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The Brokers (re) Evolution: The CEO's reply

Dan Roth, CEO and President for the NFA: "The number of forex firms is not the issue for us"

Tue, Oct 23 2007, 14:53 GMT
by Marina Schiaffino

Mr. Dan Roth, CEO and President for the NFA answered to the questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent to the NFA last October 18th. We've got Mr. Roth's feed-back through NFA's Director, Communications and Education Mr. Larry Dyekman.

[ View the full interview ]

Mr Francesc Riverola would like to thank Mr. Roth and Mr. Dyekman for their collaboration.

Questionnaire:

1. Which is the expected impact of the new NFA's requirements in the FX business?

NFA's new capital requirements for Forex Dealer Members ($5 million) become effective on December 21, 2007. We have been contacting our Forex Dealer Members that currently do not have $5 million in capital to determine what actions they will be taking within the next two months to meet their new requirements. Most firms have indicated they will infuse additional capital in their business. At this point, it is unclear whether or not the new financial requirements will impact the number of forex firms in operation.

2. In September 26th, you testified before a Congressional sub-committee regarding the reauthorization of the CFTC. Highlights of your testimony included a request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA. Do you think these additional measures would be enough to grant transparency and competition in the retail FX industry?

The purpose of the proposal is to improve customer protection. Acting as an off-exchange forex dealer involves greater risk than acting as an agent in on-exchange futures trading. The increase of minimum capital to at least $20 million will help ensure that forex firms can meet their obligations to their customers. Likewise, it's difficult to protect forex customers when forex solicitors, trading advisors and pool operators are not subject to any registration and regulatory requirements.

3. Will the NFA find positive if there are some corporate moves, such as M&A's or acquisitions? How does the NFA view the possibility of having fewer participants in the business?

"The purpose of the proposal is to improve customer protection. Acting as an off-exchange forex dealer involves greater risk than acting as an agent in on-exchange futures trading. The increase of minimum capital to at least $20 million will help ensure that forex firms can meet their obligations to their customers."

The number of forex firms is not the issue for us. It's the business practices of forex firms that we are primarily concerned with. Are they properly capitalized? Do they meet their regulatory obligations?

4. Apart from a strong vigilance on the accounting practices, will the NFA perform a strong vigilance on trading practices?

A new NFA Interpretive Notice governing electronic trading systems used for forex transactions was recently approved by the CFTC and became effective on July 1, 2007. The Notice details how NFA Forex Dealer Members can fulfill their supervisory responsibilities over the security, capacity, credit and risk management controls, recordkeeping and trade integrity of forex trading systems. We are currently monitoring our FDMs for compliance with this new Interpretive Notice.

5. Switzerland has recently started a similar process, is this process being coordinated with NFA?

We have been contacted by Swiss officials. Communication among regulatory agencies is essential as the markets become increasingly global in scope.

6. For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading "against them," which contradicts traders' well-being. How does NFA deal with this issue? Is there any regulation in this matter that customers should know? Will the NFA regulate somehow if a FDM has the ability to act as a broker/dealer and clearer at the same time, which means in most cases taking opposite trades to their customers?

"NFA is committed to ensuring that investors have the information they need to make informed investment decisions. We want to make sure that customers know what they are buying and how much they are paying for it."

NFA is concerned that retail customers do not fully appreciate the nature of their transactions with Forex Dealer Members and the inherent conflict that exists between the FCM's interests and those of its customers. That's why we are proposing an amendment to our "Forex Transactions" Interpretive Notice to require Forex Dealer Members to provide disclosure language that should make clear to customers that the FDM is acting as a principal in these transactions and may profit from the market moving against the customer. We will present this amendment to our Board of Directors in November and, if approved, will submit the amendment to the CFTC for approval.

7. Customers believe the liquidity sources of a firm should be disclosed. What does the NFA say to that? Is there a way to have more transparency in pricing?

NFA is committed to ensuring that investors have the information they need to make informed investment decisions. We want to make sure that customers know what they are buying and how much they are paying for it.

Disclaimer: The above information is provided as an opinion of the author. The author shall not be held liable for any acts or omissions on the part of the reader based on the information provided in this opinion. No severed part of this opinion shall be copied, transmitted electronically or otherwise, modified, linked or used without prior written approval by the author. All rights to the entire contents are reserved by the author. The recipient of this correspondence or any other reader is allowed to read, download, print this opinion as a whole, but is NOT granted any rights to the use of this opinion. The opinion(s) expressed above must be used with this accompanying disclaimer at all times.

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Published on Tue, Oct 23 2007, 14:53 GMT

Glenn Stevens, CEO at GAIN Capital Group: "A $20MM requirement would go even further in protecting retail clients"

Fri, Oct 12 2007, 14:30 GMT
by Marina Schiaffino

FXstreet.com

Glenn Stevens, CEO at GAIN Capital Group, has become the 7th top FX industry's CEO to answer the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.

[ View the full interview ]

Mr Francesc Riverola would like to thank Mr. Stevens and GAIN Capital Group - owner of www.forex.com one of the most visited FX sites on the web - for collaborating with FXstreet.com.

GAIN Capital Group is joining GFT, FXCM or Saxo Bank in answering our questionnaire. We are sure we still have many to come.

Questionnaire:

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

We support the new $5MM minimum net capital requirement, as it helps to ensure that all FDMs are better capitalized. In fact, we support Daniel Roth’s recommendation of an even higher $20MM minimum capital requirement. At the rate retail investors are coming into the markets and with the volatility we’ve seen lately, it’s critical that FDMs are on solid financial footing. A $20MM requirement would go even further in protecting retail clients and helping to avoid any further insolvencies.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

Our current accounting practices are already in line with the proposal. Deloitte is our long standing auditor and our books and records are GAAP compliant. Our shareholders include several large venture capital and private equity firms; our financial statements and internal procedures are audited every year. Although this methodology may be more burdensome and costly, it reflects a firm’s ability to accommodate a higher level of independent scrutiny.

3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

The new standards being considered will create a broader base of potential investors as our member firms achieve higher levels of financial reporting standards.

4 - Switzerland has recently started a similar process, what is your opinion about it?

Currently, regulation can vary pretty dramatically from country to country and there is no reciprocity among the major regulatory bodies. It’s a pretty confusing landscape for retail investors as they don’t understand the regulatory framework in each country. Ideally, in the future there will be more reciprocity between the major regulatory agencies around the world -- but we’re not there yet.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

We’ve already assumed the customer accounts from some of the smaller FDMs that would not have been able to meet the new capital requirements. We are in active discussions with several others.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

With regard to M&A activities, I differ from some of my colleagues on this topic. I do believe there will be some M&A activity over the next few couple of years. We’ve seen some pretty significant private equity investments in the space recently. I expect that we’ll see a few more of those over the next year. Also, the bank white label deals that have been announced over the past year are almost certainly a precursor to the banks entering the space. It’s clear that banks are now starting to realize the potential of this market. I would not rule out a few banks taking strategic equity stakes in retail FX firms within the next year.

7 - For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading 'against them', which contradicts traders' well-being. What is your company position on this? How do you hedge your customers' trades?

This question highlights the fact that most retail investors do not fully understand how Over the Counter (OTC) markets operate. In any OTC market (equities, derivatives, etc.), each trade is a contract between two parties – there is no exchange through which trades are routed. Wholesale FX desks at banks run a “book” (the net of their customer trades), laying off risk as needed by trading with their own counterparties. Retail dealing desks are designed in the same manner. There is no inherent conflict of interest or degradation in price/ execution quality in a dealing desk model.

"The bank white label deals that have been announced over the past year are almost certainly a precursor to the banks entering the space. It’s clear that banks are now starting to realize the potential of this market. I would not rule out a few banks taking strategic equity stakes in retail FX firms within the next year."

However, all you need to do is spend a few minutes on the forums to realize that some retail firms have clearly taken advantage of their customers to boost their own profits, most often by stop hunting or re-quoting during news events. Customers quickly caught onto which firms were operating in that manner, and out of the backlash came the non-dealing desk firms.

In the end, what should matter most to retail traders is their ability to get into a trade quickly and at the price they request, and where their resting orders are filled. Where the order is ultimately routed to a retail dealing desk or a bank dealing desk is inconsequential - as long as the execution is solid. That’s why GAIN has always employed experienced bank traders - their job is to make tight markets 24 hours a day, ensure quality fills for our customers, and manage our risk effectively. We’ve had the same model since we started back in 2000 and have maintained steady growth each year. Our customer satisfaction is very high – in a recent FOREX.com customer survey over 90% of our customers told us they would recommend FOREX.com to a friend or relative. I think our track record speaks for itself.

8 - Would you like to add something else?

Thank you, Francesc, for offering this opportunity to comment on the important issues facing our industry.

Glenn Stevens
CEO
GAIN Capital Group

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Published on Fri, Oct 12 2007, 14:30 GMT

Charles−Henri Sabet, CEO at Synthesis Bank: "These new measures will strengthen the credibility of our industry"

Fri, Oct 12 2007, 06:40 GMT
by Marina Schiaffino

FXstreet.com

synthesis bank

Charles-Henri Sabet, CEO at Synthesis Bank at Synthesis Bank answered the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.

[ View the full interview ]

Mr Francesc Riverola would to thanks Mr. Sabet and Synthesis Bank for participating in FXstreet’s questionnaire.

Synthesis Bank is joining Saxo Bank, InterbankFX, FXCM, GFT and Forex.ch in answering our questionnaire. We are sure we still have many to come.

Questionnaire:

What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

It ensures a more professional service offering in margin FX and strengthens the credibility of our industry.

The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

No, it will not affect our business in particular. Synthesis operates under strict internal controls and regulatory requirements. This is how we have always done business.

Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

It is always a balance but in this case, yes, they are a breath of fresh air. We all have an interest in FX becoming a true asset class and these new measures will strengthen the credibility of our industry.

Switzerland has recently started a similar process, what is your opinion about it?

Our opinion is on line with the of the Swiss Federal Banking Commission recommendations resulting from the observation of several abuses in the field. Synthesis is supporting the SFBC initiative, that recommends, amongst other things a regulated business model for professional FX traders, clear practice policies and compliance applications. In fact, at Synthesis, all the recommendations are already applied and we would have no issues in meeting the SFBC requirements.

Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

Following Saxo Bank’s acquisition of Synthesis in September, it is not a question for me to answer alone. I believe, however, that Saxo Bank will evaluate this like any business venture we undertake.

"We all have an interest in FX becoming a true asset class and these new measures will strengthen the credibility of our industry."

How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

M&A does have a significant impact on the industry. However, I do not believe M&A will be able to top the more strategic partnerships.

Take for example Saxo Bank. The bank provides the full technological, trading and risk management application to its partners, including the award-winning trading platform in their own branding. This business has made Saxo Bank the world's leading provider of White Label Services with over 100 partners globally. Synthesis was actually Saxo Bank’s biggest White Label Partner prior to the acquisition and it is these kinds of strategic partnerships that are more likely to change the industry.

For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading 'against them', which contradicts traders' well-being. What is your company position on this? How do you hedge your customers' trades?

Our business case has always been to grow our customer base and you can only do that if your clients are satisfied and profitable.

Would you like to add something else?

I would like to end on a positive note. The 2007 BIS survey came out last week and it showed that the FX marketplace is growing like never before. The 70% jump since the last survey in 2004 is the largest ever jump since the survey began. FX is becoming a true asset class.

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Published on Fri, Oct 12 2007, 06:40 GMT

Christian Frahm, Senior Executive Director at Saxo Bank A/S: "NFA regulatory changes strengthens the credibility of our industry"

Mon, Oct 1 2007, 16:12 GMT
by Marina Schiaffino

FXstreet.com

Mr. Christian Frahm, Senior Executive Director at Saxo Bank A/S answered the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.

[ View the full interview ]

Mr Francesc Riverola would to thanks Mr. Frahm and Saxo Bank for participating in FXstreet’s questionnaire.

Saxo Bank is joining InterbankFX, FXCM, GFT and Forex.ch in answering our questionnaire. We are sure we still have many to come.

Questionnaire:

What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

I think it strengthens the credibility of our industry and we view it as a positive move.

We have been through regulations in Europe over 10 years ago and a couple of years ago in Japan.

If you look at Japan as an example - before the regulatory changes they had over 600 brokerage companies offering margin FX - a lot of them very small and some of them not necessarily offering a professional service to their clients. As soon as regulations kicked in, the market space changed from 600 unlicensed brokers to less than 100 licensed brokers.

The clients benefited from the comfort of being serviced by a licensed counterpart and as a whole the industry benefited from a more professional service offering in margin FX.

We see the same dynamics coming into play in the US – a lot fewer brokers offering margin FX - but as a whole a more professional industry.

The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

No, we do not think it will have a direct impact for our business.

Saxo Bank, as a fully EU licensed bank, is already under very stringent internal controls and regulatory requirements. Our award-winning platform, the SaxoTrader, is already industry leading in terms of back office reporting, audit trails and transparency and availability of account information for the clients.

We remain committed to satisfy the reporting requirements for areas where we do business and keep an open dialogue with local regulators.

"As soon as regulations kicked in, the market space changed from 600 unlicensed brokers to less than 100 licensed brokers. The clients benefited from the comfort of being serviced by a licensed counterpart and as a whole the industry benefited from a more professional service offering in margin FX."

Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

In general, yes. The FX industry in the US has had a mixed reputation over the years, however in recent years this has improved. More stringent regulations with higher capital requirements and better reporting for the clients, will only validate the FX business as an asset class in my mind and attract more people to invest in FX.

Switzerland has recently started a similar process, what is your opinion about it?

Similar thoughts. I think. The industry benefits, the clients benefit and ultimately as clients go for quality, names like Saxo Bank benefit.

Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

Sure, that is a possibility that we cannot rule out. Clearly, there will be good companies which will not meet the new requirements and if the opportunity is right, we will evaluate like any business venture we undertake.

How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

I think we will see some M&A activity in the industry, but more of strategic nature like Saxo Bank's purchase of Synthesis Bank. We are still in a very healthy growth stage and fairly early in the maturity stage of the margin FX business. So I think we are some years away from an actual consolidation for market share.

However, on the partnership side, we see a lot of things happening. Saxo Bank, as the world's leading provider of White Label Services with over 100 partners globally, made a very early bet on providing other financial institutions with infrastructure and a trading platform in their own branding. Synthesis which Saxo Bank acquired in September actually started out as a white label partner. White Labeling is a major part of the business and we see this business growing rapidly as more and more financial institutions recognize their roles as local distributors to their client base focusing on servicing their client with the best products provided by leading facilitators like Saxo Bank.

Many are asking themselves: why try and built your own trading platform when you can get an award winning platform like SaxoTrader with your own branding - and benefit from 15 years of expertise and development in this business?

"Clearly, there will be good companies which will not meet the new requirements and if the opportunity is right, we will evaluate like any business venture we undertake."

I think the question to ask is whether the broker you are trading with is growing customer assets under management? What is the company doing in terms of advice, education and tools on the platform to ensure the client has the best possible information and analytics to make a profitable trade.

In the end, you only grow your customer's asset under management significantly if you are able to facilitate happy and profitable clients.

If you look at Saxo Bank, we, year after year, have a significant increase in our customer assets under management. In addition, we have a strong focus on developing tools to help the investor. Moreover, Saxo Bank has a world class track record from our own Strategy Team. The Strategy Team shares with our clients which trades they are doing and why.

Disclaimer: The above information is provided as an opinion of the author. The author shall not be held liable for any acts or omissions on the part of the reader based on the information provided in this opinion. No severed part of this opinion shall be copied, transmitted electronically or otherwise, modified, linked or used without prior written approval by the author. All rights to the entire contents are reserved by the author. The recipient of this correspondence or any other reader is allowed to read, download, print this opinion as a whole, but is NOT granted any rights to the use of this opinion. The opinion(s) expressed above must be used with this accompanying disclaimer at all times.

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Published on Mon, Oct 1 2007, 16:12 GMT

James E. Green, Managing Director at FX Direct Dealer, LLC: "FXDD will not be affected by the increase in capital requirements"

Thu, Sep 27 2007, 14:59 GMT
by Marina Schiaffino

FXstreet.com

Mr. James E. Green, Managing Director at FX Direct Dealer, LLC (“FXDD”) answered the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.
[ View the full interview ]

I am providing this memorandum in response to your email enquiry and further to our discussion of the issues you raised in your email. I believe our telephone conversation clarified some of the questions you raised, particularly as they relate to the form of some the questions and terms that are, at least in the United States, what I terms of art. I appreciated your candor during our discussion and I trust you appreciated mine.

The internet, like any anonymous means of publicly available communication, is a two edged sword and anonymous self censorship is not one of the internet’s strengths. There is nothing to prevent one person’s comments from being taken out of context while providing anonymity to the person who republishes the comments in chat rooms and on bulletin boards. I know that many firms have been on the receiving end of comments they believe were unfair, half truths or simply wrong. You have the unenviable task of trying to strike the right balance in publishing comments made on FXStreet. Like most forums, FXStreet has allowed people to openly express their views anonymously. There are always instances, as you and I discussed, where unhappy, unlucky and/or unskilled “traders” use the internet to vent their anger at one or multiple firms for both real and imagined slights. As we noted, perhaps time could be better spent learning their craft, developing an understanding of how the OTC spot foreign exchange market actually works (rather than wishing it worked differently) and taking advantage of the services offered by the many excellent firms that appear on your site.

"We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA."

There has been much made of the NFA’s decision to increase capital requirements and we, like many firms, have fielded telephone calls from traders wanting to know how this increase in capital will impact the firm. It seems as though these traders have all been reading each other’s mail or reading the same chats because they all refer to the companies that “the NFA put out of business.” We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA. We also note, however, that we do not believe that increasing capital requirements to $5,000,000 is sufficient. If $5,000,000 is the miinimum threshold entry to the foreign exchange business, it is only a slightly higher barrier to entry than the previous $1,000,000 minimum capital requirement. While it is true that the companies against whom the NFA took action were undercapitalized, their management’s lack of experience and expertise surely contributed to the failures. Perhaps a “minimum net experience” threshold should also be a requirement. We advise our clients that FXDD is well capitalized and holds substantially more capital than that belonging exclusively to its clients. FXDD does not publish its capital or the amount of customer equity it holds. Those prospects who demand to see our confidential financial information are advised that we do not release that information.

As I suggested to you during our conversation, customer funds held for off exchange OTC transactions may not be deemed to be “segregated” as that term is understood in the context of the Commodity Exchange Act and the NFA’s regulations. Thus it is unclear whether funds held for such transaction are protected in the event of a bankruptcy. To the best of my knowledge, only funds held for regulated activity in the futures markets will receive segregated protection. Most firms, FXDD included, manage their own firm capital separate and apart from the margin capital posted with their liquidity providers. Thus, firms who imply to clients that client funds are “segregated” are by reference seeking to assure the client that somehow their funds are secured and are protected. This issue struck home with the Refco fiasco. Perhaps the U.S. Congress will, at some point, extend the benefits of true segregation to client funds held by all foreign exchange dealers. Currently, however, that option does not appear to be available to any dealer regardless of its registration status. Thus it appears that once a firm files for bankruptcy protection, clients would not be able to withdraw their funds. Those clients would become unsecured creditors of the firm. FXDD carries a blanket bond that covers theft, fraud and criminal activity by its officers and employees, but even that does not cover bankruptcy.. I do not know whether other firms carry such a bond.

The company listed on the CFTC’s website, Tradition Securities and Futures, Inc. (TSF) is not FX Direct Dealer. Tradition Securities and Futures, Inc. is a registered futures commission merchant that does not deal in spot foreign exchange. TSF is owned by Tradition North America, Inc. which is also a minority shareholder of FXDD. Tradition North America, Inc. is one of the largest interdealer brokers and provided financial and professional assistance to FXDD when it was a startup company. Tradition North America, Inc. is part of the Tradition Group which has a forty plus year history in the financial markets (www.traditiongroup.com). FXDD has maintained the policies, procedures and protocols established when it was a subsidiary of Tradition.

"As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question."

Regarding the business model that foreign exchange dealers follow. Some firms accumulate customer positions; others pass those positions through to the dealer’s liquidity provider (STP); while others use a combination of accumulation and STP. As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question. From the client’s perspective (at least our clients’ perspective), the issue is not whether there is a perceived or actual inherent conflict of interest on the part of firms who may accumulate positions. Our clients want to know that our desk manages client positions with integrity based on honest pricing and fair dealing practices. Some firms have, rightly or wrongly, developed a reputation as “stop hunters,” and “boosters.” Since the dealing firm knows all customer positions, it might be tempted to widen the market or boost the bid or offer just so that it can hit client stops. Later they justify the price change based on a set of objective or subjective parameters. Those firms, to our way of thinking, are not credible dealers and abuse their clients’ trust. And firms who are strictly providing liquidity on an STP basis (no dealing desk interference) have the same ability to manipulate the price should they choose to. Professional dealing desks like FXDD’s manage risk, execute customer trades when needed and provide constant liquidity to the firm’s clients. The bottom line is that clients must always demand credible pricing and honest dealing from their firm whether it is FXDD or one of the other excellent firms on your site.

I hope I have answered your questions Francesc. FXDD prides itself on providing honest pricing, credible dealing practices, good client support and competent assistance with all matters relating to our clients’ accounts. There are many good firms on your site and we, like them, would like to see the foreign exchange market grow. The really good firms do not tolerate abusive activities or remarks aimed at their competitors and are content to let their services speak for themselves.

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Published on Thu, Sep 27 2007, 14:59 GMT

Gary Tilkin, President & CEO at Global Forex Trading: "We view the NFA's new changes as a positive for the forex industry"

Wed, Sep 26 2007, 09:33 GMT
by Marina Schiaffino

FXstreet.com

Gary Tilkin, President & CEO at Global Forex Trading (GFT), has been the 4th top executive to answer the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry. [ View the full interview ]

1- What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

In general, we view the NFA's new changes as a positive for the forex industry. GFT has always operated with integrity and acted as though far tougher regulations existed in the retail forex industry, even prior to the Commodity Futures Modernization Act of 2000. More recently, GFT has been working with the NFA on many of the new regulations you refer to, and in fact, GFT has suggested to the NFA some of the regulations that are being implemented. GFT continues to speak with both the NFA and the CFTC in the U.S. to help work for a stronger retail forex industry.

2- The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

Most, if not all, of the proposed changes will affect GFT as they will affect all FDMs, but we view these as positive changes. GFT practices proper accounting methods, and employs one of the world's big three accounting firms to do our annual audit as well as separate internal control-auditing.

Currently, GFT ranks as the #1 Forex Dealer Member, in terms of Adjusted Net Capital (according to the CFTC website, which lists Adjusted Net Capital figures for FCMs, including FDMs). We have far more capital than the majority of FDMs and we strongly believe that our dominant position will continue, and in fact, grow with sensible regulations not only in the United States but around the world.

3- Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?

The number of customers moving to the forex market is very impressive and we see this strong growth curve continuing for many years to come. A properly regulated forex industry by well-informed regulators can only benefit everyone involved.

"Most, if not all, of the proposed changes will affect GFT as they will affect all FDMs, but we view these as positive changes."

4- Switzerland has recently started a similar process, what is your opinion about it?

We would like to see similar regulations in most, if not all, developed nations of the world. GFT has customers worldwide supported by three offices in the U.S. and outside of the U.S. in London, Tokyo and Sydney with more offices planned for 2008 and beyond, so we are in favor of consistent regulations globally.

5- Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

GFT has the capital, service levels and depth of products to be able to greatly benefit some of the smaller forex firms that find they cannot meet the new capital requirements. With our three versions of order entry and analysis software (DealBook 360, DealBook Web, and DealBook Mobile) as well as our training and analysis products, we are uniquely qualified to give substantial upgrades in service to customers of smaller firms. We currently have near perfect uptime statistics for our dealing platforms and substantial additional capacity, so we are always in a position to immediately add a significant amount of new trading volume.

GFT is currently speaking with some of the smaller players in the industry who could benefit from our capital base and capabilities, and we are interested in speaking with any firm or customer who would like to partner with GFT.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

There will probably be some mergers and acquisitions, but we don't expect many.

7- For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading 'against them', which contradicts traders' well-being. What is your company position on this? How do you hedge your customers' trades?

This question assumes something to be a fact where there is none. The assumed fact is that forex dealers who "book" the trades of at least some of their customers are somehow working against those customers. Perhaps in the old days of the true bucket shops or even in the more modern world of some smaller forex firms, there were or are those who may have wished their customer's ill. But to assume that the practice of booking trades of customers is working against those customers is a very naive and simplistic view of what is really happening.

Many firms that own and operate their own software and are true forex dealers (as opposed to simple brokers--shifting the trades to someone else), often by virtue of filling orders instantly have to take those customer orders into their own book, at least temporarily. This is often done to facilitate very quick executions of orders. As these counter positions build up, the dealer often seeks to offset the risk of these positions with their various banks. Depending on the size of the forex dealer's capital, the dealer may or may not offset certain levels of these counter positions. To assume, however, that the dealer is then "working against" the customers with whom they hold non-offset positions is totally ridiculous. Well-established, reputable forex dealers need never do anything to harm any of their customers to make good profits.

At GFT, we profit by our customers becoming more successful and growing their accounts larger and larger and bringing more people into the business. This is why we've developed a high-quality series of training courses for our customers, so they can become more knowledgeable and informed traders.

"The number of customers moving to the forex market is very impressive and we see this strong growth curve continuing for many years to come. A properly regulated forex industry by well-informed regulators can only benefit everyone involved."

8- Would you like to add something else?

A closely related topic that has been promoted lately by some forex dealers is the notion that they have "no dealing desk." While it may be true that the firm running such a promotion has no dealing desk itself, it borders on fraud to suggest that no dealing desk is involved in the forex transaction. Those forex dealers who have no dealing desk are simply passing on the trades to one of the banks they deal with. That bank, of course, has a dealing desk and handles that transaction the same as any other forex dealer would. The biggest difference is that when a customer deals with a forex dealer who operates a dealing desk, the customer has the luxury of being able to call that dealing desk to discuss any problems or questions they may have on any of their trades. They can get a quick, informed answer as opposed to attempting to deal with a large bank that is shielded by a forex dealer that has no dealing desk and no intention of letting the customer talk to that bank's dealing desk. The main point that customers must understand is that there is always a dealing desk involved in a forex transaction, and any attempt to confuse customers into thinking that there is not is highly dishonest.

Those firms that used to operate as forex dealers and are now operating as forex "brokers" (operating no dealing desk of their own but simply passing on trades to banks) are using a tried and true method of processing orders but may be short-changing their customers as they become a "middle man" for the transaction, placing the customer further away from the dealing desk that actually fills their order. For small "hit and run" type of trades this may not be much of a problem, but for serious customers doing substantial forex trades and looking for the best in service, dealing with a firm operating a dealing desk staffed by helpful, experienced dealers is a huge advantage.

Firms such as GFT who operate dealing desks properly can fill thousands and thousands of orders virtually instantly, but also have trained individuals monitoring orders to help customers with any situation. Properly run dealing desks are simply a higher level of customer service as opposed to an impediment to execution speeds.

Contrary to popular opinion, when dealing with forex dealer members acting as brokers, customers must realize that their broker makes a portion of the spread that is added on to the dealer spread. And as they are a degree separated from the actual dealing desk where the trade occurs, there is less discretion that the market maker/dealer can have in order acceptance, especially since there are additional revenue streams for each order (orders introduced by introducing brokers may also have additional mark-ups applied). Common side effects experienced by the trader include more trade rejections and generally higher rates of slippage.

At GFT, customers see and can execute their trades on streaming prices 24 hours a day, almost 6 days a week, directly with a market maker. On liquid markets, GFT customers have access to trade up to 20 million in notional volume with a single click of a mouse. Unlike most of our competitors, GFT does not widen spreads during market volatility, due to its interbank dealing relationships and the liquidity that GFT has available during even the most turbulent market conditions.

Gary Tilkin,
President & CEO at Global Forex Trading

Back to The Brokers (re) Evolution

Published on Wed, Sep 26 2007, 09:33 GMT

Drew Niv, CEO at FXCM: "The new NFA regulatory changes will lead to a consolidation of the retail forex industry"

Fri, Sep 21 2007, 14:07 GMT
by Marina Schiaffino

FXstreet.com

Drew Niv, CEO at FXCM, has been the second top executive to answer the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry. [ View the full interview ]

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

We believe the new NFA regulatory changes will lead to a consolidation of the retail forex industry. The consolidation will benefit FXCM, since we easily meet the new proposed regulations.

The proposed regulations will require that firms have at least $5 million in net capital. However, the requirement for brokers with large amounts of customer capital could be substantially higher. We estimate that as many as 20 firms would not be able to meet this requirement if enforced today.

The forex industry in the long term will benefit from having a smaller number of better capitalized brokers. In essence, a broker with more firm capital is less likely to make imprudent decisions that would put its funds and its customer funds at risk.

Although these new regulations are good for the industry, the resulting short-term changes may be difficult for clients whose brokers do not meet the new requirements. We hope that the NFA will make every effort to facilitate an orderly transition as brokers make new arrangements to enable their clients to trade through firms that meet the new requirements.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

No. FXCM’s accounting practices will not be affected by the new proposed regulations. Our own business standards led us several years ago to adopt the practices specified in the new proposed regulation.

For the last six years, FXCM has been audited by major accounting firms which audit public traded companies. Our financial statements comply with international GAAP standards.

To live up to these higher standards, we have had to maintain a highly trained and professional staff of accountants and internal auditors. We believe only a large firm, such as FXCM, can make the type of investment in financial integrity which will now be required of all FDMs by the new proposed standards.

3 - Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?

Yes. The FX market has been growing at an incredibly fast pace. However, its momentum could be slowed if one or more brokers became insolvent. These new proposed rules significantly reduce the probability of that happening. Thus, the proposed new rules help protect the future of the industry.

My personal opinion is that the emerging credit crisis will have a major impact on equity markets. As profitability in trading stocks becomes more difficult, there will be a mass of traders into forex. We do not want those traders’ first opinion of forex trading to be of an industry in need of regulation.

"The forex industry in the long term will benefit from having a smaller number of better capitalized brokers. In essence, a broker with more firm capital is less likely to make imprudent decisions that would put its funds and its customer funds at risk."

4 - Switzerland has recently started a similar process, what is your opinion about it?

Switzerland’s regulation of the forex market has lagged years behind the world’s other major financial centers. The recent insolvency of a Swiss trading firm, TradeX, highlights the dangers of dealing with a broker based out of Switzerland, where there is currently minimal regulatory oversight. As Switzerland moves to correct these problems, it will help the world-wide forex industry.

Every time a major country embraces regulation of retail forex trading, such as Japan in 2005 and the United States in 2000, the industry has grown.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

FXCM is in discussions with several small and mid-sized FDMs who are concerned about their ability to meet the new proposed requirements. We are interested in purchasing the client accounts of these firms, or finding a mutually beneficial relationship with them.

The FXCM Group is uniquely positioned to accept and service the books from other brokers. We have 1) A global footprint with offices in the Americas, Asia and Europe; 2) A staff of over 500 capable of handling the migration of a large numbers of client; 3) over $100 million in group capital to fulfill the capital requirement associated with servicing these new clients.

A forex broker seeking a buy or an IB relationship must first of all consider the buyer’s ability to pay. Brokers will have thousands of clients trading many millions of dollars; the buyer will be obligated to rebate millions of dollars to them. The brokerage firms must satisfy themselves that the buyer can afford to do that – in fact, has been routinely doing that for years.

Also: The broker must be assured that the buying firm can absorb thousands of new clients, service them well and, in order to continue to continue to receive revenue from their trading, keep them as clients.

The most important reason that many FDMs are considering a relationship with FXCM involves trust. In blunt terms, FXCM can always be trusted to pay the firm’s owners the revenue their accounts earn – in full and on time. FXCM has been working with Introducing Brokers for over eight years. In fact, our very first Introducing Broker continues to refer business to us.

Our No Dealing Desk business Model is ideally suited to processing a large Introducing Broker book of business. Under our No Dealing Desk system, our monthly revenues, in the form of pip markups, are an exclusive reflection of trade volume: if we do X volume, we book X pips. And the revenues of our IBs move in perfect concert with our own, since they are rebated an exact percentage of total volume.

The revenues of a market-making broker, on the other hand, are not only dependent on volume, but may vary significantly depending on the quality and effectiveness of the broker’s traders as well as market volatility. Therefore, if the FDM allies with a market maker, and that market maker suffers a losing month, yet still owes a volume rebate to the IB, the IB may encounter difficulties in collecting everything it is owed.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

Six. The M&A market in forex is particularly tough for several reasons.

· No common standards – for software platform, accounting standards, back office procedures. It makes integrating an acquisition much more difficult than a firm in the equity industry, for example, where standards are shared.
· Recent market volatility meant rising volumes and profits for most firms. August was one of the best months in FXCM Group’s history – we had over half a trillion in trading volume – and we suspect that other firms also did very well. This recent success, I believe, will make owners of smaller brokers reluctant to sell. As a founder of a forex firm, I completely understand their feelings and their attitude. It is very tough to exit now. However, as the new proposed regulations come closer to enactment there may be a major re-assessment.
· Many private equity firms and venture capitalists are eager to fund profitable forex firms. But they are in search of the fastest and surest payout, and will tend to ignore all but the largest and most competitive forex firms on the market. Furthermore, they realize that even those large FDMs have been put in a weak – and perhaps ultimately desperate -- bargaining position by the new proposed regulations, and will negotiate accordingly. If past is precedent, at contract time the deal will become much more one-sided, and full of pitfalls for the forex broker owner. Private equity firms are expert at negotiating terms that are extremely profitable for them but costly for the business owner.

The illusion of private equity firms lining up to invest in the business may give the owner false hope that buckets of cash are theirs for the taking. I believe that once the FDM owner is discouraged by the private equity experience, actual M&A activity between forex brokers will intensify.

"FXCM is in discussions with several small and mid-sized FDMs who are concerned about their ability to meet the new proposed requirements. We are interested in purchasing the client accounts of these firms, or finding a mutually beneficial relationship with them."

We believe that No Dealing Desk model is best for both trader and broker, and FXCM is totally committed to it. Over 99.9% of our business is conducted on this model.

FXCM was primarily a market maker until the end of 2006, when we took a 180 degree turn to the agency execution model. So we know the market-making business. Currently, many of our competitors believe that because volatility has returned, market making is the more profitable business model. That is true -- in the short term. Long-term, however, the no dealing desk system is better for both the broker and the client, for several reasons.

· Better Execution During News Events & Market Volatility. In the past few years, clients have become much more focused on trading news events -- those turbulent times when it is most difficult to make prices. By aggregating large bids and asks from the large banks, we solved that problem, and the proof is that since we inaugurated no dealing desk our trading volume during news events has grown immensely. Market makers, however, have an especially tough time during news trading, because if they honor all prices they will lose money. (When we were market-making we certainly lost money during the big market moving news events.) Remember too that the market-maker’s prices are removed from the real market, and so they must protect themselves by offering created prices. We avoid the problem by having the world’s largest banks streaming their prices through us.
· Lower Spreads. We can now review our policies relating to prices and markups above the best bid/offer we get from the banks, and we’ve introduced fractional pips to further tighten spreads. In the next few months we will continue cutting the cost of trading pairs across the board. And we have launched numerous incentive programs to provide additional discounts to high-frequency traders.
· Greater Opportunity to Scalp the Market. Many traders favor short-term scalping strategies. For scalping to be profitable for the client, the market maker must lose. So either the market maker takes the loss or disallows the strategy. With no dealing desk we are able to accommodate scalpers – but of course we clearly warn them of the risks involved.
· Aligned Broker-Trader Interests. The no dealing desk strategy has aligned FXCM’s interests with those of our customers. Since it is in our interest for them to trade more, we want them to increase their profits and account sizes. We have studied which trading behavior is most profitable for the retail trader, and have discovered that most retail clients are less successful when they trade pairs with large swings – especially GBP/USD. They are much more profitable with the quieter, range-bound pairs like EUR/CHF, EUR/ GBP and AUD/NZD. To give our clients an extra incentive to trade the more successful pairs, we have been aggressively reducing our markups on these pairs to make their spreads the tightest of all the currencies we offer.
· Easier Implementation of Programmed Trading. We can now accommodate more black box traders, both those with high-frequency systems and those with break out systems. The change to no dealing desk allows us to service a large new group of traders who never thought of trading through us when we were market-makers.

8 - Would you like to add something else?

The major reason for the proposed regulations is that the NFA and the industry realizes that we must provide more funds security to forex traders. The new proposals are a major step forward, but I think we all realize they don’t go far enough.

I am proud to say that FXCM is in the vanguard of the movement to convince the US Congress to pass legislation extending funds segregation to the forex industry. In fact, we have even established a Political Action Committee to support and coordinate the actions of this Safety of Funds initiative, and we have convinced three other large FCMs to add their names to our petitions. We are urging every firm in our industry to join us in this effort.

FXCM already has the ability to offer our clients segregated forex accounts. Thanks to our British subsidiary, accounts with Forex Capital Markets LTD (FXCM-UK) are fully segregated in accordance with United Kingdom financial regulations.

Back to The Brokers (re) Evolution

Published on Fri, Sep 21 2007, 14:07 GMT

Peter Furrer, President at GFX Group SA: "GFX Group SA is currently not affected by these changes"

Fri, Sep 21 2007, 14:00 GMT
by Marina Schiaffino

FXstreet.com

Peter Furrer, President at GFX Group SA has answered the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry. [ View the full interview ]

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

GFX Group SA is currently not affected by these changes.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

Yes, in 2 ways – 1st from an expenditure point of view. Operational & controlling costs will increase substantially in the industry and 2nd from a client confidence point of view. Transparency & tighter controls provide the customers with a higher level of security comfort.

3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

Yes, see above.

4 - Switzerland has recently started a similar process, what is your opinion about it?

Highly supportive. General Financial Market reputation is at stake without some control & supervision. Regulators focus should be on security of investor funds without an extravagant and expensive bureaucratic process.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

To be reviewed on a case-by-case basis – but reluctant to look at companies that could not meet the new requirements. Interest depends on possible market perception and - penetration.

"The regulatory requirements will force some FX traders to join forces with competitors to get a grip on costs."

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

Not in the next few months but - especially on a technical / operational basis - within the next year or two. The regulatory requirements will force some FX traders to join forces with competitors to get a grip on costs.

The current business model of brokerage houses taking opposite trading positions is a question of taking a calculated risk and having enough capital in order to absorb a potential trading loss. Prudent risk management is the essence. We are hedging in the market.

Back to The Brokers (re) Evolution

Published on Fri, Sep 21 2007, 14:00 GMT

Todd B. Crosland, Chairman and President at Interbank FX: "The requirement for FCM's to have $10,000,000 in net capital is good"

Thu, Sep 20 2007, 09:16 GMT
by Marina Schiaffino

FXstreet.com

Todd B. Crosland, Chairman and President at Interbank FX has been the first top executive of the selected 20 FX Brokerage firms to answer the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?

The NFA’s primary concern is to protect the individual investor. The NFA has been very vigilant in policing our industry. I personally support the efforts of the NFA. By the end of September or October, the CFTC will approve the NFA’s proposed increase in minimum net capital. The new minimum net capital requirement will be $5,000,000. If firms offer great than 100:1 leverage, they will need to maintain two times the required minimum or $10,000,000. Since most all FCM’s offer mini accounts with 200:1 leverage, all FCM’s will need $10,000,000 in net capital. The current net capital requirement is $1,000,000 or 5% of customers funds. Since our customer funds balance is over $100,000,000, we need to maintain 5% of this amount in net capital. Since we offer 200:1 or 400:1 leverage to our customers we need to maintain two times the required net capital. Based on our customer funds balance we need to maintain in excess of $10,000,000 in net capital. So the NFA’s increase in minimum net capital will not affect Interbank FX, since our net capital is over $27,000,000.

I believe that the requirement for FCM’s to have $10,000,000 in net capital is good. This will assure that customers funds will be safer and that firms involved in the industry will be sufficiently capitalized.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company's business in some way?

Interbank FX has always have significant financial and operational controls. Requiring this for all FCM’s again is very positive for customers.

3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?

The greater transparency and financial stability for FCM’s and customers will be positive for the industry and will attract new participants to the Forex market.

"I believe that the requirement for FCM’s to have $10,000,000 in net capital is good. This will assure that customers funds will be safer and that firms involved in the industry will be sufficiently capitalized."

4 - Switzerland has recently started a similar process, what is your opinion about it?

I am not familiar with the proposed regulations in Switzerland, but again I support this regulatory effort.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company's policy on acquisitions of smaller firms?

Interbank FX will be interested in bidding for firms that do not meet the new stricter requirements. We are currently actively working on this at the present time.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?

I do not believe that there will be any M&A activity in the top six US FCM’s, of which Interbank FX is one of these. But the smaller firms with under $10,000,000 in net capital, I believe there will be activity with these firms. These small firms will either have to raise additional or try to sell to a larger FCM. The NFA reported in August that 25 of the 40 Forex Dealer Member FCM’s would not meet the required $5,000,000 minimum net capital requirement. With the required $10,000,000 minimum net capital to offer mini accounts with 200:1 leverage, the number of FDM – FCM’s would be left to less than 10. This means that possibly 30 Forex Dealer Member FCM’s will not meet the new requirements.

"I do not believe that there will be any M&A activity in the top six US FCM’s, of which Interbank FX is one of these. But the smaller firms with under $10,000,000 in net capital, I believe there will be activity with these firms. These small firms will either have to raise additional or try to sell to a larger FCM."

Interbank FX does not trade against our customers. We have a pure “agency” model and “back to back” all customer trades with the counter party Bank’s that we deal with. We only make money when our customers trade. The more our customers are profitable, means the more trades our customers make. Our interests our squarely aligned with our customers. Most firms make their money when their customers lose money. I do not support this model. Our goal is to provide free tools for our customers to become successful. In the tracking that we do with our customers, we have found that 49% of our standard accounts have been profitable over the last 24 months. I believe this is an industry high. Other firms that trade against their customers will never have the incentive to provide the tools for their customers to be successful. Could you ever imagine going to Las Vegas and having someone at the casino stop you any teach you how to be successful? The same is true with the firms that trade against their customers.

Please let me know if there is anything else we can help with.

Regards,

Todd B. Crosland
Chairman and President
Interbank FX

Back to The Brokers (re) Evolution

Published on Thu, Sep 20 2007, 09:16 GMT

FX Club Response to the Open Letter

Tue, Sep 4 2007, 10:00 GMT
by Marina Schiaffino

FXstreet.com

These are the answers of Mr. Peter-Tatarnikov, Vice-President of Forex Club Financial Company, to the questions of Francesc Riverola, CEO at FXstreet.com.

1. NFA is expected to raise soon capital requirements to Forex brokers.

- How are you adapting to the new NFA requirements?
I surmise that the new rules would be beneficial for the industry. Even though they would increase entrance barriers to the market, at the same time they would ensure that those entering have sufficient resources remain financially stable regardless of market conditions and also have sufficient expertise to manage risks.

- Does your company hold more assets than those belonging exclusively to clients' deposits?
No, but we have access to the financial resources necessary to satisfy the new capital requirement, if adopted.

- Are client's funds segregated from the firm's own capital? Are they used in any way by the firm?
Our client’s funds are separated from our own funds – they remain in the designated bank accounts regularly monitored by the NFA.

2. In case that you don't meet the new financial requirements, what are you planning to do?

We have been expecting new requirements for quite some time and, actually, even welcomed them. Thus, new rules would not come as a surprise. It would be an adequate response by the NFA to the growing importance of Forex market in general. New requirements would have no effect on our long-term strategy – providing superb services and products to our customers, effectively managing risks and so fourth.

- In case you had to fill for bankruptcy, are your customers aware of that possibility at this time? Will they be protected?
Our firm is in a great financial standing and new financial requirements would not alter the situation. New capital requirements would be positive because they would further improve industry standards. As soon as these rules become official we will update our customers on what this means for Forex industry in general and for them in particular.

- Can you guarantee your customers that in case of bankruptcy each and every on of them will be able to withdraw all his/her funds?
Our name is one of our greatest commodities. It has substantial value. Undermining it by declaring bankruptcy or failing to fulfill any of our contractual obligation vis-à-vis our customers would be myopic, irrational and antecedent to our business interests. Let’s put it this way - our name has a larger value than all of our customer funds because it is this very name that brings us customers.

- How long could it take for a customer to withdraw the funds in his/her account in case you were filling for bankruptcy?
If this was to happen, it would be done in accordance to the US bankruptcy laws. However, we do not consider bankruptcy as an option for us. If one day capital requirements were to be raised hundredfold, we would still not declare a bankruptcy. Instead, we would form a relationship with a broker with sufficient capital to satisfy the new requirements.

3. For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading 'against them', which contradicts traders' well-being. What is your company’s position on this? Is your firm currently taking the other side of customers' position/trade?

As a matter of fact, the business model of Forex brokerage firms is not so unique. When a Forex firm takes an opposite side of a position it essentially assumes risks. When an insurance firm issues insurance it also assumes risks. If an FX trade is so large that a broker puts itself in a danger of not being able to pay profits, it will carry the risks over to a larger broker (its clearing house). Similarly, when someone asks a medium-sized insurance firm to issue insurance for a giant sea liner, the firm will carry the risks over to a larger insurer. Naturally, when risks are passed “up the ladder” so is the reward potential. Those involved in the debate around “trading against a customer” should not forget that risk management is at a core of every financial market. Even if there was only one Forex broker in the world it would still be taking the other side of a trade (i.e. managing risks).

This being said, however, it is important to prevent brokers from acting opportunistically – carrying more risks than they can handle and thus jeopardizing their financial stability. Smaller firms are more likely to be risk-averse. Smaller firms are also less likely to have expertise necessary for proper risk management and, perhaps, more likely to lack discipline for internal controls. The new rules will weed out some smaller firms, enhance the NFA’s ability to monitor remaining firms (it is easier to monitor 10-15 brokers than 30-35) and make the words “NFA-regulated” more meaningful for brokers and their customers.

Peter-Tatarnikov
Vice-President
Forex Club Financial Company
info@fxclub.com

Back to The Brokers (re) Evolution

Published on Tue, Sep 4 2007, 10:00 GMT

MG Financial Response to the Open Letter

Tue, Sep 4 2007, 09:49 GMT
by Marina Schiaffino

FXstreet.com

These are the answers of Tak S. Fung, CEO at MG Financial Group Inc., to the questions of Francesc Riverola, CEO at FXstreet.com.

1. NFA is expected to raise soon capital requirements to Forex brokers.

- How are you adapting to the new NFA requirements?
MG will have no difficulty accommodating this change if the proposal does pass. MG Financial as a group has ample capital to satisfy the new Net Capital requirement. Retail FX is just one part of the group's business and a reallocation of investments has already been initiated. Already as of the end of July, MG has increased its Net Capital to be in excess of the new proposal. This proposal to increase the Net Capital Requirement came out in the middle of June; however, the basis of information that caused the panic is the two months old Financial Reports (as of April 2007) when MG had over 120% of the requirement at that time. MG has always been above the Net Capital Requirement as set by the NFA but there is no reason to have more cash tied up than 120% of Net Capital to satisfy regulatory requirements. One needs to understand that in running a multi-faceted company, it is not prudent business practice to tie up capital for regulatory reasons just for “show”.

MG is certainly not opposed to increased Net Capital Requirements but it seems that everyone is only concentrating on the first part of the NFA proposal (the new Net Capital Requirement), and completely overlooking the very important second part. Along with a higher Net Capital, the new proposal also calls for the use of proper and uniform accounting methods.

It has always been our position at MG that enforcement of proper financial accounting and internal controls is the most important means to verify and ensure the FCM’s ability to operate. When you are dealing in a highly leveraged industry, no amount of money will ever ensure safety. Many “big” firms have failed in the past and many more will fail in the future. The reason for their failure was not necessarily a lack of adequate capital but the fact that they incurred more risk than their financial condition would allow. Some of these firms misrepresented their financial condition to the public.

- Does your company hold more assets than those belonging exclusively to clients' deposits?
Yes. Obviously MG has its own funds significantly in excess of client funds and which have nothing to do with client funds. I think we are overlooking the definition of Net Capital here.

- Are client's funds segregated from the firm's own capital? Are they used in any way by the firm?
The NFA does not allow us the use of the term "segregated", so instead I will say that MG customers' funds are "separated" and are being held in NFA-approved financial institutions, in separate accounts named “Customers’ Separated Accounts.” Keeping clients’ funds in such separated accounts has always been MG's policy. Bear in mind that MG has been in business many years before the NFA began regulating the forex markets. Similarly, MG currently uses and has always used its own capital for business operations and has never tapped into client funds.

2. - In case that you don't meet the new financial requirements, what are you planning to do?

MG has the ability to meet the new financial requirements. We have been in business since 1992, so to us, this is just another chapter in a long history. Over the last 15 years in the retail forex business, there have been many problems: embezzlements, unfair pricing techniques, even bankruptcies. This is the first time that the NFA has made a regulatory proposal that has been used to cause panic in the forex markets. I question if this is a scare tactic, proposed by a large entity to eliminate competition in the forex market. (In the original proposal from the NFA, the statement was made that “…at least one FDM (Forex Dealer Member) suggested imposing a higher capital requirement on FDMs…”)

- In case you had to fill for bankruptcy, are your customers aware of that possibility at this time? Will they be protected?
Yes, MG customers are aware of the risks. They are provided with a Risk Disclosure statement that explains the risks before they open their accounts. It has always been clear to all our customers irrespective of this event, that there are no empty promises or a false sense of security when dealing with MG. There are always risks in this business and MG’s customers are all made aware of those risks before opening an account with us. Even in the past, when our competitors were promising guaranteed stops and who knows what else, we refused to do the same, because such promises are misleading and impossible to keep. History has shown that we were right, and the firms that made those promises were eventually penalized (fined) by the NFA for their actions. While some companies view fines as a mere “slap on the wrist” or a non-deterring cost of doing business, MG hopes that as the forex market matures, its participants will recognize that a firm’s reputation is one of its biggest assets.

Although this higher Net Capital will not adversely affect us, I still do not see how not meeting the new Net Capital Requirement is related to bankruptcy. Just because a company does not meet the new Net Capital Requirement does not mean that it is anywhere near bankrupt. A company that can easily meet the new Net Capital Requirement can still go bankrupt as can be seen by reviewing the many bankruptcies that have occurred in the financial services industry, most recently in the case of Refco. Sound business practices and internal controls are the decisive factors that are much more important than an increased net capital.

- Can you guarantee your customers that in case of bankruptcy each and every on of them will be able to withdraw all his/her funds?
Every possible step has been taken to ensure protection against bankruptcy including MG purchasing fidelity bond insurance for the past decade. MG has numerous procedures in place to protect both the company and the customers’ funds. Also, as I said in my previous answer, customers' funds are "separated" and are not part of MG’s operating accounts.

Can we give a 100% guarantee to everyone? I think that an answer to this question would only insult people’s intelligence. Clients should be looking at the firm's internal controls and its reputation. Clients should check the BASIC section of the NFA website as well as talk to the NFA, research the firm’s history and use their own best judgment in making decisions about any company. As I said, many bigger firms and banks have failed in the past. The only guarantee is that: There is NO GUARANTEE. Customers must learn to do their own research and look deep within a firm instead of falling for unreliable guarantees, smoke and mirrors.

- How long could it take for a customer to withdraw the funds in his/her account in case you were filling for bankruptcy?
According to US bankruptcy laws, once a company files for bankruptcy, a judge appoints a receiver, so the truth of the matter is that the customers’ funds would be distributed by a court of law. Once again, a good example of how clients can expect to withdraw funds in the event of a firm’s bankruptcy would be the recent Refco case. And although this might sound alarming to some people, if a person wishes to ask such questions, I think that they should familiarize themselves with the realities of the official process. It would be much easier for me to say , "don't worry, your money will be wired to your bank account immediately", but I think that this would once again just be insulting people’s intelligence.

Trading in the retail off-exchange foreign currency market, by definition, means that the market maker (in this case the forex FCM) takes the other side of the trade. We are not talking about an exchange traded instrument where there is a "meeting of the minds". How else can a customer enter or exit the market, if no one is on the other side of the trade? Is it betting against the customer? No. A legitimate forex FCM operates no differently than a bank. The profit is generated through risk management. The customers’ business provides "flow" (volume) which allows the firm to maneuver in and out of the market to generate revenue for the firm. MG's management team is made up of ex-bankers and as a result, MG's operation mirrors that of a bank. This has been MG’s policy for many years now. There is a big difference between a firm that bets 100% against the customers' positions, and a firm that uses customers' positions as flow for trading. A firm that bets against the customer operates no differently from a casino, and thus becomes a casino. Gaming laws governing the activities of casinos are based on capital adequacy; however a firm that does the flow trading is managing risk and not operating as a casino.

Let me sum it all up, "retail FX" is a fast growing market. Where there is money to be made, there will be unqualified people trying to enter the business. Raising the net capital is not a comprehensive solution. All it will do is raise the entry fee for the newcomers that are still either qualified to run a business or they aren’t. Stringent and clear rules governing internal controls and vigilant enforcement of these rules are much more important. As I mentioned, there is no amount of money that can be considered safe, when running a leveraged financial business. Look back in history to companies like Enron, Barings Bank, Refco, Franklin National Bank, etc... They were all big firms, all much bigger than any of the existing Forex Dealer Members that are in operation today. All those firms failed not because of lack of capital, but due to the lack of internal controls of risk and poor accounting practices. 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. Net capital is important, sure, but it is only a part of the bigger picture when looking at a company. I think it is important to point out all the relevant issues at hands. What about firms that cancel trades after the fact? What about firms that have clearly violated the rules in what can easily be construed as FRAUD, and are still in business? This new proposal by the NFA has been turned into a big marketing campaign by some firms as a scare tactic to lure customers from competitors. That, in itself, should be a clear indication of the type of business environment we are in.

Tak S. Fung
CEO
MG Financial Group Inc.
www.mgforex.com
inquiry@mgforex.com

Disclaimer: The opinion(s) expressed above must be used with this accompanying disclaimer at all times. All rights to the entire contents of this opinion are reserved by the author. The recipient of this correspondence or any other reader is allowed to read, download and print the above opinion as a whole but is granted NO rights to the use of parts of this opinion. No severed part of this opinion shall be copied, transmitted electronically or otherwise, modified, linked or used without prior written approval by the author The above information is provided as an opinion of the author. The author shall not be held liable for any acts or omissions on the part of the reader based on the information provided in this opinion.

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Published on Tue, Sep 4 2007, 09:49 GMT

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The Brokers (re) Evolution: The CEO's reply

Dan Roth, CEO and President for the NFA: "The number of forex firms is not the issue for us"

Questionnaire:

Glenn Stevens, CEO at GAIN Capital Group: "A $20MM requirement would go even further in protecting retail clients"

Questionnaire:

Charles−Henri Sabet, CEO at Synthesis Bank: "These new measures will strengthen the credibility of our industry"

Questionnaire:

Christian Frahm, Senior Executive Director at Saxo Bank A/S: "NFA regulatory changes strengthens the credibility of our industry"

Questionnaire:

James E. Green, Managing Director at FX Direct Dealer, LLC: "FXDD will not be affected by the increase in capital requirements"

Gary Tilkin, President & CEO at Global Forex Trading: "We view the NFA's new changes as a positive for the forex industry"

Drew Niv, CEO at FXCM: "The new NFA regulatory changes will lead to a consolidation of the retail forex industry"

Peter Furrer, President at GFX Group SA: "GFX Group SA is currently not affected by these changes"

Todd B. Crosland, Chairman and President at Interbank FX: "The requirement for FCM's to have $10,000,000 in net capital is good"

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MG Financial Response to the Open Letter

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