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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

FXstreet.com

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.

• Back to The Brokers (re) Evolution

Published on  Tue, Oct 23 2007, 15:07 GMT

Archive

• Dan Roth, CEO and President for the NFA: "The number of forex firms is not the issue for us"
  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"
  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"
  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"
  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"
  Published On Thu, Sep 27 2007, 14:59 GMT

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