FXCM strikes back at CFTC’s charge over undercapitalization during SNB ‘black Thursday’

Yesterday, the Commodity Futures Trading Commission (CFTC) made a formal complaint against retail FX giant FXCM citing that on January 15, 2015 when the SNB removed the 1.20 peg on the EURCHF pair, FXCM admitted it had a shortfall of at least $200 million under its adjusted net capital requirement, meaning FXCM had liabilities exceeding its assets by approximately $175 million.

As alleged in the Complaint, the capital shortfall followed the removal of the 1.2000 EUR/CHF fixed exchange rate, also known as the “peg,” and the drop of the EUR/CHF rate to 1.1659. FXCM’s systems were not designed to prevent or diminish the effects of such a market event, leading to increased losses. FXCM’s capital shortfall was not resolved until January 16, 2015, when FXCM sought and obtained a loan of approximately $279 million from a large conglomerate holding company, according to the Complaint.

The Complaint also alleges that FXCM failed to immediately notify the CFTC when it knew or should have known that its adjusted net capital was less than that required under the applicable CFTC regulation and that it was, therefore, undercapitalized. The complaint further stipulates that FXCM never affirmatively gave notice to the CFTC, and it was only after the National Futures Association (NFA) and the CFTC initiated contact that FXCM provided notice of its capital deficiency.

Today, in a rare set of circumstances as the vast majority of CFTC regulated FX dealers and NFA members never contest regulatory charges or complaints, however in this case, FXCM has today issued a statement on the matter, stating that the company is disappointed in the CFTC’s intimation that the Company’s “seatbelt” system contributed to the FXCM’s undercapitalization during the SNB Event, that the company succeeded in ensuring that it rectified its situation very quickly given the lack of time and extremely unusual circumstances, and that FXCM considers the CFTC’s claim that the firm did not notify the CFTC in a timely fashion of the capital shortfall.

FinanceFeeds concurs with FXCM’s statement, having met with CEO Drew Niv recently at the company’s offices in New York where Mr. Niv explained his actions in detail and how he maintained a very even keel and kept the company in the same condition now as it was pre-SNB event.

FXCM’s statement is as follows:

The CFTC claims relate to the unprecedented and unforeseen crisis that occurred in January 2015 — more than twenty months ago — when the Swiss National Bank (“SNB”) shocked the world currency market by announcing in the middle of a trading day that it was discontinuing the minimum exchange rate of the Swiss Franc to the Euro (the “SNB Event”). The Company is very disappointed by the CFTC’s decision to file this complaint and attempt to punish FXCM who, like other market participants, was a victim of the SNB Event.

The SNB Event damaged world markets and damaged FXCM and its customers. By the close of business on January 15, 2015, FXCM customers lost approximately $225 million. As a result of such losses, FXCM experienced for the very first and only time in its history a one-day regulatory net capital shortfall.

FXCM thereafter promptly notified both the CFTC and the National Futures Association (the “NFA”) of its net capital shortfall due to the unforeseen SNB Event. Within hours of that notification, teams of CFTC and NFA personnel were on site at FXCM’s offices.

Faced with the crisis of the SNB Event, FXCM and its board of directors worked around the clock to raise the funds needed to cure its regulatory shortfall.

We succeeded. By the next afternoon, the Company cured its capital shortfall through a $300 million loan from Leucadia National Corporation. We averted the crisis. Given those facts, we could not be more disappointed that the CFTC has decided to pursue an undercapitalization violation claim against FXCM. Such a claim under these circumstances is unprecedented and unwarranted.

We are also disappointed in the CFTC’s intimation that the Company’s “seatbelt” system contributed to the FXCM’s undercapitalization during the SNB Event. To the contrary, the Company’s seatbelt system prevented FXCM and its customers from suffering additional trading losses that day.

Equally unwarranted is the CFTC’s claim that the Company did not timely notify the CFTC of its net capital shortfall. As noted above, the regulators were fully apprised of the capital shortfall and, within hours of the SNB Event, the CFTC and the NFA were on site at FXCM’s offices.

We also see no basis for the CFTC’s claim that the Company improperly guaranteed customers that they would not lose money. To the contrary, FXCM repeatedly represented to and warned its customers of the significant risks of trading FX and that such trading is appropriate only for individuals who can assume risk of loss in excess of their investment and margin deposit. In fact, FXCM customers were required to acknowledge in writing that they received no guarantees of profit or freedom of losses from FXCM or its representatives.

This action is unfortunate and disappointing, but the good news is that, because we acted as expeditiously as we did in January 2015, we protected our clients, we protected our employees, we protected our shareholders, and we protected our franchise.

Photograph: FXCM Headquarters, New York. Copyright FinanceFeeds