The US Commodity Futures Trading Commission (CFTC) has just issued an order against Tradestation Forex, Inc. (IBFX), for violating regulations by failing to meet the minimum net capital requirements, failing to timely report one of the minimum net capital deficits and failing to supervise its employees and agents diligently.
Last year, the NFA also fined IBFX, the US subsidiary of the Japanese Monex Group, with a $600,000 penalty for other forex execution reporting inadequacies.
The CFTC says it has found that from December 2011 through June 9, 2014, IBFX violated regulations by failing to meet the minimum net capital requirements on three separate occasions. First, during the period December 2011 to June 2012, IBFX had uncovered foreign currency positions. Based on the corrected charges to capital for these uncovered positions, as calculated on a month-end basis, IBFX failed to meet the minimum net capital requirements for January 31, 2012.
Secondly, IBFX failed to meet the minimum net capital requirements for a brief period of time on January 9, 2013, due to a typographical error. IBFX immediately discovered this error, but failed to report it to the CFTC until January 11, 2013.
Finally, IBFX failed to meet the minimum net capital requirements on June 9, 2014, when software that IBFX installed, but did not fully test prior to installation, resulted in uncovered positions requiring charges to capital. IBFX’s failure to adequately test the new software, the lack of a system to timely detect erroneous trades generated by the new software and inability to accurately assess and reverse the errors are evidence of IBFX’s lack of diligent supervision in violation of a CFTC regulation.
The post Dodd-Frank regulatory regime has caused shockwaves to the once jubilant retail FX broking environment in the US. Firms operating as margin FX providers have been forced to hold minimum capital requirements of 20 million US dollars. As a result of the new substantiated capital figures, a number of providers have exited the market.
The financial regulator’s witch hunt against brokers breaching capital levels also saw FX broker CMS FX face a similar penalty whereby the firm was ordered to pay a $275,000 fine for capital adequacy breaches.
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The CFTC requires IBFX to pay a $600,000 civil monetary penalty, develop an automated forex exposure monitoring system that will enable the comprehensive real-time monitoring of its actual forex exposure and to adopt and implement risk management procedures regarding 24-hour forex exposure monitoring.
The regulator also requires IBFX to retain a nationally recognized, independent, third-party consultant to review and evaluate IBFX’s information technology development and implementation policies and procedures, and to prepare a written report with recommendations for improvement, which IBFX will implement.
Raising the Bar
Capital adequacy has been a key point for regulators as they address the 2008 recession and devise new rulings to prevent a further mishap. On the banking front, guidelines under Basel III have addressed a number of areas for banks that include higher capital requirements–for example, initiatives such as capital buffers or mandatory capital conservation buffers of 2.5% and a discretionary counter-cyclical buffer to allow national regulators to require up to an additional 2.5% of capital during periods of high credit growth.
In the margin derivatives sector, several regulators have addressed the minimum capital requirements policy for providers. In Australia, the financial watchdog ASIC deployed new rulings over a two-year period that require certain thresholds to be met, with a similar notion present in Turkey for brokers operating in FX.
In the UK, firms authorised as market makers or those that can hold positions as principal are required to hold 730,000 euros (equivalent), under CySEC the figure is one million euros.
In October this year, Maltese authorities tried to strengthen their operating landscape by introducing minimum capital requirements for all participating firms, including firms that act as pure brokers and pass client orders on to their prescribed liquidity providers.
An open playing field has been a key contributor to the growth and development of forex trading over the last 15 years. However, under the current rulings, entrepreneurial driven firms and individuals will find it difficult to bring forward their concept under a closed regulatory banner. Furthermore, only the largest financial institutions such as banks will be able to uphold such high capital requirements, reducing the competition factor bright brokers bring to the table.