Proposed NFA Capital Requirement

[forexsavior]

I Trade FX has officially come out in favor of the new proposed capital requirement with an impressive statement below. It is a statement no other firm has made to date. There was no equivocation or spin in their support for the rule. As such I will be removing them from the dead pool and request that the moderators delete them from the list. You have my congratulations I Trade.

I Trade FX Press Release
I-Trade FX experiences growth in excess of 700% for 2007.
Orlando, FL- August 15th 2007 – I-Trade FX, LLC, one of the nation’s leading Forex Brokers and provider of currency trading services for large and small institutional and individual investors, announced today that I-Trade FX has seen exceptional growth in 2007, with current revenues in excess of 700% year-to-date from 2006.

Mr. Martinez, Co-Founder and President stated, “I-Trade FX was founded by a very talented and experienced management team with over 75 years of experience in the investment banking arena. It is our mission to deliver a higher standard of dealing practices and customer service to the industry.” Mr. Martinez continued, “I clearly believe that after salvaging relationships with approximately 3,000 clients acquired from CFGTrader, the industry has no choice but to realize we are a major competitor.”

I-Trade FX welcomes and is in full support of the NFA’s most recent proposal to raise the minimum capital requirement from $1 million to $5 million for Forex Brokers. “Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client,” reported Mr. Martinez.

 

[forexsavior]

Quote from forexsavior:

I Trade FX has officially come out in favor of the new proposed capital requirement with an impressive statement below. It is a statement no other firm has made to date. There was no equivocation or spin in their support for the rule. As such I will be removing them from the dead pool and request that the moderators delete them from the list. You have my congratulations I Trade.

I Trade FX Press Release
I-Trade FX experiences growth in excess of 700% for 2007.
Orlando, FL- August 15th 2007 – I-Trade FX, LLC, one of the nation’s leading Forex Brokers and provider of currency trading services for large and small institutional and individual investors, announced today that I-Trade FX has seen exceptional growth in 2007, with current revenues in excess of 700% year-to-date from 2006.

Mr. Martinez, Co-Founder and President stated, “I-Trade FX was founded by a very talented and experienced management team with over 75 years of experience in the investment banking arena. It is our mission to deliver a higher standard of dealing practices and customer service to the industry.” Mr. Martinez continued, “I clearly believe that after salvaging relationships with approximately 3,000 clients acquired from CFGTrader, the industry has no choice but to realize we are a major competitor.”

I-Trade FX welcomes and is in full support of the NFA’s most recent proposal to raise the minimum capital requirement from $1 million to $5 million for Forex Brokers. “Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client,” reported Mr. Martinez.

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Before Moving On

Before moving on from I Trade FX I wanted to comment further on the Press Release (included below), which is so close to the points I have been making that quite frankly I could have written it myself.

What impresses me is that unlike other firms that have said "well should the rule pass we'll meet the new requirement" I Trade FX addressed the undercapitalization issue head on. I Trade FX's President said "Undercapitalized firms dramatically increase risk for the investor. Raising the capital requirements will substantially reduce the risk to current and future clients that open accounts and will provide greater security for the client." This goes to the heart of the proposed NFA capital requirement which is that firms that are poorly capitalized are at far greater risk than firms that are well capitalized. This makes it clear I Trade FX gets it and is now taking a position of leadership on this issue. And as a result the industry has no choice but concede that I Trade FX is indeed a major competitor.

 

[forexsavior]

On Tap for Next Week

What a wild ride it has been the last few days in the market. Sadly, some traders have missed out on all the action. Specifically, the traders of Tradex Swiss AG. Tradex is apparently under investigation and there is some kind of account freeze for customers. Next week I’ll talk more about the Tradex case and also discuss the perilous state of FX regulation in Switzerland.

Also, I’ve been getting a lot of tips and private messages about One World Capital. Something is afoot at One World and I’ll share with everyone what I have learned thus far.

 

[forexsavior]

MG Comments on Capital Requirement

Money Garden has gone public with a statement about the proposed capital requirement rule over at Forex News:
http://www.forexnews.com/fxforum/forum/forum_posts.asp?TID=1722&PN=1

Unfortunately, the response was rather underwhelming and for the most part brushed off the severity of the current capitalization problem in the industry. Of course, being poorly capitalized according to CFTC reports, that's exactly the kind of answer one would expect from MG. But to their credit they have indicated they will be upping their reported capital on the next CFTC report so let's wait and see what the next report has in store for them.

However, their initial response to the proposal indicates a firm that doesn't quite get what has been going on in the industry these past few years. MG states they are "not opposed to increased Net Capital Requirements..." That's not exactly a ringing endorsement for the proposal. MG then focuses in on accounting standards, which everyone agrees need to be tightened up. Indeed, I wholeheartedly agree with this MG statement, "From reading the second part of the NFA proposal on internal controls, it is alarming to learn that there are firms out there which lack any of the requirements that NFA is only now going to enforce."

But I find the following statement to be wholly revealing of MG's ignorance of the issue, "Sound business practices and internal controls are the decisive factors that are much more important than an increased net capital." Wrong. As the NFA has demonstrated sound business practices and internal controls are often directly related to net capital. Firms that are not well capitalized are far more likely to cut corners and not implement proper internal controls. That is the lesson from the demise of such firms as CFG. I find MG's obtuseness to these kinds of examples to be very disturbing.

All in all MG's statement is a dodge. Unlike I Trade FX, Gain Capital, Interbank FX and others there is no recognition of the seriousness of the capitalization problem the industry is currently facing. Certainly there are other issues that need to be addressed (in particular dealing practices which MG touched upon in their interview.) But none are more serious than capitalization. As such, MG's statement is a big disappointment.

 

[forexsavior]

Crunching the Numbers

One of the more interesting comments made about the proposed capital requirement was made by Todd Crosland of Interbank FX who said, "The NFA has proposed to raise the minimum net capital requirement to $5 million. If you offer greater than 100:1 leverage, you would have to maintain two times that amount, or $10 million." It's a point I have not stressed enough.

The minimum initial capital requirement is not the only capital requirement that firms have to make. There are other requirements as well and when they are added together they can quickly total $10 million. Let's do the math:

Should the proposal pass the following requirements will have to be met:

1) Minimum Initial Capital Requirement: $5 million

2) Requirement that firms offering 100:1 leverage set aside 10% of customer assets in additional capital. Assuming a firm has $30 million in customer assets: $3 million

3) CFTC concentration charges on outstanding open positions which can range from 6 to 20% of total net exposure. Assume a firm has $50 million in net exposure then 6% of 50 million would be: $3 million

As you can see when you add up all the various capital requirements most firms will need in excess of $10 million to be compliant. These cold, hard numbers are staring many of the poorly capitalized squarely in the face and no amount of spin can make them go away.

 

[forexsavior]

Switzerland's Swiss Cheese Regulation

For all the problems that exist in the U.S. domestic retail forex market they still pale in comparison to the problems that exist in the unregulated retail forex market. And it is here on the periphery of the respectable forex world that a whole host of firms operate outside any kind of regulatory scrutiny providing their customers with scant funds protection or any means to conduct any form of due diligence. In short, these firms are the damned of retail fx and woe be to the trader who opens an account with one of them since they are merely playing a game of Russian Roulette.

In the last few years firms have set up shop in unregulated locales all over the world from the Cayman Islands to Cyprus. From the British Virgin Islands to the Philippines to Belize. Yet no part of the world has attracted more unregulated forex broker dealers than has Switzerland.

Ah, Switzerland. Land of fine watches, exhilarating ski slopes and tasty chocolate. Renowned for its banking prowess and for being a pillar of international finance. On the face of it seems like Switzerland would be an ideal place to open a forex business since the Swiss of all people should be very knowledgeable about this most complicated of financial instruments. But that facade is easily torn away once you do some further digging and discover that the vast majority of Swiss forex broker dealers are not in the least bit regulated and for the most part are completely ignored by the Swiss Regulatory Establishment.

"But I go to the websites of these Swiss brokers and see all sorts of regulatory Acronyms referenced. What is that all about?"

Good question Smithers. You see, while Switzerland is well known for being a haven for high finance they are also well known for being a haven for drug kingpins, terrorists, Ex-Nazis on the run, deposed third world dictators, former Refco/Enron Executives and other money launderers and money swindlers as well. So to counter the problem the Swiss government requires any firm that holds customer assets belong to a self-regulatory body which requires member firms to obey certain anti-money laundering guidelines. There are a whole host of these organizations from OAR-G to Polyreg and ARIF. Membership in these associations does not mean the association is checking in on how the firm runs it forex business. Nor can one go to any of these organizations to ask for background information on their member firm. And if the firm goes bankrupt these associations could care less about helping you get your money back. In short, these anti-money laundering organizations are useless to the average forex trader. Listing membership in such an organization is in my opinion patently offensive since membership in that organization is of no benefit to traders.

There is one government body however that does regulate forex trading in Switzerland: The Swiss Federal Banking Commission. True, they regulate banks but they also offer licenses to Securities Dealers as well. Synthesis Bank has just such a license. You can also verify that license by going to the SFBC's website directly: http://www.ebk.ch/e/index.html

Yet the majority of Swiss forex brokers are not licensed by the SFBC because as the SFBC states on its own website (http://www.ebk.ch/e/faq/faq1.html) "Foreign Exchange dealers, provided that they exclusively deal in foreign exchange, are not subject to supervision by the SFBC." That lack of "supervision" is on full display right now in the case of Tradex Swiss AG (http://www.tradexfx.com/).

Tradex Swiss AG
Earlier this year the NFA barred Tradex from soliciting clients in the United States due to the fact they were not properly registered (http://www.nfa.futures.org/BasicNet/Details.aspx?entityid=0350721&rn=Y). As a side note the head of the Boston office of Tradex, Craig Karlis, is apparently trying to move on to bigger and better things. Several times this year Karlis tried to register a new firm by the name FX Nation Inc only to withdraw the FCM application with the NFA (http://www.nfa.futures.org/BasicNet/Details.aspx?entityid=0375959.) The latest withdrawal being as recently as July 30, 2007. Considering people can't even get money out of the last firm he was involved with you would think Karlis would know when to call it quits. Talk about churn em and burn em.

Anyway getting back to the main actor, Tradex Swiss AG. It appears that Swiss authorities shut them down. Although since Tradex has been very tight lipped it is hard to tell what is going on: http://www.hra.sz.ch/cgi-bin/fnrGet.cgi?fnr=0203027861&amt=130&lang=1&hrg_opt=11000&shab=0000000
But the bulletin boards have been flooded with angry customers (http://www.forexfactory.com/showthread.php?t=10894) who can't get their money out. And Tradex is not exactly going out of their way to provide their own traders with any information. One click on their website and all you get is this very disturbing message:

Dear Tradex Swiss AG Clients
Due to technical reasons, we wish to inform you that for the time being, we cannot accept any new account opening requests, or receive payments on existing accounts. For the same reason we also request all clients to close any open positions on their accounts, and to refrain from trading until further notice. We apologise for any inconvenience caused, and we expect to restore all operations in the near future.

Some inconvenience! Such is the peril of investing with an unregulated Swiss Broker. When things go wrong you are completely in the dark with no one to turn to. One day you are trading with such a firm, the next you go to the website and it is kaput while your funds are lost in purgatory.

The lesson? Avoid unregulated Swiss Brokers. The following Swiss brokers, like Tradex Swiss Ag, are not regulated:

WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk.

 

[meatstick]

Quality post good Sir. Thank you.

 

[forex162]

Quote from forexsavior:


Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk. [/B]

Thanks for the update. I briefly considered opening an account with Crown Forex since they promised "zero swaps", a.k.a. you don't buy or pay interest. Yet after reading horror stories in the forums, you would probably do well staying away from what all accounts say is a chop shop.

 

[forexsavior]

One World Forex with One Foot in the Grave

A few months ago the NFA filed a complaint against One World Forex that stated among other things, "One World lacked an understanding of, or was inattentive to, regulatory requirements and was ill prepared to accept customer business as either an FDM or an FCM. The firm had not established adequate systems to enable it to handle customer funds or comply with customer reporting requirements."
http://www.nfa.futures.org/basicnet/Case.aspx?entityid=0359973&case=07BCC00017&contrib=NFA

Well, with each passing day One World appears to be vindicating the NFA’s assessment as they continue their death spiral downward. The last few weeks I have been flooded with tips about One World Forex. No other firm in the Dead Pool has generated more feedback. And all that feedback has been overwhelmingly negative. But I have been holding back waiting for a clearer picture to emerge. However, this thread at an obscure bulletin board has provided me with the Smoking Gun on One World:
http://www.goldenmoneytree.com/forum/viewtopic.php?t=692&postdays=0&postorder=asc&start=100

First my sources combined with the users on this thread indicate that One World is having severe problems with customer transfers/withdrawals. The reason why is unclear. It could be due to One World’s changing bank accounts from Citi to Bank of America. Or it could be that One World’s books are such a shambles that we may have another CFG on our hands. There is no way to tell right now. However this customer of One World said the following:

“Day 21: Still haven't granted my redemption request. I am so angry now that I don't know if I should still expect to get my money. Last week Jack Walsh said they are having problems or that they still cannot accomplish international wires and blamed it on bank of america. They said hopefully they could do it within the next 40 minutes but until today, it still hasn't been deducted from my account. I don't know why they singled me out to do this to me. Is it because I'm far away and won't sue them because it would be more expensive than my $18,950 that I'm trying to withdraw? I called the NFA and the guy I spoke to states that it is no guarantee that I would get my money back, he says it depends on the agreement with one world that I signed. Well, there's an expensive lesson for not reading the fine print. In my country $18,950 is roughly 900,000 pesos. And that wasn't my entire account with them, I still have $2,756 that I don't know if they'll give back to me. It's my entire savings since I was a child. Although it won't hurt my lifestyle since I still live at home, IT SURE HURTS!
Am I just supposed to sit back and lose my money? I thought I was safe with an american nfa registered broker. The guy from the NFA said he would send a team over to one world but again, he says, there is no guarantee. He said I could file a complaint or he could send me an arbitration kit. This is so sad news for me, and a sad realization. Suddenly, my dreams of having time freedom and doing this full time comes shattering. How do I really know which broker to trust? Will I ever get my savings back?

Day 22: My boyfriend called one world again. They said to wait until next week because they are having management problems and that almost all accounts are under review and that my account is one of those under review. I'm guessing that next week, they'll tell me to wait until next month, and then until next year...I wonder what went wrong and wonder if this is finally the truth. the NFA hasn't gotten back to me yet.

Other traders have sent me private messages confirming the rough shape One World is in. The word on the street is that the situation at One World has become so dire that a large chunk of their sales force resigned because they hadn’t been paid for two months. Other traders are reporting non-responsive customer service, emails that go unanswered and phones that keep on ringing. All the signs of a firm in its last death throes…

The bottom line is when you can’t return a customer’s money when they ask for it you are finished in this business. One World may be able to limp on indefinitely but it is hard to see this firm making a comeback to respectability. Barring a fat sugar daddy willing to pump in ten million dollars this firm’s days appear to be numbered.

 

[KVincent]

I've found this thread to be most informative but a sad commentary on the industry as a whole. A frequent visitor to the NDD forum, it's apparent to me that Forexsavior and Forexscholar are one in the same. I don't doubt for a minute that the industry is going through a major shakeup but why desn't the individual throwing stones at the little guys identify himself and his affiliations. As to the notion that Forexsavior [Forexscholar] doesn't work for FXCM, let's get real. If he didn't work for them, as self- assured and aggressive a writer as he is, he would most certainly have challenged the outing when it occurred in mid-July. He didn't.

Just a couple of observations here.

1. Early on in this thread, a representative of MBTrading clearly identifies himself as such, Forexsavior (aka Forexscholar) continues to post as though he were some sort of disinterested party. This, to my way of thinking, doesn't invalidate what Forexsavior is saying; it only colors his comments self-serving and, therefore, disingenuous. If he came out of the closet, what he has to say could and would be put in its proper perspective.

2. Forexsavior cites all sort of negative NFA news about brokers but fails to cite sanctions taken against brokers like FXCM. The firm was hammered last December for virtually the same misrepresentations it was cited for a year ealier. Question arises. Who would you prefer to do business with? A rich con artist or a modestly capitalized (not undercapitalized) broker who has never been caught misrepresenting itself.

3. In response to one member's expressed concern about broker's misconduct in this thread, Forexsavior basically dismisses the thought basically saying that the NFA has more important things to do. To my way of thinking, the gorillia in the room isn't the poorly capitalized FCM, it's the pick pocket who accompanies the trader every where he goes.

4. The entire brokerage community appears to be in trouble. When Phil Davis posted a snapshot of FXCM's traffic rating over the past five years, I was frankly shocked to see that over the past 8 months their traffic has dropped by roughly 75%. But that's the tip of the iceberg. A quick check of the traffic ratings of those FCMs with $5M or more in assets reveals a strikingly similar trend. Most now have traffic ratings which while sky rocketing up to the end of 2006, are now lower than what they had four years ago.

5. I don't want to pick on FXCM but they seem to be a easy target here. They have, for instance, been claiming for well over six months now that they have 90,000 active traders. How does that square with a 75% drop in website traffic?

I know. I know. Alexa traffic ratings don't really reflect actual traffic but most in the world of SEO will tell you that Alexa traffic ratings are a good indicator when it comes to trends. Whether the downward trend can be traced to the great Refco awakening or a general feeling on the part of traders that the industry just has too much smoke and too many mirrors is anyone's guess.

IMHO.