FXCM charged over CHF crisis. One charge is for protecting clients.

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I have a love-hate relationship with the CFTC. I love how they track down scammers. I love how they can often get at least some stolen money back. I love that they protect US traders as best they can.

Then there are the things I hate. I hate that they make it very hard for US citizens to have a wider range of broker choices. I hate that they restrict trading styles available to traders. I suppose it is not their fault. They have to uphold the laws, even when some of those laws harm traders.

During last year's SNB-CHF crisis, many brokers worldwide went under when the CHF peg was removed without warning. FXCM nearly went under, but managed to get bailed out.

Now the CFTC is enforcing the law. During the crisis, FXCM's capitalization fell too low. It actually went negative, and one of the reasons for this was that FXCM would zero out negative customer balances. This had been advertised for some time, but the CFTC then noticed that this very consumer-friendly policy is illegal for some reason. I don't know if it was another anti-trader part of the Dodd-Frank act or if this one came in somewhere else. If anyone can cite exactly where this law came from, I'd appreciate it if you could add information about it to this thread.

Here's the CFTC Press Release...

RELEASE: PR7431-16
  • August 18, 2016

    CFTC Charges Forex Capital Markets, LLC with Undercapitalization, Failing to Timely Report Undercapitalization Violation, and Guaranteeing against Customer Losses
    Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Forex Capital Markets, LLC (FXCM), charging FXCM with undercapitalization, failure to timely report its undercapitalization violation, and guaranteeing against customer losses. FXCM, with headquarters in New York, New York, is registered with the CFTC as a Retail Foreign Exchange Dealer (RFED).

    The CFTC Complaint, filed on August 18, 2016, alleges that FXCM, as an RFED in the business of offering or engaging in retail off-exchange foreign currency transactions, was required to maintain adjusted net capital of approximately $25 million on January 15, 2015. However, the Complaint alleges that on that day FXCM admitted it had a shortfall of at least $200 million under its adjusted net capital requirement, meaning FXCM had liabilities exceeding its assets by approximately $175 million.

    As alleged in the Complaint, the capital shortfall followed the removal of the 1.2000 EUR/CHF fixed exchange rate, also known as the “peg,” and the drop of the EUR/CHF rate to 1.1659. FXCM’s systems were not designed to prevent or diminish the effects of such a market event, leading to increased losses. FXCM’s capital shortfall was not resolved until January 16, 2015, when FXCM sought and obtained a loan of approximately $279 million from a large conglomerate holding company, according to the Complaint.

    The Complaint also alleges that FXCM failed to immediately notify the CFTC when it knew or should have known that its adjusted net capital was less than that required under the applicable CFTC regulation and that it was, therefore, undercapitalized. In fact, FXCM never affirmatively gave notice to the CFTC, and it was only after the National Futures Association (NFA) and the CFTC initiated contact that FXCM provided notice of its capital deficiency, according to the Complaint.

    The Complaint also alleges that FXCM had an advertised policy of zeroing out negative customer balances, effectively guaranteeing customers against loss in contravention of CFTC regulations. FXCM’s policy of zeroing out negative customer balances was memorialized in FXCM’s customer account opening documents, which had a provision stating that if the customer incurred a negative balance through trading activity FXCM would credit the customer account with the amount of the negative balance, according to the Complaint.

    In its request for relief against FXCM, the CFTC seeks civil monetary penalties and a permanent injunction against future violations of federal commodities laws, as charged.

    The CFTC thanks the NFA for its assistance.

    CFTC Division of Enforcement staff members responsible for this case are Saadeh Al-Jurf, Luke Marsh, Dmitriy Vilenskiy, and Paul G. Hayeck.

Link to the original at the CFTC
 
OMG !!!! As much as I hate FXcm, (BTW even their employees, mostly EX ones say they are a bad company.) , This is just wrong !!! They finally did something right by their customers and this is the result? Crazy!
 
Falling below minimum capitalization - yeah, that's bad, but it happened to a lot of brokers worldwide when this hit. Many went out of business.

Didn't have a plan for this - although this particular mess was a bolt from the blue, brokers should know that any central bank at any time can do something completely crazy, so should have a plan to deal with insane price movements. I'd agree to a reasonable fine for this.

Didn't instantly notify the CFTC and NFA - hmmnnn.... I'd think anyone in a position to do such a notification was probably far too busy saving the company from financial ruin. If the choice is to prevent a large company from going under by fixing the problem or filing a report about the problem on time, I'd ignore the report. Will the judge care more about a timely report of "we're bankrupt and here's a long and detailed report about why" vs fixing the imminent bankruptcy by putting all available resources into finding some investors willing to bail the company out? I hope the judge does fine them on this - exactly 1 cent per day the report was late.

Protected clients from negative balances - if this was illegal, why didn't the NFA or CFTC notice that it was clearly mentioned on the website? What law lead to this particular "kill the consumer" regulation and how can we get that law fixed? Maybe if we're very lucky, the judge on this case will find some reason to declare the law to be in violation of other consumer protection laws and issue a ruling invalidating it.


I'm surprised the CFTC and NFA couldn't have worked out a reasonable deal with FXCM for a modest fine and some internal changes instead of taking this to court.
 
Hi Everyone,

While I'm not authorized to comment on this personally, I can refer you to our official response:

FXCM Issues Statement on CFTC Complaint

NEW YORK, Aug. 19, 2016 (GLOBE NEWSWIRE) -- FXCM Inc. (NYSE:FXCM) (or the "Company"), today issued a statement on the complaint filed yesterday by the Commodity Futures Trading Commission (the "CFTC") alleging violations of certain provisions of the Commodity Exchange Act. The CFTC claims relate to the unprecedented and unforeseen crisis that occurred in January 2015 more than twenty months ago when the Swiss National Bank ("SNB") shocked the world currency market by announcing in the middle of a trading day that it was discontinuing the minimum exchange rate of the Swiss Franc to the Euro (the "SNB Event"). The Company is very disappointed by the CFTC's decision to file this complaint and attempt to punish FXCM who, like other market participants, was a victim of the SNB Event.

The SNB Event damaged world markets and damaged FXCM and its customers. By the close of business on January 15, 2015, FXCM customers lost approximately $225 million. As a result of such losses, FXCM experienced for the very first and only time in its history a one-day regulatory net capital shortfall. FXCM thereafter promptly notified both the CFTC and the National Futures Association (the "NFA") of its net capital shortfall due to the unforeseen SNB Event. Within hours of that notification, teams of CFTC and NFA personnel were on site at FXCM's offices.

Faced with the crisis of the SNB Event, FXCM and its board of directors worked around the clock to raise the funds needed to cure its regulatory shortfall. We succeeded. By the next afternoon, the Company cured its capital shortfall through a $300 million loan from Leucadia National Corporation. We averted the crisis. Given those facts, we could not be more disappointed that the CFTC has decided to pursue an undercapitalization violation claim against FXCM. Such a claim under these circumstances is unprecedented and unwarranted. We are also disappointed in the CFTC's intimation that the Company's "seatbelt" system contributed to the FXCM's undercapitalization during the SNB Event. To the contrary, the Company's seatbelt system prevented FXCM and its customers from suffering additional trading losses that day.

Equally unwarranted is the CFTC's claim that the Company did not timely notify the CFTC of its net capital shortfall. As noted above, the regulators were fully apprised of the capital shortfall and, within hours of the SNB Event, the CFTC and the NFA were on site at FXCM's offices.

We also see no basis for the CFTC's claim that the Company improperly guaranteed customers that they would not lose money. To the contrary, FXCM repeatedly represented to and warned its customers of the significant risks of trading FX and that such trading is appropriate only for individuals who can assume risk of loss in excess of their investment and margin deposit. In fact, FXCM customers were required to acknowledge in writing that they received no guarantees of profit or freedom of losses from FXCM or its representatives.

This action is unfortunate and disappointing, but the good news is that, because we acted as expeditiously as we did in January 2015, we protected our clients, we protected our employees, we protected our shareholders, and we protected our franchise.

About FXCM Inc.

FXCM Inc. (NYSE:FXCM) is a leading provider of online foreign exchange (FX) trading, CFD trading, spread betting and related services. Our mission is to provide global traders with access to the world's largest and most liquid market by offering innovative trading tools, hiring excellent trading educators, meeting strict financial standards and striving for the best online trading experience in the market.

Clients have the advantage of mobile trading, one-click order execution and trading from real-time charts. In addition, FXCM offers educational courses on FX trading and provides free news and market research through DailyFX.com.

Trading foreign exchange and CFDs on margin carries a high level of risk, which may result in losses that could exceed your deposits, therefore may not be suitable for all investors. Read full disclaimer.

Contacts
Jaclyn Sales, 646-432-2463
Vice-President, Corporate Communications and Investor Relations
jsales@fxcm.com
 
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