FXCM (Global Brokerage Inc) warns of heavy risks due to Leucadia deal, regulatory action

Maria Nikolova

Whereas US regulatory actions may have detrimental damage on the broker’s reputation and business, an acceleration by Leucadia of the repayment of borrowings may see the company lack sufficient assets to repay its debt.

The 10-K report by Global Brokerage Inc (NASDAQ:GLBR), formerly known as FXCM Inc, is out and it is full of warnings about the risks the company is facing in the near and long-term future. Part of these relate, of course, to the recent regulatory action in the United States that saw Forex Capital Markets LLC and several of its principals abandon their registrations with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). The broker warns that this is will lead to damage to its reputation and to its ability to conduct business.

The regulators

“There can be no guarantee our regulators in others parts of the world do not bring similar actions to those of the NFA and/or CFTC. Moreover, there can be no guarantee that any resolution to such potential actions does not require withdrawal from additional localities, markets, regions, or countries. Requirements to withdraw from business in any geographic region could adversely affect our reputation, revenue and profitability”, the broker states.

“We remain at risk that we may be exposed to civil or criminal penalties or be required to cease operations if we are found to be operating in jurisdictions without the proper license or authorization or if we become subject to regulation by local government bodies” – the report adds.

Outside of the US

Non-US business is indeed under the watch of non-US regulators. The 10-K report says:

“The Company’s subsidiaries are cooperating with regulatory authorities outside the U.S. in relation to their requests for information arising from the settlements announced on February 6, 2017.”

This is the first confirmation by FXCM that its business outside of the US is under investigation.


Following the gloomy statement by Leucadia National Corp. (NYSE:LUK) about its exposure to loss due to recent events affecting FXCM, the report by FXCM is even gloomier. The broker says that as of December 31, 2016, it owes $154.5 million aggregate principal to Leucadia and has $172.5 million aggregate principal amount of 2.25% convertible senior notes due 2018 (the “Convertible Notes”) outstanding. This may have important negative consequences for the company and its stockholders.

If Leucadia accelerates the repayment of borrowings, the broker may not have sufficient assets to repay its debt or it would have a material adverse effect on its business, operations, financial condition and liquidity.

“The Convertible Notes mature on June 15, 2018. At that time, we will be obligated to repay the aggregate principal amount of the Convertible Notes. We may not have enough available cash or be able to obtain financing at that time to meet our repayment obligations”, the company warns.

At the same time, as a result of the release of regulatory capital in connection with FXCM’s withdrawal from business in the U.S. and termination of its registration as a futures commission merchant and retail foreign exchange dealer in the U.S., the broker repaid $30 million in principal on the Leucadia term loan on March 17, 2017.

FXCM also notes that its holdings in V3 Markets, Lucid Markets and FastMatch are held for sale and the proceeds will be used to repay the loan to Leucadia.

Possible acquisition

In addition, certain provisions of the Convertible Notes could discourage an acquisition of the broker by a third party, as they render the broker more expensive to buy. There are also anti-takeover provisions in Delaware law.

What’s not in this report?

The report did not provide details on the FXCM-GAIN Capital deal. There was no information on the role that Drew Niv is playing now at any of FXCM businesses. There was no specification on which regulators asked for more information on the US regulatory action regarding FXCM.

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