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Futures Broker Due Diligence Notes post PFG
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Futures Broker Due Diligence Notes post PFG

  #51 (permalink)
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djkiwi View Post
@FCMReform

... MF Global went down the toilet was because unlike the US, the UK had no limits in place. They sent client US client funds to their UK subsidiary and went on a sovereign debt spending spree.


Cheers
DJ

@djkiwi

1. That was part one ... injury

2. Part two ... Adding insult to injury... Corzine faces no charges and is considering starting a Hedge Fund

:wtf:

I'm just a simple man trading a simple plan.

My daddy always said, "Every day above ground is a good day!"
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  #52 (permalink)
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djkiwi View Post
@FCMReform

Secondly, MFG was a publicly listed company and what good did that do. I agree prop trading firms like that need more stringent requirements. The important point here is disclosing the percentage of the customers funds leveraged and the extent of the exposure. Any material changes to their net derivatives exposure should be reported to the regulator daily.

Cheers
DJ

I agree with you DJ that public disclosure of financials is certainly not a guarantee of safety. Only insurance (which we support) could provide that kind of rock solid security. However, in the case of MF Global many customers bailed out in the dying days of the firm precisely because the news surrounding MF Global's stock price became so bleak. With PFG, there were no life rafts at all when the ship went down since there was no hint whatsoever that PFG had become a ponzi scheme. In the end, publicly disclosing financials is merely an added due diligence capability that will allow customers to judge how financially stable a firm they are putting money on deposit with truly is.

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  #53 (permalink)
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Additional Argument in Favor or Stronger Retail Forex Protections


Reading through the comments at the CFTC a number of good points have been brought up regarding the need for additional protections. Alex Winters made the following comment to the CFTC: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=58421&SearchText=


Quoting 
Forex traders should be considered in these rulings. PFG and MF Global hurt both Forex and Futures traders during their collapse. I submit that any protections offered to futures traders also be extended to forex also. While insurance would be the best protection the emerging forex industry shares the same (and more) insecurities. For this industry to survive and prosper we must be able to trust that brokers that hold our funds are solvent especially since past CFTC rulings (50:1 leverage) require that we deposit even more of our money with brokers when we have no way auditing their financial health.


The CFTC's requirement a few years ago that traders put up more margin to trade retail forex leads to the logical conclusion that regulators put in additional protections (disclosure of company financials, better accounting standards, insurance) since retail forex traders now have more capital at risk. This is a pretty powerful argument and I would encourage traders who leave comments with the CFTC to make it.

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  #54 (permalink)
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CFTC Nearing A Decision Regarding FCM Reforms?

The CFTC has recently closed the comment period that was associated with the Public Roundtable on PFG:

http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1250

This could mean that CFTC is nearing a decision and is about to announce their planned reforms. Comments and suggestions can still be sent to the CFTC however by emailing secretary@cftc.gov.

FXCM is recommending that all FCM’s and forex dealers publicly publish their financials once a quarter and employ a top ten accounting firm. We encourage retail forex traders to share these and other suggestions with regulators by emailing them directly. Thousands of PFG customers traded retail forex with PFG and their voices should be included in any discussion designed to increase customer protections for NFA regulated firms. Furthermore, providing insurance to futures traders and not forex traders would be a further insult to injury for those currency traders at PFG and any future forex traders caught up in an insolvency. Make your voice heard today.

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  #55 (permalink)
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Retail Forex Not part of New NFA Reforms

We've been told by the NFA that the instant "view only" bank account access that FCM's must now grant to the NFA is not applicable to Forex Dealers. In short, NFA is not requiring forex dealers provide the same instant bank account access that Futures Commission Merchants provide. This is the clearest sign yet that regulators are not planning to extend any additional customer funds protections to the retail forex community.

The stated reason is that since retail forex funds are not legally required to be "segregated" they are not in the same category as the seg funds that FCM's hold on deposit. This has long been an issue involving the Commodity Exchange Act which grants seg funds to on-exchange contracts but does not have a word to say about retail foreign exchange because nobody was trading forex online in the 1970's when these laws were passed.

This logic will likely be used for additional proposals such as insurance where we can now expect retail forex to be excluded as well. This is why financial disclosure for retail forex firms becomes even more important. With retail forex dealers not being included in the safety of funds discussion currency traders are now solely left to their own due diligence when it comes to picking a broker.

We still encourage you to email secretary@cftc.gov to let regulators know that retail forex should not be excluded. If no one speaks up then regulators can assume that retail forex need not be a priority.

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  #56 (permalink)
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A Quick Primer on Retail Forex Regulation

I've been asked why retail forex does not have seg funds protection and so I wanted to pass along this brief regulatory history of the retail foreign exchange market:

In 2001 retail online currency trading was regulated for the first time with the passage of the Commodities Futures Modernization Act of 2000 (“CFMA”). This law provided that any non-bank firm making a market in retail FX transactions could be registered and licensed by the Commodities Futures Trading Commission (“CFTC”). This law was a step in the right direction but it did not in any way grant customers trading FX with these firms any funds protection in the event of bankruptcy as is common in exchange traded markets such as equities and futures.

In particular, the CFMA did not make any adjustments to the CFTC’s “segregation rule.” The segregation rule stipulates that all client funds deposited for trading domestic, on exchange futures or options on futuresbe kept segregated from all company funds and that in the event of bankruptcy the customer’s funds are legally segregated from creditors and must be returned to the clients.

In May 2008, Congress amended the Commodity Exchange Act (“CEA”) and created an entirely new registration category, the Retail Foreign Exchange Dealer (“RFED”), for forex dealers operating in the U.S. Neither at that time nor two years later when Congress enacted sweeping financial sector reform legislation with the Dodd-Frank Reform and Consumer Protection Act of 2010 were provisions included that could have provided for RFEDs to segregate funds for the protection of retail FX customers

The CFTC explained the reason for not including segregation of funds for retail FX as follows:

http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-21729a.pdf


“… Several commenters maintained that the Commission should require segregation of customer funds by counterparties in order to provide some protection in the event of a counterparty insolvency. The Commission’s segregation requirements with regard to futures flow from Section 4d of the Act which, generally speaking, requires that customer property for trading commodity contracts be kept apart, or segregated, from the FCM’s own funds. However, as noted in the Commission’s proposing release, a segregated funds regime cannot be replicated in the context of off-exchange retail forex trading. Unlike segregation of customer funds deposited for futures trading, under the relevant provisions of the Bankruptcy Code, such amounts held in connection with retail forex trading would not receive any preferential treatment to unsecured creditors in bankruptcy.”

This hiccup with the bankruptcy code is what is currently holding up everything from seg funds protection to insurance. More in my next post.

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  #57 (permalink)
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Form the rankings posted here - I work together with some of the top ranking brokers from the lists.

Its hard to do due diligence - but So far I am happy with them.

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  #58 (permalink)
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CFTC to Announce Reforms next Week

Next Wednesday morning the CFTC will be holding a meeting where they are expected to announce additional post-PFG customer protections. As I discussed in my previous post the absence of any language pertaining to off-exchange, retail forex transactions in the bankruptcy code is the given reason cited by regulators as to why no additional protections for retail forex traders can be put in place. It will likely also be the reason that retail forex will be excluded from any insurance scheme. We shall see on Wednesday.

However, this would not preclude regulators from requiring FCM's/RFED's from disclosing their financials on a quarterly basis or requiring tougher accounting standards. In fact, absent insurance protection or seg funds these may be the only protections that can be offered to the retail forex community. Since customers cannot rely on clear legal language to protect them in the event of bankruptcy it becomes even more imperative that customers be able to see for themselves just how sturdy the retail forex broker they are doing business with is. Comments can still be submitted to CFTC by emailing secretary@cftc.gov

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  #59 (permalink)
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PFG's Forex Customers told to Get In Line

Last week the Trustee of PFG's estate announced a series of limited distributions to customers of the bankrupt firm. Of interest to retail forex traders is that the estate is not making any current distributions to PFG customers who were trading off-exchange forex:

http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf


Quote:
“The Forex Customers and the Metals Customers, however, do not hold claims against the Debtor on account of "commodity contracts" and therefore, are not "customers" under § 761(9) of the Bankruptcy Code and the Part 190 Rules. Accordingly, in accordance with subchapter IV and the Part 190 Rules, the distributions requested under the Motion, discussed below, will apply solely to the Futures Customers. Forex Customers and Metals Customers will not be included in such distributions and their claims will be addressed separately as part of the case."

The way the law is written the trustee is justified in putting futures customers first. This is why it has become urgent that regulators take additional steps to bring transparecy to the futures/forex industry so that customers can have a look at their broker's finances in order to weigh the risks invovled before putting funds on deposit with them. Since the law is not designed to currently protect forex investors, then traders need to protect themselves. This starts with granting traders the ability to conduct greater due diligence. If regulators can mandate that brokers disclose profitability ratios surely they can also mandate greater financial disclosure.

CFTC to announce initial recommendations this week. Contact secretary@cftc.gov with your thoughts.

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  #60 (permalink)
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FCMReform View Post
Last week the Trustee of PFG's estate announced a series of limited distributions to customers of the bankrupt firm. Of interest to retail forex traders is that the estate is not making any current distributions to PFG customers who were trading off-exchange forex:

http://www.omnimgt.com/CMSVol/CMSDoc...333616_147.pdf

Link does not work.

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