This day in history: December 9, 2014 – IBFX gets $600,000 fine for failing to meet net capital requirements. Now they’re gone

Undercapitalization is a no-no as far as CFTC and NFA rules are concerned. Two years ago today, IBFX found itself in receipt of a $600,000 fine for failing to meet capital requirements, which was followed later by a further fine for warehousing and trade execution deficiencies, topped off by another $1 million fine earlier this year for undercapitalization. The company no longer operates in the United States

Government Pension Fund of Norway

This year, IBFX, the North American subsidiary of Japanese electronic trading giant MONEX Group, disappeared from the US market.

Two years ago, the firm sold its MetaTrader 4 client base to FXCM for $4.4 million, hanging onto its customers which traded via the proprietary Tradestation platform until selling that client book of 2,200 traders to OANDA Corporation in the summer of this year, who were then migrated onto the fxTrade platform.

On this day two years ago, IBFX had found itself on the receiving end of the long arm of the regulatory authorities, the US Commodity Futures Trading Commission (CFTC) having issued a $600,000 penalty for failing to meet the minimum net capital requirements set forth by the National Futures Association and the CFTC.

At the time of the issuance of this particular penalty, the CFTC stated 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.

The company’s censure did not stop there, ith IBFX having been found by the CFTC to have been undercapitalized at a point during Jun 2014 in which the firm installed new commercial software which was not tested prior to its installation. As a result, this created a situation in which positions were uncovered, which meant that these positions would have had to be covered by company capital, meaning that a further dip below the required capitalization levels would have occurred.

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.

That particular penalty was the second $600,000 monetary fine issued by the US authorities to IBFX in the space of a year.

took a swing at IBFX as a result of trade execution reporting inadequacies that had come to light from a look at the NFA’s Forex Transaction Reporting Execution Surveillance System, which is the NFA’s central reporting system, in which all members are duty bound to submit data relating to all aspects of trade execution in order that it can be referred to in cases of necessity, such as compliance inspections or customer complaints.

One specific aspect was with regard to trade warehousing.

An examination by the NFA ensued, which initially focused on IBFX’s activities for the two-year period of 2010 and 2011, relating to price movements which occur between the time at which an order is placed by a customer and executed by the company.

As a result of this particular investigation, inadequacies in recordkeeping were discovered and the NFA was unable to fully evaluate the company’s trade execution practices.

According to the material detailed in the NFA’s complaint, IBFX used two models to execute its retail FX transactions. One was STP, and the other being a practice known as warehousing.

According to the NFA report at the time, and the parlance of the legal document on which the NFA’s complaint was registered, warehousing occured whereby IBFX acted as the counterparty for trades whose value was less than the notional volume threshold level lnterbank had established for STP trades. Interbank would aggregate the “warehoused” trades for risk management purposes and earn revenue from the bid/ask spread and from beneficial market moves that the aggregated “warehoused” trades experienced.

For the vast majority of trades, IBFX would warehouse the trades, and for the remainder of trades, IBFX used the STP model, which accounted for a very small percentage of the firm’s trading volume and applied when the contract size was at or over the specific notional volume threshold set by the firm for its warehouse trades.

Under the STP model, after a customer clicked on the bid or offer price, which included lnterbank’s predefined markup, IBFX would fill the customer’s order but only after the firm had filled the offsetting position (contra-fill) with a liquidity provider.

The NFA attempted to analyze IBFX’s execution data on all STP transactions from January 2010 up to the time the firm was acquired in late 2011. However, while the firm ultimately was able to provide historical markup information since June 2010, the NFA was unable to complete its analysis because historical markup data prior to June 2010 was not available, and for certain types of STP transactions (split fill transactions) since June 2010, Interbank’s record of historical markup changes could not be reconciled to specific trades. As a result, NFA was unable to analyze all of the firm’s STP transactions.

Specifically, since February 4, 2011 the NFA required IBFX, in line with all NFA members, to submit electronic reports to NFA through the FORTRESS system that contained, among other data, specific records of trades executed on a daily basis, including the contra-fill price for trades executed via STP. However, the information IBFX provided to NFA through the Fortress system was incomplete, and failed to report contra-fill prices throughout much of 2011.

In March this year, IBFX exited the US market, following the migration of its final 2,200 customers to OANDA Corporation’s fxTrade platform.

Just two weeks later, further regulatory woes ensued, this time in the form of a $1 Million Penalty for failing to meet minimum capital requirements yet again, failing to timely report minimum net capital violations, supervisory failures, and violating a prior CFTC Order in which IBFX was fined $600,000 for a series of net capital deficets and also failure to supervise.

The CFTC Order determined that from January 15, 2015, through February 5, 2015, IBFX failed to meet the minimum capital requirements, failed to notify the CFTC of its undercapitalization, and failed to diligently supervise its employees in violation of CFTC Regulations. The Order also settles charges that IBFX violated a prior CFTC Order entered against IBFX on December 10, 2014.

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