Notice I-07-39

September 28, 2007

Effective Date of Amendments to NFA Financial Requirements Section 11 and the Interpretive Notice Entitled "Forex Transactions"

NFA has received notice that the Commodity Futures Trading Commission has approved changes to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions." The amendments increase the minimum net capital requirement for Forex Dealer Members (FDMs) to $5,000,000. They also eliminate the concentration charge and replace it with restrictions on the types of firms with which an FDM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17. These changes will become effective on December 21, 2007.

A Forex Dealer Member must have $5 million in adjusted net capital as of December 21, 2007. This increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). Since this is a significant change to the qualifications for the exemption, Members that are currently operating under Section 12(b) should notify NFA’s Compliance Department whether they intend to continue using the exemption.

As noted above, the changes eliminate the concentration charge and replace it with restrictions on the types of firms with which an FDM may maintain assets and cover its exposure for purposes of CFTC Regulation 1.17. In particular, an FDM may not include assets held by an unregulated person or an affiliate in its current assets for purposes of determining its adjusted net capital, and it may not use positions entered into with an unregulated person or an affiliate to cover its exposure for purposes of avoiding the haircuts imposed by CFTC Regulation 1.17. In general, a firm is unregulated unless it is a U.S. bank; a FINRA-member broker-dealer; an NFA-Member FCM; a state regulated insurance company; or a bank, broker-dealer, FCM, or insurance company regulated in certain foreign jurisdictions. NFA can, however, grant exemptions authorizing the use of unregulated entities or of particular affiliates.

NFA’s August 17, 2007 submission letter to the Commodity Futures Trading Commission includes a copy of the revised language as well as a more detailed description of the changes. You can access an electronic copy of the submission letter at National Futures Association | News Center.

Questions concerning these requirements should be directed to Sharon Pendleton, Director, Compliance, (spendleton@nfa.futures.org or 312-658-6540) or Valerie Kretschmer, Field Supervisor, Compliance (vkretschmer@nfa.futures.org or 312-658-6588).

©2003-2007 National Futures Association

In our constant effort to improve the services of our web, we have launched a new Quotes & Charts service for the Futures section.

We are sharing this project with Interactive Data and Netdania, two of the leading companies in the sector, which provide us with the most up-to-date information for all the main futures markets.

Working with huge exchanges such as CBOT, EUREX, CME, ICE, LIFFE or Euronext we will be able to offer one of the most complete Q&CH service in the whole net. Right now we are offering a fantastic pack on Financials and Indices that will be very soon expanded with more intra-day information on Metals and Energy.

We hope that you enjoy it!

Hi everybody

Are you really bored? Sure have nothing better to do?

Then be brave and read the interview Trader’s Journal Magazine made me in their new issue about to be launched October 2007.

But remember that I warned you… you must have nothing better to do!

Francesc

Download francesc_interview_Traders_Journal_Magazine_Sep07.pdf

Dan Roth the President and CEO of the NFA testified before a Congressional sub-committee yesterday regarding the reauthorization of the CFTC. Highlights of his testimony included his request for net capital to increase to $20 million and that all IB, Money Managers and any solicitors become registered with the NFA.

An interesting reading indeed!

Good night everyone

Francesc

Download nfa_testimonycftc_reauthorization_sept_26_2007.pdf

Hi everybody,

Mr. James E. Green, Managing Director at FX Direct Dealer, LLC (“FXDD”), sent me  a few days ago his response to our open letter to FXstreet’s clients affected by NFA’s capital requirements changes. I do not know why the e-mail entered in a wrong foulder and I´ve not discover it till five days later, so please Mr. Green accept my apologies for this unfortunated delay.

I want to thank Mr. Green for attending my request and I just hope that the last FXstreet’s client affected - ITradeFX - will get back to me with their statement as soon as possible.

Francesc

Francesc: 

I am providing this memorandum in response to your email enquiry and further to our discussion of the issues you raised in your email.  I believe our telephone conversation clarified some of the questions you raised, particularly as they relate to the form of some the questions and terms that are, at least in the United States, what I terms of art.  I appreciated your candor during our discussion and I trust you appreciated mine.

The internet, like any anonymous means of publicly available communication, is a two edged sword and anonymous self censorship is not one of the internet’s strengths.  There is nothing to prevent one person’s comments from being taken out of context while providing anonymity to the person who republishes the comments in chat rooms and on bulletin boards. I know that many firms have been on the receiving end of comments they believe were unfair, half truths or simply wrong.  You have the unenviable task of trying to strike the right balance in publishing comments made on FXStreet.  Like most forums, FXStreet has allowed people to openly express their views anonymously.  There are always instances, as you and I discussed, where unhappy, unlucky and/or unskilled “traders” use the internet to vent their anger at one or multiple firms for both real and imagined slights.  As we noted, perhaps time could be better spent learning their craft, developing an understanding of how the OTC spot foreign exchange market actually works (rather than wishing it worked differently) and taking advantage of the services offered by the many excellent firms that appear on your site.

There has been much made of the NFA’s decision to increase capital requirements and we, like many firms, have fielded telephone calls from traders wanting to know how this increase in capital will impact the firm.  It seems as though these traders have all been reading each other’s mail or reading the same chats because they all refer to the companies that “the NFA put out of business.”  We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA.  We also note, however, that we do not believe that increasing capital requirements to $5,000,000 is sufficient.  If $5,000,000 is the miinimum threshold entry to the foreign exchange business, it is only a slightly higher barrier to entry than the previous $1,000,000 minimum capital requirement.  While it is true that the companies against whom the NFA took action were undercapitalized, their management’s lack of experience and expertise surely contributed to the failures.  Perhaps a “minimum net experience” threshold should also be a requirement.  We advise our clients that FXDD is well capitalized and holds substantially more capital than that belonging exclusively to its clients.  FXDD does not publish its capital or the amount of customer equity it holds.  Those prospects who demand to see our confidential financial information are advised that we do not release that information. 

As I suggested to you during our conversation, customer funds held for off exchange OTC transactions may not be deemed to be “segregated” as that term is understood in the context of the Commodity Exchange Act and the NFA’s regulations. Thus it is unclear whether funds held for such transaction are protected in the event of a bankruptcy.  To the best of my knowledge, only funds held for regulated activity in the futures markets will receive segregated protection.  Most firms, FXDD included, manage their own firm capital separate and apart from the margin capital posted with their liquidity providers.  Thus, firms who imply to clients that client funds are “segregated” are by reference seeking to assure the client that somehow their funds are secured and are protected.  This issue struck home with the Refco fiasco.  Perhaps the U.S. Congress will, at some point, extend the benefits of true segregation to client funds held by all foreign exchange dealers.  Currently, however, that option does not appear to be available to any dealer regardless of its registration status.  Thus it appears that once a firm files for bankruptcy protection, clients would not be able to withdraw their funds.  Those clients would become unsecured creditors of the firm. FXDD carries a blanket bond that covers theft, fraud and criminal activity by its officers and employees, but even that does not cover bankruptcy..  I do not know whether other firms carry such a bond.

The company listed on the CFTC’s website, Tradition Securities and Futures, Inc. (TSF) is not FX Direct Dealer.  Tradition Securities and Futures, Inc. is a registered futures commission merchant that does not deal in spot foreign exchange. TSF is owned by Tradition North America, Inc. which is also a minority shareholder of FXDD.  Tradition North America, Inc. is one of the largest interdealer brokers and provided financial and professional assistance to FXDD when it was a startup company.  Tradition North America, Inc. is part of the Tradition Group which has a forty plus year history in the financial markets (www.traditiongroup.com).  FXDD has maintained the policies, procedures and protocols established when it was a subsidiary of Tradition.

Regarding the business model that foreign exchange dealers follow.  Some firms accumulate customer positions; others pass those positions through to the dealer’s liquidity provider (STP); while others use a combination of accumulation and STP.  As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question. From the client’s perspective (at least our clients’ perspective), the issue is not whether there is a perceived or actual inherent conflict of interest on the part of firms who may accumulate positions.  Our clients want to know that our desk manages client positions with integrity based on honest pricing and fair dealing practices.  Some firms have, rightly or wrongly, developed a reputation as “stop hunters,” and “boosters.”  Since the dealing firm knows all customer positions, it might be tempted to widen the market or boost the bid or offer just so that it can hit client stops.  Later they justify the price change based on a set of objective or subjective parameters.  Those firms, to our way of thinking, are not credible dealers and abuse their clients’ trust.  And firms who are strictly providing liquidity on an STP basis (no dealing desk interference) have the same ability to manipulate the price should they choose to.  Professional dealing desks like FXDD’s manage risk, execute customer trades when needed and provide constant liquidity to the firm’s clients. The bottom line is that clients must always demand credible pricing and honest dealing from their firm whether it is FXDD or one of the other excellent firms on your site.

I hope I have answered your questions Francesc.  FXDD prides itself on providing honest pricing, credible dealing practices, good client support and competent assistance with all matters relating to our clients’ accounts.  There are many good firms on your site and we, like them, would like to see the foreign exchange market grow.  The really good firms do not tolerate abusive activities or remarks aimed at their competitors and are content to let their services speak for themselves. 

The Bank for International Settlemens has just released the preliminary results of its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2007.

The BIS plans to publish a more detailed analysis of the results for the traditional foreign exchange markets in the December 2007 BIS Quarterly Review. In addition, the BIS will release the preliminary global results from the second part of the triennial survey covering open contracts outstanding in OTC derivatives markets at end-June 2007 in November 2007, and a final report with global results on foreign exchange market turnover and on OTC derivatives market turnover and amounts outstanding in December 2007.

The 2007 survey shows an unprecedented rise in activity in traditional foreign exchange markets compared to 2004. Average daily turnover rose to $3.2 trillion in April 2007, an increase of 71%. This increase was much stronger than the one observed between 2001 and 2004.

To read it all, please go to:

http://www.bis.org/publ/rpfx07.htm

Gary Tilkin, President & CEO at Global Forex Trading (GFT),  has been the 4th top executive of the selected 20 FX Brokerage firms to answer FXstreet’s questionnaire regarding new NFA requirements and their potential impact on the FX industry.

I want to thank Gary for attending my request and wish him and his company GFT all the best of luck.

Francesc

Questionnaire:

1- What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
In general, we view the NFA’s new changes as a positive for the forex industry.  GFT has always operated with integrity and acted as though far tougher regulations existed in the retail forex industry, even prior to the Commodity Futures Modernization Act of 2000.  More recently, GFT has been working with the NFA on many of the new regulations you refer to, and in fact, GFT has suggested to the NFA some of the regulations that are being implemented.  GFT continues to speak with both the NFA and the CFTC in the U.S. to help work for a stronger retail forex industry.

2- The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company’s business in some way?
Most, if not all, of the proposed changes will affect GFT as they will affect all FDMs, but we view these as positive changes.  GFT practices proper accounting methods, and employs one of the world’s big three accounting firms to do our annual audit as well as separate internal control-auditing.

Currently, GFT ranks as the #1 Forex Dealer Member, in terms of Adjusted Net Capital (according to the CFTC website, which lists Adjusted Net Capital figures for FCMs, including FDMs).  We have far more capital than the majority of FDMs and we strongly believe that our dominant position will continue, and in fact, grow with sensible regulations not only in the United States but around the world.

3- Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?
The number of customers moving to the forex market is very impressive and we see this strong growth curve continuing for many years to come.  A properly regulated forex industry by well-informed regulators can only benefit everyone involved.

4- Switzerland has recently started a similar process, what is your opinion about it?
We would like to see similar regulations in most, if not all, developed nations of the world.  GFT has customers worldwide supported by three offices in the U.S. and outside of the U.S. in London, Tokyo and Sydney with more offices planned for 2008 and beyond, so we are in favor of consistent regulations globally.

5- Would your company be on the bid side if some firms were not meeting new requirements? What is your company’s policy on acquisitions of smaller firms?
GFT has the capital, service levels and depth of products to be able to greatly benefit some of the smaller forex firms that find they cannot meet the new capital requirements.  With our three versions of order entry and analysis software (DealBook 360, DealBook Web, and DealBook Mobile) as well as our training and analysis products, we are uniquely qualified to give substantial upgrades in service to customers of smaller firms.  We currently have near perfect uptime statistics for our dealing platforms and substantial additional capacity, so we are always in a position to immediately add a significant amount of new trading volume. 

GFT is currently speaking with some of the smaller players in the industry who could benefit from our capital base and capabilities, and we are interested in speaking with any firm or customer who would like to partner with GFT.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
There will probably be some mergers and acquisitions, but we don’t expect many.

7- For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading ‘against them’, which contradicts traders’ well-being. What is your company position on this? How do you hedge your customers’ trades?
This question assumes something to be a fact where there is none.  The assumed fact is that forex dealers who "book" the trades of at least some of their customers are somehow working against those customers.  Perhaps in the old days of the true bucket shops or even in the more modern world of some smaller forex firms, there were or are those who may have wished their customer’s ill. But to assume that the practice of booking trades of customers is working against those customers is a very naive and simplistic view of what is really happening. 

Many firms that own and operate their own software and are true forex dealers (as opposed to simple brokers–shifting the trades to someone else), often by virtue of filling orders instantly have to take those customer orders into their own book, at least temporarily.  This is often done to facilitate very quick executions of orders.  As these counter positions build up, the dealer often seeks to offset the risk of these positions with their various banks.  Depending on the size of the forex dealer’s capital, the dealer may or may not offset certain levels of these counter positions.  To assume, however, that the dealer is then "working against" the customers with whom they hold non-offset positions is totally ridiculous.  Well-established, reputable forex dealers need never do anything to harm any of their customers to make good profits. 

At GFT, we profit by our customers becoming more successful and growing their accounts larger and larger and bringing more people into the business.  This is why we’ve developed a high-quality series of training courses for our customers, so they can become more knowledgeable and informed traders.

8- Would you like to add something else?
A closely related topic that has been promoted lately by some forex dealers is the notion that they have "no dealing desk."  While it may be true that the firm running such a promotion has no dealing desk itself, it borders on fraud to suggest that no dealing desk is involved in the forex transaction.  Those forex dealers who have no dealing desk are simply passing on the trades to one of the banks they deal with.  That bank, of course, has a dealing desk and handles that transaction the same as any other forex dealer would.  The biggest difference is that when a customer deals with a forex dealer who operates a dealing desk, the customer has the luxury of being able to call that dealing desk to discuss any problems or questions they may have on any of their trades. They can get a quick, informed answer as opposed to attempting to deal with a large bank that is shielded by a forex dealer that has no dealing desk and no intention of letting the customer talk to that bank’s dealing desk.  The main point that customers must understand is that there is always a dealing desk involved in a forex transaction, and any attempt to confuse customers into thinking that there is not is highly dishonest.

Those firms that used to operate as forex dealers and are now operating as forex "brokers" (operating no dealing desk of their own but simply passing on trades to banks) are using a tried and true method of processing orders but may be short-changing their customers as they become a "middle man" for the transaction, placing the customer further away from the dealing desk that actually fills their order.  For small "hit and run" type of trades this may not be much of a problem, but for serious customers doing substantial forex trades and looking for the best in service, dealing with a firm operating a dealing desk staffed by helpful, experienced dealers is a huge advantage. 

Firms such as GFT who operate dealing desks properly can fill thousands and thousands of orders virtually instantly, but also have trained individuals monitoring orders to help customers with any situation.  Properly run dealing desks are simply a higher level of customer service as opposed to an impediment to execution speeds. 

Contrary to popular opinion, when dealing with forex dealer members acting as brokers, customers must realize that their broker makes a portion of the spread that is added on to the dealer spread. And as they are a degree separated from the actual dealing desk where the trade occurs, there is less discretion that the market maker/dealer can have in order acceptance, especially since  there are  additional revenue streams for each order (orders introduced by introducing brokers may also have additional mark-ups applied).  Common side effects experienced by the trader include more trade rejections and generally higher rates of slippage. 

At GFT, customers see and can execute their trades on streaming prices 24 hours a day, almost 6 days a week, directly with a market maker.  On liquid markets, GFT customers have access to trade up to 20 million in notional volume with a single click of a mouse.  Unlike most of our competitors, GFT does not widen spreads during market volatility, due to its interbank dealing relationships and the liquidity that GFT has available during even the most turbulent market conditions. 

Gary Tilkin, President & CEO at Global Forex Trading

Hi everybody,

I’m more than happy than month after month I’m coming to you to announce that FXstreet.com is hitting new all-time records in audience.

This time I’m very glad to announce that the week from September 17th to 23rd has been the best week ever in our 7 years and something history.

On that week we didn’t only get a new all-time record September 18th with almost 40,000 visitors but we got the best Sunday ever with 33,000 visitors more than twice the regular traffic we have any given Monday.

The numbers for the week of Sept. 17th were as follows:
350,381 Visits
152,540 Absolute Unique Visitors
994,387 Pageviews
2.84 Average Pageviews
00:03:47 Time on Site

I wish that from now on we will get 150k unique visitors per week - 600k unique visitors per month - but I doubt we will be able to match this numbers in the coming weeks. I was not expecting this numbers not early than February 2008 so please be very welcome!

All the best

Francesc

Drew Niv, CEO at FXCM,  has been the second top executive of the selected 20 FX Brokerage firms to answer the questionnaire we sent yesterday morning regarding new NFA requirements and their potential impact on the FX industry.

I want to thank Drew for attending my request so quickly and wish him and his company FXCM all the best of luck.

Francesc

Questionnaire:

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
We believe the new NFA regulatory changes will lead to a consolidation of the retail forex industry. The consolidation will benefit FXCM, since we easily meet the new proposed regulations.

The proposed regulations will require that firms have at least $5 million in net capital. However, the requirement for brokers with large amounts of customer capital could be substantially higher. We estimate that as many as 20 firms would not be able to meet this requirement if enforced today.

The forex industry in the long term will benefit from having a smaller number of better capitalized brokers. In essence, a broker with more firm capital is less likely to make imprudent decisions that would put its funds and its customer funds at risk.

Although these new regulations are good for the industry, the resulting short-term changes may be difficult for clients whose brokers do not meet the new requirements. We hope that the NFA will make every effort to facilitate an orderly transition as brokers make new arrangements to enable their clients to trade through firms that meet the new requirements.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company’s business in some way?
No. FXCM’s accounting practices will not be affected by the new proposed regulations. Our own business standards led us several years ago to adopt the practices specified in the new proposed regulation.

For the last six years, FXCM has been audited by major accounting firms which audit public traded companies. Our financial statements comply with international GAAP standards. 

To live up to these higher standards, we have had to maintain a highly trained and professional staff of accountants and internal auditors. We believe only a large firm, such as FXCM, can make the type of investment in financial integrity which will now be required of all FDMs by the new proposed standards.

3 - Do you consider these measures could be a breathe of fresh air that could result in more investors joining the FX Market?
Yes. The FX market has been growing at an incredibly fast pace. However, its momentum could be slowed if one or more brokers became insolvent. These new proposed rules significantly reduce the probability of that happening. Thus, the proposed new rules help protect the future of the industry.

My personal opinion is that the emerging credit crisis will have a major impact on equity markets. As profitability in trading stocks becomes more difficult, there will be a mass of traders into forex. We do not want those traders’ first opinion of forex trading to be of  an industry in need of regulation.

4 - Switzerland has recently started a similar process, what is your opinion about it?
Switzerland’s regulation of the forex market has lagged years behind the world’s other major financial centers. The recent insolvency of a Swiss trading firm, TradeX, highlights the dangers of dealing with a broker based out of Switzerland, where there is currently minimal regulatory oversight. As Switzerland moves to correct these problems, it will help the world-wide forex industry.

Every time a major country embraces regulation of retail forex trading, such as Japan in 2005 and the United States in 2000, the industry has grown.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company’s policy on acquisitions of smaller firms?
FXCM is in discussions with several small and mid-sized FDMs who are concerned about their ability to meet the new proposed requirements. We are interested in purchasing the client accounts of these firms, or finding  a mutually beneficial relationship with them.

The FXCM Group is uniquely positioned to accept and service the books from other brokers. We have  1) A global footprint with offices in the Americas, Asia and Europe; 2) A staff of over 500 capable of handling the migration of a large numbers of client; 3) over $100 million in group capital to fulfill the capital requirement associated with servicing these new clients.

A forex broker seeking a buy or an IB relationship must first of all consider the buyer’s ability to pay. Brokers will have thousands of  clients trading many millions of dollars; the buyer will be obligated to rebate millions of dollars to them. The brokerage firms must satisfy themselves that the buyer can afford to do that – in fact, has been routinely doing that for years.

Also: The broker must be assured that the buying firm can absorb thousands of new clients, service them well and, in order to continue to continue to receive revenue from their trading, keep them as clients.

The most important reason that many FDMs are considering a relationship with FXCM involves trust. In blunt terms, FXCM can always be trusted to pay the firm’s owners the revenue their accounts earn – in full and on time. FXCM has been working with Introducing Brokers for over eight years. In fact, our very first Introducing Broker continues to refer business to us.

Our No Dealing Desk business Model is ideally suited to processing a large Introducing Broker book of business. Under our No Dealing Desk system, our monthly revenues, in the form of pip markups, are an exclusive reflection of trade volume: if we do X volume, we book X pips. And the revenues of our IBs move in perfect concert with our own, since they are rebated an exact percentage of total volume.

The revenues of a market-making broker, on the other hand, are not only dependent on volume, but may vary significantly depending on the quality and effectiveness of the broker’s traders as well as market volatility. Therefore, if the FDM allies with a market maker, and that market maker suffers a losing month, yet still owes a volume rebate to the IB, the IB may encounter difficulties in collecting everything it is owed.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
Six. The M&A market in forex is particularly tough for several reasons.

• No common standards – for software platform, accounting standards, back office procedures. It makes integrating an acquisition much more difficult than a firm in the equity industry, for example, where standards are shared.
• Recent market volatility meant rising volumes and profits for most firms. August was one of the best months in FXCM Group’s history – we had over half a trillion in trading volume – and we suspect that other firms also did very well. This recent success, I believe, will make owners of smaller brokers reluctant to sell. As a founder of a forex firm, I completely understand their feelings and their attitude. It is very tough to exit now. However, as the new proposed regulations come closer to enactment there may be a major re-assessment.
• Many private equity firms and venture capitalists are eager to fund profitable forex firms. But they are in search of the fastest and surest payout, and will tend to ignore all but the largest and most competitive forex firms on the market. Furthermore, they realize that even those large FDMs have been put in a weak – and perhaps ultimately desperate — bargaining position by the new proposed regulations, and will negotiate accordingly. If past is precedent, at contract time the deal will become much more one-sided, and full of pitfalls for the forex broker owner. Private equity firms are expert at negotiating terms that are extremely profitable for them but costly for the business owner. 

The  illusion of private equity firms lining up to invest in the business may give the owner false hope that buckets of cash are theirs for the taking. I believe that once the FDM owner is discouraged by the private equity experience, actual M&A activity between forex brokers will intensify.

7 - For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading ‘against them’, which contradicts traders’ well-being. What is your company position on this? How do you hedge your customers’ trades?
We believe that No Dealing Desk model is best for both trader and  broker, and FXCM is totally committed to it. Over 99.9% of our business is conducted on this model.

FXCM was primarily a market maker until the end of 2006, when we took a 180 degree turn to the agency execution model. So we know the market-making business. Currently, many of our competitors believe that because volatility has returned, market making is the more profitable business model. That is true — in the short term. Long-term, however, the no dealing desk system is better for both the broker and the client, for several reasons.

• Better Execution During News Events & Market Volatility.  In the past few years, clients have become much more focused on trading news events –  those turbulent times when it is most difficult to make prices. By aggregating large bids and asks from the large banks, we solved that problem, and the proof is that since we inaugurated no dealing desk our trading volume during news events has grown immensely. Market makers, however, have an especially tough time during news trading, because if they honor all prices they will lose money. (When we were market-making we certainly lost money during the big market moving news events.) Remember too that the market-maker’s prices are removed from the real market, and so they must protect themselves by offering created prices. We avoid the problem by having the world’s largest banks streaming their prices through us.
• Lower Spreads. We can now review our policies relating to prices and markups above the best bid/offer we get from the banks, and we’ve introduced fractional pips to further tighten spreads. In the next few months we will continue cutting the cost of trading pairs across the board. And we have launched numerous incentive programs to provide additional discounts to high-frequency traders.
• Greater Opportunity to Scalp the Market. Many traders favor short-term scalping strategies. For scalping to be profitable for the client, the market maker must lose. So either the market maker takes the loss or disallows the strategy. With no dealing desk we are able to accommodate scalpers – but of course we clearly warn them of the risks involved.
• Aligned Broker-Trader Interests.  The no dealing desk strategy has aligned FXCM’s interests with those of our customers. Since it is in our interest for them to trade more, we want them to increase their profits and account sizes. We have studied which trading behavior is most profitable for the retail trader, and have discovered that most retail clients are less successful when they trade pairs with large swings – especially GBP/USD. They are much more profitable with the quieter, range-bound pairs like EUR/CHF, EUR/ GBP and AUD/NZD. To give our clients an extra incentive to trade the more successful pairs, we have been aggressively reducing our markups on these pairs to make their spreads the tightest of all the currencies we offer.
• Easier Implementation of Programmed Trading.  We can now accommodate more black box traders, both those with high-frequency systems and those with break out systems. The change to no dealing desk allows us to service a large new group of traders who never thought of trading through us when we were market-makers.

8 - Would you like to add something else?
The major reason for the proposed regulations is that the NFA and the industry realizes that we must provide more funds security to forex traders. The new proposals are a major step forward, but I think we all realize they don’t go far enough.

I am proud to say that FXCM is in the vanguard of the movement to convince the US Congress to pass legislation extending funds segregation to the forex industry. In fact, we have even established a Political Action Committee to support and coordinate the actions of this Safety of Funds initiative, and we have convinced three other large FCMs to add their names to our petitions. We are urging every firm in our industry to join us in this effort.

FXCM already has the ability to offer our clients segregated forex accounts. Thanks to our British subsidiary, accounts with Forex Capital Markets LTD (FXCM-UK) are fully segregated in accordance with United Kingdom financial regulations.

Peter Furrer, President at GFX Group SA,  has
been the third top executive of the selected 20 FX Brokerage firms to
answer the questionnaire we sent yesterday morning regarding new NFA
requirements and their potential impact on the FX industry.

I want to thank Peter for attending my request and wish him and his company GFX Group SA all the best.

Francesc

Dear Francesc,

Thank you for the privilege to be part of your survey.

First I would like to confirm, that I concur with the opinion that some of the changes in progress will affect not only the retail FX industry but more importantly the customers view on this business. Security and safety of funds is the most important concern of any investor and if the retail FX industry is capable of confirming that, I am certain, we will see an increase in business. Unfortunately this primarily means investments & costs for us, as every new bureaucratic measure has its price tag.

I tried to be as short and precise as possible – my comments below your respective question.

Please do not hesitate to contact me in case you might have any further question.

With kind regards

Peter Furrer
GFX Group SA

 Questionnaire:

1 - What is your opinion on the recent NFA regulatory changes? How do you view the implementation of these new measures for FDMs?
GFX Group SA is currently not affected by these changes.

2 - The new proposal also calls for the use of proper and uniform accounting methods and tightens internal controls. Do you think this measure could affect your company’s business in some way?
Yes, in 2 ways – 1st from an expenditure point of view. Operational & controlling costs will increase substantially in the industry and 2nd from a client confidence point of view. Transparency & tighter controls provide the customers with a higher level of security comfort.

3 - Do you consider these measures could be a breath of fresh air that could result in more investors joining the FX Market?
Yes, see above.

4 - Switzerland has recently started a similar process, what is your opinion about it?
Highly supportive. General Financial Market reputation is at stake without some control & supervision. Regulators focus should be on security of investor funds without an extravagant and expensive bureaucratic process.

5 - Would your company be on the bid side if some firms were not meeting new requirements? What is your company’s policy on acquisitions of smaller firms?
To be reviewed on a case-by-case basis – but reluctant to look at companies that could not meet the new requirements. Interest depends on possible market perception and - penetration.

6- How do you see the M&A market in the Forex industry? Do you expect important corporative movements in the next months?
Not in the next few months but - especially on a technical / operational basis - within the next year or two. The regulatory requirements will force some FX traders to join forces with competitors to get a grip on costs.

7 - For many, the very business model of Forex brokerage firms that needs to be decided is whether or not such brokerage houses can take opposite trading positions to those held by their customers, i.e., trading ‘against them’, which contradicts traders’ well-being. What is your company position on this? How do you hedge your customers’ trades?
The current business model of brokerage houses taking opposite trading positions is a question of taking a calculated risk and having enough capital in order to absorb a potential trading loss. Prudent risk management is the essence. We are hedging in the market.

8 - Would you like to add something else?