NFA files an administrative complaint against Interactive Brokers

NFA filed a complaint against Interactive Brokers charging it with doing business with entities alleged to be CPOs (commodity pool

NFA filed a complaint against Interactive Brokers charging it with doing business with entities alleged to be CPOs (commodity pool operators) without them being registered as such with the CFTC. Basically NFA claims that several accounts opened with IB were in fact pooled accounts used by money managers to manage funds for several other customers, without being declared as such.

Judging by previous similar complaint against IB that was settled for $125k, this one may cost IB above $0.5m.

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Interactive Brokers is one of the largest brokers in the US and ever since it started reporting its forex figures it tops our profitability charts. In Q3 2012 IB reported 11,115 forex accounts of whom 44.6% were profitable, only 0.4% below CitiFX Pro who were in the first spot.

Part of the Complaint:

11. As required under NFA Bylaw 1101, no Member may carry an account, accept an order or handle a transaction in commodity futures contracts for or on behalf of any non-Member of NFA that is required to be registered with the CFTC and is acting in respect to the account, order or transaction for a customer.

12. NFA learned from audits of certain commodity pool operators (“CPOs”) NFA Members, which NFA conducted between September 2011 and January 2012, that Interactive had aOowed entities that appeared to be commodity pools to engage in futures trading in accounts at Interactive even though the firms operating those pools had not yet registered as CPOs and NFA Members.

For example, a September 2011 NFA audit of Trend Fund Management LLC (“Trend”), a CPO NFA Member forex firm, found that Trend maintained a trading account at Interactive for a non.-exempt commodity pool, Trendfund Partners LP (“Trendfund Partners”), which Trend operated and that Interactive permitted to engage in futures trading in the Trendfund Partners_ account before Trend became registered as a CPO NFA Member on August 12, 2011.

Similarly, during a November 2011 NFA audit of VII Capital Management LLC (“VCM”), another CPO NFA Member, NFA found that VCM had operated a commodity pool which began trading futures at Interactive in April 2010, several months before VCM became registered as a CPO NFA Member in September 2010.

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According to Interactive, Trend and VCM both represented that they were in the process of working with NFA on their CPO registration applications and that, until their applications were approved, they would only trade securities products.

Interactive also claimed that its staff monitored the progress of Trend’s and VCM’s registration applications in order to know when their applications were approved.

Despite Trend’s and VCM_s purported representations that they would only trade securities products prior to becoming registered, Interactive allowed the accounts of both Trend and VCM to engage in futures trading before Trend and VCM were registered as CPOs.

In addition to Trend and VCM, NFA determined that, beginning in November 2010, Interactive also allowed Arista LLC (“Arista”) – which at the time was not registered as a CPO NFA Member – to maintain an account at Interactive in Arista’s name that was actually a pool account that held almost $10 million from approximately 28 investors. Interactive allowed the Arista pool account to engage in futures trading for almost six months before Arista became registered as a CPO NFA Member in April 2011. Moreover, Interactive allowed Arista to trade this pool account, without the benefit of CPO registration, even though Arista had answered “yes” to the question in the Interactive account opening documents which asked if Arista was required to be registered in the U.S., pursuant to NFA Bylaw 1101, with the CFTC or another regulator.

Approximately three months after the Arista pool account started trading, Interactive apparently noticed that Arista’s account opening documents indicated that the Arista account had multiple owners. As a consequence, in early 2011, Interactive requested Arista to either register as a CPO or file an exemption from registration. Yet, Interactive took no steps, at that time, to prohibit or restrict the Arista pool account from continuing to engage in futures trading prior to Arista becoming registered as a CPO or filing an exemption from registration.

As a result of the Bylaw 1101 problems that NFA noted with respect to Interactive’s dealings with Trend, VCM, and Arista, NFA commenced an audit of Interactive in March 2012 to determine if Interactive’s Bylaw 1101 problems were restricted to the above firms or were more widespread.

Full Complaint:

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