The US Commodity Futures Trading Commission (CFTC) has filed a civil enforcement action against foreign exchange brokerage FXCM Inc (NYSE:FXCM). According to the regulator the broker failed to meet capital requirements, marketing guaranteeing against customer losses and failure to timely report its undercapitalization.
The biggest Retail Foreign Exchange Dealer (RFED) in the US, FXCM was forced to take out a loan from Leucadia National in the aftermath of the Swiss National Bank’s decision to stop maintaining an exchange rate floor under the EUR/CHF pair.
According to the CFTC complaint which it filed in relation to the civil enforcement action against FXCM, the company was required to maintain at all times an adjusted net capital requirement of about $25 million on January 15th, 2016.
On the day of the SNB black swan however the capital of the company dropped into negative territory with the firm admitting to the regulators that it was at least $200 million under its adjusted net capital requirement. The net liabilities of FXCM were at the time exceeding its assets by about $175 million.
According to the CFTC the drop of the EUR/CHF pair to 1.1659 was the primary reason for this move, however at the time it was very difficult for the market to price at this level, which resulted in the huge losses which FXCM took on from its clients.
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The CFTC asserts that FXCM’s systems were not suited to protect the company from such an adverse event, which magnified the losses. The capital shortfall situation of the brokerage was not addressed before the next day when the firm received a loan of about $279 million from Leucadia National.
Failure to Notify Regulators in a Timely Manner
According to the CFTC’s complaint the company failed to notify its regulators about the adverse situation and only shared its peculiar position after the National Futures Association (NFA) and the CFTC contacted the brokerage enquiring about the firm’s capital position. FXCM subsequently notified the watchdogs about the capital shortfall.
Negative Balance Protection Marketing
According to the CFTC complaint, FXCM had been actively advertising its services with a marketing message that it would credit customers whose balances dipped into negative territory to zero them out.
The clients of the brokerage were therefore guaranteed by the brokerage that they couldn’t lose more money that their initial investment.
According to the CFTC statement: “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.”
The financial regulator is looking for civil monetary penalties and a permanent injunction against future violations of the regulatory framework.
Finance Magnates has contacted an FXCM spokesperson for a comment on the matter, however at the time of publication, the company has not yet published its official statement.