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

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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

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, Sep 4 2007, 10:39 GMT