This day in history: September 2, 2010 – FXCM speaks out on reduced leverage, shows concern over rulings on foreign business

The landscape of the OTC retail FX industry in exchange-listed futures orientated North America began to change dramatically in the latter part of 2010, a period during which the ink was still wet on President Barack Obama’s signature on the official Dodd Frank Wall Street Reform Act which revolutionized the methods by which OTC derivatives could be traded, and insisted on a complete redesign of the entire infrastructure behind the electronic financial markets system.

In the shadow that was cast over America’s regulators by the high profile demises of MF Global and latterly PFG Best, the notorious ‘customer first’ approach was high on the agenda of the US government, which means powers to restitute customer funds, and a massive insurance policy in the form of a $20 million net capital adequacy requirement for all brokerages, however the most important ruling was the decision by the US authorities not to allow domestic companies to accept overseas customers, and vice versa thus ensuring total regulatory jurisdiction over all firms and the ability to supervise and act accordingly if something goes wrong.

Many FX brokerages with offices in the US retracted, leaving domestic giants to continue, and elevating the NFA and America’s brokerages to a very high level of commercial regard.

FXCM, one of the very largest FX brokerages in the world, had continued business as normal as it had expanded to have offices in other jurisdictions with the relevant regulatory licenses by that time, thus its main US division could concentrate on offering service to US clients from its North American offices, and overseas clients from London, Singapore, Berlin, Paris, Sydney, Legnano, Athens, Tokyo, Tel Aviv and Johannesburg.

Business as usual indeed, however the all-seeing eye of the National Futures Association (NFA) and CFTC looks beyond regional structure, and is scrutinous of every aspect of the business, including which division acts as a counterparty for which clients, FXCM having fallen foul of a $140,000 penalty issued by the CFTC one year after the Dodd Frank Act was sworn in as a result of its London office acting as a counterparty for RFED clients in America.

FXCM’s vocal approach to the new regulations that restricted American clients to American brokers and vice versa began on this day six years ago.

A week after the announcement by the CFTC of new rules that took effect on October 18, 2010, FXCM commenced correspondance with the CFTC and NFA in order to obtain interpretative guidance on some of the details.

At the time, FXCM emphasized that its goal was to provide retail clients and the FX industry with clear and correct information on how accounts with FXCM will be impacted.

FXCM looked at leverage reductions, in particular the reduction to 50:1 for major pairs and 20:1 for non-majors which differed from the original CFTC proposal of 10:1.

FXCM actually took a positive view on the reduction of leverage, stating at the time that it would be of benefit to traders as higher leverage can result in a few losing trades offsetting many winning trades. By the time FXCM spoke out on this, the firm had already implemented 50:1 as the default margin setting on FXCM LLC standard accounts, although traders still had the option to change margin levels upon request to 100:1 leverage with FXCM LLC. As of Oct 18th 2010, FXCM began to comply with the new maximum leverage requirements.

FXCM also noted on September 9, 2010 that as of October 18, 2010 all referring brokers introducing business to registered FCMs or Retail Foreign Exchange Dealers in the United States will be required to formally register with the CFTC as introducing brokers and become NFA members, which in turn meant a net capital adequacy requirement for introducing brokers of $45,000 – a world first as no other region requires introducing brokers to maintain net minimum capital adequacy.

In anticipation of this rule, by September 2, 2010 FXCM had already initiated procedures to be in compliance as of October 18th. At present, all Introducing Brokers to FXCM LLC are either registered with the CFTC as IBs or pending registration.