:52am Oct 12, 2012 10:58am | Edited 11:52am
In yesterday's hearing on Drohan Lee LLP's motion on behalf of PFG's retail forex customers Judge Carol Doyle advised the plaintiffs to file an "adversary" suit against the Trustee to force him to return the funds of PFG's forex customers.

http://www.law360.com/articles/38598...unds-atty-says

That is exactly what they are about to do. Futures Magazine has a good article regarding the new motion:

http://www.futuresmag.com/2012/10/11...s-want-justice

Quote
In total, there are 7,000 clients with forex and metals accounts at PFG, but Medley says the impact of the case could be much broader. “We feel like this is a precedent-setting case with respect to the rights of forex and metals account holders, and how it relates to the CFTC regulations.”

A victory for Drohan Lee would indeed be a huge precedent for all retail forex traders in the United States, and a welcome one at that. However, the precedent may not be to the liking of many in the futures industry. This quote from John Roe of the Commodity Customer Coalition is very telling:

Quote
Roe says the CCC has not made a decision on how to argue this but says, “The important thing once this is all said and done is that we don’t have a precedent at PFG that once someone steals something out of segregation, it doesn’t matter. That would mean segregation protection is completely meaningless,” he says. “The NFA said in its brief in the MF Global case that the intent of Congress was not to have to trace funds when the music stopped. If they aren’t there and there is a hole, you have to replace those with substitute assets. In this case, the substitute asset is FX customers’ money.”

If FX customer assets are no more than a backstop for futures customers in the event of bankruptcy then retail forex traders need to think long and hard before opening an account with a FCM whose primary business is futures.
  • #66
  • Oct 18, 2012 4:00pm Oct 18, 2012 4:00pm
The CFTC has just announced they will be holding an open meeting to consider additional customer protections for the futures industry next Thursday.

http://www.cftc.gov/PressRoom/PressReleases/pr6392-12

FXCM has been lobbying in Washington to extend such protections to retail forex traders as well. FXCM supports tougher accounting standards, customer insurance and a requirement that all FCM's disclose their fully audited financials to the public. We are encouraging traders to submit their comments to the CFTC at [email protected].
  • #67
  • Oct 23, 2012 3:23pm Oct 23, 2012 3:23pm
Chairman Gary Gensler put out a press release today announcing a series of reforms designed to afford customers greater protections in the futures industry. It does not appear retail forex has been included in these reforms but we'll learn more in the days ahead. Here are the highlights:

http://www.cftc.gov/PressRoom/Speech...tatement102312

Quote
This customer protection proposal incorporates these NFA rules into the Commission’s regulations so that the CFTC can directly enforce these important rules. Under this proposal, FCMs would be required to:
• Hold sufficient funds in Part 30 secured accounts (funds held for U.S. foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method. FCMs would no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures;
• Maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC; and
• Make additional reports available to the SRO and the CFTC, including daily computations of segregated and Part 30 secured amounts.
Beyond the NFA rules, additional reforms in this proposal benefited from the CFTC’s broad outreach and consultation with the SROs and market participants, as well as substantial feedback from CFTC Commissioners. They include:
• First, bringing the regulators’ view of customer accounts into the 21st century by giving the SROs and the CFTC direct electronic access to FCMs’ bank and custodial accounts for customer funds, without asking the FCMs’ permission. Further, acknowledgement letters and confirmation letters must come directly to regulators from banks and custodians.
• Second, increasing disclosures to customers regarding the risks associated with futures trading and using FCMs to invest their funds. Futures customers, if they wish, should have access to information about how their assets are held, similar to that which is available to mutual fund and securities customers. FCMs would be required to provide current and potential customers with specific information about the FCM’s risks.
• Third, enhancing controls at FCMs regarding how customer accounts are handled, including policies and procedures on supervision and risk management of customer funds.
• Fourth, setting standards for the SROs’ examinations and the annual certified financial statement audits, including raising minimum standards for independent public accountants who audit FCMs.
• Fifth, requiring FCMs to ensure they back up segregated customer accounts with funds to cover potential margin deficits.
• Sixth, implementing a more effective early warning system for the Commission and the SROs that alerts them to certain problems, including a) when an FCM’s funds are insufficient to meet the targeted residual interest in customer accounts b) when there is a material adverse impact to the FCM’s creditworthiness and c) when there is a material change to the FCM’s clearing or financial arrangements.
• And seventh, instituting a liquidity requirement for FCMs, in addition to the existing capital requirement, to better detect FCMs that have become distressed and may put customer funds at risk.
Prior to this proposal, the Commission already made some important improvements to protections for customer funds. They include:
• The completed amendments to rule 1.25 regarding the investment of funds that bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements;
• Clearinghouses will have to collect margin on a gross basis and FCMs will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse;
• The so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse; and
• The Commission included customer protection enhancements in the final rule for designated contract markets. These provisions codify into rules staff guidance on minimum requirements for SROs regarding their financial surveillance of FCMs.
  • #68
  • Oct 23, 2012 9:15pm Oct 23, 2012 9:15pm
And I would like to say "again" that the problem is enforcement

Forget about new laws, just allow the regulators to have real time access to the brokers account. Thats it.

From their terminal a few employees at the CFTC can monitor all brokers in the USA. If something looks suspicious they can investigate.
So, you think you have rights? LOL
  • #69
  • Oct 29, 2012 5:19pm Oct 29, 2012 5:19pm
The CFTC is expected to formally submit their reform proposals to the federal register, which will once again give customers a chance to make comments. I’ll post a link once it is available. In the meantime, Futures Magazine has published an interesting article on conducting your due diligence:
http://www.futuresmag.com/2012/11/01/spotting-broker-red-flags

The article partly highlights the importance of good auditing and the benefits to traders of being able to look at the many reports that publicly traded companies have to file.

Quote
A red flag that has come up in several cases is inadequate auditing. A large futures broker or investment firm should have, if not one of the big four, an institutional level auditor. The Sam Israel Bayou Hedge Fund, Bernie Madoff and PFG scandals all used sole proprietor or inadequate auditors. While the big guys have messed up as well, a large firm managing hundreds of millions of dollars shouldn’t be hiring someone working out of his (or her) garage. If they do, it is a blazing red flag.


Quote
Publicly traded companies like MF Global have numerous reports they must file with the Securities and Exchange Commission (SEC), and, as a registered FCM, MF Global had to submit monthly segregated account reports to the CFTC. These reports can reveal a lot of information, though many of them, especially SEC filings, can be dense and hard to interpret if you don’t know what to look for. Find someone who does.

Traders should not have to do go searching for expensive accountants to conduct due diligence. They should be able to easily review a firm’s financial statements at a public website so that they can determine how healthy a firm actually is. This is a far better way to conduct due diligence than the current system which merely relies on the public statements of individuals like Russ Wassendorf. Marketing promises are no substitute for hard data. There is still time to get the CFTC to adopt such safeguards. Email [font=Calibri][size=3][color=#0000ff][email protected][/color][/size][/font] to make your own recommendations regarding customer insurance, these proposals, or any others.
  • #70
  • Nov 12, 2012 11:52am Nov 12, 2012 11:52am
The NFA has debuted its new financial reporting section on the BASIC search part of their website:

http://www.futuresmag.com/2012/11/08...-fcm-financial


Quote
Using the new BASIC system, customers will be able to view[list=1][*]An FCM Capital report, showing the most recent month’s data on adjusted net capital, required net capitals and excess net capital[*]An FCM customer segregated funds report, which will include information including the total funds held in segregated accounts, the funds required to be held in segregated accounts, excess segregated funds and the percentage of segregated funds that are held in cash[*]An FCM customer secured amount funds report, which will show the same information...

While this is a step in the right direction it still does not provide the kind of hard data that would provide traders (particularly retail forex traders) with the kind of financial numbers one gets to see in a quarterly earnings report from publically traded companies. Such a disclosure would give traders a much better insight into the health of a FCM or RFED then currently exists.
  • #71
  • Nov 12, 2012 12:39pm Nov 12, 2012 12:39pm
Quoting FCM-Reform
The NFA has debuted its new financial reporting section on the BASIC search part of their website:

http://www.futuresmag.com/2012/11/08...-fcm-financial




While this is a step in the right direction it still does not provide the kind of hard data that would provide traders (particularly retail forex traders) with the kind of financial numbers one gets to see in a quarterly earnings report from publically traded companies. Such a disclosure would give traders a much better insight into the health...
once again retail forex has been left out, any broker that deal with forex doesn't have to segregated forex funds , am i correct
  • #72
  • Nov 12, 2012 12:42pm Nov 12, 2012 12:42pm
Quoting SmallPaul
once again retail forex has been left out, any broker that deal with forex doesn't have to segregated forex funds , am i correct
You're correct. Although NFA does provide a link to net capital requirements for forex dealers on the Basic Site.
  • #73
  • Nov 12, 2012 12:53pm Nov 12, 2012 12:53pm
Quoting FCM-Reform
You're correct. Although NFA does provide a link to net capital requirements for forex dealers on the Basic Site.
does that help protect forex funds?
  • #74
  • Nov 14, 2012 11:31am Nov 14, 2012 11:31am
Quoting SmallPaul
does that help protect forex funds?
It does not.
  • #75
  • Nov 15, 2012 2:01am Nov 15, 2012 2:01am
Quoting FCM-Reform
It does not.
  • #76
  • Nov 19, 2012 11:17am Nov 19, 2012 11:17am
Last week the CFTC released their latest rule proposal to the public regarding customer funds protection for the futures industry. Once again the CFTC is accepting comments from the public:

http://comments.cftc.gov/PublicComments/CommentForm.aspx?id=1291

The comment period is slated to be open until January 14. FXCM continues to encourage forex traders to leave comments with the regulators on this matter. Retail forex has not been included in these reforms despite the thousands of customers at PFG who traded retail forex. In addition to supporting segregation of funds protection and insurance for the industry FXCM is also proposing the following:

Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry

1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter:
Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s and RFED’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have.

Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence.

Too often, those firms that are teetering on the edge of bankruptcy lure customers in by offering unsustainable gimmicks (dirt cheap commissions, account opening bonuses) that temporarily puts off the inevitable. Customers should be aware of the perilous finances of those firms that would offer these kinds of gimmicks before opening an account with such a firm. PFG Best was a classic example of a firm that used such gimmicks as they routinely low balled their competitors with uneconomical discounts that no reputable, legally compliant firm could match.

2) Require all FCM’s to Employ a Top Ten Accounting Firm:
There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet.

While no one proposal will guarantee that a future FCM will not fail, these proposals will enhance the public’s due diligence capabilities by bringing greater market transparency and accountability to the world of futures/forex trading.
  • #77
  • Nov 27, 2012 10:48am Nov 27, 2012 10:48am
The CFTC has published some early comments regarding their additional customer funds protection proposals. Here is a sampling below:
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1291

· From: Brandon Shoemaker
Comment No: 58945
Date: 11/19/2012
Comment Text:
Here are my recommendations which are a result of a consensus in the trading groups i participate. 1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter:
Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s and RFED’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that these firms have. Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily affect the regulated FCM/RFED. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence.

· From: William Allen
Comment No: 58946
Date: 11/19/2012
Comment Text:
Do we really need this regulations for companies to do what they know they should do anyway. Why is it that government regulate everything in our lives. What the hell is wrong with all you people in D.C.. Do you really feel the need to try to control everybody. Why don't we just enforce the laws already on the books and not create more regulation that doesn't do anything but make more rules that nobody understands or knows about. As far as I'm concerned, welcome to the USSA United Socialist States of Americka.

· From: Anthony Ingrassia
Comment No: 58947
Date: 11/19/2012
Comment Text:
Honorable Members of the Commission, As an independent CTA active in the forex markets, I find it unconscionable that forex account holders with FCMs that deal in both futures and forex (such as was the case with PFG Best) are omitted from or considered subordinate to those who hold futures accounts. Neither should RFEDs be exempted from these proposed changes to increase transparency. Thank you for the opportunity to comment.

You can also leave your own comments with CFTC by clicking the following link:
http://comments.cftc.gov/PublicComments/CommentForm.aspx?id=1291
  • #78
  • Nov 27, 2012 11:57am Nov 27, 2012 11:57am
Quoting FCM-Reform
2) Require all FCM’s to Employ a Top Ten Accounting Firm:
There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet.

While no one proposal will guarantee that a future FCM will not fail, these...

Quite frankly - what I would really like to see are more retail banks offering retail FX intermediary services, such that real (genuine) competition enters the market in the area of Spreads and Execution. All of the above regulatory proposals now being considered would automatically be addressed, if the industry had more retail banks involved in the business.

Why is the retail trader not able to trade through: BofA, Wells Fargo, CHASE, etc.?

If FCM's can turn a profit from retail FX, then so can these Federally Chartered retail banks. They are already regulated. The already have sufficient compensating balances to protect customer funds. They are real financial institutions - not neo-financial institutions and they will do more to uphold and protect the name of their bank and their public credibility, than any Forex "Broker."

I say that every retail FX trader should get on the phone, call their bank and request that they start offering retail Forex intermediary services to their customers. I bet there would be a flock of new business coming through the doors of such banks, if they were to make an announcement that CitiFx was not the only game in town. Spreads would get razor thin - execution would become far more efficient - accountability would soar and transparency would be unprecedented.

We need more real banks in this business.
  • #79
  • Edited 12:38pm Dec 14, 2012 12:01pm | Edited 12:38pm
FXCM has formally submitted its reform proposals to the CFTC for comment. We encourage everyone to contact CFTC as well to urge greater protections for the retail forex industry: http://comments.cftc.gov/PublicComme...m.aspx?id=1291

December 14, 2012

Via Mail and Electronic Submission

Mr. David Stawick
Secretary
Commodity Futures Trading Commission
1155 21st Street, N.W. Washington, D.C. 20581

Re: Enhancing Protections Afforded Customers and Customer Funds Held by Futures
Commission Merchants and Derivatives Clearing Organizations: (RIN3038-AD88)

Dear Mr. Stawick:

Forex Capital Markets LLC (“FXCM”) is a retail foreign exchange dealer (“RFED”) and Forex Dealer Member of the National Futures Association (“NFA”). FXCM has been registered with the Commodity Futures Trading Commission (“CFTC”) as a Futures Commission Merchant (“FCM”) since 2001 and is one of the leading U.S. firms offering off-exchange forex trading to retail clients around the world. FXCM is proud of its position as an industry leader in retail FX both in the United States and globally. FXCM has been a staunch advocate for increased regulation for the U.S. forex industry and the protection of retail forex customers. FXCM submits these comments in response to the Commission’s November 14, 2012 rulemaking proposal (the “November 14th Proposal”) concerning “Enhancing Protections Afforded Customers and Customer Funds held by Futures Commission Merchants and Derivatives Clearing Organizations.”

FXCM believes that in light of the bankruptcies of MF Global and PFG Best the regulations contained in the November 14th Proposal are necessary. However, we are concerned they do not go far enough in protecting the trading public and would therefore like to propose additional protections. Since the financial crisis of 2008, many FCMs and RFEDs have been struggling financially as the traditional business model for FCMs and RFEDs has come under enormous pressure. FCMs earn commissions on each trade their customers make; however, electronic trading has caused a price competition among FCMs that has resulted in falling commissions throughout the industry. RFEDs earn revenue on the bid/ask spread but tightening spreads in the industry have pressured RFED bottom lines as well.

Additionally, interest rates have plummeted depriving FCMs and RFEDs of a large portion of revenue derived from the interest collected on customer deposits. Furthermore, decreased volatility throughout all financial markets has lowered the amount of trading in general. This constant pressure on revenues can result in a firm making aggressive, losing bets with client funds (MF Global) or in outright fraud (PFG Best).


It is precisely because of this challenging business climate that we believe the following two proposals be given serious consideration.


Require all FCMs and RFEDs to employ a Top Ten Accounting Firm

One of the many reasons that Russ Wasendorf Sr. was able to get away with his Ponzi scheme for so long was that PFG Best had very poor internal accounting procedures. While no accounting firm is perfect, there should be much higher accounting standards for FCMs and RFEDs. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCMs and RFEDs. Whether it is top 10 or top 25, FCMs and RFEDs should use a nationally recognized and respected accounting firm that will apply the same accounting standards that publicly traded companies must meet.


Require All FCMs and RFEDs to Publish a Consolidated Balance Sheet and Income Statement
Once a Quarter

Futures Commission Merchants are very unique in the world of finance. They hold customer funds that are supposed to be in segregated accounts but they have no insurance in the event the firm goes bankrupt. The entire system revolves around trust. But with that trust violated something more must be offered to ease the investing public’s mind, specifically, a complete, fully audited, and publicly disclosed consolidated balance sheet and income statement.

Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a FCM or RFED has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCMs and RFEDs to publish a quarterly, consolidated balance sheet and income statement the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that a firm has.

Furthermore, the published balance sheet and income statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily effect the regulated entity. Each company should be required to provide a link to these financial statements on its own homepage so that the public can conduct proper due diligence.

Too often, those FCMs and RFEDs that are on the edge of insolvency lure customers in by marketing unsustainable offers (low commissions, account opening bonuses) that temporarily puts off the inevitable. If traders have access to such a firm’s income statement they will be able to see for themselves that these kinds of marketing gimmicks may not be producing revenue for the firm (or even leading to losses) and this will allow the trader to make a safer choice and also discourage firms from engaging in uneconomical business practices. One customer found this out the hard way:



http://www.huffingtonpost.com/2012/07/17/pfgbest-peregrine-customer-losses_n_1679825.html


“But Khan was not worried about risk or diversification when he moved his money to PFG Best, he said. He had been aggressively saving for years and wanted to venture into commodities, which can produce high returns though with increased risk, to further grow his $380,000 nest egg.

In December, Khan transferred all his money from a Charles Schwab account to PFG Best, attracted by low fees that were half the cost of Schwab's and the faster trading platform.”

Had customers like Khan known the poor state of the finances of firms like PFG (who routinely hard sell these illusory discounts) then such a tragedy could have been avoided.

In addition, by requiring this additional disclosure customers will be able to watch out for firms who take excessive risks and have abnormally high volatility in their earnings, and other warning signs they may not be aware of. This would require firms to be more vigilant with the risks they are taking.

PFG Best highlights the need for putting the public interest ahead of the desire of many FCMs and RFEDs to keep their financials private. FCMs and RFEDs hold customer funds in trust. If a FCM or RFED goes out of business the collateral damage to the firm’s customers and to the confidence of market participants is far worse than with your average business, which is why the standards need to be much higher. In short, any FCM or RFED that holds customer funds in
trust needs to accept the costs that come along with that trust.

FXCM appreciates the opportunity to offer these comments to the Commission on the November
14th Proposal.



Sincerely,



Drew Niv
Chief Executive Officer
Forex Capital Markets LLC
55 Water Street, 50th floor
New York, NY 10041
  • #80
  • Dec 24, 2012 11:45am Dec 24, 2012 11:45am
The National Futures Association has put forth some additional customer "safeguard" rules in light of the of the bankruptcies of MF Global and PFG. Again, these are steps in the right direction but we believe requiring firms to publish a quarterly, audited financial statement to be a more effective and comprehensive public safeguard.

http://www.nfa.futures.org/news/memb...12/121912.HTML
NFA enhances monitoring of FCMs, amends forex capital requirements

At its November 15 meeting, National Futures Association's (NFA) Board of Directors approved two measures that will further enhance customer protection safeguards. The first measure will enable NFA to make better use of technology in order to better monitor futures commission merchant (FCM) segregation compliance. Secondly, NFA's Board approved rule amendments to increase the capital requirement for FCMs acting as counterparties in off-exchange foreign currency (forex) transactions with eligible contract participants (ECP).
FCM daily confirmation system

Earlier this year, as part of NFA's ongoing effort to further safeguard customer funds, NFA's Board approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated and secured amount funds-including banks, clearing FCMs, broker-dealers and money market accounts-to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCM's designated self-regulatory organization (DSRO). The DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to identify any material discrepancies.

In November, NFA's Board approved amendments to Financial Requirements Section 4 in order to implement this new daily confirmation system. The new amendments will require an FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances to a third party designated by NFA. The amended rule also states that in order for a depository to be deemed acceptable, it must report the FCM's customer segregated and secured amount balances and cleared swaps customer collateral balances to a third party designated by NFA.
The daily conformation system is still under implementation, but the first phase, beginning with banks, is expected to be implemented by December 31. Other categories of depositories will be added in 2013.

Increase in capital requirements for FCMs acting as counterparties in forex transactions with ECPs
Over the past year, NFA has observed that several NFA Member FCMs are almost exclusively acting as counterparties to forex transactions with ECPs. Specifically, three FCM Members have ceased to act as forex dealer members (FDM) but continue to act as counterparties to forex transactions with ECPs. Because these firms do not act as a counterparty to retail forex transactions, their minimum adjusted net capital requirement is only $1 million pursuant to NFA Financial Requirements Section 1.

Given the counterparty nature of these FCMs' forex activities, NFA is concerned that these firms are currently subject to inadequate capital requirements. Specifically, NFA believes there is no sense from a financial safeguard perspective that an FDM that acts as counterparty to a retail forex transaction must maintain at least $20 million in adjusted net capital while an FCM that engages in an identical type transaction with an ECP must only maintain a minimum $1 million in capital.

Therefore, NFA's Board approved an amendment to Section 1 that includes a provision requiring an FCM that acts as counterparty to a forex transaction with an ECP to maintain adjusted net capital of at least $20 million. This amendment was submitted to the Commodity Futures Trading Commission for approval on November 20.
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