Following our coverage last Friday that Institutional Liquidity LLC (ILQ) announced it will discontinue its operation in the U.S. as a Retail Foreign Exchange Dealer (RFED), Forex Magnates has obtained feedback and comments from the company’s CEO Jason Tanner.
ILQ had followed its announcement of the bulk liquidation -which provides clients nearly two weeks to transfer their funds to another broker or withdraw their funds – in an email to clients last week, and then issued a press release regarding its futures business which is moving to the FCM Advantage Futures. Forex Magnates had reported when ILQ had acquired the futures business of the FCM Velocity Futures during 2013.
Mr. Tanner explained that the reason for the exit was strategic as the overseas operation under ILQ Australia had already surpassed its US entity. In 2013, ILQ Australia’s trading volumes exceeded that of the U.S. entity. Mr. Tanner added that the exit from the U.S. was not related to any litigation with the NFA or how committed ILQ was to cooperating with U.S. regulators.
“ILQ made a strategic decision to exist in the U.S. markets, in part, to more efficiently utilize our resources in the area that we are experiencing growth. ILQ Australia was launched in early 2013 and grew quickly. Its trading volume surpassed that of its U.S. counterpart by the end 2013. Currently, ILQ Australia’s monthly trading volumes represent a significant part of our global volume. Although a difficult decision, ILQ believes that allocating its resources to better support our growth overseas will result in a favorable experience for our global partners and their clients.”
100% Introducing Broker Focused, as Driven by B2B Model
Unlike most forex brokers whose efforts to on-board customers are driven from a combination of direct retail sales efforts, and partnerships with introducing brokers and/or affiliates, including white-labels or other intermediaries that bring in business, ILQ is 100% focused on a B2B model which focuses entirely on the IB, Affiliate and white-label side of the spectrum.
This business model was explained as the reason for ILQ not selling its book of Forex accounts in the U.S. to a specific broker, as have other companies in similar exits, since ILQ wanted to allow its partners the option to choose were to take their clients – although the clients ultimately decide. However at least in this scenario IB’s have a chance to contact their clients and discuss options. Because in the case of a bulk transfer, IB’s might not have received a favorable deal with the new acquiring broker, as an example.
What is next for ILQ?
While ILQ’s RFED license is still active and valid with the NFA, once it discontinues that license, as implied in its email to clients and notice that was since posted on its website, the net capital that will be freed up which was recently around $33 million – will be a considerable boost for it to allocate to the Australia-based entity or other business efforts in-the-works.
Indeed, during our conversation, Mr. Tanner stated that ILQ is preparing for an upcoming announcement having to do with new offerings offshore, and it is news that ILQ will share with Forex Magnates for its readers. However, Mr. Tanner said ILQ will wait for the dust to settle as the firm is busy handling the current transferring and closing of accounts in the U.S. for its Forex business, and transferring futures accounts to the NFA-regulated FCM Advantage Futures.
ILQ Regulatory Status with NFA Still Active
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It is not clear for how long ILQ will keep its FCM license, since if it will no longer hold client segregated funds and hence that status wouldn’t be needed, it’s possible it could become an IB, with regards to the Advantage Futures business that was introduced. However, it may retain some status with the NFA as in Forex Magnates’ opinion – as compiled from feedback given to us from senior industry executives regarding maintaining a U.S license, having such a status appeals to overseas investors – even if those investors deal with the firms non-US-regulated entity.
It will be interesting to see how ILQ Australia fares as its efforts become more concentrated on that business and with the available capital that will be freed from its U.S. entity. The company has a competitive spread structure for end-traders which includes its rebate to partners, and although many IB’s and/or clients may have been disappointed or sad about the planned exit from the U.S., according to sources, a large number of IB’s that have non-US business will continue to work with ILQ in its Australian entity.
Highlights of Some of the Historical Challenges in the US Retail Forex Space
During the conversation with Mr. Tanner, we explored the history of the FX Market in the U.S., where in the early part of the last decade after President George W. Bush had signed the Commodities Futures Modernization Act (CFMA) of 2000, the CFTC began combating fraud related to Forex schemes, and ponzi scams, and other unscrupulous people who really had nothing to do (most often) with the legitimate Forex space, and who most of the time didn’t even use any trading platforms, and had collectively given Foreign Exchange a bad name in the USA.
While such fraudsters still occasionally surface on the CFTC’s radar, back in the early 2000’s Forex was referred to as the ‘Wild Wild West.’ However, the key again is that these firms who gave FX a bad rap, had nothing to do with the real emerging retail forex space that was just starting to develop at that time.
A document from the CFTC published in the second half of the last decade, that provided the agency’s outlook for 2007-2012, had summarized that some $500,000,000 in civil monetary fines had been imposed on fraudulent persons purported to be FX brokers, since 2000 when the CFMA had been signed. Since the passage of the CFMA in 2000 through 2007, in addition to those fines, nearly another half of a billion dollars in restitution were imposed on these fraudsters from nearly 100 filed cases. If these firms were legitimate forex brokers, it would be different, but most of them were just purporting to be involved in FX just to cater to the allure that clients had with Foreign Exchange as it was [really] emerging in the retail space.
All of this history for FX, even though it didn’t represent the real emerging retail FX industry that was starting to take off, created a tremendous level of resistance from the regulators towards the subject of foreign exchange, given their experience with the firms purporting to act in the space – who were the subject of the above mentioned CFTC actions. It’s like the analogy of a few bad apples spoiling the bunch, except imagine if the spoiled apples aren’t even real apples.
Why its Been Challenging In the U.S. for Retail Firms
Forex Magnates opines that this history had a massive effect on the regulators attitude towards FX, and its subsequent rules and actions taken to scrutinize legitimate firms, and then following the Zelner vs. CFTC case (which argued jurisdiction over OTC contracts and their definition), then the Farm Act (which required OTC fx firms to get NFA-registered), then the Dodd-Frank Act (which increased the CFTC’s authority over derivatives by broadening the definition of what constitutes a derivative), the space became incredibly difficult with Retail Foreign Exchange Dealers required to maintain a higher net capital – of over $20,000,000 – when compared to other Futures Commission Merchants whose net capital is nearly 1/20th that amount.
As a result of the regulatory burden for retail forex brokers, only a few have managed to strive and survive, while trying to best meet the stringent rules. Ironically, these rules do not always guarantee investor protection as was seen in the case of PFG and MF Global, both firms involved in Forex and Futures, where clients didn’t receive full protection that they had expected from then-regulated firms, following their respective demise.
The regulatory landscape, not only in the U.S, but around the world – for Retail and even Institutional Forex – is a work in progress, and could be thought of as cyclical if it goes through periods of tightening as well as loosening just as economies and political policies get tightened and loosened. Therefore while the last decade may have been on the increasingly tightening side, hopefully some more friendly and convenient regulatory efficiencies will provide an easier environment for firms to operate in (although big changes may come first). However in this U.S. this remains an expensive and overall difficult challenge -with the latest at the mercy of this being ILQ’s planned departure to focus on other markets overseas.
Forex Magnates has explored related subjects as part of our research compiled for our Quarterly Industry Report (QIR) for the 1st Quarter of 2014, which will be available for purchase shortly.