NFA Forex Dealer Dead Pool

[forexscholar]

The news about the NFA shaking up the forex industry by dramatically raising capital requirements has kicked off a lot of speculation. So I gathered everything I have learned about this new NFA proposal and am posting here for your review. As someone who has been burned by a bankrupted forex broker I can tell you it is not a pleasant feeling to watch your funds get sucked into some black hole. So my advice is to stay away from any firm that is not currently meeting the coming $5 million capital requirement. And if you already have money at such a firm, get it out, now. If you don't, you could end up like the poor souls at United Global Markets (UGMFX) who can't get their money out due to an NFA account freeze: http://www.forexfactory.com/showthread.php?t=35197

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

Healthy Forex Firms
FXCM ($51,000,000)
GFT ($48,000,000)
Oanda ($44,000,000)
FX Solutions ($20,000,000)
Gain Capital ($20,000,000)
CMS ($10,000,000)

Dead Firms Walking
One World Capital ($1,105,000)
Velocity4X ($1,587,000)
Direct Forex LLC ($1,523,000)
FiniFX ($1,464,000)
Forex Club ($3,304,000)
GFS Futures & Forex ($3,074,000)
Nations Investments ($1,699,000)
Royal Forex Trading ($1,102,000)
SNC Investments ($1,565,000)
MB Futures ($3,080,000)
Money Garden ($3,399,844)
United Global Markets (Bankrupt)

Here is the actual NFA proposal to raise capital requirements (below that is the sad email from the CEO of UGMFX stating the firm is going under.) The CFTC is expected to sign off on it this summer. I'll comment further on the proposal in a future posting as it will actually require most firms to have upwards of $10 million in capital when you take into consideration such things as open customer positions and margin levels. In any case, this should be sober reading to anyone who is currently trading at one of the "Dead Firms Walking."

NFA Proposal
The proposals pertain to the minimum adjusted net capital requirement and the concentration charge and set certain requirements for FDMs' internal financial controls.

Minimum Adjusted Net Capital and Concentration Charges

In the past twenty years, there have been nine FCM insolvencies. Since 1990, there have been only two insolvencies by traditional FCMs trading on U.S. exchanges, and no funds in segregated customer accounts were lost in either of those two instances. This is from a population that averages around 250 (over the last 20 years). Even in the Refco matter, the FCM filed for bankruptcy not because customer funds were at risk but, rather, to facilitate the sale of its assets and the transfer of its accounts in connection with the parent company’s insolvency.

The FCM insolvency rate becomes more troubling when FDMs are added to the mix. Of the three bankruptcy or receivership proceedings for insolvency occurring in the last four years, two have involved FDMs (Refco was the third), and they are drawn from the smaller FDM population (averaging around 40). Specifically, in late 2003, an FDM misappropriated almost $2 million of customer funds, which depleted the amount of assets necessary to meet the amounts owed to customers. The Commodity Futures Trading Commission ("CFTC") is still working to try to get back some of the customers’ funds. More recently, NFA took a Member Responsibility Action ("MRA") against an FDM whose liabilities exceeded its assets by over $1 million. The CFTC also brought an emergency action in U.S. District Court, and the Court immediately appointed a receiver who was subsequently able to sell the FDM’s customer accounts. Due to this sale, it appears that the customers were made whole.

This discrepancy between FDMs and FCMs involved in on-exchange transactions is even greater when looking at the number of financial MRAs NFA has issued in the last ten years. During that period, NFA issued twelve MRAs to FCMs for failing to demonstrate compliance with NFA’s financial requirements. Three of these firms were traditional FCMs with an on-exchange business, one was a forex dealer registered as an FCM prior to the advent of the FDM category, and the remaining eight were FDMs.

NFA's concern that one day an FDM might be unable to meet its financial obligations to its customers has heightened as the amount of retail customer funds held by FDMs has increased to over $1 billion. The above described FDM insolvencies have done nothing to abate this concern, particularly with the most recent occurring just months after the $1 million capital requirement became effective. If the receiver had not sold the FDM's accounts, then twice within less than four years customers of FDMs would have lost funds due to an FCM insolvency. Additionally, since March, eight different FDMs have fallen under the early warning requirement of $1.5 million.

One of the reasons for the 2006 increase to the FDM capital requirements was that an FDM’s dealer activities create greater financial risks than the agency transactions involved in traditional exchange-traded futures and options. A second reason is that the need for adequate capital is particularly acute for FDMs since customers trading off-exchange forex have not received a priority under the Bankruptcy Code in the event of a firm’s insolvency. Both of these reasons still exist.

NFA is not alone in recognizing the increased financial risk of acting as a dealer. Congress recognized that acting as a dealer increases financial risk and requires substantially higher capital on the part of the dealer. Pursuant to Section 4c(d)(2)(A) of the Commodity Exchange Act (the "Act") the grantor of a dealer option must maintain at all times a net worth of $5 million. The Commission has likewise recognized the increased financial risk resulting from being a dealer, imposing an adjusted net capital requirement of $2.5 million on leverage transaction merchants ("LTMs").[1]

When the Commission adopted the financial requirements for LTMs in 1984, it noted that the leverage market is "essentially a principals' market" and that the "purchaser of a leverage contract is solely dependent on the LTM for performance on the contract."[2] This is the exact same situation that customers are in when they purchase or sell currencies with an FDM. Further, as with an LTM, an FDM "takes the other side of every [contract] entered into by a [customer]" and the FDM "is the sole guarantor of performance on the [contract]." When trading with an FDM "there is no clearing organization to take the other side of every trade, no FCM guaranty of variation margin to the clearing organization and no clearing organization guaranty fund and assessment power."[3] Due to these factors, the financial requirements for FDMs, like LTMs, must be substantially higher than those for FCMs engaging in agency transactions.

As noted above, the Commission imposed the $2.5 million capital requirement for LTMs in 1984. Based upon the Consumer Price Index, $2.5 million in 1984 dollars would be worth approximately $5 million today. Accordingly, NFA is proposing to raise the minimum adjusted net capital for FDMs to $5 million. An increased capital requirement would result in an FDM having a larger buffer to meet its obligations to its customers. Additionally, an increase in capital requirements for FDMs would ensure that FDMs have a larger financial stake in their forex business.

Mr. Stephen Leahy
Chief Financial Officer
United Global Markets, LLC
20 Park Plaza, Suite 1000
Boston, MA 02116
Tel # (617) 357-5122
sleahy@ugmfx.com


Dear Valued Client:

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

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

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

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

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

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

[FRiverola]

Hi Forexscholar

Here you have attached what I just post in my blog http://weblog.fxstreet.com/ regarding this issue.

It seems that the winds of change are not just affecting the US but Switzerland as well

Keep tuned

Francesc


Hi Everybody

I’ve got an e-mail from a very reliable source that I wanted to share with you.

He is talking about growing rumour in the market that NFA is going to raise capital requirements for FX brokers. This rumour have dramatically raised traders concern that brokers with less capital than $5 million could be forced to shut down or even worse, to go bankrupt making people loose their money.

Here I’m reproducing my colleague’s e-mail for you as I consider this a very important issue to closely follow in the next months

”Dear Francesc

NFA has been coming down pretty hard on the Forex industry lately. They have shut down 4 brokers so far this month, due to fraud and/or lack of funding, and they are just warming up.

As far as I know, the names of the brokers that were shut down in June are the following:
FX Option Inc.
Spot FX Clearing Corporation
Trend Commodities Limited
United Global Markets

I've been receiving information from some reliable sources, but it's not confirmed yet, but it seems like NFA will shut down any broker that has less than $5 million in funds.

I am not sure of the exact time frame, but it seems like in the next month or two. That's not the real problem. The real problem is that I believe some of these bucket shops are not well managed, and when the time comes that they have to go out of business and give all the money back to their clients, they may not have enough. Or even if they do, it's entirely possible that some of their CEO’s may run away with the funds offshore.

So I suggest that you check on your broker's financial capability by going to this link.

http://www.cftc.gov/files/tm/fcm/tmfcmdata0704.pdf

Don't get me wrong, I do believe that some serious firms that currently don't have enough funds could get enough funds to meet the requirements, but I do think that your safety of funds in some smaller firms could be under risk.

The rumour on the street that NFA will raise capital requirement to 9 million by end of this year, but it's still a rumour. If that happens, I am sure we'll have most small Forex brokers go out of business, and we'll probably only have 15 or 20 left, which I think is a good thing. “

Also, please read in interesting post from forexscholar I´ve found today at FXstreet’s Forum. He goes in the same direction than my colleague:

http://www.fxstreet.com/forum/showthread.php?t=1005

All the best

Francesc

[forexscholar]

Another important point to keep in mind is that $5 million is just the initial minimum capital requirement. In addition to this requirement regulators also require brokers to set aside 10% of all customer assets aside in addition to the $5 million requirement. That means that a firm with $30 million in customer assets will have to set aside an additional $3 million. Then there are concentration charges the firm must also set aside capital for. Altogether that means most firms will need at a minimum TEN MILLION DOLLARS in net capital to survive. Judging from the Dead Firms Walking list none of those firms are even remotely close to meeting these requirements. If anything, the situation is much worse than it appears. Again, if you have money with a smaller firm talk to your broker and ask them these questions. After all, its only your money at stake.

[FXDementor]

Also note that even if NFA never raises capital requirements lot of people aware of the proposal would take off the money from the brokers that don't meet the requirements.

Regards,
FXD

[forexscholar]

Well, it looks like the forex dead pool is about to claim its first two victims. Read it and weep.

The NFA has issued serious complaints against two small, undercapitalized firms.

The first is Advanced Markets (Amifx). The NFA says in its complaint, “On June 28, 2007, NFA issued a Complaint charging AMI with cheating, defrauding or deceiving another person or attempting to do so and failure to observe high standards of commercial honor and just and equitable principles of trade. The Complaint also charged AMI with failure to maintain required adjusted net capital; failure to take required charges; failure to collect and maintain required security deposits; failure to file accurate weekly reports; and failure to maintain accurate records.”

http://www.nfa.futures.org/basicnet/...px?seqnum=1251

What is even more frightening is that Amifx has only $1,020,000 in capital. Could this be ANOTHER UGMFX?

The second is against Bacera Corporation (whoever they are?) But just like UGMFX Bacera looks like they got no money left. On June 28, 2007, NFA issued a Complaint charging Bacera with failure to give required notice; failure to maintain required adjusted net capital; failure to take required charges; and failure to maintain accurate records. The Complaint also charged Bacera with cheating, defrauding or deceiving another person or attempting to do so and failure to observe high standards of commercial honor and just and equitable principles of trade. Finally, the Complaint charged Bacera, Wong, Hsu and Valdivia with failure to supervise.

It seems like these smaller firms are going under on a weekly basis. I'll keep everyone posted as the dead forex firms walking continue to die off...

[forexscholar]

As I continue to update the dead forex firms walking list I'm amazed how many people think fraud and undercapitalization are completely separate issues. Often times they are not. The reason is quite simple: firms that are committing fraud are not known for having legible books. And Vice versa. Firms that have a hard time maintaining their capital requirements will often cut corners and commit fraud to keep their firms from going under. Finally, smaller firms simply don't have the money to maintain the kind of large legal and compliance staffs necessary to keep up with the battery of regulations being issued by the NFA and CFTC. And of course some firms are just plain incompetent. All these factors have come to a head with Forex Dealer Dead Pool Member One World Capital, who is now in serious trouble with regulators.

To see the full report on One World's misdeeds you can click on the NFA's report yourself: http://www.nfa.futures.org/BasicNet/...px?seqnum=1190

I have highlighted some of the worst allegations below. After reading through them I think you'll understand why One World is on the dead firm's walking list and why that should be serious cause for concern for anyone who has an account with them or any firm like them.

"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."

"The firm was unable to properly account for its liabilities to its forex customers." (Insert appropriate jaw dropping sound. This is the text book definition of a firm destined to go bankrupt.)

"In addition, NFA's audit found that One World and Walsh [Principal] provided false and misleading information to NFA auditors concerning an individual names Charles Martin and his role at One World. Walsh said Martin had no involvement in the firm. However, NFA subsequently learned that Walsh's claim was untrue and that Martin was, in fact, heavily involved in the operations of One World and solicited customers on its behalf." (Who is Charles Martin you ask? The NFA states Martin was turned down to be a principal before because of a "felony drug conviction and a misdemeanor theft conviction.")

It goes on and on, misleading promotional materials, outright lies to regulators, failure to report capital and maintain any semblance of book keeping standards. In short, One World is a classic Dead Forex Firm walking. Firms like One World are the reason the NFA is going to raise capital requirements. And when they do, does anyone honestly believe the One World's of the world will survive?

[FRiverola]

Forexscholar

I´m very interested in this issue so I´ll keep following this thread for new updates you may had about the subject

Thanks for the info!

Francesc

[forexscholar]

Another day, another small forex broker dealer shuttered. But before we start throwing dirt on the coffin of forward forex let's take a peak inside and perform an autopsy on the cadaver. For some its old news but for those concerned about the fragile state of the forex industry I think a proper examination is in order. For starters, why and how did this firm get shut down by regulators?

Forward Forex was granted a NFA license in January of 2006.
http://www.nfa.futures.org/BasicNet/...tityid=0362887

On June 18, 2007, the NFA began its examination of Forward Forex and met its CEO, Onelio Manuel Murias. Murias stuck around for an hour after the NFA arrived and then apparently slipped out the back door. He has not been seen since. That's right. As soon as the regulators showed up at his door to look at his books the CEO of the company fled! It's like an episode of "To Catch a Predator" where Chris Hansen breaks out the cameras and the perps go running. So the NFA goes over and speaks with another AP/Principal of the firm, Marshall David Wertheim. Wertheim then tells the NFA that he didn't even know he was an Associated Person and just entered trades in the dealing room. And this guy was legally listed as an AP of the firm?! The rest of the audit consists of the NFA desperately trying to get basic book keeping information only to be told by clueless employees that "we know nothing." Finally Murias' lawyer followed up with the NFA and after a round of Monty Pythonesque negotiating conclude that Murias will not be responding to queries. Hard to believe right? See it all for yourself:
http://www.nfa.futures.org/BasicNet/...px?seqnum=1269

This goes right to the heart of what I have been saying these past few weeks. The National Futures Association has been inundated with this kind of activity amongst smaller, undercapitalized broker dealers (for the record Forward Forex had only $1.8 million according to the latest CFTC report.) When you don't have any capital you skimp on things like, oh, well, accountants, compliance staff, Associated Persons... This company was a complete farce. But if you are an ordinary trader how can you really tell? Before this scandal broke they were registered with the NFA and were meeting their minimum capital requirements. I'm sure they had some smooth talking salesmen spinning stories about how well regulated they were. So from the outside it looked ok, right?

Wrong. This is why the NFA is dramatically raising capital requirements. They are tired of dealing with these flimsy, undercapitalized firms. The very fact that the NFA is raising capital requirements should tell you that they have very little confidence in firms with net capital below $5 million. This isn't my opinion. This is the NFA's own opinion. And if a regulator thinks that then the average trader needs to think long and hard before putting their hard earned money in the bank accounts of any of the dead forex firms walking.

One last point. It has been said by some that after the NFA decides to raise capital requirements that there will be an orderly process for unwinding the smaller brokers who can't make the cut. Really? What's to stop the Murias' of the world from bolting with the company's funds and fleeing the state or country once they know the jig is up? The NFA couldn't even get the CEO of forward forex to answer some simple auditing questions and they're going to be able to keep some of these bucket shops out there from fleeing with customer assets? This whole Capitalization issue has the potential to be a real train wreck. So do yourself a favor and keep a sharp eye out on the dead forex firms walking.

P.S. To those firms on the dead forex firms walking list just put up the money now. Why put your customers through the agony of not knowing whether or not your firm is going to make the cut?

[forexscholar]

Having put myself in a good mood chuckling over the antics of Forward Forex I have decided to exhume some other FX broker dealer corpses, all for the benefit of the general trading public of course. The point? To emphasize why regulators are so concerned about firms that are undercapitalized.

The term "Maggot Mile" (http://www.forbes.com/forbes/1985/0520/038_print.html) refers to a stretch of land running from Boca Raton to Miami, Florida. Within these geographic boundaries lies one of the greatest concentrations of wealth in the world (held by American retirees.) And preying on these often naive denizens are thousands upon thousands of crooks, criminals, crackpots and con-men. Forex happens to be the financial instrument of choice at the moment for these petty thieves in suits. Back in the 1980's these same hucksters were peddling "oil lease scams" and in the 1990's during the big stock boom they peddled bogus internet stocks. The actual financial instrument being sold is of little consequence to these crooks out on the hustings since the instruments can be interchanged with whatever the latest marketplace fad happens to be. The main point is that regardless of whatever the huckster happens to be selling it is guaranteed to make the victim millions of dollars. It's the oldest sales pitch in the book.

Which brings us to our first slimy customer: Worldwide Commodity Corp in Ft. Lauderdale.
http://www.nfa.futures.org/BasicNet/...tityid=0291471

The owner of Worldwide was one Steven Labell. A quick look at Labell's resume should have sent the average investor screaming in terror. Labell has worked for one crooked operation after another. The firms Labell has been associated with showcase a rogue's gallery of compliance outlaws:
http://www.nfa.futures.org/BasicNet/...d=0189993&rn=Y

JCC INC (License Revoked in 1994 after massive commodities Fraud)
FSG International Inc (License forfeited in 2003 after being sanctioned for Fraud)
Financial Services Group Inc (License revoked in 1987 after massive commodities Fraud)
South Coast Commodities Inc (License revoked in 2007 after massive commodities Fraud)
Concorde Trading Group Inc (License revoked in 2002 after massive commodities Fraud)

While Labell was not guilty of every trespass at these firms clearly the apple didn't fall far from the tree in this instance. Nor, surprisingly, did it stop Worldwide from getting their license which they got on November 24, 2003. Fresh with a license what did Steven Labell do as a newly minted master of the universe? Why he went around selling Forex options promising would be ******s that they couldn't lose money betting on the war in Iraq… Add war profiteer to Labell's dubious list of lifetime accomplishments. By June of 2004 the CFTC had hauled Labell and his cronies into court to answer for the fact that over 200 customers had lost nearly $1.8 million betting away their life savings.
http://www.cftc.gov/opa/enf04/opa4944-04.htm

So what was the court’s verdict? “The order holds Labell and WWF (Worldwide Forex) jointly and severally liable to pay WWF's customers restitution in the following amounts: WWF $3.1 million and Labell $1.5 million. The order also imposes civil monetary penalties of $126,000 against Labell and $3.1 million against WWF. Finally, the order permanently prohibits defendants from engaging, directly or indirectly, in any commodity-related activity.”
http://www.cftc.gov/opa/enf07/opa5341-07.htm

End of story right? Not in the U.S. domestic retail forex industry where the shysters rise from the grave like the flesh eating zombies from 28 days later. Nope, what really makes this story juicy is the fact that refugees from Worldwide apparently migrated over to another firm, a dead forex firm walking, by the name of Nations Investments LLC. ($1,699,000 in net capital).
http://www.nfa.futures.org/BasicNet/...d=0358507&rn=Y

In fact, Nations even has the same address as did Worldwide!

1700 NW 64TH ST. SUITE 100
FT. LAUDERDALE, FL 33309

Anyone want to make odds on how long it will be before Nations gets shuttered? Perhaps the folks over at Intrade can add a dead forex firms expiration date contract to their prediction market. If so, I’m going long on Nations going under. And I ain’t worried about a margin call…

[forexscholar]

Queue up the Queen music. The NFA has slapped another padlock on the front door of another teetering, undercapitalized forex firm. And the winner is... Cal Financial Corporation.
http://www.nfa.futures.org/basicnet/...04&contrib=NFA

Who? Well, to be honest Cal Financial wasn't exactly a dead forex firm walking (if only they were that lucky). Cal was more like a vegetable on life support- and the NFA finally decided to pull the plug. But with net capital of only $790,000 you wonder how they managed to even stay comatose all these years?

We pick up the story in the summer of 2004. Ah remember those days? A confident John Kerry was introducing a beaming John Edwards to the world and proclaiming the glory of having "good hair." England was eliminated from the Euro Cup in heartbreaking fashion to Portugal. Usher was at the top of the pop charts and Catwoman was bombing at the box office. And in Thousand Oaks, California John Indelicato had a dream: to conquer mainland China and get rich gloriously.

Cal's goal was "to develop its forex business overseas, and based on the level of success, determine whether it should take on U.S. customer accounts." To that end Cal had two principals located in China where they recruited customers under the name of the "Shanghai Carewell Financial Planning Company." But the going was tough. In a 2006 NFA audit Cal was cited for not collecting any proof of employment information for SCFP accounts. Cal responded that Chinese customers did not like to give out this kind of information so Cal instituted a don't ask, don't tell policy. Needless to say the NFA was not amused and to Cal's credit they voluntary liquidated the accounts.

But in the end it wouldn't matter anyway. On March 1, 2007, the NFA issued a complaint against Cal citing it for a variety of accounting violations that essentially finished them off.
http://www.nfa.futures.org/basicnet/...px?seqnum=1069

But what stands out in the complaint are the NFA's accusations about the shoddiness of Cal's bookkeeping. The NFA charges that Cal:

a) failed to maintain, at all times, a record of customer deposits and withdrawals
b) include approximately $92,000 of its customer accounts balance in its ledger, resulting in an understatement of the amount of customer funds on deposit
c) maintain an equity run and/or similar report aggregating all balances for the firm's forex customers, including cash, open positions, and realized profit/loss

What's my point in listing all of this? It's simple: running a forex broker dealer is not easy. It requires talented, trained professionals with accounting, compliance and administrative backgrounds. It can't be done by Willie Loman alone. And the simple fact is if you are a small firm, with limited resources and limited capital on hand you just aren't going to invest your money in these things when you also have to pay for servers, sales staff, office space, etc... So you try to do the administrative stuff on the cheap. Well, you can't. John Indelicato couldn't. And the NFA by raising its capital requirements is making it clear it doesn't think anyone under $5 million can, else it wouldn't be making this proposal in the first place.

In all fairness to Indelicato, he is no fraudster. By his own account he has been in the futures business for 35 years. He's just not very good at it...